<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 18, 1997
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM F-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
AEGON N.V.
(Exact name of Registrant as specified in its charter)
THE NETHERLANDS 6311 NONE
(State or jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or Industrial Identification No.)
organization) Classification Code
Number)
MARIAHOEVEPLEIN 50
2591 TV
THE HAGUE, THE NETHERLANDS
(31-70) 344-8344
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
----------------
CRAIG D. VERMIE
AEGON USA, INC.
4333 EDGEWOOD ROAD NE
CEDAR RAPIDS, IOWA 52499
(319) 363-5400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
RICHARD D. TRUESDELL, JR. E. WILLIAM BATES, II
DAVIS POLK & WARDWELL KING & SPALDING
450 LEXINGTON AVENUE 120 WEST 45TH STREET
NEW YORK, NEW YORK 10017 NEW YORK, NEW YORK 10036-4003
212-450-4000 ---------------- 212-556-2100
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective and the
consummation of the Merger described herein.
CALCULATION OF REGISTRATION FEE
<TABLE>
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
<CAPTION>
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED(1) REGISTERED(2) PER UNIT OFFERING PRICE(3) REGISTRATION FEE(3)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares, par value
one Dutch Guilder per
share.................. 54,668,136 Not applicable $2,606,551,000 $789,864
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) This Registration Statement relates to the AEGON N.V. common shares, par
value one Dutch Guilder per share, which may be issued in connection with
the Merger described herein.
(2) Based upon an estimate of the maximum number of AEGON N.V. common shares
that will be issued in connection with the Merger described herein
(includes AEGON N.V. common shares issuable to holders of Providian
Corporation common stock and to holders of options to acquire Providian
Corporation common stock).
(3) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(f)(2) under the Securities Act of
1933, based on the pro forma book value at December 31, 1996 of Providian
Corporation common stock to be acquired in the Merger.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION--DATED APRIL 18, 1997
Irving W. Bailey II. CLU
Chairman and Chief Executive Officer
[LOGO] PROVIDIAN
Providian Corporation
400 West Market Street
Post Office Box 32830
Louisville, Kentucky 40232
April 17, 1997
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of the Stockholders of
Providian Corporation (Providian) to be held on Thursday, May 29, 1997, in the
Medallion Room of the Seelbach Hotel, Louisville, Kentucky. The meeting will
begin at 11:00 a.m., local time. Your Board of Directors and management look
forward to personally greeting those stockholders able to attend.
At the meeting, we will ask you to vote upon the election of four directors
and to approve the appointment of Providian's independent auditors. In addition
to these routine matters, we will ask you to approve our agreement to merge, in
a tax-free transaction, Providian's insurance operations with a subsidiary of
AEGON N.V. (AEGON). AEGON has agreed to pay you AEGON common shares for our
insurance operations. This exchange is valued at approximately $28.00 per share
of Providian Common Stock, or $2.63 billion in total. However, the value of
this exchange may be affected by provisions that we describe in this document.
We believe this transaction is in your best interest.
To accomplish this merger, we will take the following steps:
1. SPIN OFF PROVIDIAN BANCORP, INC. TO OUR STOCKHOLDERS.
In a tax-free distribution, we will spin off to you shares in our wholly
owned subsidiary Providian Bancorp, Inc., which is engaged in the consumer
lending business. For each share of Providian stock you own at the time of
the spin-off, you will receive one share of Providian Bancorp stock.
2. MERGE PROVIDIAN CORPORATION WITH A SUBSIDIARY OF AEGON.
Immediately after the spin-off, we will merge Providian with a wholly
owned indirect subsidiary of AEGON. AEGON will issue AEGON common shares
directly to you, in exchange for your old Providian shares. We are seeking
a ruling from the Internal Revenue Service that you will not pay federal
income tax on this transaction, except that you will pay tax on any cash
that AEGON pays you in place of any fractional AEGON shares you would have
received in the exchange. The number of AEGON shares you receive will
depend on the average trading price of AEGON common shares on the New York
Stock Exchange for a 20 day trading period ending on the second business
day before the merger.
The holders of at least a majority of our outstanding shares must vote in
favor of the merger in order to approve it. You are being asked to vote on the
merger only, and are not being asked to vote on the spin-off. Please keep in
mind, however, that neither the spin-off nor the merger will happen unless the
merger is approved.
<PAGE>
Regardless of the number of shares you own or whether you plan to attend, it
is important that your shares be represented and voted at the meeting. We ask
that you please take the time to vote by completing and mailing the enclosed
proxy card promptly. Your Board of Directors recommends that you vote FOR the
election of directors, FOR ratification of the appointment of Providian's
independent auditors and FOR the merger. If you sign, date and mail your proxy
card without indicating how you want to vote, we will count your proxy as a
vote in favor of these matters.
This document provides detailed information about the matters on which you
are voting, including the proposed merger. We also mailed to you, together with
this document, an information statement about Providian Bancorp. The
information statement describes Providian Bancorp's business, management and
financial condition.
I encourage you to read both of these documents thoroughly. In addition, you
can find more information about Providian and AEGON in the documents we and
they have filed with the Securities and Exchange Commission. If you have any
questions or comments about matters discussed in this document or the operation
of your company, please call our Shareholder Relations Department, collect, at
(502) 560-3508. We look forward to seeing you at the meeting.
Sincerely,
/s/ Irving W. Bailey II
Irving W. Bailey II
Chairman and Chief Executive Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED THE AEGON COMMON SHARES TO BE ISSUED OR THE PROVIDIAN
BANCORP COMMON STOCK TO BE DISTRIBUTED TO PROVIDIAN STOCKHOLDERS, OR DETERMINED
IF THIS DOCUMENT IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
Proxy Statement-Prospectus dated April 18, 1997 and first mailed to
stockholders on April 21, 1997.
