2
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1994
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the
Securities Exchange Act of 1934
For the transition period from ____________________ to
___________________
Commission file Number 1-6701
PROVIDIAN
CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 51-0108922
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
Providian Center, 400 West Market Street, Louisville, Kentucky 40202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(502) 560 2000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $1 par value New York Stock Exchange
Pacific Stock Exchange
8 7/8% Cumulative Monthly Income
Preferred Shares* New York Stock Exchange
________________________________ ____________________________
*Issued by Providian LLC and the payment of dividends and
payments on liquidation or redemption are guaranteed by
Providian Corporation
Securities registered pursuant to Section 12(g) of the Act:
None
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 and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.[ ]
State the aggregate market value of the voting stock held by
non affiliates of the registrant as of March 15, 1995.
Common Stock, $1 par value - $3,494,845,908
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of March 15, 1995.
Common Stock, $1 par value - 97,079,053 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report for the year ended December 31,
1994, are incorporated by reference into Parts I and II.
Portions of the Proxy Statement for the Annual Meeting of
Stockholders to be held May 5, 1995, are incorporated by
reference into Part III.
PART 1
Item 1. BUSINESS
ORGANIZATION AND SEGMENTS
Providian Corporation (the "Company"), an insurance and
diversified financial services company based in Louisville,
Kentucky, was incorporated in Delaware in 1969 by Commonwealth
Life Insurance Company ("Commonwealth Life"). The objective was
to achieve earnings growth through acquisitions of other
insurance companies and, thus, effect economies of scale and the
sharing of commonly needed resources, while preserving the
strengths of acquired companies' marketing operations. The name
of the Company was changed from Capital Holding Corporation to
Providian Corporation effective May 12, 1994.
Through affiliates of its Providian Agency Group, Providian
Direct Insurance and Providian Capital Management business units,
the Company offers accumulation, life and annuity, accident and
health and property and casualty insurance products. The
Company's Providian Bancorp affiliates provide consumer loans,
deposits and other banking and related services.
Providian Agency Group
By 1976, the Company had acquired Peoples Life Insurance Company
("Peoples Life") in Washington, D.C.; National Standard Life
Insurance Company ("National Standard") in Orlando, Florida;
Georgia International Life Insurance Company ("Georgia
International") in Atlanta, Georgia; Home Security Life Insurance
Company ("Home Security") in Durham, North Carolina; and several
other companies that were subsequently merged into these
affiliates. On October 1, 1985, Peoples Life and Home Security
Life were merged to form Peoples Security Life Insurance Company
("Peoples Security") with headquarters in Durham. On March 31,
1987, the Company sold Georgia International to Southmark
Corporation. On April 1, 1988, National Standard was merged into
Commonwealth Life. On September 8, 1989, the Company acquired
Southlife Holding Company and its primary operating companies,
Public Savings Life Insurance Company ("Public Savings
Insurance") and Security Trust Life Insurance Company ("Security
Trust"). In December, 1991, the Company created Capital Security
Life Insurance Company ("Capital Security"), as the successor to
Public Savings Insurance. On November 14, 1991, the Company
acquired Durham Corporation and its primary operating company,
Durham Life Insurance Company ("Durham Life"), with headquarters
in Raleigh, North Carolina. On September 30, 1994, Durham Life
was merged into Peoples Security. Agency Group's business is
conducted primarily through three affiliates: Commonwealth Life,
Peoples Security and Capital Security.
Providian Direct Insurance
In 1979, Commonwealth Life's property and casualty operation was
recapitalized, made a direct subsidiary of the Company and later
renamed Capital Enterprise Insurance Company ("Capital
Enterprise"). On December 31, 1986, the Company acquired
Worldwide Underwriters Insurance Company ("Worldwide Insurance"),
located in St. Louis, Missouri, and the personal lines property
and casualty insurance business of the Wausau Insurance
Companies. Concurrently, it made Capital Enterprise a direct
subsidiary of Worldwide Insurance. These two affiliates,
together with Capital Landmark Insurance Company, a subsidiary of
Capital Enterprise, form the property and casualty line of
business of the Providian Direct Insurance business unit. In
January 1994, Worldwide Insurance acquired a block of property
and casualty business from Skandia U.S. Insurance Company.
National Liberty Corporation ("National Liberty") in Valley
Forge, Pennsylvania, was acquired on January 14, 1981, and added
a
nationwide direct marketing operation to what previously had been
a regional, agent based marketing system.
- 2 -
Item 1. (continued)
In addition, National Home Life Assurance Company ("National
Home"), domiciled in Missouri, was also acquired as National
Liberty's primary operating company, together with its principal
subsidiaries, Veterans Life Insurance Company ("Veterans Life")
and National Home Life Insurance Company of New York ("National
Home NY").
Effective January 15, 1993, Worldwide Insurance acquired Academy
Insurance Group ("Academy") and its affiliates. Academy
principally markets life insurance to active duty military
service personnel.
Providian Capital Management
In 1987, the institutional accumulation product business,
previously managed in Providian Agency Group, and the retail
accumulation product business, previously managed by National
Liberty, were moved to the business unit formerly known as
Accumulation and Investment Group (now Providian Capital
Management). Affiliates of Providian Agency Group and Providian
Direct Insurance offer these institutional and retail
accumulation products. In addition to the marketing and
management of accumulation (investment-type) products, Providian
Capital Management manages the Company's insurance-related
investment portfolios.
Providian Bancorp
In April, 1984, the Company acquired a controlling interest in
First Deposit Corporation (which, in September 1994, changed its
name to Providian Bancorp, Inc. "Providian Bancorp")), which owns
a consumer bank (First Deposit National Bank) and in 1987
established a credit card bank (First Deposit National Credit
Card Bank) which, in January 1995, changed its name to Providian
National Bank. The Company's ownership of Providian Bancorp was
increased each year until 1989 when the remaining shares were
purchased. At December 31, 1994, the Company owned 100% of the
common stock and 100% of the outstanding preferred stock of
Providian Bancorp. These affiliates form the Providian Bancorp
business unit.
Financial information about business segments is included in Item
7, Management's Discussion and Analysis of Financial Condition
and
Results of Operations.
PRODUCTS
Insurance
Commonwealth Life, Peoples Security, Capital Security, National
Home, Veterans Life, National Home NY and Academy write a
variety of individual, nonparticipating life insurance products.
These include universal life contracts, traditional and interest
sensitive whole life insurance, term life insurance, endowments,
accidental death and dismemberment coverage and premium waiver
disability insurance.
- 3 -
Item 1. (continued)
The following table reconciles total life insurance in force for
the year ended December 31, 1994:
Total Life Insurance
(dollars in thousands)
In force at December 31, 1993 $65,986,504
Sales and additions 13,855,647
79,842,151
Terminations:
Surrender and Conversion 2,056,274
Lapse 9,752,858
Reinsurance -
Other
1,958,814
Subtotal 13,767,946
In force at December 31, 1994 $66,074,205(
1)
Number of policies in force before
reinsurance ceded at December 31, 1994 1,859,284(
1)
(1)Reinsurance assumed has been included. Reinsurance ceded has
not been deducted.
Commonwealth Life, Peoples Security, Capital Security, National
Home, Veterans Life, National Home NY and Academy also issue an
assortment of individual accident and health insurance products.
These include coverages for regular income during periods of
hospitalization, scheduled reimbursement for specific
hospital/surgical expenses and cancer treatments, hospice care,
deductible and co-payment amounts not covered by other health
insurance and lump sum payments for accidental death or
dismemberment and provide benefits for death and injury
resulting from an accident. Additionally, National Home and
Academy offer a Medicare supplement product.
Worldwide Insurance, Capital Enterprise and their subsidiaries
underwrite personal lines automobile, homeowners and umbrella
liability coverages mainly for standard and preferred risks.
Accumulation
The institutional line of accumulation products, offered through
Commonwealth Life, Peoples Security and National Home, consists
of floating and fixed rate guaranteed investment contracts
("GICs"), Trust GICs and separate account products offered to
institutional customers, including pension funds, banks, mutual
funds and other organizations. The Trust GICs permit the plan
sponsor to own and retain assets related to these contracts and
Commonwealth Life and Peoples Security provide benefit
responsiveness in the event that benefit requests and other
contractual commitments exceed current cash flows.
Through National Home, Commonwealth Life and Peoples Security,
the Company offers retail accumulation products including
immediate life annuities (primarily structured settlements),
variable annuities, single premium and flexible premium deferred
annuities and individual retirement annuities. Single premium
and
- 4 -
Item 1. (continued)
flexible premium deferred annuities are offered at a fixed
interest rate on either a fixed or indexed basis. In addition,
flexible premium deferred annuities are offered on a variable
contract basis.
Banking
Providian Bancorp affiliates offer both secured and unsecured
loan accounts, as well as a broad range of deposit products. The
receivables portfolio consists primarily of unsecured consumer
loans which use a VISA or MasterCard credit card as the credit
extension vehicle, a revolving cash loan product without a credit
card, a savings deposit secured line of credit using a VISA or
MasterCard credit card, a home equity secured loan product called
Select Equity and insurance premium finance installment loans.
Providian Bancorp affiliates also offer fee-based strategic
protection products and services such as Credit Protection, Home
Protection, First Health Advantagesm and DriveProsm. Deposit
products include retail and institutional certificates of deposit
and money market deposit accounts.
MARKETING
Providian Agency Group markets individual insurance products
primarily through agents, who call on customers in their homes to
sell policies and provide related services. Substantially all of
the agents are employees of Agency Group affiliates and do not
represent other insurers. Such representatives receive
compensation from sales commissions, and from renewal and service
commissions. The compensation arrangement is designed to reward
representatives who not only sell new policies, but who also
effectively maintain and service in-force business to meet
Company sales and persistency objectives. In addition to its
agent sales organization, marketing partnerships have also been
formed whereby products are distributed through the insurance and
marketing organizations of third parties.
Providian Direct Insurance primarily uses television and print
media solicitation, direct mail, telephone and third-party
programs to market its insurance products. Additional mail
correspondence and telephone communications are used to follow up
and close sales.
Sponsored marketing programs are conducted through major banks,
oil companies, department stores, associations and other
businesses with large customer bases. Products are marketed to
active duty military
personnel on military bases through Agents/Counselors. Property
and casualty products are also marketed through a portion of the
home service agents of Agency Group.
Institutional accumulation products of Providian Capital
Management are marketed through a small sales staff, bank
trustees, municipal GIC brokers, GIC fund managers, brokers and
direct marketing. Retail products are marketed through financial
planners, stock brokerage firms, pension consultants, savings and
loan associations, banks and other financial institutions.
Providian Bancorp's consumer loan and deposit products are
primarily marketed using direct mail and telemarketing channels
and other direct response methods. Installment loans are
primarily marketed through independent third parties. Consumer
credit products are also endorsed by, or offered in connection
with the products or services of, unaffiliated third parties
through joint marketing arrangements with such third parties.
The Company's Providian Agency Group affiliates concentrate their
marketing efforts in the Southeast and Mid-Atlantic states, while
the Providian Direct Insurance, Providian Capital Management and
Providian Bancorp business units market their products
nationwide.
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Item 1. (continued)
RISK
Risk is integral to insurance but, as is customary in the
insurance business, risk exposure is kept within acceptable
limits. The Company's subsidiaries retain no more than
$1,000,000 of life insurance and $250,000 of accidental death
benefits for any single life. Excess coverages are reinsured
externally. At December 31, 1994, approximately $3.7 billion, or
approximately 5.6 percent of total life insurance in force, was
reinsured with nonaffiliated insurance companies. The Company
would become liable for the reinsured risks if the reinsurers
could not meet their obligations.
The Company's life insurance affiliates in many cases require
evidence of insurability before issuing individual life policies
including, in some cases, a medical examination or a statement by
an attending physician. Home office underwriters review that
evidence and approve the issuance of the policy in accordance
with the application if the risk is acceptable. Some applicants
who are substandard risks are rejected, but many are offered
policies with higher premiums or restricted coverages. As of
December 31, 1994, approximately 1.9 percent of life insurance in
force was represented by risks which were substandard at the time
the policy was issued. The majority of individual health
insurance is Providian Direct Insurance business and written
without evidence of insurability, relying on safeguards such as
product design, limits on the amount of coverage, and premiums
which recognize the resultant higher level of claims.
Providian Bancorp's unsecured consumer loans are principally
generated through direct mail solicitations sent to a prescreened
list of prospective account holders, followed by credit
verification. Four principles guide development of specific
underwriting criteria for each mailing: (i) sufficient credit
history; (ii) no unacceptable derogatory credit remarks; (iii)
necessary income qualification; and (iv) no rapid increase in
outstanding debt or credit availability.
Detailed discussions about the Company's investments and
financial instruments are included in Notes C and D,
respectively, to the Consolidated Financial Statements on pages
45-47 of the Company's 1994 Annual Report and Item 7,
Management's Discussion and Analysis of Financial Condition and
Results of Operations. As a diversified financial services
company, many of the Company's assets and liabilities are
monetary in nature and thus are sensitive to changes in the
interest rate environment. Additional information about interest
rate risk is included in Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations.
REGULATION
Insurance
The business of the Company's insurance subsidiaries is subject
to regulation and supervision by the insurance regulatory
authority of each state in which the subsidiaries are licensed to
do business. Such regulators grant licenses to transact business;
regulate trade practices; approve policy forms; license agents;
approve certain premium rates; establish minimum reserve and loss
ratio requirements; review form and content of required financial
statements; prescribe type and amount of investments permitted;
and assure that capital, surplus and solvency requirements are
met. Insurance companies can also be required under the solvency
or guaranty laws of most states in which they do business to pay
assessments up to prescribed limits to fund policyholder losses
or liabilities of insolvent insurance companies. They are also
required to file detailed annual reports with supervisory
agencies, and records of their business are subject to
- 6 -
Item 1. (continued)
examination at any time. Under the rules of the National
Association of Insurance Commissioners (the "NAIC"), a self
regulatory organization of state insurance commissioners,
insurance companies are examined periodically by one or more of
the supervisory agencies.
The NAIC adopted, in December of 1992, a "Risk Based Capital for
Life and/or Health Insurers Model Act" (the "Model Act") which
was designed to identify inadequately capitalized life and health
insurers. The Model Act defines two key measures: (i) Adjusted
Capital, which equals an insurer's statutory capital and surplus
plus its Asset Valuation Reserve, plus half its liability for
policyholder dividends, and (ii) Risk Based Capital. Risk Based
Capital is determined by a complex formula which is intended to
take into account the various risks assumed by an insurer.
Should an insurer's Adjusted Capital fall below certain
prescribed levels (defined in terms of its Risk Based Capital),
the Model Act provides for four different levels of regulatory
attention:
"Plan Level": Triggered if an insurer's Adjusted Capital is less
than 100% but greater than or equal to 75% of its Risk Based
Capital; requires the insurer to submit a plan to the appropriate
regulatory authority that discusses proposed corrective action.
"Action Level": Triggered if an insurer's Adjusted Capital is
less than 75% but greater than or equal to 50% of its Risk Based
Capital; authorizes the regulatory authority to perform a special
examination of the insurer and to issue an order specifying
corrective actions.
"Authorized Control Level": Triggered if an insurer's Adjusted
Capital is less than 50% but greater than or equal to 35% of its
Risk Based Capital; authorizes the regulatory authority to take
whatever
action it deems necessary.
"Mandatory Control Level": Triggered if an insurer's Adjusted
Capital falls below 35% of its Risk Based Capital; requires the
regulatory authority to place the insurer under its control.
Since the Adjusted Capital levels of the Company's insurance
subsidiaries currently exceed all of the regulatory action levels
as defined by the NAIC's Model Act, the Model Act currently has
no impact on the Company's operations or financial condition.
Although the federal government does not directly regulate
insurance business, except with respect to Medicare supplement
plans, legislation and administration policies concerning
premiums, age and gender discrimination, financial services and
taxation, among other areas, can significantly affect the
insurance business.
Banking
Providian Bancorp's consumer banking subsidiaries are subject to
federal and state regulation with respect to lending and
investment practices, capital requirements, and financial
reporting. The primary regulator for these consumer banking
subsidiaries is the Office of the Comptroller of the Currency.
Holding Company
States have enacted legislation requiring registration and
periodic reporting by insurance companies domiciled within their
respective jurisdictions that control or are controlled by other
corporations so as to constitute a holding company system. The
Company and its subsidiaries have registered as a holding company
system pursuant to such legislation in Kentucky, Missouri, North
Carolina, New York, Illinois, Pennsylvania and New Jersey.
- 7 -
Item 1. (continued)
Insurance holding company system statutes and rules impose
various limitations on investments in subsidiaries and may
require prior regulatory approval for the payment of dividends
and other distributions in excess of statutory net gain from
operations on an annual noncumulative basis by the registered
insurance company to the holding company or its affiliates.
Separate Accounts
Separate accounts of the Company's subsidiaries which offer
retail variable annuities are registered with the Securities and
Exchange Commission under the Investment Company Act of 1940 and
are governed by the provisions of the Internal Revenue Code of
1986, as amended, pertaining to the tax treatment of annuities.
COMPETITION
The insurance industry is highly competitive with over 2,000 life
insurance companies competing in the United States, some of which
have substantially greater financial resources, broader product
lines and larger staffs than the Company's insurance
subsidiaries. Additionally, life insurance companies face
increasing competition
from banks, mutual funds and other financial entities for
attracting investment funds.
The Company's insurance subsidiaries differentiate themselves
through
progressive marketing techniques, product features, price,
customer service, stability and reputation, as well as
competitive credit ratings. The insurance subsidiaries maintain
their competitive position by their focus on low risk/high return
markets and efficient cost structure. Other competitive
strengths include integrated asset/liability management, risk
management and innovative product engineering.
The credit card and consumer revolving loan industry business in
which Providian Bancorp's subsidiaries are engaged is highly
competitive. Over the past several years, the industry has
experienced consolidation, lower growth and rising charge-offs.
Competitors are increasing their use of advertising, target
marketing, pricing competition and incentive programs, have
implemented aggressive balance transfer programs to attract
customers from other issuers and have announced changes in the
terms of certain credit cards, including lowering the rate of
interest charged on balances. In addition, other credit card
issuers have announced "tiered" or "risk-adjusted" rates under
which the annual percentage rate for the issuer's most
creditworthy customers is lowered.
In response to the competitive environment, Providian Bancorp's
subsidiaries have implemented a variety of new programs to
attract and retain customers, including reducing interest rates
on selected accounts. Providian Bancorp's subsidiaries have
generally retained the right to alter various charges, fees and
other terms with respect to consumer credit accounts. In
addition, Providian Bancorp has experienced steady growth in its
secured loan products and is increasing its efforts to offer its
products to underserved markets.
EMPLOYEES
The total number of persons employed by the Company and its
subsidiaries was approximately 8,985 as of December 31, 1994,
including an agency sales force of 3,193. The Company has
approximately 334 employees.
- 8 -
Item 1. (continued)
FOREIGN OPERATIONS
Substantially all of the Company's operations are conducted in
the United States.
ITEM 2. PROPERTIES
Principal properties of the Company and its subsidiaries includes
offices located in Louisville, Kentucky (Commonwealth Life),
Valley Forge, Pennsylvania (National Liberty and Worldwide
Insurance) and Pleasonton, California (Providian Bancorp), which
are owned; and Louisville, Kentucky (Providian Corporation),
Durham, North Carolina (Peoples Security and Capital Security)
and San Francisco and San Ramon, California (Providian Bancorp),
which are leased.
ITEM 3. LEGAL PROCEEDINGS
The last subsection titled "Legal Proceedings," of Note K
Commitments and Contingencies on Page 55 of the 1994 Annual
Report is
incorporated by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER
MATTERS
Common Stock Dividend and Market Data, and Quarterly Price
Ranges of Common Stock and Dividends Per Common Share on
page 34 of the Annual Report for the year ended December 31,
1994 are incorporated by reference.
Item 6. SELECTED FINANCIAL DATA
Selected Financial Data on pages 16 and 17 of the Annual
Report for the year ended December 31, 1994, is incorporated
by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND
RESULTS OF OPERATIONS
Consolidated Results and Analysis on pages 16 through 18,
Results by Business Segment on pages 18, 19, and 23 through
32, Business Segment Data on pages 20 and 21, Supplemental
Earnings Data on page 35 and Liquidity and Capital Resources
and Inflation on pages 32 and 33 of the Annual Report for
the year ended December 31, 1994, are incorporated by
reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of Providian
Corporation and Subsidiaries included on pages 37 through 55
and Quarterly Financial Data on page 34 of the Annual Report
for the year ended December 31, 1994, are incorporated by
reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING
AND
FINANCIAL DISCLOSURE
None.
- 9 -
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Election of Directors on pages 3 through 5 of the Proxy
Statement for the Annual Meeting of Stockholders to be
held May 5, 1995, is incorporated by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name and Age Principal Occupation and Business
Experience
Irving W. Bailey II Chairman of the Board of Directors,
Age: 53 Providian Corporation, since November
1988,
and Chief Executive Officer, Providian
Corporation, since April 1988. President,
Providian Corporation, from September 1987
to December 1994, and Chief Operating
Officer, Providian Corporation, September
1987 to April 1988. Executive Vice
President and Chief Investment Officer,
Providian Corporation, from February
1981 to September 1987.
Shailesh J. Mehta President and Chief Operating Officer,
Age: 45 Providian Corporation, since December
1994.
Executive Vice President, Providian
Corporation, from August 1993 to
December 1994. Chairman and CEO,
Providian Direct Insurance from August
1993 to December 1994. Also, President
and CEO - Banking Group, Providian
Corporation, and Chairman of the Board,
President and Chief Executive Officer of
Providian Bancorp, Inc. and subsidiaries
from April 1988 to January 1995. He
served as Executive Vice President and
Chief Operating Officer of Providian
Bancorp from March 1986 until his
election as CEO.
Robert L. Walker Senior Vice President - Finance and
Chief
Age: 44 Financial Officer, Providian
Corporation,
since August 1993. He served as Vice
President and General Counsel, Providian
Corporation, from December 1991 to
August 1993, and Vice President,
Corporate Tax, Providian Corporation,
from March 1988 to December 1991.
Steven T. Downey Vice President and Controller, Providian
Age: 37 Corporation, since November 1993. He
served
as Director, Finance and Accounting
Providian Capital Management, Providian
Corporation, from January 1993 to
November 1993, and Second Vice President
and Assistant Controller from August
1991 to January 1993. Prior to joining
Providian Corporation, he was with Ernst
& Young, Certified Public Accountants,
from 1978 to 1991.
James V. Elliott Senior Vice President and General
Counsel,
Age: 50 Providian Corporation, since January
1995.
General Counsel, Providian Bancorp,
Inc., since 1989 and a Senior Vice
President, Providian Bancorp, Inc., from
March 1993 through December, 1994.
During 1993, he was also responsible for
Providian Bancorp's emerging business
operation.
- 10 -
EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
Name and Age Principal Occupation and Business
Experience
Joseph M. Tumbler President and CEO - Providian Capital
Age: 46 Management, Providian Corporation, since
November 1989. He served as Senior Vice
President - Strategic Planning and
Corporate
Development, Providian Corporation, from
January 1988 to November 1989. He
previously was with National Liberty
Corporation as Executive Vice President
Financial Marketing from September 1986
to January 1988.
Lawrence Pitterman Senior Vice President of Administration,
Age: 47 Providian Corporation, since January
1991.
Previously with Providian Bancorp, Inc.
as Vice President, Human Resources, from
July 1990 to December 1990; Vice
President, Corporate Communications,
from 1989 to 1990; and Vice President,
First Deposit Savings Bank, from 1987 to
1989.
Lee Adrean President - Agency Group, Providian
Age: 43 Corporation, since August 1993. Chief
Executive Officer - Agency Group from
August 1993 to January 1995. He served
as Senior Vice President, Planning and
Finance and Chief Financial Officer,
Providian Corporation, from December
1991 to August 1993, and Senior Vice
President, Strategic Planning and
Corporate Development, Providian
Corporation, from September 1990 to
August 1993. Prior to joining Providian
Corporation, he was with Bain & Company,
Inc. from 1979 to 1990, serving as Vice
President, 1985 to 1990; Manager, 1982
to 1985; and Consultant, 1979 to 1982.
Elaine J. Robinson Vice President and Treasurer, Providian
Age: 46 Corporation, since December 1991, Second
Vice President and Assistant Treasurer,
Providian Corporation, from November
1987 to December 1991, and Second Vice
President, Corporate Finance, Providian
Corporation, from August 1987 to
November 1987.
Bruce E. Ogle Vice President and Corporate Auditor,
Age: 39 Providian Corporation, since 1989. He
served as Director, Marketing Support
Agency Group, Providian Corporation,
from 1987 to 1988, and as Manager,
Computer Audit Function-Agency Group,
Providian Corporation, from 1984 to
1987.
Frederick C. Vice President and Chief Investment
Officer, Kessell Providian Capital Management, Providian
Age: 46 Corporation since May 1993. Managing
Director, Chief Investment Officer
Providian Capital Management, Providian
Corporation, from May 1989 to May 1993,
and Vice President, Fixed Income
Securities Providian Capital Management,
Providian Corporation, from May 1985 to
May 1989.
- 11 -
Item 11. EXECUTIVE COMPENSATION
Compensation of Directors and Executive Officers on pages 6
through 15 of the Proxy Statement for the Annual Meeting of
Stockholders to be held May 5, 1995, is incorporated by
reference.
Item l2. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Security Ownership of Certain Beneficial Owners and
Management on pages 1 and 2 of the Proxy Statement for the
Annual Meeting of Stockholders to be held May 5, 1995, are
incorporated by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a)(1) and (2)--The response to these portions of Item
14 is submitted as a separate section of this report.
(a)(3)--The response to this portion of Item 14 is
submitted as a separate section of this report.
(b)On December 16, 1994 the Company filed a current
report dated December 16, 1994 on Form 8-K, Item 5
(other events). This report was in regards to the Board
of Directors electing Shailesh Mehta, President and
Chief Operating Officer of the Company. He was also
elected a Director of Providian. He had been Executive
Vice President of Providian since August 1993 and
serving as Chief Executive Officer of Providian Bancorp
and Providian Direct Insurance. In his new position he
will continue to oversee Providian Bancorp and Providian
Direct Insurance as well as Providian Agency Group. Lee
Adrean will remain President of Providian Agency Group.
(c) Exhibits are submitted as a separate section of this
report.
(d)Financial statement schedules are submitted as a
separate section of this report.
- 12 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Louisville, and the Commonwealth of Kentucky, on the 15th day
of February 1995:
PROVIDIAN CORPORATION
Irving W. Bailey II
Irving W. Bailey II
Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been
signed bel ow by the following persons on behalf of the registrant in the
capacities indicated on the 15th day of February 1995:
SIGNATURE TITLE
Irving W. Bailey II Chairman, Chief Executive
Irving W. Bailey II Officer and Director
Shailesh Mehta President, Chief
Operating
Shailesh Mehta Officer and Director
Robert L. Walker Senior Vice President
and
Robert L. Walker Chief Financial Officer
Steven T. Downey Vice President and
Controller
Steven T. Downey (Principal Accounting
Officer)
Director
John L. Clendenin
John M. Cranor III Director
John M. Cranor III
Joseph F. Decosimo Director
Joseph F. Decosimo
Lyle Everingham Director
Lyle Everingham
- 13 -
SIGNATURE TITLE
Raymond V. Gilmartin Director
Raymond V. Gilmartin
J. David Grissom
Director
J. David Grissom
Watts Hill, Jr.
Director
Watts Hill, Jr.
F. Warren McFarlan
Director
F. Warren McFarlan
Martha R. Seger
Director
Martha R. Seger
Florence R. Skelly
Director
Florence R. Skelly
Director Larry D. Thompson
Director John L. Weinberg
- 14 -
ANNUAL REPORT ON FORM 10-K
ITEM l4(a)(1), (2) and (3), (c) and (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULES
FINANCIAL STATEMENT
SCHEDULES
LIST AND INDEX OF EXHIBITS
YEAR ENDED DECEMBER 31,
1994
PROVIDIAN CORPORATION
LOUISVILLE, KENTUCKY
- 15 -
FORM 10-K--ITEM 14(a)(1) and (2)
PROVIDIAN CORPORATION AND SUBSIDIARIES
INDEX OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following Consolidated Financial Statements of Providian
Corporation and Subsidiaries, included on pages 37 through 55 of
the Annual Report for the year ended December 31, 1994, are
incorporated by reference in Item 8:
Page
Consolidated Statements of Income -
Years Ended December 31, 1994, 1993 and 1992 37
Consolidated Statements of Financial Condition -
December 31, 1994 and 1993 38 -
39
Consolidated Statements of Cash Flows -
Years Ended December 31, 1994, 1993 and 1992 40
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1994, 1993 and 1992 41
Notes to Consolidated Financial Statements 42 -
55
The following financial statement schedules and the related Report
of Independent Auditors are included in Item 14(d):
Schedule I - Summary of Investments - Other Than
Investments in
Related Parties
Schedule II - Condensed Financial Information of Registrant
Schedule III - Supplementary Insurance Information
Schedule IV - Reinsurance
Information required in Schedule V, "Valuation and Qualifying
Accounts," is included in Note C to the consolidated financial
statements of Providian Corporation and subsidiaries, incorporated
herein by reference. All other schedules for which provision is
made in the applicable accounting regulation of the Securities and
Exchange Commission are not required under the related instructions
or are inapplicable and, therefore, have been omitted.
- 16 -
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Providian Corporation
We have audited the consolidated financial statements of
Providian Corporation and subsidiaries listed in the accompanying
Index to financial statements (Item 14(a)). Our audits also
included the financial statement schedules listed in the index at
Item 14(a). These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedules
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated
financial position of Providian Corporation and subsidiaries at
December 31, 1994 and 1993, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1994, in conformity with generally
accepted accounting principles. Also, in our opinion, the financial
statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
As discussed in Note A to the consolidated financial
statements, in 1994 the Company changed its method of accounting for
certain investments in debt and equity securities.
ERNST & YOUNG LLP
Louisville, Kentucky
February 8, 1995
- 17 -
December
31, 1994
Amount Shown
in Statement
Amortized Market of Financial
Cost
Value Condition
Type of Investment (000's
Omitted)
[S] [C]
[C] [C]
Securities available for sale:
Debt securities:
Bonds:
US government & government agencies
$2,278,415 $2,152,582
$2,152,582
State and municipal
637,551 634,899 634,899
Foreign governments
192,843 176,896 176,896
Public utilities
942,221 863,918 863,918
Industrial and miscellaneous
6,233,105 5,901,241
5,901,241
Total bonds
10,284,135
9,729,536 9,729,536
Redeemable preferred stocks
15,382 14,913 14,913
Total debt securities
10,299,517 9,744,449
9,744,449
Equity securities:
Common stocks:
Industrial and miscellaneous
5,009 4,687 4,687
Nonredeemable preferred stocks
606,279 552,546
552,546
Total equity securities
611,288 557,233 557,233
Trading account securities
XXXXXXXXX 115,470
115,470
Commercial mortgage loans
2,649,664 XXXXXXXX
2,649,664
Residential mortgage loans
2,550,194 XXXXXXXX
2,550,194
Policy loans
390,639 XXXXXXXX 390,639
Consumer loans
2,269,531 XXXXXXXX 2,269,531
Real estate <F1>
70,847 XXXXXXXX 70,847
Other long-term investments
237,235 XXXXXXXX 237,235
Short-term investments
110,239 XXXXXXXX 110,239
Total Investments
$19,189,154 $18,695,501
[FN]
<F1> Includes real estate taken in foreclosure of $60,726
in our
mortgage loan portfolio.
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
[CAPTION]
PROVIDIAN CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31
1994 1993
000's Omitted
[C]
[C]
[S]
Assets
Cash and cash equivalents
$88,642 $0
Investments:
Common stock
16 16
Investments in and advances
to subsidiaries <F1>
2,673,071 2,921,792
Short-term investments
14,404 0
Notes receivable from subsidiaries <F1>
364,202 364,061
Accrued interest and accounts receivable
from subsidiaries
12,084 9,081
Other assets
47,717 49,973
Total assets
3,200,136 3,344,923
Liabilities and Shareholders' Equity:
Liabilities
Cash overdraft
$0 $783
Notes, accounts payable and other
liabilities to subsidiaries <F1>
199,109 75,539
Short-term borrowings
49,711 49,870
Other liabilities
72,464 67,350
Long-term debt
694,250 587,750
Total liabilities
1,015,534 781,292
Redeemable cumulative preferred stock
held by subsidiary <F1>
62,740 70,740
Shareholders' equity
Preferred stock
0 100,000
Common stock
115,325 115,325
Additional paid-in capital
57,096 57,053
Retained earnings
262,178 130,589
Equity in undistributed earnings
of subsidiaries
2,250,757 2,165,385
Equity in net unrealized investment gain
(loss) of subsidiaries
(344,526) 17,204
Common stock held in treasury - at cost
(214,031) (89,289)
Unearned restricted stock
(4,937) (3,376)
Total shareholders' equity
2,121,862 2,492,891
Total liabilities and shareholders' equity
$3,200,136 $3,344,923
[FN]
<F1> Eliminated in consolidation.
See notes to condensed financial statements.
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONTINUED
[CAPTION]
PROVIDIAN CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF INCOME Year
Ended December 31
1994 1993 1992
000's
Omitted
[C]
[C] [C]
[S]
Revenues
Dividends from subsidiaries <F1>
$236,089 $199,687 $117,187
Interest on notes receivable from
subsidiaries <F1>
46,621 47,944 50,433
Management and service fees <F1>
27,501 25,599 23,683
Investment and other income, net
1,017 1,897 798
Total revenues
311,228 275,127
192,101
Expenses
Operating expenses
40,182 37,996 37,438
Interest expense
59,881 54,175 55,794
Interest expense on notes payable to
subsidiaries <F1>
12,606 5,790 6,908
Total expenses
112,669 97,961
100,140
Income before federal income tax
benefit and equity in undistributed net
income from subsidiaries
198,559 177,166
91,961
Federal income tax benefit
16,970 12,775 6,434
Income before equity in undistributed
net income of subsidiaries
215,529 189,941
98,395
Equity in undistributed net income
of subsidiaries
85,372 132,724 224,101
Net income
$300,901 $322,665
$322,496
[FN]
<F1> Eliminated in consolidation.
See notes to condensed financial statements.
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONTINUED
[CAPTION]
PROVIDIAN CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
Year
Ended December 31
1994 1993 1992
000's Omitted
[C]
[C] [C]
[S]
Net Cash Flows provided by Operating Activities
$223,269 $198,996 $102,613
Cash Flows from Investment Activities:
Investments sold or matured
0 0 4,532
Change in short term investments
(14,404) 0
0
Changes in investments in and
advances to subsidiaries <F1>
(26,741) (102,015)
(1,287) Changes in operating
property
801 (2,155) (5,197)
All other investment activities, net
0 (28) (79)
Net Cash Flows used in Investment
Activities (40,344) (104,198)
(2,031)
Cash Flows from Financing Activities:
Change in short-term borrowings
(159) 118 128 Issuance
of long-term debt
106,500 0 65,000
Repayment of long-term debt
0 0 (86,822)
Redemption of preferred stock (100,000)
0 0
Redemption of redeemable cumulative
preferred stock <F1>
(8,000) (6,120) (2,320)
Purchase of common stock for treasury
(138,790) 0 0
Dividends
(81,988) (80,600) (73,511)
Proceeds from exercise of stock options
3,789 7,900 7,764
Change in notes payable to subsidiaries <F1>
125,148 (13,992) (12,541)
Net Cash Flows used in Financing Activities
(93,500) (92,694) (102,302)
Net Increase (Decrease) in Cash and
Cash Equivalents or Cash Overdraft during Year
89,425 2,104 (1,720)
Cash Overdraft at Beginning of Year
(783) (2,887) (1,167)
Cash and Cash Equivalents (Cash Overdraft)
at End of Year
$88,642 ($783) ($2,887)
[FN]
<F1> Eliminated in consolidation.
See notes to condensed financial statements.
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF
REGISTRANT CONTINUED
PROVIDIAN CORPORATION (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note A Basis of Presentation
In the parent company only condensed financial statements, the
Company's investment in subsidiaries is stated at cost plus equity
in undistributed income of subsidiaries since date of acquisition.
Certain 1993 and 1992 amounts have been reclassified to conform with
the 1994 presentation. These reclassifications had no significant
effect on the Company's financial position or results of operations.
The condensed financial statements of the parent company should be
read in conjunction with the Consolidated Financial Statements and
Notes of Providian Corporation and Subsidiaries.
Note B Federal Income Tax
The Company files a consolidated federal income tax return with
certain of its subsidiaries. The federal income tax benefit in the
accompanying condensed financial statements reflects the Company's
allocable share of the consolidated provision. See Note G to the
Consolidated Financial Statements of Providian Corporation and
Subsidiaries for a description of the components of the consolidated
federal income tax provision.
Note C Note Payable to Providian LLC
In May 1994, Providian LLC was formed and capitalized through the
purchase of common shares by the Company. On May 12, 1994 Providian
LLC completed the issuance of 4,000,000 shares of Cumulative Monthly
Income Preferred Stock (MIPS) at $25 per share. The total proceeds
of $126,600,000 from the issuance of the MIPS and the common stock
were subsequently lent to the Company to provide permanent funding
for the redemption of the Company's Adjustable Rate Cumulative
Preferred Stock, Series F. The MIPS are redeemable at the option of
Providian LLC (with the Company's consent) in whole or in part on or
after May 31, 1999 at a redemption price of $25 per share plus
accumulated and unpaid dividends. Upon liquidation of Providian
LLC, the holders of the MIPS are entitled to $25 per share plus
accumulated and unpaid dividends. The MIPS pays monthly dividends
at an annual rate of 8.875 percent. The Company has unconditionally
guaranteed all legally declared and unpaid dividends of Providian
LLC. The note payable to Providian LLC is included in Notes,
accounts payable and other liabilities to subsidiaries in the
accompanying Condensed Statement of Financial Condition.
Note D Long-Term Debt
Long-term debt of the Company at December 31, 1994 and 1993
consisted of Debentures and Notes in the amount of $694,250,000 and
$587,750,000, respectively. See Note H to the Consolidated
Financial Statements of Providian Corporation and Subsidiaries for a
description of the terms and aggregate maturities of the Company's
long-term debt.
Note E Common Stock
In 1994, the Company announced plans to repurchase five million
shares of the Company's common stock on the open market. Through
December 31, 1994 the Company repurchased 4,334,400 shares at an
aggregate cost of $138,791,000. Between January 1, 1995 and February
8, 1995, the Company repurchased an additional 422,200 shares at an
aggregate cost of $13,882,000.
- 22 -
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF
REGISTRANT CONTINUED
PROVIDIAN CORPORATION (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note F Preferred Stock
The Company has 6,000,000 shares of preferred stock, par value $5,
authorized for issuance in series.
Redeemable Cumulative Preferred Stock Held By Subsidiary
The Company has designated 747,400 shares of preferred stock as
redeemable cumulative preferred stock to be issued in different
series with varying annual dividend rates. The shares outstanding
at December 31, 1994 and 1993 were 627,400 and 707,400 respectively.
The subsidiary has the right, on an annual basis, to waive receipt
of dividends and has waived any dividends payable through 1994. The
characteristics of the redeemable preferred stock are as follows:
Shares outstanding
Dividend Shares Year at December 31 Period of
Series rate authorized issued 1994 1993 redemption B
12.25% 49,200 1980 49,200 57,400 1991-2000
C 14.00% 105,000 1981 105,000 120,000 1992-
2001
D 15.00% 80,000 1982 80,000 90,000 1993-
2002
E 14.25% 120,000 1982 120,000 135,000 1993-
2002
G 12.00% 224,000 1983 104,000 117,000 1993-
2002
H 11.50% 90,000 1984 90,000 100,000 1994-
2003
I 12.00% 79,200 1984 79,200 88,000 1994-
2003
747,400 627,400 707,400
Mandatory pro-rata sinking fund payments are required to redeem 10%
of each series of redeemable preferred stock annually, beginning
approximately ten years after issuance at $100 per share. As the
shares are redeemed, they are retired thereby reducing the total
authorized shares of each series. The Company redeemed the
following shares of cumulative preferred stock in 1994: 8,200 of
the Series B; 15,000 of the Series C; 10,000 of the Series D;
15,000 of the Series E; 13,000 of the Series G; 10,000 of Series H;
and 8,800 of Series I. The aggregate amount of mandatory pro-rata
sinking fund payments required for redemption of the redeemable
preferred stock in each of the following years are: 1995-
$8,000,000; 1996-$8,000,000; 1997$8,000,000, 1998-$8,000,000 and
1999-$8,000,000. The Company shall have the annual non-cumulative
option to double any sinking fund payment subject to an aggregate
limitation of 25% of the total issue. The redeemable preferred
stock is non-callable for approximately ten years and callable
thereafter at $105 per share plus accrued dividends. However, in
the event the Company is required to obtain approval of a specified
percentage of the holders of the issue to effect a merger,
consolidation, or sale of assets and such approval is denied, then
the Company may redeem the preferred stock in its entirety at $100
per share plus accrued dividends.
Noncumulative Convertible Junior Preferred Stock
Effective June 16, 1993, each outstanding share of Series J
preferred stock was exchanged for 5.55 shares of the Company's
common stock and all rights of the holders of Series J preferred
stock, including the rights to receive dividends, were terminated.
Adjustable Rate Cumulative Preferred Stock
On March 2, 1994, the Company redeemed, at face value, all
1,000,000 shares of its Series F, Adjustable Rate Cumulative
Preferred Stock, at $100 per share plus accrued and unpaid
dividends through the date of redemption.
- 23
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONTINUED PROVIDIAN CORPORATION (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note G Management and Service Fees
The Company provides its subsidiaries with general management
support, including services in the data processing, human
resources, legal and financial areas. The related charges are
billed to the subsidiaries being serviced as management fees,
and are computed using various allocation methods which are, in
the opinion of management, reasonable in relation to services
rendered.
- 24 -
<TABLE>
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
<CAPTION>
PROVIDIAN CORPORATION AND SUBSIDIARIES
Year Ended December 31, 1994 - (000's Omitted)
Benefits, Amortization
Deferred
Policy claims, and of
deferred Commissions
policy & loan
and Net increase in
policy and
acquisition Benefit
Unearned contract Premium investment
benefit acquisition expenses, Premiums
Segment costs <F1> reserves
<F2> premiums claims income income <F3>
reserves <F4> costs <F5> net <F3> written
<S> <C> <C>
<C> <C> <C> <C> <C>
<C> <C> <C>
Providian Agency Group:
Life $806,236
$2,361,257 $0 $16,018 $347,778
$252,094 $249,374 $77,362 $94,497
Health 74,739
102,130 0 14,207 62,417
9,256 43,825 6,596 15,749 $62,735
Other product lines 1,750
192,851 0 3,026 30,118
18,415 40,257 378 13,375 5,578
Total 882,725
2,656,238 0 33,251 440,313
279,765 333,456 84,336 123,621
Providian Direct Insurance:
Life 443,975
681,492 0 20,653 307,587
61,361 216,027 51,847 41,279
Health 212,804
115,322 0 27,194 186,135
12,674 82,356 36,460 39,565 189,093
Property & casualty 48,146
0 52,913 118,788 176,479 15,809
142,396 8,742 33,561 175,056
Other product lines 7,271
31,773 0 804 6,412 3,563
5,986 1,124 6,079
Total 712,196
828,587 52,913 167,439 676,613
93,407 446,765 98,173 120,484
Providian Bancorp 22,830
0 0 0 0 321,973
70,725 40,300 300,654
Providian Capital Management 145,442
12,641,385 0 1,900 24,658
840,999 681,508 42,319 47,665
Corporate and Other 1,695
1,058 0 471 (396) 75,683
370 4,150 30,017
Consolidated $1,764,888
$16,127,268 $52,913 $203,061 $1,141,188
$1,611,827 $1,532,824 $269,278 $622,441
</TABLE>
<TABLE>
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
<CAPTION>
PROVIDIAN CORPORATION AND SUBSIDIARIES
Year Ended December 31, 1993 - (000's Omitted)
Benefits, Amortization
Deferred
Policy claims, and of
deferred Commissions
policy & loan
and Net increase in policy
and
acquisition Benefit
Unearned contract Premium investment benefit
acquisition expenses, Premiums
Segment costs <F1> reserves
<F2> premiums claims income income <F3>
reserves <F4> costs <F5> net <F3> written
<S> <C> <C>
<C> <C> <C> <C> <C>
<C> <C> <C>
Providian Agency Group:
Life $766,988
$2,256,769 $0 $19,410 $344,392 $248,667
$239,279 $74,482 $95,682
Health 71,791
101,864 0 13,733 65,472 9,459
47,131 6,956 15,323 $65,186
Other product lines 3,082
187,230 0 3,704 37,309 23,349
44,826 350 14,658 10,816
Total 841,861
2,545,863 0 36,847 447,173 281,475
331,236 81,788 125,663
Providian Direct Insurance:
Life 417,356
621,998 0 21,452 298,897 61,600
207,434 50,631 47,623
Health 208,462
124,486 0 32,252 197,957 14,108
82,573 38,208 45,469 200,107
Property & Casualty 35,047
0 47,340 115,602 143,781 15,913
116,707 7,128 28,965 145,818
Other product lines 11,979
32,265 0 1,371 7,107 3,642
6,574 5,517 14,103
Total 672,844
778,749 47,340 170,677 647,742 95,263
413,288 101,484 136,160
Providian Bancorp 33,092
0 0 0 0 316,831
84,714 81,416 235,438
Providian Capital Management 109,193
11,717,684 0 1,612 71,127 724,061
607,954 38,802 51,920
Corporate and Other 0
4,233 0 2,162 1,642 43,816
(5,783) (171) 24,523
Consolidated $1,656,990
$15,046,529 $47,340 $211,298 $1,167,684 $1,461,446
$1,431,409 $303,319 $573,704
</TABLE>
<TABLE>
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
<CAPTION>
PROVIDIAN CORPORATION AND SUBSIDIARIES
Year Ended December 31, 1992 - (000's Omitted)
Benefits, Amortization
Deferred
Policy claims, and of
deferred Commissions
policy & loan
and Net increase in
policy and
acquisition Benefit
Unearned contract Premium investment benefit
acquisition expenses, Premiums
Segment costs <F1> reserves
<F2> premiums claims income income <F3>
reserves <F4> costs <F5> net <F3> written
<S> <C> <C>
<C> <C> <C> <C> <C>
<C> <C> <C>
Providian Agency Group:
Life $724,334
$2,188,844 $0 $15,991 $332,028 $248,766
$231,592 $66,241 $100,455
Health 70,386
93,835 0 14,195 64,656 9,192
47,967 7,423 16,126 $65,581
Other product lines 2,563
191,357 0 1,943 40,187 23,725
47,646 301 16,386 12,075
Total 797,283
2,474,036 0 32,129 436,871 281,683
327,205 73,965 132,967
Providian Direct Insurance:
Life 317,108
480,077 0 22,269 234,967 39,002
160,390 39,314 33,881
Health 216,291
139,661 0 42,185 183,157 14,633
74,367 40,730 39,510 187,400
Property & Casualty 33,146
0 45,300 119,829 140,024 16,982
115,952 6,144 29,849 140,660
Other product lines 15,587
32,698 0 1,808 8,567 3,981
6,495 3,771 11,949
Total 582,132
652,436 45,300 186,091 566,715 74,598
357,204 89,959 115,189
Providian Bancorp 43,253
0 0 0 0 324,200
108,540 46,063 213,376
Providian Capital Management 118,155
10,411,459 0 390 110,108 716,037
661,095 20,077 51,229
Corporate and Other 0
10,514 0 13,077 76,331 57,024
41,278 5,282 56,968 61,579
Consolidated $1,540,823
$13,548,445 $45,300 $231,687 $1,190,025
$1,453,542 $1,495,322 $235,346 $569,729
<FN>
<F1> Includes value of insurance in force purchased
<F2> Includes policyholder contract deposits
<F3> See Note N to the Consolidated Financial Statements of
Providian Corporation and Subsidiaries for a description
of the basis used in the allocation of net investment
income and expenses.
<F4> Includes policyholder interest on investment-type
contracts, interest on banking deposits and interest on related
hedging instruments.
<F5> Includes amortization of value of insurance in force
purchased.
SCHEDULE IV - REINSURANCE
<CAPTION>
PROVIDIAN CORPORATION AND SUBSIDIARIES
Percentage
Ceded to
Assumed of amount
Gross other
from other Net assumed to
amount companies
companies amount net amount
(000's Omitted Except Percentages)
<S> <C> <C>
<C> <C> <C>
Year Ended December 31, 1994
Life insurance
in force $56,344,224 $3,724,440
$9,729,981 $62,349,765 15.6%
Premiums and other
considerations
Life insurance<F1> $701,684 $35,807
$50,212 $716,089 7.0%
Accident and health
insurance 256,859 58,886
50,647 248,620 20.4%
Property and casualty
insurance 145,565 5,027
35,941 176,479 20.4%
Total premiums $1,104,108 $99,720
$136,800 $1,141,188 12.0%
Year Ended December 31, 1993
Life insurance
in force $57,081,876 $4,617,457
$8,904,628 $61,369,047 14.5%
Premiums and other
considerations
Life insurance<F1> $735,784 $33,357
$45,045 $747,472 6.0%
Accident and health
insurance 357,557 138,291
57,165 276,431 20.7%
Property and casualty
insurance 137,610 3,303
9,474 143,781 6.6%
Total premiums $1,230,951 $174,951
$111,684 $1,167,684 9.6%
Year Ended December 31, 1992
Life insurance
in force $47,992,676 $2,829,588
$10,269,734 $55,432,822 18.5%
Premiums and other
considerations
Life insurance<F1> $715,909 $37,833
$46,662 $724,738 6.4%
Accident and health
insurance 383,828 110,711
50,169 323,286 15.5%
Property and casualty
insurance 138,025 2,899
6,875 142,001 4.8%
Total premiums $1,237,762 $151,443
$103,706 $1,190,025 8.7%
<FN>
<F1> Includes annuities.
FORM 10-K--ITEM 14(a)(3) AND (c)
PROVIDIAN CORPORATION AND SUBSIDIARIES
LIST AND INDEX OF EXHIBITS
Reference
Number Per Exhibit
Exhibit Table Description of Exhibit Number
Page
(3) Certificate of Incorporation as 3.1
-
amended on May 12, 1994. (Provided
as part of electronic transmission.)
(3) By-Laws of Providian Corporation as 3.2
-
amended on February 17, 1988.
(Incorporated by reference as Exhibit 3.3 of the
Company's Annual Report on Form 10-K for the year
ended December 31, 1989, SEC File No. 1-6701.)
(4) Indenture dated April 1, 1983 4.1
-
between the Company and Connecticut
National Bank (as successor to National
Westminster Bank USA) for Debt Securities (which
now are 8 3/4% Sinking Fund Debentures due January
15, 2017 and Medium Term Notes due 1995 to 2022).
(Incorporated by reference as Exhibit 4.2 to
Registration Statement on Form S-3, Registration
No. 2-82957 filed with the Commission on April 8,
1983.)
(4) Supplemental Indenture, dated 4.2
-
September 1, 1989, between the
Company and Connecticut National Bank (as
successor to National Westminster Bank USA),
Supplements the Indenture dated April 1, 1983,
between the Company and Connecticut National Bank
(as successor to National Westminster Bank USA).
(Incorporated by reference as Exhibit 4.1 of Form
8-K dated September 18, 1989, SEC File No. 16701.)
(4) Providian Corporation 1987 4.3
-
Shareholder Rights Agreement as
amended on November 4, 1992. (Incorporated by
reference as Exhibit 4.5 of the Company's Annual
Report on Form 10-K for the year
ended December 31, 1992, SEC File
No. 1-6701.)
(4) Indenture between the Company and 4.4
-
First Trust of New York (successor-
in-interest to Morgan Guaranty Trust Company of
New York), as Trustee, dated as of January 1,
1994. (Incorporated by reference as Exhibit 4.4 of
the Company's Annual Report on Form 10-K for the
year ended December 31, 1993, SEC File No. 1-
6701.)
- 29 -
FORM 10-K--ITEM 14(a)(3) AND (c)
PROVIDIAN CORPORATION AND SUBSIDIARIES
LIST AND INDEX OF EXHIBITS (CONTINUED)
Reference
Number Per Exhibit
Exhibit Table Description of Exhibit Number
Page
(4) Payment and Guarantee Agreement 4.5 -
dated as of May 12, 1994 between
Providian LLC and the Company. (Incorporated by
reference as Exhibit 4.1 of Form 8-K dated May 12,
1994, SEC File No. 1-6701.)
(4) Terms of the 8 7/8% Cumulative 4.6 -
Monthly Income Preferred Stock dated
as of May 15, 1994. (Incorporated by reference as
Exhibit 4.2 of Form 8-K dated May 12, 1994, SEC
File No. 1-6701.)
(10) Providian Corporation 1981 Stock 10.1 -
Option Incentive Plan, through
August 7, 1991. (Incorporated by reference as
Exhibit 10.1 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1990,
SEC File No. 1-6701.)*
(10) 1991 amendments to 1981 Stock Option 10.2 -
Incentive Plan and 1989 Stock Option
Plan. (Incorporated by reference as Exhibit 10.2
of the Company's Annual Report on Form 10-K for
the year ended December 31, 1991, SEC File No. 1
6701.)*
(10) Providian Corporation 1981 Tax- 10.3
-
Qualified Stock Option Plan, as
amended. (Incorporated by reference as Exhibit
10.2 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1990, SEC File
No. 1-6701.)*
(10) Employment Agreement between the 10.4
-
Company and Irving W. Bailey II.
(Incorporated by reference as
Exhibit 10.6 of the Company's
Annual
Report on Form 10-K for the year
ended December 31, 1987, SEC File
No. 1-6701.)*
(10) Descriptions of Company's Management 10.5 -
Incentive Plan, Providian Bancorp's
Annual Incentive Plan and
Company's Long-Term Incentive
Plan. (Incorporated by reference
to the descriptions of the
Incentive Compensation Plans as
described on Pages 6 and 7 of the
Proxy Statement for the Annual
Meeting of Stockholders held May
1, 1992, SEC File No. 1-6701.)*
- 30 -
FORM 10-K--ITEM 14(a)(3) AND (c)
PROVIDIAN CORPORATION AND SUBSIDIARIES
LIST AND INDEX OF EXHIBITS (CONTINUED)
Reference
Number Per Exhibit
Exhibit Table Description of Exhibit Number
Page
(10) Providian Corporation 1989 Stock 10.6 -
Option Plan, through August 7, 1991.
(Incorporated by reference as
Exhibit 10.6 of the Company's
Annual
Report on Form 10-K for the year
ended December 31, 1990, SEC File
No. 1-6701.)*
(10) Amendment to Employment Agreement 10.7 -
between the Company and Irving W.
Bailey II. (Incorporated by reference as
Exhibit 10.7 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1989,
SEC File No. 1-6701.)*
(10) Employment Agreement between the 10.8 -
Company and Joseph M. Tumbler.
(Incorporated by reference as
Exhibit 10.8 of the Company's
Annual
Report on Form 10-K for the year
ended December 31, 1989, SEC File
No. 1-6701.)*
(10) Employment Agreement between the 10.9 -
Company and Lee Adrean, Shailesh J.
Mehta and Lawrence Pitterman.
(Incorporated by reference as
Exhibit 10.9 of the Company's
Annual
Report on Form 10-K for the year
ended December 31, 1990, SEC
File
No. 1-6701.)*
(10) Employment Agreements between the 10.10 -
Company and Frederick C. Kessell and
Robert L. Walker. (Incorporated by reference as
Exhibit 10.11 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1991,
SEC File No. 1-6701.)*
(10) Providian Bancorp Equity Unit Plan. 10.11
-
(Incorporated by reference as
Exhibit 10.12 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1991,
SEC File No. 1-6701.)*
(10) Providian Corporation Deferred 10.12
-
Compensation Plan for Deferral of
Payments under the Providian Corporation
Management Incentive Plan. (Incorporated by
reference as Exhibit 10.13 of the Company's Annual
Report on Form 10-K for the year ended December
31, 1991, SEC File No. 1-6701.)*
- 31 -
FORM 10-K--ITEM 14(a)(3) AND (c)
PROVIDIAN CORPORATION AND SUBSIDIARIES
LIST AND INDEX OF EXHIBITS (CONTINUED)
Reference
Number Per Exhibit
Exhibit Table Description of Exhibit Number
Page
(10) Providian Corporation Deferred 10.13 -
Compensation Plan under the
Providian Corporation Long-Term Incentive Plan.
(Incorporated by reference as Exhibit 10.14 of the
Company's Annual Report on Form 10-K for the year
ended December 31, 1991, SEC File No. 1-6701.)*
(10) Providian Bancorp Deferred 10.14 -
Compensation Plan under the
Providian Bancorp Annual Incentive Plan.
(Incorporated by reference as Exhibit 10.15 of the
Company's Annual Report on Form 10-K for the year
ended December 31, 1991, SEC File No. 1-6701.)*
(10) Descriptions of Providian 10.15 -
Corporation Supplemental Non-
qualified Thrift Savings Plan and Nonqualified
Pension Agreements. (Incorporated by reference to
the descriptions of the Retirement Plans and
Thrift Savings Plan as described on pages 7
through 9 of the Proxy Statement for the Annual
Meeting of Stockholders held May 1, 1992, SEC
File No. 1-6701.)*
(10) Providian Corporation Stock 10.16
-
Ownership Plan (Incorporated by
reference as Exhibit 10.17 of the Company's
Annual Report on Form 10-K for the year ended
December 31, 1992, SEC File No. 1-6701.)*
(10) 1994 Amendments to 1989 Stock Option 10.17
-
Plan. (Provided as part of
electronic transmission.)*
(10) Employment Agreement between the 10.18 -
Company and James V. Elliott.
(Provided as part of electronic
transmission.)*
(10) Operating and Policy Committee 10.19 -
Deferred Compensation Plan.
(Provided as part of electronic
transmission.)*
(12) Computation of ratio of earnings to 12.1
34
fixed charges (Provided as part of
electronic transmission.)
(13) Portions of the Annual Report for 13.1 -
the year ended December 31, 1994.
(Provided as part of electronic
transmission.)
- 32 -
FORM 10-K--ITEM 14(a)(3) AND (c)
PROVIDIAN CORPORATION AND SUBSIDIARIES
LIST AND INDEX OF EXHIBITS (CONTINUED)
Reference
Number Per Exhibit
Exhibit Table Description of Exhibit Number
Page
(21) List of subsidiaries. (Provided as 21.1 36
part of electronic transmission.)
(23) Consent of independent auditors. 23.1 39
(Provided as part of electronic
transmission.)
(27) Financial Data Schedule. (Provided 27.1 40
as part of electronic transmission.)
* This indicates a management
contract or compensatory plan or
arrangement.
