<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 June 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 JUNE 30, 1998
- ------------------------------ ----------------------------------
Common Stock, $1.00 Par Value 135,169,206
1
<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 June 30, 1998 and December 31, 1997 4
Condensed Consolidated Statements of Income
for the Three Months and Six Months
Ended June 30, 1998 and 1997 6
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 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 4. Submission of Matters to a Vote of Securities Holders 41
Item 5. Other Information 41
Item 6. Exhibits and Reports on Form 8-K 42
2
<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
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
(in millions of dollars)
-------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Investments
Fixed Maturity Securities
Available-for-Sale $15,056.4 $17,035.1
Held-to-Maturity 298.9 306.8
Equity Securities 17.2 10.0
Mortgage Loans 18.0 17.8
Real Estate 43.9 87.1
Policy Loans 2,049.7 1,983.9
Other Long-term Investments 33.2 22.6
Short-term Investments 0.5 57.5
--------- ---------
Total Investments 17,517.8 19,520.8
Cash and Bank Deposits 64.6 37.7
Accounts and Premiums Receivable 111.7 166.4
Reinsurance Receivable 3,212.6 987.2
Accrued Investment Income 349.1 363.2
Deferred Policy Acquisition Costs 392.0 362.9
Value of Business Acquired 507.9 560.8
Goodwill 702.7 732.3
Property and Equipment 115.5 109.2
Miscellaneous 28.9 26.2
Separate Account Assets 354.7 310.9
--------- ---------
TOTAL ASSETS $23,357.5 $23,177.6
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
-4-
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION--CONTINUED
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
(in millions of dollars)
-----------------------------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy and Contract Benefits $ 497.1 $ 531.2
Reserves for Future Policy and Contract Benefits
and Unearned Premiums 13,496.0 13,193.8
Policyholders' Funds and Experience Rating Refunds 3,691.7 4,328.0
Federal Income Tax Liability 308.1 190.1
Short-term Debt 628.9 150.7
Long-term Debt 200.0 725.0
Other Liabilities 534.1 468.6
Separate Account Liabilities 354.7 310.9
--------- ---------
TOTAL LIABILITIES 19,710.6 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 135.7 135.2
Additional Paid-in Capital 754.3 750.6
Retained Earnings 1,753.3 1,635.2
Accumulated Other Comprehensive Income--Note 7 714.0 603.6
Treasury Stock (10.4) (1.5)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 3,346.9 3,279.3
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $23,357.5 $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 June 30 Six Months Ended June 30
1998 1997 1998 1997
(in millions of dollars, except share data)
--------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE
Premium Income $ 579.4 $ 590.0 $ 1,166.6 $ 877.5
Net Investment Income 348.3 364.7 710.1 627.2
Net Realized Investment Gains 2.8 1.5 9.0 6.2
Other Income 52.5 37.6 90.9 54.2
------------ ------------ ------------ ------------
TOTAL REVENUE 983.0 993.8 1,976.6 1,565.1
------------ ------------ ------------ ------------
BENEFITS AND EXPENSES
Policy and Contract Benefits 465.1 468.7 932.1 760.4
Change in Reserves for Future Policy and
Contract Benefits and Policyholders' Funds 153.8 200.3 322.4 310.4
Amortization
Deferred Policy Acquisition Costs 19.3 19.2 38.9 36.5
Value of Business Acquired 8.6 10.1 17.3 10.2
Goodwill 5.4 4.2 10.9 4.4
Interest Expense on Debt 18.4 9.5 34.0 15.8
Salaries 56.7 53.5 111.4 77.0
Commissions 62.1 65.7 131.1 96.9
Other Operating Expenses 69.5 71.9 141.5 100.0
------------ ------------ ------------ ------------
TOTAL BENEFITS AND EXPENSES 858.9 903.1 1,739.6 1,411.6
------------ ------------ ------------ ------------
INCOME BEFORE FEDERAL INCOME TAXES 124.1 90.7 237.0 153.5
FEDERAL INCOME TAXES 49.3 31.0 91.1 53.0
------------ ------------ ------------ ------------
NET INCOME $ 74.8 $ 59.7 $ 145.9 $ 100.5
============ ============ ============ ============
NET INCOME PER COMMON SHARE
Basic $ 0.55 $ 0.42 $ 1.07 $ 0.83
Assuming Dilution $ 0.54 $ 0.41 $ 1.04 $ 0.81
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 135,142,701 134,147,472 135,045,931 113,792,672
Assuming Dilution 138,626,889 136,650,166 138,641,309 116,151,010
DIVIDENDS PER COMMON SHARE $ 0.10 $ 0.09 $ 0.20 $ 0.18
</TABLE>
See notes to condensed consolidated financial statements.
-6-
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Six Months Ended June 30
1998 1997
(in millions of dollars)
-------------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 284.9 $ 369.3
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sales of Investments 1,022.7 724.7
Proceeds from Maturities of Investments 592.6 752.6
Purchase of Investments (1,458.1) (1,172.6)
Net Sales of Short-term Investments 54.3 347.7
Acquisition of Business--Note 4 - (857.8)
Disposition of Business--Note 5 58.0 -
Other (15.7) (15.0)
--------- ---------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 253.8 (220.4)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits to Policyholder Accounts 47.8 287.0
Maturities and Benefit Payments from Policyholder Accounts (618.5) (1,194.5)
Net Short-term Borrowings 478.2 -
Net Long-term Borrowings (Repayments) (525.0) 425.9
Issuance of Company Obligated Mandatorily Redeemable Preferred
Securities 300.0 -
Redemption of Preferred Stock (156.2) -
Issuance of Common Stock 4.2 384.3
Dividends Paid to Stockholders (31.0) (26.6)
Other (11.3) 0.3
--------- ---------
NET CASH USED BY FINANCING ACTIVITIES (511.8) (123.6)
--------- ---------
Effect of Foreign Exchange Rate Changes on Cash - (0.7)
--------- ---------
NET INCREASE IN CASH AND BANK DEPOSITS 26.9 24.6
CASH AND BANK DEPOSITS AT BEGINNING OF PERIOD 37.7 19.3
------ ---------
CASH AND BANK DEPOSITS AT END OF PERIOD $64.6 $ 43.9
===== =========
</TABLE>
See notes to condensed consolidated financial statements.
-7-
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
JUNE 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 six month periods ended June
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
JUNE 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 Six Months Ended
June 30 June 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 $561.4 $535.8 $1,118.5 $ 797.8
Employee Benefits 271.5 248.8 530.9 394.6
Other Operations 147.3 207.7 318.2 366.5
------ ------ -------- --------
Total $980.2 $992.3 $1,967.6 $1,558.9
====== ====== ======== ========
Income Before Net Realized Investment
Gains and Losses and Federal Income Taxes
Individual Disability and Life $ 78.3 $ 60.1 $ 153.4 $ 85.9
Employee Benefits 31.7 12.0 58.5 24.3
Other Operations 11.3 17.1 16.1 37.1
------ ------ -------- --------
Total $121.3 $ 89.2 $ 228.0 $ 147.3
====== ====== ======== ========
</TABLE>
-9-
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
JUNE 30, 1998
NOTE 3--SEGMENT INFORMATION - CONTINUED
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 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 $563.2 $537.3 $1,129.4 $ 804.2
Employee Benefits 271.6 248.6 532.6 394.2
Other Operations 148.2 207.9 314.6 366.7
------ ------ -------- --------
Total $983.0 $993.8 $1,976.6 $1,565.1
====== ====== ======== ========
Income Before Federal Income Taxes
Individual Disability and Life $ 80.1 $ 61.6 $ 164.3 $ 92.3
Employee Benefits 31.8 11.8 60.2 23.9
Other Operations 12.2 17.3 12.5 37.3
------ ------ -------- --------
Total $124.1 $ 90.7 $ 237.0 $ 153.5
====== ====== ======== ========
</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
JUNE 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 six months ended June 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:
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1997
(in millions of
dollars, except
share data)
----------------
<S> <C>
Revenue $2,021.5
Income Before Federal Income Taxes 201.9
Net Income 129.5
Net Income per Common Share
Basic 0.92
Assuming Dilution 0.90
</TABLE>
-11-
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
JUNE 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. On a
statutory basis, 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 on 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 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 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 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.
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.
-12-
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
JUNE 30, 1998
NOTE 7--COMPREHENSIVE INCOME - CONTINUED
The components of accumulated other comprehensive income, net of related tax,
are as follows:
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
(in millions of dollars)
-----------------------------------------------
<S> <C> <C>
Net Unrealized Gain on Securities $740.2 $624.3
Foreign Currency Translation Adjustment (26.2) (20.7)
------ ------
Accumulated Other Comprehensive Income $714.0 $603.6
====== ======
</TABLE>
The components of comprehensive income, net of related tax, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
(in millions of dollars)
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $ 74.8 $ 59.7 $145.9 $100.5
Change in Net Unrealized Gain on Securities 88.5 215.1 115.9 147.7
Change in Foreign Currency Translation Adjustment (7.9) 1.7 (5.5) 1.3
------ ------ ------ ------
Comprehensive Income $155.4 $276.5 $256.3 $249.5
====== ====== ====== ======
</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 June 30, 1998,
the related condensed consolidated statements of income for the three and six
month periods ended June 30, 1998 and 1997, and the condensed consolidated
statements of cash flows for the six month periods ended June 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.
ERNST & YOUNG LLP
Chattanooga, Tennessee
August 12, 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 six months of 1998 but for only four and three months of the first six
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 $12.1 million, or 1.2 percent, to $980.2 million in the second quarter
of 1998 from $992.3 million in the second quarter of 1997. The decline was the
result of lower revenue in the other operations segment ($60.4 million), which
was partly offset by slightly higher revenue in the individual disability and
life segment ($25.6 million) and employee benefits segment ($22.7 million).
In the first six months of 1998, revenue increased $408.7 million, or 26.2
percent, to $1,967.6 million from $1,558.9 million in the first six months of
1997. The increase was the result of higher revenue in the individual
disability and life segment ($320.7 million) and employee benefits segment
($136.3 million), which was
15
<PAGE>
partly offset by lower revenue in the other operations segment ($48.3 million).
Income before net realized investment gains and losses and federal income
taxes ("income") increased $32.1 million, or 36.0 percent, to $121.3 million in
the second quarter of 1998, from $89.2 million in the second quarter of 1997.
The increase was the result of increased income in the individual disability and
life segment ($18.2 million) and employee benefits segment ($19.7 million),
which was partly offset by lower income in the other operations segment ($5.8
million).
In the first six months of 1998, income increased $80.7 million, or 54.8
percent, to $228.0 million, from $147.3 million in the first six months of 1997.
The increase was the result of increased income in the individual disability and
life segment ($67.5 million) and the employee benefits segment ($34.2 million),
which was partly offset by lower income in the other operations segment ($21.0
million).
Net income increased $15.1 million, or 25.3 percent, to $74.8 million in
the second quarter of 1998, from $59.7 million in the second quarter of 1997.
Net realized investment gains after taxes were $1.9 million in the second
quarter of 1998, compared to $1.0 million in the second quarter of 1997. For
the first six months of 1998, net income increased $45.4 million, or 45.2
percent, to $145.9 million, from $100.5 million in the first six months of 1997.
Net realized investment gains after taxes were $6.0 million in the first
16
<PAGE>
six months of 1998, compared to $4.1 million in the first six months of 1997.
The gain on the sale of the Company's annuity business (discussed in detail
in the other operations segment) increased operating results for the three and
six months periods ended June 30, 1998 by $12.2 million before taxes and $1.4
million after taxes.
INDIVIDUAL DISABILITY AND LIFE
Revenue in the individual disability and life segment increased $25.6
million, or 4.8 percent, to $561.4 million in the second quarter of 1998, from
$535.8 million in the second quarter of 1997. The increase was primarily the
result of an increase in investment income of $26.8 million, or 16.8 percent, to
$186.4 million in the second quarter of 1998, compared to $159.6 million in the
second quarter of 1997. This increase is primarily due to increased capital
allocation to this segment and a shift in investment mix to higher yielding
investments in the Paul Revere portfolio. Premium income in this segment
declined $2.8 million, or 0.8 percent, to $365.0 million in the second quarter
of 1998, from $367.8 million in the second 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 six months of 1998, revenue in this segment increased $320.7
million, or 40.2 percent, to $1,118.5 million, from $797.8 million in the first
six months of 1997. The increase was
17
<PAGE>
primarily the result of the acquisition of Paul Revere. Net investment income
increased $101.2 million, or 39.3 percent, to $358.9 million in the first six
months of 1998, from $257.7 million in the first six 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 $209.8 million, or 39.6 percent, to $739.0 million in the
first six months of 1998, from $529.2 million in the first six 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 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 is in the process of repricing
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
18
<PAGE>
coverages along with its more complete line of loss of earnings related
disability coverages.
In the second quarter of 1998, new annualized sales in the individual
disability income line totaled $26.7 million, compared to $32.1 million in the
second quarter of 1997 and $ 26.2 million in the first 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 six months of 1998, are dependent on the response of customers and
competitors in the industry.