<PAGE>
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
Providian Corporation will hold the annual meeting of its stockholders on May
29, 1997, at 11:00 a.m., local time, in the Medallion Room of the Seelbach
Hotel, Louisville, Kentucky for the following purposes:
1. To elect four directors;
2. To consider and act upon a proposal to ratify the appointment of
independent auditors;
3. To consider and vote on a proposal to approve the Amended and Restated
Plan and Agreement of Merger and Reorganization, dated as of December 28,
1996, among AEGON N.V., LT Merger Corp. and Providian; and
4. To transact such other business as may properly come before the
meeting.
The record date for determining stockholders entitled to vote at the meeting
or any adjournment is April 10, 1997. A list of stockholders will be available
for inspection by stockholders of record during business hours at Providian,
400 West Market Street, Louisville, Kentucky for ten days prior to the date of
the meeting, and will also be available at the meeting.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE TO
APPROVE THE THREE PROPOSALS LISTED ABOVE, WHICH ARE DESCRIBED IN DETAIL IN THE
ACCOMPANYING PROXY STATEMENT-PROSPECTUS. Please sign and promptly return the
proxy card in the enclosed envelope, whether or not you expect to attend the
meeting.
By Order of the Board of Directors
James V. Elliott
Senior Vice President, General Counsel and Secretary
Providian Corporation
Louisville, Kentucky
April 18, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY.................................................................... 1
THE ANNUAL MEETING......................................................... 21
General.................................................................. 21
Date, Place and Time..................................................... 21
Record Date.............................................................. 21
Votes Required........................................................... 22
Voting and Revocation of Proxies......................................... 22
Solicitation of Proxies.................................................. 22
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............. 23
Security Ownership of Certain Beneficial Owners.......................... 23
Security Ownership of Management......................................... 23
PROPOSAL 1: ELECTION OF DIRECTORS.......................................... 25
Nominees for Election at the Annual Meeting.............................. 25
Directors Continuing in Office Whose Terms Expire in 1998................ 25
Directors Continuing in Office Whose Terms Expire in 1999................ 26
Committees of the Board.................................................. 26
Directors' Meetings...................................................... 27
Directors' Compensation.................................................. 27
Executive Compensation and Other Information............................. 28
Stock Options and Stock Appreciation Rights (SARs)....................... 29
Option Exercises and Holdings............................................ 30
Pension Plans............................................................ 31
Human Resources Committee Executive Compensation Report.................. 32
Performance Graph........................................................ 35
Executive Employment and Change in Control Agreements.................... 35
PROPOSAL 2: TO RATIFY THE APPOINTMENT OF INDEPENDENT AUDITORS.............. 37
PROPOSAL 3: THE PROPOSED MERGER............................................ 37
General.................................................................. 37
Background of and Reasons for the Transactions........................... 38
Recommendation of the Providian Board of Directors....................... 42
Opinion of Financial Advisor............................................. 44
Material Federal Income Tax Consequences................................. 51
Appraisal Rights......................................................... 53
Stock Exchange Listing................................................... 53
HSR Act, Insurance Regulatory Approvals and Other Regulatory Approvals... 53
Accounting Treatment..................................................... 54
Interests of Certain Persons in the Transactions......................... 54
Cautionary Statement Concerning Forward-Looking Statements............... 55
Federal Securities Law Consequences...................................... 55
MARKETS AND MARKET PRICES.................................................. 56
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION............... 58
THE MERGER AGREEMENT....................................................... 70
Terms of the Merger...................................................... 70
Effective Time; Closing.................................................. 70
Exchange of Shares....................................................... 71
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Representations and Warranties.......................................... 71
Business of Providian Pending the Merger................................ 72
Business of AEGON Pending the Merger.................................... 73
No Solicitation of Third Party Acquisition Proposals.................... 73
Termination; Certain Fees............................................... 74
Certain Other Covenants................................................. 75
Fees and Expenses....................................................... 77
Conditions.............................................................. 77
THE DISTRIBUTION.......................................................... 78
Background of and Reasons for the Distribution.......................... 78
Terms of the Distribution Agreement..................................... 79
Tax Disaffiliation Agreement............................................ 81
Employee Benefits Agreement............................................. 81
Transition Services Agreement........................................... 82
General Intellectual Property Assignment and Renunciation............... 83
Trademark License Agreement............................................. 83
DESCRIPTION OF CAPITAL STOCK OF AEGON..................................... 83
Share Capital........................................................... 84
General................................................................. 84
Dividends............................................................... 84
Voting Rights and Appointment of Supervisory and Executive Boards....... 85
Liquidation Rights...................................................... 86
Issuance of Additional Shares........................................... 86
Preemptive Rights....................................................... 86
Repurchase by AEGON of its Own Shares................................... 87
Certificates for Common Shares and their Transfer....................... 87
COMPARISON OF CERTAIN RIGHTS OF STOCKHOLDERS OF PROVIDIAN AND AEGON....... 87
Voting Rights........................................................... 88
Amendment of Charter Documents.......................................... 88
Appraisal Rights........................................................ 89
Preemptive Rights....................................................... 89
Action by Written Consent of Shareholders............................... 89
Shareholders' Meetings.................................................. 90
Election of Directors................................................... 90
Removal of Directors.................................................... 90
Filling of Vacancies.................................................... 91
Shareholder Nominations................................................. 91
Dividends............................................................... 92
Rights of Purchase...................................................... 92
Limitation of Directors' Liability/Indemnification of Officers and
Directors.............................................................. 92
Special Meetings........................................................ 93
Shareholder Votes on Certain Reorganizations............................ 93
Certain Provisions Relating to Business Combinations.................... 94
Rights of Inspection.................................................... 94
Shareholder Suits....................................................... 94
Shareholder Proposals................................................... 94
Conflict-of-Interest Transactions....................................... 95
Financial Information Available to Shareholders......................... 95
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXPERTS.................................................................... 95
LEGAL MATTERS.............................................................. 96
OTHER PROPOSED ACTION...................................................... 96
STOCKHOLDER PROPOSALS...................................................... 96
WHERE YOU CAN FIND MORE INFORMATION........................................ 96
INDEX OF DEFINED TERMS..................................................... 99
</TABLE>
Appendix A: Amended and Restated Plan and Agreement of Merger and
Reorganization, dated as of December 28, 1996, as amended by
Amendment No. 1 dated April 2, 1997, by and among AEGON N.V., LT
Merger Corp. and Providian Corporation
Appendix B: Agreement and Plan of Distribution, dated as of December 28,
1996, by and between Providian Corporation and Providian Bancorp,
Inc.
