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, 1996
[ ] 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.[X]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 6, 1997.
Common Stock, $1 par value - $5,404,654,428
-------------------------------------------
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of March 6, 1997.
Common Stock, $1 par value - 94,459,922 shares
----------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report for the year ended December 31, 1996, are
incorporated by reference into Parts I and II.
Portions of the definitive Proxy Statement relative to the 1997 Annual Meeting
of Stockholders to be filed by the Registrant with the Commission within 120
days following the end of the Registrant's fiscal year, are incorporated by
reference into Part III.
<PAGE>
Item 1. (continued)
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, affect 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 and certain fee-based products. The Company's Providian Bancorp
affiliates provide consumer loans, deposits and other banking and related
services and certain fee-based products.
Changes in Control of Registrant
- --------------------------------
On December 28, 1996, Providian Corporation executed a Plan and Agreement of
Merger and Reorganization (the "Merger Agreement") with AEGON N.V. ("AEGON") and
LT Merger Corp., a wholly owned subsidiary of AEGON ("Merger Sub"), pursuant to
which Merger Sub will merge with Providian Corporation. In connection with this
merger, Providian Corporation will spin off Providian Bancorp, Inc. to Providian
Corporation shareholders (the "Distribution"). For each share of Providian
Corporation stock owned, shareholders will receive one share of Providian
Bancorp, Inc. in the Distribution. Pursuant to the Merger Agreement, among other
things, (a) Providian Corporation will be the surviving corporation in the
merger and become a wholly owned subsidiary of AEGON, and (b) each shareholder
of Providian Corporation will be entitled to receive a number of shares of AEGON
common stock in exchange for shares of Providian Corporation's common stock.
Shareholders of Providian Corporation will receive in exchange for each share of
common stock, a fraction of an AEGON common share equal to $28.00 divided by the
"AEGON Share Price." Generally, the "AEGON Share Price" is equal to the average,
during the 20 trading days immediately preceding the last business day before
the date of the merger, of the average daily high and low prices per share of an
AEGON common share on the New York Stock Exchange (the "Fair Market Value at the
Effective Time"). The AEGON Share Price, however, is subject to a collar, for
the purposes of calculating the exchange ratio, which provides that the AEGON
Share Price shall be $61.153 if the Fair Market Value at the Effective Time is
equal to or greater than $61.153 and shall be $50.034 if the Fair Market Value
at the Effective Time is equal to or less than $50.034. The Merger Agreement
also provides that AEGON may terminate the agreement if the AEGON Share Price is
more than $66.713 and that Providian Corporation may terminate the agreement if
the AEGON Share Price is less than $44.475, unless the other party agrees to a
"make-whole" provision. In general, the "make-whole" provision would mean that
the value of the AEGON common shares issued in the merger would not be more than
$30.545 or less than $24.889 for each share of Providian Corporation common
stock.
The Board of Directors of Providian Corporation has unanimously approved the
Merger Agreement and the Distribution. The merger is subject to approval by
various regulatory authorities, approval by Providian Corporation's shareholders
and certain other conditions. The Distribution will occur only if all of the
conditions necessary for the merger are satisfied.
Should the Merger Agreement be terminated as a result of certain fiduciary
obligations of the Board of Directors of Providian Corporation, Providian
Corporation would be required to pay to AEGON liquidated damages of $80 million
to $100 million.
Because consummation of the merger and the Distribution is subject to the above
conditions, no representations can be made as to whether, or when, the merger
and Distribution will be completed or as to the possible impact of the merger
and Distribution on the financial condition and results of operations of the
Company should the merger and Distribution occur.
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"), headquartered in Nashville,
Tennessee. 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. On January 31, 1996, Capital Security was merged
into Security Trust and Security Trust's name was changed to Capital Security.
Following this merger, 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 Providian Property and
Casualty Insurance Company ("Providian P&C"). On December 31, 1986, the Company
acquired Worldwide Underwriters Insurance Company, which has been renamed
Providian Auto and Home Insurance Company ("Providian Auto"), located in St.
Louis, Missouri, and the personal lines property and casualty insurance business
of the Wausau Insurance Companies. Concurrently, it made Providian P&C a direct
subsidiary of Providian Auto. These two affiliates, together with Providian Fire
Insurance Company, a subsidiary of Providian P&C, form the property and casualty
line of business of the Providian Direct Insurance business unit.
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.
In addition, National Home Life Assurance Company, which has been renamed
Providian Life and Health Insurance Company ("Providian Life") and which is
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,
which has been renamed First Providian Life and Health Insurance Company ("First
Providian").
Effective January 15, 1993, Providian Auto 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 group accumulation product business, previously managed in
Providian Agency Group, and the individual accumulation product business,
previously managed by National Liberty, were moved to Providian Capital
Management. Affiliates of Providian Agency Group and Providian Direct Insurance
offer these group and individual 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, effective November 11, 1994, changed its name to Providian
Bancorp, Inc.), located in San Francisco, California, which owns, among other
subsidiaries, a grandfathered non-bank bank (First Deposit National Bank) and a
credit card bank (Providian National Bank, which changed its name from First
Deposit National Credit Card Bank effective January 1, 1995). Ownership was
increased each year until 1989 when the remaining shares were purchased. At
December 31, 1996, 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, Providian Life, Veterans
Life, First Providian and Academy write a variety of group and individual,
nonparticipating life insurance products. These include universal life,
traditional and interest-sensitive whole life insurance, term life insurance,
accidental death and dismemberment coverage and premium waiver disability
insurance.
<PAGE>
The following table reconciles total life insurance in force for the year ended
December 31, 1996:
Total Life Insurance
(dollars in millions)
---------------------
In force at December 31, 1995 $66,131 (1)
Sales and additions 10,346
Terminations:
Surrender and Conversion 2,313
Lapse 7,771
Reinsurance --
Other 1,617
---------
Subtotal 11,701
---------
In force at December 31, 1996 $64,776 (1)
=========
Number of policies in force before reinsurance
ceded at December 31, 1996 6,287,573
=========
(1) Reinsurance assumed has been included. Reinsurance ceded has not been
deducted.
Commonwealth Life, Peoples Security, Capital Security, Providian Life, Veterans
Life, First Providian and Academy also issue an assortment of individual and
group 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, Providian Life offers
a Medicare supplement product.
Providian Auto and its subsidiaries underwrite personal lines automobile and
umbrella liability coverages mainly for standard and preferred risks.
Accumulation
- ------------
The group line of accumulation products, offered through Commonwealth Life,
Peoples Security and Providian Life, consists of floating and fixed rate
guaranteed investment contracts ("GICs"), Trust GICs and separate account
products offered to group customers, including pension funds, banks, mutual
funds and other organizations. The Trust GIC product, an off-balance sheet
fee-based product, permits 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 qualified plan benefit requests exceed plan
cash flows.
Through Providian Life, Commonwealth Life and Peoples Security, the Company
offers individual accumulation products including immediate life annuities
(primarily structured settlements), variable annuities, single premium and
flexible premium deferred annuities and individual retirement annuities. Single
premium deferred annuities and 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 loans, as
well as a broad range of deposit products. The receivables portfolio consists
primarily of unsecured consumer loans which use a VISA(R) or MasterCard(R)
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(R)
or MasterCard(R) credit card, a home equity secured loan product and insurance
premium finance installment loans. Deposit products include retail and
institutional certificates of deposit and money market deposit accounts.
Fee-Based Products
- ------------------
Providian Bancorp has developed fee-based strategic protection products and
services such as Credit Protection, Home Protection(R), First Health Advantagesm
and DrivePro(R). Certain of these products are also marketed by Providian Agency
Group and Providian Direct Insurance.
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. In addition, such agents market certain of the fee-based
products described above. Substantially all of the agents are employees of
Providian Agency Group, Inc. and do not represent insurers other than Agency
Group. 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 and certain fee-based 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. Academy's products are marketed to active duty military
personnel on military bases through independent Agents/Counselors. Property and
casualty products are also marketed through a portion of the home service agents
of Agency Group.
Group 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. Individual products are marketed through financial
planners, stock brokerage firms, independent agents, pension consultants,
savings and loan associations, banks and other financial institutions and direct
mail programs.
Providian Bancorp's consumer loan and deposit products are primarily marketed
using direct mail and telemarketing channels and other direct response methods.
Insurance premium finance installment loans are primarily marketed through
agents under the management of a third party vendor.
Except for Providian Agency Group's marketing partnerships arrangements, 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, Providian Agency Group (through its marketing
partnerships arrangements) and Providian Bancorp business units market their
products nationwide.
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 million of life insurance and $250 thousand of accidental
death benefits for any single life. Excess coverages are reinsured externally.
At December 31, 1996, approximately $3.7 billion, or approximately 5.7 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, 1996, approximately 2.06
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.
The Company's annuities and structured settlements carry reinvestment and
mortality risks. Additionally, deferred annuities are subject to
disintermediation under some circumstances. Providian Capital Management employs
appropriate underwriting and investment strategies to minimize these risks.
Banking Group's unsecured consumer loans are principally generated through
direct mail and telemarketing solicitations and are made to a prescreened list
of prospective accountholders, followed by credit verification. Banking Group
uses proprietary technology and credit models to target creditworthy unsecured
consumer loan customers who are expected to be eligible for a high credit line
and who are likely to respond to the offer and resolve their balances.
Detailed discussions about the Company's investments are included in Note D to
the Consolidated Financial Statements on pages 51 and 52 of the Company's 1996
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 the 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 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.
In 1992, the NAIC adopted 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) Total 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. The NAIC adopted a similar, though more
elaborate model act for property/casualty insurers in 1993. 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:
"Company Action 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.
"Regulatory 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 Total Adjusted Capital levels of the Company's insurance subsidiaries
currently exceed all of the action levels as defined by the NAIC's Model Acts,
these Model Acts currently have no impact on the Company's operations or
financial condition.
Prior to creation of the Model Act, the NAIC created the Insurance Regulatory
Information System ("IRIS") ratios as an early warning system for use by state
insurance regulators. The effect on the Company of these IRIS ratios has been
the need to discuss with regulators any ratios which fell outside the expected
ranges; however, there has been no heightened level of review of the Company as
a result of these ratios.
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
- -------
The primary regulator of Providian Bancorp's consumer banking subsidiaries,
First Deposit National Bank and Providian National Bank, is the Office of the
Comptroller of the Currency ("OCC"). The banks' deposits are insured by the Bank
Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC") and
accordingly, the banks are subject to certain regulations of the FDIC. As
members of the Federal Reserve System, the banks are also subject to regulation
by the Board of Governors of the Federal Reserve System. In 1996, Providian
Bancorp obtained FDIC insurance for a third banking subsidiary, Providian Credit
Services, Inc., a Utah industrial loan company, which is regulated by the Utah
department of Financial Institutions and the FDIC.
Regulations of the OCC, the FDIC and other applicable federal regulatory
agencies affect many areas of banking operations, including capital ratios,
reserve requirements, the payment of dividends and permitted investments.
First Deposit National Bank must comply with certain restrictions under the Bank
Holding Company Act in order to maintain its grandfathered status. These
restrictions include a limitation on its ability to engage in certain new
activities. Providian National Bank's charter generally limits its activities to
credit card operations. Notwithstanding their direct or indirect ownership of
First Deposit National Bank, Providian National Bank and Providian Credit
Services, Inc., neither Providian Bancorp, Inc. nor the Company is a "bank
holding company" within the meaning of the Bank Holding Company Act. But for
these grandfather rights, the Company would be required to register as a bank
holding company and would be subject to the restrictions set forth with the
Company's activities to those owning and managing banks and certain other
activities deemed by the Federal Reserve to be closely related to banking and a
proper incident thereto.
The relationship between Providian Bancorp's consumer banking subsidiaries and
their customers is extensively regulated by federal and state consumer
protection laws. The most significant laws include the federal Truth-in-Lending,
Equal Credit Opportunity, Fair Credit Reporting and Truth-in-Savings Acts. These
laws impose disclosure requirements when a consumer credit loan is advertised,
when it is extended and in connection with monthly billing statements, limit the
liability of credit card holders for unauthorized use, prohibit certain
discriminatory practices and limit the manner in which consumer credit reports
may be used.
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 and New Jersey.
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. The NAIC is seeking changes in
state law which would further restrict the amount of dividends which could be
paid without prior approval.
Separate Accounts
- -----------------
Separate accounts of the Company's subsidiaries which offer individual variable
annuities are registered with the Securities and Exchange Commission under the
Investment Company Act of 1940 and the Securities Act of 1993 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 1,700 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 lower risk
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. The industry has
recently experienced rising charge-offs and continued competitive pressure.
Competitors continually refine their use of advertising, target marketing,
balance transfers, pricing competition, incentive programs and changes in the
terms of certain credit cards, including lowering the rate of interest charged
on balances and adopting "tiered" or "risk-adjusted" or "performance-based"
rates under which the annual percentage rate is lowered or raised for the
issuer's most or least creditworthy customers.
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 and marketing additional
fee-based products. 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 additional
products to underserved markets.
EMPLOYEES
---------
The total number of persons employed by the Company and its subsidiaries is
approximately 9,300.
FOREIGN OPERATIONS
------------------
Substantially all of the Company's operations are conducted in the United
States.
<PAGE>
14
ITEM 2. PROPERTIES
Principal properties of the Company and its subsidiaries include home offices
located in Louisville, Kentucky (Commonwealth Life) and Valley Forge,
Pennsylvania (Providian Life and Health and Providian Auto and Home Insurance),
which are owned; offices in Pleasanton, California (Providian Bancorp), which
are owned; and Louisville, Kentucky (Providian Corporation), Durham, North
Carolina (Peoples Security and Capital Security) and San Francisco and
Sacramento, California (Providian Bancorp), which are leased.
ITEM 3. LEGAL PROCEEDINGS
The last subsection titled "Legal Proceedings," of Note L - Commitments and
Contingencies on page 61 of the 1996 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 38 and page 39 of
the Annual Report for the year ended December 31, 1996 are incorporated
by reference.
Item 6. SELECTED FINANCIAL DATA
Selected Financial Data on pages 18 and 19 of the Annual Report for the
year ended December 31, 1996, is incorporated by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Consolidated Results and Analysis on pages 19 and 20, Results by
Business Segment on pages 20 through 30, Asset Liability Management and
Review on pages 30 through 36 and Liquidity and Capital Resources and
Inflation on pages 37 and 38 of the Annual Report for the year ended
December 31, 1996, are incorporated by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of Providian Corporation and
Subsidiaries included on pages 41 through 45 and Quarterly Financial
Data on page 39 of the Annual Report for the year ended December 31,
1996, are incorporated by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section entitled "Election of Directors" of the Proxy Statement
for the 1997 Annual Meeting of Stockholders to be filed with the
Commission within 120 days following the end of the Registrant's fiscal
year end, 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: 55 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: 47 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 -
Providian Bancorp, 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 its CEO.
Robert L. Walker Senior Vice President - Finance and Chief
Age: 46 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,
Age: 39 Providian Corporation, since November
1993. He served as Director, Finance and
Accounting - Providian Capital Management,
from January 1993 to November 1993, and
Second Vice President and Assistant
Controller, Providian Corporation, from
August 1991 to January 1993. Prior to
joining Providian Corporation, he was with
Ernst & Young LLP, Certified Public
Accountants, from 1978 to 1991.
James V. Elliott Senior Vice President and General Counsel,
Age: 52 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.
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
Name and Age Principal Occupation and Business Experience
- ------------ --------------------------------------------
Lawrence Pitterman Senior Vice President of Administration,
Age: 49 Providian Corporation, since January
1991. Vice President, Human Resources,
Providian Bancorp, Inc. 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.
Robert S. Greer, Jr. Chief Operating Officer and President of
Age: 49 Agency Group since July 1995. He was
President of the Home Service Division
of United Insurance Company of America
since 1991, while continuing to serve
as President of Union National Life
Insurance Company and Union National Fire
Insurance Company since 1985. These
companies are owned by UNITRIN, Inc.
Frederick C. Kessell President, Providian Capital Management
Age: 48 since April 1996 and Chief Investment
Officer, Providian Capital Management,
since May 1993. Managing Director,
Chief Investment Officer - Providian
Capital Management, from May 1989 to May
1993, and Vice President, Fixed Income
Securities - Providian Capital Management,
Providian Corporation, from May 1985 to
May 1989.
A. Sami Siddiqui Executive Vice President - Providian
Age: 44 Bancorp, since January 1995. He
originally joined Providian Bancorp in 1985
as Vice President, and for seven years,
he managed various areas of
unsecured spread business, including
product development, market management,
and the marketing services group. He was
later promoted to Senior Vice President.
He worked as an independent consultant
from July 1992 through December 1994.
David J. Miller Chief Operating Officer - Providian Direct
Age: 37 Insurance since September, 1996
and is responsible for all aspects of
marketing and marketing support,strategic
partnerships, insurance operations and
information systems. He originally joined
Providian Direct Insurance in 1994 as Vice
President with responsibility for all
direct-sold life and health insurance
and non-insurance products, marketing
support and strategic partnerships. Prior
to joining Providian, he was with
Progressive Insurance from 1987 to 1994,
where he served as division controller and
product manager and was responsible for
several national auto insurance programs.
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
Name and Age Principal Occupation and Business Experience
- ------------ --------------------------------------------
David B. Smith Executive Vice President of Providian
Age: 45 Bancorp since January 1997, with
responsibilities in the Unsecured Spread
business and Providian Home Loan perations.
From July 1996 to January 1997, he was
Senior Vice President of Providian Bancorp.
From 1995 to July 1996 he was Chief
Technology Officer for Providian
Corporation and in 1991 he was responsible
for life insurance marketing, systems and
operations for Providian Direct Insurance.
From 1990 to 1994, he was Senior Vice
President of Providian Bancorp with
responsibilities in various aspects of
operations, systems and marketing for the
Unsecured Spread business.
Item 11. EXECUTIVE COMPENSATION
The sections entitled "Directors' Compensation,"Executive
Compensation and Other Information,"Stock Options and Stock
Appreciation Rights (SARs)", "Option Exercises and Holdings,"
"Pension Plans" and "Human Resources Committee Executive Compensation
Report" of the Proxy Statement for the 1997 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of the
Registrant's fiscal year-end, are incorporated by reference.
Item l2. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Security Ownership of Certain Beneficial Owners
and Management" of the Proxy Statement for the 1997 Annual Meeting
of Stockholders to be filed within 120 days of the Registrant's fiscal
year-end, is 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) None.
(c) Exhibits are submitted as a separate section of this report.
(d) Financial statement schedules are submitted as a separate section of
this report.
<PAGE>
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 19th day of February 1997:
PROVIDIAN CORPORATION
/s/ 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 below by the following persons on behalf of the
registrant in the capacities indicated on the 19th day of February 1997:
SIGNATURE TITLE
--------- -----
/s/ Irving W. Bailey II Chairman, Chief Executive
--------------------------- Officer and Director
Irving W. Bailey II
/s/ Shailesh J. Mehta President, Chief Operating
--------------------------- Officer and Director
Shailesh J. Mehta
/s/ Robert L Walker Senior Vice President and
-------------------------- Chief Financial Officer
Robert L Walker
/s/ Steven T. Downey Vice President and Controller
----------------------------
Steven T. Downey
/s/ John L. Clendenin Director
---------------------------
John L. Clendenin
/s/John M. Cranor III Director
----------------------------
John M. Cranor III
/s/Lyle Everingham Director
-----------------------------
Lyle Everingham
<PAGE>
SIGNATURE TITLE
--------- -----
/s/Raymond V. Gilmartin Director
--------------------------------
Raymond V. Gilmartin
/s/J. David Grissom Director
-------------------------------
J. David Grissom
/s/Watts Hill, Jr. Director
--------------------------------
Watts Hill, Jr.
Ned C. Lautenbach Director
/s/F. Warren McFarlan Director
--------------------------------
F. Warren McFarlan
Martha R. Seger Director
--------------------------------
Martha R. Seger
/s/Larry D. Thompson Director
--------------------------------
Larry D. Thompson
<PAGE>
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, 1996
PROVIDIAN CORPORATION
LOUISVILLE, KENTUCKY
<PAGE>
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 41 through 62 of the Annual Report for the year
ended December 31, 1996, are incorporated by reference in Item 8:
Page
Consolidated Statements of Income -
Years Ended December 31, 1996, 1995 and 1994 41
Consolidated Statements of Financial Condition -
December 31, 1996 and 1995 42 - 43
Consolidated Statements of Cash Flows -
Years Ended December 31, 1996, 1995 and 1994 44
Consolidated Statements of Shareholders' Equity -
Years Ended December 31, 1996, 1995 and 1994 45
Notes to Consolidated Financial Statements 46 - 62
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 D 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.
<PAGE>
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, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related 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 C to the Consolidated Financial Statements, in
1994 the Company changed its method of accounting for certain investments in
debt and equity securities.
/s/ERNST & YOUNG LLP
Louisville, Kentucky
February 4, 1997
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS
IN RELATED PARTIES
PROVIDIAN CORPORATION AND SUBSIDIARIES
December 31, 1996
-----------------------------
Amount Shown
in Statement
Amortized Market of Financial
Cost Value Condition
--------- ------- --------------
<S> <C> <C> <C>
Type of Investment (Dollars in millions)
Debt securities:
Bonds:
US government & government agencies $ 2,075 $ 2,091 $ 2,091
State and municipal 734 787 787
Foreign governments 129 144 144
Public utilities 525 529 529
Industrial and miscellaneous 7,181 7,382 7,382
------- ------- -------
Total bonds 10,644 10,933 10,933
Redeemable preferred stocks 19 19 19
------- ------- -------
Total debt securities 10,663 10,952 10,952
------- ------- -------
Equity securities:
Common stocks:
Industrial and miscellaneous 13 14 14
Nonredeemable preferred stocks 435 441 441
------- ------- -------
Total equity securities 448 455 455
------- ------- -------
Trading account securities XXXXXXX 96 96
Commercial mortgage loans 2,864 XXXXXXX 2,864
Residential mortgage loans 2,718 XXXXXXX 2,718
Policy loans 487 XXXXXXX 487
Consumer loans 3,550 XXXXXXX 3,550
Real estate <F1> 54 XXXXXXX 54
Other long-term investments 550 XXXXXXX 550
Short-term investments 239 XXXXXXX 239
------- -------
Total Investments $21,573 $21,965
======= =======
<FN>
<F1> Includes real estate taken in foreclosure of $46.0 million in our
mortgage loan portfolio.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PROVIDIAN CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31
----------------------
1996 1995
--------- ----------
(Dollars in millions)
<S> <C> <C>
Assets
Cash and cash equivalents $ 70 $ 55
Investments:
Investments in and advances
to subsidiaries <F1> 3,909 3,841
Short-term investments 19 15
Notes receivable from subsidiaries <F1> 44 56
Accrued interest and accounts receivable
from subsidiaries <F1> 11 8
Other assets 74 58
------- -------
Total assets $ 4,127 $ 4,033
======= =======
Liabilities and Shareholders' Equity:
Liabilities
Notes, accounts payable and other
liabilities to subsidiaries <F1> $ 137 $ 197
Short-term borrowings 50 50
Other liabilities 85 49
Long-term debt 718 721
------- -------
Total liabilities 990 1,017
Redeemable cumulative preferred stock
held by subsidiary <F1> 47 55
Commitments and Contingencies
Shareholders' equity
Common stock 115 115
Additional paid-in capital 44 50
Retained earnings 510 420
Equity in undistributed earnings
of subsidiaries 2,599 2,350
Equity in net unrealized investment gain
(loss) of subsidiaries 182 359
Common stock held in treasury - at cost (356) (330)
Unearned restricted stock (4) (3)
------- -------
Total shareholders' equity 3,090 2,961
------- -------
Total liabilities and shareholders' equity $ 4,127 $ 4,033
======= =======
<FN>
<F1> Eliminated in consolidation.
</FN>
</TABLE>
See notes to condensed financial statements.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
PROVIDIAN CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF INCOME
Year Ended December 31
----------------------
1996 1995 1994
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Revenues
Dividends from subsidiaries <F1> $260 $270 $236
Interest on notes receivable from
subsidiaries <F1> 6 47 47
Management and service fees <F1> 43 35 28
Investment and other income, net 12 3 1
---- ---- ----
Total revenues 321 355 312
Expenses
Operating expenses 55 43 40
Interest expense 67 65 60
Interest expense on notes payable to
subsidiaries <F1> 14 15 13
---- ---- ----
Total expenses 136 123 113
---- ---- ----
Income before federal income tax
benefit and equity in undistributed net
income from subsidiaries 185 232 199
Federal income tax benefit 1 14 17
---- ---- ----
Income before equity in undistributed
net income of subsidiaries 186 246 216
Equity in undistributed net income
of subsidiaries 249 99 85
---- ---- ----
Net income $435 $345 $301
==== ==== ====
<FN>
<F1> Eliminated in consolidation.
</FN>
</TABLE>
See notes to condensed financial statements.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
PROVIDIAN CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31
-------------------------
1996 1995 1994
----- ----- -----
(Dollars in millions)
<S> <C> <C> <C>
Net Cash Flows provided by Operating Activities $ 149 $ 221 $ 223
Cash Flows from Investment Activities:
Change in short term investments (4) (1) (14)
Changes in investments in and advances
to subsidiaries <F1> 16 (58) (27)
Changes in operating property -- -- 1
----- ----- -----
Net Cash Flows used in Investment Activities 12 (59) (40)
Cash Flows from Financing Activities:
Issuance of long-term debt 63 111 107
Repayment of long-term debt (66) (84) --
Redemption of preferred stock -- -- (100)
Redemption of redeemable cumulative
preferred stock <F1> (8) (8) (8)
Purchase of common stock for treasury (55) (143) (139)
Dividends (94) (86) (82)
Proceeds from exercise of stock options 14 14 4
Change in notes payable to subsidiaries <F1> -- -- 125
----- ----- -----
Net Cash Flows used in Financing Activities (146) (196) (93)
----- ----- -----
Net Increase (Decrease) in Cash and
Cash Equivalents or Cash Overdraft during Year 15 (34) 90
Cash and Cash Equivalents (Cash Overdraft)
at Beginning of Year 55 89 (1)
----- ----- -----
Cash and Cash Equivalents at End of Year $ 70 $ 55 $ 89
===== ===== =====
<FN>
<F1> Eliminated in consolidation.
</FN>
</TABLE>
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 of Providian
Corporation (the "Company"), investment in subsidiaries is stated at cost plus
equity in undistributed income of subsidiaries since date of acquisition. The
condensed financial statements of the parent company should be read in
conjunction with the Consolidated Financial Statements and related Notes of
Providian Corporation and Subsidiaries.
Note B Plan and Agreement of Merger and Reorganization
On December 28, 1996, Providian Corporation executed a Plan and Agreement of
Merger and Reorganization (the "Merger Agreement") with AEGON N.V. ("AEGON") and
LT Merger Corp., a wholly owned subsidiary of AEGON ("Merger Sub"), pursuant to
which Merger Sub will merge with Providian Corporation. In connection with this
merger, Providian Corporation will spin off Providian Bancorp, Inc. to Providian
Corporation shareholders (the "Distribution"). For each share of Providian
Corporation stock owned, shareholders will receive one share of Providian
Bancorp, Inc. in the Distribution. Pursuant to the Merger Agreement, among other
things, (a) Providian Corporation will be the surviving corporation in the
merger and become a wholly owned subsidiary of AEGON, and (b) each shareholder
of Providian Corporation will be entitled to receive a number of shares of AEGON
common stock in exchange for shares of Providian Corporation's common stock.
Shareholders of Providian Corporation will receive in exchange for each share of
common stock, a fraction of an AEGON common share equal to $28.00 divided by the
"AEGON Share Price." Generally, the "AEGON Share Price" is equal to the average,
during the 20 trading days immediately preceding the last business day before
the date of the merger, of the average daily high and low prices per share of an
AEGON common share on the New York Stock Exchange (the "Fair Market Value at the
Effective Time"). The AEGON Share Price, however, is subject to a collar, for
the purposes of calculating the exchange ratio, which provides that the AEGON
Share Price shall be $61.153 if the Fair Market Value at the Effective Time is
equal to or greater than $61.153 and shall be $50.034 if the Fair Market Value
at the Effective Time is equal to or less than $50.034. The Merger Agreement
also provides that AEGON may terminate the agreement if the AEGON Share Price is
more than $66.713 and that Providian Corporation may terminate the agreement if
the AEGON Share Price is less than $44.475, unless the other party agrees to a
"make-whole" provision. In general, the "make-whole" provision would mean that
the value of the AEGON common shares issued in the merger would not be more than
$30.545 or less than $24.889 for each share of Providian Corporation common
stock.
The Board of Directors of Providian Corporation has unanimously approved the
Merger Agreement and the Distribution. The merger is subject to approval by
various regulatory authorities, approval by Providian Corporation's shareholders
and certain other conditions. The Distribution will occur only if all of the
conditions necessary for the merger are satisfied.
Should the Merger Agreement be terminated as a result of certain fiduciary
obligations of the Board of Directors of Providian Corporation, Providian
Corporation would be required to pay to AEGON liquidated damages of $80 million
to $100 million.
<PAGE>
Because consummation of the merger and the Distribution is subject to the above
conditions, no representations can be made as to whether, or when, the merger
and Distribution will be completed or as to the possible impact of the merger
and Distribution on the financial condition and results of operations of the
Company should the merger and Distribution occur.
Note C 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
income tax provision. See Note H to the Consolidated Financial Statements of
Providian Corporation and Subsidiaries for a description of the components of
the consolidated federal income tax provision.
Note D 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 $127 million 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 note receivable from the Company that results
from such loans constitutes the only material assets of Providian LLC. The MIPS
is 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 E Long-Term Debt
Long-term debt of the Company at December 31, 1996 and 1995 consisted of
Debentures and Notes in the amount of $718 million and $721 million,
respectively. See Note I 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 F Common Stock
During 1996, 1995 and 1994, the Company announced plans to repurchase a total of
11,500,000 shares of the Company's common stock on the open market. Through
December 31, 1996, the Company repurchased 9,500,000 shares (1,256,000 shares in
1996, 3,910,000 shares in 1995 and 4,334,000 shares in 1994) at an aggregate
cost of $337 million ($55 million in 1996, $143 million in 1995 and $139 million
in 1994).
Note G Preferred Stock
The Company has 6,000,000 shares of preferred stock, par value $5, authorized
for issuance in series.
<PAGE>
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
PROVIDIAN CORPORATION (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Redeemable Cumulative Preferred Stock Held By Subsidiary
The Company has designated 587,400 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, 1996 and 1995 were
467,400 and 547,400, respectively. The subsidiary has the right, on an annual
basis, to waive receipt of dividends and has waived any dividends payable
through 1996. The characteristics of the redeemable preferred stock are as
follows:
Shares outstanding
Dividend Shares Year at December 31 Period of
Series rate authorized issued 1996 1995 redemption
------ ---- ---------- ------ ---- ---- ----------
B 12.25 32,800 1980 32,800 41,000 1991-2000
C 14.00 75,000 1981 75,000 90,000 1992-2001
D 15.00 60,000 1982 60,000 70,000 1993-2002
E 14.25 90,000 1982 90,000 105,000 1993-2002
G 12.00 198,000 1983 78,000 91,000 1993-2002
H 11.50 70,000 1984 70,000 80,000 1994-2003
I 12.00 61,600 1984 61,600 70,400 1994-2003
======= ======= ========
587,400 467,400 547,400
======= ======= ========
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 1996: 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 the Series H; and 8,800 of the
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: 1997-$8 million; 1998-$8 million; 1999-$8 million, 2000-$8
million and 2001-$7 million. 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.
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.
Note H 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
<PAGE>
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
PROVIDIAN CORPORATION (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
which are, in the opinion of management, reasonable in relation to services
rendered.
Note I Contribution of Note Receivable to Subsidiary
On December 29, 1995, the Company made a non-cash investment of $307.7 million
into one of its wholly-owned subsidiaries. This investment was made through the
contribution to the subsidiary of a note receivable held by the Company.
Note J Subsequent Event
On February 4, 1997, Providian Bancorp, Inc. ("Bancorp"), a wholly owned
subsidiary of the Company, issued $160 million of redeemable preferred stock,
which pays quarterly dividends at an annual rate of 9.525%. Bancorp intends to
use the proceeds from the issuance to retire debt and redeem preferred stock
held by the Company ($43 million and $63 million, respectively, at December 31,
1996). The Company plans to use the proceeds to redeem its $95 million Sinking
Fund Debentures during 1997.