- 33 -
</TABLE>
EXHIBIT 10.17
EXCERPT FROM THE MINUTES OF THE MEETING OF THE
HUMAN RESOURCES COMMITTEE OF THE
BOARD OF DIRECTORS OF PROVIDIAN CORPORATION,
HELD FEBRUARY 16, 1994
RESOLVED, that the following STOCK OPTION PLAN
amendments to the 1989 Stock Option AMENDMENTS
Plan, be and hereby are approved
by the Human Resources Committee of Capital Holding
Corporation (the "Corporation") and recommended for
submission (i) to the Corporation's Board of Directors for
its approval and (ii) to the Corporation's stockholders for
approval by them at the next Annual Meeting of Stockholders:
(a) A new Section III(D) shall be added as follows:
(D) The maximum number of shares with respect to which
options may be granted to any employee during any
fiscal year shall be 500,000.
(b) Section VI shall be removed in its entirety.
(c) Section VIII(B) and (C) shall be deleted in their
entirety and replaced with the following:
(B) If a grantee's employment with the Corporation or
an operating company shall cease due to disability
or retirement after attainment of age 55, the
grantee may exercise such grantee's options and
stock appreciation rights at any time within five
years after such grantee shall cease to be an
employee without regard to the limitations on
exercise contained in Section VII(B), or imposed
by the Committee under Section V(C), but in the
case of retirement, no options or stock
appreciation rights may be exercised within six
months of the date of grant; provided, however,
that no option or stock appreciation right may be
exercised on a date subsequent to its expiration.
If a grantee shall die during such five year
period, any option and stock appreciation right
theretofore granted to the grantee under this Plan
may be exercised by the grantee's estate or by the
person designated in the grantee's last will and
testament to the full extent that such option and
stock appreciation right could be exercised by
such deceased grantee immediately prior to such
grantee's death.
(C) If a grantee's employment with the Corporation or
an operating company shall cease due to the
grantee's death, any option and stock appreciation
rights theretofore granted to the grantee under
this Plan may be exercised at any time within five
years after such grantee's death by the grantee's
estate or by the person designated in the
grantee's last will and testament to the full
extent that such option and stock appreciation
rights could have been exercised by such deceased
grantee immediately prior to such grantee's death
without regard to the limitations on exercise
contained in Section VII(B), or imposed by the
Committee under Section V(C); provided, however,
that no option or stock appreciation right may be
exercised on a date subsequent to its expiration.
(d) A new Section X(B) shall be added as follows:
(B) The Committee shall have the discretion to make
any amendments to the Plan applicable to options
and SARs then outstanding under the Plan; provided
however that no amendment shall impair the rights
of any grantee without such grantee's consent.
25
EXHIBIT 10.18
EMPLOYMENT AGREEMENT
AGREEMENT between Providian Corporation, a Delaware
corporation (the "Corporation"), and James V. Elliott (the
"Executive"), dated as of the 15th day of February, 1995.
The Board of Directors of the Corporation (the
"Board"), has determined that it is in the best interests of
the Corporation and its shareholders to assure that the
Corporation will have the continued dedication of the
Executive, notwithstanding the possibility, threat or
occurrence of a Change in Control (as defined below) of the
Corporation. The Board believes it is imperative to
diminish the inevitable distraction of the Executive by
virtue of the personal uncertainties and risks created by a
pending or threatened Change in Control and to encourage the
Executive's full attention and dedication to the Corporation
currently and in the event of any threatened or pending
Change in Control, and to provide the Executive with
compensation and benefits arrangements upon a Change in
Control which ensure that the compensation and benefits
expectations of the Executive will be satisfied and which
are competitive with those of other corporations.
Therefore, in order to accomplish these objectives, the
Board has caused the Corporation to enter into this
Agreement.
IT IS, THEREFORE, AGREED:
1. Certain Definitions. (a) The "Effective Date"
shall be the first date during the "Change in Control
Period" (as defined in Section 1(b)) on which a Change in
Control (as defined in Section 2) occurs. Anything in this
Agreement to the contrary notwithstanding, if a Change in
Control occurs and if the Executive's employment with the
Corporation is terminated or the Executive ceases to be an
officer of the Corporation prior to the date on which a
Change in Control occurs, and if it is reasonably
demonstrated by the Executive that such termination of
employment or cessation of status as an officer (i) was at
the request of a third party who has taken steps reasonably
calculated to effect the Change in Control or (ii) otherwise
arose in connection with the Change in Control, then for all
purposes of this Agreement the "Effective Date" shall mean
the date immediately prior to the date of such termination
of employment or cessation of status as an officer.
(b) The "Change in Control Period" shall mean the
period commencing on the date hereof and ending on the
second anniversary of such date; provided, however, that
commencing on the date one year after the date hereof, and
on each annual anniversary of such date (the date one year
after the date hereof and each annual anniversary of such
date, is hereinafter referred to as the "Renewal Date"), the
Change in Control Period shall be automatically extended so
as to terminate two years from such Renewal Date, unless at
least 60 days prior to the Renewal Date the Corporation
shall give notice to the Executive that the Change in
Control Period shall not be so extended.
2. Change in Control. For the purpose of this
Agreement, a "Change in Control" shall mean:
(a) Any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"))
becomes a beneficial owner (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 20% or more of either
(i) the then outstanding shares of common stock of the
Corporation (the "Outstanding Corporation Common Stock") or
(ii) the combined voting power of the then outstanding
voting securities of the Corporation entitled to vote
generally in the election of directors (the "Outstanding
Corporation Voting Securities"); provided, however, that
beneficial ownership by any of the following shall not
constitute a Change in Control: (x) the Corporation or any
of its subsidiaries, (y) the employee benefit plan (or
related trust) sponsored or maintained by the Corporation or
any of its subsidiaries or (z) any corporation with respect
to which, following such acquisition, more than 60% of,
respectively, the then outstanding shares of common stock of
such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled
to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were
the beneficial owners, respectively, of the Outstanding
Corporation Common Stock and Corporation Voting Securities
immediately prior to such acquisition in substantially the
same proportions as their ownership, immediately prior to
such acquisition, of the Outstanding Corporation Common
Stock and Outstanding Corporation Voting Securities, as the
case may be; or
(b) Individuals who, as of the date hereof, constitute
the Board (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board; provided,
however, that any individual becoming a director subsequent
to the date hereof whose election, or nomination for
election by the Corporation's shareholders, was approved by
a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though
such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose
initial assumption of office occurs as a result of either an
actual or threatened election contest (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act); or
(c) A reorganization, merger or consolidation, with
respect to which, in each case, all or substantially all of
the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Corporation Common Stock
and Outstanding Corporation Voting Securities immediately
prior to such reorganization, merger or consolidation do
not, following such reorganization, merger or consolidation,
beneficially own, directly or indirectly, more than 60% of,
respectively, the then outstanding shares of common stock
and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of
directors, as the case may be, of the corporation resulting
from such reorganization, merger or consolidation in
substantially the same proportions as their ownership,
immediately prior to such reorganization, merger or
consolidation of the Outstanding Corporation Common Stock
and Outstanding Corporation Voting Securities, as the case
may be; or
(d) (i) Approval by the shareholders of the
Corporation of a complete liquidation or dissolution of the
Corporation or (ii) the sale or other disposition of all or
substantially all of the assets of the Corporation, other
than to a corporation, with respect to which following such
sale or other disposition, more than 60% of, respectively,
the then outstanding shares of common stock of such
corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled
to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were
the beneficial owners, respectively, of the Outstanding
Corporation Common Stock and Outstanding Corporation Voting
Securities immediately prior to such sale or other
disposition in substantially the same proportion as their
ownership, immediately prior to such sale or other
disposition, of the Outstanding Corporation Common Stock and
Outstanding Corporation Voting Securities, as the case may
be.
3. Employment Period. The Corporation hereby agrees
to continue the Executive in its employ for the period
commencing on the Effective Date and ending on the earlier
to occur of (i) the fifth anniversary of such date or (ii)
unless the Executive elects to continue employment beyond
the Executive's Normal Retirement Date, the first day of the
month coinciding with or next following the Executive's
Normal Retirement Date (the "Employment Period").
4. Terms of Employment. (a) Position of Duties.
(i) During the Employ-ment Period, (A) the Executive's
position (including status, offices, titles and reporting
requirements), authority, duties and responsibilities shall
be at least commensurate in all material respects with the
most significant of those held, exercised and assigned at
any time during the 90-day period immediately preceding the
Effective Date and (B) unless Executive otherwise agrees,
the Executive's services shall be performed at the location
where the Executive was employed immediately preceding the
Effective Date or at any office or location less than thirty-
five (35) miles from such location.
(ii) During the Employment Period, and excluding
periods of vacation and sick leave to which the Executive is
entitled, the Executive agrees to devote reasonable
attention and time during normal business hours to the
business and affairs of the Corporation and, to the extent
necessary to discharge the responsibilities assigned to the
Executive hereunder, to use reasonable efforts to perform
faithfully and efficiently such responsibilities. The
Executive may (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking
engagements or teach at educational institutions and (C)
manage personal investments, so long as such activities do
not significantly interfere with the performance of the
Executive's responsibilities. It is expressly understood
and agreed that to the extent that any such activities have
been conducted by the Executive prior to the Effective Date,
such prior conduct of activities, and any subsequent conduct
of activities similar in nature and scope shall not
thereafter be deemed to interfere with the performance of
the Executive's responsibilities to the Corporation.
(b) Compensation. (i) Base Salary. During the
Employment Period, the Executive shall receive an annual
base salary ("Annual Base Salary"), which shall be paid at a
bi-weekly rate, at least equal to twenty-six times the
highest bi-weekly base salary paid or payable to the
Executive by the Corporation, together with any of its
affiliated companies, during the twelve-month period
immediately preceding the month in which the Effective Date
occurs. During the Employment Period, the Annual Base
Salary shall be reviewed at least annually and shall be
increased at any time and from time to time as shall be
substantially consistent with increases in base salary
awarded in the ordinary course of business to other peer
executives of the Corporation and its affiliates. Any
increase in Annual Base Salary shall not serve to limit or
reduce any other obligation to the Executive under this
Agreement. Annual Base Salary shall not be reduced after
any such increase and the term Annual Base Salary as
utilized in this Agreement shall refer to Annual Base Salary
as so increased. As used in this Agreement, the term
"affiliated companies" includes any company controlling,
controlled by or under common control with the Corporation.
(ii) Annual Bonus. In addition to Annual Base Salary,
the Executive shall be awarded, for each fiscal year during
the Employment Period, an annual bonus under the
Corporation's Management Incentive Plan (the "Annual Bonus")
in cash at least equal to the average annualized (for any
fiscal year consisting of less than twelve full months or
with respect to which the Executive has been employed by the
Corporation for less than twelve full months) bonus paid or
payable, including by reason of any deferral, to the
Executive by the Corporation and its affiliated companies in
respect of the three fiscal years immediately preceding the
fiscal year in which the Effective Date occurs (the "Recent
Average Bonus"). Each such Annual Bonus shall be payable in
March of the fiscal year next following the fiscal year for
which the Annual Bonus is awarded, unless the Executive
shall otherwise elect to defer the receipt of such Annual
Bonus.
(iii) Long Term Bonus. The Executive shall
participate in all long-term incentive plans generally
applicable to senior management of the Corporation and in
any other long-term plan in which the Executive is
designated by the Board to participate (the "Long Term
Bonus"). In the event of termination of Executive's
employment triggering compensation under Section 6(a) of
this Agreement prior to expiration of any performance cycle
(the "Performance Cycle") under a longer term incentive plan
amounts due Executive under Section 6(a) of this Agreement
shall be determined as follows:
(A) during the balance of the Performance Cycle(s) in
which the Executive is participating at the time of the
termination of his employment, the Company or the relevant
business unit and any similar companies used for comparison
purposes shall be deemed to have achieved the same rate of
growth or change in each of the relevant factors as achieved
in each such factor as of the end of the year in which such
termination occurs:
(B) using the assumptions and methods set forth in
clause (A) above, the amount of long-term incentive that the
Executive would have received at the end of the relevant
Performance Cycle(s) had his employment continued to the end
of such Performance Cycle(s) shall be computed; and
(C) the amount determined pursuant to clause (B) above
shall be multiplied by a fraction, the numerator of which
shall be the number of days in the relevant Performance
Cycle(s) during which the Executive was employed and the
denominator of which shall be the total number of days in
such Performance Cycle(s).
Payment to the Executive or his estate, as the case may
be, of any long-term incentive award shall be made promptly
after the determination of the amount of such award.
(iv) Incentive, Savings and Retirement Plans. During
the Employment Period, the Executive shall be entitled to
participate in all incentive, savings and retirement plans,
practices, policies and programs applicable generally to
other peer executives of the Corporation and its affiliated
companies, but in no event shall such plans, practices,
policies and programs provide the Executive with incentive
opportunities (measured with respect to both regular and
special incentive opportunities, to the extent, if any, that
such distinction is applicable), savings opportunities and
retirement benefit opportunities, in each case, less
favorable, in the aggregate, than the most favorable of
those provided by the Corporation and its affiliated
companies for the Executive under such plans, practices,
policies and programs as in effect at any time during the 90-
day period immediately preceding the Effective Date or if
more favorable to the Executive, those provided generally at
any time after the Effective Date to other peer executives
of the Corporation and its affiliated companies.
(v) Welfare Benefit Plans. During the Employment
Period, the Executive and/or the Executive's family, as the
case may be, shall be eligible for participation in and
shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Corporation
and its affiliated companies, (including, without
limitation, medical, prescription, dental, disability,
salary continuance, employee life, group life, accidental
death and travel accident insurance plans and programs) to
the extent applicable generally to other peer executives of
the Corporation and its affiliated companies, but in no
event shall such plans, practices, policies and programs
provide the Executive with benefits which are less
favorable, in the aggregate, than the most favorable of such
plans, practices, policies and programs in effect for the
Executive at any time during the 90-day period immediately
preceding the Effective Date or, if more favorable to the
Executive, those provided generally at any time after the
Effective Date to other peer executives of the Corporation
and its affiliated companies.
(vi) Expenses. During the Employment Period, the
Executive shall be entitled to receive prompt reimbursement
for all reasonable expenses incurred by the Executive in
accordance with the policies and procedures of the
Corporation and its affiliated companies in effect at any
time during the 90-day period immediately preceding the
Effective Date or, if more favorable to the Executive, as in
effect at any time thereafter with respect to other peer
executives of the Corporation and its affiliated companies.
(vii) Fringe Benefits. During the Employment
Period, the Executive shall be entitled to fringe benefits
in accordance with the most favorable plans, practices,
programs and policies of the Corporation and its affiliated
companies in effect at any time during the 90-day period
immediately preceding the Effective Date or, if more
favorable to the Executive, as in effect at any time
thereafter with respect to other peer executives of the
Corporation and its affiliated companies.
(viii) Office and Support Staff. During the
Employment Period, the Executive shall be entitled to an
office or offices of a size and with furnishings and other
appointments, and to secretarial and other assistance, at
least equal to the most favorable of the foregoing provided
to the Executive at any time during the 90-day period
immediately preceding the Effective Date or, if more
favorable to the Executive, as in effect at any time
thereafter with respect to other peer executives of the
Corporation and its affiliated companies.
(ix) Vacation. During the Employment Period, the
Executive shall be entitled to paid vacation in accordance
with the most favorable plans, policies, programs and
practices of the Corporation and its affiliated companies as
in effect at any time during the 90-day period immediately
preceding the Effective Date or, if more favorable to the
Executive, as in effect generally at any time thereafter
with respect to other peer executives of the Corporation and
its affiliated companies.
5. Termination. (a) Death or Disability. This
Agreement shall terminate automatically upon the Executive's
death. If the Corporation determines in good faith that the
Disability of the Executive has occurred during the
Employment Period (pursuant to the definition of
"Disability" set forth below), it may give the Executive
written notice in accordance with Section 12(b) of this
Agreement of its intention to terminate the Executive's
employment. In such event, the Executive's employment with
the Corporation shall terminate effective on the 30th day
after receipt of such notice (the "Disability Effective
Date"), provided that, within 30 days after such receipt,
the Executive shall fail to return to full-time performance
of the Executive's duties. For purposes of this Agreement,
"Disability" means the absence of the Executive from the
Executive's duties within the Corporation for 180
consecutive business days as a result of the incapacity due
to physical or mental illness which, after the expiration of
such 180 business days, is determined to be total and
permanent by a physician selected by the Corporation or its
insurers and acceptable to the Executive or the Executive's
legal representative (such agreement to acceptability not to
be withheld unreasonably).
(b) Cause. The Corporation may terminate the
Executive's employment for "Cause." For purposes of this
Agreement, "Cause" means (i) a willful and continuing
failure to perform substantially the Executive's obligations
under Section 4(a) of this Agreement (other than as a result
of the Executive's death or Disability); or (ii) conduct
undertaken by the Executive which is demonstrably willful
and deliberate on the Executive's part and which is intended
to result in (x) substantial personal enrichment of the
Executive at the expense of the Corporation and (y)
substantial injury to the Corporation; or (iii) commitment
by the Executive of a felony involving the Corporation.
A termination for Cause within the meaning of clause
(i) or (ii) shall not take effect unless:
(A) the Board shall have delivered a written notice to
the Executive within 30 days of its having knowledge of one
of the circumstances constituting cause within the meaning
of clause (i) or (ii), stating which one of those
circumstances has occurred;
(B) within 30 days of such notice, the Executive is
permitted to respond and defend himself before the Board;
(C) within 15 days of the date on which the Executive
is given the opportunity to respond and defend himself
before the Board, the Executive has not remedied such
circumstance; and
(D) if the Executive has not remedied such
circumstance as provided in subclause (C) above, the Board
notifies the Executive in writing that it is terminating his
employment for Cause.
(c) Good Reason. The Executive's employment may be
terminated during the Employment Period by the Executive for
Good Reason. For purposes of this Agreement, "Good Reason"
means:
(i) (A) the assignment to the Executive of any duties
inconsistent in any respect with the Executive's position
(including status, offices, titles and reporting
requirements), authority, duties or responsibilities as
contemplated by Section 4(a) of this Agreement or (B) any
other action by the Corporation which results in a
diminution in such position, authority, duties or
responsibilities, excluding for this purpose an isolated,
insubstantial and inadvertent action not occurring in bad
faith which is remedied by the Corporation promptly after
receipt of notice thereof given by the Executive;
(ii) any failure by the Corporation to comply with any
of the provisions of Section 4(b) of this Agreement,
excluding for this purpose an isolated, insubstantial and
inadvertent failure not occurring in bad faith which is
remedied by the Corporation promptly after receipt of notice
thereof given by the Executive;
(iii) unless the Executive otherwise agrees, the
Corporation's requiring the Executive to be based at any
office or location other than that at which the Executive is
based at the Effective Date or within thirty-five (35) miles
of such location, except for travel reasonably required in
the performance of the Executive's responsibilities;
(iv) any purported termination by the Corporation of
the Executive's employment otherwise than as permitted by
this Agreement; or
(v) any failure by the Corporation to comply with and
satisfy Section 11(c) of this Agreement provided that such
successor has received at least ten days prior written
notice from the Corporation or the Executive of the
requirements of Section 11(c) of this Agreement.
For purposes of this Section 5(c), any good faith
determination of "Good Reason" made by the Executive shall
be conclusive.
(d) Notice of Termination. Any termination by the
Corporation for Cause or by the Executive for Good Reason
shall be communicated by Notice of Termination to the other
party hereto given in accordance with Section 12(b) of this
Agreement. For purposes of this Agreement, a "Notice of
Termination" means a written notice which (i) indicates the
specific termination provision in this Agreement relied
upon, (ii) to the extent applicable, sets forth in
reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's
employment under the provision so indicated and (iii) if the
Date of Termination (as defined below) is other than the
date of receipt of such notice, specifies the termination
date (which date shall be not more than 15 days after the
giving of such notice). The failure by the Executive or the
Corporation to set forth in the Notice of Termination any
fact or circumstance which contributes to a showing of Good
Reason or Cause shall not waive any right of the Executive
or the Corporation hereunder or preclude the Executive or
the Corporation from asserting such fact or circumstance in
enforcing the Executive's or the Corporation's rights
hereunder.
(e) Date of Termination. "Date of Termination" means
(i) if the Executive's employment is terminated by the
Corporation for Cause, or by the Executive for Good Reason,
the date of receipt of the Notice of Termination or any
later date specified therein, as the case may be, (ii) if
the Executive's employment is terminated by the Corporation
other than for Cause or Disability, the Date of Termination
shall be the date on which the Corporation notifies the
Executive of such termination and (iii) if the Executive's
employment is terminated by reason of death or Disability,
the Date of Termination shall be the date of death of the
Executive or the Disability Effective Date, as the case may
be.
6. Obligations of the Corporation upon Termination.
(a) Good Reason; Other Than for Cause, Death or Disability.
If, during the Employment Period, the Corporation shall
terminate the Executive's employment other than for Cause or
Disability or the Executive shall terminate employment for
Good Reason:
(i) the Corporation shall pay to the Executive in a
lump sum in cash within 30 days after the Date of
Termination the aggregate of the following amounts:
A. the sum of (1) the Executive's Annual Base Salary
through the Date of Termination to the extent not
theretofore paid, (2) the product of (x) the Annual Bonus
and (y) a fraction, the numerator of which is the number of
days in the current fiscal year through the Date of
Termination, and the denominator of which is 365 and (3) any
compensation previously deferred by the Executive (together
with any accrued interest or earnings thereon) and any
accrued vacation pay, in each case to the extent not
theretofore paid (the sum of the amounts described in
clauses (1), (2) and (3) shall be hereinafter referred to as
the "Accrued Obligations"); and
B. the amount equal to the product of (1) two and (2)
the sum of (x) the Executive's Annual Base Salary, (y) the
Annual Bonus and (z) any Long Term Bonus earned or accrued
but not yet paid under Section 4(b)(iii); provided, however,
that such amount shall be paid in lieu of, and the Executive
hereby waives the right to receive, any other amount of
severance relating to salary or bonus continuation to be
received by the Executive upon termination of employment of
the Executive under any severance plan, policy or
arrangement of the Corporation; and
C. a separate lump-sum supplemental retirement
benefit equal to the difference between (1) the actuarial
equivalent (utilizing for this purpose the actuarial
assumptions utilized with respect to the Corporation's
Retirement Plan (or any successor plan thereto) (the
"Retirement Plan") during the 90-day period immediately
preceding the Effective Date) of the benefit payable under
the Retirement Plan and any supplemental and/or excess
retirement plan providing benefits for the Executive (the
"SERP") which the Executive would receive if the Executive's
employment continued at the compensation level provided for
in Sections 4(b)(i) and 4(b)(ii) of this Agreement for the
remainder of the Employment Period, assuming for this
purpose that all accrued benefits are fully vested and that
benefit accrual formulas are no less advantageous to the
Executive than those in effect during the 90-day period
immediately preceding the Effective Date, and (2) the
actuarial equivalent (utilizing for this purpose the
actuarial assumptions utilized with respect to the
Retirement Plan during the 90-day period immediately
preceding the Effective Date) of the Executive's actual
benefit (paid or payable), if any, under the Retirement Plan
and the SERP;
(ii) for the remainder of the Employment Period, or
such longer period as any plan, program, practice or policy
may provide, the Corporation shall continue benefits to the
Executive and/or the Executive's family at least equal to
those which would have been provided to them in accordance
with the plans, programs, practices and policies described
in Section 4(b)(iv) of this Agreement if the Executive's
employment had not been terminated in accordance with the
most favorable plans, practices, programs or policies of the
Corporation and its affiliated companies applicable
generally to other peer executives and their families during
the 90-day period immediately preceding the Effective Date
or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer
executives of the Corporation and its affiliated companies
and their families, provided, however, that if the Executive
becomes reemployed with another employer and is eligible to
receive medical or other welfare benefits under another
employer provided plan, the medical and other welfare
benefits described herein shall be secondary to those
provided under such other plan during such applicable period
of eligibility. For purposes of determining eligibility of
the Executive for retiree benefits pursuant to such plans,
practices, programs and policies, the Executive shall be
considered to have remained employed until the end of the
Employment Period and to have retired on the last day of
such period; and
(iii) to the extent not theretofore paid or
provided, the Corporation shall timely pay or provide to the
Executive any other amounts or benefits required to be paid
or provided or which the Executive is eligible to receive
pursuant to this Agreement under any plan, program, policy
or practice or contract or agreement of the Corporation and
its affiliated companies (such other amounts and benefits
shall be hereinafter referred to as the "Other Benefits"),
but excluding solely purposes of this Section 6(a)(iii)
amounts waived by the Executive pursuant to the proviso of
Section 6(a)(i)(B).
(b) Death. If the Executive's employment is
terminated by reason of the Executive's death, this
Agreement shall terminate without further obligations to the
Executive's legal representatives under this Agreement other
than for payment of the Accrued Obligations and the timely
payment or provision of Other Benefits. All Accrued
Obligations shall be paid to the Executive's estate or
beneficiary, as applicable, in a lump sum in cash within 30
days of the Date of Termination. Anything in this Agreement
to the contrary notwithstanding, the Executive's family
shall be entitled to receive benefits at least equal to the
most favorable benefits provided by the Corporation and any
of its affiliated companies to surviving families of peer
executives of the Corporation and such affiliated companies
under such plans, programs, practices and policies relating
to family death benefits, if any, as in effect at any time
during the 90-day period immediately preceding the Effective
Date or, if more favorable to the Executive and/or the
Executive's family, as in effect at any time on the date of
Executive's death with respect to other peer executives of
the Corporation and its affiliated companies and their
families.
(c) Disability. If the Executive's employment is
terminated by reason of the Executive's Disability during
the Employment Period, this Agreement shall terminate
without further obligations to the Executive, other than for
payment of Accrued Obligations and the timely payment or
provision of Other Benefits. All Accrued Obligations shall
be paid to the Executive in a lump sum in cash within 30
days of the Date of Termination. With respect to the
provision of Other Benefits, the term Other Benefits as
utilized in this Section 6(c) shall include, and the
Executive shall be entitled after the Disability Effective
Date to receive, disability and other benefits at least
equal to the most favorable of those generally provided by
the Corporation and its affiliated companies to disabled
executives and/or their families in accordance with such
plans, programs, practices and policies relating to
disability, if any, as in effect generally with respect to
other peer executives and their families at any time during
the 90-day period immediately preceding the Effective Date
or, if more favorable to the Executive and/or the
Executive's family, as in effect at any time thereafter
generally with respect to other peer executives of the
Corporation and its affiliated companies and their families.
(d) Cause; Other than for Good Reason. If the
Executive's employment shall be terminated for Cause during
the Employment Period, this Agreement shall terminate
without further obligations other than the obligation to pay
to the Executive Annual Base Salary through the Date of
Termination plus the amount of any compensation previously
deferred by the Executive, in each case to the extent
theretofore not paid. If the Executive terminates
employment during the Employment Period, excluding a
termination for Good Reason, this Agreement shall terminate
without further obligations to the Executive, other than for
Accrued Obligations and the timely payment or provision of
Other Benefits. In such case, all Accrued Obligations shall
be paid to the Executive in a lump sum in cash within 30
days of the Date of Termination.
7. Non-exclusivity of Rights. Except as otherwise
provided in Sections 6(a)(i)(B), 6(a)(ii) and 6(a)(iii) of
this Agreement, nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in
any benefit, bonus, incentive or other plan or program
provided by the Corporation or any of its affiliated
companies and for which the Executive may qualify, nor shall
anything herein limit or otherwise affect such rights as the
Executive may have under any stock option or other
agreements with the Corporation or any of its affiliated
companies. Amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plan or
program of the Corporation or any of its affiliated
companies at or subsequent to the Date of Termination shall
be payable in accordance with such plan or program.
8. Full Settlement. The Corporation's obligation to
make the payments provided for in this Agreement and
otherwise to perform its obligations hereunder shall not be
affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment, defense
or other right which the Corporation may have against the
Executive or others. In no event shall the Executive be
obligated to seek other employment by way of mitigation of
the amounts payable to the Executive under any of the
provisions of this Agreement, and, except as provided in
Section 6(a)(ii) of this Agreement, such amounts shall not
be reduced whether or not the Executive obtains other
employment. The Corporation agrees to pay, to the full
extent permitted by law, all legal fees and expenses which
the Executive may reasonably incur as a result of any
contest (regardless of the outcome thereof) by the
Corporation or others of the validity or enforceability of,
or liability under, any provision of this Agreement or any
guarantee of performance thereof (including as a result of
any contest by the Executive about the amount of any payment
pursuant to this Agreement), plus in each case interest, on
any delayed payment at the applicable Federal rate provided
for in Section 7872(f)(2)(A) of the Internal Revenue Code of
1986, as amended (the "Code").
9. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary
notwithstanding, in the event it shall be determined that
any payment or distribution by the Company to or for the
benefit of the Executive (whether paid or payable or
distributed or distributable pursuant to the terms of this
Agreement or otherwise, but determined without regard to any
additional payments required under this Section 9) (a
"Payment") would be subject to the excise tax imposed by
Section 4999 of the code or any interest or penalties are
incurred by the Executive with respect to such excise tax
(such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the
"Excise Tax"), then the Executive shall be entitled to
receive an additional payment (a "Gross-Up Payment") in an
amount such that after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to
such taxes), including, without limitation, any income taxes
(and any interest and penalties imposed with respect
thereto) and Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 9(c), all
determinations required to be made under this Section 9,
including whether and when a Gross-Up Payment is required
and the amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination, shall be
made by a nationally recognized accounting firm (the
"Accounting Firm") which shall provide detailed supporting
calculations both to the Company and the Executive within 15
business days of the receipt of notice from the Executive
that there has been a Payment, or such earlier time as is
requested by the Company. The Accounting Firm shall be
jointly selected by the Company and the Executive and shall
not, during the two years preceding the date of its
selection, have acted in any way on behalf of the Company.
If the Company and the Executive cannot agree on the firm to
serve as the Accounting Firm, then the Company and the
Executive shall each select a nationally recognized
accounting firm and those two firms shall jointly select a
nationally recognized accounting firm to serve as the
Accounting Firm. All fees and expenses of the Accounting
Firm shall be borne solely by the Company. Any Gross-Up
Payment, as determined pursuant to this Section 9, shall be
paid by the Company to the Executive within five days of the
receipt of the Accounting Firm's determination. If the
Accounting Firm determines that no Excise Tax is payable by
the Executive, it shall furnish the Executive with a written
opinion that failure to report the Excise Tax on the
Executive's applicable federal income tax return would not
result in the imposition of a negligence or similar penalty.
Any determination by the Accounting Firm shall be binding
upon the Company and the Executive. As a result of the
uncertainty in the application of Section 4999 of the Code
at the time of the initial determination by the Accounting
Firm hereunder, it is possible that Gross-Up Payments which
will not have been made by the Company should have been made
("Underpayment"), consistent with the calculations required
to be made hereunder. In the event that the Company
exhausts its remedies pursuant to Section 9(c) and the
Executive thereafter is required to make a payment of any
Excise Tax, the Accounting Firm shall determine the amount
of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for
the benefit of the Executive.
(c) The Executive shall notify the company in writing
of any claim by the Internal Revenue Service that, if
successful, would require the payment by the Company of a
Gross-Up Payment. Such notification shall be given as soon
as practicable but no later than ten business days after the
Executive is informed in writing of such claim and shall
apprise the Company of the nature of such claim and the date
on which such claim is requested to be paid. The Executive
shall not pay such claim prior to the expiration of the 30-
day period following the date on which he or she gives such
notice to the Company (or such shorter period ending on the
date that any payment of taxes with respect to such claim is
due). If the Company notifies the Executive in writing
prior to the expiration of such period that it desires to
contest such claim, the Executive shall:
(i) give the Company any information reasonably
requested by the Company relating to such claim,
(ii) take such action in connection with contesting
such claim as the Company shall reasonably request in
writing from time to time, including, without limitation,
accepting legal representation with respect to such claim by
an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in
order effectively to contest such claim, and
(iv) permit the Company to participate in any
proceedings relating to such claim;
provided, however, that the Company shall bear and pay
directly all costs and expenses (including additional
interest and penalties) incurred in connection with such
contest and shall indemnify and hold the Executive harmless,
on an after-tax basis, for any Excise Tax or income tax
(including interest and penalties with respect thereto)
imposed as a result of such representation and payment of
costs and expenses. Without limitation on the foregoing
provisions of this Section 9(c), the Company shall control
all proceedings taken in connection with such contest and,
at its sole option, may pursue or forego any and all
administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such
claim and may, at its sole option, either direct the
Executive to pay the tax claimed and sue for a refund or
contest the claim in any permissible manner, and the
Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court
of initial jurisdiction and in one or more appellate courts,
as the Company shall determine; provided, however, that if
the Company directs the Executive to pay such claim and sue
for a refund, the Company shall advance the amount of such
payment to the Executive, on an interest-free basis and
shall indemnify and hold the Executive harmless, on an after-
tax basis, from any Excise Tax or income tax (including
interest or penalties with respect thereto) imposed with
respect to such advance or with respect to any imputed
income with respect to such advance; and further provided
the Executive shall not be required by the Company to agree
to any extension of the statute of limitations relating to
the payment of taxes for the taxable year of the Executive
with respect to which such contested amount is claimed to be
due unless such extension is limited solely to such
contested amount. Furthermore, the Company's control of the
contest shall be limited to issues with respect to which a
Gross-Up Payment would be payable hereunder and the
Executive shall be entitled to settle or contest, as the
case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
(d) If, after the receipt by the Executive of an
amount advanced by the Company pursuant to Section 9(c), the
Executive becomes entitled to receive any refund with
respect to such claim, the Executive shall (subject to the
Company's complying with the requirements of Section 9(c))
promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the
Executive of an amount advanced by the Company pursuant to
Section 9(c), a determination is made that the Executive
shall not be entitled to any refund with respect to such
claim and the Company does not notify the Executive in
writing of its intent to contest such denial of refund prior
to the expiration of 30 days after such determination, then
such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to
the extent thereof, the amount of Gross-Up Payment required
to be paid.
(e) If, pursuant to regulations issued under Section
280G or 4999 of the Code, the Company and the Executive were
required to make a preliminary determination of the amount
of an excess parachute payment (as contemplated by Q/A of
the proposed regulations under Section 280G of the Code as
issued on May 4, 1989) and thereafter a redetermination of
the Excise Tax is required under the applicable regulations,
the parties shall request the Accounting Firm to make such
redetermination. If as a result of such redetermination an
additional Gross-Up Payment is required, the amount thereof
shall be paid by the Company to the Executive within five
days of the receipt of the Accounting Firm's determination.
If the redetermination of the Excise Tax results in a
reduction of the Excise Tax, the Executive shall take such
steps as the Company may reasonably direct in order to
obtain a refund of the excess Excise Tax paid. If the
Company determines that any suit or proceeding is necessary
or advisable in order to obtain such refund, the provisions
of Section 9(c) relating to the contesting of a claim shall
apply to the claim for such refund, including, without
limitation, the provisions concerning legal representation,
cooperation by the Executive, participation by the Company
in the proceedings and indemnification by the Company. Upon
receipt of any such refund, the Executive shall promptly pay
the amount of such refund to the Company. If the amount of
the income taxes otherwise payable by the Executive in
respect of the year in which the Executive makes such
payment to the Company is reduced as a result of such
payment, the Executive shall, no later than the filing of
his income tax return in respect of such year, pay the
amount of such tax benefit to the Company. In the event
there is a subsequent redetermination of the Executive's
income taxes resulting in a reduction of such tax benefit,
the Company shall, promptly after receipt of notice of such
reduction, pay to the Executive the amount of such
reduction. If the Company objects to the calculation or
recalculation of the tax benefit, as described in the
preceding two sentences, the Accounting Firm shall make the
final determination of the appropriate amount. The
Executive shall not be obligated to pay to the Company the
amount of any further tax benefits that may be realized by
him or her as a result of paying to the Company the amount
of the initial tax benefit.
10. Confidential Information. (a) The Executive shall
not, without the prior written consent of the Corporation,
divulge, disclose or make accessible to any other person,
firm, partnership or corporation or other entity any
Confidential Information (as defined in Section 10(b) below)
pertaining to the business of the Corporation except (i)
while employed by the Corporation in the business of and for
the benefit of the Corporation or (ii) when required to do
so by a court of competent jurisdiction, by any governmental
agency having supervisory authority over the business of the
Corporation, or by any administrative body or legislative
body (including a committee thereof) with purported or
apparent jurisdiction to order the Executive to divulge,
disclose or make accessible such information.
(b) For the purposes of this Agreement, Confidential
Information shall mean all nonpublic information concerning
the Corporation's business including its products, customer
lists, financial information and marketing plans and
strategies. Confidential Information does not include the
information that is, or becomes, available to the public,
unless such availability occurs through a breach by the
Executive of the provisions of this Section.
(c) In no event shall an asserted violation of the
provisions of this Section 10 constitute a basis for
deferring or withholding any amounts otherwise payable to
the Executive under this Agreement.
11. Successors. (a) This Agreement is personal to
the Executive and without the prior written consent of the
Corporation shall not be assignable by the Executive
otherwise than by will or the laws of descent and
distribution. This Agreement shall inure to the benefit of
and be enforceable by the Executive's legal representatives.
(b) This Agreement shall inure to the benefit of and
be binding upon the Corporation and its successors.
(c) In the event of a Change in Control of the
Corporation, (i) any parent company or Successor shall, in
the case of a successor, by an agreement in form and
substance satisfactory to the Executive, expressly assume
and agree to perform this Agreement and, in the case of a
parent company, by an agreement in form and substance
satisfactory to the Executive, guarantee and agree to cause
the performance of this Agreement, in each case, in the same
manner and to the same extent as the Corporation would be
required to perform if no Change in Control had taken place.
12. Miscellaneous. (a) This Agreement shall be
governed by and construed in accordance with the laws of the
Commonwealth of Kentucky, without reference to principles of
conflict of laws. The captions of this Agreement are not
part of the provisions hereof and shall have no force or
effect. This Agreement may not be amended or modified
otherwise than by a written agreement executed by the
parties hereto or their respective successors and legal
representatives.
(b) All notices and other communications hereunder
shall be in writing and shall be given by hand delivery to
the other party or by registered or certified mail, return
receipt requested, postage prepaid, addressed as follows:
If to the Executive: James V. Elliott
Providian Corporation
Post Office Box 32830
Louisville, Kentucky 40232
If to the Corporation: Providian Corporation
400 West Market Street
Post Office Box 32830
Louisville, Kentucky 40232
Attention: V. P. Human Resources
or to such other address as either party shall have
furnished to the other in writing in accordance herewith.
Notice and communications shall be effective when actually
received by the addressee.
(c) The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement.
(d) The Corporation may withhold from any amounts
payable under this Agreement such Federal, state or local
taxes as shall be required to be withheld pursuant to any
applicable law or regulation.
(e) The Executive's failure to insist upon strict
compliance with any provision of this Agreement shall not be
deemed to be a waiver of such provision or any other
provisions hereof.
(f) All references to sections of the Code shall be
deemed to refer to corresponding sections of any successor
federal income tax statute.
(g) This Agreement contains the entire understanding
of the Corporation and the Executive with respect to the
subject matter hereof and supersedes all prior agreements,
representations and understandings of the parties with
respect to the subject matter hereof. It is further
specifically agreed that Executive shall not otherwise be
entitled to any compensation or benefits under the terms of
the Corporation's Change in Control Policy.
(h) The Executive and the Corporation acknowledge that
the employment of the Executive by the Corporation is
currently "at will", and, prior to the Effective Date, may
be terminated by either the Executive or the Corporation at
any time. This Agreement shall terminate and there shall be
no further rights or liabilities hereunder upon a
termination of Executive's employment prior to the Effective
Date.
IN WITNESS WHEREOF, the Executive has hereunto set his
hand and, pursuant to the authorization from its Board of
Directors, the Corporation has caused these presents to be
executed in its name on its behalf, all as of the date and
year first above written.
PROVIDIAN CORPORATION
______________________________
Irving W. Bailey, II
Chairman and Chief Executive
Officer
_____________________________
James V. Elliott
1
O&PDCP.DOC
Owner: Greg Meiman
1. PURPOSE
The purpose of the Operating & Policy Committee Deferred
Compensation Plan is to provide retirement, long-term
savings, death or termination of employment benefits to Key
Employees (as hereinafter defined) of Providian Corporation
and its affiliates.
2. DEFINITIONS
2.1 "Beneficiary" means the person or persons so designated
by a Participant in accordance with Section 6 hereof.
2.2 "Cash Account" means a Deferred Compensation Account
pursuant to which a Participant's Deferred Compensation
shall be credited with interest as provided in Section
4.4 hereof.
2.3 "Change in Control" shall mean:
(a) Any individual, entity or group (within the
meaning of Section 13(d) (3) or 14 (d) (2) of the
Securities Exchange Act of 1934, as amended (the
"Exchange Act")) who becomes a beneficial owner (within
the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 20% or more of either (i) the then
outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the
combined voting power of the then outstanding
securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company
Voting Securities"); provided, however, that beneficial
ownership by any of the following shall not constitute
a Change in Control: (x) the company or any of its
subsidiaries, (y) any employee benefit plan (or
related trust) sponsored or maintained by the Company
or any of its subsidiaries or (z) any corporation
with respect to which, following such acquisition, more
than 60% or, respectively, the then outstanding shares
of common stock of such corporation and the combined
voting power of the then outstanding voting securities
of such corporation entitled to vote generally in the
election of directors is then beneficially owned,
directly or indirectly, by all or substantially all of
the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities
immediately prior to such acquisition in substantially
the same proportions as their ownership, immediately
prior to such acquisition, of the Outstanding Company
Common Stock and Outstanding Company Voting Securities,
as the case may be; or
(b) Individuals who, as of the date hereof,
constitute the Board of Directors of the Company (the
"Incumbent Board") cease for any reason to constitute
at least a majority of the Board of Directors of the
company; provided, however, that any individual
becoming a director subsequent to the date hereof whose
election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent
Board shall be considered as though such individual
were a member of the Incumbent Board, but excluding,
for this purpose, any such individual whose initial
assumption of office occurs as a result of either an
actual or threatened election contest (as such terms
are used in Rule 14a-11 of Regulation 14A promulgated
under Exchange Act); or
(c) A reorganization, merger or consolidation,
with respect to which, in each case, all or
substantially all of the individuals and entities who
were the beneficial owner, respectively, of the
Outstanding Company Stock and Outstanding Company
Voting Securities immediately prior to such
reorganization, merger or consolidation do not,
following such reorganization, merger or consolidation,
beneficially own, directly or indirectly, more than 60%
of, respectively, the then outstanding shares of common
stock and the combined voting power of the then
outstanding voting securities entitled to vote
generally in the election of directors, as the case may
be, of the corporation resulting from such
reorganization, merger or consolidation in
substantially the same proportions as their ownership,
immediately prior to such reorganization, merger or
consolidation of the Outstanding Company Common Stock
and Outstanding Company Voting Securities, as the case
may be; or
(d) (i) Approval by the shareholders of the
Company of a complete liquidation or dissolution of the
Company of (ii) the sale or other disposition of all
or substantially all of the assets of the Company,
other than to a corporation, with respect to which
following such sale or other disposition, more than 60%
of, respectively, the then outstanding share of common
stock or such corporation and the combined voting power
of the then outstanding voting securities of such
corporation entitled to vote generally in the election
of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the
individuals and entities who are the beneficial owners,
respectively, of the Outstanding Company Common Stock
and Outstanding Company Voting Securities immediately
prior to such sale or other disposition in
substantially the same proportion as their ownership,
immediately prior to such sale or other disposition, of
the Outstanding Company Common Stock and Outstanding
Company Voting Securities , as the case may be.
2.4 "Company" means Providian Corporation and its affiliate
corporations who participate in the Plan.
2.5 "Compensation Plans" means those Company plans
designated by the Senior Vice President -
Administration - Human Resources of the Company under
which compensation may be deferred into this Plan,
including base salary and all incentive plans.
2.6 "Deferred Compensation" means compensation earned by a
Participant under any of the Compensation Plans which
the Participant has elected to defer pursuant to the
provisions of the Compensation Plans or this Plan.
2.7 "Deferred Compensation Account" means a Cash Account
maintained by the Company on its books for a
Participant who has Deferred Compensation under any of
the Company's Compensation Plans.
2.8 "Key Employee" means a member of the Operating and
Policy Committee of the Company in a position that has
a significant impact upon the success of the Company's
annual business results and is a member of a select
group of management or highly compensated employees.
2.9 "Participant" means any Key Employee of the Company
selected to participate in the Plan.
2.10 "Period" means a year, quarter, month, or biweekly
duration as provided for in the Compensation Plan.
2.11 "Plan" means this Operating & Policy Committee Deferred
Compensation Plan.
2.12 "Unforeseeable Emergency" means demonstrable and
unforeseen financial need for funds to meet
extraordinary medical or medical-related expenses, or
extraordinary expenses related to an unanticipated
casualty or accident beyond the control of the
Participant.
2.13 "Year" means the fiscal year of the Company, which is
the calendar year.
3. PARTICIPATION IN THE PLAN
3.1 Eligibility for participation in the Plan shall be
limited to Key Employees as defined by the Plan.
4. DEFERRED COMPENSATION ACCOUNTS
4.1 The Company shall establish a Deferred Compensation
Account, with respect to the Deferred Compensation of a
Participant, for each Participant in accordance with
the instructions provided by such Participant pursuant
to the requirements of the Compensation Plans or this
Plan.
4.2 A Participant's or Beneficiary's rights to receive
payments under this Plan are merely those of an
unsecured general creditor of the Company and its
affiliate corporations. Such rights constitute a mere
promise by the Company and its affiliate corporations
to make payments to Participants and their
Beneficiaries in the future. It is the intention of
all of the parties to this agreement, that the Plan be
unfunded for federal tax purposes and for purposes of
Title I of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"). The obligation of the
Company may, in its sole discretion, be satisfied from
any course of funds, including but not limited to
payment from a trust or trusts established by the
Company which permit such payments to be made
therefrom.
4.3 Deferred Compensation shall be credited to a Cash
Account as soon as practicable following the Period
with respect to which such Deferred Compensation is
earned by the Participant.
4.4 Interest on the Cash Account balance shall be
calculated and shall either be paid to the Participant
quarterly or credited to his or her account at the end
of each calendar quarter in accordance with an election
made by each Participant in compliance with the terms
of the applicable Compensation Plans. Amounts credited
to the Cash Account after the first day of a calendar
quarter shall be credited with pro rata interest on the
basis of the number of days of such quarter during
which such amounts were credited. Withdrawals prior to
the end of a calendar quarter shall be credited with
interest, based on the prior quarter's interest rate,
for the number of days during the quarter for which
such amount was credited. The interest rate for the
quarter shall be equal to the Salomon Brothers Index
for a single A-rated utility bonds in effect at the end
of such quarter less five-tenths of one percent (0.5%).
4.5 If Participant's active employment with the Company
ceases by reason of retirement pursuant to the
Company's retirement plan or written contract, the
Company shall make payments to such Participant either
in a lump sum or in substantially equal annual
installments over a three or five-year period in
accordance with an election made by such Participant,
provided such election was made in compliance with the
terms of the applicable Compensation Plans or this
Plan. If the Participant's active employment with the
Company ceases by reason of long-term disability
recognized as such by the Company, or if the
Participant's active employment with the Company ceases
by reason of retirement pursuant to the Company's
retirement plan or written contract but no election was
made in accordance with the previous sentence with
respect to an amount deferred under a Compensation
Plan, the Company will make payments to such
Participant in substantially equal annual installments
over a three-year period. The amounts payable pursuant
to this paragraph 4.5 are described below:
4.5.1 The number of dollars equal to the
Cash Account balance with interest as provided in
paragraph 4.4 as of the date of the cessation of
active employment;
4.5.2 If a Participant receives payment in
installments, the Company shall calculate and credit
interest until each payment date on the unpaid
balance of such Participant's account at the rate
specified in Section 4.4
4.5.3 If a Participant whose active
employment ceased due to long-term disability, as
recognized by the Company, again becomes actively
employed by the Company, installment payments
pursuant to Section 4.5 shall cease. The unpaid
balance of the account shall then be credited to a
Deferred Cash Account which shall be maintained
subject to the provisions of the Plan as if active
employment had never ceased.
4.5.4 Lump sum payments, if elected in
accordance with the provisions of a Compensation
Plan or this Plan and in accordance with paragraph
4.5 above, shall be made within 30 days following
the cessation of a Participant's active employment
under Section 4.5. If a Participant elects to
receive payment in substantially equal annual
installments over a three or five-year period or
otherwise becomes entitled to receive payments in
substantially equal annual installments pursuant to
paragraph 4.5 above, such installments shall
commence 30 days following the cessation of
Participant's employment with the Company.
4.6 Within 30 days following the cessation of a
Participant's active employment with the Company for
reasons other than retirement pursuant to the Company's
retirement plan or written contract, or long-term
disability recognized as such by the Company, the
Company will pay to such Participant or to the
Participant's Beneficiary, in a lump sum, an amount
equal to the Deferred Cash Account balance as of the
date of cessation of active employment with interest,
as determined in accordance with Section 4.4 above, to
the date of payment; however, if the Participant has
elected to receive interest payments as provided for in
Section 4.4, such amount shall be less any interest
payments received.
4.7 Upon application by a Participant who is receiving
payments in the form of installments following
separation from active employment on account of long-
term disability or retirement, the Committee may direct
payment in a lump sum of all or a portion of the
remaining amounts credited to the account of such
Participant in the event of Unforeseeable Emergency.
Any such application must set forth the circumstances
constituting such Unforeseeable Emergency.
Notwithstanding the foregoing, the Committee may not
direct payment of any amounts credited to the accounts
of a Participant to the extent that such emergency is
or may be relieved (a) through reimbursement or
compensation by insurance or otherwise; or (b) by
liquidation of the Participant's assets, to the extent
that such liquidation would itself not cause severe
financial hardship. Any distribution due to
Unforeseeable Emergency shall only be permitted to the
extent reasonable needed to satisfy such hardship, and
shall be made in the sole discretion of the Committee,
both with respect to the determination as to whether an
Unforeseable Emergency exists and as to the amount
distributable. In all cases, the requirements and
standards set forth in section 1.457.2(h) (4) and (5)
of the Income Tax Regulations will govern the
determinations of a Participant's eligibility for and
the amount of any distributions under this paragraph
4.7.
4.8 The establishment of the accounts under this Plan
constitutes only a method, by bookkeeping entry, of
determining the amount of deferred awards payable. The
Company shall be under no obligation to segregate any
assets or to otherwise secure any payment provided
hereunder. It is not intended by the Company nor by
any Participant that the amounts in the accounts be
held by the Company in trust for any Participant or for
the Beneficiary of any such Participant; provided,
however, that the Company retains the right, in its
sole and absolute discretion, to establish and maintain
a trust or trusts, the corpus of which may be used to
discharge the obligations of the Company hereunder.
4.9 The right to receive payment under this Plan shall not
be subject to anticipation, alienation, sale,
assignment, pledge, encumbrance, or charge, and any
attempt to anticipate, alienate, sell, assign, pledge,
encumber, or charge such right shall be void. No
payment nor right to payment shall in any manner be
liable for or subject to debts, contracts, liabilities
or torts of the Participant or the Participant's
Beneficiary.
4.10 All payments made pursuant to Section 4 above shall be
reduced by the amount of any federal, state, or local
taxes required to be withheld by the Company or other
payor.
5. ADMINISTRATION
5.1 The Senior Vice President - Administration - Human
Resources of the Company shall be the sole
administrator of the Plan and will administer the Plan,
interpret, construe and apply its provisions in
accordance with its terms. The Senior Vice President -
Administration - Human Resources of the Company shall
further establish, adopt or revise such rules and
regulations as it may deem necessary or advisable for
the administration of the Plan.
5.2 Each Participant will receive quarterly statements in
such form as the Committee deems desirable setting for
the the balance standing to the credit of the
Participant's Deferred Compensation Account.
5.3 Manner of election to defer pursuant to the provisions
of this Plan. In the event that the Compensation Plan
does not otherwise provide for a method of making a
deferral election, a Participant may make such election
under this paragraph. In the event a Participant
desires to defer all or part of the payment of an
amount due under a Compensation Plan, each such
Participant shall irrevocably elect, before the Period
of performance of services, in writing on forms
provided by the Company, the specific percentage and
method of payment of the portion of the compensation
which is to be deferred, if earned for such Period.
6. BENEFICIARY DESIGNATION
6.1 Each Participant shall have the right, at any time, to
designate any person or persons as Beneficiary or
Beneficiaries (both primary as well as contingent) to
whom payment under the Plan shall be made in the event
of the Participant's death prior to complete
distribution to the Participant of the benefits due to
the Participant under the Plan. Each Beneficiary
designation shall become effective only when filed in
writing with the Senior Vice President - Administration
- Human Resources of the Company during the
Participant's lifetime on a form prescribed by the
Senior Vice President - Administration - Human
Resources of the Company with written acknowledgment of
receipt.
6.2 The filing of a new Beneficiary designation form will
cancel all Beneficiary designations previously filed.
The spouse of a married Participant domiciled in a
community property jurisdiction shall join in any
designation of Beneficiary or Beneficiaries other than
the spouse.
6.3 If a Participant fails to designate a Beneficiary as
provided above, or if all designated Beneficiaries
predecease the Participant or die prior to complete
distribution of Participant's benefits, then the
Senior Vice President - Administration - Human
Resources of the Company shall direct the distribution
of such benefits to the Participant's estate.
7. MISCELLANEOUS
7.1 This Plan shall be effective June 1, 1994, with
continuation thereafter contemplated, subject to review
of its operation. However, this Plan shall at all
times remain subject to amendment, modification or
termination by action of the Senior Vice President -
Administration - Human Resources of the Company;
provided, however, in the event of termination, any
amount held in a Participant's Deferred Compensation
Account shall be distributed to the Participant in
accordance with Section 4.6 hereof. Notwithstanding
the foregoing, this Plan may not be amended, modified
or terminated following a Change in Control, without
the prior written consent of each Participant
hereunder.
7.2 This Plan shall not be deemed to constitute a contract
between the Company and any Participant. Nothing
contained in this Plan shall be deemed to give any
Participant the right to be retained in the service of
the Company or to interfere with the right of the
Company to discharge any Participant at any time
regardless of the effect which such discharge shall
have upon such individual as a Participant in the Plan.
7.3 This Plan shall be construed in accordance with the
laws of the Commonwealth of Kentucky.
7.4 In the event any prevision of this Plan is held
invalid, void, or unenforceable, the same shall not
affect, in any respect whatsoever, the validity of any
other provisions of this Plan.
7.5 Any notice of filing required or permitted to be given
to the Senior Vice President - Administration - Human
Resources of the Company under the Plan shall be in
writing and hand delivered, or sent by registered or
certified mail, to the principal office of the Company.
Such notice shall be deemed given as of the date of
delivery or the postmark on the receipt for
registration or certification.
7.6 This Plan shall be binding upon the Company and its
successors and assigns.
do not remove page breaks and sections! Thank you
TABLE OF CONTENTS
Section Description Page
1 Purpose . . . . . . . . . . . . . .
. . . . . 1
2 Definitions . . . . . . . . . . . .
. . . . . 1
3 Participation in the Plan . . . . .
. . 5
4 Deferred Compensation Accounts 5
5 Administration . . . . . . . . . . . . . .
11
6 Beneficiary Designation . . . . . . . 12
7 Miscellaneous . . . . . . . . . . . . . . .
13
do not remove these breaks and sections!
PROVIDIAN CORPORATION
OPERATING & POLICY COMMITTEE DEFERRED COMPENSATION PLAN
EFFECTIVE AS OF JUNE 1, 1994
<TABLE>
EXHIBIT 12.1
<CAPTION>
PROVIDIAN CORPORATION AND SUBSIDIARIES
COMPUTATION OF HISTORICAL RATIO OF EARNINGS TO FIXED CHARGES
Years
Ended December 31
1994 1993 1992 1991
1990
(000's Omitted)
<S> <C>
<C> <C> <C> <C>
Earnings as Adjusted:
Pretax income from continuing operations
$440,472 $487,058 $452,027 $345,936
$224,712
Interest expense, excluding interest on
banking deposits, annuities and other
financial products
87,357 72,888 81,024 88,875
62,326
Portion of rent expense representing the
interest factor
7,114 8,170 9,254 5,335
5,348
Subtotal
534,943 568,116 542,305 440,146
292,386
Interest expense on banking deposits
61,920 54,025 64,472 86,999
96,440
Subtotal
596,863 622,141 606,777 527,145
388,826
Interest expense on annuities and other
financial products
754,708 682,960 704,147 756,918
709,668
Total
$1,351,571 $1,305,101 $1,310,924 $1,284,063
$1,098,494
Fixed Charges:
Interest incurred, excluding interest incurred
on banking deposits, annuities and other
financial products
$87,357 $72,888 $81,024 $88,875
$62,326
Portion of rent expense representing the
interest factor
7,114 8,170 9,254 5,335
5,348
Subtotal
94,471 81,058 90,278 94,210
67,674
Interest incurred on banking deposits
61,920 54,025 64,472 86,999
96,440
Subtotal
156,391 135,083 154,750 181,209
164,114
Interest incurred on annuities and other
financial products
756,837 686,204 704,147 756,918
709,668
Total
$913,228 $821,287 $858,897 $938,127
$873,782
Ratio of Earnings to Fixed Charges:
Excluding interest on banking
deposits, annuities, and other
financial products <F1>
5.7 7.0 6.0 4.7
4.3
Including interest on
banking deposits <F2>
3.8 4.6 3.9 2.9
2.4
Including interest on banking
deposits, annuities and other
financial products <F3>
1.5 1.6 1.5 1.4
1.3
<FN>
EXHIBIT 12.1 (CONTINUED)
COMPUTATION OF HISTORICAL RATIO OF EARNINGS TO FIXED CHARGES
<F1> For the purpose of computing the ratio of earnings to
fixed charges,
earnings have been calculated by adding to pretax
income from continuing
operations the amount of fixed charges reduced for
capitalized interest
and increased for amortization of previously
capitalized interest.
Fixed charges consists of interest on debt and a
portion of net rental
expense, approximately one-third, deemed to represent
interest.
<F2> Computation of this ratio is the same as described in
note (1) above
except that fixed charges also includes interest on
banking deposits.
<F3> Computation of this ratio is the same as described in
note (1) above
except that fixed charges also includes interest on
banking deposits,
annuities and other financial products.