Income in the individual disability and life segment increased $18.2
million, or 30.3 percent, to $78.3 million in the second quarter of 1998, from
$60.1 million in the second quarter of 1997. Income from the individual
disability income line of business increased $15.9 million, or 31.0 percent, to
$67.2 million in the second quarter of 1998, from $51.3 million in the first
quarter of 1997. This increase is primarily due to increased investment income
19
<PAGE>
in the individual disability income line of business and an improvement in net
claim resolutions on the Paul Revere block of business. 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 $2.3 million, or 26.1 percent, to
$11.1 million in the second quarter of 1998, from $8.8 million in the second
quarter of 1997. This increase is primarily due to higher investment income.
For the first six months of 1998, income in this segment increased $67.5
million, or 78.6 percent, to $153.4 million from $85.9 million in the first six
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
$62.6 million, or 86.0 percent, to $135.4 million in the first six months of
1998, from $72.8 million in the first six 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 $4.9 million, or 37.4 percent, to
$18.0 million in the first six months of 1998, from $13.1 million in the first
six months
20
<PAGE>
of 1997. This increase is primarily due to the acquisition of Paul Revere and
higher investment income.
EMPLOYEE BENEFITS
Revenue in the employee benefits segment increased $22.7 million, or 9.1
percent, to $271.5 million in the second quarter of 1998, from $248.8 million in
the second quarter of 1997. The increase was primarily the result of an
increase in premium income in this segment of $15.1 million, or 7.9 percent, to
$206.1 million in the second quarter of 1998, from $191.0 million in the second
quarter of 1997. The increase in premium income was primarily the result of
increased premium income in the group disability, group life, and voluntary
benefits lines of business.
For the first six months of 1998, revenue in this segment increased $136.3
million, or 34.5 percent, to $530.9 million from $394.6 million in the first six
months of 1997. Premium income increased $99.8 million, or 33.0 percent, to
$402.1 million in the first six months of 1998, from $302.3 million in the first
six 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 $47.0 million in the first six months of 1998 compared to $28.6 million
of revenue contributed in 1997 subsequent to its acquisition.
21
<PAGE>
Income in the employee benefits segment increased $19.7 million, or 164.2
percent, to $31.7 million in the second quarter of 1998, from $12.0 million in
the second quarter of 1997. Income in the group disability line of business
increased to $16.1 million in the second quarter of 1998 compared to $3.8
million in the second 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, increased business volumes, and lower expenses. Voluntary benefits
reported income of $4.8 million in the second quarter of 1998 compared to $3.4
million in the second quarter of 1997. The group life line of business produced
income of $8.9 million in the second quarter of 1998 compared to $3.3 million in
the second quarter of 1997.
For the first six months of 1998, income increased $34.2 million, or 140.7
percent, to $58.5 million, from $24.3 million in the first six 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
$30.4 million in the first six months of 1998 compared to $7.5 million in the
first six 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, increased business volumes, and lower
expenses. Voluntary benefits reported income of $8.0 million in the first six
22
<PAGE>
months of 1998 compared to $6.9 million in the first six months of 1997. The
group life line of business produced income of $16.1 million in the first six
months of 1998 compared to $4.3 million in the first six 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
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 income of $6.6 million. During the first six months
of 1998, this business produced revenue of $8.3 million and income of $2.7
million.
23
<PAGE>
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 were no
longer actively marketed by the Company. 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 does 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 Corp. ("Ameritas"). The dental block,
which was acquired in the Paul 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.
24
<PAGE>
Revenue in the other operations segment declined $60.4 million, or 29.1
percent, to $147.3 million in the second quarter of 1998, from $207.7 million in
the second quarter of 1997. Revenue from the individual annuity line totaled
$27.7 million in the second quarter of 1998, compared to $46.2 million in the
second quarter of 1997. Included in the 1998 second quarter and year-to-date
revenue is a gain of $12.2 million from the sale of the annuity business.
Revenue from the group pension line of business declined $25.8 million, or 32.8
percent, to $52.8 million in the second quarter of 1998, from $78.6 million in
the second 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 six months of 1998, revenue in this segment declined $48.3
million, or 13.2 percent, to $318.2 million, from $366.5 million in the first
six months of 1997. 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 $53.3 million, or 32.5
percent, to $110.8 million in the first six months of 1998, from $164.1 million
in the first six 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.
25
<PAGE>
Income in the other operations segment declined $5.8 million, or 33.9
percent, to $11.3 million in the second quarter of 1998, from $17.1 million in
the second quarter of 1997. The decline in this segment was due in part to lower
income in the group pension line of business, which declined to $6.0 million in
the second quarter of 1998, from $6.9 million in the second 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 medical
stop-loss line of business declined to $1.6 million in the second quarter of
1998 from $2.3 million in the second quarter of 1997, reflecting lower premium
income and the strategic decision to reinsure this business. Income from the
individual annuity business was $12.7 million in the second quarter of 1998
compared to $7.2 million in the second quarter of 1997. Included in the 1998
second quarter and year-to-date income is a gain of $12.2 million from the sale
of the annuity business. Income from the COLI line of business increased to $5.6
million in the second quarter of 1998 from $4.5 million in the second quarter of
1997. Interest expense on debt totaled $17.4 million in the second quarter of
1998, compared to $9.5 million in the second quarter of 1997. Goodwill
amortization totaled $5.4 million in the second quarter of 1998, compared to
$4.2 million in the second quarter of 1997.
For the first six months of 1998, income in this segment declined $21.0
million, or 56.6 percent, to $16.1 million in the first six months of 1998, from
$37.1 million in the first six months of 1997. The decline in this segment was
due in part to lower income
26
<PAGE>
in the group pension line of business, which declined to $14.0 million in the
first six months of 1998, from $17.7 million in the first six 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 medical stop-
loss line of business declined to $2.7 million in the first six months of 1998
from $6.6 million in the first six months of 1997. Income from the annuity line
of business was $12.9 million for the first six months of 1998 compared to $7.6
million for 1997. Income from the COLI line of business increased to $11.0
million in the first six months of 1998 from $9.2 million in the first six
months of 1997. Interest expense on debt totaled $33.0 million in the first six
months of 1998, compared to $15.8 million in the first six months of 1997.
Goodwill amortization totaled $10.9 million in the first six months of 1998,
compared to $4.4 million in the first six months of 1997.
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.
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
27
<PAGE>
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
28
<PAGE>
capital securities offering. The sole assets of the subsidiary trust are the
junior subordinated debt securities.
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.
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.
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 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
29
<PAGE>
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 amount
$109.9 million was paid. The Company anticipates that $151.9 million will be
available in 1998 for such purposes.
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 second quarter and first six 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 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
30
<PAGE>
million and a book value of $258.4 million. The purpose of this transaction 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.
31
<PAGE>
June 30 December 31
-------- --------------
1998 1997 1996
-------- ------ ------
Investment-Grade Fixed Maturity Securities 80.1% 82.2% 77.0%
Below-Investment-Grade Fixed Maturity Securities 7.6 6.6 6.7
Equity Securities 0.1 0.1 0.1
Mortgage Loans 0.1 0.1 --
Real Estate 0.2 0.4 1.1
Policy Loans 11.7 10.2 13.1
Other 0.2 0.4 2.0
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
The following table provides certain investment information and results for
the periods indicated.
Six Months Ended
June 30 Year Ended December 31
---------- ------------------------
1998 1997 1996
---------- ----------- -----------
(in millions of dollars)
Average Cash and Invested Assets $18,899.8 $17,808.2 $14,056.3
Net Investment Income $ 710.1 $ 1,354.7 $ 1,090.1
Average Yield * 7.5% 7.6% 7.8%
Net Realized Investment Gains (Losses) $ 9.0 $ 15.1 $ (8.6)
- -----------------
* Average yield is determined by dividing annualized net investment income by
the average cash and invested assets for the period. Excluding net unrealized
gains on securities, the yield is 8.2%, 8.0%, and 8.1% for the first six
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 $6.7 million at June 30, 1998, or 0.04 percent of invested
assets.
32
<PAGE>
The Company's investment in mortgage-backed securities totaled $2.3 billion
on an amortized cost basis at June 30, 1998 and $3.1 billion at December 31,
1997. At June 30, 1998, the mortgage-backed securities had an average life of
10.1 years and effective duration of 7.2 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 June 30, 1998, was $1,337.1 million, representing 7.6 percent of invested
assets, below the Company's internal limit of
33
<PAGE>
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.
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 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.
In 1997, the Company opened $400.0 million of interest rate futures
contracts and wrote $50.0 million of options on interest rate futures in order
to hedge the anticipated refinancing of long-term debt. These contracts were
terminated during the first quarter of
34
<PAGE>
1998 at the time the $200.0 million of debt and $300.0 million of capital
securities offerings were completed. During the second quarter of 1998, the
Company opened $400.0 million of options on interest rate futures in order to
hedge the borrowing rate on the remaining debt offering. This position was
terminated in July upon completion of the debt offering.
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.
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
relationship has a year 2000 issue and the most appropriate method of
remediation or conversion to a compliant alternative); (iv) construction
(remediating the system in order to be compliant); (v) testing (subjecting the
remediated system to: (a) regression testing to validate current processing, (b)
integrated testing to validate interconnected and future date processing in the
current environment, and (c) year 2000 testing to validate processing in a date
forward year 2000 environment); and (vi) completion. 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.
35
<PAGE>
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.
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:
36
<PAGE>
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>
<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 Begins Risk assessments completed
Developed
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>
<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, of business
business applications
applications
begin
time machine
testing
- -------------------------------------------------------------------------------------------------------
User Systems in Full compliance
Developed construction and of user
Systems testing developed
systems
-------------------------------------------------------------------------------------------------------
Hardware and Inventory of Standard software
Software field office configuration
third party established
service
providers
- -------------------------------------------------------------------------------------------------------
Enterprise Time machine Certification Full compliance of
Computing environment testing of home office
constructed at computing infrastructure,
3 sites infrastructure network and
completed telephony systems
- -------------------------------------------------------------------------------------------------------
Business Request for Contingency Contingency plans Business partner
Partners information planning process finalized for all interface
sent to defined for critical business testing
electronic critical business interfaces
business partners
partners
- -------------------------------------------------------------------------------------------------------
Project Office Testing metrics Business impact
established for time teams formulated
machine
- -------------------------------------------------------------------------------------------------------
</TABLE>
37
<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.
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
38
<PAGE>
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 $5.8 million
through June 30, 1998, in connection with incremental cost of the year 2000
project and estimates an additional $2.5 million to complete the project.
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
39
<PAGE>
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
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.
40
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of Provident Companies, Inc. held on
May 6, 1998, Provident's shareholders elected all of management's nominees
for the Board of Directors as listed in the proxy statement and approved
the following proposals:
Votes
In Votes
Favor Withheld
----- --------
1. Election of Directors:
William L. Armstrong 117,752,035 1,191,157
William H. Bolinder 117,738,449 1,204,743
J. Harold Chandler 117,742,404 1,200,788
Charlotte M. Heffner 117,747,511 1,195,681
Hugh B. Jacks 117,752,085 1,191,107
Hugh O. Maclellan, Jr. 117,749,964 1,193,228
A. S. MacMillan 117,741,884 1,201,308
C. William Pollard 117,659,364 1,283,828
Scott L. Probasco, Jr. 117,742,168 1,201,024
Steven S Reinemund 103,436,328 15,506,864
Burton E. Sorensen 117,737,236 1,205,956
Thomas R. Watjen 117,746,486 1,196,706
Votes Votes
In Votes Withheld/
Favor Against Abstentions
----------- --------- -----------
2. Approval of the Amended
and Restated Annual
Management Incentive
Compensation Plan of 1994 117,547,589 1,104,034 291,569
3. Approval of the Stock
Plan of 1999 113,614,431 5,050,526 278,235
4. Approval of Non-Employee
Director Compensation
Plan of 1998 116,952,824 1,712,509 277,859
5. Approval of the selection
of Ernst & Young LLP
as independent auditors 118,797,677 25,474 120,041
Item 5. Other Information
The Company does not currently have a charter or by-law provision relating
to the advance notice which must be given by a shareholder making a proposal to
be voted on at an annual or special meeting of shareholders. Under current
regulations, a proposal that a shareholder wants to have included in the
Company's proxy statement and on its proxy card under the provisions of Rule
14a-8 of the Securities Exchange Act of 1934, must be received by the Company
not less than 120 calendar days before the date the Company's proxy statement
was released to shareholders in connection with the previous year's annual
meeting. For the 1998 annual meeting, the Company released the proxy statement
to shareholders on April 7, 1998. Therefore, shareholder proposals to be
included in the Company's proxy statement and proxy card for the 1999 annual
meeting must be received by December 8, 1998.
Also, the Company's proxy for the 1999 annual meeting may confer
discretionary authority to vote on any shareholder proposal of which the Company
did not have notice at least 45 days before the date on which the Company mailed
its proxy materials for the 1998 annual meeting of shareholders. Therefore,
notice of any proposal which the shareholder has not requested to be included in
the proxy statement and proxy card under the procedures established by Rule
14a-8 of the Securities Exchange Act of 1934 must be received by the Company no
later than February 20, 1999, in order for the proposal not be subject to the
discretionary voting authority.