<PAGE>
<TABLE>
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
<CAPTION>
PROVIDIAN CORPORATION AND SUBSIDIARIES
Year Ended December 31, 1996 - (Dollars in millions)
Benefits,
Deferred Policy claims, and
policy & loan and Net increase in
acquisition Benefit Unearned contract Premium investme benefit
Segment costs<F1> reserves<F2> premiums claims income income<F3> reserves<F4>
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Providian Agency Group:
Life $ 827 $ 2,578 $ -- $ 22 $ 362 $ 266 $ 276
Health 72 99 -- 16 57 10 37
Other product lines 2 189 -- 3 24 18 29
------- ------- ------- ------- ------- ------- -------
Total 901 2,866 -- 41 443 294 342
Providian Direct Insurance:
Life 488 792 -- 25 319 70 219
Health 209 103 -- 31 172 11 83
Property & casualty 58 -- 52 118 167 15 146
Other product lines 6 30 -- 1 6 3 5
------- ------- ------- ------- ------- ------- -------
Total 761 925 52 175 664 99 453
Providian Bancorp 31 -- -- -- -- 575 141
Providian Capital Management 50 12,652 -- 2 92 917 799
Corporate and Other 2 -- -- -- -- 47 --
------- ------- ------- ------- ------- ------- -------
Consolidated $ 1,745 $16,443 $ 52 $ 218 $ 1,199 $ 1,932 $ 1,735
======= ======= ======= ======= ======= ======= =======
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
PROVIDIAN CORPORATION AND SUBSIDIARIES
Year Ended December 31, 1996 - (Dollars in millions)
Amortization
of deferred Commissions
policy and
acquisition expenses, Premiums
Segment costs<F5> net <F3> written
- ------------------------------------------------------------------
<S> <C> <C> <C>
Providian Agency Group:
Life $ 83 $ 90
Health 7 15 $ 56
Other product lines -- 13 5
------- -------
Total 90 118
Providian Direct Insurance
Life 59 36
Health 41 37 172
Property & casualty 15 30 165
Other product lines 1 5
------- -------
Total 116 108
Providian Bancorp 45 525
Providian Capital Management 38 68
Corporate and Other 1 35
------- -------
Consolidated $ 290 $ 854
======= =======
<PAGE>
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
PROVIDIAN CORPORATION AND SUBSIDIARIES
Year Ended December 31, 1995 - (Dollars in millions)
Benefits,
Deferred Policy claims, and
policy & loan and Net increase in
acquisition Benefit Unearned contract Premium investment benefit
Segment costs<F1> reserves<F2> premiums claims income income<F3> reserves<F4>
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Providian Agency Group:
Life $ 801 $ 2,496 $ -- $ 19 $ 359 $ 261 $ 268
Health 72 103 -- 15 60 10 43
Other product lines 2 191 -- 3 28 18 32
------- ------- ------- ------- ------- ------- -------
Total 875 2,790 -- 37 447 289 343
Providian Direct Insurance:
Life 477 739 -- 22 320 65 220
Health 223 109 -- 26 180 13 83
Property & casualty 55 -- 55 118 175 16 143
Other product lines 6 31 -- 1 7 3 6
------- ------- ------- ------- ------- ------- -------
Total 761 879 55 167 682 97 452
Providian Bancorp 35 -- -- -- -- 457 106
Providian Capital Management 64 12,692 -- 2 66 968 856
Corporate and Other 2 -- -- -- -- 50 --
------- ------- ------- ------- ------- ------- -------
Consolidated $ 1,737 $16,361 $ 55 $ 206 $ 1,195 $ 1,861 $ 1,757
======= ======= ======= ======= ======= ======= =======
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
PROVIDIAN CORPORATION AND SUBSIDIARIES
Year Ended December 31, 1995 - (Dollars in millions)
Amortization
of deferred Commissions
policy and
acquisition expenses, Premiums
Segment costs <F5> net <F3> written
- -----------------------------------------------------------------
<S> <C> <C> <C>
Providian Agency Group:
Life $ 76 $ 96
Health 10 17 $ 60
Other product lines -- 16 5
------- -------
Total 86 129
Providian Direct Insurance:
Life 55 37
Health 39 38 182
Property & casualty 11 31 177
Other product lines 1 5
------- -------
Total 106 111
Providian Bancorp 16 432
Providian Capital Management 35 59
Corporate and Other (2) 33
------- -------
Consolidated $ 241 $ 764
======= =======
<PAGE>
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
PROVIDIAN CORPORATION AND SUBSIDIARIES
Year Ended December 31, 1994 - (Dollars in millions)
Benefits,
Deferred Policy claims, and
policy & loan and Net increase in
acquisition Benefit Unearned contract Premium investment benefit
Segment costs<F1> reserves<F2> premiums claims income income<F3> reserves<F4>
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Providian Agency Group:
Life $ 806 $ 2,361 $ -- $ 16 $ 348 $ 252 $ 249
Health 75 102 -- 14 62 9 44
Other product lines 2 193 -- 3 30 19 40
------- ------- ------- ------- ------- ------- -------
Total 883 2,656 -- 33 440 280 333
Providian Direct Insurance:
Life 444 681 -- 21 308 61 216
Health 213 115 -- 27 186 13 82
Property & casualty 48 -- 53 119 176 16 143
Other product lines 7 32 -- 1 6 3 6
------- ------- ------- ------- ------- ------- -------
Total 712 828 53 168 676 93 447
Providian Bancorp 23 -- -- -- -- 322 71
Providian Capital Management 145 12,638 -- 2 25 848 681
Corporate and Other 2 1 -- -- -- 52 --
------- ------- ------- ------- ------- ------- -------
Consolidated $ 1,765 $16,123 $ 53 $ 203 $ 1,141 $ 1,595 $ 1,532
======= ======= ======= ======= ======= ======= =======
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
PROVIDIAN CORPORATION AND SUBSIDIARIES
Year Ended December 31, 1994 - (Dollars in millions)
Amortization
of deferred Commissions
policy and
acquisition expenses, Premiums
Segment costs<F5> net <F3> written
- --------------------------------------------------------------------
<S> <C> <C> <C>
Providian Agency Group:
Life $ 78 $ 94
Health 7 16 $ 63
Other product lines -- 13 6
------- -------
Total 85 123
Providian Direct Insurance:
Life 52 41
Health 37 40 189
Property & casualty 9 33 175
Other product lines 1 6
------- -------
Total 99 120
Providian Bancorp 40 301
Providian Capital Management 42 48
Corporate and Other 4 30
------- -------
Consolidated $ 270 $ 622
======= =======
<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.
</FN>
</TABLE>
<PAGE>
<TABLE>
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
- ---------------------------------------------------------------------------------------------------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996
Life insurance
in force $54,893 $ 3,697 $ 9,883 $61,079 16.2%
=========================================================
Premiums and other
considerations
Life insurance<F1> $ 776 $ 34 $ 55 $ 797 6.9%
Accident and health
insurance 236 38 37 235 15.7%
Property and casualty
insurance 150 4 21 167 12.6%
---------------------------------------------------------
Total premiums $ 1,162 $ 76 $ 113 $ 1,199 9.4%
=========================================================
Year Ended December 31, 1995
Life insurance
in force $56,676 $ 3,822 $ 9,455 $62,309 15.2%
=========================================================
Premiums and other
considerations
Life insurance<F1> $ 733 $ 32 $ 62 $ 763 8.1%
Accident and health
insurance 248 44 53 257 20.6%
Property and casualty
insurance 154 5 26 175 14.9%
---------------------------------------------------------
Total premiums $ 1,135 $ 81 $ 141 $ 1,195 11.8%
=========================================================
Year Ended December 31, 1994
Life insurance
in force $56,344 $ 3,724 $ 9,730 $62,350 15.6%
=========================================================
Premiums and other
considerations
Life insurance<F1> $ 702 $ 36 $ 50 $ 716 7.0%
Accident and health
insurance 257 59 51 249 20.5%
Property and casualty
insurance 145 5 36 176 20.5%
---------------------------------------------------------
Total premiums $ 1,104 $ 100 $ 137 $ 1,141 12.0%
=========================================================
<FN>
<F1> Includes annuities.
</FN>
</TABLE>
<PAGE>
<TABLE>
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
- ------------- ---------------------- ------ ----
<S> <C> <C> <C>
(2) Plan and Agreement of Merger and Reorganization dated as of 2.1 -
December 28, 1996 among the Registrant, AEGON N.V. and LT
Merger Corp. (Incorporated by reference as Exhibit 2 to
Current Report on Form 8-K filed with the Commission on
January 31, 1997.)
(3) Certificate of Incorporation as amended on November 21, 1996. 3.1 -
(Provided as part of electronic transmission.)
(3) By-Laws of Providian Corporation as amended on February 17, 3.2 -
1997. (Provided as part of electronic transmission.)
(4) Indenture dated April 1, 1983 between the Company and 4.1 -
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 September 1, 1989, between the 4.2 -
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. 1-6701.)
(4) Providian Corporation 1987 Shareholder Rights Agreement as 4.3 -
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.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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
- ------------- ---------------------- ------ ----
<S> <C> <C> <C>
(4) Indenture between the Company and First Trust of New York 4.4 -
(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.)
(4) Payment and Guarantee Agreement dated as of May 12, 1994 4.5 -
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 Monthly Income Preferred Stock 4.6 -
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 Option Incentive Plan, 10.1 -
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 Incentive Plan and 1989 10.2 -
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-Qualified Stock Option Plan, as 10.3 -
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 Company and Irving W. Bailey 10.4 -
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.)*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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
- ------------- ---------------------- ------ ----
<S> <C> <C> <C>
(10) Descriptions of Company's Management Incentive Plan, Providian 10.5 -
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.)*
(10) Providian Corporation 1989 Stock Option Plan, through August 10.6 -
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 between the Company and 10.7 -
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 Agreements between Providian Corporation and David 10.8 -
J. Miller, David B. Smith, James V. Elliott, Robert S. Greer,
Jr., Frederick C. Kessell, Shailesh J. Mehta, Lawrence
Pitterman, A. Sami Siddiqui and Robert L. Walker and Second
Amendment to Employment Agreement between Providian
Corporation and Irving W. Bailey II. (Incorporated by
reference as Exhibit 10.1 of the Company's Quarterly Report
for the quarter ended March 31, 1996, SEC File No. 1-6701.)
(10) Providian Bancorp Equity Unit Plan. (Incorporated by 10.10 -
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.)*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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
- ------------- ---------------------- ------ ----
<S> <C> <C> <C>
(10) Providian Corporation Deferred Compensation Plan for Deferral 10.11 -
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.)*
(10) Providian Corporation Deferred Compensation Plan under the 10.12 -
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 Compensation Plan under the 10.13 -
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 Corporation Supplemental 10.14 -
Non-qualified Thrift Savings Plan and Non-qualified 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 Ownership Plan (Incorporated by 10.15 -
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 Plan. (Incorporated by 10.16 -
reference as Exhibit 10.17 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1994.)*
(10) Operating and Policy Committee Deferred Compensation Plan. 10.17 -
(Incorporated by reference as Exhibit 10.19 of the Company's
Annual Report on Form 10-K for the year ended December 31,
1994.)*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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
- ------------- ---------------------- ------ ----
<S> <C> <C> <C>
(10) Employment agreement between the Company and Robert S. Greer, 10.19 -
Jr. (Incorporated by reference as Exhibit 10.19 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995.)*
(10) Providian Corporation's 1995 Stock Option Plan. (Incorporated 10.20 -
by reference as Appendix A of the Company's 1995 Proxy
Statement.)
(10) Revolving Credit Facility Agreement between the Company and 10.21 -
various domestic and international banks, effective date
August 21, 1995. (Incorporated by reference as Exhibit 10.21
of the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.)
(10) Revolving Credit Agreement between Providian Bancorp, Inc. and 10.22 -
various domestic and international banks, as terminated,
replaced and restated on May 14, 1996. (Incorporated by
reference as Exhibit 10.1 of the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 1996.)
(10) Third Amendment to Employment Agreement between Providian 10.23 -
Corporation and Irving W. Bailey II. (Provided as part of
electronic transmission.)*
(10) Amendments to Employment Agreements, dated November 6, 1996, 10.24
between Providian Corporation and David J. Miller,
Steven T. Downey, David B. Smith, James V. Elliott, Robert S.
Greer, Jr., Frederick C. Kessell, Shailesh J. Mehta, Lawrence
Pitterman, A. Sami Siddiqui and Robert J. Walker and Fourth
Amendment to Employment Agreement between Providian
Corporation and Irving W. Bailey II. (Provided as part of
electronic transmission.)*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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
- ------------- ---------------------- ------ ----
<S> <C> <C> <C>
(10) Agreement between Shailesh J. Mehta and the Company (Provided 10.25 -
as part of electronic transmission.)*
(12) Computation of ratio of earnings to fixed charges (Provided as 12.1 38
part of electronic transmission.)
(13) Portions of the Annual Report for the year ended December 31, 13.1 -
1996. (Provided as part of electronic transmission.)
(21) List of subsidiaries. (Provided as part of electronic 21.1 40
transmission.)
(23) Consent of independent auditors. (Provided as part of 23.1 42
electronic transmission.)
(27) Financial Data Schedule. (Provided as part of electronic 27.1 -
transmission.)
* This indicates a management contract or compensatory plan or arrangement.
</TABLE>
EXHIBIT 3.1
PROVIDIAN CORPORATION CERTIFICATE OF INCORPORATION
EXHIBIT 3.1
We, the undersigned, being the Chairman and Chief Executive Officer and
Assistant Secretary, respectively, of Providian Corporation, formerly 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 is duly adopted
in accordance with Section 245 of the Delaware Corporation Law Annotated, and
correctly sets forth without change the corresponding provisions of the
Corporation's Certificate of Incorporation as heretofore amended, and supercedes
the Certificate of Incorporation and all previous amendments thereto:
RESTATED CERTIFICATE OF INCORPORATION
OF
PROVIDIAN CORPORATION
FIRST. The name of the Corporation is Providian Corporation.
SECOND. The address of the Corporation's registered office in the State
of Delaware is 1209 Orange Street in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust 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 three hundred 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").
(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 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 relation 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 non-cumulative;
(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) 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.
(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 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.
(D) 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.
(1) $12.25 Cumulative Preferred Stock, Series B (Par Value $5.00 Per Share)
-----------------------------------------------------------------
RESOLVED, that 32,800 shares of the total authorized amount of
6,000,000 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 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.
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 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 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 (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 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 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 therefore 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
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 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 this 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 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 canceled, 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 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
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 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, 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 (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 of 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 State 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 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 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.
(2) $14.00 Cumulative Preferred Stock, Series C (Par Value $5.00 Per Share)
- -----------------------------------------------------------------------
RESOLVED, that 75,000 shares of the total authorized amount of
6,000,000 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 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
distributions 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 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 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 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.
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 $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 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 given 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 party 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 canceled, 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 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
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 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 qualifications 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 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 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 $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.
(3) $15.00 Cumulative Preferred Stock, Series D (Par Value $5.00 Per Share)
RESOLVED, that 60,000 shares of the total authorized amount of
6,000,000 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 quarterly period
shall be deemed to have been declared with respect in 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 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 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 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 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 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, upon
presentation and surrender at the place designated in such notice of other
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 canceled, 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 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
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 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 shareholders of the
Corporation and the election (by the holders of the shares of each series in
arrears) and qualification of their respective successors of (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 a 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, 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 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 note 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) and 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.
(4) $14.25 Cumulative Preferred Stock, Series E (Par Value $5.00 Per Share)
RESOLVED, that 90,000 shares of the total authorized amount of
6,000,000 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
payments 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 the Series of record on the date, not exceeding sixty (60)
days preceding the date for such payment, fixed for the purpose of 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.
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 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 divided 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, 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 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 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 to 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 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 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 and amount equal to
the dividends accrued and unpaid to the date fixed for redemption, whether of
not earned or declared, the total sum so payable being herein 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 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 the 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.
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, 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 canceled, 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
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 to 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 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 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 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 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 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 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 of 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 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 to 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 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 dissolution,
liquidation or winding up of the Corporation within the meaning of this
Paragraph E.
(5) $12.00 Cumulative Preferred Stock, Series G (Par Value of $5.00 Per
Share)
- --------------------------------------------------------------------------
RESOLVED, that 78,000 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 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. 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 Cooperation
or any subsidiary unless all such preferred shares are redeemed or an offer to
purchase is made to all holder 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 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 the 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 e 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 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, 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 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, its 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 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.
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 shares.
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 accompanies by proper instruments of
assignment in blank (if required by the Corporation) and bearing all necessary
stock transfer tax stamps thereto affixed and canceled, 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 stockholder 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 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 as "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 redemption 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 who
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.
(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 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 nonrecurringi 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 Section 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 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 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 the 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.
(6) $11.50 Cumulative Preferred Stock, Series H (Par Value $5.00 Per Share)
RESOLVED, that 70,000 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.
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 60 days after the date of record for determining
the holders to whom the dividend is to be paid; and
(i) 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
(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 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 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 of 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 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 provisions 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 morel 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 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 canceled, 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 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 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 the 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 provisions 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:
(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 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 liquidation,
dissolution, or winding up of the Corporation of the shares of such series for
each such share held or 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, whenever 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.
(7) $12.00 Cumulative Preferred Stock, Series I (Par Value $5.00 Per Share)
- -----------------------------------------------------------------------
RESOLVED, that 61,600 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.
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 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:
(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
(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 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 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 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
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.
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 canceled, 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 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 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 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
annual meeting of the 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:
(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 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 shares held of record and, to the extent permitted by
applicable law:
(a) each holders 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 $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.
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 Bylaws 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 unto three classes, as nearly
equal in number as possible, with the term of office of the first class to
expire at the 1987 annual meeting of the 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 the stockholders held in the
third year following the year of their election.
Advance 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% 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% 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% 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
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 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 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.
(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 any 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 the 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 more than ten
percent 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 of 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 Shareholders, if
such assignment or succession shall have occurred in the course of a transaction
or 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 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, warranties
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.
(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 are the subject to 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% 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 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
is 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 this Certificate of
Incorporation, By-Law, agreement, vote of stockholders of disinterested
directors or otherwise.
(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 Providian
Corporation was duly approved by the Board of Directors of the Corporation at a
meeting duly held on November 6, 1996.
IV. The Restated Certificate of Incorporation of Providian Corporation
set forth above only restates and integrates and does not further amend the
Certificate of Incorporation of Providian 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
Providian Corporation and signed by Irving W. Bailey, II, its Chairman and Chief
Executive Officer, and attested by R. Michael Slaven, its Assistant Secretary,
this 21st day of November, 1996.
/s/ Irving W. Bailey II Irving W. Bailey, II
Chairman and Chief Executive Officer
[Corporate Seal]
ATTEST:
/s/ R. Michael Slaven
R. Michael Slaven
Assistant Secretary
STATE OF KENTUCKY )
) SS
COUNTY OF JEFFERSON )
BE IT REMEMBERED that on this 21st day of November, 1996, personally
came before me, a Notary Public in and for the State and County aforesaid,
Irving W. Bailey, II, Chairman and Chief Executive Officer of Providian
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 Chairman and Chief Executive 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 Chairman and Chief Executive Officer and of R.
Michael Slaven, Assistant Secretary of said Corporation, to said foregoing
certificate are in the handwriting of the said Chairman and Chief Executive
Officer and Assistant 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/ Debbie H. Davis
Notary Public, State-at-Large, Kentucky
My Commission Expires: 5/10/97
[Notarial Seal]
EXHIBIT 3.2
Revised 2/28/97
BY-LAWS
OF
PROVIDIAN CORPORATION
ARTICLE I
Stockholders
Section 1.1 Annual Meetings. An annual meeting of stockholders shall be
held for the election of the directors at such date, time and place, either
within or without the State of Delaware, as may be designated by resolution of
the Board of Directors from time to time. Any other proper business may be
transacted at the annual meeting.
Section 1.2 Special Meetings. (a) 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).
(b) Special meetings of the stockholders of the Corporation may be held
at such time and at such place within or without the State of Delaware, as may
be stated in the call.
Section 1.3. Notice of Meetings; Waiver of Notice. Whenever
stockholders are required or permitted to take any action at a meeting, a
written notice of the meeting shall be given which shall state the place, date
and hour of the meeting, and, in the case of a special meeting, the purpose or
purposes for which the meeting is called. No business may be conducted at a
special meeting except such business as has been brought before the meeting
pursuant to the Corporation's notice of meeting. Unless otherwise provided by
law, the written notice of any meeting shall be given not less than ten (10) nor
more than fifty (50) days before the date of the meeting to each stockholder
entitled to vote at such meeting. If mailed, such notice shall be deemed to be
given when deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the Corporation. A
written waiver of notice, signed by the person or persons entitled thereto,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting of stockholders shall constitute a
waiver of notice of such meeting, except when the stockholder attends a meeting
for the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders need be specified in any written
waiver of notice.
Section 1.4. Adjournments. At any meeting of stockholders, annual or
special, the Chairman of the meeting may, without a stockholder vote, or the
stockholders present may, by majority vote, adjourn from time to time to
reconvene at the same or some other place, and notice need not be given of any
such adjourned meeting if the time and place thereof are announced at the
meeting at which the adjournment is taken. At the adjourned meeting the
Corporation may transact any business which might have been transacted at the
original meeting. If the adjournment is for more than thirty (30) days, or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.
Section 1.5. Quorum. At each meeting of stockholders, except where
otherwise provided by law or the Certificate of Incorporation or these By-laws,
the holders of a majority of the outstanding shares of each class of stock
entitled to vote at the meeting, present in person or by proxy, shall constitute
quorum. In the absence of a quorum, the Chairman of the meeting may, without a
stockholder vote, or the stockholders so present may, by majority vote, adjourn
the meeting from time to time in the manner provided by Section 1.4 of these
By-laws until a quorum shall attend.
Section 1.6. Organization. Meetings of stockholders shall be presided
over by the Chairman of the Board or in the Chairman's absence by the President
or in their absence by a chairman chosen at the meeting. The Secretary shall act
as secretary of the meeting, but in his absence the chairman of the meeting may
appoint any person to act as secretary of the meeting.
Section 1.7. Voting; Proxies. Each stockholder entitled to vote at any
meeting of stockholders shall be entitled to one vote for each share of stock
held by such stockholder which has voting power upon the matter in question.
Each stockholder entitled to vote at a meeting of stockholders may authorize
another person or persons to act for such stockholder by proxy, but no such
proxy shall be voted or acted upon more than eleven months after its date.
Voting at meetings of stockholders need not be by written ballot or need not be
conducted by inspectors unless the holders of a majority of the outstanding
shares of all classes of stock entitled to vote thereon present in person or by
proxy at such meeting shall so determine. At all meetings of stockholders for
election of directors a plurality of the votes cast shall be sufficient to
elect. All other elections and questions shall, unless otherwise provided by law
or by the Certificate of Incorporation or by these By-laws, be decided by the
vote of the holders of a majority of the outstanding shares of all classes of
stock entitled to vote thereon present in person or by proxy at the meeting,
provided that (except as otherwise required by law or by the Certificate of
Incorporation or by these By-laws) the Board of Directors may require a larger
vote upon any election or question.
Section 1.8. Fixing Date for Determination of Stockholders of Record.
In order that the Corporation may determine the stockholders entitled to notice
of or to vote at any meeting of stockholders or any adjournment thereof, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may fix, in advance, a record date, which shall not be
more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action. If no record
date is fixed: (1) the record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held; and (2) the record date for determining stockholders
for any other purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
Section 1.9. List of Stockholders Entitled to Vote. The Secretary shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to beheld,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof and may be inspected by any stockholder who is present. Upon the willful
neglect or refusal of the directors to produce such a list in any meeting for
the election of directors, they shall be ineligible for election to any office
at such meeting. The stock ledger shall be the only evidence as to who are the
stockholders entitled to examine the stock ledger, the list of stockholders of
the books of the Corporation, or to vote in person or by proxy at any meeting of
stockholders.
Section 1.10. Notice of Stockholder Business. At an annual meeting of
the stockholders, only such business shall be conducted as shall have been
properly brought before the meeting. To be properly brought before an annual
meeting business must be (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (b)
otherwise properly brought before the meeting by or at the direction of the
Board of Directors, or (c) otherwise properly brought before the meeting by a
stockholder. For business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary of the Corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation, not less than sixty (60) days nor more than ninety (90) days prior
to the meeting; provided, however, that in the event that less than seventy (70)
days' notice or prior public disclosure of the date of the meeting is given or
made to stockholders, notice by the stockholder to be timely must be so received
not later than the close of business on the tenth day following the day on which
such notice of the date of the annual meeting was mailed or such public
disclosure was made. A stockholder's notice to the Secretary shall set forth as
to each matter the stockholder proposes to bring before the annual meeting (a) a
brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting, (b)
the name and address, as they appear on the Corporation's books, of the
stockholder proposing such business, (c) the class and number of shares of the
Corporation which are beneficially owned by the stockholder, and (d) any
material interest of the stockholder in such business. Notwithstanding anything
in these By-laws to the contrary, no business shall be conducted at an annual
meeting except in accordance with the procedures set forth in this Section 1.10.
The Chairman of an annual meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
and in accordance with the provisions of this Section 1.10, and if the Chairman
should so determine, the Chairman shall so declare to the meeting and any such
business not properly brought before the meeting shall not be transacted.
ARTICLE II
Board of Directors
Section 2.1. General Powers. The Board of Directors shall manage the
business and affairs of the Corporation, and, subject to any restrictions
imposed by law, the Articles of Incorporation or these By-laws, may exercise all
powers of the Corporation.
Section 2.2. Number and Term of Directors. (a) Except as otherwise
fixed by or pursuant to the provisions of Article FOURTH of the Certificate of
Incorporation 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 resolution adopted by a majority of the total number of
authorized directors (whether or not there exists any vacancies in previously
authorized directorships at the time any such resolutions is presented to the
Board for adoption), but shall be not less than the minimum number prescribed by
law nor more than twenty-five (25). The directors, other than those who may be
elected by the holders of any class or series of stock having a preference over
the Common Stock as to dividends or upon liquidation, shall be classified, with
respect to the time for which they severally hold office, into three classes, as
nearly equal in number as possible, as determined by the Board of Directors of
the Corporation, one class to be originally elected for a term expiring at the
annual meeting of stockholders to be held in 1986, another class to be
originally elected for a term expiring at the annual meeting of stockholders to
be held in 1987, and another class to be originally elected for a term expiring
at the annual meeting of stockholders to be held in 1988, with each class to
hold office until its successor is elected and qualified. 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.
(b) Advance notice of stockholder nominations for the election of
directors shall be given in the manner provided in Section 2.9 of Article II of
these By-laws.
(c) No person shall be eligible to serve as a director after the annual
meeting of stockholders next after such person reaches seventy-two (72) years of
age. When the employment status of a director changes, that person shall offer
his or her resignation from the Board of Directors.
(d) Except as otherwise provided for or fixed by or pursuant to the
provisions of Article FOURTH of the Certificate of Incorporation 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 authorized number of directors or any vacancies in the
Board of Directors resulting from death, resignation, retirement,
disqualification, remove from office or other cause may be filled only 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.
(e) 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 to elect additional directors under specified circumstances, any
director, or the entire Board of Directors, may be removed from office at any
time, but only for cause and only by the affirmative vote of the holders of at
least eighty (80) percent of the voting power of all of the then outstanding
shares of the stock entitled to vote generally in the election of directors,
voting together as a single class.
Section 2.3. Regular Meetings. Regular meetings of the Board of
Directors may be held at such places within or without the State of Delaware and
at such times as the Board of Directors may from time to time determine, and if
so determined notices thereof need not be given.
Section 2.4. Special Meetings. Special meetings of the Board of
Directors may be held at any time or place within or without the State of
Delaware whenever called by the Chairman of the Board or by a majority of the
Board of Directors. Reasonable notice thereof shall be given by the Chairman of
the Board or the Secretary, or by the directors calling the meeting, to each
director who has not waived such notice, unless all directors are present.
Section 2.5. A majority of the directors qualified and in office at any
time shall constitute a quorum for the transaction of business at any meeting of
the Board except that if there is an event number of directors qualified and in
office, one-half of the members of the Board shall constitute a quorum. Whether
or not a quorum is present, a majority of the directors present at any meeting
of the Board may adjourn the meeting to some later time. Unless otherwise
provided in the Certificate of Incorporation or elsewhere in these By-laws, when
a quorum is present, the vote of a majority of the directors present shall
decide any question.
Section 2.6. Organization. Meetings of the Board of Directors shall be
presided over by the Chairman of the Board or in his absence by the President or
in their absence by a chairman chosen at the meeting. The Secretary shall act as
secretary of the meeting, but in his absence the chairman of the meeting may
appoint any person to act as secretary of the meeting.
Section 2.7. Informal Action by Directors. Any action required or
permitted to be taken at any meeting of the Board of Directors, or of any
committee thereof, may be taken without a meeting if all members of the Board of
Directors or of such committee, as the case may be, consent thereto in writing,
and the writing or writings are filed with the minutes or proceedings of the
Board of Directors or committee.
Section 2.8. Compensation. Fees for service as a director and/or fees and
reimbursement for expenses for attendance at meetings of the Board or any
committee thereof may be fixed by resolution of the Board.
Section 2.9. Notice of Stockholder Nominees. Only persons who are
nominated in accordance with the procedures set forth in this Section 2.9 shall
be eligible for election as directors. Nominations of persons for election to
the Board of Directors of the Corporation may be made at a meeting of
stockholders of the Corporation entitled to vote for the election of directors
at the meeting who complied with the notice procedures set forth in this Section
2.9. Such nominations, other than those made by or at the direction of the Board
of Directors, shall be made pursuant to timely notice in writing to the
Secretary of the Corporation. To be timely, a stockholder's notice shall meet
the timeliness requirements of Section 1.10 of these By-laws. Such stockholder's
notice shall set forth (a) as to each person whom the stockholder proposes to
nominate for election or re-election as a director, (i) the name, age, business
address and residence address of such person, (ii) the principal occupation or
employment of such person, (iii) the class and number of shares of the
Corporation which are beneficially owned by such person and (iv) any other
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended (including without limitation such person's written consent to being
named in the proxy statement as a nominee and to serving as a director if
elected); and (b) as to the stockholder giving the notice of (i) the name and
address, as they appear on the Corporation's books, of such stockholder and (ii)
the class and number of shares of the Corporation which are beneficially owned
by such stockholder. At the request of the Board of Directors any person
nominated by the Board of Directors for election as a director shall furnish to
the Secretary of the Corporation that information required to be set forth in a
stockholder's notice of nomination which pertains to the nominee. No person
shall be eligible for election as a director of the Corporation unless nominated
in accordance with the procedures set forth in this Section 2.9. The Chairman of
the meeting shall, if the facts warrant, determine and declare to the meeting
that a nomination was not made in accordance with the procedures prescribed by
these By-laws, and if the Chairman should so determine, the Chairman shall so
declare to the meeting and the defective nomination shall be disregarded.
ARTICLE III
Committees
Section 3.1. Committees. The Board of Directors may, by resolution
passed by majority of the whole Board, designate one or more committees, each
committee to consist of two or more of the directors of the Corporation. Any
such committee, to the extent provided in the resolution, shall have and may
exercise the powers of the Board of Directors in the management of the business
and affairs of the Corporation, and may authorize the seal of the Corporation to
be affixed to all papers which may require it.
ARTICLE IV
Officers
Section 4.1. Executive Officers; Election; Qualifications; Term of
Office; Resignation; Vacancies. The Board of Directors shall choose a Chairman,
a President, a Secretary and a Treasurer. The Board of Directors may also choose
one or more Vice Presidents, one or more Assistant Secretaries and one or more
Assistant Treasurers. Each such officer shall hold office until the first
meeting of the Board of Directors after the annual meeting of stockholders next
succeeding such officer's election, and until such officer's successor is
elected and qualified or until the earlier resignation or removal of such
officer. Any officer may resign at any time upon written notice to the
Corporation. Any number of offices may be held by the same person. Any vacancy
occurring in any office of the Corporation by death, resignation, removal or
otherwise may be filled for the unexpired portion of the term by the Board of
Directors at any regular meeting or special meeting.
Section 4.2. Chairman of the Board. The Chairman of the Board shall
preside at all meetings of the Board of Directors and of the stockholders at
which the Chairman shall be present. The Chairman shall be the chief executive
officer and shall have general charge and supervision of the business of the
Corporation; and, in general, the Chairman shall perform all duties incident to
the office of chairman of a corporation, and such other duties as, from time to
time, may be assigned by the Board of Directors or as may be provided by law.
