- -----------------------------------------------------------------------------
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 MARCH 31, 1998
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 May 8, 1998:
61,758,264 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 Months
ended March 31, 1998 and 1997 (unaudited).......................
Consolidated Condensed Balance Sheets as of March 31, 1998
(unaudited) and December 31, 1997...............................
Consolidated Condensed Statements of Cash Flows for the
Three Months ended March 31, 1998 and 1997 (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 2(c). Changes in Securities......................................
Item 4. Submission of Matters to a Vote of Security Holders...........
Item 5. 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 March 31, 1998, and the
related consolidated condensed statements of income and consolidated condensed
statements of cash flows for the three-month periods ended March 31, 1998 and
1997. 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, 1997, 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, 1998, except for Note N as to which the date is March 2, 1998, 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, 1997, 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
April 23, 1998
2
<PAGE>
<TABLE>
<CAPTION>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
(Unaudited)
THREE MONTHS ENDED
MARCH 31
1998 1997
---- ----
<S> <C> <C>
REVENUES
Premiums and policy fees (net of reinsurance ceded:
1998 - $99,628; 1997 - $54,509) $149,358 $129,578
Net investment income 157,626 130,330
Realized investment gains (losses) 11 (418)
Other income 13,518 4,762
--------- ----------
320,513 264,252
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
1998 - $57,363; 1997 - $33,536) 187,897 163,019
Amortization of deferred policy acquisition costs 24,835 20,835
Other operating expenses (net of reinsurance ceded:
1998 - $31,709; 1997 - $14,254) 57,755 41,630
--------- ----------
270,487 225,484
INCOME BEFORE INCOME TAX AND MINORITY
INTEREST 50,026 38,768
Income tax expense 17,009 13,181
--------- ---------
INCOME BEFORE MINORITY INTEREST 33,017 25,587
Minority interest in net income
of consolidated subsidiaries 3,024 804
--------- ---------
NET INCOME $ 29,993 $ 24,783
======== ========
NET INCOME PER SHARE - BASIC $ .48 $ .40
========== ==========
NET INCOME PER SHARE - DILUTED $ .47 $ .40
========== ==========
DIVIDENDS PAID PER SHARE $ .10 $ .09
========== ==========
Average shares outstanding - basic 62,606,735 62,317,466
Average shares outstanding - diluted 63,261,753 62,669,264
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3
<PAGE>
<TABLE>
<CAPTION>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
MARCH 31 DECEMBER 31
1998 1997
-------------------------------------
<S> <C> <C>
ASSETS (Unaudited)
Investments:
Fixed maturities $ 6,297,854 $ 6,374,328
Equity securities 13,130 15,006
Mortgage loans on real estate 1,367,866 1,312,778
Investment real estate, net 13,319 13,602
Policy loans 192,961 194,109
Other long-term investments 62,796 63,511
Short-term investments 169,267 76,086
------------- -------------
Total investments 8,117,193 8,049,420
Cash 47,502
Accrued investment income 94,390 95,616
Accounts and premiums receivable, net 48,052 47,784
Reinsurance receivables 584,516 591,613
Deferred policy acquisition costs 652,832 632,737
Property and equipment, net 38,931 36,957
Other assets 97,239 78,541
Assets held in separate accounts 1,123,756 931,465
------------ -------------
$10,756,909 $10,511,635
LIABILITIES
Policy liabilities and accruals $ 3,821,813 $ 3,725,151
Guaranteed investment contract deposits 2,677,543 2,684,676
Annuity deposits 1,502,662 1,511,553
Other policyholders' funds 166,121 183,233
Other liabilities 258,090 306,241
Accrued income taxes 15,937 4,907
Deferred income taxes 40,555 41,212
Debt 120,000 120,000
Liabilities related to separate accounts 1,123,756 931,465
----------- -------------
9,726,477 9,508,438
----------- ------------
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 75,000
6.5% FELINE PRIDES 115,000 115,000
------------ -------------
245,000 245,000
------------ -------------
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: 1998 and 1997 - 66,672,924 33,336 33,336
Additional paid-in capital 170,671 167,923
Treasury stock (1998 - 4,914,660 shares; 1997 - 5,030,640 shares) (13,198) (13,455)
Unallocated stock in Employee Stock Ownership Plan
(1998 - 1,291,194 shares; 1997 - 1,386,244 shares) (4,277) (4,592)
Retained earnings 537,073 513,258
Accumulated other comprehensive income
Net unrealized gains on investments
(net of income tax: 1998 - $33,317; 1997 - $33,238) 61,827 61,727
------------- --------------
785,432 758,197
------------- --------------
$10,756,909 $10,511,635
============= ==============
</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)
THREE MONTHS ENDED
MARCH 31
1998 1997
---- ----
<S> <C> <C>>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 29,993 $ 24,783
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred policy acquisition costs 24,835 20,835
Capitalization of deferred policy acquisition costs (43,931) (25,480)
Depreciation expense 1,964 1,496
Deferred income taxes (1,224) (314)
Accrued income taxes 10,207 11,406
Interest credited to universal life and investment products 84,729 41,239
Policy fees assessed on universal life and investment products (34,045) (31,163)
Change in accrued investment income and other receivables 8,056 2,381
Change in policy liabilities and other policyholders' funds
of traditional life and health products 114,125 93,441
Change in other liabilities (48,076) (17,899)
Other (net) (18,652) (4,914)
-------------- -------------
Net cash provided by operating activities 127,981 115,811
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 1,806,667 723,663
Other 76,911 28,655
Sale of investments
Investments available for sale 145,772 537,926
Other 234,634 2,776
Cost of investments acquired
Investments available for sale (2,047,391) (1,332,927)
Other (281,863) (89,573)
Acquisitions and bulk reinsurance assumptions (2,436)
Purchase of property and equipment (2,684) (1,890)
Sale of property and equipment 22 54
--------------------------------
Net cash used in investing activities (67,932) (133,752)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit arrangements and debt 304,500 534,400
Principal payments on line of credit arrangements and debt (304,500) (520,400)
Dividends to stockholders (6,178) (5,549)
Investment product deposits and changes in universal life deposits 330,148 174,968
Investment product withdrawals (431,521) (244,533)
-------------- -------------
Net cash used in financing activities (107,551) (61,114)
-------------- --------------
INCREASE (DECREASE) IN CASH (47,502) (79,055)
CASH AT BEGINNING OF PERIOD 47,502 121,051
--------------- -------------
CASH AT END OF PERIOD $ 0 $ 41,996
================= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period:
Interest on debt $ 1,558 $ 4,662
Income taxes $ 8,554 $ 1,858
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Reissuance of treasury stock to ESOP $ 84
Unallocated stock in ESOP $ 315 $ 333
Reissuance of treasury stock $ 49
Acquisitions
Assets acquired $ 3,398 $ 339
Liabilities assumed (347) (90)
Reissuance of treasury stock (3,005)
----------------- ------------
Net $ 46 $ 249
================= ============
</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; STOCK SPLIT
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
three-month period ended March 31, 1998, are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998. 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, 1997.
On March 2, 1998, the Company's Board of Directors approved a
two-for-one split of the Company's Common Stock in the form of a 100% stock
dividend distributed on April 1, 1998. Stockholders' equity has been restated to
give retroactive recognition to the stock split for all periods presented by
reclassifying from retained earnings to common stock the par value of the
additional shares arising from the stock split. In addition, unless indicated
otherwise, all references to number of shares and per share amounts included
herein have been restated to reflect the stock split.
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 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
6
<PAGE>
the award of substantial judgments against the insurer that are disproportionate
to the actual damages, including material amounts of punitive damages. In
addition, in some class action and other lawsuits involving insurers' sales
practices, insurers have made material settlement payments. 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
insurers, in the ordinary course of business, are involved in such litigation.
Although the outcome of any such 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 ("MIPSSM"). On April 29, 1997, another
special purpose finance subsidiary, PLC Capital Trust I ("PLC Capital Trust I")
issued $75 million of 8.25% Trust Originated Preferred Securities ("TOPrSSM").
The MIPS and 8.25% 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 8.25% TOPrS, constitutes a full and unconditional
guarantee by the Company of PLC Capital and PLC Capital Trust I's obligations
with respect to the MIPS and 8.25% TOPrS.
PLC Capital and PLC Capital Trust I 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% Subordinated Debentures due June 30, 2024, Series A. The sole
assets of PLC Capital Trust I 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 8.25% 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 I, 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 8.25%TOPrS are redeemable by PLC Capital Trust I at any time
on or after April 29, 2002.
On November 20, 1997, another special purpose finance subsidiary, PLC
Capital Trust II, issued $115 million of FELINE PRIDESSM which are comprised of
a stock purchase contract and a beneficial ownership of 6.5% TOPrS. The sole
assets of PLC Capital Trust II are $118.6 million of Protective Life Corporation
6.5% Subordinated Debentures due 2003, Series C. Under the stock purchase
contract, on February 16, 2001, the holders will purchase shares of the
Company's Common Stock from the Company. The holders may generally settle the
contract in cash or by exercising their right to put, in effect, the 6.5% TOPrS
back to the Company. The shares of Common Stock issuable range from
approximately 3.6 million shares if the price of the Company's Common Stock is
greater than or equal to $32.52 to approximately 4.4 million shares if the stock
price is less than or equal to $26.66. The 6.5% TOPrS are guaranteed on a
subordinated basis by the Company. Dividends on the 6.5% TOPrS may be deferred
until maturity. The dividend rate on
7
<PAGE>
the 6.5% TOPrS which remain outstanding after February 16, 2001, will be reset
by a formula specified in the agreement.
The MIPS, 8.25% TOPrS, and FELINE PRIDES 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".
8
<PAGE>
NOTE D - BUSINESS SEGMENTS
The Company operates predominantly in the life and accident and health
insurance industry. The following table sets forth total operating segment
income and assets for the periods shown. Adjustments represent the inclusion of
unallocated realized investment gains (losses), the reclassification and tax
effecting of pretax minority interest in the Corporate and Other segment, and
the recognition of income tax expense. There are no asset adjustments.