41
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10.1 Amended and Restated Annual Management Incentive
Compensation Plan of 1994
Exhibit 10.2 Provident Companies, Inc. Stock Plan of 1999
Exhibit 10.3 Provident Companies, Inc. Non-Employee
Director Compensation Plan of 1998
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 April 9, 1998, relating to the Company and the Provident
Financing Trust I (the "Provident Trust") offering for sale pursuant to a
preliminary prospectus, subject to completion, $300,000,000 aggregate
amount of Capital Securities representing preferred undivided beneficial
interests in the assets of Provident Trust, and $200,000,000 of the
Company's 7.25% Senior Notes.
42
<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: August 10, 1998 /s/ J. Harold Chandler
-------------------------
J. Harold Chandler
Chairman, President and
Chief Executive Officer
Date: August 10, 1998 /s/ Thomas R. Watjen
-------------------------
Thomas R. Watjen
Vice Chairman and
Chief Financial Officer
43
<PAGE>
EXHIBIT 10.1
AMENDED AND RESTATED ANNUAL MANAGEMENT INCENTIVE COMPENSATION PLAN OF 1994
ARTICLE 1
Purpose
The purpose of this Amended and Restated Annual Management Incentive
Compensation Plan ("MICP") is to motivate the participants to perform in a way
that will enable Provident Companies, Inc. and its subsidiaries ("the
Company"), to reach its short-term and long-term goals.
ARTICLE 2
Administration of the Plan
The Compensation Committee of the Board of Directors ("the Committee"), will
administer, construe, and interpret the MICP. No member of the Committee, the
Board of Directors, or any delegatee as the case may be, shall be liable for
any act done in good faith. The construction and interpretation by the
Committee of any provision of the MICP shall be final and conclusive. The
Committee must approve, subject to the provisions of the MICP, the amount, if
any, due a participant. The Committee, may, in its discretion, delegate its
general administrative duties to an officer or employee or committee composed
of officers or employees of the Company, but may not delegate its authority to
construe and interpret the MICP or approve awards. The Committee, subject to
approval by the Board of Directors, may, at any time or from time to time
amend the MICP in any respect without restriction and without the consent of
any participant. However, any modification of the MICP which would increase
materially the benefits accruing to participants, modify materially the
requirements as to eligibility for participation, materially increase the cost
of the MICP to the Company, or permit any member of the Committee to receive
an award, must be approved by the stockholders of the Company.
ARTICLE 3
Elements of the MICP
The MICP consists of two subparts: (i) the Annual Incentive Plan, under
which annual incentive awards are based upon the achievement of one-year
goals; and (ii) the Performance Share Plan, pursuant to which participants are
granted deferred compensation units in the form of performance shares which
are payable in cash or shares of common stock upon a subsequent payment date.
Each of the subparts of the MICP is described below.
ARTICLE 4
Participation in the Plan
Participation in the MICP shall be based on recommendation by Company
management and subject to approval by the Committee. Participation in all
portions of the MICP except the Performance Share Plan (as described below)
will be limited to officers and other key employees of the Company and its
subsidiaries whose judgments, decisions and actions can have a discernible
impact on the profitability of the Company. The Committee will establish
participation criteria and make decisions on eligibility based on such
criteria.
<PAGE>
ARTICLE 5
Stock To Be Awarded
Stock awards will be for shares of Company common stock. Stock subject to
the Plan may be unissued shares, reacquired shares or shares bought on the
open market for purposes of the Plan. The total number of shares of common
stock that may be awarded to all participants under the Plan may not exceed
1,500,000 shares. No more than 100,000 shares may be awarded to a participant
in a calendar year.
ARTICLE 6
Annual Incentive Plan
6.1 General. The Annual Incentive Plan portion of the MICP shall include the
Corporate Performance Subplan and the Individual Performance Subplan, as more
specifically described below. Awards under the Annual Incentive Plan will be
based entirely upon achievement of one-year goals. Each plan year runs from
January 1 to December 31.
6.2 Corporate Performance Subplan. The Corporate Performance Subplan will be
based solely on the achievement of objective corporate performance goals. The
awards under this Subplan may be determined on the basis of one or more of the
following measures of corporate performance, alone or in combination, for the
Company as a whole or for any division or business unit: (a) return on equity,
(b) overall or selected premium or sales growth, (c) stock performance, (d)
expense efficiency ratios (ratio of expenses to premium income), (e) earnings
per share, (f) market share, (g) revenue, (h) customer service measures or
indices (i) underwriting efficiency and/or quality, and (j) persistency
factors. Measurement of performance against such goals established by the
Committee shall be objectively determinable, and to the extent such goals are
expressed in standard accounting terms, performance shall be measured in
accordance with generally accepted accounting principles. The Committee shall
have the right for any reason to reduce or eliminate (but not increase) any
such award, notwithstanding the achievement of a specified goal. The maximum
annual award under the Corporate Performance Subplan to any participant will
be $2.5 million. At the beginning of each plan year, the Committee will
establish performance goals under the Corporate Performance Subplan based on
one or more of the above corporate performance criteria, and establish target
awards and any formula for payouts in excess of target based on the
achievement of measurable goals. Target awards under the Corporate Performance
Subplan are to be set by the Committee as percentages of base salary, which
percentages may differ from participant to participant and from year to year.
6.3 Individual Performance Subplan. Awards under the Individual Performance
Subplan will be based on an individual's contribution to the business of the
Company, as determined by the Committee. This contribution may be assessed on
nonobjective as well as objective measures. The Committee will establish
target awards under the Individual Performance Subplan and limits on payouts
in excess of targets, if any. Target awards under the Individual Performance
Subplan are set at percentages of base salary to be established by the
Committee which may differ from participant to participant and from year to
year. Awards under the Individual Performance Subplan will not be contingent
on the failure to attain the performance goals under the Corporate Performance
Subplan.
6.4 Form and Payment of Awards. Awards under the Annual Incentive Plan will
be approved by the Committee after the end of each plan year. No awards will
be payable to any employee under any measure if thresholds established by the
Committee are not reached. Awards will be paid partly in cash and partly in
Performance Shares, as described below under Article 7.
6.5 Vesting. Any award under the Annual Incentive Plan will be vested
(considered the participant's property) at the time the Committee approves the
award; except that, if a participant dies or becomes disabled after the close
of the plan year for which the award was earned and prior to approval of the
award, the award will be vested as of the date of death or disability.
2
<PAGE>
6.6 Change in Control. In the event of a Change in Control, the Committee
will determine the Annual Incentive Plan awards for each participant that
would have been earned if the plan year had ended on the date of the Change in
Control, based on actual performance through the date of the Change in Control
(the "Vested Awards"). Thereafter:
(a) Each participant who is in active employment at the end of the plan
year shall be entitled to the greater of his or her Vested Award and an
award based on actual performance for the entire plan year.
(b) If the MICP is terminated during a plan year after the date a Change
in Control occurs, each participant who is in active employment at the time
of such termination shall be entitled to the greater of his or her Vested
Award and an award based on actual performance through the date of
termination of the plan.
(c) If a participant's employment is terminated without Cause by the
Company during a plan year after the Change in Control occurs, such
participant shall be entitled to the greater of his or her Vested Award and
an award based on actual performance through the date of termination of
employment.
6.7 Definitions. For purposes of the MICP, the following terms have the
following meanings.
(a) "Cause" shall mean the occurrence of one of the following :
(1) A conviction of the participant of (x) a felony or (y) any lesser
crime or offense involving the property of the Company or one of its
subsidiaries.
(2) The willful engaging by the participant in conduct which has
caused demonstrable and serious injury to the Company, monetary or
otherwise, as evidenced by a determination in a binding and final
judgment, order or decree of a court or administrative agency of
competent jurisdiction, in effect after exhaustion or lapse of all
rights of appeal, in an action, suit or proceeding, whether civil,
criminal, administrative or investigative.
(3) Willful gross dereliction of duty or other willful grave
misconduct by the participant and failure to cure such situation within
thirty (30) days after receipt of notice thereof from the Chairman of
the Committee.
No act or failure to act on the part of the participant shall be deemed
willful if done, or omitted to be done, by the participant in good faith and
with a reasonable belief that his action or omission was in the best interests
of the Company or a subsidiary. The participant shall not be deemed to have
been terminated for "Cause" unless and until there shall have been delivered
to the participant a copy of a resolution duly adopted by the Committee (or
another committee of the Board hereafter succeeding the responsibilities
performed on the effective date of the MICP by the Committee) finding that in
the good faith opinion of the Committee the participant has committed an act
set forth in clause (1), (2) or (3) of this definition and specifying the
particulars thereof in detail.
(b) "Change in Control" shall be deemed to have occurred if at any time
or from time to time after the effective date of the MICP:
(1) any "person" or "group" (as those terms are used in Sections
13(d) and 14(d), respectively, of the Securities Exchange Act of 1934
("Exchange Act")), other than the Maclellan family or a trustee or
other fiduciary holding securities under an employee benefit plan of
the Company, or a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as
their ownership of stock of the Company, is or becomes the "beneficial
owner," (as defined in Rule 13d-3 of the Exchange Act), directly or
indirectly, of securities of the Company representing thirty percent
(30%) or more of the combined voting power of the Company's then
outstanding securities and (ii) the "group" comprised of the Maclellan
family does not then
3
<PAGE>
beneficially own, directly or indirectly, securities of the Company
representing more than thirty percent (30%) of the combined voting
power of the Company's then outstanding securities; or
(2) the stockholders of the Company approve a merger or consolidation
of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than fifty percent (50%) of
the combined voting power of the voting securities of the Company or
such surviving entity outstanding immediately after such merger or
consolidation, or the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all the Company's
assets.
ARTICLE 7
Performance Share Plan
7.1 General. A Performance Share Plan is also included in the MICP, the
specific terms and conditions of which shall be set forth in one or more
separate subplan documents approved and amended from time to time by the
Committee consistent with the terms of the MICP. One such subplan
("Performance Share Plan I") shall be applicable to senior officers, and
producers of insurance business for the benefit of the Company or its
subsidiaries, selected by the Committee upon the recommendation of the Chief
Executive Officer ("CEO"), who are in a position to contribute materially to
the Company's continued growth and development and to its long term financial
success. For purposes of this Plan, producers shall be deemed to be
consultants of the Company or its subsidiaries. Another such subplan
("Performance Share Plan II") is for all persons who receive MICP annual
incentive awards who are not otherwise participating in such year in
Performance Share Plan I.
7.2 Performance Share Plan I. Participants in Performance Share Plan I are
the CEO, President, Vice Chairman, Executive Vice Presidents and such other
senior officers selected by the Committee upon the recommendation of the CEO
to participate in Performance Share Plan I for a given year. Producers for the
Company who achieve certain performance sales goals may also be selected to
participate in Performance Share Plan I as described below. Approximately 15-
35 officers may participate in any one year. The officers, all of whom have
company stock ownership requirements, are required to receive a portion of
their MICP annual incentive awards in "Performance Shares" based on the
following table:
<TABLE>
<CAPTION>
MICP INCENTIVE EARNED PERCENT PAID IN PERFORMANCE SHARES
--------------------- ----------------------------------
<S> <C>
Less than $100,000........................ 25.0%
$100,000--$249,999........................ 37.5%
$250,000 or more.......................... 50.0%
</TABLE>
Participants in Performance Share Plan I may elect to receive any portion of
their MICP awards above the required percentage in Performance Shares.
A "Performance Share" is a unit of deferred compensation, equal in value to
one share of Company common stock. The number of Performance Shares to be
awarded to any participant in Performance Share Plan I is determined by:
(1) Dividing the amount of MICP award being paid in Performance Shares
(both mandatory and voluntary) by the market price for a share of Company
common stock on the date the amount of the MICP award is determined, and
(2) "Grossing-up" the number of Performance Shares on a 30% basis, to
reflect the increased risk of the volatility of stock price, particularly
during the deferral period, as well as lack of liquidity and marketability.
4
<PAGE>
Performance Shares granted under Performance Share Plan I are subject to the
following:
(1) The shares attributable to the "gross-up" factor are subject to
forfeiture during a three-year period following the award. The remaining
Performance Shares are not subject to forfeiture.
(2) Participants may elect to extend the deferral period for payment of
Performance Shares beyond the required period of three years, but not
beyond the earliest of retirement, death, or disability. Any such election
must be made prior to the date such shares are credited to the participant.
(3) Generally, Performance Shares will be paid in Company common stock;
however, the Committee has the authority to direct that the value of such
shares be paid in part or entirely in cash.
(4) Participant accounts under Performance Share Plan I will be credited
with dividend equivalents in an amount equal to the cash dividends paid on
Company common stock during the period of deferral. The dividend may be
paid in cash or applied to accumulate additional Performance Shares, at the
election of the participant.
(5) Performance Shares will be counted in the calculation of
participants' total ownership of Company stock for purposes of determining
the extent to which stock ownership requirements have been met.
(6) In the event of death, normal retirement, termination without cause,
or Change in Control of the Company, any shares attributable to the "gross-
up" factor, which otherwise would be subject to forfeiture during a three
year period, will automatically cease to be subject to such forfeiture. In
the event of termination for Cause or voluntary resignation, any shares
subject to the "gross-up" factor will be forfeited. The Committee has the
authority to review such forfeiture on a case by case basis.