Appendix C: Opinion of Goldman, Sachs & Co.
iii
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT, AND MAY NOT
CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO BETTER UNDERSTAND
THE MERGER, AND FOR A MORE COMPLETE UNDERSTANDING OF THE LEGAL TERMS OF THE
MERGER, YOU SHOULD READ THIS ENTIRE DOCUMENT CAREFULLY, AS WELL AS THOSE
ADDITIONAL DOCUMENTS TO WHICH WE REFER YOU. SEE "WHERE YOU CAN FIND MORE
INFORMATION." (PAGE 96)
Q: WHY IS PROVIDIAN MERGING WITH AEGON?
A:Providian's Board believes that the AEGON merger will increase stockholder
value and enhance the growth opportunities of Providian Bancorp and the
Providian insurance operations. The merger allows you, in a tax-free
transaction, to receive an attractive value for our insurance operations by
receiving shares in a profitable company with greater capital and resources. In
addition, the Board believes the spin-off of Providian Bancorp will allow
Providian Bancorp to continue to develop its business successfully as a stand-
alone entity.
Q: WHAT WILL I RECEIVE FOR MY PROVIDIAN SHARES?
A:First, in the spin-off, you will receive one share of Providian Bancorp
common stock for each share of Providian common stock you now own. Second, in
the merger, you will receive a fraction of an AEGON common share in exchange
for each of your Providian shares. The exact fraction that you will receive for
each Providian share will be computed using an exchange ratio that we summarize
below and explain in more detail later in this document.
In exchange for each share of Providian common stock, you will receive a
fraction of an AEGON common share equal to $28.00 divided by the "AEGON Share
Price." To calculate the AEGON Share Price we will average over the first 20 of
the 21 trading days before the merger, the average of the daily high and low
prices per AEGON common share on the New York Stock Exchange (NYSE). As long as
the average price is between $50.034 and $61.153 we will use that price. If
this average goes above $61.153 or below $50.034, we will use $61.153 or
$50.034 for the AEGON Share Price.
AEGON may, however, terminate the agreement if the average price is more than
$66.713, and Providian may terminate the agreement if the average price is less
than $44.475, unless the other party exercises the "make-whole" provisions
contained in the merger agreement. In general, the exercise of the "make-whole"
provisions would mean that the value of the AEGON common shares issued in the
merger would not be more than $30.545 or less than $24.889 for each Providian
share.
AEGON will not issue fractional shares in the merger. As a result, the total
number of AEGON shares that you will receive in the merger will be rounded down
to the nearest whole number. You will receive a cash payment for the value of
the remaining fraction of an AEGON common share that you would otherwise
receive.
Q: WHAT ARE THE CURRENT MARKET PRICES OF PROVIDIAN AND AEGON STOCK?
A:On April 16, 1997, the closing price of Providian common stock on the NYSE
was $55.375, and the AEGON common shares on the NYSE closed at $68.375. As we
describe below, changes in the market price of AEGON shares may affect the
number of AEGON shares you receive in the merger. You may receive more current
pricing information by checking the financial section of your newspaper or
contacting your broker. AEGON's common shares trade on the NYSE under the
symbol "AEG" and Providian's common stock trades on the NYSE under the symbol
"PVN."
Q: WHEN WILL YOU DETERMINE THE EXACT EXCHANGE RATIO?
A:Because a number of factors we use in the exchange ratio will not be set
until the date of the merger, we will not be able to calculate the exact ratio
until that time. This means that, when you vote on the merger, you will not
know the exact fraction of an AEGON common share that you will receive for each
Providian share.
Q: WHO WILL DECIDE TO EXERCISE THE "MAKE-WHOLE" PROVISION?
A:Providian has a right to call off the merger if the average AEGON share price
falls below $44.475, unless AEGON agrees to exercise the "make-whole" provision
and pay more shares. If
1
<PAGE>
AEGON agrees to pay more shares, the value of the fraction of an AEGON common
share that you receive for each share of Providian would be $24.889. On April
16, 1997, the AEGON common stock price closed at $55.375. AEGON has a right to
call off the merger if the average AEGON share price rises above $66.713,
unless Providian agrees to exercise the "make-whole" provision and accept fewer
shares of AEGON. If Providian agrees to accept fewer AEGON shares, the value of
the fraction of an AEGON common share that you receive for each share of
Providian would be $30.545.