<TABLE>
<CAPTION>
OPERATING SEGMENT INCOME FOR THE
THREE MONTHS ENDING MARCH 31, 1998
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
DENTAL AND
INDIVIDUAL CONSUMER FINANCIAL
ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS
<S> <C> <C> <C> <C> <C>
Premiums and policy fees $24,244 $34,025 $ 7,220 $51,603 $28,112
Net investment income 26,732 14,043 15,012 3,974 6,281
Realized investment gains (losses)
Other income 7,031 599 5,097
----------- ------- ---------- --------- --------
Total revenues 50,976 55,099 22,232 56,176 39,490
-------- ------- ------- ------- -------
Benefits and settlement expenses 29,105 27,197 15,395 35,825 15,167
Amortization of deferred policy
acquisition costs 4,541 7,172 (12) 2,970 5,649
Other operating expenses 5,856 14,363 2,391 14,079 14,348
--------- ------- ------- ------- -------
Total benefits and expenses 39,502 48,732 17,774 52,874 35,164
-------- ------- ------- ------- -------
Income before tax 11,474 6,367 4,458 3,302 4,326
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
GUARANTEED CORPORATE
INVESTMENT INVESTMENT AND TOTAL
CONTRACTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED
Premiums and policy fees $4,062 $ 92 $149,358
Net investment income $53,435 26,240 11,909 157,626
Realized investment gains (losses) (433) (87) $ 531 11
Other income 1,992 (1,201) 13,518
----------- ------- ------- ---------- --------
Total revenues 53,002 32,207 10,800 531 320,513
------- ------- ------- -------- --------
Benefits and settlement expenses 44,656 20,269 283 187,897
Amortization of deferred policy
acquisition costs 174 4,330 11 24,835
Other operating expenses 185 4,675 6,511 (4,653) 57,755
-------- ------- ------- ------- --------
Total benefits and expenses 45,015 29,274 6,805 (4,653) 270,487
------- ------- ------- ------- --------
Income before tax 7,987 2,933 3,995 50,026
Income tax expense 17,009 17,009
Minority interest 3,024 3,024
----------
Net income $ 29,993
=========
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
OPERATING SEGMENT INCOME FOR THE
THREE MONTHS ENDING MARCH 31, 1997
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
DENTAL AND
INDIVIDUAL CONSUMER FINANCIAL
ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS
<S> <C> <C> <C> <C>
Premiums and policy fees $26,579 $32,333 N/A $56,329 $11,861
Net investment income 27,531 12,913 4,100 2,971
Realized investment gains (losses)
Other income 3,681 407 196
---------- -------- -------- --------
Total revenues 54,110 48,927 60,836 15,028
------- ------- ------- -------
Benefits and settlement expenses 28,451 25,759 40,378 5,060
Amortization of deferred policy
acquisition costs 4,573 7,442 1,560 3,707
Other operating expense 6,251 9,962 15,180 3,344
------- ------- ------- -------
Total benefits and expenses 39,275 43,163 57,118 12,111
------- ------- ------- -------
Income before income tax 14,835 5,764 3,718 2,917
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
GUARANTEED CORPORATE
INVESTMENT INVESTMENT AND TOTAL
CONTRACTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED
Premiums and policy fees $ 2,424 $ 52 $129,578
Net investment income $51,609 25,856 5,350 130,330
Realized investment gains (losses) (724) 145 $ 161 (418)
Other 1,165 (687) 4,762
----------- ------- ------- ---------- ---------
Total revenues 50,885 29,590 4,715 161 264,252
-------- ------- ------ -------- --------
Benefits and settlement expenses 43,497 19,787 87 163,019
Amortization of deferred policy
acquisition costs 131 3,409 13 20,835
Other operating expenses 1,068 3,176 3,886 (1,237) 41,630
-------- ------- ------ ------- --------
Total benefits and expenses 44,696 26,372 3,986 (1,237) 225,484
------- ------- ------ ------- --------
Income before tax 6,189 3,218 729 38,768
Income tax expense 13,181 13,181
Minority interest 804 804
----------
Net income $ 24,783
========
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
OPERATING SEGMENT ASSETS
MARCH 31, 1998
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
DENTAL AND
INDIVIDUAL CONSUMER FINANCIAL
ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS
<S> <C> <C> <C> <C> <C>
Investments and other assets $1,363,992 $ 988,541 $ 919,246 $266,162 $540,879
Deferred policy acquisition costs 134,169 263,291 116,947 23,971 53,934
----------- ----------- ----------- --------- ---------
Total assets $1,498,161 $1,251,832 $1,036,193 $290,133 $594,813
========== ========== ========== ======== ========
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
Guaranteed Corporate
Investment Investment and Total
CONTRACTS PRODUCTS OTHER CONSOLIDATED
Investments and other assets $2,867,976 $2,512,375 $644,906 $10,104,077
Deferred policy acquisition costs 1,708 58,683 129 652,832
------------- ------------ ---------- -------------
Total assets $2,869,684 $2,571,058 $645,035 $10,756,909
========== ========== ======== ===========
OPERATING SEGMENT ASSETS
DECEMBER 31, 1997
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
Dental and
Individual Consumer Financial
ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS
Investments and other assets $1,401,294 $ 963,661 $ 910,030 $264,083 $544,085
Deferred policy acquisition costs 138,052 252,321 108,126 22,459 52,837
----------- ----------- ----------- --------- ---------
Total assets $1,539,346 $1,215,982 $1,018,156 $286,542 $596,922
========== ========== ========== ======== ========
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
Guaranteed Corporate
Investment Investment and Total
CONTRACTS PRODUCTS OTHER CONSOLIDATED
Investments and other assets $2,887,732 $2,316,495 $591,518 $ 9,878,898
Deferred policy acquisition costs 1,785 56,074 1,083 632,737
------------- ------------ ---------- -------------
Total assets $2,889,517 $2,372,569 $592,601 $10,511,635
========== ========== ======== ===========
11
</TABLE>
<PAGE>
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 March 31, 1998 and for the three months then ended, the
Company's life insurance subsidiaries had consolidated stockholder's equity and
net income prepared in conformity with statutory reporting practices of $590.5
million and $24.9 million, respectively.
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 March 31, 1998 and December 31, 1997,
prepared on the basis of reporting investments at amortized cost rather than at
market values, are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Total investments $ 8,001,544 $ 7,933,017
Deferred policy acquisition costs 673,337 654,175
All other assets 1,986,884 1,829,478
------------ ------------
$10,661,765 $10,416,670
=========== ===========
Deferred income taxes $ 7,238 $ 7,974
All other liabilities 9,685,922 9,467,226
------------ ------------
9,693,160 9,475,200
Guaranteed preferred beneficial
interests in Company's sub-
ordinated debentures 245,000 245,000
Stockholders' equity 723,605 696,470
------------- -------------
$10,661,765 $10,416,670
=========== ===========
</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 March 31, 1998, options and open
12
<PAGE>
futures contracts with a notional amount of $1.2 billion were in a $0.6 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 8.25% TOPrS from a fixed rate to a variable rate of interest. Amounts paid
or received related to the initiation of interest rate swap contracts and
swaptions are deferred and amortized over the life of the related debt. At March
31, 1998, related open interest rate swap contracts with a notional amount of
$365.3 million were in a $4.4 million net unrealized gain position.
In connection with a commercial mortgage loan securitization, the
Company entered into interest rate swap contracts converting a fixed rate of
interest to a floating rate of interest and converting a floating rate of
interest to a fixed rate of interest with a notional amount at March 31, 1998,
of $332.4 million. In the aggregate, there were no net unrealized gains or
losses associated with these swap contracts at March 31, 1998.
NOTE H - NET INCOME PER SHARE
Net income per share - basic is net income divided by the average
number of shares of Common Stock outstanding including shares that are issuable
under various deferred compensation plans. The average shares outstanding used
to compute net income per share - basic were 62,606,735 and 62,317,466 for the
three months ended March 31, 1998 and 1997, respectively.
Net income per share - diluted is net income divided by the average
number of shares outstanding including all dilutive potentially issuable shares
that are issuable under various stock-based compensation plans and stock
purchase contracts. The average shares outstanding used to compute net income
per share - diluted were 63,261,753 and 62,669,264 for the three months ended
March 31, 1998 and 1997, respectively.
A reconciliation of average shares outstanding for the three months
ended March 31 is summarized as follows:
<TABLE>
<CAPTION>
RECONCILIATION OF
AVERAGE SHARES OUTSTANDING
MARCH 31
1998 1997
---- ----
<S> <C> <C>
Issued and outstanding 61,754,156 61,611,732
Issuable under various deferred compensation plans 852,579 705,734
------------ ------------
Basic 62,606,735 62,317,466
Stock appreciation rights 144,145
Issuable under various other stock-based compensation plans 475,300 351,798
FELINE PRIDES stock purchase contracts 35,573
------------ -----------
Diluted 63,261,753 62,669,264
========== ==========
</TABLE>
13
<PAGE>
NOTE I - COMPREHENSIVE INCOME
The following table sets forth the Company's comprehensive income for
the three months ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
1998 1997
---- ----
<S> <C> <C>
Net income $29,993 $ 24,783
Increase (decrease) in net unrealized gains
on investments (net of income tax:
1998 - $83; 1997 - $(21,168)) 107 (39,312)
Reclassification adjustment for amounts included
in net income (net of income tax:
1998 - $(4); 1997 - $146) (7) 272
---------- ----------
Comprehensive income (loss) $30,093 $(14,257)
======= =========
</TABLE>
NOTE J - ACQUISITION
On March 11, 1998, the Company announced a definitive agreement under
which the Company will acquire United Dental Care, Inc. ("United Dental Care").
United Dental Care is a leading provider of managed dental care plans with over
1.8 million members. The purchase price per share of United Dental Care common
stock is payable in a combination of $9.31 in cash and 0.2893 shares of the
Company's common stock. The transaction is subject to approval by United Dental
Care stockholders and regulators and other closing conditions. United Dental
Care (subject to the Company's right to increase the merger consideration) or
the Company may terminate the agreement if the price of the Company's common
stock is below $27.50 per share and the Company may terminate the agreement if
the price of the Company's common stock is above $39.50 per share. United Dental
Care has approximately 8.9 million shares of its common stock outstanding.
NOTE K - 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.
NOTE L - SUBSEQUENT EVENT
On April 27, 1998, the Company's shareholders approved an increase in
the number of authorized shares of Common Stock from 80 million to 160 million.
14
<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 seven operating divisions: Acquisitions, Individual
Life, West Coast, Dental and Consumer Benefits ("Dental"), Financial
Institutions, Guaranteed Investment Contracts ("GIC"), and Investment Products.
The Company also has an additional business segment which is described herein as
Corporate and Other.
This report includes "forward-looking statements" which express
expectations of future events and/or results. All statements based on future
expectations rather than on historical facts are forward- looking statements
that involve a number of risks and uncertainties, and the Company cannot give
assurance that such statements will prove to be correct. Please refer to Exhibit
99 for more information about factors which could affect future results.
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:
<TABLE>
<CAPTION>
PREMIUMS AND POLICY FEES
THREE MONTHS
ENDED AMOUNT PERCENTAGE
MARCH 31 (IN THOUSANDS) INCREASE
<S> <C> <C> <C>
1997 $129,578 12.1%
1998 149,358 15.3
</TABLE>
Premiums and policy fees increased $19.8 million or 15.3% in the first
three months of 1998 over the first three months of 1997. Premiums and policy
fees from the Acquisitions Division decreased $2.3 million. The Individual Life
Division's premiums and policy fees increased $1.7 million. The acquisition of
West Coast Life Insurance Company ("West Coast") in the second quarter of 1997
increased premiums and policy fees $7.2 million. The Dental Division's exit from
the group major medical business resulted in an $11.7 million decrease in
premiums and policy fees. Premiums and policy fees related to the Dental
Division's other businesses increased $7.0 million in the first three months of
1998 as compared to the same period in 1997. Premiums and policy fees from the
Financial Institutions Division increased $16.3 million in the first three
months of 1998 as
15
<PAGE>
compared to the first three months of 1997. The acquisition of the Western
Diversified Group ("Western Diversified") and the coinsurance of an unrelated
closed block of credit insurance policies in late 1997 increased premiums and
policy fees $19.0 million. Decreases of $2.7 million relate to the normal
decrease in premiums on a closed block of credit insurance policies reinsured in
1996. The increase in premiums and policy fees from the Investment Products
Division was $1.6 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:
<TABLE>
<CAPTION>
THREE MONTHS NET INVESTMENT INCOME
ENDED AMOUNT PERCENTAGE
MARCH 31 (IN THOUSANDS) INCREASE
<S> <C> <C> <C>
1997 $130,330 4.9%
1998 157,626 20.9
</TABLE>
Net investment income in the first three months of 1998 was $27.3
million or 20.9% 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 acquisitions and due to receiving annuity deposits. The
acquisition of West Coast, Western Diversified, and a block of credit insurance
policies in 1997 resulted in an increase in net investment income of $18.7
million in the first three months of 1998 as compared to the same period in
1997.