Certain producers who achieve performance sales goals may also be selected
to participate Performance Share Plan I. The goals required and the terms of
the producers' participation will be approved by the Committee. However, there
is no "gross-up" of the number of shares to be awarded under Performance Share
Plan I to the producers, and the terms of such participation would be no more
favorable than those applicable to the officers. Management estimates that
approximately ten to thirty-five producers would participate in Performance
Share Plan I each year.
7.3 Performance Share Plan II. Each person who receives an annual incentive
award under the MICP and is not otherwise participating in such year in
Performance Share Plan I, shall automatically be a participant in Performance
Share Plan II. Participants in Performance Share Plan II are required to
receive a portion of the MICP annual incentive awards in "Performance Shares"
based on the following table:
<TABLE>
<CAPTION>
MICP INCENTIVE EARNED PERCENT PAID IN PERFORMANCE SHARES
--------------------- ----------------------------------
<S> <C>
Less than $20,000......................... 15.0% (minimum of 50 shares)
$20,000 or more........................... 25.0%
</TABLE>
The number of Performance Shares to be awarded to any participant in
Performance Share Plan II is determined by dividing the amount of MICP award
being paid in Performance Shares by the market price for a share of Company
common stock on the date the amount of the MICP award is determined.
Performance Shares granted under Performance Share Plan II are subject to
the following:
(1) Participants may elect to extend the deferral period for payment of
Performance Shares for up to two years beyond the required period of three
years, but not beyond the earliest of retirement, death, or disability. Any
such election must be made prior to the date such shares are credited to
the participant.
(2) Generally, Performance Shares will be paid in Company common stock;
however, the Committee has the authority to direct that the value of such
Performance Shares be paid in part or entirely in cash.
Participant accounts under Performance Share Plan II will be credited with
dividend equivalents in an amount equal to the cash dividends paid on Company
common stock during the period of deferral. The dividend will be applied to
accumulate additional Performance Shares in the participant's account.
5
<PAGE>
Performance Shares will be counted in the calculation of participants' total
ownership of Company stock for purposes of determining the extent to which any
stock ownership requirements have been met.
ARTICLE 8
General Provisions
8.1 Non-Assignability. No grants or awards under the MICP shall be subject
in any manner to alienation, anticipation, sale, transfer, assignment, pledge
or encumbrance.
8.2 No Right to Continued Employment. Participation in the MICP shall not
give any employee any right to remain in the employ of the Company. The MICP
is not to be construed as a contract of employment for any period and does not
alter the at-will status of any participant.
8.3 Source of Benefits. Awards under the MICP will not be prefunded but will
be paid by the Company as and when they become due as provided herein, and the
participant's interest in the award shall be only that of an unsecured
creditor of the Company.
8.4 Withholding. The Company may deduct or withhold, or require a
participant to remit to the Company, an amount sufficient to satisfy federal,
state and local taxes (including the participant's FICA obligation) required
by law to be withheld with respect to any taxable event arising as a result of
the MICP.
8.5 Governing Law. This MICP, and the rights and obligations of the parties
thereunder, will be construed in accordance with the laws of the State of
Tennessee.
The foregoing is hereby acknowledged as being the Provident Companies, Inc.,
Amended and Restated Annual Management Incentive Compensation Plan of 1994 as
adopted by the Board of Directors of the Company on March 26, 1998, and
approved by the Stockholders of the Company on May 6, 1998.
PROVIDENT COMPANIES, INC.
By:__________________________________
Its:_________________________________
6
<PAGE>
EXHIBIT 10.2
PROVIDENT COMPANIES, INC.
STOCK PLAN OF 1999
ARTICLE I
Purpose
1.1 General. The purpose of the Provident Companies, Inc. Stock Plan of 1999
(the "Plan") is to promote the success, and enhance the value, of Provident
Companies, Inc. (the "Corporation"), by linking the personal interests of its
employees, officers, producers and directors to those of Corporation
stockholders and by providing such persons with an incentive for outstanding
performance. The Plan is further intended to provide flexibility to the
Corporation in its ability to motivate, attract, and retain the services of
employees, officers, producers and directors upon whose judgment, interest,
and special effort the successful conduct of the Corporation's operation is
largely dependent. Accordingly, the Plan permits the grant of incentive awards
from time to time to selected employees, officers, producers and directors.
ARTICLE 2
Effective Date
2.1 Effective Date. The Plan shall be effective as of January 1, 1999.
ARTICLE 3
Definitions
3.1 Definitions. When a word or phrase appears in this Plan with the initial
letter capitalized, and the word or phrase does not commence a sentence, the
word or phrase shall generally be given the meaning ascribed to it in this
Section or in Section 1.1 unless a clearly different meaning is required by
the context. The following words and phrases shall have the following
meanings:
(a) "Award" means any Option, Stock Appreciation Right, Restricted Stock
Award, or Dividend Equivalent Award, or any other right or interest
relating to Stock or cash, granted to a Participant under the Plan.
(b) "Award Agreement" means any written agreement, contract, or other
instrument or document evidencing an Award.
(c) "Board" means the Board of Directors of the Corporation.
(d) "Change in Control" means and includes each of the following:
(1) any "person" or "group" (as those terms are used in Sections
13(d) and 14(d), respectively, of the 1934 Act), other than the
Maclellan family or a trustee or other fiduciary holding securities
under an employee benefit plan of the Company, or a corporation
owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of
the Company, is or becomes the "beneficial owner," (as defined in
Rule 13d-3 of the 1934 Act), directly or indirectly, of securities
of the Company representing thirty percent (30%) or more of the
combined voting power of the Company's then outstanding securities
and (ii) the "group" comprised of the Maclellan family does not then
beneficially own, directly or indirectly, securities of the Company
representing more than thirty percent (30%) of the combined voting
power of the Company's then outstanding securities; or
(2) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than
a merger or consolidation which would result in the voting
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the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than fifty
percent (50%) of the combined voting power of the voting securities
of the Company or such surviving entity outstanding immediately
after such merger or consolidation, or the stockholders of the
Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or
substantially all the Company's assets.
(e) "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
(f) "Committee" means the committee of the Board described in Article 4.
(g) "Corporation" means Provident Companies, Inc., a Delaware
corporation.
(h) "Covered Employee" means a covered employee as defined in Code
Section 162(m)(3).
(i) "Disability" means any illness or other physical or mental condition
of a Participant that renders the Participant incapable of performing his
customary and usual duties for the Corporation, or any medically
determinable illness or other physical or mental condition resulting from a
bodily injury, disease or mental disorder which, in the judgment of the
Committee, is permanent and continuous in nature. The Committee may require
such medical or other evidence as it deems necessary to judge the nature
and permanency of the Participant's condition.
(j) "Dividend Equivalent" means a right granted to a Participant under
Article 11.
(k) "Effective Date" has the meaning assigned such term in Section 2.1.
(l) "Fair Market Value", on any date, means (i) if the Common Stock is
listed on a securities exchange or traded over the Nasdaq National Market,
the average of the high and low market prices reported in The Wall Street
Journal at which a Share of Common Stock shall have been sold on such day
or on the next preceding trading day if such date was not a trading day, or
(ii) if the Common Stock is not listed on a securities exchange or traded
over the Nasdaq National Market, the mean between the bid and offered
prices as quoted by Nasdaq for such date, provided that if it is determined
that the fair market value is not properly reflected by such Nasdaq
quotations, Fair Market Value will be determined by such other method as
the Committee determines in good faith to be reasonable.
(m) "Incentive Stock Option" means an Option that is intended to meet the
requirements of Section 422 of the Code or any successor provision thereto.
(n) "Non-Qualified Stock Option" means an Option that is not an Incentive
Stock Option.
(o) "Option" means a right granted to a Participant under Article 7 of
the Plan to purchase Stock at a specified price during specified time
periods. An Option may be either an Incentive Stock Option or a
Non-Qualified Stock Option.
(p) "Parent" means a corporation which owns or beneficially owns a
majority of the outstanding voting stock or voting power of the
Corporation. For Incentive Stock Options, the term shall have the same
meaning as set forth in Code Section 424(e).
(q) "Participant" means a person who, as an employee, officer, Producer
or director of the Corporation or any Parent or Subsidiary, has been
granted an Award under the Plan.
(r) "Plan" means the Provident Companies, Inc. Stock Plan of 1999, as
amended from time to time.
(s) "Producer" means producer of insurance business for the benefit of
the Company or its subsidiaries. For purposes of this Plan, Producers are
deemed to be consultants of the Company or its subsidiaries.
(t) "Restricted Stock Award" means Stock granted to a Participant under
Article 10 that is subject to certain restrictions and to risk of
forfeiture.
(u) "Retirement" means a Participant's voluntary termination of
employment or as a director of the Corporation, Parent or Subsidiary after
attaining age 55 and with the approval of the Committee.
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(v) "Stock" means the $1.00 par value common stock of the Corporation and
such other securities of the Corporation as may be substituted for Stock
pursuant to Article 12.
(w) "Stock Appreciation Right" or "SAR" means a right granted to a
Participant under Article 8 to receive a payment equal to the difference
between the Fair Market Value of a share of Stock as of the date of
exercise of the SAR over the grant price of the SAR, all as determined
pursuant to Article 8.
(x) "Subsidiary" means any corporation, limited liability company,
partnership or other entity of which a majority of the outstanding voting
stock or voting power is beneficially owned directly or indirectly by the
Corporation. For Incentive Stock Options, the term shall have the meaning
set forth in Code Section 424(f).
(y) "1933 Act" means the Securities Act of 1933, as amended from time to
time.
(z) "1934 Act" means the Securities Exchange Act of 1934, as amended from
time to time.
ARTICLE 4
Administration
4.1 Committee. The Plan shall be administered by a committee (the
"Committee") appointed by the Board (which Committee shall consist of two or
more directors) or, at the discretion of the Board from time to time, the Plan
may be administered by the Board. It is intended that the directors appointed
to serve on the Committee shall be "non-employee directors" (within the
meaning of Rule 16b-3 promulgated under the 1934 Act) and "outside directors"
(within the meaning of Code Section 162(m) and the regulations thereunder) to
the extent that Rule 16b-3 and, if necessary for relief from the limitation
under Code Section 162(m) and such relief is sought by the Company, Code
Section 162(m), respectively, are applicable. However, the mere fact that a
Committee member shall fail to qualify under either of the foregoing
requirements shall not invalidate any Award made by the Committee which Award
is otherwise validly made under the Plan. The members of the Committee shall
be appointed by, and may be changed at any time and from time to time in the
discretion of, the Board. During any time that the Board is acting as
administrator of the Plan, it shall have all the powers of the Committee
hereunder, and any reference herein to the Committee (other than in this
Section 4.1) shall include the Board.
4.2 Action By The Committee. For purposes of administering the Plan, the
following rules of procedure shall govern the Committee. A majority of the
Committee shall constitute a quorum. The acts of a majority of the members
present at any meeting at which a quorum is present, and acts approved
unanimously in writing by the members of the Committee in lieu of a meeting,
shall be deemed the acts of the Committee. Each member of the Committee is
entitled to, in good faith, rely or act upon any report or other information
furnished to that member by any officer or other employee of the Corporation
or any Parent or Subsidiary, the Corporation's independent certified public
accountants, or any executive compensation consultant or other professional
retained by the Corporation to assist in the administration of the Plan.
4.3 Authority Of Committee. The Committee has the exclusive power, authority
and discretion to:
(a) Designate Participants;
(b) Determine the type or types of Awards to be granted to each
Participant;
(c) Determine the number of Awards to be granted and the number of shares
of Stock to which an Award will relate;
(d) Determine the terms and conditions of any Award granted under the
Plan, including but not limited to, the exercise price, grant price, or
purchase price, any restrictions or limitations on the Award, any schedule
for lapse of forfeiture restrictions or restrictions on the exercisability
of an Award, and accelerations or waivers thereof, based in each case on
such considerations as the Committee in its sole discretion determines;
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(e) Accelerate the vesting or lapse of restrictions of any outstanding
Award, based in each case on such considerations as the Committee in its
sole discretion determines;
(f) Determine whether, to what extent, and under what circumstances an
Award may be settled in, or the exercise price of an Award may be paid in,
cash, Stock, other Awards, or other property, or an Award may be canceled,
forfeited, or surrendered;
(g) Prescribe the form of each Award Agreement, which need not be
identical for each Participant;
(h) Decide all other matters that must be determined in connection with
an Award;
(i) Establish, adopt or revise any rules and regulations as it may deem
necessary or advisable to administer the Plan;
(j) Make all other decisions and determinations that may be required
under the Plan or as the Committee deems necessary or advisable to
administer the Plan;
(k) Amend the Plan or any Award Agreement as provided herein; and
(l) Delegate its general administrative duties under the Plan to an
officer or employee or committee of officers or employees of the Company,
but the Committee may not delegate its authority to construe and interpret
the Plan or approve the grant or the terms of Awards hereunder, except that
the Committee may authorize the Chairman of the Committee and the Chief
Executive Officer to approve grants subject to and contingent on
ratification by the Committee.