Providian's decision whether to call off the merger or to exercise the "make-
whole" provision will be made by Providian's Board. It is impossible at this
time to determine what the Board would decide because their decision will
depend on the facts and circumstances existing at the time it is faced with
such a decision. When you vote to approve the merger, you are authorizing
Providian's Board to decide whether to call off the merger or to exercise the
"make-whole" provision, and you will not have the opportunity to vote to
approve the Board's decision.
Q: CAN YOU GIVE ME AN EXAMPLE OF HOW YOU WILL CALCULATE THE NUMBER OF AEGON
SHARES I WILL RECEIVE?
A:The table below shows some hypothetical examples of how we would use the
formula to determine the fraction of an AEGON common share that will be issued
for each Providian share in the merger. We have used a variety of average
market values for AEGON common shares to show you what you will receive at
various AEGON common share prices. This table assumes that you own 100
Providian shares.
<TABLE>
<CAPTION>
NUMBER OF CASH PERCENT OF
AVERAGE AEGON PAYMENT IN AEGON SHARES
AEGON SHARES TO PLACE OF VALUE PER HELD BY
MARKET EXCHANGE BE FRACTIONAL PROVIDIAN PROVIDIAN
VALUE RATIO RECEIVED SHARES SHARE STOCKHOLDERS
- ------- -------- --------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
$44.475 .559619 55 $42.78 $24.89 18.02%
45.00 .559619 55 43.28 25.18 18.02
50.034 .559619 55 48.12 28.00 18.02
52.00 .538462 53 44.00 28.00 17.34
55.00 .509091 50 50.00 28.00 16.36
58.00 .482759 48 16.00 28.00 15.60
61.153 .457868 45 48.11 28.00 14.86
65.00 .457868 45 51.14 29.76 14.86
66.713 .457868 45 52.49 30.55 14.86
</TABLE>
The value you will receive for each of your Providian shares you exchange for
AEGON common shares equals the average AEGON market value times the exchange
ratio. You should remember that the numbers we have chosen for this table are
hypothetical. We are not attempting to predict the actual fraction of an AEGON
common share that would be issued for each Providian share in the merger.
Q: WHY IS THE SALE STRUCTURED AS A SPIN-OFF AND A MERGER?
A:Providian does not want to sell, and AEGON does not want to buy, the
Providian Bancorp business. The spin-off is necessary to separate the Providian
Bancorp business so that AEGON can then acquire Providian's insurance
businesses. The transaction is conditioned on our receipt of a letter from the
Internal Revenue Service that both transactions will be tax-free to you and
Providian. You will be taxed, however, on any cash payments you receive in
place of a fractional AEGON share. To review the tax consequences to
stockholders in greater detail, see page 51.
Q: WHAT DO I NEED TO DO NOW?
A:Just mail your signed proxy card in the enclosed return envelope as soon as
possible, so that we may vote your shares at the meeting on May 29, 1997.
Providian's Board unanimously recommends that you vote in favor of the proposed
merger.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A:Yes. You can change your vote at any time before we vote your proxy at the
meeting. You can do so in one of three ways. First, you can send a written
notice stating that you would like to revoke your proxy to the Secretary of
Providian at the address below. Second, you can complete a new proxy card and
send it to the Secretary of Providian at the address below. Third, you can
attend the meeting and vote in person.
You should send any written notice revoking your proxy, or any request for a
new proxy card, to the Secretary of Providian at the following address:
Providian Corporation, 400 West Market Street, Post Office Box 32830,
Louisville, Kentucky 40232, Attention: Mr. James V. Elliott.
2
<PAGE>
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A:No. If you continue to hold your Providian shares at the time of the spin-off
and the merger, you will automatically receive your Providian Bancorp shares
without any need to take further action. You will also receive instructions on
how to exchange your old Providian shares for AEGON common shares and receive
your cash payment for any fractional share.
Q: WHEN DO YOU EXPECT THE SPIN-OFF AND THE MERGER TO BE COMPLETED?
A:We are working to complete the spin-off and the merger during June 1997.
However, it is possible that delays in obtaining regulatory approvals or a
ruling from the Internal Revenue Service could require us to postpone the spin-
off and the merger until a later time.
Q: HOW WILL I DETERMINE THE FEDERAL INCOME TAX BASIS OF MY PROVIDIAN BANCORP
AND AEGON SHARES AFTER THE SPIN-OFF AND MERGER?
A:The basis of both your Providian Bancorp common stock and Providian common
stock immediately after the spin-off will be the same as the basis of the
Providian common stock that you held immediately before the spin-off. You will
allocate your tax basis between the Providian Bancorp common stock and
Providian common stock based upon their relative fair market values at the time
of the spin-off. Your tax basis for the AEGON common shares that you receive in
the merger, including any fractional share interest for which you receive cash,
will equal your basis in the Providian common stock exchanged in the merger, as
determined immediately following the spin-off.
Q: IF THE MERGER TAKES PLACE, WHEN WILL I BE ELIGIBLE TO RECEIVE DIVIDENDS PAID
ON THE AEGON SHARES I RECEIVE?
A:Until the merger takes place, you will not have the right to receive any
dividends that AEGON may declare. After the merger takes place, all holders of
record of AEGON common shares on any record date, including shares that you
receive in the merger, will have the right to receive any dividends that AEGON
may declare. AEGON has historically paid dividends twice a year. The first
dividend is generally paid each year in the third or fourth quarter and is
called the interim dividend. This is called the interim dividend because it is
the first of two dividends that AEGON pays relating to revenue earned in the
year in which it is paid. The second dividend, called the final dividend, is
paid each year about two or three weeks after AEGON's annual shareholders'
meeting, usually held in May. This is called the final dividend because it
relates to revenue AEGON earned the prior year. Since the merger will take
place after the record date of this year's final dividend, you will not receive
this year's final dividend.
