<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended September 30, 1998.
Commission file number 1-11834
--------
PROVIDENT COMPANIES, INC.
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 62-1598430
- ------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 Fountain Square, Chattanooga, Tennessee 37402
------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(423)755-1011
---------------------------------------------------
(Registrant's telephone number, including area code)
None
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding for each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT SEPTEMBER 30, 1998
- ----------------------------- ---------------------------------
Common Stock, $1.00 Par Value 135,242,680
Total number of pages are 152
<PAGE>
PROVIDENT COMPANIES, INC.
INDEX
PAGE
PART I.
FORWARD LOOKING STATEMENTS 3
FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Statements of Financial
Condition at September 30, 1998 and December 31, 1997 4
Condensed Consolidated Statements of Income
for the Three Months and Nine Months
Ended September 30, 1998 and 1997 6
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1998 and 1997 7
Notes to Condensed Consolidated Financial Statements 8
Independent Auditors' Review Report 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 40
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<PAGE>
PART 1
FORWARD LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements relating
to such matters as financial performance and the business of the Company. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order for the Company to comply with the terms
of the safe harbor the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's forward
looking statements, which involve certain risks and uncertainties. These
factors include, (i) heightened competition, including specifically the
intensification of price competition, the entry of new competitors, and the
development of new products by new and existing competitors; (ii) adverse state
and federal legislation and regulation, including limitations on premium levels,
increases in minimum capital requirements, and other financial viability
requirements; (iii) failure to develop multiple distribution channels in order
to obtain new customers or failure to retain existing customers; (iv) inability
to carry out product design, marketing and sales plans, including, among others,
planned changes to existing products (which may result in reduced market
acceptance of the revised products) or planned strategies to penetrate new
market segments; (v) loss of key executives; (vi) changes in interest rates
causing a reduction of investment income; (vii) general economic and business
conditions which are less favorable than expected; (viii) unanticipated changes
in industry trends; (ix) inaccuracies in assumptions regarding future morbidity,
persistency, mortality, and interest rates or portfolio yield used in
calculating reserve amounts; (x) failure to continue improvement of the
Company's disability insurance claims management process; and (xi) failure to
develop and maintain systems and other information technology that are
sufficient to support Company initiatives and changes; (xii) failure to
substantially complete the Company's Year 2000 project in a manner that avoids a
material adverse impact on results of operations arising from Year 2000 issues;
and (xiii) litigation involving the Company's business and activities. See "Risk
Factors" included in the Company's report on Form 10-K for the year ended
December 31, 1997 (pp.17-20), incorporated herein by reference. See also "Year
2000 Issues" below.
-3-
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
September 30 December 31
1998 1997
(in millions of dollars)
----------------------------------
(Unaudited)
ASSETS
Investments
Fixed Maturity Securities
Available-for-Sale $14,946.5 $17,035.1
Held-to-Maturity 298.9 306.8
Equity Securities 12.7 10.0
Mortgage Loans 17.8 17.8
Real Estate 43.7 87.1
Policy Loans 2,101.4 1,983.9
Other Long-term Investments 33.9 22.6
Short-term Investments 44.0 57.5
--------- ---------
Total Investments 17,498.9 19,520.8
Cash and Bank Deposits 42.3 37.7
Accounts and Premiums Receivable 109.8 166.4
Reinsurance Receivable 3,171.2 987.2
Accrued Investment Income 363.1 363.2
Deferred Policy Acquisition Costs 413.7 362.9
Value of Business Acquired 498.7 560.8
Goodwill 697.5 732.3
Property and Equipment 118.0 109.2
Miscellaneous 33.6 26.2
Separate Account Assets 320.2 310.9
--------- ---------
TOTAL ASSETS $23,267.0 $23,177.6
========= =========
See notes to condensed consolidated financial statements.
-4-
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - CONTINUED
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
<S> <C> <C>
(in millions of dollars)
---------------------------------------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy and Contract Benefits $ 513.0 $ 531.2
Reserves for Future Policy and Contract Benefits
and Unearned Premiums 13,674.9 13,193.8
Policyholders' Funds and Experience Rating Refunds 3,482.6 4,328.0
Federal Income Tax Liability 347.0 190.1
Short-term Debt 98.9 150.7
Long-term Debt 600.0 725.0
Other Liabilities 481.9 468.6
Separate Account Liabilities 320.2 310.9
--------- ---------
TOTAL LIABILITIES 19,518.5 19,898.3
--------- ---------
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR
SUBORDINATED DEBT SECURITIES OF THE COMPANY 300.0 -
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES - NOTE 6
STOCKHOLDERS' EQUITY
Preferred Stock - 156.2
Common Stock, $1 par 135.8 135.2
Additional Paid-in Capital 756.3 750.6
Retained Earnings 1,821.6 1,635.2
Accumulated Other Comprehensive Income--Note 7 745.7 603.6
Treasury Stock (10.9) (1.5)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 3,448.5 3,279.3
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $23,267.0 $23,177.6
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
-5-
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
(in millions of dollars, except share data)
---------------------------------------------------------------
REVENUE
Premium Income $ 593.2 $ 594.0 $ 1,759.8 $ 1,471.5
Net Investment Income 329.5 362.9 1,039.6 990.1
Net Realized Investment Gains 9.2 6.9 18.2 13.1
Other Income 43.4 33.3 134.3 87.5
------------ ------------ ------------ ------------
TOTAL REVENUE 975.3 997.1 2,951.9 2,562.2
------------ ------------ ------------ ------------
BENEFITS AND EXPENSES
Policy and Contract Benefits 445.7 451.8 1,377.8 1,212.2
Change in Reserves for Future Policy and
Contract Benefits and Policyholders' Funds 163.8 197.3 486.2 507.7
Amortization
Deferred Policy Acquisition Costs 19.3 21.4 58.2 57.9
Value of Business Acquired 7.9 9.1 25.2 19.3
Goodwill 5.2 4.2 16.1 8.6
Interest Expense on Debt 20.0 12.0 54.0 27.8
Salaries 57.1 55.1 168.5 132.1
Commissions 58.6 65.0 189.7 161.9
Other Operating Expenses 71.9 71.7 213.4 171.7
------------ ------------ ------------ ------------
TOTAL BENEFITS AND EXPENSES 849.5 887.6 2,589.1 2,299.2
------------ ------------ ------------ ------------
INCOME BEFORE FEDERAL INCOME TAXES 125.8 109.5 362.8 263.0
FEDERAL INCOME TAXES 43.9 38.5 135.0 91.5
------------ ------------ ------------ ------------
NET INCOME $ 81.9 $ 71.0 $ 227.8 $ 171.5
============ ============ ============ ============
NET INCOME PER COMMON SHARE
Basic $ 0.61 $ 0.50 $ 1.67 $ 1.34
Assuming Dilution $ 0.59 $ 0.49 $ 1.63 $ 1.31
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 135,210,161 134,962,688 135,101,280 120,928,246
Assuming Dilution 138,491,624 137,939,702 138,589,198 123,492,809
DIVIDENDS PER COMMON SHARE $ 0.10 $ 0.10 $ 0.30 $ 0.28
</TABLE>
See notes to condensed consolidated financial statements.
-6-
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Nine Months Ended September 30
1998 1997
(in millions of dollars)
---------------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 631.7 $ 763.9
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sales of Investments 1,039.9 1,256.6
Proceeds from Maturities of Investments 923.1 1,334.7
Purchase of Investments (1,821.7) (2,195.1)
Net Sales of Short-term Investments 10.4 362.1
Acquisition of Business--Note 4 - (860.0)
Disposition of Business--Note 5 58.0 -
Other (19.4) (23.2)
--------- ---------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 190.3 (124.9)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits to Policyholder Accounts 66.0 415.7
Maturities and Benefit Payments from Policyholder Accounts (802.5) (1,704.8)
Net Short-term Debt Repayments (51.8) -
Net Long-term Borrowings (Repayments) (125.0) 425.9
Issuance of Company Obligated Mandatorily Redeemable Preferred Securities 300.0 -
Redemption of Preferred Stock (156.2) -
Issuance of Common Stock 6.3 388.4
Dividends Paid to Stockholders (44.6) (43.3)
Other (9.4) 0.5
--------- ---------
NET CASH USED BY FINANCING ACTIVITIES (817.2) (517.6)
--------- ---------
Effect of Foreign Exchange Rate Changes on Cash (0.2) (0.7)
--------- ---------
NET INCREASE IN CASH AND BANK DEPOSITS 4.6 120.7
CASH AND BANK DEPOSITS AT BEGINNING OF PERIOD 37.7 19.3
--------- ---------
CASH AND BANK DEPOSITS AT END OF PERIOD $ 42.3 $ 140.0
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
-7-
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
SEPTEMBER 30, 1998
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 1998, are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1997.
NOTE 2--DEBT AND EQUITY SECURITIES
On February 24, 1998, the Company repaid the $725.0 million outstanding
borrowing on its revolving credit facility and redeemed its cumulative preferred
stock outstanding of $156.2 million at $150 per share equivalent to $25 per
depositary share. The debt repayment and preferred stock redemption were funded
through short-term borrowings.
In May 1997, the Securities and Exchange Commission declared effective a shelf
registration statement pursuant to which the Company could issue up to $900.0
million in debt and/or equity securities. On March 16, 1998, the Company
completed a public offering of $200.0 million of 7.25% senior notes due March
15, 2028. On March 16, 1998, Provident Financing Trust I, a wholly-owned
subsidiary trust of the Company, issued $300.0 million of 7.405% capital
securities in a public offering. These capital securities, which mature on
March 15, 2038, are fully and unconditionally guaranteed by the Company, have a
liquidation value of $1,000 per capital security, and have a mandatory
redemption feature under certain circumstances. The Company issued $300.0
million of 7.405% junior subordinated deferrable interest debentures which
mature on March 15, 2038, to the subsidiary trust in connection with the capital
securities offering. The sole assets of the subsidiary trust are the junior
subordinated debt securities. On July 9, 1998, the Company completed a public
offering of $200.0 million of 6.375% senior notes due July 15, 2005, and $200.0
million of 7% senior notes due July 15, 2018.
-8-
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
SEPTEMBER 30, 1998
NOTE 3--SEGMENT INFORMATION
A summary by segment of the Company's revenue and income before federal income
taxes, excluding and including net realized investment gains and losses,
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
(in millions of dollars)
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue (Excluding Net Realized Investment
Gains and Losses)
Individual Disability and Life $565.4 $544.1 $1,683.9 $1,341.9
Employee Benefits 277.8 248.9 808.7 643.5
Other Operations 122.9 197.2 441.1 563.7
------ ------ -------- --------
Total $966.1 $990.2 $2,933.7 $2,549.1
====== ====== ======== ========
Income Before Net Realized Investment
Gains and Losses and Federal Income Taxes
Individual Disability and Life $ 82.1 $ 64.9 $ 235.5 $ 150.8
Employee Benefits 32.0 20.3 90.5 44.6
Other Operations 2.5 17.4 18.6 54.5
------ ------ -------- --------
Total $116.6 $102.6 $ 344.6 $ 249.9
====== ====== ======== ========
</TABLE>
-9-
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
SEPTEMBER 30, 1998
NOTE 3--SEGMENT INFORMATION - CONTINUED
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
(in millions of dollars)
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue (Including Net Realized Investment
Gains and Losses)
Individual Disability and Life $568.6 $547.5 $1,698.0 $1,351.7
Employee Benefits 277.7 251.1 810.3 645.3
Other Operations 129.0 198.5 443.6 565.2
------ ------ -------- --------
Total $975.3 $997.1 $2,951.9 $2,562.2
====== ====== ======== ========
Income Before Federal Income Taxes
Individual Disability and Life $ 85.3 $ 68.3 $ 249.6 $ 160.6
Employee Benefits 31.9 22.5 92.1 46.4
Other Operations 8.6 18.7 21.1 56.0
------ ------ -------- --------
Total $125.8 $109.5 $ 362.8 $ 263.0
====== ====== ======== ========
</TABLE>
Total revenue (excluding net realized investment gains and losses) includes
premium income, net investment income, and other income. Total revenue
(including net realized investment gains and losses) includes premium income,
net investment income, net realized investment gains and losses, and other
income.
-10-
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
SEPTEMBER 30, 1998
NOTE 4--ACQUISITION OF BUSINESS
GENEX SERVICES, INC.
On February 28, 1997, the Company acquired GENEX Services, Inc. and GENEX
Services of Canada, Inc. (GENEX) at a price of $70.0 million. GENEX is a
provider of case management, vocational rehabilitation, and related services to
corporations, third party administrators, and insurance companies. These
services are utilized in the management of disability and worker's compensation
cases. The acquisition was accounted for by the purchase method. The fair
values of the assets acquired and liabilities assumed were $17.9 million and
$8.9 million, respectively. The purchase price has been allocated to goodwill
and is being amortized on a straight-line basis over a 25 year period. The
consolidated financial statements include the operating results of GENEX from
March 1, 1997.
THE PAUL REVERE CORPORATION
On March 27, 1997, the Company acquired The Paul Revere Corporation (Paul
Revere), a provider of life and disability insurance products, at a price of
approximately $1.2 billion. The transaction was financed through common equity
issued to Zurich Insurance Company, a Swiss insurer, and its affiliates in the
amount of $300.0 million, common equity of $437.5 million and cash of $2.5
million issued to Paul Revere shareholders, internally generated funds of $145.0
million, and borrowings on the Company's revolving credit facility of $305.0
million. The acquisition was accounted for by the purchase method. The fair
values of the assets acquired and liabilities assumed were $6,680.0 million and
$6,675.4 million, respectively. The purchase price has been allocated
principally to the value of business acquired with the remainder being allocated
to goodwill. The value of business acquired will be amortized with interest
based on premium income for the traditional individual life and disability
income products and on the estimates of future gross profits for interest-
sensitive individual life products. Goodwill is being amortized on a straight-
line basis over a 40 year period.
The following pro forma results of operations for the nine months ended
September 30, 1997, give effect to the acquisitions and the related financing
arrangements, including the acquisition of debt and issuance of common stock
equity. The pro forma results of operations, prepared from historical financial
results of operations of the Company, Paul Revere, and GENEX with such
adjustments as are necessary to present the results of operations as if the
acquisitions had occurred as of the beginning of the period presented, are as
follows:
Nine Months Ended
September 30, 1997
(in millions of
dollars, except share
data)
------------------------
Revenue $3,018.6
Income Before Federal Income Taxes 311.4
Net Income 200.5
Net Income per Common Share
Basic 1.42
Assuming Dilution 1.39
-11-
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
SEPTEMBER 30, 1998
NOTE 4--ACQUISITION OF BUSINESS - CONTINUED
Revenue and income before federal income taxes include $36.4 million of pre-tax
net realized investment gains for the acquired companies for the 1997 period
prior to acquisition. Net income includes $23.7 million ($0.18 per common
share) of after-tax net investment gains for the 1997 period prior to
acquisition.
NOTE 5--SALE OF A PORTION OF A LINE OF BUSINESS
In December 1997, the Company entered into an agreement with American General
Corporation (American General) under which various affiliates of American
General agreed to acquire certain assets and assume certain liabilities of the
Company's individual and tax-sheltered annuity business for approximately $58.0
million in cash. In addition, American General acquired a number of
miscellaneous group pension lines of business which were no longer actively
marketed by the Company. The sale did not include the Company's Canadian annuity
business, traditional guaranteed investment contracts, or group single premium
annuities. The sale was completed during the second quarter of 1998. Assets
transferred to American General in connection with the business sold had a
carrying value of approximately $2,413.3 million, and liabilities assumed by
American General totaled $2,493.1 million. In connection with the sale, the
Company wrote off $18.7 million of goodwill associated with the annuity business
acquired from Paul Revere. The gain recognized at the time of the sale of this
business increased 1998 operating earnings by $12.2 million ($0.09 per common
share) before taxes and $1.4 million ($0.01 per common share) after taxes.
Note 6--COMMITMENTS AND CONTINGENT LIABILITIES
Two alleged class action lawsuits have been filed in Superior Court in
Worcester, Massachusetts (the Court) against the Company - one purporting to
represent all career agents of Paul Revere whose employment relationships ended
on June 30, 1997 and were offered contracts to sell insurance policies as
independent producers, and the other purporting to represent independent brokers
who sold certain Paul Revere individual disability income policies with benefit
riders. Motions filed by the Company to dismiss most of the counts in the
complaints, which allege various breach of contract and statutory claims, have
been denied, but the cases remain at a preliminary stage. To date, no class has
been certified in either lawsuit. The Company has filed a conditional
counterclaim in each action which requests a substantial return of commissions
should the Court agree with the plaintiff's interpretation of the contract. The
Company has strong defenses to both lawsuits and will vigorously defend its
position and resist certification of the classes. In addition, the same
plaintiff's attorney who has filed the purported class action lawsuits has filed
41 individual lawsuits on behalf of current and former Paul Revere sales
managers alleging various breach of contract claims. The Company has filed a
motion in federal court to compel arbitration for 16 of the plaintiffs who are
licensed by the National Association of Securities Dealers and have executed the
Uniform Application for Registration or Transfer in the Securities Industry
(Form U-4). The Company has strong defenses and will vigorously defend its
position in these cases as well. Although the alleged class action lawsuits and
the 41 individual lawsuits are in the early stages, management does not
currently expect these suits to materially affect the financial position or
results of operations of the Company.
Various lawsuits against the Company have arisen in the normal course of
business. Contingent liabilities that might arise from litigation are not
deemed likely to materially affect the financial position or results of
operations of the Company.
-12-
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
Provident Companies, Inc. and Subsidiaries
SEPTEMBER 30, 1998
NOTE 7--COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive
Income, which establishes standards for reporting and presentation of
comprehensive income and its components. SFAS 130 requires foreign currency
translation adjustments and unrealized holding gains and losses on the Company's
available-for-sale fixed maturity and equity securities, which prior to adoption
were reported separately in stockholders' equity, to be reported as components
of comprehensive income. Prior periods have been reclassified to conform to the
requirements of SFAS 130. SFAS 130 had no impact on the Company's net income or
stockholders' equity.
The components of accumulated other comprehensive income, net of related tax,
are as follows:
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
(in millions of dollars)
-------------------------------------
<S> <C> <C>
Net Unrealized Gain on Securities $775.7 $624.3
Foreign Currency Translation Adjustment (30.0) (20.7)
------ ------
Accumulated Other Comprehensive Income $745.7 $603.6
====== ======
</TABLE>
The components of comprehensive income, net of related tax, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
(in millions of dollars)
-------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $ 81.9 $ 71.0 $227.8 $171.5
Change in Net Unrealized Gain on Securities 35.5 217.3 151.4 365.0
Change in Foreign Currency Translation Adjustment (3.8) (2.8) (9.3) (1.5)
------ ------ ------ ------
Comprehensive Income $113.6 $285.5 $369.9 $535.0
====== ====== ====== ======
</TABLE>
-13-
<PAGE>
INDEPENDENT AUDITORS' REVIEW REPORT
Board of Directors and Shareholders
Provident Companies, Inc.
We have reviewed the accompanying condensed consolidated statement of financial
condition of Provident Companies, Inc. and Subsidiaries as of September 30,
1998, and the related condensed consolidated statements of income for the three
and nine month periods ended September 30, 1998 and 1997, and the condensed
consolidated statements of cash flows for the nine month periods ended September
30, 1998 and 1997. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of financial condition of Provident
Companies, Inc. and Subsidiaries as of December 31, 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 3, 1998,
we expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed
consolidated statement of financial condition as of December 31, 1997, is fairly
stated in all material respects in relation to the consolidated statement of
financial condition from which it has been derived.
Chattanooga, Tennessee
November 10, 1998
-14-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company acquired GENEX Services, Inc. ("GENEX") and The Paul Revere
Corporation ("Paul Revere") on February 28, 1997, and March 27, 1997,
respectively. The financial information contained herein includes the accounts
and operating results of GENEX and Paul Revere from the respective dates of
acquisition. Since GENEX and Paul Revere are reflected in the results of the
first nine months of 1998 but for only seven and six months of the first nine
months of 1997, respectively, the difference in comparability of the periods is
frequently attributable to that fact as indicated below.
OPERATING RESULTS
Revenue excluding net realized investment gains and losses ("revenue")
declined $24.1 million, or 2.4 percent, to $966.1 million in the third quarter
of 1998 from $990.2 million in the third quarter of 1997. The decline was the
result of lower revenue in the other operations segment ($74.3 million), which
was partly offset by slightly higher revenue in the individual disability and
life segment ($21.3 million) and employee benefits segment ($28.9 million).
In the first nine months of 1998, revenue increased $384.6 million, or 15.1
percent, to $2,933.7 million from $2,549.1 million in the first nine months of
1997. The increase was the result of higher revenue in the individual
disability and life segment ($342.0 million) and employee benefits segment
($165.2 million), which was partly offset by lower revenue in the other
operations segment ($122.6 million).
-15-
<PAGE>
Income before net realized investment gains and losses and federal income
taxes ("income") increased $14.0 million, or 13.6 percent, to $116.6 million in
the third quarter of 1998, from $102.6 million in the third quarter of 1997.
The increase was the result of increased income in the individual disability and
life segment ($17.2 million) and employee benefits segment ($11.7 million),
which was partly offset by lower income in the other operations segment ($14.9
million).
In the first nine months of 1998, income increased $94.7 million, or 37.9
percent, to $344.6 million, from $249.9 million in the first nine months of
1997. The increase was the result of increased income in the individual life
and disability segment ($84.7 million) and the employee benefits segment ($45.9
million), which was partly offset by lower income in the other operations
segment ($35.9 million).
Net income increased $10.9 million, or 15.4 percent, to $81.9 million in
the third quarter of 1998, from $71.0 million in the third quarter of 1997. Net
realized investment gains after taxes were $6.0 million in the third quarter of
1998, compared to $4.7 million in the third quarter of 1997. For the first nine
months of 1998, net income increased $56.3 million, or 32.8 percent, to $227.8
million, from $171.5 million in the first nine months of 1997. Net realized
investment gains after taxes were $12.0 million in the first nine months of
1998, compared to $8.8 million in the first nine months of 1997.
The gain recognized at the time of the sale of the Company's annuity
business (discussed in detail in the other operations segment) increased
operating results for the nine month period ending September 30, 1998 by $12.2
million before taxes and $1.4 million after taxes.
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<PAGE>
INDIVIDUAL DISABILITY AND LIFE
Revenue in the individual disability and life segment increased $21.3
million, or 3.9 percent, to $565.4 million in the third quarter of 1998, from
$544.1 million in the third quarter of 1997. The increase was primarily the
result of an increase in investment income of $22.2 million, or 13.5 percent, to
$186.2 million in the third quarter of 1998, compared to $164.0 million in the
third quarter of 1997. This increase is primarily due to increased capital
allocation to this line of business and a shift in investment mix to higher
yielding investments in the Paul Revere portfolio. Premium income in this
segment declined $5.5 million, or 1.5 percent, to $369.3 million in the third
quarter of 1998, from $374.8 million in the third quarter of 1997. The decline
was primarily the result of lower premium income in both the individual
disability income and individual life lines of business.
For the first nine months of 1998, revenue in this segment increased $342.0
million, or 25.5 percent, to $1,683.9 million, from $1,341.9 million in the
first nine months of 1997. The increase was primarily the result of the
acquisition of Paul Revere. Net investment income increased $123.4 million, or
29.3 percent, to $545.1 million in the first nine months of 1998, from $421.7
million in the first nine months of 1997, primarily due to the acquisition of
Paul Revere, the shift in investment mix to higher yielding investments, and
increased capital allocation. Premium income in this segment increased $204.3
million, or 22.6 percent, to $1,108.3 million in the first nine months of 1998,
from $904.0 million in the first nine months of 1997, reflecting the acquisition
of Paul Revere.
In November 1994, the Company announced its intention to discontinue the
sale of individual disability products which combined lifetime benefits and
short elimination periods with own-occupation provisions (other than conversion
policies available under existing contractual arrangements). At the same
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<PAGE>
time the Company began introducing products that insured "loss of earnings" as
opposed to occupations, and these products generally contained more limited
benefit periods and longer elimination periods. Since the acquisition of Paul
Revere in March 1997, the Company has discontinued the sale of certain Paul
Revere products that are not consistent with the Company's strategic direction
for its product portfolio. The Company expects to continue to offer selected
Paul Revere products with own-occupation (while not working) features applying
stricter underwriting standards. The Company has filed new rates for some of
these products and is in the process of repricing other of these selected
products and making modifications to their features where appropriate. Going
forward, the Company expects to offer a limited portfolio of own-occupation
based coverages along with its more complete line of loss of earnings related
disability coverages.
In the third quarter of 1998, new annualized sales in the individual
disability income line totaled $28.2 million, compared to $31.5 million in the
third quarter of 1997 and $26.7 million in the second quarter of 1998,
reflecting the continued product transition. On a pro forma basis, sales of
individual disability income contracts declined in 1998 compared to the previous
year, reflecting the disruption associated with the continued product transition
and, secondarily, with the consolidation of the Company's and Paul Revere's
sales offices and related realignment of the field sales force.
Revenue is not expected to be significantly impacted by the transition in
products due to continued favorable persistency. The magnitude and duration of
the decline in sales from previous years, such as that experienced during 1997
and the first nine months of 1998, are dependent on the response of customers
and competitors in the industry.
-18-
<PAGE>
Income in the individual disability and life segment increased $17.2
million, or 26.5 percent, to $82.1 million in the third quarter of 1998, from
$64.9 million in the third quarter of 1997. Income from the individual
disability income line of business increased $15.7 million, or 27.7 percent, to
$72.3 million in the third quarter of 1998, from $56.6 million in the third
quarter of 1997. This increase is primarily due to increased investment income
in the individual disability income line of business and a lower level of new
claims relative to the third quarter of 1997. Management believes substantial
investments in the individual disability claims management process since the
first quarter of 1995 helped produce the improvement that has occurred in this
line over the past three years. The major elements of this investment include
an emphasis on early intervention to better respond to the specific nature of
the claims, increased specialization to properly adjudicate the increasingly
specialized nature of disability claims, and an increased level of staffing with
experienced claim adjusters. Also in this segment, income in the individual
life line of business increased $1.5 million, or 18.1 percent, to $9.8 million
in the third quarter of 1998, from $8.3 million in the third quarter of 1997.
This increase is primarily due to improved mortality experience.
For the first nine months of 1998, income in this segment increased $84.7
million, or 56.2 percent, to $235.5 million from $150.8 million in the first
nine months of 1997. The increase is primarily due to the acquisition of Paul
Revere and improved results in the Company's individual disability income line
of business. Income in the individual disability income line of business
increased $78.3 million, or 60.5 percent, to $207.7 million in the first nine
months of 1998, from $129.4 million in the first nine months of 1997. This
improvement is primarily due to the acquisition of Paul Revere. Also in this
segment, income in the individual life line of business increased $6.4 million,
or 29.9 percent, to $27.8 million in the first nine months of 1998, from $21.4
million in the first nine months of 1997. This increase is primarily due to the
acquisition of Paul Revere, higher investment income, and improved mortality
experience.
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<PAGE>
EMPLOYEE BENEFITS
Revenue in the employee benefits segment increased $28.9 million, or 11.6
percent, to $277.8 million in the third quarter of 1998, from $248.9 million in
the third quarter of 1997. The increase was primarily the result of an increase
in premium income in this segment of $22.1 million, or 11.6 percent, to $212.6
million in the third quarter of 1998, from $190.5 million in the third quarter
of 1997. The increase in premium income was primarily the result of increased
premium income in the group disability and group life lines of business.
For the first nine months of 1998, revenue in this segment increased $165.2
million, or 25.7 percent, to $808.7 million from $643.5 million in the first
nine months of 1997. Premium income increased $121.9 million, or 24.7 percent,
to $614.7 million in the first nine months of 1998, from $492.8 million in the
first nine months of 1997. The increase is the result of the acquisition of
Paul Revere and increased premium income in the group disability, group life,
and voluntary benefits lines of business. Also in this segment, revenue from
GENEX totaled $71.1 million in the first nine months of 1998 compared to $50.3
million of revenue contributed in 1997 subsequent to its acquisition.
Income in the employee benefits segment increased $11.7 million, or 57.6
percent, to $32.0 million in the third quarter of 1998, from $20.3 million in
the third quarter of 1997. Income in the group disability line of business
increased to $12.2 million in the third quarter of 1998 compared to $7.4 million
in the third quarter of 1997, primarily due to the impact of updated factors
used in calculating Social Security offset amounts and probabilities and claim
termination rates, resulting from year-end 1997 group disability reserve
studies. Voluntary benefits reported income of $6.3 million in the third quarter
of 1998 compared
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<PAGE>
to $4.7 million in the third quarter of 1997. The group life line of business
produced income of $9.3 million in the third quarter of 1998 compared to $5.2
million in the third quarter of 1997.
For the first nine months of 1998, income increased $45.9 million, or 102.9
percent, to $90.5 million, from $44.6 million in the first nine months of 1997.
The increase is primarily the result of the acquisition of Paul Revere and
improved results in the group disability, group life, and voluntary benefits
lines of business. The group disability line of business produced income of
$42.6 million in the first nine months of 1998 compared to $14.9 million in the
first nine months of 1997, primarily due to the acquisition of Paul Revere and
the impact of updated factors used in calculating Social Security offset amounts
and probabilities and claim termination rates, resulting from year-end 1997
group disability reserve studies. Voluntary benefits reported income of $14.3
million in the first nine months of 1998 compared to $11.6 million in the first
nine months of 1997. The group life line of business produced income of $25.4
million in the first nine months of 1998 compared to $9.5 million in the first
nine months of 1997.
OTHER OPERATIONS
The other operations segment includes the Company's group pension products,
corporate-owned life insurance ("COLI"), medical stop-loss, individual
annuities, corporate interest expense, goodwill amortization, and corporate
(unallocated) capital and assets. The closed blocks of business have been
segregated for reporting and monitoring purposes.
Effective January 1, 1998, the Company entered into an agreement with
Connecticut General Life Insurance Company ("Connecticut General") for
Connecticut General to reinsure, on a 100% coinsurance basis, the Company's in-
force medical stop-loss insurance coverages sold to clients of CIGNA Healthcare
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<PAGE>
and its affiliates ("CIGNA"). This reinsured block constitutes substantially
all of the Company's medical stop-loss insurance business. The small portion
remaining consists of medical stop-loss coverages sold to clients other than
those of CIGNA. These coverages will not be renewed. During 1997, the medical
stop-loss business produced revenue of $38.1 million and income of $6.6 million.
During the first nine months of 1998, this business produced revenue of $10.4
million.
Effective April 30, 1998, the Company closed the sale of its in-force
individual and tax-sheltered annuity business to various affiliates of American
General Corporation ("American General"). The in-force business sold consisted
primarily of individual fixed annuities and tax-sheltered annuities in Provident
Life and Accident Insurance Company ("Accident"), Provident National Assurance
Company ("National"), The Paul Revere Life Insurance Company ("Paul Revere
Life"), The Paul Revere Variable Annuity Insurance Company ("Paul Revere
Variable"), and The Paul Revere Protective Life Insurance Company ("Paul Revere
Protective"). In addition, American General acquired a number of miscellaneous
group pension lines of business sold in the 1970's and 1980's which are no
longer actively marketed. Pursuant to an administrative services agreement, an
affiliate of American General will be providing administrative services to
registered separate accounts of Paul Revere Variable and National. The sale did
not include the Company's block of traditional guaranteed investment contracts
("GICs") or group single premium annuities, which will continue in a run-off
mode. In consideration for the transfer of the approximately $2.4 billion of
statutory reserves, American General paid the Company a ceding commission of
approximately $58.0 million.
On June 30, 1997, the Company announced that it had agreed to transfer its
dental business to Ameritas Life Insurance Corporation ("Ameritas"). The dental
block, which was acquired in the Paul
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<PAGE>
Revere acquisition, produced $39.2 million in premium income in 1997. The full
transition of the dental business to Ameritas was completed in November 1997.
Revenue in the other operations segment declined $74.3 million, or 37.7
percent, to $122.9 million in the third quarter of 1998, from $197.2 million in
the third quarter of 1997. Revenue from the group pension line of business
declined $22.1 million, or 31.6 percent, to $47.9 million in the third quarter
of 1998, from $70.0 million in the third quarter of 1997. This decline is
primarily the result of a decrease in funds under management resulting from the
strategic decision to discontinue the sale of products in the group pension line
of business.
For the first nine months of 1998, revenue in this segment declined $122.6
million, or 21.7 percent, to $441.1 million, from $563.7 million in the first
nine months of 1997. Included in the 1998 year-to-date revenue is a gain of
$12.2 million from the sale of the annuity business. The decline is primarily
the result of a decrease in funds under management resulting from the
discontinuation of the sale of products in the group pension business. Revenue
in this line declined $75.4 million, or 32.2 percent, to $158.7 million in the
first nine months of 1998, from $234.1 million in the first nine months of 1997.
Management expects that revenue in 1998 from this segment will decline from
the levels recorded in 1997 due to the decline in funds under management and the
sale of the individual annuity line of business.
Income in the other operations segment declined $14.9 million, or 85.6
percent, to $2.5 million in the third quarter of 1998, from $17.4 million in the
third quarter of 1997. The decline in this segment was due in part to the sale
of the annuity line and the medical stop-loss line, as well as lower income in
the
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<PAGE>
group pension line of business, which declined to $7.7 million in the third
quarter of 1998, from $10.3 million in the third quarter of 1997 primarily due
to the result of lower funds under management and lower income from a reduced
amount of capital allocated to this line. Income from the COLI line of business
increased to $9.6 million in the third quarter of 1998 from $5.2 million in the
third quarter of 1997. Interest expense on debt totaled $15.8 million in the
third quarter of 1998, compared to $12.0 million in the third quarter of 1997.
Goodwill amortization totaled $5.2 million in the third quarter of 1998,
compared to $4.2 million in the third quarter of 1997.
For the first nine months of 1998, income in this segment declined $35.9
million, or 65.9 percent, to $18.6 million in the first nine months of 1998,
from $54.5 million in the first nine months of 1997. The decline in this
segment was due in part to lower income in the group pension line of business,
which declined to $21.7 million in the first nine months of 1998, from $28.0
million in the first nine months of 1997 primarily as a result of lower funds
under management and lower income from a reduced amount of capital allocated to
this line. Income from the COLI line of business increased to $20.6 million in
the first nine months of 1998 from $14.4 million in the first nine months of
1997. Interest expense on debt totaled $48.8 million in the first nine months
of 1998, compared to $27.8 million in the first nine months of 1997. Goodwill
amortization totaled $16.1 million in the first nine months of 1998, compared to
$8.6 million in the first nine months of 1997. Included in the 1998 year-to-
date income is a gain of $12.2 million from the sale of the annuity business.
Management expects that income in 1998 from this segment will continue to
decline from the levels recorded in 1997 due to the sale of the annuity line and
the continued run-off of the group pension business.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
On March 27, 1997, the Company consummated the acquisition of Paul Revere
("Paul Revere Merger"), which was financed through common equity issuance to
Zurich Insurance Company, a Swiss insurer, and its affiliates, common equity
issuance and cash to Paul Revere stockholders, debt, and internally generated
funds. The debt financing was provided through an $800.0 million revolving bank
credit facility with various domestic and international banks. The revolving
bank credit facility was established in 1996 to provide partial financing for
the purchase of Paul Revere and GENEX, to refinance the existing bank term notes
of $200.0 million, and for general corporate uses. At December 31, 1997,
outstanding borrowings under the revolving bank credit facility were $725.0
million. The revolving bank credit facility was repaid on February 24, 1998.
The Company also redeemed its outstanding 8.10% cumulative preferred stock,
which had an aggregate value of $156.2 million, on February 24, 1998. The debt
repayment and preferred stock redemption were funded through short-term
borrowing.
In May 1997, the Securities and Exchange Commission declared effective a
shelf registration statement pursuant to which the Company could issue up to
$900.0 million in debt and/or equity securities. On March 16, 1998, the Company
completed a public offering of $200.0 million of 7.25% senior notes due March
15, 2028. On March 16, 1998, Provident Financing Trust I, a wholly-owned
subsidiary trust of the Company, issued $300.0 million of 7.405% capital
securities in a public offering. These capital securities, which mature on March
15, 2038, are fully and unconditionally guaranteed by the Company, have a
liquidation value of $1,000 per capital security, and have a mandatory
redemption feature under certain circumstances. The Company issued $300.0
million of 7.405% junior subordinated deferrable interest debentures, which
mature on March 15, 2038, to the subsidiary trust in connection with the capital
securities offering. The sole assets of the subsidiary trust are the junior
subordinated debt securities.
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<PAGE>
In April 1998, the Company entered into a $150.0 million five-year
revolving credit facility and a $150.0 million 364-day revolving credit facility
with various domestic and international banks. The purpose of the facilities is
for general corporate purposes. There are no outstanding borrowings under
either of the credit facilities.
On July 9, 1998, the Company completed a public offering of $200.0 million
of 6.375% senior notes due July 15, 2005, and $200.0 million of 7.0% senior
notes due July 15, 2018. After completion of this offering, there are no
remaining debt or equity securities available under the Company's shelf
registration statement.
As the Company announced on September 14, 1998, Capital Z Financial
Services Fund II, L.P. is a party to an agreement with Zurich Insurance Company
pursuant to which it may purchase all of the 12,698,414 shares of the Company's
common stock held by Zurich. Capital Z is a global private equity fund focused
on investing in insurance, financial and healthcare services and other related
businesses. Zurich is the largest investor in Capital Z. The transaction, which
is subject to certain conditions, is still pending.
The Company believes the cash flow from its operations will be sufficient
to meet its operating and financial cash flow requirements. Periodically, the
Company may issue debt or equity securities to fund internal expansion,
acquisitions, investment opportunities, and the retirement of the Company's debt
and equity.
As a holding company, the Company is dependent upon payments from its
wholly-owned insurance subsidiaries and GENEX to pay dividends to its
stockholders and to pay its expenses. These payments by
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<PAGE>
the Company's subsidiaries may take the form of either dividends or interest
payments on amounts loaned to such subsidiaries by the Company.