4.4. Decisions Binding. The Committee's interpretation of the Plan, any
Awards granted under the Plan, any Award Agreement and all decisions and
determinations by the Committee with respect to the Plan are final, binding,
and conclusive on all parties. No member of the Committee shall be liable for
any act done in good faith.
ARTICLE 5
Shares Subject To The Plan
5.1. Number Of Shares. Subject to adjustment as provided in Section 12.1,
the aggregate number of shares of Stock reserved and available for Awards or
which may be used to provide a basis of measurement for or to determine the
value of an Award (such as with a Stock Appreciation Right or Performance Unit
Award) shall be 4,000,000, of which not more than (20%) may be granted as
Awards of Restricted Stock or unrestricted Stock Awards.
5.2. Lapsed Awards. To the extent that an Award is canceled, terminates,
expires or lapses for any reason, any shares of Stock subject to the Award
will again be available for the grant of an Award under the Plan and shares
subject to SARs or other Awards settled in cash will be available for the
grant of an Award under the Plan.
5.3. Stock Distributed. Any Stock distributed pursuant to an Award may
consist, in whole or in part, of authorized and unissued Stock, treasury Stock
or Stock purchased on the open market.
5.4. Limitation On Awards. Notwithstanding any provision in the Plan to the
contrary, the maximum number of shares of Stock with respect to one or more
Options and/or SARs that may be granted during any one calendar year under the
Plan to any one Covered Employee shall be 1,000,000. The maximum Fair Market
Value (measured as of the date of grant) of any Awards other than Options and
SARs that may be received by a Covered Employee (less any consideration paid
by the Participant for such Award) during any one calendar year under the Plan
shall be $10,000,000.
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ARTICLE 6
Eligibility
6.1. General. Awards may be granted only to individuals who are employees,
officers, Producers or directors of the Corporation or a Parent or Subsidiary.
ARTICLE 7
Stock Options
7.1. General. The Committee is authorized to grant Options to Participants
on the following terms and conditions:
(a) Exercise Price. The exercise price per share of Stock under an Option
shall be determined by the Committee, provided that the exercise price for
any Option shall not be less than the Fair Market Value as of the date of
the grant.
(b) Time And Conditions Of Exercise. The Committee shall determine the
time or times at which an Option may be exercised in whole or in part. The
Committee also shall determine the performance or other conditions, if any,
that must be satisfied before all or part of an Option may be exercised.
The Committee may waive any exercise provisions at any time in whole or in
part based upon factors as the Committee may determine in its sole
discretion so that the Option becomes exercisable at an earlier date.
(c) Payment. The Committee shall determine the methods by which the
exercise price of an Option may be paid, the form of payment, including,
without limitation, cash, shares of Stock, or other property (including
"cashless exercise" arrangements), and the methods by which shares of Stock
shall be delivered or deemed to be delivered to Participants; provided that
if shares of Stock surrendered in payment of the exercise price were
themselves acquired otherwise than on the open market, such shares shall
have been held by the Participant for at least six months.
(d) Evidence Of Grant. All Options shall be evidenced by a written Award
Agreement between the Corporation and the Participant. The Award Agreement
shall include such provisions, not inconsistent with the Plan, as may be
specified by the Committee.
(e) Additional Options Upon Exercise. The Committee may, in its sole
discretion, provide in an Award Agreement, or in an amendment thereto, for
the automatic grant of a new Option to any Participant who delivers shares
of Stock as full or partial payment of the exercise price of the original
Option. Any new Option granted in such a case (i) shall be for the same
number of shares of Stock as the Participant delivered in exercising the
original Option, (ii) shall have an exercise price of 100% of the Fair
Market Value of the surrendered shares of Stock on the date of exercise of
the original Option (the grant date for the new Option), and (iii) shall
have a term equal to the unexpired term of the original Option.
7.2. Incentive Stock Options. The terms of any Incentive Stock Options
granted under the Plan must comply with the following additional rules:
(a) Exercise Price. The exercise price per share of Stock shall be set by
the Committee, provided that the exercise price for any Incentive Stock
Option shall not be less than the Fair Market Value as of the date of the
grant.
(b) Exercise. In no event may any Incentive Stock Option be exercisable
for more than ten years from the date of its grant.
(c) Lapse Of Option. An Incentive Stock Option shall lapse under the
earliest of the following circumstances; provided, however, that the
Committee may, prior to the lapse of the Incentive Stock Option under the
circumstances described in paragraphs (3), (4) and (5) below, provide in
writing that the Option will extend until a later date, but if Option is
exercised after the dates specified in paragraphs (3), (4) and (5) below,
it will automatically become a Non-Qualified Stock Option:
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(1) The Incentive Stock Option shall lapse as of the option
expiration date set forth in the Award Agreement.
(2) The Incentive Stock Option shall lapse ten years after it is
granted, unless an earlier time is set in the Award Agreement.
(3) If the Participant terminates employment for any reason other
than as provided in paragraph (4) or (5) below, the Incentive Stock
Option shall lapse, unless it is previously exercised, three months
after the Participant's termination of employment; provided, however,
that if the Participant's employment is terminated by the Company for
cause or by the Participant without the consent of the Company, the
Incentive Stock Option shall (to the extent not previously exercised)
lapse immediately.
(4) If the Participant terminates employment by reason of his
Disability, the Incentive Stock Option shall lapse, unless it is
previously exercised, one year after the Participant's termination of
employment.
(5) If the Participant dies while employed, or during the three -
month period described in paragraph (3) or during the one - year period
described in paragraph (4) and before the Option otherwise lapses, the
Option shall lapse one year after the Participant's death. Upon the
Participant's death, any exercisable Incentive Stock Options may be
exercised by the Participant's beneficiary, determined in accordance
with Section 11.6.
Unless the exercisability of the Incentive Stock Option is accelerated as
provided in Article 11, if a Participant exercises an Option after termination
of employment, the Option may be exercised only with respect to the shares
that were otherwise vested on the Participant's termination of employment.
(d) Individual Dollar Limitation. The aggregate Fair Market Value
(determined as of the time an Award is made) of all shares of Stock with
respect to which Incentive Stock Options are first exercisable by a
Participant in any calendar year may not exceed $100,000.00.
(e) Ten Percent Owners. No Incentive Stock Option shall be granted to any
individual who, at the date of grant, owns stock possessing more than ten
percent of the total combined voting power of all classes of stock of the
Corporation or any Parent or Subsidiary unless the exercise price per share
of such Option is at least 110% of the Fair Market Value per share of Stock
at the date of grant and the Option expires no later than five years after
the date of grant.
(f) Expiration Of Incentive Stock Options. No Award of an Incentive Stock
Option may be made pursuant to the Plan after the day immediately prior to
the tenth anniversary of the Effective Date.
(g) Right To Exercise. During a Participant's lifetime, an Incentive
Stock Option may be exercised only by the Participant or, in the case of
the Participant's Disability, by the Participant's guardian or legal
representative.
(h) Directors. The Committee may not grant an Incentive Stock Option to a
non - employee director. The Committee may grant an Incentive Stock Option
to a director who is also an employee of the Corporation or Parent or
Subsidiary but only in that individual's position as an employee and not as
a director.
ARTICLE 8
Stock Appreciation Rights
8.1. Grant of SARs. The Committee is authorized to grant SARs to
Participants on the following terms and conditions:
(a) Right To Payment. Upon the exercise of a Stock Appreciation Right,
the Participant to whom it is granted has the right to receive the excess,
if any, of:
(1) The Fair Market Value of one share of Stock on the date of
exercise; over
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(2) The grant price of the Stock Appreciation Right as determined by
the Committee, which shall not be less than the Fair Market Value of
one share of Stock on the date of grant.
(b) Other Terms. All awards of Stock Appreciation Rights shall be
evidenced by an Award Agreement. The terms, methods of exercise, methods of
settlement, form of consideration payable in settlement, and any other
terms and conditions of any Stock Appreciation Right shall be determined by
the Committee at the time of the grant of the Award and shall be reflected
in the Award Agreement.
ARTICLE 9
Restricted Stock Awards
9.1. Grant Of Restricted Stock. The Committee is authorized to make Awards
of Restricted Stock to Participants in such amounts and subject to such terms
and conditions as may be selected by the Committee. All Awards of Restricted
Stock shall be evidenced by a Restricted Stock Award Agreement.
9.2. Issuance And Restrictions. Restricted Stock shall be subject to such
restrictions on transferability and other restrictions as the Committee may
impose (including, without limitation, limitations on the right to vote
Restricted Stock or the right to receive dividends on the Restricted Stock).
These restrictions may lapse separately or in combination at such times, under
such circumstances, in such installments, upon the satisfaction of performance
goals or otherwise, as the Committee determines at the time of the grant of
the Award or thereafter.
9.3. Forfeiture. Except as otherwise determined by the Committee at the time
of the grant of the Award or thereafter, upon termination of employment during
the applicable restriction period or upon failure to satisfy a performance
goal during the applicable restriction period, Restricted Stock that is at
that time subject to restrictions shall be forfeited and reacquired by the
Corporation; provided, however, that the Committee may provide in any Award
Agreement that restrictions or forfeiture conditions relating to Restricted
Stock will be waived in whole or in part in the event of terminations
resulting from specified causes, and the Committee may in other cases waive in
whole or in part restrictions or forfeiture conditions relating to Restricted
Stock.
9.4. Certificates For Restricted Stock. Restricted Stock granted under the
Plan may be evidenced in such manner as the Committee shall determine. If
certificates representing shares of Restricted Stock are registered in the
name of the Participant, certificates must bear an appropriate legend
referring to the terms, conditions, and restrictions applicable to such
Restricted Stock.
ARTICLE 10
Dividend Equivalents
10.1 Grant Of Dividend Equivalents. The Committee is authorized to grant
Dividend Equivalents to Participants subject to such terms and conditions as
may be selected by the Committee. Dividend Equivalents shall entitle the
Participant to receive payments equal to dividends with respect to all or a
portion of the number of shares of Stock subject to an Award, as determined by
the Committee. The Committee may provide that Dividend Equivalents be paid or
distributed when accrued or be deemed to have been reinvested in additional
shares of Stock, or otherwise reinvested.
ARTICLE 11
Provisions Applicable To Awards
11.1. Stand-alone, Tandem, And Substitute Awards. Awards granted under the
Plan may, in the discretion of the Committee, be granted either alone or in
addition to, in tandem with, or in substitution for, any
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other Award granted under the Plan. If an Award is granted in substitution for
another Award, the Committee may require the surrender of such other Award in
consideration of the grant of the new Award. Awards granted in addition to or
in tandem with other Awards may be granted either at the same time as or at a
different time from the grant of such other Awards.
11.2. Exchange Provisions. The Committee may at any time offer to exchange
or buy out any previously granted Award for a payment in cash, Stock, or
another Award (subject to Section 12.1), based on the terms and conditions the
Committee determines and communicates to the Participant at the time the offer
is made.
11.3. Term Of Award. The term of each Award shall be for the period as
determined by the Committee, provided that in no event shall the term of any
Incentive Stock Option or a Stock Appreciation Right granted in tandem with
the Incentive Stock Option exceed a period of ten years from the date of its
grant (or, if Section 7.2(e) applies, five years from the date of its grant).
11.4. Form Of Payment For Awards. Subject to the terms of the Plan and any
applicable law or Award Agreement, payments or transfers to be made by the
Corporation or a Parent or Subsidiary on the grant or exercise of an Award may
be made in such form as the Committee determines at or after the time of
grant, including without limitation, cash, Stock, other Awards, or other
property, or any combination, and may be made in a single payment or transfer,
in installments, or on a deferred basis, in each case determined in accordance
with rules adopted by, and at the discretion of, the Committee.
11.5. Limits On Transfer. No right or interest of a Participant in any
unexercised or restricted Award may be pledged, encumbered, or hypothecated to
or in favor of any party other than the Corporation or a Parent or Subsidiary,
or shall be subject to any lien, obligation, or liability of such Participant
to any other party other than the Corporation or a Parent or Subsidiary. No
unexercised or restricted Award shall be assignable or transferable by a
Participant other than by will or the laws of descent and distribution or,
except in the case of an Incentive Stock Option, pursuant to a domestic
relations order that would satisfy Section 414(p)(1)(A) of the Code if such
Section applied to an Award under the Plan; provided, however, that the
Committee may (but need not) permit other transfers where the Committee
concludes that such transferability (i) does not result in accelerated
taxation, (ii) does not cause any Option intended to be an incentive stock
option to fail to be described in Code Section 422(b), and (iii) is otherwise
appropriate and desirable, taking into account any factors deemed relevant,
including without limitation, any state or federal tax or securities laws or
regulations applicable to transferable Awards.
11.6 Beneficiaries. Notwithstanding Section 11.5, a Participant may, in the
manner determined by the Committee, designate a beneficiary to exercise the
rights of the Participant and to receive any distribution with respect to any
Award upon the Participant's death. A beneficiary, legal guardian, legal
representative, or other person claiming any rights under the Plan is subject
to all terms and conditions of the Plan and any Award Agreement applicable to
the Participant, except to the extent the Plan and Award Agreement otherwise
provide, and to any additional restrictions deemed necessary or appropriate by
the Committee. If no beneficiary has been designated or survives the
Participant, payment shall be made to the Participant's estate. Subject to the
foregoing, a beneficiary designation may be changed or revoked by a
Participant at any time provided the change or revocation is filed with the
Committee.
