- -------------------------------------------------------------------------------
FORM 10-Q
------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1997
OR
[ ] 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 1-12332
PROTECTIVE LIFE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-2492236
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
2801 HIGHWAY 280 SOUTH
BIRMINGHAM, ALABAMA 35223
(Address of principal executive offices and zip code)
(205) 879-9230
(Registrant's telephone number, including area code)
------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Number of shares of Common Stock, $.50 par value, outstanding as of November 7,
1997: 30,814,136 shares.
<PAGE>
PROTECTIVE LIFE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Report of Independent Accountants...................................
Consolidated Condensed Statements of Income for the Three and Nine
Months ended September 30, 1997 and 1996 (unaudited)..............
Consolidated Condensed Balance Sheets as of September 30, 1997
(unaudited) and December 31, 1996.................................
Consolidated Condensed Statements of Cash Flows for the
Nine Months ended September 30, 1997 and 1996 (unaudited).........
Notes to Consolidated Condensed Financial Statements (unaudited)....
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K................................
Signature...................................................................
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholders
Protective Life Corporation
Birmingham, Alabama
We have reviewed the accompanying consolidated condensed balance sheet of
Protective Life Corporation and subsidiaries as of September 30, 1997, and the
related consolidated condensed statements of income for the three-month and
nine-month periods ended September 30, 1997 and 1996 and consolidated condensed
statements of cash flows for the nine-month periods ended September 30, 1997 and
1996. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated condensed financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the year then ended (not presented herein); and in our report dated February
11, 1997, we expressed an unqualified opinion which contains an explanatory
paragraph regarding the changes in accounting for stock-based employee
compensation plans in 1995 on those consolidated financial statements. In our
opinion, the information set forth in the accompanying consolidated condensed
balance sheet as of December 31, 1996, is fairly stated in all material respects
in relation to the consolidated balance sheet from which it has been derived.
COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
October 23, 1997
2
<PAGE>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------------ ---------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Premiums and policy fees (net of reinsurance ceded:
three months: 1997 - $95,507; 1996 - $81,453
nine months: 1997 - $221,292; 1996 - $247,988) $116,246 $118,696 $363,817 $366,533
Net investment income 158,196 129,309 426,001 384,149
Realized investment gains 61 861 786 5,882
Other income 8,222 5,079 21,890 15,509
---------- ---------- --------- ---------
282,725 253,945 812,494 772,073
--------- --------- -------- --------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
three months: 1997 - $51,059; 1996 - $64,420
nine months: 1997 - $93,780; 1996 - $182,201) 163,880 162,635 496,712 479,832
Amortization of deferred policy acquisition costs 28,516 18,822 67,561 70,162
Other operating expenses (net of reinsurance ceded:
three months: 1997 - $26,459; 1996 - $24,368
nine months: 1997 - $63,086; 1996 - $67,183) 41,475 40,932 116,618 120,860
-------- --------- -------- --------
233,871 222,389 680,891 670,854
-------- -------- -------- --------
INCOME BEFORE INCOME TAX AND MINORITY
INTEREST 48,854 31,556 131,603 101,219
Income tax expense 16,610 10,730 44,745 34,415
-------- --------- --------- -------
INCOME BEFORE MINORITY INTEREST 32,244 20,826 86,858 66,804
Minority interest in net income
of consolidated subsidiaries 1,810 804 4,111 2,413
--------- ---------- --------- ---------
NET INCOME $ 30,434 $ 20,022 $ 82,747 $ 64,391
========== ======== ======== ========
NET INCOME PER SHARE $ .97 $ .64 $ 2.65 $ 2.15
========== ========== ========== ==========
DIVIDENDS PAID PER SHARE $ .20 $ .18 $ .58 $ .52
========== ========== =========== ===========
Average shares outstanding 31,252,722 31,147,723 31,219,799 29,995,190
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3
<PAGE>
<TABLE>
<CAPTION>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
SEPTEMBER 30 DECEMBER 31
1997 1996
-------------------------------------
ASSETS (Unaudited)
<S> <C> <C>
Investments:
Fixed maturities $ 6,157,588 $4,686,072
Equity securities 18,620 35,250
Mortgage loans on real estate 1,261,809 1,503,080
Investment real estate, net 14,770 14,305
Policy loans 194,190 166,704
Other long-term investments 66,630 32,506
Short-term investments 202,463 114,258
------------ -----------
Total investments 7,916,070 6,552,175
Cash 310 121,051
Accrued investment income 92,058 70,544
Accounts and premiums receivable, net 42,175 47,371
Reinsurance receivables 473,521 332,614
Deferred policy acquisition costs 630,330 488,384
Property and equipment, net 37,431 36,091
Other assets 83,542 64,278
Assets held in separate accounts 880,083 550,697
------------- -----------
$10,155,520 $8,263,205
=========== ==========
LIABILITIES
Policy liabilities and accruals $ 3,584,204 $2,709,386
Guaranteed investment contract deposits 2,784,252 2,474,728
Annuity deposits 1,481,726 1,331,067
Other policyholders' funds 170,051 142,221
Other liabilities 222,857 170,442
Accrued income taxes 16,761 (4,521)
Deferred income taxes 36,058 37,869
Debt 138,600 181,000
Liabilities related to separate accounts 880,083 550,697
-------------- ------------
9,314,592 7,592,889
------------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES - NOTE B
GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN COMPANY'S SUBORDINATED DEBENTURES
9% Cumulative Monthly Income Preferred Securities, Series A 55,000 55,000
8.25% Trust Originated Preferred Securities 75,000
-------------- ------------
130,000 55,000
------------- ------------
STOCKHOLDERS' EQUITY
Preferred Stock, $1 par value
Shares authorized: 3,600,000; Issued: none
Junior Participating Cumulative Preferred Stock, $1 par value
Shares authorized: 400,000; Issued: none
Common Stock, $0.50 par value
Shares authorized: 80,000,000
Issued: 1997 and 1996 - 33,336,462 16,668 16,668
Additional paid-in capital 167,668 166,713
Net unrealized gains on investments
(net of income tax: 1997 - $22,139; 1996 - $3,601) 37,754 6,688
Retained earnings 506,918 442,046
Treasury stock (1997 - 2,522,326 shares; 1996 - 2,561,344 shares) (13,488) (11,874)
Unallocated stock in Employee Stock Ownership Plan
(1997 - 693,120 shares; 1996 - 743,462 shares) (4,592) (4,925)
-------------- ------------
710,928 615,316
------------- -----------
$10,155,520 $8,263,205
=========== ==========
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
4
<PAGE>
<TABLE>
<CAPTION>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $82,747 $64,391
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred policy acquisition costs 67,561 70,162
Capitalization of deferred policy acquisition costs (88,154) (70,124)
Depreciation expense 1,946 5,114
Deferred income taxes (20,349) (4,659)
Accrued income taxes 16,637 (1,319)
Interest credited to universal life and investment products 357,880 206,763
Policy fees assessed on universal life and investment products (97,491) (84,362)
Change in accrued investment income and other receivables (34,468) (78,861)
Change in policy liabilities and other policyholders' funds
of traditional life and health products (5,602) 53,996
Change in other liabilities (10,515) 8,619
Other (net) (23,341) (11,792)
-------------- ------------
Net cash provided by operating activities 246,851 157,928
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 4,670,040 494,088
Other 225,427 94,816
Sale of investments
Investments available for sale 1,062,668 769,357
Other 689,043 561,440
Cost of investments acquired
Investments available for sale (6,547,985) (2,112,193)
Other (582,300) (335,397)
Acquisitions and bulk reinsurance assumptions (171,560) 172,726
Purchase of property and equipment (3,594) (6,040)
Sale of property and equipment 2,681 455
-------------- -------------
Net cash used in investing activities (655,580) (360,748)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit arrangements and debt 1,202,938 840,484
Principal payments on line of credit arrangements and debt (1,245,338) (816,984)
Issuance of Common Stock 70,538
Issuance of preferred securities 75,000
Dividends to stockholders (17,874) (15,343)
Investment product deposits and changes in universal life deposits 771,793 842,765
Investment product withdrawals (498,531) (711,826)
------------- ------------
Net cash provided by financing activities 287,988 209,634
------------- ------------
INCREASE (DECREASE) IN CASH (120,741) 6,814
CASH AT BEGINNING OF PERIOD 121,051 11,392
------------- -------------
CASH AT END OF PERIOD $ 310 $ 18,206
============== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest on debt $ (11,264) $ (9,389)
Income taxes $ (40,585) $ (38,971)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Reissuance of treasury stock to ESOP $ 84 $ 669
Unallocated stock in ESOP $ 333 $ 334
Reissuance of treasury stock $ 1,096 $ 258
Acquisitions
Assets acquired $1,115,171 $ 200,737
Liabilities assumed (902,357) (253,480)
------------ -----------
Net $ 212,814 $ (52,743)
=========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
5
<PAGE>
PROTECTIVE LIFE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
of Protective Life Corporation (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the disclosures required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation have been included. Operating results for the
nine-month period ended September 30, 1997, are not necessarily indicative of
the results that may be expected for the year ending December 31, 1997. The
year-end consolidated condensed balance sheet data was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles. For further information, refer to the
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K for the year ended December 31, 1996.
NOTE B - COMMITMENTS AND CONTINGENT LIABILITIES
The Company is contingently liable to obtain a $20 million letter of
credit under indemnity agreements with its directors. Such agreements provide
insurance protection in excess of the directors' and officers' liability
insurance in force at the time up to $20 million. Should certain events occur
constituting a change in control of the Company, the Company must obtain the
letter of credit upon which directors may draw for defense or settlement of any
claim relating to performance of their duties as directors. The Company has
similar agreements with certain of its officers providing up to $10 million in
indemnification which are not secured by the obligation to obtain a letter of
credit.
Under insurance guaranty fund laws in most states, insurance companies
doing business therein can be assessed up to prescribed limits for policyholder
losses incurred by insolvent companies. The Company does not believe such
assessments will be materially different from amounts already provided for in
the financial statements. Most of these laws do provide, however, that an
assessment may be excused or deferred if it would threaten an insurer's own
financial strength.