Q: WILL DIVIDENDS PAID ON THE AEGON SHARES I RECEIVE IN THE MERGER BE SUBJECT
TO FOREIGN WITHHOLDING TAXES?
A:Yes. Under the income tax treaty currently in force between The Netherlands
and the United States, any dividend paid by AEGON to a resident of the U.S. (as
defined under the treaty) will be subject to a Dutch withholding tax. In most
cases, the tax will equal 15% of the total amount of the dividend. An AEGON
shareholder who is subject to this withholding tax generally should be allowed
a credit or deduction for the withholding tax against his or her U.S. income
tax liability.
Q: WILL DIVIDENDS PAID ON MY PROVIDIAN BANCORP COMMON STOCK OR AEGON
COMMON SHARES BE SUBJECT TO ANY U.S. WITHHOLDING TAXES?
A:In most circumstances, no. However, in certain limited circumstances, U.S.
back-up withholding could apply. Under the U.S. back-up withholding rules, a
holder of Providian Bancorp common stock or, under proposed Treasury
Regulations, a holder of AEGON common shares may be subject to back-up
withholding in the U.S. at a rate of 31% for dividends. You would be exempt
from back-up withholding, however, if you (a) are a corporation or fall within
another exempt category and can demonstrate this fact when required or (b)
provide a correct taxpayer identification number and certain other information.
Most taxpayers will satisfy one or both of these exemptions. Any amount
withheld under these rules would be credited against your U.S. income tax
liability.
3
<PAGE>
THE COMPANIES
AEGON
Mariahoeveplein 50
P.O. Box 202, 2501 CE The Hague
The Netherlands
Tel.: 011/(31-70) 344 32 10
AEGON is a leading international insurance group with its headquarters in The
Hague, The Netherlands. Its shares are quoted on the stock exchanges of
Amsterdam, New York (NYSE), London, Zurich and Tokyo. Ranked by market
capitalization, total assets and profits, AEGON is one of the world's ten
largest listed insurance groups. Approximately 75% of AEGON's business is life
insurance and related pension, savings and investment products. The remaining
25% of AEGON's business is in health insurance, property and casualty insurance
and banking. Consistent with its policy of spreading risks to achieve reliable
performance, AEGON seeks to maintain a good balance of business within its
insurance group, both geographically and within product groups. With core
operations in The Netherlands, the U.S., the United Kingdom, Spain and Hungary,
AEGON has five highly concentrated national units. Each unit is a major
competitor in its local market.
AEGON USA, Inc., headquartered in Baltimore, Maryland, consists of four
operating groups. The Agency Group sells traditional and universal life and
annuity products through various agency organizations. The Asset Accumulation
Group offers fixed and variable life and annuity products along with mutual
funds and collective investment trusts through various distribution channels.
The Health Group focuses on supplemental health insurance markets. The Home
Service Group markets traditional, universal and interest-sensitive life
insurance products tailored for the middle income market, through agents
employed by AEGON, independent brokers and funeral directors.
Recent Developments. In March 1997, AEGON announced that its total revenues
for 1996 were NLG 24,487 million, a 16.7% increase over total revenues of NLG
20,979 million for 1995. The total revenues consisted of premium income of NLG
16,703 million, a 21.3% increase from 1995, investment income of NLG 6,577
million, a 9.9% increase from 1995 and income from banking activities of NLG
1,207 million, a 1.7% decrease from 1995.
AEGON's net income was NLG 1,568 million in 1996, a 18.5% increase over net
income in 1995. Net income per share was NLG 5.93 in 1996, as compared to NLG
5.05 in 1995. See AEGON's Report on Form 6-K filed on April 3, 1997 for further
information regarding AEGON's 1996 financial results for the year ended
December 31, 1996 (you can obtain this report by following the instructions we
provide in this Proxy Statement-Prospectus under "Where You Can Find More
Information" on page 96).
PROVIDIAN
Providian Center
400 West Market Street
P.O. Box 32830
Louisville, Kentucky 40202
Tel.: (502) 560-2000
Providian is a leading financial services company in the U.S. With
headquarters in Louisville, Kentucky, it currently operates nationwide through
its four business units: Providian Bancorp, Providian Agency Group, Providian
Direct Insurance and Providian Capital Management.
Providian Agency Group markets traditional and interest-sensitive individual
life insurance products, health insurance products and related fee-based
products through home service representatives of its life insurance
subsidiaries.
4
<PAGE>
Providian Direct Insurance markets life, health and personal lines property
and casualty insurance and related fee-based products to individuals directly
and through third-party organizations primarily using television, direct mail
and telephone. Providian Direct Insurance also markets its products to retired
and active duty military service personnel.
Providian Capital Management is responsible for the marketing and management
of spread- and fee-based retirement and savings products to individuals and
group customers through Providian's life insurance subsidiaries as well as the
management of all insurance-related investment assets. Providian Capital
Management offers a broad array of financial products, including floating and
fixed rate guaranteed investments contracts (GICs), Trust GICs (synthetic GICs)
and separate account products offered to pension funds, banks, mutual funds and
other organizations.