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:
THREE MONTHS REALIZED INVESTMENT
ENDED GAINS (LOSSES)
MARCH 31 (IN THOUSANDS)
1997 $(418)
1998 11
Realized investment gains were less than $0.1 million for the first
three months of 1998 compared to realized investment losses of $0.4 million for
the corresponding period of 1997.
16
<PAGE>
OTHER INCOME
The following table sets forth other income for the periods shown:
THREE MONTHS
ENDED OTHER INCOME
MARCH 31 (IN THOUSANDS)
1997 $ 4,762
1998 13,518
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 three months of 1998 was $8.8 million higher
than the corresponding period of 1997. Revenues from the Company's broker-dealer
subsidiary increased $3.6 million in the first three months of 1998 as compared
to the same period in 1997. Other income from all other sources increased $5.2
million in the first three months of 1998 as compared with the first three
months of 1997.
17
<PAGE>
INCOME BEFORE INCOME TAX AND MINORITY INTEREST
The following table sets forth operating income or loss and income or
loss before income tax for the periods shown:
<TABLE>
<CAPTION>
OPERATING INCOME (LOSS) AND INCOME (LOSS) BEFORE
INCOME TAX THREE MONTHS ENDED MARCH 31
(IN THOUSANDS)
1997 1998
---- ----
<S> <C> <C>
Operating Income (Loss)1,2
Life Insurance
Acquisitions $14,835 $11,474
Individual Life 5,764 6,367
West Coast 4,458
Specialty Insurance Products
Dental and Consumer Benefits 3,718 3,302
Financial Institutions 2,917 4,326
Retirement Savings and Investment Products
Guaranteed Investment Contracts 6,913 8,420
Investment Products 3,166 2,977
Corporate and Other2 729 3,995
--------- --------
Total operating income 38,042 45,319
------- -------
Realized Investment Gains (Losses)
Guaranteed Investment Contracts (724) (433)
Investment Products 145 (87)
Unallocated Realized Investment Gains (Losses) 161 531
Related Amortization of Deferred Policy Acquisition Costs
Investment Products (93) 43
--------- ---------
Total net (511) 54
-------- ---------
Income (Loss) Before Income Tax2
Life Insurance
Acquisitions 14,835 11,474
Individual Life 5,764 6,367
West Coast 4,458
Specialty Insurance Products
Dental and Consumer Benefits 3,718 3,302
Financial Institutions 2,917 4,326
Retirement Savings and Investment Products
Guaranteed Investment Contracts 6,189 7,987
Investment Products 3,218 2,933
Corporate and Other2 729 3,995
Unallocated Realized Investment Gains (Losses) 161 531
--------- ---------
Total income before income tax $37,531 $45,373
======= =======
</TABLE>
1 Income before income tax excluding realized investment gains and losses and
related amortization of deferred acquisition costs.
2 Operating income and income before income tax for the Corporate and Other
segment have been reduced by pretax minority interest in income of
consolidated subsidiaries of $1,237 in the first three months of 1997 and
$4,653 in the first three months of 1998. Such minority interest related to
payments made on the Company's MIPSSM, 8.25%TOPrSSM, and FELINE PRIDESSM.
18
<PAGE>
Pretax earnings from the Acquisitions Division decreased $3.4 million
in the first three months of 1998 as compared to the same period of 1997.
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. In addition, the
Division's mortality experience was approximately $2.6 million worse than
expected in the first three months of 1998 as compared to being approximately
$2.0 million better than expected in the 1997 first quarter.
The Individual Life Division's pretax earnings of $6.4 million in the
first three months of 1998 were $0.6 million above the same period of 1997. The
Division's earnings increased even though the Division's mortality experience
was approximately $1.8 million worse than expected. Individual life sales
measured by new premiums were $15.8 million, 68% above the first quarter of
1997.
Headquartered in San Francisco, West Coast was acquired by the Company
on June 3, 1997. West Coast had pretax earnings of $4.5 million for the first
three months of 1998. Sales measured by new premiums were $11.6 million, 91%
above the first quarter of 1997.
Dental Division pretax earnings were $0.4 million lower in the first
three months of 1998 as compared to the first three months of 1997 primarily due
to higher dental claims in the first quarter of 1998 as compared to the first
quarter of 1997.
Pretax earnings of the Financial Institutions Division were $1.4
million higher in the first three months of 1998 as compared to the same period
in 1997. At the end of the 1997 third quarter, the Division acquired the Western
Diversified Group and coinsured an unrelated block of policies. These
acquisitions increased earnings $1.3 million.
The GIC Division had pretax operating earnings of $8.4 million in the
first three months of 1998 and $6.9 million in the corresponding period of 1997.
The increase largely reflects an improvement in operating spreads and an
increase in the amount of GIC and related annuity deposits. Realized investment
losses associated with this Division in the first three months of 1998 were $0.4
million as compared to $0.7 million in the same period last year. As a result,
total pretax earnings were $8.0 million in the first three months of 1998
compared to $6.2 million for the same period last year.
Investment Products Division pretax operating earnings of $3.0 million
were $0.2 million lower in the first three months of 1998 compared to the same
period of 1997. Realized investment gains associated with the Division, net of
related amortization of deferred policy acquisition costs, were approximately
$0.1 million in the first three months of both 1998 and 1997. Total pretax
earnings were of $2.9 million in the first three months of 1998 as compared to
$3.2 million in the same period of 1997.
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 $3.3 million in the first three months of 1998 as
compared to the first three months of 1997.
19
<PAGE>
INCOME TAXES
The following table sets forth the effective income tax rates for the
periods shown:
THREE MONTHS
ENDED ESTIMATED EFFECTIVE
MARCH 31 INCOME TAX RATES
1997 34%
1998 34
The effective income tax rate for the full year of 1997 was 34%.
Management's estimate of the effective income tax rate for 1998 is between 34%
and 35%.
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:
<TABLE>
<CAPTION>
THREE MONTHS NET INCOME
ENDED TOTAL PER SHARE- PERCENTAGE PER SHARE- PERCENTAGE
MARCH 31 (IN THOUSANDS) BASIC INCREASE DILUTED INCREASE
--------------- ------------- --------------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
1997 $24,783 $.40 11.1% $.40 11.1%
1998 29,993 .48 20.0 .47 17.5
</TABLE>
Compared to the same period in 1997, net income per share-basic in the
first three months of 1998 increased 20.0%, reflecting improved operating
earnings in the Individual Life, West Coast, Financial Institutions, and
Guaranteed Investment Contracts Divisions and the Corporate and Other segment,
and higher realized investment gains (net of related amortization of deferred
policy acquisition costs), which were partially offset by lower operating
earnings in the Acquisitions, Dental, and Investment Products Divisions.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 132, "Employers' Disclosures About Pension
and Other Postretirement Benefits." This statement revises the footnote
disclosures about pension and other postretirement benefit plans and its
adoption will have no effect on the Company's financial condition.
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.
20
<PAGE>
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 March 31, 1998, the fixed maturity investments (bonds, bank loan
participations, and redeemable preferred stocks) had a market value of $6,297.9
million, which is 2.0% above amortized cost (less allowances for uncollectible
amounts on investments) of $6,171.4 million. The Company had $1,367.9 million in
mortgage loans at March 31, 1998. While the Company's mortgage loans do not have
quoted market values, at March 31, 1998, the Company estimates the market value
of its mortgage loans to be $1,459.5 million (using discounted cash flows from
the next call date) which is 6.7% 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 $393.0 million of the Company's mortgage loans have this
participation feature.
At March 31, 1998, delinquent mortgage loans and foreclosed real estate
were 0.2% of assets. Bonds rated less than investment grade were 2.0% 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 investments was $22.0 million at March
31, 1998.
Policy loans at March 31, 1998, were $193.0 million, a decrease of $1.1
million from December 31, 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 general policy to generally
maintain asset and liability durations within one half year of one another,
although from time to time a broader interval may be allowed.
21
<PAGE>
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 March 31, 1998, options and open futures contracts with a notional
amount of $1.2 billion were in a $0.6 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. Amounts paid or
received related to the initiation of interest rate swap contracts and swaptions
are deferred and amortized over the life of the related debt. At March 31, 1998,
related open interest rate swap contracts with a notional amount of $365.3
million were in a $4.4 million net unrealized gain position.
In connection with a commercial mortgage loan securitization, the
Company entered into interest rate swap contracts converting a fixed rate of
interest to a floating rate of interest and converting a floating rate of
interest to a fixed rate of interest with a notional amount at March 31, 1998,
of $332.4 million. In the aggregate, there were no net unrealized gains or
losses associated with these swap contracts at March 31, 1998.
Withdrawals related to GICs were approximately $700 million during
1997. Withdrawals related to GICs are estimated to be approximately $900 million
in 1998. The Company's asset/liability management programs and procedures take
into account GIC withdrawals. Accordingly, the Company does not expect GIC
withdrawals 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 March 31, 1998, to fund mortgage loans
and to purchase fixed maturity and other long-term investments in the amount of
$601.0 million. The Company's subsidiaries held $168.0 million in cash and
short-term investments at March 31, 1998. Protective Life Corporation had an
additional $1.3 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.
At March 31, 1998, Protective Life Corporation had no borrowings
outstanding under its $70 million revolving line of credit.
22
<PAGE>
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, 1997, approximately $154 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 $727 million, would be subject to
federal income tax at rates then effective.
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 common stock 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.
A number of civil jury verdicts have been returned against 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 addition, in
some class action and other lawsuits involving insurers' sales practices,
insurers have made material settlement payments. 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 insurers, in
the ordinary course of business, are involved in such litigation. Although the
outcome of any such litigation cannot be predicted with certainty, the Company
believes that at the present time there are no pending or threatened lawsuits
that are
23
<PAGE>
reasonably likely to have a material adverse effect on the financial position,
results of operations, or liquidity of the Company.
President Clinton's recent budget proposal contains provisions that
would change the way insurance companies and certain of their products are
taxed, which, if enacted by Congress would negatively affect the Company.
The Company is not aware of any material pending or threatened
regulatory action with respect to the Company or any of its subsidiaries.
24
<PAGE>
PART II
Item 2(c). CHANGES IN SECURITIES
References in this item to shares and price per share of the Company's
common stock have not been adjusted for the Company's two-for-one stock split on
April 1, 1998.
Effective January 1, 1998, the Company acquired all of the issued and
outstanding capital stock of the following four corporations: Autoquest
Insurance Services of Utah, Inc. (a Utah corporation), Income Development
Specialists, Inc. (d/b/a/ Autoquest Insurance Services of California) (a
California corporation), Autoquest Insurance Services of Nevada, Inc. (a Nevada
corporation), and Checker Flag Protection, Inc. (d/b/a Autoquest Administrative
Services, Inc.) (a Nevada corporation) (all four companies being hereinafter
collectively referred to as the "Autoquest Companies"). Pursuant to the terms of
the Stock Purchase Agreements entered into in connection with this acquisition,
the Company issued to the stockholders of the Autoquest Companies an aggregate
of 54,896 shares of Protective Life Corporation Common Stock, par value $0.50
per share ("Common Stock"), which were issued from treasury shares on January 1,
1998.