A number of civil jury verdicts have been returned against life and
health insurers in the jurisdictions in which the Company does business
involving the insurers' sales practices, alleged agent misconduct, failure to
properly supervise agents, and other matters. Increasingly these lawsuits have
resulted in the award of substantial judgments against the insurer that are
disproportionate to the actual damages, including material amounts of punitive
damages. In some states (including Alabama), juries have substantial discretion
in awarding punitive damages which creates the potential for unpredictable
material adverse judgments in any given punitive damages suit. The Company and
its subsidiaries, like other life and health insurers, in the ordinary course of
business, are involved in such litigation, including purported class action
litigation. The outcome of any such litigation cannot be predicted with
certainty. In addition, in some lawsuits involving insurers' sales practices,
insurers have made material settlement payments to end litigation.
6
<PAGE>
Although the outcome of any litigation cannot be predicted with
certainty, the Company believes that at the present time there are no pending or
threatened lawsuits that are reasonably likely to have a material adverse effect
on the financial position, results of operations, or liquidity of the Company.
NOTE C - PREFERRED SECURITIES
In 1994 a special purpose finance subsidiary of the Company, PLC
Capital L.L.C. ("PLC Capital"), issued $55 million of 9% Cumulative Monthly
Income Preferred Securities, Series A ("MIPS"). On April 29, 1997, another
special purpose finance subsidiary, PLC Capital Trust I ("PLC Capital Trust")
issued $75 million of 8.25% Trust Originated Preferred Securities ("TOPrS"). The
MIPS and TOPrS are guaranteed on a subordinated basis by the Company. This
guarantee, considered together with the other obligations of the Company with
respect to the MIPS and TOPrS, constitutes a full and unconditional guarantee by
the Company of PLC Capital and PLC Capital Trust's obligations with respect to
the MIPS and TOPrS.
PLC Capital and PLC Capital Trust were formed solely to issue
securities and use the proceeds thereof to purchase subordinated debentures of
the Company. The sole assets of PLC Capital are $69.6 million of Protective Life
Corporation 9% Series A Subordinated Debentures due June 30, 2024. The sole
assets of PLC Capital Trust are $77.3 million of Protective Life Corporation
8.25% Subordinated Debentures due 2027, Series B. The Company has the right
under the subordinated debentures to extend interest payment periods up to five
consecutive years, and, as a consequence, dividends on the MIPS and TOPrS may be
deferred (but will continue to accumulate, together with additional dividends on
any accumulated but unpaid dividends at the dividend rate) by PLC Capital and
PLC Capital Trust, respectively, during any such extended interest payment
period. The MIPS are redeemable by PLC Capital at any time on or after June 30,
1999. The TOPrS are redeemable by PLC Capital Trust at any time on or after
April 29, 2002.
The MIPS and TOPrS are reported in the accompanying balance sheets as
"Guaranteed Preferred Beneficial Interests In Company's Subordinated Debentures"
and the related dividends are reported in the accompanying statements of income
as "minority interest in net income of consolidated subsidiaries".
7
<PAGE>
NOTE D - BUSINESS SEGMENTS
The Company operates predominantly in the life and accident and health
insurance industry. The following table sets forth total revenues, income (loss)
before income tax and minority interest, and identifiable assets of the
Company's business segments.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
1997 1996
---- ----
AMOUNT PERCENT AMOUNT PERCENT
(dollars in thousands)
<S> <C> <C> <C> <C>
TOTAL REVENUES:
Acquisitions $168,054 20.7 % $157,565 20.4%
Dental and Consumer Benefits 158,137 19.5 151,767 19.7
Financial Institutions 41,212 5.1 69,453 9.0
Guaranteed Investment Contracts 155,876 19.2 153,720 19.9
Individual Life 165,945 20.4 133,958 17.4
Investment Products 91,405 11.2 85,949 11.1
Corporate and Other 29,828 3.7 13,871 1.8
Unallocated Realized
Investment Gains (Losses) 2,037 0.2 5,790 0.7
---------- ------ ---------- ------
$812,494 100.0 % $772,073 100.0%
======== ===== ======== =====
INCOME (LOSS) BEFORE INCOME
TAX AND MINORITY INTEREST:
Acquisitions $ 45,033 34.2 % $ 38,252 37.8%
Dental and Consumer Benefits 14,103 10.7 2,821 2.8
Financial Institutions 9,197 7.0 6,893 6.8
Guaranteed Investment Contracts 20,082 15.3 22,299 22.0
Individual Life 14,778 11.2 11,502 11.4
Investment Products 8,577 6.5 9,822 9.7
Corporate and Other 17,796 13.5 3,840 3.8
Unallocated Realized
Investment Gains (Losses) 2,037 1.6 5,790 5.7
---------- ------ ---------- ------
$131,603 100.0 % $101,219 100.0%
======== ===== ======== =====
SEPTEMBER 30, 1997 DECEMBER 31, 1996
AMOUNT PERCENT AMOUNT PERCENT
(dollars in thousands)
IDENTIFIABLE ASSETS:
Acquisitions $ 1,507,191 14.8 % $1,579,253 19.1%
Dental and Consumer Benefits 294,759 2.9 278,926 3.4
Financial Institutions 467,542 4.6 352,021 4.3
Guaranteed Investment Contracts 2,973,521 29.3 2,608,149 31.5
Individual Life 2,100,872 20.7 1,037,386 12.5
Investment Products 2,324,258 22.9 1,873,119 22.7
Corporate and Other 487,377 4.8 534,351 6.5
------------- ------ ----------- ------
$10,155,520 100.0 % $8,263,205 100.0%
=========== ===== ========== =====
</TABLE>
NOTE E - STATUTORY REPORTING PRACTICES
Financial statements prepared in conformity with generally accepted
accounting principles ("GAAP") differ in some respects from the statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. At September 30, 1997 and for the nine months then ended, the
Company's life insurance subsidiaries had stockholder's equity and net income
prepared in conformity with statutory reporting practices of $417.2 million and
$84.9 million, respectively.
8
<PAGE>
NOTE F - INVESTMENTS
As prescribed by Statement of Financial Accounting Standards ("SFAS")
No. 115, certain investments are recorded at their market values with the
resulting unrealized gains and losses reduced by a related adjustment to
deferred policy acquisition costs, net of income tax, reported as a component of
stockholders' equity. The market values of fixed maturities increase or decrease
as interest rates fall or rise. Therefore, although the adoption of SFAS No. 115
does not affect the Company's operations, its reported stockholders' equity will
fluctuate significantly as interest rates change.
The Company's balance sheets at September 30, 1997 and December 31,
1996, prepared on the basis of reporting investments at amortized cost rather
than at market values, are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
(IN THOUSANDS)
<S> <C> <C>
Total investments $ 7,839,655 $6,534,122
Deferred policy acquisition costs 646,852 496,148
All other assets 1,609,120 1,222,646
------------ ----------
$10,095,627 $8,252,916
=========== ==========
Deferred income taxes $ 13,919 $ 34,268
All other liabilities 9,278,534 7,555,020
------------ ----------
9,292,453 7,589,288
Preferred Securities 130,000 55,000
Stockholders' equity 673,174 608,628
------------- -----------
$10,095,627 $8,252,916
=========== ==========
</TABLE>
NOTE G - ACCOUNTING POLICIES FOR DERIVATIVE FINANCIAL INSTRUMENTS
The Company does not use derivative financial instruments for trading
purposes. Combinations of futures contracts and options on treasury notes are
currently being used as hedges for asset/liability management of certain
investments, primarily mortgage loans on real estate, mortgage-backed
securities, and liabilities arising from interest-sensitive products such as
guaranteed investment contracts and annuities. Realized investment gains and
losses on such contracts are deferred and amortized over the life of the hedged
asset. At September 30, 1997, open option contracts with a notional amount of
$1.2 billion were in a $1.1 million unrealized loss position.
The Company uses interest rate swap contracts to convert certain
investments from a variable to a fixed rate of interest. The Company also uses
interest rate swap contracts and options to enter into interest rate swaps
(swaptions) to convert a portion of its Senior Notes, Medium-Term Notes, MIPS,
and TOPrS from a fixed rate to a variable rate of interest. The proceeds from
the sale of swaptions are deferred and amortized over the life of the related
securities. At September 30, 1997, related open interest rate swap contracts
with a notional amount of $460.3 million were in a $0.9 million net unrealized
gain position.
9
<PAGE>
NOTE H - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1996 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". This
statement is effective for transactions entered into after January 1, 1997.
NOTE I - RECLASSIFICATIONS
Certain reclassifications have been made in the previously reported
financial statements and accompanying notes to make the prior year amounts
comparable to those of the current year. Such reclassifications had no effect on
previously reported net income, total assets or stockholders' equity.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Protective Life Corporation, through its subsidiaries, provides
financial services through the production, distribution, and administration of
insurance and investment products. Founded in 1907, Protective Life Insurance
Company ("Protective Life") is the Company's principal operating subsidiary.
Unless the context otherwise requires, the "Company" refers to the
consolidated group of Protective Life Corporation and its subsidiaries.
The Company has six operating divisions: Acquisitions, Dental and
Consumer Benefits ("Dental"), Financial Institutions, Guaranteed Investment
Contracts ("GIC"), Individual Life, and Investment Products. The Company also
has an additional business segment which is described herein as Corporate and
Other.
The Dental Division (formerly known as the Group Division) recently
exited from the traditional group major medical business, fulfilling the
Division's strategy to focus primarily on dental and related products.
Accordingly, the Division was renamed the Dental and Consumer Benefits Division.