</TABLE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
as of December 31, 1994
State or other jurisdiction of
Corporation incorporation or organization
Academy Insurance Group, Inc. Delaware
Academy Life Insurance Company Missouri
Academy Services, Inc. Delaware
Agency Holding I, Inc. Delaware
Agency Holding II, Inc. Delaware
Agency Holding III, Inc. Delaware
Agency Investments I, Inc. Delaware
Agency Investments II, Inc. Delaware
Agency Investments III, Inc. Delaware
Ammest Development Corporation, Inc. Kansas
Ammest Insurance Agency, Inc. California
Ammest Massachusetts Insurance Agency, Inc. Massachusetts
Ammest Realty Corporation Texas
Ammest Realty, Inc. Pennsylvania
Ampac, Inc. Texas
Ampac Insurance Agency, Inc. Pennsylvania
Association Consultants, Inc. Illinois
Benefit Plans, Inc.1 Delaware
Capital 200 Block Corporation Delaware
Capital Assignment Corporation Kentucky
Capital Broadway Corporation Kentucky
Capital Enterprise Insurance Company Kentucky
Capital General Development Corporation Delaware
Capital Holding Corporation Voluntary Employees' Kentucky
Beneficiary Association
Capital Landmark Insurance Company Kentucky
Capital Liberty, L.P. Delaware
Capital Real Estate Development Corporation Delaware
Capital Security Life Insurance Company North Carolina
Capital Values Financial Services, Inc. Pennsylvania
Capital Values Securities Corporation Pennsylvania
College Resource Group, Inc. Kentucky
Commonwealth Agency, Inc. Kentucky
Commonwealth Life Insurance Company Kentucky
Commonwealth Premium Finance California
Compass Rose Development Corporation Pennsylvania
Data/Mark Services, Inc. Delaware
DurCo Agency, Inc. Virginia
Financial Planning Services, Inc. Dist. of
Columbia
First Deposit Financial Corporation Utah
First Deposit Life Insurance Company Arkansas
First Deposit National Bank United States
First Deposit National Credit Card Bank2 United States
First Deposit Service Corporation California
Force Financial Group, Inc. Delaware
Force Financial Services, Inc. Massachusetts
Independence Automobile Association, Inc. Florida
Independence Automobile Club, Inc. Georgia
EXHIBIT 21.1
LIST OF SUBSIDIARIES
as of December 31, 1994
State or other jurisdiction of
Corporation incorporation or organization
KB Currency Advisors, Inc. Delaware
Knight Insurance Agency (New Hampshire), Inc. New Hampshire
Knight Tuition Payment Plans, Inc. Massachusetts
Military Associates, Inc. Pennsylvania
National Assets Management Corporation Pennsylvania
National Home Life Assurance Company Missouri
National Home Life Assurance Company of New York New York
National Information Systems Corporation Pennsylvania
National Liberty Corporation Pennsylvania
National Liberty Life Insurance Company Pennsylvania
NCOAA Management Company Texas
NCOA Motor Club, Inc. Georgia
NL/UL Joint Venture none
Pension Life Insurance Company of America New Jersey
Peoples Security Life Insurance Company North Carolina
Providian Agency Group, Inc.3 Kentucky
Providian Bancorp, Inc.4 Delaware
Providian Capital Management, Inc.5 Delaware
Providian Capital Management Investment Delaware
Advisors, Inc.6
Providian Capital Management Real Estate Delaware
Services, Inc.7
Providian Corporation8 Delaware
Providian Corporation Political Action Committee9 United States
Providian LLC10 Turks & Caicos
Is.
Providian National Bancorp11 California
Providian National Credit Corporation12 Delaware
Security Trust Life Insurance Company Kentucky
Southlife, Inc. Tennessee
Unicom Administrative Services, Inc. Pennsylvania
Unicom Administrative Services GmbH Germany
Valley Forge Associates, Inc. Pennsylvania
Veterans Benefits Plans, Inc. Pennsylvania
Veterans Insurance Services, Inc. Delaware
EXHIBIT 21.1
LIST OF SUBSIDIARIES (Continued)
as of December 31, 1994
State or other jurisdiction of
Corporation incorporation or organization
Veterans Life Insurance Company Illinois
Winnisquam Community Development Corporation New Hampshire
Worldwide Underwriters Insurance Company Missouri
Worldwide Underwriters Insurance Company North Carolina
of North Carolina13
_______________________________
1Name changed from CHC Durham Corporation, 10/20/94.
2Name changed to Providian National Bank, 1/1/95.
- 36 -
3Name changed from Capital Holding Agency Group, Inc.,
11/21/94.
4Name changed from First Deposit Corporation, 9/1/94.
5Name changed from CHC Real Estate Corporation, 8/24/94.
6Name changed from Providian Investment Advisors, Inc.,
8/24/94; previously
changed from Capital Values Corporation, 7/22/94.
7Name changed from Capital Holding Accumulation and
Investment Group, Inc.,
10/07/94; previously changed from Accumulation and
Investment Group, Inc.,
1/24/94.
8Name changed from Capital Holding Corporation, 5/12/94.
9Name changed from Capital Holding Corporation Political
Action Committee -
CAP*PAC, 6/10/94.
10Name changed from Capital Holding LLC, 6/22/94;
incorporated 3/18/94.
11Name changed from First Deposit National Corporation,
9/2/94.
12Incorporated 6/2/94.
- 37 -
13Liquidated by Worldwide Underwriters Insurance Company,
1/1/95.
- 38 -
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration
Statement No. 33-49719 on Form S-3 dated June 25, 1993, as amended by
the Pre-Effective Amendment No. 1 dated September 2, 1993,
Pre-Effective Amendment No. 2 dated November 12, 1993 and
Pre-Effective Amendment No. 3 dated January 12, 1994; Registration
Statement No. 33-35006 on Form S-3 dated May 25, 1990; Registration
Statement No. 33-34655 on Form S-8 dated April 24, 1990, as amended
by Post Effective Amendment No. 1; Registration Statement No.
33-47336 on Form S-8 dated April 21, 1992, (which also serves as Post
Effective Amendment No. 2 to Registration Statement No. 33-34655), as
amended by Post Effective Amendment No. 2; Registration Statement No.
2-77160 on Form S-8 dated May 14, 1982, as amended by Post Effective
Amendment No. 9; Registration Statement No. 33-39989 on Form S-8
dated April 16, 1991 and Registration Statement No. 33-47335 on Form
S-8 dated April 21, 1992 (which also serves as Post Effective
Amendment No. 1 to Registration Statement No. 33-39989), of our
report dated February 8, 1995, included herein, with respect to the
consolidated financial statements and schedules of Providian
Corporation included or incorporated by reference in this Annual
Report (Form 10-K) for the year ended December 31, 1994.
ERNST & YOUNG LLP
Louisville, Kentucky
March 24, 1995
- 39 -
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF PROVIDIAN CORPORATION AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<DEBT-HELD-FOR-SALE> 9,744,449
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 557,233
<MORTGAGE> 5,199,858<F1>
[LOANS] 2,269,531<F2>
<REAL-ESTATE> 70,847
<TOTAL-INVEST> 18,695,501
<CASH> 573,379
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,491,422
<TOTAL-ASSETS> 23,613,359
<POLICY-LOSSES> 9,092,370<F3>
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 7,421,604
[DEPOSITS] 1,680,450<F4>
<NOTES-PAYABLE> 694,250
<COMMON> 115,325
0
100,000<F5>
<OTHER-SE> 2,006,537<F6>
<TOTAL-LIABILITY-AND-EQUITY> 23,613,359
1,141,188
<INVESTMENT-INCOME> 1,611,827
<INVESTMENT-GAINS> (100,348)
<OTHER-INCOME> 306,397<F7>
<BENEFITS> 1,532,824<F8>
<UNDERWRITING-AMORTIZATION> 277,426<F9>
<UNDERWRITING-OTHER> 622,441<F10>
<INCOME-PRETAX> 440,472
<INCOME-TAX> 135,902
<INCOME-CONTINUING> 300,901
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 300,901
<EPS-PRIMARY> 3.02
<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>Includes Commercial and Residential mortgage loans.
<F2>Consists of Consumer loans
<F3>Includes Benefit reserves, Policy and contract claims, and Other policyholders' funds.
<F4>Consists of Banking deposits.
<F5>Consists of Cumulative Monthly Income Preferred Stock issued by a subsidiary.
<F6>Includes Additional paid-in capital, Net unrealized investment loss, Retained
earnings, Common stock held in treasury and Unearned restriced stock.
<F7>Includes Consumer loan servicing fees of $206,802.
<F8>Includes Benefits and claims and Increase in benefit and contract reserves.
<F9>Includes Amortization of deferred policy and loan acquistion costs, value of
insurance in force purchased and goodwill.
<F10>Includes Commissions, net and General, administrative and other expenses, net.
</FN>
</TABLE>
<PAGE>
We, the undersigned being the president and Secretary, respectively Of Capital
Holding Corporation, a corporation organized under the General Corporation Law
of the State of Delaware on March 26, 1969, do hereby certify under seal of the
Corporation as follows:
I. The following Restated Certificate of Incorporation correctly sets forth
without change the corresponding provisions of the Corporation's Certificate of
Incorporation as heretofore amended, and supersedes the Certificate of
Incorporation and all previous amendments thereto:
RESTATED CERTIFICATE OF INCORPORATION
OF
CAPITAL HOLDING CORPORATION
FIRST. The name of the Corporation is Capital Holding Corporation.
SECOND. The address of the Corporation's registered office in the State of
Delaware is 229 South State Street in the City of Dover, County of Kent. The
name of its registered agent at such address is United States Corporation
Company.
THIRD. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH. (A) The total number of shares of all classes of stock which the
Corporation shall have authority to issue is seventy-five million, of which six
million are to be Preferred Stock, par value $5 per share (hereafter called the
"Preferred Stock"), and sixty-nine million are to be Common Stock, par value $1
per share (hereafter called the "Common Stock").
(B) The designations, preferences and relative, participating, optional or
other special rights and the qualifications, limitations or restrictions on
the Preferred Stock and the Common Stock are as follows:
(1) The Preferred Stock may be issued from time to time as fully paid
and non-assessable shares of one or more series. All shares of Preferred
Stock shall be of equal rank with each other, regardless of series, and shall
be identical with each other in all respects except as provided in or
permitted by the paragraph next following; and the shares of Preferred Stock
of any one series shall be identical with each other in all respects except
as to the dates from and after which dividends thereon shall be cumulative,
if so provided.
The number of shares of each such series and the voting powers,
designations, preferences and relative, participating, optional or other
special rights and qualifications, limitations or restrictions thereof shall
be fixed by and set forth in resolutions of the Board of Directors of the
Corporation pursuant to authority hereby expressly vested in such Board. The
authority of the Board of Directors with respect to each
<PAGE>
series shall include to the full extent now or hereafter permitted by the laws
of Delaware, but shall not be limited to, the determination or fixing of the
following:
(a) The distinctive designation of such series and the number of
shares which shall constitute such series, which number may be increased
(except where otherwise provided by the Board of Directors in creating such
series) or decreased (but not below the number of shares thereof then
outstanding) from time to time by like action of the Board of Directors to
the extent permitted by law;
(b) The dividend rate of such series, the conditions and times upon
which such dividends shall be payable, the relations which such dividends
shall bear to the dividends payable on any other class or classes of stock or
series thereof, or any other series of the same class, whether the
Corporation shall be required to pay such dividends on specified dates, if
funds are legally available for the payment thereof, or whether the payment
of such dividends shall be entirely at the discretion of the Board of
Directors, whether such dividends shall be payable in cash or by the issuance
of Common or Preferred Stock of the Corporation, and whether dividends shall
be cumulative or noncumulative;
(c) Whether or not the shares of such series shall be subject to
redemption by the Corporation and the conditions thereof, and the times,
prices and other terms and provisions upon which the shares of the series may
be redeemed;
(d) Whether or not the shares of the series shall be subject to the
operation of a retirement or sinking fund to be applied to the purchase or
redemption of such shares and, if such retirement or sinking fund be
established, the annual amount thereof and the terms and provisions relative
to the operation thereof;
(e) Whether or not the shares of the series shall be convertible into or
exchangeable for shares of any other class or classes, with or without par
value, or any other series of the same class, and, if provision is made for
conversion or exchange, the times, prices, rates, adjustments and other
terms and conditions of such conversion or exchange;
(f) Whether or not the shares of the series have voting rights, in
addition to the voting rights provided by law, and, if so, the terms of such
voting rights;
(g) The rights of the shares of the series in the event of voluntary or
involuntary liquidation, dissolution, or upon the distribution of assets
of the Corporation;
(h) Any other powers, preferences and relative, participating, optional
or other special rights, and qualifications, limitations or restrictions
thereof, of the shares of such series, as the Board of Directors may deem
advisable and as shall not be inconsistent with the provisions of this
Certificate of Incorporation.
2
<PAGE>
(C) Adjustable Rate Cumulative
--------------------------
Preferred Stock, Series F
-------------------------
(Par Value $5.00 Per Share)
"RESOLVED that, pursuant to authority conferred upon the Board of Directors by
the Certificate of Incorporation of the Corporation (hereinafter called the
'Certificate of Incorporation'), the Board of Directors hereby provides for
the issuance of a series of Preferred Stock of the Corporation to consist of
1,000,000 shares, and hereby fixes the voting powers, designations, preferences
and relative, participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, of the shares of such
series, in addition to those set forth in the Certificate of Incorporation, as
follows:
"(a) Designation. This resolution shall provide for a single series of
Preferred Stock, the designation of which shall be 'Adjustable Rate
Cumulative Preferred Stock, Series F' (hereinafter called this 'Series') and
the number of authorized shares constituting this Series is one million
(1,000,000). Shares of this Series shall be issued in a face value of $100
per share and shall have a par value of $5.00 per share. The number of
authorized shares of this Series may be reduced by further resolution duly
adopted by the Board of Directors of the Corporation and by the filing of a
certificate pursuant to the provisions of the General Corporation Law of the
State of Delaware stating that such reduction has been so authorized, but
the number of authorized shares of this Series shall not be increased.
"(b) Dividends.
"(1) Dividends on each $100 face value share of this Series shall be
equal to: (i) for the periods (the 'Initial Dividend Period') from the date
of their original issue to and including January 15, 1983 and April 15,
1983, 10% per annum multiplied by such $100 face value, and (ii) for each
quarterly dividend period (hereinafter referred to as a 'Quarterly Dividend
Period'; and the Initial Dividend Period or any Quarterly Dividend Period
being hereinafter individually referred to as a 'Dividend Period' and
collectively referred to as 'Dividend Periods')
3
<PAGE>
thereafter, which Quarterly Dividend Periods shall commence on January
16, April 16, July 16 and October 16 in each year end shall end on and
include the day next preceding the first day of the next Quarterly
Dividend Period the Applicable Rate (as defined in paragraph (2) of this
Section (b)) per annum in respect of such Quarterly Dividend Period
multiplied by such $100 face value. Such dividends shall be cumulative
from the date of original issue of such shares and shall be payable,
when and as declared by the Board of Directors, out of assets legally
available for such purpose, on January 15, April 15, July 15, and
October 15, of each year, commencing January 15, 1983, except that if
such date is a Saturday, Sunday or legal holiday, then such dividend
shall be payable on the first immediately preceding calendar day which
is not a Saturday, Sunday or legal holiday. Each such dividend shall be
paid to the holders of record of shares of this Series as they appear on
the books of the Corporation on such record date, not exceeding 30 days
preceding the payment date thereof, as shall be fixed by the Board of
Directors of the Corporation. Dividends in arrears for any past Dividend
Periods may be declared and paid at any time, without reference to any
regular dividend payment date, to holders of record on any date, not
exceeding 45 days preceding the payment date thereof, as may be fixed by
the Board of Directors of the Corporation.
"(2) Except as provided below in this paragraph, the 'Applicable
Rate' for any Quarterly Dividend Period shall be (a) the highest of the
Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Twenty
Year Constant Maturity Rate (each as hereinafter defined) for such
Dividend Period, less (b) 1.85%. In the event that the Corporation
determines in good faith that for any reason:
"(i) any one of the Treasury Bill Rate, the Ten Year Constant
Maturity Rate and the Twenty Year Constant Maturity Rate cannot be
determined for any Quarterly Dividend Period, then the Applicable
Rate for such Dividend Period shall be (a) the higher of whichever
two of such Rates can be so determined, less (b) 1.85%:
4
<PAGE>
"(ii) only one of the Treasury Bill Rate, the Ten Year Constant
Maturity Rate and the Twenty Year Constant Maturity Rate can be determined
for any Quarterly Dividend Period, then the Applicable Rate for such
Dividend Period shall be (a) whichever such Rate can be so determined,
less (b) l.85%; or
"(iii) none of the Treasury Bill Rate, the Ten Year Constant
Maturity Rate and the Twenty Year Constant Maturity Rate can be determined
for any Quarterly Dividend Period, then the Applicable Rate in effect for
the preceding Dividend Period shall be continued for such Dividend Period.
Anything herein to the contrary notwithstanding, the Applicable Rate for any
Quarterly Dividend Period shall in no event be less than 6-3/4% per annum or
greater than 14% per annum.
"(3) Except as provided below in this paragraph, the Treasury Bill
Rate' for each Quarterly Dividend Period shall be the arithmetic average of the
two most recent weekly per annum market discount rates (or the one weekly per
annum market discount rate, if only one such rate shall be published during the
relevant Calendar Period as defined below) for three-month U.S. Treasury bills,
as published weekly by the Federal Reserve Board during the last Calendar Period
of March, June, September or December, as the case may be, immediately prior to
the commencement of the Quarterly Dividend Period for which the Applicable Rate
is being determined. In the event that the Federal Reserve Board does not
publish such a weekly per annum market discount rate during such Calendar
Period, then the Treasury Bill Rate for such Dividend Period shall be the
arithmetic average of the two most recent weekly per annum market discount rates
(or the one weekly per annum market discount rate, if only one such rate shall
be published during the relevant Calendar Period) for three-month U.S. Treasury
bills, as published weekly during such Calendar Period by any Federal Reserve
Bank or by any U.S. Government department or agency selected by the Corporation.
In the event that a weekly per annum market discount rate for three-month U.S.
Treasury bills shall not be published by the Federal Reserve Board or by any
Federal Reserve Bank or by any U.S. Government department or agency during such
Calendar Period, then the Treasury Bill Rate for such Dividend Period shall be
the arithmetic average of the two most recent weekly per annum market discount
rates
5
<PAGE>
(or the one weekly per annum market discount rate, if only one such rate shall
be published during the relevant Calendar Period) for all of the U.S. Treasury
bills then having maturities of not less than 80 nor more than 100 days, as
published during such Calendar Period by the Federal Reserve Board or, if the
Federal Reserve Board shall not publish such rates, by any Federal Reserve Bank
or by any U.S. Government department or agency selected by the Corporation. In
the event that the Corporation determines in good faith that for any reason no
such U.S. Treasury bill rates are published as provided above during such
Calendar Period, then the Treasury Bill Rate for such Dividend Period shall be
the arithmetic average of the per annum market discount rates based upon the
closing bids during such Calendar Period for each of the issues of marketable
non-interest bearing U.S. Treasury securities with a maturity of not less than
80 nor more than 100 days from the date of each such quotation, as chosen and
quoted daily for each business day in New York City (or less frequently if daily
quotations shall not be available) to the Corporation by at least
three recognized dealers in U.S. Government securities selected by the
Corporation. In the event that the Corporation determines in good faith that for
any reason the Corporation cannot determine the Treasury Bill Rate for any
Quarterly Dividend Period as provided above in this paragraph, the Treasury Bill
Rate for such Dividend Period shall be the arithmetic average of the per annum
market discount rates based upon the closing bids during such Calendar Period
for each of the issues of marketable interest-bearing U.S. Treasury securities
with a maturity of not less than 80 nor more than l00 days, as chosen and quoted
daily for each business day in New York City (or less frequently if
daily quotations shall not be available) to the Corporation by at least three
recognized dealers in U.S. Government securities selected by the Corporation.
"(4) Except as provided below in this paragraph, the 'Ten Year Constant
Maturity Rate' for each Quarterly Dividend Period shall be the arithmetic
average of the two most recent weekly per annum Ten Year Average Yields (or the
one weekly per annum Ten Year Average Yield, if only one such Yield shall be
published during the relevant Calendar Period), as published weekly by
the Federal Reserve Board during the last Calendar Period of March, June,
September or December, as the case may be, immediately prior to the commencement
of the Quarterly Dividend Period for which the Applicable Rate is being
determined. In
6
<PAGE>
the event that the Federal Reserve Board does not publish such a weekly per
annum Ten Year Average Yield during such Calendar Period, then the Ten Year
Constant Maturity Rate for such Dividend Period shall be the arithmetic average
of the two most recent weekly per annum Ten Year Average Yields (or the one
weekly per annum Ten Year Average Yield, if only one such Yield shall be
published during the relevant Calendar Period), as published weekly during such
Calendar Period by any Federal Reserve Bank or by any U.S. Government department
or agency selected by the Corporation. In the event that a weekly per annum Ten
Year Average Yield shall not be published by the Federal Reserve Board or by any
Federal Reserve Bank or by any U.S. Government department or agency during
such Calendar Period, then the Ten Year Constant Maturity Rate for such Dividend
Period shall be the arithmetic average of the two most recent weekly per annum
average yields to maturity (or the one weekly per annum average yield to
maturity, if only one such yield shall be published during the relevant Calendar
Period) for all of the actively traded marketable U.S. Treasury fixed interest
rate securities (other than Special Securities as defined below) then having
maturities of not less than eight nor more than twelve years, as published
during such Calendar Period by the Federal Reserve Board or, if the Federal
Reserve Board shall not publish such yields, by any Federal Reserve Bank or by
any U.S. Government department or agency selected by the Corporation. In the
event that the Corporation determines in good faith that for any reason the
Corporation cannot determine the Ten Year Constant Maturity Rate for any
Quarterly Dividend Period as provided above in this paragraph, then the Ten
Year Constant Maturity Rate for such Dividend Period shall be the
arithmetic average of the per annum average yields to maturity based upon the
closing bids during such Calendar Period for each of the issues of actively
traded marketable U.S. Treasury fixed interest rate securities (other than
Special Securities with a final maturity date not less than eight nor more
than twelve years from the date of each such quotation, as chosen and quoted
daily for each business day in New York City (or less frequently if daily
quotations shall not be available) to the Corporation by at least three
recognized dealers in U.S. Government securities selected by the Corporation.
"(5) Except as provided below in this paragraph, the 'Twenty Year
Constant Maturity Rate' for each Quarterly Dividend Period shall be the
arithmetic average of the two most recent
7
<PAGE>
weekly per annum Twenty Year Average Yields (or the one weekly per annum Twenty
Year Average Yield, if only one such Yield shall be published during the
relevant Calendar Period), as published weekly by the Federal Reserve Board
during the last Calendar Period of March, June, September or December, as the
case may be, immediately prior to the commencement of the Quarterly Dividend
Period for which the Applicable Rate is being determined. In the event that the
Federal Reserve Board does not publish such a weekly per annum Twenty Year
Average Yield during such Calendar Period, then the Twenty Year Constant
Maturity Rate for such Dividend Period shall be the arithmetic average of the
two most recent weekly per annum Twenty Year Average Yields (or the one weekly
per annum Twenty Year Average Yield, if only one such Yield shall be published
during the relevant Calendar Period), as published weekly during such Calendar
Period by any Federal Reserve Bank or by any U.S. Government department or
agency selected by the Corporation. In the event that a weekly per annum Twenty
Year Average Yield shall not be published by the Federal Reserve Bank or by any
U.S. Government department or agency during such Calendar Period, then the
Twenty Year Constant Maturity Rate for such Dividend Period shall be the
arithmetic average of the two most recent weekly per annum average yields to
maturity (or the one weekly per annum average yield to maturity, if only one
such yield shall be published during the relevant Calendar Period) for all of
the actively traded marketable U.S. Treasury fixed interest rate securities
(other than Special Securities) then having maturities of not less than eighteen
nor more than twenty-two years, as published during such Calendar Period by the
Federal Reserve Board or, if the Federal Reserve Board shall not publish such
yields, by any Federal Reserve Bank or by any U.S. Government department or
agency selected by the Corporation. In the event that the Corporation determines
in good faith that for any reason the Corporation cannot determine the Twenty
Year Constant Maturity Rate for any Quarterly Dividend Period as provided above
in this paragraph, the Twenty Year Constant Maturity Rate for such Dividend
Period shall be the arithmetic average of the per annum average yields to
maturity based upon the closing bids during such Calendar Period for each of the
issues of actively traded marketable U.S. Treasury fixed interest rate
securities (other than Special Securities) with a final maturity date not less
than eighteen nor more than twenty-two years from the date of each such
quotation, as chosen and quoted daily for each business day in New York City (or
less frequently if daily quotations shall not be available) to the corporation
by at least three recognized dealers
8
<PAGE>
in U.S. Government securities selected by the Corporation.
"(6) The Treasury Bill Rate, the Ten Year Constant Maturity Rate and
the Twenty Year Constant Maturity Rate shall each be rounded to the nearest five
one-hundredths of a percentage point.
"(7) The Applicable Rate with respect to each Quarterly Dividend Period
will be calculated as promptly as practicable by the Corporation according to
the appropriate method described herein. The mathematical accuracy of each such
calculation will be confirmed in writing by independent accountants of
recognized national standing. The Corporation will cause each Applicable Rate to
be published in a newspaper of general circulation in New York City prior to
the commencement of the new Quarterly Dividend Period to which it applies and
will cause notice of such Applicable Rate to be enclosed with the dividend
payment checks next mailed to the holders of record of shares of this Series.
"(8) For purposes of this Section (b), the term
(i) 'Calendar Period' shall mean 14 consecutive calendar days;
(ii) 'Special Securities' shall mean securities which can, at the
option of the holder, be surrendered at face value in payment of any
Federal estate tax or which provide tax benefits to the holders and are
priced to reflect such tax benefits or which were originally issued at a
deep or substantial discount;
(iii) 'Ten Year Average Yield' shall mean the average yield to
maturity for actively traded marketable U.S. Treasury fixed interest rate
securities (adjusted to constant maturities of ten years); and
(iv) 'Twenty Year Average Yield' shall mean the average yield to
maturity for actively traded marketable U.S. Treasury fixed interest rate
securities (adjusted to constant maturities of 20 years).
9
<PAGE>
"(9) Except as hereinafter provided, no dividends shall be declared or
paid or set apart for payment on the Preferred Stock of any series ranking, as
to dividends, on a parity with or junior to this Series for any period
unless full cumulative dividends have been or contemporaneously are declared and
paid on this Series for all past Dividend Periods. When dividends are not paid
in full, as aforesaid, upon the shares of this Series and any other Preferred
Stock ranking on a parity as to dividends with this Series, all dividends
declared upon shares of this Series and any other Preferred Stock ranking on a
parity as to dividends with this Series shall be declared pro rata so that the
amount of dividends declared per share on this Series and such other Preferred
Stock shall in all cases bear to each other the same ratio that accrued
dividends per share on the shares of this Series and such other Preferred Stock
bear to each other. Holders of shares of this Series shall not be entitled to
any dividends, whether payable in cash, property or stock, in excess of full
cumulative dividends, as herein provided, on this Series. No interest, or sum of
money in lieu of interest, shall be payable in respect of any dividend payment
or payments on this Series which may be in arrears.
"(10) So long as any shares of this Series are outstanding, no dividend
(other than a dividend in Common Stock or in any other stock of the Corporation
ranking junior to this Series as to dividends and upon liquidation and other
than as provided in paragraph (9) of this Section (b)) shall be declared or
paid or set aside for payment or other distribution declared or made upon the
Common Stock or upon any other stock of the Corporation ranking junior to or on
a parity with this Series as to dividends or upon liquidation be redeemed,
purchased or otherwise acquired for any consideration (or any moneys be paid to
or made available for a sinking fund for the redemption of any shares of any
such stock) by the Corporation (except by conversion into or exchange for stock
of the Corporation ranking junior to this Series as to dividends and upon
liquidation) unless, in each case, the full cumulative dividends on all
outstanding shares of this Series shall have been paid or contemporaneously are
declared and paid for all past Dividend Periods.
10
<PAGE>
"(11) Dividends payable on this Series for each full Quarterly Dividend
Period shall be computed by annualizing the Applicable Rate, dividing by four
and multiplying by the face amount per share. Dividends payable on this Series
for any period less than a full Quarterly Dividend Period, and for the Initial
Dividend Period, shall be computed on the basis of a 360-day year of 30-day
months.
"(c) Redemption.
"(1) The shares of this Series shall not be redeemable prior to
November 15, 1987. On and after November 15, 1987, the Corporation, at its sole
option, may redeem shares of this Series, as a whole or in part, at any time or
from time to time, at a redemption price (i) in the case of any redemption on a
redemption date occurring on or after November 15, 1987, and prior to November
15, 1992, of $103.00 per share and (ii) in the case of any redemption on a
redemption date occurring on or after November 15, 1992, of $100 per share,
plus, in each case, accrued (whether or not declared) and unpaid dividends
thereon to the date fixed for redemption.
"(2) In the event that fewer than all the outstanding shares of this
Series are to be redeemed, the number of shares to be redeemed shall be
determined by the Board of Directors and the shares to be redeemed shall be
determined by lot or pro rata as may be determined by the Board of Directors or
by any other method as may be determined by the Board of Directors in its sole
discretion to be equitable, except that in any redemption of fewer than all the
outstanding shares the Corporation may redeem all shares of this Series held by
all holders of a number of shares not to exceed 100 as may be specified by the
Corporation.
"(3) In the event the Corporation shall redeem shares of this Series,
notice of such redemption shall be given by first class mail, postage prepaid,
mailed not less than 30 nor more than 60 days prior to the redemption date, to
each holder of record of the shares to be redeemed, at such holder's address as
the same appears on the books of the Corporation. Each such notice shall state:
(i) the redemption date; (ii) the number
11
<PAGE>
of shares of this Series to be redeemed and, if fewer than all the shares held
by such holder are to be redeemed, the number of such shares to be redeemed from
such holder; (iii) the redemption price; (iv) the place or places where
certificates for such shares are to be surrendered for payment of the redemption
price; and (v) that dividends on the shares to be redeemed will cease to accrue
on such redemption date.
"(4) Notice having been mailed as aforesaid, from and after the
redemption date (unless default shall be made by the Corporation in providing
money for the payment of the redemption price of the shares called for
redemption) dividends on the shares of this Series so called for redemption
shall cease to accrue, and said shares shall no longer be deemed to be
outstanding, and all rights of the holders thereof as stockholders of the
Corporation (except the right to receive from the Corporation the redemption
price) shall cease. Upon surrender in accordance with said notice of the
certificates for any shares so redeemed (properly endorsed or assigned for
transfer, if the Board of Directors of the Corporation shall so require and the
notice shall so state), such shares shall be redeemed by the Corporation at the
redemption price aforesaid. In case fewer than all the shares represented by any
such certificate are redeemed, a new certificate shall be issued representing
the unredeemed shares without cost to the holder thereof.
"(5) Any shares of this Series which shall at any time have been
redeemed shall, after such redemption, have the status of authorized but
unissued shares of Preferred Stock, without designation as to series until such
shares are once more designated as part of a particular series by the Board of
Directors.
"(6) Notwithstanding the foregoing provisions of this Section (c),
unless the full cumulative dividends on all outstanding shares of this Series
shall have been paid or contemporaneously are declared and paid for all past
Dividend Periods, no shares of this Series shall be redeemed unless all
outstanding shares of this Series are simultaneously redeemed, and the
Corporation shall not purchase or otherwise acquire any shares of this Series;
provided,
12
<PAGE>
however, that the foregoing shall not prevent the purchase or
acquisition of shares of this Series pursuant to a purchase or exchange
offer made on the same terms to holders of all outstanding shares of
this Series.
"(d) Conversion or Exchange. The holders of shares of this Series shall
not have any rights herein to convert such shares into or exchange such shares
for shares of any other class or classes or of any other series of any class or
classes of capital stock of the Corporation.
"(e) Voting. The shares of this Series shall not have any voting powers
either general or special, except that
"(1) Unless the vote or consent of the holders of a greater
number of shares shall then be required by law, the consent of the
holders of at least 66-2/3% of all of the shares of this Series at the
time outstanding, given in person or by proxy, either in writing or by a
vote at a meeting called for the purpose at which the holders of shares
of this Series shall vote together as a separate class, shall be
necessary for authorizing, effecting or validating the amendment,
alteration or repeal of any of the provisions of the Certificate of
Incorporation or of any certificate amendatory thereof or supplemental
thereto (including any Certificate of Designation and Terms or any
similar document relating to any series of Preferred Stock) so as to
affect adversely the powers, preferences, or rights, of this Series. The
increase of the authorized amount of the Preferred Stock, or the
creation or authorization of any shares of any other class of stock of
the Corporation ranking prior to or on a parity with the shares of this
Series as to dividends or upon liquidation, or the reclassification of
any authorized stock of the Corporation into any such parity shares, or
the creation or authorization of any obligation or security convertible
into or evidencing the right to purchase any such prior to parity shares
shall not be deemed to affect adversely the powers, preferences or
rights of this Series;
"(2) Unless the vote or consent of the holders of a greater
number of shares shall then be required by law, the consent of the
holders of
13
<PAGE>
at least 66-2/3% of all of the shares of this Series and all other series of
Preferred Stock ranking on a parity with shares of this Series, either as to
dividends or upon liquidation, at the time outstanding, given in person or by
proxy, either in writing or by a vote at a meeting called for the purpose at
which the holders of shares of this Series and such other series of Preferred
Stock shall vote together as a single class without regard to series, shall be
necessary for authorizing, effecting or validating the issuance of any shares of
any class of stock of the Corporation ranking prior to the shares of this Series
as to dividends or upon liquidation, or the reclassification of any outstanding
stock of the Corporation into any such prior shares, or the issuance of any
obligation or security convertible into or evidencing the right to purchase any
such prior shares;
"(3) Unless the vote or consent of the holders of a greater number of
shares shall then be required by law, the consent of the holders of at least
66-2/3% of all of the shares of this Series and all other series of Preferred
Stock ranking on a parity with this Series, either as to dividends or upon
liquidation, at the time outstanding, given in person or by proxy, either in
writing or by a vote at a meeting called for the purpose at which the holders of
shares of this Series and such other series of Preferred Stock shall vote
together as a single class without regard to series, shall be necessary for
authorizing, effecting or validating the merger or consolidation of the
Corporation into or with any other corporation if such merger or consolidation
would adversely affect the powers, preferences or rights of this Series or such
other series of Preferred Stock or if, after such merger or consolidation there
shall be outstanding any shares of any class of stock ranking prior to the
shares of this Series as to dividends or upon liquidation or any obligation or
security convertible into or evidencing the right to purchase any such prior
shares (except such stock, securities or obligations of the Corporation as may
have been outstanding immediately preceding such merger or consolidation).
"(4) If, on the date used to determine stockholders of record for any
meeting of
14
<PAGE>
stockholders for the election of directors, a default in preference
dividends on the Preferred Stock shall exist, the number of directors
constituting the Board of Directors of the Corporation shall be
increased by two, and the holders of Preferred Stock of all series
(whether or not the holders of such series of Preferred Stock would be
entitled to vote for the election of directors if such default in
preference dividends did not exist), shall have the right at such
meeting, voting together as a single class without regard to series, to
the exclusion of the holders of Common Stock, to elect two directors of
the Corporation to fill such newly created directorships. Each director
elected by the holders of shares of Preferred Stock (herein called a
'Preferred Director'), shall continue to serve as such director for the
full term for which he shall have been elected, notwithstanding that
prior to the end of such term a default in preference dividends shall
cease to exist. Any Preferred Director may be removed by, and shall not
be removed except by, the vote of the holders of record of the
outstanding shares of Preferred Stock, voting together as a single class
without regard to series, at a meeting of the stockholders, or of the
holders of shares of Preferred Stock, called for the purpose. So long
as a default in any preference dividends on the Preferred Stock shall
exist (A) any vacancy in the office of a Preferred Director may be
filled (except as provided in the following clause (B)) by an instrument
in writing signed by the remaining Preferred Director and filed with
the Corporation and (B) in the case of the removal of any Preferred
Director, the vacancy may be filled by the vote of the holders of the
outstanding shares of Preferred Stock, voting together as a single
class without regard to series, at the same meeting at which such
removal shall be voted. Each director appointed as aforesaid by the
remaining Preferred Director shall be deemed, for all purposes hereof,
to be a Preferred Director. Whenever the term of office of the Preferred
Directors shall end and no default in preference dividends shall exist,
the number of directors constituting the Board of Directors of the
Corporation shall be reduced by two. For the purposes hereof, a 'default
in preference dividends' on the Preferred Stock shall be deemed to have
occurred whenever the amount of accrued
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<PAGE>
and unpaid dividends upon any series of the Preferred Stock shall be
equivalent to six full quarter-yearly dividends or more, and, having so
occurred, such default shall be deemed to exist hereafter until, but
only until, all accrued dividends on all shares of Preferred Stock of
each and every series then outstanding shall have been paid for all past
Dividend Periods.
"(f) Liquidation Rights.
"(1) Upon the dissolution, liquidation or winding up of the
Corporation, whether voluntary or involuntary, the holders of the shares
of this Series shall be entitled to receive out of the assets of the
Corporation available for distribution to stockholders, before any
payment or distribution shall be made on the Common Stock or on any
other class of stock ranking junior to the Preferred Stock upon
liquidation, the amount of $100 per share, plus a sum equal to
all dividends (whether or not earned or declared) on such shares accrued
and unpaid thereon to the date of final distribution.
"(2) Neither the sale, lease or exchange (for cash, shares of
stock, securities or other consideration) of all or substantially all
the property and assets of the Corporation or the merger or
consolidation of the Corporation into or with any other corporation or
the merger or consolidation of any other corporation into or with the
Corporation, shall be deemed to be a dissolution, liquidation or winding
up, voluntary or involuntary, for the purposes of this Section (f).
"(3) After the payment to the holders of the shares of this
Series of the full preferential amounts provided for in this Section
(f), the holders of this Series as such shall have no right or claim to
any of the remaining assets of the Corporation.
"(4) In the event the assets of the Corporation available for
distribution to the holders of shares of this Series upon any
dissolution, liquidation or winding up of the Corporation, whether
voluntary or involuntary, shall be insufficient to pay in full all
amounts to which such holders are entitled pursuant to paragraph
16
<PAGE>
(1) of this Section (f), no such distribution shall be made on account
of any shares of any other class or series of Preferred Stock ranking on
a parity with the shares of this Series upon such dissolution,
liquidation or winding up unless proportionate distributive amounts
shall be paid on account of the shares of this Series, ratably, in
proportion to the full distributable amounts for which holders of all
such parity shares are respectively entitled upon such dissolution,
liquidation or winding up.
"(g) For purposes of this resolution, any stock of any class or classes
of the Corporation shall be deemed to rank:
"(1) prior to the shares of this Series, either as to dividends
or upon liquidation, if the holders of such class or classes shall be
entitled to the receipt of dividends or of amounts distributable upon
dissolution, liquidation or winding up of the Corporation, whether
voluntary or involuntary, as the case may be, in preference or priority
to the holders of shares of this Series;
"(2) on a parity with shares of this Series, either as to
dividends or upon liquidation, whether or not the dividend rates,
dividend payment dates or redemption or liquidation prices per share or
sinking fund provisions, if any, be different from those of this Series,
if the holders of such stock shall be entitled to the receipt of
dividends or of amounts distributable upon dissolution, liquidation or
winding up of the Corporation, whether voluntary or involuntary, as the
case may be, in proportion to their respective dividend rates or
liquidation prices, without preference or priority, one over the other,
as between the holders of such stock and the holders of shares of this
Series; and
"(3) junior to shares of this Series, either as to dividends or
upon liquidation, if such class shall be Common Stock or if the holders
of shares of this Series shall be entitled to receipt of dividends or of
amounts distributable upon dissolution, liquidation or winding up of the
Corporation, whether voluntary or involuntary, as the case may be, in
preference or priority to the holders of shares of such class or
classes."
17
<PAGE>
(D) $12.25 Cumulative Preferred Stock, Series B
-------------------------------------------
(Par Value $5.00 Per Share)
RESOLVED, that 400,000 shares of the total authorized amount of
2,000,000 shares of preferred stock be issued in and constitute a single series
designated "$12.25 Cumulative Preferred Stock, Series B" (the "Series"). Each
share of the Series shall be issued for a consideration of $100.00 and shall
have a par value of $5.00. Of the consideration for each share, the par value of
$5.00 shall be capital of the Corporation. The shares of the Series shall have
the voting powers, designations, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions thereof hereinafter set forth:
A. DIVIDEND RIGHTS
Out of the assets of the Corporation which are by law available for the
payment of dividends, the holders of shares of this Series shall be entitled to
receive, as and when declared by the Board of Directors, cumulative cash
dividends, at, but not exceeding, the rate of $12.25 per share per annum,
payable quarterly on the fifteenth days of April, July, October and January of
each year, accruing from the date of issuance or from such other date as may be
specified by the Board of Directors. Each dividend payment shall be made to the
holders of shares of this Series of record on the date, not exceeding sixty (60)
days preceding the date for such payment, fixed for the purpose by the Board of
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<PAGE>
Directors in advance of such payment. The holders of shares of this Series shall
be entitled to no other dividends. Any dividend declared in any quarterly period
shall be deemed to have been declared with respect to the quarterly period
ending immediately prior to the day upon which such dividend is payable.
So long as any shares of this Series are outstanding, unless:
(i) in case of a dividend declaration, such dividend is payable
not more than sixty (60) days after the date of record for determining
the holders to whom the dividend is to be paid, and
(ii) a full cash dividend on the shares of this Series for all
past quarterly dividend periods and for the quarterly period during
which such declaration, distribution, purchase, redemption or
acquisition occurs, shall have been paid or declared, and a sum
sufficient for the payment thereof set apart,
no dividends shall be declared, and no distribution made, on any shares of
common stock (other than in shares of common stock), nor shall any shares of
common stock be purchased, redeemed or otherwise acquired for value by
Corporation or any subsidiary, and no dividends shall be declared, and no
distribution made, on any shares of any other series of or class of preferred
stock unless proportionate dividends are paid on all series of parity ranking
preferred shares, nor shall any shares of any other series or class of preferred
stock be purchased, redeemed or otherwise acquired for value by the Corporation
or any subsidiary unless all such preferred shares are redeemed or an offer to
purchase is made to all holders of such preferred shares on substantially equal
terms.
19
<PAGE>
Provided, however, that, notwithstanding the foregoing, (i) the
Corporation may make any required sinking fund redemption (including delinquent
accrued dividends) on this or any other series or class of preferred stock if
the number of shares of such series or class of preferred stock being so
redeemed bears (as nearly as practicable) the same ratio to the aggregate number
of shares of such series or class then due to be redeemed as the number of
shares of this Series being redeemed bears to the aggregate number of shares of
this Series then due to be redeemed and (ii) the foregoing restrictions shall
not apply to the acquisition of any stock solely in exchange for or solely out
of the proceeds of sale of stock.
B. REDEMPTION AND SINKING FUND
Mandatory Redemption (Sinking Fund). Shares of this Series shall be
subject to redemption through the operation of a sinking fund (herein called the
"Sinking Fund") at the redemption price (the "Sinking Fund Redemption Price") of
$100 per share plus an amount equal to the dividends accrued and unpaid thereon
to the redemption date, whether or not earned or declared. For the purposes of
the Sinking Fund, out of any funds of the Corporation legally available therefor
remaining after full cumulative dividends upon all series and classes of
preferred stock then outstanding to the end of the dividend period next
preceding the date fixed for such redemption (and for the current dividend
period if the date fixed for such redemption is a dividend payment date) shall
have been declared and shall have been paid or set apart for
20
<PAGE>
payment, as and when directed by the Board of Directors the Corporation shall
set aside in cash, annually on October 15 commencing October 15, 1991, and
ending October 15, 2000, an amount sufficient to redeem, at the Sinking Fund
Redemption Price, ten percent (l0%) of the shares of this Series. In the event
such amounts are not set aside, the holders of shares of this Series shall have
such exclusive rights and remedies as are set forth herein.
The Sinking Fund shall be cumulative so that if on any such October 15 the
funds of the Corporation legally available therefor shall be insufficient to
permit any such amount to be set aside in full, or if for any other reason such
amount shall not have been set aside in full, the amount of the deficiency shall
be set aside, but without interest, before any cash dividend shall be paid or
declared, or any distribution made, on any junior shares or before any junior
shares or any shares of preferred stock shall be purchased, redeemed or
otherwise acquired by the Corporation, or any moneys shall be paid to or set
aside or made available for a sinking fund for the purchase or redemption of any
junior shares or any shares or parity ranking preferred stock; provided,
however, that, notwithstanding the existence of any such deficiency, the
Corporation may make any required sinking fund redemption on any other series or
class of preferred stock if the number of shares of such other series or class
of preferred stock being so redeemed bears (as nearly as practicable) the same
ratio to the aggregate number of shares of such other series or class then due
to be redeemed as the number of shares of this Series being redeemed
21
<PAGE>
bears to the aggregate number of shares of this Series then due to be redeemed.
Moneys in the Sinking Fund shall be applied on such October 15 to the
redemption of shares of this Series. The Corporation shall, prior to each such
Sinking Fund redemption, give notice of redemption as hereinafter provided.
In addition, the Corporation shall have the right, at its option, to redeem at
the Sinking Fund Redemption Price on October 15, 1991, and on any October 15
thereafter, an additional number of shares of this Series equal to the number it
is required to redeem on such date. This right shall not be cumulative from year
to year and shall not in the aggregate exceed 25% of the shares of this issue.
Optional Redemption. Shares of this Series may be redeemed at the option of
the Corporation, in whole or in part, on any date on or after October 15, 1990
upon at least thirty (30) days' notice as hereinafter provided, out of any funds
of the Corporation legally available therefor remaining after full cumulative
dividends upon all series and classes of preferred stock then outstanding to the
end of the dividend period next preceding the date fixed for such redemption
(and for the current dividend period if the date fixed for such redemption is a
dividend payment date) shall have been declared and shall have been paid or set
aside for payment, at $105 per share plus an amount equal to the dividends
accrued and unpaid to the date fixed for redemption, whether or not earned or
declared, the total sum so payable being herein referred to as the "Redemption
Price".
22
<PAGE>
Special Redemption. If the situation arises under which the
Corporation is required to attain approval of a specified percentage of the
holders of shares of this Series to effect a merger, consolidation or sale of
assets, and such approval is denied, then the Corporation shall have the special
option of redeeming shares of this Series as an entirety at the Sinking Fund
Redemption Price.
Repurchases. So long as the Corporation has paid, or made provision
for all dividends previously accrued on shares of this Series, it may re-
purchase shares of this Series on a negotiated basis, provided no redemption of
shares of this Series (other than as required by the Mandatory Redemption
(Sinking Fund) section of this Paragraph B) nor any other purchase or
acquisition of shares of this Series by the Corporation shall constitute a
redemption of such shares in lieu of or as a credit against the Mandatory
Redemption (Sinking Fund) requirements of this Paragraph B.
Notice and Payment. Notice of every redemption shall be sent by
certified mail, return receipt requested, to the holders of record of the
shares of this Series so to be redeemed, at their respective addresses as the
same shall appear on the records of the Corporation, or as given by such holder
to the Corporation for the purpose of notice, or if no such address appears or
is so given, at the place where the principal office of the Corporation is
located. Such notice shall be mailed at least thirty (30) but not more than
sixty (60) days in advance of the date fixed for such redemption. Each such
notice of redemption shall state how many, if not all, of the shares of the
Series are to be redeemed, the date fixed for
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<PAGE>
redemption, the Redemption Price and/or Sinking Fund Redemption Price and the
manner and place of payment of such Redemption Price and/or Sinking Fund
Redemption Price.
Any notice which is mailed in the manner herein provided shall be
conclusively presumed to have been duly given, whether or not the holder
receives the notice. In any case, failure duly to give notice by mail, or any
defect in notice, to the holder of any share designated for redemption shall not
affect the validity of the proceedings for the redemption of any other share.
In the case of the redemption of a part only of the shares of this
Series at the time outstanding, the Corporation shall select pro rata, in such
reasonable manner as the Board of Directors may determine, the shares to be
redeemed. The Board of Directors shall have full power and authority, subject to
the limitations and provisions herein contained, to prescribe the manner in
which and the terms and conditions upon which shares of this Series shall from
time to time be redeemable. On and after the date specified in such notice, each
holder of the shares of this Series called for redemption as aforesaid, upon
presentation and surrender at the place designated in such notice of the
certificate or certificates for shares of this Series held by him, properly
endorsed in blank for transfer or accompanied by proper instruments of
assignment in blank (if required by the Corporation) and bearing all necessary
stock transfer tax stamps thereto affixed and cancelled, shall be entitled to
receive therefor the redemption price thereof.
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<PAGE>
From and after the date of redemption specified in such notice (unless
default shall be made by the Corporation in providing moneys for the payment
of the redemption price) all dividends upon shares of this Series so called for
redemption shall cease to accrue and, from and after said date (unless default
shall be made by the Company as aforesaid) or, if the Corporation shall so
elect, from and after the date specified therefor in the notice of redemption
(prior to the date of redemption so specified) on which the Corporation shall
provide the moneys for the payment of the redemption price by depositing the
amount thereof in trust for such purpose with a bank or trust company doing
business in the Commonwealth of Kentucky, and having a capital and surplus of at
least $10,000,000, all rights of the holders of shares of this Series so called
for redemption as stockholders of the Corporation, excepting only the right to
receive the redemption price of such shares on and after the redemption date
without interest thereon, shall cease and determine.
In case any holders of shares of this Series so called for redemption shall
not, within six years after such deposit, claim the amounts deposited with
respect to the redemption thereof, any such bank or trust company shall, upon
demand, pay over to the Corporation such unclaimed amounts and thereupon such
bank or trust company shall be relieved of all responsibility in respect thereof
to such holders.
25
<PAGE>
C. CONVERSION RIGHTS
The holders of shares of this Series shall not have the right to convert such
shares into, or exchange such shares for, shares of any other class, or of any
other series of the same class, of the Corporation.
D. VOTING RIGHTS
Except as otherwise required by law, holders of shares of this Series shall
have no voting rights nor be entitled to notice of or to attend any meetings of
stockholders; provided, however, that:
Defaults. (a) If and whenever accrued dividends on the shares of this Series
or any preferred shares of any other series ranking on a parity shall not have
been paid in an aggregate amount equal to or greater than six quarter-annual
dividends on the shares of this Series or such other preferred shares at the
time outstanding or if and whenever any mandatory redemptions of shares of this
Series or any other preferred shares at the time ranking on a parity with this
Series have not been made (each such series being, in this Paragraph D, called a
"series in arrears") then, and in any such event, the number of Directors then
constituting the entire Board of Directors of the Corporation shall
automatically be increased by two Directors and the holders of the shares of all
series in arrears, voting together as a single class, shall be entitled to fill
such newly created directorships. Such right to vote as a single class to elect
two Directors shall, when vested, continue until all dividends in default on the
shares of this
26
<PAGE>
Series, and such other preferred shares, as the case may be, shall have been
paid in full and all delinquent mandatory redemptions of shares of this Series
and such other preferred shares, as the case may be, have been made and, when so
done, such right to elect two Directors separately as a class shall cease,
subject, always, to the same provisions for the vesting of such right to elect
two Directors separately as a class in the case of future defaults. At any time
when such right to elect two Directors separately as a class shall have so
vested the Corporation may, and upon the written request of the holders of
record of not less than twenty percent (20%) of the total number of shares of
all series in arrears then outstanding shall, call a special meeting of the
holders of such shares to fill such newly created directorships for the election
of Directors. In the case of such a written request, such special meeting shall
be held within ninety {90) days after the delivery of such request and, in
either case, at the place and upon the notice provided by law and in the By-Laws
of the Corporation, provided that the Corporation shall not be required to call
such a special meeting if such request is received less than one hundred twenty
(120) days before the date fixed for the next ensuing annual meeting of
shareholders of the Corporation, at which meeting such newly created
directorships shall be filled by the holders of the shares of each series in
arrears, voting together as a single class.
(b) So long as any shares of this Series are outstanding, the By-Laws of the
Corporation shall at all times be such that the exercise, by the holders of
shares of this Series (of any other
27
<PAGE>
series) of the right to elect Directors under the circumstances provided for in
this Paragraph D will not contravene any provision of the Certificate of
Incorporation restricting the number of Directors which may constitute the
entire Board of Directors of the Corporation.
(c) Directors elected pursuant to this Paragraph D shall serve until the
earlier of (i) the next annual meeting of the shareholders of the Corporation
and the election (by the holders of the shares of each series in arrears) and
qualification of their respective successors or (ii) the next annual meeting of
the shareholders of the Corporation following the date upon which all dividends
in default on the shares of each series in arrears shall have been paid in full
and any default in mandatory redemption shall have been cured. If, prior to the
end of the term of any Director elected as aforesaid, a vacancy in the office of
such Director shall occur during the continuance of such a default by reason of
death, resignation, or disability, such vacancy shall be filled for the
unexpired term by appointment by the remaining Director elected as aforesaid of
a new Director for the unexpired term of such former Director.
Miscellaneous. Without the affirmative vote of the holders of at least two-
thirds of the outstanding preferred shares, voting as a single class (or, if
less than all of the outstanding series of preferred shares would be adversely
affected thereby, without the affirmative vote of the holders of at least two-
thirds of the outstanding shares of each such series so affected, voting as a
separate class), the Corporation may not
28
<PAGE>
(a) amend the Certificate of Incorporation so as to adversely affect the
voting powers (except as such voting powers may be affected by the authorization
of any additional preferred shares having the same voting rights as the
outstanding preferred shares or by the authorization of any other shares of
any class having voting rights which are not entitled to vote together with the
preferred shares in any separate class vote of the preferred shares), rights or
preferences of the preferred shares or such series;
(b) authorize or create any class of stock ranking prior to
shares of this Series;
(c) issue any additional preferred shares ranking on a parity with shares
of this Series unless, after giving effect to such issuance and the application
of the proceeds thereof, net income (excluding nonrecurring items) of the
Corporation for any period of twelve (12) consecutive months during the eighteen
(18) months immediately preceding the date of such issuance would be equal to
not less than 200% of the annual dividend requirements of all shares
(outstanding and pro forma) ranking prior to or on a parity with the shares of
this Series with respect to dividends;
(d) effect any merger or consolidation unless the Corporation is the survivor
or the surviving corporation is organized under the laws of a state of the
United States and it issues new preferred shares in exchange for shares of this
Series with terms at least as favorable as provided herein for shares of this
Series; or
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<PAGE>
(e) effect a sale of substantially all of the assets of the
Corporation.
Voting. Whenever the holders of the preferred shares are entitled to vote as a
single class, each holder of shares of this Series shall be Entitled to one vote
for each such share held of record and, to the extent permitted by applicable
law, (a) each holder of shares of any other series of the preferred shares shall
be entitled to one vote for each $100 of the liquidation price (without regard
to accrued dividends) in respect of the involuntary liquidation, dissolution or
winding up of the Corporation of the shares of such series for each such share
held of record and (b) in the case of any such shares such liquidation price of
which shall not be an integral multiple of $100, each holder thereof shall be
entitled to a vote in respect of each such share so held equal to the result
obtained by multiplying one by a fraction, the numerator of which is a number
equal to the number of dollars constituting such liquidation price of such share
and the denominator of which is 100.
E. LIQUIDATION RIGHTS
Before any distribution may be made to the holders of the common stock of the
Corporation upon any liquidation, the holders of shares of this Series will be
entitled to receive, in case of voluntary liquidation, $105 per share and, in
case of involuntary liquidation, $100 per share plus, in each case, an amount
equal to the dividends accrued and unpaid thereon, whether or not earned or
declared.
30
<PAGE>
If upon any dissolution, liquidation or winding up of the Corporation, the
assets available for distribution shall be insufficient to pay the holders of
all shares of this Series then outstanding (and the holders of all shares of
preferred stock of any other series then outstanding and ranking senior to or on
a parity with the shares of this Series upon dissolution, liquidation or winding
up) the full amounts to which they respectively shall be entitled, the holders
of shares of this Series (and the holders of shares of preferred stock of any
other series ranking on a parity) shall share ratably in such distribution of
assets in accordance with the amounts which would be payable if all such amounts
were paid in full.
Neither the consolidation nor merger of the Corporation with or into any other
corporation nor any sale, lease or conveyance of all or any part of the property
or business of the Corporation, shall be deemed to be a dissolution, liquidation
or winding up of the Corporation within the meaning of this Paragraph E.
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<PAGE>
(E) Amended $12.25 Cumulative Preferred Stock, Series B
---------------------------------------------------
(Par Value $5.00 Per Share)
RESOLVED, (a) that in the opinion of this Board of Directors it is adviseable
to amend Paragraph E of the Designation and Terms of the Corporation's $12.25
Cumulative Preferred Stock, Series B, and of the Certificate evidencing such
Designation and Terms, as set forth below, (b) that such Designation and Terms
and Certificate be and are so amended, subject to the approval of all holders of
outstanding shares of such Preferred Stock, and (c) the officers of the
Corporation are directed to call a special meeting of such shareholders to
approve such amendment, so that in its entirety such Paragraph E shall be as
follows:
E. LIQUIDATION RIGHTS:
Before any distribution may be made to the holders of the common stock of the
Corporation upon any liquidation, the holders of shares of this Series will be
entitled to receive $100 per share plus an amount equal to the dividends accrued
and unpaid thereon, whether or not earned or declared;
If upon any dissolution, liquidation or winding up of the Corporation, the
assets available for distribution shall be insufficient to pay the holders of
all shares of this Series then outstanding (and the holders of all shares of
preferred stock of any other series then outstanding and ranking senior to or on
a
32
<PAGE>
parity with the shares of this Series upon dissolution, liquidation or winding
up) the full amounts to which they respectively shall be entitled, the holders
of shares of this Series (and the holders of shares of preferred stock of any
other series ranking on a parity) shall share ratably in such distribution of
assets in accordance with the amounts which would be payable if all such amounts
were paid in full.
Neither the consolidation nor merger of the Corporation with or into any other
corporation nor any sale, lease or conveyance of all or any part of the property
or business of the Corporation, shall be deemed to be a dissolution, liquidation
or winding up of the Corporation within the meaning of this Paragraph E.
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<PAGE>
(F) Decrease of $12.25 Cumulative Preferred Stock, Series B
-------------------------------------------------------
(Par Value $5.00 Per Share)
RESOLVED, that, pursuant to the provisions of (B) (6) of Article Fourth of the
Certificate of Incorporation of the Corporation, 318,000 shares of "$12.25
Cumulative Preferred Stock, Series B" of the Corporation which have not been
issued are returned to the status of authorized and unissued shares of Preferred
Stock of the Corporation, and
FURTHER RESOLVED, that the officers of the Corporation are authorized and
directed to take such further action as in their opinion may be necessary or
desirable to effectuate such return including but not limited to the execution
and filing of any certificates to such effect as may be required under
applicable law.
34
<PAGE>
(G) $14.00 Cumulative Preferred Stock, Series C
--------------------------------------------
(Par Value $5.00 Per Share)
RESOLVED, that 150,000 shares of the total authorized amount of 2,000,000
shares of preferred stock be issued in and constitute a single series designated
"$14 Cumulative Preferred Stock, Series C" (the "Series"). Each share of the
Series shall be issued for a consideration of $100.00 and shall have a par value
of $5.00. Of the consideration for each share, the par value of $5.00 shall be
capital of the Corporation. The shares of the Series shall have the voting
powers, designations, preferences and relative, participating, optional or other
special rights, and qualifications, limitations or restrictions thereof
hereinafter set forth:
A. DIVIDEND RIGHTS
Out of the assets of the Corporation which are by law available for the
payment of dividends, the holders of shares of this Series shall be entitled to
receive, as and when declared by the Board of Directors, cumulative cash
dividends, at, but not exceeding, the rate of $14 per share per annum, payable
quarterly on the first days of November, February, May and August of each year,
accruing from the date of issuance or from such other date as may be specified
by the Board of Directors. Each dividend payment shall be made to the holders of
shares of this Series of record on the date, not exceeding sixty (60) days
preceding the date for such payment, fixed for the purpose by the Board of
Directors in advance of such payment. The holders of shares of this Series shall
be entitled to no other dividends. Any dividend declared in any quarterly
period shall be deemed to have been declared with respect
35
<PAGE>
to the quarterly period ending immediately prior to the day upon
which such dividend is payable.