The offer and sale of 54,896 shares of the Company's Common Stock in
this stock-for-stock exchange transaction was not registered under the
Securities Act of 1933, as amended, (the "Securities Act") in reliance on
exemption under Rule 506 of Regulation D promulgated by the Securities and
Exchange Commission under Section 4(2) of the Securities Act. The 54,896 shares
of Common Stock were issued to ten (10) investors. Each of these investors was a
shareholder of the Autoquest Companies acquired by the Company, was provided
with the information required by Rule 502 of Regulation D, and represented to
the Company prior to the sale that he or she was capable of evaluating the
merits and risks of the proposed investment. No commissions or other forms of
remuneration were paid, directly or indirectly, to any person for soliciting any
investor in this transaction. A Form D notice was filed with the U. S.
Securities and Exchange Commission reporting the issuance of the 54,896 shares
of Common Stock in connection with this transaction.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
References in this item to shares of the Company's common stock have
not been adjusted for the Company's two-for-one stock split on April 1, 1998.
The Annual Meeting of Stockholders was held on April 27, 1998. Shares
entitled to vote at the Annual Meeting totaled 30,879,132 of which 26,523,112
shares were represented. The number of shares entitled to vote were determined
as of a date prior to the April 1, 1998, stock split
At the Annual Meeting the following directors were elected. The number
of shares cast for and authorization withheld for each nominee is shown below.
25
<PAGE>
<TABLE>
<CAPTION>
AUTHORIZATION
FOR WITHHELD
<S> <C> <C>
William J. Rushton III 25,830,955 692,157
William J. Cabaniss, Jr. 25,820,605 702,507
Drayton Nabers, Jr. 25,831,155 691,957
John J. McMahon, Jr. 25,831,155 691,957
A. W. Dahlberg 25,831,155 691,957
Ronald L. Kuehn, Jr. 25,831,155 691,957
Herbert A. Sklenar 25,831,155 691,957
James S. M. French 25,830,075 693,037
Robert A. Yellowlees 25,831,155 691,957
John D. Johns 25,831,155 691,957
Elaine L. Chao 25,831,279 691,833
Donald M. James 25,831,351 691,761
</TABLE>
Additionally, at the Annual Meeting stockholders approved three
proposals. The first proposal was to approve an amendment to the Company's 1985
Restated Certificate of Incorporation to increase the authorized Common Stock of
the Company from 80 million to 160 million shares, par value $0.50 per share.
Shares voting for the first proposal were 24,135,073, shares voting against were
2,348,300, and shares abstaining were 39,739. The second proposal was to approve
an amendment to the Company's 1997 Performance Share Plan. Shares voting for the
second proposal were 25,829,541, shares voting against were 514,032, and shares
abstaining were 179,539. The third proposal was to ratify the appointment of
Coopers & Lybrand L.L.P. as the independent public accountants for the Company
and its subsidiaries for the current year. Shares voting for the third proposal
were 26,460,500, shares voting against were 16,174, and shares abstaining were
46,438.
With regard to the transaction of such other business as might properly
come before the Annual Meeting or any adjournment thereof 4,277,921 shares were
cast as authorization withheld. No other matters came before the Annual Meeting
or any adjournment thereof.
Item 5. OTHER INFORMATION
PREPARATION FOR YEAR 2000. Older computer hardware and software often
denote the year using two digits rather than four; for example, the year 1997
often is denoted by such hardware and software as "97." It is probable that such
hardware and software will malfunction when calculations involving the year 2000
are attempted because the hardware and/or software will interpret "00" as
representing the year 1900 rather that the year 2000. This "Year 2000" issue
potentially affects all individuals and companies (including the Company, its
customers, business partners, suppliers, banks, custodians and administrators)
who rely on computers or devices containing computer chips.
The Company has developed and is implementing a Year 2000 transition
plan intended to identify and modify or replace primary hardware and/or software
systems on which it relies that have a Year 2000 issue. The Company is also
developing and implementing a plan to identify and modify or replace secondary
hardware and/or software systems on which it relies that have a Year 2000 issue.
Substantial resources are being devoted to this effort; however, the costs to
develop and implement these plans are not expected to be material. The Company
is also confirming that its
26
<PAGE>
service providers are implementing plans to identify and modify or replace their
systems that have a Year 2000 issue.
The Company currently anticipates that its systems will be able to
process transactions dated beyond 1999 on or before December 31, 1999. There can
be no assurances, however, that the Company's efforts will be successful, that
interactions with other service providers with Year 2000 issues will not impair
the Company's operations, or that the Year 2000 issue will not otherwise
adversely affect the Company.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibit 10(a) - The Company's 1997 Long-Term Incentive Plan
(formerly the "1997 Performance Share Plan")
Exhibit 15 - Letter re: unaudited interim financial statements
Exhibit 27 - Financial Data Schedule
Exhibit 99 - Safe harbor for Forward Looking Statements
(b). A current report on Form 8-K was filed February 11, 1998,
reporting under Item 5 and Item 7 the Company's 1997 fourth
quarter earnings press release.
A current report on Form 8-K was filed March 11, 1998,
reporting under Item 5 and Item 7 the Company's press release
describing its definitive agreement to acquire United Dental
Care, Inc.
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: May 15, 1998 /S/ JERRY W. DEFOOR
----------------------
Jerry W. DeFoor
Vice President and Controller,
and Chief Accounting Officer
(Duly authorized officer)
27
<PAGE>
Exhibit 10(a)
PROTECTIVE LIFE CORPORATION
1997 LONG-TERM INCENTIVE PLAN
1. PURPOSE.
The purpose of the Protective Life Corporation 1997 Long-Term Incentive
Plan (formerly known as the 1997 Performance Share Plan) is to further the
long-term growth in profitability of Protective Life Corporation by offering
long-term incentives in addition to current compensation to those key executives
who will be largely responsible for such growth.
2. DEFINITIONS.
"AWARD" shall mean any grant or award under the Plan.
"AWARD PERIOD" means the period of calendar years fixed by the Committee
with respect to all Performance Share Awards with the same Date of Grant (but no
more than five years) commencing with each Date of Grant, except that the Award
Period for a recently hired Employee may be for such lesser period as determined
by the Committee.
"BOARD" shall mean the Board of Directors of the Company.
"CAUSE" shall mean (I) the willful failure by the Participant to perform
substantially the Participant's duties as an employee of the Company (other than
due to physical or mental illness) after reasonable notice to the Participant of
such failure, (II) the Participant's engaging in serious misconduct that is
injurious to the Company or any Subsidiary (III) the Participant's having been
convicted of, or entered a plea of NOLO CONTENDERE to, a crime that constitutes
a felony, or (IV) the breach by the Participant of any written covenant or
agreement not to compete with the Company or any Subsidiary.
"CHANGE IN CONTROL" shall mean the occurrence of any of the following
events: (I) a transaction or acquisition as identified in the Company's Rights
Agreement, as in effect from time to time, (ii) the consummation of (A) any
consolidation, merger or similar transaction or purchase of securities of the
Company 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,
(iii) 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 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, or (iv)
any other event or transaction that is declared by resolution of the Board to
constitute a Change in Control for purposes of the Plan.
"CHANGE IN CONTROL PRICE" shall mean the greater of (I) the price per share
of Common Stock immediately preceding any transaction resulting in a Change in
Control or (ii) the highest price per
<PAGE>
share of Common Stock offered in conjunction with any transaction resulting in a
Change in Control (as determined in good faith by the Committee if any part of
the offered price is payable other than in cash), EXCEPT THAT, in the case of
Incentive Stock Options and Stock Appreciation Rights relating to Incentive
Stock Options such price shall be the Fair Market Value on the date on which the
cash out described in Section 11 occurs.
"CODE" shall mean the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"COMMITTEE" shall mean the Compensation and Management Succession Committee
of the Board (or such other committee of the Board that the Board shall
designate from time to time) or any subcommittee thereof comprised of two or
more directors each of whom is an "outside director" within the meaning of
Section 162(m) of the Code and a "non-employee director" within the meaning of
Rule 16b-3, as promulgated under Section 16 of the Exchange Act.
"COMMON STOCK" shall mean the common stock, par value $0.50 per share, of
the Company.
"COMPANY" shall mean Protective Life Corporation, a Delaware corporation.
"DATE OF GRANT" with respect to a Performance Share Award shall mean as of
January 1 of any year in which such an Award is made.
"DEFERRED STOCK" shall mean a contractual right to receive a share of
Common Stock at the time and subject to the conditions set forth in Section 10
hereof.
"DISABILITY" shall mean long-term disability as defined under the terms of
the Company's qualified pension plan.
"ELIGIBLE EMPLOYEE" shall mean any person (including any officer) employed
by the Company or any Subsidiary on a full-time salaried basis.
"EMPLOYMENT" shall mean, for purposes of Sections [6(C) through (f), 7(d),
8(c), 9(b) and 10(c)] continuous and regular salaried employment with the
Company or a subsidiary, which shall include (unless the Committee shall
otherwise determine) any period of vacation, any approved leave of absence or
any salary continuation or severance pay period and, at the discretion of the
Committee, may include service with any former subsidiary of the Company.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended.
"EXECUTIVE OFFICER" shall mean those persons who are officers of the
Company within the meaning of Rule 16a-1(f) of the Exchange Act.
"FAIR MARKET VALUE" of the Common Stock shall mean (I) with respect to
Performance Shares, the average of the daily closing prices for a share of the
Common Stock for the twenty trading days prior to the date of payment of
Performance Shares for an Award Period or an Interim Period, as the case may be,
on the Composite Tape for New York Stock Exchange - Listed Stocks, or, if the
Common Stock is not listed on such Exchange, on the principal United States
securities exchange registered under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), on which the Common Stock is listed, or, if the
Common Stock is not listed on any such Exchange, the average
<PAGE>
of the daily closing bid quotations with respect to a share of the Common Stock
for such twenty trading days on the National Association of Securities Dealers,
Inc., Automated Quotations System or any system then in use or (ii) with respect
to other Awards, on any date, the closing price of a share of Common Stock, as
reported for such day on a national exchange, or the mean between the closing
bid and asked prices for a share of Common Stock on such date, as reported on a
nationally recognized system of price quotation, PROVIDED THAT, in the event
that there are no Common Stock transactions reported on such exchange or system
on such date, Fair Market Value shall mean the closing price on the immediately
preceding date on which Common Stock transactions were so reported.
"INCENTIVE STOCK OPTION" shall mean an Option which is intended to meet the
requirements of Section 422 of the Code.
"INTERIM PERIOD" shall mean a period of calendar years chosen by the
Committee commencing with any Date of Grant, which period is less than the Award
Period commencing on the Date of Grant.
"NONSTATUTORY STOCK OPTION" shall mean an Option which is not intended to
be an Incentive Stock Option.
"NORMAL RETIREMENT" shall mean retirement at or after the earliest age at
which the Participant may retire and receive a retirement benefit without an
actuarial reduction for early commencement of benefits under any defined benefit
pension plan maintained by the Company or any of its Subsidiaries in which such
Participant participates.
"OPTION" shall mean the right to purchase the number of shares of Common
Stock specified by the Committee, at a price and for the term fixed by the
Committee in accordance with the Plan and subject to any other limitations and
restrictions as this Plan and the Committee shall impose.
"PARTICIPANT" shall mean an Eligible Employee who is selected by the
Committee to receive an Award under the Plan.
"PERFORMANCE SHARE" shall mean the equivalent of one share of Common Stock
granted under Section 6 which becomes vested and nonforfeitable upon the
attainment, in whole or in part, of performance objectives determined by the
Committee.
"PLAN" shall mean the Protective Life Corporation 1997 Long-Term Incentive
Plan as set forth herein and as may be amended from time to time.
"RESTRICTED PERIOD" shall mean the period during which a grant of
Restricted Stock or Restricted Units is subject to forfeiture.