State insurance laws generally restrict the ability of insurance companies
to pay cash dividends or make other payments to their affiliates in excess of
certain prescribed limitations. In the Company's insurance subsidiaries' states
of domicile, regulatory approval is required if an insurance company seeks to
make loans to affiliates in amounts equal to or in excess of three percent of
the insurer's admitted assets or to pay cash dividends in any twelve month
period in excess of the greater of such company's net gain from operations of
the preceding year or ten percent of its surplus as regards policyholders as of
the preceding year end, each as determined in accordance with accounting
practices prescribed or permitted by insurance regulatory authorities. An
aggregate of $141.5 million was available in 1997 for the payment of dividends
and other distributions by the Company's top-tier insurance subsidiaries without
regulatory approval, of which $109.9 million was paid. The Company anticipates
that $151.9 million will be available in 1998 for such purposes. On October 28,
1998, the respective Boards of Directors of National, Paul Revere Protective,
and Paul Revere Variable approved, subject to and contingent on the required
regulatory approvals, extraordinary dividends to be paid by the companies to
their respective parents of $25.0 million, $100.0 million, and $50.0 million,
respectively. The dividends are to be paid on or before December 31, 1998.
The Company's liquidity requirements are met primarily by cash flow
provided from operations, principally in its insurance subsidiaries. Premium
and investment income, as well as maturities and sales of invested assets,
provide the primary sources of cash. Cash flow from operations was sufficient
in the third quarter and first nine months of 1998. Cash is applied to the
payment of policy benefits, costs of acquiring new business (principally
commissions) and operating expenses as well as purchases of new
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<PAGE>
investments. The Company has established an investment strategy that management
believes will provide for adequate cash flow from operations.
During 1997, the Company sold commercial mortgage loans acquired through
the Paul Revere Merger with a principal amount of $268.1 million and a book
value of $258.4 million. The purpose of this transition was to increase the
liquidity and improve the asset quality and asset/liability management of the
investment portfolio.
As a result of the release of capital generated by the run-off of the GIC
portfolio, the sale of the commercial mortgage loans, and other corporate
actions, the Company has increased its available capital to support the growth
of its businesses, including assisting in the financing of the acquisitions of
Paul Revere and GENEX. Management continues to analyze potential opportunities
to utilize the capital to further enhance stockholder value, including exploring
options that would support the Company's growth initiatives.
INVESTMENTS
Investment activities are an integral part of the Company's business, and
profitability is significantly affected by investment results. Invested assets
are segmented into portfolios, which support the various product lines.
Generally, the investment strategy for the portfolios is to match the effective
asset durations with related expected liability durations and to maximize
investment returns, subject to constraints of quality, liquidity,
diversification, and regulatory considerations. The following table provides the
distribution of invested assets for the periods indicated.
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<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
------------- -----------------
1998 1997 1996
------------- ------ -----
<S> <C> <C> <C>
Investment-Grade Fixed Maturity Securities 79.4% 82.2% 77.0%
Below-Investment-Grade Fixed Maturity Securities 7.7 6.6 6.7
Equity Securities 0.1 0.1 0.1
Mortgage Loans 0.1 0.1 --
Real Estate 0.3 0.4 1.1
Policy Loans 12.0 10.2 13.1
Other 0.4 0.4 2.0
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
The following table provides certain investment information and results for
the years indicated.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
1998 1997 1996
----------------- --------- ---------
<S> <C> <C> <C>
(in millions of dollars)
Average Cash and Invested Assets $18,437.8 $17,808.2 $14,056.3
Net Investment Income $ 1,039.6 $ 1,354.7 $ 1,090.1
Average Yield * 7.5% 7.6% 7.8%
Net Realized Investment Gains (Losses) $ 18.2 $ 15.1 $ (8.6)
</TABLE>
- ----------------
*Average yield is determined by dividing net investment income by the average
cash and invested assets for the period. Excluding net unrealized gains and
losses on securities, the yield is 8.3%, 8.0%, and 8.1% for the first nine
months of 1998, full year 1997, and full year 1996, respectively.
For the past three years, the Company's exposure to non-current investments
has improved significantly from prior years. These non-current investments are
primarily foreclosed real estate and mortgage loans which became more than
thirty days past due in their principal and interest payments. Non-current
investments totaled $12.2 million at September 30, 1998, or 0.07 percent of
invested assets.
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<PAGE>
The Company's investment in mortgage-backed securities totaled $2.3 billion
on an amortized cost basis at September 30, 1998 and $3.1 billion at December
31, 1997. At September 30, 1998, the mortgage-backed securities had an average
life of 9.4 years and effective duration of 8.5 years. The mortgage-backed
securities are valued on a monthly basis using valuations supplied by the
brokerage firms that are dealers in these securities. The primary risk involved
in investing in mortgage-backed securities is the uncertainty of the timing of
cash flows from the underlying loans due to prepayment of principal. The
Company uses models which incorporate economic variables and possible future
interest rate scenarios to predict future prepayment rates. The Company has not
invested in mortgage-backed derivatives, such as interest-only, principal-only
or residuals, where market values can be highly volatile relative to changes in
interest rates.
Below-investment-grade bonds are inherently more risky than investment-
grade bonds since the risk of default by the issuer, by definition and as
exhibited by bond rating, is higher. Also, the secondary market for certain
below-investment-grade issues can be highly illiquid. Management does not
anticipate any liquidity problem caused by the investments in below-investment-
grade securities, nor does it expect these investments to adversely affect its
ability to hold its other investments to maturity.
The Company's exposure to below-investment-grade fixed maturity securities
at September 30, 1998, was $1,355.9 million, representing 7.7 percent of
invested assets, below the Company's internal limit of 10.0 percent of invested
assets for this type of investment. The Company's exposure to below-investment-
grade fixed maturities totaled $1,297.1 million at December 31, 1997,
representing 6.6 percent of invested assets.
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<PAGE>
Changes in interest rates and individuals' behavior affect the amount and
timing of asset and liability cash flows. Management regularly models and tests
all asset and liability portfolios to improve interest rate risk management and
net yields. Testing the asset and liability portfolios under various interest
rate and economic scenarios allows management to choose the most appropriate
investment strategy as well as to prepare for the most disadvantageous outcomes.
The Company utilizes forward interest rate swaps, forward treasury
purchases, and options on forward interest rate swaps to manage and increase
yield on cash flows expected from current holdings. All transactions are
hedging in nature and not speculative. Almost all transactions are associated
with the individual disability product portfolio. During the first quarter of
1998, transactions of this type totaled $415.0 million in notional amount,
increasing yield on $63.5 million of purchased securities by approximately 153
basis points. During the second quarter of 1998, transactions of this type
totaled $30.0 million in notional amount, increasing yield on $30.5 million of
purchased securities by approximately 141 basis points. During the third
quarter of 1998, there were no transactions of this type.
YEAR 2000 ISSUES
As are many other businesses in this country and abroad, the Company is
affected in numerous ways, both by its own computer information systems and by
third parties with which it has business relationships, in the processing of
date data relating to the year 2000 and beyond. Failure to adequately address
and substantially resolve year 2000 issues could, and as to mission critical
systems in certain circumstances would, have a material adverse effect on the
Company's business, results of operations, or financial condition. While there
can be no assurance as to its success, the Company has a project underway which
is intended and designed to avoid any such material adverse effect from year
2000 issues.
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<PAGE>
In 1996 the Company completed the significant aspects of the planning phase
of a project designed to modify its computer information systems to enable
proper processing of date data relating to the year 2000. This project has a
number of phases, including (i) planning; (ii) inventory (ascertaining the
various internal systems and external relationships potentially affected by year
2000 issues); (iii) analysis (determining the extent to which the system or
remediation or conversion to a compliant alternative); (iv) construction
(remediating the system in order to be compliant); (v) testing (subjecting the
integrated testing to validate interconnected and future date processing in the
forward year 2000 environment); and (vi) completion. The Company defines Year
2000 "compliant" or "compliance" to mean that software will have the ability to
(i) accept input and provide output of data involving dates or portions of dates
correctly and without ambiguity as to the twentieth or twenty-first centuries;
(ii) manage, store, manipulate, sort, sequence, and perform calculations with
respect to data involving dates or portions of dates before, during and after
January 1, 2000 (including single-century or multi-century date formulas)
without malfunction, abends, aborts; and (iii) manage the leap year occurring in
the year 2000 and any Special Dates. The term "Special Dates" means dates used
by programmers to create exceptions where no date could be determined as
specified to serve as end-of-file indicators or to facilitate sort routines.
The Company's approach has primarily been one of modifying or remediating
systems to make them compliant since there are not generally compliant
replacements available in the market that will meet the Company's operational
needs. In some instances non-compliant systems are being replaced with
available and usable compliant systems where that approach is both cost and time
effective.
In addition, there are different areas of remediation requiring different
solutions. These include the following: (i) business applications (systems
supporting core business processes; this area constitutes more than 75 percent
of the overall project effort), (ii) user developed systems (non-mission
critical systems developed by business areas in the Company for specific tasks),
(iii) hardware and software (computers, central operating systems, software
development, and non-information technology systems; this area requires
contacting vendors as to year 2000 compliance), (iv) enterprise computing
(compliance of the computing infrastructure and year 2000 test facilities), and
(v) business partners (other external business relationships that have year 2000
compliance issues; this area requires contacting third parties as to the status
of year 2000 compliance). Operational control of the project is the
responsibility of the project office.
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<PAGE>
The following table provides information as to the timeline of phases of
completion of the year 2000 project for different areas of the Company's
business:
Year 2000 Project--Time Line(1)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Date 4Q 1995 1Q 1996 2Q 1996 3Q 1996 4Q 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Business Impact analysis Initial project Development of Pilot
Applications completed plan developed methodology applications
chosen to
validate
methodology
- -----------------------------------------------------------------------------------------------------------
Project Office Corporate
awareness
activities begin
- -----------------------------------------------------------------------------------------------------------
</TABLE>
-33-
<PAGE>
Year 2000 Project--Time Line(1)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Date 1Q 1997 2Q 1997 3Q 1997 4Q 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Business Detail project Risk assessments Regression testing begins
Applications plan developed performed,
inventory complete
- -------------------------------------------------------------------------------------------------------
User Inventory Risk assessments completed
Developed Begins
Systems
- -------------------------------------------------------------------------------------------------------
Hardware and Vendor surveys Vendor Inventory of hardware and
Software initiated management software begins
program
formalized
- -------------------------------------------------------------------------------------------------------
Enterprise Future date time Upgrade of Definition/analysis/
Computing machine infrastructure work plan development/
environment products begins construction of in-house
planning begins system applications
- -------------------------------------------------------------------------------------------------------
Business Awareness
Partners campaign extends
to responses to
external
inquiries
- -------------------------------------------------------------------------------------------------------
Project Office Documentation and Project Office Formalized executive and
audit process formed board reporting
defined
- -------------------------------------------------------------------------------------------------------
</TABLE>
-34-
<PAGE>
Year 2000 Project--Time Line (Continued)(1)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Date 1Q 1998 2Q 1998 3Q 1998 4Q 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Business Construction Full compliance
Applications completed, business of business
applications begin applications
time machine testing
- -------------------------------------------------------------------------------------------------------
User Systems in Full compliance
Developed construction and of user
Systems testing developed
systems
- -------------------------------------------------------------------------------------------------------
Hardware and Inventory of field Standard software
Software office third party configuration
service providers established
- -------------------------------------------------------------------------------------------------------
Enterprise Time machine Certification Full compliance of
Computing environment testing of computing home office
constructed at 3 infrastructure infrastructure,
sites completed network and telephony
systems
- -------------------------------------------------------------------------------------------------------
Business Request for Contingency planning Contingency plans Business
Partners information sent process defined for finalized for all partner
to electronic critical business critical business interface
business partners processes interfaces testing
- -------------------------------------------------------------------------------------------------------
Project Office Testing metrics Business impact
established for time teams formulated
machine
- -------------------------------------------------------------------------------------------------------
</TABLE>
-35-
<PAGE>
Year 2000 Project--Time Line (Continued)(1)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Date 1Q 1999 2Q 1999 3Q 1999 4Q 1999 - 2000
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Business
Applications
- -------------------------------------------------------------------------------------------------
User
Developed
Systems
- -------------------------------------------------------------------------------------------------
Hardware and Contingency plans
Software implemented as
required
- -------------------------------------------------------------------------------------------------
Enterprise Upgrade and
Computing replacement of
all PC systems
completed
- -------------------------------------------------------------------------------------------------
Business Business Contingency plans
Partners partner implemented as
interface required
testing
completed
- -------------------------------------------------------------------------------------------------
Project Office Enterprise - Enterprise -
wide wide
integration integration
testing for testing for
re-certification re-certification
begins complete
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) With regard to GENEX, a separate operating subsidiary acquired in February
1997, the primary approach to attaining year 2000 compliance will be replacing
non-compliant systems with compliant systems. This process is expected to be
complete in the third quarter of 1999.
-36-
<PAGE>
With the exception of GENEX, the Company expects its systems to be
compliant by the end of 1998, although it is unlikely that the Company will have
received satisfactory assurances from third parties as to year 2000 compliance
by the end of 1998.
There are numerous instances in which third parties having a relationship
with the Company have year 2000 issues to address and resolve. These include
primarily vendors of hardware and software, holders of group insurance policies,
issuers of investment securities, financial institutions, governmental agencies,
and suppliers. An aspect of the project is to identify these third parties and
generally to contact them seeking written assurance as to the third party's
expectancy to be year 2000 compliant. Written requests have been sent to more
than 925 third parties. The nature of the Company's follow up depends upon its
assessment of the response and of the materiality of the effect of non-
compliance by the third party on the Company. For example, the Company follows
up with additional written requests and telephonic inquiries depending upon the
circumstances and in some instances determines that it is appropriate to test
third party systems about which it has received written assurance. In instances
in which the effect of non-compliance may be deemed materially adverse to the
Company's business, results of operations, or financial condition, the project
personnel are in the process of determining an appropriate contingency
arrangement. Project personnel have identified primary business areas which,
based on the status of current responses from third parties, have the potential
for year 2000 problems. At this time these include cash management,
underwriting, client services, and claims. Initial alternatives for contingent
arrangements have been selected, and project personnel are considering
appropriate documentation of potential procedural changes by the Company or
third party providers. With regard to material relationships, contingency plans
are expected to be complete by year end 1998.
Since inception of the project, the Company has expensed $6.4 million
through September 30, 1998, in connection with incremental cost of the year 2000
project and estimates an additional $1.9 million to complete the project.
-37-
<PAGE>
The effort of the information systems personnel and others devoted to the
project has been considerable. Temporary personnel in varying numbers have been
retained to assist full time personnel in some phases or aspects of the project.
The Company has utilized compensation programs to retain project personnel in
order to keep the project on schedule. While the project has required systems
management to more closely scrutinize the prioritization of information
technology projects, it is not believed that any deferral of information
technology projects has had a material impact on the Company. At various stages
during the project, the Company has used consultants on some particular aspects
of the project. The Company has also had occasional contact with certain peer
companies comparing approaches to year 2000 issues. The Company has not sought
and does not currently expect to obtain independent verification of its
processes for dealing with year 2000.
Given the range of possibilities that may occur in connection with non-
compliance with year 2000 that could affect the Company, particularly as a
consequence of third parties, the Company is unable to provide an estimate of
the impact of such non-compliance on its business, results of operations, or
financial condition. With regard to non-compliance resulting from the Company's
systems, which the Company believes to be less likely than that resulting from
third parties, the Company would devote its financial and personnel resources,
which include approximately 250 systems personnel who would be available, to
remediate the problem as soon as possible. With regard to non-compliance
resulting from third party failure, the Company is trying to determine through
responses and other appropriate action where there is any material likelihood of
non-compliance having a potentially material impact. In these instances it is
seeking to develop an appropriate contingency arrangement that will minimize
such impact; however, given the range of possibilities, no assurance can be
given that the Company's efforts will be successful.
The foregoing discussion of the year 2000 issue contains forward-looking
statements relating to such matters as financial performance and the business of
the Company. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward-looking statements. In order for the Company to comply
with the terms of the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience relating to compliance
with year 2000 to differ materially from the anticipated results or other
expectations expressed in the Company's forward looking statements concerning
year 2000 issues, which involve certain risks and uncertainties. These factors
include (i) the unanticipated material impact of a system fault of the Company
relating to year 2000, (ii) the failure to successfully remediate, in spite of
testing, material systems of the Company, (iii) the time it may take to
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<PAGE>
successfully remediate a failure once it occurs, as well as the resulting costs
and loss of revenues, and (iv) the failure of third parties to properly
remediate material year 2000 problems.
REVIEW BY INDEPENDENT ACCOUNTANTS
The condensed consolidated financial statements at September 30, 1998, and
for the three month and nine month periods then ended have been reviewed, prior
to filing, by Ernst and Young LLP, the Company's independent accountants, and
their report is included herein.
-39-
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 3.2 Amended and Restated By-Laws
Exhibit 10.18 American General Agreements
Exhibit 15 Letter re: unaudited interim financial information
Exhibit 27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K:
Form 8-K filed on September 22, 1998, relating to the sale of $200.0
million 6.375% Senior Notes due July 15, 2005, and $200.0 million 7.0%
Senior Notes due July 15, 2018, and incorporation of the Underwriting
Agreement and the opinions and comments of Alston & Bird LLP issued in
connection therewith into the Registration Statement under which the
Notes were issued.
-40-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Provident Companies, Inc.
(Registrant)
Date: November 12, 1998
/s/ J. Harold Chandler
------------------------------------
J. Harold Chandler
Chairman, President and
Chief Executive Officer
Date: November 12, 1998
/s/ Thomas R. Watjen
-----------------------------------
Thomas R. Watjen
Vice Chairman and
Chief Financial Officer
-41-
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
to
FORM 10-Q
PROVIDENT COMPANIES, INC.
-42-
<PAGE>
INDEX OF EXHIBITS
EXHIBIT PAGE
Exhibit 3.2 Amended and Restated By-Laws 44
Exhibit 10.18 American General Agreements 58
Exhibit 15 Letter re: unaudited interim financial information 151
Exhibit 27 Financial Data Schedule (for SEC use only) 152
-43-
<PAGE>
EXHIBIT 3.2
PROVIDENT COMPANIES, INC.
BYLAWS
(As Amended by Action of the Board of Directors on October 28, 1998)
SECTION I
CAPITAL STOCK
SECTION 1.1. CERTIFICATES. Every holder of stock in the Corporation shall
be entitled to have a certificate signed in the name of the Corporation by the
President or a Vice President, and by the Treasurer or an Assistant Treasurer or
the Secretary or an Assistant Secretary of the Corporation certifying the number
of shares in the Corporation owned by such holder. If such certificate is
countersigned (a) by a transfer agent other than the Corporation or its
employee, or, (b) by a registrar other than the Corporation or its employee, any
other signature on the certificate may be a facsimile. In case any officer,
transfer agent, or registrar who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer, transfer
agent, or registrar before such certificate is issued, it may be issued by the
Corporation with the same effect as if such person were such officer, transfer
agent, or registrar at the date of issue.
SECTION 1.2. RECORD OWNERSHIP. A record of the name and address of the
holder of each certificate, the number of shares represented thereby and the
date of issue thereof shall be made on the Corporation's books. The Corporation
shall be entitled to treat the holder of record of any share of stock as the
holder in fact thereof, and accordingly shall not be bound to recognize any
equitable or other claim to or interest in any share on the part of any other
person, whether or not it shall have express or other notice thereof, except as
required by the laws of the State of Delaware.
SECTION 1.3. TRANSFER OF RECORD OWNERSHIP. Transfers of stock shall be
made on the books of the Corporation only by direction of the person named in
the certificate or such person's attorney, lawfully constituted in writing, and
only upon the surrender of the certificate therefor and a written assignment of
the shares evidenced thereby, which certificate shall be canceled before the new
certificate is issued.
SECTION 1.4. LOST CERTIFICATES. Any person claiming a stock certificate
in lieu of one lost, stolen or destroyed shall give the Corporation an affidavit
as to such person's ownership of the certificate and of the facts which go to
prove its loss, theft or destruction. Such person shall also, if required by
policies adopted by the Board of Directors, give the Corporation a bond, in such
form as may be approved by the Corporation, sufficient to indemnify the
Corporation against any claim that may be made against it on account of the
alleged loss of the certificate or the issuance of a new certificate.
<PAGE>
SECTION 1.5. TRANSFER AGENTS; REGISTRARS; RULES RESPECTING CERTIFICATES.
The Board of Directors may appoint, or authorize any officer or officers to
appoint, one or more transfer agents and one or more registrars. The Board of
Directors may make such further rules and regulations as it may deem expedient
concerning the issue, transfer and registration of stock certificates of the
Corporation.
SECTION 1.6. RECORD DATE. The Board of Directors may fix in advance a
future date, not exceeding 60 days (nor, in the case of a stockholders' meeting,
less than ten days) preceding the date of any meeting of stockholders, payment
of dividend or other distribution, allotment of rights, or change, conversion or
exchange of capital stock or for the purpose of any other lawful action, as the
record date for determination of the stockholders entitled to notice of and to
vote at any such meeting and any adjournment thereof, or to receive any such
dividend or other distribution or allotment of rights, or to exercise the rights
in respect of any such change, conversion or exchange of capital stock, or to
participate in any such other lawful action, and in such case such stockholders
and only such stockholders as shall be stockholders of record on the date so
fixed shall be entitled to such notice of and to vote at such meeting and any
adjournment thereof, or to receive such dividend or other distribution or
allotment of rights, or to exercise such rights, or to participate in any such
other lawful action, as the case may be, notwithstanding any transfer of any
stock on the books of the Corporation after any such record date fixed as
aforesaid.
SECTION II
MEETINGS OF STOCKHOLDERS
SECTION 2.1. ANNUAL. The annual meeting of stockholders for the election
of directors and the transaction of such other proper business shall be held on
the first Wednesday in May, unless otherwise specified by resolution adopted by
the Board of Directors, and at the time and place, within or without the State
of Delaware, as determined by the Board of Directors.
SECTION 2.2. SPECIAL. Special meetings of stockholders for any purpose or
purposes may be called only by the President, the Board of Directors, pursuant
to a resolution adopted by a majority of the members of the Board of Directors
then in office, or upon written request of the holders of at least ten (10)
percent of the votes entitled to be cast on any issue proposed to be considered
at the proposed special meeting. Special meetings may be held at any place,
within or without the State of Delaware, as determined by the Board of
Directors. The only business which may be conducted at such a meeting, other
than procedural matters and matters relating to the conduct of the meeting,
shall be the matter or matters described in the notice of the meeting.
SECTION 2.3. NOTICE. Written notice of each meeting of stockholders,
stating the date, time, place and, in the case of a special meeting, the purpose
thereof, shall be given as provided by law by the Secretary or an Assistant
Secretary not less than ten days nor more than 60 days before
-2-
<PAGE>
such meeting (unless a different time is specified by law) to every stockholder
entitled by law to notice of such meeting.
SECTION 2.4. LIST OF STOCKHOLDERS. A complete list of the stockholders
entitled to vote at any meeting of stockholders, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder, shall be prepared by the Secretary and shall be
open to the examination of any stockholder, for any purpose germane to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified at the place where the meeting is to be held, for at least ten days
before the meeting and at the place of the meeting during the whole time of the
meeting.
SECTION 2.5. QUORUM. The holders of shares of stock entitled to cast a
majority of the votes on the matters at issue at a meeting of stockholders,
present in person or represented by proxy, shall constitute a quorum, except as
otherwise required by the Delaware General Corporation Law. In the event of a
lack of a quorum, the chairman of the meeting or a majority in interest of the
stockholders present in person or represented by proxy may adjourn the meeting
from time to time without notice other than announcement at the meeting, until a
quorum shall be obtained. At any such adjourned meeting at which there is a
quorum, any business may be transacted that might have been transacted at the
meeting originally called.
SECTION 2.6. ORGANIZATION AND PROCEDURE. (a) The President, or, in the
absence of the President, any other person designated by the Board of Directors,
shall preside at meetings of stockholders. The Secretary of the Corporation
shall act as secretary, but in the absence of the Secretary, the presiding
officer may appoint a secretary.
(b) At each meeting of stockholders, the chairman of the meeting shall fix
and announce the date and time of the opening and the closing of the polls for
each matter upon which the stockholders will vote at the meeting and shall
determine the order of business and all other matters of procedure. Except to
the extent inconsistent with any such rules and regulations as adopted by the
Board of Directors, the chairman of the meeting may establish rules, which need
not be in writing, to maintain order for the conduct of the meeting, including,
without limitation, restricting attendance to bona fide stockholders of record
and their proxies and other persons in attendance at the invitation of the
chairman and making rules governing speeches and debates. The chairman of the
meeting acts in his or her absolute discretion and his or her rulings are not
subject to appeal.
SECTION 2.7. VOTING. Unless otherwise provided in a resolution or
resolutions providing for any class or series of Preferred Stock pursuant to
Article IV of the Certificate of Incorporation or by the Delaware General
Corporation Law, each stockholder shall be entitled to one vote, in person or by
written proxy, for each share held of record by such stockholder who is entitled
to vote generally in the election of directors. All elections for the Board of
Directors shall be decided by a plurality of the votes cast and all other
questions shall be decided by a majority of the
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<PAGE>
votes cast, except as otherwise required by the Delaware General Corporation
Law or as provided for in the Certificate of Incorporation or these Bylaws.
Abstentions shall not be considered to be votes cast.
SECTION 2.8. INSPECTORS. The Board of Directors by resolution shall, in
advance of any meeting of stockholders, appoint one or more inspectors, which
inspector or inspectors may include individuals who serve the Corporation in
other capacities, including, without limitation, as officers, employees, agents
or representatives of the Corporation, to act at the meeting and make a written
report thereof. One or more persons may be designated by the Board of Directors
as alternate inspectors to replace any inspector who fails to act. If no
inspector or alternate is able to act at a meeting of stockholders, the chairman
of the meeting shall appoint one or more inspectors to act at the meeting. Each
inspector, before discharging his or her duties, shall take and sign an oath
faithfully to execute the duties of inspector with strict impartiality and
according to the best of his or her ability. The inspectors shall have the
duties prescribed by the Delaware General Corporation Law.
SECTION 2.9. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS.
(a) Annual Meetings of Stockholders.
--------------------------------
(1) Nominations of persons for election to the Board of Directors of
the Corporation and the proposal of business to be considered by the
stockholders may be made at an annual meeting of stockholders (a) pursuant to
the Corporation's notice of meeting, (b) by or at the direction of the Board of
Directors or (c) by any stockholder of the Corporation who was a stockholder of
record at the time of giving of notice provided for in this Bylaw, who is
entitled to vote at the meeting and who complies with the notice procedures set
forth in this Bylaw.
(2) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of
this Bylaw, the stockholder must have given timely notice thereof in writing to
the Secretary of the Corporation and such other business must otherwise be a
proper matter for stockholder action. To be timely, a stockholder's notice
shall be delivered to the Secretary at the principal executive offices of the
Corporation not later than the close of business on the 60th day nor earlier
than the close of business on the 90th day prior to the first anniversary of the
preceding year's annual meeting; provided, however, that in the event that the
date of the annual meeting is more than 30 days before or more than 60 days
after such anniversary date, notice by the stockholder to be timely must be so
delivered not earlier than the close of business on the 90th day prior to such
annual meeting and not later than the close of business on the later of the 60th
day prior to such annual meeting or the 10th day following the day on which
public announcement of the date of such meeting is first made by the
Corporation. In no event shall the public announcement of an adjournment of an
annual meeting commence a new time period for the giving of a stockholder's
notice as described above. Such stockholder's notice shall set forth (a) as to
each person whom the stockholder proposes to nominate for election or re-
election as a director all information
-4-
<PAGE>
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors in an election contest, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder
(including such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected); (b) as to any other
business that the stockholder proposes to bring before the meeting, a brief
description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such stockholder and the beneficial owner, if any, on whose
behalf the proposal is made; and (c) as to the stockholder giving the notice and
the beneficial owner, if any, on whose behalf the nomination or proposal is made
(i) the name and address of such stockholder, as they appear on the
Corporation's books, and of such beneficial owner and (ii) the class and number
of shares of the Corporation which are owned beneficially and of record by such
stockholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph (A)(2) of
this Bylaw to the contrary, in the event that the number of directors to be
elected to the Board of Directors of the corporation at an annual meeting is
increased and there is no public announcement by the Corporation naming all of
the nominees for director or specifying the size of the increased Board of
Directors at least 70 days prior to the first anniversary of the preceding
year's annual meeting, stockholder's notice required by this Bylaw shall also be
considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the close of
business on the 10th day following the day on which such public announcement is
first made by the Corporation.
(b) Special Meetings of Stockholders. Only such business shall be
--------------------------------
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Corporation's notice of meeting. Nominations of
persons for election to the Board of Directors may be made at a special meeting
of stockholders at which directors are to be elected pursuant to the
Corporation's notice of meeting (a) by or at the direction of the Board of
Directors or (b) provided that the Board of Directors has determined that
directors shall be elected at such meeting, by any stockholder of the
Corporation who is a stockholder of record at the time of giving of notice
provided for in this Bylaw, who shall be entitled to vote at the meeting and who
complies with the notice procedures set forth in this Bylaw. In the event the
Corporation calls a special meeting of stockholders for the purpose of electing
one or more directors to the Board of Directors, any such stockholder may
nominate a person or persons (as the case may be), for election to such
position(s) as specified in the Corporation's notice of meeting, if the
stockholder's notice required by paragraph (A)(2) of this Bylaw shall be
delivered to the Secretary of the principal executive offices of the Corporation
not earlier than the close of business on the 90th day prior to such special
meeting and not later than the close of business on the later of the 60th day
prior to such special meeting or the 10th day following the day on which public
announcement is first made of the date of the special meeting and of the
nominees proposed by the Board of Directors to be elected at such meeting. In
no event shall the public
-5-
<PAGE>
announcement of an adjournment of a special meeting commence a new time period
for the giving of a stockholder's notice as described above.
(c) General.
--------
(1) Only such persons who are nominated in accordance with the
procedures set forth in these Bylaws shall be eligible to serve as directors and
only such business shall be conducted at a meeting of stockholders as shall have
been brought before the meeting in accordance with the procedures set forth in
this Bylaw. Except as otherwise provided by law, the Certificate of
Incorporation or these Bylaws, the Chairman of the meeting shall have the power
and duty to determine whether a nomination or any business proposed to be
brought before the meeting was made or proposed, as the case may be, in
accordance with the procedures set forth in this Bylaw and, if any proposed
nomination or business is not in compliance with this Bylaw, to declare that
such defective proposal or nomination shall be disregarded.
(2) For purposes of this Bylaw, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Bylaw, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with the respect to the matters set
forth in this Bylaw. Nothing in this Bylaw shall be deemed to affect any rights
(i) of stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders
of any series of Preferred Stock to elect directors under specified
circumstances.
SECTION III
BOARD OF DIRECTORS
SECTION 3.1. POWERS AND NUMBER. The business and affairs of the
Corporation shall be managed by or under the direction of its Board of
Directors. In furtherance, and not in limitation, of the powers conferred by
the laws of the State of Delaware, the Board of Directors is expressly
authorized to:
(a) adopt, amend, alter, change or repeal the Bylaws of the Corporation;
provided, however, that no Bylaws hereafter adopted shall invalidate any prior
act of the directors that would have been valid if such new Bylaws had not been
adopted;
-6-
<PAGE>
(b) determine the rights, powers, duties, rules and procedures that affect
the power of the Board of Directors to manage and direct the business and
affairs of the Corporation, including the power to designate and empower
committees of the Board of Directors, to elect, appoint and empower the officers
and other agents of the Corporation, and to determine the time and place of, and
the notice requirements for, Board meetings, as well as quorum and voting
requirements for, and the manner of taking, Board action; and
(c) exercise all such powers and do all such acts as may be exercised or
done by the Corporation, subject to the provisions of the laws of the State of
Delaware and the Certificate of Incorporation and the Bylaws of the Corporation.
The number of directors constituting the Board of Directors shall be as
authorized from time to time by a vote of a majority of the members of the Board
of Directors then in office.
SECTION 3.2. RESIGNATION. A director may resign at any time by giving
written notice to the President or to the Secretary. Unless otherwise stated in
such notice of resignation, the acceptance thereof shall not be necessary to
make it effective; and such resignation shall take effect at the time specified
therein or, in the absence of such specification, it shall take effect upon the
receipt thereof.
SECTION 3.3. VACANCIES. Any vacancies in the Board of Directors for any
reason and any newly created directorships resulting by reason of any increase
in the number of directors may be filled only by the Board of Directors, acting
by a majority of the remaining directors then in office, although less than a
quorum, or by a sole remaining director, unless there are no remaining
directors, in which event the stockholders may fill such vacancies in accordance
with Delaware law. Any directors so appointed shall hold office until the next
election of directors and until their successors are elected and qualified or
their earlier resignation or removal.
SECTION 3.4. REMOVAL OF DIRECTORS. Except as may be provided in a
designation of the preferences, limitations and relative rights of any class or
series of Preferred Stock pursuant to Article IV hereof with respect to any
directors elected by the holders of such class or series, any director, or the
entire Board of Directors, may be removed from office at any time, with or
without cause, by the holders of a majority of the voting power of all of the
shares of capital stock of the Corporation then entitled to vote generally in
the election of directors, voting together as a single class.
SECTION 3.5. REGULAR MEETINGS. Regular meetings of the Board of Directors
may be held without further notice at such time as shall from time to time be
determined by the Board of Directors. Unless otherwise determined by the Board
of Directors, the locations of the regular meetings of the Board of Directors
shall be in Chattanooga, Tennessee. A meeting of the Board of Directors for the
election of officers and the transaction of such other business as may come
before it may be held without notice immediately following the annual meeting of
stockholders.
-7-
<PAGE>
SECTION 3.6. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by the President or at the request in writing of one third of the
members of the Board of Directors then in office.
SECTION 3.7. NOTICE OF SPECIAL MEETINGS. Notice of the date, time and
place of each special meeting shall be mailed by regular mail to each director
at his designated address at least six days before the meeting; or sent by
overnight courier to each director at his designated address at least two days
before the meeting (with delivery scheduled to occur no later than the day
before the meeting); or given orally by telephone or other means, or by
telegraph or telecopy, or by any other means comparable to any of the foregoing,
to each director at his designated address at least 24 hours before the meeting;
provided, however, that if less than five days' notice is provided and one third
of the members of the Board of Directors then in office object in writing prior
to or at the commencement of the meeting, such meeting shall be postponed until
five days after such notice was given pursuant to this sentence (or such shorter
period to which a majority of those who objected in writing agree), provided
that notice of such postponed meeting shall be given in accordance with this
Section 3.7. The notice of the special meeting shall state the general purpose
of the meeting, but other routine business may be conducted at the special
meeting without such matter being stated in the notice.
SECTION 3.8. PLACE OF MEETINGS. The Board of Directors may hold their
meetings and have an office or offices inside or outside of the State of
Delaware.
SECTION 3.9. TELEPHONIC MEETING AND PARTICIPATION. Any or all of the
directors may participate in a meeting of the Board of Directors or any
committee thereof by conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other, and
such participation shall constitute presence in person at the meeting.
SECTION 3.10. ACTION BY DIRECTORS WITHOUT A MEETING. Unless otherwise
restricted by the Certificate of Incorporation or these Bylaws, any action
required or permitted to be taken at any meeting of the Board of Directors, or
of any committee thereof, may be taken without a meeting if all members of the
Board or of such committee, as the case may be, consent thereto in writing, and
the writing or writings are filed with the minutes of proceedings of the Board
or committee.
SECTION 3.11. QUORUM AND ADJOURNMENT. A majority of the directors then
holding office shall constitute a quorum. The vote of the majority of the
directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors. Whether or not a quorum is present to conduct a
meeting, any meeting of the Board of Directors (including an adjourned meeting)
may be adjourned by a majority of the directors present, to reconvene at a
specific time and place. It shall not be necessary to give to the directors
present at the adjourned meeting notice of the reconvened meeting or of the
business to be transacted, other than by announcement at the meeting that was
adjourned; provided, however, notice of such reconvened meeting, stating
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<PAGE>
the date, time, and place of the reconvened meeting, shall be given to the
directors not present at the adjourned meeting in accordance with the
requirements of Section 3.7 hereof.
SECTION 3.12. ORGANIZATION. The President, or, in the absence of the
President, a member of the Board selected by the members present, shall preside
at meetings of the Board. The Secretary of the Corporation shall act as
secretary, but in the absence of the Secretary, the presiding officer may
appoint a secretary.
SECTION 3.13. COMPENSATION OF DIRECTORS. Directors shall receive such
compensation for their services as the Board of Directors may determine. Any
director may serve the Corporation in any other capacity and receive
compensation therefor.
SECTION 3.14. PRESUMPTION OF ASSENT. A director of the Corporation who
is present at a meeting of the Board of Directors when a vote on any matter is
taken is deemed to have assented to the action taken unless he votes against or
abstains from the action taken, or unless at the beginning of the meeting or
promptly upon arrival the director objects to the holding of the meeting or
transacting specified business at the meeting. Any such dissenting votes,
abstentions or objections shall be entered in the minutes of the meeting.
SECTION IV
COMMITTEES
SECTION 4.1. COMMITTEES. The Board of Directors may, by resolutions
passed by a majority of the members of the Board of Directors, designate members
of the Board of Directors to constitute other committees which shall in each
case consist of such number of directors, and shall have and may execute such
powers as may be determined and specified in the respective resolutions
appointing them. Any such committee may fix its rules of procedure, determine
its manner of acting and the time and place, whether within or without the State
of Delaware, of its meetings and specify what notice thereof, if any, shall be
given, unless the Board of Directors shall otherwise by resolution provide.
Unless otherwise provided by the Board of Directors or such committee, the
quorum, voting and other procedures shall be the same as those applicable to
actions taken by the Board of Directors. A majority of the members of the Board
of Directors then in office shall have the power to change the membership of any
such committee at any time, to fill vacancies therein and to discharge any such
committee or to remove any member thereof, either with or without cause, at any
time.