So long as any shares of this Series are outstanding, unless:
(i) in case of a dividend declaration, such dividend is payable not more
than sixty (60) days after the date of record for determining the holders to
whom the dividend is to be paid, and
(ii) a full cash dividend on the shares of this Series for all past
quarterly dividend periods and for the quarterly period during which such
declaration, distribution, purchase, redemption or acquisition occurs, shall
have been paid or declared, and a sum sufficient for the payment thereof set
apart,
no dividends shall be declared, and no distribution made, on any shares of
common stock (other than in shares of common stock), nor shall any shares of
common stock be purchased, redeemed or otherwise acquired for value by the
Corporation or any subsidiary, and no dividends shall be declared, and no
distribution made, on any shares of any other series of or class of preferred
stock unless proportionate dividends are paid on all series of parity ranking
preferred shares, nor shall any shares of any other series or class of preferred
stock be purchased, redeemed or otherwise acquired for value by the Corporation
or any subsidiary unless all such preferred shares are redeemed or an offer to
purchase is made to all holders of such preferred shares on substantially equal
terms.
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<PAGE>
Provided, however, that, notwithstanding the foregoing, (i) the Corporation
may make any required sinking fund redemption (including delinquent accrued
dividends) on this or any other series or class of preferred stock if the
number of shares of such series or class of preferred stock being so redeemed
bears (as nearly as practicable) the same ratio to the aggregate number of
shares of such series or class then due to be redeemed as the number of shares
of this Series being redeemed bears to the aggregate number of shares of this
Series then due to be redeemed and (ii) the foregoing restrictions shall not
apply to the acquisition of any stock solely in exchange for or solely out of
the proceeds of sale of stock.
B. REDEMPTION AND SINKING FUND
Mandatory Redemption (Sinking Fund). Shares of this Series shall be subject to
redemption through the operation of a sinking fund (herein called the "Sinking
Fund") at the redemption price (the "Sinking Fund Redemption Price") of $100 per
share plus an amount equal to the dividends accrued and unpaid thereon to the
redemption date, whether or not earned or declared. For the purposes of the
Sinking Fund, out of any funds of the Corporation legally available therefor
remaining after full cumulative dividends upon all series and classes of
preferred stock then outstanding to the end of the dividend period next
preceding the date fixed for such redemption (and for the current dividend
period if the date fixed for such redemption is a dividend payment date) shall
have been declared and shall have been paid or set apart for pay-
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ment, as and when directed by the Board of Directors the Corporation shall set
aside in cash, annually on August 1 commencing August 1, 1992, and ending August
1, 2001, an amount sufficient to redeem, at the Sinking Fund Redemption Price,
ten percent (10%) of the shares of this Series. In the event such amounts are
not set aside, the holders of shares of this Series shall have such exclusive
rights and remedies as are set forth herein.
The Sinking Fund shall be cumulative so that if on any such August 1 the funds
of the Corporation legally available therefor shall be insufficient to permit
any such amount to be set aside in full, or if for any other reason such amount
shall not have been set aside in full, the amount of the deficiency shall be set
aside, but without interest, before any cash dividend shall be paid or declared,
or any distribution made, on any junior shares or before any junior shares or
any shares of preferred stock shall be purchased, redeemed or otherwise acquired
by the Corporation, or any moneys shall be paid to or set aside or made
available for a sinking fund for the purchase or redemption of any junior shares
or any shares or parity ranking preferred stock; provided, however, that,
notwithstanding the existence of any such deficiency, the Corporation may make
any required sinking fund redemption on any other series or class of preferred
stock if the number of shares of such other series or class of preferred stock
being so redeemed bears (as nearly as practicable) the same ratio to the
aggregate number of shares of such other series or class then due to be redeemed
as the number of shares of this Series being redeemed bears to the aggregate
number of shares of this Series then due to be redeemed.
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Moneys in the Sinking Fund shall be applied on such August 1 to the redemption
of shares of this Series. The Corporation shall, prior to each such Sinking Fund
redemption, give notice of redemption as hereinafter provided.
In addition, the Corporation shall have the right, at its option, to redeem at
the Sinking Fund Redemption Price on August 1, 1992, and on any August 1
thereafter, an additional number of shares of this Series equal to the number it
is required to redeem on such date. This right shall not be cumulative from year
to year and shall not in the aggregate exceed 25% of the shares of this issue.
Optional Redemption. Shares of this Series may be redeemed at the option of
the Corporation, in whole or in part, on any date on or after August 1, 1991
upon at least thirty (30) days' notice as hereinafter provided, out of any funds
of the Corporation legally available therefor remaining after full cumulative
dividends upon all series and classes of preferred stock then outstanding to the
end of the dividend period next preceding the date fixed for such redemption
(and for the current dividend period if the date fixed for such redemption is a
dividend payment date) shall have been declared and shall have been paid or set
aside for payment, at S105 per share plus an amount equal to the dividends
accrued and unpaid to the date fixed for redemption, whether or not earned or
declared, the total sum so payable being herein referred to as the "Redemption
Price".
Special Redemption. If the situation arises under which the Corporation is
required to attain approval of a specified per-
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centage of the holders of shares of this Series to effect a merger,
consolidation or sale of assets, and such approval is denied, then the
Corporation shall have the special option of redeeming shares of this Series as
an entirety at the Sinking Fund Redemption Price.
Repurchases. So long as the Corporation has paid, or made provision for all
dividends previously accrued on shares of this Series, it may repurchase shares
of this Series on a negotiated basis, provided no redemption of shares of this
Series (other than as required by the Mandatory Redemption (Sinking Fund)
section of this Paragraph B) nor any other purchase or acquisition of shares of
this Series by the Corporation shall constitute a redemption of such shares in
lieu of or as a credit against the Mandatory Redemption (Sinking Fund)
requirements of this Paragraph B.
Notice and Payment. Notice of every redemption shall be sent by certified
mail, return receipt requested, to the holders of record of the shares of this
Series so to be redeemed, at their respective addresses as the same shall appear
on the records of the Corporation, or as given by such holder to the Corporation
for the purpose of notice, or if no such address appears or is so given, at the
place where the principal office of the Corporation is located. Such notice
shall be mailed at least thirty (30) but not more than sixty (60) days in
advance of the date fixed for such redemption. Each such notice of redemption
shall state how many, if not all, of the shares of the Series are to be
redeemed, the date fixed for redemption, the Redemption Price and/or Sinking
Fund Redemption Price and the manner and place of payment of such Redemption
Price and/or Sinking Fund Redemption Price.
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Any notice which is mailed in the manner herein provided shall be conclusively
presumed to have been duly given, whether or not the holder receives the notice.
In any case, failure duly to give notice by mail, or any defect in notice, to
the holder of any share designated for redemption shall not affect the validity
of the proceedings for the redemption of any other share.
In the case of the redemption of a part only of the shares of this Series at
the time outstanding, the Corporation shall select pro rata, in such reasonable
manner as the Board of Directors may determine, the shares to be redeemed. The
Board of Directors shall have full power and authority, subject to the
limitations and provisions herein contained, to prescribe the manner in which
and the terms and conditions upon which shares of this Series shall from time to
time be redeemable. On and after the date specified in such notice, each holder
of the shares of this Series called for redemption as aforesaid, upon
presentation and surrender at the place designated in such notice of the
certificate or certificates for shares of this Series held by him, properly
endorsed in blank for transfer or accompanied by proper instruments of
assignment in blank (if required by the Corporation) and bearing all necessary
stock transfer tax stamps thereto affixed and cancelled, shall be entitled to
receive therefor the redemption price thereof.
From and after the date of redemption specified in such notice (unless default
shall be made by the Corporation in providing moneys for the payment of the
redemption price) all dividends upon shares of this Series so called for
redemption shall cease to accrue and, from and after said date (unless default
shall be made
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by the Company as aforesaid) or, if the Corporation shall so elect, from and
after the date specified therefor in the notice of redemption (prior to the
date of redemption so specified) on which the Corporation shall provide the
moneys for the payment of the redemption price by depositing the amount thereof
in trust for such purpose with a bank or trust company doing business in the
Commonwealth of Kentucky, and having a capital and surplus of at least
$10,000,000, all rights of the holders of shares of this Series so called for
redemption as stockholders of the Corporation, excepting only the right to
receive the redemption price of such shares on and after the redemption date
without interest thereon, shall cease and determine.
In case any holders of shares of this Series so called for redemption shall
not, within six years after such deposit, claim the amounts deposited with
respect to the redemption thereof, any such bank or trust company shall, upon
demand, pay over to the Corporation such unclaimed amounts and thereupon such
bank or trust company shall be relieved of all responsibility in respect thereof
to such holders.
C. CONVERSION RIGHTS
The holders of shares of this Series shall not have the right to convert such
shares into, or exchange such shares for, shares of any other class, or of any
other series of the same class, of the Corporation.
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D. VOTING RIGHTS
Except as otherwise required by law, holders of shares of this Series shall
have no voting rights nor be entitled to notice of or to attend any meetings of
stockholders; provided, however, that:
Defaults. (a) If and whenever accrued dividends on the shares of this Series
or any preferred shares of any other series ranking on a parity shall not have
been paid in an aggregate amount equal to or greater than six quarter-annual
dividends on the shares of this Series or such other preferred shares at the
time outstanding or if and whenever any mandatory redemptions of shares of this
Series or any other preferred shares at the time ranking on a parity with this
Series have not been made (each such series being, in this Paragraph D, called a
"series in arrears") then, and in any such event, the number of Directors then
constituting the entire Board of Directors of the Corporation shall
automatically be increased by two Directors and the holders of the shares of all
series in arrears, voting together as a single class, shall be entitled to fill
such newly created directorships. Such right to vote as a single class to elect
two Directors shall, when vested, continue until all dividends in default on the
shares of this Series, and such other preferred shares, as the case may be,
shall have been paid in full and all delinquent mandatory redemptions of shares
of this Series and such other preferred shares, as the case may be, have been
made and, when so done, such right to elect two Directors separately as a class
shall cease, subject, always, to the same provisions for the vesting of such
right to elect two
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Directors separately as a class in the case of future defaults. At any time
when such right to elect two Directors separately as a class shall have so
vested the Corporation may, and upon the written request of the holders of
record of not less than twenty percent (20%) of the total number of shares
of all series in arrears then outstanding shall, call a special meeting of the
holders of such shares to fill such newly created directorships for the election
of Directors. In the case of such a written request, such special meeting shall
be held within ninety (90) days after the delivery of such request and, in
either case, at the place and upon the notice provided by law and in the By-Laws
of the Corporation, provided that the Corporation shall not be required to call
such a special meeting if such request is received less than one hundred twenty
(120) days before the date fixed for the next ensuing annual meeting of
shareholders of the Corporation, at which meeting such newly created
directorships shall be filled by the holders of the shares of each series in
arrears, voting together as a single class.
(b) So long as any shares of this Series are outstanding, the By-Laws of the
Corporation shall at all times be such that the exercise, by the holders of
shares of this Series (of any other series) of the right to elect Directors
under the circumstances provided for in this Paragraph D will not contravene any
provision of the Certificate of Incorporation restricting the number of
Directors which may constitute the entire Board of Directors of the Corporation.
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(c) Directors elected pursuant to this Paragraph D shall serve until the
earlier of (i) the next annual meeting of the shareholders of the Corporation
and the election (by the holders of the shares of each series in arrears) and
qualification of their respective successors or (ii) the next annual meeting of
the shareholders of the Corporation following the date upon which all dividends
in default on the shares of each series in arrears shall have been paid in full
and any default in mandatory redemption shall have been cured. If, prior to the
end of the term of any Director elected as aforesaid, a vacancy in the office of
such Director shall occur during the continuance of such a default by reason of
death, resignation, or disability, such vacancy shall be filled for the
unexpired term by appointment by the remaining Director elected as
aforesaid of a new Director for the unexpired term of such former Director.
Miscellaneous. Without the affirmative vote of the holders of at least two-
thirds of the outstanding preferred shares, voting as a single class (or, if
less than all of the outstanding series of preferred shares would be adversely
affected thereby, without the affirmative vote of the holders of at least
two-thirds of the outstanding shares of each such series so affected, voting as
a separate class), the Corporation may not
(a) amend the Certificate of Incorporation so as to adversely affect the
voting powers (except as such voting powers may be affected by the authorization
of any additional preferred shares having the same voting rights as the
outstanding preferred shares or by the authorization of any other shares of any
class having
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voting rights which are not entitled to vote together with the preferred shares
in any separate class vote of the preferred shares), rights or preferences of
the preferred shares or such series;
(b) authorize or create any class of stock ranking prior to shares of this
Series;
(c) issue any additional preferred shares ranking on a parity with shares of
this Series unless, after giving effect to such issuance and the application of
the proceeds thereof, net income (excluding nonrecurring items) of the
Corporation for any period of twelve (12) consecutive months during the eighteen
(18) months immediately preceding the date of such issuance would be equal to
not less than 200% of the annual dividend requirements of all shares
(outstanding and pro forma) ranking prior to or on a parity with the shares of
this Series with respect to dividends;
(d) effect any merger or consolidation unless the Corporation is the survivor
or the surviving corporation is organized under the laws of a state of the
United States and it issues new preferred shares in exchange for shares of this
Series with terms at least as favorable as provided herein for shares of this
Series; or
(e) effect a sale of substantially all of the assets of the Corporation.
Voting. Whenever the holders of the preferred shares are entitled to vote as a
single class, each holder of shares of this Series shall be entitled to one vote
for each such share held of record and, to the extent permitted by applicable
law, (a) each holder of shares of any other series of the preferred shares shall
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be entitled to one vote for each $100 of the liquidation price (without regard
to accrued dividends) in respect of the involuntary liquidation, dissolution or
winding up of the Corporation of the shares of such series for each such share
held of record and (b) in the case of any such shares such liquidation price of
which shall not be an integral multiple of $100, each holder thereof shall be
entitled to a vote in respect of each such share so held equal to the result
obtained by multiplying one by a fraction, the numerator of which is a number
equal to the number of dollars constituting such liquidation price of such share
and the denominator of which is 100.
E. LIQUIDATION RIGHTS
Before any distribution may be made to the holders of the common stock of the
Corporation upon any liquidation, the holders of shares of this Series will be
entitled to receive, in case of voluntary liquidation, $105 per share or, in
case of involuntary liquidation, $100 per share plus, in each case, an amount
equal to the dividends accrued and unpaid thereon, whether or not earned or
declared.
If upon any dissolution, liquidation or winding up of the Corporation, the
assets available for distribution shall be insufficient to pay the holders of
all shares of this Series then outstanding (and the holders of all shares of
preferred stock of any other series then outstanding and ranking senior to or on
a parity with the shares of this Series upon dissolution, liquidation or winding
up) the full amounts to which they respectively shall be
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<PAGE>
entitled, the holders of shares of this Series (and the holders of shares of
preferred stock of any other series ranking on a parity) shall share ratably in
such distribution of assets in accordance with the amounts which would be
payable if all such amounts were paid in full.
Neither the consolidation nor merger of the Corporation with or into any other
corporation nor any sale, lease or conveyance of all or any part of the property
or business of the Corporation, shall be deemed to be a dissolution, liquidation
or winding up of the Corporation within the meaning of this Paragraph E.
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(H) Amended $14.00 Cumulative Preferred Stock, Series C
---------------------------------------------------
(Par Value $5.00 Per Share)
RESOLVED, (a) that in the opinion of this Board of Directors it is adviseable
to amend Paragraph E of the Designation and Terms of the Corporation's $14.00
Cumulative Preferred Stock, Series C, and of the Certificate evidencing such
Designation and Terms, as set forth below, (b) that such Designation and Terms
and Certificate be and are so amended, subject to the approval of all holders
of outstanding shares of such Preferred Stock, and (c) the officers of the
Corporation are directed to call a special meeting of such shareholders to
approve such amendment, so that in its entirety such Paragraph E shall be as
follows:
E. LIQUIDATION RIGHTS
Before any distribution may be made to the holders of the common stock of the
Corporation upon any liquidation, the holders of shares of this Series will be
entitled to receive $100 per share plus an amount equal to the dividends accrued
and unpaid thereon, whether or not earned or declared.
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If upon any dissolution, liquidation or winding up of the Corporation, the
assets available for distribution shall be insufficient to pay the holders of
all shares of this Series then outstanding (and the holders of all shares of
preferred stock of any other series then outstanding and ranking senior to or
on a parity with the shares of this Series upon dissolution, liquidation or
winding up) the full amounts to which they respectively shall be entitled, the
holders of shares of this Series (and the holders of shares of preferred stock
of any other series ranking on a parity) shall share ratably in such
distribution of assets in accordance with the amounts which would be payable if
all such amounts were paid in full.
Neither the consolidation nor merger of the Corporation with or into any other
corporation nor any sale, lease or conveyance of all or any part of the property
or business of the Corporation, shall be deemed to be a dissolution, liquidation
or winding up of the Corporation within the meaning of this Paragraph E.
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(I) $15.00 Cumulative Preferred Stock, Series D
-------------------------------------------
(Par Value $5.00 Per Share)
RESOLVED, that 100,000 shares of the total authorized amount of 2,000,000
shares of preferred stock be issued in and constitute a single series designated
"$15 Cumulative Preferred Stock, Series D" (the "Series"). Each share of the
Series shall be issued for a consideration of $100.00 and shall have a par value
of $5.00. Of the consideration for each share, the par value of $5.00 shall be
capital of the Corporation. The shares of the Series shall have the voting
powers, designations, preferences and relative, participating, optional or other
special rights, and qualifications, limitations or restrictions thereof
hereinafter set forth:
A. DIVIDEND RIGHTS
Out of the assets of the Corporation which are by law available for the
payment of dividends, the holders of shares of this Series shall be entitled to
receive, as and when declared by the Board of Directors, cumulative cash
dividends, at, but not exceeding, the rate of $15 per share per annum, payable
quarterly on the first days of May, August, November and February of each year,
accruing from the date of issuance or from such other date as may be specified
by the Board of Directors. Each dividend payment shall be made to the holders of
shares of this Series of record on the date, not exceeding sixty (60) days
preceding the date for such payment, fixed for the purpose by the Board of
Directors in advance of such payment. The holders of shares of this Series shall
be entitled to no other dividends. Any dividend declared in any
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quarterly period shall be deemed to have been declared with respect to the
quarterly period ending immediately prior to the day upon which such dividend is
payable.
So long as any shares of this Series are outstanding, unless:
(i) in case of a dividend declaration, such dividend is payable not more than
sixty (60) days after the date of record for determining the holders to whom
the dividend is to be paid, and
(ii) a full cash dividend on the shares of this Series for all past quarterly
dividend periods and for the quarterly period during which such declaration,
distribution, purchase, redemption or acquisition occurs, shall have been
paid or declared, and a sum sufficient for the payment thereof set apart,
no dividends shall be declared, and no distribution made, on any shares of
common stock (other than in shares of common stock), nor shall any shares of
common stock be purchased, redeemed or otherwise acquired for value by the
Corporation or any subsidiary, and no dividends shall be declared, and no
distribution made, on any shares of any other series of or class of preferred
stock unless proportionate dividends are paid on all series of parity ranking
preferred shares, nor shall any shares of any other series or class of preferred
stock be purchased, redeemed or otherwise acquired for value by the Corporation
or any subsidiary unless all such preferred shares are redeemed or an offer to
purchase is made to all holders of such preferred shares on substantially equal
terms.
Provided, however, that, notwithstanding the foregoing, (i) the Corporation
may make any required sinking fund
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redemption (including delinquent accrued dividends) on this or any other series
or class of preferred stock if the number of shares of such series or class of
preferred stock being so redeemed bears (as nearly as practicable) the same
ratio to the aggregate number of shares of such series or class then due to be
redeemed as the number of shares of this Series being redeemed bears to the
aggregate number of shares of this Series then due to be redeemed and (ii) the
foregoing restrictions shall not apply to the acquisition of any stock solely in
exchange for or solely out of the proceeds of sale of stock.
B. REDEMPTION AND SINKING FUND
Mandatory Redemption (Sinking Fund). Shares of this Series shall be subject to
redemption through the operation of a sinking fund (herein called the "Sinking
Fund") at the redemption price (the "Sinking Fund Redemption Price") of $100
per share plus an amount equal to the dividends accrued and unpaid thereon to
the redemption date, whether or not earned or declared. For the purposes of the
Sinking Fund, out of any funds of the Corporation legally available therefor
remaining after full cumulative dividends upon all series and classes of
preferred stock then outstanding to the end of the dividend period next
preceding the date fixed for such redemption (and for the current dividend
period if the date fixed for such redemption is a dividend payment date) shall
have been declared and shall have been paid or set apart for payment, as and
when directed by the Board of Directors, the Corporation shall set
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aside in cash, annually on February 1 commencing February 1, 1993, and ending
February 1, 2002, an amount sufficient to redeem, at the Sinking Fund Redemption
Price, ten percent (10%) of the shares of this Series. In the event such amounts
are not set aside, the holders of shares of this Series shall have such
exclusive rights and remedies as are set forth herein.
The Sinking Fund shall be cumulative so that if on any such February 1 the
funds of the Corporation legally available therefor shall be insufficient to
permit any such amount to be set aside in full, or if for any other reason such
amount shall not have been set aside in full, the amount of the deficiency shall
be set aside, but without interest, before any cash dividend shall be paid or
declared, or any distribution made, on any junior shares or before any junior
shares or any shares of preferred stock shall be purchased, redeemed or
otherwise acquired by the Corporation, or any moneys shall be paid to or set
aside or made available for a sinking fund for the purchase or redemption of any
junior shares or any shares or parity ranking preferred stock; provided,
however, that, notwithstanding the existence of any such deficiency, the
Corporation may make any required sinking fund redemption on any other series or
class of preferred stock if the number of shares of such other series or class
of preferred stock being so redeemed bears (as nearly as practicable) the same
ratio to the aggregate number of shares of such other series or class then due
to be redeemed as the number of shares of this Series
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<PAGE>
being redeemed bears to the aggregate number of shares of this Series then due
to be redeemed.
Moneys in the Sinking Fund shall be applied on such February 1 to the
redemption of shares of this Series. The Corporation shall, prior to each such
Sinking Fund redemption, give notice of redemption as hereinafter provided.
In addition, the Corporation shall have the right, at its option, to redeem at
the Sinking Fund Redemption Price on February 1, 1993, and on any February 1
thereafter, an additional number of shares of this Series equal to the number of
shares of this Series equal to the number it is required to redeem on such date.
This right shall not be cumulative from year to year and shall not in the
aggregate exceed 25% of the shares of this issue.
Optional Redemption. Shares of this Series may be redeemed at the option of
the Corporation, in whole or in part, on any date on or after February 1, 1992
upon at least thirty (30) days' notice as hereinafter provided, out of any funds
of the Corporation legally available therefor remaining after full cumulative
dividends upon all series and classes of preferred stock then outstanding to the
end of the dividend period next preceding the date fixed for such redemption
(and for the current dividend period if the date fixed for such redemption is a
dividend payment date) shall have been declared and shall have been paid or set
aside for payment at $105 per share plus an amount equal to the dividends
accrued and unpaid to the date
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<PAGE>
fixed for redemption, whether or not earned or declared, the total sum so
payable being herein referred to as the "Redemption Price".
Special Redemption. If the situation arises under which the Corporation
is required to attain approval of a specified percentage of the holders of
shares of this Series to effect a merger, consolidation or sale of assets, and
such approval is denied, then the Corporation shall have the special option of
redeeming shares of this Series as an entirety at the Sinking Fund Redemption
Price.
Repurchases. So long as the Corporation has paid, or made provision for all
dividends previously accrued on shares of this Series, it may repurchase shares
of this Series on a negotiated basis, provided no redemption of shares of this
Series (other than as required by the Mandatory Redemption (Sinking Fund)
section of this Paragraph B) nor any other purchase or acquisition of shares of
this Series by the Corporation shall constitute a redemption of such shares in
lieu of or as a credit against the Mandatory Redemption (Sinking Fund)
requirements of this Paragraph B.
Notice and Payment. Notice of every redemption shall be sent by certified
mail, return receipt requested, to the holders of record of the shares of this
Series so to be redeemed, at their respective addresses as the same shall appear
on the records of the Corporation, or as given by such holder to the Corporation
for the purpose of notice, or if no
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<PAGE>
such address appears or is so given, at the place where the principal office of
the Corporation is located. Such notice shall be mailed at least thirty (30) but
not more than sixty (60) days in advance of the date fixed for such redemption.
Each such notice of redemption shall state how many, if not all, of the shares
of the Series are to be redeemed, the date fixed for redemption, the Redemption
Price and/or Sinking Fund Redemption Price and the manner and place of payment
of such Redemption Price and/or Sinking Fund Redemption Price.
Any notice which is mailed in the manner herein provided shall be conclusively
presumed to have been duly given, whether or not the holder receives the notice.
In any case, failure to duly give notice by mail, or any defect in notice, to
the holder of any share designated for redemption shall not affect the validity
of the proceedings for the redemption of any other share.
In the case of the redemption of a part only of the shares of this Series at
the time outstanding, the Corporation shall select pro rata, in such reasonable
manner as the Board of Directors may determine, the shares to be redeemed. The
Board of Directors shall have full power and authority, subject to the
limitations and provisions herein contained, to prescribe the manner in which
and the terms and conditions upon which shares of this Series shall from time to
time be redeemable. On and after the date specified in such notice, each holder
of the shares of this Series called for redemption as aforesaid,
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<PAGE>
upon presentation and surrender at the place designated in such notice of the
certificate or certificates for shares of this Series held by him, properly
endorsed in blank for transfer or accompanied by proper instruments of
assignment in blank (if required by the Corporation) and bearing all necessary
stock-transfer tax stamps thereto affixed and cancelled, shall be entitled to
receive therefor the redemption price thereof.
From and after the date of redemption specified in such notice (unless default
shall be made by the Corporation in providing moneys for the payment of the
redemption price) all dividends upon shares of this Series so called for
redemption shall cease to accrue and, from and after said date (unless default
shall be made by the Company as aforesaid) or, if the Corporation shall so
elect, from and after the date specified therefor in the notice of redemption
(prior to the date of redemption so specified) on which the Corporation shall
provide the moneys for the payment of the redemption price by depositing the
amount thereof in trust for such purpose with a bank or trust company doing
business in the Commonwealth of Kentucky, and having a capital and surplus of at
least $10,000,000, all rights of the holders of shares of this Series so called
for redemption as stockholders of the Corporation, excepting only the right to
receive the redemption price of such shares on and after the redemption date
without interest thereon, shall cease and determine.
In case any holders of shares of this Series so called for
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redemption shall not, within six years after such deposit, claim the amounts
deposited with respect to the redemption thereof, any such bank or trust company
shall, upon demand, pay over to the Corporation such unclaimed amounts and
thereupon such bank or trust company shall be relieved of all responsibility in
respect thereof to such holders.
C. CONVERSION RIGHTS
The holders of shares of this Series shall not have the right to convert such
shares into, or exchange such shares for, shares of any other class, or of any
other series of the same class, of the Corporation.
D. VOTING RIGHTS
Except as otherwise required by law, holders of shares of this Series shall
have no voting rights nor be entitled to notice of or to attend any meetings of
stockholders; provided, however, that:
Defaults. (a) If and whenever accrued dividends on the shares of this Series
or any preferred shares of any other series ranking on a parity shall not have
been paid in an aggregate amount equal to or greater than six quarter-annual
dividends on the shares of this Series or such other preferred shares at the
time outstanding or if and whenever any mandatory redemptions of shares of this
Series or any other preferred shares at the time ranking on a parity with this
Series have not been made (each such series being, in this Paragraph D, called a
"series in arrears") then, and in any such event, the
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number of Directors then constituting the entire Board of Directors of the
Corporation shall automatically be increased by two Directors and the holders of
the shares of all series in arrears, voting together as a single class, shall be
entitled to fill such newly created directorships. Such right to vote as a
single class to elect two Directors shall, when vested, continue until all
dividends in default on the shares of this Series, and such other preferred
shares, as the case may be, shall have been paid in full and all delinquent
mandatory redemptions of shares of this Series and such other preferred shares,
as the case may be, have been made and, when so done, such right to elect two
Directors separately as a class shall cease, subject, always, to the same
provisions for the vesting of such right to elect two Directors separately as a
class in the case of future defaults. At any time when such right to elect two
Directors separately as a class shall have so vested the Corporation may, and
upon the written request of the holders of record of not less than twenty
percent (20%) of the total number of shares of all series in arrears then
outstanding shall, call a special meeting of the holders of such shares to fill
such newly created directorships for the election of Directors. In the case of
such a written request, such special meeting shall be held within ninety (90)
days after the delivery of such request and, in either case, at the place and
upon the notice provided by law and in the By-Laws of the Corporation, provided
that the Corporation shall not be
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required to call such a special meeting if such request is received less than
one hundred twenty (120) days before the date fixed for the next ensuing annual
meeting of shareholders of the Corporation, at which meeting such newly created
directorships shall be filled by the holders of the shares of each series in
arrears, voting together as a single class.
(b) So long as any shares of this Series are outstanding, the By-Laws of the
Corporation shall at all times be such that the exercise, by the holders of
shares of this Series (or any other series) of the right to elect Directors
under the circumstances provided for in this Paragraph D will not contravene any
provision of the Certificate of Incorporation restricting the number of
Directors which may constitute the entire Board of Directors of the Corporation.
(c) Directors elected pursuant to this Paragraph D shall serve until the
earlier of (i) the next annual meeting of the shareholders of the Corporation
and the election (by the holders of the shares of each series in arrears) and
qualification of their respective successors or (ii) the next annual meeting of
the shareholders of the Corporation following the date upon which all dividends
in default on the shares of each series in arrears shall have been paid in full
and any default in mandatory redemption shall have been cured. If, prior to the
end of the term of any Director elected as aforesaid, a vacancy in the office of
such Director shall occur during the continuance of such a default by reason of
death,
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resignation, or disability, such vacancy shall be filled for the unexpired term
by appointment by the remaining Director elected as aforesaid of a new Director
for the unexpired term of such former Director.
Miscellaneous. Without the affirmative vote of the holders of at least
two-thirds of the outstanding preferred shares, voting as a single class (or, if
less than all of the outstanding series of preferred shares would be adversely
affected thereby, without the affirmative vote of the holders of at least
two-thirds of the outstanding shares of each such series so affected, voting as
a separate class), the Corporation may not
(a) amend the Certificate of Incorporation so as to adversely affect the
voting powers (except as such voting powers may be affected by the authorization
of any additional preferred shares having the same voting rights as the
outstanding preferred shares or by the authorization of any other shares of any
class having voting rights which are not entitled to vote together with the
preferred shares in any separate class vote of the preferred shares), rights or
preferences of the preferred shares or such series;
(b) authorize or create any class of stock ranking prior to shares of this
Series;
(c) issue any additional preferred shares ranking on a parity with shares of
this Series unless, after giving effect to such issuance and the application of
the proceeds thereof,
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net income (excluding nonrecurring items) of the Corporation for any period of
twelve (12) consecutive months during the eighteen (18) months immediately
preceding the date of such issuance would be equal to not less than 200% of the
annual dividend requirements of all shares (outstanding and pro forma) ranking
prior to or on a parity with the shares of this Series with respect to
dividends;
(d) effect any merger or consolidation unless the Corporation is the survivor
or the surviving corporation is organized under the laws of a state of the
United States and it issues new preferred shares in exchange for shares of this
Series with terms at least as favorable as provided herein for shares of this
Series; or
(e) effect a sale of substantially all of the assets of the Corporation.
Voting. Whenever the holder of the preferred shares are entitled to vote as a
single class, each holder of shares of this Series shall be entitled to one vote
for such share held of record and, to the extent permitted by applicable law,
(a) each holder of shares of any other series of the preferred shares shall be
entitled to one vote for each $100 of the liquidation price (without regard to
accrued dividends) in respect of the involuntary liquidation, dissolution or
winding up of the Corporation of the shares of such series for each such share
held of record and (b) in the case of any such shares such liquidation price of
which shall not be an integral
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multiple of $100, each holder thereof shall be entitled to a vote in respect of
each such share so held equal to the result obtained by multiplying one by a
fraction, the numerator of which is a number equal to the number of dollars
constituting such liquidation price of such share and the denominator of which
is 100.
E. LIQUIDATION RIGHTS
Before any distribution may be made to the holders of the common stock of the
Corporation upon any liquidation, the holders of shares of this Series will be
entitled to receive, in case of voluntary liquidation, $105 per share or, in
case of involuntary liquidation, $100 per share plus, in each case, an amount
equal to the dividends accrued and unpaid thereon, whether or not earned or
declared.
If upon any dissolution, liquidation or winding up of the Corporation, the
assets available for distribution shall be insufficient to pay the holders of
all shares of this Series then outstanding (and the holders of all shares of
preferred stock of any other series then outstanding and ranking senior to or on
a parity with the shares of this Series upon dissolution, liquidation or winding
up) the full amounts to which they respectively shall be entitled, the holders
of shares of this Series (and the holders of shares of preferred stock of any
other series ranking on a parity) shall share ratably in such distribution of
assets in accordance with the
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amounts which would be payable if all such amounts were paid in full.
Neither the consolidation nor merger of the Corporation with or into any other
corporation nor any sale, lease or conveyance of all or any part of the property
or business of the Corporation, shall be deemed to be a dissolution, liquidation
or winding up of the Corporation within the meaning of this Paragraph E.
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(J) Amended $15.00 Cumulative Preferred Stock,
------------------------------------------
Series D
--------
(Par Value $5.00 Per Share)
RESOLVED, (a) that in the opinion of this Board of Directors it is adviseable
to amend Paragraph E of the Designation and Terms of the Corporation's $15.00
Cumulative Preferred Stock, Series D, and of the Certificate evidencing such
Designation and Terms, as set forth below, (b) that such Designation and Terms
and Certificate be and are so amended, subject to the approval of all holders of
outstanding shares of such Preferred Stock, and (c) the officers of the
Corporation are directed to call a special meeting of such shareholders to
approve such amendment, so that in its entirety such Paragraph E shall be as
follows:
E. LIQUIDATION RIGHTS
Before any distribution may be made to the holders of the common stock of the
Corporation upon any liquidation, the holders of shares of this Series will be
entitled to receive $100 per share plus an amount equal to the dividends accrued
and unpaid thereon, whether or not earned or declared.
If upon any dissolution, liquidation or winding up of the Corporation, the
assets available for distribution shall be insufficient to pay the holders of
all shares of this Series then outstanding (and the holders of all shares of
preferred stock of any
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other series then outstanding and ranking senior to or on a parity with the
shares of this Series upon dissolution, liquidation or winding up) the full
amounts to which they respectively shall be entitled, the holders of shares of
this Series (and the holders of shares of preferred stock of any other series
ranking on a parity) shall share ratably in such distribution of assets in
accordance with the amounts which would be payable if all such amounts were paid
in full.
Neither the consolidation nor merger of the Corporation with or into any other
corporation nor any sale, lease or conveyance of all or any part of the property
or business of the Corporation, shall be deemed to be a dissolution, liquidation
or winding up of the Corporation within the meaning of this Paragraph E.
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(K) $14.25 Cumulative Preferred Stock, Series E
-------------------------------------------
(Par Value $5.00 Per Share)
RESOLVED, that 150,000 shares of the total authorized amount of 2,000,000
shares of preferred stock be issued in and constitute a single series designated
"$14.25 Cumulative Preferred Stock, Series E" (the "Series"). Each share of
the Series shall be issued for a consideration of $100.00 and shall have a par
value of $5.00. Of the consideration for each share, the par value of $5.00
shall be capital of the Corporation. The shares of the Series shall have the
voting powers, designations, preferences and relative, participating, optional
or other special rights, and qualifications, limitations or restrictions thereof
hereinafter set forth:
A. DIVIDEND RIGHTS
Out of the assets of the Corporation which are by law available for the payment
of dividends, the holders of shares of this Series shall be entitled to receive,
as and when declared by the Board of Directors, cumulative cash dividends, at,
but not exceeding, the rate of $14.25 per share per annum, payable quarterly on
the first days of May, August, November and February of each year, accruing from
the date of issuance or from such other date as may be specified by the Board of
Directors. Each dividend payment shall be made to the holders of shares of this
Series of record on the date, not exceeding sixty (60) days preceding the date
for such payment, fixed for the purpose by the Board of Directors in advance of
such payment. The holders of shares of this Series shall be
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entitled to no other dividends. Any dividend declared in any quarterly period
shall be deemed to have been declared with respect to the quarterly period
ending immediately prior to the day upon which such dividend is payable.
So long as any shares of this Series are outstanding, unless:
(i) in case of a dividend declaration, such dividend is payable not more
than sixty (60) days after the date of record for determining the holders to
whom the dividend is to be paid, and
(ii) a full cash dividend on the shares of this Series for all past
quarterly dividend periods and for the quarterly period during which such
declaration, distribution, purchase, redemption or acquisition occurs, shall
have been paid or declared, and a sum sufficient for the payment thereof set
apart,
no dividends shall be declared, and no distribution made, on any shares of
common stock (other than in shares of common stock), nor shall any shares of
common stock be purchased, redeemed or otherwise acquired for value by the
Corporation or any subsidiary, and no dividends shall be declared, and no
distribution made, on any shares of any other series of or class of preferred
stock unless proportionate dividends are paid on all series of parity ranking
preferred shares, nor shall any shares of any other series or class of preferred
stock be purchased, redeemed or otherwise acquired for value by the Corporation
or any subsidiary unless all such preferred shares are redeemed or an offer to
purchase is made to all holders of such preferred shares on substantially equal
terms.
Provided, however, that, notwithstanding the foregoing,
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(i) the Corporation may make any required sinking fund redemption (including
delinquent accrued dividends) on this or any other series or class of preferred
stock if the number of shares of such series or class of preferred stock being
so redeemed bears (as nearly as practicable) the same ratio to the aggregate
number of shares of such series or class then due to be redeemed as the number
of shares of this Series being redeemed bears to the aggregate number of shares
of this Series then due to be redeemed and (ii) the foregoing restrictions shall
not apply to the acquisition of any stock solely in exchange for or solely out
of the proceeds of sale of stock.
B. REDEMPTION AND SINKING FUND
Mandatory Redemption (Sinking Fund). Shares of this Series shall be subject to
redemption through the operation of a sinking fund (herein called the "Sinking
Fund") at the redemption price (the "Sinking Fund Redemption Price") of $100
per share plus an amount equal to the dividends accrued and unpaid thereon to
the redemption date, whether or not earned or declared. For the purposes of the
Sinking Fund, out of any funds of the Corporation legally available therefor
remaining after full cumulative dividends upon all series and classes of
preferred stock then outstanding to the end of the dividend period next
preceding the date fixed for such redemption (and for the current dividend
period if the date fixed for such redemption is a dividend payment date) shall
have been declared
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and shall have been paid or set apart for payment, as and when directed by the
Board of Directors, the Corporation shall set aside in cash, annually on May 1
commencing May 1, 1993, and ending May 1, 2002, an amount sufficient to redeem,
at the Sinking Fund Redemption Price, ten percent (10%) of the shares of this
Series. In the event such amounts are not set aside, the holders of shares of
this Series shall have such exclusive rights and remedies as are set forth
herein.
The Sinking Fund shall be cumulative so that if on any such May 1 the funds of
the Corporation legally available therefor shall be insufficient to permit any
such amount to be set aside in full, or if for any other reason such amount
shall not have been set aside in full, the amount of the deficiency shall be set
aside, but without interest, before any cash dividend shall be paid or declared,
or any distribution made, on any junior shares or before any junior shares or
any shares of preferred stock shall be purchased, redeemed or otherwise acquired
by the Corporation, or any moneys shall be paid to or set aside or made
available for a sinking fund for the purchase or redemption of any junior shares
or any shares or parity ranking preferred stock; provided, however, that,
notwithstanding the existence of any such deficiency, the Corporation may make
any required sinking fund redemption on any other series or class of preferred
stock if the number of shares of such other series or class of preferred stock
being so redeemed bears (as nearly as practicable) the same ratio to
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the aggregate number of shares of such other series or class then due to be
redeemed as the number of shares of this Series being redeemed bears to the
aggregate number of shares of this Series then due to be redeemed.
Moneys in the Sinking Fund shall be applied on each or any such May 1 to the
redemption of shares of this Series. The Corporation shall, prior to each such
Sinking Fund redemption, give notice of redemption as hereinafter provided.
In addition, the Corporation shall have the right, at its option, to redeem at
the Sinking Fund Redemption Price on May 1, 1993, and on any May 1 thereafter,
an additional number of shares of this Series equal to the number it is required
to redeem on such date. This right shall not be cumulative from year to year and
shall not in the aggregate exceed 25% of the shares of this issue.
Optional Redemption. Shares of this Series may be redeemed at the option of the
Corporation, in whole or in part, on any date on or after May 1, 1992 upon at
least thirty (30) days' notice as hereinafter provided, out of any funds of the
Corporation legally available therefor remaining after full cumulative dividends
upon all series and classes of preferred stock then outstanding to the end of
the dividend period next preceding the date fixed for such redemption (and for
the current dividend period if the date fixed for such redemption is a
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dividend payment date) shall have been declared and shall have been paid or set
aside for payment at $105 per share plus an amount equal to the dividends
accrued and unpaid to the date fixed for redemption, whether or not earned or
declared, the total sum so payable being herein referred to as the "Redemption
Price".
Special Redemption. If the situation arises under which the Corporation is
required to attain approval of a specified percentage of the holders of shares
of this Series to effect a merger, consolidation or sale of assets, and such
approval is denied, then the Corporation shall have the special option of
redeeming shares of this Series as an entirety at the Sinking Fund Redemption
Price.
Repurchases. So long as the Corporation has paid, or made provision for all
dividends previously accrued on shares of this Series, it may repurchase shares
of this Series on a negotiated basis, provided no redemption of shares of this
Series (other than as required by the Mandatory Redemption (Sinking Fund)
section of this Paragraph B) nor any other purchase or acquisition of shares of
this Series by the Corporation shall constitute a redemption of such shares in
lieu of or as a credit against the Mandatory Redemption (Sinking Fund)
requirements of this Paragraph B.
Notice and Payment. Notice of every redemption shall be sent
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by certified mail, return receipt requested, to the holders of record of the
shares of this Series so to be redeemed, at their respective addresses as the
same shall appear on the records of the Corporation, or as given by such holder
to the Corporation for the purpose of notice, or if no such address appears or
is so given, at the place where the principal office of the Corporation is
located. Such notice shall be mailed at least thirty (30) but not more than
sixty (60) days in advance of the date fixed for such redemption. Each such
notice of redemption shall state how many, if not all, of the shares of the
Series are to be redeemed, the date fixed for redemption, the Redemption Price
and/or Sinking Fund Redemption Price and the manner and place of payment of such
Redemption Price and/or Sinking Fund Redemption Price.
Any notice which is mailed in the manner herein provided shall be conclusively
presumed to have been duly given, whether or not the holder receives the notice.
In any case, failure to duly give notice by mail, or any defect in notice, to
the holder of any share designated for redemption shall not affect the validity
of the proceedings for the redemption of any other share.
In the case of the redemption of a part only of the shares of this Series at the
time outstanding, the Corporation shall select pro rata, in such reasonable
manner as the Board of Directors may determine, the shares to be redeemed. The
Board
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of Directors shall have full power and authority, subject to the limitations and
provisions herein contained, to prescribe the manner in which and the terms and
conditions upon which shares of this Series shall from time to time be
redeemable. On and after the date specified in such notice, each holder of the
shares of this Series called for redemption as aforesaid, upon presentation and
surrender at the place designated in such notice of the certificate or
certificates for shares of this Series held by him, properly endorsed in blank
for transfer or accompanied by proper instruments of assignment in blank (if
required by the Corporation) and bearing all necessary stock transfer tax stamps
thereto affixed and cancelled, shall be entitled to receive therefor the
redemption price thereof.
From and after the date of redemption specified in such notice (unless default
shall be made by the Corporation in providing moneys for the payment of the
redemption price) all dividends upon shares of this Series so called for
redemption shall cease to accrue and, from and after said date (unless default
shall be made by the Company as aforesaid) or, if the Corporation shall so
elect, from and after the date specified therefor in the notice of redemption
(prior to the date of redemption so specified) on which the Corporation shall
provide the moneys for the payment of the redemption price by depositing the
amount thereof in trust for such purpose with a bank or trust company doing
business in the Commonwealth of Kentucky, and having a capital and surplus of at
least $10,000,000, all
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rights of the holders of shares of this Series so called for redemption as
stockholders of the Corporation, excepting only the right to receive the
redemption price of such shares on and after the redemption date without
interest thereon, shall cease and determine.
In case any holders of shares of this Series so called for redemption shall not,
within six years after such deposit, claim the amounts deposited with respect to
the redemption thereof, any such bank or trust company shall, upon demand, pay
over to the Corporation such unclaimed amounts and thereupon such bank or trust
company shall be relieved of all responsibility in respect thereof to such
holders.
C. CONVERSION RIGHTS
The holders of shares of this Series shall not have the right to convert such
shares into, or exchange such shares for, shares of any other class, or of any
other series of the same class, of the Corporation.
D. VOTING RIGHTS
Except as otherwise required by law, holders of shares of this Series shall have
no voting rights nor be entitled to notice of or to attend any meetings of
stockholders; provided, however, that:
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Defaults. (a) If and whenever accrued dividends on the shares of this Series or
any preferred shares of any other series ranking on a parity shall not have been
paid in an aggregate amount equal to or greater than six quarter-annual
dividends on the shares of this Series or such other preferred shares at the
time outstanding or if and whenever any mandatory redemptions of shares of this
Series or any other preferred shares at the time ranking on a parity with this
Series have not been made (each such series being, in this Paragraph D, called a
"series in arrears") then, and in any such event, the number of Directors then
constituting the entire Board of Directors of the Corporation shall
automatically be increased by two Directors and the holders of the shares of all
series in arrears, voting together as a single class, shall be entitled to fill
such newly created directorships. Such right to vote as a single class to elect
two Directors shall, when vested, continue until all dividends in default on the
shares of this Series, and such other preferred shares, as the case may be,
shall have been paid in full and all delinquent mandatory redemptions of shares
of this Series and such other preferred shares, as the case may be, have been
made and, when so done, such right to elect two Directors separately as a class
shall cease, subject, always, to the same provisions for the vesting of such
right to elect two Directors separately as a class in the case of future
defaults. At any time when such right to elect two Directors separately as a
class shall have so vested the Corporation may, and upon the written request of
the
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holders of record of not less than twenty percent (20%) of the total number of
shares of all series in arrears then outstanding shall call a special meeting
of the holders of such shares to fill such newly created directorships for the
election of Directors. In the case of such a written request, such special
meeting shall be held within ninety (90) days after the delivery of such request
and, in either case, at the place and upon the notice provided by law and in the
By-Laws of the Corporation, provided that the Corporation shall not be required
to call such a special meeting if such request is received less than one
hundred twenty (120) days before the date fixed for the next ensuing annual
meeting of shareholders of the Corporation, at which meeting such newly created
directorships shall be filled by the holders of the shares of each series in
arrears, voting together as a single class.
(b) So long as any shares of this Series are outstanding, the By-Laws of the
Corporation shall at all times be such that the exercise, by the holders of
shares of this Series (or any other series) of the right to elect Directors
under the circumstances provided for in this Paragraph D will not contravene any
provision of the Certificate of Incorporation restricting the number of
Directors which may constitute the entire Board of Directors of the Corporation.
(c) Directors elected pursuant to this Paragraph D shall serve until the
earlier of (i) the next annual meeting of the
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shareholders of the Corporation and the election (by the holders of the shares
of each series in arrears) and qualification of their respective successors or
(ii) the next annual meeting of the shareholders of the Corporation following
the date upon which all dividends in default on the shares of each series in
arrears shall have been paid in full and any default in mandatory redemption
shall have been cured. If, prior to the end of the term of any Director elected
as aforesaid, a vacancy in the office of such Director shall occur during the
continuance of such a default by reason of death, resignation, or disability,
such vacancy shall be filled for the unexpired term by appointment by the
remaining Director elected as aforesaid of a new Director for the unexpired term
of such former Director.
Miscellaneous. Without the affirmative vote of the holders of at least
two-thirds of the outstanding preferred shares, voting as a single class (or, if
less than all of the outstanding series of preferred shares would be adversely
affected thereby, without the affirmative vote of the holders of at least
two-thirds of the outstanding shares of each such series so affected, voting as
a separate class), the Corporation may not
(a) amend the Certificate of Incorporation so as to adversely affect the voting
powers (except as such voting powers may be affected by the authorization of any
additional preferred shares having the same voting rights as the outstanding
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preferred shares or by the authorization of any other shares of any class having
voting rights which are not entitled to vote together with the preferred shares
in any separate class vote of the preferred shares), rights or preferences of
the preferred shares or such series;
(b) authorize or create any class of stock ranking prior to shares of this
Series;
(c) issue any additional preferred shares ranking on a parity with shares of
this Series unless, after giving effect to such issuance and the application of
the proceeds thereof, net income (excluding nonrecurring items) of the
Corporation for any period of twelve (12) consecutive months during the eighteen
(18) months immediately preceding the date of such issuance would be equal to
not less than 200% of the annual dividend requirements of all shares
(outstanding and pro forma) ranking prior to or on a parity with the shares of
this Series with respect to dividends;
(d) effect any merger or consolidation unless the Corporation is the survivor or
the surviving corporation is organized under the laws of a state of the United
States and it issues new preferred shares in exchange for shares of this Series
with terms at least as favorable as provided herein for shares of this Series;
or
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(e) affect a sale of substantially all of the assets of the Corporation.
Voting. Whenever the holder of the preferred shares are entitled to vote as a
single class, each holder of shares of this Series shall be entitled to one vote
for such share held of record and, to the extent permitted by applicable law,
(a) each holder of shares of any other series of the preferred shares shall be
entitled to one vote for each $100 of the liquidation price (without regard to
accrued dividends) in respect of the involuntary liquidation, dissolution or
winding up of the Corporation of the shares of such series for each such share
held of record and (b) in the case of any such shares such liquidation price of
which shall not be an integral multiple of $100, each holder thereof shall be
entitled to a vote in respect of each such share so held equal to the result
obtained by multiplying one by a fraction, the numerator of which is a number
equal to the number of dollars constituting such liquidation price of such share
and the denominator of which is 100.
E. LIQUIDATION RIGHTS
Before any distribution may be made to the holders of the common stock of the
Corporation upon any liquidation, the holders of shares of this Series will be
entitled to receive, in case of voluntary liquidation, $105 per share or, in
case of
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involuntary liquidation, $100 per share plus, in each case, an amount equal to
the dividends accrued and unpaid thereon, whether or not earned or declared.
If upon any dissolution, liquidation or winding up of the Corporation, the
assets available for distribution shall be insufficient to pay the holders of
all shares of this Series then outstanding (and the holders of all shares of
preferred stock of any other series then outstanding and ranking senior to or on
a parity with the shares of this Series upon dissolution, liquidation or winding
up) the full amounts to which they respectively shall be entitled, the holders
of shares of this Series (and the holders of shares of preferred stock of any
other series ranking on a parity) shall share ratably in such distribution of
assets in accordance with the amounts which would be payable if all such amounts
were paid in full.
Neither the consolidation nor merger of the Corporation with or into any other
corporation nor any sale, lease or conveyance of all or any part of the property
or business of the Corporation, shall be deemed to be a dissolution, liquidation
or winding up of the Corporation within the meaning of this Paragraph E.
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(L) Amended $14.25 Cumulative Preferred Stock
-----------------------------------------
Series E
--------
(Par Value $5.00 Per Share)
RESOLVED, (a) that in the opinion of this Board of Directors it is adviseable to
amend Paragraph E of the Designation and Terms of the Corporation's $14.25
Cumulative Preferred Stock, Series E, and of the Certificate evidencing such
Designation and Terms, as set forth below, (b) that such Designation and Terms
and Certificate be and are so amended, subject to the approval of all holders of
outstanding shares of such Preferred Stock, and (c) the officers of the
Corporation are directed to call a special meeting of such shareholders to
approve such amendment, so that in its entirety such Paragraph E shall be as
follows:
E. LIQUIDATION RIGHTS
Before any distribution may be made to the holders of the common stock of the
Corporation upon any liquidation, the holders of shares of this Series will be
entitled to receive $100 per share plus an amount equal to the dividends accrued
and unpaid thereon, whether or not earned or declared.
If upon any dissolution, liquidation or winding up of the Corporation, the
assets available for distribution shall be insufficient to pay the holders of
all shares of this Series then outstanding (and the holders of all shares of
preferred stock of any other series then outstanding and ranking senior to or on
a parity with the shares of this Series upon dissolution, liquidation or winding
up) the full amounts to which they respectively
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shall be entitled, the holders of shares of this Series (and the holders of
shares of preferred stock of any other series ranking on a parity) shall share
ratably in such distribution of assets in accordance with the amounts which
would be payable if all such amounts were paid in full.
Neither the consolidation nor merger of the Corporation with or into any other
corporation nor any sale, lease or conveyance of all or any part of the property
or business of the Corporation, shall be deemed to be a dissolution, liquidation
or winding up of the Corporation within the meaning of this Paragraph E.
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(M) $12.00 Cumulative Preferred Stock,
---------------------------------
Series G
--------
(Par Value $5.00 Per Share)
RESOLVED, that 250,000 shares of the total authorized amount of 2,000,000
shares of preferred stock be issued in and constitute a single series
designated "$12.00 Cumulative Preferred Stock, Series G" (the "Series").
Each share of the Series shall be issued for a consideration of $100.00 and
shall have a par value of $5.00. Of the consideration for each share, the par
value of $5.00 shall be capital of the Corporation. The shares of the Series
shall have the voting powers, designations, preferences and relative,
participating, optional or other special rights, and qualifications,
limitations or restrictions thereof hereinafter set forth:
A. DIVIDEND RIGHTS
Out of the assets of the Corporation which are by law available for the
payment of dividends, the holders of shares of this Series shall be entitled to
receive, as and when declared by the Board of Directors, cumulative cash
dividends, at, but not exceeding, the rate of $12.00 per share per annum,
payable quarterly on the first days of November, February, May and August of
each year, accruing from the date of issuance or from such other date as may be
specified by the Board of Directors. Each dividend payment shall be made to the
holders of shares of this Series of record on the date, not exceeding sixty (60)
days preceding the date for such payment, fixed for the purpose by the Board of
Directors in advance of such payment. The holders of shares of this Series shall
be entitled to no other dividends.
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Any dividend declared in any quarterly period shall be deemed to have been
declared with respect to the quarterly period ending immediately prior to the
day upon which such dividend is payable.
So long as any shares of this Series are outstanding, unless:
(i) in case of a dividend declaration, such dividend is payable not more
than sixty (60) days after the date of record for determining the holders to
whom the dividend is to be paid, and
(ii) a full cash dividend on the shares of this Series for all past
quarterly dividend periods and for the quarterly period during which such
declaration, distribution, purchase, redemption or acquisition occurs, shall
have been paid or declared, and a sum sufficient for the payment thereof set
apart,
no dividends shall be declared, and no distribution made, on any shares of
common stock (other than in shares of common stock), nor shall any shares of
common stock be purchased, redeemed or otherwise acquired for value by the
Corporation or any subsidiary, and no dividends shall be declared, and no
distribution made, on any shares of any other series of or class of preferred
stock unless proportionate dividends are paid on all series of parity ranking
preferred shares, nor shall any shares of any other series or class of preferred
stock be purchased, redeemed or otherwise acquired for value by the Corporation
or any subsidiary unless all such preferred shares are redeemed or an offer to
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purchase is made to all holders of such preferred shares on substantially equal
terms.
Provided, however, that, notwithstanding the foregoing, (i) the Corporation
may make any required sinking fund redemption (including delinquent accrued
dividends) on this or any other series or class of preferred stock if the number
of shares of such series or class of preferred stock being so redeemed bears (as
nearly as practicable) the same ratio to the aggregate number of shares of such
series or class then due to be redeemed as the number of shares of this Series
being redeemed bears to the aggregate number of shares of this Series then due
to be redeemed, (ii) the foregoing restrictions shall not apply to the
acquisition of any stock solely in exchange for or solely out of the proceeds of
sale of stock, and (iii) the Corporation may declare and pay dividends on the
Corporation's Adjustable Rate Cumulative Preferred Stock, Series F, without
paying a proportionate dividend on shares of this Series.
B. REDEMPTION AND SINKING FUND
Mandatory Redemption (Sinking Fund). Shares of this Series shall be subject to
redemption through the operation of a sinking fund (herein called the "Sinking
Fund") at the redemption price (the "Sinking Fund Redemption Price") of $100
per share plus an amount equal to the dividends accrued and unpaid thereon to
the redemption date, whether or not earned or declared. For the purposes of the
Sinking Fund, out of any funds of the Cor-
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poration legally available therefor remaining after full cumulative dividends
upon all series and classes of preferred stock then outstanding to the end of
the dividend period next preceding the date fixed for such redemption (and for
the current dividend period if the date fixed for such redemption is a dividend
payment date) shall have been declared and shall have been paid or set apart for
payment, as and when directed by the Board of Directors, the Corporation shall
set aside in cash, annually on November 1 commencing November 1, 1993, and
ending November 1, 2002, an amount sufficient to redeem, at the Sinking Fund
Redemption Price, ten percent (10%) of the shares of this Series. In the event
such amounts are not set aside, the holders of shares of this Series shall have
such exclusive rights and remedies as are set forth herein.
The Sinking Fund shall be cumulative so that if on any such November 1 the
funds of the Corporation legally available therefor shall be insufficient to
permit any such amount to be set aside in full, or if for any other reason such
amount shall not have been set aside in full, the amount of the deficiency shall
be set aside, but without interest, before any cash dividend shall be paid or
declared, or any distribution made, on any junior shares or before any junior
shares or any shares of preferred stock shall be purchased, redeemed or
otherwise acquired by the Corporation, or any moneys shall be paid to or set
aside or made available for a sinking fund for the purchase or redemption of any
junior shares or any shares or parity ranking pre-
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ferred stock; provided, however, that, notwithstanding the existence of any such
deficiency, the Corporation may make any required sinking fund redemption on any
other series or class of preferred stock if the number of shares of such other
series or class of preferred stock being so redeemed bears (as nearly as
practicable) the same ratio to the aggregate number of shares of such other
series or class then due to be redeemed as the number of shares of this Series
being redeemed bears to the aggregate number of shares of this Series then due
to be redeemed.
Moneys in the Sinking Fund shall be applied on such November 1 to the
redemption of shares of this Series. The Corporation shall, prior to each such
Sinking Fund redemption, give notice of redemption as hereinafter provided.