"RESTRICTED STOCK" shall mean any Award of Common Stock granted under
Section 9 which becomes vested and nonforfeitable, in whole or in part, upon the
completion of such period of service as shall be determined by the Committee.
"RESTRICTED UNIT" shall mean any Award of a contractual right granted under
Section 9 to receive Common Stock (or, at the discretion of the Committee, cash
based on the Fair Market Value of the
<PAGE>
Common Stock) which becomes vested and nonforfeitable, in whole or in part, upon
the completion of such period of service as shall be determined by the
Committee.
"SECTION 162(M)" shall mean Section 162(m) of the Code and any regulations
promulgated thereunder.
"STOCK APPRECIATION RIGHT" shall mean a contractual right granted under
Section 8 to receive cash, Common Stock or a combination thereof.
"SUBSIDIARY" shall mean any corporation of which the Company possesses
directly or indirectly fifty percent (50%) or more of the total combined voting
power of all classes of stock of such corporation and any other business
organization, regardless of form, in which the Company possesses directly or
indirectly fifty percent (50%) or more of the total combined equity interests in
such organization.
3. ADMINISTRATION OF THE PLAN.
The Plan shall be administered by the Committee which, subject to the
provisions of the Plan, shall have the authority to select the Employees who are
to participate in the Plan, to determine the Award to be made to each Employee
selected to participate in the Plan, and to determine the conditions subject to
which Awards will become payable under the Plan.
The Committee shall have full power to administer and interpret the Plan
and to adopt such rules and regulations consistent with the terms of the Plan as
the Committee deems necessary or advisable in order to carry out the provisions
of the Plan. Except as otherwise provided in the Plan, the Committee's
interpretation and construction of the Plan and its determination of any
conditions applicable to Awards or the granting of Awards to specific
Participants shall be conclusive and binding on all Participants.
In connection with its determination as to the payment of Performance
Shares, the Committee has full discretion to adjust performance criteria to
recognize special or nonrecurring situations or circumstances for the Company or
any other corporation for any year.
The Committee may employ such legal counsel, consultants and agents
(including counsel or agents who are employees of the Company or a Subsidiary)
as it may deem desirable for the administration of the Plan and may rely upon
any opinion received from any such counsel or consultant or agent and any
computation received from such consultant or agent. All expenses incurred in the
administration of the Plan, including, without limitation, for the engagement of
any counsel, consultant or agent, shall be paid by the Company. No member or
former member of the Board or the Committee shall be liable for any act,
omission, interpretation, construction or determination made in connection with
the Plan other than as a result of such individual's willful misconduct.
The Plan shall be unfunded. Benefits under the Plan shall be paid from the
general assets of the Company.
<PAGE>
4. MAXIMUM AMOUNT OF SHARES AVAILABLE FOR AWARDS.
(a) MAXIMUM NUMBER OF SHARES. The maximum number of shares of Stock in
respect of which Awards may be made under the Plan shall be a total of 2,000,000
shares of Common Stock. Without limiting the generality of the foregoing,
whenever shares are received by the Company in connection with the exercise of
or payment for any Award granted under the Plan, only the net number of shares
actually issued shall be counted against the foregoing limit. Notwithstanding
the foregoing, but subject to the provisions of Section 4(c), in no event shall
(I) the number of shares of Common Stock issued under the Plan with respect to
Restricted Stock, Restricted Units or Deferred Stock exceed 400,000 shares of
Common Stock and (ii) any Participant receive Awards in any 12-month period for
more than 200,000 shares of Common Stock.
(b) SHARES AVAILABLE FOR ISSUANCE. Shares of Common Stock may be made
available from the authorized but unissued shares of the Company or from shares
held in the Company's treasury and not reserved for some other purpose. In the
event that any Award is payable solely in cash, no shares shall be deducted from
the number of shares available for issuance under Section 4(a) by reason of such
Award except in the case of the exercise of a Stock Appreciation Right granted
in tandem with an Option. In addition, if any Award in respect of shares is
canceled or forfeited for any reason without delivery of shares of Common Stock,
the shares subject to such Award shall thereafter again be available for award
pursuant to the Plan.
(C) ADJUSTMENT FOR CORPORATE TRANSACTIONS. In the event that the Committee
shall determine that any stock dividend, extraordinary cash dividend,
recapitalization, reorganization, merger, consolidation, split-up, spin-off,
combination, exchange of shares, warrants or rights offering to purchase Common
Stock at a price substantially below fair market value, or other similar event
affects the Common Stock such that an adjustment is required to preserve, or to
prevent enlargement of, the benefits or potential benefits made available under
this Plan, then the Committee may, in such manner as the Committee may deem
equitable, adjust any or all of (I) the number and kind of shares which
thereafter may be awarded or optioned and sold or made the subject of Stock
Appreciation Rights under the Plan, (II) the number and kinds of shares subject
to outstanding Options and other Awards and (III) the grant, exercise or
conversion price with respect to any of the foregoing. Additionally, the
Committee may make provisions for a cash payment to a Participant or a person
who has an outstanding Option or other Award. However, the number of shares
subject to any Option or other Award shall always be a whole number.
5. PARTICIPATION.
Participants in the Plan shall be selected by the Committee from those
Eligible Employees who, in the estimation of the Committee, have a substantial
opportunity to influence the long-term profitability of the Company.
6. PERFORMANCE SHARES.
(a) PERFORMANCE SHARE AWARDS.
(1) After appropriate approval of the Plan, and thereafter from time to
time, the Committee shall select Employees to receive Performance Share Awards
in any year as of the Date of Grant. Any Employee may be granted more than one
Performance Share Award under the Plan, but no Employee may earn, in the
aggregate, more than 50% of the Performance Shares which are the
<PAGE>
subject of this Plan. Awards of Performance Shares hereunder shall not be made
unless any such Award is in compliance with all applicable law.
(2) No Participant shall be entitled to receive any dividends or
dividend equivalents on Performance Shares; with respect to any Performance
Shares, no Participant shall have any voting or any other rights of a Company
stockholder; and no Participant shall have any interest in or right to receive
any shares of Common Stock prior to the time when the Committee determines the
form of payment of Performance Shares pursuant to this Section 6.
(3) Payment of the Performance Share Award to any Participant shall be
made in accordance with this Section 6 and shall be subject to such conditions
for payment as the Committee may prescribe. The Committee may prescribe
different conditions for different Participants. Such conditions may be
expressed in terms of income per share, return on equity, economic value added,
total return, sales or revenues, or on other reasonable bases. Unless the
Committee otherwise determines at the time of grant of Performance Shares to an
Executive Officer, the performance objectives with respect to such Award shall
be related to at least one of the following criteria, which may be determined
solely by reference to the performance of the Company or a division or
subsidiary or based on comparative performance relative to other companies: (I)
income per share, (ii) return on equity, (iii) economic value added, (iv) total
return, (v) sales or revenues, or (vi) other reasonable bases; PROVIDED THAT to
the extent the Committee determines that it is necessary to qualify compensation
under Section 162(m), the performance criteria shall be based on one or more of
the criteria listed in (I) through (v) above. The Committee may prescribe
conditions such that payment of an Award may be made with respect to a number of
shares of Common Stock that is greater than the number of Performance Shares
awarded. Except to the extent otherwise expressly provided herein, the Committee
may, at any time and from time to time, change the performance objectives
applicable with respect to any Performance Shares to reflect such factors,
including, without limitation, changes in a Participant's duties or
responsibilities or changes in business objectives (e.g., from corporate to
subsidiary or division performance or vice versa), as the Committee shall deem
necessary or appropriate. In making any such adjustment, the Committee shall
adjust the number of Performance Shares or take other appropriate actions to
prevent any enlargement or diminution of the Participant's rights related to
service rendered and performance attained prior to the effective date of such
adjustment.
(4) Each Performance Share Award shall be made in writing and shall set
forth the terms and conditions set by the Committee for payment of such Award
including, without limitation, the length of the Award Period and whether there
will be an Interim Period with respect to the Award and if so, the length of the
Interim Period.
(b) PAYMENT OF PERFORMANCE SHARE AWARDS. Each Participant granted a
Performance Share Award shall be entitled to payment of the Award as of the
close of the Award Period applicable to such Award, but only if and after the
Committee has determined that the conditions for payment of the Award set by the
Committee have been satisfied. At the time of grant of each Performance Share
Award, the Committee shall decide whether there will be an Interim Period. If
the Committee determines that there shall be an Interim Period for the Award to
any Participant, each such Participant granted a Performance Share Award with an
Interim Period shall be entitled to partial payment on account thereof as of the
close of the Interim Period, but only if and after the Committee has determined
that the conditions for partial payment of the Award set by the Committee have
been satisfied. Performance Shares paid to a Participant for an Interim Period
may be retained by the Participant and shall not be repaid to the Company,
notwithstanding that based on the conditions set
<PAGE>
for payment at the end of the Award Period such Participant would not have been
entitled to payment of some or any of his Award. Any Performance Shares paid to
a Participant for the Interim Period during an Award Period shall be deducted
from the Performance Shares to which such Participant is entitled at the end of
the Award Period.
Unless otherwise directed by the Committee, payment of Performance Share
Awards shall be made, as promptly as possible, by the Company after the
determination by the Committee that payment has been earned. Unless otherwise
directed by the Committee, all payments of Performance Share Awards to
Participants shall be made partly in shares of Common Stock and partly in cash,
with the cash portion being approximately equal to the amount of federal, state,
and local taxes which the Participant's employer is required to withhold on
account of said payment. The Committee, in its discretion, may provide for
payment of cash and distribution of shares of Common Stock in such other
proportions as the Committee deems appropriate, except and provided that the
Committee must pay in cash an amount equal to the federal, state, and local
taxes which the Participant's employer is required to withhold on account of
said payment. There shall be deducted from the cash portion of all Performance
Share Awards all taxes to be withheld with respect to such Awards.
For payment of each Performance Share Award, the number of shares of Common
Stock to be distributed to Participants shall equal the Fair Market Value of the
total Performance Shares determined by the Committee to have been earned by the
Participant less the portion of the Award that was paid in cash divided by the
Fair Market Value of a Performance Share.
(C) DEATH OR DISABILITY. If, prior to the close of an Award Period, a
Participant's Employment terminates by reason of his or her death or Disability,
payment of his or her outstanding Performance Share Award or Awards shall be
made as promptly as possible after death or the date of the determination of
Disability, and the number of Performance Shares to be paid shall be computed as
follows: First, determine (based on the conditions set by the Committee for
payment of Performance Share Awards for the subject Award Period) the number of
Performance Shares that would have been paid if each subject Award Period had
ended on the December 31st immediately preceding the date of death or the date
of determination of Disability. Then, multiply each above-determined number by a
fraction, the numerator of which is the number of months during the subject
Award Period that the Participant was an active Employee, and the denominator of
which is the number of months in the Award Period. This product shall be reduced
by any Performance Shares for which payment has been made with respect to any
Interim Period during each Award Period. In this instance, the Fair Market Value
of the Common Stock shall be based on the twenty days immediately preceding the
date of death or the date of the determination of Disability. Except as provided
in Section 6(g), payments for Awards awarded in the year employment terminates
shall be paid at the same percentage as the Award awarded in the year
immediately preceding the year of death or Disability.
(d) RETIREMENT PRIOR TO CLOSE OF AWARD PERIOD. Unless otherwise determined
by the Committee, if, prior to the close of an Award Period, a Participant's
Employment terminates by reason of his retirement on or after his or her Normal
Retirement date or prior to his or her Normal Retirement date if such retirement
was at the request of his employer, payment of the Participant's outstanding
Performance Share Award or Awards will be made as promptly as possible after
such retirement and such payment shall be computed in the same manner as in
Section 6(c), using the effective date of retirement in place of the date of
death or determination of Disability.