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SECTION V
OFFICERS
SECTION 5.1. DESIGNATION. The officers of the Corporation shall be a
President, one or more Vice Presidents in such gradations as the Board of
Directors may determine, a Treasurer, one or more Assistant Treasurers, a
Comptroller, one or more Assistant Comptrollers, a Secretary, and one or more
Assistant Secretaries, as may be elected by the Board. The Board of Directors
may elect or appoint, or provide for the appointment of, such officers or agents
as may from time to time appear necessary or advisable in the conduct of the
business and affairs of the Corporation. Any number of offices may be held by
the same person.
SECTION 5.2. ELECTION TERM. At its first meeting after each annual
meeting of stockholders, the Board of Directors shall elect the officers or
provide for the appointment thereof. Subject to Section 5.3 and Section 5.4
hereof, the term of each officer elected by the Board of Directors shall be
until the first meeting of the Board of Directors following the next annual
meeting of stockholders and until such officer's successor is chosen and
qualified.
SECTION 5.3. RESIGNATION. Any officer may resign at any time by giving
written notice to the Secretary. Unless otherwise stated in such notice of
resignation, the acceptance thereof shall not be necessary to make it effective;
and such resignation shall take effect at the time specified therein or, in the
absence of such specification, it shall take effect upon the receipt thereof.
SECTION 5.4. REMOVAL. Any officer may be removed at any time with or
without cause by the affirmative vote of a majority of the members of the Board
of Directors then in office. Any officer appointed by another officer may be
removed with or without cause by such officer or the Chief Executive Officer.
SECTION 5.5. VACANCIES. A vacancy in any office may be filled for the
unexpired portion of the term by the Board of Directors or, in the case of
offices held by officers who may be appointed by other officers, by any officer
authorized to appoint such officer.
SECTION 5.6. CHIEF EXECUTIVE OFFICER. The President shall initially be
the Chief Executive Officer of the Corporation and thereafter, at such time as
the Board of Directors shall determine, the Chief Executive Officer shall be
such officer as the Board of Directors shall designate from time to time. The
Chief Executive Officer shall be responsible for carrying out the policies
adopted by the Board of Directors.
SECTION 5.7. PRESIDENT. The President shall have such powers and perform
such duties as may be provided for herein and as may be incident to the office
and as may be assigned by the Board of Directors.
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SECTION 5.8. CHAIRMAN OF THE BOARD. The Board, in its discretion may
elect a Chairman of the Board, who shall have such powers and perform such
duties as may be incident to the office and as may be assigned by the Board of
Directors.
SECTION 5.9. VICE PRESIDENT. Each Vice President shall have such powers
and perform such duties as may be provided for herein and as may be assigned by
the President or the Board of Directors.
SECTION 5.10. TREASURER. The Treasurer shall have charge of all funds of
the Corporation and shall perform all acts incident to the position of
Treasurer, subject to the control of the Board of Directors.
SECTION 5.11. COMPTROLLER. The Comptroller shall have the custody and
operation of the accounting books and records of the Corporation and shall
perform all acts incident to the position of Comptroller, subject to the control
of the Board of Directors.
SECTION 5.12. SECRETARY. The Secretary shall keep the minutes, and give
notices, of all meetings of stockholders and directors and of such committees as
directed by the Board of Directors. The Secretary shall have charge of such
books and papers as the Board of Directors may require. The Secretary or any
Assistant Secretary is authorized to certify copies of extracts from minutes and
of documents in the Secretary's charge and anyone may rely on such certified
copies to the same effect as if such copies were originals and may rely upon any
statement of fact concerning the Corporation certified by the Secretary (or any
Assistant Secretary). The Secretary shall perform all acts incident to the
office of Secretary, subject to the control of the Board of Directors.
SECTION 5.13. ASSISTANT SECRETARIES, ASSISTANT TREASURERS AND ASSISTANT
COMPTROLLERS. Assistant Secretaries, Assistant Treasurers and Assistant
Comptrollers shall have such powers and perform such duties as usually pertain
to their respective offices and as may be assigned by the Board of Directors or
an officer designated by the Board of Directors.
SECTION 5.14. COMPENSATION OF OFFICERS. The officers of the Corporation
shall receive such compensation for their services as the Board of Directors or
the appropriate committee thereof may determine. The Board of Directors may
delegate its authority to determine compensation to designated officers of the
Corporation.
SECTION 5.15. EXECUTION OF INSTRUMENTS. Checks, notes, drafts, other
commercial instruments, assignments, guarantees of signatures and contracts
(except as otherwise provided herein or by law) shall be executed by the
President or such officers or employees or agents as the Board of Directors or
the President may direct.
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SECTION 5.16. MECHANICAL ENDORSEMENTS. The President or the Secretary may
authorize any endorsement on behalf of the Corporation to be made by such
mechanical means or stamps as any of such officers may deem appropriate.
SECTION VI
INDEMNIFICATION
SECTION 6.1. INDEMNIFICATION PROVISIONS IN CERTIFICATE OF INCORPORATION.
The provisions of this Section VI are intended to supplement Article V of the
Certificate of Incorporation pursuant to Sections 5.2 and 5.3 thereof. To the
extent that this Section VI contains any provisions inconsistent with said
Article V, the provisions of the Certificate of Incorporation shall govern.
Terms defined in such Article V shall have the same meaning in this Section VI.
SECTION 6.2. INDEMNIFICATION OF EMPLOYEES. The Corporation may indemnify
and advance expenses to its employees to the same or any lesser extent as to its
directors and officers, as set forth in the Certificate of Incorporation and in
this Section VI of the Bylaws of the Corporation.
SECTION 6.3. UNDERTAKINGS FOR ADVANCES OF EXPENSES. If and to the extent
the Delaware General Corporation Law requires, an advancement by the Corporation
of expenses incurred by an indemnitee pursuant to clause (iii) of the last
sentence of Section 5.1 of the Certificate of Incorporation (hereinafter an
"advancement of expenses") shall be made only upon delivery to the Corporation
of an undertaking (hereinafter an "undertaking"), by or on behalf of such
indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal (hereinafter a "final adjudication") that such indemnitee is not entitled
to be indemnified for such expenses under Article V of the Certificate of
Incorporation or otherwise.
SECTION 6.4. CLAIMS FOR INDEMNIFICATION. If a claim for indemnification
under Section 5.1 of the Certificate of Incorporation is not paid in full by the
Corporation within 60 days after it has been received in writing by the
Corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be 20 days, the indemnitee may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such suit, or in a suit
brought by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the indemnitee shall be entitled to be paid also the
expense of prosecuting or defending such suit. In any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a suit
brought by the indemnitee to enforce a right to an advancement of expenses) it
shall be a defense that, and in any suit by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking the Corporation
shall be entitled to recover such expenses only upon a final
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adjudication that, the indemnitee has not met the applicable standard of conduct
set forth in Section 145 of the Delaware General Corporation Law (or any
successor provision or provisions). Neither the failure of the Corporation
(including the Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
Section 145 of the Delaware General Corporation Law (or any successor provision
or provisions), nor an actual determination by the Corporation (including the
Board of Directors, independent legal counsel, or its stockholders) that the
indemnitee has not met such applicable standard of conduct, shall create a
presumption that the indemnitee has not met the applicable standard of conduct
or, in the case of such a suit brought by the indemnitee, be a defense to such
suit. In any suit brought by the indemnitee to enforce a right to
indemnification or to an advancement of expenses hereunder, or by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the burden of proving that the indemnitee is not entitled to be
indemnified, or to have or retain such advancement of expenses, under Article V
of the Certificate of Incorporation or this Section VI or otherwise, shall be on
the Corporation.
SECTION 6.5. INSURANCE. The Corporation may maintain insurance, at its
expense, to protect itself and any director, trustee, officer, employee or agent
of the Corporation or another enterprise against any expense, liability or loss,
whether or not the Corporation would have the power to indemnify such person
against such expense, liability or loss under the Delaware General Corporation
Law.
SECTION 6.6. SEVERABILITY. In the event that any of the provisions of
this Section VI (including any provision within a single section, paragraph or
sentence) is held by a court of competent jurisdiction to be invalid, void or
otherwise unenforceable, the remaining provisions are severable and shall remain
enforceable to the full extent permitted by law.
SECTION VII
MISCELLANEOUS
SECTION 7.1. SEAL. The Corporation shall have a suitable seal, containing
the name of the Corporation. The Secretary shall be in charge of the seal and
may authorize one or more duplicate seals to be kept and used by any other
officer or person.
SECTION 7.2. WAIVER OF NOTICE. Whenever any notice is required to be
given, a waiver thereof in writing, signed by the person or persons entitled to
the notice, whether before or after the time stated therein shall be deemed
equivalent thereto. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
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SECTION 7.3. VOTING OF STOCK OWNED BY THE CORPORATION. Powers of
attorney, proxies, waivers of notice of meeting, consents and other instruments
relating to securities owned by the Corporation may be executed in the name of
and on behalf of the Corporation by the President or such officers or employees
or agents as the Board of Directors or the President may direct. Any such
officer may, in the name of and on behalf of the Corporation, take all such
action as any such officer may deem advisable to vote in person or by proxy at
any meeting of security holders of any corporation in which the Corporation may
own securities and at any such meeting shall possess and may exercise any and
all rights and powers incident to the ownership of such securities and which, as
the owner thereof, the Corporation might have exercised and possessed if
present. The Board of Directors may from time to time confer like powers upon
any other person or persons.
SECTION VIII
AMENDMENT OF BYLAWS
The Board of Directors shall have power to amend, alter, change, adopt or
repeal the Bylaws of the Corporation by a two-thirds vote of the members of the
Board of Directors then in office, but such power shall not limit the power of
the stockholders to amend, alter, change, adopt or repeal the Bylaws. The
stockholders also shall have the power to amend, alter, change, adopt or repeal
the Bylaws of the Corporation at any annual or special meeting subject to the
requirements of the Certificate of Incorporation.
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EXHIBIT 10.18
Execution Copy
---------------
ASSET TRANSFER AND ACQUISITION AGREEMENT
BY AND AMONG
PROVIDENT COMPANIES, INC.,
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY,
PROVIDENT NATIONAL ASSURANCE COMPANY,
THE PAUL REVERE LIFE INSURANCE COMPANY,
THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY,
THE PAUL REVERE PROTECTIVE LIFE INSURANCE COMPANY
AND
AMERICAN GENERAL CORPORATION,
WESTERN NATIONAL LIFE INSURANCE COMPANY,
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
Dated as of December 8, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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ARTICLE 1 - TRANSFER AND ACQUISITION OF ASSETS.............................................................. 1
1.1 Closing................................................................................... 1
1.2 Acquisition of Transferred Assets and Assumption of Assumed Liabilities................... 2
1.3 Determination of Investment Assets and Cash Payments...................................... 3
1.4 Post-Closing Adjustments.................................................................. 5
1.5 Ceding Commission......................................................................... 6
1.6 Closing Deliveries........................................................................ 7
ARTICLE 2 - REPRESENTATIONS AND WARRANTIES OF PROVIDENT AND SELLERS......................................... 9
2.1 Organization, Standing and Authority of Provident and Each Seller......................... 9
2.2 Authorization............................................................................. 9
2.3 Actions and Proceedings................................................................... 10
2.4 No Conflict or Violation.................................................................. 10
2.5 Governmental Consents and Approvals....................................................... 10
2.6 Compliance With Laws...................................................................... 10
2.7 Permits, Licenses and Franchises.......................................................... 11
2.8 Insurance Contracts....................................................................... 11
2.9 Regulatory Filings........................................................................ 13
2.10 Reinsurance............................................................................... 13
2.11 Seller Separate Accounts.................................................................. 13
2.12 Transferred Assets........................................................................ 13
2.13 Assigned and Assumed Contracts............................................................ 13
2.14 Tax Matters............................................................................... 14
2.15 GAAP Financial Statements................................................................. 14
2.16 Statutory Statements...................................................................... 15
2.17 Certain Additional Financial Information.................................................. 15
2.18 Actuarial Appraisal....................................................................... 15
2.19 Conduct of Business....................................................................... 15
2.20 Absence of Certain Changes................................................................ 15
2.21 Other Sale Arrangements................................................................... 16
2.22 Brokerage and Financial Advisers.......................................................... 16
ARTICLE 3 - REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASERS......................................... 16
3.1 Organization and Standing................................................................. 16
3.2 Authorization............................................................................. 16
3.3 Actions and Proceedings................................................................... 16
3.4 No Conflict or Violation.................................................................. 17
3.5 Governmental Consents and Approvals....................................................... 17
3.6 Compliance With Laws...................................................................... 17
3.7 Permits, Licenses and Franchises.......................................................... 17
3.8 Absence of Certain Changes................................................................ 18
</TABLE>
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<TABLE>
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3.9 Brokerage and Financial Advisers.......................................................... 18
3.10 Qualified Institutional Buyer............................................................. 18
3.11 Sufficient Funds.......................................................................... 18
3.12 WNC Acquisition........................................................................... 18
ARTICLE 4 - COVENANTS....................................................................................... 18
4.1 Conduct of Business....................................................................... 18
4.2 Certain Transactions...................................................................... 20
4.3 Investigations; Pre-Closing Access........................................................ 20
4.4 Post-Closing Access....................................................................... 21
4.5 Confidentiality........................................................................... 21
4.6 HSR Act Filings........................................................................... 22
4.7 Consents and Reasonable Efforts........................................................... 22
4.8 Representations and Warranties............................................................ 23
4.9 Expenses.................................................................................. 23
4.10 Marketing Agreements...................................................................... 23
4.11 Bank Accounts and Lockboxes............................................................... 23
4.12 Allocation of Purchase Price and Assumed Liabilities...................................... 24
4.13 Further Assurances........................................................................ 25
4.14 Western National Corporation Acquisition.................................................. 26
4.15 Transition to Purchasers Policy Forms..................................................... 26
4.16 Crediting Rates........................................................................... 26
4.17 Disposition of PNAC and PRV............................................................... 26
4.18 Certain Other Matters..................................................................... 26
ARTICLE 5 - CONDITIONS PRECEDENT TO THE OBLIGATION OF PURCHASERS TO CLOSE................................... 26
5.1 Representations and Warranties; Compliance With Covenants................................. 26
5.2 Other Agreements.......................................................................... 27
5.3 Governmental and Regulatory Consents and Approvals........................................ 27
5.4 Possession of Assets; Instruments of Conveyance........................................... 27
5.5 Injunction................................................................................ 27
5.6 WNC Acquisition........................................................................... 27
ARTICLE 6 - CONDITIONS PRECEDENT TO THE OBLIGATION OF SELLERS TO CLOSE...................................... 27
6.1 Representations and Warranties; Compliance With Covenants................................. 28
6.2 Other Agreements.......................................................................... 28
6.3 Governmental and Regulatory Consents and Approvals........................................ 28
6.4 Injunction................................................................................ 28
ARTICLE 7 - SURVIVAL AND INDEMNIFICATION.................................................................... 28
7.1 Survival of Representations and Warranties................................................ 28
7.2 Obligation to Indemnify................................................................... 29
7.3 Claims Notice............................................................................. 29
7.4 Right to Contest Claims of Third Parties.................................................. 30
7.5 Tax Effect and Insurance.................................................................. 32
7.6 Indemnification Payments.................................................................. 32
7.7 Exclusivity............................................................................... 32
</TABLE>
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<TABLE>
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7.8 Arbitration............................................................................... 33
ARTICLE 8 - TERMINATION PRIOR TO CLOSING.................................................................... 33
8.1 Termination of Agreement.................................................................. 33
8.2 Survival.................................................................................. 34
ARTICLE 9 - MISCELLANEOUS................................................................................... 34
9.1 Definitions............................................................................... 34
9.2 Expenses.................................................................................. 45
9.3 Substitute Purchaser...................................................................... 46
9.4 Publicity................................................................................. 46
9.5 Confidentiality........................................................................... 46
9.6 Notices................................................................................... 46
9.7 Entire Agreement.......................................................................... 47
9.8 Waivers and Amendments; Non-Contractual Remedies; Preservation of Remedies................ 48
9.9 Governing Law............................................................................. 48
9.10 Binding Effect; Assignment................................................................ 48
9.11 Interpretation............................................................................ 48
9.12 No Third Party Beneficiaries.............................................................. 49
9.13 Counterparts.............................................................................. 49
9.14 Other Agreements, Exhibits and Schedules.................................................. 49
9.15 Headings.................................................................................. 49
</TABLE>
EXHIBITS
Exhibit 1 Form of Reinsurance Agreement
Exhibit 2 Form of Bill of Sale
Exhibit 3 Form of General Assignment and Assumption Agreement
Exhibit 4 Terms of Marketing Agreements
Exhibit 5 State Regulatory Approvals
Exhibit 6 Subadvisory Agreement
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ASSET TRANSFER AND ACQUISITION AGREEMENT
THIS ASSET TRANSFER AND ACQUISITION AGREEMENT (this "Agreement"), dated as
of December 8, 1997, is entered into by and among Provident Companies, Inc., a
Delaware corporation ("Provident"), Provident Life and Accident Insurance
Company, a Tennessee stock life insurance company and a wholly owned subsidiary
of Provident ("PLA"), Provident National Assurance Company, a Tennessee stock
life insurance company and a wholly owned subsidiary of Provident ("PNAC"), The
Paul Revere Life Insurance Company, a Massachusetts stock life insurance company
and a wholly owned indirect subsidiary of Provident ("PRL"), The Paul Revere
Variable Annuity Insurance Company, a Massachusetts stock life insurance company
and a wholly owned indirect subsidiary of Provident ("PRV") and The Paul Revere
Protective Life Insurance Company, a Delaware stock life insurance company and a
wholly owned indirect subsidiary of Provident ("PRPL"; each of PLA, PNAC, PRL,
PRV and PRPL being referred to individually as a "Seller" and together as the
"Sellers"), American General Corporation, a Texas corporation ("Parent"),
Western National Life Insurance Company ("WNL"), a Texas stock life insurance
company (which as of the Closing Date will be a wholly owned indirect subsidiary
of Parent), and The Variable Annuity Life Insurance Company ("VALIC"), a Texas
stock life insurance company and a wholly owned indirect subsidiary of Parent
(each of WNL and VALIC being referred to individually as a "Purchaser" and
together as the "Purchasers").
PREAMBLE
--------
Upon the terms and subject to the conditions of this Agreement, Sellers
wish to sell, and Purchasers wish to acquire, certain of the annuity business of
Sellers, and certain other assets of Sellers, and Provident, Sellers, Parent and
Purchasers desire to enter into one or more strategic marketing agreements, all
as described below.
Contemporaneously with the signing of this Agreement, Provident Investment
Management, LLC has entered into a Subadvisory Agreement in substantially the
form of Exhibit 6 with Parent (the "Subadvisory Agreement").
Certain terms used in this Agreement are defined in Section 9.1.
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein, and in reliance upon the representations, warranties, conditions
and covenants contained herein, and intending to be legally bound hereby, the
parties hereto do hereby agree as follows:
ARTICLE 1
TRANSFER AND ACQUISITION OF ASSETS
----------------------------------
1.1 CLOSING. The Closing shall take place at 10:00 a.m. local time at the
-------
offices of Alston & Bird LLP, One Atlantic Center, 1201 West Peachtree Street,
Atlanta, Georgia, or such other time and place as Parent and Provident may
mutually agree in writing, on the Closing Date
<PAGE>
following the satisfaction or waiver of all conditions set forth in Articles 5
and 6 concerning the parties' respective obligations to consummate the
transactions contemplated herein shall be deemed to have been consummated and
become effective for all purposes as of 11:59 p.m. on the Closing Date.
1.2 ACQUISITION OF TRANSFERRED ASSETS AND ASSUMPTION OF ASSUMED
-----------------------------------------------------------
LIABILITIES.
- -----------
(a) Subject to the terms and conditions set forth herein, at the
Closing, the Sellers shall sell, assign, transfer, convey and deliver to
Purchasers, and Purchasers shall purchase and accept from the Sellers, all of
the Sellers' right, title and interest in and to the Transferred Assets;
provided, however, that the amount of cash and Investment Assets to be
transferred shall be determined in accordance with the provisions of Section 1.3
and adjusted as required by Section 1.4.
(b) On the Closing Date, delivery of the Investment Assets shall be
made by transfer to the accounts designated by Purchasers at least two business
days prior to the Closing Date. The cash portion of the Transferred Assets
shall be transferred to Purchasers by wire transfer of immediately available
funds. All other assets included among the Investment Assets shall be
transferred by such instruments of transfer or book entry transfer, as
appropriate, as are reasonably acceptable to Provident and Purchasers. All
sales, assignments and transfers of the Transferred Assets other than cash and
Investment Assets shall be effected by the Bills of Sale and the General
Assignment and Assumption Agreements. Notwithstanding anything in this
Agreement to the contrary, but subject to the provisions of Section 4.4, Sellers
shall be entitled to keep and maintain copies of all Books and Records from and
after the Closing, and to have access to the originals of the Books and Records
in accordance with the terms hereof.
(c) Upon the terms and subject to the conditions of this Agreement, on
the Closing Date, WNL shall assume: (i) pursuant to the Reinsurance Agreements,
as between WNL and each Seller, any and all Adjusted Statutory Reserves and
Other Statutory Liabilities of such Seller arising out of or with respect to
each WNL Contract, and (ii) pursuant to the General Assignment and Assumption
Agreements, all Assumed Liabilities other than the Retained Liabilities.
(d) Upon the terms and subject to the conditions of this Agreement, on
the Closing Date, VALIC shall assume: (i) pursuant to the Reinsurance
Agreements, as between VALIC and each Seller, any and all Adjusted Statutory
Reserves and Other Statutory Liabilities of such Seller arising out of or with
respect to each VALIC Contract, and (ii) pursuant to the Separate Account
Transfer Agreements, any and all Separate Account Liabilities of Sellers arising
out of or with respect to each Insurance Contract, other than Retained
Liabilities.
(e) The liabilities assumed by Purchasers hereunder and under the
Ancillary Agreements, less the Ceding Commission, shall be allocated among the
Transferred Assets as provided in Section 4.12.
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1.3 DETERMINATION OF INVESTMENT ASSETS AND CASH PAYMENTS.
----------------------------------------------------
(a) Attached as Schedule 1.3(A) is a listing of investment assets (the
"Preliminary Investment Assets") which the parties have agreed may be included
in the Initial Portfolio (as defined herein), together with an estimate of the
Initial Cash Position (as defined herein) (such estimate, the "Estimated Initial
Cash Position"). Provident and the Sellers have appointed Morgan Stanley, Dean
Witter, Discover & Co. and Parent and Purchasers have appointed Bear, Stearns &
Co., Inc.. and the parties have jointly appointed Credit Suisse First Boston
Corporation (each of Morgan Stanley, Dean Witter, Discover & Co., Bear, Stearns
& Co., Inc. and Credit Suisse First Boston Corporation being referred to
individually as a "Valuer" and together as the "Valuers"). Provident and Parent
shall each be responsible for the cost, if any, of the preparation of the
Valuations produced by their respective Valuers and shall be jointly responsible
for the cost, if any, of the Valuation prepared by Credit Suisse First Boston
Corporation. Each Valuer shall produce a valuation of the Preliminary
Investment Assets, based on the midpoint of the bid-ask spread, as of 4:00 p.m.,
New York City time, on December 8, 1997 (each such valuation referred to as a
"Valuation" and together as the "Valuations"). The "Agreed Value" of each
Preliminary Investment Asset shall be (i) the middle Valuation thereof plus (ii)
the amount of investment income accrued on such Preliminary Investment Asset as
of November 30, 1997.
(b) As soon as practicable after the date of this Agreement, Provident
and the Sellers shall deliver to Parent a statement ("Transferred Reserves
Statement") setting forth their determination of the amount of Adjusted
Statutory Reserves and Other Statutory Liabilities attributable to the Insurance
Contracts in force as of November 30, 1997 (the "Transferred Reserves"), which
amounts shall be determined in accordance with Applicable SAP consistently
applied. Parent shall have the opportunity to review the Transferred Reserves
Statement and Provident and Sellers shall make available their personnel and
relevant work papers as reasonably requested by Parent in connection with such
review, for a period not to exceed 15 Business Days following delivery of the
Transferred Reserves Statement. Any changes in the Transferred Reserves
Statement that are agreed to by Parent and Provident within such 15-Business-Day
period shall be incorporated into a final Transferred Reserves Statement (the
"Final Transferred Reserves Statement"). If Parent and Provident are unable to
agree with respect to the amount of the Transferred Reserves included in the
Final Transferred Reserves Statement, they shall submit the dispute to an
independent actuarial firm jointly selected by them (or selected by their
respective actuarial advisors) (the "Independent Actuary"), whose determination
of the amount of the Transferred Reserves shall be final and binding and
reflected in the Final Transferred Reserves Statement; provided, that such
amount shall be within the range of dollar amounts proposed by Parent and
Provident, respectively.
(c) Within ten Business Days following determination of the
Transferred Reserves, the parties shall jointly agree upon a portfolio of assets
from among the Preliminary Investment Assets (the "Initial Portfolio") having an
aggregate Agreed Value which, together with the Initial Cash Position, shall
equal the sum of the Transferred Reserves minus the Ceding Commission minus a
----- -----
receivable from Provident and Sellers equal to the index option component of
reserves for those contracts described in Schedule 4.18 minus policy loans to
-----
contract holders under Insurance Contracts intended to be reinsured by
Purchasers as of November 30, 1997, minus separate
-----
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<PAGE>
account receivables with respect to the Business as of November 30,1997 (such
sum, the "Net Asset Value"). In the event the parties are unable to produce an
Initial Portfolio having an aggregate Agreed Value equal to the Net Asset Value
without subdivision of individual assets, the Initial Portfolio shall consist of
whole assets and the difference between the Net Asset Value and the aggregate
Agreed Value of the assets composing the Initial Portfolio (whether such
difference is a positive or a negative number) shall constitute the "Initial
Cash Position." The difference, if any, between the Initial Cash Position and
the Estimated Initial Cash Position shall be referred to as the "Initial Cash
Position Difference." Provident and the Sellers shall segregate the assets
constituting the Initial Portfolio on their books and records (the "Pool") and
shall maintain records of all transactions in assets included in the Pool from
time to time through the Closing Date. Pursuant to the Subadvisory Agreement,
Parent shall serve as subadvisor in respect of the Pool and pursuant to such
authority shall have the authority to direct the disposition of investment
securities included in the Pool and to direct the purchase of investment
securities for inclusion in the Pool (such purchases to be funded from Net Cash
From the Business (as defined herein) then available, which shall include on
December 8, 1997, an amount equal to the Estimated Initial Cash Position,
together with interest thereon from November 30, 1997 to, but not including,
December 8, 1997, computed at an Annual Rate equal to the 90- day Treasury Rate
in effect on November 30, 1997). On each Business Day Provident will produce and
deliver to Parent a good faith estimate of the Net Cash From the Business the
close of business on the preceding Business Day, which estimate will be prepared
on a basis consistent with Provident's existing internal reporting systems
and procedures. The parties agree that (i) the Estimated Initial Cash Position
shall be available for investment by the sub- advisor under the Subadvisory
Agreement as of 4:00 p.m., New York City time on December 8, 1997, (ii) the
Initial Cash Position Difference (if a positive number) shall be available for
investment by such subadvisor on the Business Day following its determination,
and (iii) Net Cash From the Business reflected in the daily good faith estimates
thereof shall be available for investment by such subadvisor on the Business Day
following delivery of such estimate.
(d) On the Closing Date, Sellers will deliver to Purchasers the assets
then included in the Pool (the "Investment Assets"), which shall consist of (i)
the Initial Portfolio plus (ii) those investment assets which, after December 8,
----
1997 and prior to the Closing Date, are purchased for inclusion in the Pool from
Net Cash of the Business ("Pool Asset Additions") minus (iii) those investment
-----
assets in the Pool (including any Pool Asset Additions) which, after December 8,
1997 and prior to the Closing Date, are (x) redeemed by the issuer thereof, (y)
mature in accordance with their terms, or (z) sold ("Pool Asset Reductions").
(e) In addition, prior to the Closing Date, Provident and Sellers
shall deliver to Parent and Purchasers an estimated reconciliation of Net Cash
From the Business through the Closing Date (the "Preliminary Reconciliation")
and a certification of the treasurer of Provident that all items on the
Preliminary Reconciliation were estimated in good faith by Sellers and were
based upon the books and records of Sellers. If (i) the Net Cash From the
Business reflected on the Preliminary Reconciliation is a positive number,
Sellers will pay to Purchasers cash in an amount equal to such amount; and (ii)
if the Net Cash From the Business reflected on the Preliminary Reconciliation is
a negative number, Purchasers will pay to Sellers at Closing cash in such
amount.
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<PAGE>
(f) For purposes of this Agreement, "Net Cash From the Business" shall
mean an amount equal to the sum of (i) the Estimated Initial Cash Position
(including interest thereon from November 30, 1997 to but not including December
8, 1997, computed at an Annual Rate equal to the 90-day Treasury Rate in effect
on November 30, 1997) plus the Initial Cash Position Difference (including
----
interest thereon from November 30, 1997 to but not including the date on which
the Initial Cash Position Difference is determined, computed at an Annual Rate
equal to the 90-day Treasury Rate in effect on November 30, 1997) plus (ii) net
----
cash proceeds received by Sellers in respect of Pool Asset Reductions plus (iii)
----
net cash proceeds attributable to interest received by Sellers after November
30, 1997 and prior to the Closing Date in respect of assets in the Pool minus
-----
(iv) cash used to fund Pool Asset Additions plus (v) premiums paid and
----
additional deposits made after November 30, 1997 and prior to the Closing Date
in respect of Insurance Contracts intended to be reinsured by Purchasers minus
-----
(vi) withdrawals and benefits paid after November 30, 1997 and prior to the
Closing Date in respect of Insurance Contracts intended to be reinsured by
Purchasers plus (vii) cash proceeds received by Sellers after November 30, 1997
----
and prior to the Closing Date from payments on policy loans to contract holders
under Insurance Contracts which are intended to be reinsured by Purchasers minus
-----
(viii) cash used to fund, after November 30, 1997 and prior to the Closing Date,
policy loan advances to contract holders under Insurance Contracts which are
intended to be reinsured by Purchasers plus (ix) cash payments received by
----
Sellers after November 30, 1997 and prior to the Closing Date, in respect of
receivables relating to the Business minus (x) premium taxes, guaranty fund
-----
assessments that would not be Retained Liabilities and similar charges incurred
by Sellers in respect of the Business after November 30, 1997 and prior to the
Closing Date minus (xi) commissions incurred after November 30, 1997 and prior
-----
to the Closing Date in respect of Insurance Contracts intended to be reinsured
by Purchasers (the amount of such commissions to be determined utilizing the
commission schedule attached to the Reinsurance Agreements) minus (xii) other
-----
expenses of administering the Business after November 30, 1997 and prior to the
Closing Date (such expenses to be determined on a basis consistent with the
schedule of fees for services to be rendered by Provident and the Sellers
pursuant to the Transition Services Agreement).
1.4 POST-CLOSING ADJUSTMENTS.
------------------------
(a) Provident shall, on or before the date that is 60 days after the
Closing Date, prepare a proposed reconciliation of Net Cash From the Business
through the Closing Date (the "Reconciliation") and a certification of the
treasurer of Provident that all items on the Reconciliation were determined in
good faith by Sellers and were based upon the books and records of Sellers.
Promptly after its preparation, Provident shall deliver copies of the
Reconciliation to Parent. Parent shall have the right to review the
Reconciliation and comment thereon for a period of 45 days after receipt
thereof. Provident and Sellers agree that Parent and its accountants may have
access to the accounting records of Provident and Sellers relating to the
preparation of the Reconciliation for the purpose of conducting their review.
Any changes in the Reconciliation that are agreed to by Parent and Provident
within such 45-day-period shall be incorporated into a final reconciliation of
Net Cash From the Business through the Closing Date (the "Final
Reconciliation"). In the event that Purchasers and Provident are unable to
agree on the manner in which any item or items should be treated in the
preparation of the Final
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<PAGE>
Reconciliation within such 45-day period, separate written reports of such item
or items shall be made in concise form and shall be referred to such independent
accounting firm as Parent and Provident shall mutually designate (the firm
making such determination is referred to herein as the "Third Party
Accountant"). The Third Party Accountant shall determine as promptly as
practicable the manner in which such item or items shall be treated on the Final
Reconciliation; provided, however, that the dollar amount of each item in
dispute shall be determined within the range of dollar amounts proposed by
Provident and Parent, respectively. The determinations by the Third Party
Accountant as to the items in dispute shall be in writing and shall be binding
and conclusive on the parties and shall be so reflected in the Final
Reconciliation. The fees, costs and expenses of retaining the Third Party
Accountant shall be shared equally by the parties. Following the resolution of
all disputed items (or, if there is no dispute, promptly after the parties reach
agreement on the Final Reconciliation), Provident shall prepare the Final
Reconciliation and shall deliver copies of such Reconciliation and such
calculation to Parent.
(b) In the event the amount of Net Cash From the Business reflected on
the Final Reconciliation exceeds the amount of Net Cash From the Business
reflected on the Preliminary Reconciliation, Sellers shall transfer to
Purchasers additional cash equal to the amount of such difference. In the event
the amount of Net Cash From the Business reflected on the Preliminary
Reconciliation exceeds the amount of Net Cash From the Business reflected on the
Final Reconciliation, Sellers shall transfer to Purchasers additional cash equal
to the amount of such difference. Any transfer of cash required under this
Section 1.4 shall be made within ten Business Days of the date of the delivery
of the Final Reconciliation to Purchasers, together with interest thereon from
and including the Closing Date to but not including the date of such transfer,
computed at an Annual Rate equal to the 90-day Treasury Rate in effect on the
Closing Date.
1.5 CEDING COMMISSION.
-----------------
(a) The ceding commission is $58,000,000 (the "Ceding Commission").
(b) Not later than March 31, 1999, Parent shall deliver to Provident a
written statement (the "Reserves Statement") setting forth the amount of General
Account Reserves relating to the individual annuity Business as of November 30,
1998 (the "Final Annuity Reserves"), which Final Annuity Reserves shall be
determined in accordance with Applicable SAP applied consistently with, and
using the methodologies used in determining, the General Account Reserves of the
individual annuity Business included in the Transferred Reserves (the
"Transferred Annuity Reserves"). Provident shall have the opportunity to review
the Reserves Statement and Parent shall make available its personnel and
relevant work papers as reasonably requested by Provident in connection with
such review, for a period not to exceed 15 Business Days following delivery of
the Reserves Statement. Any changes in the Reserves Statement that are agreed
to by Parent and Provident within such 15-Business-Day period shall be
incorporated into a final Reserves Statement (the "Final Reserves Statement").
If Parent and Provident are unable to agree with respect to the amount of Final
Annuity Reserves included in the Final Reserves Statement, they shall submit the
dispute to the Independent Actuary, whose determination of the amount of Final
Annuity Reserves shall be final and binding and reflected in the Final Reserves
Statement;
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<PAGE>
provided, that such amount shall be within the range of dollar amounts proposed
by Parent and Provident, respectively.
(c) If (i) the amount of Final Annuity Reserves shown on the Final
Reserves Statement exceeds 97.45% of the amount of Transferred Annuity Reserves,
Parent shall pay to Provident an amount in cash equal to the percentage increase
in such reserves multiplied by the Ceding Commission, and if (ii) the amount of
Final Annuity Reserves shown on the Final Reserves Statement is less than 97.45%
of the amount of Transferred Annuity Reserves, Provident shall pay to Parent an
amount in cash equal to the percentage decrease in such reserves multiplied by
the Ceding Commission. In no event shall the payment required by the preceding
sentence exceed 20% of the Ceding Commission. Any such payment shall be made
within ten Business Days of the date of resolution of all disputed items (or, if
there is no dispute, after the parties reach agreement on the amount of Final
Annuity Reserves included in the Final Reserves Statement). Any transfer of
cash required under this Section 1.5 shall be made within ten Business Days of
the date of the delivery of the Final Reconciliation to Purchasers, together
with interest thereon from and including November 30, 1997 to but not including
the date of such transfer, computed at an Annual Rate equal to the 90-day
Treasury Rate in effect on November 30, 1997.
(d) Notwithstanding the foregoing, no payment shall be made to the
extent that increases or decreases in the Final Annuity Reserves as shown on the
Final Reserves Statement are directly attributable to (i) Insurance Contracts
not transferred to Purchasers pursuant to this Agreement, (ii) Insurance
Contracts where the customer has lapsed but has replaced its policy or contract
with another comparable policy or contract issued by a Purchaser or an Affiliate
of a Purchaser, (iii) Insurance Contracts issued after November 30, 1997, or
(iv) Insurance Contracts that are not individual annuity Insurance Contracts.
1.6 CLOSING DELIVERIES.
------------------
(a) At the Closing, Sellers shall execute (where appropriate) and
deliver to Purchasers the following:
(i) the Reinsurance Agreements;
(ii) the Administrative Services Agreements;
(iii) the General Assignment and Assumption Agreements;
(iv) the Bills of Sale;
(v) evidence of compliance with the requirements of the HSR Act;
(vi) evidence of receipt of the Permits described on Exhibit 5 from
the Insurance Departments of the States of Tennessee, Delaware, New York and
California and the Commonwealth of Massachusetts; and
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<PAGE>
(vii) evidence of compliance with any state pre-acquisition
notification acts from which no exemption is available.
(b) At the Closing, PNAC and PRV shall execute and deliver to VALIC
the Separate Account Transfer Agreements and the Separate Account Administration
Agreements.
(c) At the Closing, Provident and Sellers shall execute and deliver to
Purchasers the following:
(i) the Transition Services Agreement;
(ii) the License Agreement;
(iii) the Marketing Agreements; and
(iv) a certificate of an executive officer of Provident, dated the
Closing Date, representing and warranting to the effect that (A) the person
signing such certificate is familiar with the provisions of this Agreement
and (B) the conditions specified in Article 5 have been satisfied.