In addition, the Corporation shall have the right, at its option, to redeem at
the Sinking Fund Redemption Price on November 1, 1993, and on any November 1
thereafter, an additional number of shares of this Series equal to the number it
is required to redeem on such date. This right shall not be cumulative from year
to year and shall not in the aggregate exceed 25% of the shares of this issue.
Optional Redemption. Shares of this Series may be redeemed at the option of
the Corporation, in whole or in part, on any date on or after November 1, 1992
upon at least thirty (30) days' notice as hereinafter provided, out of any funds
of the Corporation legally available therefor remaining after full cumulative
dividends upon all series and classes of preferred
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stock then outstanding to the end of the dividend period next preceding the date
fixed for such redemption (and for the current dividend period if the date fixed
for such redemption is a dividend payment date) shall have been declared and
shall have been paid or set aside for payment, at $105 per share plus an amount
equal to the dividends accrued and unpaid to the date fixed for redemption,
whether or not earned or declared, the total sum so payable being herein
referred to as the "Redemption Price".
Special Redemption. If the situation arises under which the Corporation is
required to attain approval of a specified percentage of the holders of shares
of this Series to effect a merger, consolidation or sale of assets, and such
approval is denied, then the Corporation shall have the special option of
redeeming shares of this Series as an entirety at the Sinking Fund Redemption
Price.
Repurchases. So long as the Corporation has paid, or made provision for all
dividends previously accrued on shares of this Series, it may repurchase shares
of this Series on a negotiated basis, provided no redemption of shares of this
Series (other than as required by the Mandatory Redemption (Sinking Fund)
section of this Paragraph B) nor any other purchase or acquisition of shares of
this Series by the Corporation shall constitute a redemption of such shares in
lieu of or as a credit against the Mandatory Redemption (Sinking Fund)
requirements of this Paragraph B.
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Notice and Payment. Notice of every redemption shall be sent by certified
mail, return receipt requested, to the holders of record of the shares of this
Series so to be redeemed, at their respective addresses as the same shall appear
on the records of the Corporation, or as given by such holder to the Corporation
for the purpose of notice, or if no such address appears or is so given, at the
place where the principal office of the Corporation is located. Such notice
shall be mailed at least thirty (30) but not more than sixty (60) days in
advance of the date fixed for such redemption. Each such notice of redemption
shall state how many, if not all, of the shares of the Series are to be
redeemed, the date fixed for redemption, the Redemption Price and/or Sinking
Fund Redemption Price and the manner and place of payment of such Redemption
Price and/or Sinking Fund Redemption Price.
Any notice which is mailed in the manner herein provided shall be conclusively
presumed to have been duly given, whether or not the holder receives the
notice. In any case, failure duly to give notice by mail, or any defect in
notice, to the holder of any share designated for redemption shall not affect
the validity of the proceedings for the redemption of any other share.
In the case of the redemption of a part only of the shares of this Series at
the time outstanding, the Corporation shall select pro rata, in such reasonable
manner as the Board of Directors may determine, the shares to be redeemed. The
Board of
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Directors shall have full power and authority, subject to the limitations and
provisions herein contained, to prescribe the manner in which and the terms and
conditions upon which shares of this Series shall from time to time be
redeemable. On and after the date specified in such notice, each holder of the
shares of this Series called for redemption as aforesaid, upon presentation and
surrender at the place designated in such notice of the certificate or
certificates for shares of this Series held by him, properly endorsed in blank
for transfer or accompanied by proper instruments of assignment in blank (if
required by the Corporation) and bearing all necessary stock transfer tax stamps
thereto affixed and cancelled, shall be entitled to receive therefor the
redemption price thereof.
From and after the date of redemption specified in such notice (unless default
shall be made by the Corporation in providing moneys for the payment of the
redemption price) all dividends upon shares of this Series so called for
redemption shall cease to accrue and, from and after said date (unless default
shall be made by the Company as aforesaid) or, if the Corporation shall so
elect, from and after the date specified therefor in the notice of redemption
(prior to the date of redemption so specified) on which the Corporation shall
provide the moneys for the payment of the redemption price by depositing the
amount thereof in trust for such purpose with a bank or trust company doing
business in the Commonwealth of Kentucky, and having a capital and surplus of at
least $10,000,000 all rights
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of the holders of shares of this Series so called for redemption as stockholders
of the Corporation, excepting only the right to receive the redemption price of
such shares on and after the redemption date without interest thereon, shall
cease and determine.
In case any holders of shares of this Series so called for redemption shall
not, within six years after such deposit, claim the amounts deposited with
respect to the redemption thereof, any such bank or trust company shall, upon
demand, pay over to the Corporation such unclaimed amounts and thereupon such
bank or trust company shall be relieved of all responsibility in respect thereof
to such holders.
C. CONVERSION RIGHTS
The holders of shares of this Series shall not have the right to convert such
shares into, or exchange such shares for, shares of any other class, or of any
other series of the same class, of the Corporation.
D. VOTING RIGHTS
Except as otherwise required by law, holders of shares of this Series shall
have no voting rights nor be entitled to notice of or to attend any meetings of
stockholders; provided, however, that:
Defaults. (a) If and whenever accrued dividends on the shares of this Series
or any preferred shares of any other series
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ranking on a parity shall not have been paid in an aggregate amount equal to or
greater than six quarter-annual dividends on the shares of this Series or such
other preferred shares at the time outstanding or if and whenever any mandatory
redemptions of shares of this Series or any other preferred shares at the time
ranking on a parity with this Series have not been made (each such series being,
in this Paragraph D, called a "series in arrears") then, and in any such event,
the number of Directors then constituting the entire Board of Directors of the
Corporation shall automatically be increased by two Directors and the holders of
the shares of all series in arrears, voting together as a single class, shall be
entitled to fill such newly created directorships. Such right to vote as a
single class to elect two Directors shall, when vested, continue until all
dividends in default on the shares of this Series, and such other preferred
shares, as the case may be, shall have been paid in full and all delinquent
mandatory redemptions of shares of this Series and such other preferred shares,
as the case may be, have been made and, when so done, such right to elect two
Directors separately as a class shall cease, subject, always, to the same
provisions for the vesting of such right to elect two Directors separately as a
class in the case of future defaults. At any time when such right to elect two
Directors separately as a class shall have so vested the Corporation may, and
upon the written request of the holders of record of not less than twenty
percent (20%) of the total number of shares of all series in arrears then
outstanding
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shall, call a special meeting of the holders of such shares to fill such newly
created directorships for the election of Directors. In the case of such a
written request, such special meeting shall be held within ninety (90) days
after the delivery of such request and, in either case, at the place and upon
the notice provided by law and in the By-Laws of the Corporation, provided that
the Corporation shall not be required to call such a special meeting if such
request is received less than one hundred twenty (120) days before the date
fixed for the next ensuing annual meeting of shareholders of the Corporation, at
which meeting such newly created directorships shall be filled by the holders of
the shares of each series in arrears, voting together as a single class.
(b) So long as any shares of this Series are outstanding, the By-Laws of the
Corporation shall at all times be such that the exercise, by the holders of
shares of this Series (of any other series) of the right to elect Directors
under the circumstances provided for in this Paragraph D will not contravene any
provision of the Certificate of Incorporation restricting the number of
Directors which may constitute the entire Board of Directors of the Corporation.
(c) Directors elected pursuant to this Paragraph D shall serve until the
earlier of (i) the next annual meeting of the shareholders of the Corporation
and the election (by the holders of the shares of each series in arrears) and
qualification of their respective successors or (ii) the next annual
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meeting of the shareholders of the Corporation following the date upon which all
dividends in default on the shares of each series in arrears shall have been
paid in full and any default in mandatory redemption shall have been cured. If,
prior to the end of the term of any Director elected as aforesaid, a vacancy in
the office of such Director shall occur during the continuance of such a
default by reason of death, resignation, or disability, such vacancy shall be
filled for the unexpired term by appointment by the remaining Director elected
as aforesaid of a new Director for the unexpired term of such former Director.
Miscellaneous. Without the affirmative vote of the holders of at least
two-thirds of the outstanding preferred shares, voting as a single class (or, if
less than all of the outstanding series of preferred shares would be adversely
affected thereby, without the affirmative vote of the holders of at least
two-thirds of the outstanding shares of each such series so affected, voting as
a separate class), the Corporation may not
(a) amend the Certificate of Incorporation so as to adversely affect the
voting powers (except as such voting powers may be affected by the authorization
of any additional preferred shares having the same voting rights as the
outstanding preferred shares or by the authorization of any other shares of any
class having voting rights which are not entitled to vote together with the
preferred shares in any separate class vote of the preferred shares), rights or
preferences of the preferred shares or such series;
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(b) authorize or create any class of stock ranking prior to shares of this
Series;
(c) issue any additional preferred shares ranking on a parity with shares of
this Series unless, after giving effect to such issuance and the application of
the proceeds thereof, net income (excluding nonrecurring items) of the
Corporation for any period of twelve (12) consecutive months during the eighteen
(18) months immediately preceding the date of such issuance would be equal to
not less than 200% of the annual dividend requirements of all shares
(outstanding and pro forma) ranking prior to or on a parity with the shares of
this Series with respect to dividends;
(d) effect any merger or consolidation unless the Corporation is the survivor
or the surviving corporation is organized under the laws of a state of the
United States and it issues new preferred shares in exchange for shares of this
Series with terms at least as favorable as provided herein for shares of this
Series; or
(e) effect a sale of substantially all of the assets of the Corporation.
Voting. Whenever the holders of the preferred shares are entitled to vote as a
single class, each holder of shares of this Series shall be entitled to one vote
for each such share held of record and, to the extent permitted by applicable
law, (a) each holder of shares of any other series of the preferred shares shall
be entitled to one vote for each $100 of the
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liquidation price (without regard to accrued dividends) in respect of the
involuntary liquidation, dissolution or winding up of the Corporation of the
shares of such series for each such share held of record and (b) in the case of
any such shares such liquidation price of which shall not be an integral
multiple of $100, each holder thereof shall be entitled to a vote in respect of
each such share so held equal to the result obtained by multiplying one by a
fraction, the numerator of which is a number equal to the number of dollars
constituting such liquidation price of such share and the denominator of which
is $100.
E. LIQUIDATION RIGHTS
Before any distribution may be made to the holders of the common stock of the
Corporation upon any liquidation, the holders of shares of this Series will be
entitled to receive $100 per share plus an amount equal to the dividends accrued
and unpaid thereon, whether or not earned or declared.
If upon any dissolution, liquidation or winding up of the Corporation, the
assets available for distribution shall be insufficient to pay the holders of
all shares of this Series then outstanding (and the holders of all shares of
preferred stock of any other series then outstanding and ranking senior to or on
a parity with the shares of this Series upon dissolution, liquidation or winding
up) the full amounts to which they respectively shall be entitled, the holders
of shares of this Series (and the holders of shares of preferred stock of any
other series ranking
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on a parity) shall share ratably in such distribution of assets in accordance
with the amounts which would be payable if all such amounts were paid in full.
Neither the consolidation nor merger of the Corporation with or into any other
corporation nor any sale, lease or conveyance of all or any part of the property
or business of the Corporation, shall be deemed to be a dissolution, liquidation
or winding up of the Corporation within the meaning of this Paragraph E.
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(N) Decrease of $12.00 Cumulative Preferred Stock,
----------------------------------------------
Series G
--------
(Par Value $5.00 Per Share)
RESOLVED, that, pursuant to the provisions of (B)(6) of Article Fourth of the
Certificate of Incorporation of the Corporation, Twelve Million (12,000,000)
shares of "$12.00 Cumulative Preferred Stock, Series G" of the Corporation
which have not been issued are returned to the status of authorized and unissued
shares of Preferred Stock of the Corporation; and
FURTHER RESOLVED, that the officers of the Corporation are authorized and
directed to take such further action as in their opinion may be necessary or
desirable to effectuate such return, including but not limited to the execution
and filing of any certificates to such effect as may be required under
applicable law.
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(O) $11.50 Cumulative Preferred Stock, Series H
-------------------------------------------
(Par Value $5.00 Per Share)
RESOLVED, that 100,000 shares of the total authorized amount of 6,000,000
shares of preferred stock be issued in and constitute a single series designated
"$11.50 Cumulative Preferred Stock, Series H" (the "Series"). Each share of
the Series shall be issued for a consideration of $100.00 and shall have a par
value of $5.00. Of the consideration for each share, the par value of $5.00
shall be capital of the Corporation. The shares of the Series shall have the
following voting powers, designations, preferences and relative, participating,
optional or other special rights, and qualifications, limitations, or
restrictions:
A. DIVIDEND RIGHTS
Out of the assets of the Corporation which are by law available for the
payment of dividends, the holders of shares of this Series shall be entitled to
receive, as and when declared by the Board of Directors, cumulative cash
dividends, at, but not exceeding, the rate of $11.50 per share per annum,
payable quarterly on the first days of May, August, November, and February of
each year, accruing from the date of issuance or from such other date as may be
specified by the Board of Directors. Each dividend payment shall be made to the
holders of shares of this Series of record on the date, not exceeding 60 days
preceding the date for such payment, fixed for the purpose by the Board of
Directors in advance of such payment. The holders of shares of this Series shall
be entitled to no other dividends. Any dividend declared in any quarterly period
shall be deemed to have been declared with respect to the quarterly period
ending immediately prior to the day upon which such dividend is payable.
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So long as any shares of this Series are outstanding, unless:
(a) in case of a dividend declaration, such dividend is payable not more
than 60 days after the date of record for determining the holders to
whom the dividend is to be paid; and
(b) a full cash dividend on the shares of this Series for all past quarterly
dividend periods and for the quarterly period during which such
declaration, distribution, purchase, redemption, or acquisition occurs,
shall have been paid or declared, and a sum sufficient for the payment
thereof set apart,
no dividends shall be declared, and no distribution made, on any shares of
common stock (other than in shares of common stock), nor shall any shares of
common stock be purchased, redeemed, or otherwise acquired for value by the
Corporation or any subsidiary, and no dividends shall be declared, and no
distribution made, on any shares of any other series of or class of preferred
stock unless proportionate dividends are paid on all series of parity ranking
preferred shares, nor shall any shares of any other series or class of preferred
stock be purchased, redeemed, or otherwise acquired for value by the Corporation
or any subsidiary unless all such preferred shares are redeemed or an offer to
purchase is made to all holders of such preferred shares on substantially equal
terms.
Provided, however, that, notwithstanding the foregoing:
(a) the Corporation may make any required sinking fund redemption (including
delinquent accrued dividends) on this or any other series or class of
preferred stock if the number of shares of such series or class of
preferred stock being so redeemed bears (as nearly as practicable) the
same ratio to the aggregate number of shares of such series or class
then due to be redeemed as the number of shares of this Series being
redeemed bears to the aggregate number of shares of this Series then due
to be redeemed;
(b) the foregoing restrictions shall not apply to the acquisition of any
stock solely in exchange for or solely out of the proceeds of sale of
stock; and
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(c) the Corporation may declare and pay dividends on the Corporation's
Adjustable Rate Cumulative Preferred Stock, Series F, without paying a
proportionate dividend on shares of this Series.
B. REDEMPTION AND SINKING FUND
Mandatory Redemption (Sinking Fund). Shares of this Series shall be subject
to redemption through the operation of a sinking fund (herein called the
"Sinking Fund") at the redemption price (the "Sinking Fund Redemption Price") of
$100 per share plus an amount equal to the dividends accrued and unpaid thereon
to the redemption date, whether or not earned or declared. For the purposes of
the Sinking Fund, out of any funds of the Corporation legally available therefor
remaining after full cumulative dividends upon all series and class of preferred
stock then outstanding to the end of the dividend period next preceding the date
fixed for such redemption (and for the current dividend period if the date fixed
for such redemption is a dividend payment date) shall have been declared and
shall have been paid or set apart for payment, as and when directed by the Board
of Directors, the Corporation shall set aside in cash, annually on May 1
commencing May 1, 1994, and ending May 1, 2003, an amount sufficient to redeem,
at the Sinking Fund Redemption Price, 10% of the shares of this Series. In the
event such amounts are not set aside, the holders of shares of this Series shall
have such exclusive rights and remedies as are set forth herein.
The Sinking Fund shall be cumulative so that if on any such May 1 the funds
of the Corporation legally available therefor shall be insufficient to permit
any such amount to be set aside in full, or if for any other reason such amount
shall not have been set aside in full, the amount of the deficiency shall be set
aside, but without interest, before any cash dividend shall be paid or declared,
or any distribution made, on any junior shares or before any junior shares or
any shares of preferred stock shall be purchased, redeemed or otherwise acquired
by the Corporation, or any moneys shall be paid to or set aside or made
available for a sinking fund for the purchase or redemption of any junior shares
or any shares or parity ranking preferred
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stock; provided, however, that, notwithstanding the existence of any such
deficiency, the Corporation may make any required sinking fund redemption on any
other series or class of preferred stock if the number of shares of such other
series or class of preferred stock being so redeemed bears (as nearly as
practicable) the same ratio to the aggregate number of shares of such other
series or class then due to be redeemed as the number of shares of this Series
being redeemed bears to the aggregate number of shares of this Series then due
to be redeemed.
Moneys in the Sinking Fund shall be applied on such May 1 to the redemption
of shares of this Series. The Corporation shall, prior to each such Sinking Fund
redemption, give notice of redemption as hereinafter provided.
In addition, the Corporation shall have the right, at its option, to redeem
at the Sinking Fund Redemption Price on May 1, 1994, and on any May 1
thereafter, an additional number of shares of this Series equal to the number it
is required to redeem on such date. This right shall not be cumulative from year
to year and shall not in the aggregate exceed 25% of the shares of this issue.
Optional Redemption. Shares of this Series may be redeemed at the option of
the Corporation, in whole or in part, on any date on or after May 1, 1993, upon
at least 30 days' notice as hereinafter provided, out of any funds of the
Corporation legally available therefor remaining after full cumulative dividends
upon all series and classes of preferred stock then outstanding to the end of
the dividend period next preceding the date fixed for such redemption (and for
the current dividend period if the date fixed for such redemption is a dividend
payment date) shall have been declared and shall have been paid or set aside for
payment, at $105 per share plus an amount equal to the dividends accrued and
unpaid to the date fixed for redemption, whether or not earned or declared, the
total sum so payable being herein referred to as the "Redemption Price."
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Special Redemption. If the situation arises under which the Corporation
is required to attain approval of a specified percentage of the holders of
shares of this Series to effect a merger, consolidation or sale of assets, and
such approval is denied, then the Corporation shall have the special option of
redeeming shares of this Series as an entirety at the Sinking Fund Redemption
Price.
Repurchases. So long as the Corporation has paid or made provision for
all dividends previously accrued on shares of this Series, it may repurchase
shares of this Series on a negotiated basis, provided no redemption of shares of
this Series (other than as required by the Mandatory Redemption (Sinking Fund)
section of this Paragraph B) nor any other purchase or acquisition of shares of
this Series by the Corporation shall constitute a redemption of such shares in
lieu of or as a credit against the Mandatory Redemption (Sinking Fund)
requirements of this Paragraph B.
Notice and Payment. Notice of every redemption shall be sent by
certified mail, return receipt requested, to the holders of record of the shares
of this Series so to be redeemed, at their respective addresses as the same
shall appear on the records of the Corporation, or as given by such holder to
the Corporation for the purpose of notice, or if no such address appears or is
so given, at the place where the principal office of the Corporation is located.
Such notice will be mailed at least 30 but not more than 60 days in advance of
the date fixed for such redemption. Each such notice of redemption shall state
how many, if not all, of the shares of the Series are to be redeemed, the date
fixed for redemption, the Redemption Price and/or Sinking Fund Redemption Price
and the manner and place of payment of such Redemption Price and/or Sinking Fund
Redemption Price.
Any notice which is mailed in the manner herein provided shall be
conclusively presumed to have been duly given, whether or not the holder
receives the notice. In any case, failure duly
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to give notice by mail, or any defect in notice, to the holder of any share
designated for redemption shall not affect the validity of the proceedings for
the redemption of any other share.
In the case of the redemption of a part only of the shares of this
Series at the time outstanding, the Corporation shall select pro rata, in such
reasonable manner as the Board of Directors may determine, the shares to be
redeemed. The Board of Directors shall have full power and authority, subject to
the limitations and provisions herein contained, to prescribe the manner in
which and the terms and conditions upon which shares of this Series shall from
time to time be redeemable. On and after the date specified in such notice, each
holder of the shares of this Series called for redemption as aforesaid, upon
presentation and surrender at the place designated in such notice of the
certificate or certificates for shares of this Series held by him, properly
endorsed in blank for transfer or accompanied by proper instruments of
assignment in blank (if required by the Corporation) and bearing all necessary
stock transfer tax stamps thereto affixed and cancelled, shall be entitled to
receive therefor the redemption price thereof.
From and after the date of redemption specified in such notice (unless
default shall be made by the Corporation in providing moneys for the payment of
the redemption price) all dividends upon shares of this Series so called for
redemption shall cease to accrue and, from and after said date (unless default
shall be made by the Company as aforesaid) or, if the Corporation shall so
elect, from and after the date specified therefor in the notice of redemption
(prior to the date of redemption so specified) on which the Corporation shall
provide the moneys for the payment of the redemption price by depositing the
amount thereof in trust for such purpose with a bank or trust company doing
business in the Commonwealth of Kentucky, and having a capital and surplus of at
least $10,000,000, all rights of the holders of shares of this Series so called
for redemption as stockholders of the Corporation, excepting only the right to
receive the redemption price of such shares on or after the redemption date
without interest thereon, shall cease and determine.
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In case any holders of shares of this Series so called for redemption
shall not, within six years after such deposit, claim the amounts deposited with
respect to the redemption thereof, any such bank or trust company shall, upon
demand, pay over to the Corporation such unclaimed amounts and thereupon such
bank or trust company shall be relieved of all responsibility in respect thereof
to such holders.
C. CONVERSION RIGHTS
The holders of shares of this Series shall not have the right to convert
such shares into, or exchange such shares for, shares of any other class, or of
any other series of the same class, of the Corporation.
D. VOTING RIGHTS
Except as otherwise required by law, holders of shares of this Series
shall have no voting rights nor be entitled to notice of or to attend any
meetings of stockholders; provided, however, that:
(a) If and whenever accrued dividends on the shares of this Series or
any preferred shares of any other series ranking on a parity shall
not have been paid in an aggregate amount equal to or greater than
six quarter-annual dividends on the shares of this Series or such
other preferred shares at the time outstanding or if and whenever
any mandatory redemptions of shares of this Series or any other
preferred shares at the time ranking on a parity with this Series
have not been made (each such series being, in this Paragraph D,
called a "series in arrears") then, and in any such event, the
number of Directors then constituting the entire Board of Directors
of the Corporation shall automatically be increased by two Directors
and the holders of the shares of all series in arrears, voting
together as a single class, shall be entitled to fill such newly
created directorships. Such right to vote as a single class to elect
two Directors shall, when vested, continue until all dividends in
default on the shares of this Series, and such other preferred
shares, as the
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case may be, shall have been paid in full and all delinquent mandatory
redemptions of shares of this Series and such other preferred shares,
as the case may be, have been made and, when so done, such right to
elect two Directors separately as a class shall cease, subject,
always, to the same provisions for the vesting of such right to elect
two Directors separately as a class in the case of future defaults.
At any time when such right to elect two Directors separately as a
class shall have so vested the Corporation may, and upon the written
request of the holders of record of not less than 20% of the total
number of shares of all series in arrears then outstanding shall, call
a special meeting of the holders of such shares to fill such newly
created directorships for the election of Directors. In the case of
such a written request, such special meeting shall be held within 90
days after the delivery of such request and, in either case, at the
place and upon the notice provided by law and in the By-Laws of the
Corporation, provided that the Corporation shall not be required to
call such a special meeting if such request is received less than 120
days before the date fixed for the next ensuing annual meeting of
shareholders of the Corporation, at which meeting such newly created
directorships shall be filled by the holders of the shares of each
series in arrears, voting together as a single class.
(b) So long as any shares of this Series are outstanding, the By-Laws of
the Corporation shall at all times be such that the exercise, by the
holders of shares of this Series (of any other series) of the right to
elect Directors under the circumstances provided for in this Paragraph
D will not contravene any provision of the Certificate of Incorporation
restricting the number of
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Directors which may constitute the entire Board of Directors of the
Corporation.
(c) Directors elected pursuant to this Paragraph D shall
serve until the earlier of:
(1) the next annual meeting of the shareholders of the Corporation
and the election (by the holders of the shares of each series in
arrears) and qualification of their respective successors; or
(2) the next annual meeting of the shareholders of the Corporation
following the date upon which all dividends in default on the
shares of each series in arrears shall have been paid in full and
any default in mandatory redemption shall have been cured.
If, prior to the end of the term of any Director elected as aforesaid,
a vacancy in the office of such Director shall occur during the
continuance of such a default by reason of death, resignation, or
disability, such vacancy shall be filled for the unexpired term by
appointment by the remaining Directors elected as aforesaid of a new
Director for the unexpired term of such former Director.
Miscellaneous. Without the affirmative vote of the holders of at least
two-thirds of the outstanding preferred shares, voting as a single class (or, if
less than all of the outstanding series of preferred shares would be adversely
affected thereby, without the affirmative vote of the holders of at least two-
thirds of the outstanding shares of each such series so affected, voting as a
separate class), the Corporation may not:
(a) amend the Certificate of Incorporation so as to adversely affect the
voting powers (except as such voting powers may be affected by the
authorization of any additional preferred shares having the same voting
rights as the outstanding preferred shares or by the
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authorization of any other shares of any class having voting rights
which are not entitled to vote together with the preferred shares in
any separate class vote of the preferred shares), rights, or
preferences of the preferred shares or such series;
(b) authorize or create any class of stock ranking prior to shares of this
Series;
(c) issue any additional preferred shares ranking on a parity with shares
of this Series unless, after giving effect to such issuance and the
application of the proceeds thereof, net income (excluding nonrecurring
items) of the Corporation for any period of 12 consecutive months
during the 18 months immediately preceding the date of such issuance
would be equal to not less than 200% of the annual dividend
requirements of all shares (outstanding and pro forma) ranking prior
to or on a parity with the shares of this Series with respect to
dividends;
(d) effect any merger or consolidation unless the Corporation is the
survivor or the surviving corporation is organized under the laws of a
state of the United States and it issues new preferred shares in
exchange for shares of this Series with terms at least as favorable as
provided herein for shares of this Series; or
(e) effect a sale of substantially all of the assets of the Corporation.
Voting. Whenever the holders of the preferred shares are entitled to vote
as a single class, each holder of shares of this Series shall be entitled to one
vote for each such share held of record and, to the extent permitted by
applicable law:
(a) each holder of shares of any other series of the preferred shares
shall be entitled to one vote for each $100 of the liquidation price
(without regard to accrued dividends) in respect of the involuntary
liqui-
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dation, dissolution, or winding up of the Corporation of the shares of
such series for each such share held of record; and
(b) in the case of any such shares such liquidation price of which shall
not be an integral multiple of $100, each holder thereof shall be
entitled to a vote in respect of each such share so held equal to the
result obtained by multiplying one by a fraction, the numerator of
which is a number equal to the number of dollars constituting such
liquidation price of such share and the denominator of which is 100.
E. LIQUIDATION RIGHTS
Before any distribution may be made to holders of the common stock of the
Corporation upon any liquidation, the holders of shares of this Series will be
entitled to receive $100 per share plus an amount equal to the dividends accrued
and unpaid thereon, whether or not earned or declared.
If upon any dissolution, liquidation, or winding up of the Corporation, the
assets available for distribution shall be insufficient to pay the holders of
all shares of this Series then outstanding (and the holders of all shares of
preferred stock of any other series then outstanding and ranking senior to or on
a parity with the shares of this Series upon dissolution, liquidation or winding
up), the full amounts to which they respectively shall be entitled, the holders
of shares of this Series (and the holders of shares of preferred stock of any
other series ranking on a parity) shall share ratably in such distribution of
assets in accordance with the amounts which would be payable if all such amounts
were paid in full.
Neither the consolidation nor merger of the Corporation with or into any
other corporation nor any sale, lease or conveyance of all or any part of the
property or business of the Corporation, shall be deemed to be a dissolution,
liquidation or winding up of the Corporation within the meaning of this
Paragraph E.
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(P) $12.00 Cumulative Preferred Stock, Series I
-------------------------------------------
(Par Value $5.00 Per Share)
RESOLVED, that 88,000 shares of the total authorized amount of 6,000,000
shares of preferred stock be issued in and constitute a single series designated
"$12.00 Cumulative Preferred Stock, Series I" (the "Series"). Each share of
the Series shall be issued for a consideration of $100.00 and shall have a par
value of $5.00. Of the consideration for each share, the par value of $5.00
shall be capital of the Corporation. The shares of the Series shall have the
following voting powers, designations, preferences and relative, participating,
optional or other special rights, and qualifications, limitations, or
restrictions:
A. DIVIDEND RIGHTS
Out of the assets of the Corporation which are by law available for the
payment of dividends, the holders of shares of this Series shall be entitled to
receive, as and when declared by the Board of Directors, cumulative cash
dividends, at, but not exceeding, the rate of $12.00 per share per annum,
payable quarterly on the first days of August, November, February, and May of
each year, accruing from the date of issuance or from such other date as may be
specified by the Board of Directors. Each dividend payment shall be made to the
holders of shares of this Series of record on the date, not exceeding 60 days
preceding the date for such payment, fixed for the purpose by the Board of
Directors in advance of such payment. The holders of shares of this Series shall
be entitled to no other dividends. Any dividend declared in any quarterly period
shall be deemed to have been declared with respect to the quarterly period
ending immediately prior to the day upon which such dividend is payable.
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So long as any shares of this Series are outstanding, unless:
(a) in the case of a dividend declaration, such dividend is payable not
more than 60 days after the date of record for determining the holders
to whom the dividend is to be paid; and
(b) a full cash dividend on the shares of this Series for all past
quarterly dividend periods and for the quarterly period during which
such declaration, distribution, purchase, redemption, or acquisition
occurs, shall have been paid or declared, and a sum sufficient for the
payment thereof set apart,
no dividends shall be declared, and no distribution made, on any shares of
common stock (other than in shares of common stock), nor shall any shares of
common stock be purchased, redeemed, or otherwise acquired for value by the
Corporation or any subsidiary, and no dividends shall be declared, and no
distribution made, on any shares of any other series of or class of preferred
stock unless proportionate dividends are paid on all series of parity ranking
preferred shares, nor shall any shares of any other series or class of preferred
stock be purchased, redeemed, or otherwise acquired for value by the Corporation
or any subsidiary unless all such preferred shares are redeemed or an offer to
purchase is made to all holders of such preferred shares on substantially equal
terms.
Provided, however, that, notwithstanding the foregoing:
(a) the Corporation may make any required sinking fund redemption
(including delinquent accrued dividends) on this or any other series or class of
preferred stock if the number of shares of such series or class of preferred
stock being so redeemed bears (as nearly as practicable) the same ratio to the
aggregate number of shares of such series or class then due to be redeemed as
the number of shares of this Series being redeemed bears to the aggregate number
of shares of this Series then due to be redeemed;
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(b) the foregoing restrictions shall not apply to the acquisition of any
stock solely in exchange for or solely out of the proceeds of sale of
stock; and
(c) the Corporation may declare and pay dividends on the Corporation's
Adjustable Rate Cumulative Preferred Stock, Series F, without paying a
proportionate dividend on shares of this Series.
B. REDEMPTION AND SINKING FUND
Mandatory Redemption (Sinking Fund). Shares of this Series shall be subject
to redemption through the operation of a sinking fund (herein called the
"Sinking Fund") at the redemption price (the "Sinking Fund Redemption Price") of
$100 per share plus an amount equal to the dividends accrued and unpaid thereon
to the redemption date, whether or not earned or declared. For the purposes of
the Sinking Fund, out of any funds of the Corporation legally available therefor
remaining after full cumulative dividends upon all series and classes of
preferred stock then outstanding to the end of the dividend period next
preceding the date fixed for such redemption (and for the current dividend
period if the date fixed for such redemption is a dividend payment date) shall
have been declared and shall have been paid or set apart for payment, as and
when directed by the Board of Directors, the Corporation shall set aside in
cash, annually on August 1 commencing August 1, 1994, and ending August 1, 2003,
an amount sufficient to redeem, at the Sinking Fund Redemption Price, 10% of the
shares of this Series. In the event such amounts are not set aside, the holders
of shares of this Series shall have such exclusive rights and remedies as are
set forth herein.
The Sinking Fund shall be cumulative so that if on any such August 1 the
funds of the Corporation legally available therefor shall be insufficient to
permit any such amount to be set aside in full, or if for any other reason such
amount shall not have been set aside in full, the amount of the deficiency shall
be set aside, but without interest, before any cash dividend shall be paid or
declared, or any distribution made, on any junior shares or before any junior
shares or any shares of preferred stock
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shall be purchased, redeemed or otherwise acquired by the Corporation, or any
moneys shall be paid to or set aside or made available for a sinking fund for
the purchase or redemption of any junior shares or any shares or parity ranking
preferred stock; provided, however, that, notwithstanding the existence of any
such deficiency, the Corporation may make any required sinking fund redemption
on any other series or class of preferred stock if the number of shares of such
other series or class of preferred stock being so redeemed bears (as nearly as
practicable) the same ratio to the aggregate number of shares of such other
series or class then due to be redeemed as the number of shares of this Series
being redeemed bears to the aggregate number of shares of this Series then due
to be redeemed.
Moneys in the Sinking Fund shall be applied on such August 1 to the redemption
of shares of this Series. The Corporation shall, prior to each such Sinking Fund
redemption, give notice of redemption as hereinafter provided.
In addition, the Corporation shall have the right, at its option, to redeem at
the Sinking Fund Redemption Price on August 1, 1994, and on any August 1
thereafter, an additional number of shares of this Series equal to the number it
is required to redeem on such date. This right shall not be cumulative from year
to year and shall not in the aggregate exceed 25% of the shares of this issue.
Optional Redemption. Shares of this Series may be redeemed at the option of
the Corporation, in whole or in part, on any date on or after August 1, 1993,
upon at least 30 days' notice as hereinafter provided, out of any funds of the
Corporation legally available therefor remaining after full cumulative dividends
upon all series and classes of preferred stock then outstanding to the end of
the dividend period next preceding the date fixed for such redemption (and for
the current dividend period if the date fixed for such redemption is a dividend
payment date) shall have been declared and shall have been paid or set aside for
payment, at $105 per share plus an amount equal to the dividends accrued and
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unpaid to the date fixed for redemption, whether or not earned or declared, the
total sum so payable being herein referred to as the "Redemption Price."
Special Redemption. If the situation arises under which the Corporation is
required to attain approval of a specified percentage of the holders of shares
of this Series to effect a merger, consolidation or sale of assets, and such
approval is denied, then the Corporation shall have the special option of
redeeming shares of this Series as an entirety at the Sinking Fund Redemption
Price.
Repurchases. So long as the Corporation has paid or made provision for all
dividends previously accrued on shares of this Series, it may repurchase shares
of this Series on a negotiated basis, provided no redemption of shares of this
Series (other than as required by the Mandatory Redemption (Sinking Fund)
section of this Paragraph B) nor any other purchase or acquisition of shares of
this Series by the Corporation shall constitute a redemption of such shares in
lieu of or as a credit against the Mandatory Redemption (Sinking Fund)
requirements of this Paragraph B.
Notice and Payment. Notice of every redemption shall be sent by certified
mail, return receipt requested, to the holders of record of the shares of this
Series so to be redeemed, at their respective addresses as the same shall appear
on the records of the Corporation, or as given by such holder to the Corporation
for the purpose of notice, or if no such address appears or is so given, at the
place where the principal office of the Corporation is located. Such notice
shall be mailed at least 30 but not more than 60 days in advance of the date
fixed for such redemption. Each such notice of redemption shall state how many,
if not all, of the shares of the Series are to be redeemed, the date fixed for
redemption, the Redemption Price and/or Sinking Fund Redemption Price and the
manner and place of payment of such Redemption Price and/or Sinking Fund
Redemption Price.
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Any notice which is mailed in the manner herein provided shall be conclusively
presumed to have been duly given, whether or not the holder receives the notice.
In any case, failure duly to give notice by mail, or any defect in notice, to
the holder of any share designated for redemption shall not affect the validity
of the proceedings for the redemption of any other share.
In the case of the redemption of a part only of the shares of this Series at
the time outstanding, the Corporation shall select pro rata, in such reasonable
manner as the Board of Directors may determine, the shares to be redeemed. The
Board of Directors shall have full power and authority, subject to the
limitations and provisions herein contained, to prescribe the manner in which
and the terms and conditions upon which shares of this Series shall from time to
time be redeemable. On and after the date specified in such notice, each holder
of the shares of this Series called for redemption as aforesaid, upon
presentation and surrender at the place designated in such notice of the
certificate or certificates for shares of this Series held by him, properly
endorsed in blank for transfer or accompanied by proper instruments of
assignment in blank (if required by the Corporation) and bearing all necessary
stock transfer tax stamps thereto affixed and cancelled, shall be entitled to
receive therefor the redemption price thereof.
From and after the date of redemption specified in such notice (unless default
shall be made by the Corporation in providing moneys for the payment of the
redemption price) all dividends upon shares of this Series so called for
redemption shall cease to accrue and, from and after said date (unless default
shall be made by the Company as aforesaid) or, if the Corporation shall so
elect, from and after the date specified therefor in the notice of redemption
(prior to the date of redemption so specified) on which the Corporation shall
provide the moneys for the payment of the redemption price by depositing the
amount thereof in trust for such purpose with a bank or trust company doing
business in the Commonwealth of Kentucky, and having a capital and surplus of at
least $10,000,000, all rights of the holders of shares of this Series so called
for redemption as stockholders of the Corporation, excepting only the right to
receive the redemp-
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tion price of such shares on and after the redemption date without interest
thereon, shall cease and determine.
In case any holders of shares of this Series so called for redemption shall
not, within six years after such deposit, claim the amounts deposited with
respect to the redemption thereof, any such bank or trust company shall, upon
demand, pay over to the Corporation such unclaimed amounts and thereupon such
bank or trust company shall be relieved of all responsibility in respect thereof
to such holders.
C. CONVERSION RIGHTS
The holders of shares of this Series shall not have the right to convert
such shares into, or exchange such shares for, shares of any other class, or of
any other series of the same class, of the Corporation.
D. VOTING RIGHTS
Except as otherwise required by law, holders of shares of this Series shall
have no voting rights nor be entitled to notice of or to attend any meetings of
stockholders; provided, however, that:
(a) If and whenever accrued dividends on the shares of this Series or any
preferred shares of any other series ranking on a parity shall not have
been paid in an aggregate amount equal to or greater than six quarter-
annual dividends on the shares of this Series or such other preferred
shares at the time outstanding or if and whenever any mandatory
redemptions of shares of this Series or any other preferred shares at
the time ranking on a parity with this Series have not been made (each
such series being, in this Paragraph D, called a "series in arrears")
then, and in any such event, the number of Directors then constituting
the entire Board of Directors of the Corporation shall automatically be
increased by two Directors and the holders of the shares of all series
in arrears, voting together as a single class, shall be entitled to
fill such newly cre-
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ated directorships. Such right to vote as a single class to elect two
Directors shall, when vested, continue until all dividends in default
on the shares of this Series, and such other preferred shares, as the
case may be, shall have been paid in full and all delinquent mandatory
redemptions of shares of this Series and such other preferred shares,
as the case may be, have been made and, when so done, such right to
elect two Directors separately as a class shall cease, subject, always,
to the same provisions for the vesting of such right to elect two
Directors separately as a class in the case of future defaults. At any
time when such right to elect two Directors separately as a class shall
have so vested the Corporation may, and upon the written request of the
holders of record of not less than 20% of the total number of shares of
all series in arrears then outstanding shall, call a special meeting of
the holders of such shares to fill such newly created directorships for
the election of Directors. In the case of such a written request, such
special meeting shall be held within 90 days after the delivery of such
request and, in either case, at the place and upon the notice provided
by law and in the By-Laws of the Corporation, provided that the
Corporation shall not be required to call such a special meeting if
such request is received less than 120 days before the date fixed for
the next ensuing annual meeting of shareholders of the Corporation, at
which meeting such newly created directorships shall be filled by the
holders of the shares of each series in arrears, voting together as a
single class.
(b) So long as any shares of this Series are outstanding, the By-Laws of
the Corporation shall at all times be such that the exercise, by the
holders of shares of this Series (of any other series) of the right to
elect Directors under the circumstances provided for in this Paragraph
D will not contravene any provision of the Certificate of Incorporation
restricting the number of
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Directors which may constitute the entire Board of Directors of the
Corporation.
(c) Directors elected pursuant to this Paragraph D shall serve until the
earlier of:
(1) the next annual meeting of the shareholders of the Corporation and
the election (by the holders of the shares of each series in
arrears) and qualification of their respective successors; or
(2) the next annual meeting of the shareholders of the Corporation
following the date upon which all dividends in default on the
shares of each series in arrears shall have been paid in full and
any default in mandatory redemption shall have been cured.
If, prior to the end of the term of any Director elected as aforesaid,
a vacancy in the office of such Director shall occur during the
continuance of such a default by reason of death, resignation, or
disability, such vacancy shall be filled for the unexpired term by
appointment by the remaining Director elected as aforesaid of a new
Director for the unexpired term of such former Director.
Miscellaneous. Without the affirmative vote of the holders of at least
two-thirds of the outstanding preferred shares, voting as a single class (or, if
less than all of the outstanding series of preferred shares would be adversely
affected thereby, without the affirmative vote of the holders of at least
two-thirds of the outstanding shares of each such series so affected, voting as
a separate class), the Corporation may not:
(a) amend the Certificate of Incorporation so as to adversely affect the
voting powers (except as such voting powers may be affected by the
authorization of any additional preferred shares having the same voting
rights as the outstanding preferred shares or by the
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authorization of any other shares of any class having voting rights
which are not entitled to vote together with the preferred shares in
any separate class vote of the preferred shares), rights, or
preferences of the preferred shares or such series;
(b) authorize or create any class of stock ranking prior to shares of this
Series;
(c) issue any additional preferred shares ranking on a parity with shares
of this Series unless, after giving effect to such issuance and the
application of the proceeds thereof, net income (excluding nonrecurring
items) of the Corporation for any period of 12 consecutive months
during the 18 months immediately preceding the date of such issuance
would be equal to not less than 200% of the annual dividend
requirements of all shares (outstanding and pro forma) ranking prior to
or on a parity with the shares of this Series with respect to
dividends;
(d) effect any merger or consolidation unless the Corporation is the
survivor or the surviving corporation is organized under the laws of a
state of the United States and it issues new preferred shares in
exchange for shares of this Series with terms at least as favorable as
provided herein for shares of this Series; or
(e) effect a sale of substantially all of the assets of the Corporation.
Voting. Whenever the holders of the preferred shares are entitled to vote as
a single class, each holder of shares of this Series shall be entitled to one
vote for each such share held of record and, to the extent permitted by
applicable law:
(a) each holder of shares of any other series of the preferred shares shall
be entitled to one vote for each $100 of the liquidation price
(without regard to accrued dividends) in respect of the involuntary
liqui-
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dation, dissolution, or winding up of the Corporation of the shares of
such series for each such share held of record; and
(b) in the case of any such shares such liquidation price of which shall
not be an integral multiple of $100, each holder thereof shall be
entitled to a vote in respect of each such share so held equal to the
result obtained by multiplying one by a fraction, the numerator of
which is a number equal to the number of dollars constituting such
liquidation price of such share and the denominator of which is 100.
E. LIQUIDATION RIGHTS
Before any distribution may be made to the holders of the common stock of
the Corporation upon any liquidation, the holders of shares of this Series will
be entitled to receive $100 per share plus an amount equal to the dividends
accrued and unpaid thereon, whether or not earned or declared.
If upon any dissolution, liquidation, or winding up of the Corporation, the
assets available for distribution shall be insufficient to pay the holders of
all shares of this Series then outstanding (and the holders of all shares of
preferred stock of any other series then outstanding and ranking senior to or on
a parity with the shares of this Series upon dissolution, liquidation or winding
up), the full amounts to which they respectively shall be entitled, the holders
of shares of this Series (and the holders of shares of preferred stock of any
other series ranking on a parity) shall share ratably in such distribution of
assets in accordance with the amounts which would be payable if all such amounts
were paid in full.
Neither the consolidation nor merger of the Corporation with or into any
other corporation nor any sale, lease or conveyance of all or any part of the
property or business of the Corporation, shall be deemed to be a dissolution,
liquidation or winding up of the Corporation within the meaning of this
Paragraph E.
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(2) The holders of shares of the Preferred Stock of each series shall be
entitled to receive dividends, in accordance with the provisions of the
resolution of the Board of Directors creating each series, out of funds
legally available for the payment thereof, at the rates fixed by the Board
of Directors for such series, and no more, before any dividends, other than
dividends payable in Common Stock, shall be declared and paid, or set apart
for payment, on the Common Stock with respect to the same dividend period.
(3) Whenever, at any time, dividends on the then outstanding Preferred
Stock as may be required with respect to any series outstanding shall have
been paid or declared and set apart for payment on the then outstanding
Preferred Stock, and after complying with respect to any retirement or
sinking fund or funds for any series of Preferred Stock, the Board of
Directors may, subject to the provisions of the resolution or resolutions
creating any series of Preferred Stock, declare and pay dividends on the
Common Stock.
(4) The holders of shares of the Preferred Stock of each series shall be
entitled upon liquidation or dissolution or upon the distribution of the
assets of the Corporation to such preferences as are provided in the
resolution or resolutions creating such series of Preferred Stock, and no
more, before any distribution of the assets of the Corporation shall be made
to the holders of shares of Common Stock. Whenever the holders of shares of
the Preferred Stock shall have been paid the full amounts to which they
shall be entitled, the holders of shares of the Common Stock shall be
entitled to share ratably in all assets of the Corporation remaining unless
otherwise provided in the resolution or resolutions creating such series of
Preferred Stock.
(5) Except as otherwise provided by a resolution or resolutions of the
Board of Directors creating any series of Preferred Stock or by the General
Corporation Law of Delaware, the holders of shares of the Common Stock
issued and outstanding shall have and possess the exclusive right to notice
of stockholders' meetings and the exclusive power to vote.
(6) The Preferred Stock purchased, redeemed or converted pursuant to any
of the provisions of the resolution of the Board of Directors creating each
series, shall, at the discretion of the Board of Directors, be held in the
treasury of the Corporation subject to reissuance, or shall, from time to
time, in the discretion of the Board of Directors, upon the filing and
recording of such certificate as may be in accordance with the laws of the
State of Delaware, be returned to the status of authorized and unissued
shares of Preferred Stock, in which event such shares shall no longer be
part of the series created in connection with the original issuance thereof.
(7) No holder of the Preferred Stock of the Corporation shall be
entitled as such, as a matter of right, to subscribe for, or purchase any
part of, any new or additional issue of stock of the Corporation of any
class or of any issue of securities convertible into or exchangeable for
stock, or of any warrants or rights to purchase stock, whether now or
hereafter authorized and whether issued for money or for a consideration
other than money.
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(8) Each holder of Common Stock entitled to vote at any particular time
shall have one vote for each share of stock held of record by such
stockholder and at the time entitled to voting rights.
(C) The shares of capital stock of the Corporation may be issued by the
Corporation from time to time for such consideration not less than the par
value thereof as from time to time may be fixed by the Board of Directors of the
Corporation.
FIFTH. The name and mailing address of the incorporator is Walter F. Gilges,
48 Wall Street, New York, New York 10005.
SIXTH. The Board of Directors shall have the power to make, alter, amend and
repeal the By-Laws of the Corporation (except so far as the By-Laws of the
Corporation adopted by the stockholders shall otherwise provide). Any By-Laws
made by the Board of Directors under the powers conferred hereby may be altered,
amended or repealed by the Directors or by the stockholders. Notwithstanding the
foregoing and anything contained in this Certificate of Incorporation to the
contrary, Sections 1.2 and 1.10 of the Article I of the By-Laws, paragraphs (a),
(b), (d) and (e) of Section 2.2 of Article II of the By-Laws, and Section 2.9 of
Article II of the By-Laws shall not be altered, amended or repealed and no
provision inconsistent therewith shall be adopted without the affirmative vote
of the holder of at least 80 percent of the voting power of all the shares of
the Corporation entitled to vote generally in the election of directors, voting
together as a single class. Notwithstanding anything contained in this
Certificate of Incorporation to the contrary, the affirmative vote of the
holders of at least 80 percent of the voting power of all the shares of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class, shall be required to alter, amend, adopt any
provision inconsistent with or to repeal this Article SIXTH.
SEVENTH. Except as otherwise fixed by or pursuant to the provision of
Article FOURTH hereof relating to the rights of the holders of any class or
series of stock having a preference over the Common Stock as to dividends or
upon liquidation to elect additional directors under specified circumstances,
the number of directors shall be fixed from time to time exclusively by the
Board of Directors pursuant to a resolution adopted by a majority of the total
number of authorized directors (whether or not there exist any vacancies in
previously authorized directorships at the time any such resolution is presented
to the Board for adoption). The directors, other than those who may be elected
by any class or series of stock having a preference over the Common Stock as to
dividends or upon liquidation, shall be divided into three classes, as nearly
equal in number as possible, with the term of office of the first class to
expire at the 1986 annual meeting of stockholders, the term of office of the
second class to expire at the 1987 annual meeting of stockholders, and the term
of office of the third class to expire at the 1988 annual meeting of
stockholders. At each annual meeting of the stockholders of the Corporation, the
successors of the class of directors whose term expires at that meeting shall be
elected to hold office for a term expiring at the annual meeting of
stockholders held in the third year following the year of their election.
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Advanced notice of stockholder nominations for the election of directors
shall be given in the manner provided in the By-Laws of the Corporation.
Except as otherwise provided for or fixed by or pursuant to the provisions
of Article FOURTH hereof relating to the rights of the holders of any class or
series of stock having a preference over the Common Stock as to dividends or
upon liquidation to elect additional directors under specified circumstances,
newly created directorships resulting from any increase in the number of
directors and any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other cause shall be filled by the
affirmative vote of a majority of the remaining directors then in office, even
though less than a quorum of the Board of Directors. Any director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of directors in which the new directorship was
created or the vacancy occurred and until such director's successor shall have
been elected and qualified. No decrease in the number of directors constituting
the Board of Directors shall shorten the term of any incumbent Director.
Subject to the rights of any class or series of stock having a preference
over the Common Stock as to dividends or upon liquidation to elect additional
directors under specified circumstances, any director may be removed from
office, but only for cause and only by the affirmative vote of the holders of 80
percent of the combined voting power of the then outstanding shares of stock
entitled to vote generally in the election of directors, voting together as a
single class.
Notwithstanding anything contained in this Certificate of Incorporation to
the contrary, the affirmative vote of the holders of at least 80 percent of the
voting power of all shares of the Corporation entitled to vote generally in the
election of directors, voting together as a single class, shall be required to
alter, amend, adopt any provision inconsistent with or to repeal this Article
SEVENTH.
EIGHTH. Any action required or permitted to be taken by the stockholders of
the Corporation must be effected at a duly called annual or special meeting of
stockholders of the Corporation and may not be effected by any consent in
writing by such stockholders. Except as otherwise required by law and subject
to the rights of the holders of any class or series of stock having a preference
over the Common Stock as to dividends or upon liquidation, special meetings of
stockholders of the Corporation may be called only by the Board of Directors
pursuant to a resolution adopted by a majority of the total number of authorized
directors (whether or not there exist any vacancies in previously authorized
directorships at the time any such resolution is presented to the Board for
adoption). Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, the affirmative vote of the holders of at least
80 percent of the voting power of all shares of the Corporation entitled to vote
generally in the election of directors, voting together as a single class, shall
be required to alter, amend, adopt any provision inconsistent with or to repeal
this Article EIGHTH.
NINTH. Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
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jurisdiction within the State of Delaware may, on the application in a
summary way of this Corporation or of any creditor or stockholder thereof or on
the application of any receiver or receivers appointed for this Corporation
under the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code, order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said organization shall,
if sanctioned by the court to which the said application has been made, be
binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
TENTH. (A)(1) In addition to any affirmative vote required by law or this
Certificate of Incorporation, and except as otherwise expressly provided in
Section B of this Article TENTH:
(a) any merger or consolidation of the Corporation or any Subsidiary
(as hereinafter defined) with (i) any Interested Shareholder (as hereinafter
defined) or (ii) any other corporation (whether or not itself an Interested
Shareholder) which is, or after such merger or consolidation would be, an
Affiliate (as hereinafter defined) of any Interested Shareholder; or
(b) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with any
Interested Shareholder or any Affiliate of any Interested Shareholder of any
assets of the Corporation or any Subsidiary having an aggregate Fair Market
Value of $50,000,000 or more; or
(c) the issuance or transfer by the Corporation or any Subsidiary (in
one transaction or a series of transactions) of any securities of the
Corporation or any Subsidiary to any Interested Shareholder or any Affiliate
of any Interested Shareholder in exchange for cash, securities or other
property (or a combination thereof) having an aggregate Fair Market Value of
$50,000,000 or more; or
(d) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of an Interested
Shareholder or any Affiliate of any Interested Shareholder; or
(e) any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any other
transaction (whether or not with or into or otherwise involving an
Interested Shareholder) which has the effect, directly or indirectly, of
increasing the proportionate share of the outstanding shares of any class of
equity or convertible securities of the Corporation or any Subsidiary
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which is directly or indirectly owned by any Interested Shareholder or any
Affiliate of any Interested Shareholder;
shall require the affirmative vote of the holders of at least 80 percent of the
voting power of the then outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors (the "Voting Stock"),
voting together as a single class (it being understood that for purposes of this
Article TENTH, each share of the Voting Stock shall have the number of votes
granted to it pursuant to Article FOURTH of this Certificate of Incorporation).
Such affirmative vote shall be required notwithstanding the fact that no vote
may be required, or that a lesser percentage may be specified, by law or in any
agreement with any national securities exchange or otherwise.
(2) The term "Business Combination" as used in this Article TENTH shall
mean any transaction which is referred to in any one or more of clauses (a)
through (e) of paragraph (1) of this Section A.
(B) The provisions of Section A of this Article TENTH shall not be
applicable to any particular Business Combination, and such Business Combination
shall require only such affirmative vote as is required by law and any other
provision of this Certificate of Incorporation, if all of the conditions
specified in either of the following paragraphs (1) and (2) are met:
(1) The Business Combination shall have been approved by a majority of
the Disinterested Directors (as hereinafter defined).
(2) All of the following conditions shall have been met:
(a) The aggregate amount of the cash and the Fair Market Value
(as hereinafter defined) as of the date of the consummation of the
Business Combination of consideration other than cash to be received
per share by holders of Common Stock in such Business Combination shall
be at least equal to the higher of the following:
(i) (if applicable) the highest per share price (including
any brokerage commissions, transfer taxes and soliciting dealers'
fees) paid by the Interested Shareholder for any shares of Common
Stock acquired by it (1) within the two-year period immediately
prior to the first public announcement of the proposal of the
Business Combination (the "Announcement Date") or (2) in the
transaction in which it became an Interested Shareholder,
whichever is higher; and
(ii) the Fair Market Value per share of Common Stock on the
Announcement Date or on the date on which the Interested
Shareholder became an Interested Shareholder (such latter date is
referred to in this Article TENTH as the "Determination Date"),
whichever is higher.
(b) The aggregate amount of the cash and the Fair Market Value as of
the date of the consummation of the Business Combination of consideration
other than cash to be received per share by holders of shares of any
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other class of outstanding Voting Stock shall be at least equal to the highest
of the following (it being intended that the requirements of this Paragraph
(2)(b) shall be required to be met with respect to every class of outstanding
Voting Stock, whether or not the Interested Shareholder has previously acquired
any shares of a particular class of Voting Stock):
(i) (if applicable) the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers' fees) paid
by the Interested Shareholder for any shares of such class of Voting
Stock acquired by it (1) within the two-year period immediately prior to
the Announcement Date or (2) in the transaction in which it became an
Interested Shareholder, whichever is higher;
(ii) (if applicable) the highest preferential amount per share
to which the holders of shares of such class of Voting Stock are
entitled in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation; and
(iii) the Fair Market Value per share of such class of Voting
Stock on the Announcement Date or on the Determination Date, whichever
is higher.
(c) The consideration to be received by holders of a particular class of
outstanding Voting Stock (including Common Stock) shall be in cash or in the
same form as the Interested Shareholder has previously paid for shares of such
class of Voting Stock. If the Interested Shareholder has paid for shares of any
class of Voting Stock with varying forms of consideration, the form of
consideration for such class of Voting Stock shall be either cash or the form
used to acquire the largest number of shares of such class of Voting Stock
previously acquired by it. The price determined in accordance with Paragraphs
(2)(a) and (b) of this Section B shall be subject to appropriate adjustment in
the event of any stock dividend, stock split, combination of shares or similar
event.
(d) after such Interested Shareholder has become an Interested
Shareholder and prior to the consummation of such Business Combination: (i)
except as approved by a majority of the Disinterested Directors, there shall
have been no failure to declare and pay at the regular date therefor any full
quarterly dividends (whether or not cumulative) on the outstanding Preferred
Stock; (ii) there shall have been (1) no reduction in the annual rate of
dividends paid on the Common Stock (except as necessary to reflect any
subdivision of the Common Stock), except as approved by a majority of the
Disinterested Directors, and (2) an increase in such annual rate of dividends as
necessary to reflect any reclassification (including any reverse stock split),
recapitalization, reorganization or any similar transaction which has the effect
of reducing the number of outstanding shares of the Common Stock, unless the
failure so to increase such annual rate is approved by a majority of the
Disinterested Directors; and (iii) such Interested Shareholder shall have not
become the beneficial owner of any additional shares of Voting Stock except as
part of the transaction which results in such Interested Shareholder becoming an
Interested Shareholder.
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(e) After such Interested Shareholder has become an Interested
Shareholder, such Interested Shareholder shall not have received the
benefit, directly or indirectly (except proportionately as a stockholder),
of any loans, advances, guarantees, pledges or other financial assistance
or other tax credits or other tax advantages provided by the Corporation,
whether in anticipation of or in connection with such Business Combination
or otherwise.
(f) A proxy or information statement describing the proposed Business
Combination and complying with the requirements of the Securities Exchange
Act of 1934 and rules and regulations thereunder (or any subsequent
provisions replacing such Act, rules or regulations) shall be mailed to
public stockholders of the Corporation at least 30 days prior to the
consummation of such Business Combination (whether or not such proxy or
information statement is required to be mailed pursuant to such Act or
subsequent provisions).
(C) For the purposes of this Article TENTH:
(1) A "person" shall mean any individual, firm, corporation or other
entity.