(e) TERMINATION UNDER CERTAIN CIRCUMSTANCES. If, prior to the close of
an Award Period, a Participant's Employment terminates by reason of (I) his or
her retirement prior to his or her Normal
<PAGE>
Retirement date and such retirement was at the request of the Participant and
approved by his of her employer, (ii) the divestiture by the Company of one or
more of its business segments or a significant portion of the assets of a
business segment, or (iii) a significant reduction by the Company in its
salaried work force, the determination of whether such Participant shall receive
payment of his or her outstanding Performance Share Award or Awards shall be
within the exclusive discretion of the Committee. Payment, if any, of his or her
Performance Share Award or Awards to such Participant shall be made as promptly
as possible after one of the events described in subsections (I), (ii), and
(iii) of this Section 9 occurs and the amount of such payment shall be computed
in the same manner as in Section 6(c), using the effective date that such event
occurs in place of the date or determination of Disability.
(f) VOLUNTARY TERMINATION OR DISCHARGE. If, prior to the close of an Award
Period, a Participant's Employment terminates and there is no payment due under
the terms of Sections 6(c), (d) or (h) or 11, all of such Participant's
outstanding Performance Shares shall forthwith and automatically be cancelled
and all rights of the former holder of such cancelled Performance Shares in
respect to such cancelled Performance Shares shall forthwith terminate.
(g) INTERPRETATION. Notwithstanding anything else contained in this Plan to
the contrary, if any Award of Performance Shares is intended, at the time of
grant, to be other performance-based compensation within the meaning of Section
162(m)(4)(C) of the Code, to the extent required to so qualify any Award
hereunder, (I) the Committee shall not be entitled to exercise any discretion
otherwise authorized under this Plan with respect to such award if the ability
to exercise such discretion (as opposed to the exercise of such discretion)
would cause such award to fail to qualify as other performance-based
compensation and (ii) in the event that an Executive Officer's Employment
terminates by reason of his or her retirement on or after his or her Normal
Retirement date or prior to his or her Normal Retirement date if such retirement
was at the request of his employer, the payment, if any, with respect to any
Performance Shares awarded since the December 31st immediately preceding the
date of termination shall be made as promptly as possible after the end of the
year in which such termination occurs and the number of Performance Shares to be
paid shall be equal to that percentage, if any, of such Award that would have
been earned if, based on the conditions set by the Committee for payment of
Awards for the subject Award Period, the subject Award Period had ended as of
December 31 of the year in which the termination occurred, times a fraction, the
numerator of which is the number of months during the subject Award Period that
the Participant was an active Employee, and the denominator of which is the
number of months in the Award Period.
(h) PAYMENT UPON PLAN TERMINATION. Payment of all Performance Share Awards
outstanding at the date of Plan Termination shall be made as promptly as
possible after such date and payment of each such Award shall be computed in the
same manner as in Section 6(C) using the effective date of Plan Termination in
place of the date of death or the date of the determination of Disability,
except that the Common Stock will be priced at Fair Market Value based on the
twenty trading days immediately preceding the date of Plan Termination.
7. STOCK OPTIONS.
(a) GRANT. Subject to the provisions of the Plan, the Committee shall have
the authority to grant Options to an Eligible Employee and to determine (I) the
number of shares to be covered by each Option, (II) the exercise price therefor
and (III) the conditions and limitations applicable to the exercise of the
Option. The Committee shall have the authority to grant Incentive Stock Options
or
<PAGE>
Nonstatutory Stock Options; PROVIDED THAT Incentive Stock Options may not be
granted to any Participant who is not an employee of the Company or one of its
Subsidiaries at the time of grant. In the case of Incentive Stock Options, the
terms and conditions of such grants shall be subject to and comply with Section
422 of the Code and the regulations thereunder.
(b) OPTION PRICE. The Committee shall establish the exercise price at the
time each Option is granted, which price shall not be less than 100% of the Fair
Market Value of the Common Stock at the date of grant, except that, for purposes
of satisfying the foregoing requirement with respect to a Nonstatutory Stock
Option, the Committee may elect to credit against the exercise price payable by
a Participant the value of any compensation otherwise payable to the Participant
under the terms of the Company's compensation practices and programs which is
surrendered, foregone or exchanged pursuant to such rules or procedures as the
Committee shall establish from time to time.
(C) EXERCISE. Each Option shall be exercised at such times and subject to
such terms and conditions as the Committee may specify in the applicable Award
or thereafter; provided, however, that if the Committee does not establish a
different exercise schedule at or after the date of grant of an Option, such
Option shall become exercisable in three (3) equal installments on each of the
first three anniversaries of the date the Option is granted. The Committee may
impose such conditions with respect to the exercise of Options as it shall deem
appropriate, including without limitation, any conditions relating to the
application of federal or state securities laws. No shares shall be delivered
pursuant to any exercise of an Option unless arrangements satisfactory to the
Committee have been made to assure full payment of the option price therefor.
Without limiting the generality of the foregoing, payment of the option price
may be made in cash or its equivalent or, if and to the extent permitted by the
Committee, by exchanging shares of Common Stock owned by the optionee (which are
not the subject of any pledge or other security interest), or by a combination
of the foregoing, provided that the combined value of all cash and cash
equivalents and the Fair Market Value of any such Common Stock so tendered to
the Company, valued as of the date of such tender, is at least equal to such
option price. The Committee may permit a Participant to elect to pay the
exercise price upon the exercise of an Option by authorizing a third party to
sell shares of Common Stock (or a sufficient portion of the shares) acquired
upon the exercise of the Option and remit to the Company a sufficient portion of
the sale proceeds to pay the entire exercise price and any tax withholding
resulting from such exercise.
(d) TERMINATION OF EMPLOYMENT. Unless the Committee shall otherwise
determine at or after grant, an Option shall be exercisable following the
termination of a Participant's Employment only to the extent provided in this
Section 7(d). If a Participant's Employment terminates due to the Participant's
(I) death, (II) Disability, (III) early retirement with the consent of the
Committee or (IV) Normal Retirement, the Participant (or, in the event of the
Participant's death or Disability during Employment or during the period during
which an Option is exercisable under this sentence, the Participant's
beneficiary or legal representative) may exercise any Option held by the
Participant at the time of such termination, regardless of whether then
exercisable, for a period of three years in the case of Normal Retirement or
early retirement with consent and one year in the case of death or Disability
(or such greater or lesser period as the Committee shall determine at or after
grant), but in no event after the date the Option otherwise expires. If a
Participant's Employment is terminated for Cause (or, if after the Participant's
termination of Employment, the Committee determines that the Participant's
Employment could have been terminated for Cause had the Participant still been
employed or has otherwise engaged in conduct that is detrimental to the
interests of the Company, as determined by the Committee in its sole
discretion), all Options held by the Participant shall immediately terminate,
regardless of whether then exercisable. In the event of a Participant's
<PAGE>
termination of Employment for any reason not described in the preceding two
sentences, the Participant (or, in the event of the Participant's death or
Disability during the period during which an Option is exercisable under this
sentence, the Participant's beneficiary or legal representative) may exercise
any Option which was exercisable at the time of such termination for 90 days (or
such greater or lesser period as the Committee shall specify at or after the
grant of such Option) following the date of such termination, but in no event
after the date the Option otherwise expires.
8. STOCK APPRECIATION RIGHTS.
(a) GRANT OF STOCK APPRECIATION RIGHTS. The Committee shall have the
authority to grant Stock Appreciation Rights in tandem with an Option, in
addition to an Option, or freestanding and unrelated to an Option. Stock
Appreciation Rights granted in tandem or in addition to an Option may be granted
either at the same time as the Option or at a later time. Stock Appreciation
Rights shall not be exercisable after the expiration of ten years from the date
of grant and shall have a base price determined in the same manner as, and
subject to the same conditions as apply with respect to, a Nonstatutory Stock
Option under Section 7(b).
(b) EXERCISE OF STOCK APPRECIATION RIGHTS. A Stock Appreciation Right shall
entitle the Participant to receive from the Company an amount equal to the
excess of the Fair Market Value of a share of Common Stock on the date of
exercise of the Stock Appreciation Right over the base price thereof. The
Committee shall determine the time or times at which or the event or events
(including, without limitation, a Change of Control) upon which a Stock
Appreciation Right may be exercised in whole or in part, the method of exercise
and whether such Stock Appreciation Right shall be settled in cash, shares of
Common Stock or a combination of cash and shares of Common Stock; provided,
however, that unless otherwise specified by the Committee at or after grant, a
Stock Appreciation Right granted in tandem with an Option shall be exercisable
only at the same time or times as the related Option is exercisable. Unless the
Committee shall establish a different exercise schedule at or after the date of
grant, each Stock Appreciation Right shall become exercisable in three (3) equal
installments on each of the first three anniversaries of the date of grant.
(C) TERMINATION OF EMPLOYMENT. Unless the Committee shall otherwise
determine at or after grant, a Stock Appreciation Right shall be exercisable
following the termination of a Participant's Employment only to the extent
provided in this Section 8(c). If a Participant's Employment terminates due to
the Participant's (I) death, (II) Disability, (III) early retirement with the
consent of the Committee or (IV) Normal Retirement, the Participant (or, in the
event of the Participant's death or Disability during Employment or during the
period during which a Stock Appreciation Right is exercisable under this
sentence, the Participant's beneficiary or legal representative) may exercise
any Stock Appreciation Right held by the Participant at the time of such
termination, regardless of whether then exercisable, for a period of three years
in the case of Normal Retirement or early retirement with consent and one year
in the case of death or Disability (or such greater or lesser period as the
Committee shall determine at or after grant), but in no event after the date the
Stock Appreciation Right otherwise expires. If a Participant's Employment is
terminated for Cause (or, if after the Participant's termination of Employment,
the Committee determines that the Participant's Employment could have been
terminated for Cause had the Participant still been employed or has otherwise
engaged in conduct that is detrimental to the interests of the Company, as
determined by the Committee in its sole discretion), all Stock Appreciation
Rights held by the Participant shall immediately terminate, regardless of
whether then exercisable. In the event of a Participant's termination of
Employment for any reason not described in the preceding two sentences, the
Participant (or, in the event of the Participant's death or Disability during
the period during which
<PAGE>
a Stock Appreciation Right is exercisable under this sentence, the Participant's
beneficiary or legal representative) may exercise any Stock Appreciation Right
which was exercisable at the time of such termination for 90 days (or such
greater or lesser period as the Committee shall specify at or after the grant of
such Stock Appreciation Right) following the date of such termination, but in no
event after the date the Stock Appreciation Right otherwise expires.
9. RESTRICTED STOCK AND RESTRICTED UNITS.
(a) GRANT OF RESTRICTED STOCK OR RESTRICTED UNITS. The Committee may grant
Awards of Restricted Stock or Restricted Units to Participants at such times and
in such amounts, and subject to such other terms and conditions not inconsistent
with the Plan, as it shall determine. Each grant of Restricted Stock or
Restricted Units shall be evidenced by an Award Agreement. Unless the Committee
provides otherwise at or after the date of grant, stock certificates evidencing
any shares of Restricted Stock so granted shall be held in the custody of the
Secretary of the Company until the Restricted Period lapses, and, as a condition
to the grant of any Award of shares of Restricted Stock, the Participant shall
have delivered to the Secretary of the Company a certificate, endorsed in blank,
relating to the shares of Common Stock covered by such Award.