(d) At the Closing, Purchasers shall execute (where appropriate) and
deliver to Sellers the following:
(i) the Reinsurance Agreements;
(ii) the Administrative Services Agreements;
(iii) the General Assignment and Assumption Agreements;
(iv) evidence of compliance with the requirements of the HSR Act;
and
(v) evidence of compliance with any state pre-acquisition
notification requirements from which no exemption is available.
(e) At the Closing, VALIC shall execute and deliver to PNAC and PRV
the Separate Account Transfer Agreements and the Separate Account Administration
Agreements.
(f) At the Closing, Purchasers shall execute and deliver to Provident
and Sellers the following:
(i) the Transition Services Agreement;
(ii) the License Agreement;
(iii) the Marketing Agreements; and
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<PAGE>
(iv) a certificate of an executive officer of each Purchaser, dated
the Closing Date, representing and warranting to the effect that (A) the
person signing such certificate is familiar with the provisions of this
Agreement and (B) the conditions specified in Article 6 have been satisfied.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF PROVIDENT AND SELLERS
-------------------------------------------------------
Provident and each Seller hereby represent and warrant to Purchasers as
follows (it being understood that each Seller hereby makes only those
representations and warranties that specifically relate to it):
2.1 ORGANIZATION, STANDING AND AUTHORITY OF PROVIDENT AND EACH SELLER.
-----------------------------------------------------------------
Each of Provident and PRPL is duly organized, validly existing and in good
standing under the laws of Delaware and has all requisite power and authority to
carry on its operations as they are now being conducted, except where the
failure to have such authority would not, individually or in the aggregate, have
a Seller Material Adverse Effect. Each of PLA and PNAC is duly organized,
validly existing and in good standing under the laws of Tennessee and has all
requisite power and authority to carry on the operations of the Business as they
are now being conducted, except where the failure to have such authority would
not, individually or in the aggregate, have a Seller Material Adverse Effect.
Each of PRL and PRV is duly organized, validly existing and in good standing
under the laws of Massachusetts and has all requisite power and authority to
carry on the operations of the Business as they are now being conducted, except
where the failure to have such authority would not, individually or in the
aggregate, have a Seller Material Adverse Effect. Each of Provident and each
Seller is duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction where such qualification is necessary, except for
those jurisdictions where failure to be so qualified would not, individually or
in the aggregate, have a Seller Material Adverse Effect.
2.2 AUTHORIZATION. Each of Provident and the Sellers has all requisite
-------------
power and authority to execute and deliver, and to perform its respective
obligations under, this Agreement and under each of the Ancillary Agreements to
be executed by it. The execution and delivery by Provident and each Seller of
this Agreement and the Ancillary Agreements to be executed by them, and the
performance by Provident and each Seller of their respective obligations under
such agreements, have been duly authorized by all necessary corporate action on
the part of Provident and each Seller. This Agreement has been duly executed
and delivered by Provident and by each Seller, and on the Closing Date the
Ancillary Agreements executed by Provident and/or each Seller will be duly
executed and delivered by Provident and/or each Seller, as appropriate; and,
subject to the due execution and delivery by the other parties to such
agreements, this Agreement and the Ancillary Agreements executed by Provident
and/or each Seller will, upon due execution and delivery, be valid and binding
obligations of Provident and/or each Seller, as the case may be, enforceable
against Provident and/or each Seller in accordance with their respective terms.
Notwithstanding the foregoing, the obligation of Provident and each Seller to
execute any Ancillary Agreement shall be subject to the terms and conditions of
this Agreement.
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<PAGE>
2.3 ACTIONS AND PROCEEDINGS. There are no outstanding Orders by or with
-----------------------
any court, governmental agency, regulatory body or arbitration tribunal before
which Provident or any Seller was a party that, individually or in the
aggregate, have a Seller Material Adverse Effect. There are no actions, suits,
arbitrations or legal, administrative or other proceedings pending or, to the
knowledge of Provident or Sellers, threatened against Provident or any Seller,
at law or in equity, or before or by any governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, or before any
arbitrator of any kind which, if adversely determined, would, individually or in
the aggregate, have a Seller Material Adverse Effect.
2.4 NO CONFLICT OR VIOLATION. The execution, delivery and performance by
------------------------
Provident and each Seller of this Agreement and the Ancillary Agreements to
which any of them may become a party and the consummation of the transactions
contemplated hereby and thereby in accordance with the respective terms and
conditions hereof and thereof will not (a) violate any provision of the charter,
bylaws or other organizational documents of Provident or any Seller, (b)
violate, conflict with or result in the breach of any of the terms of, result in
any modification of the effect of, otherwise give any other contracting party
the right to terminate, or constitute (or with notice or lapse of time or both,
constitute) a default under, any contract relating to or arising in connection
with the Business to which Provident or any Seller is a party or by or to which
Provident or any Seller or any of their respective assets or properties may be
bound or subject, except for such violations, conflicts, breaches or
modifications that would not, individually or in the aggregate, have a Seller
Material Adverse Effect, (c) violate any Order against, or binding upon, or any
agreement with, or condition imposed by, any governmental or regulatory body,
foreign or domestic, binding upon Provident or any Seller in connection with the
Business, except for such violations that would not, individually or in the
aggregate, have a Seller Material Adverse Effect, (d) subject to obtaining the
Permits referred to in Section 2.5, violate any statute, law or regulation of
any jurisdiction, except for such violations that would not, individually or in
the aggregate, have a Seller Material Adverse Effect, or (e) result in a breach
or violation of any of the terms or conditions of, constitute a default under,
or otherwise cause an impairment or revocation of, any Permit related to the
Business, except for such breaches, violations, defaults, impairments or
revocations that would not, individually or in the aggregate, have a Seller
Material Adverse Effect.
2.5 GOVERNMENTAL CONSENTS AND APPROVALS. Except as required under the HSR
-----------------------------------
Act and except for required Permits of and filings with applicable insurance or
securities regulatory authorities, the execution, delivery and performance by
Provident and each Seller of this Agreement and the Ancillary Agreements to
which any of them is a party and the consummation of the transactions
contemplated hereby and thereby in accordance with the respective terms hereof
and thereof do not require any of Provident or any Seller to obtain any Consent
of, make any filing with, or give any notice to, any governmental or regulatory
body.
2.6 COMPLIANCE WITH LAWS. Except with respect to those violations, if
--------------------
any, which would not, individually or in the aggregate, have a Seller Material
Adverse Effect, (i) none of the Sellers nor the Seller Separate Accounts is in
violation of any Law or Order applicable to the Business nor, to the knowledge
of Sellers, has any Seller received any written notice that any such
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<PAGE>
violation is being alleged and (ii) without limiting the generality of the
foregoing, in connection with Sellers' most recently completed or any ongoing
quinquennial or triennial examination, no Seller has, to the knowledge of
Sellers, received any notice, nor, to the knowledge of Sellers, is any Seller
aware of the intention to send any notice, from any state regulatory authority
alleging any violation of any such Law or Order or directing any Seller to take
any remedial action with respect to such Law or Order, in either case relating
to the Business.
2.7 PERMITS, LICENSES AND FRANCHISES. Schedule 2.7 lists (i) all
--------------------------------
jurisdictions in which Sellers are licensed to issue the Insurance Contracts and
(ii) the lines of business in connection with the Business which Sellers are
authorized to transact in each such jurisdiction. Each Seller has been duly
authorized by the relevant state insurance regulatory authorities to issue the
Insurance Contracts that it is currently writing, and was duly authorized to
issue the Insurance Contracts that it is not currently writing at the time such
Insurance Contracts were issued, in the respective states in which it conducts
the Business, except for authorizations the failure of which to have would not,
individually or in the aggregate, have a Seller Material Adverse Effect. Except
as set forth on Schedule 2.7, each Seller has all other Permits necessary to
conduct the Business in the manner and in the areas in which the Business is
presently being conducted and all such Permits are valid and in full force and
effect, except where the failure to have such a Permit would not, individually
or in the aggregate, have a Seller Material Adverse Effect.
2.8 INSURANCE CONTRACTS.
-------------------
(a) The forms of Insurance Contracts available for issuance, and the
states in which such forms are authorized for issuance, on the date hereof are
listed on Schedule 9.1(C) and are specifically identified on such Schedule. All
Insurance Contracts as now in force are in all respects, to the extent required
under applicable Law, on forms approved by applicable insurance regulatory
authorities or which have been filed and not objected to by such authorities
within the period provided for objection, and such forms comply in all material
respects with the insurance statutes, regulations and rules applicable thereto,
except where the failure to have such approval or non-objection or the failure
to so comply would not, individually or in the aggregate, have a Seller Material
Adverse Effect. At the time any Seller paid commissions to any broker or agent
within the past 36 months in connection with the sale of Insurance Contracts,
each such broker or agent was duly licensed as an insurance broker (for the type
of business sold by such broker) or agent in the particular jurisdiction in
which such broker or agent sold such business for Seller, and no such broker or
agent violated (or with or without notice or lapse of time or both would have
violated) any federal, state, local or foreign law, ordinance or regulation or
any other requirement of any governmental or regulatory body, court or
arbitrator applicable to the Business, except where the failure to be so
licensed or any such violation would not, individually or in the aggregate, have
a Seller Material Adverse Effect. Neither the manner in which any Seller
compensates any Person involved in the sale or servicing of Insurance Contracts
that is not registered as a broker-dealer or insurance agent, as applicable,
nor, to the knowledge of Sellers, the conduct of any such Person, renders such
Person a broker-dealer or insurance agent under any applicable federal or state
law, and the manner in which any Seller compensates each Person involved in the
sale or servicing of Insurance Contracts is in compliance with all applicable
federal or state laws except where such manner of compensation or conduct having
such effect or the
-11-
<PAGE>
failure to be so in compliance would not, individually or in the aggregate, have
a Seller Material Adverse Effect.
(b) Each Seller and Provident (with respect to the Business) has
implemented procedures and programs which are reasonably designed to provide
assurance that its respective agents and employees are in material compliance
with all Laws, including without limitation, advertising, licensing and sales
practices laws, regulations, directives, bulletins and opinions of governmental
authorities, except for non-compliances that, individually or in the aggregate,
have not had and would not have a Seller Material Adverse Effect. Each Seller
and Provident (with respect to the Business) has previously made available to
Purchaser a true, complete and correct copy of its compliance program and
procedures referred to in the preceding sentence, and, except as previously
disclosed in this Agreement or any Schedule to this Agreement, neither Provident
nor any Seller has knowledge of any noncompliance therewith, except for
instances of noncompliance which, individually or in the aggregate, have not had
and would not have a Seller Material Adverse Effect.
(c) Each Seller has at all times since January 1, 1987, maintained
records which in all material respects accurately reflect transactions in
reasonable detail, and accounting controls, policies and procedures sufficient
to ensure in all material respects that such transactions are recorded in a
manner which permits the preparation of financial statements in accordance with
applicable statutory accounting requirements.
(d) Except as set forth on Schedule 2.8(A), to the knowledge of
Sellers:
(i) to the extent that by operation of law or written agreement or
otherwise any Seller is legally responsible therefor, (A) the terms of each
Qualified Contract and the administration and operation thereof and of any
plan or arrangement funded in whole or in part through any such Qualified
Contract comply, and at all relevant times have complied, in all material
respects with the applicable provisions of the Code and ERISA and (to the
extent such plan is intended by the Contract holder to limit fiduciary
responsibility in accordance with section 404(c) of ERISA) comply, and at all
relevant times have complied, in all material respects with all applicable
requirements for limiting fiduciary responsibility under section 404(c) of
ERISA; (B) contributions or payments to each such Qualified Contract which
are intended to be nontaxable are not taxable; and (C) plan or contract loans
made under such Qualified Contracts were neither prohibited transactions nor
taxable when made or at any time thereafter, except with respect to taxable
defaults in repayment of such plan or contracts loans; and
(ii) neither any Seller nor any of their Affiliates is legally
responsible, by operation of law, written agreement or otherwise, for
testing, determining or otherwise ensuring compliance under sections 401(a),
403(a), 403(b), 408 and 457 of the Code or otherwise administering or
providing administrative services of any nature to any plan or arrangement
funded in whole or in part through any such Qualified Contract.
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2.9 REGULATORY FILINGS. Except as listed on Schedule 2.9, each Seller has
------------------
filed or will prior to Closing file all reports, statements, documents,
registrations, filings or submissions required to be filed by such Seller, and
the Seller Separate Accounts with any governmental or regulatory body to the
extent they relate to the Business, except where the failure to make such
filings would not, individually or in the aggregate, have a Seller Material
Adverse Effect. Except as listed on Schedule 2.9, all such registrations,
filings and submissions were or will be in compliance in all material respects
with applicable law when filed or as amended or supplemented, and, to the
knowledge of Sellers, no material deficiencies have been asserted by any such
governmental or regulatory body with respect to such registrations, filings or
submissions that have not been satisfied.
2.10 REINSURANCE. To the knowledge of Sellers, (a) there are no
-----------
agreements, written or oral, pursuant to which any Seller cedes or retrocedes
risks assumed under the Insurance Contracts and (b) there are no Insurance
Contracts which are agreements of assumed reinsurance.
2.11 SELLER SEPARATE ACCOUNTS. Each of the Seller Separate Accounts is
------------------------
duly and validly established and maintained in all material respects under
applicable Laws and the assets of the Seller Separate Accounts are not
chargeable with liabilities arising out of any other business that any Seller or
Provident may conduct. Each of the Seller Separate Accounts is duly registered
as an investment company under the 1940 Act (or exempt from such registration).
Except as listed on Schedule 2.11, each of the Seller Separate Accounts is and
has been operated in compliance with the 1940 Act in all material respects, and
each Seller has filed all reports and amendments of its registration statement
required to be filed, and has been granted all exemptive relief necessary for
the operations of the Seller Separate Accounts. The Insurance Contracts under
which the Seller Separate Account assets are held are duly and validly issued
and were sold pursuant to an effective registration statement under the
Securities Act and any applicable state securities laws and each such
registration statement is currently in effect to the extent necessary to allow
Seller to receive contributions under such contracts. Each Seller, as
appropriate, has filed each prospectus and statement of additional information,
as amended or supplemented, under which the Seller Separate Accounts assets are
held that are required to be filed, and each such prospectus and statement of
additional information, as of its respective mailing date or date of use,
complied in all material respects with applicable securities laws.
2.12 TRANSFERRED ASSETS. Each Seller has good and marketable title to all
------------------
assets included within the Transferred Assets (other than cash and the
Transferred Contracts), free of any lien, encumbrance, restriction, claim,
charge, or defect of title, except for any liens, encumbrances, restrictions,
claims, charges or defects of title whose effect on the value of the relevant
Transferred Asset will be collectively reflected in the Agreed Value thereof.
2.13 ASSIGNED AND ASSUMED CONTRACTS. Each of the Assigned and Assumed
------------------------------
Contracts is valid, binding and in full force and effect according to its terms
as against each Seller party thereto and, to the knowledge of Sellers, the other
party or parties thereto; and is freely assignable to Purchasers pursuant to
this Agreement and the General Assignment and Assumption Agreement without
notice to or Consent of any Person. No Seller nor, to the knowledge of Sellers,
any other party to any such contract is in default with respect to any such
contract or such other agreement,
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<PAGE>
except for any such default that would not, individually or in the aggregate,
have a Seller Material Adverse Effect. To the knowledge of Sellers, there are no
contracts, agreements, commitments or arrangements to which any Seller or
Provident is a party, or which is binding upon any Seller or Provident, that
restrict the right of any Seller or Provident to change the crediting rates and
other non-guaranteed elements under the Insurance Contracts, other than pursuant
to the terms of the Insurance Contracts.
2.14 TAX MATTERS. Except for inaccuracies the effect of which would not
-----------
have a Seller Material Adverse Effect:
(a) The assets of the Seller Separate Accounts are and have been
adequately diversified at all times within the meaning of section 817(h) of
the Code;
(b) Each Insurance Contract complies with the requirements of section
72 of the Code;
(c) To the knowledge of Sellers, there are no "hold harmless," tax
sharing, indemnification, or similar arrangements regarding the Tax
qualification or treatment of any Insurance Contracts;
(d) Each Seller is or is treated for all federal income Tax purposes
as the owner of the assets underlying each variable Insurance Contract
issued, entered into, or sold by Seller; and
(e) Each Seller has complied in all material respects with all
applicable reporting, withholding and disclosure requirements under the Code,
ERISA and other applicable law, including those regarding distributions, with
respect to the Insurance Contracts and has reported the distributions under
such contracts in accordance with section 72 of the Code in all material
respects.
2.15 GAAP FINANCIAL STATEMENTS. On or prior to the date hereof, Provident
-------------------------
has delivered to Parent true, correct and complete copies of (a) audited
consolidated balance sheet of Provident and its Subsidiaries as of December 31,
1996, prepared in accordance with GAAP, together with the notes thereon and the
related report of Ernst & Young LLP, the independent certified public accountant
of Provident, and (b) the audited consolidated statements of income,
stockholders' equity and cash flows of Provident and its Subsidiaries for the
year ended December 31, 1996, together with the notes thereon and the related
report of Ernst & Young LLP (collectively, the "Provident Financial
Statements"). Provident has delivered to Parent a true, correct and complete
copy of the consolidated balance sheet, and the related consolidated statements
of income, stockholders' equity and cash flows of Provident and its Subsidiaries
for the quarter ended September 30, 1997 (the "Interim Financial Statements").
The Provident Financial Statements and the Interim Financial Statements are
based on the books and records of Provident and its Subsidiaries, and the
Provident Financial Statements and the Interim Financial Statements have been
prepared in accordance with GAAP (subject, in the case of the Interim Financial
Statements, to normal recurring year-end adjustments) consistently applied, and
fairly present in all material
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<PAGE>
respects the consolidated financial position and results of operations of
Provident and its Subsidiaries as of the date and for the period indicated
therein.
2.16 STATUTORY STATEMENTS. Provident has previously delivered to Parent
--------------------
true, complete and correct copies of the Annual Statements of the Sellers as
filed with the Tennessee, Delaware and Massachusetts Insurance Departments for
the years ended December 31, 1996 and 1995, together with all audits and
schedules thereto and the actuarial opinions applicable to the Business for such
years and supporting actuarial memoranda for the year ended December 31, 1996
only. Provident has previously disclosed to Purchaser a true, complete and
correct copy of the Quarterly Statement of the Sellers as filed with the
Tennessee, Delaware and Massachusetts Insurance Departments, for the quarter
ended September 30, 1997, together with all exhibits and schedules thereto.
2.17 CERTAIN ADDITIONAL FINANCIAL INFORMATION Provident has previously
----------------------------------------
delivered to Parent the combined balance sheets and income statements for the
Business described in Schedule 2.17 (the "Additional Statutory Information").
The Additional Statutory Information was prepared in good faith by Provident in
accordance with Applicable SAP consistently applied for the purpose of the sale
of the Business, and fairly represents in all material respects the financial
position of the Business for the periods and as of the date stated therein,
respectively, and the results of operations of the Business for the periods
reflected therein. Provident also has previously delivered to Parent certain
pro forma projected financial information for the Business described in Schedule
2.17 (the "Projections"), which Projections were prepared in good faith by
Provident in accordance with GAAP consistently applied for the purpose of the
sale of the Business.
2.18 ACTUARIAL APPRAISAL. To the knowledge of Sellers, the Actuarial
-------------------
Appraisal of Provident's Individual Annuity Business and Guaranteed Interest
Contracts ("GICs") Business, dated as of June 30, 1997, (i) reflected only (x)
the GICs and insurance contracts written in Canada which are not included in the
Insurance Contracts, and (y) insurance policies and annuity contracts issued by
Sellers that would have constituted Insurance Contracts if in effect on the date
hereof and (ii) was prepared in accordance with Actuarial Standards of Practice
numbers 14 and 19, as they apply to actuarial appraisals, and Applicable SAP,
consistently applied.
2.19 CONDUCT OF BUSINESS. Except as expressly contemplated or required by
-------------------
this Agreement, since December 31, 1996, each Seller has generally conducted the
Business only in the ordinary course consistent with its past practices and
there has not been any material change in the underwriting, pricing, actuarial,
reserving, investment, sales, marketing or agency practices or policies of the
Business.
2.20 ABSENCE OF CERTAIN CHANGES. Since December 31, 1996, there has been
--------------------------
no adverse change in mortality or lapse experience, or any damage, destruction,
loss or other event or condition of any character (whether or not in the
ordinary course of business), other than those occurring as a result of general
economic or financial conditions or other developments which are not unique to
the Business but also affect other Persons who participate or are engaged in
lines of
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<PAGE>
business similar to the Business and that, individually or in the
aggregate, is likely to have a Seller Material Adverse Effect.
2.21 OTHER SALE ARRANGEMENTS. Neither Provident nor any Seller is
-----------------------
obligated or liable, contingently or otherwise, for or with respect to
negotiations, letters of intent or commitments for the sale of all or any part
of the Business (except in the ordinary course of business) to any Persons other
than Purchasers.
2.22 BROKERAGE AND FINANCIAL ADVISERS. No broker, finder or financial
--------------------------------
adviser has acted directly or indirectly as such for, or is entitled to any
compensation from, Provident, any Seller or their respective Affiliates in
connection with this Agreement or the transactions contemplated hereby.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASERS
-------------------------------------------------------
Parent and each Purchaser hereby represent and warrant to Provident and
each Seller as follows:
3.1 ORGANIZATION AND STANDING. Parent and each Purchaser is a
-------------------------
corporation duly organized and validly existing under the laws of the State of
Texas and has all requisite power and authority to own, lease and operate its
assets, properties and business and to carry on the operations of its business
as they are now being conducted, except where such authority is not material to
such operations.
3.2 AUTHORIZATION. Parent and each Purchaser has all requisite power and
-------------
authority to execute, deliver and perform its obligations under this Agreement
and under each of the Ancillary Agreements to be executed by it. The execution
and delivery by Parent and Purchasers of this Agreement and the execution and
delivery of the Ancillary Agreements to be executed by Purchasers, and the
performance by each of them of their obligations under such agreements, have
been or, in the case of WNL and VALIC, will be as soon as practicable after
execution of this Agreement, duly authorized. This Agreement has been duly
executed and delivered by Parent and Purchasers, and on the Closing Date the
Ancillary Agreements executed by Purchasers will be duly executed and delivered
by such Purchaser; and, subject to the due execution and delivery by the other
parties to such agreements, this Agreement is, and the Ancillary Agreements
executed by each Purchaser will, upon due execution and delivery, be valid and
binding obligations of Parent and Purchasers, respectively, enforceable against
Parent or Purchasers, as appropriate, in accordance with their respective terms.
Notwithstanding the foregoing, the obligation of each Purchaser to execute any
Ancillary Agreement shall be subject to the terms and conditions of this
Agreement.
3.3 ACTIONS AND PROCEEDINGS. There are no outstanding Orders by or with
-----------------------
any court, governmental agency, regulatory body or arbitration tribunal before
which either Purchaser was a party that, individually or in the aggregate, have
a Purchaser Material Adverse Effect. There are no actions, suits, arbitrations
or legal, administrative or other proceedings pending or, to the
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<PAGE>
knowledge of Purchasers, threatened against either Purchaser, at law or in
equity, or before or by any governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, or before any arbitrator of any
kind which, if adversely determined, would, individually or in the aggregate,
have a Purchaser Material Adverse Effect.
3.4 NO CONFLICT OR VIOLATION. The execution, delivery and performance by
------------------------
Parent and each Purchaser of this Agreement and the execution, delivery and
performance by each Purchaser of the Ancillary Agreements and the consummation
of the transactions contemplated hereby and thereby in accordance with the
respective terms and conditions hereof and thereof will not (a) violate any
provision of the charter, bylaws or other organizational document of Parent or
either Purchaser, (b) violate, conflict with or result in the breach of any of
the terms of, result in any modification of the effect of, otherwise give any
other contracting party the right to terminate, or constitute (or with notice or
lapse of time or both, constitute) a default under, any contract to which Parent
or either Purchaser is a party or by or to which either of them or any of their
respective assets or properties may be bound or subject, except for such
violations, conflicts, breaches or modifications that would not, individually or
in the aggregate, have a Purchasers Material Adverse Effect, (c) violate any
Order against, or binding upon, or any agreement with, or condition imposed by,
any governmental or regulatory body, foreign or domestic, binding upon Parent or
either Purchaser, except for such violations that would not, individually or in
the aggregate, have a Purchaser Material Adverse Effect, (d) violate any
statute, law or regulation of any jurisdiction except for such violations that
would not, individually or in the aggregate, have a Purchaser Material Adverse
Effect, or (e) result in a breach or violation of any of the terms or conditions
of, constitute a default under, or otherwise cause an impairment of, any Permit
related to Parent's or either Purchaser's business or necessary to conduct the
Business, except for any violation, conflict, breach or default that would
individually or in the aggregate, have a Purchaser Material Adverse Effect.
3.5 GOVERNMENTAL CONSENTS AND APPROVALS. Except as required under the HSR
-----------------------------------
Act and except for required Permits of applicable insurance regulatory
authorities, the execution, delivery and performance by Parent and Purchasers of
this Agreement, and the execution, delivery and performance by Purchasers of the
Ancillary Agreements, and the consummation of the transactions contemplated
hereby and thereby in accordance with the respective terms hereof and thereof,
do not require either of Parent or Purchasers to obtain any Consent of, make any
governmental filing with or give any notice to, any Person, except for such
Consents, filings or notices the failure of which to obtain, make or give, as
the case may be, would not individually or in the aggregate have a Purchaser
Material Adverse Effect.
3.6 COMPLIANCE WITH LAWS. Except with respect to those violations, if
--------------------
any, that will be cured by Parent and Purchasers prior to, or by the act of,
Closing or which individually or in the aggregate would not have a Purchaser
Material Adverse Effect, neither Purchaser is in violation of any applicable
Laws or Orders nor has either Purchaser received any written notice that any
such violation is being alleged.
3.7 PERMITS, LICENSES AND FRANCHISES. Schedule 3.7 lists (i) all
--------------------------------
jurisdictions in which each Purchaser is licensed to transact an insurance
business and (ii) the lines of such business that
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<PAGE>
each Purchaser is authorized to transact in each such jurisdiction. Except as
listed on Schedule 3.7, each Purchaser has all Permits necessary to conduct the
Business in the manner and in the jurisdictions in which the Business is
presently being conducted, and all such Permits are valid and in full force and
effect, except where the failure to have such a Permit would not, individually
or in the aggregate, have a Purchaser Material Adverse Effect. Except as listed
on Schedule 3.7, neither Purchaser has engaged in any activity which would cause
revocation or suspension of any such Permit and no action or proceeding looking
to or contemplating the revocation or suspension of any such Permit is pending
or threatened.
3.8 ABSENCE OF CERTAIN CHANGES. Except as expressly contemplated or
--------------------------
required by this Agreement, since December 31, 1996, there has not been (i) any
change in the business, operations, condition (financial or otherwise), results
of operations, properties, prospects or assets of either Purchaser or (ii) in
the ability of either Purchaser to consummate the transactions contemplated
hereby or in any Ancillary Agreement, in either case that has had or is likely
to have a Purchaser Material Adverse Effect.
3.9 BROKERAGE AND FINANCIAL ADVISERS. No broker, finder or financial
--------------------------------
adviser has acted directly or indirectly as such for, or is entitled to any
compensation from, Parent or either Purchaser in connection with this Agreement
or the transactions contemplated hereby.
3.10 QUALIFIED INSTITUTIONAL BUYER. Each Purchaser is a "qualified
-----------------------------
institutional buyer" within the meaning of Rule 144A promulgated under the
Securities Act. Each Purchaser hereby acknowledges that Sellers may be relying,
with respect to the transfer of Investment Assets, on the exemption from the
registration provisions of the Securities Act provided by Rule 144A.
3.11 SUFFICIENT FUNDS. Either Purchasers or Parent has or will have at
----------------
Closing sufficient funds available (through existing credit arrangements or
otherwise) to pay the Purchase Price and to pay all fees and expenses related to
the transactions contemplated.
3.12 WNC ACQUISITION. Parent has provided to Provident a true and correct
---------------
copy of the Agreement and Plan of Merger, dated as of September 11, 1997, (the
"WNC Agreement") by and among Parent, Astro Acquisition Corp. and Western
National Corporation, the parent company of WNL ("WNC"), pursuant to which WNC
will become a wholly owned subsidiary of Parent (the "WNC Acquisition"). Parent
knows of no reason which would reasonably be expected to cause the WNC
Acquisition not to be consummated prior to the date specified in Section 8.1(e).
ARTICLE 4
COVENANTS
---------
4.1 CONDUCT OF BUSINESS.
-------------------
(a) Prior to the earlier of the Closing or termination of this
Agreement, except as expressly provided in this Agreement, without the prior
written consent of Parent, each Seller shall (i) in all material respects
operate the Business as presently operated and only in the ordinary
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<PAGE>
course and consistent with past practice (including but not limited to past
underwriting standards), (ii) use commercially reasonable best efforts to
preserve the value of the Business and (iii) use commercially reasonable best
efforts to preserve their relationships with and the goodwill of their agents,
brokers, customers, suppliers, employees and other Persons having business
dealings with any Seller.
(b) Without limiting the generality of Section 4.1(a), and except as
otherwise expressly provided in this Agreement, prior to the earlier of the
Closing or termination of this Agreement, no Seller will, without the prior
written consent of Parent:
(i) enter into any contract that would constitute an Assigned
and Assumed Contract, other than in the ordinary course of business
consistent with past practice;
(ii) acquire or dispose of any asset that would constitute a
Transferred Asset if owned by any Seller at Closing, other than acquisitions
or dispositions in the ordinary course of the Business;
(iii) change any of the accounting principles, practices,
methods or policies (including but not limited to any reserving methods,
practices or policies) employed with respect to the Business, except as may
be required as a result of a change in law, SAP or guidelines issued by the
Commission or its accounting staff;
(iv) change the method of determining the SAP reserves with
respect to the Business for any guaranty fund assessment, special insurance
assessment or similar assessment or tax;
(v) pay, discharge or satisfy any material claims, liabilities
or obligations associated with the Business (absolute, asserted or
unasserted, contingent or otherwise) other than the payment, discharge or
satisfaction in the ordinary course of the Business consistent with past
practice;
(vi) enter into any reinsurance contract relating to the
Business, other than in the ordinary course of business consistent with past
practice;
(vii) take or cause to be taken any action that would result in
such Seller's Seller Separate Accounts to be managed other than in the
ordinary course consistent with past practice in all material respects; or
(viii) agree in writing or otherwise to take any of the actions
described above in this Section 4.1(b).
(c) Prior to Closing, each Seller shall notify Parent as promptly as
practicable of any event or transaction having a Seller Material Adverse Effect.
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<PAGE>
4.2 CERTAIN TRANSACTIONS. From the date of this Agreement through the
--------------------
Closing, neither Provident nor any Seller nor any of their respective officers,
employees, representatives or agents will, directly or indirectly, solicit,
encourage or initiate any negotiations or discussions with, or provide any
information to, or otherwise cooperate in any other manner with, any Person or
group (other than Purchasers and their Affiliates and their respective
representatives) concerning any direct or indirect sale or other disposition of
the Business.
4.3 INVESTIGATIONS; PRE-CLOSING ACCESS.
----------------------------------
(a) Prior to the Closing Date, Parent and Purchasers shall be
entitled, through their employees and representatives, to make such
investigation of the assets, liabilities, business and operations of the
Business, and such examination of the Books and Records, as Parent and
Purchasers may reasonably request. Any investigation, examination or interview
by Parent or Purchasers of Sellers' employees and agents or access pursuant to
any of the provisions of this Section 4.3(a) shall be conducted or occur at
reasonable times upon reasonable prior notice; and each of the parties hereto
and its employees and representatives, including counsel, investment bankers,
and independent public accountants, shall cooperate with the other's employees
and representatives, as the case may be, in connection with such review and
examination.
(b) In addition, prior to the Closing Date, Provident and each Seller
shall provide Parent and Purchasers with full and complete access to every
aspect of the Business, subject only to any applicable legal limitations.
Without limiting the generality of the foregoing, Provident and each Seller
shall (i) provide Parent and Purchasers with access to individuals reasonably
specified by Parent or Purchasers to plan the transition of the Business to
Purchasers, (ii) designate certain individuals (subject to Parent's reasonable
approval) to serve as members of a Provident/Parent transition team and cause
such individuals to devote reasonable time to transition matters, (iii) devote
reasonable resources to transition matters (such resources to include office
accommodations and related facilities for a substantial and continuing presence
of Parent's transition team members on Sellers' premises), (iv) cooperate with
Parent and Purchasers in connection with their filing of policy and contract
forms to enable Purchasers to issue policies and contracts substantially similar
to those included in the Business, (v) consult with Parent and Purchasers
regarding Seller's development work pertaining to systems, products,
distribution and customer and producer services, and (vi) cooperate with Parent
and Purchasers in their development work pertaining to systems, products,
distribution and customer and producer services.
(c) Prior to the Closing Date, Provident and each Seller shall be
entitled, through its employees and representatives, to make such investigation
of the assets, liabilities, business and operations of Purchasers as Provident
or such Seller may reasonably request. Any such investigation or examination
shall be conducted at reasonable times upon reasonable prior notice; and each of
the parties hereto and its employees and representatives, including counsel,
investment bankers, and independent public accountants, shall cooperate with the
other's employees and representatives, as the case may be, in connection with
such review and examination.
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<PAGE>
(d) Notwithstanding any other provisions of this Section 4.3,
Purchasers and Provident shall cooperate in implementing the provisions of this
Section 4.3 so as not to prevent or interfere with Sellers' compliance with
Section 4.1.
4.4 POST-CLOSING ACCESS.
-------------------
(a) Following the Closing Date, Provident and each Seller shall (i)
allow Purchasers, upon reasonable prior notice and during regular business
hours, through their employees and representatives, the right, at Purchasers
expense, to examine and make copies of any books and records retained by
Sellers, to the extent they relate to the Business, for any reasonable business
purpose, including the preparation or examination of Purchasers Tax returns,
regulatory filings and financial statements and the conduct of any litigation or
regulatory dispute resolution, whether pending or threatened, concerning the
conduct of the Business prior to the Closing Date and (ii) maintain such books
and records for Purchasers examination and copying, subject to Provident's or
such Seller's general document retention policies, which have been described to
Purchasers. Access to such books and records shall be at Purchasers expense and
may not unreasonably interfere with Seller's or any successor company's business
operations.
(b) Following the Closing Date, Purchasers shall (i) allow Provident
and each Seller, upon reasonable prior notice and during regular business hours,
through its employees and representatives, the right, at Provident's or such
Seller's expense, as applicable, to examine and make copies of the Books and
Records transferred to Purchasers, respectively, at the Closing for any
reasonable business purpose, including the preparation or examination of Tax
returns, regulatory filings and financial statements and the conduct of any
litigation or the conduct of any regulatory, contract holder, participant or
other dispute resolution whether pending or threatened, and (ii) maintain such
Books and Records for Seller's examination and copying, subject to Purchasers
general document retention policies, which have been described to Provident.
Access to such Books and Records shall be at Provident's or such Seller's
expense, as applicable, and may not unreasonably interfere with Purchasers' or
any successor company's business operations.
4.5 CONFIDENTIALITY. Each party hereto (with Provident and Sellers, on
---------------
the one hand, and Parent and Purchasers, on the other hand, considered to be one
party for purposes of this Section 4.5) will hold, and will use its best efforts
to cause its Affiliates, and their respective representatives to hold, in strict
confidence from any Person (other than any such Affiliate or representative),
unless (i) compelled to disclose by judicial or administrative process
(including in connection with obtaining the necessary Consents of governmental
or regulatory authorities required for consummation of the transactions
contemplated hereby) or by other requirements of Law or (ii) disclosed in an
action or proceeding brought by a party hereto in pursuit of its rights or in
the exercise of its remedies hereunder, all documents and information concerning
the other party or any of its Affiliates furnished to it by the other party or
such other party's representatives in connection with this Agreement or the
transactions contemplated hereby, except to the extent that such documents or
information can be shown to have been (a) previously known by the party
receiving such documents or information, (b) in the public domain (either prior
to or after the furnishing of such documents or information hereunder) through
no fault of such receiving party or (c) later acquired by the receiving party
from another source if the receiving party is not aware
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<PAGE>
that such source is under an obligation to another party hereto to keep such
documents and information confidential; provided that following the Closing the
foregoing restrictions will not apply to Parent's or Purchasers use of documents
and information concerning the Business furnished by Provident or a Seller
hereunder. In the event the transactions contemplated hereby are not
consummated, upon the request of the other party, each party hereto will, and
will cause its Affiliates and their respective representatives to, promptly
redeliver or cause to be redelivered all copies of confidential documents and
information furnished by the other party in connection with this Agreement or
the transactions contemplated hereby and destroy or cause to be destroyed all
notes, memoranda, summaries, analyses, compilations and other writings related
thereto or based thereon prepared by the party furnished such documents and
information or its representatives.
4.6 HSR ACT FILINGS. Provident and Parent shall, as promptly as
---------------
practicable, file, or cause to be filed, Notification and Report Forms to be
filed under the HSR Act with the Federal Trade Commission (the "FTC") and the
Antitrust Division of the United States Department of Justice (the "Antitrust
Division") in connection with the transactions contemplated by this Agreement,
the Ancillary Agreements and the other agreements contemplated hereby and
thereby, and will use their respective reasonable efforts to respond as promptly
as practicable to all inquiries received from the FTC or the Antitrust Division
for additional information or documentation and to cause the waiting periods
under the HSR Act to terminate or expire at the earliest possible date.
Provident and Parent will each furnish to the other such necessary information
and reasonable assistance as the other may request in connection with its
preparation of necessary filings or submissions to any governmental or
regulatory agency, including any filings necessary under the provisions of the
HSR Act.