RESULTS OF OPERATIONS
PREMIUMS AND POLICY FEES
The following table sets forth for the periods shown the amount of
premiums and policy fees and the percentage change from the prior period:
PREMIUMS AND POLICY FEES
NINE MONTHS PERCENTAGE
ENDED AMOUNT INCREASE/
SEPTEMBER 30 (IN THOUSANDS) (DECREASE)
1996 $366,533 12.8 %
1997 363,817 (0.7)
Premiums and policy fees decreased $2.7 million or 0.7% in the first
nine months of 1997 over the first nine months of 1996. The coinsurance by the
Acquisitions Division of a block of policies and the acquisition of a small life
insurance company in the fourth quarter of 1996 resulted in a $6.1 million
increase in premiums and policy fees. Decreases in older acquired blocks
resulted in a $6.0 million decrease in premiums and policy fees. The Dental
Division's exit from the group major medical business resulted in a $22.4
million decrease in premiums and policy fees. Premiums and policy fees related
to the Dental Division's other businesses increased $26.2 million in the first
nine months of 1997 as compared to the same period in 1996. Premiums and policy
fees from the Financial Institutions Division decreased $27.1 million in the
first nine months of 1997 as compared to the first nine months of 1996.
Decreases of $12.8 million resulted from a reinsurance arrangement begun in 1995
whereby most of the Division's new credit insurance sales are being ceded to a
11
<PAGE>
reinsurer. Decreases of $14.3 million relate to the normal decrease in premiums
on a closed block of credit insurance policies reinsured in 1996. The Individual
Life Division's premiums and policy fees increased $16.0 million, including $6.4
million from the acquisition of West Coast Life Insurance Company ("West Coast")
in the second quarter of 1997. The increase in premiums and policy fees from the
Investment Products Division was $2.7 million.
NET INVESTMENT INCOME
The following table sets forth for the periods shown the amount of net
investment income and the percentage change from the prior period:
NINE MONTHS NET INVESTMENT INCOME
ENDED AMOUNT PERCENTAGE
SEPTEMBER 30 (IN THOUSANDS) INCREASE
1996 $384,149 8.3%
1997 426,001 10.9
Net investment income in the first nine months of 1997 was $41.9
million or 10.9% higher than the corresponding period of the preceding year
primarily due to increases in the average amount of invested assets and an
increase in participating mortgage loan income. Invested assets have increased
primarily due to receiving annuity deposits and due to acquisitions. The
coinsurance of a block of policies and the acquisition of a small life insurance
company in the fourth quarter of 1996 and the acquisition of West Coast in the
second quarter of 1997 resulted in an increase in net investment income of $24.9
million in the first nine months of 1997 as compared to the same period in 1996.
REALIZED INVESTMENT GAINS
The Company generally purchases its investments with the intent to hold
to maturity by purchasing investments that match future cash-flow needs.
However, the Company may sell any of its investments to maintain approximate
matching of assets and liabilities. Accordingly, the Company has classified its
fixed maturities and certain other securities as "available for sale." The sales
of investments that have occurred have resulted principally from portfolio
management decisions to maintain approximate matching of assets and liabilities.
The following table sets forth net realized investment gains for the
periods shown:
NINE MONTHS NET REALIZED
ENDED INVESTMENT GAINS
SEPTEMBER 30 (IN THOUSANDS)
1996 $5,882
1997 786
Net realized investment gains were $0.8 million for the first nine
months of 1997 compared to $5.9 million for the corresponding period of 1996. In
the 1996 first quarter, the Company reported a $6.1 million gain relating to a
securitization transaction.
12
<PAGE>
OTHER INCOME
The following table sets forth other income for the periods shown:
NINE MONTHS
ENDED OTHER INCOME
SEPTEMBER 30 (IN THOUSANDS)
1996 $15,509
1997 21,890
Other income consists primarily of revenues of the Company's
broker-dealer subsidiary, fees from variable insurance products, revenues of the
Company's wholly-owned insurance marketing organizations and small noninsurance
subsidiaries, and the results of the Company's 50%-owned joint venture in Hong
Kong. Other income in the first nine months of 1997 was $6.4 million higher than
the corresponding period of 1996. Revenues from the Company's broker-dealer
subsidiary increased $4.1 million in the first nine months of 1997 as compared
to the same period in 1996. Other income from all other sources increased $2.3
million in the first nine months of 1997 as compared with the first nine months
of 1996.
INCOME BEFORE INCOME TAX AND MINORITY INTEREST
The following table sets forth income or loss before income tax and
minority interest by business segment for the periods shown:
<TABLE>
<CAPTION>
INCOME (LOSS) BEFORE INCOME TAX
AND MINORITY INTEREST
NINE MONTHS ENDED SEPTEMBER 30
(IN THOUSANDS)
BUSINESS SEGMENT 1997 1996
---------------- ---- ----
<S> <C> <C>
Acquisitions $ 45,033 $ 38,252
Dental and Consumer Benefits 14,103 2,821
Financial Institutions 9,197 6,893
Guaranteed Investment Contracts 20,082 22,299
Individual Life 14,778 11,502
Investment Products 8,577 9,822
Corporate and Other 17,796 3,840
Unallocated Realized Investment Gains 2,037 5,790
---------- ----------
$131,603 $101,219
======== ========
Percentage Increase 30.0% 11.1%
</TABLE>
13
<PAGE>
Pretax earnings from the Acquisitions Division increased $6.8 million
in the first nine months of 1997 as compared to the same period of 1996.
Earnings from the Acquisitions Division are normally expected to decline over
time (due to the lapsing of policies resulting from deaths of insureds or
terminations of coverage) unless new acquisitions are made. The Division's most
recent acquisitions resulted in a $3.3 million increase in pretax earnings. In
addition, the Division's mortality experience was approximately $7.2 million
more favorable in the first nine months of 1997 as compared to the same period
last year.
Dental Division pretax earnings were $4.5 million higher in the first
nine months of 1997 as compared to the first nine months of 1996 excluding a
$6.8 million refund of premiums and related expenses in the 1996 third quarter.
Dental earnings were $8.3 million, an increase of $1.6 million, before expenses
of $1.8 million to develop a new discounted fee-for-service dental program. $1.8
million of the increase was a one-time release of reserves associated with
exiting the group major medical business. Lower cancer earnings partially offset
improved results in other lines.
Pretax earnings of the Financial Institutions Division were $2.3
million higher in the first nine months of 1997 as compared to the same period
in 1996. Included in the Division's results are earnings from the coinsurance of
a block of policies in the second quarter of 1996.
The GIC Division had pretax operating earnings of $21.9 million in the
first nine months of 1997 and $30.1 million in the corresponding period of 1996.
The decline largely reflects a reallocation of investment income from the GIC
Division to the Company's other divisions and Corporate and Other segment. In
December 1996, the Company sold a major portion of its bank loan participations
in a securitization transaction which has reduced the Division's earnings. The
decrease was partially offset by a related improvement in earnings in the
Corporate and Other segment. In addition, the Company has shortened the duration
of the GIC Division's invested assets which also reduced earnings and lengthened
the duration of the other divisions' invested assets to better match assets to
liabilities on a divisional level. Realized investment losses associated with
this Division in the first nine months of 1997 were $1.8 million as compared to
$7.8 million in the same period last year. As a result, total pretax earnings
were $20.1 million in the first nine months of 1997 compared to $22.3 million
for the same period last year.
The Individual Life Division's results include West Coast which the
Company acquired on June 3. The Division's pretax operating earnings of $14.8
million in the first nine months of 1997 were $4.4 million above the same period
of 1996. West Coast represents $3.0 million of the increase. Mortality returned
to normal levels in the 1997 third quarter after experiencing record high
mortality in the previous quarter which reduced earnings approximately $4.3
million. Realized investment gains, net of related amortization of deferred
policy acquisition costs, associated with this Division were $1.1 million in
1996. As a result, total pretax earnings were $14.8 million in the first nine
months of 1997 as compared to $11.5 million in the first nine months of 1996.
Investment Products Division pretax operating earnings of $8.4 million
were $1.0 million higher in the first nine months of 1997 compared to the same
period of 1996. The Division's 1996 results included a one-time $0.9 million
addition to earnings. Realized investment gains associated with the Division,
net of related amortization of deferred policy acquisition costs, were $0.2
million in the first nine months of 1997 as compared to $2.4 million in 1996,
resulting in total pretax earnings of $8.6 million in the first nine months of
1997 as compared to $9.8 million in the same period of 1996.
14
<PAGE>
The Corporate and Other segment consists primarily of net investment
income on capital, interest expense on substantially all debt, the Company's
50%-owned joint venture in Hong Kong, several small insurance lines of business,
and the operations of several small noninsurance subsidiaries. Pretax earnings
for this segment increased $14.0 million in the first nine months of 1997 as
compared to the first nine months of 1996. In the 1997 second quarter the
Company sold its interest in a money management joint venture resulting in
income of $4.1 million. In the 1997 third quarter the segment had $3.0 million
of income from the Company's participation commercial mortgage loan program. In
addition, the segment's results include a decrease in interest expense of $2.6
million representing the dividends on the Company's Trust Originated Preferred
Securities which are reported as "minority interest in net income of
consolidated subsidiaries" rather than as expenses of the Corporate and Other
segment. The remaining increase in earnings relates primarily to increased net
investment income on capital and income from a securitization transaction.
INCOME TAXES
The following table sets forth the effective income tax rates for the
periods shown:
NINE MONTHS
ENDED ESTIMATED EFFECTIVE
SEPTEMBER 30 INCOME TAX RATES
1996 34%
1997 34
The effective income tax rate for the full year of 1996 was 34%.
Management's estimate of the effective income tax rate for 1997 is also 34%.
NET INCOME
The following table sets forth net income and the net income per share
for the periods shown, and the percentage change from the prior period:
NINE MONTHS NET INCOME
ENDED TOTAL PERCENTAGE
SEPTEMBER 30 (IN THOUSANDS) PER SHARE INCREASE
------------ ------------- --------- ---------
1996 $64,391 $2.15 5.9%
1997 82,747 2.65 23.3
Compared to the same period in 1996, net income per share in the first
nine months of 1997 increased 23.3%, reflecting improved operating earnings in
the Acquisitions, Dental, Financial Institutions, Individual Life and Investment
Products Divisions and the Corporate and Other segment, which were partially
offset by lower operating earnings in the Guaranteed Investment Contracts
Division and lower realized investment gains (net of related amortization of
deferred policy acquisition costs).