(2) "Interested Shareholder" shall mean any person (other than the
Corporation or any Subsidiary) who or which:
(a) is the beneficial owner, directly or indirectly, of ten percent
or more of the voting power of the outstanding Voting Stock; or
(b) is an Affiliate of the Corporation and at any time within the
two-year period immediately prior to the date in question was the
beneficial owner, directly or indirectly, of ten percent or more of the
voting power of the then outstanding Voting Stock; or
(c) is an assignee or has otherwise succeeded to any shares of
Voting Stock which were at any time within the two-year period
immediately prior to the date in question beneficially owned by any
Interested Shareholder, if such assignment or succession shall have
occurred in the course of a transaction or a series of transactions not
involving a public offering within the meaning of the Securities Act of
1933.
(3) A person shall be a "Beneficial Owner" of any Voting Stock:
(a) which such person or any of its Affiliates or Associates (as
hereinafter defined) beneficially owns, directly or indirectly; or
(b) which such person or any of its Affiliates or Associates has
(i) the right to acquire (whether such right is exercisable immediately
or only after the passage of time), pursuant to any agreement,
arrangement or understanding or upon the exercise of conversion rights,
exchange rights, warrants or options, or
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otherwise, or (ii) the right to vote pursuant to any agreement,
arrangement or understanding; or
(c) which are beneficially owned, directly or indirectly, by any
other person with which such person or any of its Affiliates or
Associates has any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of any shares of
Voting Stock.
(4) For the purposes of determining whether a person is an Interested
Shareholder pursuant to Paragraph (2) of this Section C, the number of
shares of Voting Stock deemed to be outstanding shall not include shares
deemed owned through application of Paragraph (3) of this Section C but
shall not include any other shares of Voting Stock which may be issuable
pursuant to any agreement, arrangement or understanding, or upon exercise of
conversion rights, warrants or options, or otherwise.
(5) "Affiliate" or "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as in effect on February 19,
1985.
(6) "Subsidiary" means any corporation, of which a majority of any
class of equity security is owned, directly or indirectly, by the
Corporation; provided, however, that for the purposes of the definition of
Interested Shareholder set forth in Paragraph (2) of this Section C, the
term "Subsidiary" shall mean only a corporation of which a majority of each
class of equity security is owned, directly or indirectly, by the
Corporation.
(7) "Disinterested Director" means any member of the Board of Directors
of the Corporation (the "Board") who is unaffiliated with the Interested
Shareholder and was a member of the Board prior to the time that the
Interested Shareholder became an Interested Shareholder, and any successor
of a Disinterested Director who is unaffiliated with the Interested
Shareholder and is recommended to succeed a Disinterested Director by a
majority of Disinterested Directors then on the Board.
(8) "Fair Market Value" means: (a) in the case of stock, the highest
closing sale price during the 30-day period immediately preceding the date
in question of a share of such stock on the Composite Tape for New York
Stock Exchange-Listed Stocks, or, if such stock is not quoted on the
Composite Tape, on the New York Stock Exchange, or, if such stock is not
listed on such Exchange, on the principal United States securities exchange
registered under the Securities Exchange Act of 1934 on which such stock is
listed, or, if such stock is not listed on any such exchange, the highest
closing bid quotation with respect to a share of such stock during the 30-
day period preceding the date in question on the National Association of
Securities Dealers, Inc. Automated Quotations System or any system then in
use, or if no such quotations are available, the fair market value on the
date in question of a share of such stock as determined by the Board in good
faith; and (b) in the case of property other than cash or stock, the fair
market value of such property on the date in question as determined by the
Board in good faith.
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(9) In the event of any Business Combination in which the Corporation
survives, the phrase "other consideration to be received" as used in
Paragraphs (2)(a) and (b) of Section B of this Article TENTH shall include
the shares of Common Stock and/or the shares of any other class of
outstanding Voting Stock retained by the holders of such shares.
(D) A majority of the directors of the Corporation shall have the power and
duty to determine for the purposes of this Article TENTH, on the basis of
information known to them after reasonable inquiry, (1) whether a person is an
Interested Shareholder, (2) the number of shares of Voting Stock beneficially
owned by any person, (3) whether a person is an Affiliate or Associate of
another, (4) whether the assets which are the subject of any Business
Combination have, or the consideration to be received for the issuance or
transfer of securities by the Corporation or any Subsidiary in any Business
Combination has, an aggregate Fair Market Value of $50,000,000 or more. A
majority of the directors of the Corporation shall have the further power to
interpret all of the terms and provisions of this Article TENTH.
(E) Nothing contained in this Article TENTH shall be construed to relieve
any Interested Shareholder from any fiduciary obligation imposed by law.
(F) Notwithstanding any other provisions of this Certificate of
Incorporation or the By-Laws of the Corporation (and notwithstanding the fact
that a lesser percentage may be specified by law, this Certificate of
Incorporation or the By-Laws of the Corporation), the affirmative vote of the
holders of 80 percent or more of the outstanding Voting Stock, voting together
as a single class, shall be required to alter, amend, adopt any provisions
inconsistent with or to repeal this Article TENTH.
ELEVENTH. (A) A director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived an
improper personal benefit.
(B)(1) Each person who was or is made a party or is threatened to be made a
party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that such person, or another person for whom such person is
the legal representative, is or was a director, officer, employee or agent of
the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged action
in an official capacity as a director, officer, employee or agent or in any
other capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than said law permitted the Corporation to
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provide prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid or to be paid in settlement) reasonably incurred or suffered by
such person in connection therewith and such indemnification shall continue as
to a person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of such person's heirs, executors and
administrators; provided, however, that, except as provided in Section (B),
paragraph (2) hereof, the Corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) was authorized by the
board of directors of the Corporation. The right to indemnification conferred in
this Section shall be a contract right and shall include the right to be paid by
the Corporation the expenses incurred in defending any such proceeding in
advance of its final disposition; provided, however, that, if the Delaware
General Corporation Law requires, the payment of such expenses incurred by a
director or officer in such person's capacity as a director or officer (and not
in any other capacity in which service was or is rendered by such person while a
director or officer, including, without limitation service to an employee
benefit plan) in advance of the final disposition of a proceeding, shall be made
only upon delivery to the Corporation of an undertaking, by or on behalf of such
director or officer, to repay all amounts so advanced if it shall ultimately be
determined that such director or officer is not entitled to be indemnified under
this Section or otherwise.
(2) If a claim under Section (B), paragraph (1) of this Article Eleventh
is not paid in full by the Corporation within thirty days after a written claim
has been received by the Corporation, the claimant may at any time thereafter
bring suit against the Corporation to recover the unpaid amount of the claim
and, if successful in whole or in part, the claimant shall be entitled to be
paid also the expense of prosecuting such claim. It shall be a defense to any
such action (other than an action brought to enforce a claim for expenses
incurred in defending any proceeding in advance of its final disposition where
the required undertaking, if any is required, has been tendered to the
Corporation) that the claimant has not met the standards of conduct which make
it permissible under the Delaware General Corporation Law for the Corporation to
indemnify the claimant for the amount claimed, but the burden of proving such
defense shall be on the Corporation. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because the claimant has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) that the claimant has not met such applicable standard or conduct,
shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard of conduct.
(3) The right to indemnification and the payment of expenses incurred
in defending a proceeding in advance of its final disposition conferred in this
Article Eleventh shall not be exclusive of any other right which any person may
have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, By-Law, agreement, vote of stockholders or disinterested
directors or otherwise.
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(4) The Corporation may maintain insurance, at its expense, to protect itself
and any director, officer, employee or agent of the Corporation or another
corporation, partnership, joint venture, trust or other enterprise against any
such expense, liability or loss, whether or not the Corporation would have the
power to indemnify such person against such expense, liability or loss under the
Delaware General Corporation Law.
II. The capital of the corporation will not be reduced under or by reason of
this Restated Certificate of Incorporation.
III. In accordance with Section 245(b) of the General Corporation Law of the
State of Delaware, the Restated Certificate of Incorporation of Capital Holding
Corporation was duly approved by the Board of Directors of the Corporation at a
meeting duly held on August 5, 1987.
IV. The Restated Certificate of Incorporation of Capital Holding Corporation set
forth above only restates and integrates and does not further amend the
Certificate of Incorporation of Capital Holding Corporation as heretofore
amended, and there is no discrepancy between those provisions and the provisions
of the restated certificate.
IN WITNESS WHEREOF, this Certificate is made under the seal of said Capital
Holding Corporation and signed by Irving W. Bailey, II, its President and Chief
Operating Officer, and by John S. Speed, its Secretary, this 5th day of October,
1987.
/s/ IRVING W. BAILEY, II
----------------------------------------
Irving W. Bailey, II
President and Chief Operating Officer of
Capital Holding Corporation
[Corporate Seal]
/s/ JOHN S. SPEED
----------------------------------------
John S. Speed
Secretary of Capital Holding Corporation
ATTEST:
/s/ JOHN S. SPEED
-------------------------------
John S. Speed
Secretary of Capital Holding
Corporation
STATE OF KENTUCKY )
) SS:
COUNTY OF JEFFERSON )
BE IT REMEMBERED that on this 5th day of October, 1987, personally came
before me, a Notary Public in and for the State and County aforesaid, Irving W.
Bailey, II, President and Chief Operating Officer of Capital Holding
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Corporation, a corporation of the State of Delaware, the Corporation described
in, and the seal of which is affixed to the foregoing Restated Certificate of
Incorporation known to me personally to be such, and he, the said Irving W.
Bailey, II, as such President and Chief Operating Officer, duly executed said
certificate before me and acknowledged said Restated Certificate of
Incorporation to be his act and deed and the act and deed of such Corporation;
that the signatures of the said President and Chief Operating Officer and of
John S. Speed, Secretary of said Corporation, to said foregoing certificate are
in the handwriting of the said President and Chief Operating Officer and
Secretary of said Corporation, respectively, and the seal affixed to said
Restated Certificate of Incorporation is the seal of said Corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and seal of office the day
and year aforesaid.
/s/ JOAN B. WEYER
-----------------------------------------
Notary Public, Jefferson County, Kentucky
My Commission Expires: 4-5-88
------
[Notarial Seal]
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CERTIFICATE OF AMENDMENT
TO CERTIFICATE OF INCORPORATION
OF
CAPITAL HOLDING CORPORATION
Irving W. Bailey II and R. Michael Slaven, being the President and
Secretary, respectively, of Capital Holding Corporation, a corporation organized
and existing under and by virtue of the General Corporation Law of the State of
Delaware (the "Corporation"), do hereby certify as follows:
1. That the Board of Directors of the Corporation, in accordance with
Sections 222 and 242 of the General Corporation Law of the State of Delaware, at
a regularly scheduled meeting adopted the resolutions set forth below proposing
amendments to the Certificate of Incorporation of the Corporation (the
"Amendments") and further directed that the Amendments be submitted to the
stockholders of the Corporation entitled to vote thereon for their consideration
and approval:
"RESOLVED, that the Certificate of Incorporation of the Corporation be
amended by deleting Article FIRST of the Certificate of Incorporation in its
entirety and substituting a new Article FIRST in its place to read as follows:
FIRST. The name of the Corporation is Providian Corporation."
"RESOLVED, that the Board of Directors declares advisable, and adopts,
the Amendments to the Corporation's Certificate of Incorporation set forth
below and directs that said Amendments be considered at the next Annual
Meeting of stockholders to be held on May 11, 1994:
That paragraph (A) of the Article FOURTH be and hereby is amended to
read in its entirety as follows:
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FOURTH: (A) The total number of shares of all classes of stock which the
Corporation shall have authority to issue is three hundred and thirty-one
million, of which six million are to be Preferred Stock, par value $5 per share
(hereafter called the "Preferred Stock"), twenty-five million are to be
Preference Stock, par value $.01 per share (hereafter called the "Preference
Stock") and three hundred million are to be Common Stock, par value $1 per share
(hereafter called the "Common Stock").
That paragraph (C) of Article FOURTH of the Certificate of Incorporation of
Capital Holding be and hereby is redesignated as paragraph (D), and that a new
paragraph (C) be added, to read in its entirety as follows:
(C) The board of directors is authorized, subject to any limitations
prescribed by law, to provide for the issuance of the shares of Preference Stock
in series, and by filing a certificate pursuant to the applicable law of the
State of Delaware, to establish from time to time the number of shares to be
included in each such series, and to fix the designation, powers, preferences,
and rights of the shares of each such series and any qualifications, limitations
or restrictions thereof; provided, however, that no voting rights or powers
shall be established with respect to the Preference Stock or any series thereof
which will entitle the holders of such Preference Stock or series thereof to
more than one vote per share when voting as a class with the holders of shares
of Common Stock.
The number of authorized shares of Preference Stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the Common Stock, without a
vote of the holders of the Preference Stock, or of any series thereof, unless a
vote of the holders of any such series is required pursuant to the certificate
or certificates establishing such series of Preference Stock.
FURTHER RESOLVED, that the proper officers of the Corporation be, and each of
them, with full authority to act and perform, or cause to be done and performed,
all such acts, deeds and things and to make, execute and deliver or cause to be
made, executed and delivered, all such agreements, undertakings, documents,
instruments or certificates in the name and
136
<PAGE>
on behalf of the Corporation or otherwise as each such officer may deem
necessary or appropriate to effectuate or carry out fully the purpose and
intent of the foregoing resolutions, including the performance of the
obligations of the Corporation with respect to the filing of a Certificate of
Amendment with the office of the Secretary of State of the State of
Delaware."
2. That thereafter pursuant to resolution of the Board of Directors, at the
annual meeting of stockholders of the Corporation, duly called and held pursuant
to written notice in accordance with Section 222 of the General Corporation Law
of the State of Delaware, at which meeting the necessary number of shares as
required by statute was voted in favor of the Amendments.
3. That said Amendments were duly adopted in accordance with the provisions
of Section 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the undersigned, being the President and Secretary
hereinabove named, for the purpose of amending the Certificate of Incorporation
of the Corporation pursuant to the General Corporation Law of the State of
Delaware, under penalties of perjury do each hereby declare and certify that
this is the act and deed of the Corporation and the facts stated herein are
true, and
137
<PAGE>
accordingly have hereunto signed this Certificate of Amendment to Certificate of
Incorporation this 11th day of May, 1994.
By:
-----------------------
Irving W. Bailey II
President
ATTEST:
By:
---------------------
R. Michael Slaven
Secretary
138
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS
--------------------------------------------------------------------------------
CONSOLIDATED RESULTS AND ANALYSIS
On May 11, 1994 at the Annual Shareholders' Meeting, the Company changed its
name from Capital Holding Corporation to Providian Corporation. The name change
is consistent with the strategic direction the Company began pursuing several
years ago and communicates the mission of the Company: to help individuals and
families enhance their peace of mind and quality of life by providing products
and services that help them establish and achieve their financial objectives.
Providian is a multi-divisional, integrated operating company providing
insurance protection and access to credit and investment services that benefit
individual consumers.
Providian builds and shares capabilities among business segments. After a
critical review of the Company's strengths, Providian has identified four core
capabilities which give the Company an advantage over its competition. The first
capability is targeting market segments which have underserved needs the Company
can profitably fulfill. Second is the ability to acquire customers through
focused marketing, products and distribution channels which meet customers'
needs. Third is the ability to manage relationships with these customers
exceedingly well. Profitability management is Providian's fourth core
capability, which includes superior risk management, asset/liability management
and cost control. Providian's strategy includes building depth in these
capabilities and transferring and sharing these capabilities across businesses.
Providian's 1994 net income was $3.02 per common and common equivalent share
(hereinafter called "per common share"), down 3.2 percent from the $3.12 per
common share reported in 1993 (down .6 percent from $3.14 in 1992). Net income
for 1993 was reduced by a deferred income tax charge of $11.7 million, or $.12
per common share, as a result of the passage of tax legislation on August 10,
1993. Excluding this nonrecurring charge in 1993, net income per common share
declined 6.8 percent in 1994. Net income per common share for 1993, excluding
the deferred income tax charge, was up 3.2 percent over 1992.
Net income in 1994 included net realized investment losses (net of related
deferred acquisition cost amortization and taxes) of $.73 per common share.
These losses resulted from pretax losses of $26.9 million from realized
investment and securities transactions, provisions for mortgage loan losses of
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
(Amounts in thousands except per common share information)
-----------------------------------------------------------------------------------------------------
Year Ended December 31 1994 1993 1992
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Realized investment gain (loss) $ (100,348) $ (20,155) $ 6,477
Total revenues 2,959,064 2,879,026 2,837,629
Cumulative effect of change in accounting principle - - -
Net income 300,901 322,665 322,496
Total assets $23,613,359 $22,929,005 $20,588,264
Long-term debt 694,250 589,268 589,320
Preferred stock of consolidated subsidiary 100,000 - -
Realized shareholders' equity(a) 2,466,388 2,475,687 2,220,925
Total shareholders' equity(b) 2,121,862 2,492,891 2,185,927
-----------------------------------------------------------------------------------------------------
Per Common Share:
Operating earnings(c) $ 3.75 $ 3.32 $ 3.18
Income before cumulative effect of change
in accounting principle 3.02 3.12 3.14
Cumulative effect of change in accounting principle - - -
Net income 3.02 3.12 3.14
Realized shareholders' equity(a) 25.29 23.42 20.92
Total shareholders' equity(b) 21.75 23.59 20.55
Cash dividends paid .80 .73 .66
Closing market price 30.88 37.13 36.13
Operating return on realized equity(d) 15.4% 15.0% 16.1%
Common shares outstanding at year end 97,537 101,426 94,804
Weighted average common and common
equivalent shares outstanding 99,319 101,132 100,531
-----------------------------------------------------------------------------------------------------
</TABLE>
(a) Realized shareholders' equity excludes from total shareholders' equity the
net unrealized investment gain (loss) component of shareholders' equity.
(b) Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities."
(c) Operating earnings exclude from net income, realized investment gains and
losses and related deferred acquisition cost amortization, net of taxes.
(d) Operating return on realized equity is computed as operating earnings less
dividends on preferred stock of consolidated subsidiary and dividends for
nonconvertible preferred stock, divided by a rolling four quarter average of
total shareholders' equity, exclusive of the nonconvertible preferred stock
and the net unrealized investment gain (loss) component of shareholders'
equity.
16
<PAGE>
--------------------------------------------------------------------------------
$21.0 million, and a $52.4 million nonrecurring first quarter write-off of the
impaired investment in a limited partnership. Net income in 1993 and 1992
included net realized investment losses of $.20 and $.04 per common share,
respectively.
Operating earnings applicable to common shareholders (operating earnings less
the dividends on preferred stock of consolidated subsidiary and nonconvertible
preferred stock) were $3.75 per common share in 1994, up 9.0 percent from $3.44
per common share reported in 1993 after excluding the nonrecurring income tax
charge (up 8.2 percent from 1992). Providian Bancorp's outstanding results were
the major contributor to the earnings increase in 1994 along with solid
improvement at Providian Direct Insurance. Providian's mix of businesses and
continued ability to identify and implement profit improvement initiatives has
allowed for steady earnings growth in a very difficult interest rate
environment.
Operating return on realized equity was 15.4 percent in 1994, up from 15.0
percent in 1993 (down from 16.1 percent in 1992). The increase in 1994 was
primarily attributable to the Company's common stock repurchase program (see
separate discussion in the Common Stock Dividend and Market Data
--------------------------------------------------------------------------------
The graph below is a stacked bar chart reflecting the Operating Earnings by each
Business Segment (excluding Corporate and Other) for the years ended December
31, 1992 through 1994.
Operating Earnings by Business Segment
(Excluding Corporate and Other)
(Dollars in millions)
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Business Segment 1992 1993 1994
---------------- ---- ---- ----
<S> <C> <C> <C>
Providian Agency Group $ 190 $ 194 $ 182
Providian Direct Insurance 85 98 110
Providian Bancorp 94 118 150
Providian Capital Management 120 134 137
</TABLE>
--------------------------------------------------------------------------------
section) and the 1993 nonrecurring deferred income tax charge, while the
reduction in 1993 was primarily attributable to the tax
rate change.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
1991 1990 1989 1988 1987 1986 1985 1984
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ (18,780) $ (122,799) $ 124,269 $ 25,310 $ 14,302 $ 169,341 $ 5,346 $ (6,612)
2,660,437 2,577,309 2,500,116 2,045,866 1,784,692 1,640,353 1,361,804 1,201,853
- - (56,021) - - (104,069) - -
250,232 166,193 219,687 189,864 178,591 168,945 134,238 116,369
$18,873,028 $16,668,545 $14,970,015 $12,963,268 $10,356,492 $8,295,014 $6,722,165 $5,580,581
611,245 386,247 330,299 262,574 287,574 192,575 273,705 276,952
- - - - - - - -
1,964,224 1,584,060 1,521,684 1,263,912 1,200,400 1,175,780 1,064,284 977,558
1,930,924 1,552,515 1,516,269 1,257,549 1,186,468 1,173,485 1,073,963 959,091
--------------------------------------------------------------------------------------------------------------
$ 2.89 $ 2.57 $ 2.23 $ 1.91 $ 1.66 $ 1.63 $ 1.26 $ 1.10
2.66 1.70 2.93 2.00 1.74 2.62 1.23 1.04
- - (.62) - - (1.03) - -
2.66 1.70 2.31 2.00 1.74 1.59 1.23 1.04
18.21 16.01 14.86 12.96 11.66 10.63 9.51 8.68
17.86 15.66 14.81 12.89 11.51 10.61 9.60 8.50
.60 .54 .50 .47 .44 .41 .39 .37
31.81 19.56 26.00 16.38 13.50 15.31 14.69 10.75
16.9% 16.8% 16.5% 15.7% 14.6% 169% 13.8% 13.2%
92,708 89,568 92,284 89,791 94,385 101,186 101,402 101,092
90,699 91,821 90,594 91,271 98,410 101,498 101,258 101,678
--------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
--------------------------------------------------------------------------------
The graph below is a stacked bar chart reflecting the Revenues by Business
Segment for the years ended December 31, 1992 through 1994. Total revenues
appear on the top of each bar.
Revenues by Business Segment
(Dollars in millions)
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Business Segment 1992 1993 1994
---------------- ------ ------ ------
<S> <C> <C> <C>
Providian Agency Group $ 727 $ 735 $ 726
Providian Direct Insurance 651 757 780
Providian Bancorp 491 540 592
Providian Capital Management 853 833 908
Corporate and Other 116 14 (47)
------ ------ ------
Total Revenues $2,838 $2,879 $2,959
</TABLE>
--------------------------------------------------------------------------------
Consolidated revenues were $3.0 billion, up 2.8 percent (1993 - $2.9 billion, up
1.5 percent). Consolidated revenues included pretax net realized investment
losses of $100.3 million and $20.2 million in 1994 and 1993, respectively (1992
- gains of $6.5 million). Revenues, as discussed hereinafter, exclude realized
investment gains and losses. Revenues on this basis were $3.1 billion, up 5.5
percent (1993 - $2.9 billion, up 2.4 percent). Revenue growth of $160.2 million
in 1994 was primarily due to higher yields and deposit growth at Providian
Capital Management and an increase in fee income from servicing securitized
consumer loans at Providian Bancorp.
RESULTS BY BUSINESS SEGMENT
PROVIDIAN AGENCY GROUP
Description
Providian Agency Group (PAG), markets traditional and interest-sensitive
individual life and health insurance products through home service
representatives of PAG's principal operating subsidiaries, including
Commonwealth Life Insurance Company (Commonwealth Insurance), Peoples Security
Life Insurance Company (Peoples Security Insurance) and Capital Security Life
Insurance Company. PAG is committed to meeting the insurance needs of lower and
middle income families, primarily in the Southeastern and mid-Atlantic states.
In addition, PAG leverages its insurance capabilities by marketing insurance
products in partnership with several third-party insurance and marketing
organizations.
Profit Drivers
Premium growth, interest spreads, spending levels and underwriting margins are
key drivers of PAG's profitability. Premium growth is driven by three important
factors: the number and retention of agents in the field, agent productivity and
policy persistency. In addition, acquisitions can be a source of PAG's growth,
as they have been in the past. The individual life insurance business is a
mature market in which first year premiums are expected to grow slowly as the
primary insurance-buying population is expected to decrease slightly over the
next several years. However, PAG has provided a strong, reliable profit stream
for the Company and will continue to do so by focusing on the identified profit
drivers.
Results
PAG pretax earnings were $182.0 million, down 6.0 percent from $193.7 million in
1993, primarily due to lower interest spreads and lower earnings on certain
marketing partnerships. These factors were partially offset by reduced operating
costs, reflecting PAG's commitment to cost containment measures. Management
continues to introduce field management and profit improvement initiatives to
enhance performance, including the actions taken in fourth quarter 1994 to
reduce home office staff by over eight percent. Pretax earnings in 1993 were up
1.8 percent from 1992, primarily due to improved life earnings. Life pretax
earnings, which account for more than 98 percent of PAG's 1994 income, were
$179.0 million, down 3.6 percent from $185.6 million in 1993 (up 1.4 percent
from $183.1 million in 1992) for the same reasons noted above. Life profit
margins, defined as pretax earnings as a percent of mean policyholder reserves,
were 7.8 percent compared with the 1993 margin of 8.4 percent, reflecting the
reduced interest spreads and lower marketing partnership earnings, partially
offset by favorable spending. The decrease in 1993 from 8.6 percent in 1992 was
the result of tighter interest spreads and unfavorable claims experience.
Revenues were $726.3 million, down 1.2 percent from 1993 ($734.8 million, up
1.1 percent from 1992), reflecting declining investment yields and certain
terminated marketing partnerships, partially offset by life premium growth. The
growth in 1993 was primarily due to growth in life premium income, partially
offset by lower investment and other income. Life premium income of $347.8
million increased 1.0 percent from 1993 ($344.4 million, up 3.7 percent),
primarily due to continued improvement in the persistency of policies in force.
Life sales in 1994 decreased by 10.9 percent from 1993. A principal factor
driving down sales was the reduction in the number of working agents, which was
undertaken to increase the volume of business per agent. This action should
increase future profitability by reducing subsidies to agents and improving
agent retention. In addition to fewer working agents, severe weather in January
and February in several areas of PAG's key markets dampened sales.
Although sales were down in 1994, PAG has been successful in retaining the
inforce business. Life termination rates were 14.5 percent in 1994 compared to
16.2 percent in 1993 and 17.2 percent in 1992, reflecting PAG's continued
emphasis on improved policy persistency.
18
<PAGE>
--------------------------------------------------------------------------------
[Chart Agency Group Life Termination Rates]
The graph below is a bar chart reflecting Agency Group Life Termination Rates
for the years ended December 31, 1992 through 1994.
Agency Group Life Termination Rates
[GRAPH APPEARS HERE]
1992 1993 1994
----- ----- -----
17.2% 16.2% 14.5%
--------------------------------------------------------------------------------
Net investment and other income was $286.0 million, down .6 percent from 1993
($287.6 million, down .9 percent), due to increased bond and mortgage payoffs
requiring reinvestment in lower yielding investments, which more than offset
PAG's invested asset growth. The decrease in 1993 was primarily due to
miscellaneous other income fluctuations.
Outlook
PAG is committed to achieving some very challenging goals to secure success for
the home service business. Critical to PAG's future success will be its ability
to effectively execute marketing plans and deliver increased premium growth
while improving profitability. In order to meet these goals, each agent must
achieve successful sales growth, persistency and career progress. PAG is
concentrating on building superb management throughout its marketing
organization, pinpointing what is needed to achieve the required levels of
performance and insuring that the right operating programs are in place to
accomplish its objectives. In addition, PAG has targeted lower operating costs
and improved underwriting margins as critical elements necessary to improve
overall profit margins and earnings growth. PAG will continue to focus on
reducing its field and home office costs by streamlining processes and service
automation and by leveraging off the capabilities of the other businesses.
PROVIDIAN DIRECT INSURANCE
Description
Providian Direct Insurance (PDI), formerly Direct Response Group, markets life,
health and personal lines property and casualty insurance to individuals
directly and through third-party organizations primarily using television,
direct mail and telephone. PDI also markets its products through an agency field
force to active duty military service personnel, and through selected Providian
Agency Group home service representatives for property and casualty coverages.
Marketing partnerships with third-party organizations also provide PDI with
additional customer relationships and distribution channels. In 1993, PDI
acquired Academy Insurance Group, which has the endorsement of the Non
Commissioned Officers Association (NCOA), providing its agents/counselors with
preferred access to military personnel.
Profit Drivers
The more significant profit drivers for PDI's business include the overall level
of sales and persistency as well as claims and operating expense management.
PDI's practice is to continually design profitability into its products through
its underwriting and rate structuring activities, while actively managing its
markets. This approach includes first looking for high-potential markets and
then identifying the types of products that can profitably serve needs present
in those markets.
Results
PDI delivered solid performance in 1994, with several factors contributing
strongly to the overall increase in revenues and pretax income. Focus on the
sales process to improve market selection, testing and customer management has
resulted in increased sales. Persistency has improved through efforts such as
moving customers from monthly billing statements to automated payment methods
and proactive phone calls to reduce lapsation. PDI continues to pursue
activities such as premium rate increases that were implemented for a large
portion of business in 1994. On the cost management level, PDI eliminated some
underperforming programs during the year as a means of creating operating
efficiencies and has implemented technology solutions to enable more efficient
customer identification, contact and service. Additionally, marketing materials
were redesigned, resulting in lower acquisition costs.
Pretax earnings in 1994 were up $12.2 million (12.4 percent) to $110.0
million, reflecting a strong focus on profit improvement initiatives, including
premium rate increases for several life and health products, an ongoing emphasis
on persistency improvement and cost management, and a 1993 loss on discontinued
businesses. Pretax earnings in 1993 were $97.9 million, up $13.4 million (15.8
percent) due primarily to the benefit from the Academy acquisition.
Life pretax earnings in 1994 were up $8.0 million (14.1 percent) to $64.5
million, principally due to reduced spending and increased premium volume
resulting from improved persistency and rate increases. Life pretax earnings in
1993 were up $16.1 million, reflecting the positive impact of the Academy
acquisition partially offset by unfavorable mortality. Life profit margins
(defined as pretax earnings as a percent of premium income) were 21.0 percent,
up from the 1993 margin of 18.9 percent, reflecting lower expenses. The increase
over the 1992 margin of 17.2 percent reflects the higher margins from the
Academy business.
Health pretax earnings were down $4.0 million, or 8.8 percent, to $41.8
million due to lower premium volume partially offset by lower spending. In 1993,
health earnings were up $2.6 million (6.0 percent) to $45.8 million due to the
Academy acquisition and favorable claims experience, offset by lower
19
<PAGE>
<TABLE>
<CAPTION>
BUSINESS SEGMENT DATA
(Dollars in thousands)
=======================================================================================================================
Year Ended December 31 1994 1993 1992 1991 1990 1989
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums and Other Considerations:
Providian Agency Group
Life $ 347,778 $ 344,392 $ 332,028 $ 281,043 $ 267,271 $ 240,438
Health 62,417 65,472 64,656 60,734 57,722 47,888
Other product lines 30,118 37,309 40,187 31,920 28,891 27,940
-----------------------------------------------------------------------------------------------------------------------
Total Providian Agency Group 440,313 447,173 436,871 373,697 353,884 316,266
Providian Direct Insurance
Life 307,587 298,897 234,967 222,414 205,894 197,409
Health 186,135 197,957 183,157 194,540 198,658 182,089
Property and casualty 176,479 143,781 140,024 142,561 135,327 174,149
Other product lines 6,412 7,107 8,567 8,681 9,952 10,893
-----------------------------------------------------------------------------------------------------------------------
Total Providian Direct Insurance 676,613 647,742 566,715 568,196 549,831 564,540
Providian Capital Management 24,658 71,127 110,108 86,118 258,705 135,656
Corporate and Other (396) 1,642 76,331 27,994 9,049 10,482
-----------------------------------------------------------------------------------------------------------------------
Consolidated Premiums
and Other Considerations $ 1,141,188 $ 1,167,684 $ 1,190,025 $ 1,056,005 $ 1,171,469 $ 1,026,944
-----------------------------------------------------------------------------------------------------------------------
Revenues:
Providian Agency Group
Life $ 601,622 $ 596,112 $ 583,928 $ 497,801 $ 464,693 $ 425,692
Health 71,757 74,646 74,095 69,337 66,584 54,259
Other product lines 52,966 64,049 68,986 56,199 50,400 48,180
-----------------------------------------------------------------------------------------------------------------------
Total Providian Agency Group 726,345 734,807 727,009 623,337 581,677 528,131
Providian Direct Insurance
Life 374,013 362,571 273,969 260,464 245,291 235,558
Health 200,191 212,074 197,790 209,655 214,504 196,862
Property and casualty 194,905 161,052 158,603 160,652 153,719 191,708
Other product lines 10,630 21,489 20,489 20,023 24,124 24,363
-----------------------------------------------------------------------------------------------------------------------
Total Providian Direct Insurance 779,739 757,186 650,851 650,794 637,638 648,491
Providian Bancorp 591,649 539,932 491,028 440,737 384,498 341,965
Providian Capital Management 908,101 832,768 852,550 913,532 1,077,827 836,243
Corporate and Other
Other 53,578 34,488 109,714 50,817 18,468 21,017
Realized investment gain (loss) (100,348) (20,155) 6,477 (18,780) (122,799) 124,269
-----------------------------------------------------------------------------------------------------------------------
Total Corporate and Other (46,770) 14,333 116,191 32,037 (104,331) 145,286
-----------------------------------------------------------------------------------------------------------------------
Consolidated Revenues $ 2,959,064 $ 2,879,026 $ 2,837,629 $ 2,660,437 $ 2,577,309 $ 2,500,116
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Business Segment Data
(Dollars in thousands)
-----------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1994 1993 1992 1991 1990 1989
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income before Federal Income Tax
and Cumulative Effect Adjustment:
Providian Agency Group
Life $ 179,004 $ 185,644 $ 183,112 $ 168,350 $ 157,805 $ 139,728
Health 4,087 3,936 2,579 1,232 3,124 3,837
Other product lines (1,044) 4,083 4,521 3,370 4,618 2,291
-----------------------------------------------------------------------------------------------------------------------
Total Providian Agency Group 182,047 193,663 190,212 172,952 165,547 145,856
Providian Direct Insurance
Life 64,471 56,494 40,384 38,409 29,725 24,816
Health 41,769 45,783 43,183 35,329 38,567 35,468
Property and casualty 10,156 8,202 6,608 1,244 (6,949) 3,275
Other product lines (6,387) (12,621) (5,673) (4,262) (1,127) (2,151)
-----------------------------------------------------------------------------------------------------------------------
Total Providian Direct Insurance 110,009 97,858 84,502 70,720 60,216 61,408
Providian Bancorp 150,021 117,720 93,502 73,231 57,315 34,101
Providian Capital Management 136,602 134,085 120,142 112,242 95,974 81,438
Corporate and Other
Other (32,035) (34,375) (32,493) (56,334) (46,802) (44,241)
Realized investment gain (loss),
net of related amortization (106,172) (21,893) (3,838) (26,875) (107,538) 105,965
-----------------------------------------------------------------------------------------------------------------------
Total Corporate and Other (138,207) (56,268) (36,331) (83,209) (154,340) 61,724
-----------------------------------------------------------------------------------------------------------------------
Consolidated Income before
Federal Income Tax and
Cumulative Effect Adjustment $ 440,472 $ 487,058 $ 452,027 $ 345,936 $ 224,712 $ 384,527
-----------------------------------------------------------------------------------------------------------------------
Assets:
Providian Agency Group $ 4,281,469 $ 4,271,842 $ 4,169,153 $ 3,998,386 $ 3,262,556 $ 3,127,954
Providian Direct Insurance 1,994,379 1,963,246 1,615,368 1,534,870 1,577,952 1,535,661
Providian Bancorp 2,618,429 2,211,537 2,136,624 2,033,834 1,582,040 1,550,900
Providian Capital Management 13,683,501 13,068,453 11,405,996 10,164,266 9,480,402 7,958,866
Corporate and Other 1,035,581 1,413,927 1,261,123 1,141,672 765,595 796,634
-----------------------------------------------------------------------------------------------------------------------
Consolidated Assets $23,613,359 $22,929,005 $20,588,264 $18,873,028 $16,668,545 $14,970,015
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Business Segment Data
(Dollars in thousands)
==================================================================================================================================
Year Ended December 31 1994 1993 1992 1991 1990 1989
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Providian Agency Group:
Life
Pretax earnings $ 179,004 $ 185,644 $ 183,112 $ 168,350 $ 157,805 $ 139,728
Mean policyholder reserves 2,309,013 2,219,099 2,140,303 1,820,377 1,683,739 1,566,388
Margin on mean reserves 7.8% 8.4% 8.6% 9.2% 9.4% 8.9%
Health
Pretax earnings $ 4,087 $ 3,936 $ 2,579 $ 1,232 $ 3,124 $ 3,837
Mean policyholder reserves 62,417 65,472 64,656 60,734 57,722 47,888
Margin on mean reserves 6.5% 6.0% 4.0% 2.0% 5.4% 8.0%
Providian Direct Insurance:
Life
Pretax earnings $ 64,471 $ 56,494 $ 40,384 $ 38,409 $ 29,725 $ 24,816
Premium income 307,587 298,897 234,967 222,414 205,894 197,409
Margin on premium 21.0% 18.9% 17.2% 17.3% 14.4% 12.6%
Health
Pretax earnings $ 41,769 $ 45,783 $ 43,183 $ 35,329 $ 38,567 $ 35,468
Premium income 186,135 197,957 183,157 194,540 198,658 182,089
Margin on premium 22.4% 23.1% 23.6% 18.2% 19.4% 19.5%
Property and casualty
Pretax earnings (loss) $ 10,156 $ 8,202 $ 6,608 $ 1,244 $ (6,949) $ 3,275
Earned premium 176,479 143,781 140,024 142,561 135,327 174,149
Loss/LAE ratio 80.7% 81.2% 82.8% 86.2% 98.4% 92.3%
Expense ratio 24.2 24.8 25.6 26.0 19.3 18.2
Combined ratio 104.9 106.0 108.4 112.2 117.7 110.5
Providian Bancorp:
Pretax earnings $ 150,021 $ 117,720 $ 93,502 $ 73,231 $ 57,315 $ 34,101
Ending assets 2,618,429 2,211,537 2,136,624 2,033,834 1,582,040 1,563,537
Mean assets 2,414,983 2,174,082 2,085,229 1,807,937 1,572,789 1,607,240
Margin on mean assets 6.2% 5.4% 4.5% 4.1% 3.6% 2.1%
Providian Capital Management:
Spread-based
Pretax earnings $ 130,709 $ 131,276 $ 119,172 $ 111,662 $ 96,073 $ 81,066
Institutional policyholder balances 7,417,456 6,635,033 5,792,655 5,354,469 5,319,158 4,261,826
Retail policyholder balances 5,181,706 5,203,045 4,840,963 4,322,686 3,896,545 3,375,276
Total policyholder balances 12,599,162 11,838,078 10,633,618 9,677,155 9,215,703 7,637,102
Margin on mean policyholder balances(a) 105 114 117 115 115 117
Fee-based
Pretax earnings (loss) $ 5,893 $ 2,809 $ 970 $ 580 $ (99) $ 372
Institutional policyholder balances(b) 8,498,367 4,439,494 1,457,614 70,299 -- --
Retail policyholder balances 1,012,452 816,681 410,425 175,873 47,976 51,479
Total policyholder balances 9,510,819 5,256,175 1,868,039 246,172 47,976 51,479
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Margin on mean spread-based policyholder balances is presented in basis
points.
(b) Fee-based institutional policyholder balances are off-balance sheet.
22
<PAGE>
premium income on other health business. Health profit margins (defined as
pretax earnings as a percent of premium income) were 22.4 percent, down from
23.1 percent in 1993 due to higher benefits and commissions offset by reduced
spending.
Property and casualty pretax earnings were $10.2 million, up 23.8 percent
from $8.2 million in 1993, primarily due to improved loss experience in the
direct response auto business and continued cost containment efforts. The
increased property and casualty earnings in 1993 reflect lower catastrophic
losses and expense levels. The combined ratio (the primary profit measure for
the property and casualty business) represents the relationship of losses and
expenses to premiums. This ratio continues to show a positive trend at 104.9
percent in 1994, improved from 106.0 percent in 1993 and 108.4 percent in 1992.
Property and casualty results continue to be favorably impacted by initiatives
to re-underwrite existing contracts and reprice new business, as well as by
ongoing risk management.
Revenues in 1994 were $779.7 million, up $22.6 million or 3.0 percent from
1993, reflecting higher property and casualty and life premium income. Total
sales increased 21.4 percent in 1994 to $117.8 million from $97.1 million in
1993 and $83.4 million in 1992. The 1994 sales increase is a result of improved
direct response health sales from value-added product enhancements, strong sales
from PDI's partner marketing channel and an expansion of sales from the Skandia
customer base. Life premium income grew $8.7 million, or 2.9 percent, to $307.6
million due to normal growth from previous years' sales volume, improved
persistency and premium rate increases. Property and casualty premium income
increased $32.7 million, or 22.7 percent, to $176.5 million due to increased
direct response marketing and the January 1994 acquisition of a block of
business from Skandia U.S. Insurance Company, an auto insurer specializing in
the active-duty military market. Health premiums declined due to low 1993 sales
and continued lapsation of the core business, despite an improvement in 1994
sales and in first year and renewal persistency.
--------------------------------------------------------------------------------
[CHART-PDI NEW PAID ANNUALIZED PREMIUMS (SALES)]
The graph below is a stacked bar chart reflecting the Providian Direct Insurance
New Paid Annualized Premiums (Sales) by category for the years 1992 through
1994. Total sales appear on the top of each bar.
PDI New Paid Annualized Premiums (Sales)
(Dollars in millions)
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Category 1992 1993 1994
-------- ----- ----- -----
<S> <C> <C> <C>
Life $ 49 $ 60 $ 56
Health 23 19 32
Property & Casualty 11 18 30
----- ----- -----
Total $ 83 $ 97 $ 118
</TABLE>
--------------------------------------------------------------------------------
Outlook
The direct response market continues to grow faster than the industry overall,
and PDI plans to participate significantly in this growth by remaining focused
on its markets. Over the past year, PDI has improved its execution of the
strategies necessary to produce continued sales and earnings growth. In 1995 and
beyond, PDI will improve profitability by applying the engineering approach,
originally developed at Providian Bancorp. This approach focuses on making
improvements in three major areas: customer targeting, customer acquisition and
customer profitability management. PDI will also continue to develop and
distribute fee-based products to provide additional value-added services to
customers.
PROVIDIAN BANCORP
Description
Providian Bancorp (Bancorp) formerly Banking Group, markets consumer loans,
deposit products and other banking services, using mail, telephone and other
direct response channels. Consumer loans include unsecured credit cards,
unsecured revolving lines, revolving home equity loans, installment loans for
insurance premium financing and a credit card secured by an interest-bearing
savings account. In addition to lending products, Bancorp markets money market
deposit accounts to retail customers and certificates of deposit to both retail
and institutional customers. Bancorp has also expanded its profitability through
cross-selling to existing customers various fee-based strategic protection
products and services such as Credit Protection, Home Protection, First Health
AdvantageSM and DriveProSM.
Profit Drivers
Key profit drivers for Bancorp's spread-based businesses are portfolio asset
growth, pricing (rates offered to borrowers), the level of credit losses and
market selectivity (the cost to acquire customers). While cost of funds is also
considered an important profit driver for most financial institutions, Bancorp
limits its exposure to changes in interest rates through various asset/liability
management strategies (see separate discussion later in this section). As a
result of these strategies and the resulting relatively stable cost of funds,
the previously mentioned profit drivers have a much stronger influence on the
profitability of the spread-based businesses than cost of funds. Key profit
drivers for Bancorp's fee-based businesses include the number of customer
relationships, pricing, servicing costs, market selectivity and persistency. By
providing value to the customer, Bancorp's strategy is to profitably build
sustainable, long-term customer relationships generating both spread- and fee-
based income.
Results
Bancorp had another outstanding year in 1994, with pretax
earnings increasing 27.4 percent to $150.0 million, compared with a 25.9 percent
increase in 1993 to $117.7 million. The increases in both years were due
primarily to growth in the number of consumer receivable accounts and balances,
higher fee-based income, improved credit loss ratios and strong net interest
23
<PAGE>
margins, partially offset by higher expenses due to growth in business volume
and a reduction in 1994 in the deferral of acquisition costs. In 1993, the
favorable factors were partially offset by an approximate $19 million impact of
increased acquisition cost amortization due to the adoption of a new accounting
rule requiring amortization of acquisition costs for certain loan types over a
much shorter time period than Bancorp was previously utilizing. Revenues of
$591.6 million were up 9.6 percent from 1993 ($539.9 million, up 10.0 percent
from 1992) due primarily to increased fee-based income.
Total assets under management (including $2.4 billion of securitized
receivables - see discussion which follows on Bancorp's securitization program)
were $5.0 billion compared to $4.2 billion in 1993 (including $2.0 billion of
securitized receivables). First Gold(R) credit card balances more than doubled
to $590.7 million and Secured Card product (First VISA(R) Classic) balances grew
92.2 percent to $103.8 million. Balances for Select Equity(R), Bancorp's home
equity loan product, grew 48.8 percent to $465.0 million at the end of 1994.
Bancorp's pretax return on mean assets was 6.2 percent compared to 5.4
percent for 1993 and 4.5 percent for 1992 due to improved net credit losses and
higher fee income from servicing securitized consumer loans, reflecting growth
in average securitized balances. Fees from these services were $206.8 million in
1994, $172.8 million in 1993 and $140.3 million in 1992. Other income includes
fees from strategic protection products, transaction processing and other
services. Income from these sources was: $62.9 million in 1994, $50.3 million in
1993 and $26.6 million in 1992.
--------------------------------------------------------------------------------
The graph below is a stacked bar chart reflecting Providian Bancorp
Unsecuritized (on-balance sheet)Consumer Loans by category at December 31, 1993
and 1994. Total unsecuritized consumer loans appear on the top of each bar.
Bancorp Unsecuritized Consumer Loans
December 31
(Dollars in millions)
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Category 1993 1994
-------- ------ ------
<S> <C> <C>
Credit Card Receivables $1,099 $1,423
Revolving Lines of Credit 460 445
Equity Lines of Credit and Other 384 478
------ ------
Total Unsecuritized Consumer loans $1,943 $2,346
</TABLE>
--------------------------------------------------------------------------------
Loan loss reserves were 4.0 percent of on-balance sheet credit card
receivables and consumer line of credit loans, compared to 4.8 percent at the
end of 1993. Net credit losses were 3.4 percent of average on-balance sheet
outstanding loan balances in 1994 compared to 4.2 percent in 1993. Delinquencies
of 30 days or more related to on-balance sheet loans were 2.3 percent, stable
compared to 2.2 percent at December 31, 1993 and even with 1992's rate.
The following table summarizes unsecuritized problem consumer loans,
including non-accrual loans and loans past due greater than 30 days:
<TABLE>
<CAPTION>
---------------------------------------------------
December 31 1994 1993
---------------------------------------------------
<S> <C> <C>
(Dollars in millions)
Non-accrual loans $ 7.2 $ 8.0
Loans past due greater than 30 days 59.5 45.2
---------------------------------------------------
Total problem consumer loans $66.7 $53.2
---------------------------------------------------
</TABLE>
There are no additional specifically identified loans that represent significant
potential problems.
Bancorp has engaged in non-recourse sales of its consumer loans through
securitization since 1989. Securitization, the process of selling a pool of
assets to investors, is used by Bancorp as a tool to manage growth within
banking regulatory guidelines as well as to manage capital more efficiently and
provide an alternative source of funding to support continued business growth.
These sales occur on a non-recourse basis, which means the investors cannot look
to Bancorp to make up credit losses experienced by the portfolio. Securitized
loan balances are removed from the balance sheet for financial and regulatory
purposes. Bancorp continues to service the loans and earns fee income generated
by the pool in excess of the contractual amounts paid to investors. During 1994,
approximately $526 million of consumer loans were securitized through the
issuance of a public series from a Master Trust. The Master Trust was created in
1993 to more efficiently securitize consumer loans and to access the public
markets. A shelf registration was filed with the Securities and Exchange
Commission in 1993 and was amended in 1994 to add $1.0 billion to the
registration, bringing the total available to $1.5 billion. Total securitized
balances at year end were $2.4 billion.
The overall objective of Bancorp's asset/liability management process is to
provide maximum levels of net interest income, while limiting interest rate and
liquidity risk at acceptable levels and facilitating its funding needs. As part
of this process, Bancorp monitors and projects changes in the level of assets
due to customer activity on outstanding and newly issued products. Projected
changes in asset levels are monitored on a daily and weekly basis and are used
to determine the level of funding required during a particular period. Bancorp
has a policy of monitoring and managing the amount of funding that matures
during a particular period (weekly or monthly), as well as managing the level of
individual customer concentrations in the portfolio.
Bancorp structures its deposit maturities to fund current assets and, in the
event of securitization of assets, to comply with asset growth restrictions
imposed by banking laws. Bancorp accesses funds from a variety of sources with
varying interest rate structures and terms, including Federal Deposit Insurance
Corporation insured retail money market accounts and certificates of deposit,
wholesale certificates of deposit, other short-term borrowings and
24
<PAGE>
the asset securitization program. While such funding diversification provides
flexibility, continuity and availability of funds at optimal prices, the
characteristics of these sources increases the importance of monitoring and
maintaining liquidity.
--------------------------------------------------------------------------------
[Chart - Bancorp Banking Deposits]
The graph below is a stacked bar chart reflecting Providian Bancorp Banking
Deposits by category as of December 31, 1993 and 1994. Total banking deposits
appear on the top of each bar. The legend contains a further breakdown of CDs
of $100,000 or greater by duration.
Bancorp Banking Deposits
December 31
(Dollars in millions)
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Category 1993 1994
-------- ------ ------
<S> <C> <C>
Savings Deposits $ 364 $ 394
Time and CDs less than $100,000 395 519
CDs of $100,000 or greater:
Duration
--------
0-3 Months 517 443
3-12 Months 266 246
1-5 Years 11 78
------ ------
Total 794 767
------ ------
Total Savings Deposits $1,553 $1,680
====== ======
</TABLE>
Bancorp's operations are subject to interest rate risk to the extent that
changes in rates could impact its cost of funding and net interest spread. As a
result, Bancorp uses interest rate swap and cap agreements to manage this risk
associated with the repricing characteristics of its interest earning assets and
interest bearing liabilities. These interest rate agreements are used to modify
the interest rate characteristics of the underlying asset or liability in order
to adjust the interest rate risk to a level deemed appropriate by management.
Due to the effective use of these types of interest rate agreements, Bancorp's
net interest margin is largely insulated from rapid changes in interest rates,
and therefore, is expected to remain relatively stable in the current interest
rate environment.
Bancorp is exposed to counterparty credit risk associated with these
derivative financial instruments. These derivatives are traded "over-the-
counter" with highly rated, nationally recognized financial institutions and
dealers which carry at least investment grade ratings. Additionally, Bancorp
manages its exposure to counterparty credit risk by utilizing various highly
rated counterparties for its derivative contracts and by closely monitoring and
limiting its exposure to each.
Outlook
Bancorp has been successful with its business diversification strategy, and has
become a multi-market, multi-product provider of financial services. This
business has diversified its sources of earnings with fee income from various
protection products and products geared for high volume credit card purchasers,
fee- and spread-based income on the Secured Card product and spread-based income
from Select Equity(R). Bancorp has also continued to protect and grow its
unsecured spread business despite increasing industry competition. This has been
accomplished by expanding the Primary Lender strategy to new market segments,
while also enhancing customer relationships with strategic protection products
and improved value-added services.
Going forward, Bancorp will continue its focus on achieving growth in assets
and income in its traditional consumer loan business, while continuing to
diversify into niche markets where it can leverage its capabilities and build on
the success of its strategic protection products. Based on these strategies,
earnings contributions from non-traditional sources will continue to increase as
a percentage of total earnings.
PROVIDIAN CAPITAL MANAGEMENT
Description
Providian Capital Management (PCM), formerly the Accumulation and Investment
Group, is responsible for the marketing and management of spread- and fee-based
accumulation (investment-type) products issued through the Company's life
insurance subsidiaries as well as the management of all insurance-related
invested assets. In the asset/liability spread management business, PCM receives
deposits from customers, and in most situations, guarantees to return the full
principal plus interest at a specified or formula-driven rate. These funds are
invested to earn interest, dividends and capital appreciation sufficient to
cover guarantees, pay expenses and produce a profit. In the fee-based business
however, PCM assumes little, if any, investment risk. Fee-based products provide
certain liquidity and withdrawal guarantees or tax advantages to customers, but
also generally do not guarantee the performance of underlying assets.
PCM offers a broad array of financial products to both institutions and
individuals, including floating and fixed rate guaranteed investment contracts
(GICs), Trust GICs (synthetic GICs) and separate account products offered to
institutional customers, including pension funds, banks, mutual funds and other
organizations. These contracts have stated as well as indeterminate maturities.
PCM markets retail annuities which include fixed and variable contracts and
immediate life annuities (primarily structured settlements) to individuals
through banks, securities brokerage firms, financial planners and third-party
marketing organizations.
Profit Drivers
The level of PCM's profits are a function of a number of business and economic
factors which may change in importance from time to time given market conditions
and management's perspective of and tolerance for risk.
Profits on spread-based products represent the excess of investment earnings
over the interest credited on policyholder deposits and related costs. Profits
are primarily driven by changes in interest rates, asset and liability growth
and mix, credit experience and spending levels. Interest rate exposure is
25
<PAGE>
controlled through asset/liability strategies designed to appropriately manage
the estimated durations of investments and policyholder deposits (explained on
page 27). To control credit risk, PCM maintains strict underwriting standards
and emphasizes a diverse investment portfolio. The current asset/liability mix
will result in lower spread margins in a rising interest rate environment and
higher spread margins in a falling interest rate environment.
--------------------------------------------------------------------------------
[Chart -- PCM Spread- & Fee-Based Products]
The graph below is a stacked bar chart reflecting Providian Capital Management
Spread- and Fee-based Products with two bars for the years ended December 31,
1992 through 1994. The Spread- and Fee-based bars for each of the years
contains a further breakdown by retail and institutional.
<TABLE>
<CAPTION>
PCM Spread- and Fee-Based Products
December 31
(Dollars in millions)
[GRAPH APPEARS HERE]
Category 1992 1993 1994
-------- ----- ----- -----
<S> <C> <C> <C>
Fee-based products:
Retail $ .4 $ .8 $ 1.0
Institutional* 1.5 4.7 8.8
----- ----- -----
Total Fee-based products $ 1.9 $ 5.5 $ 9.8
Spread-based products:
Retail $ 4.8 $ 5.2 $ 5.2
Institutional 5.8 6.6 7.4
----- ----- -----
Total Spread-based products $10.6 $11.8 $12.6
</TABLE>
* - Institutional fee-based products are off-balance sheet.
--------------------------------------------------------------------------------
In order to mitigate the risks and profit variability in spread-based
products, PCM is strategically moving toward fee-based products and retail
spread business. Profits for these products will be driven by PCM's ability to
continue to aggressively grow fee-based products, maintain fee income margins,
achieve economies of scale and control operating costs.
Results
PCM pretax earnings were $136.6 million for the year, up 1.9 percent from $134.1
million in 1993. Earnings improved over 1993 due to the impact of higher volumes
of spread- and fee-based products, higher yields on invested assets and the
absence of the one-time reverse mortgage shut down costs experienced in 1993.
Offsetting these results were higher credited rates on policyholder deposits.
The growth in earnings of 11.6 percent in 1993 was due to the decline in
interest rates credited to policyholders, growth in spread- and fee-based
deposits and a decline in provisions for estimated state insurance guaranty fund
assessments. These positive factors were partially offset by lower yields on
invested assets, higher expense levels and accelerated amortization of retail
acquisition costs. Revenues were $908.1 million in 1994, an increase of 9.0
percent, reflecting higher fee-based sales and investment income, partially
offset by lower life annuity sales (1993 - $832.8 million, down 2.3 percent from
1992, primarily due to lower life annuity sales).
Mean spread-based deposits grew $1.0 billion or 8.7 percent in 1994 (1993 -
up 12.9 percent). Profit margins (defined as the ratio of pretax earnings to
mean spread-based deposits) were 105 basis points, down from 114 basis points in
1993 and 117 basis points in 1992, due to the negative impact of higher interest
rates throughout 1994 and the flattening of the yield curve. In 1993 and 1992,
PCM benefited from low short-term rates and a steep, positively sloped yield
curve.
Spread- and fee-based deposits grew $956.9 million to $13.6 billion in 1994
(1993 growth was $1.6 billion). Growth in 1994 was due primarily to continued
strong institutional gains of $782.4 million compared to $842.4 million in 1993,
despite the decision to terminate $522.6 million of certain long-indexed GIC
contracts as their cost of funds was high relative to other products. Retail
spread-based deposits decreased by $21.3 million, due to lower sales and higher
withdrawals resulting from PCM's conservative crediting rate strategy and the
absence of surrender charges on a higher percentage of policies. In 1994, fee-
based variable annuities increased $195.8 million to $1.0 billion. In 1993,
retail spread-based deposits increased $362.1 million and fee-based variable
annuities grew $406.3 million. Additionally in 1994, Trust GIC, which is not
reflected as a deposit on the balance sheet, continued to benefit from customer
demand as balances grew $4.1 billion to $8.5 billion at year end 1994 (1993
growth was $3.0 billion).
The table below shows PCM's policyholder deposits and its other fee-based
products:
<TABLE>
<CAPTION>
December 31 1994 1993
------- -------
<S> <C> <C>
(Dollars in millions)
Benefit reserves -
Deferred and immediate annuities and
single premium life business $ 5,178 $ 5,197
Policyholder contract deposits -
Fixed rate, long- and short-indexed GICs
and total return GICs 7,422 6,641
Separate account liabilities -
variable annuities 1,012 817
------- -------
Total policyholder deposits reported
on the balance sheet 13,612 12,655
Trust GIC and other fee-based products 8,836 4,692
------- -------
Total $22,448 $17,347
======= =======
</TABLE>
Outlook
The retirement savings market is growing very rapidly due to the maturing
population and the shifting of the retirement decision-making process from
corporations to individuals. PCM's chosen segments of that market, the defined
contribution and retirement annuity segments, are growing even more rapidly.
PCM, with its diverse business serving different customers and different market
segments using various distribution channels, is positioned to capitalize on
this market growth. As a result of a corporate strategy review concluded late in
1994, PCM will focus on developing its retail spread- and fee-based businesses
and its institutional fee-based business while prospectively maintaining
institutional spread-based balances at year end 1994 levels.
Due to the decision to limit the growth of the institutional spread-based
business and the increased interest rates over the last several months of 1994
which resulted in higher credited rates and subjected certain groups of
adjustable rate mortgages to annual interest rate caps, total PCM earnings are
expected to
26
<PAGE>
decline somewhat in 1995. However, the strategic move toward fee-
based products should reduce interest rate sensitivity and earnings volatility
over time. Additionally, PCM will use its product engineering expertise to
remain a leading, customer-driven product innovator in the industry.
CORPORATE AND OTHER
Corporate and Other includes activities of a general corporate nature such as
debt service, intersegment eliminations, an allocation of net investment income
for the capital allocated to business segments, realized investment gains and
losses, intercompany service fees and real estate development activities. This
category also includes the results of developing businesses that have not yet
been integrated into Providian's other business segments.