4.7 CONSENTS AND REASONABLE EFFORTS. Each Purchaser and each Seller shall
-------------------------------
cooperate and use commercially reasonable best efforts to obtain all Consents
and agreements of, and to give and make all notices and filings with, any
governmental authorities and regulatory agencies, necessary to Consent to the
consummation of the transactions contemplated by this Agreement, the Ancillary
Agreements and the other agreements contemplated hereby and thereby, including
the Permits described in Sections 5.3 and 6.3. Each Seller shall use
commercially reasonable best efforts to obtain, and each Purchaser will
cooperate with Seller in obtaining, all other Consents to the transactions
contemplated by this Agreement and the Ancillary Agreements, and the Consents of
third parties under contracts to be assigned. In the event third party Consents
under contracts to be assigned cannot be obtained, Sellers shall have no
obligation to provide or obtain comparable benefits for Purchasers, but shall,
at the request of Purchasers, continue after the Closing to use commercially
reasonable best efforts to obtain, and each Purchaser will cooperate with Seller
in obtaining, all such Consents which have not been obtained. Each Purchaser
will use commercially reasonable best efforts to obtain all Consents to the
transactions contemplated by this Agreement and the Ancillary Agreements as set
forth on Schedule 3.4. The parties hereto agree to negotiate in good faith, and
execute prior to, or in connection with the Closing, the Separate Account
Transfer Agreements, the Separate Account Administration Agreements, the
Transition Services Agreements, the Administration Services Agreements and the
License Agreement.
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<PAGE>
4.8 REPRESENTATIONS AND WARRANTIES. From the date hereof through the
------------------------------
Closing Date, (a) Provident and each Seller shall use their respective
commercially reasonable best efforts to conduct its affairs in such a manner so
that, except as otherwise contemplated or permitted by this Agreement, the
representations and warranties contained in Article 2 shall continue to be true,
complete and correct in all material respects on and as of the Closing Date as
if made on and as of the Closing Date, except for representations and warranties
that are expressly stated to be made as of an earlier date, (b) Parent and each
Purchaser shall use their respective commercially reasonable best efforts to
conduct their affairs in such a manner so that, except as otherwise contemplated
or permitted by this Agreement, the representations and warranties contained in
Article 3 shall continue to be true and correct in all material respects on and
as of the Closing Date as if made on and as of the Closing Date, (c) Sellers
shall notify Purchasers promptly of any event, condition or circumstance known
to Sellers occurring from the date hereof through the Closing Date that would
constitute a violation or breach of this Agreement by any Seller, and (d)
Purchasers shall notify Provident promptly of any event, condition or
circumstance known to Purchasers occurring from the date hereof through the
Closing Date that would constitute a violation or breach of this Agreement by
either Purchaser.
4.9 EXPENSES. Except as otherwise specifically provided in this
--------
Agreement, the parties to this Agreement shall bear their respective expenses
incurred in connection with the preparation, execution and performance of this
Agreement and the transactions contemplated hereby, including all fees and
expenses of agents, representatives, counsel, investment bankers, actuaries and
accountants; provided, however, that (a) Parent shall pay the cost of the filing
fees in connection with all filings by any of the parties hereto with the FTC
and the Antitrust Division under the HSR Act with respect to the transactions
contemplated hereby and (b) Purchasers shall bear the cost of obtaining required
insurance regulatory Consents and Orders for the implementation of the
Reinsurance Agreements from the State of Texas, (c) Sellers shall bear the cost
of obtaining required Consents and Orders for the implementation of the
Reinsurance Agreements from the States of Tennessee, Delaware and the
Commonwealth of Massachusetts, and (d) Parent and Sellers shall each bear one-
half of the cost of obtaining required Consents and Orders for the
implementation of the Reinsurance Agreements from any States other than Texas,
Tennessee, Delaware and the Commonwealth of Massachusetts.
4.10 MARKETING AGREEMENTS. The parties hereto agree to negotiate in good
--------------------
faith, and execute prior to or in connection with the Closing, one or more
marketing agreements, which marketing agreements shall (i) be effective as of
the Closing, (ii) have terms consistent with the summary of terms attached
hereto as Exhibit 4, and (iii) have such other terms as the parties may agree
(the "Marketing Agreements").
4.11 BANK ACCOUNTS AND LOCKBOXES. Pursuant to the General Assignment and
---------------------------
Assumption Agreements, each Seller shall transfer to Purchasers the bank
accounts and lockboxes of such Seller used solely in the operation of the
Business. Each Seller shall execute such additional agreements and instruments
as may be required by a particular bank to effectuate the transfer to Purchasers
of such bank accounts and lockboxes.
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4.12 ALLOCATION OF PURCHASE PRICE AND ASSUMED LIABILITIES.
----------------------------------------------------
(a) Provident, each Seller and each Purchaser agree to allocate the
Ceding Commission, the liabilities assumed by Purchasers hereunder and under the
Ancillary Agreements, and all other capitalizable costs incurred in connection
with the transactions described herein (collectively, the "Allocable Amount")
among the Transferred Assets in accordance with this Section 4.12 for all
purposes, including Tax and financial accounting purposes (giving effect to
appropriate differences between tax and SAP reserves and appropriate allocation
of the Ceding Commission).
(b) For purposes of section 1060 of the Code, each Seller and
Purchasers shall (i) make the allocation described in Section 4.12(a) in the
manner described in Income Tax Regulations section 1.1060-1T, and (ii) file
asset acquisition statements on Form 8594 (or any replacement or successor form)
reflecting such allocation at the time, in the manner, and under the procedures
described in such provision of the Income Tax Regulations.
(c) As soon as practicable after the Closing Date, each Purchaser
shall prepare a schedule reflecting the allocation of the Allocable Amount under
Section 4.12(b) in the manner described in Income Tax Regulations section
1.1060-1T and shall submit it to Provident. If, within 30 days of Provident's
receipt of such schedule, Provident shall not have objected in writing to the
determination of the Allocable Amount or to such allocation, the allocation
shall be used by each Seller and Purchasers for purposes of Form 8594 (and any
replacement or successor form) and all other federal income Tax purposes. If,
within 15 days of any objection in writing to the determination of the Allocable
Amount or to such allocation, Provident and Purchasers shall not have agreed in
writing to the allocation under Section 4.12(b), any disputed aspects of the
determination of the Allocable Amount or to such allocation shall be resolved by
the Third Party Accountant within 30 days of the submission of the dispute to
the Third Party Accountant by Provident or Purchasers. The decision of the
Third Party Accountant shall be final, and the costs, expenses, and fees of the
Third Party Accountant shall be borne equally by Provident and Purchasers.
(d) Neither Provident, any Seller, Parent nor any Purchaser shall take
any position before any Taxing Authority or otherwise (including in any Tax
return) inconsistent with this Section 4.12 unless and to the extent required to
do so pursuant to a determination (as defined in section 1313(a) of the Code or
any similar provision of state, local or foreign law).
(e) Sellers and Parent will comply with the following concerning the
capitalization of certain policy expenses, pursuant to section 848 of the Code
and Income Tax Regulations sections 1.848-1 and 1.848-2:
(i) As used in this Section 4.12(e), the following terms shall
have the following meanings:
(A) The term "party" will refer either to each Seller or to
Purchasers, as appropriate. The term "parties" will refer to Sellers and
Purchasers.
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(B) The term "Agreement" will refer to the Reinsurance Agreement
between each Seller and each Purchaser.
(C) Other terms used in this Section 4.12 are defined by
reference to section 848 of the Code and Income Tax Regulation sections
1.848-1 and 1.848-2 as in effect on the Closing Date.
(ii) Pursuant to the joint election set forth in section 1.848-
2(g)(8) of the Income Tax Regulations, the party with net positive
consideration for each taxable year will capitalize specified policy
acquisition expenses with respect to the Agreement without regard to the
general deductions limitation of section 848(c)(1) of the Code. The first
taxable year for which the joint election will be effective is the tax year
ending December 31, 1998. Both parties shall attach a joint schedule to their
1998 Federal income Tax Returns which identifies the Agreement for which the
joint election has been made.
(iii) Both parties shall exchange information pertaining to the
amount of net consideration under the Agreement each year to ensure
consistency or as otherwise required by the Internal Revenue Service. Such
exchange of information will be made according to the following procedure:
By May 15 of each year, each Seller will submit to Parent a schedule of its
calculation of the net consideration under the Agreement for the preceding
calendar year. That schedule will be accompanied by a statement signed by an
officer of such Seller disclosing the amount of net consideration such Seller
will report with respect to the Agreement in its Federal income Tax Return
for the preceding calendar year. To ensure consistency, Parent will utilize
that information in determining its net consideration with respect to the
Agreement for its preceding taxable year. Parent will advise Sellers if they
disagree with the calculations provided and the parties agree to act in good
faith to resolve such differences amicably.
4.13 FURTHER ASSURANCES.
------------------
(a) Upon the terms and subject to the conditions herein provided, on
and prior to the Closing Date each Purchaser and each Seller shall use all
commercially reasonable best efforts to take, or cause to be taken, all action
or do, or cause to be done, all things or execute any documents necessary,
proper or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement, the Ancillary
Agreements and the other agreements contemplated hereby and thereby.
(b) On and after the Closing Date, each Seller (as reasonably
requested from time to time by any Purchaser) and Purchasers (as reasonably
requested from time to time by any Seller) shall take all reasonably appropriate
action and execute any additional documents, instruments or conveyances of any
kind (not containing additional representations and warranties) which may be
reasonably necessary to carry out any of the provisions hereof, including
putting each of Purchasers in full possession and operating control of the
Transferred Assets and the Business,
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and giving effect to the assumption of liabilities by Purchasers as contemplated
hereby and thereby.
4.14 WESTERN NATIONAL CORPORATION ACQUISITION. Parent shall use its
----------------------------------------
commercially reasonable best efforts, subject to the terms and conditions of the
WNC Agreement, to consummate the WNC Acquisition.
4.15 TRANSITION TO PURCHASERS POLICY FORMS. Commencing on the Closing
-------------------------------------
Date, as requested in writing by Purchasers, each Seller shall issue contracts
("Post-Closing Contracts") of the type specified in Schedule 9.1(C) as products
currently being issued and that are in effect on the Closing Date; provided,
that such Seller shall not be required to issue contracts pursuant to this
Section 4.15 in any state if either Purchaser has obtained insurance department
approval of its own forms in substitution for the Insurance Contracts in such
state. Purchasers shall use their commercially reasonable best efforts to
obtain the policy forms approvals referred to in the previous sentence as soon
as is reasonably practicable after the date hereof.
4.16 CREDITING RATES. Each Seller shall adopt the crediting rates that shall
---------------
be prescribed by Purchasers and approved by Sellers, such approval not to be
unreasonably withheld, for its respective business for the first quarter of 1998
and shall cooperate with Purchasers prior to Closing in determining the
crediting rates to be applied thereafter.
4.17 DISPOSITION OF PNAC AND PRV. For so long as any Reinsurance Contracts
---------------------------
remain outstanding under any Reinsurance Agreements to which PNAC or PRV are
party, Provident shall not, and shall not permit its Subsidiaries to, sell,
transfer or otherwise dispose of a majority of the equity interest in PNAC or
PRV, as applicable, to any Person (other than to Provident or any of its
Affiliates) who at the time of such sale, transfer or disposition does not have
a published A. M. Best rating of at least "A", without first obtaining the prior
written consent of Parent, which consent shall not be unreasonably withheld or
delayed.
4.18 CERTAIN OTHER MATTERS. The parties agree to take the actions specified
---------------------
in Schedule 4.18 with respect to the contracts described in Schedule 4.18.
ARTICLE 5
CONDITIONS PRECEDENT TO THE OBLIGATION OF PURCHASERS TO CLOSE
-------------------------------------------------------------
The obligations of Parent and Purchasers under this Agreement are subject to
the satisfaction on or prior to the Closing of the following conditions, any one
or more of which may be waived by Purchasers to the extent permitted by Law:
5.1 REPRESENTATIONS AND WARRANTIES; COMPLIANCE WITH COVENANTS. Except for
---------------------------------------------------------
changes as may be permitted or required pursuant to the terms hereof, the
representations and warranties of Provident and the Sellers contained in this
Agreement shall be true and correct in all material respects and such
representations and warranties as are qualified as to materiality shall be true
and correct in all respects on and as of the Closing with the same effect as
though such
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representations and warranties had been made on and as of the Closing, except
that any such representations and warranties that are given as of a specified
date and relate solely to a specified date or period shall be true and correct
in all material respects or all respects, as the case may be, only as of such
date or period. Provident and each Seller shall have performed and complied with
all covenants and agreements required to be performed or complied with by
Provident or such Seller under this Agreement prior to or concurrently with the
Closing in all material respects.
5.2 OTHER AGREEMENTS. The Ancillary Agreements and each of the other
----------------
agreements and instruments contemplated hereby and thereby to which each Seller
or Provident is a party shall have been duly executed and delivered by each
Seller or Provident, as applicable, on the Closing Date and each of such
agreements, documents and instruments shall be in full force and effect with
respect to each such Seller or Provident on the Closing Date, as applicable.
5.3 GOVERNMENTAL AND REGULATORY CONSENTS AND APPROVALS.
--------------------------------------------------
(a) All Permits and authorizations required by each Seller and
Purchasers from governmental and regulatory bodies listed on Exhibit 5 shall
have been obtained and shall be in full force and effect and without conditions
or limitations which would have a material adverse effect on the Business as
operated by Purchasers after the Closing Date and are unacceptable to Purchasers
in the exercise of its reasonable business judgment, and Purchasers shall have
been furnished with appropriate evidence, reasonably satisfactory to it and its
counsel, of the granting of such Permits.
(b) The applicable waiting period under the HSR Act, including all
extensions thereof, shall have expired or been terminated and Purchasers shall
have been furnished with appropriate evidence, reasonably satisfactory to it, of
such expiration or termination.
5.4 POSSESSION OF ASSETS; INSTRUMENTS OF CONVEYANCE. On the Closing Date,
-----------------------------------------------
each Seller shall have delivered to Purchasers possession of the Transferred
Assets to be transferred on the Closing Date and shall have transferred to
Purchasers all of the right, title and interest of each such Seller in and to
such assets as provided in this Agreement and the Ancillary Agreements.
5.5 INJUNCTION. There shall be no effective injunction, writ, preliminary
----------
restraining order or any other Order of any nature issued by a court of
competent jurisdiction, directing that the transactions provided for herein not
be consummated as herein provided.
5.6 WNC ACQUISITION. The WNC Acquisition shall have been consummated.
---------------
ARTICLE 6
CONDITIONS PRECEDENT TO THE OBLIGATION OF SELLERS TO CLOSE
-----------------------------------------------------------
The obligations of Provident and Sellers under this Agreement are subject
to the satisfaction on or prior to the Closing of the following conditions, any
one or more of which may be waived by Provident to the extent permitted by Law:
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<PAGE>
6.1 REPRESENTATIONS AND WARRANTIES; COMPLIANCE WITH COVENANTS. Except for
---------------------------------------------------------
changes as may be permitted or required pursuant to the terms hereof, the
representations and warranties of Purchasers contained in this Agreement shall
be true and correct in all material respects and such representations and
warranties as are qualified as to materiality shall be true and correct in all
respects on and as of the Closing with the same effect as though such
representations and warranties had been made on and as of the Closing, except
that any such representations and warranties that are given as of a specified
date and relate solely to a specified date or period shall be true and correct
in all material respects or all respects, as the case may be, only as of such
date or period. Purchasers and Parent shall have performed and complied with
all covenants and agreements required to be performed or complied with by
Purchasers or Parent under this Agreement prior to or concurrently with the
Closing in all material respects.
6.2 OTHER AGREEMENTS. The Ancillary Agreements and each of the other
----------------
agreements and instruments contemplated hereby and thereby to which Purchasers
is a party shall have been duly executed and delivered by Purchasers on the
Closing Date and each of such agreements and instruments shall be in full force
and effect with respect to Purchasers on the Closing Date.
6.3 GOVERNMENTAL AND REGULATORY CONSENTS AND APPROVALS.
--------------------------------------------------
(a) All Permits required by each Seller and Purchasers from
governmental and regulatory bodies listed on Exhibit 5 shall have been obtained
and shall be in full force and effect and without conditions or limitations
which would have a material adverse effect on the business of such Seller and
are unacceptable to Provident in the exercise of its reasonable business
judgment, and Provident shall have been furnished with appropriate evidence,
reasonably satisfactory to it and its counsel, of the granting of such Permits.
(b) The applicable waiting period under the HSR Act, including all
extensions thereof, shall have expired or been terminated and Provident shall
have been furnished with appropriate evidence, reasonably satisfactory to it, of
such expiration or termination.
6.4 INJUNCTION. There shall be no effective injunction, writ, preliminary
----------
restraining order or any other Order of any nature issued by a court of
competent jurisdiction, directing that the transactions provided for herein not
be consummated as herein provided.
ARTICLE 7
SURVIVAL AND INDEMNIFICATION
----------------------------
7.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
------------------------------------------
warranties of the parties hereto contained in this Agreement and the Ancillary
Agreements shall survive the execution and delivery hereof; provided that,
except as set forth in the following sentence, the representations and
warranties of the parties hereto herein shall terminate and expire on the second
anniversary of the Closing Date, except for matters as to which a Claims Notice
shall have been given pursuant to Section 7.3 or 7.4 by a party hereto prior to
the applicable expiration date,
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<PAGE>
which representations shall continue with respect to such matters until such
matters have been finally decided, settled or adjudicated. The representations
contained in Sections 2.1 and 2.2 shall survive until the expiration of all
applicable statutes of limitations.
7.2 OBLIGATION TO INDEMNIFY.
-----------------------
(a) Subject to the limitations set forth in this Article 7, from and
after the Closing Date, each Seller (other than PNAC, PRV and PRPL) agrees to
indemnify, defend and hold harmless Parent and Purchasers (and their respective
directors, officers, employees, Affiliates, successors and permitted assigns)
(collectively, the "Purchaser Indemnitees") from and against all Losses based
upon: (i) any breach of or inaccuracy in the representations and warranties
contained in Article 2 or in any certificate delivered by any Seller to
Purchasers pursuant to this Agreement on or after the date of execution of this
Agreement; (ii) any breach, nonfulfillment or default in the performance of any
of the covenants and agreements of Provident or any Seller contained in this
Agreement or in any Ancillary Agreement; or (iii) all Retained Liabilities.
(b) Subject to the limitations set forth in this Article 7, from and
after the Closing Date, Purchasers agree to indemnify, defend and hold harmless
Provident and each Seller (and their respective directors, officers, employees,
Affiliates, successors and permitted assigns) (collectively, the "Seller
Indemnitees") from and against all Losses, based upon: (i) any breach of or
inaccuracy in the representations and warranties of Parent and Purchasers
contained in Article 3 or in any certificate delivered by any Purchaser to
Provident or Sellers pursuant to this Agreement on or after the date of
execution of this Agreement; (ii) any breach, nonfulfillment or default in the
performance of any of the covenants and agreements of Parent or Purchasers
contained in this Agreement or in any Ancillary Agreement; or (iii) all Assumed
Liabilities.
(c) For the avoidance of doubt, the Purchaser Indemnitees shall not be
entitled to the benefit of the indemnity in Section 7.2(a) in respect of any
amounts which are taken into account in calculating the amounts to be paid
pursuant to Section 1.5(c).
(d) The aggregate amount for which the Sellers shall be liable under
Section 7.2(a)(i) and (ii) shall be $20,000,000. The aggregate amount for which
Purchasers shall be liable under Section 7.2(b)(i) and (ii) shall be
$20,000,000. Except as set forth in the following sentence, the Sellers shall
be required to indemnify the Purchaser Indemnitees pursuant to Section 7.2(a)(i)
and (ii) only to the extent that the sum of Losses incurred by the Purchaser
Indemnitees in connection with such clauses exceeds $300,000 in the aggregate
(the "Deductible"), and then only for the amount of such excess.
Notwithstanding the foregoing, no Loss resulting from a breach by any Seller of
the covenant set forth in Section 4.16 shall be subject to the Deductible.
Purchasers shall be required to indemnify the Seller Indemnitees pursuant to
Section 7.2(b)(i) and (ii) only to the extent that the sum of Losses incurred by
the Seller Indemnitees in connection with such clauses exceeds the Deductible,
and then only for the amount of such excess.
7.3 CLAIMS NOTICE. In the event that either a Purchaser Indemnitee or a
-------------
Seller Indemnitee wishes to assert a claim for indemnification hereunder, such
party seeking indemnification (the "Indemnified Party") shall deliver written
notice (a "Claims Notice") to the party from which
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<PAGE>
indemnification is sought (the "Indemnifying Party") no later than ten (10)
Business Days after such claim becomes known to the Indemnified Party,
specifying the facts constituting the basis for, and the amount (if known) of
the claim asserted. Failure to deliver a Claims Notice with respect to a claim
(other than a claim based on a Third Party Claim) in a timely manner as
specified in the preceding sentence shall not be deemed a waiver of the
Indemnified Party's right to indemnification hereunder for Losses in connection
with such claim, but the amount of reimbursement to which the Indemnified Party
is entitled shall be reduced by the amount, if any, by which the Indemnified
Party's Losses would have been less had such Claims Notice been timely
delivered.
7.4 RIGHT TO CONTEST CLAIMS OF THIRD PARTIES.
----------------------------------------
(a) If an Indemnified Party asserts, or may in the future seek to
assert, a claim for indemnification hereunder because of a claim or demand made,
or an action, proceeding or investigation instituted, by any Person not a party
to this Agreement (a "Third Party Claimant") that may result in a Loss with
respect to which the Indemnified Party would be entitled to indemnification
pursuant to this Article 7 (a "Third Party Claim"), the Indemnified Party shall
deliver to the Indemnifying Party a Claims Notice with respect thereto, which
Claims Notice shall, in accordance with the provisions of Section 7.3, be
delivered as promptly as practicable and in any event no later than ten (10)
Business Days after such Third Party Claim is actually known to the Indemnified
Party. Failure to deliver a Claims Notice with respect to a claim in a timely
manner as specified in the preceding sentence shall not be deemed a waiver of
the Indemnified Party's right to indemnification hereunder for Losses in
connection with such claim, but the amount of reimbursement to which the
Indemnified Party is entitled shall be reduced by the amount, if any, by which
the Indemnified Party's Losses would have been less had such Claims Notice been
timely delivered; provided, that the failure to deliver a Claims Notice with
respect to a Third Party Claim within twenty (20) Business Days of the
Indemnified Party's receipt of written notice of such Third Party Claim shall be
deemed to be a waiver of the Indemnified Party's right to indemnification
hereunder for Losses in connection with such Third Party Claim.
(b) (i) The Indemnifying Party shall have the right, upon written
notice to the Indemnified Party, to investigate, contest, defend or settle any
Third Party Claim that may result in a Loss with respect to which the
Indemnified Party is entitled to indemnification pursuant to this Article 7;
provided, that the Indemnified Party may, at its option and at its own expense,
participate in the investigation, contesting, defense or settlement of any such
Third Party Claim through representatives and counsel of its own choosing; and,
provided further, that the Indemnifying Party shall not settle any Third Party
Claim unless (i) such settlement is on exclusively monetary terms or (ii) the
Indemnified Party shall have consented to the terms of such settlement, which
consent shall not unreasonably be withheld. If requested by the Indemnifying
Party, the Indemnified Party will, at the sole cost and expense of the
Indemnifying Party, cooperate with the Indemnifying Party and its counsel in
contesting any Third Party Claim or, if appropriate and related to the Third
Party Claim in question, in making any counterclaim against the Third Party
Claimant, or any cross-complaint against any Person (other than the Indemnified
Party or its Affiliates). The failure of the Indemnifying Party to provide the
above-mentioned written notice to the Indemnified Party within ten (10) Business
Days after receipt of a Claims
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<PAGE>
Notice with respect to a Third Party Claim shall be deemed an election not to
defend the same. Unless and until the Indemnifying Party elects to defend the
Third Party Claim, the Indemnified Party shall have the right, at its option and
at the Indemnifying Party's expense to the extent that the applicable Deductible
has been exhausted, to do so in such manner as it deems appropriate; provided,
however, that the Indemnified Party shall not settle or compromise any Third
Party Claim for which it seeks indemnification hereunder without the prior
written consent of the Indemnifying Party (which shall not be unreasonably
withheld) during the ten (10) Business Day period referred to above after the
receipt of a Claims Notice, or thereafter in a manner that would cause any
applicable Deductible to be exhausted.
(ii) Notwithstanding Section 7.4(b)(i), the Indemnified Party shall
have the right to investigate, contest, defend or settle any Third Party Claim
falling under Section 7.2(a)(i) or (b)(i), as the case may be, so long as the
Losses that could reasonably be expected to result from such Third Party Claim,
together with all Losses under any other Third Party Claim falling under such
Sections over which the Indemnified Party has retained control pursuant to this
Section 7.4(b)(ii), would not exceed the Deductible. In the event that an
Indemnified Party retains control over any Third Party Claim pursuant to this
Section 7.4(b)(ii): (A) the Indemnifying Party shall have the right to
participate in (but not control) the defense of such Third Party Claim; (B) the
Indemnified Party shall not settle or compromise such Third Party Claim without
the prior written consent of the Indemnifying Party (which shall not be
unreasonably withheld); and (C) the Indemnified Party shall not be entitled to
any indemnification for any amounts by which the actual Losses resulting from
such Asserted Claims exceeds, in the aggregate, the Deductible.
(c) The Indemnifying Party shall be entitled to participate in (but
not to control) the defense of any Third Party Claim which it has elected, or is
deemed to have elected, not to defend, or as to which it does not have the right
to defend under Section 7.4(b), with its own counsel and at its own expense.
(d) Except as provided in the first sentence of Section 7.4(b), the
Indemnifying Party shall bear all costs of defending any Third Party Claim and
shall indemnify and hold the Indemnified Party harmless against and from all
costs, fees and expenses incurred in connection with defending such Third Party
Claim.
(e) Purchasers and the Sellers shall make mutually available to each
other (or to Provident or Parent, as applicable) all relevant information in
their possession relating to any Third Party Claim (except to the extent that
such action would result in a loss of attorney-client privilege) and shall
cooperate with each other in the defense thereof.
(f) In the event that any party, or any Affiliate thereof, becomes
aware of, or any Person brings, or threatens to bring, an action, proceeding or
investigation with respect to, any defect affecting a plan in which a Qualified
Contract is held (a "Plan Defect"), the parties shall cooperate in identifying
actions that may be necessary or desirable in order to cure or otherwise
address such Plan Defect, including, without limitation, the modification,
amendment or replacement of such plan, and Sellers shall have the right to take
such necessary corrective actions
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<PAGE>
relating thereto as such Sellers shall identify; provided that Sellers shall not
take any action to which Purchasers reasonably object on the grounds that the
proposed action would adversely affect the ability of such plan to continue
investing in such Qualified Contract, would require changes to such Qualified
Contract adverse to Purchasers, or otherwise adversely affect Purchasers'
relationship with the sponsor of such plan, without the prior written consent of
Purchasers, which consent shall not be unreasonably withheld or delayed.
Provident and Sellers shall use commercially reasonable efforts to determine, as
soon as practicable after the date of this Agreement, and in any event prior to
Closing, whether any Plan Defects exist and shall keep Parent reasonably
apprised of the results of their investigation; provided that Provident and
Sellers shall not be required to disclose any information subject to the
attorney-client privilege. Parent and Purchasers shall not seek to replace any
plan under which any Qualified Contracts are presently held until such time as
Provident or any Seller shall notify Parent or any Purchaser that it has
determined that such plan does not contain a Plan Defect, or that any such Plan
Defect has been cured or otherwise addressed.
7.5 TAX EFFECT AND INSURANCE. The liability of the Indemnitors with
------------------------
respect to any Indemnification Claim shall be reduced by the tax benefit
actually realized and any insurance proceeds received by the Indemnitees as a
result of any Losses upon which such Indemnification Claim is based, and shall
include any tax detriment actually suffered by the Indemnitees as a result of
such Losses. The amount of any such tax benefit or detriment shall be
determined by taking into account the effect, if any and to the extent
determinable, of timing differences resulting from the acceleration or deferral
of items of gain or loss resulting from such Losses and shall otherwise be
determined so that payment by the Indemnitors of the Indemnification Claim, as
adjusted to give effect to any such tax benefit or detriment, will make the
Indemnitee as economically whole as is reasonably practical with respect to the
Losses upon which the Indemnification Claim is based. Any dispute as to the
amount of such tax benefit or detriment shall be resolved by arbitration as
provided in Section 7.8 of this Agreement.
7.6 INDEMNIFICATION PAYMENTS. Any payment hereunder shall be made by wire
------------------------
transfer of immediately available funds to such account or accounts as the
Indemnified Party shall designate to the Indemnifying Party in writing.
7.7 EXCLUSIVITY. After the Closing, to the extent permitted by applicable
-----------
Laws, the indemnities provided for in Section 7.2 shall be the exclusive
remedies of Purchasers and Sellers and their respective officers, directors,
employees, agents and Affiliates for any breach of or inaccuracy in any
representation or warranty (including in any certificate delivered by a party
pursuant to this Agreement) or any breach, nonfulfillment or default in the
performance of any of the covenants or agreements contained in this Agreement
(but not any such covenants or agreements to the extent they are by their terms
to be performed after the Closing Date), and the parties shall not be entitled
to a rescission of this Agreement or to any further indemnification rights or
claims of any nature whatsoever in respect thereof, all of which the parties
hereto hereby waive.
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7.8 ARBITRATION.
-----------
(a) Any dispute arising out of or relating to the interpretation,
performance or breach of this Agreement, including the formation or validity
thereof, shall be submitted for decision to a panel of three arbitrators. Notice
requesting arbitration must be in writing and sent certified or registered mail,
return receipt requested.
(b) One arbitrator shall be chosen by each party and the two
arbitrators shall, before instituting the hearing, choose an impartial third
arbitrator (the "Umpire") who shall preside at the hearing. If either party
fails to appoint its arbitrator within 30 days after being requested to do so by
the other party, the latter, after ten days notice by certified or registered
mail of its intention to do so, may appoint the second arbitrator. If the two
arbitrators are unable to agree upon the selection of the Umpire within 30 days
of their appointment, then each arbitrator shall submit to the other a list of
three Umpire candidates. Each arbitrator shall strike the names of two
candidates from the other arbitrator's list, and the Umpire shall be selected
from the two remaining candidates by a lot drawing procedure determined by the
two arbitrators.
(c) Unless the parties otherwise agree all arbitrators shall be
disinterested active or former officers of insurance or reinsurance companies.
(d) Within 30 days after notice of appointment of all arbitrators, the
panel shall meet and determine a schedule for the conduct of the arbitration,
including hearings. The panel shall be relieved of all judicial formality and
shall not be bound by the strict rules of procedure and evidence. The panel
shall determine where the arbitration shall take place. To the extent and only
to the extent that the provisions of this Agreement are ambiguous or unclear,
the panel shall make its decision considering the custom and practice of the
applicable insurance and reinsurance business. Insofar as the arbitration panel
looks to substantive Law, the Law of Tennessee shall govern. The decision of
any two arbitrators when rendered in writing shall be final and binding. The
panel is empowered to grant interim relief as it may deem appropriate.
(e) The panel shall render its decision, which shall be in writing and
state the reasons therefor, within 60 days following the termination of
hearings. Judgment upon the award may be entered in any court having
jurisdiction thereof. Each party shall bear the expense of its own arbitrator
and shall jointly and equally bear with the other party the cost of the Umpire.
The remaining costs of the arbitration shall be allocated by the panel. The
panel may, at its discretion, award such further costs and expenses as it
considers appropriate, including but not limited to interest (determined at the
panel's discretion) and attorneys' fees, to the extent permitted by Law. The
panel shall not award punitive damages under any circumstances.
ARTICLE 8
TERMINATION PRIOR TO CLOSING
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8.1 TERMINATION OF AGREEMENT. This Agreement may be terminated at any
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time prior to the Closing:
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(a) by mutual written consent of Provident and Parent.
(b) by Provident or Parent in writing, if there shall be any Order of
any court or governmental or regulatory agency binding on Parent or any
Purchasers and/or Provident or any Seller, which prohibits or restrains
Parent or any Purchasers and/or Provident or any Seller from consummating the
transactions contemplated hereby; provided, that Parent or such Purchasers
and/or Provident or such Sellers, as the case may be, shall have used its
commercially reasonable best efforts to have any such Order lifted and the
same shall not have been lifted by April 1, 1998;
(c) by Parent in writing if there has been a material breach by
Provident or any Seller of any of the representations, warranties, agreements
or covenants of Provident and the Sellers set forth herein which is not
subject to cure prior to the Closing, or a failure of any other condition not
subject to cure prior to the Closing to which the obligations of Purchasers
are subject;
(d) by Provident in writing if there has been a material breach by
Parent or Purchasers of any of the representations, warranties, agreements or
covenants of Parent and Purchasers set forth herein which is not subject to
cure prior to the Closing, or a failure of any other condition not subject to
cure prior to the Closing to which the obligations of Provident and the
Sellers are subject; and
(e) by either of Provident or Parent in writing, if the Closing has not
occurred on or prior to April 1, 1998, unless the failure of the Closing to
occur shall be due to the failure of the party seeking to terminate this
Agreement to materially perform each of its obligations under this Agreement
required to be performed by it on or prior to the Closing Date.
8.2 SURVIVAL. If this Agreement is terminated and the transactions
--------
contemplated hereby are not consummated as described above, this Agreement shall
become null and void and of no further force and effect, except for (a) the
provisions of this Agreement relating to the obligations of the parties hereto
to keep confidential and not to use certain information and data obtained from
the other parties hereto and (b) the provisions of Sections 4.9, 9.2, 9.9(b) and
this Section 8.2.
ARTICLE 9
MISCELLANEOUS
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9.1 DEFINITIONS. The following terms shall have the respective meanings set
-----------
forth below throughout this Agreement:
"1940 ACT" means the Investment Company Act of 1940, as amended, and all
rules and regulations thereunder.
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"90-DAY TREASURY RATE" means the annual yield rate, on the date to which
such 90-Day Treasury Rate relates, of actively traded U.S. Treasury
securities having a remaining duration to maturity of three months, as such
rate is published under "Treasury Constant Maturities" in Federal Reserve
Statistical Release H.15(519).
"ADJUSTED STATUTORY RESERVES AND OTHER STATUTORY LIABILITIES" at any time
means statutory reserves and other statutory liabilities of the Business
appropriately includable in line items 1 through 25, except lines 11.4 and
24.1, of the Liabilities, Surplus and Other Funds page of the NAIC Annual
Statement Blank (1996 format), but excluding from such statutory reserves and
other statutory liabilities the statutory liabilities included within
Retained Liabilities.
"ADMINISTRATIVE SERVICES AGREEMENTS" means the Administrative Services
Agreements between each Seller and Purchaser, in form and substance
reasonably acceptable to the parties, which shall set forth (i) the terms and
conditions upon which such Purchaser shall provide certain administrative
services to such Seller with respect to the Reinsured Contracts, and (ii) the
consideration to be paid therefor.
"ADVERTISEMENT" means any material designed to create public interest in
insurance policies, annuity contracts and variable annuity contracts or in an
insurer, or in an insurance producer, or to induce the public to purchase,
increase, modify, reinstate, borrow on, surrender, replace or retain such a
policy or contract.
"AFFILIATE" means, with respect to any Person, at the time in question, any
other Person controlling, controlled by or under common control with such
Person.
"AGREED VALUE" shall have the meaning set forth in Section 1.3(a).
"ALLOCABLE AMOUNT" shall have the meaning set forth in Section 4.12(a).
"ANCILLARY AGREEMENTS" means the Reinsurance Agreements, the Separate
Account Transfer Agreements, the Administrative Services Agreements, the
Separate Account Administration Agreements, the General Assignment and
Assumption Agreements, the Bills of Sale, the Transition Services Agreement,
the Marketing Agreements, and the License Agreement.
"ANNUAL RATE" means the value of "r" in the expression (1 + r)n/365 - 1,
where "n" is equal to the number of days for which interest is to be computed
and the result of the expression is the interest factor for computing the
applicable interest amounts.
"ANTITRUST DIVISION" shall have the meaning set forth in Section 4.6.
"APPLICABLE SAP" means Tennessee SAP, in the case of PLA and PNAC,
Massachusetts SAP, in the case of PRL and PRV and Delaware SAP, in the case
of PRPL.
"ASSIGNED AND ASSUMED CONTRACTS" means those contracts and other agreements
material to the operation of the Business identified on Schedule 9.1(A).
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"ASSUMED LIABILITIES" shall mean all (i) liabilities and obligations first
to be paid or performed after the Closing Date under or pursuant to the
Assigned and Assumed Contracts, if any, (ii) liabilities for amounts payable
after November 30, 1997 for returns or refunds of Premiums in respect of
Insurance Contracts intended to be reinsured by Purchasers, and (iii)
liabilities for guaranty fund assessments and similar charges imposed with
respect to the Insurance Contracts based on dates of insolvency after
November 30, 1997.
"BILL OF SALE" means the Bill of Sale which is substantially in the form of
Exhibit 2.
"BOOKS AND RECORDS" means the originals or copies of all customer lists,
policy information, Insurance Contract forms and rating plans, disclosure and
other documents and filings required under applicable securities laws, claim
records, sales records, underwriting records, financial records, tax records
and compliance records in the possession or control of Sellers and relating
principally to the operation of the Business, including any database,
magnetic or optical media (to the extent not subject to licensing
restrictions) and any other form of recorded, computer generated or stored
information or process, but excluding any such records that are subject to
the attorney-client privilege.
"BUSINESS DAY" means any day other than a Saturday, Sunday, a day on which
banking institutions in the State of New York are permitted or obligated by
law to be closed or a day on which the New York Stock Exchange is closed for
trading.
"BUSINESS" means the business of administering the Insurance Contracts, as
currently conducted by Sellers.
"CEDING COMMISSION" shall have the meaning provided in Section 1.5.
"CLAIMS NOTICE" shall have the meaning set forth in Section 7.3.