15
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997 the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share," effective for financial statements issued for periods ending after
December 15, 1997. In June 1997 the FASB issued SFAS No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective for financial statements issued
for periods beginning after December 15, 1997. The Company anticipates that the
impact of adopting these accounting standards will not be significant.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations usually produce a positive cash flow. This
cash flow is used to fund an investment portfolio to finance future benefit
payments. Since future benefit payments largely represent medium- and long-term
obligations reserved using certain assumed interest rates, the Company's
investments are predominantly in medium- and long-term, fixed-rate investments
such as bonds and mortgage loans.
Many of the Company's products contain surrender charges and other
features that reward persistency and penalize the early withdrawal of funds.
Surrender charges for these products generally are sufficient to cover the
Company's unamortized deferred policy acquisition costs with respect to the
policy being surrendered. GICs and certain annuity contracts have market-value
adjustments that protect the Company against investment losses if interest rates
are higher at the time of surrender than at the time of issue.
The Company's investments in debt and equity securities are reported at
market value, and investments in mortgage loans are reported at amortized cost.
At September 30, 1997, the fixed maturity investments (bonds, bank loan
participations, and redeemable preferred stocks) had a market value of $6,157.6
million, which is 1.4% above amortized cost (less allowances for uncollectible
amounts on investments) of $6,072.0 million. The Company had $1,261.8 million in
mortgage loans at September 30, 1997. While the Company's mortgage loans do not
have quoted market values, at September 30, 1997, the Company estimates the
market value of its mortgage loans to be $1,339.8 million (using discounted cash
flows from the next call date) which is 6.2% in excess of amortized book value.
Most of the Company's mortgage loans have significant prepayment penalties.
These assets are invested for terms approximately corresponding to anticipated
future benefit payments. Thus, market value fluctuations should not adversely
affect liquidity.
For several years the Company has offered a type of commercial loan
under which the Company will permit a slightly higher loan-to-value ratio in
exchange for a participating interest in the cash flows from the underlying real
estate. Approximately $487.7 million of the Company's mortgage loans have this
participation feature.
At September 30, 1997, delinquent mortgage loans and foreclosed real
estate were 0.2% of assets. Bonds rated less than investment grade were 1.9% of
assets. Additionally, the Company had bank loan participations that were less
than investment grade representing 0.2% of assets. The Company does not expect
these investments to adversely affect its liquidity or ability to maintain
proper matching of assets and liabilities. The Company's allowance for
uncollectible amounts on
16
<PAGE>
investments was $24.7 million at September 30, 1997.
Policy loans at September 30, 1997, were $194.2 million, a decrease of
$3.4 million from December 31, 1996 (after excluding approximately $30.9 million
of policy loans associated with an acquisition in the second quarter of 1997).
Policy loan rates are generally in the 4.5% to 8.0% range and are at least equal
the assumed interest rates used for future policy benefits.
The Company believes its asset/liability management programs and
procedures and certain product features provide significant protection for the
Company against the effects of changes in interest rates. However, approximately
one-fourth of the Company's liabilities relate to products (primarily whole life
insurance) the profitability of which may be affected by changes in interest
rates. The effect of such changes in any one year is not expected to be
material. Additionally, the Company believes its asset/liability management
programs and procedures provide sufficient liquidity to enable it to fulfill its
obligation to pay benefits under its various insurance and deposit contracts.
The Company's asset/liability management programs and procedures
involve the monitoring of asset and liability durations for various product
lines; cash flow testing under various interest rate scenarios; and the
continuous rebalancing of assets and liabilities with respect to yield, risk,
and cash flow characteristics. It is the Company's policy to generally maintain
asset and liability durations within one half year of one another, although from
time to time broader duration matching is allowed.
The Company does not use derivative financial instruments for trading
purposes. Combinations of futures contracts, interest rate options, and interest
rate swaps are sometimes used as hedges for asset/liability management of
certain investments, primarily mortgage loans on real estate, mortgage-backed
securities, and liabilities arising from interest-sensitive products such as
GICs and annuities. Realized investment gains and losses of such contracts are
deferred and amortized over the life of the hedged asset. At September 30, 1997,
open option contracts with a notional amount of $1.2 billion were in a $1.1
million unrealized loss position.
The Company may also sometimes use interest rate swap contracts and
options to enter into interest rate swap contracts (swaptions) to convert
certain investments from a variable to a fixed rate of interest and from a fixed
to a variable rate of interest, and to convert a portion of its Senior Notes,
Medium-Term Notes, Monthly Income Preferred Securities, and Trust Originated
Preferred Securities from a fixed rate to a variable rate of interest. The
proceeds from the sale of swaptions are deferred and amortized over the life of
the related debt. At September 30, 1997, related open interest rate swap
contracts with a notional amount of $460.3 million were in a $0.9 million net
unrealized gain position.
Withdrawals related to GICs were approximately $786 million during
1996. Withdrawals related to GICs are estimated to be approximately $600 million
in 1997. The Company's asset/liability management programs and procedures take
into account maturing contracts. Accordingly, the Company does not expect
maturing contracts to have an unusual effect on the future operations and
liquidity of the Company.
In anticipation of receiving GIC and annuity deposits, the life
insurance subsidiaries were committed at September 30, 1997, to fund mortgage
loans and to purchase fixed maturity and other long-term investments in the
amount of $426.0 million. The Company's subsidiaries held $199.8
17
<PAGE>
million in cash and short-term investments at September 30, 1997. Protective
Life Corporation had an additional $2.9 million in cash and short-term
investments available for general corporate purposes.
While the Company generally anticipates that the cash flows of its
subsidiaries will be sufficient to meet their investment commitments and
operating cash needs, the Company recognizes that investment commitments
scheduled to be funded may from time to time exceed the funds then available.
Therefore, the Company has arranged sources of credit for its insurance
subsidiaries to use when needed. The Company expects that the rate received on
its investments will equal or exceed its borrowing rate. Additionally, the
Company may from time to time sell short-duration GICs to complement its cash
management practices.
On April 29, 1997, a special purpose finance subsidiary of the Company,
PLC Capital Trust I ("PLC Capital Trust") issued $75 million of 8.25% Trust
Originated Preferred Securities ("TOPrS"), guaranteed on a subordinated basis by
the Company. PLC Capital Trust was formed solely to issue TOPrS and other
securities and use the proceeds thereof to purchase subordinated debentures of
the Company. The Company has the right under the subordinated debentures to
extend interest payment periods up to 20 consecutive quarters, and, as a
consequence, quarterly dividends on the TOPrS may be deferred (but will continue
to accumulate, together with additional dividends on any accumulated but unpaid
dividends at the dividend rate) by PLC Capital Trust during any such extended
interest payment period. The TOPrS are redeemable by PLC Capital Trust at any
time on or after April 29, 2002. Net proceeds of approximately $72.6 million
were used to repay bank borrowings. In related transactions, the Company entered
into interest rate swap agreements which effectively converted the TOPrS from a
fixed dividend rate to the floating 90 day London Interbank Offered Rate
("LIBOR") plus 74 basis points. The effective interest rate at September 30,
1997, was 6.46%.
On September 15, 1997, the Company sold approximately $445 million of
its commercial mortgage loans in a securitization transaction. Proceeds from the
sale consisted of cash of approximately $328 million, net of expenses, and
securities issued in the securitization transaction of approximately $110
million.
At September 30, 1997, Protective Life Corporation had borrowed $7.1
million of a $70 million revolving line of credit bearing interest rates
averaging 6.1% and an additional $11.5 million at a rate of 5.9%.
Protective Life Corporation's cash flow is dependent on cash dividends
and payments on surplus notes from its subsidiaries, revenues from investment,
data processing, legal, and management services rendered to the subsidiaries,
and investment income. At December 31, 1996, approximately $173 million of
consolidated stockholders' equity, excluding net unrealized losses on
investments, represented net assets of the Company's insurance subsidiaries that
cannot be transferred in the form of dividends, loans or advances to the parent
company. In addition, the states in which the Company's insurance subsidiaries
are domiciled impose certain restrictions on the insurance subsidiaries' ability
to pay dividends to Protective Life Corporation. Also, distributions, including
cash dividends to Protective Life Corporation from its life insurance
subsidiaries, in excess of approximately $439 million, would be subject to
federal income tax at rates then effective.
18
<PAGE>
Due to the expected growth of the Company's insurance sales, the
Company plans to retain substantial portions of the earnings of its life
insurance subsidiaries in those companies primarily to support their future
growth. Protective Life Corporation's cash disbursements have from time to time
exceeded its cash receipts, and these shortfalls have been funded through
various external financings. Therefore, Protective Life Corporation may from
time to time require additional external financing.
To give the Company flexibility in connection with future acquisitions
and other growth opportunities, the Company has registered debt securities,
preferred and common stock and stock purchase contracts of Protective Life
Corporation, and additional preferred securities of special purpose finance
subsidiaries under the Securities Act of 1933 on a delayed (or shelf) basis.
A life insurance company's statutory capital is computed according to
rules prescribed by the National Association of Insurance Commissioners
("NAIC"), as modified by the insurance company's state of domicile. Statutory
accounting rules are different from generally accepted accounting principles and
are intended to reflect a more conservative view by, for example, requiring
immediate expensing of policy acquisition costs. The NAIC's risk-based capital
requirements require insurance companies to calculate and report information
under a risk-based capital formula. The achievement of long-term growth will
require growth in the statutory capital of the Company's insurance subsidiaries.
The subsidiaries may secure additional statutory capital through various
sources, such as retained statutory earnings or equity contributions by the
Company.
Under insurance guaranty fund laws in most states, insurance companies
doing business in a participating state can be assessed up to prescribed limits
for policyholder losses incurred by insolvent companies. The Company does not
believe that any such assessments will be materially different from amounts
already reflected in the financial statements.
The Company and its subsidiaries, like other life and health insurers,
in the course of business are involved in litigation. Although the outcome of
any litigation cannot be predicted with certainty, the Company believes that at
the present time there are no pending or threatened lawsuits that are reasonably
likely to have a material adverse effect on the financial position, results of
operations, or liquidity of the Company.
Rating downgrades have exceeded upgrades for the past several years,
and public pronouncements by the rating agencies indicate that this trend is
expected to continue for the near future.