Corporate and Other pretax loss, excluding realized investment gains and
losses, was $32.0 million in 1994, down from $34.4 million in 1993. The variance
was primarily influenced by higher net investment income on capital invested in
the business segments, partially offset by higher corporate expenses and higher
interest expense on corporate debt due to the issuance of additional medium-term
notes in 1994. The decline in revenues and expenses in 1993 compared to 1992 is
due to the Durham Life Insurance group and credit business, which was included
in the Corporate segment. The Durham credit business was sold effective July 1,
1992 and the group business was reinsured, effective January 1, 1993.
ASSET/LIABILITY MANAGEMENT
In both the Company's insurance and banking operations, asset/liability
management represents a key element of the Company's overall risk management
program. The following discussion addresses the integrated management of assets
and liabilities, along with the use of derivative financial instruments, related
to the insurance operations managed by PCM. The management process for banking
operations is discussed separately under the Providian Bancorp section. The
asset/liability management process focuses on a variety of risks, including
market risk (primarily interest rate risk) and credit risk. Effective management
of these risks is an important determinant of profit levels and volatility.
The Company manages interest rate risk by employing a variety of modeling
techniques to estimate the duration of both assets and liabilities and then
managing the net duration position within a range considered appropriate.
Duration is a key portfolio management tool and is measured for both assets and
liabilities. For the simplest forms of assets or liabilities, duration is
proportional to their weighted average life, with weights equal to the
discounted present value of estimated cash flows. This methodology causes near-
term cash flows to have greater proportional weight than cash flows further in
the future. For more complex assets and liabilities with optional cash flows,
for example, callable bonds, mortgage-backed securities or insurance
liabilities, additional adjustments are made in estimating an effective duration
number.
The net duration level represents the difference between the estimated
durations of policy liabilities and those of an equal amount of assets which
support those liabilities. Net duration levels are adjusted throughout the year
to reflect changing business and economic conditions. Generally, the Company's
asset durations are longer than its liability durations. At December 31, 1994,
the Company's asset durations were longer than liability durations by
approximately .9 years. The Company manages net duration levels within an
acceptable range by changing the nature of underlying assets or liabilities in
the portfolio and through the use of derivatives. During 1994, net duration
levels averaged 1.1 years. The calculation of the estimated net duration level
is very subjective in nature. Additionally, there is no generally accepted
method of calculating the duration of liabilities, and others might have
estimated durations differently. Accordingly, net duration levels among
companies may not be comparable.
The Company manages interest rate risk by employing various derivative
programs, among other techniques, that adjust the overall net duration level or
which modify the interest rate characteristics of the underlying assets or
liabilities. The Company's major programs include the use of interest rate swaps
(including basis swaps) and exchange-traded futures contracts. Interest rate
swaps generally involve the exchange of fixed and floating rate interest
payments on an underlying notional amount. Basis swaps involve the exchange of
one floating interest rate payment for another floating interest rate payment
determined from different floating rate indexes. Futures are contracts which
call for the future delivery of securities in which the seller agrees to deliver
on a specified date, a specified instrument at a specified price. The Company
historically has used interest rate swaps to convert fixed rate GICs to floating
rate contracts, to reduce the volatility on shareholders' equity caused by
changes in the market value of actively managed debt securities as a result of
interest rate movements, to adjust the net duration level of the overall
portfolio and to reduce basis risk by exchanging floating interest rate payments
utilizing an index that better correlates with the underlying assets and
liabilities. Additionally, the Company uses futures contracts to adjust the net
duration level of the overall portfolio.
The Company is exposed to credit risk, which is defined as the risk that a
loss will occur due to a borrower or swap counterparty defaulting on a loan or
swap contract when the contract is in a favorable economic position to the
Company. The Company manages such risk through a stringent ongoing credit
review, approval and monitoring process. Master netting agreements are entered
into with swap counterparties to reduce the Company's exposure to credit risk
with the individual counterparty. Credit limits are established for each
borrower and swap counterparty and are considered based on total net credit
exposure to the borrower, including both derivatives and debt securities. In the
event that the individual borrower or derivative counterparty credit risk
exceeds the pre-established credit limit as determined by the Company, action is
taken to reduce either the derivative or the bond exposure with the
counterparty. The Company also monitors exposure to counterparty credit risk
through the performance of sensitivity testing. "Worst-case" scenarios are
considered to determine the maximum credit risk exposure on derivatives
associated with the individual counterparty. This maximum
27
<PAGE>
===============================================================================
exposure is then aggregated with other nonderivative credit risk associated with
the individual counterparty to determine compliance with the total individual
counterparty credit limit established by the Company during the credit review
process. A majority of the Company's derivatives (interest rate swap, cap and
floor agreements) are traded "over-the-counter" with highly rated, creditworthy
counterparties, while futures contracts are traded on a market exchange. The
exchange-traded nature of futures contracts reduces credit risk due to the
clearinghouse function of the exchange, and due to the daily settlement of gains
or losses on virtually all exchange-traded contracts. See Note D of the
accompanying Consolidated Financial Statements for additional information on
credit risk.
The asset/liability management process is also designed to monitor liability
and asset characteristics on both the individual product and Company aggregate
levels. Each major product category is supported by a separate asset portfolio,
which is managed in accordance with a pre-established baseline asset strategy.
This baseline strategy represents an appropriate matching of each product's
asset and liability characteristics. Baselines are developed and updated through
extensive financial modeling to design the optimal asset baseline suited to the
individual product. These analyses, which reflect asset and liability durations,
liquidity, and other risk characteristics, are used to design the aggregate
portfolio of assets and liabilities within desired risk tolerances while
producing attractive expected returns. Aggregate portfolio management takes
advantage of offsetting characteristics of individual products and makes
aggregate portfolio adjustments to obtain a better overall balance of asset and
liability characteristics than that available at the individual product level.
The Company has the flexibility to actively manage a significant portion of
its investment portfolio. Securities are evaluated among sectors for relative
value based on their current price and long-term outlook, and positions are
moved from fully valued sectors to undervalued ones, capturing the incremental
returns when those sectors regain market equilibrium. This active management
process adds value for shareholders but also has the potential to introduce
incremental volatility to net income, as bonds are bought and sold in both
rising and falling interest rate environments. However, the management of the
investment portfolio is subject to several risk management constraints,
including those designed to insure preservation of a strong capital position,
optimization of future earnings and management of the level of realized gains
and losses and resultant tax effects.
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." SFAS No. 115 significantly restricts a company's ability
to sell securities in the held to maturity category without raising questions
about the appropriateness of its accounting policy for such securities. Thus, a
company's ability to maintain the appropriate flexibility to make optimal
investment decisions is significantly restricted if it classifies securities as
held to maturity. To maximize investment flexibility, the Company classified
substantially all of its debt and equity securities as available for sale as of
January 1, 1994. Those securities which were previously classified as actively
managed and carried at market value, with unrealized gains or losses reflected
directly in shareholders' equity, net of deferred taxes, have been reclassified
to the available for sale category for financial statement purposes. As a result
of the adoption of SFAS No. 115, the net unrealized investment gain (loss)
component of shareholders' equity increased by $261.4 million (net of deferred
taxes of $140.8 million and an adjustment of $42.0 million to deferred policy
acquisition costs) to reflect the January 1, 1994 net unrealized gains on
securities classified as available for sale previously classified as held for
investment and carried at amortized cost.
During 1994, the total return performance of the bond market was the worst in
many years. The Federal Reserve increased the federal funds rate a total of six
times during 1994, from 3.0 percent at January 1, 1994 to 5.5 percent at
December 31, 1994. A corresponding increase in bond yields occurred during 1994,
with 5 year, 10 year and 30 year treasury bond yields increasing by
approximately 263, 204 and 153 basis points, respectively. As a result of these
increases, the market value of the Company's debt securities decreased
substantially during 1994, causing the net unrealized investment gain (loss)
component of shareholders' equity to deteriorate significantly. The adjustments
to record the net unrealized investment gain (loss) component of shareholders'
equity were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
December 31, January 1, December 31,
1994 1994 1993
-------------------------------------------------------------------------------
<S> <C> <C> <C>
(Dollars in millions)
Unrealized investment gain (loss)
on available for sale securities $(609,123) $ 468,101 $23,901
Adjusted by:
Increase (decrease) in deferred
policy acquisition costs 79,083 (42,000) -
Decrease (increase) in deferred
federal income taxes 185,514 (147,497) (6,697)
-------------------------------------------------------------------------------
Net unrealized investment gain
(loss) on available for
sale securities $(344,526) $ 278,604 $17,204
-------------------------------------------------------------------------------
</TABLE>
As of December 31, 1994, the Company had $115.5 million of debt and equity
securities which were classified as trading account securities. The Company
classifies these securities as trading primarily because the Company has
purchased these securities with the expectation of selling them in the near
term. These securities were carried at fair value with the unrealized gain
(loss) included as a component of investment income in the accompanying
Consolidated Statements of Income.
SFAS No. 115, with substantially all debt and equity securities carried at
fair value, introduces additional volatility to reported shareholders' equity.
It does not, however, change the underlying economics of the Company's
investment operations. The current accounting model required by the FASB, which
28
<PAGE>
values some assets at fair value, and other assets and all liabilities at
historical cost, does not accurately portray overall economic results.
Considering the closely integrated manner in which the Company manages its
assets and liabilities, the concept of adjusting certain assets to fair value,
principally reflecting changes in the interest rate environment, without making
a similar adjustment to liabilities, distorts reported financial results.
Due to this potential for distortion, fair value disclosure is provided in
Note E of the accompanying Consolidated Financial Statements. SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments," requires disclosure of
fair values for selected financial instruments but does not require disclosure
of fair value for traditional insurance liabilities. Fair value disclosure is
provided for all financial instruments, including traditional insurance
liabilities, in an effort to more properly reflect changes in shareholders'
equity from fluctuations in interest rates. The fair values of individual asset
and liability categories as presented differ from carrying amounts principally
as a result of changes in the interest rate environment, including changes in
various credit spreads. The fair value disclosures do not provide and are not
intended to provide an indication of the fair value of the Company. However, the
information does provide a more balanced picture of the economic position of the
Company due to interest rate changes than provided by only marking debt and
equity securities to market as required by SFAS No. 115. A large portion of the
decline in the fair value of shareholders' equity was attributable to specific
equity management transactions intended to optimize the Company's capital
structure and was unrelated to changes in the interest rate environment. These
equity transactions included: the refunding of the $100 million Series F,
Adjustable Rate Cumulative Preferred Stock (included in shareholders' equity in
1993) with Monthly Income Preferred Stock (reflected above shareholders' equity
on the balance sheet because it was issued by a consolidated subsidiary) and
treasury stock purchases of $139 million in 1994.
ASSET/LIABILITY REVIEW
Cash and invested assets were $19.3 billion at December 31, 1994, up 2.9 percent
(1993 - $18.7 billion, up 11.6 percent). Excluding Providian Bancorp assets,
invested assets related to insurance operations were $16.8 billion in 1994
compared to $16.7 billion in 1993. The discussion which follows relates solely
to the invested assets and liabilities of the insurance operations. As
investment manager for the Company's invested assets related to insurance
operations, PCM manages the distribution of assets to optimize risk adjusted
returns in accordance with its baseline strategies. Overall, the distribution of
invested assets related to insurance operations remains similar to year end
1993.
[Chart - Distribution of Insurance Invested Assets]
The graph below is a pie chart reflecting the percentage Distribution of
Insurance Invested Assets by investment type at December 31, 1994. The legend
contains the dollar amount of each investment in millions as well as total
insurance invested assets.
Distribution of Insurance Invested
Assets
December 31, 1994
(Dollars in millions)
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
% of
Investment Type Amount Total
--------------- ------ ----
<S> <C> <C>
Public Bonds $ 8,479 50.5%
Commercial Mortgages 2,650 15.8
Residential Mortgages 2,550 15.2
Private Placements 1,318 7.8
Common and Preferred Stocks 617 3.7
Cash and Cash Equivalents 581 3.4
Other 535 3.2
Real Estate 71 .4
------- -----
Total Insurance Invested Assets $16,801 100.0%
</TABLE>
The Company has historically had a low default rate in public and private debt
securities. This is due to the Company's ability to prudently seek out and
manage among sectors within various asset classes. Additionally, selectivity and
thorough credit underwriting have proven effective for residential and
commercial mortgages.
Public and private bonds account for the majority of invested assets. The
Company maintains a high credit quality investment portfolio with only 4.9
percent and 4.4 percent of invested assets at December 31, 1994 and 1993,
respectively, representing below investment grade bonds. Below investment grade
bonds, preferred stocks and investments in limited partnerships with below
investment grade characteristics represent 5.5 percent of invested assets at
December 31, 1994 compared to 4.9 percent at December 31, 1993. The Company had
investments at December 31, 1994 totaling $54.2 million in U.S. dollar
denominated Mexican debt securities which were included in below investment
grade holdings.
The foregoing percentages of below investment grade assets exclude amounts
invested in a traditional convertible arbitrage strategy of $130.9 million and
$196.9 million at December 31, 1994 and 1993, respectively. This strategy, under
contract with an external investment manager, focuses on hedged investments
using exchangeable securities, such as convertible bonds, preferred stocks,
warrants and options, in combination with the underlying common stocks. The
convertible bonds underlying this strategy are, in general, below investment
grade. The risk associated with the convertible bond position is substantially
mitigated by a related short stock position. In the event of a gradual credit
deterioration in the underlying convertible bond position, the decline in the
bond's value is expected to be significantly offset by the related short stock
position, thereby allowing for orderly liquidation of the investment.
There were no securities in the bond or preferred stock portfolio that were
delinquent as to interest or dividends at December 31, 1994. While the Company
experienced a significant loss in the first quarter of 1994 in its investment in
Granite Partners, default and loss experience in the remainder of the securities
portfolio was excellent with no defaults and no other significant losses as a
result of impairments in value during 1994. The
29
<PAGE>
Company wrote off its $52.4 million investment in Granite Partners, a limited
partnership which invested in complex mortgage-backed securities, as a result of
a total deterioration in value of the limited partnership. The Company invested
in this partnership during 1993 as a means of diversifying its investment risk
profile through the use of an external investment manager who was a recognized
expert in the mortgage-backed securities market. The investment strategy to be
followed by the investment manager was represented to the Company as being
market neutral, designed to maintain value and performance over a wide range of
interest rates. However, upon investigation, it appeared that the investment
manager had unilaterally changed the investment strategy in 1994 and did not
follow the stated market neutral strategy. Consequently, the value of the
limited partnership deteriorated rapidly.
In addition to the convertible arbitrage strategy discussed above, the Company
has investments in other programs which are managed under contract by external
investment managers. These investments generally participate in arbitrage
strategies and are made primarily in the form of limited partnership
arrangements. The strategies underlying these investments are diverse and are
expected to be uncorrelated to changes in interest rates. The Company manages
its exposure to these types of investments by performing a stringent credit and
underwriting review prior to the initial investment, by limiting the amount that
can be invested in any one strategy and by thorough ongoing monitoring. At
December 31, 1994, the largest investment in any one of these strategies was
$27.4 million.
The Company's bond and preferred stock portfolios are highly diversified among
industries and types of securities. Included in the portfolios are $2.2 billion
of mortgage-backed securities (MBS), which are debt instruments backed by pools
of mortgages, the majority of which are guaranteed by a federal agency with
respect to principal and interest payments.
MBS provide diversification, excellent credit quality (generally AAA), and
good liquidity characteristics to our total portfolio. The primary investment
uncertainty with MBS is the timing of cash flows due to the uncertainty of the
timing of prepayments of the underlying mortgages rather than the loss of
principal (i.e. credit risk). While MBS are subject to changing prepayment
patterns (as are callable corporate bonds), our investment in MBS should be
viewed in the context of the broader portfolios, and in light of the integrated
manner in which the Company manages its assets and liabilities. The Company's
MBS portfolio comprised 13.2 percent of total invested assets at December 31,
1994.
Collateralized mortgage obligations (CMOs) are the largest component of MBS in
the portfolio, representing approximately 52 percent of the total MBS portfolio.
CMOs are securities which pool together mortgage pass-throughs and separate the
cash flows to create securities with average lives which are shorter or longer
than pass-through securities by themselves. The bonds created by this process
are called "tranches." The Company's CMO holdings include a wide variety of
individual issues, and are highly concentrated in shorter, more stable tranches.
The Company has only nominal exposure to high-volatility CMO tranches, such as
interest-only or residual securities.
A portion of the MBS portfolio, approximately 21 percent, has coupons which
adjust with changes in short-term interest rates, such as LIBOR and Treasury
bills, and are also subject to caps and floors. While yields on both fixed rate
and floating rate MBS investments will vary somewhat with changes in prepayment
speeds, the overall impact of variability in yields on the portfolio is not
significant relative to total invested asset yields. The second largest class of
CMOs is planned amortization class (PAC) bonds, representing approximately 16
percent of the total MBS portfolio. PACs are structured to provide a more
certain cash flow to the investor and therefore have reduced prepayment risk.
Pass-through securities represent the other component of MBS owned by the
Company. Pass-throughs are primarily federal agency guaranteed MBS which reflect
an interest in a mortgage pool, with monthly payments of principal and interest
being passed from the homeowner through to the investor.
The table below provides the detail of mortgage-backed securities as of
December 31, 1994:
<TABLE>
<CAPTION>
-----------------------------------------------------------
Mortgage-Backed Securities by Type
----------------------------------
Market Value
Amortized Cost (carrying value)
-----------------------------------------------------------
<S> <C> <C>
(Dollars in millions)
CMOs $1,228 $1,163
Pass-throughs 1,121 1,061
-----------------------------------------------------------
Total $2,349 $2,224
===========================================================
</TABLE>
The Company engages in commercial and residential mortgage lending in the
course of its management of the insurance-related portfolio. Substantially all
the commercial mortgage loans originated are first mortgage loans with maximum
loan-to-value ratios of 75 percent. The Company requires minimum debt service
coverage from existing cash flows of 1.2 times. At the time of origination of
the mortgage loan, a personal inspection of the collateral and research
concerning the borrower and the market are completed. In addition, new mortgage
loans require engineering and environmental studies. Currently, multi-family
apartments,
The graph below is a pie chart reflecting the percentage of total Commercial
Mortgage Loan Principal Balance by Property Type at December 31, 1994. The
legend contains the dollar amount by property type in millions as well as total
commercial mortgage loans.
Commercial Mortgage Loan Principal Balance
by Property Type
December 31, 1994
(Dollars in millions)
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
% of
Category Amount Total
-------- ------ -----
<S> <C> <C>
Retail $ 884 31.7%
Apartment 775 27.8
Office 590 21.1
Industrial 249 8.9
Health Care 152 5.5
Hotel 79 2.8
Other 62 2.2
------ -----
Total Commercial Mortgage Loans $2,791 100.0%
</TABLE>
30
<PAGE>
===============================================================================
credit-anchored shopping centers and industrial facilities are preferred
projects for mortgage loans. Mortgage loans are not currently offered on
projects secured by raw land, unanchored shopping centers and special purpose
type properties.
In addition to its stringent underwriting standards, the Company minimizes
credit risk through various means, including limiting average loan balances,
diversification by borrower and property type and, significantly, through a
geographic dispersion of similar property types.
The Company's mortgage loan philosophy is conservative in loan origination and
proactive in identifying and resolving problem loan situations. It includes an
"early warning" system designed to assist in detecting potential problems before
actual delinquencies occur, so that these loans can be reviewed monthly to
monitor results and take further action, as necessary. Included in the Company's
commercial mortgage loan portfolio are certain loans which require a principal
payment upon maturity.
The graph represented below is a pie chart reflecting the percentage of total
Commercial Mortgage Loans by Geographic Location based on ACLI defined regions
at December 31, 1994. The legend contains the dollar amount by region in
millions as well as total commercial mortgage loans.
-------------------------------------------------------------------------------
Chart--
Commercial Mortgage Loan Principal Balance by Geographic* Location
December 31, 1994
(Dollars in millions)
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
% of
Category Amount Total
-------- ------ ------
<S> <C> <C>
South Atlantic $ 607 21.7%
East North Central 562 20.1
West South Central 444 15.9
Pacific 345 12.4
East South Central 317 11.4
Middle Atlantic 256 9.2
Mountain 123 4.4
New England 103 3.7
West North Central 34 1.2
------ ------
Total Commercial Mortgage Loans $2,791 100.0%
</TABLE>
* Based on ACLI defined regions
-------------------------------------------------------------------------------
During the next three years, $814.4 million (1995 -- $135.4 million; 1996 --
$355.4 million; and 1997 -- $323.6 million) of these commercial mortgage loans
will mature. The Company does not expect to incur any material credit losses in
excess of amounts currently reserved due to its stringent underwriting,
collateral requirement and diversification policies mentioned above.
Additionally, the Company does not expect that the maturity of these loans will
have a significant impact on its overall liquidity position over the next three
years. Problem commercial mortgage loans (based on American Council of Life
Insurance (ACLI) standards, which include loans past due 60 days or more,
restructured loans, loans in the process of foreclosure and real estate acquired
through foreclosure) as of December 31, 1994, amounted to 4.6 percent of
outstanding commercial loans, compared to the 5.1 percent reported at the end of
1993. These results compare very favorably to industry results of 18.4 percent
at December 31, 1994.
-------------------------------------------------------------------------------
Chart--
Residential Mortgage Loan Principal Balance by Geographic Location
The graph represented below is a pie chart reflecting the percentage of total
Residential Mortgage Loans by Geographic Location based on ACLI defined regions
at December 31, 1994. The legend contains the dollar amount by region in
millions as well as total residential mortgage loans.
Residential Mortgage Loan Principal Balance by Geographic* Location
December 31, 1994
(Dollars in millions)
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
% of
Category Amount Total
-------- ------ -----
<S> <C> <C>
Pacific $1,047 41.1%
South Atlantic 378 14.8
Middle Atlantic 373 14.6
Mountain 251 9.8
East North Central 166 6.5
New England 162 6.4
West South Central 95 3.7
West North Central 49 1.9
East South Central 30 1.2
------ ----
Total Residential Mortgage Loans $2,551 100.0%
</TABLE>
* Based on ACLI defined regions
-------------------------------------------------------------------------------
The Company also maintains a residential mortgage loan portfolio with
conservative underwriting standards. Residential mortgages increased by $912.7
million in 1994 as the Company purchased "jumbo" adjustable rate mortgage loans,
which are considered a good asset/liability management fit. Loans are only
acquired from approved originators, individually re-underwritten by the Company,
and all legal documentation is reviewed to ensure a first lien position. Quality
control reviews are additionally performed on ten percent of all purchased
loans, which includes "re-creating" the credit files to protect against fraud or
significant inaccuracy.
Included in the Company's residential mortgage loans in the Pacific region are
$923.0 million in California loans. Pool insurance has been obtained to reduce
exposure to any potential loss that might result from weakening real estate
values in that state.
Problem residential mortgage loans (based on Mortgage Bankers Association
(MBA) standards, which include loans past due 30 days or more and loans in the
process of foreclosure, and are based on number of loans) were 1.5 percent and
3.6 percent at December 31, 1994 and 1993, respectively. The MBA average for
such loans was 2.5 percent at September 30, 1994, the latest date for which such
information is available, and 5.3 percent at December 31, 1993.
Mortgage loans on which the Company has discontinued the accrual of interest
and restructured loans accruing interest are as follows:
<TABLE>
<CAPTION>
---------------------------------------------------
Mortgage Loans
--------------------------
Commercial Residential
------------ ------------
December 31 1994 1993 1994 1993
---------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in millions)
Non-accrual loans $68.2 $64.3 $10.7 $12.6
Restructured loans,
accruing interest 4.3 5.2 - -
---------------------------------------------------
Total $72.5 $69.5 $10.7 $12.6
---------------------------------------------------
</TABLE>
31
<PAGE>
===============================================================================
As of December 31, 1994, the Company had approximately $33.8 million of
commercial mortgage loans with identified potential problems which could cause
these loans to be included in one of the above categories in the future.
However, the Company does not currently anticipate any material losses from
these loans.
With respect to the Company's liabilities, the tables below contain
information on the Company's major insurance products with related interest
components. In addition to these products, the Company also offers products that
provide a return based on the market performance of the underlying assets.
--------------------------------------------------------------------
<TABLE>
<CAPTION>
Mean
Deposits
and Effective
Year Ended December 31, 1994 Reserves Interest* Rate*
--------------------------------------------------------------------
<S> <C> <C> <C>
(Dollars in thousands)
Guaranteed investment contracts $7,298,873 $350,799 4.81%
Retail annuities 3,307,326 179,336 5.42
Life annuities 1,180,285 102,943 8.72
Single premium life 715,479 33,200 4.64
Life, health and other 3,397,347 191,894 5.65
--------------------------------------------------------------------
Mean
Deposits
and Effective
Year Ended December 31, 1993 Reserves Interest* Rate*
--------------------------------------------------------------------
(Dollars in thousands)
Guaranteed investment contracts $6,438,067 $250,152 3.89%
Retail annuities 3,218,696 182,303 5.66
Life annuities 1,109,389 98,765 8.90
Single premium life 733,065 32,058 4.37
Life, health and other 3,282,191 187,900 5.72
--------------------------------------------------------------------
*After related hedges
</TABLE>
GICs are either floating rate, indeterminate maturity contracts (46 percent of
GIC deposits) or fixed rate, fixed maturity contracts (54 percent of GIC
deposits). Floating rate contracts credit interest based on various indices
which reset monthly and allow the contractholder to withdraw funds with advance
notice periods ranging from three to twelve months. There is no withdrawal
penalty. The fixed maturity contracts, which are synthetically converted to
floating rate contracts using interest rate swaps or futures, allow no
withdrawal or have both a market value adjustment and surrender penalty for
early withdrawal, and mature as follows (dollars in millions): 1995 -- $961.4;
1996 -- $1,051.8; 1997 -- $939.5; 1998 -- $854.9; and 1999 -- $540.6.
Retail annuities include single premium and flexible premium deferred
annuities. The contracts typically have a first-year surrender charge of 5.0 to
7.0 percent, which generally declines to zero over five to six years. The
average remaining surrender charge on policies still in the surrender period is
4.4 percent. Retail annuities as of December 31, 1994 also included $169.8
million of market value adjustment annuities, having a market value adjustment
on withdrawal prior to the end of the six year interest guarantee period. As of
December 31, 1994, approximately 55 percent of retail annuities were subject to
a surrender charge.
Life annuities include structured settlements and pension buyout annuities
which pay fixed periodic benefits to contractholders. Early withdrawals are
prohibited. Annual benefit payments on this line are currently about $95.9
million. This cash outflow is scheduled to taper off over the next 20 years, but
some payments will continue well into the next century.
Single premium life contracts have minimal surrender provisions. However, 1987
changes in the federal tax laws "grandfathered" favorable tax treatment for
existing contracts, thus creating a significant withdrawal disincentive.
The life, health and other category contains a full range of traditional and
interest-sensitive life and health insurance products which contain standard
insurance surrender provisions.
In addition to the above products, the Company also had $8.5 billion of Trust
GIC contracts at December 31, 1994. With Trust GIC, the customer retains legal
title to the assets and receives the investment performance over time. The
Company controls investment-related risks by setting investment guidelines and
routinely monitoring compliance. The underlying investment portfolios
predominately include Treasuries, federal agency securities, high quality
corporate bonds and low volatility mortgage-backed instruments. The Company
provides benefit responsiveness on the Trust GIC contracts affording book value
accounting treatment for the plan sponsor. The Company provides liquidity, if
necessary, for appropriate defined, benefit responsive events. Potential
liquidity draws are mitigated and managed through stringent plan underwriting,
product structure and diversification. During 1994, the monthly average amount
funded to customers totaled $3.9 million, or less than .06 percent of the
monthly average Trust GIC commitment balance of $6.5 billion.
LIQUIDITY AND CAPITAL RESOURCES
Providian is a legal entity, separate and distinct from its subsidiaries and has
no business operations. The primary sources of cash to meet its obligations,
including principal and interest payments with respect to indebtedness, are
dividends and other statutorily permitted payments from its subsidiaries.
A strong liquidity position is critical to the Company's continuing financial
strength. The availability of cash is essential to the timely payment of
policyholder, debt and other obligations, and instrumental to realizing
opportunities in today's fast-paced financial markets. As a result, the
Company's liquidity position is actively monitored and managed.
Product design and investment strategies play a major role in liquidity
management. The Company's products provide significant customer value, which
protects against sudden cash demands (disintermediation). In addition, many
insurance contracts contain withdrawal notice provisions or early withdrawal
penalties and pay interest rates that are reset regularly to market levels,
which protect against disintermediation. Liquidity risks are minimized further
by investment strategies which provide for high quality asset portfolios and by
active, integrated asset/liability management processes.
Cash flows from operations in 1994 were $1.0 billion, down from $1.1 billion
in 1993 and 1992. These substantial levels come
32
<PAGE>
from a stable base of income from insurance premiums (particularly from the home
service Providian Agency Group operations, which are very predictable and
relatively immune to disintermediation), from investments and from other product
sales.
Investment commitments are planned to coincide with expected cash flows.
Normal day-to-day cash variations are met by a commercial paper program,
supplemented by committed lines of credit. Commercial paper borrowings averaged
$94.0 million in 1994 at a weighted average interest rate of 4.14 percent.
Commercial paper outstanding at December 31, 1994 was $49.7 million compared to
$49.9 million at the end of 1993. In addition to the corporate commercial paper
program, Commonwealth Insurance, Peoples Security Insurance and National Home
Life Assurance Company (National Home Assurance) each have $50 million in
available commercial paper programs. There were no borrowings under these
programs in 1994.
The Company has committed lines of credit of $850 million which serve as a
contingency reserve should adverse conditions materialize, and as back-up to the
commercial paper program. There were no borrowings under these lines of credit
during the year. In addition the Company's bond and stock portfolio of $10.4
billion at December 31, 1994 provides a significant source of short-term
liquidity.
Providian Bancorp analyzes its current and future liquidity needs to support
its deposit portfolio and asset growth. On October 14, 1994, Providian Bancorp
entered into a new $500 million revolving credit agreement and replaced the
existing $400 million facility. The agreement provides liquidity for the
existing deposit base as well as satisfying short-term funding requirements.
Outstanding borrowings under the new agreement were $235.0 million at December
31, 1994, compared to $175.0 million outstanding under the old agreement at the
end of 1993.
The Company's Series D medium-term note program permits the issuance of up to
$400 million in medium-term notes. During 1994, $106.5 million of these notes
were issued leaving a capacity of $293.5 million. The ratio of long-term debt to
total realized capital (including long-term debt and the preferred stock of
consolidated subsidiary and excluding the net unrealized investment gain (loss)
component of shareholders' equity) was 21.3 percent at December 31, 1994,
compared with 19.2 percent at the end of 1993, both within the lower end of
ranges of leverage considered acceptable by the Company.
On March 2, 1994, the Company redeemed, at face value, all $100 million of its
Series F, Adjustable Rate Cumulative Preferred Stock, at $100 per share plus
accrued and unpaid dividends through the date of redemption. In May 1994,
Providian LLC, a newly formed subsidiary of the Company, issued $100 million of
Cumulative Monthly Income Preferred Stock (MIPS) paying monthly dividends at an
annual rate of 8.875 percent. Providian LLC loaned the net proceeds from the
issuance of the MIPS to the Company to provide permanent funding for the
redemption of the Company's Series F, Adjustable Rate Cumulative Preferred
Stock. The Company has unconditionally guaranteed all legally declared and
unpaid dividends of Providian LLC.
The table below reflects the debt and claims paying ability ratings for
Providian Corporation and its major insurance subsidiaries at December 31, 1994:
<TABLE>
<CAPTION>
---------------------------------------------------------------
Standard Duff & A.M.
& Poor's Moody's Phelps Best
---------------------------------------------------------------
<S> <C> <C> <C> <C>
PROVIDIAN CORPORATION
RATINGS:
Senior Debt AA A2 AA-
Monthly Income
Preferred Stock AA- a2 A+
Commercial Paper A-1+ P-1 D-1+
CLAIMS PAYING/FINANCIAL
STRENGTH RATINGS:
Commonwealth Insurance AAA Aa3 AA+ A+
Peoples Security Insurance AAA Aa3 AA+ A+
National Home Assurance AA A2 AA A+
COMMERCIAL PAPER RATINGS:
Commonwealth Insurance A-1+ P-1 D-1+
Peoples Security Insurance A-1+ P-1 D-1+
National Home Assurance A-1+
---------------------------------------------------------------
</TABLE>
At the beginning of 1994, the National Association of Insurance Commissioners
(NAIC) implemented a risk-based capital formula for the life insurance industry
designed to establish minimum levels of statutory capital and surplus. The new
formula assigns various weighting factors to reflect the perceived riskiness of
each insurer's business. The prior method utilized a state-mandated minimum
dollar level of surplus, without regard to varying levels of risk within or
among companies. The adjusted capital levels of the Company's life insurance
subsidiaries currently exceed all of the regulatory action levels.
INFLATION
As a diversified financial services company, the Company's assets and
liabilities are inherently sensitive to the overall level of and changes in
interest rates. Some of the Company's assets benefit when interest rates
increase while others lose value. Likewise, some liabilities perform better in a
rising environment, while others are adversely affected. The converse is true
when interest rates decline. In response to these sensitivities, the Company has
instituted what it believes to be a very effective asset/liability management
process. The objective of this process is to optimize net interest margins
within prescribed risk tolerances, while also protecting net asset values (see
separate discussion of Asset/Liability Management). Despite such management
activities, however, changes in interest rates could cause net interest margins
to fluctuate from historical levels.
COMMON STOCK DIVIDEND AND MARKET DATA
The Company has increased its dividend in each year since its founding in 1969.
In 1994, the increase was 9.6 percent compared with a 10.6 percent increase in
1993. The quarterly dividend of $.225 per common share declared by the Board of
Directors for the first quarter of 1995 represents an increase of 12.5 percent
over the 1994 quarterly rate. The ten-year annual compounded growth rate has
been 8.0 percent, measurably higher than the approximate 6 percent compound
growth rate for the companies that make up the Dow Jones Industrial Average. The
33
<PAGE>
Company's annual dividend growth rate has been more than twice the compound
annual growth rate of the Consumer Price Index over the same ten-year period,
providing shareholders with an income stream that has outpaced inflation by a
wide margin.
The market price for the Company's common stock was $30.88 per common share at
December 31, 1994, compared with $37.13 per common share at December 31, 1993
and $36.13 at December 31, 1992. The price-earnings multiple (calculated on the
last twelve months' net income per common share) was 10.2 compared to 11.9 at
the end of 1993 and 11.5 at the end of 1992. The table below shows the
historical price range of the Company's common stock as quoted on the New York
Stock Exchange - Composite Transactions. The New York Stock Exchange is the
principal market in which the Company's stock is traded (ticker symbols: PVN -
common; and PVN Pr M - Monthly Income Preferred Stock (MIPS)). The Company's
common shares are also listed on the Pacific Stock Exchange.
Approximately 17,200 named individuals and institutions own Providian stock
including approximately 6,150 employees who own stock through the Company's
Thrift Savings Plan. During 1994, the Company announced its plan to repurchase
approximately 5.0 million shares of its common stock. After completing purchases
of approximately 4.3 million shares of its common stock in 1994 at an average
price of $32.02 per common share, the Company held 17.8 million common shares in
treasury at December 31, 1994, at an average cost of $12.03 per common share.
The Company repurchased approximately 420,000 additional shares of its stock
through February 8, 1995 through open market purchases.
QUARTERLY FINANCIAL DATA
(Dollars in thousands except per common share)
<TABLE>
<CAPTION>
Per Common Share
Premiums Investment Realized Benefits ----------------------
and Other and Other Investment and Net Operating Net
Considerations Income, Net(a) Gain (Loss) Expenses Income Earnings(b) Income
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1994
4th Quarter $278,849 $514,740 $(40,369) $653,283 $69,083 $.97 $.70
3rd Quarter 282,995 486,489 (7,196) 632,333 86,108 .95 .87
2nd Quarter 287,852 473,495 (16,050) 627,169 81,702 .93 .82
1st Quarter 291,492 443,500 (36,733) 605,807 64,008 .90 .62
1993
4th Quarter $290,866 $432,363 $ 4,421 $593,628 $91,536 $.90 $.89
3rd Quarter 279,229 434,494 (7,050) 580,294 73,763 .75 .71
2nd Quarter 290,000 441,242 1,635 601,463 91,530 .86 .89
1st Quarter 307,589 423,398 (19,161) 616,583 65,836 .81 .64
------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes investment income, net of expenses, consumer loan servicing fees
and other income, net.
(b) Operating earnings exclude from net income, realized investment gains and
losses and related deferred acquisition cost amortization, net of taxes.
QUARTERLY PRICE RANGES OF COMMON STOCK AND
DIVIDENDS PER COMMON SHARE
<TABLE>
<CAPTION>
High Low Dividend High Low Dividend
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1994 1993
4th Quarter $33.50 $29.88 $.20 4th Quarter $44.88 $36.25 $.1825
3rd Quarter 34.00 28.63 .20 3rd Quarter 44.50 38.38 .1825
2nd Quarter 33.13 28.75 .20 2nd Quarter 42.25 34.50 .1825
1st Quarter 38.13 31.00 .20 1st Quarter 40.63 35.63 .1825
------------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
SUPPLEMENTAL EARNINGS DATA
(Dollars in thousands except per common share)
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993 1992 1991 1990 1989
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating earnings before federal income tax(a) $546,644 $508,951 $455,865 $372,811 $332,250 $278,562
Federal income tax on operating earnings before
impact on deferred taxes due to tax law change 169,441 155,230 129,907 102,500 85,510 66,330
--------------------------------------------------------------------------------------------------------------
Operating earnings before impact of tax law change 377,203 353,721 325,958 270,311 246,740 212,232
Federal income tax impact on deferred taxes due to
tax law change(b) - 11,682 - - - -
--------------------------------------------------------------------------------------------------------------
Operating earnings 377,203 342,039 325,958 270,311 246,740 212,232
Realized investment gain (loss), net of tax (68,847) (18,244) 3,346 (14,738) (90,619) 75,557
Related amortization, net of tax (3,786) (1,130) (6,808) (5,341) 10,072 (12,081)
Dividends on preferred stock of
consolidated subsidiary (3,669) - - - - -
Cumulative effect of change in
accounting principle, net of tax - - - - - (56,021)
--------------------------------------------------------------------------------------------------------------
Net Income 300,901 322,665 322,496 250,232 166,193 219,687
Dividends on nonconvertible preferred stock 1,163 6,750 6,750 8,604 10,432 10,515
--------------------------------------------------------------------------------------------------------------
Net Income Applicable to Common Stock $299,738 $315,915 $315,746 $241,628 $155,761 $209,172
--------------------------------------------------------------------------------------------------------------
Per common share:
Operating earnings before impact on
deferred taxes due to tax law change(a) $ 3.75 $ 3.44 $ 3.18 $ 2.89 $ 2.57 $ 2.23
Federal income tax impact on deferred taxes
due to tax law change(b) - (.12) - - - -
--------------------------------------------------------------------------------------------------------------
Operating earnings 3.75 3.32 3.18 2.89 2.57 2.23
Realized investment gain (loss), net of tax (.69) (.18) .03 (.17) (.98) .83
Related amortization, net of tax (.04) (.02) (.07) (.06) .11 (.13)
Cumulative effect of change in
accounting principle, net of tax - - - - - (.62)
--------------------------------------------------------------------------------------------------------------
Net Income $ 3.02 $ 3.12 $ 3.14 $ 2.66 $ 1.70 $ 2.31
--------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Operating earnings exclude realized investment gains and losses and related
deferred acquisition cost amortization.
(b) A nonrecurring deferred tax charge of $11.7 million, or $.12 per share, was
recorded as a result of the Omnibus Budget Reconciliation Act of 1993.
35
<PAGE>
MANAGEMENT'S RESPONSIBILITIES
FOR FINANCIAL REPORTING
--------------------------------------------------------------------------------
The consolidated financial statements appearing in this Annual Report have been
prepared by management, which is responsible for their preparation, integrity
and fair presentation. The statements have been prepared in accordance with
generally accepted accounting principles and necessarily include some amounts
that are based on management's best estimates and judgments.
Management is responsible for the system of internal controls over financial
reporting at Providian and its affiliates, a system designed to provide
reasonable assurance regarding the preparation of reliable published financial
statements. This system is augmented by written policies and procedures
including a code of conduct to foster a strong ethical climate, a program of
internal audit, and the selection and training of qualified personnel.
Management believes that the Company's system of internal controls over
financial reporting provides reasonable assurance that the financial records are
reliable for preparing financial statements.
The Audit Committee of the Board of Directors, composed solely of outside
Directors, meets with the independent auditors, management and internal auditors
periodically to discuss internal controls over financial reporting, auditing and
financial reporting matters. The Committee reviews with the independent auditors
the scope and results of the audit effort. The Committee also meets with the
independent auditors and with internal auditors without management present to
ensure that these groups have free access to the Committee.
The independent auditors are recommended by the Audit Committee of the Board
of Directors, selected by the Board of Directors and ratified by the
shareholders. Based upon their audit of the consolidated financial statements,
the independent auditors, Ernst & Young LLP, have issued their Auditors' Report,
which appears on this page.
Irving W. Bailey II Robert L. Walker
Chairman and Senior Vice President - Finance
Chief Executive Officer and Chief Financial Officer
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
--------------------------------------------------------------------------------
Board of Directors and Shareholders
Providian Corporation
We have audited the accompanying consolidated statements of financial condition
of Providian Corporation and subsidiaries as of December 31, 1994 and 1993, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Providian
Corporation and subsidiaries at December 31, 1994 and 1993, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1994, in conformity with generally accepted
accounting principles.
As discussed in Note A to the consolidated financial statements, in 1994 the
Company changed its method of accounting for certain investments in debt and
equity securities.
Ernst & Young LLP
Louisville, Kentucky
February 8, 1995
36
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per common and common equivalent share)
Providian Corporation and Subsidiaries
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Year Ended December 31 1994 1993 1992
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Premiums and other considerations $1,141,188 $1,167,684 $1,190,025
Investment income, net of expenses 1,611,827 1,461,446 1,453,542
Consumer loan servicing fees 206,802 172,814 140,273
Realized investment gain (loss) (100,348) (20,155) 6,477
Other income, net 99,595 97,237 47,312
-----------------------------------------------------------------------------------------------
TOTAL REVENUES 2,959,064 2,879,026 2,837,629
BENEFITS AND EXPENSES:
Benefits and claims 832,456 846,616 865,945
Increase in benefit and contract reserves 700,368 584,793 629,377
Commissions, net 73,435 74,762 89,532
General, administrative and other expenses, net 549,006 498,942 480,197
Amortization:
Deferred policy and loan acquisition costs 248,535 284,104 222,322
Value of insurance in force purchased 20,743 19,215 13,024
Goodwill 8,148 12,162 7,781
Interest expense 85,901 71,374 77,424
-----------------------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 2,518,592 2,391,968 2,385,602
INCOME BEFORE FEDERAL INCOME TAX 440,472 487,058 452,027
Federal Income Tax 135,902 164,393 129,531
-----------------------------------------------------------------------------------------------
NET INCOME BEFORE PREFERRED STOCK DIVIDENDS OF
CONSOLIDATED SUBSIDIARY 304,570 322,665 322,496
Dividends on Preferred Stock of Consolidated Subsidiary 3,669 - -
-----------------------------------------------------------------------------------------------
NET INCOME 300,901 322,665 322,496
Dividends on Nonconvertible Preferred Stock 1,163 6,750 6,750
-----------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO COMMON STOCK $ 299,738 $ 315,915 $ 315,746
-----------------------------------------------------------------------------------------------
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE $ 3.02 $ 3.12 $ 3.14
-----------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
37
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
--------------------------------------------------------------------------------------------
December 31 1994 1993
--------------------------------------------------------------------------------------------
ASSETS
Investments:
Securities available for sale, at fair value:
Bonds and redeemable preferred stocks (amortized cost of
$10,299,517 and $5,279,833 in 1994 and 1993, respectively) $ 9,744,449 $ 5,299,083
Common and nonredeemable preferred stocks (cost of $611,288
and $408,043 in 1994 and 1993, respectively) 557,233 412,694
Bonds and redeemable preferred stocks, held for investment,
at amortized cost (fair value of $5,767,618 in 1993) - 5,323,421
Trading account securities, at fair value 115,470 -
Commercial mortgage loans 2,649,664 2,558,466
Residential mortgage loans 2,550,194 1,637,452
Consumer loans 2,269,531 1,867,944
Policy loans 390,639 351,507
Real estate 70,847 103,258
Other long-term investments 237,235 426,494
Short-term investments 110,239 34,995
--------------------------------------------------------------------------------------------
TOTAL INVESTMENTS 18,695,501 18,015,314
Cash and cash equivalents 573,379 719,053
Investment income due and accrued 307,134 326,650
Operating property - at cost, less accumulated depreciation
and amortization 167,157 167,345
Deferred policy and loan acquisition costs 1,491,422 1,373,481
Value of insurance in force purchased 273,466 283,509
Goodwill 222,035 230,183
Separate account assets 1,353,476 1,446,238
Other assets 529,789 367,232
--------------------------------------------------------------------------------------------
TOTAL ASSETS $23,613,359 $22,929,005
--------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
Providian Corporation and Subsidiaries
======================================================================================
December 31 1994 1993
--------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Policy liabilities:
Benefit reserves $ 8,705,664 $ 8,404,785
Policyholder contract deposits 7,421,604 6,641,744
Policy and contract claims 203,061 211,298
Other policyholders' funds 183,645 242,666
--------------------------------------------------------------------------------------
TOTAL POLICY LIABILITIES 16,513,974 15,500,493
Banking deposits 1,680,450 1,553,385
Accrued expenses and other liabilities 999,516 986,305
Separate account liabilities 1,353,476 1,446,238
Long-term debt 694,250 589,268
Deferred federal income tax 149,831 360,425
--------------------------------------------------------------------------------------
TOTAL LIABILITIES 21,391,497 20,436,114
COMMITMENTS AND CONTINGENCIES
PREFERRED STOCK OF CONSOLIDATED SUBSIDIARY 100,000 --
SHAREHOLDERS' EQUITY
Preferred stock:
6,000,000 shares authorized for issuance in series:
Series F, Adjustable Rate Cumulative, $100 face value;
Issued and outstanding in 1993 - 1,000,000 shares -- 100,000
Common stock, $1 par:
300,000,000 shares authorized;
Issued - 115,325,000 shares 115,325 115,325
Additional paid-in capital 57,096 57,053
Net unrealized investment gain (loss) (344,526) 17,204
Retained earnings 2,512,935 2,295,974
Common stock held in treasury - at cost:
1994 - 17,789,000 shares; 1993 - 13,899,000 shares (214,031) (89,289)
--------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 2,121,862 2,492,891
--------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $23,613,359 $22,929,005
======================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
39
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in thousands) Providian Corporation and Subsidiaries
===============================================================================================================
Year Ended December 31 1994 1993 1992
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net income $ 300,901 $ 322,665 $ 322,496
Adjustments to reconcile net income to net cash
flows from operations:
Increase in policy liabilities 668,726 703,033 773,276
Amortization of deferred policy and loan acquisition costs 248,535 284,104 222,322
Amortization of value of insurance in force purchased and goodwill 28,891 31,377 20,805
Provision for consumer loan losses 50,313 58,918 79,002
Change in investment income due and accrued 19,516 29,074 (12,469)
Depreciation and other amortization, net 11,617 27,235 28,506
Net purchases of trading account securities (49,032) -- --
Realized investment (gain) loss 100,348 20,155 (6,477)
Change in current federal income tax (95,382) 32,003 (27,315)
Provision (benefit) for deferred federal income tax (462) (28,498) 11,263
Policy and loan acquisition costs deferred:
General, administrative and other expenses (197,986) (242,043) (209,724)
Commissions (89,407) (103,643) (100,477)
Other 424 (28,078) (40,956)
---------------------------------------------------------------------------------------------------------------
NET CASH FLOWS PROVIDED BY OPERATIONS 997,002 1,106,302 1,060,252
CASH FLOWS FROM INVESTMENT ACTIVITIES:
Available for sale securities sold 4,862,207 -- --
Available for sale securities acquired (4,927,211) -- --
Other investments sold or matured 607,503 14,721,793 8,250,517
Other investments acquired (1,549,046) (16,009,134) (9,056,499)
Additions to operating property (37,999) (40,426) (60,195)
Net increase in credit card receivables and other consumer loans (980,679) (779,513) (796,830)
Proceeds from securitization of credit card receivables 574,629 1,469,204 601,359
Purchase of consumer loans (49,289) (914,011) --
Acquisition of subsidiaries -- (59,363) --
All other investment activities (48,550) (21,718) 49,115
---------------------------------------------------------------------------------------------------------------
NET CASH FLOWS USED IN INVESTMENT ACTIVITIES (1,548,435) (1,633,168) (1,012,533)
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in other short-term borrowings 145,015 (78,989) (39,066)
Policyholder contract deposits 2,861,930 2,917,475 1,904,060
Withdrawals of policyholder contract deposits (2,676,244) (2,323,211) (1,626,053)
Net increase (decrease) in certificates of deposit 117,508 80,616 (66,943)
Increase in other banking deposits 9,557 37,841 20,350
Issuance of preferred stock of consolidated subsidiary 100,000 -- --
Redemption of preferred stock (100,000) -- --
Issuance of long-term debt 106,500 -- 65,000
Repayment of long-term debt (1,518) (35,152) (86,925)
Net borrowings under revolving line of credit 60,000 3,000 63,000
Purchase of common stock for treasury (138,790) -- --
Dividends (81,988) (80,600) (73,511)
Proceeds from exercise of stock options 3,789 7,900 7,764
---------------------------------------------------------------------------------------------------------------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 405,759 528,880 167,676
---------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS DURING YEAR (145,674) 2,014 215,395
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 719,053 717,039 501,644
---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 573,379 $ 719,053 $ 717,039
===============================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
40
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Dollars in thousands) Providian Corporation and Subsidiaries
===================================================================================================================================
Net Common
Additional Unrealized Stock Unearned Total
Preferred Common Paid-in Investment Retained Held in Restricted Shareholders'
Stock Stock Capital Gain (Loss) Earnings Treasury Stock Equity
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1992 $ 275,593 $ 57,662 $ 43,530 $ (33,300) $1,809,103 $(221,664) $ -- $1,930,924
Net income 322,496 322,496
Dividends:
Preferred (11,456) (11,456)
Common (64,012) (64,012)
Change in net unrealized
investment gain (loss) (1,698) (1,698)
Issuance of 1,637,700 common
shares from treasury on
conversion of 295,200
shares Series J Preferred
Stock, and cash paid in
lieu of fractional shares (38,081) 14,160 23,815 (106)
Issuance of 458,400 common
shares under employee
benefit plans, including
tax benefit 2,015 988 6,776 9,779
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1992 237,512 57,662 59,705 (34,998) 2,057,119 (191,073) -- 2,185,927
Net income 322,665 322,665
Dividends:
Preferred (7,493) (7,493)
Common (75,912) (75,912)
Common stock split 57,663 (57,890) (227)
Change in net unrealized
investment gain (loss) 52,202 52,202
Issuance of 5,927,900
common shares from
treasury on conversion
of 1,068,100 shares
Series J Preferred Stock,
and cash paid in lieu of
fractional shares (137,512) 47,077 90,407 (28)
Issuance of 583,800 common
shares under employee
benefit plans, including
tax benefit 5,705 (405) 9,650 14,950
Award of 110,500 unearned
restricted common shares
to employees, net of
forfeitures and
amortization 2,456 1,727 (3,376) 807
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 100,000 115,325 57,053 17,204 2,295,974 (89,289) (3,376) 2,492,891
Adjustment to beginning
balance for change in
accounting method 261,400 261,400
Net income 300,901 300,901
Dividends:
Preferred (1,163) (1,163)
Common (81,080) (81,080)
Change in net unrealized
investment gain (loss) (623,130) (623,130)
Purchase of 4,334,400
common shares for treasury (138,790) (138,790)
Redemption of 1,000,000
shares Series F Adjustable
Rate Cumulative Preferred
Stock (100,000) (100,000)
Issuance of 329,600 common
shares under employee
benefit plans, including
tax benefit 593 (1,697) 10,267 9,163
Award of 115,200 unearned
restricted common shares
to employees, net of
forfeitures and
amortization (550) 3,781 (1,561) 1,670
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 $ -- $115,325 $ 57,096 $(344,526) $2,512,935 $(214,031) $(4,937) $2,121,862
===================================================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP) designed for
shareholder reporting to measure income on a going-concern basis. Insurance and
banking subsidiaries of Providian Corporation (the "Company") also submit
financial reports to regulatory authorities based on regulatory accounting
practices designed to measure solvency, which differ significantly from GAAP.
Certain 1993 and 1992 amounts have been reclassified to conform with the 1994
presentation. These reclassifications had no significant effect on the Company's
financial position or results of operations. On May 11, 1994, the shareholders
of the Company formally approved the change of its name to Providian Corporation
from Capital Holding Corporation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Providian
Corporation and all of its subsidiaries. All significant intercompany accounts
and transactions are eliminated in consolidation.
INVESTMENTS
Effective January 1, 1994, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Under this Statement, securities are classified either as held to
maturity, available for sale or trading. Upon adoption of SFAS No. 115, the
Company classified substantially all of its securities as available for sale. In
accordance with the Statement, prior year financial statements have not been
restated to reflect the change in accounting principle. As a result of the
adoption of SFAS No. 115, the net unrealized investment gain (loss) component of
shareholders' equity increased by $261,400,000 (net of an adjustment to deferred
policy acquisition costs of $42,000,000 and deferred federal income taxes of
$140,800,000) to reflect the January 1, 1994, net unrealized gains on securities
classified as available for sale previously carried at amortized cost. The
adoption of SFAS No. 115 had no effect on net income.
Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading. Trading
account securities are carried at fair value with the unrealized gain or loss
included as a component of investment income.
Those bonds and redeemable preferred stocks that are not bought and held
principally for the purpose of selling them in the near term or those which are
not intended to be held to maturity are classified as available for sale and are
carried at fair value. Unrealized gains and losses on securities available for
sale are credited or charged, net of applicable taxes and adjustments to related
deferred policy acquisition costs, directly to shareholders' equity as a
component of net unrealized investment gain (loss) and are recognized in income
as a realized gain (loss) upon disposition of the investment. Securities that
were classified as actively managed at December 31, 1993 were accounted for in
the same manner as securities available for sale and have been reclassified as
such in the accompanying balance sheet.
Prior to January 1, 1994, the Company classified certain bonds and
redeemable preferred stocks that were intended to be held to maturity as held
for investment. These securities were carried at cost, adjusted for amortization
of premium or accretion of discount. Adjustments to cost were amortized into
investment income on a constant yield basis over the expected life of the
investment. Gains and losses were recognized in income when the investment was
sold. As permitted by SFAS No. 115, the Company designated those securities
previously classified as held for investment as available for sale on January 1,
1994.
Realized gains and losses on investments sold, net of unamortized gains and
losses of related hedging instruments, and provisions for other than temporary
impairment in the value of investments retained, are included in income. The
cost of investments sold is determined on a first-in, first-out basis.
Dividends on redeemable preferred stocks and interest on bonds and loans
are credited to income as they accrue. Dividends on common and nonredeemable
preferred stocks are credited to income on ex-dividend dates.
Mortgage and consumer loans are carried at unpaid balances, net of
allowances for uncollectible amounts. It is the Company's policy to discontinue
the accrual of interest on mortgage loans when more than 90 days delinquent and
on consumer loans when more than 180 days delinquent. Real estate taken in
foreclosure is recorded at the lower of cost or fair value. Real estate is
carried at cost less depreciation, generally calculated using the straight-line
method. Policy loans are carried at unpaid balances. Other long-term investments
are carried at cost or on the equity method, as appropriate. Short-term
investments and cash equivalents are carried at cost, which approximates market
value.
In May 1993, the Financial Accounting Standards Board issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures," which establish accounting standards for creditors when a loan is
deemed impaired. These Statements are primarily applicable to the commercial
loan portfolio, as large groups of smaller balance homogeneous loans such as
credit card, consumer installment loans, or residential mortgages are excluded.
The Company will adopt these Statements effective January 1, 1995 and has
determined that the adoption of these Statements will not have a material effect
on the Company's financial position or results of operations.
42
<PAGE>
DERIVATIVE FINANCIAL INSTRUMENTS
Interest Rate Swap, Cap and Floor Agreements
Interest rate swap agreements generally involve the exchange of fixed and
floating rate interest payments, without an exchange of the underlying principal
amount. Interest rate cap agreements involve the payment of a maximum fixed
interest rate when an indexed rate exceeds that fixed rate. Interest rate floor
agreements involve the payment of a minimum fixed interest rate when that rate
exceeds an indexed rate. The fair values of interest rate swap agreements, all
of which are accounted for as hedges in 1994, are recorded in the Consolidated
Statements of Financial Condition in a manner similar to the underlying asset or
liability which is being hedged. During 1993, all interest rate swap agreements
were accounted for as hedges except for certain interest rate swap agreements
that were used as economic hedges against market value changes of certain debt
securities. In accordance with insurance industry accounting practices prior to
SFAS No. 115, these economic hedges were marked to market with the unrealized
gains or losses credited or charged, net of applicable taxes, directly to
shareholders' equity as a component of net unrealized investment gain (loss).
See Note C for additional information related to these interest rate swap
agreements. The amounts to be paid or received as a result of these agreements
are accrued and recognized in the Consolidated Statements of Income through an
adjustment to investment income or benefits and claims. Gains or losses realized
on closed or terminated agreements accounted for as hedges are deferred and
amortized to investment income on a constant yield basis over the expected
remaining life of the hedged item, which approximates the term of the hedging
instrument prior to its termination.
Futures and Forwards
Futures and forwards are contracts which call for the delayed delivery of
securities in which the seller agrees to deliver on a specified future date, a
specified instrument at a specified price. The daily change in market value of
these contracts is recognized in realized gains (losses) in the Consolidated
Statements of Income. Margin requirements on futures contracts, equal to the
change in market value, usually are settled on a daily basis.
Options
Options are contracts that give the option purchaser the right, but not the
obligation, to buy or sell, within a specified period of time, a financial
instrument at a specified price. The Company generally hedges written option
positions with counterbalancing futures or purchased option positions. Options
are carried at market value, with realized and unrealized gains and losses
recognized in income or, if the option contract qualifies as a hedge, as an
adjustment to the carrying amount of the asset or liability being hedged.
OPERATING PROPERTY
Operating property, including real estate, furniture and fixtures, and data
processing hardware and related systems, is recorded at cost, which, for
significant additions, includes interest capitalized. These assets are
depreciated or amortized over their estimated useful lives, principally using
the straight-line method.
POLICY AND LOAN ACQUISITION COSTS
The costs of acquiring new individual life, annuity, accident and health and
property and casualty insurance policies are deferred to the extent recoverable
from future premiums or expected gross profits. These costs consist principally
of commissions; product-related printing, mailing, and solicitation costs; and
other issue and marketing-related administrative expenses. The amortization
policy is explained under Premiums, Benefits and Expenses. Mortgage loan
commitment fees, net of direct costs incurred for successful efforts in
acquiring loans, are deferred and amortized as income over the expected life of
the loan, generally seven years. The direct costs of acquiring consumer loans
are netted against related credit card and line of credit fees, if any, and
deferred and amortized on a straight-line basis, generally over one year for
credit card products and five or seven years for consumer line of credit
products.