REASONS FOR THE MERGER
Providian's Board of Directors believes that the merger with AEGON will
provide a strategic opportunity for Providian to expand and develop its
insurance businesses and that the spin-off of Providian Bancorp will allow
Providian Bancorp to continue to develop its business successfully as a stand-
alone entity. Consolidation of Providian's insurance activities with AEGON USA
will make AEGON one of the largest insurance groups in the U.S. market. On a
combined basis after giving effect to the merger, the AEGON USA insurance group
of companies will become the 11th largest U.S. life insurance group of
companies based on assets, and ninth based on net statutory premium. (A.M. Best
1996 Edition of Aggregates and Averages). In approving the transaction, the
Providian Board recognized that there are risks relating to the merger. These
include the risk that the operations of AEGON and Providian will not be
integrated successfully or in a timely manner. In addition, the process of
combining AEGON and Providian or any delay in the merger might affect employee
morale or result in the loss of key employees. The Providian Board concluded,
however, that the potential benefits of the transaction outweighed these risks.
For a more detailed summary please see "The Proposed Merger--Background of and
Reasons for the Transactions" on page 38 and "--Recommendation of the Providian
Board of Directors" on page 42.
AEGON's acquisition of Providian is consistent with AEGON's overall strategy
to expand its life insurance activities through acquisitions. While we cannot
guarantee that the combination of AEGON and Providian will be successful or
accomplished in a timely fashion, AEGON believes that the merger will generate
many significant benefits, including:
. Cost efficiencies through consolidation. These economies include
consolidation of certain administrative services, field operations,
management information systems and numerous corporate and managerial
functions.
. Growth through expanded product offerings and distribution
channels. AEGON believes that Providian Direct Insurance's experience in
developing new products will increase AEGON's efficiency in getting new
products to the market. AEGON also believes that the combination of
Providian Direct Insurance's advanced technology and AEGON's large
customer base may provide significant opportunities for growth. AEGON
also believes that Providian Capital Management offers products that are
complementary to AEGON's existing product base, while AEGON will provide
additional marketing channels to market an expanded product portfolio.
RECOMMENDATION TO STOCKHOLDERS
Providian's Board of Directors has unanimously approved the merger. The
Providian Board unanimously recommends that you vote FOR the proposal to
approve the merger and the merger agreement, under which AEGON will acquire
Providian following the spin-off.
5
<PAGE>
ABOUT PROVIDIAN BANCORP
In the spin-off, Providian stockholders will receive one share of Providian
Bancorp common stock for each Providian share. Providian Bancorp is a consumer
lending company. Providian Bancorp offers a variety of loans to consumers whose
need for credit and ability to pay may qualify them for a line of credit of as
little as $300 or as much as $150,000. Some of Providian Bancorp's loans are
secured by the customer's home or a savings account; some are unsecured.
Depending on the type of loan, Providian Bancorp's customers can borrow money
by using a credit card, writing a check, transferring funds electronically,
making an ATM withdrawal, or cashing a check Providian Bancorp sends to them.
Providian Bancorp also offers deposit products, such as certificates of
deposit and money market deposit accounts. Providian Bancorp's customers are
located throughout the U.S., and Providian Bancorp communicates with them by
mail and telephone rather than at branch offices.
Providian Bancorp's most important loan products are Gold Visa and MasterCard
credit cards, lines of credit under which consumers can borrow money by writing
checks, home equity loans, and secured credit cards. Providian Bancorp earns a
profit on the loans they make based on the difference between the interest
rates it charges and the cost to Providian Bancorp of the funds used for the
loans. This is called "spread-based" income. Providian Bancorp also offers a
number of products and services for fees. In this way, it tries to vary its
sources of earnings growth. Providian Bancorp believes that the consumer
lending business will continue to provide opportunities for growth in the
future.
Providian Bancorp is customer-focused, which means that it tries to
understand its customers and design products and services that meet their
needs. And Providian Bancorp is return-driven, which means that it tries to
attract customers whose needs it can serve profitably, then manage the
relationship so that it continues to be profitable. Providian Bancorp does this
by constantly gathering information about its customers' behavior and its own
financial results. Providian Bancorp uses an engineering approach to analyze
the information and incorporate the results into the design of new products and
services that it thinks will appeal to customers while increasing its revenues
and decreasing its risks.
As of December 31, 1996, Providian Bancorp had more than 3.8 million
customers, with outstanding loans of approximately $9.3 billion. Providian
Bancorp is the 13th largest issuer of Visa and MasterCard credit cards in the
U.S., as reported in the January 1997 Nilson Report. As of December 31, 1996,
Providian Bancorp had approximately three million active credit card and
unsecured revolving line accounts outstanding, with aggregate balances
outstanding of approximately $7.8 billion. In addition, as of December 31,
1996, Providian Bancorp had approximately 31,500 home equity loans outstanding,
representing $945 million in managed loans, together with approximately 732,500
secured credit cards representing $467 million in managed loans outstanding.
Providian Bancorp was incorporated under the laws of the State of Delaware in
1981. Its principal executive offices are located at 201 Mission Street, San
Francisco, California 94105. Providian Bancorp's telephone number is (415) 543-
0404.
Because Providian Bancorp is currently a wholly owned subsidiary of
Providian, the directors of Providian Bancorp are employees of Providian and
its subsidiaries. Effective upon the spin-off, the following persons will be
the directors of Providian Bancorp: Shailesh J. Mehta, Irving W. Bailey II,
John M. Cranor III, James V. Elliott, Lyle Everingham, J. David Grissom, F.
Warren McFarlan, Ph.D., and Larry D. Thompson, and John L. Weinberg will be a
director emeritus. In addition, the Providian Bancorp Board will be divided
into three classes, with one-third of the Providian Bancorp Board elected at
each annual meeting of stockholders. Some management restructuring may also be
effected in connection with the spin-off; however, Providian Bancorp does not
anticipate any material changes to its senior management team.