The Company is not aware of any material pending or threatened
regulatory action with respect to the Company or any of its subsidiaries.
19
<PAGE>
PART II
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibit 10(a) - Form of Employment Continuation Agreement
Exhibit 15 - Letter re: unaudited interim financial statements
Exhibit 27 - Financial Data Schedule
Exhibit 99 - Safe Harbor for Forward Looking Statements
(b). A report on Form 8-K dated July 23, 1997, was filed reporting
under Item 5 and Item 7, the Company's 1997 second quarter
earnings press release.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROTECTIVE LIFE CORPORATION
Date: November 12, 1997 /S/ JERRY W. DEFOOR
--------------------
Jerry W. DeFoor
Vice President and Controller,
and Chief Accounting Officer
(Duly authorized officer)
20
EXHIBIT 10(A)
EMPLOYMENT CONTINUATION AGREEMENT
THIS AGREEMENT between Protective Life Corporation, a Delaware
corporation (the "Company"), and (the "Executive"), dated as of this ____ day of
, 1997.
W I T N E S S E T H :
WHEREAS, the Company has employed the Executive in a key executive
officer position and has determined that the Executive holds a position which is
of critical importance to the Company;
WHEREAS, the Company believes that, in the event it is confronted
with a situation that could result in a change in ownership or control of the
Company, continuity of management will be essential to its ability to evaluate
and respond to such situation in the best interests of shareholders;
WHEREAS, the Company understands that any such situation will
present significant concerns for the Executive with respect to his financial and
job security;
WHEREAS, the Company desires to assure itself of the Executive's
services during the period in which it is confronting such a situation, and to
provide the Executive with certain financial assurances to enable the Executive
to perform the responsibilities of his position without undue distraction and to
exercise his judgment without bias due to his personal circumstances;
WHEREAS, to achieve these objectives, the Company and the
Executive desire to enter into an agreement providing the Company and the
Executive with certain rights and obligations upon the occurrence of a Change of
Control (as defined in Section 2);
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, it is hereby agreed by and between the Company and
the Executive as follows:
1. OPERATION OF AGREEMENT. (a) EFFECTIVE DATE. The effective date of this
Agreement shall be the date on which a Change of Control occurs (the "Change of
Control Date"), PROVIDED THAT, if the Executive is not employed by the Company
on the Change of Control Date, this Agreement shall be void and without effect.
2. DEFINITIONS.(a) CHANGE OF CONTROL. For the purposes of this Agreement, a
"Change of Control" shall mean (I) a transaction or acquisition as identified in
the Company's Rights Agreement as in effect from time to time; (II) upon the
consummation of any merger,
<PAGE>
consolidation, or similar transaction or a purchase of securities pursuant to
which (x) the members of the Board of Directors of the Company immediately prior
to such transaction do not, immediately after the transaction, constitute a
majority of the Board of Directors of the surviving entity or (y) the
stockholders of the Company immediately preceding the transaction do not,
immediately after the transaction, own at least 50% of the combined voting power
of the outstanding securities of the surviving entity; or (III) a sale, lease,
exchange or other transfer (in one transaction or a series of related
transactions) of all or substantially all of the assets of the Company
including, without limitation any sale, lease, exchange or other transfer (in
one transaction or a series of related transactions) of all or substantially all
of the assets of Protective Life Insurance Company.
(b) POTENTIAL CHANGE OF CONTROL. For the purposes of this
Agreement, a Potential Change of Control shall be deemed to have occurred if (I)
the Company enters into an agreement, the consummation of which would result in
the occurrence of a Change of Control; (ii) any person publicly announces an
intention to take or to consider taking actions which, if consummated, would
constitute a Change of Control; (iii) any person (other than any of the
Company's subsidiaries or any employee benefit plan of the Company or any of its
subsidiaries) hereafter becomes the beneficial owner, directly or indirectly, of
securities of the Company representing greater than 10% of the combined voting
power of the Company's then outstanding securities (determined by taking into
account as though converted or exercised any securities convertible into voting
securities or any options exercisable for voting securities, but only to the
extent such convertible securities or options are beneficially owned or held by
such person); (iv) any person files soliciting materials intended to result in a
change in the composition of the Board of Directors of the Company; or (v) the
Board of Directors of the Company adopts a resolution to the effect that, for
purposes of this Agreement, a Potential Change of Control has occurred.
3. EMPLOYMENT PERIOD. Subject to Section 6 of this Agreement, the
Company agrees to continue the Executive in its employ, and the Executive agrees
to remain in the employ of the Company, for the period (the "Employment Period")
commencing on the Change of Control Date and ending on the second anniversary of
the Change of Control Date.
4. POSITION AND DUTIES. (a) NO REDUCTION IN POSITION. During the
Employment Period, the Executive's position (including titles), authority and
responsibilities shall be at least commensurate with those held, exercised and
assigned immediately prior to the Change of Control Date. The Executive's
services shall be performed at the location where the Executive was employed
immediately preceding the Change of Control Date.
(b) BUSINESS TIME. From and after the Change of Control Date, the
Executive agrees to devote his full attention during normal business hours to
the business and affairs of the Company and to perform faithfully and
efficiently the responsibilities assigned to him hereunder, to the extent
necessary to discharge such responsibilities, except for periods of vacation,
sick leave and other leave to which he is entitled. It is expressly understood
and agreed that the Executive's continuing to serve on any boards and committees
on which he is serving or with which he is otherwise associated immediately
preceding the Change of Control
<PAGE>
Date shall not be deemed to interfere with the performance of the Executive's
services to the Company.
5. COMPENSATION. (a) BASE SALARY. During the Employment Period,
the Executive shall receive a base salary at a monthly rate at least equal to
the monthly salary paid to the Executive by the Company immediately prior to the
Change of Control Date. The base salary shall be reviewed at least once each
year after the Change of Control Date, and may be increased (but not decreased)
at any time and from time to time by action of the Board of Directors or any
committee thereof or any individual having authority to take such action in
accordance with the Company's regular practices. The Executive's base salary, as
it may be increased from time to time, shall hereafter be referred to as "Base
Salary". Neither the Base Salary nor any increase in Base Salary after the
Change of Control Date shall serve to limit or reduce any other obligation of
the Company hereunder.
(b) ANNUAL BONUS AND INCENTIVE COMPENSATION. During the Employment
Period, in addition to the Base Salary, for each fiscal year of the Company
ending during the Employment Period, the Executive shall be entitled to receive
(I) an annual bonus which is at least equal to the greater of (1) the highest
annual bonus, including, without limitation, any bonus provided under the
Company's Annual Incentive Plan, that had been payable to the Executive in
respect of either of the last two fiscal years ended immediately prior to the
Change of Control Date or (2) the amount that would have been payable to the
Executive as a target bonus including, without limitation, under the Company's
Annual Incentive Plan, for the year in which the Change of Control occurs and
(II) long-term incentive compensation opportunities on terms and conditions no
less favorable to the Executive than those applicable to the Executive prior to
the Change of Control Date. Any amount payable hereunder as an annual bonus
shall be paid as soon as practicable following the year for which the amount is
payable, unless electively deferred by the Executive pursuant to any deferral
programs or arrangements that the Company may make available to the Executive.
(c) BENEFIT PLANS. During the Employment Period, the Executive (and, to
the extent applicable, his dependents) shall be entitled to participate in or be
covered under all pension, retirement, deferred compensation, savings, medical,
dental, health, disability, group life, accidental death and travel accident
insurance plans at a level that is commensurate with the Executive's
participation in such plans immediately prior to the Change of Control Date, or,
if more favorable to the Executive, at the level made available to the Executive
or other similarly situated officers at any time thereafter. The Executive shall
also be entitled to receive such perquisites as were generally provided to the
Executive in accordance with the Company's policies and practices immediately
prior to the Change of Control Date.
(d) EXPENSES. During the Employment Period, the Executive shall be
entitled to receive prompt reimbursement for all reasonable expenses incurred by
the Executive in accordance with the policies and procedures of the Company as
in effect immediately prior to the Change of Control Date. Notwithstanding the
foregoing, the Company may apply the policies and procedures in effect after the
Change of Control Date to the Executive, if such
<PAGE>
policies and procedures are more favorable to the Executive than those in effect
immediately prior to the Change of Control Date.
(e) INDEMNIFICATION. During and after the Employment Period, the
Company shall indemnify the Executive and hold the Executive harmless from and
against any claim, loss or cause of action arising from or out of the
Executive's performance as an officer, director or employee of the Company or
any of its subsidiaries or in any other capacity, including any fiduciary
capacity, in which the Executive serves at the request of the Company to the
maximum extent permitted by applicable law and the Company's Certificate of
Incorporation and By-Laws (the "Governing Documents"), PROVIDED THAT in no event
shall the protection afforded to the Executive hereunder be less than that
afforded under the Governing Documents as in effect immediately prior to the
Change of Control Date.
6. TERMINATION. (a) DEATH, DISABILITY OR RETIREMENT. This
Agreement shall terminate automatically upon the Executive's death, termination
due to "Disability" (as defined below) or voluntary retirement under any of the
Company's retirement plans as in effect from time to time. For purposes of this
Agreement, Disability shall mean the Executive's inability to perform the duties
of his position, as determined in accordance with the policies and procedures
applicable with respect to the Company's long-term disability plan, as in effect
immediately prior to the Change of Control Date.
(b) VOLUNTARY TERMINATION. Notwithstanding anything in this
Agreement to the contrary, following a Change of Control the Executive may, upon
not less than 10 days' written notice to the Company, voluntarily terminate his
employment for any reason (including early retirement under the terms of any of
the Company's retirement plans as in effect from time to time), PROVIDED THAT
any termination by the Executive pursuant to Section 6(d) on account of Good
Reason (as defined therein) shall not be treated as a voluntary termination
under this Section 6(b).
(c) CAUSE. The Company may terminate the Executive's employment
for Cause. For purposes of this Agreement, "Cause" means (I) the Executive's
conviction or plea of NOLO CONTENDERE to a felony; (II) an act or acts of
extreme dishonesty or gross misconduct on the Executive's part which result or
are intended to result in material damage to the Company's business or
reputation; or (III) repeated material violations by the Executive of his
obligations under Section 4 of this Agreement, which violations are demonstrably
willful and deliberate on the Executive's part and which result in material
damage to the Company's business or reputation.