Section 4.3. President. In the absence of the Chairman of the Board,
the President shall preside at all meetings of the Board of Directors and of the
stockholders at which the President shall be present. The President shall have
and may exercise such powers as are from time to time assigned by the Board of
Directors or by the Chairman or as may be provided by law.
Section 4.4. Vice Presidents. The Vice President or Vice Presidents shall
perform such duties and exercise such functions as may be assigned to them by
the Board of Directors or the Chairman of the Board or as may be provided by
law.
Section 4.5. Secretary or Assistant Secretary. The Secretary, or if
there be none, the Assistant Secretary, shall record all the proceedings of the
meetings of the stockholders and directors and of any committees in a book to be
kept for that purpose; shall see that all notices are duly given in accordance
with the provisions of these By-laws or as required by law; shall be custodian
of the records of the Corporation; shall see that the corporate seal is affixed
to all documents the execution of which, on behalf of the Corporation, under its
seal, is duly authorized, and when so affixed may attest the same; and, in
general, shall perform all duties incident to the office of Secretary of a
Corporation, and such other duties as, from time to time, may be assigned by the
Board of Directors or the Chairman or as may be provided by law.
Section 4.6. Treasurer. The Treasurer shall have charge of and be
responsible for all funds, securities, receipts and disbursements of the
Corporation, and shall deposit or cause to be deposited, in the name of the
Corporation, all moneys or other valuable effects in such banks, trust companies
or other depositories as shall, from time to time, be selected by or under
authority of the Board of Directors; if required by the Board of Directors, and
shall give a bond for the faithful discharge of the duties, with such surety or
sureties as the Board of Directors may determine and shall keep or cause to be
kept full and accurate records of all receipts and disbursements in books of the
Corporation and shall render to the Chairman and to the Board of Directors,
whenever requested, an account of the financial condition of the Corporation;
and, in general, shall perform all the duties incident to the office of
Treasurer of a Corporation, and such other duties as may be assigned by the
Board of Directors or the Chairman or as may be provided by law.
Section 4.7. Other Officers. The Board of Directors may from time to time
appoint such other officers, agents or employees, and may delegate to them such
powers and duties as it may deem desirable.
ARTICLE V
Stock
Section 5.1. Certificates. Every holder of stock shall be entitled to
have a certificate signed by or in the name of the Corporation by the Chairman
of the Board of Directors, or the President or a Vice President, and by the
Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary,
of the Corporation, certifying the number of shares owned by such stockholder in
the Corporation. If such certificate is countersigned (1) by a transfer agent
other than the Corporation or its employee, or (2) by a registrar other than the
Corporation or its employee, any other signature on the certificate may be a
facsimile. In case any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent, or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if such
person were such officer, transfer agent, or registrar at the date of issue.
Section 5.2. Lost, Stolen or Destroyed Stock Certificates; Issuance of
New Certificates. The Corporation may issue a new certificate of stock in the
place of any certificate theretofore issued by it, alleged to have been lost,
stolen or destroyed, and the Corporation may require the owner of the lost,
stolen or destroyed certificate, or the legal representative of such owner, to
give the Corporation a bond sufficient to indemnify it against any claim that
may be made against it on account of the alleged loss, theft or destruction of
any such certificate or the issuance of such new certificate.
ARTICLE VI
Indemnity
Section 6.1. The officers, directors, employees and agents of the
Corporation shall have such rights to indemnification as are provided in the
Article ELEVENTH of the Certificate of Incorporation of the Corporation.
<PAGE>
ARTICLE VII
Miscellaneous
Section 7.1. Fiscal Year. The fiscal year of the Corporation shall be
determined by resolution of the Board of Directors.
Section 7.2. Seal. The corporate seal shall have the name of the
Corporation inscribed thereon and shall be in such form as may be approved from
time to time by the Board of Directors.
Section 7.3. Form of Records. Any records maintained by the Corporation
in the regular course of its business, including its stock ledger, books of
account, and minute books, may be kept on, or be in the form of punch cards,
magnetic tape, photographs, micro-photographs, or any other information clearly
legible form within a reasonable time. The Corporation shall so convert any
records so kept upon the request of any person entitled to inspect the same.
Section 7.4. Amendment of By-laws. Subject to the provisions of the
Certificate of Incorporation, these By-laws may be altered, amended or repealed
at any regular meeting of the stockholders (or at any special meeting thereof
duly called for that purpose) by a majority vote of the shares represented and
entitled to vote at such meeting; provided that in the notice of such special
meeting notice or such purpose shall be given. Subject to the laws of the State
of Delaware, the Certificate of Incorporation and these By-laws, the Board of
Directors may by majority vote of those present at any meeting at which a quorum
is present amend these By-laws, or enact such other By-laws as in their judgment
may be advisable for the regulation of the conduct of the affairs of the
Corporation.
EXECUTION COPY
EXHIBIT 10.23
EXHIBIT 10.23
THIRD AMENDMENT
THIRD AMENDMENT dated as of June 1, 1996, between Providian
Corporation, a Delaware corporation (the "Company"), and Irving W. Bailey, II
(the "Executive").
W I T N E S S E T H:
WHEREAS, the Company and the Executive are parties to an
employment agreement dated as of February 17, 1988, as amended August 9, 1989
and February 21, 1996 (as so amended, the "Employment Agreement"); and
WHEREAS, the Company and the Executive desire to amend the
Employment Agreement.
NOW, THEREFORE, it is agreed as follows:
1. Section 1(k)(ii) of the Employment Agreement is amended to read in its
entirety as follows:
(ii) a breach of Section 2(c) below;
2. Section 1(q) of the Employment Agreement is amended by adding to the end
of clause (ii) thereof the following:
; or
(iii) to the extent set forth in Section 10(d), by virtue of
the Company providing a notice pursuant to Section 2(b) that causes the
initial Term of Employment not to be extended for at least two one-year
periods (i.e., until at least June 30, 2001).
3. Section 1(r) of the Employment Agreement is amended to read in its
entirety as follows:
(r) "Total Cash Compensation" shall mean the
Executive's Base Salary and any bonuses earned by the Executive under
Sections 4 and 5 below for any year whether or not such Base Salary or
bonus is paid in a subsequent year; provided that said amount shall be
increased for each year beginning January 1, 1997 by a replacement
amount equal to the Executive's Base Salary for such year multiplied by
the Replacement Percentage. For purposes of the foregoing sentence, the
Replacement Percentage shall equal 0.4 times the portion of the
Executive's Award Percentage, as defined in Company's Management
Incentive Plan, actually earned by the Executive for the applicable
year.
4. Section 2 of the Employment Agreement is amended to read in its entirety
as follows:
2. Term of Employment, Positions and Duties.
(a) The Company hereby employs the Executive, and the
Executive hereby accepts employment with the Company, for the Term of
Employment, in the positions and with the duties and responsibilities
set forth below, and upon such other terms and conditions as are
hereinafter stated.
(b) The initial Term of Employment shall commence on
the date hereof and shall terminate upon the close of business on June
30, 1999. The Term of Employment shall automatically be extended for
successive one-year periods unless either Party gives written notice to
the other, not less than one year prior to the otherwise scheduled
expiration of the Term of Employment, that it or he does not want the
term to so extend. Unless the Term of Employment shall have previously
expired, upon the occurrence of a Change in Control, the Term of
Employment shall automatically be extended until the third anniversary
of the date on which a Change in Control occurs, notwithstanding any
prior notice of non-extension given pursuant to the immediately
preceding sentence; provided, that any extension pursuant to this
sentence shall not extend the Term of Employment beyond the Executive's
65th birthday.
(c) At all times during the Term of Employment, the
Executive shall be employed as the Chairman of the Board or the Chief
Executive Officer, or both, of the Company. It is also the intention of
the Parties that at all times during the Term of Employment the
Executive shall serve as a member of the Board.
(d) During the Term of Employment, the Executive
shall devote his full business time and attention to the business and
affairs of the Company and shall use his best efforts, skills and
abilities to promote its interests. Anything herein to the contrary
notwithstanding, nothing shall preclude the Executive from serving on
the board of directors of other corporations, engaging in charitable
and community affairs or managing his personal investments.
5. Section 10(d) of the Employment Agreement is amended to read in its
entirety as follows:
(d) Termination Without Cause. In the event there is a Termination Without
Cause of the Executive's employment, he shall be entitled to:
(i) his Base Salary through the date of termination of his employment;
(ii) a bonus equal to the product of (A) his Base
Salary in effect on the date of termination of his employment prorated
to the date of such termination, and (B) the Bonus Percentage;
(iii) his Base Salary, at the rate in effect at
termination of his employment, until the second anniversary of the end
of the initial Term of Employment under Section 2(b) or, if later,
until the earlier of (A) 24 months following his termination of
employment and (B) the Executive's 65th birthday;
(iv) annual bonuses equal to his Base Salary in effect
at termination of his employment multiplied by the Bonus Percentage,
until the second anniversary of the end of the initial Term of
Employment under Section 2(b) or, if later, until the earlier of (A) 24
months following his termination of employment and (B) the Executive's
65th birthday, such bonuses to be paid at the same time annual bonuses
are regularly paid by the Company to its senior management and prorated
for any portion of the period which is less than a full calendar year;
(v) any bonus earned or accrued but not yet paid under Section 4 or 5
above;
(vi) any bonus or other compensation deferred under any plans and programs of
the Company in accordance with such plans and programs;
(vii) the pension, if any, provided in Section 7 above;
(viii) continued vesting following termination of his employment in any
awards of restricted stock made to the Executive, until the second anniversary
of the end of the initial Term of Employment under Section 2(b) or, if later,
until the earlier of (A) 24 months following his termination of employment and
(B) the Executive's 65th birthday;
(ix) continuation in all employee benefit plans or
programs in which he was participating at the termination of his
employment, including, without limitation, continued accrual of
benefits under the Plan and Excess Benefit Plan, until the second
anniversary of the end of the initial Term of Employment under Section
2(b) or, if later, 24 months following his termination of employment,
but in no event beyond the earlier of (A) the Executive's 65th birthday
and (B) the date, if any, the Executive receives equivalent coverage
and benefits under the plans and programs of a subsequent employer; and
(x) other benefits in accordance with the plans and programs of the
Company.
In the event that the Executive may not be continued
in any employee benefit plan or program, as provided in (ix) above, he
shall be provided with the after-tax economic equivalent thereof.
Without limiting the foregoing, if the Executive may not be continued
as a participant in the Plan, the Company shall have the option to make
equivalent contributions to the Excess Benefit Plan.
In the event there is a Termination Without Cause of
the Executive's employment, the Company shall, upon the Executive's
written request furnished to the Company within 20 days following such
Termination Without Cause, make a lump sum payment to the Executive in
amount equal to the Spread on the Payment Date with respect to the
relevant options in each option grant, multiplied in each case by the
number of relevant options in each option grant. For the purpose of the
immediately preceding sentence, "relevant options" means any options
granted by the Company to the Executive to purchase its common stock
that (i) are outstanding on the date of termination of his employment
and remain unexercised on the Payment Date (whether or not such options
expire by their terms prior to the Payment Date) and (ii) by their
terms, were exercisable on the date of termination of his employment or
which would have become exercisable if his employment had continued
until the second anniversary of the end of the initial Term of
Employment under Section 2(b) or, if later, until the earlier of (X) 24
months following his termination of employment or (Y) the Executive's
65th birthday. The Company shall make such payment on the Payment Date
(or, if later, promptly following the Executive's request) and, as a
condition to making such payment, the Executive agrees that all
outstanding options granted to him with respect to which such payment
is made shall thereupon be cancelled. In the event that the Executive
does not request such payment, each option grant shall become fully
exercisable as of the date of termination of employment and shall
remain outstanding for the remainder of the originally scheduled term.
For purposes of this Section 10(d), a Termination
Without Cause of the Executive's employment shall be deemed to have
occurred in the event the Company provides a notice pursuant to Section
2(b) that causes the initial Term of Employment not to be extended for
at least two one-year periods (i.e., until at least June 30, 2001). In
the event such a notice is given, the Executive will be entitled to the
benefits set forth above as if the Termination Without Cause (and thus
the termination of the Executive's employment) had occurred on the last
day of the Term of Employment (i.e., on June 30, 1999 or 2000, as the
case may be); provided, however, that if the initial Term of Employment
is extended for one one-year period (so that the Term of Employment
ends on June 30, 2000), the references to "24 months" in clauses
(iii)(A), (iv)(A), (viii)(A) and (ix)(A) of this Section 10(d), and in
clause (ii)(X) of the immediately preceding paragraph, shall be deemed
to be "12 months" rather than "24 months."
6. General. Except for the amendments specified in Sections 1 through 3
above, the Employment Agreement shall continue in effect without any change.
IN WITNESS WHEREOF, the undersigned have executed this
Amendment as of the date first written above.
Providian Corporation
By
Irving W. Bailey, II
EXHIBIT 10.24
EXHIBIT 10.24
CONFIDENTIAL
FIRST AMENDMENT
FIRST AMENDMENT dated as of November 6, 1996, between Providian
Corporation, a Delaware corporation (the "Corporation"), and David J. Miller
(the "Executive"). W I T N E S S E T H: WHEREAS, the Company and the Executive
are parties to an employment agreement dated as of February 21, 1996 (the
"Employment Agreement"); and WHEREAS, the Company and the Executive desire to
amend the Employment Agreement. NOW, THEREFORE, it is agreed as follows: 1. The
definition of "Bonus Percentage" contained in Section 6(a)(i)(B) of the
Employment Agreement is amended to read in its entirety as follows: For purposes
of this Section 6(a)(i)(B), "Bonus Percentage" shall mean the highest percentage
obtained by dividing (1) the sum of (x) the annual bonus earned by the Executive
in any year beginning with the third full year before the date on which a Change
in Control occurs and (y) the long-term incentive bonus, if any, received by the
Executive for any one Performance Cycle that included such prior year divided,
if payouts under the applicable long-term incentive award plan are scheduled
less frequently than annually, by the number of years between scheduled payouts
under such long-term incentive award plan, by (2) the base salary paid to the
Executive for such year. 2. General. Except for the amendments specified in
Section 1 above, the Employment Agreement shall continue in effect without any
change. IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the date first written above. PROVIDIAN CORPORATION
By /s/ Irving W. Bailey II
/s/ David J. Miller
David J. Miller
<PAGE>
CONFIDENTIAL
FIRST AMENDMENT
FIRST AMENDMENT dated as of November 6, 1996, between Providian
Corporation, a Delaware corporation (the "Corporation"), and Steven T. Downey
(the "Executive"). W I T N E S S E T H: WHEREAS, the Company and the Executive
are parties to an employment agreement dated as of February 21, 1996 (the
"Employment Agreement"); and WHEREAS, the Company and the Executive desire to
amend the Employment Agreement. NOW, THEREFORE, it is agreed as follows: 1. The
definition of "Bonus Percentage" contained in Section 6(a)(i)(B) of the
Employment Agreement is amended to read in its entirety as follows: For purposes
of this Section 6(a)(i)(B), "Bonus Percentage" shall mean the highest percentage
obtained by dividing (1) the sum of (x) the annual bonus earned by the Executive
in any year beginning with the third full year before the date on which a Change
in Control occurs and (y) the long-term incentive bonus, if any, received by the
Executive for any one Performance Cycle that included such prior year divided,
if payouts under the applicable long-term incentive award plan are scheduled
less frequently than annually, by the number of years between scheduled payouts
under such long-term incentive award plan, by (2) the base salary paid to the
Executive for such year. 2. General. Except for the amendments specified in
Section 1 above, the Employment Agreement shall continue in effect without any
change. IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the date first written above. PROVIDIAN CORPORATION
By /s/ Irving W. Bailey II
/s/ Steven T. Downey
Steven T. Downey
<PAGE>
CONFIDENTIAL
FIRST AMENDMENT
FIRST AMENDMENT dated as of November 6, 1996, between Providian
Corporation, a Delaware corporation (the "Corporation"), and David B. Smith (the
"Executive"). W I T N E S S E T H: WHEREAS, the Company and the Executive are
parties to an employment agreement dated as of February 21, 1996 (the
"Employment Agreement"); and WHEREAS, the Company and the Executive desire to
amend the Employment Agreement. NOW, THEREFORE, it is agreed as follows: 1. The
definition of "Bonus Percentage" contained in Section 6(a)(i)(B) of the
Employment Agreement is amended to read in its entirety as follows: For purposes
of this Section 6(a)(i)(B), "Bonus Percentage" shall mean the highest percentage
obtained by dividing (1) the sum of (x) the annual bonus earned by the Executive
in any year beginning with the third full year before the date on which a Change
in Control occurs and (y) the long-term incentive bonus, if any, received by the
Executive for any one Performance Cycle that included such prior year divided,
if payouts under the applicable long-term incentive award plan are scheduled
less frequently than annually, by the number of years between scheduled payouts
under such long-term incentive award plan, by (2) the base salary paid to the
Executive for such year. 2. General. Except for the amendments specified in
Section 1 above, the Employment Agreement shall continue in effect without any
change. IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the date first written above.
PROVIDIAN CORPORATION
By /s/ Irving W. Bailey II
/s/ David B. Smith
David B. Smith
<PAGE>
CONFIDENTIAL
FIRST AMENDMENT
FIRST AMENDMENT dated as of November 6, 1996, between Providian
Corporation, a Delaware corporation (the "Corporation"), and James V. Elliott
(the "Executive"). W I T N E S S E T H: WHEREAS, the Company and the Executive
are parties to an employment agreement dated as of February 21, 1996 (the
"Employment Agreement"); and WHEREAS, the Company and the Executive desire to
amend the Employment Agreement. NOW, THEREFORE, it is agreed as follows: 1. The
definition of "Bonus Percentage" contained in Section 6(a)(i)(B) of the
Employment Agreement is amended to read in its entirety as follows: For purposes
of this Section 6(a)(i)(B), "Bonus Percentage" shall mean the highest percentage
obtained by dividing (1) the sum of (x) the annual bonus earned by the Executive
in any year beginning with the third full year before the date on which a Change
in Control occurs and (y) the long-term incentive bonus, if any, received by the
Executive for any one Performance Cycle that included such prior year divided,
if payouts under the applicable long-term incentive award plan are scheduled
less frequently than annually, by the number of years between scheduled payouts
under such long-term incentive award plan, by (2) the base salary paid to the
Executive for such year. 2. General. Except for the amendments specified in
Section 1 above, the Employment Agreement shall continue in effect without any
change. IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the date first written above. PROVIDIAN CORPORATION
By /s/ Irving W. Bailey II
/s/ James V. Elliott
James V. Elliott
<PAGE>
2
CONFIDENTIAL
FIRST AMENDMENT
FIRST AMENDMENT dated as of November 6, 1996, between Providian
Corporation, a Delaware corporation (the "Corporation"), and Robert S. Greer,
Jr. (the "Executive"). W I T N E S S E T H: WHEREAS, the Company and the
Executive are parties to an employment agreement dated as of February 21, 1996
(the "Employment Agreement"); and WHEREAS, the Company and the Executive desire
to amend the Employment Agreement. NOW, THEREFORE, it is agreed as follows: 1.
The definition of "Bonus Percentage" contained in Section 6(a)(i)(B) of the
Employment Agreement is amended to read in its entirety as follows: For purposes
of this Section 6(a)(i)(B), "Bonus Percentage" shall mean the highest percentage
obtained by dividing (1) the sum of (x) the annual bonus earned by the Executive
in any year beginning with the third full year before the date on which a Change
in Control occurs and (y) the long-term incentive bonus, if any, received by the
Executive for any one Performance Cycle that included such prior year divided,
if payouts under the applicable long-term incentive award plan are scheduled
less frequently than annually, by the number of years between scheduled payouts
under such long-term incentive award plan, by (2) the base salary paid to the
Executive for such year. 2. Section 6(a) of the Employment Agreement is amended
to delete the word "and" at the end of subparagraph (ii) thereof; to replace the
period at the end of subparagraph (iii) thereof with "; and "; and to add the
following new subparagraph (iv): (iv) At the Executive's request made within 90
days after the date of the Executive's termination of employment, other than a
termination of employment pursuant to Section 5(c)(vi) hereof, the Corporation
shall purchase the Executive's residence in Jefferson County, Kentucky, at a
price equal to the Executive's purchase price plus cost of improvements with
respect to such residence. In addition, if requested, the Corporation shall
provide the Executive with a moving allowance not to exceed $25,000. 3. General.
Except for the amendments specified in Sections 1 and 2 above, the Employment
Agreement shall continue in effect without any change. IN WITNESS WHEREOF, the
undersigned have executed this Amendment as of the date first written above.
PROVIDIAN CORPORATION
By /s/ Irving W. Bailey II
/s/ Robert S. Greer, Jr.
Robert S. Greer, Jr.
<PAGE>
CONFIDENTIAL
FIRST AMENDMENT
FIRST AMENDMENT dated as of November 6, 1996, between Providian
Corporation, a Delaware corporation (the "Corporation"), and Frederick C.
Kessell (the "Executive"). W I T N E S S E T H: WHEREAS, the Company and the
Executive are parties to an employment agreement dated as of February 21, 1996
(the "Employment Agreement"); and WHEREAS, the Company and the Executive desire
to amend the Employment Agreement. NOW, THEREFORE, it is agreed as follows: 1.
The definition of "Bonus Percentage" contained in Section 6(a)(i)(B) of the
Employment Agreement is amended to read in its entirety as follows: For purposes
of this Section 6(a)(i)(B), "Bonus Percentage" shall mean the highest percentage
obtained by dividing (1) the sum of (x) the annual bonus earned by the Executive
in any year beginning with the third full year before the date on which a Change
in Control occurs and (y) the long-term incentive bonus, if any, received by the
Executive for any one Performance Cycle that included such prior year divided,
if payouts under the applicable long-term incentive award plan are scheduled
less frequently than annually, by the number of years between scheduled payouts
under such long-term incentive award plan, by (2) the base salary paid to the
Executive for such year. 2. General. Except for the amendments specified in
Section 1 above, the Employment Agreement shall continue in effect without any
change. IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the date first written above. PROVIDIAN CORPORATION
By /s/ Irving W. Bailey II
/s/ Frederick C. Kessell
Frederick C. Kessell
<PAGE>
CONFIDENTIAL
FIRST AMENDMENT
FIRST AMENDMENT dated as of November 6, 1996, between Providian
Corporation, a Delaware corporation (the "Corporation"), and Shailesh J. Mehta
(the "Executive"). W I T N E S S E T H: WHEREAS, the Company and the Executive
are parties to an employment agreement dated as of February 21, 1996 (the
"Employment Agreement"); and WHEREAS, the Company and the Executive desire to
amend the Employment Agreement. NOW, THEREFORE, it is agreed as follows: 1. The
definition of "Bonus Percentage" contained in Section 6(a)(i)(B) of the
Employment Agreement is amended to read in its entirety as follows: For purposes
of this Section 6(a)(i)(B), "Bonus Percentage" shall mean the highest percentage
obtained by dividing (1) the sum of (x) the annual bonus earned by the Executive
in any year beginning with the third full year before the date on which a Change
in Control occurs and (y) the long-term incentive bonus, if any, received by the
Executive for any one Performance Cycle that included such prior year divided,
if payouts under the applicable long-term incentive award plan are scheduled
less frequently than annually, by the number of years between scheduled payouts
under such long-term incentive award plan, by (2) the base salary paid to the
Executive for such year. 2. General. Except for the amendments specified in
Section 1 above, the Employment Agreement shall continue in effect without any
change. IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the date first written above. PROVIDIAN CORPORATION
By /s/ Irving W. Bailey II
/s/ Shailesh J. Mehta
Shailesh J. Mehta
<PAGE>
CONFIDENTIAL
FIRST AMENDMENT
FIRST AMENDMENT dated as of November 6, 1996, between Providian
Corporation, a Delaware corporation (the "Corporation"), and Lawrence Pitterman
(the "Executive"). W I T N E S S E T H: WHEREAS, the Company and the Executive
are parties to an employment agreement dated as of February 21, 1996 (the
"Employment Agreement"); and WHEREAS, the Company and the Executive desire to
amend the Employment Agreement. NOW, THEREFORE, it is agreed as follows: 1. The
definition of "Bonus Percentage" contained in Section 6(a)(i)(B) of the
Employment Agreement is amended to read in its entirety as follows: For purposes
of this Section 6(a)(i)(B), "Bonus Percentage" shall mean the highest percentage
obtained by dividing (1) the sum of (x) the annual bonus earned by the Executive
in any year beginning with the third full year before the date on which a Change
in Control occurs and (y) the long-term incentive bonus, if any, received by the
Executive for any one Performance Cycle that included such prior year divided,
if payouts under the applicable long-term incentive award plan are scheduled
less frequently than annually, by the number of years between scheduled payouts
under such long-term incentive award plan, by (2) the base salary paid to the
Executive for such year. 2. General. Except for the amendments specified in
Section 1 above, the Employment Agreement shall continue in effect without any
change. IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the date first written above. PROVIDIAN CORPORATION
By /s/ Irving W. Bailey II
/s/ Lawrence Pitterman
Lawrence Pitterman
<PAGE>
CONFIDENTIAL
FIRST AMENDMENT
FIRST AMENDMENT dated as of November 6, 1996, between Providian
Corporation, a Delaware corporation (the "Corporation"), and A. Sami Siddiqui
(the "Executive"). W I T N E S S E T H: WHEREAS, the Company and the Executive
are parties to an employment agreement dated as of February 21, 1996 (the
"Employment Agreement"); and WHEREAS, the Company and the Executive desire to
amend the Employment Agreement. NOW, THEREFORE, it is agreed as follows: 1. The
definition of "Bonus Percentage" contained in Section 6(a)(i)(B) of the
Employment Agreement is amended to read in its entirety as follows: For purposes
of this Section 6(a)(i)(B), "Bonus Percentage" shall mean the highest percentage
obtained by dividing (1) the sum of (x) the annual bonus earned by the Executive
in any year beginning with the third full year before the date on which a Change
in Control occurs and (y) the long-term incentive bonus, if any, received by the
Executive for any one Performance Cycle that included such prior year divided,
if payouts under the applicable long-term incentive award plan are scheduled
less frequently than annually, by the number of years between scheduled payouts
under such long-term incentive award plan, by (2) the base salary paid to the
Executive for such year. 2. General. Except for the amendments specified in
Section 1 above, the Employment Agreement shall continue in effect without any
change. IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the date first written above. PROVIDIAN CORPORATION
By /s/ Irving W. Bailey II
/s/ A. Sami Siddiqui
A. Sami Siddiqui
<PAGE>
CONFIDENTIAL
FIRST AMENDMENT
FIRST AMENDMENT dated as of November 6, 1996, between Providian
Corporation, a Delaware corporation (the "Corporation"), and Robert L. Walker
(the "Executive"). W I T N E S S E T H: WHEREAS, the Company and the Executive
are parties to an employment agreement dated as of February 21, 1996 (the
"Employment Agreement"); and WHEREAS, the Company and the Executive desire to
amend the Employment Agreement. NOW, THEREFORE, it is agreed as follows: 1. The
definition of "Bonus Percentage" contained in Section 6(a)(i)(B) of the
Employment Agreement is amended to read in its entirety as follows: For purposes
of this Section 6(a)(i)(B), "Bonus Percentage" shall mean the highest percentage
obtained by dividing (1) the sum of (x) the annual bonus earned by the Executive
in any year beginning with the third full year before the date on which a Change
in Control occurs and (y) the long-term incentive bonus, if any, received by the
Executive for any one Performance Cycle that included such prior year divided,
if payouts under the applicable long-term incentive award plan are scheduled
less frequently than annually, by the number of years between scheduled payouts
under such long-term incentive award plan, by (2) the base salary paid to the
Executive for such year.
2. General. Except for the amendments specified in Section 1 above, the
Employment Agreement shall continue in effect without any change. IN WITNESS
WHEREOF, the undersigned have executed this Amendment as of the date first
written above. PROVIDIAN CORPORATION
By /s/ Irving W. Bailey II
/s/ Robert L. Walker
Robert L. Walker
<PAGE>
CONFIDENTIAL
FOURTH AMENDMENT
FOURTH AMENDMENT dated as of November 6, 1996, between Providian
Corporation, a Delaware corporation (the "Company"), and Irving W. Bailey, II
(the "Executive"). W I T N E S S E T H: WHEREAS, the Company and the Executive
are parties to an employment agreement dated as of February 17, 1988, as amended
August 9, 1989, February 21, 1996 and June 1, 1996 (as so amended, the
"Employment Agreement"); and WHEREAS, the Company and the Executive desire to
further amend the Employment Agreement. NOW, THEREFORE, it is agreed as follows:
1. Section 1(d) of the Employment Agreement is amended to read in its entirety
as follows: (d) "Bonus Percentage" shall mean the highest percentage obtained by
dividing (i) the sum of (A) the annual bonus earned by the Executive in any year
prior to the year in which his termination of employment occurs and (B) the
highest long-term incentive award, if any, received by the Executive for any one
Performance Cycle that included such prior year divided, if payouts under the
applicable long-term incentive award plan are scheduled less frequently than
annually, by the number of years between scheduled payouts under such long-term
incentive award plan, by (ii) the base salary paid to the Executive for such
year. 2. The penultimate paragraph of Section 10(e) of the Employment Agreement
is amended to read in its entirety as follows: In the event there is a
Termination Without Cause of the Executive's employment following a Change in
Control, the Company shall, upon the Executive's written request furnished to
the Company within 20 days following such Termination Without Cause, make a lump
sum payment to the Executive in an amount equal to the Spread on the Payment
Date with respect to the relevant options in each option grant, multiplied by
the number of relevant options in each option grant. For the purposes of the
immediately preceding sentence, "relevant options" means all options granted by
the Company to the Executive to purchase its common stock that are outstanding
on the date of his termination of employment and remain unexercised on the
Payment Date (whether or not such options expire by their terms prior to the
Payment Date). The Company shall make such payment on the Payment Date (or, if
later, promptly following the Executive's request) and, as a condition to making
such payment, the Executive agrees that all outstanding options granted to him
with respect to which such payment is made shall thereupon be canceled. In the
event that the Executive does not request such payment, each option grant shall
become fully exercisable as of the date of termination of employment and shall
remain outstanding for the lesser of (i) five years from the date of termination
of employment or (ii) the remainder of the originally scheduled term. 3.
General. Except for the amendments specified in Sections 1 and 2 above, the
Employment Agreement shall continue in effect without any change.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this
Amendment as of the date first written above.
PROVIDIAN CORPORATION
By /s/ Lawrence Pitterman
/s/ Irving W. Bailey, II
Irving W. Bailey, II
EXHIBIT 10.25
CONFIDENTIAL
November 6, 1996
Shailesh J. Mehta
President & COO
Providian Corporation
400 West Market Street
Louisville, KY 40202
Dear Shailesh:
This will set forth our mutual agreements concerning certain matters
relating to employment between you ("Executive") and Providian Corporation (the
"Corporation"). The parties agree that, except as otherwise expressly provided
herein, this letter agreement is intended to supplement, and not to supersede,
the Employment Agreement dated as of February 21, 1996 between Executive and the
Corporation (the "Existing Employment Agreement"). Capitalized terms used but
not otherwise defined herein shall have the meanings assigned to them in the
Existing Employment Agreement; provided that, to the extent that any such
capitalized term is defined in the Existing Employment Agreement by reference to
the date of a Change in Control, for purposes of the definition of such term as
used in this letter agreement, the earlier of January 1, 1998 or the date of
termination of Executive's employment shall be substituted for the date of a
Change in Control.
1. Except as otherwise expressly provided herein, in the event that
either (a) Executive is terminated without Cause prior to January 1, 1998 or (b)
Executive has not been offered the position of Chief Executive Officer of the
Corporation prior to January 1, 1998 and Executive submits his resignation from
employment with the Corporation at any time from January 1, 1998 through January
31, 1988, then, in either event, the Corporation shall pay to the Executive:
(i) his Base Salary through the date of termination of his employment;
<PAGE>
(ii) a bonus, if not previously paid, in respect of the
corporation's last completed fiscal year prior to the date of termination of his
employment, calculated in accordance with the formula under the Corporation's
bonus plan applicable to the Executive for such year;
(iii) in addition to any bonus payable pursuant to the
foregoing subparagraph (ii), but only in the event of a termination of
employment under clause (a) of this paragraph 1, a bonus equal to the product of
(A) his Base Salary in effect on the date of termination of his employment
prorated to the date of such termination, and (B) the bonus Percentage;
(iv) his Base Salary, at the rate in effect at termination of his
employment, until the third anniversary of his termination of employment;
(v) any other bonus or compensation deferred under any plans
and programs of the Corporation in accordance with such plans and programs,
except as otherwise provided pursuant to the terms of any such plan or program;
(vi) continued vesting following termination of his employment in any
awards of restricted stock made to the Executive, until the third anniversary of
his termination of employment;
(vii) continuation in all employee benefit plans or programs
in which he was participating at the termination of his employment, until the
third anniversary of his termination of employment, but (A) only to the extent
such plans or programs permit continued participation after termination of
employment and (B) in no event beyond the date, if any, that Executive becomes
employed by a subsequent employer; and
(viii) other benefits in accordance with the plans and programs of the
Corporation.