11.7. Stock Certificates. All Stock certificates delivered under the Plan
are subject to any stop-transfer orders and other restrictions as the
Committee deems necessary or advisable to comply with federal or state
securities laws, rules and regulations and the rules of any national
securities exchange or automated quotation system on which the Stock is
listed, quoted, or traded. The Committee may place legends on any Stock
certificate to reference restrictions applicable to the Stock.
11.8 Acceleration Upon Death, Disability Or Retirement. Notwithstanding any
other provision in the Plan or any Participant's Award Agreement to the
contrary, upon the Participant's death or Disability during his employment or
service as a producer or director or upon the Participant's Retirement, all
outstanding Options,
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Stock Appreciation Rights, and other Awards in the nature of rights that may
be exercised shall become fully exercisable and all restrictions on
outstanding Awards shall lapse. Any Option or Stock Appreciation Rights Awards
shall thereafter continue or lapse in accordance with the other provisions of
the Plan and the Award Agreement. To the extent that this provision causes
Incentive Stock Options to exceed the dollar limitation set forth in Section
7.2(d), the excess Options shall be deemed to be Non-Qualified Stock Options.
11.9. Acceleration Upon A Change In Control. Except as otherwise provided in
the Award Agreement, upon the occurrence of a Change in Control, all
outstanding Options, Stock Appreciation Rights, and other Awards in the nature
of rights that may be exercised shall become fully exercisable and all
restrictions on outstanding Awards shall lapse; provided, however that such
acceleration will not occur if, in the opinion of the Company's accountants,
such acceleration would preclude the use of "pooling of interest" accounting
treatment for a Change in Control transaction that (a) would otherwise qualify
for such accounting treatment, and (b) is contingent upon qualifying for such
accounting treatment. To the extent that this provision causes Incentive Stock
Options to exceed the dollar limitation set forth in Section 7.2(d), the
excess Options shall be deemed to be Non-Qualified Stock Options.
11.10. Acceleration Upon Certain Events Not Constituting A Change In
Control. In the event of the occurrence of any circumstance, transaction or
event not constituting a Change in Control (as defined in Section 3.1) but
which the Board of Directors deems to be, or to be reasonably likely to lead
to, an effective change in control of the Company of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of the 1934
Act, the Committee may in its sole discretion declare all outstanding Options,
Stock Appreciation Rights, and other Awards in the nature of rights that may
be exercised to be fully exercisable, and/or all restrictions on all
outstanding Awards to have lapsed, in each case, as of such date as the
Committee may, in its sole discretion, declare, which may be on or before the
consummation of such transaction or event. To the extent that this provision
causes Incentive Stock Options to exceed the dollar limitation set forth in
Section 7.2(d), the excess Options shall be deemed to be Non-Qualified Stock
Options.
11.11. Acceleration For Any Other Reason. Regardless of whether an event has
occurred as described in Section 11.9 or 11.10 above, the Committee may in its
sole discretion at any time determine that all or a portion of a Participant's
Options, Stock Appreciation Rights, and other Awards in the nature of rights
that may be exercised shall become fully or partially exercisable, and/or that
all or a part of the restrictions on all or a portion of the outstanding
Awards shall lapse, in each case, as of such date as the Committee may, in its
sole discretion, declare. The Committee may discriminate among Participants
and among Awards granted to a Participant in exercising its discretion
pursuant to this Section 11.11.
11.12 Effect Of Acceleration. If an Award is accelerated under Section 11.9
or 11.10, the Committee may, in its sole discretion, provide (i) that the
Award will expire after a designated period of time after such acceleration to
the extent not then exercised, (ii) that the Award will be settled in cash
rather than Stock, (iii) that the Award will be assumed by another party to
the transaction giving rise to the acceleration or otherwise be equitably
converted in connection with such transaction, or (iv) any combination of the
foregoing. The Committee's determination need not be uniform and may be
different for different Participants whether or not such Participants are
similarly situated.
11.13. Performance Goals. The Committee may determine that any Award granted
pursuant to this Plan to a Participant (including, but not limited to,
Participants who are Covered Employees) shall be determined solely on the
basis of (a) the achievement by the Company, or an individual or a business
unit of the Company or a Parent or Subsidiary, of a specified target with
respect to, or target growth in, any of the following areas: (i) return on
equity or on assets, (ii) overall or selected premium or sales growth, (iii)
revenues, net income or earnings per share, (iv) expense efficiency ratios
(ratio of expenses to premium income), (v) customer service measures or
indices, (vi) underwriting efficiency and/or quality, (vii) market share, or
(vii) persistency factors, or (b) the Company's or a Parent's or Subsidiary's
stock performance, or (c) any combination of the goals set forth in any of (a)
or (b) above. If an Award is made on such basis, the Committee shall establish
goals prior to the beginning of the period for which such performance goal
relates (or such later date as may be permitted under
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Code Section 162(m) or the regulations thereunder) and the Committee may for
any reason reduce (but not increase) any Award, notwithstanding the
achievement of a specified goal. Any payment of an Award granted with
performance goals shall be conditioned on the written certification of the
Committee in each case that the performance goals and any other material
conditions were satisfied.
11.14. Termination Of Employment. Whether military, government or other
service or other leave of absence shall constitute a termination of employment
shall be determined in each case by the Committee at its discretion, and any
determination by the Committee shall be final and conclusive. A termination of
employment shall not occur in a circumstance in which a Participant transfers
from the Corporation to one of its Parents or Subsidiaries, transfers from a
Parent or Subsidiary to the Corporation, or transfers from one Parent or
Subsidiary to another Parent or Subsidiary.
ARTICLE 12
Changes In Capital Structure
12.1. General. In the event a stock dividend is declared upon the Stock, the
shares of Stock then subject to each Award shall be increased proportionately
without any change in the aggregate purchase price therefor. In the event the
Stock shall be changed into or exchanged for a different number or class of
shares of stock or securities of the Corporation or of another corporation,
whether through reorganization, recapitalization, reclassification, stock
split-up, combination of shares, merger or consolidation, there shall be
substituted for each such share of Stock then subject to each Award the number
and class of shares into which each outstanding share of Stock shall be so
exchanged, all without any change in the aggregate purchase price for the
shares then subject to each Award.
ARTICLE 13
Amendment, Modification And Termination
13.1. Amendment, Modification And Termination. The Board or the Committee
may, at any time and from time to time, amend, modify or terminate the Plan
without stockholder approval; provided, however, that the Board or Committee
may condition any amendment or modification on the approval of stockholders of
the Company if such approval is necessary or deemed advisable with respect to
tax, securities or other applicable laws, policies or regulations.
13.2 Awards Previously Granted. At any time and from time to time, the
Committee may amend, modify or terminate any outstanding Award without
approval of the Participant; provided, however, that such amendment,
modification or termination shall not, without the Participant's consent,
reduce or diminish the value of such Award determined as if the Award had been
exercised, vested, cashed in or otherwise settled on the date of such
amendment or termination; and provided further that, except as otherwise
permitted in the Plan, the exercise price of any Option may not be reduced and
the original term of any Option may not be extended. No termination,
amendment, or modification of the Plan shall adversely affect any Award
previously granted under the Plan, without the written consent of the
Participant.
ARTICLE 14
General Provisions
14.1. No Rights To Awards. No Participant or employee, officer, producer or
director shall have any claim to be granted any Award under the Plan, and
neither the Corporation nor the Committee is obligated to treat Participants
and employees, officers, producers or directors uniformly.
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14.2. No Stockholder Rights. No Award gives the Participant any of the
rights of a stockholder of the Corporation unless and until shares of Stock
are in fact issued to such person in connection with such Award.
14.3. Withholding. The Corporation or any Parent or Subsidiary shall have
the authority and the right to deduct or withhold, or require a Participant to
remit to the Corporation, an amount sufficient to satisfy federal, state, and
local taxes (including the Participant's FICA obligation) required by law to
be withheld with respect to any taxable event arising as a result of the Plan.
With respect to withholding required upon any taxable event under the Plan,
the Committee may, at the time the Award is granted or thereafter, require
that any such withholding requirement be satisfied, in whole or in part, by
withholding shares of Stock having a Fair Market Value on the date of
withholding equal to the amount to be withheld for tax purposes, all in
accordance with such procedures as the Committee establishes.
14.4. No Right To Employment Or Other Status. Nothing in the Plan or any
Award Agreement shall interfere with or limit in any way the right of the
Corporation or any Parent or Subsidiary to terminate any Participant's
employment or status as a producer or director at any time, nor confer upon
any Participant any right to continue as an employee, officer, producer or
director of the Corporation or any Parent or Subsidiary.
14.5. Unfunded Status Of Awards. The Plan is intended to be an "unfunded"
plan for incentive and deferred compensation. With respect to any payments not
yet made to a Participant pursuant to an Award, nothing contained in the Plan
or any Award Agreement shall give the Participant any rights that are greater
than those of a general creditor of the Corporation or any Parent or
Subsidiary.
14.6. Relationship To Other Benefits. No payment under the Plan shall be
taken into account in determining any benefits under any pension, retirement,
savings, profit sharing, group insurance, welfare or benefit plan of the
Corporation or any Parent or Subsidiary unless provided otherwise in such
other plan.
14.7. Expenses. The expenses of administering the Plan shall be borne by the
Corporation and its Parents or Subsidiaries.
14.8. Titles And Headings. The titles and headings of the Sections in the
Plan are for convenience of reference only, and in the event of any conflict,
the text of the Plan, rather than such titles or headings, shall control.
14.9. Gender And Number. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine; the plural
shall include the singular and the singular shall include the plural.
14.10. Fractional Shares. No fractional shares of Stock shall be issued and
the Committee shall determine, in its discretion, whether cash shall be given
in lieu of fractional shares or whether such fractional shares shall be
eliminated by rounding up.
14.11. Government and other Regulations. The obligation of the Corporation
to make payment of awards in Stock or otherwise shall be subject to all
applicable laws, rules, and regulations, and to such approvals by government
agencies as may be required. The Corporation shall be under no obligation to
register under the 1933 Act, or any state securities act, any of the shares of
Stock paid under the Plan. The shares paid under the Plan may in certain
circumstances be exempt from registration under the 1933 Act, and the
Corporation may restrict the transfer of such shares in such manner as it
deems advisable to ensure the availability of any such exemption.
14.12. Governing Law. To the extent not governed by federal law, the Plan
and all Award Agreements shall be construed in accordance with and governed by
the laws of the State of Tennessee.
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14.13. Additional Provisions. Each Award Agreement may contain such other
terms and conditions as the Committee may determine; provided that such other
terms and conditions are not inconsistent with the provisions of this Plan.
The foregoing is hereby acknowledged as being the Provident Companies, Inc.
1999 Stock Plan as adopted by the Board of Directors of the Company on March
26, 1998, and approved by the stockholders of the Company on May 6, 1998.
PROVIDENT COMPANIES, INC.
By:________________________
Its:_______________________
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EXHIBIT 10.3
PROVIDENT COMPANIES, INC.
NON-EMPLOYEE DIRECTOR COMPENSATION PLAN OF 1998
1. Establishment of Plan.
(a) Purpose. The purpose of the Provident Companies, Inc. Non-Employee
Director Compensation Plan of 1998 is to attract, retain and compensate
highly-qualified individuals who are not employees of Provident Companies,
Inc. or any of its subsidiaries or affiliates for service as members of the
Board by providing them with an opportunity to increase their ownership
interest in the Common Stock of the Company. The Company intends that the Plan
will benefit the Company and its stockholders by allowing Non-Employee
Directors to have a personal financial stake in the Company through an
ownership interest in the Common Stock and will closely associate the
interests of Non-Employee Directors with that of the Company's stockholders.
(b) Status of Plan. The Plan is intended, in part, to be a nonqualified,
unfunded plan of deferred compensation under the Internal Revenue Code of
1986, as amended. Although the plan is unfunded for tax purposes, the Company
may establish a trust under Revenue Procedure 92-64 to provide benefits under
the Plan.
(c) Establishment of Trust. As noted above, the Company may establish a
trust to fund benefits provided under the terms of the Plan ("Trust"). It is
intended that a transfer of assets into the Trust will not generate taxable
income (for federal income tax purposes) to the Participants until such assets
are actually distributed or otherwise made available to the Participants.
2. Defined Terms. Unless the context clearly indicates otherwise, the
following terms shall have the following meanings:
"Annual Retainer" means the annual retainer payable by the Company at the
beginning of each Plan Year to a Non-Employee Director for service as a
director of the Company, as such amount may be changed from time to time.
Until changed by the Board, the Annual Retainer will be $80,000.
"Board" means the Board of Directors of the Company.