(d) GOOD REASON. Following the occurrence of a Change of Control,
the Executive may terminate his employment for Good Reason. For purposes of this
Agreement, "Good Reason" means the occurrence of any of the following, without
the express written consent of the Executive, after the occurrence of a Change
of Control:
(i) (A) the assignment to the Executive of any duties inconsistent
in any material adverse respect with the Executive's position,
authority or responsibilities as
<PAGE>
contemplated by Section 4 of this Agreement, or (B) any other material
adverse change in such position, including titles, authority or
responsibilities;
(ii) any failure by the Company to comply with any of the
provisions of Section 5 of this Agreement, other than an insubstantial
or inadvertent failure remedied by the Company promptly after receipt
of notice thereof given by the Executive;
(iii) the Company's requiring the Executive to be based at any
office or location more than 20 miles from that location at which he
performed his services specified under the provisions of Section 4
immediately prior to the Change of Control, except for travel
reasonably required in the performance of the Executive's
responsibilities; or
(iv) any failure by the Company to obtain the assumption and
agreement to perform this Agreement by a successor as contemplated by
Section 11(b).
In no event shall the mere occurrence of a Change of Control, absent any further
impact on the Executive, be deemed to constitute Good Reason.
(e) NOTICE OF TERMINATION. Any termination by the Company for
Cause or by the Executive for Good Reason shall be communicated by Notice of
Termination to the other party hereto given in accordance with Section 12(e).
For purposes of this Agreement, a "Notice of Termination" means a written notice
given, in the case of a termination for Cause, within 10 business days of the
Company's having actual knowledge of the events giving rise to such termination,
and in the case of a termination for Good Reason, within 180 days of the
Executive's having actual knowledge of the events giving rise to such
termination, and which (I) indicates the specific termination provision in this
Agreement relied upon, (II) sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated, and (III) if the termination date
is other than the date of receipt of such notice, specifies the termination date
of this Agreement (which date shall be not more than 15 days after the giving of
such notice). The failure by the Executive to set forth in the Notice of
Termination any fact or circumstance which contributes to a showing of Good
Reason shall not waive any right of the Executive hereunder or preclude the
Executive from asserting such fact or circumstance in enforcing his rights
hereunder.
(f) DATE OF TERMINATION. For the purpose of this Agreement, the
term "Date of Termination" means (I) in the case of a termination for which a
Notice of Termination is required, the date of receipt of such Notice of
Termination or, if later, the date specified therein, as the case may be, and
(II) in all other cases, the actual date on which the Executive's employment
terminates during the Employment Period.
7. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) DEATH OR
DISABILITY. If the Executive's employment is terminated during the Employment
Period by reason of the Executive's death or Disability, this Agreement shall
terminate without further obligations to the Executive or the Executive's legal
representatives under this Agreement other than those obligations accrued
hereunder at the Date of Termination, and the Company shall pay to the
<PAGE>
Executive (or his beneficiary or estate) (I) the Executive's full Base Salary
through the Date of Termination (the "Earned Salary"), (II) any vested amounts
or benefits owing to the Executive under the Company's otherwise applicable
employee benefit plans and programs, including any compensation previously
deferred by the Executive (together with any accrued earnings thereon) and not
yet paid by the Company and any accrued vacation pay not yet paid by the Company
(the "Accrued Obligations"), and (III) any other benefits payable due to the
Executive's death or Disability under the Company's plans, policies or programs
(the "Additional Benefits").
Any Earned Salary shall be paid in cash in a single lump sum as
soon as practicable, but in no event more than 10 business days (or at such
earlier date required by law), following the Date of Termination. Accrued
Obligations and Additional Benefits shall be paid in accordance with the terms
of the applicable plan, program or arrangement.
(b) CAUSE AND VOLUNTARY TERMINATION. If, during the Employment
Period, the Executive's employment shall be terminated for Cause or voluntarily
terminated by the Executive (other than on account of Good Reason following a
Change of Control) in accordance with Section 6(b), the Company shall pay the
Executive (I) the Earned Salary in cash in a single lump sum as soon as
practicable, but in no event more than 10 days, following the Date of
Termination, and (II) the Accrued Obligations in accordance with the terms of
the applicable plan, program or arrangement.
(c) TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE AND GOOD
REASON TERMINATION BY THE EXECUTIVE.
(i) LUMP SUM PAYMENTS. If (X) the Company terminates the
Executive's employment other than for Cause during the Employment
Period or (Y) the Executive terminates his employment for Good Reason
at any time during the Employment Period then the Company shall pay to
the Executive the following amounts:
(A) the Executive's Earned Salary;
(B) a cash amount (the "Severance Amount") equal to [three] [two]
[one]1 times the sum of
(1) the Executive's annual Base Salary; and
(2) the greater of (i) the average of the bonus amount
payable (including any amounts payable under the
Annual Incentive Plan) to the Executive for the three
fiscal years of the Company immediately preceding the
Change in Control or (Y) the average of the bonus
amount payable (including any amount payable under
the Annual Incentive Plan) to the Executive for
- --------
1 Applies to five Executives, seven Executives, and 18 Executives, respectively.
<PAGE>
the three fiscal years of the Company ending
immediately prior to the Date of Termination; and
(C) the Accrued Obligations.
The Earned Salary and Severance Amount shall be paid in cash in a
single lump sum as soon as practicable, but in no event more than 10
business days (or at such earlier date required by law), following the
Date of Termination. Accrued Obligations shall be paid in accordance
with the terms of the applicable plan, program or arrangement.
(ii) SUPPLEMENTAL RETIREMENT BENEFIT. In the event the Executive
is entitled to receive the Severance Amount described in Section
7(c)(i), the Executive (and, to the extent applicable, his dependents)
shall be entitled to receive a supplemental retirement benefit payable
pursuant to a deferred annuity contract issued by a solvent insurer
mutually acceptable to the Company and the Executive and purchased by
the Company and delivered to the Executive within 60 days after the
Date of Termination. Such annuity contract shall provide for monthly
payments on and after the Executive's 65th birthday and 100% survivor
benefits to the Executive's spouse for such individual's lifetime in
the event of the Executive's death prior to or after age 65. The
monthly benefits to be provided by the annuity shall be determined as
follows:
(A) three years shall be added to Executive's credited service as
determined at Date of Termination under the terms of Company's
qualified defined benefit pension plan and supplemental
pension plan (collectively, the "Pension Plans") as in effect
immediately prior to the Change in Control (subject to any
applicable maximum on credited service) PROVIDED THAT, for the
purposes of this Section 7(c)(ii), Executive shall be deemed
to be a Participant in such supplemental pension plan as of
the Date of Termination;
(B) using such adjusted credited service, a new monthly benefit
for life commencing at age 65 shall be determined as of the
Date of Termination under the terms of the Pension Plans;
(C) from such monthly benefit as calculated in (B) above shall be
subtracted the monthly vested deferred benefit of Executive
due to be paid on and after attainment of age 65, if any,
pursuant to the terms of all defined benefit pension plans,
active or frozen, in which Executive is a participant at his
Date of Termination if such plans are sponsored by the
Company, its successors or affiliates thereof; and
(D) in accordance with the terms of the Pension Plans, the
difference described in (C) next above shall be converted from
a monthly lifetime benefit after age 65 to the actuarial
equivalent monthly benefit on and
<PAGE>
after attainment of age 65 which provides the 100%
survivorship feature first above described in this Section
7(c)(ii).
For purposes of making the foregoing determinations, at the request of
Executive in the Notice of Termination given by Executive or in writing
within 3 days of Executive's receipt of Notice of Termination, but in
either event at Company expense, the independent pension consultants
most recently used by Company in connection with its qualified pension
plan prior to the Change in Control shall be engaged and shall certify
the benefits due Executive under this Section 7(c)(ii) in writing
within 30 days after the Date of Termination. If the amount to be
offset under subparagraph (C) above shall not be determined by the end
of a period of 30 days after the Date of Termination, no such offset
shall be permitted.
(iii) CONTINUATION OF BENEFITS. In the event the Executive is
entitled to receive the Severance Amount described in Section 7(c)(i),
the Executive (and, to the extent applicable, his dependents) shall be
entitled, after the Date of Termination until the earlier of (1) the
second anniversary of the Date of Termination (the "End Date") or (2)
the date the Executive becomes eligible for comparable benefits under a
similar plan, policy or program of a subsequent employer, to continue
participation in all of the Company's employee welfare benefit plans
including, without limitation, the Company's hospital, medical,
accident, disability, and life insurance plans (the "Benefit Plans") as
were generally provided to the Executive in accordance with the
Company's policies and practices immediately prior to the Change of
Control Date. To the extent any such benefits cannot be provided under
the terms of the applicable plan, policy or program, the Company shall
provide a comparable benefit under another plan or from the Company's
general assets. The Executive's participation in the Benefit Plans will
be on the same terms and conditions that would have applied had the
Executive continued to be employed by the Company through the End Date.
(d) DISCHARGE OF THE COMPANY'S OBLIGATIONS. Except as expressly
provided in the last sentence of this Section 7(d), the amounts payable to the
Executive pursuant to this Section 7 (whether or not reduced pursuant to Section
7(e)) following termination of his employment shall be in full and complete
satisfaction of the Executive's rights under this Agreement and any other claims
he may have in respect of his employment by the Company or any of its
subsidiaries. Such amounts shall constitute liquidated damages with respect to
any and all such rights and claims and, upon the Executive's receipt of such
amounts, the Company shall be released and discharged from any and all liability
to the Executive in connection with this Agreement or otherwise in connection
with the Executive's employment with the Company and its subsidiaries. Nothing
in this Section 7(d) shall be construed to release the Company from its
commitment to indemnify the Executive and hold the Executive harmless from and
against any claim, loss or cause of action arising from or out of the
Executive's performance as an officer, director or employee of the Company or
any of its subsidiaries or in any other capacity, including any fiduciary
capacity, in which the Executive served at the request of the Company to the
maximum extent permitted by applicable law and the Governing Documents.