In the event there is a termination of the Executive's employment under
clause (a) of this paragraph 1, the Corporation shall, upon the Executive's
written request furnished to the Corporation within 20 days following such
termination, make a lump sum payment to the Executive in an amount equal to the
Spread on the Payment Date with respect to the relevant options in each option
grant, multiplied in each case by the number of relevant options in each option
grant. In the event that the Executive does not request such payment, or in the
event of a termination of the Executive's employment under clause (b) of this
paragraph 1, each option grant shall become fully exercisable as of the date of
termination of employment and shall remain outstanding for three years following
termination of employment or, if shorter, for the remainder of the originally
scheduled term of such option grant; provided that, to the extent the terms of
any option grant do not permit the option to remain outstanding for such period,
the corporation shall make a lump sum payment to the executive in an amount
equal to the Spread on the Payment Date with respect to the relevant options in
each such option grant, multiplied in each case by the number of relevant
options in each such option grant. For the purpose of the immediately preceding
two sentences, "relevant options" in any referenced option grant means any
options granted by the Corporation to the Executive to purchase its common stock
that (i) are outstanding on the date of termination of his employment and remain
unexercised on the Payment Date (whether or not such options expire by their
terms prior to the Payment Date) and (ii) by their terms were exercisable on the
date of termination of his employment or which would have become exercisable if
his employment had continued until the third anniversary of his termination of
employment. The Corporation shall make any such lump sum payment on the Payment
Date (or, if later, promptly following the Executive's request) and, as a
condition to making such payment, the Executive agrees that all outstanding
options granted to him with respect to which such payment is made shall
thereupon be canceled.
For purposes of the foregoing, "Spread" shall mean the excess, if any,
of the Fair Market Value of a share of the common stock of the Corporation over
the purchase price of such share pursuant to any option to purchase such share
granted by the Corporation to the Executive; and "Payment Date" shall mean the
first business day following termination of the Executive's employment on or
after which he is no longer subject to the provisions of Section 16(b) of the
Securities Exchange Act of 1934, as amended, with respect to any payments
required to be made to him by the Corporation pursuant to the foregoing
provisions of this paragraph 1. "Fair Market Value" shall mean the mean between
the highest and lowest sale price of the common stock of the Corporation as
reflected on the consolidated tape of New York Stock Exchange issues on the date
preceding the date as of which such value is being determined. If the commons
stock of the Corporation is not sold on such day, the value shall be determined
on the next preceding day on which the common stock of the Corporation is sold.
2. Executive and the Corporation agree that, in the event of a
termination of the Executive's employment entitling the Executive to payments
under the provisions of paragraph 1, such provisions of paragraph 1 will
supersede the provisions of the Existing Employment Agreement, and no payments
will be due to the Executive under the Existing Employment Agreement in the
event of a Change in Control of the Corporation following termination of
Executive's employment with the Corporation. Executive and the Corporation
further agree that, in the event of a Change in Control of the Corporation prior
to any termination of Executive's employment, the provisions of the Existing
Employment Agreement shall govern and this letter agreement shall be of no
further force or effect.
3. Notwithstanding any provision of the Existing Employment Agreement
or this letter agreement to the contrary, in the event of a spin-off or other
separation transaction with respect to Providian Bancorp, Inc. (the
"Subsidiary"), or all or substantially all the assets of the Subsidiary, in
connection with which the Subsidiary (or the successor to all or substantially
all the assets of the Subsidiary) becomes a separate publicly traded
<PAGE>
company and the Executive is appointed to and accepts the position of Chairman
and Chief Executive Officer of the Subsidiary (or such successor), then upon
consummation of such spin-off or other transaction, all the provisions of this
letter agreement and of the Existing Employment Agreement shall expire and shall
cease to have any further force or effect.
4. (a) During the period beginning on the date of the Executive's
termination of employment and ending one year thereafter, the Executive shall
not personally solicit any existing customer or partner of the Corporation or
any prospective customer or partner identified in the business proposals of the
Corporation outstanding on the date of the Executive's termination of
employment, in either case as limited to those concerns known by the Executive
either to be, or to have the possibility of becoming, customers or partners of
the Corporation and, in the latter case, limited to business proposals with
which the Executive was familiar, for the purpose of inducing any such existing
or prospective customers or partners to reduce or forego using the insurance or
financial services business of the Corporation within the United States of
America.
(b) During the period described in subparagraph (a) above,
except when acting on behalf of the Corporation or any affiliate thereof, the
Executive shall not solicit any employee of the Corporation or any affiliate
thereof to terminate his employment.
(c) During the period described in subparagraph (a) above, the
Executive shall not (i) do or say anything that reasonably may be expected to
have the effect of diminishing or impairing the goodwill and good reputation of
the Corporation and its officers, directors and products, (ii) intentionally
disparage or injure the reputation of the Corporation by making any material
negative statements about the Corporation's methods of doing business, the
effectiveness of its business policies or the quality of any of its products or
personnel, (iii) make any substantive statements or issue any releases regarding
the internal business affairs of the Corporation or the circumstances of the
termination of his employment to any member of the print or broadcast media
except after consultation with the Corporation and after giving due
consideration to the reasonable suggestions of the Corporation in connection
with any such statements or releases.
(d) During the period described in subparagraph (a) above, the
Corporation shall not (i) whether by authorizing or knowingly condoning such
conduct by its personnel, intentionally disparage the Executive or injure his
reputation by making any negative statement about him or his talents, (ii) make
any substantive statements or issue any releases regarding the circumstances of
the termination of the Executives employment to any member of the print of
broadcast media except after consultation with the Executive and after giving
due consideration to the reasonable suggestions of the Executive in connection
with any such statements or releases. The foregoing notwithstanding, the
Corporation may publicly or privately (i) disclose the fact that such
termination has occurred, (ii) make any statement that conforms to the
announcement previously issued within the Corporation (the terms of which shall
have previously been furnished to the Executive for his approval), or (iii)
provide any disclosure required by applicable law, without obligation to consult
the Executive.
(e) In no event shall an asserted violation by the Executive
of the provisions of this paragraph 4 constitute a basis for deferring or
withholding any amounts otherwise payable to the Executive under this letter
agreement.
5. This letter agreement is personal to Executive and without the prior
written consent of the Corporation shall not be assignable by Executive
otherwise than by will or the laws of descent and distribution. This letter
agreement shall inure to the benefit of and be enforceable by Executive's legal
representatives. This letter agreement shall inure to the benefit of and be
binding upon the Corporation and its successors.
6. (a) This letter 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. This letter 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 given in the
manner set forth in the Existing Employment Agreement.
(c) The invalidity or unenforceability of any provision of
this letter agreement shall not affect the validity or enforceability of any
other provision of this letter agreement.
(d) The Corporation may withhold from any amounts payable
under this letter agreement such Federal, state or local taxes as shall be
required to be withheld pursuant to any applicable law or regulation.
(e) Executive's failure to insist upon strict compliance with
any provision of this letter agreement shall not be deemed to be a waiver of
such provision or any other provisions hereof.
(f) This letter agreement and the Existing Employment
Agreement contain the entire understanding of the Corporation and Executive with
respect to the subject matter hereof and thereof and supersede all prior
agreements, representations and understandings of the parties with respect to
the subject matter hereof. Except as expressly modified or superseded by this
letter agreement, the Existing Employment Agreement is hereby reconfirmed in all
respects.
<PAGE>
IN WITNESS WHEREOF, Executive has hereunto set his hand and, pursuant
to the authorization from its Board of Directors, the Corporation has caused
this letter agreement to be executed in its name on its behalf, all as of the
date and year first above written.
PROVIDIAN CORPORATION
/s/ Irving W. Bailey II
Chairman and Chief Executive Officer
Accepted and Agreed:
/s/ Shailesh J. Mehta
Shailesh J. Mehta
<TABLE>
EXHIBIT 12.1
<CAPTION>
PROVIDIAN CORPORATION AND SUBSIDIARIES
COMPUTATION OF HISTORICAL RATIO OF EARNINGS TO FIXED CHARGES
Years Ended December 31
--------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings as Adjusted:
Pretax income from continuing operations $ 624 $ 506 $ 441 $ 487 $ 452
Interest expense, excluding interest on
banking deposits, annuities and other
financial products 112 114 87 73 81
Portion of rent expense representing the
interest factor 8 8 7 8 9
------ ------ ------ ------ ------
Subtotal 744 628 535 568 542
Interest expense on banking deposits 142 105 62 54 65
------ ------ ------ ------ ------
Subtotal 886 733 597 622 607
Interest expense on annuities and other
financial products 837 1,005 755 683 704
------ ------ ------ ------ ------
Total $1,723 $1,738 $1,352 $1,305 $1,311
====== ====== ====== ====== ======
Fixed Charges:
Interest incurred, excluding interest incurred
on banking deposits, annuities and other
financial products $ 112 $ 114 $ 87 $ 73 $ 81
Portion of rent expense representing the
interest factor 8 8 7 8 9
------ ------ ------ ------ ------
Subtotal 120 122 94 81 90
Interest incurred on banking deposits 142 105 62 54 65
------ ------ ------ ------ ------
Subtotal 262 227 156 135 155
Interest incurred on annuities and other
financial products 844 1,014 757 686 704
------ ------ ------ ------ ------
Total $1,106 $1,241 $ 913 $ 821 $ 859
====== ====== ====== ====== ======
Ratio of Earnings to Fixed Charges:
Excluding interest on banking
deposits, annuities, and other
financial products <F1> 6.2 5.1 5.7 7.0 6.0
Including interest on
banking deposits <F2> 3.4 3.2 3.8 4.6 3.9
Including interest on banking
deposits, annuities and other
financial products <F3> 1.6 1.4 1.5 1.6 1.5
<PAGE>
EXHIBIT 12.1 (CONTINUED)
COMPUTATION OF HISTORICAL RATIO OF EARNINGS TO FIXED CHARGES
<FN>
<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.
</FN>
</TABLE>
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
as of December 31, 1996
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. Delaware
Capital 200 Block Corporation Delaware
Capital Broadway Corporation Kentucky
Capital General Development Corporation Delaware
Capital Liberty, L.P. Delaware
Capital Real Estate Development Corporation Delaware
Capital Security Life Insurance Company1 North Carolina
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 Life Insurance Company Arkansas
First Deposit National Bank United States
First Deposit Service Corporation California
First Providian Life and Health Insurance Company New York
Force Financial Group, Inc. Delaware
Force Financial Services, Inc. Massachusetts
Independence Automobile Association, Inc. Florida
Independence Automobile Club, Inc. Georgia
JMH Operating Company, Inc.2 Mississippi
Military Associates, Inc. Pennsylvania
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES (Continued)
as of December 31, 1996
State or other jurisdiction of
Corporation incorporation or organization
- ----------- -----------------------------
National Home Life Corporation 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. Kentucky
Providian Assignment Corporation Kentucky
Providian Auto and Home Insurance Company Missouri
Providian Bancorp, Inc. Delaware
Providian Capital Management, Inc. Delaware
Providian Capital Management Real Estate Services,Inc. Delaware
Providian Corporation Delaware
Providian Corporation Political Action Committee United States
Providian Corporation Voluntary Employees'
Beneficiary Association Kentucky
Providian Credit Corporation Delaware
Providian Credit Services, Inc. Utah
Providian Financial Services, Inc.3 Pennsylvania
Providian Fire Insurance Company Kentucky
Providian Insurance Agency, Inc.4 Pennsylvania
Providian Investment Advisors, Inc. Delaware
Providian Life and Health Insurance Company Missouri
Providian LLC Turks & Caicos Is.
Providian Mauritius Investment Ltd Mauritius
Providian National Bancorp California
Providian National Bank United States
Providian Property and Casualty Insurance Company Kentucky
Providian Securities Corporation Pennsylvania
Providian Services, Inc. Pennsylvania
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
Veterans Life Insurance Company Illinois
Wannalancit Corp. Massachusetts
Winnisquam Community Development Corporation New Hampshire
- --------
1 Name changed from Security Trust Life Insurance Company, 1/31/96; survivor of
1/31/96 merger with former Capital Security Life Insurance Company. 2 Name
changed from Ramada Inn Coliseum Operating Company, Inc., 11/21/96; incorporated
5/21/96.
3 Name changed from Capital Values Financial Services, 5/2/96.
4 Name changed from National Liberty Insurance Agency, Inc., 4/15/96; previously
changed from National Liberty Corporation, 2/28/96.
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement No.
333-10123 on Form S-3 dated September 27, 1996 (which also incorporates
Post-Effective Amendment No. 1 to Registration Statement No. 33-49719);
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 4, 1997,
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, 1996.
ERNST & YOUNG LLP
Louisville, Kentucky
March 24, 1997
<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> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 10,952
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 455
<MORTGAGE> 5,582 <F1>
<REAL-ESTATE> 54
<TOTAL-INVEST> 21,965
<CASH> 904
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,508
<TOTAL-ASSETS> 28,993 <F2>
<POLICY-LOSSES> 9,668 <F3>
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 7,170 <F4>
<NOTES-PAYABLE> 768
100 <F5>
0
<COMMON> 115
<OTHER-SE> 2,975 <F6>
<TOTAL-LIABILITY-AND-EQUITY> 28,993 <F7>
1,199
<INVESTMENT-INCOME> 1,932
<INVESTMENT-GAINS> 4
<OTHER-INCOME> 487 <F8>
<BENEFITS> 1,735 <F9>
<UNDERWRITING-AMORTIZATION> 298 <F10>
<UNDERWRITING-OTHER> 854 <F11>
<INCOME-PRETAX> 624
<INCOME-TAX> 183
<INCOME-CONTINUING> 435
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 435
<EPS-PRIMARY> 4.64
<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>Includes Consumer Loans of $3,550.
<F3>Includes Benefit reserves, Individual annuity reserves and other policy
liabilities.
<F4>Consists of Group annuity deposits.
<F5>Consists of Company-Obligated Mandatorily Redeemable
Preferred Securities of Providian LLC.
<F6>Includes Additional paid-in capital, Net unrealized investment gain,
Retained earnings, Common stock held in treasury and Unearned restricted stock.
<F7>Includes Banking Deposits of $3,390.
<F8>Includes Consumer loan servicing fees of $281.
<F9>Includes Benefits and claims and Increase in benefit and contract reserves.
<F10>Includes Amortization of deferred policy and loan acquisition costs, value
of insurance in force purchased and goodwill.
<F11>Includes Commissions,net and General,administrative and other expenses,net.
</FN>
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
The following Management's Discussion and Analysis should be read in conjunction
with the accompanying Consolidated Financial Statements, Notes to Consolidated
Financial Statements and Selected Financial Data.
This Management's Discussion and Analysis contains certain forward-looking
statements that involve risks and uncertainties. Primarily found in the Outlook
sections, the terms "expects", "plans", "believes", "intends", "will continue",
"may continue" or similar expressions are intended to identify such forward-
looking statements. Such statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions that may cause Providian
Corporation's actual results or actions to differ materially from those
expressed or implied by such forward-looking statements. Factors that could
cause or contribute to such material differences include those listed under
Planned Merger and Reorganization and Profit Drivers and are beyond the
Company's ability to control or predict. Readers are cautioned not to put
undue reliance on forward-looking statements.
Planned Merger and Reorganization
On December 28, 1996, Providian Corporation executed a Plan and Agreement of
Merger and Reorganization (the "Merger Agreement") with AEGON N.V. ("AEGON"),
and LT Merger Corp., a wholly owned subsidiary of AEGON ("Merger Sub"), pursuant
to which Merger Sub will merge with Providian Corporation. In connection with
this merger, Providian Corporation will spin off Providian Bancorp, Inc. to
Providian Corporation shareholders (the "Distribution"). For each share of
Providian Corporation stock owned, shareholders will receive one share of
Providian Bancorp, Inc. in the Distribution. Pursuant to the Merger Agreement,
among other things, (a) Providian Corporation will be the surviving
Pretax Operating Earnings by Business Segment
(Dollars in millions)
[CHART APPEARS HERE]
Selected Financial Data
(Amounts in millions except per common share information)
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Realized investment gain (loss) $ 4 $ (69) $ (100)
Total revenues 3,622 3,388 2,959
Cumulative effect of change in accounting principle - - -
Net income 435 345 301
Total assets $28,993 $26,839 $23,613
Long-term debt 768 721 694
Company-obligated mandatorily redeemable preferred securities of Providian LLC 100 100 100
Realized shareholders' equity/(a)/ 2,913 2,596 2,431
Total shareholders' equity/(b)/ 3,090 2,961 2,122
- ----------------------------------------------------------------------------------------------------------------
Per Common Share:
Operating earnings/(c)/ $ 4.64 $ 4.09 $ 3.75
Income before cumulative effect of change in accounting principle 4.64 3.60 3.02
Cumulative effect of change in accounting principle - - -
Net income 4.64 3.60 3.02
Realized shareholders' equity/(a)/ 31.07 27.52 24.93
Total shareholders' equity/(b)/ 32.95 31.38 21.75
Cash dividends paid 1.00 .90 .80
Closing market price 51.38 40.75 30.88
Operating return on realized equity/(d)/ 15.9% 15.7% 15.5%
Common shares outstanding at year end 93.8 94.4 97.5
Weighted average common and common equivalent shares outstanding 93.7 95.9 99.3
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Realized shareholders' equity excludes from total shareholders' equity the
net unrealized investment gain (loss) on debt securities and redeemable
preferred stocks, net of adjustments for deferred acquisition costs and
deferred income taxes.
(b) Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities."
18 PROVIDIAN 1996 ANNUAL REPORT
<PAGE>
- --------------------------------------------------------------------------------
corporation in the merger and become a wholly owned subsidiary of AEGON, and (b)
each shareholder of Providian Corporation will be entitled to receive a number
of shares of AEGON common stock in exchange for shares of Providian
Corporation's common stock. (See Note B to the accompanying Consolidated
Financial Statements.)
The Board of Directors of Providian Corporation has unanimously approved
the Merger Agreement and the Distribution. The merger is subject to approval by
various regulatory authorities, approval by Providian Corporation's shareholders
and certain other conditions. The Distribution will occur only if all of the
conditions necessary for the merger are satisfied.
Should the Merger Agreement be terminated as a result of certain fiduciary
obligations of the Board of Directors of Providian Corporation, Providian
Corporation would be required to pay to AEGON liquidated damages of $80 million
to $100 million.
Because consummation of the merger and the Distribution is subject to the
above conditions, no representations can be made as to whether, or when, the
merger and Distribution will be completed or as to the possible impact of the
merger and Distribution on the financial condition and results of operations of
Providian Corporation and subsidiaries (the "Company") should the merger and
Distribution occur.
Consolidated Results and Analysis
The Company's net income for 1996 was $4.64 per common share, up 28.9% from the
$3.60 per common share reported in 1995. Net income per common share for 1995
was up 19.2% from $3.02 in 1994.
Net income of $434.7 million in 1996 included net realized investment gains
(net of related deferred acquisition cost amortization and taxes) of $0.5
million. These results include pretax
Revenues by Business Segment
(Dollars in millions)
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989 1988 1987 1986
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ (20) $ 6 $ (19) $ (123) $ 124 $ 25 $ 14 $ 169
2,879 2,838 2,660 2,577 2,500 2,046 1,785 1,640
- - - - (56) - - (104)
323 322 250 166 220 190 179 169
$22,929 $20,588 $18,873 $16,669 $14,970 $12,963 $10,357 $8,295
589 589 611 386 330 263 288 193
- - - - - - - -
2,479 2,196 1,947 1,553 1,516 1,258 1,186 1,173
2,493 2,186 1,931 1,553 1,516 1,258 1,186 1,173
- ------------------------------------------------------------------------------
$ 3.32 $ 3.18 $ 2.89 $ 2.57 $ 2.23 $ 1.91 $ 1.66 $ 1.63
3.12 3.14 2.66 1.70 2.93 2.00 1.74 2.62
- - - - (.62) - - (1.03)
3.12 3.14 2.66 1.70 2.31 2.00 1.74 1.59
23.45 20.66 18.03 15.66 14.81 12.89 11.51 10.61
23.59 20.55 17.86 15.66 14.81 12.89 11.51 10.61
.73 .66 .60 .54 .50 .47 .44 .41
37.13 36.13 31.81 19.56 26.00 16.38 13.50 15.31
15.0% 16.2% 17.1% 17.0% 16.5% 15.7% 14.4% 16.7%
101.4 94.8 92.7 89.6 92.3 89.8 94.4 101.2
101.1 100.5 90.7 91.8 90.6 91.3 98.4 101.5
- ------------------------------------------------------------------------------
</TABLE>
(c) Operating earnings per common share exclude from net income applicable to
common stock 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 company-obligated mandatorily redeemable preferred securities
of Providian LLC 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) on debt securities and redeemable preferred stocks, net of
adjustments for deferred acquisition costs and deferred income taxes.
19 PROVIDIAN 1996 ANNUAL REPORT
<PAGE>
gains of $12.3 million from investments and securities and $8.0 million from
provisions for mortgage loan losses. Net income in 1995 and 1994 included net
realized investment losses of $.49 and $.73 per common share, respectively. The
results in 1995 included pretax losses of $52.8 million from investments and
securities and $15.7 million from provisions for mortgage loan losses. The 1994
results included pretax losses of $26.9 million from investments and securities,
provisions for mortgage loan losses of $21.0 million and a $52.4 million write-
off of an impaired investment in a limited partnership.
Operating earnings applicable to common shareholders were $4.64 per common
share in 1996, up 13.4% from 1995 results. Operating earnings increased 9.1% in
1995. Providian Bancorp's outstanding results were a major contributor to the
earnings increase in both 1996 and 1995. Strong earnings at Providian Capital
Management also contributed to the 1996 earnings increase.
Operating return on realized equity was 15.9% in 1996, up from 15.7% in
1995 and 15.5% in 1994.
Consolidated revenues up 6.9% (1995 - up 14.5%) included pretax net
realized investment gains of $4.3 million in 1996 and pretax net realized
investment losses of $68.5 million and $100.3 million in 1995 and 1994,
respectively. Revenues, as discussed hereinafter, exclude realized investment
gains and losses. Revenues on this basis were $3.6 billion in 1996, up 4.7%
(1995 - $3.5 billion, up 13.0%). The increase in revenues for 1996 was due to
Providian Bancorp's strong growth in total managed loans. Providian Bancorp's
revenues, primarily investment income and consumer loan servicing fees,
increased $194.0 million, or 24.5%, from 1995. Revenues in 1995 were up 13.0%
over 1994 primarily due to an increase in investment income at Providian Capital
Management and an increase in consumer loan servicing fees at Providian Bancorp.
Total benefits and expenses were up $115.8 million in 1996, or 4.0%. Benefit and
contract reserves decreased $21.7 million, or 1.2%, primarily due to Providian
Capital Management's lower credited rates as a result of the decline in interest
rates throughout 1995 and early 1996, partially offset by Providian Bancorp's
growth in average deposits on hand. General, administrative and other expenses
were up $88.3 million in 1996, or 13.0%, primarily reflecting an increase in the
provision for loan losses by Providian Bancorp to address significant on-balance
sheet loan growth and higher credit loss rates, consistent with industry trends.
Increased marketing activity also contributed to higher expenses at Providian
Bancorp. However, general, administrative and other expenses declined at
Providian Direct Insurance and Providian Agency Group as a result of continuing
cost management initiatives. Amortization increased $47.7 million in 1996, or
19.1%, primarily due to the normal amortization of increased deferred
acquisition costs at Providian Bancorp as well as the accelerated amortization
of a portion of such costs in connection with the securitization of a portion of
Providian Bancorp's home equity loan portfolio.
Results by Business Segment
Description Providian Bancorp (Bancorp) is a diversified consumer lender,
currently operating through three distinct business divisions: the Unsecured
Spread Business, Providian Home Loans and the Unbanked Business. Bancorp offers
a range of lending products, including unsecured credit cards, unsecured
revolving lines of credit, home equity loans, secured credit cards, insurance
premium financing, and a variety of fee-based products and services. Through
these products and services, Bancorp seeks to achieve diversified earnings
sources, with both spread-based and fee-based income from loans and related
products and services. Bancorp develops its customer relationships through
direct mail and telephone solicitations.
Profit Drivers Key profit drivers for Bancorp's spread-based businesses are
portfolio asset growth, the level of credit losses, the cost to acquire
customers and pricing (rates offered to borrowers). 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 on page 21). As a result of these
strategies and the 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, persistency and the cost to acquire customers. 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 continued its strong performance in 1996, with significant
growth in unsecured and home equity loan products, as well as growth in fee-
based income. The higher earnings were driven by growth through the Primary
Lender program, which offers custom-tailored services to fulfill the specific
needs of individual customers. In 1996 and 1995, the increase in revenues was
primarily due to growth in consumer receivable accounts and balances, partially
offset by lower finance yields. Bancorp also realized higher fee-based income
during both years. The revenue increases were partially offset by increases in
expenses due to growth in business volume as well as increased net credit
losses, as discussed below.
Total managed loans grew 39.0% to $9.3 billion at the end of 1996 compared
to $6.7 billion at the end of 1995. Growth in both 1996 and 1995 resulted from
strong customer acceptance of core product offerings such as VISA(R) Gold,
marketed via the Primary Lender program. Balances for Providian Home Loans,
Bancorp's home equity loan product, including balances held for securitization,
grew 32.0% to $944.2 million at the end of 1996.
After decreasing slightly in 1995, net credit loss rates and loan loss
reserves as a percentage of period-end on-balance sheet unsecured receivables
increased in 1996, reflecting the current industry-wide downturn in the credit
quality of unse-
PROVIDIAN 1996 ANNUAL REPORT
20
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Results by Business Segment
Providian Bancorp
(Dollars in millions)
Period Ended December 31 1996 %Change 1995 %Change 1994 %Change
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans $553.3 27.1% $435.4 47.7% $294.9 (1.9)%
Investment securities 21.6 (0.4) 21.7 (19.8) 27.1 67.7
- ----------------------------------------------------------------------------------------------------------
Total interest income 574.9 25.8 457.1 42.0 322.0 1.6
Interest expense:
Deposits 140.5 33.6 105.1 48.7 70.7 (16.5)
Borrowings 48.8 (6.5) 52.2 74.7 29.9 45.1
- ----------------------------------------------------------------------------------------------------------
Total interest expense 189.3 20.3 157.3 56.4 100.6 (4.5)
- ----------------------------------------------------------------------------------------------------------
Net interest income 385.6 28.6 299.8 35.4 221.4 4.7
Provision for loan losses 126.6 58.4 79.9 58.8 50.3 (14.6)
- ----------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 259.0 17.8 219.9 28.5 171.1 12.1
Other income:
Loan servicing fees 280.9 12.3 250.2 21.0 206.8 19.7
Late charges, other fees and other 131.1 53.1 85.6 36.2 62.8 25.0
- ----------------------------------------------------------------------------------------------------------
Total other income 412.0 22.7 335.8 24.5 269.6 20.9
Other expenses:
General, administrative and other expenses, net 398.1 13.2 351.7 40.5 250.3 41.8
Amortization of loan acquisition costs 44.8 N/M 16.1 (60.0) 40.4 (50.4)
- ----------------------------------------------------------------------------------------------------------
Total other expenses 442.9 20.4 367.8 26.5 290.7 12.7
- ----------------------------------------------------------------------------------------------------------
Pretax earnings $228.1 21.4% $187.9 25.2% $150.0 27.4%
==========================================================================================================
</TABLE>
cured loans. Correspondingly, unsecured receivable delinquencies, consisting of
loans 31 days or more past due, have increased but are in line with Bancorp's
expectations. Net interest margins on total unsecured credit card loans
decreased in 1996 and 1995 as a result of increased market rates on variable
rate cost of funds and lower yields on new unsecured loans due to the three-
month, zero percent introductory rate offer under the Primary Lender program.
Asset/Liability Management Bancorp manages interest rate risk individually for
each regulated banking institution and comprehensively for Bancorp as a
consolidated banking entity, and includes both on- and off-balance sheet assets
and liabilities in its analyses and management. Bancorp's goal in managing
interest rate risk is to cost-effectively minimize the effect of changes in
interest rates on profitability.
Bancorp's receivables generally yield either a variable Annual Percentage
Rate (APR), indexed to prime, or a fixed APR set independently of market
interest rates. The liabilities' interest rates are generally indexed to LIBOR
or are fixed rate with prices based on U.S. Treasury Bond rates. These balance
sheet characteristics potentially expose Bancorp to two types of interest rate
risk: (1) interest rate level risk, which could impact the net interest income
of the fixed APR receivables if liabilities reprice more often than assets; and
(2) basis risk, which could impact the net interest income of variable APR
receivables if the spread between prime and LIBOR compresses.
The primary tool Bancorp uses to monitor interest rate risk for its
operations is net income simulation analysis. Net income simulation is used to
measure the banking operations' future earnings under multiple interest rate
scenarios against plan earnings under a baseline interest rate scenario. The
dispersion of net income due to interest rate changes is compared to levels
deemed appropriate by management and limits established by the banking entities'
Board of Directors.
Bancorp strives to manage to acceptable risk levels by seeking to maintain
a relatively interest-rate neutral position on the managed balance sheet by
generally matching the repricing characteristics of the assets and liabilities.
The first tool used to achieve the matched position is the natural repricing
structure of the on- and off-balance sheet assets and liabilities. Fixed rate
liabilities generally fund fixed APR assets, while variable rate liabilities
generally fund variable APR assets.
When the natural repricing characteristics of the assets and liabilities do
not result in a relatively matched position, Bancorp's subsidiaries will engage
in derivative transactions to change the repricing structure of underlying
assets or liabilities to reduce interest rate risk. These transactions consist
of over-the-counter swap and cap transactions executed with highly rated U.S.
and international banks. All transactions are executed under master netting
agreements and hedge identified interest rate risks for both accounting and tax
purposes. No Bancorp entity trades in derivatives or uses derivatives to
speculate on interest rates or as an investment vehicle.
21 | PROVIDIAN 1996 ANNUAL REPORT
<PAGE>
<TABLE>
<CAPTION>
Providian Bancorp
(Dollars in millions)
Period Ended December 31 1996 %Change 1995 %Change 1994 %Change
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Managed loan portfolio: (a)(b)
Credit card receivables $ 7,202.0 28.9% $ 5,588.9 36.9% $ 4,083.6 16.3%
Equity lines of credit 846.2 18.3 715.4 53.9 465.0 48.8
Other consumer loans 486.7 N/M 243.0 46.5 165.8 32.5
Credit card receivables held for securitization 641.7 N/M 123.3 N/A - N/A
Equity lines of credit held for securitization 98.0 N/A - N/A - N/A
- ----------------------------------------------------------------------------------------------------------------------
Total managed loans 9,274.6 39.0 6,670.6 41.5 4,714.4 19.4
Securitized credit card receivables (5,175.0) 48.5 (3,485.9) 47.2 (2,368.7) 18.2
Securitized equity lines of credit (435.0) N/A - N/A - N/A
- ----------------------------------------------------------------------------------------------------------------------
Total securitized loans (5,610.0) 60.9 (3,485.9) 47.2 (2,368.7) 18.2
- ----------------------------------------------------------------------------------------------------------------------
Total on-balance sheet loans $ 3,664.6 15.1% $ 3,184.7 35.8% $ 2,345.7 20.7%
======================================================================================================================
On-balance sheet credit card receivable statistics:
Average credit card receivables $ 2,602.0 30.8% $ 1,989.1 46.2% $ 1,360.6 (7.5)%
Net credit losses incurred 93.0 58.8 58.6 28.3 45.6 (24.5)
Net credit loss rate (c) 3.57% 2.94% 3.35%
Delinquency rate (d) 2.56% 2.41% 2.25%
Managed credit card receivable statistics:
Average credit card receivables $ 6,742.7 38.4% $ 4,870.6 34.7% $ 3,617.0 8.7%
Net credit losses incurred 368.1 68.2 218.8 28.6 170.2 (0.4)
Net credit loss rate (c) 5.46% 4.49% 4.71%
Delinquency rate (d) 4.08% 3.22% 2.97%
Net interest margin (e) 11.22% 12.43% 13.55%
======================================================================================================================
</TABLE>
(a) Credit cards include unsecured revolving lines of credit. Other consumer
loans include Secured Card loans and insurance premium financing loans.