"CLOSING DATE" means (i) if the last of the conditions to Closing set forth
in this Agreement is satisfied or waived in writing prior to the 15th day of
a given month, then the Closing Date shall be the first day of the month
following the month in which the last of the conditions was so satisfied or
waived in writing, or (ii) if such satisfaction or waiver in writing occurs
or is granted after the 15th day of any given month, then the Closing Date
shall be the first day of the second month following the month in which the
last of the closing conditions is so satisfied or waived; provided, however,
that if such date is not a Business Day, the Closing Date shall be the
immediately succeeding Business Day; and provided further, that the Closing
may occur on such other date as the parties may agree to in writing, provided
however, that the Closing Date shall not be later than the date specified in
Section 8.1(e).
"CLOSING" means the closing of the transactions contemplated by this
Agreement.
"CODE" means the Internal Revenue Code of 1986, as amended. Any citation to
a provision of the Code includes a citation to any successor provision.
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"COMMISSION" means the United States Securities and Exchange Commission.
"CONSENT" shall mean any consent, approval, authorization, clearance,
exemption, waiver, or similar affirmation by any Person pursuant to any
contract or any applicable Law, Order, or Permit.
"DELAWARE SAP" means the statutory accounting principles and practices
prescribed or permitted by the Insurance Department of the State of Delaware
as applied on a basis consistent with those utilized in the preparation of
1996 Annual Statement of PRPL.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and all final and temporary regulations and interpretive Bulletins
and other rulings of general applicability thereunder.
"ESTIMATED INITIAL CASH POSITION" shall have the meaning set forth in
Section 1.3(a).
"FINAL ANNUITY RESERVES" shall have the meaning set forth in Section
1.5(b).
"FINAL RECONCILIATION" shall have the meaning set forth in Section 1.4(a).
"FINAL RESERVES STATEMENT" shall have the meaning set forth in Section
1.5(b).
"FINAL TRANSFERRED RESERVES STATEMENT" shall have the meaning set forth in
Section 1.3(b).
"FTC" shall have the meaning set forth in Section 4.6.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"GENERAL ACCOUNT RESERVES" means the general account statutory reserves of
Seller (without regard to the transactions contemplated by the Reinsurance
Agreements) with respect to the Insurance Contracts determined pursuant to
Applicable SAP, as such reserves would have been included in lines 1, 2, 3,
4.1, 4.2, 5, 6, 7.1, 7.2, 7.3, 8, 9, 10.1, 10.2, 10.3, 11.1, 11.2 and 11.3 of
the Liabilities, Surplus and Other Funds page of the NAIC Annual Statement
Blank (1996 format), excluding, however, any general account statutory
reserve adjustments in relation to Separate Account Liabilities.
"GENERAL ASSIGNMENT AND ASSUMPTION AGREEMENT" means the General Assignment
and Assumption Agreement between each Seller and Purchasers which is
substantially in the form of Exhibit 3.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, and the rules and regulations thereunder.
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"INCOME TAX REGULATIONS" means the temporary or final regulations issued
under the Code. Any citation to a provision of the Income Tax Regulations
includes a reference to any successor regulatory provision.
"INDEMNIFIED PARTY" shall have the meaning set forth in Section 7.3.
"INDEMNIFYING PARTY" shall have the meaning set forth in Section 7.3.
"INDEPENDENT ACTUARY" shall have the meaning set forth in Section 1.3(b).
"INITIAL CASH POSITION" shall have the meaning set forth in Section 1.3(c).
"INITIAL CASH POSITION DIFFERENCE" shall have the meaning set forth in
Section 1.3(c).
"INITIAL PORTFOLIO" shall have the meaning set forth in Section 1.3(c).
"INSURANCE CONTRACTS" means those contracts of insurance and annuities, and
riders thereto and renewals, exchanges and extensions thereof, of Sellers
described on Schedule 9.1(C) and new policies of like type issued after the
date of this Agreement but before the Closing Date.
"INVESTMENT ASSETS" shall have the meaning set forth in Section 1.3(d).
"IRS" means the United States Internal Revenue Service.
"KNOWLEDGE" shall be interpreted for the purposes of this Agreement as
follows: (i) a matter will be deemed to be within the "knowledge of Sellers"
if (A) such matter is as of the date of the execution of this Agreement
actually known to any of the Seller Key People, or (B) in light of the
positions held by the Seller Key People, but taking into account that the due
diligence undertaken by the Seller Key People prior to the execution of this
Agreement was limited to reviewing materials accessible to the Seller Key
People without informing other individuals of the transactions contemplated
by this Agreement, the matter would reasonably be expected to be known by the
Seller Key People; and (ii) a matter will be deemed to be within the
"knowledge of Purchasers" if it is actually known to any of the Purchaser Key
People as of the date of the execution of this Agreement after reasonable
inquiry.
"LAW" means any domestic or foreign federal, state or local code, law,
statute, ordinance, regulation, rule, reporting or licensing requirement,
policy, guideline, administrative interpretation or other requirement
(including those of the Commission, NASD, NAIC and any state) applicable to
the parties hereto, or any of their respective Affiliates, properties,
assets, officers, directors, employees or agents, as the case may be.
"LICENSE AGREEMENT" means the software license agreement to be entered into
on or prior to the Closing Date among Sellers and Purchasers, in form and
substance reasonably acceptable to the parties, which shall set forth (i) the
terms and conditions upon which
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Sellers will grant a license to use the software described in Schedule
9.1(B), and (ii) the consideration to be paid therefor.
"LOSS" and "LOSSES" shall mean actions, claims, losses, liabilities,
damages, deficiencies, costs, expenses (including reasonable attorneys' fees
and expenses), interest, taxes and penalties.
"MARKETING AGREEMENTS" means the marketing agreements to be entered into by
Parent, each Purchaser, Provident and each Seller pursuant to Section 4.10.
"MASSACHUSETTS SAP" means the statutory accounting principles and practices
prescribed or permitted by the Insurance Department of the Commonwealth of
Massachusetts as applied on a basis consistent with those utilized in the
preparation of 1996 Annual Statements of PRL and PRV.
"MATERIAL" shall have the following meaning: A matter will be deemed to be
"material" in connection with any provision of this Agreement if such matter
would be considered significant by a reasonable acquiror of the Business in
the context of the particular provision in which the word "material" appears.
"NAIC" means the National Association of Insurance Commissioners.
"NASD" shall mean the National Association of Securities Dealers, Inc.,
including its Subsidiary, NASD Regulation, Inc.
"NET ASSET VALUE" shall have the meaning set forth in Section 1.3(c).
"NET CASH FROM THE BUSINESS" shall have the meaning set forth in Section
1.3(f).
"ORDER" shall mean any administrative decision or award, decree,
injunction, judgment, order, quasi-judicial decision or award, ruling, or
writ of any federal, state, local or foreign or other court, arbitrator,
mediator, tribunal, or other governmental or regulatory agency or authority.
"PARENT" shall have the meaning set forth in the first paragraph of this
Agreement.
"PERMITS" means all licenses, permits, orders, approvals, registrations,
authorizations, qualifications and filings with and under all federal, state,
local or foreign laws or governmental or regulatory bodies.
"PERSON" means any individual, corporation, partnership, firm, joint
venture, association, joint-stock company, trust, unincorporated
organization, governmental, judicial or regulatory body, business unit
(including, but not limited to, the Business), division or other entity.
"PLA" shall have the meaning set forth in the first paragraph of this
Agreement.
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"PNAC" shall have the meaning set forth in the first paragraph of this
Agreement.
"POOL ASSET ADDITIONS" shall have the meaning set forth in Section 1.3(d).
"POOL ASSET REDUCTIONS" shall have the meaning set forth in Section 1.3(d).
"POOL" shall have the meaning set forth in Section 1.3(c).
"POST-CLOSING CONTRACTS" shall have the meaning set forth in Section 4.15.
"PRELIMINARY INVESTMENT ASSETS" shall have the meaning set forth in Section
1.3(a).
"PRELIMINARY RECONCILIATION" shall have the meaning set forth in Section
1.3(e).
"PREMIUMS" means premiums and annuity considerations, deposits and similar
receipts with respect to the Insurance Contracts.
"PRL" shall have the meaning set forth in the first paragraph of this
Agreement.
"PROVIDENT" shall have the meaning set forth in the first paragraph of this
Agreement.
"PRPL" shall have the meaning set forth in the first paragraph of this
Agreement.
"PRV" shall have the meaning set forth in the first paragraph of this
Agreement.
"PURCHASER INDEMNITEES" shall have the meaning set forth in Section 7.2(a).
"PURCHASER KEY PEOPLE" means the individuals set forth in Schedule 9.1(D).
"PURCHASER MATERIAL ADVERSE EFFECT" shall mean an event, change or
occurrence which, individually or together with any other event, change or
occurrence, has a material adverse impact on the ability of Parent or either
Purchaser to perform its obligations under this Agreement or any Ancillary
Agreement or to consummate the transactions contemplated hereby and thereby.
"PURCHASER" shall have the meaning set forth in the first paragraph of this
Agreement.
"QUALIFIED CONTRACT" means an Insurance Contract issued in connection with
a plan intended to qualify for tax treatment under section 401(a), 403(a),
403(b), 408 or 457 of the Code.
"RECONCILIATION" shall have the meaning set forth in Section 1.4(a).
"REINSURANCE AGREEMENTS" means the Reinsurance Agreements between each
Seller and each Purchaser, substantially in the form of Exhibit 1, which set
forth (i) the terms and conditions upon which certain Adjusted Statutory
Reserves and Other Statutory Liabilities of such Seller will be reinsured by
Purchasers, and (ii) the consideration to be paid therefor.
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"REPLACEMENT TRANSACTION" means a transaction in which a new annuity
contract or variable annuity contract is to be purchased by a prospective
insured and the proposing producer should know that one or more existing
annuity contracts or variable annuity contracts is to be lapsed, forfeited,
surrendered, reduced in value or pledged as collateral for greater than 25%
of the loan value set forth in the policy.
"RESERVES STATEMENT" shall have the meaning set forth in Section 1.5(b).
"RETAINED LIABILITIES" means the following:
(i) all liabilities of the Business (other than the Adjusted Statutory
Reserves and Other Statutory Liabilities and obligations under contracts
and agreements) that have, as of November 30, 1997, either (without
duplication) (x) been accrued by a Seller on such Seller's books prepared
in accordance with Applicable SAP (to the extent of the amount of such
accrual) or (y) been asserted by a third party claimant in a writing
received by a Seller or any of its Affiliates prior to November 30, 1997;
(ii) notwithstanding anything to the contrary contained in this
Agreement, any liability for compensatory, consequential, exemplary,
punitive or similar damages or other loss, or any fines or other
statutory penalties, which results from (i) any claim, or (ii) any action
relating to (x) any alleged or actual act, error or omission by any
Seller or any of their Affiliates, agents or representatives, prior to
the Closing Date, whether intentional or otherwise, or (y) any reckless
conduct or bad faith by any Seller or any of their Affiliates, agents or
representatives, in connection with the handling of any claim under any
of the Insurance Contracts (including, but not limited to, liability
arising from failure by the Seller or any of its Affiliates, agents or
representatives, to settle within the limit of any policy, or by reason
of alleged or actual negligence or bad faith of the Seller or any of its
Affiliates, agents or representatives, in rejecting an offer of
settlement or in the preparation of defense or in the trial of any action
against an owner, insured or beneficiary of the Seller or any of its
Affiliates, agents or representatives, or in the preparation or
prosecution of an appeal consequent upon such action) or in connection
with the marketing, sale, issuance, delivery, cancellation or
administration of any of the Insurance Contracts (including, but not
limited to, (s) failure to comply with applicable laws regulating
Advertisements, requiring mandatory disclosure of policy information,
requiring employment of standards to determine if the purchase of a
policy or contract is suitable for an applicant, prohibiting the use of
unfair methods of competition and deceptive acts or practices and
regulating replacement transactions, and (t) liability arising from
claims relating to Advertisements, errors or omissions relating to policy
information disclosure, failure to employ standards to determine if the
purchase of a policy or contract is suitable for an applicant, engaging
in unfair methods of competition or deceptive acts or practices and
Replacement Transactions (other than obligations to pay benefits or other
amounts or to take any other actions specifically provided for under such
Insurance Contracts as originally issued and subsequently amended or
supplemented prior to November 30, 1997)). For the avoidance of doubt,
the foregoing would include any
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claims related to "market conduct" or other sales practices of any
Seller, Provident, or any of their Affiliates, employees, advisers or
agents;
(iii) any liability or loss incurred or suffered as a result of any
claim by any present or former employee, agent or broker of a Seller or
any of its Affiliates who performed or performs services in the Business,
that (x) relates to the employment, agency or brokerage relationship of
such present or former employee, agent or broker with such Seller or any
of its Affiliates, and (y) arose out of actions, events or omissions that
occurred (or, in the case of omissions, failed to occur) prior to the
Closing Date;
(iv) Adjusted Statutory Reserves and Other Statutory Liabilities and
Separate Account Liabilities (subject to the obligations of Purchasers
under the Reinsurance Agreements and the Separate Account Transfer
Agreements);
(v) pension and other post-employment liabilities for retired
employees;
(vi) liabilities for Taxes of Seller;
(vii) obligations under contracts of a Seller not assigned to a
Purchaser;
(viii) any liability secured by a security interest in any asset not
transferred to a Purchaser;
(ix) liabilities for amounts payable prior to November 30, 1997 for
returns or refunds of Premiums;
(x) liabilities for commission payments or other fees or
compensation (including, without limitation, persistency bonuses),
payable with respect to the Insurance Contracts to or for the benefit of
brokers and service providers;
(xi) liabilities for guaranty fund assessments and similar charges
imposed with respect to the Insurance Contracts based on dates of
insolvency prior to November 30, 1997;
(xii) liability for reinsurance in unauthorized companies; and
(xiii) liabilities specifically excluded in this Agreement from those
being assumed by Purchasers.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and all
rules and regulations thereunder.
"SELLER INDEMNITEES" shall have the meaning set forth in Section 7.2(b).
"SELLER KEY PEOPLE" means the individuals set forth in Schedule 9.1(E).
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"SELLER MATERIAL ADVERSE EFFECT" shall mean an event, change or occurrence
which, individually or together with any other event, change or occurrence,
has a material adverse impact on (i) the Business or the Transferred Assets
(taken as a whole) or (ii) the ability of Provident or any Seller to perform
their respective obligations under this Agreement or any Ancillary Agreement
or to consummate the transactions contemplated hereby and thereby.
"SELLER PARTIES" means Provident and Sellers.
"SELLER SEPARATE ACCOUNTS" means the separate accounts of PNAC and the
separate accounts of PRV, in each case identified on Schedule 9.1(F).
"SELLER" and "SELLERS" shall have the meaning set forth in the first
paragraph of this Agreement.
"SEPARATE ACCOUNT ADMINISTRATION AGREEMENTS" means the Separate Account
Administration Agreements to be entered into between Purchasers and each of
PNAC and PRV, in form and substance reasonably acceptable to the parties,
which shall set forth (i) the administrative and other services, including
investment management services, to be provided pending transfer of the Seller
Separate Accounts to Purchasers, and (ii) the consideration to be paid
therefor.
"SEPARATE ACCOUNT LIABILITIES" means those liabilities that are reflected
in the Seller Separate Accounts.
"SEPARATE ACCOUNT TRANSFER AGREEMENTS" means the Transfer and Assumption
Reinsurance Agreements to be entered into between Purchasers and each of PNAC
and PRV, in form and substance reasonably acceptable to the parties, which
shall set forth (i) the terms and conditions upon which certain Separate
Account Liabilities of such Seller will be assumed by a Purchaser, include
the receipt of all necessary governmental and Seller Separate Account
contract holder approvals for the transfer of the Seller Separate Accounts to
such Purchaser, the election of new members of the Seller Separate Accounts'
Boards of Managers, and the approval of new Seller Separate Account
investment advisory agreements, and (ii) the consideration to be paid
therefor.
"SUBSIDIARY" means, with respect to any Person on a given date (i) any
other Person of which a majority of the voting power of the equity securities
or equity interests is owned directly or indirectly by such Person and (ii)
any other Person the accounts of which, by virtue of an ownership interest in
it by such Person would be consolidated, in accordance with GAAP, with those
of such Person in its financial statements as of the applicable date.
"TAXES" (or "TAX" as the context may require) means (i) any tax, however
denominated, imposed by any federal, state, local, municipal, territorial,
provincial or foreign government or any agency or political subdivision of
any such government (a "TAXING AUTHORITY"), including any tax imposed under
Subtitle A of the Code and any net income, alternative or add-on minimum tax,
gross income, gross receipts, sales, use, gains, goods and services,
production, documentary, recording, social security, unemployment,
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disability, workers' compensation, estimated, ad valorem, value added,
transfer, franchise, profits, license, withholding on amounts paid to or by
any Seller or its Affiliates, payroll, employment, excise, severance, stamp,
capital stock, occupation, personal or real property, environmental or
windfall profit tax, premium, custom, duty or other tax, governmental fee or
other like assessment or charge of any kind whatsoever, together with any
interest, penalty, addition to tax or additional amount imposed by any Taxing
Authority relating thereto, (ii) liability of Provident or any of its
Affiliates for the payment of any amounts of the type described in (i) as a
result of being a member of an affiliated, consolidated, combined or unitary
group with any other corporation at any time on or prior to the Closing Date,
and (iii) liability of Provident or any of its Affiliates for the payment of
any amounts as a result of being a party to any Tax Sharing Agreement or with
respect to the payment of any amounts of the type described in (i) or (ii) as
a result of any express or implied obligation to indemnify any other Person.
"TAXING AUTHORITY" has the meaning set forth in the definition of "Taxes."
"TENNESSEE SAP" means the statutory accounting principles and practices
prescribed or permitted by the Insurance Department of the State of Tennessee
as applied on a basis consistent with those utilized in the preparation of
1996 Annual Statements of PLA and PNAC.
"THIRD PARTY ACCOUNTANT" shall have the meaning set forth in Section
1.4(a).
"THIRD PARTY CLAIM" shall have the meaning set forth in Section 7.4(a).
"THIRD PARTY CLAIMANT" shall have the meaning set forth in Section 7.4(a).
"TRANSFERRED ANNUITY RESERVES" shall have the meaning set forth in Section
1.5(b).
"TRANSFERRED ASSETS" means:
(i) Net Cash From the Business (if any);
(ii) Investment Assets;
(iii) all of Sellers' rights and interests under the Insurance
Contracts to receive principal and interest paid on policy or contract
loans on or after the Closing Date;
(iv) a receivable equal to the index option component of reserves for
the contracts described in Schedule 4.18;
(v) the Books and Records; and
(vi) the Transferred Contracts,
but excluding those assets (A) specifically identified on Schedule 9.1(G),
(B) described on Schedule 2.1 to the Transition Services Agreement as being
made available by Sellers,
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(C) the Insurance Contracts, the Seller Separate Accounts, and the policies
and contracts funded by the Seller Separate Accounts, (D) reinsurance
treaties and agreements, (E) cash and Investment Assets other than the Net
Cash From the Business and Investment Assets specified in clauses (i) and
(ii) above, and (F) that cannot be transferred to Purchasers because of any
Seller's inability to obtain the Consent of a third party required for such
transfer to be effective.
"TRANSFERRED CONTRACTS" means the Assigned and Assumed Contracts, and
all other contracts, assigned pursuant to the General Assignment and
Assumption Agreement.
"TRANSFERRED RESERVES" shall have the meaning set forth in Section
1.3(b).
"TRANSFERRED RESERVES STATEMENT" shall have the meaning set forth in
Section 1.3(b).
"TRANSITION SERVICES AGREEMENT" means the Transition Services Agreement
among Provident, each Seller and Purchasers in form and substance reasonably
acceptable to the parties, which shall set forth (i) the terms and conditions
upon which Provident and Sellers shall provide certain services and assets
for a transitional period to Purchasers, and (ii) the consideration to be
paid therefor.
"UMPIRE" shall have the meaning set forth in Section 7.8.
"VALIC CONTRACTS" means the Insurance Contracts written in the States of
New York, New Hampshire and Vermont.
"VALUATION" shall have the meaning set forth in Section 1.3(a).
"VALUER" shall have the meaning set forth in Section 1.3(a).
"WNL CONTRACTS" means all of the Insurance Contracts other than the
VALIC Contracts.
9.2 EXPENSES.
--------
(a) Except as otherwise provided in this Agreement and this Section 9.2,
each of Parent and Provident shall bear and pay all direct costs and expenses
incurred by them, or on their behalf, in connection with the transactions
contemplated hereunder.
(b) Notwithstanding the foregoing, if this Agreement is terminated (i)
by Provident pursuant to Section 8.1(d) or (ii) by either party pursuant to
Section 8.1(e) and the failure of the Closing to occur by the date specified in
Section 8.1(e) resulted principally from the failure to satisfy any one or more
of the conditions set forth in Sections 6.1, 6.2 or 5.6, then Parent shall
promptly pay Provident the sum of all the reasonable out-of-pocket costs and
expenses of Provident and the Sellers, including costs of counsel, investment
bankers, actuaries and accountants associated with this Agreement and the
transactions contemplated hereby, provided however, that such sum shall not
exceed $1,200,000.
-45-
<PAGE>
(c) Notwithstanding the foregoing, if this Agreement is terminated (i)
by Parent pursuant to Section 8.1(c) or (ii) by either party pursuant to Section
8.1(e) and the failure of the Closing to occur by the date specified in Section
8.1(e) resulted principally from the failure to satisfy any one or more of the
conditions set forth in Sections 5.1, 5.2 or 5.4, then Provident shall promptly
pay Parent the sum of all the reasonable out-of-pocket costs and expenses of
Parent and the Purchasers, including costs of counsel, investment bankers,
actuaries and accountants associated with this Agreement and the transactions
contemplated hereby, provided however, that such sum shall not exceed
$1,200,000.
(d) Any dispute between the parties arising out of this Section 9.2
shall be referred for arbitration pursuant to Section 7.8.
(e) The parties acknowledge that the loss to any party resulting from
breach of this Agreement by any other party or other failure of the transactions
contemplated hereby to be consummated is not susceptible of ready measurement
and, therefore, that the payments provided in this Section 9.2 are intended by
the parties to constitute liquidated damages for any breach by a party of the
terms of this Agreement, and not a penalty.
9.3 SUBSTITUTE PURCHASER. Provident and Sellers acknowledge that Parent
--------------------
shall be entitled, upon giving prior written notice to Provident and Sellers, to
assign the rights and obligations of VALIC under this Agreement, prior to or
after the Closing Date, to WNL or another Subsidiary of Parent, and hereby
consent to such assignment whereupon references herein to "VALIC" shall be
deemed to be references to such Subsidiary. Parent and Purchasers shall use all
best efforts to take, or cause to be taken, all action or do, or cause to be
done, all things or execute any documents necessary, proper or advisable under
applicable laws and regulations to provide Sellers with full credit for
reinsurance in the States of New York, New Hampshire and Vermont.
9.4 PUBLICITY. Except as may otherwise be required by law or regulation,
---------
no release or announcement concerning this Agreement or the transactions
contemplated hereby shall be made without advance consultation by Seller and
Purchasers with respect thereto. The parties hereto shall cooperate with each
other in making any release or announcement.
9.5 CONFIDENTIALITY. The parties agree that, other than as agreed or as
---------------
required to implement the transactions contemplated hereby, the parties will
keep confidential the terms and conditions of this Agreement and the Ancillary
Agreements, including the Schedules and Exhibits hereto and thereto, except as
otherwise required by law (including pursuant to any federal or state securities
laws or the rules of any stock exchange or self-regulatory organization or
pursuant to any legal, regulatory or legislative proceedings).
9.6 NOTICES. Any notice or other communication required or permitted
-------
hereunder shall be in writing and shall be delivered personally (by courier or
otherwise), telegraphed, telexed, sent by facsimile transmission or sent by
certified or registered mail, postage prepaid and return receipt
-46-
<PAGE>
requested, or by express mail. Any such notice shall be deemed given when so
delivered personally, telegraphed, telexed or sent by facsimile transmission, as
follows:
(i) if to Parent or Purchasers:
American General Corporation
2929 Allen Parkway
Houston, Texas 77019
Attention: Mark S. Berg, Esq
Telecopier No.: (713) 831-1266
With a concurrent copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Attention: Morris Kramer, Esq
Telecopier No.: (212) 735-2000
(ii) If to Provident or any Seller:
Provident Companies, Inc.
1 Fountain Square
Chattanooga, Tennessee 37402
Attention: F. Dean Copeland
Telecopier No.: (423) 755-2590
With a concurrent copy to:
Alston & Bird LLP
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
Attention: David E. Brown, Jr.
Telecopier No.: (404) 881-4777
Any party may, by notice given in accordance with this Section 9.4 to the other
parties, designate another address or person for receipt of notices hereunder
provided that notice of such a change shall be effective upon receipt.
9.7 ENTIRE AGREEMENT. This Agreement (including the Ancillary Agreements,
----------------
the other agreements contemplated hereby and thereby, the Exhibits and the
Schedules hereto) contains the entire agreement among the parties with respect
to the subject matter hereof and supersedes all prior agreements, written or
oral, with respect thereto.
-47-
<PAGE>
9.8 WAIVERS AND AMENDMENTS; NON-CONTRACTUAL REMEDIES; PRESERVATION OF
-----------------------------------------------------------------
REMEDIES. This Agreement may be amended, superseded, canceled, renewed or
- --------
extended, and the terms hereof may be waived, only by a written instrument
signed by each of the parties or, in the case of a waiver, by the party waiving
compliance. No delay on the part of any party on exercising any right, power or
privilege hereunder shall operate as a waiver thereof, or shall any waiver on
the part of any party of any right, power or privilege, or any single or partial
exercise of any such right, power or privilege, preclude any further exercise
thereof or the exercise of any other such right, power or privilege. The rights
and remedies herein provided are cumulative and are not exclusive of any rights
or remedies that any party may otherwise have at law or in equity.
9.9 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
-------------
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE
PRINCIPLES OF CONFLICTS OF LAWS THEREOF.
9.10 BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and
--------------------------
inure to the benefit of the parties and their respective successors, permitted
assigns and legal representatives. Neither this Agreement, nor any right
hereunder, may be assigned by any party (in whole or in part) without the prior
written consent of the other party hereto.
9.11 INTERPRETATION.
--------------
(a) Notwithstanding anything in this Agreement to the contrary, no
term or condition of this Agreement shall be construed to supersede, restrict or
otherwise limit any term or condition set forth in the Reinsurance Agreements.
(b) The parties acknowledge and agree that, except as specifically
provided herein, they may pursue judicial remedies at law or equity in the event
of a dispute with respect to the interpretation or construction of this
Agreement. In the event that an alternative dispute resolution procedure is
provided for in any of the Ancillary Agreements or any other agreement
contemplated hereby or thereby, and there is a dispute with respect to the
construction or interpretation of such Ancillary Agreement, the dispute
resolution procedure provided for in such Ancillary Agreement shall be the
procedure that shall apply with respect to the resolution of such dispute.
(c) For purposes of this Agreement, the words "hereof," "herein,"
"hereby" and other words of similar import refer to this Agreement as a whole
unless otherwise indicated. Whenever the singular is used herein, the same
shall include the plural, and whenever the plural is used herein, the same shall
include the singular, where appropriate. All dollar references in this
Agreement are to the currency of the United States.
-48-
<PAGE>
9.12 NO THIRD PARTY BENEFICIARIES. Except as set forth in Article 7,
----------------------------
nothing in this Agreement is intended or shall be construed to give any Person
(including, but not limited to, the employees of Seller), other than the parties
hereto, their successors and permitted assigns, any legal or equitable right,
remedy or claim under or in respect of this Agreement or any provision contained
herein.
9.13 COUNTERPARTS. This Agreement may be executed by the parties hereto in
------------
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all, of the parties hereto.
9.14 OTHER AGREEMENTS, EXHIBITS AND SCHEDULES. The Exhibits and the
----------------------------------------
Schedules are a part of this Agreement as if fully set forth herein. All
references herein to Articles, Sections, subsections, paragraphs, subparagraphs,
clauses, Exhibits and Schedules shall be deemed references to such parts of this
Agreement, unless the context shall otherwise require.
9.15 HEADINGS. The headings in this Agreement are for reference only, and
--------
shall not affect the interpretation of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Asset Transfer and
Acquisition Agreement as of the date first above written.
PROVIDENT COMPANIES, INC.
BY: /s/ Thomas R. Watjen
---------------------------------
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY
BY: /s/ Thomas R. Watjen
---------------------------------
PROVIDENT NATIONAL ASSURANCE COMPANY
BY: /s/ Thomas R. Watjen
---------------------------------
-49-
<PAGE>
THE PAUL REVERE LIFE INSURANCE COMPANY
BY: /s/ Thomas R. Watjen
-----------------------------------
THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY
BY: /s/ Thomas R. Watjen
-----------------------------------
THE PAUL REVERE PROTECTIVE LIFE INSURANCE COMPANY
BY: /s/ Thomas R. Watjen
-----------------------------------
AMERICAN GENERAL CORPORATION
BY: /s/ Jon P. Newton
-----------------------------------
WESTERN NATIONAL LIFE INSURANCE COMPANY
BY: /s/ Michael J. Akers
----------------------------------
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
BY: /s/ Jon P. Newton
-----------------------------------
-50-
<PAGE>
March 24, 1998
This letter agreement confirms and documents the agreement among the undersigned
as to certain modifications to the Asset Transfer and Acquisition Agreement,
dated as of December 8, 1997 (the "Agreement"), entered into by and among
Provident Companies, Inc., Provident Life and Accident Insurance Company,
Provident National Assurance Company, The Paul Revere Life Insurance Company,
The Paul Revere Variable Annuity Insurance Company, The Paul Revere Protective
Life Insurance Company, and American General Corporation, American General
Annuity Insurance Company (formerly Western National Life Insurance Company),
and The Variable Annuity Life Insurance Company. Capitalized terms used but not
otherwise defined herein are intended to have the meanings assigned to them in
the Agreement.
1. Termination of Agreement. The parties hereby agree to modify Section
------------------------
8.1(e) of the Agreement to provide that such Agreement may be
terminated, by either Provident or Parent in writing, if the Closing
has not occurred on or prior to April 30, 1998, unless the failure of
the Closing to occur shall be due to the failure of the party seeking
to terminate the Agreement to perform each of its obligations under
the Agreement required to be performed by it on or prior to the
Closing Date; provided that the foregoing April 30, 1998 date shall be
automatically extended to May 31, 1998, in the event that all
necessary regulatory approvals have not been obtained on or prior to
April 30, 1998.
2. License Agreement. The parties shall enter into one License Agreement,
-----------------
which shall set forth the terms and conditions upon which Sellers will
grant a royalty-free license to install and use the VARKS software to
American General Annuity Insurance Company.
3. Separate Accounts. The parties further agree that the Separate Account
-----------------
Transfer Agreements and the Separate Account Administration Agreements
contemplated by the Agreement are hereby waived as closing conditions
pursuant to Sections 1.6, 5.1, 6.1 and 9.8 of the Agreement. In lieu
of the Separate Account Transfer Agreements and Separate Account
Administration Agreements contemplated by the Agreement, the parties
shall negotiate in good faith an Administrative Services Agreement
with respect to the Separate Accounts, the form of which shall be
agreed upon prior to the Closing. The Administrative Services
Agreement would be effective on or before June 30, 1998. In addition,
at the option of Parent, Parent may propose to the Separate Account
holders for approval a change of the investment advisor for the
Separate Accounts.
4. Marketing Agreements. The parties agree that the execution of certain
--------------------
Marketing Agreements contemplated by Section 4.10 of the Agreement are
hereby waived as closing conditions pursuant to Sections 1.6, 5.1, 6.1
and 9.8 of the Agreement. The terms of any marketing agreements to be
entered into by Provident, Sellers and Purchasers may be finalized and
executed by the parties post-closing. The parties agree to negotiate
in good faith, and execute prior to June 30, 1998, such marketing
agreements.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this letter agreement as
of the date above.
PROVIDENT COMPANIES, INC.
/s/ F. Dean Copeland
-----------------------
Name: F. Dean Copeland
Title: Executive Vice President
PROVIDENT LIFE AND ACCIDENT
INSURANCE COMPANY
/s/ F. Dean Copeland
-----------------------
Name: F. Dean Copeland
Title: Executive Vice President
PROVIDENT NATIONAL ASSURANCE
COMPANY
/s/ F. Dean Copeland
-----------------------
Name: F. Dean Copeland
Title: Executive Vice President
THE PAUL REVERE LIFE
INSURANCE COMPANY
/s/ F. Dean Copeland
-----------------------
Name: F. Dean Copeland
Title: Executive Vice President
THE PAUL REVERE VARIABLE ANNUITY
INSURANCE COMPANY
/s/ F. Dean Copeland
-----------------------
Name: F. Dean Copeland
Title: Executive Vice President
-2-
<PAGE>
THE PAUL REVERE PROTECTIVE LIFE
INSURANCE COMPANY
/s/ F. Dean Copeland
-------------------------------
Name: F. Dean Copeland
Title: Executive Vice President
AMERICAN GENERAL CORPORATION
/s/ Nicholas R. Rasmussen
-------------------------------
Name: Nicholas R.Rasmussen
Title: Senior Vice President-
Corporate Development
AMERICAN GENERAL ANNUITY
INSURANCE COMPANY (formerly Western
National Life Insurance Company)
/s/ Michael J. Akers
--------------------------------
Name: Michael J. Akers
Title: Executive Vice President
and Chief Financial Officer
THE VARIABLE ANNUITY LIFE INSURANCE
COMPANY
/s/ Craig R. Rodby
---------------------------------
Name: Craig R. Rodby
Title: Vice Chairman
-3-
<PAGE>
May 15, 1998
This letter agreement confirms and documents the agreement among the undersigned
as to certain modifications to the Asset Transfer and Acquisition Agreement,
dated as of December 8, 1997 (as amended hereby and by the letter agreement
dated March 24, 1998 (the "March Amendment"), the "Agreement"), entered into by
and among Provident Companies, Inc., Provident Life and Accident Insurance
Company, Provident National Assurance Company, The Paul Revere Life Insurance
Company, The Paul Revere Variable Annuity Insurance Company, The Paul Revere
Protective Life Insurance Company, and American General Corporation, American
General Annuity Insurance Company (formerly Western National Life Insurance
Company), and The Variable Annuity Life Insurance Company. Capitalized terms
used but not otherwise defined herein are intended to have the meanings assigned
to them in the Agreement.
WHEREAS, in the course of its pre-closing investigation of the business and
operations of Sellers pursuant to Section 4.3 of the Agreement, Parent and
Purchasers have become aware of certain material inaccuracies in the
representations of Provident and Sellers contained in Section 2.08(d) and
Section 2.14 of the Agreement; and
WHEREAS, Parent and Purchasers have requested that Provident and Sellers take,
and Provident and Sellers have agreed to take, remedial actions including,
without limitation, the actions described in Paragraph 1 hereof; and
WHEREAS, the parties desire to bifurcate the Closing contemplated by the
Agreement, as described in Paragraph 2 hereof, and clarify certain closing
matters; and
WHEREAS, certain modifications to the Agreement are necessary or desirable in
order to obtain the approval of the state insurance departments, as described in
Paragraphs 3 and 4 hereof;
NOW, THEREFORE, in consideration of the foregoing, the parties hereto do hereby
agree as follows:
1. Qualified Contracts
-------------------
(a) 403(b) Endorsement. With respect to the Qualified Contracts issued
------------------
connection with a plan intended to qualify for tax treatment under
Section 403(b) of the Code, Provident and Sellers shall file with
the appropriate state insurance departments, and have distributed
to all holders of such Qualified Contracts, amended endorsements
(in the forms attached hereto as Exhibit A, the "Endorsements").
---------
All fees and expenses associated with the necessary regulatory
approvals of the Endorsements contemplated by this Paragraph 1(a),
and the distribution of the Endorsements to the Qualified Contract
holders, shall be borne by Provident and Sellers. Provident and
Sellers further acknowledge that any Losses resulting from the
failure to effect an earlier distribution of comparable
endorsements shall constitute Retained Liabilities.
<PAGE>
(b) Hold Harmless Agreements. As soon as practicable after the date
------------------------
hereof, and in any event prior to June 30, 1998, Provident and
Sellers shall deliver to Purchasers a schedule (the "Indemnitor
Obligation Schedule") that lists all of the "hold harmless," tax
sharing, indemnification, or similar arrangements regarding Tax
qualification or treatment of any Insurance Contracts, which
Schedule identifies the indemnitees and the indemnitor obligations
thereunder (the "Indemnitor Obligations"). Provident and Sellers
agree to cooperate with Purchasers in developing, within 18 months
of the date hereof, administrative procedures that will facilitate
compliance with such Indemnitor Obligations during the terms of the
respective Administrative Services Agreements and Separate Account
Administrative Services Agreements executed and delivered by the
parties hereto. Purchasers agree to provide to Provident and
Sellers, as soon as practicable after receipt of the Indemnitor
Obligation Schedule, an addendum to such Schedule indicating the
date (which, with respect to each Indemnitor Obligation, shall be
the earliest practicable date, as determined in good faith by
Purchasers, by which Purchasers can reasonably comply with such
Indemnitor Obligation without unreasonable expense or disruption of
Purchasers' business, but in no event shall such date exceed 18
months from the date hereof) by which Purchasers will comply with
each Indemnitor Obligation (each such date being referred to as a
"Compliance Date"). Provident and Sellers acknowledge that any
Losses (other than Losses based upon Purchasers' gross negligence
or wilful misconduct) based upon (i) a Purchaser's nonperformance
of any Indemnitor Obligations that are not listed on the Indemnitor
Obligation Schedule during the term of an Administrative Services
Agreement or Separate Account Administrative Services Agreement (as
the case may be), or (ii) a Purchaser's nonperformance of any
Indemnitor Obligations prior to the Compliance Date with respect to
each such obligation, shall constitute Retained Liabilities. Any
Losses based upon Purchaser's nonperformance of any Indemnitor
Obligations on or following the Compliance Date with respect to
each such obligation shall constitute Assumed Liabilities.