<PAGE>
(e) CERTAIN FURTHER PAYMENTS BY THE COMPANY.
(i) In the event that any amount or benefit paid or distributed to
the Executive pursuant to this Agreement, taken together with any
amounts or benefits otherwise paid or distributed to the Executive by
the Company or any affiliated company including, without limitation,
any distribution or payment made pursuant to the terms of the Company's
compensation plans or arrangements (collectively, the "Covered
Payments"), are or become subject to the tax (the "Excise Tax") imposed
under Section 4999 of the Internal Revenue Code of 1986, as amended
(the "Code"), or any similar tax that may hereafter be imposed, the
Company shall pay to the Executive at the time specified in Section
7(e)(v) below an additional amount (the "Tax Reimbursement Payment")
such that the net amount retained by the Executive with respect to such
Covered Payments, after deduction of any Excise Tax on the Covered
Payments and any Federal, state and local income or employment tax and
Excise Tax on the Tax Reimbursement Payment provided for by this
Section 7(e), but before deduction for any Federal, state or local
income or employment tax withholding on such Covered Payments, shall be
equal to the amount of the Covered Payments.
(ii) For purposes of determining whether any of the Covered
Payments will be subject to the Excise Tax and the amount of such
Excise Tax,
(A) such Covered Payments will be treated as "parachute payments"
within the meaning of Section 280G of the Code, and all
"parachute payments" in excess of the "base amount" (as
defined under Section 280G(b)(3) of the Code) shall be treated
as subject to the Excise Tax, unless, and except to the extent
that, in the good faith judgment of the Company's independent
certified public accountants appointed prior to the Change of
Control Date or tax counsel selected by such Accountants (the
"Accountants"), the Company has a reasonable basis to conclude
that such Covered Payments (in whole or in part) either do not
constitute "parachute payments" or represent reasonable
compensation for personal services actually rendered (within
the meaning of Section 280G(b)(4)(B) of the Code) in excess of
the "base amount," or such "parachute payments" are otherwise
not subject to such Excise Tax, and
(B) the value of any non-cash benefits or any deferred payment or
benefit shall be determined by the Accountants in accordance
with the principles of Section 280G of the Code.
(iii) For purposes of determining the amount of the Tax
Reimbursement Payment, the Executive shall be deemed to pay:
(A) Federal income taxes at the highest applicable marginal rate
of Federal income taxation for the calendar year in which the
Tax Reimbursement Payment is to be made, and
<PAGE>
(B) any applicable state and local income taxes at the highest
applicable marginal rate of taxation for the calendar year in
which the Tax Reimbursement Payment is to be made, net of the
maximum reduction in Federal income taxes which could be
obtained from the deduction of such state or local taxes if
paid in such year.
(iv) In the event that the Excise Tax is subsequently determined
by the Accountants or pursuant to any proceeding or negotiations with
the Internal Revenue Service to be less than the amount taken into
account hereunder in calculating the Tax Reimbursement Payment made,
the Executive shall repay to the Company, at the time that the amount
of such reduction in the Excise Tax is finally determined, the portion
of such prior Tax Reimbursement Payment that would not have been paid
if such Excise Tax had been applied in initially calculating such Tax
Reimbursement Payment, plus interest on the amount of such repayment at
the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding
the foregoing, in the event any portion of the Tax Reimbursement
Payment to be refunded to the Company has been paid to any Federal,
state or local tax authority, repayment thereof shall not be required
until actual refund or credit of such portion has been made to the
Executive, and interest payable to the Company shall not exceed
interest received or credited to the Executive by such tax authority
for the period it held such portion. The Executive and the Company
shall mutually agree upon the course of action to be pursued (and the
method of allocating the expenses thereof) if the Executive's good
faith claim for refund or credit is denied.
In the event that the Excise Tax is later determined by the
Accountants or pursuant to any proceeding or negotiations with the
Internal Revenue Service to exceed the amount taken into account
hereunder at the time the Tax Reimbursement Payment is made (including,
but not limited to, by reason of any payment the existence or amount of
which cannot be determined at the time of the Tax Reimbursement
Payment), the Company shall make an additional Tax Reimbursement
Payment in respect of such excess (plus any interest or penalty payable
with respect to such excess) at the time that the amount of such excess
is finally determined.
(v) The Tax Reimbursement Payment (or portion thereof) provided
for in Section 7(e)(i) above shall be paid to the Executive not later
than 10 business days following the payment of the Covered Payments;
provided, however, that if the amount of such Tax Reimbursement Payment
(or portion thereof) cannot be finally determined on or before the date
on which payment is due, the Company shall pay to the Executive by such
date an amount estimated in good faith by the Accountants to be the
minimum amount of such Tax Reimbursement Payment and shall pay the
remainder of such Tax Reimbursement Payment (together with interest at
the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the
amount thereof can be determined, but in no event later than 45
calendar days after payment of the related Covered Payment. In the
event that the amount of the estimated Tax Reimbursement Payment
exceeds the amount subsequently determined to have been due, such
excess shall constitute a loan by the Company to the Executive, payable
on the fifth business day after written demand by
<PAGE>
the Company for payment (together with interest at the rate provided in
Section 1274(b)(2)(B) of the Code).
8. NON-EXCLUSIVITY OF RIGHTS. Except as expressly provided herein,
nothing in this Agreement shall prevent or limit the Executive's continuing or
future participation in any benefit, bonus, incentive or other plan or program
provided by the Company or any of its affiliated companies and for which the
Executive may qualify, nor shall anything herein limit or otherwise prejudice
such rights as the Executive may have under any other agreements with the
Company or any of its affiliated companies. Amounts which are vested benefits or
which the Executive is otherwise entitled to receive under any plan or program
of the Company or any of its affiliated companies at or subsequent to the Date
of Termination shall be payable in accordance with such plan or program.
9. FULL SETTLEMENT. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment, defense or other right which
the Company may have against the Executive or others whether by reason of the
subsequent employment of the Executive or otherwise.
10. LEGAL FEES AND EXPENSES. If the Executive asserts any claim in
any contest (whether initiated by the Executive or by the Company) as to the
validity, enforceability or interpretation of any provision of this Agreement,
the Company shall pay the Executive's legal expenses (or cause such expenses to
be paid) including, without limitation, his reasonable attorney's fees, on a
quarterly basis, upon presentation of proof of such expenses, PROVIDED THAT the
Executive shall reimburse the Company for such amounts, plus simple interest
thereon at the 90-day United States Treasury Bill rate as in effect from time to
time, compounded annually, if the Executive shall not prevail, in whole or in
part, as to any material issue as to the validity, enforceability or
interpretation of any provision of this Agreement.
11. SUCCESSORS.
(a) This Agreement is personal to the Executive and, without the
prior written consent of the Company, shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's legal
representatives.
(b) This Agreement shall inure to the benefit of and be binding
upon the Company and its successors. The Company shall require any successor to
all or substantially all of the business and/or assets of the Company, whether
direct or indirect, by purchase, merger, consolidation, acquisition of stock, or
otherwise, by an agreement in form and substance satisfactory to the Executive,
expressly to assume and agree to perform this Agreement in the same manner and
to the same extent as the Company would be required to perform if no such
succession had taken place.
<PAGE>
12. MISCELLANEOUS.
(a) APPLICABLE LAW. This Agreement shall be governed by and
construed and conferred in accordance with the laws of the State of Delaware
applied without reference to principles of conflict of laws.
(b) ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement shall be resolved by binding arbitration. The
arbitration shall be held at a site selected by the arbitrators and except to
the extent inconsistent with this Agreement, shall be conducted in accordance
with the Expedited Employment Arbitration Rules of the American Arbitration
Association then in effect at the time of the arbitration, and otherwise in
accordance with principles which would be applied by a court of law or equity.
The arbitrator shall be acceptable to both the Company and the Executive. If the
parties cannot agree on an acceptable arbitrator, the dispute shall be heard by
a panel of three arbitrators, one appointed by each of the parties and the third
appointed by the other two arbitrators.
(c) AMENDMENTS. This Agreement may be amended or modified by the
Board of Directors at any time prior to a Change in Control PROVIDED THAT
subsequent to the occurrence of a Potential Change in Control, this Agreement
may not be amended or modified otherwise than by a written agreement executed by
the parties hereto or their respective successors and legal representatives.
Notwithstanding the foregoing sentence, in the event that subsequent to the
occurrence of a Potential Change in Control (i) the Board of Directors makes a
good faith determination that the events giving rise to a Potential Change in
Control will not result in the occurrence of a Change in Control or (ii) an
actual Change in Control has not occurred after the first anniversary of the
occurrence of a Potential Change in Control (or any Potential Change in Control
events occurring after the initial Potential Change in Control), the foregoing
limitation on the amendment or modification of this Agreement shall cease to
apply unless and until it thereafter again becomes effective by reason of the
occurrence of another Potential Change in Control or any actual Change in
Control.
(d) ENTIRE AGREEMENT. Upon the Change of Control Date, this
Agreement shall constitute the entire agreement between the parties hereto with
respect to the matters referred to herein. There are no promises,
representations, inducements or statements between the parties other than those
that are expressly contained herein. In the event any provision of this
Agreement is invalid or unenforceable, the validity and enforceability of the
remaining provisions hereof shall not be affected. The Executive acknowledges
that he is entering into this Agreement of his own free will and accord, and
with no duress, that he has read this Agreement and that he understands it and
its legal consequences.
<PAGE>
(e) NOTICES. All notices and other communications hereunder shall
be in writing and shall be given by hand-delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive: at the home address of the Executive
noted on the records of the Company
If to the Company: Protective Life Corporation
2801 Highway 280 South
Birmingham, Alabama 35223
Attn.: Deborah J. Long
Senior Vice President
General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set his hand
and the Company has caused this Agreement to be executed in its name on its
behalf, and its corporate seal to be hereunto affixed and attested by its
Secretary, all as of the day and year first above written.
PROTECTIVE LIFE CORPORATION
By: ______________________________
Name: Drayton Nabers, Jr.