(b) Securitized credit card receivables and equity lines of credit, which are
sold without recourse, are off-balance sheet.
(c) Net credit loss rate reflects annualized principal amounts written off, less
recoveries, as a percentage of average credit card receivables.
(d) Delinquencies represent credit card receivables which are 31 days or more
past due at period end.
(e) Net interest margin on managed credit card receivables is computed as
interest income, less interest expense, divided by average managed credit
card receivables.
Asset/Liability Review Bancorp's primary earning assets are consumer finance
receivables. Total managed and on-balance sheet receivables were $9.3 billion
and $3.7 billion, respectively, at December 31, 1996. The receivables include
unsecured and secured lines of credit. The unsecured credit lines represent
Bancorp's credit card and revolving line consumer loan programs. The secured
receivables represent Providian Home Loans' home equity revolving line of credit
programs and the Secured Card lending. Bancorp engages in asset sales through
the issuance of asset-backed securities in the public and private markets
(discussed below).
Bancorp markets its products exclusively in the United States, on a national
basis. The geographic distribution of the receivables is diversified roughly
similarly to the distribution of the population of the United States. As of
December 31, 1996, 13.4%, 7.2%, 6.6%, 5.1% and 4.2% of Bancorp's total managed
credit card receivables were distributed in California, Texas, New York, Florida
and Pennsylvania, respectively. No more than 4.0% of such receivables were
distributed in any other state.
Bancorp does not rely on the Company to fund Bancorp's banking subsidiaries.
Deposit instruments are the primary on-balance sheet funding source. Bancorp
offers FDIC-insured deposits to retail and wholesale investors, and offers large
block deposits to institutional investors. Bancorp also offers money market
deposit accounts and certificates of deposit ranging in term from three months
to five years to retail depositors and certificates of deposit with terms of
seven days to five years to institutional investors. Total deposits at December
31, 1996 were $3.4 billion.
Bancorp also funds a significant portion of its receivables through asset
securitizations. Securitization, the process of selling a pool of assets to
investors, provides non-recourse, off-balance sheet funding. Bancorp continues
to service the securitized assets and earns fee income generated by the pool in
excess of the contractual amounts paid to investors. The amount of fee income
earned by Bancorp is dependent on a number of factors including the total
balance in the pool and the level of finance charge, fee income and credit
losses generated by the receivables in the pool.
The primary objectives of securitization at Bancorp are to diversify funding
sources for First Deposit National Bank and Providian National Bank and to
obtain efficient all-in cost of funds, including cost of capital. Access to the
public and private securitization markets provides significant flexibility in
opportunistically accessing the capital markets resulting in competitively
priced funding.
All securitized receivables have been sold as securities to public or private
investors using legal structures that generally provide for an interest-only
(revolving) period and a principal repayment (amortization or accumulation)
period. Transactions are structured to protect the investors from credit risk
using third-party credit enhancement or cash reserve accounts and to limit the
risk to Bancorp of early amortization or payout events. The primary
securitization vehicle is the First Deposit Master Trust (FDMT), created in
1993. The FDMT is struc-
22 | PROVIDIAN 1996 ANNUAL REPORT
<PAGE>
<TABLE>
<CAPTION>
(Dollars in millions)
Period Ended December 31 1996 %Change 1995 %Change 1994 %Change
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserves for possible credit losses by product:/(a)/
Credit card receivables $ 91.4 9.4% $ 83.6 19.2% $ 70.1 (1.8)%
Equity lines of credit and other consumer loans 23.1 N/M 9.8 61.0 6.1 67.6
- ------------------------------------------------------------------------------------------------------------------------------
Total reserves for possible credit losses $ 114.5 22.6% $ 93.4 22.6% $ 76.2 1.5%
==============================================================================================================================
Reserves as a percent of period-end on-balance sheet
credit card receivables/(b)/ 4.51% 3.97% 4.09%
==============================================================================================================================
Banking Deposits:
Savings Deposits $ 762.4 58.1% $ 482.1 22.4% $ 393.9 8.3%
Time and CDs less than $100,000 561.8 (0.1) 562.5 8.4 519.0 31.3
CDs of $100,000 or greater:
0-3 months 961.6 120.1 436.9 (1.4) 442.9 (14.4)
3-12 months 766.3 67.1 458.6 85.8 246.8 (7.3)
1-5 years 338.0 55.3 217.7 N/M 77.8 N/M
- ------------------------------------------------------------------------------------------------------------------------------
Total CDs of $100,000 or greater 2,065.9 85.6 1,113.2 45.0 767.5 (3.4)
- ------------------------------------------------------------------------------------------------------------------------------
Total banking deposits $3,390.1 57.1% $2,157.8 28.4% $1,680.4 8.2%
==============================================================================================================================
Total Revenues/(c)/ $ 986.9 24.5% $ 792.9 34.0% $ 591.6 9.6%
==============================================================================================================================
Assets $3,857.7 17.4% $3,285.7 40.1% $2,344.8 17.1%
==============================================================================================================================
</TABLE>
(a) Reserve for possible credit losses relates only to Bancorp's on-balance
sheet loans, excluding credit card receivables and equity lines of credit
held for securitization.
(b) On-balance sheet statistics exclude loans held for securitization.
(c) Revenues exclude realized investment gains and losses.
tured for issuance of multiple series from a single trust and a single pool of
assets. Bancorp also utilizes private asset securitization conduits.
Total managed funding at December 31, 1996 was $9.3 billion. At December 31,
1996, on-balance sheet sources provided $3.6 billion, representing 39% of total
managed funding, while securitized, or off-balance sheet, sources provided $5.6
billion, or 61% of total managed funding. Of the $5.6 billion, $4.2 billion was
securitized via the FDMT and $1.4 billion was securitized through private
conduits. The following table shows outstanding funding for each source at
December 31, 1996.
<TABLE>
<CAPTION>
Percentage
--------------------------------
On-balance Off-balance
December 31, 1996 Funding sheet sheet Total
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in millions)
On-balance sheet funding
Retail deposits $1,663 46% 18%
Institutional deposits 1,727 47 19
- -----------------------------------------------------------------------
Total deposits 3,390 93 37
Term federal funds 51 1 0
Notes payable to banks 115 3 1
Other notes payable 93 3 1
- -----------------------------------------------------------------------
Subtotal 3,649 100 39
Off-balance sheet funding
Term securitizations 3,425 61% 37
Commercial paper 2,185 39 24
Subtotal 5,610 100 61
- -----------------------------------------------------------------------
Total funding $9,259 100% 100% 100%
=======================================================================
</TABLE>
The Competitive Equality Banking Act of 1987 (CEBA), which restricted the
average on-balance sheet asset growth of First Deposit National Bank (Bancorp's
principal operating entity) to 7% per annum, was repealed effective October 1,
1996. Although the need to securitize assets to comply with CEBA growth
constraints has been eliminated, Bancorp expects to continue to securitize in
order to strategically manage capital and access an efficient source of funding.
Outlook The credit card and consumer revolving loan industry continues to grow,
although it is highly competitive and has recently experienced increases in
delinquency and net credit loss rates that may continue into 1997. In this
environment, Bancorp will continue to focus on achieving profitable growth in
its consumer loan businesses by utilizing database marketing techniques, whereby
it identifies and acquires customers in targeted markets, and its credit
process, which is designed to optimize risk-adjusted returns.
Bancorp will also continue to focus on Providian Home Loans and secured credit
card products, which are on track to emerge as significant earnings contributors
in the future. In addition, Bancorp will continue to research and develop new
products to serve its targeted markets.
PROVIDIAN 1996 ANNUAL REPORT
23
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Providian Direct Insurance
(Dollars in millions)
Period Ended December 31 1996 %Change 1995 %Change 1994 %Change
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums:
Life $318.9 (0.5)% $320.3 4.1% $307.6 2.9%
Health 171.7 (4.7) 180.1 (3.2) 186.1 (6.0)
Property and Casualty 167.2 (4.4) 174.8 (0.9) 176.5 22.7
Other 5.7 (10.9) 6.5 0.2 6.4 (9.8)
- ----------------------------------------------------------------------------------------------------------------
Total premiums 663.5 (2.7) 681.7 0.8 676.6 4.5
Investment and other income, net 109.0 4.0 104.8 1.6 103.1 (5.8)
- ----------------------------------------------------------------------------------------------------------------
Total revenues (a) 772.5 (1.8) 786.5 0.9 779.7 3.0
Benefits and expenses:
Benefits and reserves 453.2 0.3 451.8 1.1 446.8 8.1
Commissions, net 18.9 4.8 18.0 (4.1) 18.7 4.9
General, administrative and other expenses, net 89.6 (3.9) 93.2 (8.4) 101.7 (14.0)
Amortization (a) 119.8 8.0 111.0 8.3 102.5 (6.7)
- ----------------------------------------------------------------------------------------------------------------
Total benefits and expenses 681.5 1.1 674.0 0.6 669.7 1.6
- ----------------------------------------------------------------------------------------------------------------
Pretax earnings: (b)
Life 75.7 4.9 72.1 11.9 64.5 14.1
Health 28.2 (22.6) 36.5 (12.6) 41.8 (8.8)
Property and Casualty (7.2) N/M 9.3 (8.6) 10.1 23.8
Other (5.7) 5.5 (5.4) 16.0 (6.4) 49.4
- ----------------------------------------------------------------------------------------------------------------
Pretax earnings $ 91.0 (19.1)% $112.5 2.3% $110.0 12.4%
================================================================================================================
</TABLE>
(a) Revenues exclude realized investment gains and losses, and amortization
expense excludes acquisition cost amortization related to investment gains
and losses.
(b) Pretax earnings exclude realized investment gains and losses and related
deferred acquisition cost amortization.
Description Providian Direct Insurance (PDI) sells and services various Life,
supplemental Health and personal lines auto insurance products. In addition, PDI
sells various fee-based products that are related to its insurance products. PDI
markets its products utilizing direct response methods such as television,
telephone, mail and third-party programs targeting low- to middle-income
households nationwide. PDI also markets its products to retired and active duty
military service personnel in foreign and domestic locations through an agency
field force that has the exclusive endorsement of the Non Commissioned Officers
Association. The endorsement provides PDI's agents with preferred access to
military personnel. The PDI group of companies is collectively licensed in all
50 states, the District of Columbia and Puerto Rico.
Profit Drivers PDI's significant profit drivers include the level of sales,
persistency, claims and operating expense management. PDI designs profitability
into its products through underwriting, rate structuring and building long-term
relationships by matching products with customer needs.
Results Pretax earnings were lower in 1996 as compared to 1995 due to an
unfavorable loss experience in the auto line of business and an anticipated
decline in the Health line. Higher investment income and lower general expenses
were more than offset by increased amortization of deferred acquisition costs,
lower business volume and the Property and Casualty claims. Pretax earnings in
1995 increased as compared to 1994 due to growth in fee-based and net investment
income, and lower expenses as a result of continued focus on cost management.
Life pretax earnings improved in 1996 as compared to 1995 primarily due to
higher investment income and management initiatives to lower expenses in the
military Life line and to the consolidation of certain operations. These were
partially offset by higher amortization expense on deferred acquisition costs
caused by increased marketing spending in current and prior years. Life pretax
earnings increased in 1995 as compared to 1994 due to higher net investment
income, lower general and administrative expenses and favorable claims
experience.
Despite premium growth among Health partners and a 50% increase in PDI's
fee-based revenues, Health pretax earnings were lower in 1996 as compared to
1995 due to the anticipated runoff of business in force and accompanying expense
pressures resulting from the strategic shutdown of certain lines. The loss ratio
increased slightly from 1995, as expected, due to overall aging of the business.
Amortization of deferred acquisition costs also increased due to PDI's growing
fee-based and selected partner lines. Health earnings decreased in 1995 as
compared to 1994 due to attrition of the existing in force block which offset
increased sales, improved retention and expense management initiatives.
Property and Casualty pretax earnings were lower in 1996 versus 1995 as a
result of increased auto claims reflecting severe winter storms as well as
higher claims settlement expenses and general expenses due in part to continued
investment in fraud detection programs. In addition, amortization
PROVIDIAN 1996 ANNUAL REPORT
24
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
(Dollars in millions)
Period Ended December 31 1996 %Change 1995 %Change 1994 %Change
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Annualized premium sales:
Life $ 46.2 (19.2)% $57.2 3.3% $ 55.3 (7.7)%
Health 15.5 (57.4) 36.4 33.5 27.3 39.8
Fee-based health products 4.5 (30.1) 6.5 33.0 4.9 N/A
Property and Casualty 22.9 (29.4) 32.4 6.7 30.3 72.2
- ------------------------------------------------------------------------------------------------------------------
Total annualized premium sales $ 89.1 (32.7)% $132.5 12.4% $117.8 21.4%
==================================================================================================================
Property and Casualty net written premiums $ 164.7 (6.8)% $176.7 0.9% $175.1 20.0%
==================================================================================================================
Life margin on premium 23.7% 22.5% 21.0%
Health margin on premium and fee-based income 15.8% 19.8% 22.3%
Property and Casualty ratios:
Loss/LAE 87.6% 81.6% 80.7%
Expense 25.8 22.3 22.5
- ------------------------------------------------------------------------------------------------------------------
Combined ratio 113.4% 103.9% 103.2%
==================================================================================================================
Assets $2,281.1 (0.7)% $2,298.1 11.8% $2,056.4 (1.2)%
==================================================================================================================
</TABLE>
expense on deferred acquisition costs increased due to higher deferrals recorded
in prior periods when marketing efforts increased. Property and Casualty
earnings were lower in 1995 as compared to 1994 reflecting a strategic
repositioning of the military auto business, costs associated with the
consolidation of operations and investments in fraud detection programs.
PDI revenues were lower in 1996 as compared to 1995 due to lower sales, the
continued lapsation of in force business in the core Health and Medicare
Supplement lines and the strategic repositioning of lines such as the military
auto business. These were partially offset by increases in fee-based income. PDI
revenues in 1995 increased as compared to 1994 due to Life premium and Health
fee-based income growth and higher investment income.
Sales were lower in 1996 as compared to 1995 due to the discontinuation of
a large Life and Health partnership arrangement and cutbacks in Health, direct
auto and military auto programs that were not producing targeted returns.
Offsetting this trend, however, was an encouraging 33% increase in Life direct
new customer acquisition sales fueled by the Life Universal Model approach to
marketing. Sales increased in 1995 as compared to 1994 due to increased fee-
based product sales and Health sales generated by new customers in the direct
response channel.
Outlook PDI's focus is to grow its insurance business and various successful
fee-based products, while profitably managing current customers. PDI plans to
grow the business by attracting leads, converting them quickly and providing
excellent customer service. PDI's Life Universal Model, which customizes
insurance offers to meet individual needs, has shown promising results and
will be entering the rollout phase in the first quarter of 1997. PDI expects to
grow its Health customer acquisition channel by leveraging the Life Universal
Model product customization techniques and using its supplemental income
protection products and its fee-based Providian Prescription Plan to fill the
gaps in coverage not offered by traditional health insurance providers. This
Health product customization technique is in the test phase and shows promise.
In addition to retaining and growing current strategic partners, PDI plans to
aggressively develop new Life and Health joint ventures and large endorsed
relationships. In the Property and Casualty business, PDI will continue to focus
on the direct distribution channel, concentrating on target marketing techniques
as well as enhancing claims savings initiatives.
In addition to growing the business with new customers, PDI plans to
continue to improve the profitability of current customers by selling add-on
products, maximizing the performance of retention efforts and enhancing Property
and Casualty underwriting standards utilizing selective price increases.
PROVIDIAN 1996 ANNUAL REPORT
25
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Providian Agency Group
(Dollars in millions)
Period Ended December 31 1996 %Change 1995 %Change 1994 %Change
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums:
Life $362.2 0.7% $359.6 3.4% $347.8 1.0%
Health 56.6 (5.1) 59.6 (4.5) 62.4 (4.7)
Other 24.4 (12.9) 28.1 (6.8) 30.1 (19.3)
- -------------------------------------------------------------------------------------------------------
Total premiums 443.2 (0.9) 447.3 1.6 440.3 (1.5)
Investment and other income, net 300.3 1.5 295.8 3.4 286.0 (0.6)
- -------------------------------------------------------------------------------------------------------
Total revenues (a) 743.5 0.1 743.1 2.3 726.3 (1.2)
Benefits and expenses:
Benefits and reserves 341.6 (0.3) 342.8 2.8 333.5 0.7
Commissions, net 52.2 (6.0) 55.5 9.4 50.7 (0.7)
General, administrative and other expenses, net 65.9 (10.9) 73.9 1.4 72.9 (2.2)
Amortization (a) 93.0 4.8 88.8 1.8 87.2 3.5
- -------------------------------------------------------------------------------------------------------
Total benefits and expenses 552.7 (1.5) 561.0 3.1 544.3 0.6
- -------------------------------------------------------------------------------------------------------
Pretax earnings: (b)
Life 177.6 1.0 175.9 (1.8) 179.0 (3.6)
Health 8.4 N/M 2.9 (28.4) 4.0 3.8
Other 4.8 49.0 3.3 N/M (1.0) N/M
- -------------------------------------------------------------------------------------------------------
Pretax earnings $190.8 4.8% $182.1 0.0% $182.0 (6.0)%
=======================================================================================================
</TABLE>
(a) Revenues exclude realized investment gains and losses, and amortization
expense excludes acquisition cost amortization related to investment gains
and losses.
(b) Pretax earnings exclude realized investment gains and losses and related
deferred acquisition cost amortization.
Description Providian Agency Group (PAG) markets traditional life and health
insurance and non-insurance financial 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 (Capital Security Insurance). PAG is a market-focused
distributor of insurance and financial products committed to meeting the needs
of low- 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, fee-based income growth, interest spreads,
spending levels and underwriting margins, including mortality experience, 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. 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 decreases slightly over the next several years. In response,
PAG has enhanced its profitability by increasing agent account size to reduce
compensation costs, streamlining operations to lower spending levels and
strengthening its risk management capabilities to improve its claims experience.
PAG has also been relatively successful in retaining its current business and in
generating a stable stream of earnings.
Results Pretax earnings increased over 1995 due to lower general and
administrative expenses, lower Health claims, increased First Health Advantage
(FHA) earnings and improved investment spreads. Lower expenses were a result of
PAG's enhanced use of technology, enabling reduced administrative and agency
staffing levels, and the movement to smaller agency offices, which decreased
rent expense. These improvements were partially offset by increased mortality
experience in the first half of the year and lower premium income. Life pretax
earnings, which account for more than 93% of PAG's 1996 income, increased as a
result of reduced general and administrative expenses, partially offset by an
increase in mortality levels. PAG's 1995 pretax earnings were essentially even
with 1994 as Life premium growth and the continued benefit of cost management
initiatives were offset by higher mortality levels, resulting from an increase
in the number of large claims during the first half of 1995.
PROVIDIAN 1996 ANNUAL REPORT
26
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions)
Period Ended December 31 1996 %Change 1995 %Change 1994 %Change
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Annualized premium sales:
Life $ 61.3 (5.6)% $ 64.9 (0.1)% $ 65.0 (10.9)%
Health 5.5 (12.4) 6.3 (12.3) 7.2 (20.3)
Fee-based health product (a) 2.9 (44.7) 5.3 N/A - N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Total annualized premium sales $ 69.7 (8.9)% $ 76.5 6.0% $ 72.2 (12.0)%
====================================================================================================================================
Annualized premium termination rates:
Life 14.7% 14.3% 14.5%
Health 14.4 14.3 14.8
- ------------------------------------------------------------------------------------------------------------------------------------
Total Life and Health termination rates 14.7% 14.3% 14.5%
====================================================================================================================================
Total termination rates, including fee-based product (a) 15.2% 14.5% 14.5%
====================================================================================================================================
Annualized premium gain rates:
Life 0.2% 1.7% 1.8%
Health (0.5) (2.3) (1.2)
- ------------------------------------------------------------------------------------------------------------------------------------
Total annualized Life and Health premium gain rates (0.2)% 1.3% 1.5%
====================================================================================================================================
Total annualized premium gain rates, including fee-based product (a) (0.2)% 2.2% 1.5%
====================================================================================================================================
Assets $5,266.3 (0.5)% $5,291.8 16.1% $4,556.3 (2.7)%
====================================================================================================================================
</TABLE>
(a) Includes a fee-based product (i.e., First Health Advantage) introduced in
1995.
Revenues were essentially even with 1995, with a decline in premium income
offset by increased investment income. Investment income was higher than the
prior year primarily due to normal growth in invested assets and an increase in
tax-favored investments, partially offset by lower yields. The increase in
revenues in 1995 reflected Life premium growth and greater investment income
resulting from asset growth.
In an effort to improve profitability and agent retention, management
consolidated many of its smaller accounts, which may have adversely affected
Life sales production in 1996. Also, sales of the FHA product were lower than
1995, the year the product was introduced. The discontinuance of two partnership
relationships in mid-1996 will have a negative impact on 1997 sales. Management
remains confident that the FHA product will continue to be a powerful door-
opener and provide future opportunities for cross-selling life and health
insurance products. Total 1995 sales increased due to the introduction of the
FHA product and strong partnership sales, with sales of fee-based products more
than offsetting a decline in Life and Health sales.
Although sales were down slightly for insurance products in 1996 and 1995, PAG
has been relatively successful in retaining its in force business. The increase
in the Life termination rate in 1996 reflects the discontinuance of some
partnership business. The termination rate for the home service business,
excluding fee-based products, was flat with 1995.
Outlook PAG believes enhanced premium and profitability growth can be achieved
through strengthened consumer marketing approaches. PAG is in the process of
developing and implementing a growth strategy to deliver increased sales through
more consistent execution of sales and management practices. This strategy
focuses on implementing a "back to basics" sales approach. This "back to basics"
focus emphasizes the importance of customer prospecting, needs-based selling,
and sales activity management. Complementing this focus, PAG has initiated a
field managers training program and strengthened telephone operations in
addition to continuing the rollout of an activity management (leads) system. PAG
believes that leads are effective in opening new homes and enabling Life and
Health sales. Additionally, PAG will continue to focus on reducing operating
costs and refining its risk management activities to improve profitability.
PROVIDIAN 1996 ANNUAL REPORT
27
<PAGE>
<TABLE>
<CAPTION>
Providian Capital Management
(Dollars in millions)
Period Ended December 31 1996 %Change 1995 %Change 1994 %Change
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums $ 92.5 41.0% $ 65.6 N/M $ 24.7 (65.3)%
Investment and other income, net 975.6 (4.3) 1,019.1 15.4% 883.4 16.0
- ----------------------------------------------------------------------------------------------------------
Total revenues (a) 1,068.1 (1.5) 1,084.7 19.4 908.1 9.0
Benefits and expenses:
Benefits and reserves 799.0 (6.7) 856.2 25.6 681.5 12.1
Commissions, net 16.3 44.7 11.3 N/M 4.1 (36.0)
General, administrative and other expenses, net 52.3 10.7 47.3 8.6 43.6 (4.3)
Amortization (a) 38.5 10.3 34.9 (17.6) 42.3 9.1
- ----------------------------------------------------------------------------------------------------------
Total benefits and expenses 906.1 (4.6) 949.7 23.1 771.5 10.4
- ----------------------------------------------------------------------------------------------------------
Pretax earnings: (b)
Spread-based 142.3 19.9 118.6 (9.2) 130.7 (0.4)
Fee-based 19.7 20.3 16.4 N/M 5.9 N/M
- ----------------------------------------------------------------------------------------------------------
Pretax earnings $ 162.0 20.0% $ 135.0 (1.1)% $136.6 1.9%
==========================================================================================================
</TABLE>
(a) Revenues exclude realized investment gains and losses, and amortization
expense excludes acquisition cost amortization related to investment gains
and losses.
(b) Pretax earnings exclude realized investment gains and losses and related
deferred acquisition cost amortization.
Description Providian Capital Management (PCM) is responsible for the marketing
and management of spread- and fee-based retirement and savings products issued
through the Company's life insurance subsidiaries as well as the management of
all insurance-related invested assets. In the spread-based 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 income and capital appreciation sufficient to
cover customer guarantees, pay expenses and produce a profit. In the fee-based
business, PCM assumes little, if any, investment risk. Fee-based products
provide certain liquidity and withdrawal benefits or tax advantages to customers
but generally do not guarantee the performance of underlying assets.
PCM offers a broad array of financial products, including floating and
fixed rate guaranteed investment contracts (GICs), Trust GIC (synthetic GICs)
and separate account products offered to Group customers, including pension
funds, banks, mutual funds and other organizations. These contracts have stated
as well as indeterminant maturities. PCM markets Individual annuities which
include fixed and variable contracts and immediate life annuities (primarily
structured settlements) to customers through banks, securities brokerage firms,
financial planners and third-party marketing organizations.
Profit Drivers The level of PCM's profits is a function of a number of business
and economic factors that 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, product growth, mix
of assets and liabilities, credit experience and spending levels. Interest rate
exposure is controlled through asset/liability strategies designed to
appropriately manage the estimated durations of both assets and liabilities
(explained on pages 30 through 32). To control credit risk, PCM maintains strict
underwriting standards and emphasizes a diverse investment portfolio. The
current asset/ liability mix will result over time in lower spread margins in a
rising interest rate environment and higher spread margins in a falling interest
rate environment.
In order to mitigate the risks and profit variability in spread-based
products, PCM is strategically moving toward a higher concentration of fee-based
products. Profits for these products will be driven by PCM's ability to continue
to aggressively grow the business, maintain fee income margins, achieve
economies of scale and control operating costs.
Results PCM's 1996 pretax earnings increased significantly over 1995, primarily
due to lower credited rates and growth in fee-based deposits, partially offset
by lower investment yields. Earnings in 1995 were down slightly from 1994 as a
result of lower net interest margins, partially offset by modest spread-based
product growth, substantial fee-based product growth and reduced amortization of
acquisition costs. Revenues, driven primarily by investment income earned on
spread-based
28 | PROVIDIAN 1996 ANNUAL REPORT
<PAGE>
<TABLE>
<CAPTION>
(Dollars in millions)
Period Ended December 31 1996 %Change 1995 %Change 1994 %Change
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Policyholder deposits on-balance sheet:
Spread-based:
Group $ 7,170.1 4.6% $ 6,857.8 (7.5)% $ 7,417.4 11.8%
Individual 5,479.1 (6.0) 5,828.6 11.9 5,207.0 (0.2)
- -------------------------------------------------------------------------------------------------------------------------------
Total spread-based 12,649.2 (0.3) 12,686.4 0.5 12,624.4 6.5
Fee-based 2,702.0 69.7 1,591.9 61.3 987.2 23.0
- -------------------------------------------------------------------------------------------------------------------------------
Total policyholder deposits on-balance sheet 15,351.2 7.5 14,278.3 4.9 13,611.6 7.6
Fee-based products off-balance sheet 13,501.5 8.1 12,490.4 41.4 8,836.4 88.3
- -------------------------------------------------------------------------------------------------------------------------------
Total policyholder deposits and other fee-based products $28,852.7 7.8% $26,768.7 19.2% $22,448.0 29.4%
===============================================================================================================================
Change in policyholder deposits and fee-based products:
Spread-based $ (37.2) $ 62.0 $ 772.2
Fee-based 1,110.1 604.7 184.6
Fee-based products off-balance sheet 1,011.1 3,654.0 4,143.9
- -------------------------------------------------------------------------------------------------------------------------------
Total change in policyholder deposits and fee-based products $ 2,084.0 $ 4,320.7 $ 5,100.7
===============================================================================================================================
Mean spread-based policyholder deposits $12,412.8 (3.9)% $12,910.9 3.3% $12,502.0 8.7%
Margin on mean spread-based policyholder deposits (basis points) 115 92 105
===============================================================================================================================
Assets $15,728.2 8.5% $14,499.7 9.2% $13,279.7 2.7%
===============================================================================================================================
</TABLE>
products and fees earned on fee-based products, decreased slightly in 1996 from
1995 due to lower spread-based policyholder balances and lower investment yields
on floating rate assets. Revenues increased from 1994 to 1995 as a result of
higher product balances and investment yields.
Spread-based profit margins (defined as the ratio of pretax earnings to mean
spread-based products) for 1996 were 23 basis points greater than 1995 margins
due to a decline in interest rates that began in mid-1995 and continued through
1996. Margins decreased in 1995 from 1994 due to the negative impact of rising
interest rates during the last half of 1994 and early 1995.
Group spread-based product balances increased $312.3 million from 1995 to 1996
primarily due to strong sales in the second half of the year as a result of
entering new market segments and greater demand in certain products. Soft
demand, intense rate competition and PCM's termination of a significant block of
certain GIC products with a guaranteed index that it considered too expensive
caused the decrease in Group spread-based product balances from 1994 to 1995.
Individual spread-based products declined from 1995 to 1996 primarily due to a
very competitive pricing environment and very strong stock market returns that
caused potential customers to select alternative investments such as stock
mutual funds and variable annuities. PCM also experienced higher than normal
withdrawals as customers faced a reinvestment decision at the end of their
guaranteed rate period. Individual spread-based products grew from 1994 to 1995
primarily due to a coinsurance agreement with North American Security Life
(NASL) executed in June 1995.
The growth in fee-based balances reflects PCM's strategic commitment to
producing a more stable earnings stream. Group fee-based products are dominated
by the Trust GIC product, an off-balance sheet fee-based product that provides
benefit responsiveness on contracts and affords book value accounting for the
plan sponsor. PCM maintained its position as the industry sales leader for this
product as demand continues to substantially exceed original expectations; Trust
GIC has attracted $13.1 billion in customer balances since its inception in
1991. Individual fee-based variable annuity sales continue to increase each year
based on the development of new distribution sources and significant asset
appreciation.
Outlook The retirement and savings markets are growing rapidly due to the
maturing population. Current growth is primarily in fee products due to the
recent strong equity markets; spread businesses are reasonably mature and
relatively low growth. Competition in these markets is substantial and
increasing. PCM is focused on developing its fee-based and Individual spread-
based businesses.
In 1997, PCM will focus on profitably growing its Individual spread-based
business by developing a new portfolio of products and establishing more
programs to retain existing business. PCM will continue its efforts to
aggressively grow fee business and drive down expense levels. PCM will
selectively invest in distribution channel development with primary emphasis on
building its internal distribution capabilities.
PROVIDIAN 1996 ANNUAL REPORT|29
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Corporate and Other
(Dollars in millions)
Period Ended December 31 1996 %Change 1995 %Change 1994 %Change
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues (a) $ 46.9 (5.8)% $ 49.8 (7.0)% $ 53.6 55.4%
Expenses:
General, administrative and other expenses, net 34.9 5.6 33.0 11.7 29.6 63.6
Interest expense 62.0 3.7 59.8 6.7 56.0 10.3
- ----------------------------------------------------------------------------------------------------------------
Total expenses 96.9 4.4 92.8 8.4 85.6 24.3
- ----------------------------------------------------------------------------------------------------------------
Pretax loss (b) $ (50.0) 16.2% $ (43.0) 34.3% $ (32.0) (6.8)%
================================================================================================================
Assets $1,860.1 27.1% $1,463.3 6.3% $1,376.2 11.7%
================================================================================================================
</TABLE>
(a) Revenues exclude realized investment gains and losses.
(b) Pretax loss excludes realized investment gains and losses and related
deferred acquisition cost amortization and dividends on company-obligated
mandatorily redeemable preferred securities of Providian LLC.
Corporate and Other includes activities of a general corporate nature such as
debt service, corporate-wide marketing programs, intersegment eliminations, an
allocation of net investment income for the capital allocated to business
segments, adjustments given to the business segments for tax-preferenced
investments, intercompany service fees and real estate development activities.
This category also includes the results of businesses that have not yet been
integrated into Providian's other business segments.
The Corporate and Other pretax loss was up $7.0 million from 1995 as a result
of tax-preferenced adjustments given to the business units for their investment
in low-income housing projects. On a consolidated basis this is more than offset
by a declining tax rate. Higher branding expenses used to build brand identity
in the Providian name and costs associated with the announced merger and spin-
off also contributed to the larger loss. These were partially offset by
increased investment income on capital invested in the business segments and
higher partnership income. The variance in 1995 was primarily influenced by
higher branding expenses, increased tax-preferenced adjustments and higher
interest expense.
Asset/Liability Management
In both its insurance and banking operations, asset/liability management is a
key element of the Company's overall risk management program. The objective of
asset/liability management is to support the achievement of business strategies
while maintaining appropriate risk levels. 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 variability of economic value, earnings and
surplus. The following discussion addresses the Company's integrated management
of assets and liabilities, including the use of derivative financial
instruments. The Company does not use derivative financial instruments for
speculative purposes.