"Change in Control" means the occurrence of any of the following after the
Effective Date:
(1) any "person" or "group" (as those terms are used in Sections 13(d)
and 14(d), respectively, of the Securities Exchange Act of 1934 ("Exchange
Act")), other than the Maclellan family or a trustee or other fiduciary
holding securities under an employee benefit plan of the Company, or a
corporation owned, directly or indirectly, by the stockholders of the
Company in substantially the same proportions as their ownership of stock
of the Company, is or becomes the "beneficial owner" (as defined in Rule
13d-3 of the Exchange Act), directly or indirectly, of securities of the
Company representing thirty percent (30%) or more of the combined voting
power of the Company's then outstanding securities and (ii) the "group"
comprised of the Maclellan family does not then beneficially own, directly
or indirectly, securities of the Company representing more than thirty
percent (30%) of the combined voting power of the Company's then
outstanding securities; or
(2) the stockholders of the Company approve a merger or consolidation of
the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than fifty percent (50%) of the combined voting
power of the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of all
or substantially all the Company's assets.
<PAGE>
"Company" means Provident Companies, Inc., a Delaware corporation.
"Committee" has the meaning assigned such term in Section 3.
"Common Stock" means the common stock, par value $1.00 per share, of the
Company.
"Deferred Share Right" means a right, granted under Section 7, to receive
one share of Common Stock on the Payment Date.
"Deferral Period" has the meaning set forth in Section 7(f) of the Plan.
"Deferral Termination Date" has the meaning set forth in Section 7(e) of the
Plan.
"Disability" means any illness or other physical or mental condition of a
Participant that renders the Participant incapable of performing his customary
and usual duties for the Corporation, or any medically determinable illness or
other physical or mental condition resulting from a bodily injury, disease or
mental disorder which, in the judgment of the Committee, is permanent and
continuous in nature. The Committee may require such medical or other evidence
as it deems necessary to judge the nature and permanency of the Participant's
condition.
"Payment Date" has the meaning set forth in Section 7(e) of the Plan.
"Director Retirement Program" means the Company's program which provides
certain retirement benefits to directors elected for the first time prior to
May 4, 1994.
"Distributions" has the meaning set forth in Section 7(f) of the Plan.
"Election Form" means a form approved by the Committee pursuant to which a
Non-Employee Director elects a method of payment of Annual Retainer and the
payment terms for Deferred Share Rights, if applicable.
"Election Period" means the period designated by the Committee each year
during which Non-Employee Directors may elect to receive Options or Deferred
Share Rights as payment of some or all of their Annual Retainer. The Election
Period shall end on or before April 30 of each year for the following Plan
Year.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value", on any date, means (i) if the Common Stock is listed on
a securities exchange or traded over the Nasdaq National Market, the average
of the high and low market prices reported in The Wall Street Journal at which
a Share of Common Stock shall have been sold on such day or on the next
preceding trading day if such date was not a trading day, or (ii) if the
Common Stock is not listed on a securities exchange or traded over the Nasdaq
National Market, the mean between the bid and offered prices as quoted by
Nasdaq for such date, provided that if it is determined that the fair market
value is not properly reflected by such Nasdaq quotations, Fair Market Value
will be determined by such other method as the Committee determines in good
faith to be reasonable.
"Grant Date" means the date on which Options are granted pursuant to Section
6 or Deferred Share Rights are granted pursuant to Section 7, which, in each
case, shall be the date on which the Annual Retainer is payable in each Plan
Year.
"Hardship" has the meaning set forth in Section 7(h) of the Plan.
"Non-Employee Director" means a director of the Company who is not an
employee of the Company or of any of its subsidiaries or affiliates.
"Option" means an option to purchase Shares granted under Section 6. Options
granted under the Plan are not incentive stock options within the meaning of
Section 422 of the Internal Revenue Code.
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"Optionee" means a Non-Employee Director of the Company to whom an Option
has been granted or, in the event of such Non-Employee Director's death prior
to the expiration of an Option, such Non-Employee Director's estate or other
designated beneficiary.
"Option Notice" means a written notice, agreement or certificate with a Non-
Employee Director from the Company evidencing an Option.
"Option Valuation Percentage" means the percentage determined by the
Committee on or before the Election Date in each Plan Year as being the
approximate fair value of an Option relative to a share of Common Stock on the
date of the grant of the Option. The Option Valuation Percentage may not be
less than 30%. Until changed by the Committee, the Option Valuation Percentage
shall be 33%.
"Participant" means any Non-Employee Director who is participating in the
Plan.
"Permitted Transferee" of an Optionee means (i) one or more of the following
family members of the Optionee: spouse, former spouse, child (whether natural
or adopted), stepchild, any other lineal descendent of the Optionee; (ii) a
trust, partnership or other entity established and existing for the sole
benefit of, or under the sole control of, one or more of the above family
members of the Optionee, or (iii) any other transferee specifically approved
by the Committee after taking into account any state or federal tax,
securities or other laws applicable to transferable options.
"Plan" means the Provident Companies, Inc. Non-Employee Director
Compensation Plan of 1998, as amended from time to time.
"Plan Year" means the approximately twelve-month period beginning on the
date of the annual meeting of the stockholders of the Company ("annual
meeting") in any year and ending on the date of the following annual meeting,
which, for purposes of the Plan, is the period for which Annual Retainers are
earned.
"Retirement" means a Participant's termination of service as a director
after attaining mandatory retirement age, or, in the event there is no
mandatory retirement age for directors, as determined by the Committee in its
reasonable judgment.
"Rule 16b-3" means Rule 16b-3, as amended from time to time, of the
Securities and Exchange Commission as promulgated under the Exchange Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means shares of Common Stock.
3. Administration. The Plan shall be administered by the Compensation
Committee of the Board (the "Committee"). Subject to the provisions of the
Plan, the Committee shall be authorized to interpret the Plan, to establish,
amend and rescind any rules and regulations relating to the Plan, and to make
all other determinations necessary or advisable for the administration of the
Plan; provided, however, that the Committee shall have no discretion with
respect to the eligibility or selection of Non-Employee Directors to receive
awards under the Plan, the number of Shares subject to any such awards or the
time at which any such awards are to be granted. The Committee's
interpretation of the Plan, and all actions taken and determinations made by
the Committee pursuant to the powers vested in it hereunder, shall be
conclusive and binding upon all parties concerned including the Company, its
stockholders and persons granted awards under the Plan. The Committee may
appoint a plan administrator to carry out the ministerial functions of the
Plan, but the administrator shall have no other authority or powers of the
Committee. Notwithstanding the foregoing, the Board shall exercise any and all
rights, duties and powers of the Committee under the Plan to the extent
required by the applicable exemptive conditions of Rule 16b-3, as determined
by the Board its sole discretion.
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4. Shares Subject to Plan. The Shares issued under the Plan shall not exceed
in the aggregate 500,000 Shares of Common Stock. Such Shares may be acquired
on the open market or issued out of authorized and unissued Shares or treasury
Shares.
5. Participation.
(a) Eligibility. All active Non-Employee Directors shall be eligible to
participate in the Plan.
(b) Annual Retainer Elections. A Participant may elect on or before the
Election Date for a Plan Year to receive up to 100% of his or her Annual
Retainer in the form of Options or Deferred Share Rights in accordance with
the terms of the Plan and the Election Form. A Participant may not elect to
receive both Options and Deferred Share Rights in any one Plan Year. Any
amount of the Annual Retainer not elected to be received in the form of
Options of Deferred Share Rights shall be paid to the Participant in cash.
(c) Accrued Balances under Director Retirement Program. Each Non-Employee
Director having an accrued account balance in the Director Retirement Program
as of the Effective Date shall be required to convert the net present value of
such account either 100% to Options in accordance with the procedures
described in Section 6 below with respect to Annual Retainer, or 100% to
Deferred Share Rights, in accordance with the procedures described in Section
7 below with respect to Annual Retainer. The election as to which form of
payment shall be made on an Election Form filed during the Election Period.
(d) Deferral Accounts. For bookkeeping purposes, any amounts which the
Participant elects to receive in the form of Deferred Share Rights, and any
Distributions credited in accordance with Section 7(f), shall be transferred
to and held in individual deferral accounts.
6. Stock Option Awards.
(a) Election to Receive Options. A Non-Employee Director may elect each year
to receive up to 100% of his or her Annual Retainer in the form of Options in
accordance with this Section 6. A Non-Employee Director who wishes to receive
some or all of his or her Annual Retainer for a Plan Year in the form of
Options must irrevocably elect to do so during the Election Period for such
Plan Year, by delivering a valid Election Form to the Committee or the plan
administrator. A Non-Employee Director's participation in Section 6 of the
Plan will be effective with respect to the Annual Retainer to be earned in the
first Plan Year beginning after the Committee or the plan administrator
receives the Non-Employee Director's Election Form.
(b) Irrevocable, Annual Election. Elections to receive Options as payment of
Annual Retainer are irrevocable and shall be valid only for one Plan Year. New
elections must be made for participation in Section 6 of the Plan for
subsequent Plan Years.
(c) Time of Grant. Options shall be granted to each Non-Employee Director
who, during the applicable Election Period, filed with the Committee or the
plan administrator a written irrevocable election to receive Options as
payment of some or all of such Non-Employee Director's Annual Retainer payable
in the following Plan Year. Such Options will be granted on the date the
Annual Retainer for such Plan Year is otherwise payable (the "Grant Date").
(d) Number of Options. The number of Shares subject to an Option granted
pursuant to this Section 6 shall be the number of whole Shares equal to (i)
the dollar amount of the Annual Retainer that the Non- Employee Director
elects shall be payable in the form of Options, divided by (ii) the Option
Valuation Percentage times the Fair Market Value per Share on the Grant Date.
In determining the number of Shares subject to an Option, Shares will be
rounded to the nearest 100 Shares. For example:
Assume that a Non-Employee Director has elected to receive $50,000 of his or
her Annual Retainer in the form of Options, that the Option Valuation
Percentage is 33%, and that the Fair Market Value per Share on the Grant Date
is $36. The Non-Employee Director would be granted 4,200 Options as payment of
the $50,000 compensation. $50,000 divided by 33% of $36 FMV = 4,200 Options
granted (rounded to the nearest 100 Shares).
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(e) Exercise Price. The total price paid per Share under each Option granted
under this Section 6 shall be the Fair Market Value per Share on the Grant
Date.
(f) Exercise of Options. An Option, or portion thereof, may be exercised in
whole or in part only with respect to whole Shares. Each Option shall be fully
exercisable on the first anniversary of the date of grant or upon the earlier
death, Disability or Retirement of the Optionee or the occurrence of a Change
in Control. Each Option will remain exercisable for 10 years from the Grant
Date; provided, however, that:
(i) if a Participant terminates his or her service as a director for any
reason after four years of service on the Board, or due to Retirement,
death or Disability, his or her unexercised Options shall expire on the
earlier of (A) the original expiration date of the Option or (B) the fifth
anniversary of such termination of service; and
(ii) if a Participant has served as a director for fewer than four years
and terminates his or her service as a director for any reason other than
Retirement, death or Disability, his or her unexercised Options shall
expire on the date of such termination of service.
(g) Payment of Exercise Price. Shares shall be issued to the Optionee (or
his or her Permitted Transferee) pursuant to the exercise of an Option only
upon receipt by the Company from the Optionee (or his or her Permitted
Transferee) of payment in full of the exercise price. The exercise price shall
be payable in United States dollars upon the exercise of the Option and may be
paid in cash, by check, or in Shares having a total Fair Market Value on the
date of exercise equal to the exercise price; provided that if the Shares
surrendered in payment of the exercise price were themselves acquired
otherwise than on the open market, such Shares shall have been held for at
least six months. The Committee may permit the use of any cashless exercise
methods that are permitted by law.
(h) Option Notice. Each Option granted under the Plan shall be evidenced by
an Option Notice which shall be executed by an authorized officer of the
Company. Such Option Notice shall contain provisions regarding (a) the number
of Shares that may be issued upon exercise of the Option, (b) the exercise
price per Share of the Option and the means of payment therefor, (c) the term
of the Option, and (d) such other terms and conditions not inconsistent with
the Plan as may be determined from time to time by the Committee.
(i) Transferability of Options. No Option shall be assignable or
transferable by the Optionee other than by will or the laws of descent and
distribution or to a Permitted Transferee. Any transfer to a Permitted
Transferee shall be subject to the following terms and conditions:
(i) An Option transferred to a Permitted Transferee shall not be
assignable or transferable by the Permitted Transferee other than by will
or the laws of descent and distribution.
(ii) Transferred Options shall continue to be subject to all the terms
and conditions of the Option as applicable to the original Optionee (other
than the ability to further transfer the Option).
(iii) The Optionee and the Permitted Transferee shall execute any and all
documents reasonably requested by the Committee or the plan administrator,
including without limitation documents (A) to confirm the status of the
transferee as a Permitted Transferee, (B) to satisfy any requirements for
an exemption for the transfer under applicable federal and state securities
laws, and (C) to evidence the transfer.
(iv) Shares acquired by a Permitted Transferee through exercise of an
Option may not be transferred, nor will any assignee or transferee thereof
be recognized as an owner of such Shares by the Company for any purpose,
unless a registration statement under the Securities Act and any applicable
state securities act with respect to such Shares shall then be in effect or
unless the availability of an exemption from registration with respect to
any proposed transfer or disposition of such Shares shall be established to
the satisfaction of counsel for the Company.
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7. Deferred Share Rights.