(c) Loan Defaults. In order to ensure compliance of the Qualified
-------------
with all applicable Tax regulations, Provident and Sellers hereby
agree to promptly review and make any necessary changes to the
procedures that are currently used by Sellers for loan defaults
under the Qualified Contracts ("Modified Loan Procedures"), and to
promptly prepare and distribute a notice ("Loan Notice") to the
affected plan participants. Such Modified Loan Procedures shall
include, without limitation, the following: (i) with respect to new
loans, foreclosure only when the participant is otherwise eligible
for distribution and default of the entire loan upon nonpayment;
and (ii) with respect to existing loans, foreclosure only when the
participant is otherwise eligible for distribution. All fees and
expenses associated with development and implementation of the
foregoing modifications, including the cost of preparing and
mailing a notice to the affected plan participants, shall be borne
by Provident and Sellers. Modified Loan Procedures and the Loan
Notice shall be subject to the prior approval of Purchasers, which
approval shall not be unreasonably withheld. Provident and Sellers
acknowledge that any Losses based upon a Seller's noncompliance
with the Tax regulations governing the administration of loan
defaults under a Qualified Contract, and any Losses resulting from
the failure to effect an earlier implementation of
-2-
<PAGE>
any Modified Loan Procedures or distribution of a related Loan
Notice, shall constitute Retained Liabilities.
(d) Miscellaneous. (i) The parties acknowledge that the term "Losses"
-------------
include actions, claims, losses, liabilities, damages,
deficiencies, expenses (including reasonable attorneys' fees and
expenses), interest, taxes and penalties arising from an Internal
Revenue Service audit or from a claim asserted by an employer or
plan participant, or their respective representatives, including
without limitation any claim resulting from a correction or self-
correction program permitted by the Internal Revenue Service (other
than a claim initiated by Purchasers).
(ii) In the event that the remedial actions set forth herein and
agreed to by the parties is not sufficient to cure any inaccuracies
in the representations of Provident and Sellers with respect to
Section 2.8(d) and Section 2.14 of the Agreement, Provident and
Sellers hereby agree to execute and deliver all other documents and
instruments and take all other remedial action as may be necessary
to effect the cure of such inaccuracies.
(iii) Nothing herein is intended to limit the indemnification or
other rights of Parent or Purchasers under the terms of the
Agreement, which shall remain in full force and effect, as
supplemented by this letter agreement.
2. Bifurcated Closing. (a) The parties agree that the Closing
------------------
by the Agreement shall be effected pursuant to two separate
closings, relating to the WNL Contracts (the "AGAIC Closing") and
the VALIC Contracts (the "VALIC Closing"), respectively. Each of
the AGAIC Closing and the VALIC Closing shall occur at a time and
place as Parent and Provident may mutually agree, following the
satisfaction or waiver of all conditions set forth in Articles 5
and 6 of the Agreement concerning the parties' respective
obligations to consummate the transactions contemplated in the
Agreement, as such conditions relate to the AGAIC Closing and the
VALIC Closing, respectively. Each of the AGAIC Closing and the
VALIC Closing shall be effective as of 11:59 p.m. on April 30,
1998.
(b) The reference to May 31, 1998 in Paragraph 1 of the letter
agreement dated March 24, 1998, executed by the parties hereto, is
hereby replaced with a reference to "June 30, 1998."
(c) With respect to the AGAIC Closing, the term "Closing Date"
shall mean the date on which the Investment Assets applicable to
the WNL Contracts are authorized for transfer to AGAIC. With
respect to the VALIC Closing, the term "Closing Date" shall mean
the date on which the Investment Assets applicable to the VALIC
Contracts are authorized for transfer to VALIC.
(d) The parties acknowledge that the Transferred Assets for the
AGAIC Closing and the VALIC Closing will not include any (i) Books
and Records, (ii) Transferred Contracts, or (iii) lockboxes and
bank accounts. Therefore, the parties agree that the Bills of Sale
and
-3-
<PAGE>
the General Assignment and Assumption Agreements are hereby waived
as closing conditions pursuant to Sections 1.6, 5.1, 6.1 and 9.8 of
the Agreement.
(e) With respect to the AGAIC Closing and the VALIC Closing, the
term "Insurance Contracts" shall include the contracts issued by
Sellers on or before November 15, 1998, on applications dated on or
before May 15, 1998.
(f) At the AGAIC Closing, Sellers will deliver to WNL the assets
then included in the Pool other than those listed on Exhibit B
---------
hereto (such excluded assets, the "Excluded Investment Assets").
The Excluded Investment Assets consist of (i) assets withheld
pending the VALIC Closing, and (ii) assets estimated for settlement
of the cash amounts owed by Purchasers to Sellers under Section
1.3(e) of the Agreement. The Excluded Investment Assets shall be
retained in the Pool and subject to continued investment and
reinvestment pursuant to Section 1.3 of the Agreement. At the VALIC
Closing, Sellers will deliver to VALIC all assets then included in
the Pool, net of amounts owed to Sellers or Purchasers under
Section 1.4(b) of the Agreement (as modified by Paragraph 4
hereof). The deliveries provided in this Paragraph 2(f) shall be in
satisfaction of Sellers' delivery obligations under Section 1.3(d)
of the Agreement.
(g) At the AGAIC Closing, Provident and Sellers shall deliver to
Parent and Purchasers the Preliminary Reconciliation contemplated
by Section 1.3(e) of the Agreement with respect to the portion of
the Business represented by the WNL Contracts (provided that such
Preliminary Reconciliation shall cover the period through March 31,
1998), and the parties shall make the payments contemplated by the
second sentence of Section 1.3(e) of the Agreement based upon the
amounts reflected therein. If the VALIC Closing occurs prior to the
delivery of the Reconciliation contemplated by Paragraph 2(h)
hereof, Provident and Sellers shall deliver to Parent and
Purchasers, at the VALIC Closing, the Preliminary Reconciliation
contemplated by Section 1.3(e) of the Agreement with respect to the
portion of the Business represented by the VALIC Contracts
(provided that such Preliminary Reconciliation shall cover the
period through March 31, 1998), and the parties shall make the
payments contemplated by the second sentence of Section 1.3(e) of
the Agreement based upon the amounts reflected therein. If the
VALIC Closing occurs at or after the delivery of the Reconciliation
contemplated by Paragraph 2(h) hereof, and on or before June 30,
1998, the Reconciliation so delivered will include, in lieu of a
separate Preliminary Reconciliation with respect to the VALIC
Contracts, a separate computation of such cash payment as may be
required to be made at the VALIC Closing, and the parties shall
make the payments contemplated by the second sentence of Section
1.3(e) of the Agreement based upon the amounts reflected therein.
(h) Provident shall, on or before June 30, 1998, prepare the
Reconciliation contemplated by Section 1.4(a) of the Agreement with
respect to the portion of the Business represented by the WNL
Contracts and the portion of the Business represented by the VALIC
Contracts, reflecting a proposed reconciliation of Net Cash From
the Business through April 30, 1998. Such Reconciliation shall
separately reflect a reconciliation of the Net Cash From the
Business attributable to the WNL Contracts. The parties shall
utilize the
-4-
<PAGE>
procedures set forth in Section 1.4 of the Agreement to determine
the amount of cash or securities, if any, to be transferred from
one party to the other by reason of any difference between the
Preliminary Reconciliation payments made pursuant to Paragraph 2(g)
hereof and the Final Reconciliation determined pursuant to Section
1.4 of the Agreement.
3. State Insurance Regulatory Approvals. The parties agree to amend
------------------------------------
the Agreement, and revise the form of the Ancillary Agreements, to
the extent agreed upon to obtain state insurance regulatory
approvals.
4. Post-Closing Adjustments. In order to correct a typographical
------------------------
error, Section 1.4(b) of the Agreement shall be deleted and
replaced its entirety with the following:
(b) In the event the amount of Net Cash From the Business
reflected on the Final Reconciliation exceeds the amount of
Net Cash From the Business reflected on the Preliminary
Reconciliation, Sellers shall transfer to Purchasers
additional cash equal to the amount of such difference. In
the event the amount of Net Cash From the Business reflected
on the Preliminary Reconciliation exceeds the amount of Net
Cash From the Business reflected on the Final Reconciliation,
Purchasers shall transfer to Sellers additional cash or
securities held in the Pool equal to the amount of such
difference. Any transfer of cash required under this Section
1.4 shall be made within ten Business Days of the date of the
delivery of the Final Reconciliation to Purchasers, together
with interest thereon from and including the Closing Date to
but not including the date of such transfer, computed at an
Annual Rate equal to the 90-day Treasury Rate in effect on
the Closing Date.
5. Treatment of Separate Accounts. On or before May 21, 1998, the
------------------------------
parties shall file with the New York Department of Insurance forms
of Separate Account Administrative Services Agreements for the
purposes of obtaining approval of the New York Department of
Insurance for PNAC, PRV and VALIC to enter into such Agreements.
6. Amendment of Provisions Relating to License Agreement. Paragraph
-----------------------------------------------------
2 of the March Amendment and Sections 1.6(c)(ii) and 1.6(f)(ii) of
the Agreement shall be deleted in their entirety.
7. No Other Amendments. No other amendments to the Agreement, except
-------------------
those expressly set forth herein and in the March Amendment, are
intended by the parties hereto, and the Agreement, as amended
hereby and by the March Amendment, shall continue and remain in
full force and effect. The agreements set forth herein and in the
March Amendment do not, except as expressly provided in the March
Amendment or herein, constitute a waiver of any right or claim that
the parties may have under the Agreement.
-5-
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this letter agreement as
of the date above.
PROVIDENT COMPANIES, INC.
/s/ Henry T. Hardin III
------------------------------------------
Name: Henry T. Hardin III
Title: Vice President and Senior Counsel
PROVIDENT LIFE AND ACCIDENT
INSURANCE COMPANY
/s/ Henry T. Hardin III
------------------------------------------
Name: Henry T. Hardin III
Title: Vice President and Senior Counsel
PROVIDENT NATIONAL ASSURANCE
COMPANY
/s/ Henry T. Hardin III
------------------------------------------
Name: Henry T. Hardin III
Title: Vice President and Senior Counsel
THE PAUL REVERE LIFE INSURANCE
COMPANY
/s/ Henry T. Hardin III
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Name: Henry T. Hardin III
Title: Vice President and Senior Counsel
THE PAUL REVERE VARIABLE ANNUITY
INSURANCE COMPANY
/s/ Henry T. Hardin III
------------------------------------------
Name: Henry T. Hardin III
Title: Vice President and Senior Counsel
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<PAGE>
THE PAUL REVERE PROTECTIVE LIFE
INSURANCE COMPANY
/s/ Henry T. Hardin III
------------------------------------------
Name: Henry T. Hardin III
Title: Vice President and Senior Counsel
AMERICAN GENERAL CORPORATION
/s/ Nicholas R. Rasmussen
------------------------------------------
Name: Nicholas R. Rasmussen
Title: Senior Vice President--
Corporate Development
AMERICAN GENERAL ANNUITY INSURANCE
COMPANY (formerly Western National Life
Insurance Company)
/s/ Michael J. Akers
------------------------------------------
Name: Michael J. Akers
Title: Executive Vice President
THE VARIABLE ANNUITY LIFE INSURANCE
COMPANY
/s/ Craig R. Rodby
------------------------------------------
Name: Craig R. Rodby
Title: Vice Chairman
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<PAGE>
EXHIBIT A
ENDORSEMENTS
<PAGE>
Group Annuity Contract/Certificate Amendment
The tax qualification of the Tax-Sheltered Annuity (TSA) Contract and
Certificates thereto require that:
1. The Tax-Sheltered Annuity (TSA) Contract is established for the exclusive
benefit of the Participants and their Beneficiaries. Each Participant's
interest is nonforfeitable. A Participant's interest in the Contract is not
transferable.
2. Purchase Payments are flexible. Purchase Payments in any taxable year may
not exceed the limits described in Sections 403(b), 415(c), or 402(g) of
the Internal Revenue Code of 1986, as amended ("Code"), as applicable to
the type of contribution being made, and taking into account such other
contributions as are required to be aggregated with the Purchase payments
in applying these limits. The preceding limits shall not apply to a
rollover contribution or a direct transfer permitted under the Code.
Purchase Payments must be in cash only.
3. "Includible Compensation" means, in the case of any employee, the amount of
compensation which is received from the employer described in Code Section
403(b)(1)(A), and which is includible in gross income (computed without
regard to Code Section 911) for the most recent period (ending not later
than the close of the taxable year) which under Code Section 403(b)(4) may
be counted as one year of service. Such term does not include any amount
contributed by the employer for any annuity contact to which Code Section
403(b) applies or any other employee pre-tax salary reductions, except to
the extent permitted under Code Section 403(b).
4. Except to the extent of any amounts which have been held in 403(b) annuity
contract or custodial account since December 31, 1986, the entire interest
of the Participant Account must commence to be distributed to him not later
than April 1 immediately following the calendar year in which he attains
age 70 1/2, or retires, whichever is later. The distribution may be made to
the individual either in a lump sum or in amounts to be paid over (a) the
life of the Participant, or the lives of the Participant and his
beneficiary, or (b) a period certain not extending beyond the life
expectancy of the Participant, or the life expectancies of the Participant
and his beneficiary. The entire interest of the Participant Account shall
also be subject to the appropriate incidental benefit requirements of Code
Sections 403(b)(10) and 401(a)(9). The life expectancy of the Participant
and of a beneficiary that is the Participant's spouse shall be recalculated
each year unless the Participant otherwise elects. Life expectancies shall
be determined as provided in Code Section 401(a)(9). Required distributions
from a TSA are not eligible for tax-free rollovers.
<PAGE>
5. To qualify as a contract which can defer compensation under an Internal
Revenue Code Section 403(b) annuity contract, the withdrawal restrictions
under Internal Revenue Code Section 403(b)(11) must be met.
To the extent required under Code Section 403(b)(11), withdrawals of
contributions to an annuity contract which were made pursuant to a salary
reduction agreement, and of earnings attributable to such contributions,
may be paid only upon or after attainment of age 59 1/2, separation from
service, death, total or permanent disability (as defined in Internal
Revenue Code Section 72(m)(7)) or in the case of hardship (as defined in
the Treasury Regulations). The hardship exception applies only to the
salary reduction contributions and not to any income attributed to such
contributions. The same or similar restrictions shall apply to all amounts
transferred from a Code Section 403(b)(7) custodial account.
There is an additional tax on early distributions from your TSA before you
reach age 59 1/2. Except as otherwise provided in the Code, the tax is 10%
of the taxable portion of the distribution. Exceptions to the additional
tax, which are subject to legislative revisions, generally include
distributions: (1) to an employee who has separated from service, if those
distributions are part of a scheduled series of substantially equal
periodic payments for the life of the Participant (or the joint lives of
the Participant and the Participant's beneficiary) or the life expectancy
of the Participant (or the joint life expectancies of the Participant and
the Participant's beneficiary); (2) to an employee who has separated from
service after attaining age 55; (3) a distribution which is used to pay
medical expenses to the extent the expenses are deductible under Sec. 213
(determined without regard to whether the taxpayer itemizes deductions);
(4) distributions after the death of the employee; (5) distributions after
the disability of the employee.
6. Upon the death of the Participant, the following distribution provisions
shall take effect:
(a) If the Participant dies after distribution of his interest has
commenced, the remaining portion of such interest will continue to be
distributed at least as rapidly as under the method of distribution
being used prior to the Participant's death.
(b) If the Participant dies before distribution of his interest commences,
the Participant's entire interest will be distributed no later than 5
years after the Participant's death. If any portion of the
Participant's interest is payable to a designated Beneficiary,
distributions may be made in equal installments over the life
expectancy of the designated Beneficiary, commencing no later than 1
year after the Participant's death.
If the designated Beneficiary is the Participant's Surviving Spouse, the
Surviving Spouse may elect to treat the contract as his or her own to the
extent permitted under the Code.
<PAGE>
(c) Where the survivor payee is a person other than the Participant's
Spouse, an election under Option III - Joint and Survivor Life Annuity,
can be made only if the present value of the Annuity payments to be
paid to the Participant exceeds 50 percent of the present value of the
Annuity payments to be paid to the Participant and his or her survivor.
7. The Participant will, at all times, be 100% vested in the value of the
Participant Account.
8. If any benefit payable to the Participant under this Contract or
Certificate constitutes an "eligible rollover distribution" within the
meaning of Section 402 of the Code, the Participant may elect to have such
distribution paid directly to an "eligible retirement plan" in a
transaction designated under the Code as a "direct rollover." Before any
eligible rollover distribution is made, the Participant will be provided a
written explanation of his or her rights to make a direct rollover and the
consequences of not making a direct rollover. No surrender, withdrawal, or
other benefit distribution that constitutes an eligible rollover
distribution will be made to the Participant under the Contract or
Certificate unless the Code's requirements applicable to eligible rollover
distribution have been satisfied.
9. Separate records will be maintained for the interest of each Participant.
10. The Company, as issuer of a Tax-Sheltered Annuity (TSA), shall furnish
annual calendar year reports concerning the status of such Annuity.
All provisions of the Contract and Certificate stay the same except where
changed by this Endorsement. The Date of Issue of this Endorsement is the same
as that of the Contract or the Certificate, as applicable.
Signed for the Company at Worcester, Massachusetts.
[Insert Company Name]
Secretary
<PAGE>
Individual Annuity Amendment
The tax qualification of the Tax-Sheltered Annuity (TSA) Contract and
Certificates thereto require that:
1. The Tax-Sheltered Annuity (TSA) Contract is established for the exclusive
benefit of the Participants and their Beneficiaries. Each Participant's
interest is nonforfeitable. A Participant's interest in the Contract is not
transferable.
2. Purchase Payments are flexible. Purchase Payments in any taxable year may
not exceed the limits described in Sections 403(b), 415(c), or 402(g) of
the Internal Revenue Code of 1986, as amended ("Code"), as applicable to
the type of contribution being made, and taking into account such other
contributions as are required to be aggregated with the Purchase payments
in applying these limits. The preceding limits shall not apply to a
rollover contribution or a direct transfer permitted under the Code.
Purchase Payments must be in cash only.
3. "Includible Compensation" means, in the case of any employee, the amount of
compensation which is received from the employer described in Code Section
403(b)(1)(A), and which is includible in gross income (computed without
regard to Code Section 911) for the most recent period (ending not later
than the close of the taxable year) which under Code Section 403(b)(4) may
be counted as one year of service. Such term does not include any amount
contributed by the employer for any annuity contact to which Code Section
403(b) applies or any other employee pre-tax salary reductions, except to
the extent permitted under Code Section 403(b).
4. Except to the extent of any amounts which have been held in a 403(b)
annuity contract or custodial account since December 31, 1986, the entire
interest of the Participant Account must commence to be distributed to him
not later than April 1 immediately following the calendar year in which he
attains age 70 1/2, or retires, whichever is later. The distribution may be
made to the individual either in a lump sum or in amounts to be paid over
(a) the life of the Participant, or the lives of the Participant and his
beneficiary, or (b) a period certain not extending beyond the life
expectancy of the Participant, or the life expectancies of the Participant
and his beneficiary. The entire interest of the Participant Account shall
also be subject to the appropriate incidental benefit requirements of Code
Sections 403(b)(10) and 401(a)(9). The life expectancy of the Participant
and of a beneficiary that is the Participant's spouse shall be recalculated
each year unless the Participant otherwise elects. Life expectancies shall
be determined as provided in Code Section 401(a)(9). Required distributions
from a TSA are not eligible for tax-free rollovers.
<PAGE>
5. To qualify as a contract which can defer compensation under an Internal
Revenue Code Section 403(b) annuity contract, the withdrawal restrictions
under Internal Revenue Code Section 403(b)(11) must be met.
To the extent required under Code Section 403(b)(11), withdrawals of
contributions to an annuity contract which were made pursuant to a salary
reduction agreement, and of earnings attributable to such contributions,
may be paid only upon or after attainment of age 59 1/2, separation from
service, death, total or permanent disability (as defined in Internal
Revenue Code Section 72(m)(7)) or in the case of hardship (as defined in
the Treasury Regulations). The hardship exception applies only to the
salary reduction contributions and not to any income attributed to such
contributions. The same or similar restrictions shall apply to all amounts
transferred from a Code Section 403(b)(7) custodial account.
There is an additional tax on early distributions from your TSA before you
reach age 59 1/2. Except as otherwise provided in the Code, the tax is
10% of the taxable portion of the distribution. Exceptions to the
additional tax, which are subject to legislative revisions, generally
include distributions: (1) to an employee who has separated from service,
if those distributions are part of a scheduled series of substantially
equal periodic payments for the life of the Participant (or the joint lives
of the Participant and the Participant's beneficiary) or the life
expectancy of the Participant (or the joint life expectancies of the
Participant and the Participant's beneficiary); (2) to an employee who has
separated from service after attaining age 55; (3) a distribution which is
used to pay medical expenses to the extent the expenses are deductible
under Sec. 213 (determined without regard to whether the taxpayer itemizes
deductions); (4) distributions after the death of the employee; (5)
distributions after the disability of the employee.
6. Upon the death of the Participant, the following distribution provisions
shall take effect:
(a) If the Participant dies after distribution of his interest has
commenced, the remaining portion of such interest will continue to be
distributed at least as rapidly as under the method of distribution
being used prior to the Participant's death.
(b) If the Participant dies before distribution of his interest commences,
the Participant's entire interest will be distributed no later than 5
years after the Participant's death. If any portion of the
Participant's interest is payable to a designated Beneficiary,
distributions may be made in equal installments over the life
expectancy of the designated Beneficiary, commencing no later than 1
year after the Participant's death.
If the designated Beneficiary is the Participant's Surviving Spouse, the
Surviving Spouse may elect to treat the contract as his or her own to the
extent permitted under the Code.
<PAGE>
(c) Where the survivor payee is a person other than the Participant's
Spouse, an election under Option III - Joint and Survivor Life
Annuity, can be made only if the present value of the Annuity payments
to be paid to the Participant exceeds 50 percent of the present value
of the Annuity payments to be paid to the Participant and his or her
survivor.
7. The Participant will, at all times, be 100% vested in the value of the
Participant Account.
8. If any benefit payable to the Participant under this Contract or
Certificate constitutes an "eligible rollover distribution" within the
meaning of Section 402 of the Code, the Participant may elect to have such
distribution paid directly to an "eligible retirement plan" in a
transaction designated under the Code as a "direct rollover." Before any
eligible rollover distribution is made, the Participant will be provided a
written explanation of his or her rights to make a direct rollover and the
consequences of not making a direct rollover. No surrender, withdrawal, or
other benefit distribution that constitutes an eligible rollover
distribution will be made to the Participant under the Contract or
Certificate unless the Code's requirements applicable to eligible rollover
distributions have been satisfied.
9. Separate records will be maintained for the interest of each Participant.
10. The Company, as issuer of a Tax-Sheltered Annuity (TSA), shall furnish
annual calendar year reports concerning the status of such Annuity.
All provisions of the Contract and Certificate stay the same except where
changed by this Endorsement. The Date of Issue of this Endorsement is the same
as that of the Contract or the Certificate, as applicable.
Signed for the Company at Worcester, Massachusetts.
[Insert Company Name]
Secretary
<PAGE>
EXHIBIT B
EXCLUDED INVESTMENT ASSETS
<PAGE>
June 29, 1998
This letter agreement confirms and documents the agreement among the
undersigned as to certain modifications to the Asset Transfer and Acquisition
Agreement, dated as of December 8, 1997 (as supplemented hereby and by the
letter agreements dated March 24, 1998, and May 15, 1998, the "Agreement"),
entered into by and among Provident Companies, Inc., Provident Life and Accident
Insurance Company, Provident National Assurance Company, The Paul Revere Life
Insurance Company, The Paul Revere Variable Annuity Insurance Company, The Paul
Revere Protective Life Insurance Company, and American General Corporation,
American General Annuity Insurance Company (formerly Western National Life
Insurance Company) ("AGAIC"), and The Variable Annuity Life Insurance Company
("VALIC"). Capitalized terms used but not otherwise defined herein are intended
to have the meanings assigned to them in the Agreement.
Notwithstanding anything herein to the contrary, the parties
acknowledge and agree that no transaction among the insurance companies shall
predate January 1, 1998.
1. Determination of Investment Assets and Cash Payments. The parties
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agree that Section 1.3 of the Agreement shall be deleted in its entirety, and
the following substituted in its place:
"1.3 DETERMINATION OF INVESTMENT ASSETS AND CASH PAYMENTS.
----------------------------------------------------
(a) Schedule 1.3(A) shall be prepared as a listing of
investment assets (the "Initial Seller Portfolio") included in the pool
(the "Pool"), together with their market values as of January 1, 1998, as
agreed to by the parties. Sellers shall segregate the assets constituting
the Pool on their books and records and shall maintain records of all
transactions in assets included in the Pool from time to time through the
Closing Date. Pursuant to the Subadvisory Agreement, Parent shall serve as
subadvisor in respect of the Pool and pursuant to such authority shall have
the authority to direct the disposition of investment securities included
in the Pool and to direct the purchase of investment securities for
inclusion in the Pool (such purchases to be funded from Net Cash From the
Business (as defined herein) then available). On each Business Day
Provident will produce and deliver to Parent a good faith estimate of the
Net Cash From the Business through the close of business on the preceding
Business Day, which estimate will be prepared on a basis consistent with
Provident's existing internal reporting systems and procedures. Provident
and Parent agree that Net Cash From the Business reflected in the daily
good faith estimates thereof shall be available for investment by such
subadvisor on the Business Day following delivery of such estimate.
(b) On the Closing Date, Sellers will deliver to Purchasers
the assets then included in the Pool (the "Investment Assets"), which shall
consist of (i) the Initial Seller Portfolio plus (ii) those investment
----
assets which, on and after January 1, 1998 and prior to the Closing Date,
are purchased for inclusion in the Pool from Net Cash From the Business
("Pool Asset Additions") minus (iii) those investment assets in the Pool
-----
(including any Pool Asset Additions) which, on and after January 1, 1998,
and prior to the Closing Date, are (x) redeemed by the issuer thereof, (y)
mature in accordance with their terms, or (z) sold ("Pool Asset
Reductions").
<PAGE>
(c) In addition, prior to the Closing Date, Provident and
Sellers shall deliver to Parent and Purchasers an estimated reconciliation
of Net Cash From the Business through the Closing Date (the "Preliminary
Reconciliation") and a certification of the treasurer of Provident that all
items on the Preliminary Reconciliation were estimated in good faith by
Sellers and were based upon the books and records of Sellers. If (i) the
Net Cash From the Business reflected on the Preliminary Reconciliation is a
positive number, Sellers will pay to Purchasers cash in an amount equal to
such amount; and (ii) if the Net Cash From the Business reflected on the
Preliminary Reconciliation is a negative number, Purchasers will pay to
Sellers at Closing cash in such amount.
(d) For purposes of this Agreement, "Initial Cash Balance"
shall mean an amount equal to (i) the amount of Adjusted Statutory Reserves
and Other Statutory Liabilities attributable to the Insurance Contracts in
force as of January 1, 1998, as determined in accordance with Applicable
SAP, consistently applied, minus (ii) the aggregate market value as of
-----
January 1, 1998, of the assets included in the Pool as of such date, minus
-----
(iii) policy loans to contract holders under Insurance Contracts intended
to be reinsured by Purchasers as of January 1, 1998, minus (iv) a
receivable from Provident and Sellers equal to the index option component
of reserves for those contracts described in Schedule 4.18, minus (v) the
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Ceding Commission.
(e) For purposes of this Agreement, "Net Cash From the Business"
shall mean an amount equal to the sum of (i) the Initial Cash Balance plus
----
(ii) net cash proceeds received by Sellers in respect of Pool Asset
Reductions plus (iii) net cash proceeds attributable to interest received
----
by Sellers after January 1, 1998 and prior to the Closing Date in respect
of assets in the Pool minus (iv) cash used to fund Pool Asset Additions
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plus (v) premiums paid and additional deposits made after January 1, 1998
----
and prior to the Closing Date in respect of Insurance Contracts intended to
be reinsured by Purchasers minus (vi) withdrawals and benefits paid after
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January 1, 1998 and prior to the Closing Date in respect of Insurance
Contracts intended to be reinsured by Purchasers plus (vii) cash proceeds
----
received by Sellers after January 1, 1998 and prior to the Closing Date
from payments on policy loans to contract holders under Insurance Contracts
which are intended to be reinsured by Purchasers minus (viii) cash used to
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fund, after January 1, 1998 and prior to the Closing Date, policy loan
advances to contract holders under Insurance Contracts which are intended
to be reinsured by Purchasers plus (ix) cash payments received by Sellers
----
after January 1, 1998 and prior to the Closing Date, in respect of
receivables relating to the Business minus (x) premium taxes, guaranty fund
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assessments that would not be Retained Liabilities and similar charges
incurred by Sellers in respect of the Business after January 1, 1998 and
prior to the Closing Date minus (xi) commissions incurred after January 1,
-----
1998 and prior to the Closing Date in respect of Insurance Contracts
intended to be reinsured by Purchasers (the amount of such commissions to
be determined utilizing the commission schedule attached to the Reinsurance
Agreements) minus (xii) other expenses of administering the Business after
-----
January 1, 1998 and prior to the Closing Date (such expenses to be
determined on a basis consistent with the schedule of fees for services to
be rendered pursuant to the Transition Services Agreement).
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<PAGE>
Cross-references to the subparagraphs of Section 1.3 of the Agreement shall be
changed, as appropriate, to reflect the foregoing restatement.
2. Ceding Commission. The parties agree that Section 1.5(a) of the Agreement
-----------------
shall be deleted in its entirety, and the following substituted in its place:
"(a) The ceding commission is $38.6 million (the "Ceding
Commission")."
The parties agree that Section 1.5(c) of the Agreement shall be
deleted in its entirety, and the following substituted in its place:
"(c) If (i) the amount of Final Annuity Reserves shown on the Final Reserves
Statement exceeds 97.45% of the amount of Transferred Annuity Reserves,
Parent shall pay to Provident an amount in cash equal to the percentage
increase in such reserves multiplied by $58 million, and if (ii) the amount
of Final Annuity Reserves shown on the Final Reserves Statement is less than
97.45% of the amount of Transferred Annuity Reserves, Provident shall pay to
Parent an amount in cash equal to the percentage decrease in such reserves
multiplied by $58 million. In no event shall the payment required by the
preceding sentence exceed $11.6 million. Any such payment shall be made
within ten Business Days of the date of resolution of all disputed items
(or, if there is no dispute, after the parties reach agreement on the amount
of Final Annuity Reserves included in the Final Reserves Statement). Any
transfer of cash required under this Section 1.5 shall be made within ten
Business Days of the date of the delivery of the Final Reconciliation to
Purchasers, together with interest thereon from and including November 30,
1997 to but not including the date of such transfer, computed at an Annual
Rate equal to the 90-day Treasury Rate in effect on November 30, 1997."
3. Determination of Holding Company Investment Assets and Cash Payments. The
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parties agree that a new Section 1.7 of the Agreement shall be added, as
follows:
"1.7 DETERMINATION OF HOLDING COMPANY INVESTMENT ASSETS AND CASH
-----------------------------------------------------------
PAYMENTS.
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(a) Schedule 1.7(A) shall be prepared as a listing of investment
assets (the "Preliminary Investment Assets") which Provident and Parent have
agreed may be included in the Initial Holding Company Portfolio (as defined
herein), together with an estimate of the Initial Cash Position (as defined
herein) (such estimate, the "Estimated Initial Cash Position"). Provident
has appointed Morgan Stanley, Dean Witter, Discover & Co. and Parent has
appointed Bear, Stearns & Co., Inc.. and the parties have jointly appointed
Credit Suisse First Boston Corporation (each of Morgan Stanley, Dean Witter,
Discover & Co., Bear, Stearns & Co., Inc. and Credit Suisse First Boston
Corporation being referred to individually as a "Valuer" and together as the
"Valuers"). Provident and Parent shall each be responsible for the cost, if
any, of the preparation of the Valuations produced by their respective
Valuers and shall be jointly responsible for the cost, if any, of the
Valuation prepared by Credit Suisse First Boston Corporation. Each Valuer
shall produce a valuation of the Preliminary Investment Assets, based on the
midpoint of the bid-ask spread, as of 4:00 p.m., New York City time, on
December 8, 1997 (each such
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<PAGE>
valuation referred to as a "Valuation" and together as the "Valuations").
The "Agreed Value" of each Preliminary Investment Asset shall be (i) the
middle Valuation thereof plus (ii) the amount of investment income accrued
on such Preliminary Investment Asset as of November 30, 1997.
(b) As soon as practicable after the date of this Agreement,
Provident shall deliver to Parent a statement ("Transferred Reserves
Statement") setting forth the determination of the amount of Adjusted
Statutory Reserves and Other Statutory Liabilities attributable to the
Insurance Contracts in force as of November 30, 1997 (the "Transferred
Reserves"), which amounts shall be determined in accordance with Applicable
SAP consistently applied. Parent shall have the opportunity to review the
Transferred Reserves Statement and Provident shall make available its
personnel and relevant work papers as reasonably requested by Parent in
connection with such review, for a period not to exceed 15 Business Days
following delivery of the Transferred Reserves Statement. Any changes in
the Transferred Reserves Statement that are agreed to by Parent and
Provident within such 15-Business-Day period shall be incorporated into a
final Transferred Reserves Statement (the "Final Transferred Reserves
Statement"). If Parent and Provident are unable to agree with respect to
the amount of the Transferred Reserves included in the Final Transferred
Reserves Statement, they shall submit the dispute to an independent
actuarial firm jointly selected by them (or selected by their respective
actuarial advisors) (the "Independent Actuary"), whose determination of the
amount of the Transferred Reserves shall be final and binding and reflected
in the Final Transferred Reserves Statement; provided, that such amount
shall be within the range of dollar amounts proposed by Parent and
Provident, respectively.
(c) Within ten Business Days following determination of the
Transferred Reserves, Provident and Parent shall jointly agree upon a
portfolio of assets from among the Preliminary Investment Assets (the
"Initial Holding Company Portfolio") having an aggregate Agreed Value
which, together with the Initial Cash Position, shall equal the sum of the
Transferred Reserves minus $58 million minus a receivable from Provident
----- -----
equal to the index option component of reserves for those contracts
described in Schedule 4.18 minus policy loans to contract holders under
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Insurance Contracts intended to be reinsured as of November 30, 1997 (such
sum, the "Net Asset Value"). In the event Provident and Parent are unable
to produce an Initial Holding Company Portfolio having an aggregate Agreed
Value equal to the Net Asset Value without subdivision of individual
assets, the Initial Holding Company Portfolio shall consist of whole assets
and the difference between the Net Asset Value and the aggregate Agreed
Value of the assets composing the Initial Holding Company Portfolio
(whether such difference is a positive or a negative number) shall
constitute the "Initial Cash Position." The difference, if any, between
the Initial Cash Position and the Estimated Initial Cash Position shall be
referred to as the "Initial Cash Position Difference." Provident shall
segregate the assets constituting the Initial Holding Company Portfolio on
its books and records (the "Holding Company Pool") and shall maintain
records of all transactions in assets included in the Holding Company Pool
from time to time through December 31, 1997. Pursuant to the Subadvisory
Agreement, Parent shall serve as subadvisor in respect of the Holding
Company Pool through December 31, 1997, and pursuant to such authority
shall have the authority to direct the disposition of investment securities
included in the Holding
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<PAGE>
Company Pool and to direct the purchase of investment securities for
inclusion in the Holding Company Pool (such purchases to be funded from Net
Cash Balance (as defined herein) then available, which shall include on
December 8, 1997, an amount equal to the Estimated Initial Cash Position,
together with interest thereon from November 30, 1997 to, but not including,
December 8, 1997, computed at an Annual Rate equal to the 90-day Treasury
Rate in effect on November 30, 1997). On each Business Day Provident will
produce and deliver to Parent a good faith estimate of the Net Cash Balance
through the close of business on the preceding Business Day, which estimate
will be prepared on a basis consistent with Provident's existing internal
reporting systems and procedures. Provident and Parent agree that (i) the
Estimated Initial Cash Position shall be available for investment by the
sub-advisor under the Subadvisory Agreement as of 4:00 p.m., New York City
time, on December 8, 1997, (ii) the Initial Cash Position Difference (if a
positive number) shall be available for investment by such subadvisor on the
Business Day following its determination, and (iii) Net Cash Balance
reflected in the daily good faith estimates thereof shall be available for
investment by such subadvisor on the Business Day following delivery of such
estimate.
(d) For purposes of this Agreement, "Net Cash Balance" shall mean
an amount equal to the sum of (i) the Estimated Initial Cash Position
(including interest thereon from November 30, 1997 to but not including
December 8, 1997, computed at an Annual Rate equal to the 90-day Treasury
Rate in effect on November 30, 1997) plus the Initial Cash Position
----
Difference (including interest thereon from November 30, 1997 to but not
including the date on which the Initial Cash Position Difference is
determined, computed at an Annual Rate equal to the 90-day Treasury Rate in
effect on November 30, 1997) minus (ii) cash used to fund those investment
-----
assets which, on and after November 30, 1997 and on or prior to December
31, 1997, are purchased for inclusion in the Holding Company Pool from Net
Cash Balance ("Holding Company Pool Asset Additions") plus (iii) net cash
----
proceeds received by Provident in respect of those investment assets in the
Holding Company Pool (including any Holding Company Pool Asset Additions)
which, after November 30, 1997, and on or prior to December 31, 1997, are
(x) redeemed by the issuer thereof, (y) mature in accordance with their
terms, or (z) sold ("Holding Company Pool Asset Reductions") plus (iv) net
----
cash proceeds attributable to interest received by Provident after November
30, 1997 and on or prior to December 31, 1997 in respect of assets in the
Holding Company Pool plus (v) premiums paid and additional deposits made
----
after November 30, 1997 and on or prior to December 31, 1997 in respect of
Insurance Contracts intended to be reinsured minus (vi) withdrawals and
-----
benefits paid after November 30, 1997 and on or prior to December 31, 1997,
in respect of Insurance Contracts intended to be reinsured plus (vii) cash
----
proceeds received by Provident after November 30, 1997 and on or prior to
December 31, 1997, from payments on policy loans to contract holders under
Insurance Contracts which are intended to be reinsured minus (viii) cash
-----
used to fund, after November 30, 1997 and on or prior to December 31, 1997,
policy loan advances to contract holders under Insurance Contracts which
are intended to be reinsured plus (ix) cash payments received by Provident
----
after November 30, 1997 and on or prior to December 31, 1997, in respect of
receivables relating to the Business minus (x) premium taxes, guaranty fund
-----
assessments that would not be Retained Liabilities and similar charges
incurred by Provident in respect of the Business after November 30, 1997
and on or prior to
-5-
<PAGE>
December 31, 1997 minus (xi) commissions incurred after November 30, 1997
-----
and on or prior to December 31, 1997 in respect of Insurance Contracts
intended to be reinsured (the amount of such commissions to be determined
utilizing the commission schedule attached to the Reinsurance Agreements)
minus (xii) other expenses of administering the Business after November 30,
-----
1997 and on or prior to December 31, 1997 (such expenses to be determined on
a basis consistent with the schedule of fees for services to be rendered
pursuant to the Transition Services Agreement).