Market Risk
PCM monitors interest rate risk for the insurance operations by employing a
variety of modeling techniques, including duration analysis. Duration reflects
the price sensitivity of a financial instrument to changes in interest rates.
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, such as callable bonds,
mortgage-backed securities or insurance liabilities, additional adjustments are
made to estimate an effective duration. The net duration level represents the
difference between the estimated durations of policy liabilities and an equal
amount of assets supporting those liabilities. Net duration targets are
periodically adjusted to reflect changing business and economic conditions and
are
PROVIDIAN 1996 ANNUAL REPORT
30
<PAGE>
- --------------------------------------------------------------------------------
managed within a range considered appropriate by management. PCM manages the net
duration level by changing the nature of the underlying assets or liabilities in
the portfolio and using derivatives. Generally, asset durations are longer than
liability durations. At December 31, 1996 and 1995, asset durations were longer
than liability durations by approximately 0.8 years. During 1996, net duration
levels averaged 0.8 years. While quantitatively estimated, determining the net
duration level is still a subjective process. There is no generally accepted
method of calculating the duration of liabilities; therefore, others might have
estimated durations differently. Accordingly, net duration levels among
companies may not be comparable.
The asset/liability management process is designed to monitor asset and
liability characteristics on both the individual product and 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 balancing of each product's
liability characteristics with the assets supporting those liabilities.
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 appropriate 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.
PCM manages interest rate risk by employing various risk management programs
that adjust the overall net duration level or which modify the interest rate
characteristics of the underlying assets or liabilities. Interest rate swaps,
including basis swaps, and futures contracts are the primary derivative
financial instruments used in the overall asset/liability management process.
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 indices. Futures are contracts that 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. Other derivatives,
such as options and forwards, are used to a much lesser extent in the
asset/liability management process.
PCM historically has used interest rate swaps to convert fixed rate
liabilities to floating rate liabilities, 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, futures contracts have been used to adjust
the net duration level of the overall portfolio and to hedge market risk related
to certain products that provide a return based on the market performance of a
designated index. These derivative financial instruments are an integral part of
PCM's risk management process and are used extensively in three major risk
management programs.
These three major risk management strategies are similar in that each employs
a derivative to synthetically convert either a fixed rate or market-indexed
liability to a London Interbank Offered Rate (LIBOR) or U.S. Treasury-based
floating rate. As such, these programs result in liabilities with similar
characteristics that allow the Company to employ the same baseline asset
strategy for these dissimilar products. The baseline asset strategy employed
provides for a mixture of varying asset types such as commercial and residential
mortgages, bonds and private placement securities that meet predetermined
liquidity, credit quality and duration criteria. Most of the asset types
utilized are floating rate investments indexed to LIBOR or U.S. Treasury-based
interest rates plus a spread. To a lesser extent, fixed rate and other
investment types are utilized, but in aggregate, all asset types are designed to
meet the predetermined criteria established for the baseline asset strategy.
PCM's fixed rate GIC product is synthetically converted to a floating rate
liability using swaps that receive a fixed rate and pay a LIBOR floating rate.
Additionally, the Company has hedged a portion of the basis risk inherent in
this program by entering into basis swaps that receive a LIBOR-based floating
rate and pay a floating rate indexed to the U.S. Treasury rate. Therefore, the
combined interest rate risk associated with the related assets and liabilities
is mitigated by converting fixed rate liabilities to floating rate liabilities
that more closely mirror the characteristics of the baseline asset strategy. At
December 31, 1996, the Company had notional amounts of $4.0 billion of interest
rate and basis swaps related to this product.
PCM sells market-indexed products that provide a variable return indexed to
the market performance of certain designated equity or bond indices, such as the
S&P 500 or the Lehman Brothers Aggregate Bond Index. These products are
supported by a baseline asset strategy. Futures contracts and interest rate
swaps that receive a specified index and pay LIBOR are utilized to convert the
guaranteed rates to a floating rate liability. The Company had 1,252 S&P 500
contracts with an equivalent contract value of $466.2 million and a notional of
$197.7 million of interest rate swaps at December 31, 1996.
PCM also has a program to reduce the interest rate risk on a portion of the
fixed rate annuity business reinsured from NASL. Interest rate swaps are used to
convert the fixed rate liability to a floating rate based on LIBOR, which more
closely reflects the floating nature of the underlying baseline asset strategy.
At December 31, 1996, the Company had a notional amount of $383.4 million of
interest rate swaps related to this program.
The asset/liability management process related to market risk for the
Company's banking operations is discussed separately under the Providian Bancorp
section on page 21.
PROVIDIAN 1996 ANNUAL REPORT
31
<PAGE>
Credit Risk
- --------------------------------------------------------------------------------
The Company, in both its insurance and banking operations, manages credit risk
through a rigorous ongoing credit review, approval and monitoring process.
Credit risk is defined as the risk that a loss will occur as the result of a
borrower or derivative counterparty defaulting on a loan or contract when the
contract is in a favorable economic position to the Company. Master netting
agreements are entered into with swap counterparties to reduce the exposure to
credit risk with the individual counterparty. Credit limits are established for
each borrower and counterparty and are analyzed based on total net credit
exposure to the borrower, including both debt securities and derivatives. In the
event that the individual borrower or derivative counterparty credit risk
exceeds the preestablished credit limit as determined by the Company, action is
taken to reduce either the derivative or the loan exposure with the
counterparty. The Company also monitors exposure to counterparty credit risk
through the performance of sensitivity testing. Probabilistic "worst-case"
scenarios are considered to determine the credit risk exposure on derivatives
associated with the individual counterparty. This exposure is then aggregated
with other non-derivative credit risks associated with the individual
counterparty to determine compliance with the total individual counterparty
credit limit established by the Company during the credit review process.
Interest rate swap 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 as
a result of the clearinghouse function of the exchange and the daily settlement
of gains or losses on virtually all exchange-traded contracts. See Note E of the
accompanying Consolidated Financial Statements for additional information on
credit risk.
Fair Value
The current accounting model required by the Financial Accounting Standards
Board, which 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 and credit
environments, without making a similar adjustment to liabilities, distorts
reported financial results.
As a result of this potential for distortion, fair value disclosure is
provided in Note F of the accompanying Consolidated Financial Statements.
Statement of Financial Accounting Standards (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. The Company has elected to provide additional
fair value disclosure for all financial instruments, including traditional
insurance liabilities, in an effort to more properly reflect changes in
shareholders' equity resulting 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 and changes in various credit spreads.
To illustrate further, the current accounting model resulted in a $177.4
million decrease in the net unrealized investment gain component of
shareholders' equity at December 31, 1996, as compared to December 31, 1995. As
disclosed in Note F, the fair value of shareholders' equity increased $404.0
million when all other assets and liabilities were marked to fair value. This
increase was primarily attributable to 1996 net income, partially offset by
dividends to shareholders and the effect of the Company's common stock
repurchase program. While the fair value disclosures do not provide an
indication of the fair value of the Company, the information does provide a more
balanced picture of the economic position of the Company as the result of market
changes than provided by only marking debt and equity securities to market as
required by generally accepted accounting principles.
Asset/Liability Review
Cash and invested assets were $22.9 billion at December 31, 1996, up 4.3% (1995
- - $21.9 billion, up 13.8%). Excluding Providian Bancorp assets, invested assets
related to insurance operations were $18.8 billion in 1996 compared to $18.5
billion in 1995. The discussion that follows relates solely to the invested
assets and liabilities of the insurance operations. The assets and liabilities
of the Company's banking operations are discussed separately under the Providian
Bancorp section on pages 22 through 23. As investment manager for the Company's
insurance-related invested assets, PCM manages the distribution of investments
to optimize risk-adjusted returns in accordance with its baseline asset
strategies. Overall, the distribution of invested assets related to insurance
operations remains similar to year-end 1995.
Distribution of Insurance Invested Assets
December 31, 1996
(Dollars in millions)
[CHART APPEARS HERE]
32|PROVIDIAN 1996 ANNUAL REPORT
<PAGE>
Public and private bonds account for the majority of invested assets. The
bonds are distributed across various industry sectors resulting in no
significant concentration in any one sector. The Company maintains a high credit
quality investment portfolio with 4.8% and 4.9% of invested assets at December
31, 1996 and 1995, respectively, representing below investment grade bonds.
Approximately 90% of the bond portfolio is categorized as National Association
of Insurance Commissioners (NAIC) designation 1 or 2. These NAIC designations
are given only to the highest quality investments as rated by the Securities
Valuation Office of the NAIC.
The Company has historically had a low default rate in public and private
bonds. This is because of PCM's ability to prudently seek out and manage among
sectors within various asset classes. There were no securities in the bond or
equity portfolios that were delinquent as to interest or dividends at December
31, 1996. Default and loss experience in these portfolios was excellent with no
defaults or other significant losses as a result of impairments in value during
1996.
Distribution of Public and Private Bonds by Industry Sector
Dec. 31, 1996
(Dollars in millions)
[Chart appears here]
The Company's bond and equity portfolios are also highly diversified among
types of securities. Included in the portfolios were $2.0 billion of mortgage-
backed securities (MBS) and $1.3 billion of asset-backed securities (ABS). The
Company's MBS and ABS portfolios made up 17.3% and 14.6% of total invested
assets at December 31, 1996 and 1995, respectively.
MBS 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 the Company's total portfolio. The primary
investment uncertainty with MBS is the timing of cash flows resulting from the
timing variability 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), the investment in MBS
should be viewed in the context of broader portfolios, and in light of the
integrated manner in which the Company manages its assets and liabilities.
Mortgage-backed pass-through securities were the largest component of MBS in the
portfolio, representing 80.3% of the total MBS portfolio at December 31, 1996.
Pass-through securities represent a pool of mortgages packaged as shares, whose
income passes from debtors through an intermediary to an investor. The Company's
pass-through holdings consist primarily of Aaa rated, mortgage-backed issues,
over half of which are government agency guaranteed.
Collateralized Mortgage Obligations (CMOs) represent the other component of
MBS owned by the Company. CMOs are securities that pool 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 concentrated in shorter, more stable
tranches. The Company has only nominal exposure to higher volatility CMO
tranches, such as interest-only or residual securities.
Asset-backed securities are primarily comprised of Small Business
Administration Loan Pools (SBAs) and auto, student, credit card, home equity and
home improvement loans. Approximately 75% of the ABS portfolio has an Aaa
rating, with SBAs making up 35% of this investment type. SBAs are high-quality
investments that are guaranteed by the U.S. government and have an implied Aaa
rating. Furthermore, similar to MBS, SBAs primary investment uncertainty is the
timing variability of prepayments of the underlying loans rather than the loss
of principal.
A portion of the MBS and ABS portfolios, approximately 56%, have coupons that
adjust with changes in short-term interest rates, such as LIBOR and Treasury
bills, and some are subject to caps and floors. While yields on both fixed rate
and floating rate MBS and ABS 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 following table provides a summary of amortized cost and market value for
MBS and ABS investments as of December 31, 1996:
<TABLE>
<CAPTION>
Securities by Type
-----------------------------------
Market Value
Amortized Cost (carrying value)
(Dollars in millions)
- ------------------------------------------------------------
<S> <C> <C>
Pass-throughs $1,561 $1,561
CMOs 382 398
ABS 1,292 1,301
- ------------------------------------------------------------
Total $3,235 $3,260
============================================================
</TABLE>
33 | PROVIDIAN 1996 ANNUAL REPORT
<PAGE>
- --------------------------------------------------------------------------------
The Company also engages in commercial mortgage 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%. PCM requires minimum debt
service coverage from existing cash flows of 1.2 times. At the time of
origination of the mortgage loan, an on-site 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, credit-anchored shopping centers, industrial facilities and,
to a lesser extent, agribusiness lending 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 rigorous underwriting standards, PCM minimizes credit risk
through various means, including limiting average loan balances, diversification
by borrower and property type and geographic dispersion of property types.
Commercial Mortgage Loan Principal Balance
by Geographic* Location
December 31, 1996
(Dollars in millions)
[CHART APPEARS HERE]
PCM'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. 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, 1996 amounted to 2.9% of outstanding commercial loans compared to
3.0% at the end of 1995. These results compared very favorably to industry
results of 14.8% at September 30, 1996, the latest date for which such
information is available, and 15.3% at December 31, 1995.
Commercial Mortgage Loan Principal Balance
by Property Type
December 31, 1996
(Dollars in millions)
[CHART APPEARS HERE]
Included in the Company's commercial mortgage loan portfolio are certain loans
that pay interest only with the full principal payment due upon maturity. During
the next three years, $947.1 million (1997 - $420.8 million; 1998 - $318.0
million; and 1999 - $208.3 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. 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.
The Company also maintains a residential mortgage loan portfolio with
conservative underwriting standards. Loans are acquired from approved
originators and legal documentation is reviewed to ensure a first lien position.
Quality control reviews are performed on 10% of all 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
$814.3 million in California loans. Pool insurance has been obtained on 18.2% of
these California-based mortgage loans to reduce credit exposure to that region.
Residential Mortgage Loan Principal Balance
by Geographic* Location
December 31, 1996
(Dollars in millions)
[CHART APPEARS HERE]
PROVIDIAN 1996 ANNUAL REPORT
34
<PAGE>
Pool insurance on new California residential mortgage loans is not available
because of the withdrawal from this market of the major writers of this type of
insurance. However, the Company reduces its exposure to this geographic location
by limiting its investment in California loans as a percentage of the total
residential mortgage loan portfolio. Additionally, demographic and economic
reviews are performed on all geographic regions to identify markets with an
increased potential for risk.
The percentage of problem residential mortgage loans to the total number of
loans in the portfolio (based on Mortgage Bankers Association [MBA] standards,
which include loans 30 days or more past due and loans in the process of
foreclosure) were 4.0% and 3.3% at December 31, 1996 and 1995, respectively. The
MBA average for such loans was 5.3% at September 30, 1996, the latest date for
which such information is available, and 5.4% at December 31, 1995.
Mortgage loans on which the Company has discontinued the accrual of interest
and restructured loans accruing interest as of December 31, 1996 and 1995, are
as follows:
<TABLE>
<CAPTION>
Mortgage Loans
---------------------------------
Commercial Residential
--------------- -----------
1996 1995 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in millions)
Non-accrual loans $ 27 $ 28 $ 32 $ 32
Restructured loans, accruing
interest 19 15 - -
- --------------------------------------------------------------------------
Total $ 46 $ 43 $ 32 $ 32
==========================================================================
</TABLE>
As of December 31, 1996, the Company had approximately $59.7 million of
commercial mortgage loans with identified potential problems that 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.
The Company had $504.4 million invested in alternative investment strategies,
or 2.7% of total invested assets, at December 31, 1996. Included in this
category is $166.7 million invested in a traditional convertible arbitrage
strategy. This strategy, under contract with a majority-owned 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
offset significantly by the related short stock position, which would allow for
profitable liquidation of the investment.
Most of the remaining alternative strategy investments are managed under
contract by external investment managers. These investments, some of which may
have below investment grade characteristics, 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 generally uncorrelated to changes in interest rates. The
structure of a limited partnership agreement affords PCM little control over the
day-to-day investment decisions of these partnerships. PCM manages its exposure
to these types of investments by performing appropriate credit and underwriting
reviews prior to the initial investment, by limiting the amount that can be
invested in any one strategy and by ongoing monitoring. At December 31, 1996,
the largest investment in any one of these other strategies or limited
partnerships was $75.7 million.
Additionally, at December 31, 1996, the Company had $85.5 million invested in
affordable housing limited partnerships. These limited partnerships provide
substantial incentive tax credits that give the investments a high projected
after-tax rate of return that exceeds the associated risk inherent in such
investments. The credits, equal to approximately 9% of the cost of a qualified
property per year, are earned over a ten-year period. However, the credits are
subject to recapture if the property is not held for a minimum of 15 years. As a
result, the investments will become more illiquid over time. The tax credits
received on these investments during 1996 lowered the Company's actual effective
tax rate by 1.7%.
With respect to the Company's liabilities, the following tables contain
information on the Company's major insurance products with related interest
components. In addition to these products, the Company also offers products
whose return to the customer is represented by the market performance of the
underlying assets. These products and the related investments are included in
the separate account liabilities and assets reported in the Consolidated
Statements of Financial Condition.
PROVIDIAN 1996 ANNUAL REPORT
35
<PAGE>
<TABLE>
<CAPTION>
Mean
Year Ended Deposits and Effective Effective
December 31, 1996 Reserves Interest* Rate* Rate*+
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in millions)
Guaranteed investment
contracts $6,015 $340 5.65% 6.27%
Fixed annuities 3,476 174 5.00 5.06
Payout products 1,466 122 8.30 8.30
Market-indexed products 769 45 5.85 15.32
Single-premium life 669 28 4.26 4.26
Life, health and other 3,787 216 5.70 5.70
=========================================================================
Mean
Year Ended Deposits and Effective Effective
December 31, 1995 Reserves Interest* Rate* Rate*+
- -------------------------------------------------------------------------
(Dollars in millions)
Guaranteed investment
contracts $6,523 $406 6.22% 6.57%
Fixed annuities 3,588 191 5.32 5.33
Payout products 1,237 107 8.67 8.67
Market-indexed products 861 56 6.47 28.29
Single-premium life 702 32 4.51 4.51
Life, health and other 3,566 205 5.76 5.76
=========================================================================
</TABLE>
*After related hedges *+Before related hedges
GICs consist of fixed rate, fixed maturity contracts (62%), floating rate,
indeterminate maturity contracts (32%), or floating rate, fixed maturity
contracts (6%). Credited interest on most floating rate contracts resets monthly
based on various indices. Indeterminate maturity contracts allow the
contractholder to withdraw funds with advance notice periods ranging from three
to six months. There is no withdrawal penalty. During 1996, the Company
continued to enhance its liquidity position by offering primarily fixed maturity
GICs that have no early withdrawal provisions. At December 31, 1996, $4.3
billion of GICs had early withdrawal provisions (requiring 90 to 180 day notice
provisions) with the balance ($2.2 billion) having no early withdrawal
provisions. The fixed maturity GICs mature as follows (dollars in millions):
1997 - $1,073.3; 1998 - $1,453.9; 1999 - $1,047.8; 2000 - $413.0; and 2001 -
$287.0.
Fixed annuities include single premium and flexible premium deferred
annuities. The contracts typically have a first-year surrender charge of 5.0 to
7.0%, which generally declines to zero over five to six years. The average
remaining surrender charge on policies still in the surrender period is 3.6%. As
of December 31, 1996, approximately 54%, or $1.8 billion, of fixed annuities
were subject to a surrender charge. Fixed annuities as of December 31, 1996 also
included $746.4 million of market-value adjustment annuities, having a market-
value adjustment on withdrawal prior to the end of the interest guarantee
period, which ranges from one to seven years. Approximately 51%, or $383.0
million, of these fixed annuity contracts are synthetically converted to
floating rate contracts using interest rate swaps based on LIBOR.
Payout products include structured settlements, pension buyout annuities
and single premium immediate annuities that pay periodic benefits to
contractholders. Early withdrawals are prohibited. Annual benefit payments of
this type are currently about $104 million. This cash outflow is scheduled to
taper off over the next 50 years.
Market-indexed products provide a return based on the market performance of
a designated index, such as the S&P 500 or the Lehman Brothers Aggregate Bond
Index. The Company utilizes futures contracts and interest rate swaps in order
to hedge the market risk associated with these products, effectively converting
the liability to a floating rate based primarily on one-month or three-month
LIBOR. At December 31, 1996, there was $675.8 million outstanding related to
these products.
Most single premium life contracts are outside their surrender period.
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 that contain standard
insurance surrender provisions.
In addition to the above products, PCM also had $13.5 billion of off-
balance sheet products, primarily Trust GIC contracts, at December 31, 1996.
With Trust GIC, the customer retains legal title to the assets and receives the
investment performance over time. PCM 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. PCM provides benefit responsiveness on the Trust GIC
contracts affording book value accounting treatment for the plan sponsor. PCM
provides benefit advances, if necessary, for appropriately defined, benefit-
responsive events. Potential advances are mitigated and managed through rigorous
plan underwriting, product structure and diversification. At December 31, 1996,
there were no outstanding advances to customers.
36 | PROVIDIAN 1996 ANNUAL REPORT
<PAGE>
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
Providian Corporation (the "Parent Company") is a legal entity, separate and
distinct from its subsidiaries, and has no business operations. The primary
sources of cash to meet obligations, including principal and interest payments
with respect to indebtedness, are dividends and other statutorily permitted
payments from its subsidiaries. While the subsidiaries are restricted in the
amount of dividends they may pay to the Parent Company as discussed in Note K to
the accompanying Consolidated Financial Statements, these restrictions are not
expected to affect the ability of the Parent Company to meet its cash
obligations in 1997.
The liquidity requirements of the Company are primarily met by a stable
base of cash flows from insurance premiums (particularly from the home service
Providian Agency Group operations, which are very predictable and relatively
immune to disintermediation), from banking operations, from investments and from
other product sales.
A strong liquidity position is critical to the Company's continuing
financial strength. The availability of cash is essential to the timely payment
of policyholders, 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 and is considered
sufficient to satisfy its foreseeable financial obligations.
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 that provide for high-quality asset portfolios and by
active, integrated asset/liability management processes.
Net consolidated cash flows from operations in both 1996 and 1995 were $1.5
billion, up from $1.0 billion in 1994. The increases over 1994 primarily relate
to differences in federal income taxes paid and interest credited on
policyholder balances. See the Consolidated Statements of Cash Flows for
additional information regarding liquidity and funding.
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
$95.8 million in 1996 at a weighted average interest rate of 5.42%. Commercial
paper outstanding at December 31, 1996 and 1995 was $49.5 million. In addition
to the corporate commercial paper program, Commonwealth Insurance, Peoples
Security Insurance and Providian Life and Health Insurance Company each have
$50.0 million in available commercial paper programs. There were no borrowings
under these programs in 1996.
Excluding Bancorp, the Company has committed lines of credit of $750.0
million that would provide additional liquidity should adverse conditions
materialize, and serve as backup to the commercial paper program. There were no
borrowings under these lines of credit during the year and no amounts
outstanding under them at December 31, 1996. In addition, the Company's bond and
stock portfolio of $11.5 billion at December 31, 1996 provides a significant
source of short-term liquidity.
Bancorp analyzes its current and future liquidity needs to support its
deposit portfolio and asset growth and has a revolving credit agreement. The
agreement provides liquidity for the existing deposit base as well as satisfying
short-term funding requirements. The agreement, which was terminated, replaced
and restated on May 14, 1996, provides for $1.2 billion of available lines of
credit. Outstanding borrowings under the agreement were $115.0 million at
December 31, 1996 compared to $321.0 million at the end of 1995. As discussed
previously herein, Bancorp uses securitization of consumer loans as an
alternative source of funding to support its continued business growth.
On September 27, 1996, the Company's shelf registration of debt securities
became effective and the Company commenced its $500.0 million Series E medium-
term note program. The Series E medium-term note program was created from the
combination of $389.0 million of new capacity from the registration and $111.0
million of unissued medium-term notes remaining from the Series D program.
During 1996, $63.0 million of Series D notes were issued ($110.5 million issued
in 1995). There were no Series E notes issued in 1996, leaving a remaining
capacity of $500.0 million. The proceeds from these issuances were primarily
used to fund 1996 maturities of long-term debt of $65.8 million. The ratio of
long-term debt to total realized capital (including long-term debt and the
company-obligated mandatorily redeemable preferred securities of Providian LLC
and excluding the unrealized investment gain (loss) on debt securities and
redeemable preferred stocks, net
37 | PROVIDIAN 1996 ANNUAL REPORT
<PAGE>
- --------------------------------------------------------------------------------
of adjustments for deferred acquisition costs and deferred income taxes) was
19.2% at December 31, 1996 compared to 21.1% at the end of 1995.
In 1994, the NAIC implemented a risk-based capital formula for the life
insurance industry designed to establish minimum levels of statutory capital and
surplus. The formula assigns various weighting factors to reflect the perceived
risk of each insurer's business. The formula focuses on: (1) asset impairment
risks, (2) insurance risks, (3) interest rate risks and (4) general business
risks. The adjusted capital levels of the Company's life insurance subsidiaries
currently exceed all of the regulatory action levels.
The Office of the Comptroller of Currency (OCC) requires that its regulated
institutions maintain a minimum risk-based capital ratio of 10% to achieve "well
capitalized" status. First Deposit National Bank and Providian National Bank, as
OCC regulated entities, have maintained "well capitalized" status and as of
December 31, 1996, had risk-based capital ratios of 11.18% and 13.44%,
respectively.
Subsequent to December 31, 1996, Bancorp issued $160.0 million of
mandatorily redeemable preferred securities, which bear interest at the rate of
9.525%. Bancorp intends to use the proceeds from issuance for the retirement of
outstanding indebtedness ($42.5 million as of December 31, 1996) owed to the
Parent Company, for the redemption of preferred stock ($63.3 million as of
December 31, 1996) held by the Parent Company and for general Bancorp business
purposes. The Parent Company plans to use the proceeds to be received from
Bancorp to redeem the Parent Company's $95.0 million Sinking Fund Debentures
during 1997.
Inflation
Because the Company is a diversified financial services company, its assets and
liabilities are inherently sensitive to the overall level of and changes in
interest rates, which are traditionally linked to changes in inflation. 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 each year since its founding in 1969. In
1996, the increase was 11.1% compared to a 12.5% increase in 1995. The quarterly
dividend of $0.275 per common share declared by the Board of Directors for the
first quarter of 1997 represents an increase of 10.0% over the 1996 quarterly
rate. The ten-year annual compounded growth rate has been 9.3%, significantly
higher than the approximate 5.2% compound growth rate for the companies that
make up the Dow Jones Industrial Average. The 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 $51.38 per common share
at December 31, 1996 compared to $40.75 per common share at December 31, 1995
and $30.88 per common share at December 31, 1994. The price-earnings multiple
(calculated on the last 12 months' net income per common share) was 11.1
compared to 11.3 at the end of 1995 and 10.2 at the end of 1994. 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 - Providian LLC Monthly Income
Preferred Stock). The Company's common shares are also listed on the Pacific
Stock Exchange.
Approximately 15,800 named individuals and institutions own Providian stock
including approximately 5,900 associates who own stock through the Company's
Thrift Savings Plan. The Company repurchased approximately 1.3 million shares of
its common stock in 1996 at an average price of $43.56 per common share. After
completing these repurchases, the Company held 21.6 million common shares in
treasury at December 31, 1996, at an average cost of $16.53 per common share.
38 | PROVIDIAN 1996 ANNUAL REPORT
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Supplemental Earnings Data
(Dollars in millions)
Period Ended December 31 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating earnings before federal income tax:/(a)/
Providian Bancorp $ 228 $ 188 $ 150 $ 118 $ 94
Providian Direct Insurance 91 113 110 98 85
Providian Agency Group 191 182 182 194 190
Providian Capital Management 162 135 137 134 120
Corporate and Other (50) (43) (32) (35) (33)
- --------------------------------------------------------------------------------------------------------------
Total operating earnings before federal income tax 622 575 547 509 456
- --------------------------------------------------------------------------------------------------------------
Federal income tax on operating earnings before impact on deferred
taxes due to tax law change 182 177 170 155 130
- --------------------------------------------------------------------------------------------------------------
Operating earnings before impact of tax law change 440 398 377 354 326
Federal income tax impact on deferred taxes due to tax law change/(b)/ - - - 12 -
- --------------------------------------------------------------------------------------------------------------
Operating earnings 440 398 377 342 326
Realized investment gain (loss), net of tax 2 (47) (69) (18) 3
Related amortization, net of tax (1) - (3) (1) (7)
Dividends on company-obligated mandatorily redeemable preferred
securities of Providian LLC (6) (6) (4) - -
- --------------------------------------------------------------------------------------------------------------
Net Income 435 345 301 323 322
Dividends on nonconvertible preferred stock - - 1 7 7
- --------------------------------------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ 435 $ 345 $ 300 $ 316 $ 315
==============================================================================================================
</TABLE>
(a) Operating earnings exclude from net income realized investment gains and
losses and related deferred acquisition cost amortization, net of taxes, and
dividends on company-obligated mandatorily redeemable preferred securities
of Providian LLC.
(b) A nonrecurring deferred tax charge of $11.7 million, or $.12 per common
share, was recorded as a result of the Omnibus Budget Reconciliation Act of
1993.
Quarterly Financial Data
(Dollars in millions except per common share)
<TABLE>
<CAPTION>
Investment Per Common Share
Premiums and Other Realized Benefits --------------------
and Other Income, Investment and Net Operating Net
Considerations Net(a) Gain (Loss) Expenses Income Earnings(b) Income
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996
4th Quarter $301 $654 $ 13 $786 $126 $1.28 $1.35
3rd Quarter 293 607 (8) 742 106 1.19 1.13
2nd Quarter 306 581 (5) 738 100 1.10 1.07
1st Quarter 299 577 4 732 103 1.07 1.09
- ----------------------------------------------------------------------------------------------------
1995
4th Quarter $292 $584 $ 1 $726 $103 $1.08 $1.08
3rd Quarter 297 580 (19) 727 89 1.05 .93
2nd Quarter 311 562 (16) 733 84 1.00 .88
1st Quarter 295 536 (35) 696 69 .96 .72
- ----------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes investment income, net of expenses, consumer loan servicing fees
and other income, net.
(b) Operating earnings per common share exclude from net income applicable to
common stock 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>
1996 1995
4th Quarter $55.38 $42.50 $.25 4th Quarter $42.88 $37.75 $.225
3rd Quarter 44.25 38.13 .25 3rd Quarter 41.88 34.75 .225
2nd Quarter 46.63 41.38 .25 2nd Quarter 37.50 33.50 .225
1st Quarter 47.13 40.50 .25 1st Quarter 36.88 30.88 .225
</TABLE>
PROVIDIAN 1996 ANNUAL REPORT
39
<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.
/s/ Irving W. Bailey II
Irving W. Bailey II
Chairman and
Chief Executive Officer
/s/ Shailesh J. Mehta
Shailesh J. Mehta
President and Chief
Operating Officer
/s/ Robert L. Walker
Robert L. Walker
Senior Vice President - Finance
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, 1996 and
1995, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1996. 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, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
As discussed in Note C to the consolidated financial statements, in 1994 the
Company changed its method of accounting for certain investments in debt and
equity securities.