(a) Election to Receive Deferred Share Rights. A Non-Employee Director may
elect each year to receive up to 100% of his or her Annual Retainer in the
form of Deferred Share Rights in accordance with this Section 7. A Non-
Employee Director who wishes to receive some or all of his or her Annual
Retainer for a Plan Year in the form of Deferred Share Rights must irrevocably
elect to do so during the Election Period for such Plan Year, by delivering a
valid Election Form to the Committee or the plan administrator. A Non-Employee
Director's participation in Section 7 of the Plan will be effective with
respect to the Annual Retainer to be earned in the first Plan Year beginning
after the Committee or the plan administrator receives the Non-Employee
Director's Election Form.
(b) Irrevocable, Annual Election. Elections to receive Deferred Share Rights
as payment of Annual Retainer shall be valid only for one Plan Year. New
elections must be made for participation in Section 7 of the Plan for
subsequent Plan Years. The deferral Election Form signed by the Participant
prior to the Plan Year will be irrevocable except in case of Hardship (as
defined in Section 7(h)) as determined in good faith by the Board pursuant to
Section 7(h); provided, however, that the Participant may, at least one year
in advance of the original Deferral Termination Date, designate a later
Deferral Termination Date.
(c) Time of Grant. Deferred Share Rights shall be granted to each Non-
Employee Director who, during the applicable Election Period, filed with the
Committee or the plan administrator a written irrevocable election to receive
Deferred Share Rights as payment of some or all of such Non-Employee
Director's Annual Retainer payable in the following Plan Year. Such Deferred
Share Rights will be granted on the date the Annual Retainer for such Plan
Year is otherwise payable (the "Grant Date").
(d) Number of Deferred Share Rights. The number of Deferred Share Rights
granted pursuant to this Section 7 shall be the number of whole Shares equal
to (i) the dollar amount of the Annual Retainer that the Non-Employee Director
elects shall be payable in the form of Deferred Share Rights, divided by (ii)
90% of the Fair Market Value per Share on the Grant Date. In determining the
number of Deferred Share Rights, any fraction of a Deferred Share Right will
be rounded to the next highest whole number of Deferred Share Rights. For
example:
Assume that a Non-Employee Director has elected to defer $50,000 of his or
her Annual Retainer and that the Fair Market Value per Share on the Grant Date
is $36. The Non-Employee Director would be granted 1,544 Deferred Share Rights
as payment of the $50,000 compensation. $50,000 divided by (90% of $36 FMV) =
1,544 Deferred Share Rights granted (rounded to the next highest whole
number).
(e) Nature of Deferred Share Rights. Each Deferred Share Right constitutes
the right to receive one Share of Common Stock on the earlier of (i) the
Participant's termination of service as a director or (ii) another designated
date at least three years after the date of such deferral election (in either
case, the "Deferral Termination Date"). Pursuant to the Election Form, the
Participant will elect whether the Shares will be (a) granted within 30 days
after the Deferral Termination Date or (b) granted in approximately equal
annual installments of Shares over a period of three, five or seven years (as
the Participant may elect) after the Deferral Termination Date, each such
annual grant to be made within 30 days after the anniversary of the Deferral
Termination Date. No Shares will be issued until the payment date(s) (the
"Payment Date") at which time the Company agrees to issue Shares of Common
Stock to the Participant. The Participant will have no rights as a stockholder
with respect to the Deferred Share Rights, and the Deferred Share Rights will
be unsecured.
(f) Deferred Dividend Account. If any dividends or other rights or
distributions of any kind ("Distributions") are distributed to holders of
Common Stock during the period from the applicable Grant Date until the
Deferral Termination Date (the "Deferral Period") but prior to the
Participant's termination of service, an amount equal to the cash value of
such Distributions on their distribution date, as such value is determined by
the Committee, will be credited to a deferred dividend account for the
Participant as follows: the account will be credited with the right to receive
Shares having a Fair Market Value as of the date of the Distribution equal to
the cash value of the Distribution. The Company will issue Shares equal to the
cumulative total of rights to Shares in such account within 30 days after the
Participant's Deferral Termination Date.
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If a Distribution is distributed to holders of Common Stock after the
Participant's Deferral Termination Date but prior to the settlement in full of
the Participant's Deferred Share Rights, an amount equal to the cash value of
such Distributions pertaining to the Participant's outstanding Deferred Share
Rights shall be converted into Shares equivalent in value to the Distribution
(based on the Fair Market Value as of the date of Distribution) and such
Shares will be issued to the Participant as soon as practical after the date
of the Distribution.
(g) Transferability of Deferred Share Rights. No Deferred Share Rights shall
be assignable or transferable by the Participant other than by will or the
laws of descent and distribution. No right or interest in the Deferred Share
Rights or in the deferred dividend account shall be subject to liability for
the debts, contracts or engagements of the Participant or shall be subject to
disposition by transfer, alienation, anticipation, pledge, encumbrance,
assignment or any other means whether such disposition be voluntary or
involuntary or by operation of law by judgment, levy, attachment, garnishment
or any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect;
provided, however, that nothing in this Section 7(g) shall prevent transfers
by will or by the applicable laws of descent and distribution.
(h) Hardship. The Board may accelerate the payment in Shares of all or a
portion of a Participant's Deferred Share Rights on account of his or her
Hardship, subject to the following requirements: (i) the value of such
accelerated distribution shall not exceed the amount necessary to satisfy the
Hardship, less the amount which can be satisfied from other resources which
are reasonably available to the Participant, (ii) the denial of the
Participant's request for a Hardship acceleration would result in severe
financial hardship to the Participant, and (iii) the Participant has not
received an accelerated distribution on account of Hardship within the 12-
month period preceding the acceleration. For purposes of this Plan, "Hardship"
of a Participant, as determined by the Board in its discretion on the basis of
all relevant facts and circumstances and in accordance with the following
nondiscriminatory and objective standards uniformly interpreted and
consistently applied, shall mean a severe financial hardship to the
Participant resulting from a sudden and unexpected illness or accident of the
Participant or of his or her dependent, loss of the Participant's property due
to casualty, or other extraordinary and unforeseeable circumstances arising as
a result of events beyond the control of the Participant. A financial need
shall not constitute a Hardship unless it is for at least $1,000,000 or the
entire value of the principal amount of the Participant's Deferred Share
Rights.
(i) Funding. Deferred Share Rights shall be paid from the general assets of
the Company or as otherwise directed by the Company. To the extent that any
Participant acquires the right to receive Deferred Share Rights under the
Plan, such right shall be no greater than that of an unsecured general
creditor of the Company. Participants and their Beneficiaries shall not have
any preference or security interest in the assets of the Company other than as
a general unsecured creditor.
(j) Designation of Beneficiary. Each Participant from time to time may
designate any person or persons (who may be designated contingently or
successively and who may be an entity other than a natural person) as his or
her beneficiary or beneficiaries to whom the Participant's Deferred Share
Rights are to be paid if the Participant dies before receipt of Shares. Each
beneficiary designation shall be on the form prescribed by the Committee and
will be effective only when filed with the Committee during the Participant's
lifetime. Each beneficiary designation filed with the Committee will cancel
all beneficiary designations previously filed with the Committee. The
revocation of a beneficiary designation, no matter how effected, shall not
require the consent of any designated beneficiary.
8. Prorated Grants. If on any date, Shares of Common Stock are not available
under the Plan to grant to Non-Employee Directors the full amount of a grant
(Options or Deferred Share Rights) contemplated by the Plan, then each such
director shall receive an award of Options or Deferred Share Rights, as the
case may be, equal to the number of Shares of Common Stock then available
under the Plan divided by the number of Non-Employee Directors entitled to a
grant of Options or Deferred Share Rights on such date. Fractional Shares
shall be ignored and not granted. Any shortfall resulting from such proration
shall be paid in the form of cash.
7
<PAGE>
9. Withholding. Except with respect to the exercise of Options transferred
to Permitted Transferees, whenever the Company issues Shares under the Plan,
the Company shall have the right to withhold from sums due the recipient, or
to require the recipient to remit to the Company, any amount sufficient to
satisfy any federal, state and/or local withholding tax requirements prior to
the delivery of any certificate for such Shares.
10. Adjustments.
(a) Notwithstanding any other term of this Plan, in the event that the
Committee determines that any Distribution (whether in the form of cash,
Common Stock, other securities, or other property), recapitalization,
reclassification, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase, or exchange of
Common Stock or other securities of the Company, issuance of warrants or
other rights to purchase Common Stock or other securities of the Company,
or other similar corporate transaction or event, in the Committee's sole
discretion, affects the Common Stock such that an adjustment is determined
by the Committee to be appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made
available under the Plan or with respect to an award or awards hereunder,
then the Committee shall, in such manner as it may deem equitable, adjust
the number and type of shares (or other securities or property) which may
be granted under the Plan (including, but not limited to, adjustments of
the maximum number and kind of securities which may be issued).
(b) Notwithstanding any other term of this Plan, in the event of any
corporate transaction or event described in paragraph (a) which results in
Shares being exchanged for or converted into cash, securities or other
property (including securities of another corporation), all Deferred Share
Rights granted under Section 7 shall become the right to receive such cash,
securities or other property, and there shall be substituted on an
equitable basis for each Share of Common Stock then subject to an Option
granted pursuant to Section 6 the consideration payable with respect to the
outstanding Shares of Common Stock in connection with such corporate
transaction or event, all without any change in the aggregate purchase
price for the Shares then subject to the Option.
(c) The number of Shares finally granted under this Plan shall always be
rounded to the next highest whole Share.
(d) Any decision of the Committee pursuant to the terms of this Section
10 shall be final, binding and conclusive upon the Participants, the
Company and all other interested parties.
11. Amendment. The Committee may terminate or suspend the Plan at any time,
without stockholder approval. The Committee may amend the Plan at any time and
for any reason without stockholder approval; provided, however, that the
Committee may condition any amendment on the approval of stockholders of the
Company if such approval is necessary or deemed advisable with respect to tax,
securities or other applicable laws, policies or regulations. No termination,
modification or amendment of the Plan may, without the consent of a
Participant, adversely affect a Participant's rights under an award granted
prior thereto.
12. Responsibility for Investment Choices. Each Participant is solely
responsible for any decision to receive Annual Retainer in the form of Options
or Deferred Share Rights and accepts all investment risks entailed by such
decision, including the risk of loss and a decrease in the value of the
amounts he or she elects to receive in the form of Options or Deferred Share
Rights.
13. Indemnification. Each person who is or has been a member of the
Committee or who otherwise participates in the administration or operation of
this Plan shall be indemnified by the Company against, and held harmless from,
any loss, cost, liability or expense that may be imposed upon or incurred by
him or her in connection with or resulting from any claim, action, suit or
proceeding in which such person may be involved by reason of any action taken
or failure to act under the Plan and shall be fully reimbursed by the Company
for any and all amounts paid by such person in satisfaction of judgment
against him or her in any such action, suit or proceeding, provided he or she
will give the Company an opportunity, by written notice to the Committee, to
defend the same at the Company's own expense before he or she undertakes to
defend it on his or her own behalf. This right of indemnification shall not be
exclusive of any other rights of indemnification.
8
<PAGE>
The Committee and the Board may rely upon any information furnished by the
Company, its public accountants and other experts. No individual will have
personal liability by reason of anything done or omitted to be done by the
Company, the Committee or the Board in connection with the Plan.
14. Duration of the Plan. The Plan shall remain in effect until the fifth
anniversary of the Effective Date, unless terminated earlier by the Committee.
15. Expenses of the Plan. The expenses of administering the Plan shall be
borne by the Company.
The foregoing is hereby acknowledged as being the Provident Companies, Inc.,
Non-Employee Director Compensation Plan of 1998 as adopted by the Board of
Directors of the Company on March 26, 1998, and approved by the stockholders
of the Company on May 6, 1998.
PROVIDENT COMPANIES, INC.
By:__________________________________
Its:_________________________________
9
<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 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 August 12, 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 June 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
August 12, 1998
1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PROVIDENT COMPANIES, INC. FOR THE SIX MONTHS ENDED
JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 15,056,400
<DEBT-CARRYING-VALUE> 298,900
<DEBT-MARKET-VALUE> 335,700
<EQUITIES> 17,200
<MORTGAGE> 18,000
<REAL-ESTATE> 43,900
<TOTAL-INVEST> 17,517,800
<CASH> 64,600
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 392,000
<TOTAL-ASSETS> 23,357,500
<POLICY-LOSSES> 13,496,000<F1>
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 497,100
<POLICY-HOLDER-FUNDS> 3,691,700
<NOTES-PAYABLE> 8,289,000
0
0
<COMMON> 135,700
<OTHER-SE> 3,211,200
<TOTAL-LIABILITY-AND-EQUITY> 23,357,500
1,166,600
<INVESTMENT-INCOME> 710,100
<INVESTMENT-GAINS> 9,000
<OTHER-INCOME> 90,900
<BENEFITS> 1,254,500
<UNDERWRITING-AMORTIZATION> 19,300
<UNDERWRITING-OTHER> 446,200
<INCOME-PRETAX> 237,000
<INCOME-TAX> 91,100
<INCOME-CONTINUING> 145,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 145,900
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.04
<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
$13,309,800 AND UNEARNED PREMIUMS OF $186,200.
</FN>
</TABLE>