(e) Provident shall, on or before the date that is 60 days after
the Closing Date, prepare a proposed reconciliation (the "Holding Company
Reconciliation") of the Net Cash Balance and the unrealized gains in the
Holding Company Portfolio as of December 31, 1997 (the "Unrealized Gains")
and a certification of the treasurer of Provident that all items on the
Holding Company Reconciliation were determined in good faith by Provident
and were based upon the books and records of Provident. Promptly after its
preparation, Provident shall deliver copies of the Holding Company
Reconciliation to Parent. Parent shall have the right to review the
Holding Company Reconciliation and comment thereon for a period of 45 days
after receipt thereof. Provident agrees that Parent and its accountants
may have access to the accounting records of Provident relating to the
preparation of the Holding Company Reconciliation for the purpose of
conducting their review. Any changes in the Holding Company Reconciliation
that are agreed to by Parent and Provident within such 45-day-period shall
be incorporated into a final reconciliation of Net Cash Balance (the "Final
Holding Company Reconciliation"). In the event that Purchasers and
Provident are unable to agree on the manner in which any item or items
should be treated in the preparation of the Final Holding Company
Reconciliation within such 45-day period, separate written reports of such
item or items shall be made in concise form and shall be referred to such
independent accounting firm as Parent and Provident shall mutually
designate (the firm making such determination is referred to herein as the
"Third Party Accountant"). The Third Party Accountant shall determine as
promptly as practicable the manner in which such item or items shall be
treated on the Final Holding Company Reconciliation; provided, however,
that the dollar amount of each item in dispute shall be determined within
the range of dollar amounts proposed by Provident and Parent, respectively.
The determinations by the Third Party Accountant as to the items in dispute
shall be in writing and shall be binding and conclusive on the parties and
shall be so reflected in the Final Holding Company Reconciliation. The
fees, costs and expenses of retaining the Third Party Accountant shall be
shared equally by the parties. Following the resolution of all disputed
items (or, if there is no dispute, promptly after the parties reach
agreement on the Final Holding Company Reconciliation), Provident shall
prepare the Final Holding Company Reconciliation and shall deliver copies
of such Final Holding Company Reconciliation and such calculation to
Parent.
(f) In the event that the Initial Cash Balance exceeds the sum of
Net Cash Balance plus $19.4 million minus Unrealized Gains reflected on the
---- -----
Final Holding Company Reconciliation, Parent shall transfer to Provident
additional cash equal to the amount of such difference. In the event that
the sum of Net Cash Balance plus $19.4 million minus Unrealized Gains
---- -----
reflected on the Final Holding Company Reconciliation exceeds the Initial
Cash Balance, Provident shall transfer to Parent additional cash equal to
the amount of such difference. Any transfer of cash required under this
Section 1.7 shall
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<PAGE>
be made within ten Business Days of the date of the delivery of the Final
Holding Company Reconciliation to Parent, together with interest thereon
from and including the Closing Date to but not including the date of such
transfer, computed at an Annual Rate equal to the 90-day Treasury Rate in
effect on the Closing Date."
4. Reinsurance Agreements (PNAC and PRL). In connection with the AGAIC
-------------------------------------
Closing, each of PNAC and PRL entered into a Reinsurance Agreement, dated as of
April 30, 1998, with AGAIC. The parties have agreed that such Reinsurance
Agreements shall be cancelled and superceded by the Reinsurance Agreements
executed and delivered by PNAC, PRL and VALIC at the VALIC Closing, effective as
of April 30, 1998. All of the Insurance Contracts covered by such Reinsurance
Agreements shall constitute VALIC Contracts.
5. Reinsurance Agreements (PLA, PRV, and PRPL). In connection with the AGAIC
----------------------
Closing, each of PLA, PRV, and PRPL entered into a Reinsurance Agreement, dated
as of April 30, 1998, with AGAIC. The parties have agreed that such Reinsurance
Agreements shall be cancelled and superceded by the Reinsurance Agreements
executed and delivered by PLA, PRV, PRPL, and AGAIC at the VALIC Closing.
6. New York Business of Sellers. With respect to the VALIC Contracts issued by
----------------------------
PNAC and PRL, the parties have agreed as follows:
(a) Certain Additional Financial Information. The following language
----------------------------------------
shall be added as the last sentence of SECTION 2.17 of the Agreement:
"Purchasers acknowledge that Sellers do not guaranty the profitability
of the Reinsured Contracts."
(b) Crediting Rates. The following language shall be added as the last
---------------
two sentences of SECTION 4.16 of the Agreement:
"Notwithstanding the foregoing, with respect to the VALIC Contracts to
which PNAC and PRL are parties, Sellers shall set all non-guaranteed
elements of the Reinsured Contracts from and after the Effective Time
(as defined in the respective Reinsurance Agreements), taking into
account the recommendations of the Purchasers with respect thereto."
(c) Ancillary Documents. For purposes of the VALIC Closing, the forms
-------------------
of Administrative Services Agreements and Reinsurance Agreements to
which PNAC and PRL are parties, and the form of Transition Services
Agreement, shall be modified to reflect the changes agreed to by the
New York Insurance Department.
7. Marketing Agreements. The parties agree that the execution of certain
--------------------
Marketing Agreements contemplated by Section 4.10 of the Agreement are hereby
waived as closing conditions pursuant to Sections 1.6, 5.1, 6.1, and 9.8 of the
Agreement. The terms of any marketing agreements to be entered into by
Provident, Sellers, and Purchasers may be finalized and executed by the parties
post-closing. The parties acknowledge that they have no obligation to execute
such marketing agreements on or before June 30, 1998.
-7-
<PAGE>
8. 403(b) Endorsement. The parties acknowledge that (i) PNAC and PLA may have
------------------
issued Qualified Contracts in connection with plans intended to qualify for tax
treatment under section 403(b) of the Code; and (ii) upon review of such
contracts, the forms of Endorsement attached as Exhibit A to the letter
agreement dated May 15, 1998, shall be modified and used to the extent necessary
to bring such Qualified Contracts into compliance with section 403(b) of the
Code. The forms of any such endorsements shall be prepared by Purchasers and
shall be subject to prior approval by Sellers, which approval shall not be
unreasonably withheld.
9. Miscellaneous. Any references to the Agreement in the Reinsurance
-------------
Agreements, the Administrative Services Agreements, or the Transition Services
Agreement delivered at the AGAIC Closing shall be deemed to be modified, as
necessary, to incorporate the changes made by this letter agreement. Section
9.1 of the Agreement is deleted in its entirety and shall be replaced by the
language set forth in Schedule 9.1 hereto. In addition, (i) references to
------------
"Closing" shall refer to the AGAIC Closing or the VALIC Closing, as appropriate,
and (ii) references to "Closing Date" shall refer to the AGAIC Closing Date or
the VALIC Closing Date, as appropriate.
[Signatures on Following Pages]
-8-
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this letter
agreement as of the date above.
PROVIDENT COMPANIES, INC.
/s/ Henry T. Hardin III
--------------------------
Henry T. Hardin III
Vice President and
Assistant General Counsel
PROVIDENT LIFE AND ACCIDENT
INSURANCE COMPANY
/s/ Henry T. Hardin III
--------------------------
Henry T. Hardin III
Vice President and
Assistant General Counsel
PROVIDENT NATIONAL ASSURANCE
COMPANY
/s/ Henry T. Hardin III
--------------------------
Henry T. Hardin III
Vice President and
Assistant General Counsel
THE PAUL REVERE LIFE INSURANCE
COMPANY
/s/ Henry T. Hardin III
--------------------------
Henry T. Hardin III
Vice President and
Assistant General Counsel
THE PAUL REVERE VARIABLE ANNUITY
INSURANCE COMPANY
/s/ Henry T. Hardin III
--------------------------
Henry T. Hardin III
Vice President and
Assistant General Counsel
-9-
<PAGE>
THE PAUL REVERE PROTECTIVE LIFE
INSURANCE COMPANY
/s/ Henry T. Hardin III
--------------------------
Henry T. Hardin III
Vice President and
Assistant General Counsel
AMERICAN GENERAL CORPORATION
/s/ Nicholas R. Rasmussen
----------------------------
Name: Nicholas R. Rasmussen
Title: Senior Vice President-Corporate Development
AMERICAN GENERAL ANNUITY INSURANCE
COMPANY (formerly Western National Life
Insurance Company)
/s/ Michael J. Akers
-----------------------
Name: Michael J. Akers
Title: Executive Vice President
THE VARIABLE ANNUITY LIFE INSURANCE
COMPANY
/s/ Craig R. Rodby
---------------------
Name: Craig R. Rodby
Title: Vice Chairman
-10-
<PAGE>
SCHEDULE 9.1
------------
9.1 DEFINITIONS. The following terms shall have the respective meanings set
-----------
forth below throughout this Agreement:
"1940 ACT" means the Investment Company Act of 1940, as amended, and all
rules and regulations thereunder.
"90-DAY TREASURY RATE" means the annual yield rate, on the date to which
such 90-Day Treasury Rate relates, of actively traded U.S. Treasury
securities having a remaining duration to maturity of three months, as such
rate is published under "Treasury Constant Maturities" in Federal Reserve
Statistical Release H.15(519).
"ADJUSTED STATUTORY RESERVES AND OTHER STATUTORY LIABILITIES" at any time
means statutory reserves and other statutory liabilities of the Business
appropriately includable in line items 1 through 25, except lines 11.4 and
24.1, of the Liabilities, Surplus and Other Funds page of the NAIC Annual
Statement Blank (1996 format), but excluding from such statutory reserves and
other statutory liabilities the statutory liabilities included within
Retained Liabilities.
"ADMINISTRATIVE SERVICES AGREEMENTS" means the Administrative Services
Agreements between each Seller and Purchaser, in form and substance
reasonably acceptable to the parties, which shall set forth (i) the terms and
conditions upon which such Purchaser shall provide certain administrative
services to such Seller with respect to the Reinsured Contracts, and (ii) the
consideration to be paid therefor.
"ADVERTISEMENT" means any material designed to create public interest in
insurance policies, annuity contracts and variable annuity contracts or in an
insurer, or in an insurance producer, or to induce the public to purchase,
increase, modify, reinstate, borrow on, surrender, replace or retain such a
policy or contract.
"AFFILIATE" means, with respect to any Person, at the time in question, any
other Person controlling, controlled by or under common control with such
Person.
"AGREED VALUE" shall have the meaning set forth in Section 1.7(a).
"ALLOCABLE AMOUNT" shall have the meaning set forth in Section 4.12(a).
"ANCILLARY AGREEMENTS" means the Reinsurance Agreements, the Separate
Account Transfer Agreements, the Administrative Services Agreements, the
Separate Account Administration Agreements, the General Assignment and
Assumption Agreements, the Bills of Sale, the Transition Services Agreement,
the Marketing Agreements, and the License Agreement.
"ANNUAL RATE" means the value of "r" in the expression (1 + r)n/365 - 1,
where "n" is equal to the number of days for which interest is to be computed
and the result of the expression is the interest factor for computing the
applicable interest amounts.
<PAGE>
"ANTITRUST DIVISION" shall have the meaning set forth in Section 4.6.
"APPLICABLE SAP" means Tennessee SAP, in the case of PLA and PNAC,
Massachusetts SAP, in the case of PRL and PRV and Delaware SAP, in the case
of PRPL.
"ASSIGNED AND ASSUMED CONTRACTS" means those contracts and other agreements
material to the operation of the Business identified on Schedule 9.1(A).
"ASSUMED LIABILITIES" shall mean all (i) liabilities and obligations first
to be paid or performed after the Closing Date under or pursuant to the
Assigned and Assumed Contracts, if any, (ii) liabilities for amounts payable
after November 30, 1997 for returns or refunds of Premiums in respect of
Insurance Contracts intended to be reinsured by Purchasers, and (iii)
liabilities for guaranty fund assessments and similar charges imposed with
respect to the Insurance Contracts based on dates of insolvency after
November 30, 1997.
"BILL OF SALE" means the Bill of Sale which is substantially in the form of
Exhibit 2.
"BOOKS AND RECORDS" means the originals or copies of all customer lists,
policy information, Insurance Contract forms and rating plans, disclosure and
other documents and filings required under applicable securities laws, claim
records, sales records, underwriting records, financial records, tax records
and compliance records in the possession or control of Sellers and relating
principally to the operation of the Business, including any database,
magnetic or optical media (to the extent not subject to licensing
restrictions) and any other form of recorded, computer generated or stored
information or process, but excluding any such records that are subject to
the attorney-client privilege.
"BUSINESS DAY" means any day other than a Saturday, Sunday, a day on which
banking institutions in the State of New York are permitted or obligated by
law to be closed or a day on which the New York Stock Exchange is closed for
trading.
"BUSINESS" means the business of administering the Insurance Contracts, as
currently conducted by Sellers.
"CEDING COMMISSION" shall have the meaning provided in Section 1.5(a).
"CLAIMS NOTICE" shall have the meaning set forth in Section 7.3.
"CLOSING DATE" means (i) if the last of the conditions to Closing set forth
in this Agreement is satisfied or waived in writing prior to the 15th day of
a given month, then the Closing Date shall be the first day of the month
following the month in which the last of the conditions was so satisfied or
waived in writing, or (ii) if such satisfaction or waiver in writing occurs
or is granted after the 15th day of any given month, then the Closing Date
shall be the first day of the second month following the month in which the
last of the closing conditions is so satisfied or waived; provided, however,
that if such date is not a Business Day, the Closing Date shall be the
immediately succeeding Business Day; and provided further, that the Closing
may occur on such other date as the parties may agree to in writing, provided
however, that the Closing Date shall not be later than the date specified in
Section 8.1(e).
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<PAGE>
"CLOSING" means the closing of the transactions contemplated by this
Agreement.
"CODE" means the Internal Revenue Code of 1986, as amended. Any citation to
a provision of the Code includes a citation to any successor provision.
"COMMISSION" means the United States Securities and Exchange Commission.
"CONSENT" shall mean any consent, approval, authorization, clearance,
exemption, waiver, or similar affirmation by any Person pursuant to any
contract or any applicable Law, Order, or Permit.
"DELAWARE SAP" means the statutory accounting principles and practices
prescribed or permitted by the Insurance Department of the State of Delaware
as applied on a basis consistent with those utilized in the preparation of
1996 Annual Statement of PRPL.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and all final and temporary regulations and interpretive Bulletins
and other rulings of general applicability thereunder.
"ESTIMATED INITIAL CASH POSITION" shall have the meaning set forth in
Section 1.7(a).
"FINAL ANNUITY RESERVES" shall have the meaning set forth in Section
1.5(b).
"FINAL HOLDING COMPANY RECONCILIATION" shall have the meaning set forth in
Section 1.7(e).
"FINAL RECONCILIATION" shall have the meaning set forth in Section 1.4(a).
"FINAL RESERVES STATEMENT" shall have the meaning set forth in Section
1.5(b).
"FINAL TRANSFERRED RESERVES STATEMENT" shall have the meaning set forth in
Section 1.7(b).
"FTC" shall have the meaning set forth in Section 4.6.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"GENERAL ACCOUNT RESERVES" means the general account statutory reserves of
Seller (without regard to the transactions contemplated by the Reinsurance
Agreements) with respect to the Insurance Contracts determined pursuant to
Applicable SAP, as such reserves would have been included in lines 1, 2, 3,
4.1, 4.2, 5, 6, 7.1, 7.2, 7.3, 8, 9, 10.1, 10.2, 10.3, 11.1, 11.2 and 11.3 of
the Liabilities, Surplus and Other Funds page of the NAIC Annual Statement
Blank (1996 format), excluding, however, any general account statutory
reserve adjustments in relation to Separate Account Liabilities.
"GENERAL ASSIGNMENT AND ASSUMPTION AGREEMENT" means the General Assignment
and Assumption Agreement between each Seller and Purchasers which is
substantially in the form of Exhibit 3.
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<PAGE>
"HOLDING COMPANY POOL" shall have the meaning set forth in Section 1.7(c).
"HOLDING COMPANY POOL ASSET ADDITIONS" shall have the meaning set forth in
Section 1.7(d).
"HOLDING COMPANY POOL ASSET REDUCTIONS" shall have the meaning set forth in
Section 1.7(d).
"HOLDING COMPANY RECONCILIATION" shall have the meaning set forth in
Section 1.7(e).
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, and the rules and regulations thereunder.
"INCOME TAX REGULATIONS" means the temporary or final regulations issued
under the Code. Any citation to a provision of the Income Tax Regulations
includes a reference to any successor regulatory provision.
"INDEMNIFIED PARTY" shall have the meaning set forth in Section 7.3.
"INDEMNIFYING PARTY" shall have the meaning set forth in Section 7.3.
"INDEPENDENT ACTUARY" shall have the meaning set forth in Section 1.7(b).
"INITIAL CASH BALANCE" shall have the meaning set forth in Section 1.3(d).
"INITIAL CASH POSITION" shall have the meaning set forth in Section 1.7(c).
"INITIAL CASH POSITION DIFFERENCE" shall have the meaning set forth in
Section 1.7(c).
"INITIAL HOLDING COMPANY PORTFOLIO" shall have the meaning set forth in
Section 1.7(c).
"INITIAL SELLER PORTFOLIO" shall have the meaning set forth in Section
1.3(a).
"INSURANCE CONTRACTS" means those contracts of insurance and annuities, and
riders thereto and renewals, exchanges and extensions thereof, of Sellers
described on Schedule 9.1(C) and new policies of like type issued after the
date of this Agreement but before the Closing Date.
"INVESTMENT ASSETS" shall have the meaning set forth in Section 1.3(b).
"IRS" means the United States Internal Revenue Service.
"KNOWLEDGE" shall be interpreted for the purposes of this Agreement as
follows: (i) a matter will be deemed to be within the "knowledge of Sellers"
if (A) such matter is as of the date of the execution of this Agreement
actually known to any of the Seller Key People, or (B) in light of the
positions held by the Seller Key People, but taking into account that the due
diligence undertaken by the Seller Key People prior to the execution of this
Agreement was limited to reviewing materials accessible to the Seller Key
People without informing other individuals of the transactions contemplated
by this Agreement, the matter would reasonably be expected to be known by the
Seller Key People; and (ii) a matter will be
-4-
<PAGE>
deemed to be within the "knowledge of Purchasers" if it is actually known to
any of the Purchaser Key People as of the date of the execution of this
Agreement after reasonable inquiry.
"LAW" means any domestic or foreign federal, state or local code, law,
statute, ordinance, regulation, rule, reporting or licensing requirement,
policy, guideline, administrative interpretation or other requirement
(including those of the Commission, NASD, NAIC and any state) applicable to
the parties hereto, or any of their respective Affiliates, properties,
assets, officers, directors, employees or agents, as the case may be.
"LICENSE AGREEMENT" means the software license agreement to be entered into
on or prior to the Closing Date among Sellers and Purchasers, in form and
substance reasonably acceptable to the parties, which shall set forth (i) the
terms and conditions upon which Sellers will grant a license to use the
software described in Schedule 9.1(B), and (ii) the consideration to be paid
therefor.
"LOSS" and "LOSSES" shall mean actions, claims, losses, liabilities,
damages, deficiencies, costs, expenses (including reasonable attorneys' fees
and expenses), interest, taxes and penalties.
"MARKETING AGREEMENTS" means the marketing agreements to be entered into by
Parent, each Purchaser, Provident and each Seller pursuant to Section 4.10.
"MASSACHUSETTS SAP" means the statutory accounting principles and practices
prescribed or permitted by the Insurance Department of the Commonwealth of
Massachusetts as applied on a basis consistent with those utilized in the
preparation of 1996 Annual Statements of PRL and PRV.
"MATERIAL" shall have the following meaning: A matter will be deemed to be
"material" in connection with any provision of this Agreement if such matter
would be considered significant by a reasonable acquiror of the Business in
the context of the particular provision in which the word "material" appears.
"NAIC" means the National Association of Insurance Commissioners.
"NASD" shall mean the National Association of Securities Dealers, Inc.,
including its Subsidiary, NASD Regulation, Inc.
"NET ASSET VALUE" shall have the meaning set forth in Section 1.7(c).
"NET CASH BALANCE" shall have the meaning set forth in Section 1.7(d).
"NET CASH FROM THE BUSINESS" shall have the meaning set forth in Section
1.3(e).
"ORDER" shall mean any administrative decision or award, decree,
injunction, judgment, order, quasi-judicial decision or award, ruling, or
writ of any federal, state, local or foreign or other court, arbitrator,
mediator, tribunal, or other governmental or regulatory agency or authority.
-5-
<PAGE>
"PARENT" shall have the meaning set forth in the first paragraph of this
Agreement.
"PERMITS" means all licenses, permits, orders, approvals, registrations,
authorizations, qualifications and filings with and under all federal, state,
local or foreign laws or governmental or regulatory bodies.
"PERSON" means any individual, corporation, partnership, firm, joint
venture, association, joint-stock company, trust, unincorporated
organization, governmental, judicial or regulatory body, business unit
(including, but not limited to, the Business), division or other entity.
"PLA" shall have the meaning set forth in the first paragraph of this
Agreement.
"PNAC" shall have the meaning set forth in the first paragraph of this
Agreement.
"POOL ASSET ADDITIONS" shall have the meaning set forth in Section 1.3(b).
"POOL ASSET REDUCTIONS" shall have the meaning set forth in Section 1.3(b).
"POOL" shall have the meaning set forth in Section 1.3(a).
"POST-CLOSING CONTRACTS" shall have the meaning set forth in Section 4.15.
"PRELIMINARY INVESTMENT ASSETS" shall have the meaning set forth in Section
1.7(a).
"PRELIMINARY RECONCILIATION" shall have the meaning set forth in Section
1.3(c).
"PREMIUMS" means premiums and annuity considerations, deposits and similar
receipts with respect to the Insurance Contracts.
"PRL" shall have the meaning set forth in the first paragraph of this
Agreement.
"PROVIDENT" shall have the meaning set forth in the first paragraph of this
Agreement.
"PRPL" shall have the meaning set forth in the first paragraph of this
Agreement.
"PRV" shall have the meaning set forth in the first paragraph of this
Agreement.
"PURCHASER INDEMNITEES" shall have the meaning set forth in Section 7.2(a).
"PURCHASER KEY PEOPLE" means the individuals set forth in Schedule 9.1(D).
"PURCHASER MATERIAL ADVERSE EFFECT" shall mean an event, change or
occurrence which, individually or together with any other event, change or
occurrence, has a material adverse impact on the ability of Parent or either
Purchaser to perform its obligations under this Agreement or any Ancillary
Agreement or to consummate the transactions contemplated hereby and thereby.
"PURCHASER" shall have the meaning set forth in the first paragraph of this
Agreement.
-6-
<PAGE>
"QUALIFIED CONTRACT" means an Insurance Contract issued in connection with
a plan intended to qualify for tax treatment under section 401(a), 403(a),
403(b), 408 or 457 of the Code.
"RECONCILIATION" shall have the meaning set forth in Section 1.4(a).
"REINSURANCE AGREEMENTS" means the Reinsurance Agreements between each
Seller and each Purchaser, substantially in the form of Exhibit 1, which set
forth (i) the terms and conditions upon which certain Adjusted Statutory
Reserves and Other Statutory Liabilities of such Seller will be reinsured by
Purchasers, and (ii) the consideration to be paid therefor.
"REPLACEMENT TRANSACTION" means a transaction in which a new annuity
contract or variable annuity contract is to be purchased by a prospective
insured and the proposing producer should know that one or more existing
annuity contracts or variable annuity contracts is to be lapsed, forfeited,
surrendered, reduced in value or pledged as collateral for greater than 25%
of the loan value set forth in the policy.
"RESERVES STATEMENT" shall have the meaning set forth in Section 1.5(b).
"RETAINED LIABILITIES" means the following:
(i) all liabilities of the Business (other than the Adjusted
Statutory Reserves and Other Statutory Liabilities and obligations under
contracts and agreements) that have, as of November 30, 1997, either
(without duplication) (x) been accrued by a Seller on such Seller's books
prepared in accordance with Applicable SAP (to the extent of the amount
of such accrual) or (y) been asserted by a third party claimant in a
writing received by a Seller or any of its Affiliates prior to November
30, 1997;
(ii) notwithstanding anything to the contrary contained in this
Agreement, any liability for compensatory, consequential, exemplary,
punitive or similar damages or other loss, or any fines or other
statutory penalties, which results from (i) any claim, or (ii) any action
relating to (x) any alleged or actual act, error or omission by any
Seller or any of their Affiliates, agents or representatives, prior to
the Closing Date, whether intentional or otherwise, or (y) any reckless
conduct or bad faith by any Seller or any of their Affiliates, agents or
representatives, in connection with the handling of any claim under any
of the Insurance Contracts (including, but not limited to, liability
arising from failure by the Seller or any of its Affiliates, agents or
representatives, to settle within the limit of any policy, or by reason
of alleged or actual negligence or bad faith of the Seller or any of its
Affiliates, agents or representatives, in rejecting an offer of
settlement or in the preparation of defense or in the trial of any action
against an owner, insured or beneficiary of the Seller or any of its
Affiliates, agents or representatives, or in the preparation or
prosecution of an appeal consequent upon such action) or in connection
with the marketing, sale, issuance, delivery, cancellation or
administration of any of the Insurance Contracts (including, but not
limited to, (s) failure to comply with applicable laws regulating
Advertisements, requiring mandatory disclosure of policy information,
requiring employment of standards to determine if the purchase of a
policy or contract is suitable for an applicant, prohibiting the use of
unfair methods of competition and deceptive acts or practices and
regulating
-7-
<PAGE>
replacement transactions, and (t) liability arising from claims relating
to Advertisements, errors or omissions relating to policy information
disclosure, failure to employ standards to determine if the purchase of a
policy or contract is suitable for an applicant, engaging in unfair
methods of competition or deceptive acts or practices and Replacement
Transactions (other than obligations to pay benefits or other amounts or
to take any other actions specifically provided for under such Insurance
Contracts as originally issued and subsequently amended or supplemented
prior to November 30, 1997)). For the avoidance of doubt, the foregoing
would include any claims related to "market conduct" or other sales
practices of any Seller, Provident, or any of their Affiliates,
employees, advisers or agents;
(iii) any liability or loss incurred or suffered as a result of any
claim by any present or former employee, agent or broker of a Seller or
any of its Affiliates who performed or performs services in the Business,
that (x) relates to the employment, agency or brokerage relationship of
such present or former employee, agent or broker with such Seller or any
of its Affiliates, and (y) arose out of actions, events or omissions that
occurred (or, in the case of omissions, failed to occur) prior to the
Closing Date;
(iv) Adjusted Statutory Reserves and Other Statutory Liabilities
and Separate Account Liabilities (subject to the obligations of
Purchasers under the Reinsurance Agreements and the Separate Account
Transfer Agreements);
(v) pension and other post-employment liabilities for retired
employees;
(vi) liabilities for Taxes of Seller;
(vii) obligations under contracts of a Seller not assigned to a
Purchaser;
(viii) any liability secured by a security interest in any asset not
transferred to a Purchaser;
(ix) liabilities for amounts payable prior to November 30, 1997 for
returns or refunds of Premiums;
(x) liabilities for commission payments or other fees or
compensation (including, without limitation, persistency bonuses),
payable with respect to the Insurance Contracts to or for the benefit of
brokers and service providers;
(xi) liabilities for guaranty fund assessments and similar charges
imposed with respect to the Insurance Contracts based on dates of
insolvency prior to November 30, 1997;
(xii) liability for reinsurance in unauthorized companies; and
(xiii) liabilities specifically excluded in this Agreement from those
being assumed by Purchasers.
-8-
<PAGE>
"SECURITIES ACT" means the Securities Act of 1933, as amended, and all
rules and regulations thereunder.
"SELLER INDEMNITEES" shall have the meaning set forth in Section 7.2(b).
"SELLER KEY PEOPLE" means the individuals set forth in Schedule 9.1(E).
"SELLER MATERIAL ADVERSE EFFECT" shall mean an event, change or occurrence
which, individually or together with any other event, change or occurrence,
has a material adverse impact on (i) the Business or the Transferred Assets
(taken as a whole) or (ii) the ability of Provident or any Seller to perform
their respective obligations under this Agreement or any Ancillary Agreement
or to consummate the transactions contemplated hereby and thereby.
"SELLER PARTIES" means Provident and Sellers.
"SELLER SEPARATE ACCOUNTS" means the separate accounts of PNAC and the
separate accounts of PRV, in each case identified on Schedule 9.1(F).
"SELLER" and "SELLERS" shall have the meaning set forth in the first
paragraph of this Agreement.
"SEPARATE ACCOUNT ADMINISTRATION AGREEMENTS" means the Separate Account
Administration Agreements to be entered into between Purchasers and each of
PNAC and PRV, in form and substance reasonably acceptable to the parties,
which shall set forth (i) the administrative and other services, including
investment management services, to be provided pending transfer of the Seller
Separate Accounts to Purchasers, and (ii) the consideration to be paid
therefor.
"SEPARATE ACCOUNT LIABILITIES" means those liabilities that are reflected
in the Seller Separate Accounts.
"SEPARATE ACCOUNT TRANSFER AGREEMENTS" means the Transfer and Assumption
Reinsurance Agreements to be entered into between Purchasers and each of PNAC
and PRV, in form and substance reasonably acceptable to the parties, which
shall set forth (i) the terms and conditions upon which certain Separate
Account Liabilities of such Seller will be assumed by a Purchaser, include
the receipt of all necessary governmental and Seller Separate Account
contract holder approvals for the transfer of the Seller Separate Accounts to
such Purchaser, the election of new members of the Seller Separate Accounts'
Boards of Managers, and the approval of new Seller Separate Account
investment advisory agreements, and (ii) the consideration to be paid
therefor.
"SUBSIDIARY" means, with respect to any Person on a given date (i) any
other Person of which a majority of the voting power of the equity securities
or equity interests is owned directly or indirectly by such Person and (ii)
any other Person the accounts of which, by virtue of an ownership interest in
it by such Person would be consolidated, in accordance with GAAP, with those
of such Person in its financial statements as of the applicable date.
"TAXES" (or "TAX" as the context may require) means (i) any tax, however
denominated, imposed by any federal, state, local, municipal, territorial,
provincial or foreign government
-9-
<PAGE>
or any agency or political subdivision of any such government (a "TAXING
AUTHORITY"), including any tax imposed under Subtitle A of the Code and any
net income, alternative or add-on minimum tax, gross income, gross receipts,
sales, use, gains, goods and services, production, documentary, recording,
social security, unemployment, disability, workers' compensation, estimated,
ad valorem, value added, transfer, franchise, profits, license, withholding
on amounts paid to or by any Seller or its Affiliates, payroll, employment,
excise, severance, stamp, capital stock, occupation, personal or real
property, environmental or windfall profit tax, premium, custom, duty or
other tax, governmental fee or other like assessment or charge of any kind
whatsoever, together with any interest, penalty, addition to tax or
additional amount imposed by any Taxing Authority relating thereto, (ii)
liability of Provident or any of its Affiliates for the payment of any
amounts of the type described in (i) as a result of being a member of an
affiliated, consolidated, combined or unitary group with any other
corporation at any time on or prior to the Closing Date, and (iii) liability
of Provident or any of its Affiliates for the payment of any amounts as a
result of being a party to any Tax Sharing Agreement or with respect to the
payment of any amounts of the type described in (i) or (ii) as a result of
any express or implied obligation to indemnify any other Person.
"TAXING AUTHORITY" has the meaning set forth in the definition of "Taxes."
"TENNESSEE SAP" means the statutory accounting principles and practices
prescribed or permitted by the Insurance Department of the State of Tennessee
as applied on a basis consistent with those utilized in the preparation of
1996 Annual Statements of PLA and PNAC.
"THIRD PARTY ACCOUNTANT" shall have the meaning set forth in Section
1.7(e).
"THIRD PARTY CLAIM" shall have the meaning set forth in Section 7.4(a).
"THIRD PARTY CLAIMANT" shall have the meaning set forth in Section 7.4(a).
"TRANSFERRED ANNUITY RESERVES" shall have the meaning set forth in Section
1.5(b).
"TRANSFERRED ASSETS" means:
(i) Net Cash From the Business (if any);
(ii) Investment Assets;
(iii) all of Sellers' rights and interests under the Insurance
Contracts to receive principal and interest paid on policy or contract
loans on or after the Closing Date;
(iv) a receivable equal to the index option component of reserves
for the contracts described in Schedule 4.18;
(v) the Books and Records; and
(vi) the Transferred Contracts,
-10-
<PAGE>
but excluding those assets (A) specifically identified on Schedule 9.1(G),
(B) described on Schedule 2.1 to the Transition Services Agreement as being
made available by Sellers, (C) the Insurance Contracts, the Seller Separate
Accounts, and the policies and contracts funded by the Seller Separate
Accounts, (D) reinsurance treaties and agreements, (E) cash and Investment
Assets other than the Net Cash From the Business and Investment Assets
specified in clauses (i) and (ii) above, and (F) that cannot be transferred
to Purchasers because of any Seller's inability to obtain the Consent of a
third party required for such transfer to be effective.
"TRANSFERRED CONTRACTS" means the Assigned and Assumed Contracts, and all
other contracts, assigned pursuant to the General Assignment and Assumption
Agreement.
"TRANSFERRED RESERVES" shall have the meaning set forth in Section 1.7(b).
"TRANSFERRED RESERVES STATEMENT" shall have the meaning set forth in
Section 1.7(b).
"TRANSITION SERVICES AGREEMENT" means the Transition Services Agreement
among Provident, each Seller and Purchasers in form and substance reasonably
acceptable to the parties, which shall set forth (i) the terms and conditions
upon which Provident and Sellers shall provide certain services and assets
for a transitional period to Purchasers, and (ii) the consideration to be
paid therefor.
"UNREALIZED GAINS" shall have the meaning set forth in Section 1.7(e).
"UMPIRE" shall have the meaning set forth in Section 7.8.
"VALIC CONTRACTS" means the Insurance Contracts written in the States of
New Hampshire and Vermont and the Insurance Contracts written by PNAC and
PRL.
"VALUATION" shall have the meaning set forth in Section 1.7(a).
"VALUER" shall have the meaning set forth in Section 1.7(a).
"WNL CONTRACTS" means all of the Insurance Contracts other than the VALIC
Contracts.
-11-
<PAGE>
Exhibit 15
Board of Directors and Shareholders
Provident Companies, Inc.
We are aware of the incorporation by reference in the Registration Statements
(Form S-8 No. 33-47551, Form S-8 No. 33-88108, Form S-8 No. 33-62231 and Form S-
8 No. 333-40219) of Provident Companies, Inc. pertaining to the Provident Life
and Accident Insurance Company MoneyMaker, A Long-Term 401(k) Retirement Savings
Plan, the Provident Life and Accident Insurance Company Stock Option Plan of
1994, the Provident Life and Accident Insurance Company Employee Stock Purchase
Plan of 1995, the Provident Life and Accident Insurance Company Management
Incentive Compensation Plan of 1994 and The Paul Revere Savings Plan, and in the
Registration Statement (Form S-3 No. 333-17849) of Provident Companies, Inc. for
the registration of 9,523,810 shares of its common stock of our report dated
November 10, 1998 relating to the unaudited condensed consolidated interim
financial statements of Provident Companies, Inc. which is included in its Form
10-Q for the quarter ended September 30, 1998.
Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a part
of the registration statements prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
ERNST & YOUNG LLP
Chattanooga, Tennessee
November 10, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PROVIDENT COMPANIES, INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 14,946,500
<DEBT-CARRYING-VALUE> 298,900
<DEBT-MARKET-VALUE> 355,200
<EQUITIES> 12,700
<MORTGAGE> 17,800
<REAL-ESTATE> 43,700
<TOTAL-INVEST> 17,498,900
<CASH> 42,300
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 413,700
<TOTAL-ASSETS> 23,267,000
<POLICY-LOSSES> 13,674,900<F1>
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 513,000
<POLICY-HOLDER-FUNDS> 3,482,600
<NOTES-PAYABLE> 698,900
0
0
<COMMON> 135,800
<OTHER-SE> 3,312,700
<TOTAL-LIABILITY-AND-EQUITY> 23,267,000
1,759,800
<INVESTMENT-INCOME> 1,039,600
<INVESTMENT-GAINS> 18,200
<OTHER-INCOME> 134,300
<BENEFITS> 1,864,000
<UNDERWRITING-AMORTIZATION> 58,200
<UNDERWRITING-OTHER> 666,900
<INCOME-PRETAX> 362,800
<INCOME-TAX> 135,000
<INCOME-CONTINUING> 227,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 227,800
<EPS-PRIMARY> 1.67
<EPS-DILUTED> 1.63
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>"POLICY-LOSSES" INCLUDE RESERVES FOR FUTURE POLICY AND CONTRACT BENEFITS OF
$13,487,800 AND UNEARNED PREMIUMS OF $187,100.
</FN>
</TABLE>