/s/ Ernst & Young LLP
Louisville, Kentucky
February 4, 1997
40|PROVIDIAN 1996 ANNUAL REPORT
<PAGE>
Consolidated Statements of Income
(Dollars in millions except per common share)
Providian Corporation and Subsidiaries
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Premiums and other considerations $1,199 $1,195 $1,141
Investment income, net of expenses 1,932 1,861 1,595
Consumer loan servicing fees 281 250 207
Realized investment gain (loss) 4 (69) (100)
Other income, net 206 151 116
- ------------------------------------------------------------------------------
Total Revenues 3,622 3,388 2,959
Benefits and Expenses:
Benefits and claims 919 868 832
Increase in benefit and contract reserves 816 889 700
Commissions, net 87 85 73
General, administrative and other expenses, net 767 679 549
Amortization:
Deferred policy and loan acquisition costs 269 220 249
Value of insurance in force purchased 21 21 21
Goodwill 8 8 8
Interest expense 111 112 86
- ------------------------------------------------------------------------------
Total Benefits and Expenses 2,998 2,882 2,518
Income before Federal Income Tax 624 506 441
Federal Income Tax 183 155 136
- ------------------------------------------------------------------------------
Net Income before Dividends on Company-Obligated
Mandatorily Redeemable Preferred Securities of
Providian LLC 441 351 305
Dividends on company-obligated mandatorily
redeemable preferred securities of
Providian LLC 6 6 4
- ------------------------------------------------------------------------------
Net Income 435 345 301
Dividends on Nonconvertible Preferred Stock - - 1
- ------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ 435 $ 345 $ 300
==============================================================================
Net Income Per Common Share $ 4.64 $ 3.60 $ 3.02
==============================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
41 | PROVIDIAN 1996 ANNUAL REPORT
<PAGE>
Consolidated Statements of Financial Condition
(Dollars in millions)
<TABLE>
<CAPTION>
December 31 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments:
Securities available for sale, at fair value:
Bonds and redeemable preferred stocks (amortized cost of $10,663
and $10,104 in 1996 and 1995, respectively) $10,952 $10,705
Common and nonredeemable preferred stocks (cost of $448
and $462 in 1996 and 1995, respectively) 455 453
Trading account securities, at fair value 96 105
Commercial mortgage loans 2,864 2,740
Residential mortgage loans 2,718 3,063
Consumer loans, net 2,810 2,968
Consumer loans held for securitization 740 123
Policy loans 487 454
Real estate 54 60
Other long-term investments 550 320
Short-term investments 239 225
- ------------------------------------------------------------------------------------------------
Total Investments 21,965 21,216
Cash and cash equivalents 904 708
Investment income due and accrued 300 303
Operating property -- at cost, less accumulated depreciation and amortization 189 178
Deferred policy and loan acquisition costs 1,508 1,481
Value of insurance in force purchased 237 256
Goodwill 202 214
Separate account assets 3,240 2,070
Other assets 448 413
- ------------------------------------------------------------------------------------------------
Total Assets $28,993 $26,839
- ------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Providian Corporation and Subsidiaries
December 31 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Shareholders' Equity
Liabilities
Policy liabilities:
Benefit reserves $ 3,794 $ 3,674
Individual annuity reserves 5,479 5,829
Group annuity deposits 7,170 6,858
Policy and contract claims 218 206
Other policyholders' funds 177 185
- --------------------------------------------------------------------------------
Total Policy Liabilities 16,838 16,752
Banking deposits 3,390 2,158
Accrued expenses and other liabilities 1,153 1,572
Separate account liabilities 3,240 2,070
Long-term debt issued by:
Corporate 718 721
Bancorp 50 -
Deferred federal income tax 414 505
- --------------------------------------------------------------------------------
Total Liabilities 25,803 23,778
Commitments and Contingencies
Company-Obligated Mandatorily Redeemable
Preferred Securities of Providian LLC 100 100
Shareholders' Equity
Common stock, $1 par:
300,000,000 shares authorized;
Issued - 115,325,000 shares 115 115
Additional paid-in capital 44 50
Net unrealized investment gain 182 359
Retained earnings 3,109 2,770
Common stock held in treasury - at cost:
1996 - 21,561,000 shares; 1995 - 20,967,000
shares (356) (330)
Unearned restricted stock (4) (3)
- ------------------------------------------------------------------------------
Total Shareholders' Equity 3,090 2,961
- ------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $28,993 $26,839
==============================================================================
See Notes to Consolidated Financial Statements.
PROVIDIAN 1996 ANNUAL REPORT|43
</TABLE>
<PAGE>
Consolidated Statements of Cash Flows
(Dollars in millions) Providian Corporation and Subsidiaries
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operations:
Net income $ 435 $ 345 $ 301
Adjustments to reconcile net income to net
cash flows from operations:
Increase in policy liabilities 811 998 669
Amortization of deferred policy and loan
acquisition costs 269 220 249
Amortization of value of insurance in force
purchased and goodwill 29 29 29
Provision for consumer loan losses 127 80 50
Change in investment income due and accrued 3 4 19
Depreciation and other amortization, net 15 16 12
Net sales (purchases) of trading account
securities 16 9 (49)
Realized investment gain (loss) (4) 69 100
Change in current federal income tax 21 53 (95)
Provision for deferred federal income tax 4 2 -
Policy and loan acquisition costs deferred:
General, administrative and other expenses (200) (225) (198)
Commissions (74) (84) (89)
Other 28 (32) (1)
- -------------------------------------------------------------------------------
Net Cash Flows provided by Operations 1,480 1,484 997
Cash Flows from Investment Activities:
Available for sale securities sold 5,420 4,934 4,862
Available for sale securities acquired (5,813) (4,213) (4,927)
Other investments sold or matured 1,756 1,364 608
Other investments acquired (1,576) (1,911) (1,549)
Additions to operating property (62) (45) (38)
Net increase in credit card receivables and
other consumer loans (3,056) (2,486) (981)
Proceeds from securitization of loans 2,510 1,824 575
Purchase of securitized consumer loans (39) (241) (49)
Net cash received from coinsurance transaction - 310 -
All other investment activities (163) (91) (49)
- -------------------------------------------------------------------------------
Net Cash Flows used in Investment Activities (1,023) (555) (1,548)
Cash Flows from Financing Activities:
Change in short-term borrowings (475) 328 145
Net borrowings (repayments) on Bancorp
revolving line of credit (206) 86 60
Deposits in universal life and investment-type
products 2,090 1,779 2,862
Withdrawals from universal life and
investment-type products (2,815) (3,277) (2,676)
Net increase in certificates of deposit 963 392 117
Increase in other banking deposits 270 86 10
Issuance of company-obligated mandatorily
redeemable preferred securities of
Providian LLC - - 100
Redemption of preferred stock - - (100)
Issuance of long-term debt by:
Corporate 63 111 106
Bancorp 50 - -
Repayment of long-term debt (66) (84) (2)
Purchase of common stock for treasury (55) (143) (139)
Dividends on preferred and common stock (94) (86) (82)
Proceeds from exercise of stock options 14 14 4
- -------------------------------------------------------------------------------
Net Cash Flows provided by (used in) Financing
Activities (261) (794) 405
- -------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash
Equivalents During Year 196 135 (146)
- -------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of Year 708 573 719
- -------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 904 $ 708 $ 573
===============================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
44 | PROVIDIAN 1996 ANNUAL REPORT
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Consolidated Statements of Shareholders' Equity
(Dollars in millions) Providian Corporation and Subsidiaries
Common
Additional Net 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, 1994 $ 100 $115 $ 57 $ 17 $2,296 $ (89) $(3) $2,493
Adjustment to beginning
balance for change in
accounting method 262 262
Net income 301 301
Dividends:
Preferred (1) (1)
Common (81) (81)
Change in net unrealized
investment gain (loss) (623) (623)
Purchase of 4,334,000 common
shares for treasury (139) (139)
Redemption of 1,000,000 shares
Series F Adjustable Rate
Cumulative Preferred Stock (100) (100)
Issuance of 330,000 common
shares under employee benefit
plans, including tax benefit 1 (2) 10 9
Award of 147,000 unearned
restricted common shares to
employees, less 34,000 shares
forfeited and related
amortization (1) 4 (2) 1
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 - 115 57 (344) 2,513 (214) (5) 2,122
Net income 345 345
Dividends on common stock (88) (88)
Change in net unrealized
investment gain (loss) 703 703
Purchase of 3,910,000 common
shares for treasury (143) (143)
Issuance of 732,000 common shares
under employee benefit plans,
including tax benefit (6) 26 20
Award of 69,000 unearned
restricted common shares to
employees, less 63,000 shares
forfeited and related amortization (1) 1 2 2
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 - 115 50 359 2,770 (330) (3) 2,961
Net income 435 435
Dividends on common stock (96) (96)
Change in net unrealized investment
gain (loss) (177) (177)
Purchase of 1,256,000 common shares
for treasury (55) (55)
Issuance of 612,000 common shares
under employee benefit plans,
including tax benefit (6) 27 21
Award of 82,000 unearned restricted
common shares to employees, less
24,000 shares forfeited and
related amortization 2 (1) 1
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ - $115 $44 $ 182 $3,109 $(356) $(4) $3,090
================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
PROVIDIAN 1996 ANNUAL REPORT
45
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note A - Nature of Operations
Providian Corporation and subsidiaries (the "Company") is a leading provider of
consumer financial services. Through its insurance and banking operations, the
Company offers various types of insurance, consumer credit and savings deposits,
and individual annuity and group pension products.
Providian Bancorp (Bancorp) offers consumer lending and deposit products
and services such as unsecured credit cards and revolving credit lines, home
equity loans, secured credit cards, insurance premium financing, a variety of
fee-based products and services, money market deposit accounts and certificates
of deposit nationwide through direct mail and telephone distribution channels.
Providian Direct Insurance (PDI) provides whole and term life insurance
products as well as supplemental accident and health insurance and property and
casualty insurance products. PDI utilizes direct response methods such as
television, telephone and mail to reach low- to middle-income households
nationwide. PDI also markets life and health insurance to enlisted military
personnel, both active duty and retirees.
Providian Agency Group (PAG) primarily offers individual life insurance
products (such as whole life, interest-sensitive and term life plans) through
home sales representatives. PAG markets to low- and middle-income individuals
and families, primarily in rural and small-town areas throughout the
Southeastern and Mid-Atlantic states. PAG also leverages its insurance
capabilities by marketing insurance products in partnership with third-party
insurance and marketing organizations.
Providian Capital Management (PCM) provides fixed rate and variable
individual annuities as well as group traditional and synthetic guaranteed
investment contracts (GICs) and payout annuities. Utilizing the Company's
insurance subsidiaries, PCM markets its annuities to individuals through banks,
financial planners and third-party marketing organizations. PCM also markets its
fee- and spread-based group products to pension plans, banks and other
organizations.
Note B - Plan and Agreement of Merger and Reorganization
On December 28, 1996, Providian Corporation executed a Plan and Agreement of
Merger and Reorganization (the "Merger Agreement") with AEGON N.V. ("AEGON") and
LT Merger Corp., a wholly owned subsidiary of AEGON ("Merger Sub"), pursuant to
which Merger Sub will merge with Providian Corporation. In connection with this
merger, Providian Corporation will spin off Providian Bancorp, Inc. to Providian
Corporation shareholders (the "Distribution"). For each share of Providian
Corporation stock owned, shareholders will receive one share of Providian
Bancorp, Inc. in the Distribution. Pursuant to the Merger Agreement, among other
things, (a) Providian Corporation will be the surviving corporation in the
merger and become a wholly owned subsidiary of AEGON, and (b) each shareholder
of Providian Corporation will be entitled to receive a number of shares of AEGON
common stock in exchange for shares of Providian Corporation's common stock.
Shareholders of Providian Corporation will receive in exchange for each
share of common stock, a fraction of an AEGON common share equal to $28.00
divided by the "AEGON Share Price." Generally, the "AEGON Share Price" is equal
to the average, during the 20 trading days immediately preceding the last
business day before the date of the merger, of the average daily high and low
prices per share of an AEGON common share on the New York Stock Exchange (the
"Fair Market Value at the Effective Time"). The AEGON Share Price, however, is
subject to a collar, for the purposes of calculating the exchange ratio, which
provides that the AEGON Share Price shall be $61.153 if the Fair Market Value at
the Effective Time is equal to or greater than $61.153 and shall be $50.034 if
the Fair Market Value at the Effective Time is equal to or less than $50.034.
The Merger Agreement also provides that AEGON may terminate the agreement if the
AEGON Share Price is more than $66.713 and that Providian Corporation may
terminate the agreement if the AEGON Share Price is less than $44.475, unless
the other party agrees to a "make-whole" provision. In general, the "make-whole"
provision would mean that the value of the AEGON common shares issued in the
merger would not be more than $30.545 or less than $24.889 for each share of
Providian Corporation common stock.
The Board of Directors of Providian Corporation has unanimously approved
the Merger Agreement and the Distribution. The merger is subject to approval by
various regulatory authorities, approval by Providian Corporation's shareholders
and certain other conditions. The Distribution will occur only if all of the
conditions necessary for the merger are satisfied.
Should the Merger Agreement be terminated as a result of certain fiduciary
obligations of the Board of Directors of Providian Corporation, Providian
Corporation would be required to pay to AEGON liquidated damages of $80 million
to $100 million.
Because consummation of the merger and the Distribution is subject to the
above conditions, no representations can be made as to whether, or when, the
merger and Distribution will be completed or as to the possible impact of the
merger and Distribution on the financial condition and results of operations of
the Company should the merger and Distribution occur.
46 PROVIDIAN 1996 ANNUAL REPORT
<PAGE>
- --------------------------------------------------------------------------------
Note C - 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 the Company also submit financial reports to regulatory
authorities based on regulatory accounting practices designed to measure
solvency, which differ significantly from GAAP. Certain 1995 and 1994 amounts
have been reclassified to conform with the 1996 presentation. These
reclassifications had no significant effect on the Company's financial position
or results of operations.
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.
Management's Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and the accompanying notes. Actual results could differ
from those estimates.
Significant estimates are utilized in the calculation of deferred policy
acquisition costs, benefit reserves and allowances for uncollectible mortgage
loans, credit card receivables and other consumer loans. It is reasonably
possible that these estimates may change in the near term, thereby possibly
having a material effect on the financial statements.
Investments
Debt and equity securities that are not bought and held principally for the
purpose of selling them in the near term or those that 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.
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.
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. Interest received on non-
accrual mortgage loans generally is either applied against principal or reported
as interest income, according to management's judgment as to the collectibility
of principal. Real estate taken in foreclosure is recorded at the lower of cost
or fair value. Other 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.
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.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of." This Statement
requires impairment losses to be recorded on long-lived assets used in
operations when indications of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Long-lived assets held for disposal are required to be valued
at the lower of the assets' carrying amount or fair value less cost to sell. The
adoption of this Statement did not have a material effect on the Company's
financial position or results of operations.
Effective January 1, 1995, the Company adopted 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." These
Statements, which establish accounting standards for creditors when a loan is
deemed impaired, 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 adoption of these
Statements did not have a material effect on the Company's financial position or
results of operations.
PROVIDIAN 1996 ANNUAL REPORT 47
<PAGE>
Effective January 1, 1994, the Company adopted 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. As a result of the adoption of SFAS No.
115, the net unrealized investment gain (loss) component of shareholders' equity
increased by $262 million. The adoption of SFAS No. 115 had no effect on net
income.
Derivative Financial Instruments
The Company manages interest rate and market risk by using derivative financial
instruments to adjust the overall net duration level of the portfolio or to
modify the interest rate or market characteristics of the underlying assets or
liabilities. For those derivative financial instruments designated and used to
hedge changes in fair value of an underlying security due to changes in interest
rates, Company policy requires that the correlation of the change in fair value
between the derivative financial instrument and the underlying security be
between 80% to 125% during the hedge period. If the correlation deviates from
this range and is not expected to return to this range in the near term, Company
policy requires that hedge accounting be terminated. Certain derivative
financial instruments are also used to hedge interest rate risk by changing the
interest characteristics of the underlying hedged asset or liability, for
example, to convert an asset or liability from a fixed rate to a floating rate.
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 caps, floors and swap agreements accounted for as
hedges are recorded in the Consolidated Statements of Financial Condition in a
manner similar to the underlying asset or liability that is being hedged. See
Note E 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, benefits and claims or increase in benefit and
contract reserves. 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
typically approximates the term of the hedging instrument prior to its
termination.
Futures and Forwards. Futures and forwards are contracts that 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 forwards and futures contracts used to adjust the net
duration level of the overall portfolio is recognized in realized investment
losses in the Consolidated Statements of Income. The daily change in market
value for futures contracts used as accounting hedges for products that provide
a return based on the market performance of a designated index is included in
benefits and claims 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.
Asset Securitizations
The Company actively engages in non-recourse sales of certain consumer
receivables through securitization. Since the receivables are sold at par value,
no gains or losses are recorded at the time of the sale. Upon the sale, the
underlying receivables, the related deferred acquisition costs and the allowance
for possible credit losses are removed from the Consolidated Statements of
Financial Condition.
The Company continues to service the related accounts after the receivables
are securitized. The excess of interest income and fee revenue on the
securitized assets over the interest paid to the owners of the securitized
assets, credit losses and other trust expenses is recognized monthly over the
life of the transaction when earned and is included in consumer loan servicing
fees in the Consolidated Statements of Income. Other transaction costs are
deferred and amortized as a reduction of servicing fees.
The accounting policy described above is effective for securitizations that
occurred prior to 1997. However, effective January 1, 1997, the Company has
prospectively adopted SFAS No. 125, "Accounting for Transfers and Servicing of
Financial
PROVIDIAN 1996 ANNUAL REPORT
48
<PAGE>
Assets and Extinguishments of Liabilities." The provisions of SFAS No. 125 that
relate to accounting for transfers and servicing of financial assets, which are
summarized below, are applicable to the Company's securitization activities.
SFAS No. 125 requires that a transfer of financial assets in which the
transferror surrenders certain conditions of control over those assets be
accounted for as a sale to the extent that consideration other than beneficial
interests in the transferred assets is received in exchange. SFAS No. 125 also
requires that servicing assets and other retained interests in the transferred
assets be measured by allocating the previous carrying amount between the assets
sold, if any, and retained interest, if any, based on their relative fair values
at the date of the transfer. Any gain or loss on the sale should be recognized
at that date. Under the prior accounting practice, such gains were generally
recognized over the life of the securitization transaction. The impact of the
adoption of SFAS No. 125 on the Company's Consolidated Financial Statements will
depend upon the amount and timing of future securitizations by the Company.
Consumer Loans Held for Securitization
Consumer loans held for securitization represent the lesser of receivables
eligible for securitization or receivables that management intends to securitize
within six months that are currently on-balance sheet. These assets are reported
at the lower of cost or fair value.
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 credit line 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 credit line 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%. 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. Premiums received and the accumulated value portion
of benefits paid to the separate account policyholders are excluded from the
amounts reported in the Consolidated Statements of Income. Fees charged 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, these products are
sold and reported as separate accounts for statutory purposes.
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
PROVIDIAN 1996 ANNUAL REPORT
49
<PAGE>
experience and include provisions for possible unfavorable deviation. Reserves
on most such individual policies are based on assumed investment yields that
range from a level 3.0% for policies issued before 1951 to a rate grading from
7.5% to 5.5% 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%.
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 and single
premium and flexible premium annuity and life contracts.
Benefit reserves, individual annuity reserves and group annuity 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 5.9% in 1996, 6.3% in 1995 and 6.1% in 1994.
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.
Banking Deposits
Banking deposits consist primarily of savings deposits, time deposits and
certificates of deposit of $100 thousand or more. Interest on banking deposits
and related hedging instruments is reflected in the Consolidated Statements of
Income in benefits and claims.
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. Acquisition costs are
amortized in relation to expected premium revenues using 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 4.0% to 8.0% in 1996.
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 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.
Stock-Based Compensation
The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to or greater than the fair market value of the shares
at the date of grant. The Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which is effective for 1996
calendar year financial statements. As allowed by SFAS No. 123, the Company
accounts for stock option grants in accordance with Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and,
accordingly, recognizes no compensation expense for the stock option grants.
Refer to Note M for additional disclosures.
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.
PROVIDIAN 1996 ANNUAL REPORT
50
<PAGE>
- --------------------------------------------------------------------------------
Net Income Per Common Share
Per common 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 shares
outstanding during the year (1996 - 93,664,000 shares; 1995 - 95,861,000 shares;
and 1994 - 99,319,000 shares.) Fully diluted net income per common share is not
presented as it approximates net income per common share.
Consolidated Statements of Cash Flows
Cash and cash equivalents consist of highly liquid investments with maturities
of 90 days or less at their date of purchase. Cash paid for interest on debt was
$114 million, $107 million and $82 million in 1996, 1995 and 1994, respectively.
Cash paid for federal income taxes was $155 million, $117 million and $231
million in 1996, 1995 and 1994, respectively.
Note D - Investments
The following tables contain amortized cost and market value information on debt
securities (bonds and redeemable preferred stocks) and equity securities (common
and nonredeemable preferred stocks) classified as available for sale at December
31, 1996 and 1995:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
December 31, 1996 Cost Gains Losses Value
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in millions)
Debt securities:
U.S. government
obligations $ 344 $ 4 $ 4 $ 344
States and political
subdivisions 724 55 2 777
Foreign government
obligations(a) 129 15 -- 144
Corporate 5,733 243 62 5,914
Foreign corporate(a) 498 18 3 513
Asset-backed 1,292 17 8 1,301
Mortgage-backed 1,943 26 10 1,959
- ---------------------------------------------------------------------------
Total debt securities 10,663 378 89 10,952
Equity securities 448 16 9 455
- ---------------------------------------------------------------------------
Total available for sale $11,111 $394 $98 $11,407
===========================================================================
</TABLE>
(a) Substantially all are U.S. dollar-denominated.
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
December 31, 1996 Cost Gains Losses Value
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in millions)
Debt securities:
U.S. government
obligations $ 788 $ 37 $ 1 $ 824
States and political
subdivisions 679 69 -- 748
Foreign government
obligations(a) 162 15 -- 177
Corporate 5,361 432 38 5,755
Foreign corporate(a) 457 41 3 495
Asset-backed 1,122 24 2 1,144
Mortgage-backed 1,535 40 13 1,562
- ---------------------------------------------------------------------------
Total debt securities 10,104 658 57 10,705
Equity securities 462 9 18 453
- ---------------------------------------------------------------------------
Total available for sale $10,566 $667 $75 $11,158
===========================================================================
</TABLE>
(a) Substantially all are U.S. dollar-denominated.
The amortized cost and market value of available for sale debt securities
at December 31, 1996, 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.
<TABLE>
<CAPTION>
Amortized Market
December 31, 1996 Cost Value
- ------------------------------------------------------------
(Dollars in millions)
<S> <C> <C>
Due in one year or less $ 122 $ 122
Due after one year through five years 998 1,013
Due after five years through ten years 2,090 2,133
Due after ten years 4,218 4,424
- ------------------------------------------------------------
Subtotal 7,428 7,692
Asset-backed securities 1,292 1,301
Mortgage-backed securities 1,943 1,959
- ------------------------------------------------------------
Total debt securities $10,663 $10,952
============================================================
</TABLE>
Net unrealized gains on investments classified as available for sale are
reduced by deferred federal income taxes and adjustments to deferred policy
acquisition costs that would have been required as an adjustment to income had
such gains been realized. Net unrealized investment gain on available for sale
securities as of December 31, 1996 and 1995 is summarized as follows:
<TABLE>
<CAPTION>
December 31 1996 1995
- -----------------------------------------------------------
(Dollars in millions)
<S> <C> <C>
Net unrealized investment gain
on available for sale securities before
adjustments for the following: $ 296 $ 592
Amortization of deferred
policy acquisition costs (17) (40)
Deferred federal income taxes (97) (193)
- -----------------------------------------------------------
Net unrealized investment gain
on available for sale securities $ 182 $ 359
===========================================================
</TABLE>
PROVIDIAN 1996 ANNUAL REPORT 51
<PAGE>
Additionally, the following table 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, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- --------------------------------------------------------------
(Dollars in millions)
<S> <C> <C> <C>
Change in unrealized
investment gain (loss):
Available for sale:
Debt securities $(312) $1,156 $(1,018)
Equity securities 16 45 (59)
Change in unrealized
investment gain (loss) included
in investment income:
Trading account securities:
Debt securities $ (1) $ 9 $ (10)
Equity securities (6) - 1
Realized investment gain (loss):
Debt securities $ 21 $ (44) $ (28)
Equity securities 1 (7) (3)
Other investments (10) (2) (48)
===============================================================
</TABLE>
Included in realized investment gain (loss) on other investments for 1994
in the preceding table is a $52 million nonrecurring loss on the Company's
impaired investment in Granite Partners.
Proceeds, gross gains and gross losses from sales of available for sale
securities for the years ended December 31, 1996, 1995 and 1994, were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- -------------------------------------------------
(Dollars in millions)
<S> <C> <C> <C>
Proceeds $5,420 $4,934 $4,862
Gross gains 83 115 76
Gross losses (61) (115) (125)
=================================================
</TABLE>
Gross gains of $5 million and $22 million and gross losses of $56 million
and $4 million were realized on related hedging instruments in 1995 and 1994,
respectively. Included in the above amounts for 1995 are gross losses of $56
million on futures transactions used as an economic hedge of the available for
sale debt securities portfolio.
Federal income tax in 1996, 1995 and 1994 includes an expense (benefit) of
$3 million, $(22) million and $(32) million, respectively, for the tax effect of
total net realized gains and losses.
Consumer loans have been reduced by the sales, without recourse, of
unsecured receivables under asset securitization plans during 1996, 1995 and
1994 of $2.471 billion, $1.584 billion and $526 million, respectively. Total
unsecured receivables outstanding under securitization plans were $5.610 billion
and $3.486 billion as of December 31, 1996 and 1995, respectively. Additionally,
there were $740 million and $123 million of unsecured receivables held for
future securitization as of December 31, 1996 and 1995, respectively.
An analysis of the allowance for loan losses on consumer and mortgage loans
for the years ended December 31, 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
Consumer Mortgage
----------------------- --------------------
Year Ended December 31 1996 1995 1994 1996 1995 1994
- -----------------------------------------------------------------------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning
of period $ 93 $ 76 $ 75 $ 50 $ 52 $ 51
Current period provision 127 80 50 8 16 21
Current period chargeoffs,
net of recoveries (105) (63) (49) (15) (18) (20)
- -----------------------------------------------------------------------------
Balance at end of period $ 115 $ 93 $ 76 $ 43 $ 50 $ 52
=============================================================================
</TABLE>
Mortgage loans which have been non-income producing for the preceding 12
months were $5 million and $6 million at December 31, 1996 and 1995,
respectively. The recorded investment in mortgage loans that were considered to
be impaired under SFAS No. 114 was $101 million and $112 million at December 31,
1996 and 1995, respectively, with related allowances for credit losses of $8
million and $17 million, respectively. The average recorded investment in
impaired loans was $106 million and $105 million during 1996 and 1995,
respectively. Additionally, during 1996 and 1995, the Company recognized $6
million and $7 million, respectively, of interest income on the impaired loans,
including $6 million of interest income recognized during each year using the
cash basis method of income recognition.
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, 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- ------------------------------------------------------------
(Dollars in millions)
<S> <C> <C> <C>
Gross investment income:
Available for sale:
Debt securities $ 771 $ 817 $ 805
Equity securities 38 44 61
Trading account securities 22 21 4
Mortgage loans 465 462 399
Consumer loans 574 458 314
Policy loans 30 27 23
Real estate and other long-term
investments 44 44 16
Short-term investments and
cash equivalents 42 37 23
- ------------------------------------------------------------
Total 1,986 1,910 1,645
Less investment expenses 54 49 50
- ------------------------------------------------------------
Investment income,
net of expenses $1,932 $1,861 $1,595
============================================================
</TABLE>
PROVIDIAN 1996 ANNUAL REPORT
52
<PAGE>
Note E - 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 risk (primarily interest rate risk) and credit risk.
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 (including basis swaps) 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 risk 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 that 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 manages interest rate risk primarily through the use of
duration analysis. Duration is a key portfolio management tool and is measured
for both assets and liabilities. Duration reflects the price sensitivity of
financial instruments to changes in interest rates. For the simplest forms of
assets or liabilities, duration is proportional to their weighted average lives,
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, such as callable bonds, mortgage-backed securities or
traditional insurance liabilities, additional adjustments are made in estimating
an effective duration. 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 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) that
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
nonperformance 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 nonperformance 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 to replace those interest rate
contracts in a net gain position, after consideration of the aforementioned
master netting agreements, would have been $62 million and $117 million at
December 31, 1996 and 1995, respectively.
Interest rate swaps are used in the overall asset/liability management
process to modify the interest rate characteristics of the underlying asset or
liability. 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 whereby 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 Company uses futures contracts
primarily to adjust the net duration level of the overall portfolio and to
reduce market risk related to certain products that provide a return based on
the market performance of a designated index.
53|PROVIDIAN 1996 ANNUAL REPORT
<PAGE>
The following table provides the maturities and weighted average rates for
each significant derivative product type and is based on the assumption that
rates will remain constant at December 31, 1996 levels. To the extent that
actual rates change, the variable interest rate information will change
accordingly.
<TABLE>
<CAPTION>
Maturity Schedule by Year for Derivative Products
-----------------------------------------------------------------
2001-
1997 1998 1999 2000 2006 Total
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in millions)
Receive Fixed
Swaps
Notional value $ 663 $1,045 $1,039 $ 936 $1,599 $5,282
weighted average:
Receive rate 6.35% 6.03% 6.81% 6.99% 6.73% 6.61%
Pay rate 5.60 5.67 5.64 5.76 5.75 5.69
Pay Fixed Swaps
Notional value $ 50 $ 120 $ - $ - $ 116 $ 286
Weighted average:
Receive rate 3.22% 5.53% -% -% 5.74% 5.21%
Pay rate 7.04 6.24 - - 7.01 6.69
Basis Swaps
Notional value $ 372 $ 10 $ 248 $ 100 $ 50 $ 780
Weighted average:
Receive rate 3.31% 5.91% 4.51% 5.53% 5.53% 4.15%
Pay rate 10.79 5.61 7.73 5.48 5.56 8.73
Other Derivative
Products (a)
Notional or
contract value $ 637 $ 249 $ 165 $ - $ 267 $1,318
- --------------------------------------------------------------------------------------------
Total notional or
contract value $1,722 $1,424 $1,452 $1,036 $2,032 $7,666
============================================================================================
Total Weighted
Average Rates
on Swaps:
Receive rate 5.16% 5.98% 6.37% 6.85% 6.63% 6.24%
Pay rate 7.45 5.73 6.04 5.73 5.83 6.11
============================================================================================
</TABLE>
(a) Other derivative products include interest rate caps and floors, futures,
forward rate agreements, options and foreign currency forwards.
The following table summarizes the activity by notional or contract value in
derivative products for 1996, 1995 and 1994:
<TABLE>
<CAPTION>
Receive Pay 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, 1994 $ 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
Additions 1,631 541 183 4,066 1,359
Maturities (770) (208) (457) - (6)
Terminations - - (44) (4,503) (790)
- -----------------------------------------------------------------------------------
Balance at
December 31, 1995 4,732 600 490 826 1,318
Additions 1,438 159 313 2,453 764
Maturities (640) (2) (23) - (773)
Terminations (248) (471) - (2,713) (557)
- -----------------------------------------------------------------------------------
Balance at
December 31, 1996 $ 5,282 $ 286 $ 780 $ 566 $ 752
===================================================================================
</TABLE>
(a) Other derivative products include interest rate caps and floors, forward
rate agreements, options and foreign currency forwards.
During 1996 and prior years, the Company terminated or closed certain
interest rate swaps that were accounted for as hedges. The net deferred
gains on these agreements were $41 million and $71 million as of December
31, 1996 and 1995, respectively, and are primarily being amortized to
investment income over the expected remaining lives of the related
investments, generally three to seven years.
The net unrealized gain (loss) on all derivative instruments is off-balance
sheet except for $5 million that is recorded on-balance sheet as of
December 31, 1996. The following table summarizes the unrealized gains and
losses on derivative instruments at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Total Net
Notional Unrealized Unrealized Unrealized
December 31, 1996 Value Gains Losses Gain (Loss)
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in millions)
Receive fixed $5,282 $ 66 $11 $ 55
Pay fixed 286 - 4 (4)
Basis 780 - 1 (1)
Other derivative
products (a) 1,318 9 - 9
- ---------------------------------------------------------------------------
Total $7,666 $ 75 $16 $ 59
===========================================================================
</TABLE>
(a) Other derivative products include interest rate caps and floors, futures,
forward rate agreements, options and foreign currency forwards.
54
<PAGE>
<TABLE>
<CAPTION>
Total Net
Notional Unrealized Unrealized Unrealized
December 31, 1995 Value Gains Losses Gain (Loss)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in millions)
Receive fixed $4,732 $134 $ 6 $128
Pay fixed 600 - 11 (11)
Basis 490 - 3 (3)
Other derivative
products(a) 2,144 - 1 (1)
- ---------------------------------------------------------------------------------------------------
Total $7,966 $134 $21 $113
===================================================================================================
</TABLE>
(a) Other derivative products include interest rate caps and floors, futures,
forward rate agreements, options and foreign currency forwards.
Commitments
Consumer credit line 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 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 or
proceeds from the future sales of plan assets. In return for this guarantee, the
Company receives a premium that 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. Additionally,
the plan sponsor must agree to the investment guidelines established by the
Company that help to ensure appropriate credit quality and cash flow
availability from plan assets. Funding requirements to date have been minimal
and management does not anticipate any future funding requirements that 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,
1996 and 1995:
Year Ended December 31 1996 1995
- -------------------------------------------------------
(Dollars in millions)
Consumer credit lines $11,929 $ 9,121
Trust GIC contracts 13,112 12,122
Other commitments 874 849
=======================================================
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 and private bonds, 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 rigorous underwriting standards and purchasing insurance
protection in certain cases.
In addition, the Company establishes credit approval processes, credit limits
and monitoring procedures on an individual counterparty basis. As a result,
management believes that significant concentrations of credit risk do not exist.
Note F -- 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 non-financial
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
PROVIDIAN 1996 ANNUAL REPORT | 55
<PAGE>
products, or other intangible items. Accordingly, the aggregate fair value
amounts presented do not necessarily represent the underlying value of the
Company.
The following statements reflect 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 amounts.