(b) TERMINATION OF EMPLOYMENT. Unless the Committee otherwise determines at
or after grant, the rights of a Participant with respect to an award of
Restricted Stock or Restricted Units outstanding at the time of the
Participant's termination of Employment shall be determined under this Section
9(b). In the event that a Participant's Employment terminates due to the
Participant's (I) death, (II) Disability, (III) early retirement with the
consent of the Committee or (IV) Normal Retirement, any restrictions on an award
of Restricted Stock or Restricted Units shall lapse. Unless the Committee
otherwise determines, any portion of any Restricted Stock or Restricted Unit
Award as to which the Restricted Period has not lapsed at the date of a
Participant's termination of Employment shall be forfeited as of such date.
(C) DELIVERY OF SHARES. Upon the expiration or termination of the
Restricted Period and the satisfaction (as determined by the Committee) of any
other conditions determined by the Committee, the restrictions applicable to the
Restricted Stock or Restricted Units shall lapse and a stock certificate for the
number of shares of Common Stock with respect to which the restrictions have
lapsed shall be delivered, free of all such restrictions, except any that may be
imposed by law, to the Participant or the Participant's beneficiary or estate,
as the case may be. No payment will be required to be made by the Participant
upon the delivery of such shares of Common Stock and/or cash, except as
otherwise provided in Section 12(a) of the Plan. At or after the date of grant,
the Committee may accelerate the vesting of any award of Restricted Stock or
Restricted Units or waive any conditions to the vesting of any such award.
(d) RESTRICTED PERIOD; RESTRICTIONS ON TRANSFERABILITY DURING RESTRICTED
PERIOD. Unless otherwise determined by the Committee at or after the date of
grant, the Restricted Period applicable to any award of Restricted Stock or
Restricted Units shall lapse, and the shares related to such award shall become
freely transferable, as to an equal amount of shares of Restricted Stock or
Restricted Units on each of the first five (5) anniversaries of the date of
grant. Restricted Stock or Restricted Units may not be sold, assigned, pledged
or otherwise encumbered, except as herein provided, during the Restricted
Period. Any certificates issued in respect of Restricted Stock shall be
registered in the name of the Participant and deposited by such Participant,
together with a stock power endorsed in blank, with the Company. At the
expiration of the Restricted Period with respect to any award of Restricted
Stock, unless otherwise forfeited, the Company shall deliver such certificates
to the
<PAGE>
Participant or to the Participant's legal representative. Payment for Restricted
Stock Units shall be made by the Company in shares of Common Stock, cash or in
any combination thereof, as determined by the Committee.
(e) RIGHTS AS A STOCKHOLDER; DIVIDEND EQUIVALENTS. Unless otherwise
determined by the Committee at or after the date of grant, Participants granted
shares of Restricted Stock shall be entitled to receive, either currently or at
a future date, as specified by the Committee, all dividends and other
distributions paid with respect to those shares, provided that if any such
dividends or distributions are paid in shares of Common Stock or other property
(other than cash), such shares and other property shall be subject to the same
forfeiture restrictions and restrictions on transferability as apply to the
shares of Restricted Stock with respect to which they were paid. The Committee
will determine whether and to what extent to credit to the account of, or to pay
currently to, each recipient of Restricted Units, an amount equal to any
dividends paid by the Company during the Restricted Period with respect to the
corresponding number of shares of Common Stock ("Dividend Equivalents"). To the
extent provided by the Committee at or after the date of grant, any Dividend
Equivalents with respect to cash dividends on the Common Stock credited to a
Participant's account shall be deemed to have been invested in shares of Common
Stock on the record date established for the related dividend and, accordingly,
a number of additional Restricted Units shall be credited to such Participant's
account equal to the greatest whole number which may be obtained by dividing (X)
the value of such Dividend Equivalent on the record date by (Y) the Fair Market
Value of a share of Common Stock on such date.
10. DEFERRED STOCK.
(a) DEFERRED STOCK AWARDS. Subject to such terms and conditions as the
Committee shall determine, a Participant may be granted a Deferred Stock Award,
entitling the Participant to receive shares of Common Stock without any payment
in cash or property in one or more installments at a future date or dates. Such
Award shall be non-transferrable and may be conditioned on such matters as the
Committee shall determine, including continued employment or attainment of
performance goals. No shares of Common Stock will be issued at the time an award
of Deferred Stock is made and the Company shall not be required to set aside a
fund for the payment of any such award. The Company will establish a separate
account for the Participant and will record in such account the number of
Deferred Stock Units awarded to the Participant. Any deferral restrictions under
a Deferred Stock Award may be accelerated or waived by the Committee at any time
prior to termination of employment. The Committee may permit Participants to
further deter receipt of a Deferred Stock Award.
(b) RIGHTS AS A STOCKHOLDER; DIVIDEND EQUIVALENTS. A Participant shall not
have any right in respect of Deferred Stock awarded pursuant to the Plan to vote
on any matter submitted to the Company's stockholders until such time as the
shares of Common Stock attributable to such Deferred Stock have been issued to
such Participant or his beneficiary. The Committee will determine whether and to
what extent to credit to the account of, or to pay currently to, each recipient
of a Deferred Stock Award, any Dividend Equivalents. To the extent provided by
the Committee at or after the date of grant, any Dividend Equivalents with
respect to cash dividends on the Common Stock credited to a Participant's
account shall be deemed to have been invested in shares of Common Stock on the
record date established for the related dividend and, accordingly, a number of
Deferred Stock shall be credited to such Participant's account equal to the
greatest whole number which may be obtained by dividing (X) the value of such
Dividend Equivalent on the record date by (Y) the Fair Market Value of a share
of Common Stock on such date.
<PAGE>
(C) SETTLEMENT OF DEFERRED STOCK. Unless the Committee determines otherwise
at or after the date of grant, a Participant shall receive one share of Common
Stock for each Deferred Stock Unit (and related Dividend Equivalents) that shall
have become vested on or prior to the date of such Participant's termination of
Employment with the Company and the Subsidiaries, other than any such
termination for Cause, on the date of such termination of Employment (or on such
earlier date as the Committee shall permit or such later date as may be elected
by the Participant in accordance with the rules and procedures of the
Committee). In the event of the termination of a Participant's Employment with
the Company and the Subsidiaries for Cause, the Participant shall immediately
forfeit all rights with respect to any Deferred Stock Units (and related
Dividend Equivalents) credited to his or her account. The Committee may provide
in the Award Agreement applicable to any Award of Deferred Stock that, in lieu
of issuing shares of Common Stock in settlement of the vested portion of such
Deferred Stock, the Committee may direct the Company to pay to the Participant
the cash balance of such Deferred Stock.
11. CHANGE IN CONTROL.
(a) ACCELERATED VESTING AND PAYMENT. Subject to the provisions of Section
11(b) below, in the event of a Change in Control, each Option and Stock
Appreciation Right shall promptly be canceled in exchange for a payment in cash
of an amount equal to the excess of the Change of Control Price over the
exercise price for such Option or the base price for such Stock Appreciation
Right, whichever is applicable, the Restricted Period applicable to all shares
of Restricted Stock or Restricted Units shall expire and all such shares shall
become nonforfeitable and immediately transferable and all Deferred Stock shall
become fully vested and the shares of Common Stock with respect thereto shall be
immediately payable.
(b) ALTERNATIVE AWARDS. Notwithstanding Section 11(a), no cancellation,
acceleration of exercisability, vesting, cash settlement or other payment shall
occur with respect to any Award or any class of Awards if the Committee
reasonably determines in good faith prior to the occurrence of a Change in
Control that such Award or class of Awards shall be honored or assumed, or new
rights substituted therefor (such honored, assumed or substituted award
hereinafter called an "Alternative Award") by a Participant's employer (or the
parent or a subsidiary of such employer) immediately following the Change in
Control, provided that any such Alternative Award must:
(I) be based on stock which is traded on an established securities
market, or which will be so traded within 60 days following the Change in
Control;
(ii) provide such Participant (or each Participant in a class of
Participants) with rights and entitlements substantially equivalent to or
better than the rights and entitlements applicable under such Incentive
Award, including, but not limited to, an identical or better exercise or
vesting schedule and identical or better timing and methods of payment;
(iii) have substantially equivalent economic value to such Incentive
Award (determined by the Committee as constituted immediately prior to the
Change in Control, in its sole discretion, promptly after the Change in
Control); and
(iv) have terms and conditions which provide that in the event that the
Participant's employment is involuntarily terminated or constructively
terminated (other than for Cause) upon or following such Change in Control,
any conditions on a Participant's rights under, or any
<PAGE>
restrictions on transfer or exercisability applicable to, each such
Alternative Award shall be waived or shall lapse, as the case may be.
For this purpose, a constructive termination shall mean a termination by a
Participant following a material reduction in the Participant's compensation, a
material reduction in the Participant's responsibilities or the relocation of
the Participant's principal place of employment to another location a material
distance farther away from the Participant's home, in each case, without the
Participant's prior written consent.
(C) In the event of a Change in Control, each Participant shall be deemed
to have earned Performance Shares with respect to each of his or her Performance
Share Awards outstanding at the date of such Change in Control. The number of
Performance Shares so earned shall be computed by determining (based on the
conditions set by the Committee for payment of Performance Share Awards for the
subject Award Period) the number of Performance Shares that would have been paid
if each subject Award Period had ended on the December 31st immediately
preceding the Change of Control provided that in no event shall the number of
Performance Shares earned be less than the aggregate number of Performance
Shares at the target performance level (as identified in the applicable award
letter) with respect to all such Awards. Performance Share Awards granted in the
year of the Change in Control shall be earned at the same percentage as Awards
granted in the year preceding the year of the Change in Control. Each
Performance Share so earned shall be canceled in exchange for an immediate
payment in cash of an amount equal to the Change in Control Price.
12. GENERAL PROVISIONS.
(a) WITHHOLDING. The Company shall have the right to deduct from all
amounts paid to a Participant in cash (whether under this Plan or otherwise) any
taxes required by law to be withheld in respect of Awards under this Plan. In
the case of any Award satisfied in the form of Common Stock, no shares shall be
issued unless and until arrangements satisfactory to the Committee shall have
been made to satisfy any withholding tax obligations applicable with respect to
such Award. Without limiting the generality of the foregoing and subject to such
terms and conditions as the Committee may impose, the Company shall have the
right to retain, or the Committee may, subject to such terms and conditions as
it may establish from time to time, permit Participants to elect to tender,
Common Stock (including Common Stock issuable in respect of an Award) to
satisfy, in whole or in part, the amount required to be withheld.
(b) AWARDS. Each Award hereunder shall be evidenced in writing. The written
agreement shall be delivered to the Participant and shall incorporate the terms
of the Plan by reference and specify the terms and conditions thereof and any
rules applicable thereto.
(C) CANCELLATION OF PERFORMANCE SHARES. With the written consent of a
Participant holding Performance Shares granted to him under the Plan, the
Committee may cancel such Performance Shares. In the event of any such
cancellation, all rights of the former holder of such cancelled Performance
Shares in respect to such cancelled Performance Shares shall forthwith
terminate.