Providian mailed to you an Information Statement about Providian Bancorp
together with this Proxy Statement-Prospectus. The Information Statement
describes Providian Bancorp, including a number of risks associated with its
businesses, which are discussed under the heading "Risk Factors." We encourage
you to review the Information Statement carefully.
6
<PAGE>
THE SPIN-OFF
The distribution agreement, which is the legal document that governs the
spin-off, is attached as Appendix B to this Proxy Statement-Prospectus. We
encourage you to read this document carefully. In addition, we have filed other
related agreements as exhibits to the Registration Statements filed by AEGON
and Providian Bancorp. These agreements will govern various relationships
between the two companies after we complete the spin-off and the merger. "Where
You Can Find More Information" (page 96) describes how to obtain copies of
these exhibits.
You are being asked to vote on the merger only, and are not being asked to
vote on the spin-off. Although we will not complete the spin-off unless the
merger is approved and about to occur, the spin-off is separate from the merger
and the Providian Bancorp common stock to be received by Providian stockholders
in the spin-off will not constitute a part of the merger consideration. With
the consent of AEGON, the terms of the distribution agreement and related
agreements can be modified by agreement between Providian and Providian
Bancorp. We are not aware of any material modifications that will be made in
any of the agreements. Any such modification would not require the consent of
Providian stockholders, and Providian does not anticipate that it would solicit
consent for any such modification, moreover, Providian does not intend to
resolicit stockholder approval for the merger if any such modifications were
made.
BACKGROUND OF AND REASONS FOR THE SPIN-OFF (SEE PAGE 78)
The spin-off is necessary to separate the Providian Bancorp business so that
AEGON can then acquire Providian's insurance businesses.
HOW THE SPIN-OFF WILL BE COMPLETED (SEE PAGE 79)
Immediately before the merger, Providian will distribute all outstanding
shares of Providian Bancorp common stock to its stockholders of record on June
1, 1997. Each Providian stockholder will receive one share of Providian Bancorp
common stock for each share of Providian common stock owned on June 1, 1997.
THE MERGER
The merger agreement, which is the legal document that governs the merger, is
attached as Appendix A to this Proxy Statement-Prospectus. We encourage you to
read the merger agreement carefully.
SOURCE OF AEGON COMMON SHARES (SEE PAGE 77)
Not all of the AEGON common shares necessary to effect the merger will be
newly issued. Based on an assumed exchange ratio of .457868, only 55.1% of the
AEGON common shares necessary to effect the merger will be newly issued shares
(which represents approximately an 8.9% increase in the total number of AEGON
common shares outstanding). The remaining AEGON common shares issued in the
merger will be acquired by AEGON from Vereniging AEGON (AEGON's largest
shareholder) in exchange for AEGON voting preferred shares and for cash. This
will leave Vereniging AEGON with approximately the same amount of voting
control as it had before the merger.
AEGON has agreed with Vereniging AEGON to enter into an agreement under which
Vereniging AEGON will deliver up to approximately 5.2 million additional AEGON
common shares if the price of an AEGON common share is lower than $55.594. The
consideration for this right of delivery is approximately NLG 147 million. The
consideration was determined using a binomial option pricing model which is
commonly used for valuing options on shares. AEGON has entered into this
agreement in order to minimize the dilutive effect to AEGON shareholders in the
event that AEGON is required to deliver additional AEGON shares to Providian
stockholders to complete the merger. For more information see "Notes to
Unaudited Pro Forma Condensed Consolidated Financial Statements--Transactions
Relating to the Merger" on page 65.
7
<PAGE>
CONDITIONS TO THE MERGER (SEE PAGE 77)
The completion of the merger depends upon the satisfaction of a number of
conditions, including:
. the continued accuracy of each party's representations and warranties,
. the performance by each party of its obligations under the merger
agreement,
. Providian stockholder approval,
. clearance under antitrust laws,
. approval by appropriate state insurance regulators,
. receipt of certain banking approvals, and
. the receipt of an Internal Revenue Service ruling as to the tax-free
nature of the spin-off and the merger.
Some of the conditions to the merger may be waived by the appropriate party.
Conditions that cannot be waived include Providian stockholder approval,
clearance under antitrust laws and the approval by appropriate state insurance
regulators. We may also agree with AEGON to waive the condition that we receive
the IRS ruling and instead rely on opinions from tax counsel. If we do this,
however, we intend to ask you to vote again to approve the merger. In addition,
the merger will not occur unless the spin-off has been completed. If the spin-
off is completed (which will not occur unless all other conditions to the
merger are met), the merger will occur immediately after the completion of the
spin-off.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 74)
We can agree to terminate the merger agreement without completing the merger,
and either of us can terminate the merger agreement under various
circumstances, including if (a) the merger is not completed by August 31, 1997,
for instance because the conditions summarized above are not met, (b) the
required Providian stockholder approval is not received, (c) a court or other
governmental authority prohibits the merger, or (d) Providian Board, in
compliance with its fiduciary duties, withdraws its recommendation or approves
another acquisition transaction.
AEGON may also terminate the merger agreement if the average AEGON price
during the relevant trading period is more than $66.713 and Providian may
terminate the merger agreement if the average AEGON price during the relevant
trading period is less than $44.475, in each case unless the other party agrees
to the "make-whole" provisions described in this document. If the average AEGON
price is more than $66.713 or less than $44.475, we do not plan to solicit your
consent if we decide to continue with the merger. In addition, the termination
of the merger agreement or our exercise of the "make-whole" provision, even if
it occurs after the meeting, does not require your consent, and we do not
anticipate that we will solicit your consent for either of these actions.