OTHER INTANGIBLES
The value of insurance in force purchased is an asset that is recorded in
connection with the acquisition of an insurance company. The initial value is
determined by an actuarial study using expected future gross profits as a
measurement of the net present value of the insurance purchased, which is
amortized on a constant yield basis, with the accrual of interest added to the
unamortized balance using rates ranging from 6.25 to 15 percent. The balance is
amortized over the estimated life of the insurance in force over a period not to
exceed 30 years for individual life insurance, 25 years for individual accident
and health insurance and 15 years for property and casualty insurance. Goodwill
is amortized over a period not to exceed 40 years using the straight-line
method.
SEPARATE ACCOUNTS
Separate account assets and liabilities represent funds segregated by the
Company for the benefit of certain policyholders and employee groups who
generally bear the investment risk. The separate account assets and liabilities
are carried at fair value. Revenues and expenses on the separate account assets
and related liabilities equal to the benefits paid to the separate account
policyholders are excluded from the amounts reported in the Consolidated
Statements of Income. Fees charged or spread earned on policyholders' deposits
are included in other income, net.
Certain separate accounts provide policyholders with a guaranteed return
consistent with the performance of an index such as the S&P 500. These separate
accounts are included in the general account assets and liabilities for GAAP
purposes due to the nature of the guaranteed return. However, this product is
sold and reported as a separate account for statutory purposes.
43
<PAGE>
BENEFIT RESERVES AND POLICYHOLDER
CONTRACT DEPOSITS
Traditional Life Insurance and Accident and
Health Insurance Products
Traditional life insurance products include those contracts with fixed and
guaranteed premiums and benefits, and consist principally of whole life and term
insurance policies, limited-payment life insurance policies and certain
annuities with life contingencies. Accident and health insurance products
include coverages for regular income during periods of hospitalization,
scheduled reimbursement for specific hospital/surgical expenses and cancer
treatments, and lump sum payments for accidental death or dismemberment.
Reserves on traditional life and accident and health insurance products are
calculated by using a net level premium method and assumptions, determined at
the time of policy issue, as to investment yields, mortality, morbidity and
withdrawals. The assumptions are based on projections of past experience and
include provisions for possible unfavorable deviation. Reserves on most such
individual policies are based on assumed investment yields which range from a
level 3.0 percent for policies issued before 1951 to a rate grading from 7.5 to
5.5 percent for policies issued after 1980. Reserves on individual policies
acquired by purchase are based on assumptions considered appropriate as of the
date of purchase, with an assumed investment yield grading from 9.0 to 5.5
percent.
Universal Life and Investment-Type Products
Universal life products include universal life and other interest-sensitive life
insurance policies. Investment-type products consist primarily of guaranteed
investment contracts (GICs) and single premium and flexible premium annuity and
life contracts.
Benefit reserves and policyholder contract deposits on these products are
determined following the retrospective deposit method and consist of policy
values that accrue to the benefit of the policyholder, before deduction of
surrender charges.
INTEREST RATE ASSUMPTIONS
The weighted average assumed investment yield for policy reserves and deposits
was 6.1 percent in 1994, 6.0 percent in 1993 and 6.1 percent in 1992.
POLICY AND CONTRACT CLAIMS
Policy and contract claims, principally related to accident and health and
property and casualty insurance policies, are based on estimates of future
trends in claim severity and frequency.
PREMIUMS, BENEFITS AND EXPENSES
Traditional Life Insurance and Accident and
Health Insurance Products
Premiums for individual life policies are recognized when due; premiums for
accident and health and all other policies are reported as earned
proportionately over their policy terms.
Benefit claims (including an estimated provision for claims incurred but
not reported), benefit reserve changes, and expenses (except those deferred) are
charged to income as incurred. Deferred policy acquisition costs are charged to
income over periods of 25 years or less for traditional life insurance policies
and 20 years or less for accident and health policies. Amortization is
determined principally by using the sum-of-the-years' premium method and
assumptions generally consistent with those used for computing benefit reserves.
These practices are designed to match benefits and expenses with related
premiums and thereby spread income recognition over expected policy lives.
Universal Life and Investment-Type Products
Premiums for these products consist of policy charges for the cost of insurance,
policy initiation, administration and surrenders during the period. Expenses
include interest credited to policy account balances, net payments or receipts
related to interest rate exchange agreements and benefit payments made in excess
of policy account balances. Credited interest rates ranged from 3.4 to 7.5
percent in 1994.
Deferred policy acquisition costs are amortized in relation to the
incidence of expected gross profits, including realized investment gains and
losses, over the expected life of the policies, not to exceed 25 years for
universal life-type contracts and 15 years for investment-type contracts.
FEDERAL INCOME TAX
Deferred income tax assets and liabilities reflect the future tax consequences
of differences between the reported amounts of assets and liabilities in the
accompanying financial statements and those in the Company's income tax returns.
BENEFIT PLANS
The cost of the Company's defined benefit retirement plan is determined using
the projected unit credit method, plus amortization of prior service cost and
gains and losses over the expected future service period of plan participants.
The Company's funding policy is to contribute amounts to the plan sufficient to
meet regulatory minimum funding requirements, plus such additional amounts as it
may determine appropriate from time to time. Contributions to the defined
contribution retirement, profit sharing and thrift savings plans are expensed as
incurred. The cost of plans providing life insurance benefits for active
employees, and life and health insurance benefits for eligible retirees, is
accrued generally over participants' active periods of service.
44
<PAGE>
BANKING DEPOSITS
Banking deposits consist primarily of savings deposits, time deposits and
certificates of deposit of $100,000 or more. Interest on banking deposits and
related hedging instruments is reflected in the Consolidated Statements of
Income in benefits and claims.
TREASURY STOCK
Repurchased shares of the Company's common stock are included in treasury stock
at cost. Shares issued from treasury stock under employee benefit plans and for
exercise of stock options are at original cost on a last-in, first-out basis.
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE
Per common and common equivalent share amounts in the Consolidated Statements of
Income have been calculated using net income after provision for dividends on
nonconvertible preferred stock, divided by the weighted average number of common
and common equivalent shares outstanding during the year (1994--99,319,000
shares; 1993--101,132,000 shares; and 1992--100,531,000 shares). Fully diluted
net income per common share is not presented as it approximates net income per
common and common equivalent share.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash and cash equivalents consist of highly liquid investments with maturities
of three months or less at their time of purchase. Cash paid for interest on
debt was $82,370,000, $71,470,000 and $80,970,000 in 1994, 1993 and 1992,
respectively. Cash paid for federal income taxes was $230,507,000, $154,999,000
and $147,450,000 in 1994, 1993 and 1992, respectively.
NOTE B--ACQUISITIONS
During 1993, the Company acquired a life, accident and health insurance company
and a company that provides college financing alternatives. The two companies
were acquired in separate transactions for a total purchase price of
$122,400,000, including liabilities assumed. The acquisitions were accounted for
utilizing the purchase method of accounting and, in the aggregate, were not
significant to the Company's consolidated financial position. The operating
results of these acquisitions, subsequent to their acquisition dates, are
included in the Company's consolidated results of operations. Pro forma combined
results of operations prior to acquisition would not differ significantly from
reported results and, consequently, are not presented.
NOTE C--INVESTMENTS
The following tables contain amortized cost and market value information on
equity securities (common and nonredeemable preferred stocks), debt securities
(bonds and redeemable preferred stocks) and related hedging instruments
classified as available for sale and held for investment at December 31, 1994
and 1993:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
December 31, 1994 Cost Gains Losses Value
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
AVAILABLE FOR SALE
Debt securities:
U.S. government
obligations $ 508,870 $ 1,819 $ 27,670 $ 483,019
States and political
subdivisions 633,126 18,563 20,121 631,568
Foreign government
obligations(a) 192,843 41 15,988 176,896
Corporate 6,095,224 89,412 433,067 5,751,569
Foreign corporate(a) 520,871 1,565 44,776 477,660
Mortgage-backed 2,348,583 6,409 131,255 2,223,737
------------------------------------------------------------------------
Total debt securities 10,299,517 117,809 672,877 9,744,449
Equity securities 611,288 2,163 56,218 557,233
------------------------------------------------------------------------
TOTAL AVAILABLE
FOR SALE $10,910,805 $119,972 $729,095 $10,301,682
------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
December 31, 1993 Cost Gains Losses Value
------------------------------------------------------------------------
(Dollars in thousands)
AVAILABLE FOR SALE
Debt securities:
U.S. government
obligations $ 445,404 $ 3,550 $ 3,496 $ 445,458
States and political
subdivisions 531,301 13,526 2,268 542,559
Foreign government
obligations(a) 40,601 1,387 293 41,695
Corporate 3,078,089 111,034 23,249 3,165,874
Foreign corporate(a) 113,209 3,289 719 115,779
Mortgage-backed 1,071,229 18,986 4,103 1,086,112
Related hedging
instruments -- -- 98,394 (98,394)
------------------------------------------------------------------------
Total debt securities 5,279,833 151,772 132,522 5,299,083
Equity securities 408,043 22,383 17,732 412,694
------------------------------------------------------------------------
TOTAL AVAILABLE
FOR SALE $5,687,876 $174,155 $150,254 $5,711,777
------------------------------------------------------------------------
HELD FOR INVESTMENT
Debt securities:
U.S. government
obligations $ 127,229 $ 6,688 $ 395 $ 133,522
States and political
subdivisions 382,022 46,079 50 428,051
Foreign government
obligations(a) 87,044 7,406 -- 94,450
Corporate 3,189,822 316,111 11,332 3,494,601
Foreign corporate(a) 234,797 25,884 -- 260,681
Mortgage-backed 1,302,507 58,644 4,838 1,356,313
------------------------------------------------------------------------
TOTAL HELD
FOR INVESTMENT $5,323,421 $460,812 $ 16,615 $5,767,618
------------------------------------------------------------------------
</TABLE>
(a) Substantially all are U.S. dollar denominated.
The amortized cost and market value of available for sale debt securities
at December 31, 1994, by contractual maturity follows. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations, sometimes without call or prepayment penalties.
45
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Amortized Market
December 31, 1994 Cost Value
-----------------------------------------------------------------
<S> <C> <C>
(Dollars in thousands)
Due in one year or less $ 71,102 $ 70,348
Due after one year through five years 1,186,621 1,125,516
Due after five years through ten years 1,998,440 1,869,568
Due after ten years 4,694,771 4,455,280
-----------------------------------------------------------------
Subtotal 7,950,934 7,520,712
Mortgage-backed securities 2,348,583 2,223,737
-----------------------------------------------------------------
TOTAL DEBT SECURITIES $10,299,517 $9,744,449
=================================================================
</TABLE>
In accordance with SFAS No. 115, net unrealized losses on investments
classified as available for sale in 1994 are reduced by deferred federal income
taxes and adjustments to deferred policy acquisition costs that would have been
required as a credit to income had such losses been realized. Net unrealized
investment gain (loss) on available for sale securities as of December 31, 1994
and 1993 is summarized as follows (prior to adoption of SFAS No. 115, no similar
adjustment for deferred policy acquisition costs was required):
<TABLE>
<CAPTION>
-------------------------------------------------------------
December 31 1994 1993
-------------------------------------------------------------
<S> <C> <C>
(Dollars in thousands)
Net unrealized investment gain (loss)
on available for sale securities before
adjustments for the following: $(609,123) $23,901
Amortization of deferred
policy acquisition costs 79,083 --
Deferred federal income taxes 185,514 (6,697)
-------------------------------------------------------------
NET UNREALIZED INVESTMENT GAIN (LOSS)
ON AVAILABLE FOR SALE SECURITIES $(344,526) $17,204
=============================================================
</TABLE>
Additionally, the table below shows the annual change in net unrealized
investment gain (loss) and the amount of realized investment gain (loss) on debt
and equity securities for the years ended December 31, 1994, 1993 and 1992:
<TABLE>
<CAPTION>
---------------------------------------------------------------
Year Ended December 31 1994 1993 1992
---------------------------------------------------------------
<S> <C> <C> <C>
(Dollars in thousands)
CHANGE IN UNREALIZED
INVESTMENT GAIN (LOSS)
Available for sale:
Debt securities $(1,018,515) $ 45,505 $ 1,588
Equity securities (58,706) 42,835 (12,291)
Held for investment:
Debt securities -- 254,673 (38,287)
CHANGE IN UNREALIZED
INVESTMENT GAIN (LOSS)
INCLUDED IN INVESTMENT
INCOME:
Trading account securities:
Debt securities $ (9,735) $ -- $ --
Equity securities 987 -- --
REALIZED INVESTMENT
GAIN (LOSS):
Debt securities $ (28,061) $ 16,119 $ 27,672
Equity securities (2,797) 12,112 11,886
Other investments (48,484) (14,825) (4,938)
===============================================================
</TABLE>
Proceeds during 1994 from sales of available for sale securities were
$4,862,207,000. Gross gains of $75,804,000 and gross losses of $124,776,000 were
realized on those sales. Gross gains and losses on related hedging instruments
were $21,532,000 and $3,418,000, respectively, in 1994. Proceeds during 1993 and
1992 from sales of debt securities were $11,114,981,000 and $6,113,954,000,
respectively. Gross gains of $384,268,000 and $272,059,000 and gross losses of
$45,887,000 and $149,103,000 were realized on sales of debt securities during
1993 and 1992, respectively. Gross gains of $13,666,000 in 1993 and gross losses
of $335,928,000 and $81,598,000 in 1993 and 1992, respectively, on related
hedging instruments were realized on those sales. Included in realized
investment gain (loss) in other investments in the preceding table for 1994 is a
$52.4 million nonrecurring loss on the Company's impaired investment in Granite
Partners, a limited partnership which invested in complex mortgage-backed
securities.
Federal income tax in 1994, 1993 and 1992 includes a provision (benefit) of
$(31,501,000), $(1,911,000) and $3,131,000, respectively, for the tax effect of
total realized gains or losses.
Consumer loans have been reduced by the sales, without recourse, of
unsecured receivables under asset securitization plans during 1994 and 1993 of
$525,711,000 and $557,989,000, respectively. Total unsecured receivables
outstanding under securitization plans were $2,368,642,000 as of December 31,
1994.
An analysis of the allowance for loan losses on consumer and mortgage loans
for the years ended December 31, 1994, 1993 and 1992 is as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Consumer Mortgage
------------------------------ ------------------------------
Year Ended
December 31 1994 1993 1992 1994 1993 1992
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Balance at begin-
ning of period $ 75,061 $ 82,974 $ 74,710 $ 51,362 $ 47,510 $ 46,478
Current period
provision 50,313 58,918 79,002 21,006 33,561 28,143
Current period
chargeoffs, net
of recoveries (49,156) (66,831) (70,738) (20,168) (29,709) (27,111)
---------------------------------------------------------------------------------------
BALANCE AT
END OF PERIOD $ 76,218 $ 75,061 $ 82,974 $ 52,200 $ 51,362 $ 47,510
=======================================================================================
</TABLE>
Mortgage loans which have been non-income producing for the preceding
twelve months were $20,700,000 at December 31, 1994 and $44,109,000 at December
31, 1993.
46
<PAGE>
NET INVESTMENT INCOME
Gross investment income, net of payments or receipts on related interest rate
exchange agreements, by type of investment, and investment expenses for the
years ended December 31, 1994, 1993 and 1992, were as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
Year Ended December 31 1994 1993 1992
-----------------------------------------------------------------------
<S> <C> <C> <C>
(Dollars in thousands)
Gross investment income:
Available for sale and
held for investment:
Debt securities $ 805,787 $ 694,179 $ 638,741
Equity securities 61,313 29,648 34,483
Trading account securities 3,579 -- --
Mortgage loans 398,557 421,939 430,875
Consumer loans 314,207 315,602 314,560
Policy loans 22,936 18,293 17,088
Real estate and other long-term
investments 32,252 24,116 35,288
Short-term investments and
cash equivalents 23,057 23,439 30,036
-----------------------------------------------------------------------
TOTAL 1,661,688 1,527,216 1,501,071
Less investment expenses 49,861 65,770 47,529
-----------------------------------------------------------------------
INVESTMENT INCOME,
NET OF EXPENSES $1,611,827 $1,461,446 $1,453,542
=======================================================================
</TABLE>
NOTE D--FINANCIAL INSTRUMENTS
The Company utilizes a variety of financial instruments in its asset/liability
management process and to meet its customers' financing needs. The
asset/liability management process focuses on the management of a variety of
risks, including market (primarily interest rate risk) and credit risks.
Effective management of these risks is an important determinant of
profitability. Instruments used in this process and to meet the customers'
financing and investing needs include derivative financial instruments,
primarily interest rate swap agreements and futures contracts, and commitments
to extend credit. Other derivatives, such as interest rate cap and floor
agreements, options and forwards are used to a much lesser extent in the
asset/liability management process. All of these instruments involve (to varying
degrees) elements of market and credit risks in excess of the amounts recognized
in the accompanying financial statements at a given point in time. The contract
or notional values of all of these instruments reflect the extent of involvement
in the various types of financial instruments.
The Company's exposure to market risk (including interest rate risk) is the
risk of market volatility and potential disruptions in the market which may
result in certain instruments being less valuable. The Company monitors and
controls its exposure to this risk primarily through the use of total portfolio
analysis of net duration levels, a monthly mark to market process and ongoing
monitoring of interest rate movements.
The Company's exposure to credit risk is the risk of loss from a
counterparty failing to perform according to the terms of the contract. This
exposure includes settlement risk (risk that the counterparty defaults after the
Company has delivered funds or securities under the terms of the contract) which
results in an accounting loss and replacement cost risk (cost to replace the
contract at current market rates should the counterparty default prior to the
settlement date). There is no off-balance sheet exposure to credit risk that
would result in an immediate accounting loss (settlement risk) associated with
counterparty non-performance on interest rate swap agreements (including caps
and floors), futures, forwards and options. Interest rate swap, cap and floor
agreements are subject to replacement cost risk, which equals the cost to
replace those contracts in a net gain position should a counterparty default.
These instruments, as well as futures, forwards and options are subject to
market risk, which is the possibility that future changes in market prices may
make the instruments less valuable. Credit loss exposure resulting from non-
performance by a counterparty for commitments to extend credit is represented by
the contractual amounts of the instruments.
The credit risk on all financial instruments, whether on- or off-balance
sheet, is controlled through an ongoing credit review, approval and monitoring
process. The Company determines, on an individual counterparty basis, the need
for collateral or other security to support financial instruments with credit
risk, and establishes individual and aggregate counterparty exposure limits. In
order to limit exposure associated with counterparty non-performance on interest
rate exchange agreements, the Company enters into master netting agreements with
its counterparties. These master netting agreements provide that, upon default
of either party, contracts in gain positions will be offset with contracts in
loss positions and the net gain or loss will be received or paid, respectively.
Assuming every counterparty defaulted, the cost of replacing those interest rate
contracts in a net gain position, after consideration of the aforementioned
master netting agreements, was $6,252,000 and $222,015,000 at December 31, 1994
and 1993, respectively.
The Company manages interest rate risk through the use of duration
analysis. Duration is a key portfolio management tool and is measured for both
assets and liabilities. For the simplest forms of assets or liabilities,
duration is proportional to their weighted average life, with weights equal to
the discounted present value of estimated cash flows. This methodology causes
near-term cash flows to have a greater proportional weight than cash flows
further in the future. For more complex assets and liabilities with optional
cash flows, for example, callable bonds, mortgage-backed securities, or
traditional insurance liabilities, additional adjustments are made in estimating
an effective duration number. The Company uses derivatives as a less costly and
less burdensome alternative to restructuring the underlying cash instruments to
manage interest rate risk based upon the aggregate net duration level of its
aggregate portfolio.
The following table provides information for each significant derivative
product type. The Company uses futures contracts primarily to adjust the net
duration level of the overall portfolio. Interest rate swaps are used in the
overall asset/liability management process to modify the interest rate
characteristics of the underlying asset or liability or to adjust the net
duration level of the overall
47
<PAGE>
portfolio. These interest rate swaps generally provide for the exchange of the
difference between fixed and floating (primarily six month or less London
Interbank Offered Rate (LIBOR)) interest amounts based upon an underlying
notional amount. The basis swaps are contracts where the Company receives an
amount based primarily upon six month or less LIBOR and pays an amount based on
either a short-term Treasury or Prime rate. The information below is based on
the assumption that rates will remain constant at December 31, 1994 levels. To
the extent that actual rates change, the variable interest rate information will
change accordingly. The following table illustrates the maturities and weighted
average rates by type of derivative product held at December 31, 1994:
<TABLE>
<CAPTION>
Maturity Schedule by Year for Derivative Products
-----------------------------------------------------------------------------------------------------------------------------------
1999-
1995 1996 1997 1998 2002 Total
<S> <C> <C> <C> <C> <C> <C>
(Dollars in millions)
RECEIVE FIXED
SWAPS
Notional value $ 756 $ 294 $ 392 $ 573 $1,856 $3,871
Weighted average:
Receive rate 7.87% 7.69% 6.37% 5.64% 6.96% 6.94%
Pay rate 5.90 5.81 6.08 5.82 5.95 5.92
PAY FIXED SWAPS
Notional value $ 207 $ -- $ 50 $ -- $ 10 $ 267
Weighted average:
Receive rate 5.56% -- 8.88% -- 6.08% 6.20%
Pay rate 6.45 -- 7.04 -- 5.66 6.53
BASIS SWAPS
Notional value $ 451 $ 10 $ 337 $ 10 $ -- $ 808
Weighted average:
Receive rate 7.24% 7.65% 6.95% 6.36% -- 7.12%
Pay rate 5.88 6.11 6.27 5.93 -- 6.05
OTHER DERIVATIVE
PRODUCTS(A)
Notional or
contract value $1,577 $ 80 $ 35 $ 149 $ 177 $2,018
TOTAL NOTIONAL OR
CONTRACT VALUE $2,991 $ 384 $ 814 $ 732 $2,043 $6,964
TOTAL WEIGHTED
AVERAGE RATES
ON SWAPS:
Receive rate 7.33% 7.69% 6.64% 5.65% 6.96% 6.91%
Pay rate 5.97 5.82 6.17 5.83 5.95 5.97
</TABLE>
(a) Other derivative products include interest rate caps and
floors, futures and options.
The following table summarizes the activity by notional or contract value
in derivative products for 1994, 1993 and 1992:
<TABLE>
<CAPTION>
Pay
Receive Fixed/ Other
Fixed/Pay Receive Derivative
Floating Floating Basis Futures Products(a)
<S> <C> <C> <C> <C> <C>
(Dollars in millions)
Balance at
January 1, 1992 $ 4,592 $ 3,851 $503 $ 589 $ 2,802
Additions 671 2,428 -- 1,317 1,680
Maturities (188) (597) (40) -- (1,447)
Terminations (268) (1,283) -- (1,809) (143)
Balance at
December 31, 1992 4,807 4,399 463 97 2,892
Additions 1,858 1,856 120 7,204 1,641
Maturities (646) (76) (55) -- (1,244)
Terminations (1,384) (3,942) (2) (6,569) (2,102)
Balance at
December 31, 1993 4,635 2,237 526 732 1,187
Additions 3,061 10 315 7,030 250
Maturities (555) (281) (33) -- (424)
Terminations (3,270) (1,699) -- (6,499) (258)
BALANCE AT
DECEMBER 31, 1994 $ 3,871 $ 267 $808 $ 1,263 $ 755
</TABLE>
(a) Other derivative products include interest rate caps and floors,
futures, options and foreign currency forwards.
During 1994 and 1993, the Company terminated or closed certain interest
rate swaps which were accounted for as hedges. The net deferred gains on these
agreements were $116,262,000 and $91,327,000 as of December 31, 1994 and 1993,
respectively, and are being amortized to investment income over the expected
remaining life of the related investment, generally four to ten years.
The following table summarizes the unrealized gains and losses on
derivative products as of December 31, 1994 and 1993:
<TABLE>
<CAPTION>
Total Net
Notional Unrealized Unrealized Unrealized
December 31, 1994 Value Gains Losses Gain (Loss)
<S> <C> <C> <C> <C>
(Dollars in thousands)
Receive fixed $3,871,000 $ 8,576 $133,555 $(124,979)
Pay fixed 267,000 3,406 658 2,748
Basis 808,000 1,733 2,692 (959)
Other derivative
products(a) 2,018,000 2,202 2,393 (191)
TOTAL $6,964,000 $ 15,917 $139,298 $(123,381)
Total Net
Notional Unrealized Unrealized Unrealized
December 31, 1993 Value Gains Losses Gain (Loss)
(Dollars in thousands)
Receive fixed $4,635,000 $284,396 $ 7,788 $ 276,608
Pay fixed 2,237,000 3,341 113,248 (109,907)
Basis 526,000 6,378 89 6,289
Other derivative
products(a) 1,919,000 110 387 (277)
TOTAL $9,317,000 $294,225 $121,512 $ 172,713
</TABLE>
(a) Other derivative products include interest rate caps and floors,
futures, options and foreign currency forwards.
48
<PAGE>
Included in Pay fixed for 1993 is a net unrealized loss of $98,394,000
which is recorded directly in shareholders' equity as a component of net
unrealized investment gain (loss) in the accompanying Statements of Financial
Condition. The net unrealized gain (loss) on all other derivative instruments
included in the preceding table is off-balance sheet.
COMMITMENTS
Consumer line of credit loan commitments are agreements to lend to a customer as
long as there is no violation of any condition established in the contract. In
addition, these commitments can be withdrawn by the Company at any time after 30
days notice, or without notice as permitted by law. It is anticipated that
commitment amounts will only be partially drawn upon based on overall customer
usage patterns and, therefore, do not necessarily represent future cash
requirements.
The Company has issued Trust GIC contracts to plan sponsors pursuant to the
terms of which the plan sponsor retains legal title to the assets and receives
the investment performance related to these contracts. The Company guarantees to
provide benefit responsiveness, which may take the form of annuities, in the
event that qualified plan benefit requests exceed plan cash flows. The plan
sponsor agrees to reimburse the Company for such benefit payments with interest,
either at a fixed or floating rate, from future plan contributions and asset
cash flows. In return for this guarantee, the Company receives a premium which
varies based on such elements as benefit responsive exposure and contract size.
The Company thoroughly underwrites the plan(s) for the possibility of having to
make benefit payments and also must agree to the investment guidelines to ensure
appropriate credit quality and cash flow availability. Funding requirements to
date have been minimal and management does not anticipate any future material
funding requirements which would have a material effect on reported financial
results.
Other commitments primarily consist of agreements to lend to a customer at
some future time, subject to conditions established in the contract. Since it is
likely some commitments may expire or be withdrawn without being fully drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates individually each customer's
creditworthiness. Collateral may be obtained, if deemed necessary, based on a
credit evaluation of the counterparty. The collateral may include commercial
and/or residential real estate.
The following table summarizes the Company's commitments as of December 31,
1994 and 1993:
<TABLE>
<CAPTION>
--------------------------------------------------
Year Ended December 31 1994 1993
--------------------------------------------------
<S> <C> <C>
(Dollars in thousands)
Consumer lines of credit $6,744,601 $4,664,378
Trust GIC contracts 8,498,368 4,439,494
Other commitments 1,007,791 639,522
==================================================
</TABLE>
CONCENTRATIONS OF CREDIT RISK
The Company invests its cash and cash equivalents with major financial
institutions, in U.S. government agency securities and in commercial paper of
companies with strong credit ratings. The investments mature within 90 days and,
therefore, are subject to little risk. The Company has not experienced credit
losses related to these investments.
The Company limits credit risk by diversifying its investment portfolio
among common and preferred stocks, public bonds, private placement securities
and commercial and residential mortgage loans. It further diversifies these
portfolios between and within industry sectors, by geography and by property
type. Credit risk is also limited by maintaining stringent underwriting
standards and purchasing insurance protection in certain cases.
In addition, the Company establishes credit approval processes, limits and
monitoring procedures on an individual counterparty basis. It underwrites and
originates commercial and residential loans through its insurance and banking
subsidiaries. As a result, management believes that significant concentrations
of credit risk do not exist.
NOTE E--FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, fair values are
based on estimates using discounted cash flow or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of the amount and timing of future cash flows.
SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. The fair value amounts presented
herewith do not include an amount for the value associated with customer or
agent relationships, the expected interest margin (interest earnings over
interest credited) to be earned in the future on investment-type products, or
other intangible items. Accordingly, the aggregate fair value amounts presented
do not necessarily represent the underlying value of the Company.
49
<PAGE>
The following statement reflects fair values for those instruments
specifically covered by SFAS No. 107 along with a fair value amount for those
traditional insurance liabilities for which disclosure is permitted but not
required; all other assets and liabilities have been reflected at their carrying
amount.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
1994 1993
--------------------- ---------------------
CARRYING Carrying
December 31 FAIR VALUE AMOUNT Fair Value Amount
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in millions)
ASSETS
Investments:
Securities available for sale:
Bonds and
redeemable
preferred stocks(a) $ 9,744 $ 9,744 $ 5,397 $ 5,397
Common and
nonredeemable
preferred stocks(a) 557 557 413 413
Bonds and
redeemable
preferred stocks-
held for investment -- -- 5,768 5,323
Trading account
securities(a) 115 115 -- --
Commercial
mortgage loans 2,769 2,650 2,810 2,558
Residential
mortgage loans 2,458 2,550 1,650 1,637
Consumer loans 2,801 2,270 2,393 1,868
Policy loans 391 391 352 352
Real estate and other
investments(a) 418 418 565 565
Derivative instruments
relating to:
Securities available
for sale(a) -- -- (98) (98)
Commercial and
residential
----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS 19,254 18,695 19,432 18,015
Cash and cash
equivalents(a) 573 573 719 719
Deferred policy and
loan acquisition costs -- 1,491 -- 1,374
Value of insurance in
force purchased -- 274 -- 284
Goodwill(a) 222 222 230 230
Separate account assets(a) 1,354 1,354 1,446 1,446
Other assets(a) 1,004 1,004 861 861
----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $22,407 $23,613 $22,688 $22,929
==================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
1994 1993
--------------------- ---------------------
CARRYING Carrying
December 31 FAIR VALUE AMOUNT Fair Value Amount
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LIABILITIES
Policy liabilities:
Benefit reserves $ 6,812 $ 8,706 $ 7,017 $ 8,405
Policyholder
contract deposits 7,316 7,422 6,737 6,641
Policy and contract
claims and other
policyholders' funds 373 386 436 455
----------------------------------------------------------------------------------------------------------------------------------
TOTAL POLICY
LIABILITIES 14,501 16,514 14,190 15,501
Banking deposits 1,676 1,680 1,556 1,553
Accrued expenses and
other liabilities(a) 999 999 986 986
Separate account
liabilities(a) 1,354 1,354 1,446 1,446
Long-term debt 699 694 664 589
Deferred federal
income tax 388 150 739 361
Derivative instruments
relating to:
Benefit reserves (1) -- (5) --
Policyholder contract
deposits 120 -- (95) --
Banking deposits 6 -- 8 --
Long-term debt (1) -- 3 --
----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 19,741 21,391 19,492 20,436
----------------------------------------------------------------------------------------------------------------------------------
Preferred Stock of
Consolidated
Subsidiary(a) 100 100 -- --
----------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS'
EQUITY $ 2,566 $ 2,122 $ 3,196 $ 2,493
==================================================================================================================================
</TABLE>
(a) These balance sheet items are carried at fair value or are not covered by
SFAS No. 107 and are reported at carrying amounts.
VALUATION METHODS AND ASSUMPTIONS
Bonds, Preferred Stocks and Common Stocks
Fair values for debt and equity securities (including trading account
securities) are based on quoted market prices, where available. For debt
securities for which a quoted market price is not available, fair values are
estimated using a pricing matrix or quoted prices of comparable instruments.
Commercial and Residential Mortgage Loans
Fair values of commercial and residential mortgage loans are estimated utilizing
discounted cash flow calculations, using current market interest rates for loans
with similar terms to borrowers of similar credit quality.
Consumer Loans
Fair values of consumer line of credit loans are determined by discounting the
estimated future cash flows, adjusted for differences in loan characteristics at
rates for securities backed by similar loans. Variable rate equity lines secured
by second deeds of trust with interest rate floors approximate carrying amounts
plus a floor premium calculated using external market valuations.
50
<PAGE>
For variable rate loans that reprice monthly with no applicable floor and no
significant change in credit risk, carrying amounts approximate fair values. The
fair values of consumer loans include a value for loan servicing rights related
to securitized loans.
Policy Loans
The carrying amounts of policy loans approximate their fair values.
Policy Liabilities
Fair values for liabilities under floating rate GICs approximate carrying
amounts. Fair values for liabilities under other investment-type insurance
contracts are estimated using discounted cash flow calculations, based on
current interest rates for similar contracts. Fair values for liabilities under
traditional insurance contracts are estimated using discounted cash flow
calculations based on current interest rate and pricing assumptions. Other
policy liabilities represent obligations which are anticipated to be settled in
the near-term where fair values approximate their carrying amounts. The fair
values of policy liabilities represent the fair values of the insurance
contracts as a whole which implicitly eliminates deferred policy acquisition
costs and value of insurance in force purchased.
Banking Deposits
The fair values for demand deposits (money market accounts and certain savings
accounts) are equal to the amount payable on demand at the reporting date, that
is, their carrying amount. The carrying amounts for variable rate certificates
of deposit approximate their fair values. Fair values for fixed rate
certificates and other fixed rate deposits are estimated using discounted cash
flow calculations based on interest rates currently offered on deposits of
similar remaining maturities.
Long-term Debt
Fair values of publicly traded debt are based on quoted market prices, where
available. In instances where a quoted market price is not available, fair
values are based on discounted cash flow analyses by an external source, using a
current borrowing rate for similar debt arrangements.
Deferred Federal Income Tax
Included in this caption is a projected liability for federal income tax which
may be incurred as a result of the excess of estimated fair value over reported
values of the assets, liabilities and derivative instruments. This projected tax
liability of $212,906,000 and $378,494,000 at December 31, 1994 and 1993,
respectively, has been computed on a non-discounted basis assuming a statutory
federal income tax rate of 35 percent for both 1994 and 1993.
Derivative Instruments
Derivative instruments include interest rate swap, cap and floor agreements.
Fair values for these interest rate exchange agreements are based on pricing
models or formulas using current assumptions.
NOTE F--ACCUMULATED DEPRECIATION AND AMORTIZATION
Accumulated depreciation and amortization were as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------
December 31 1994 1993
-----------------------------------------------------------
<S> <C> <C>
(Dollars in thousands)
Investment real estate $ 3,018 $ 2,431
Operating property 180,499 154,550
Value of insurance in force purchased 50,055 229,312
Goodwill 87,952 79,804
===========================================================
</TABLE>
The value of insurance in force purchased is an asset that represents the
present value of future profits on business acquired. An analysis of the value
of insurance in force purchased for the years ended December 31, 1994, 1993 and
1992 is as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------
Year Ended December 31 1994 1993 1992
----------------------------------------------------------------
<S> <C> <C> <C>
(Dollars in thousands)
Balance at beginning of period $283,509 $228,924 $259,660
Additions resulting from
acquisitions 10,700 73,800 --
Accretion of interest during
the year 29,097 30,584 28,510
Amortization of asset (49,840) (49,799) (41,534)
Write-offs -- -- (17,712)
----------------------------------------------------------------
Balance at end of period $273,466 $283,509 $228,924
================================================================
</TABLE>
The value of insurance in force purchased which was written off in 1992
relates to the Durham Corporation credit life business, which was sold during
the year. Amortization of the value of insurance in force purchased in each of
the following years is expected to be: 1995--$48,299,000; 1996--$44,668,000;
1997--$42,109,000; 1998--$39,311,000 and 1999--$36,714,000.
NOTE G--FEDERAL INCOME TAX
Federal income tax expense (benefit) for the years ended December 31, 1994, 1993
and 1992 consisted of the following:
<TABLE>
<CAPTION>
----------------------------------------------------------
Year Ended December 31 1994 1993 1992
----------------------------------------------------------
<S> <C> <C> <C>
(Dollars in thousands)
Current $136,364 $192,891 $118,268
Deferred (462) (28,498) 11,263
----------------------------------------------------------
TOTAL FEDERAL INCOME TAX $135,902 $164,393 $129,531
==========================================================
</TABLE>
As a result of the Omnibus Budget Reconciliation Act of 1993, enacted on
August 10, 1993 and made retroactive to January 1, 1993, the federal statutory
income tax rate increased to 35 percent from 34 percent. The effect of the
change in tax legislation increased income tax expense by $16,771,000 for the
year ended December 31, 1993, including a one-time charge of $11,682,000 as a
result of applying the newly enacted tax rate to
51
<PAGE>
deferred tax balances as of August 10, 1993, and a $5,089,000 impact on current
taxes for 1993 due to the change in the statutory tax rate.
The following is a reconciliation of the federal statutory income tax rate
to the Company's actual effective income tax rate:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Percent of GAAP Pretax Income
------------------------------
Year Ended December 31 1994 1993 1992
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 34.0%
Tax-preferenced investment income (3.4) (3.3) (3.6)
Impact on deferred of enacted
tax rate change -- 2.4 --
Other items, net (.7) (.3) (1.7)
-------------------------------------------------------------------------------------------------
EFFECTIVE INCOME TAX RATE 30.9% 33.8% 28.7%
=================================================================================================
</TABLE>
Deferred tax liabilities and assets consisted of the following:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
December 31 1994 1993
---------------------------------------------------------------------------------------------
<S> <C> <C>
(Dollars in thousands)
DEFERRED TAX LIABILITIES:
Deferred policy and loan acquisition costs $439,107 $421,302
Market discount on investments 26,465 23,614
Value of insurance in force purchased 79,517 85,882
Prepaid pension asset 32,530 29,128
Net unrealized gain on available
for sale securities -- 6,697
Other 12,051 35,958
---------------------------------------------------------------------------------------------
TOTAL DEFERRED TAX LIABILITIES 589,670 602,581
DEFERRED TAX ASSETS:
Policy liabilities 67,808 51,040
Employee benefit accruals 38,583 32,135
Loan loss reserve 62,377 68,255
Net unrealized loss on available
for sale securities 185,514 --
Net deferred investment gains 47,134 32,257
Other 38,423 58,469
---------------------------------------------------------------------------------------------
TOTAL DEFERRED TAX ASSETS 439,839 242,156
---------------------------------------------------------------------------------------------
NET DEFERRED TAX LIABILITIES $149,831 $360,425
=============================================================================================
</TABLE>
Prior to 1984, a portion of the life insurance subsidiaries' current income
was not subject to current income tax and was accumulated in tax accounts known
as policyholders' surplus. The total of the life insurance subsidiaries'
balances accumulated in the policyholders' surplus accounts as of December 31,
1983 amounted to $256,996,000 and was frozen at that time as a result of the Tax
Reform Act of 1984. Accordingly, no additions to the policyholders' surplus
accounts have been made since that date. Distributions from these accounts would
be subject to current income tax. At December 31, 1994, the life insurance
subsidiaries could have paid (or deemed to have paid) to the Company additional
dividends, subject to statutory limitations on subsidiary dividends as discussed
in Note J, of approximately $1,174,415,000 before being subject to tax on any
portion of the policyholders' surplus accounts. Since the Company believes that
the policyholders' surplus accounts will not be subject to current income tax in
the foreseeable future, no provision has been made for the related deferred
income taxes of $89,949,000.
NOTE H--DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
-------------------------------------------------------------
December 31 1994 1993
-------------------------------------------------------------
<S> <C> <C>
(Dollars in thousands)
Debentures:
Sinking Fund 8.75% due 2017 $ 95,000 $ 95,000
Notes:
8.95% to 9.50% medium-term notes due
1995, noncallable 84,000 84,000
8.17% to 8.97% medium-term notes due
1996, noncallable 65,750 65,750
7.043% to 9.79% medium-term notes due
1997, noncallable 57,500 57,500
8.11% to 9.35% medium-term notes due
1998, noncallable 13,000 13,000
8.83% to 8.90% medium-term notes due
1999, noncallable 70,000 70,000
7.78% to 9.99% medium-term notes due
2000 to 2022, noncallable 284,000 177,500
10.00% medium-term notes due 2021,
callable at par in 2001 25,000 25,000
Other -- 1,518
-------------------------------------------------------------
TOTAL $694,250 $589,268
=============================================================
</TABLE>
Aggregate maturities and sinking fund requirements of long-term debt in
each of the following years are: 1995--$84,000,000; 1996--$65,750,000;
1997--$57,500,000; 1998--$13,000,000 and 1999--$75,000,000.
DEBENTURES
The 8.75 percent Sinking Fund Debentures are subject to an annual sinking fund
beginning in 1998 and to a 10-year refunding provision, which may be reduced to
the extent that the debentures are acquired through early redemption provisions
or on the open market.
REVOLVING CREDIT FACILITY AGREEMENTS
The Company entered into a Revolving Credit Facility Agreement, with various
domestic and international banks, effective June 19, 1992 with an expiration
date of June 19, 1997. The agreement provides for an aggregate principal amount
of $300,000,000 in unsecured borrowings with a facility fee of .125 percent per
annum based on the commitment at the time, regardless of usage, and on the
Company's ratings on senior debt. The facility enables the Company to borrow on
a standby basis and under competitive bid procedures. The loans bear interest
based on one of the following options: fixed rates determined by the
participating banks; LIBOR adjusted for a margin; LIBOR plus a margin of .25
percent; an adjusted certificate of deposit rate plus a margin of .375 percent;
or the higher of the base commercial lending rate or the federal funds rate plus
.50 percent. The above margins are based on the Company's ratings on senior
debt. There have been no borrowings under this agreement.
52
<PAGE>
The Company renewed a short-term committed revolving credit facility
effective October 11, 1994 having an initial 364 day term that may be renewed
annually. The unsecured agreement provides for an aggregate principal amount of
$100,000,000 with a facility fee of .10 percent per annum on the daily average
balance. The borrowings bear interest based upon one of the following options:
higher of the federal funds rate plus .25 percent or the base commercial lending
rate; LIBOR plus .225 percent; or an adjusted certificate of deposit rate plus
.35 percent. There have been no borrowings under this facility.
SYNDICATED CREDIT FACILITY AGREEMENT
The Company entered into a five-year Syndicated Credit Facility Agreement, with
various international banks, effective August 21, 1990. The agreement provides
for an aggregate principal amount of $450,000,000 in unsecured borrowings with
an annual commitment fee of .10 percent on the average daily unused commitment,
and a facility fee of .025 percent per annum based on the commitment at the time
regardless of usage. The facility enables the Company to borrow on a standby
basis and under competitive bid procedures. The loans bear interest based on one
of the following options: fixed rates determined by the domestic offices of the
participating banks; LIBOR adjusted for a margin; LIBOR plus .20 percent; or the
greater of the federal funds rate plus .125 percent or the base commercial
lending rate. There have been no borrowings under this agreement.
REVOLVING CREDIT AGREEMENTS
Certain subsidiaries of Providian Bancorp, Inc., a wholly-owned subsidiary of
the Company, maintain a revolving credit agreement with various domestic and
international banks. The agreement provides for an aggregate principal amount of
$500,000,000, with a facility fee of .175 percent or .20 percent per annum of
the total commitment amount, determined on the basis of Providian Bancorp's
consolidated tangible capital. Revolving credit loans under the agreement bear
interest based on one of the following options: greater of the federal funds
rate plus .50 percent or the prime commercial lending rate of the agent bank;
LIBOR plus .175 percent, or a competitive bid option rate. The agreement expires
October 14, 1997, with an optional one-year extension. At December 31, 1994,
outstanding borrowings under the agreement were $235,000,000. This agreement
replaces previous agreements which provided for an aggregate principal amount of
$400,000,000. At December 31, 1993, the outstanding borrowings under those
agreements were $175,000,000.
SUMMARY OF SHORT-TERM BORROWINGS
In addition to the credit facilities discussed above, the Company may use other
borrowing sources, such as commercial paper, federal funds purchased and
repurchase agreements, to meet its short-term financing needs. The following
table summarizes all outstanding short-term borrowings and the weighted average
interest rate on those borrowings as of December 31, 1994 and 1993:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
1994 1993
------------------------ -----------------------
Weighted Weighted
Average Average
December 31 Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Commercial paper $ 49,711 6.14% $ 49,870 3.28%
Borrowings under
Providian Bancorp:
Revolving credit
agreements 235,000 6.41 175,000 3.80
Federal funds
purchased 198,000 6.03 -- --
Repurchase
agreements -- -- 52,826 3.43
---------------------------------------------------------------------------
</TABLE>
NOTE I--PREFERRED STOCK OF CONSOLIDATED SUBSIDIARY
In May 1994, Providian LLC was formed and capitalized through the purchase of
common shares by the Company. Providian LLC exists solely for the purpose of
issuing preferred and common shares and lending the proceeds to the Company to
provide permanent funding for the redemption of the Company's Adjustable Rate
Cumulative Preferred Stock, Series F. On May 12, 1994, Providian LLC completed
the issuance of 4,000,000 shares of Cumulative Monthly Income Preferred Stock
(MIPS) at $25 per share to replace the redeemed Series F Preferred Stock (see
Note J). The MIPS are redeemable at the option of Providian LLC (with the
Company's consent) in whole or in part on or after May 31, 1999 at a redemption
price of $25 per share plus accumulated and unpaid dividends. Upon liquidation
of Providian LLC, the holders of the MIPS are entitled to $25 per share plus
accumulated and unpaid dividends. The MIPS pays monthly dividends at an annual
rate of 8.875 percent. The Company has unconditionally guaranteed all legally
declared and unpaid dividends of Providian LLC.
NOTE J--SHAREHOLDERS' EQUITY AND RESTRICTIONS
COMMON STOCK
In 1994, the Company announced plans to repurchase five million shares of the
Company's common stock on the open market. Through December 31, 1994, the
Company repurchased 4,334,400 shares at an aggregate cost of $138,791,000.
Between January 1, 1995 and February 8, 1995, the Company repurchased an
additional 422,200 shares at an aggregate cost of $13,882,000.
53
<PAGE>
PREFERRED STOCK
On March 2, 1994, the Company redeemed, at face value, all 1,000,000 shares of
its Series F, Adjustable Rate Cumulative Preferred Stock, at $100 per share plus
accrued and unpaid dividends through the date of redemption.
Effective June 16, 1993, each of the 1,918,200 outstanding shares of Series
J, Junior Noncumulative Preferred Stock was exchanged for 5.55 shares of the
Company's common stock and all rights of the holders of Series J preferred
stock, including the right to receive dividends, were terminated.
SHAREHOLDER RIGHTS PLAN
The Company adopted in 1987 a Shareholder Rights Plan designed to deter those
takeover initiatives not in the best interest of its shareholders. Under the
Plan, as amended on November 4, 1992, a Common Share Purchase Right (Right) with
an exercise price of $75 is attached to each outstanding share of the Company's
common stock. The Rights detach and become exercisable when any person or group
acquires 20 percent or more (or announces a tender offer for 20 percent or more)
of the Company's common stock, at which time each Right (other than those held
by the acquiring company) will entitle the holder to purchase that number of
shares of common stock of the Company with a market value of two times the
exercise price. If the Company is acquired in a merger or other business
combination or 50 percent or more of its consolidated assets or earning power
are sold, each Right will entitle the holder to purchase that number of shares
of stock of the acquiring company at the exercise price having a market value of
two times that price.
The Rights, which expire December 15, 1999, are redeemable by action of the
Board of Directors at a price of $.01 per Right at any time prior to their
becoming exercisable.
STATUTORY LIMITATIONS ON SUBSIDIARY DIVIDENDS
The Company's insurance subsidiaries are subject to limitations on the payment
of dividends to it. Generally, dividends during any year may not be paid,
without prior regulatory approval, in excess of the lesser of (and with respect
to life and health subsidiaries in the state of Missouri, in excess of the
greater of): (a) 10 percent of the insurance subsidiaries' statutory
shareholders' equity as of the preceding December 31; or (b) the insurance
subsidiaries' statutory gain from operations for the preceding year. The banking
subsidiaries' payment of dividends are restricted by certain net worth
requirements, and these subsidiaries were in compliance with those requirements
at December 31, 1994.
The following table is a comparison of subsidiaries' statutory net income
and consolidated GAAP net income. Statutory shareholders' equity for the
insurance subsidiaries consisted of capital and surplus of $28,578,000 and
$1,156,435,000, respectively, in 1994 and $43,567,000 and $1,177,819,000,
respectively, in 1993. In converting to GAAP, typical adjustments to insurance
statutory amounts include: (a) costs of acquiring new policies are deferred and
amortized over the premium-paying period or in relation to the incidence of
expected gross profits; (b) benefit reserves are calculated using more realistic
investment, mortality and withdrawal assumptions; (c) deferred income taxes are
provided; (d) acquisitions accounted for as purchases recognize the fair value
of assets and liabilities acquired; (e) statutory non-admitted assets are
restored for GAAP; and (f) for banking, the direct costs of acquiring consumer
loans are deferred and amortized over one, five or seven years, depending on the
product.
<TABLE>
<CAPTION>
------------------------------------------------------------
Year Ended December 31 1994 1993 1992
------------------------------------------------------------
<S> <C> <C> <C>
(Dollars in thousands)
Statutory gain (loss) from
insurance operations:
Life insurance companies $187,750 $156,202 $112,506
Property and casualty
insurance companies (1,853) 8,662 8,095
------------------------------------------------------------
Total statutory gain from
insurance operations 185,897 164,864 120,601
Realized investment
loss, net of tax (24,267) (5,553) (16,901)
------------------------------------------------------------
Total insurance statutory
net income 161,630 159,311 103,700
Banking net income 101,298 127,707 68,037
------------------------------------------------------------
Total statutory net income $262,928 $287,018 $171,737
============================================================
Consolidated GAAP
net income $300,901 $322,665 $322,496
============================================================
</TABLE>
The Company believes that contractual and statutory limitations impose no
practical restrictions on the Company's dividend and common stock repurchase
plans.
NOTE K--COMMITMENTS AND CONTINGENCIES
LEASES
At December 31, 1994, future minimum rental commitments under noncancellable
leases aggregated $106,896,000 through 2012 for office space and aggregated
$12,899,000 through 1999 for data processing and other equipment. Total payments
under these commitments in each of the following years are: 1995--$20,571,000;
1996--$17,258,000; 1997--$12,528,000; 1998--$9,822,000 and 1999--$7,583,000.
The leases contain no significant restrictions or obligations, and capital
leases included are not material.
REINSURANCE AND UNDERWRITING RISK
To limit risk, the Company retains no more than $1,000,000 of life insurance and
$250,000 of accidental death benefits for any single life. Excess coverages are
reinsured externally, and at December 31, 1994, amounted to approximately 5.6
percent of total life insurance in force. The Company would become liable for
the reinsured benefits if the reinsurers could not meet their obligations.
Underwriting standards for individual life policies generally require
evidence of insurability. If applications involving substandard risks are
accepted, higher premiums are charged or coverage is limited. Other coverages
may be written without evidence of insurability, with product design, pricing or
other requirements compensating for the higher level of anticipated claims.
54
<PAGE>
LEGAL PROCEEDINGS
In the normal course of business, the Company and its subsidiaries are parties
to a number of lawsuits. Management believes that these suits will be resolved
with no material financial impact on the Company.
NOTE L--BENEFITS PLANS
The Company has a defined benefit pension plan covering most of its full-time
employees. The plan is non-contributory and provides benefits that are based on
employees' years of service and highest consecutive five-year average
compensation during the last ten years of employment. Employee groups not
participating in the defined benefit pension plan are covered by defined
contribution retirement or profit sharing plans. In addition, the Company has a
thrift savings plan which provides for partial employer matching of participant
contributions. The Company and its subsidiaries also provide certain life
insurance and health care benefits, including benefits to eligible retirees.
Retiree medical insurance was discontinued for those employees retiring after
June 1, 1989.
NOTE M--STOCK OWNERSHIP AND STOCK OPTION PLANS
The Providian Corporation Stock Ownership Plan (the "Plan") provides for the
award of up to 3,600,000 shares of the Company's common stock (subject to
certain adjustments) on a nonrestricted or restricted basis. Under the Plan, a
portion of key employees' incentive awards (and non-employee directors'
compensation) may be paid in nonrestricted shares of the Company's common stock
and matched with an award of restricted shares. Recipients of all stock awards
have the right to vote their respective shares and to receive cash dividends.
Nonrestricted stock can be withdrawn after the grant date, subject to forfeiture
of the matching restricted shares. Restricted stock cannot be sold or
transferred by the recipient prior to the vesting period, which is three years
for 50 percent of the shares and six years for the remaining shares. During
1994, there were 145,000 shares (1993--78,000 shares) issued under the Plan
which were nonrestricted and 147,000 shares (1993--78,000 shares) which were
restricted. Unearned compensation under the Plan is recorded as Unearned
restricted stock in the Consolidated Statements of Financial Condition and is
being amortized over the vesting period.
The Company has a stock option plan for key employees which authorizes the
Board of Directors to grant, before January 1, 1999, options to purchase a total
of 4,400,000 shares of common stock and related stock appreciation rights,
subject to various terms, at not less than fair market value. The options
granted become exercisable at the rate of one-third per year beginning one year
after the date granted, and must be exercised not later than ten years after the
grant date. At December 31, 1994, there were 1,039,000 shares available for
future grant (1993--1,548,500 shares) and options for 2,107,700 shares were
exercisable (1993--1,681,600 shares). Plan activity for the most recent three
years follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------
Number of Option Price
Options Per Share
--------------------------------------------------------------
<S> <C> <C>
Outstanding at January 1, 1992 2,809,286 $ 8.46-$26.38
Granted 786,440 $28.69-$31.91
Exercised (493,398) $ 8.46-$21.75
Canceled or forfeited (58,748) $ 9.82-$31.78
--------------------------------------------------------------
Outstanding at December 31, 1992 3,043,580 $ 9.08-$31.91
Granted 698,700 $38.31-$43.06
Exercised (575,577) $ 9.08-$31.78
Canceled or forfeited (162,090) $10.63-$43.06
--------------------------------------------------------------
Outstanding at December 31, 1993 3,004,613 $12.53-$43.06
Granted 680,475 $30.75-$33.25
Exercised (189,617) $12.69-$31.78
Canceled or forfeited (171,449) $21.75-$43.06
--------------------------------------------------------------
OUTSTANDING AT DECEMBER 31, 1994 3,324,022 $12.53-$43.06
==============================================================
</TABLE>
On December 6, 1994, the Board of Directors approved, subject to shareholder
approval, the establishment of a new stock option plan for key management
employees of the Company or its subsidiaries and granted certain options under
this new plan. This new plan, upon shareholder approval, will replace the
existing stock option plan discussed above. However, the termination of the
existing stock option plan will not affect the grants and awards made under that
plan prior to termination. As of December 31, 1994, subject to shareholder
approval, options were granted under this new plan for the purchase of 1,008,000
shares at an exercise price of $40.875. These shares are not reflected in the
outstanding options table above.
NOTE N--SEGMENT INFORMATION
The operations of the Company and its subsidiaries have been classified into
five business segments as follows: Providian Agency Group, Providian Direct
Insurance, Providian Bancorp, Providian Capital Management and Corporate and
Other. These segments reflect the management structure of the organization, and
are distinguished by products and/or marketing methods.
See Business Segment Data, pages 20 and 21, for revenues, income before
federal income tax and assets for each of the three years in the period ended
December 31, 1994.
Segment revenues include: premiums and other considerations, including
amounts assessed for mortality coverage, contract administration, initiation or
surrender; net investment income; consumer loan servicing fees; and other
income, net.
Net investment income, on a fully taxable equivalent basis, is allocated to
product lines based on policy liabilities and surplus required to support the
business. Expenses are charged to pretax segment income (and within business
segments to product lines) as incurred, or are allocated on bases considered
reasonable; however, other acceptable methods of allocation might produce
different results. Net investment income reflects a charge to the product
segments and income to corporate for capital employed to support segment
business.
Capital expenditures and depreciation expense are not material and,
consequently, are not reported.
55
<PAGE>
GRAPHICS APPENDIX
1. Page 17 of Management's Discussion and Analysis in the 1994 Annual Report
contains a stacked bar chart reflecting the Operating Earnings by each Business
Segment (excluding Corporate and Other) for the years ended December 31, 1992
through 1994.
2. Page 18 of Management's Discussion and Analysis in the 1994 Annual Report
contains a stacked bar chart reflecting the Revenues by Business Segment for the
years ended December 31, 1992 through 1994. Total revenues appear on the top of
each bar.
3. Page 19 of Management's Discussion and Analysis in the 1994 Annual Report
contains a bar chart reflecting Agency Group Life Termination Rates for the
years ended December 31, 1992 through 1994.
4. Page 23 of Management's Discussion and Analysis in the 1994 Annual Report
contains a stacked bar chart reflecting the Providian Direct Insurance New Paid
Annualized Premiums (Sales) by category for the years 1992 through 1994. Total
sales appear on the top of each bar.
5. Page 24 of Management's Discussion and Analysis in the 1994 Annual Report
contains a stacked bar chart reflecting Providian Bancorp Unsecuritized (on-
balance sheet) Consumer Loans by category at December 31, 1993 and 1994. Total
unsecuritized consumer loans appear on the top of each bar.
6. Page 25 of Management's Discussion and Analysis in the 1994 Annual Report
contains a stacked bar chart reflecting Providian Bancorp Banking Deposits by
category as of December 31, 1993 and 1994. Total banking deposits appear on the
top of each bar. The legend contains a further breakdown of CDs of $100,000 or
greater by duration.
7. Page 26 of Management's Discussion and Analysis in the 1994 Annual Report
contains a stacked bar chart reflecting Providian Capital Management Spread- and
Fee-based Products with two bars for the years ended December 31, 1992 through
1994.
8. Page 29 of Management's Discussion and Analysis in the 1994 Annual Report
contains a pie chart reflecting the percentage Distribution of Insurance
Invested Assets by investment type at December 31, 1994. The legend contains
the dollar amount of each investment in millions as well as total insurance
invested assets.
12
<PAGE>
9. Page 30 of Management's Discussion and Analysis in the 1994 Annual Report
contains a pie chart reflecting the percentage of total Commercial Mortgage Loan
Principal Balance by Property Type at December 31, 1994. The legend contains
the dollar amount by property type in millions as well as total commercial
mortgage loans.
10. Page 31 of Management's Discussion and Analysis in the 1994 Annual Report
contains a pie chart reflecting the percentage of total Commercial Mortgage
Loans by Geographic Location based on ACLI defined regions at December 31, 1994.
The legend contains the dollar amount by region in millions as well as total
commercial mortgage loans.
11. Page 31 of Management's Discussion and Analysis in the 1994 Annual Report
contains a pie chart reflecting the percentage of total Residential Mortgage
Loans by Geographic Location based on ACLI defined regions at December 31, 1994.
The legend contains the dollar amount by region in millions as well as total
residential mortgage loans.
13