(d) NO ASSIGNMENT OF INTEREST. Unless the Committee shall permit (on such
terms and conditions as it shall establish) an Award to be transferred to a
member of the Participant's immediate family or to a trust or similar vehicle
for the benefit of such immediate family members (collectively, the "Permitted
Transferees"), an Award or interest of any Participant in the Plan shall not be
assignable, either by voluntary assignment or by operation of law, and any
assignment of such interest, whether
<PAGE>
voluntary or by operation of law, shall render the Award void, except that cash
or shares of Common Stock payable under the Plan shall be transferable by
testamentary will or by the laws of descent and distribution. All shares of
Common Stock paid pursuant to this Plan are to be taken subject to an investment
representation by the Participant or other recipient that any such shares are
acquired for investment and not with a view to distribution and that such shares
shall not be transferred or sold until registered in compliance with the
Securities Act of 1933 or unless an exemption therefrom is available in the
opinion of the General Counsel for the Company. All rights with respect to
Awards granted to a Participant under the Plan shall be exercisable during his
or her lifetime only by such Participant, or, if applicable, the Permitted
Transferees.
(e) DESIGNATION OF BENEFICIARY. Each Participant may designate a
beneficiary or beneficiaries (which beneficiary may be an entity other than a
natural person) to receive any payments which may be made following the
Participant's death. Such designation may be changed or canceled at any time
without the consent of any such beneficiary. Any such designation, change or
cancellation must be made in a form approved by the Committee and shall not be
effective until received by the Committee. If no beneficiary has been named, or
the designated beneficiary or beneficiaries shall have predeceased the
Participant, the beneficiary shall be the Participant's spouse or, if no spouse
survives the Participant, the Participant's estate. If a Participant designates
more than one beneficiary, the rights of such beneficiaries shall be payable in
equal shares, unless the Participant has designated otherwise.
(f) EMPLOYMENT RIGHTS. An Award made under the Plan shall not confer any
right on the Participant to continue in the employ of the Company or any
subsidiary or limit in any way the right of his employer to terminate his
employment at any time.
(g) EXPENSES. The expenses of administrating the Plan shall be borne by the
Company.
(h) NO RIGHTS TO AWARDS, NO SHAREHOLDER RIGHTS. No Participant or Eligible
Employee shall have any claim to be granted any Award under the Plan, and there
is no obligation of uniformity of treatment of Participants and Eligible
Employees. Subject to the provisions of the Plan and the applicable Award, no
person shall have any rights as a shareholder with respect to any shares of
Common Stock to be issued under the Plan prior to the issuance thereof.
(I) CONSTRUCTION OF THE PLAN. The validity, construction, interpretation,
administration and effect of the Plan and of its rules and regulations, and
rights relating to the Plan, shall be determined solely in accordance with the
laws of the State of Delaware.
(j) LEGEND. To the extent any stock certificate is issued to a Participant
in respect of shares of Restricted Stock awarded under the Plan prior to the
expiration of the applicable Restricted Period, such certificate shall be
registered in the name of the Participant and shall bear the following (or
similar) legend:
"The shares of stock represented by this certificate are subject to the
terms and conditions contained in the Protective Life Corporation 1997
Long-Term Incentive Plan and the Award Agreement, dated as of ____________,
between the Company and the Participant, and may not be sold, pledged,
transferred, assigned, hypothecated or otherwise encumbered in any
manner (except as provided in the Plan or in such Award Agreement)
until _______________."
<PAGE>
Upon the lapse of the Restricted Period with respect to any such shares of
Restricted Stock, the Company shall issue or have issued new share certificates
without the legend described herein in exchange for those previously issued.
(k) EFFECTIVE DATE. The Plan, as amended, shall be effective on the date
the Plan is approved by shareholders. No Awards may be granted under the Plan
after December 31, 2006.
(l) AMENDMENT OF PLAN. The Board or the Committee may amend, suspend or
terminate the Plan or any portion thereof at any time, provided that no
amendment shall be made without shareholder approval if such amendment would
(l) increase the number of shares of Common Stock subject to the Plan,
except pursuant to Section 4(c);
(2) change the price at which Options may be granted;
(3) change the definition of Performance Share; or
(4) remove the administration of the Plan from the Committee.
Without the written consent of an affected Participant, no termination,
suspension or modification of the Plan shall adversely affect any right of such
Participant under the terms of an Award granted before the date of such
termination, suspension or modification.
(m) APPLICATION OF PROCEEDS. The proceeds received by the Company from the
sale of its shares under the Plan will be used for general corporate purposes.
(n) COMPLIANCE WITH LEGAL AND EXCHANGE REQUIREMENTS. The Plan, the granting
and exercising of Awards thereunder, and the other obligations of the Company
under the Plan, shall be subject to all applicable federal and state laws,
rules, and regulations, and to such approvals by any regulatory or governmental
agency as may be required. The Company, in its discretion, may postpone the
granting and exercising of Awards, the issuance or delivery of Common Stock
under any Award or any other action permitted under the Plan to permit the
Company, with reasonable diligence, to complete such stock exchange listing or
registration or qualification of such Common Stock or other required action
under any federal or state law, rule, or regulation and may require any
Participant to make such representations and furnish such information as it may
consider appropriate in connection with the issuance or delivery of Common Stock
in compliance with applicable laws, rules, and regulations. The Company shall
not be obligated by virtue of any provision of the Plan to recognize the
exercise of any Award or to otherwise sell or issue Common Stock in violation of
any such laws, rules, or regulations; and any postponement of the exercise or
settlement of any Award under this provision shall not extend the term of such
Awards, and neither the Company nor its directors or officers shall have any
obligation or liability to the Participant with respect to any Award (or Common
Stock issuable thereunder) that shall lapse because of such postponement.
(o) DEFERRALS. The Committee may postpone the exercising of Awards, the
issuance or delivery of Common Stock under any Award or any action permitted
under the Plan to prevent the Company or any of its Subsidiaries from being
denied a Federal income tax deduction with respect to any Award other than an
Incentive Stock Option.
<PAGE>
(p) GENDER AND NUMBER. Except when otherwise indicated by the context,
words in the masculine gender used in the Plan shall include the feminine
gender, the singular shall include the plural, and the plural shall include the
singular.
<PAGE>
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 April 23, 1998, on our review of interim
consolidated financial information of Protective Life Corporation and
subsidiaries for the period ended March 31, 1998, 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
May 15, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains the 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> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<DEBT-HELD-FOR-SALE> 6,297,854 4,697,855
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 13,130 37,255
<MORTGAGE> 1,367,866 1,579,900
<REAL-ESTATE> 13,319 11,775
<TOTAL-INVEST> 8,117,193 6,614,772
<CASH> 0 41,996
<RECOVER-REINSURE> 584,516 335,838
<DEFERRED-ACQUISITION> 652,832 502,568
<TOTAL-ASSETS> 10,756,909 8,317,012
<POLICY-LOSSES> 3,433,490 2,472,301
<UNEARNED-PREMIUMS> 388,323 253,439
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 166,121 146,076
<NOTES-PAYABLE> 120,000 195,000
245,000 55,000
0 0
<COMMON> 33,336<F1> 33,336<F1>
<OTHER-SE> 752,096 562,640
<TOTAL-LIABILITY-AND-EQUITY> 10,756,909 8,317,012
149,358 129,578
<INVESTMENT-INCOME> 157,626 130,330
<INVESTMENT-GAINS> 11 (418)
<OTHER-INCOME> 13,518 4,762
<BENEFITS> 187,897 163,019
<UNDERWRITING-AMORTIZATION> 24,835 20,835
<UNDERWRITING-OTHER> 57,755 41,630
<INCOME-PRETAX> 50,026 38,768
<INCOME-TAX> 17,009 13,181
<INCOME-CONTINUING> 29,993<F2> 24,783<F3>
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 29,993 24,783
<EPS-PRIMARY> .48<F1> .40<F1>
<EPS-DILUTED> .47<F1> .40<F1>
<RESERVE-OPEN> 0 0
<PROVISION-CURRENT> 0 0
<PROVISION-PRIOR> 0 0
<PAYMENTS-CURRENT> 0 0
<PAYMENTS-PRIOR> 0 0
<RESERVE-CLOSE> 0 0
<CUMULATIVE-DEFICIENCY> 0 0
<FN>
<F1>Reflects two for one stock split effective April 1, 1998.
<F2>Net of minority interest in income of consolidated subsidiaries of $3,024.
<F3>Net of minority interest in income of consolidated subsidiaries of $804.
</FN>
</TABLE>
<PAGE>
Exhibit 99
to
Form 10-Q
of
Protective Life Corporation
for the three months
ended March 31, 1998
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. Insurance is a highly competitive industry and the
Company encounters significant competition in all 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.
The life and health insurance industry is consolidating, with larger,
more efficient organizations emerging from consolidation. Also, mutual insurance
companies are converting to stock ownership which will give them greater access
to capital markets.
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.
<PAGE>
The Company competes against other insurance companies and financial
institutions in the origination of commercial mortgage loans.
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. For the past several years rating downgrades in the industry
have exceeded upgrades.
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 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. Formal 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 insurance subsidiaries to
dispose of illiquid assets on unfavorable terms, which could have a material
adverse effect on the Company.
INTEREST RATE FLUCTUATIONS. Sudden and/or significant changes in
interest rates expose insurance companies to the risk of not earning anticipated
spreads between the interest rate earned on investments and the credited rates
paid on outstanding policies. 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
insurance and investment products.
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, marketing practices, advertising, policy forms, and
capital
<PAGE>
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. Congress is currently reviewing
certain proposals contained in President Clinton's Fiscal Year 1999 Budget
which, if enacted, would adversely impact the tax treatment of variable annuity
and certain other life 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 with respect to their ability to sell such products, and, depending on
grandfathering provisions, the surrenders of existing annuity contracts and life
insurance policies. The Company cannot predict what future initiatives the
President or Congress may propose which may affect the Company.
LITIGATION. A number of civil jury verdicts have been returned against
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 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 class action and other lawsuits
involving insurers' sales practices, insurers have made material settlement
payments.
INVESTMENT RISKS. The Company's invested assets are subject to
customary 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 which the Company has
financed. Factors that may affect the overall default rate on, and market value
of, the Company's invested assets include interest rate levels, financial market
performance, 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.
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
<PAGE>
Company's products are sold through independent distribution channels; the
Investment Products Division's variable annuity deposits are invested in funds
managed by unaffiliated investment managers; a portion of the sales in the
Individual Life, Dental, and Financial Institutions Divisions comes from
arrangements with unrelated marketing organizations; and the Company has entered
the Hong Kong insurance market in a joint venture. Therefore the Company's
results may be affected by the performance of others.
YEAR 2000. Older computer hardware and software often denote the year
using two digits rather than four; for example, the year 1997 often is denoted
by such hardware and software as "97." It is probable that such hardware and
software will malfunction when calculations involving the year 2000 are
attempted because the hardware and/or software will interpret "00" as
representing the year 1900 rather that the year 2000. This "Year 2000" issue
potentially affects all individuals and companies (including the Company and its
suppliers, customers, and business partners) who rely on computers or devices
containing computer chips.
The Company has developed and is implementing a Year 2000 transition
plan intended to identify and modify or replace primary hardware and/or software
systems on which it relies that have a Year 2000 issue. The Company is also
developing and implementing a plan to identify and modify or replace secondary
hardware and/or software systems on which it relies that have a Year 2000 issue.
Substantial resources are being devoted to this effort; however, the costs to
develop and implement these plans are not expected to be material. The Company
is also confirming that its service providers are implementing plans to identify
and modify or replace their systems that have a Year 2000 issue.
The Company currently anticipates that its systems will be able to
process transactions dated beyond 1999 on or before December 31, 1999. There can
be no assurances, however, that the Company's efforts will be successful, that
interactions with other service providers with Year 2000 issues will not impair
the Company's operations, or that the Year 2000 issue will not otherwise
adversely affect the Company.
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.