Title: Chairman of the Board and
Chief Executive Officer
ATTEST:
By:_________________________
Name: _____________________
Title: _____________________
EXECUTIVE
Signature:_______________________
Name: _____________________
Title: _________________________
Exhibit 15
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Protective Life Corporation
We are aware that our report dated October 23, 1997, on our review of interim
consolidated financial information of Protective Life Corporation and
subsidiaries for the period ended September 30, 1997, and included in the
Company's quarterly report on Form 10-Q for the quarter then ended, is
incorporated by reference in the Company's registration statements on Form S-8
and Form S-3. Pursuant to Rule 436(c) under the Securities Act of 1933, this
report should not be considered a part of the registration statements prepared
or certified by us within the meaning of Sections 7 and 11 of that Act.
COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
November 11, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Protective Life Corporation and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 6,157,588
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 18,620
<MORTGAGE> 1,261,809
<REAL-ESTATE> 14,770
<TOTAL-INVEST> 7,916,070
<CASH> 310
<RECOVER-REINSURE> 473,521
<DEFERRED-ACQUISITION> 630,330
<TOTAL-ASSETS> 10,155,520
<POLICY-LOSSES> 3,331,012
<UNEARNED-PREMIUMS> 253,192
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 170,051
<NOTES-PAYABLE> 138,600
0
0
<COMMON> 16,668
<OTHER-SE> 694,260
<TOTAL-LIABILITY-AND-EQUITY> 10,155,520
363,817
<INVESTMENT-INCOME> 426,001
<INVESTMENT-GAINS> 786
<OTHER-INCOME> 21,890
<BENEFITS> 496,712
<UNDERWRITING-AMORTIZATION> 67,561
<UNDERWRITING-OTHER> 116,618
<INCOME-PRETAX> 131,603
<INCOME-TAX> 44,745
<INCOME-CONTINUING> 82,747<F1>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 82,747
<EPS-PRIMARY> 2.65
<EPS-DILUTED> 2.65
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Net of minority interest in income of consolidated subsidiaries of $4,111.
</FN>
</TABLE>
Exhibit 99
to
Form 10-Q
of
Protective Life Corporation
for the nine months
Ended September 30, 1997
Safe Harbor for Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the "Act")
encourages companies to make "forward-looking statements" by creating a safe
harbor to protect the companies from securities law liability in connection with
forward-looking statements. Forward-looking statements can be identified by use
of words such as "expect," "estimate," "project, " budget," "forecast,"
"anticipate," "plan," and similar expressions. Protective Life Corporation (the
"Company") intends to qualify both its written and oral forward-looking
statements for protection under the Act.
To qualify oral forward-looking statements for protection under the
Act, a readily available written document must identify important factors that
could cause actual results to differ materially from those in the
forward-looking statements. The Company provides the following information to
qualify forward-looking statements for the safe harbor protection of the Act.
The operating results of companies in the insurance industry have
historically been subject to significant fluctuations due to competition,
economic conditions, interest rates, investment performance, maintenance of
insurance ratings, and other factors. Certain known trends and uncertainties
which may affect future results of the Company are discussed more fully below.
MATURE INDUSTRY; COMPETITION. Life and health insurance is a mature
industry. In recent years, the industry has experienced virtually no growth in
life insurance sales, though the aging population has increased the demand for
retirement savings products. Life and health insurance is a highly competitive
industry and the Company's Divisions encounter significant competition in all
their respective lines of business from other insurance companies, many of which
have greater financial resources than the Company, as well as competition from
other providers of financial services.
Management believes that the Company's ability to compete is dependent
upon, among other things, its ability to attract and retain distribution
channels to market its insurance and investment products, its ability to develop
competitive and profitable products, its ability to maintain low unit costs, and
its maintenance of strong claims-paying and financial strength ratings from
rating agencies.
The Company competes against other insurance companies and financial
institutions in the origination of commercial mortgage loans.
<PAGE>
RATINGS. Ratings are an important factor in the competitive position of
life insurance companies. Rating organizations periodically review the financial
performance and condition of insurers, including the Company's insurance
subsidiaries. A downgrade in the ratings of the Company's life insurance
subsidiaries could adversely affect its ability to sell its products and its
ability to compete for attractive acquisition opportunities.
Rating organizations assign ratings based upon several factors. While
most of the considered factors relate to the rated company, some of the factors
relate to general economic conditions and circumstances outside the rated
company's control.
Rating downgrades have exceeded upgrades for the past several years,
and public pronouncements by the rating agencies indicate that this trend is
expected to continue for the near future.
POLICY CLAIMS FLUCTUATIONS. The Company's results may fluctuate from year
to year on account of fluctuations in policy claims received by the Company.
LIQUIDITY AND INVESTMENT PORTFOLIO. Many of the products offered by the
Company's life insurance subsidiaries allow policyholders and contractholders to
withdraw their funds under defined circumstances. The Company's life insurance
subsidiaries design products and configure investment portfolios so as to
provide and maintain sufficient liquidity to support anticipated withdrawal
demands and contract benefits and maturities. Asset/liability management
programs and procedures are used to monitor the relative duration of the
Company's assets and liabilities. While the Company's life insurance
subsidiaries own a significant amount of liquid assets, many of their assets are
relatively illiquid. Significant unanticipated withdrawal or surrender activity
could, under some circumstances, compel the Company's life insurance
subsidiaries to dispose of illiquid assets on unfavorable terms, which could
have a material adverse effect on the Company.
INTEREST RATE FLUCTUATIONS. Significant changes in interest rates
expose life insurance companies to the risk of not earning anticipated spreads
between the interest rate earned on investments and the interest rate credited
to its life insurance and investment products. Both rising and declining
interest rates can negatively affect the Company's spread income. For example,
certain of the Company's insurance and investment products guarantee a minimum
credited interest rate. While the Company develops and maintains asset/liability
management programs and procedures designed to preserve spread income in rising
or falling interest rate environments, no assurance can be given that
significant changes in interest rates will not materially affect such spreads.
Lower interest rates may result in lower sales of the Company's life
insurance and investment products.
INVESTMENT RISKS. The Company's invested assets are subject to inherent
risks of defaults and changes in market values. The value of the Company's
commercial mortgage portfolio depends in part on the financial condition of the
tenants occupying the properties on which the Company has made loans. Factors
that may affect the overall default rate on, and
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market value of, the Company's invested assets include the level of interest
rates, performance of the financial markets, and general economic conditions, as
well as particular circumstances affecting the businesses of individual
borrowers and tenants.
CONTINUING SUCCESS OF ACQUISITION STRATEGY. The Company has actively
pursued a strategy of acquiring blocks of insurance policies. This acquisition
strategy has increased the Company's earnings in part by allowing the Company to
position itself to realize certain operating efficiencies associated with
economies of scale. There can be no assurance, however, that suitable
acquisitions, presenting opportunities for continued growth and operating
efficiencies, will continue to be available to the Company, or that the Company
will realize the anticipated financial results from its acquisitions.
REGULATION AND TAXATION. The Company's insurance subsidiaries are
subject to government regulation in each of the states in which they conduct
business. Such regulation is vested in state agencies having broad
administrative power dealing with all aspects of the insurance business
including premium rates, benefits, marketing practices, advertising, policy
forms, underwriting standards, and capital adequacy, and is concerned primarily
with the protection of policyholders rather than stockholders. The Company
cannot predict the form of any future regulatory initiatives.
Under the Internal Revenue Code of 1986, as amended (the Code), income
tax payable by policyholders on investment earnings is deferred during the
accumulation period of certain life insurance and annuity products. This
favorable tax treatment may give certain of the Company's products a competitive
advantage over other non-insurance products. To the extent that the Code is
revised to reduce the tax-deferred status of life insurance and annuity
products, or to increase the tax-deferred status of competing products, all life
insurance companies, including the Company's subsidiaries, would be adversely
affected.
The Company cannot predict what future initiatives the President or
Congress may propose which may affect the life and health insurance industry and
the Company.
LITIGATION. A number of civil jury verdicts have been returned against
life and health insurers in the jurisdictions in which the Company does business
involving the insurers' sales practices, alleged agent misconduct, failure to
properly supervise agents, and other matters. Increasingly these lawsuits have
resulted in the award of substantial judgments against the insurer that are
disproportionate to the actual damages, including material amounts of punitive
damages. In some states (including Alabama), juries have substantial discretion
in awarding punitive damages which creates the potential for unpredictable
material adverse judgments in any given punitive damages suit. The Company and
its subsidiaries, like other life and health insurers, in the ordinary course of
business, are involved in such litigation. The outcome of any such litigation
cannot be predicted with certainty. In addition, in some lawsuits involving
insurers' sales practices, insurers have made material settlement payments to
end litigation.
RELIANCE UPON THE PERFORMANCE OF OTHERS. The Company has entered into
various ventures involving other parties. Examples include, but are not limited
to: many of the Company's products are sold through independent distribution
channels; the Investment Products
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Division's variable annuity deposits are invested in funds managed by
unaffiliated investment managers; a portion of the sales in the Financial
Institutions, Dental and Consumer Benefits, and Individual Life Divisions comes
from arrangements with unrelated marketing organizations; and the Company has
entered the Hong Kong insurance market in a joint venture with the Lippo Group.
Therefore the Company's results may be affected by the performance of others.
REINSURANCE. As is customary in the insurance industry, the Company's
insurance subsidiaries cede insurance to other insurance companies. However, the
ceding insurance company remains liable with respect to ceded insurance should
any reinsurer fail to meet the obligations assumed by it. Additionally, the
Company assumes policies of other insurers. Any regulatory or other adverse
development affecting the ceding insurer could also have an adverse effect on
the Company.
Forward-looking statements express expectations of future events and/or
results. All forward-looking statements are inherently uncertain as they are
based on various expectations and assumptions concerning future events and they
are subject to numerous known and unknown risks and uncertainties which could
cause actual events or results to differ materially from those projected. Due to
these inherent uncertainties, investors are urged not to place undue reliance on
forward-looking statements. In addition, the Company undertakes no obligation to
update or revise forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events, or changes to projections over time.