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
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) $10,952 $10,952 $10,705 $10,705
Common and
nonredeemable
preferred stocks (a) 455 455 453 453
Trading account securities (a) 96 96 105 105
Commercial mortgage loans 2,975 2,864 2,913 2,740
Residential mortgage loans 2,722 2,718 3,065 3,063
Consumer loans 4,016 3,550 3,547 3,091
Policy loans 487 487 454 454
Real estate and other
investments (a) 843 843 605 605
- --------------------------------------------------------------------------------
Total Investments 22,546 21,965 21,847 21,216
Cash and cash equivalents (a) 904 904 708 708
Deferred policy and
loan acquisition costs - 1,508 - 1,481
Value of insurance in
force purchased - 237 - 256
Goodwill (a) 202 202 214 214
Separate account assets (a) 3,240 3,240 2,070 2,070
Other assets (a) 937 937 894 894
- --------------------------------------------------------------------------------
Total Assets $27,829 $28,993 $25,733 $26,839
================================================================================
</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.
<TABLE>
<CAPTION>
1996 1995
--------------------- -------------------
Carrying Carrying
December 31 Fair Value Amount Fair Value Amount
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in millions)
Liabilities
Policy liabilities:
Benefit reserves $ 1,803 $ 3,794 $ 1,800 $ 3,674
Individual annuity
reserves 5,633 5,479 6,279 5,829
Group annuity
deposits 7,204 7,170 6,965 6,858
Policy and contract claims
and other policyholders' funds 384 395 384 391
- --------------------------------------------------------------------------------
Total Policy Liabilities 15,024 16,838 15,428 16,752
Banking deposits 3,396 3,390 2,172 2,158
Accrued expenses and
other liabilities (a) 1,153 1,153 1,572 1,572
Separate account liabilities (a) 3,240 3,240 2,070 2,070
Long-term debt 804 768 796 721
Deferred federal income tax 646 414 590 505
Derivative instruments
relating to:
Individual annuity reserves (1) - (8) -
Policyholder contract deposits (48) - (101) -
Banking deposits (7) - (5) -
Long-term debt - - 1 -
- --------------------------------------------------------------------------------
Total Liabilities 24,207 25,803 22,515 23,778
- --------------------------------------------------------------------------------
Company-Obligated Mandatorily
Redeemable Preferred
Securities of Providian LLC (a) 100 100 100 100
- --------------------------------------------------------------------------------
Total Shareholders' Equity $ 3,522 $ 3,090 $ 3,118 $ 2,961
================================================================================
</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 credit line loans are determined by
discounting the estimated future cash flows, adjusted for differences in loan
characteristics at rates for securities backed by similar loans. Fair values of
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.
56 | PROVIDIAN 1996 ANNUAL REPORT
<PAGE>
For variable rate loans that reprice monthly with no applicable floor and
no significant change in credit risk, carrying amounts approximate fair values.
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 that 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 that 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 that 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 $232 million and $85
million at December 31, 1996 and 1995, respectively, has been computed on a non-
discounted basis assuming a statutory federal income tax rate of 35% for both
1996 and 1995.
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 G - Accumulated Depreciation and Amortization
Accumulated depreciation and amortization were as follows:
<TABLE>
<CAPTION>
December 31 1996 1995
- ---------------------------------------------------------------------
(Dollars in millions)
<S> <C> <C>
Investment real estate $ 3 $ 3
Operating property 251 214
Value of insurance in force purchased 292 271
Goodwill 104 96
=====================================================================
</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, 1996, 1995 and
1994 is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- -------------------------------------------------------------------
(Dollars in millions)
<S> <C> <C> <C>
Balance at beginning of period $256 $273 $284
Additions resulting from
acquisitions 2 4 10
Accretion of interest during
the year 24 27 29
Amortization of asset (45) (48) (50)
- -------------------------------------------------------------------
Balance at end of period $237 $256 $273
===================================================================
</TABLE>
Amortization of the value of insurance in force purchased in each of the
following years is expected to be: 1997-$42 million; 1998 - $39 million; 1999 -
$36 million; 2000 - $34 million; and 2001 - $31 million.
Note H - Federal Income Tax
Federal income tax expense for the years ended December 31, 1996, 1995 and 1994
consisted of the following:
Year Ended December 31 1996 1995 1994
- -------------------------------------------------------------------
(Dollars in millions)
Current $179 $153 $136
Deferred 4 2 -
- -------------------------------------------------------------------
Total federal income tax $183 $155 $136
===================================================================
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 1996 1995 1994
- -------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
Tax-preferenced investment income (2.8) (3.4) (3.4)
Tax credits (1.7) (.4) (.3)
Other items, net (1.1) (.5) (.4)
- -------------------------------------------------------------------
Effective income tax rate 29.4% 30.7% 30.9%
===================================================================
</TABLE>
57
<PAGE>
Deferred tax liabilities and assets consisted of the following:
<TABLE>
<CAPTION>
December 31 1996 1995
- -----------------------------------------------------
(Dollars in millions)
<S> <C> <C>
Deferred tax liabilities:
Deferred policy and
loan acquisition costs $ 423 $ 424
Market discount on investments 28 29
Value of insurance in force purchased 73 77
Prepaid pension asset 41 33
Net unrealized gain on available
for sale securities 97 193
Other 8 6
- -----------------------------------------------------
Total deferred tax liabilities 670 762
Deferred tax assets:
Policy liabilities 92 76
Employee benefit accruals 47 43
Loan loss reserve 68 68
Net deferred investment gains 13 25
Other 36 45
- -----------------------------------------------------
Total deferred tax assets 256 257
- -----------------------------------------------------
Net deferred tax liabilities $ 414 $ 505
=====================================================
</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 $257 million 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, 1996, 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 K, of approximately $1.3 billion 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 $90 million.
<TABLE>
<CAPTION>
Note I - Debt
<S> <C> <C>
Long-term debt consisted of the following:
December 31 1996 1995
- ------------------------------------------------------------------
(Dollars in millions)
Corporate:
Sinking Fund Debentures 8.75% due 2017 $ 95 $ 95
Medium-Term Notes:
8.17% to 8.97% paid in 1996, noncallable - 66
7.04% to 9.79% due 1997, noncallable 58 57
8.11% to 9.35% due 1998, noncallable 13 13
8.83% to 8.90% due 1999, noncallable 70 70
6.92% to 9.90% due 2000, noncallable 10 10
6.31% to 9.88% due 2001 to 2026, noncallable,
net of unamortized discount of $9 in 1996 and 1995 447 385
10.00% due 2021, callable at par in 2001 25 25
- ------------------------------------------------------------------
Total Corporate 718 721
- ------------------------------------------------------------------
Bancorp:
Notes:
5.74% subordinated notes due 1999 50 -
- ------------------------------------------------------------------
Total long-term debt $ 768 $ 721
==================================================================
</TABLE>
Aggregate maturities and sinking fund requirements of Corporate long-term debt
in each of the following years are: 1997 - $58 million; 1998 - $13 million;
1999 -$75 million; 2000 - $15 million; and 2001 - $87 million. Bancorp long-term
debt of $50 million matures in 1999.
Debentures
The 8.75% Sinking Fund Debentures are subject to an annual sinking fund
beginning in 1998 and to a ten-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 has a Revolving Credit Facility Agreement, with various domestic and
international banks, that expires on December 19, 1997. The agreement provides
for an aggregate principal amount of $300 million in unsecured borrowings with a
facility fee of .125% per annum based on the commitment at the time, regardless
of usage, and on the Company's senior debt ratings. 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 rate determined
by the participating banks; LIBOR adjusted for a margin; LIBOR plus a margin of
.25%; an adjusted certificate of deposit rate plus a margin of .375%; or the
higher of the base commercial lending rate or the federal funds rate plus .50%.
The above margins are based on the Company's senior debt ratings. There have
been no borrowings under this agreement.
The Company entered into a five-year Revolving Credit Facility Agreement, with
various domestic and international banks, effective August 21, 1995. The
agreement provides for an aggregate principal amount of $450 million in
unsecured
PROVIDIAN 1996 ANNUAL REPORT
58
<PAGE>
borrowings with a facility fee of .10% per annum based on the commitment at the
time, regardless of usage, and on the Company's senior debt ratings. The
facility enables the Company to borrow on a standby basis as well as 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%; an adjusted certificate of
deposit rate plus .375%; or the higher of the base commercial lending rate or
the federal funds rate plus .50%. The above margins are based on the Company's
senior debt ratings. There have been no borrowings under this agreement.
Revolving Credit Agreement
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, which was terminated, replaced and restated
on May 14, 1996, provides for an aggregate principal amount of $1.2 billion,
with a facility fee of .10% or .125% 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: the greater of the federal funds rate plus .50% or the prime
commercial lending rate of the agent bank; LIBOR plus .175%, or a competitive
bid option rate. The agreement expires May 14, 1999, with an optional one-year
extension. At December 31, 1996 and 1995, outstanding borrowings under the
agreement were $115 million and $321 million, respectively.
Summary of Short-Term Borrowings
In addition to the credit facilities previously discussed, the Company may use
other borrowing sources, such as commercial paper, federal funds purchased,
repurchase agreements and bank notes, to meet its short-term financing needs.
The following table summarizes all outstanding short-term borrowings (included
in accrued expenses and other liabilities in the Consolidated Statements of
Financial Condition) and the weighted average interest rate on those borrowings
as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------------------- -------------------
Weighted Weighted
Average Average
Interest Interest
December 31 Balance Rate Balance Rate
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in millions)
Commercial paper $ 50 5.41% $ 50 5.85%
Borrowings under
Providian Bancorp:
Revolving credit agreement 115 5.78 321 6.03
Federal funds purchased 51 5.55 336 5.73
Bank notes - - 190 5.82
============================================================================================
</TABLE>
Note J - Company-Obligated Mandatorily Redeemable Preferred Securities of
Providian LLC
Providian LLC was formed in 1994 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. The notes
receivable from the Company that result from such loans constitute the only
material assets of Providian LLC. 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 Company's Adjustable Rate Cumulative Preferred
Stock, Series F, which had been redeemed (see Note K). 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 pay monthly dividends at an annual rate of 8.875%. The Company has
unconditionally guaranteed all legally declared and unpaid dividends of
Providian LLC.
Note K - Shareholders' Equity and Restrictions
Common Stock
During 1996, 1995 and 1994, the Company announced plans to repurchase a total of
11,500,000 shares of the Company's common stock on the open market. Through
December 31, 1996, the Company repurchased 9,500,000 shares (1,256,000 shares in
1996, 3,910,000 shares in 1995 and 4,334,000 shares in 1994) at an aggregate
cost of $337 million ($55 million in 1996, $143 million in 1995 and $139 million
in 1994).
Preferred Stock
The Company has 6,000,000 shares of preferred stock authorized for issuance. At
December 31, 1996, there were 5,533,000 shares of preferred stock available for
issuance. The remaining 467,000 shares of preferred stock are held by
Commonwealth Life Insurance Company, a wholly owned subsidiary of the Company,
and are eliminated from the Consolidated Statements of Financial Condition.
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.
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
59 PROVIDIAN 1996 ANNUAL REPORT
<PAGE>
become exercisable when any person or group acquires 20% or more (or announces a
tender offer for 20% 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% 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.
On December 28, 1996, the Company's Board of Directors adopted a further
amendment (the Amendment) in anticipation of the Company's execution of the
Merger Agreement (see Note B.) The Amendment exempts the transactions
contemplated in the Merger Agreement from the operation of the plan.
Statutory Limitations on Subsidiary Dividends
The Company's insurance subsidiaries are subject to limitations on the payment
of dividends to the Company. Generally, dividends during any 12-month period 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% of the insurance subsidiaries' statutory surplus as
of the preceding December 31; or (b) the insurance subsidiaries' statutory gain
from operations for the preceding 12-month period. The banking subsidiaries'
payment of dividends are restricted by certain risk weighted capital
requirements and required regulatory approval for dividends in excess of the
current and prior two 12-month periods' earnings. The insurance and banking
subsidiaries were in compliance with these requirements at December 31, 1996.
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 $64 million and
$1.183 billion, respectively, in 1996 and $64 million and $1.145 billion,
respectively, in 1995. In converting to GAAP, adjustments to insurance statutory
amounts include the following: (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) available-for-sale and
trading fixed maturity investments are reported at fair value with unrealized
holding gains and losses reported as a separate component of shareholders'
equity for those designated as available-for-sale and in net income for those
designated as trading; (d) deferred income taxes are provided; (e) acquisitions
accounted for as purchases recognize the fair value of assets and liabilities
acquired; and (f) statutory non-admitted assets are restored for GAAP. In
converting to GAAP for banking purposes, the direct costs of acquiring consumer
loans are deferred and amortized over one, five or seven years, depending on the
product and loan servicing income deferred in trust receivables.
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- --------------------------------------------------------------
<S> <C> <C> <C>
(Dollars in millions)
Statutory gain (loss) from
insurance operations:
Life insurance companies $364 $205 $186
Property and casualty
insurance companies (9) 1 (2)
- --------------------------------------------------------------
Total statutory gain from
insurance operations 355 206 184
Realized investment
loss, net of tax (8) (7) (24)
- --------------------------------------------------------------
Total insurance statutory
net income 347 199 160
Banking net income 117 117 101
- --------------------------------------------------------------
Total statutory net income $464 $316 $261
- --------------------------------------------------------------
Consolidated GAAP net income $435 $345 $301
==============================================================
</TABLE>
The Company believes that contractual and statutory limitations impose no
practical restrictions on the Company's dividend and common stock repurchase
plans.
Note L - Commitments and Contingencies
Leases
At December 31, 1996, future minimum rental commitments under noncancellable
leases aggregated $97 million through 2012 for office space and aggregated $23
million through 2001 for data processing and other equipment. Total payments
under these commitments in each of the following years are: 1997 - $23 million;
1998 - $19 million; 1999 - $16 million; 2000 - $12 million; and 2001 - $9
million. The leases contain no significant restrictions or obligations, and
capital leases included are not material.
Underwriting and Reinsurance Risk
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.
To limit risk, the Company retains no more than $1 million of life
insurance and $250 thousand of accidental death benefits for any single life.
Excess coverages are reinsured externally, and at December 31, 1996, amounted to
approximately 5.7% of total life insurance in force. The Company would become
liable for the reinsured benefits if the reinsurers could not meet their
obligations.
60 Providan 1996 Annual Report
<PAGE>
Effective June 30, 1995, the Company entered into a coinsurance agreement with
North American Security Life (NASL). This agreement coinsures existing deposits
of NASL's fixed annuities and the fixed account portion of its variable annuity
product business. In addition, this agreement includes prospective coinsurance
of additional annual fixed annuity deposits from the future sales of NASL's
fixed and variable annuities. Under the agreement, the Company received cash and
invested assets in exchange for its coinsurance of more than $720 million of
fixed annuity deposits. At December 31, 1996 and 1995, there were $557 million
and $729 million, respectively, of fixed annuity deposits outstanding that were
coinsured by the Company. Other reinsurance activities do not have a significant
impact on the financial statements.
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 M - Stock Ownership and Stock Option Plans
The Providian Corporation Stock Ownership Plan (the "Plan") provides for the
award of up to 2,000,000 shares of the Company's common stock (subject to
certain adjustments) on a nonrestricted or restricted basis. Under the Plan, a
portion of key salaried 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, resulting
in 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% of the shares and six years for the remaining shares. During 1996,
there were 73,200 shares (69,000 shares in 1995 and 145,000 shares in 1994)
issued under the Plan that were nonrestricted and 81,700 shares (69,000 shares
in 1995 and 147,000 shares in 1994) issued that were restricted. At December 31,
1996, there were approximately 1,374,000 shares available for future awards.
Unearned compensation under the Plan is recorded as unearned restricted stock in
the Consolidated Statements of Financial Condition and is amortized over the
vesting period.
The Company has a stock option plan for key salaried employees that authorizes
the Board of Directors to grant, before May 5, 2005, options to purchase a total
of 4,500,000 shares of common stock and related stock appreciation rights,
subject to various terms, at not less than fair market value. Generally, 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. During 1994, certain options were granted to senior
management at a price in excess of the fair market value on the date of grant.
These options granted became exercisable one year after the date granted and
must be exercised not later than seven years after the grant date.
SFAS No. 123, "Accounting for Stock-Based Compensation," issued in October
1995, was adopted by the Company as of January 1, 1996. The provisions of SFAS
No. 123 allow companies to either expense the estimated fair value of stock
options or to continue their current practice, but disclose the pro forma
effects on net income and earnings per share had the fair value of the options
been expensed. The Company elected to continue applying APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations for its
stock option plans and to provide the required pro forma information for stock
options granted after December 31, 1994. Accordingly, no compensation expense
has been recognized for the stock option plan. Had compensation expense for the
stock option plan for options granted after December 31, 1994 been determined
based on the estimated fair value at the grant dates for awards under the plan
consistent with the provisions prescribed under SFAS No. 123, net income and net
income per common share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C>
(Dollars in millions except per common share)
Net income applicable
to common stock:
As reported $ 435 $ 345
Pro forma 432 344
Net income per common share:
As reported $4.64 $3.60
Pro forma 4.61 3.59
=====================================================================
</TABLE>
The effects on 1996 and 1995 pro forma net income and net income per common
share of expensing the estimated fair value of stock options are not necessarily
representative of the effects on reported net income for future years due to
such factors as the vesting period of the stock options and the potential for
issuance of additional stock options in future years. The fair value of options
granted after December 31, 1994, used as a basis for the above pro forma
disclosures, was estimated as of the date of grant using the Black-Scholes
option pricing model. The following weighted average assumptions were made in
estimating fair value of the options awarded in the following years:
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C>
Assumptions:
Expected dividend yield 2.48% 2.48%
Risk-free interest rate 6.35 6.32
Expected life of options 5 years 5 years
Expected volatility 25% 28%
=====================================================================
</TABLE>
The weighted average fair value of options granted in 1996 was $10.49 per
share.
61|PROVIDIAN 1996 ANNUAL REPORT
<PAGE>
Information regarding the stock option plan for 1996 under SFAS No. 123
disclosure requirements and for 1995 and 1994 under APB Opinion No. 25
disclosure requirements is as follows:
<TABLE>
<CAPTION>
Weighted
Number of Option Price Average
Options Per Share Exercise Price
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding
at January 1, 1994 3,004,613 $12.53 - $43.06 N/A
Granted 1,688,475 30.75 - 40.88 N/A
Exercised (189,617) 12.69 - 31.78 N/A
Forfeited or expired (171,449) 21.75 - 43.06 N/A
- -----------------------------------------------------------------------------
Options outstanding
at December 31, 1994 4,332,022 $12.53 - $43.06 N/A
Granted 1,015,000 36.25 - 40.88 N/A
Exercised (694,193) 12.53 - 31.78 N/A
Forfeited or expired (432,634) 31.50 - 43.06 N/A
- -----------------------------------------------------------------------------
Options outstanding
at December 31, 1995 4,220,195 N/A $33.56
Granted 1,003,300 N/A 40.35
Exercised (564,684) N/A 27.41
Forfeited or expired (236,763) N/A 37.44
- -----------------------------------------------------------------------------
Options outstanding
at December 31, 1996 4,422,048 N/A $35.67
=============================================================================
</TABLE>
The following tables summarize information about stock options outstanding
and exercisable at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding
- -----------------------------------------------------------------------------
Weighted
Average Weighted
Range of Number Remaining Average
Exercise Price Outstanding Contractual Life Exercise Price
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
$14.84 - $18.41 86,100 2 years $16.00
20.53 - 25.50 529,784 4 years 21.43
30.75 - 39.50 1,616,531 8 years 34.10
40.31 - 46.25 2,189,633 9 years 41.04
- -----------------------------------------------------------------------------
Total options outstanding 4,422,048
=============================================================================
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
- -----------------------------------------------------------------------------
Weighted
Range of Number Average
Exercise Prices Exercisable Exercise Price
- -----------------------------------------------------------------------------
<S> <C> <C>
$14.84 - $18.41 86,100 $16.00
20.53 - 25.50 525,784 21.43
30.75 - 39.50 904,899 33.15
40.31 - 43.06 1,219,133 41.59
- -----------------------------------------------------------------------------
Total options exercisable 2,735,916 $34.12
=============================================================================
</TABLE>
Approximately 2,747,000 and 2,108,000 shares were exercisable at December
31, 1995 and 1994, respectively. At December 31, 1996, there were 1,822,000
shares available for future grant (2,661,000 and 3,492,000 in 1995 and 1994,
respectively).
Note N -- Segment Information
The operations of the Company and its subsidiaries have been classified into
five business segments as follows: Providian Bancorp, Providian Direct
Insurance, Providian Agency Group, 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 information on pages 21 and 23 through 30 for
revenues, income before federal income tax and assets for each of the three
years in the period ended December 31, 1996.
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, reflects a
charge to the business segments and income to corporate for capital employed to
support the operations of each segment. Net investment income is then allocated
to the product lines of each segment based on policy liabilities. 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.
Capital expenditures and depreciation expense are not material and,
consequently, are not reported.
Note O -- Subsequent Event
On February 4, 1997, Bancorp issued $160 million of mandatorily redeemable
preferred securities, which bear interest at the rate of 9.525%. Bancorp intends
to use the proceeds from issuance for the retirement of outstanding indebtedness
($43 million as of December 31, 1996) owed to Providian Corporation, for the
redemption of preferred stock ($63 million as of December 31, 1996) held by
Providian Corporation, and for general Bancorp business purposes. Providian
Corporation plans to use the proceeds to be received from Bancorp to redeem
Providian Corporation's $95 million Sinking Fund Debentures during 1997.
62
<PAGE>
- -----------------------------------------
Management
Office of the Chairman
Irving W. Bailey II
Chairman and
Chief Executive Officer
Shailesh J. Mehta
President and
Chief Operating Officer
Corporate Officers
Peter A. Cola
Vice President and
Chief Technology Officer
David C. Daulton
Senior Vice President and
Chief Actuary
James V. Elliott
Senior Vice President, General
Counsel and Corporate Secretary
Lawrence Pitterman
Senior Vice President -
Corporate Administration
Elaine J. Robinson
Vice President and Treasurer
Robert L. Walker
Senior Vice President -
Finance and
Chief Financial Officer
Consumer Lending
Operations
David R. Alvarez
Senior Vice President -
Providian Home Loans
Seth A. Barad
Executive Vice President -
Unbanked Business
A. Sami Siddiqui
Executive Vice President -
Unsecured Spread Business
David B. Smith
Executive Vice President -
Unsecured Spread Operations
Insurance Operations
Robert S. Greer, Jr.
Chief Operating Officer
Providian Agency Group
Frederick C. Kessell
President and
Chief Investment Officer
Providian Capital Management
David M. McDonough
Senior Vice President and
Chief Marketing Officer
Providian Agency Group
David J. Miller
Chief Operating Officer
Providian Direct Insurance
63|PROVIDIAN 1996 ANNUAL REPORT
<PAGE>
- --------------------------------------------------------------------------------
Board of Directors
Directors
Irving W. Bailey II, 55
Chairman and
Chief Executive Officer
Providian Corporation
Director since 1987
John L. Clendenin, 62
Chairman of the Board
BellSouth Corporation
(telecommunications holding
company)
Director since 1984
John M. Cranor III, 50
President and Chief Executive Officer
Long John Silver's Restaurants, Inc.
(quick-service seafood restaurants)
Director since 1991
Lyle Everingham, 70
Retired Chairman of the Board
and Chief Executive Officer
The Kroger Co.
(food and drug retailer and
manufacturer)
Director since 1980
Raymond V. Gilmartin, 56
Chairman, President and
Chief Executive Officer
Merck & Co., Inc.
(pharmaceutical and specialty
chemical manufacturer)
Director since 1993
J. David Grissom, 58
Chairman
Mayfair Capital
(private investment company)
Director since 1978
Watts Hill, Jr., 70
Business and Financial
Consultant
Watts Hill, Jr. & Associates
(business and financial
consulting firm)
Director since 1974
Ned C. Lautenbach, 53
Senior Vice President and
Group Executive
Sales and Services
IBM Corporation
(information technology developer
and manufacturer)
Director since 1995
F. Warren McFarlan, Ph.D., 59
Senior Associate Dean and
Professor of Business
Administration
Harvard Business School
Director since 1986
Shailesh J. Mehta, 47
President and
Chief Operating Officer
Providian Corporation
Director since 1994
Martha R. Seger, Ph.D., 65
Distinguished Visiting
Professor of Finance
Central Michigan University
Director since 1991
Larry D. Thompson, 51
Partner
King & Spalding
(law firm)
Director since 1994
Board Committees
Asset/Liability
Raymond V. Gilmartin, Chair
Irving W. Bailey II
John L. Clendenin
John M. Cranor III
Lyle Everingham
J. David Grissom
Watts Hill, Jr.
Ned C. Lautenbach
F. Warren McFarlan, Ph.D.
Shailesh J. Mehta
Martha R. Seger, Ph.D.
Larry D. Thompson
Audit
Larry D. Thompson, Chair
John L. Clendenin
J. David Grissom
Martha R. Seger, Ph.D.
Financial Resources
Watts Hill, Jr., Chair
Irving W. Bailey II
J. David Grissom
Shailesh J. Mehta
Martha R. Seger, Ph.D.
Larry D. Thompson
Human Resources
F. Warren McFarlan, Ph.D., Chair
John M. Cranor III
Lyle Everingham
Raymond V. Gilmartin
Watts Hill, Jr.
Ned C. Lautenbach
Marketing
Lyle Everingham, Chair
Irving W. Bailey II
John L. Clendenin
John M. Cranor III
Raymond V. Gilmartin
Ned C. Lautenbach
F. Warren McFarlan, Ph.D.
Shailesh J. Mehta
Special
Irving W. Bailey II
John M. Cranor III
J. David Grissom
Shailesh J. Mehta
Providian 1996 Annual Report
64
<PAGE>
The graph below is a stacked bar chart that reflects the operating earnings by
each business segment (excluding Corporate and Other) for the year ended
December 31, 1992 through 1994.The graph below is a stacked bar chart reflecting
the Operating Earnings by Business Segment for the years ended December 31, 1994
through 1996. Total pretax operating earnings appear at the top of each bar.
Pretax Operating Earnings by Business Segment
(Dollars in millions)
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Business Segment 1994 1995 1996
- ---------------- ---- ---- ----
<S> <C> <C> <C>
Providian Bancorp $ 150 $ 188 $ 228
Providian Direct Insurance 110 113 91
Providian Agency Group 182 182 191
Providian Capital Management 137 135 162
Corporate and Other (32) (43) (50)
----- ----- -----
Total Pretax Operating Earnings $ 547 $ 575 $ 622
</TABLE>
1
<PAGE>
The graph below is a stacked bar chart reflecting the Revenues by Business
Segment for the years ended December 31, 1994 through 1996. Total revenues
appear on the top of each bar.
Revenues by Business Segment
(Dollars in millions)
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Business Segment 1994 1995 1996
- ---------------- ------ ------ ------
<S> <C> <C> <C>
Providian Bancorp $ 592 $ 793 $ 987
Providian Direct Insurance 780 786 772
Providian Agency Group 726 743 744
Providian Capital Management 908 1,085 1,068
Corporate and Other (47) (19) 51
------ ------ ------
Total Revenues $2,959 $3,388 $3,622
</TABLE>
2
<PAGE>
The graph below is a pie chart reflecting the percentage Distribution of
Insurance Invested Assets at December 31, 1996. 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, 1996
(Dollars in millions)
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
% of
Investment Type Amount Total
- --------------- ------ -----
<S> <C> <C>
Public Bonds $ 8,579 45.6%
Commercial Mortgages 2,864 15.2
Residential Mortgages 2,718 14.5
Private Bonds 2,401 12.8
Cash,Cash Equivalents and Short-Term 889 4.7
Investments
Common and Preferred Stocks 506 2.7
Policy Loans 487 2.6
Limited Partnerships, Real Estate and
Other 361 1.9
------ ----
Total Insurance Invested Assets $18,805 100%
</TABLE>
3
<PAGE>
The graph below is a pie chart reflecting the percentage Distribution of Public
and Private Bonds by Industry Sector at December 31, 1996. The legend contains
the dollar amount of each investment in millions as well as total public and
private bonds.
Distribution of Public and Private Bonds by Industry Sector
December 31, 1996
(Dollars in millions)
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
% of
Industry Sector Amount Total
- --------------- ------ -----
<S> <C> <C>
Industrial $ 4,208 38.4%
Mortgage Backed 1,959 17.8
Financial Services 1,357 12.4
Asset Backed 1,301 11.8
Government Obligations 1,265 11.5
Public Utliltes 529 4.8
Other 361 3.3
------- ----
Total Public and Private Bonds $10,980 100%
</TABLE>
4
<PAGE>
The graph represented below is a pie chart reflecting the percentage of total
Commercial Mortgage Loan Principal Balance by Geographic* Location based on ACLI
defined regions at December 31, 1996. The legend contains the dollar amount by
region in millions as well as total commercial mortgage loans.
Commercial Mortgage Loan Principal Balance by Geographic* Location
December 31, 1996
(Dollars in millions)
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
% of
Category Amount Total
- -------- ------ ------
<S> <C> <C>
East North Central $ 624 21.2%
South Atlantic 543 18.5%
Pacfic 477 16.2
West South Central 463 15.8
Middle Atlantic 349 11.9
East South Central 249 8.5
Mountain 104 3.5
New England 82 2.8
West North Central 47 1.6
------ ------
Total Commercial Mortgage Loans $2,938 100%
</TABLE>
* Based on ACLI defined regions
5
<PAGE>
The graph below is a pie chart reflecting the percentage of total Commercial
Mortgage Loan Principal Balance by Property Type at December 31, 1996. 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, 1996
(Dollars in millions)
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
% of
Category Amount Total
- -------- ------ -----
<S> <C> <C>
Apartment $ 872 29.7%
Retail 840 28.6
Office 695 23.6
Industrial 202 6.9
Health Care 109 3.7
Agricultural 87 3.0
Hotel 77 2.6
Other 56 1.9
------ ----
Total Commercial Mortgage Loans $2,938 100%
</TABLE>
6
<PAGE>
The graph represented below is a pie chart reflecting the percentage of total
Residential Mortgage Loan Principal Balance by Geographic* Location based on
ACLI defined regions at December 31, 1996. 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, 1996
(Dollars in millions)
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
% of
Category Amount Total
- -------- ------ ------
<S> <C> <C>
Pacific 1,040 38.2%
South Atlantic 401 14.7
Middle Atlantic 372 13.7
Mountain 307 11.2
East North Central 194 7.1
New England 153 5.6
West South Central 122 4.5
West North Central 95 3.5
East South Central 41 1.5
------ ------
Total Residential Mortgage Loans 2,725 100%
</TABLE>
* Based on ACLI defined regions
7
<PAGE>
GRAPHICS APPENDIX
1. Page 18 of Management's Discussion and Analysis in the 1996 Annual Report
contains a stacked bar chart reflecting the Pretax Operating Earnings by
Business Segment for the years ended December 31, 1994 through 1996. Total
pretax operating earnings appear at the top of each bar.
2. Page 19 of Management's Discussion and Analysis in the 1996 Annual Report
contains a stacked bar chart reflecting the Revenues by Business Segment for the
years ended December 31, 1994 through 1996. Total revenues appear on the top of
each bar.
3. Page 31 of Management's Discussion and Analysis in the 1996 Annual Report
contains a pie chart reflecting the percentage Distribution of Insurance
Invested Assets at December 31, 1996. The legend contains the dollar amount of
each investment in millions as well as total insurance invested assets.
4. Page 33 of Management's Discussion and Analysis in the 1996 Annual Report
contains a pie chart reflecting the percentage Distribution of Pubic and Private
Bonds by Industry Sector at December 31, 1996. The legend contains the dollar
amount of each industry sector in millions as well as total public and private
bonds.
5. Page 34 of Management's Discussion and Analysis in the 1996 Annual Report
contains a pie chart reflecting the percentage of total Commercial Mortgage Loan
Principal Balance by Geographic Location based on ACLI defined regions at
December 31, 1996. The legend contains the dollar amount by region in millions
as well as total commercial mortgage loans.
6. Page 34 of Management's Discussion and Analysis in the 1996 Annual Report
contains a pie chart reflecting the percentage of total Commercial Mortgage Loan
Principal Balance by Property Type at December 31, 1996. The legend contains
the dollar amount by property type in millions as well as total commercial
mortgage loans.
7. Page 34 of Management's Discussion and Analysis in the 1996 Annual Report
contains a pie chart reflecting the percentage of total Residential Mortgage
Loan Principal Balance by Geographic Location based on ACLI defined regions at
December 31, 1996. The
8
<PAGE>
legend contains the dollar amount by region in millions as well as total
residential mortgage loans.
9