Providian's decision whether to terminate the merger or exercise the "make-
whole" provision will be made by Providian's Board. It is impossible at this
time to determine what the Board would decide because their decision will
depend on the facts and circumstances existing at the time it is faced with
such a decision. Accordingly, Providian stockholders could receive in the
merger AEGON common shares with a value per share that is significantly
different than $28 per share. The value per Providian share will depend on the
AEGON share prices immediately prior to the merger.
TERMINATION FEES (SEE PAGE 75)
If Providian enters into a merger agreement with a third party or the merger
agreement with AEGON is terminated because the Providian Board determines that
it is necessary to withdraw or modify its recommendation of the merger or to
approve or recommend another acquisition transaction in order to comply with
its fiduciary duties, Providian will pay AEGON either $80,000,000 if
termination occurs on or prior to the date of the meeting or $100,000,000 if
termination occurs after the date of the meeting.
MANAGEMENT OF AEGON FOLLOWING THE MERGER
After the merger takes place, Providian will become a wholly owned subsidiary
of AEGON, and its operations will be combined with those of AEGON. AEGON
expects that AEGON USA's management team
8
<PAGE>
will continue to manage the combined operations of AEGON USA after the merger
takes place. In addition, AEGON USA may add to its management team individuals
from Providian's management team. Following the merger, Irving W. Bailey II,
the current Chairman and Chief Executive Officer of Providian, will join the
Board of Directors of AEGON USA, Inc. AEGON management has not yet determined
the membership of the Providian Board following the merger.
AEGON management intends to consolidate the operations of the Providian
Agency Group division of Providian with AEGON USA's Home Service Group. The
Providian Direct Insurance and Providian Capital Management divisions will
remain separate divisions. AEGON management will review its own operations and
the operations of Providian and, upon completion of such review, will develop
further plans or proposals regarding the integration or combination of the
sales and marketing efforts, administrative support functions and other
operations of AEGON and Providian.
REGULATORY APPROVALS (SEE PAGE 53)
Providian and AEGON have obtained clearance for the merger from the Antitrust
Division of the Department of Justice indicating their approval under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976. Providian Bancorp has received
a no-action letter from the Board of Governors of the Federal Reserve System
allowing it to continue to operate as a grandfathered institution under the
Competitive Equality Banking Act of 1987.
In addition, prior to the merger, Providian and AEGON must receive the
approval of various state insurance regulatory agencies. AEGON and Providian
have submitted applications for these insurance regulatory approvals. There can
be no assurance as to when or if AEGON and Providian will receive these
approvals.
AEGON SHAREHOLDER APPROVAL
AEGON intends to solicit approval from its shareholders in connection with
the issuance of shares in the merger. Although shareholder approval is not
always required for AEGON to issue shares in a merger, such approval is
required in this case because under Dutch law the paid-in capital on the newly
issued shares must be made from the general reserves of AEGON.
OPINION OF PROVIDIAN'S FINANCIAL ADVISOR (SEE PAGE 44)
In deciding to approve the merger, one of the factors that the Providian
Board considered was the opinion of its financial advisor, Goldman Sachs, that
the distribution of Providian Bancorp shares to holders of Providian common
stock pursuant to the distribution agreement and the receipt by these holders
of AEGON common shares pursuant to the merger agreement, taken together, were
fair to the holders of Providian common stock. The full text of Goldman Sachs'
written opinion dated December 28, 1996, describes the basis on which Goldman
Sachs rendered its opinion and is attached as Appendix C to this document. We
encourage you to read this opinion in its entirety and consider it carefully.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 51)
Our receipt of a letter from the Internal Revenue Service (IRS) that the
spin-off and the merger will be tax-free is a condition to completion of the
transactions. We filed our request for the letter with the IRS on January 30,
1997 and filed additional information supplementally on March 3, 1997 and April
3, 1997. There can be no assurance as to when or if the letter from the IRS
will be obtained.
9
<PAGE>
INTERESTS OF OFFICERS AND DIRECTORS (SEE PAGE 54)
The officers, directors and employees of Providian may have interests in the
transactions that are different from, or in addition to, yours. For example,
some Providian employees hold stock options which will be assumed by AEGON
under the merger agreement and will vest by virtue of the merger. Other
employees hold options that will be assumed by Providian Bancorp upon
completion of the spin-off. In addition, Providian has had and continues to
have agreements with some of its officers providing benefits upon termination
of employment following a change in control of Providian.
MARKETS AND MARKET PRICES (SEE PAGE 56)
The AEGON common shares to be issued in the merger will be listed on the
NYSE, subject to notice of issuance. The common shares of Providian are
currently listed on the NYSE. AEGON's common shares are principally traded on
the Amsterdam Stock Exchange. AEGON common shares are also traded on the New
York, Tokyo, London and Zurich Stock Exchanges. On December 27, 1996, the last
trading date prior to the public announcement of the proposed merger of
Providian with AEGON, AEGON common shares on the NYSE closed at $57.00, and
Providian common stock closed at $52.75. On April 16, 1997, AEGON common shares
on the NYSE closed at $68.375, and Providian common stock closed at $55.375.
LISTING OF AEGON COMMON SHARES AND PROVIDIAN BANCORP COMMON STOCK
The AEGON common shares to be issued in the merger will be listed on the
NYSE. Providian Bancorp also expects to list the shares of Providian Bancorp
common stock on the NYSE. However, there is currently no public trading market
for the Providian Bancorp common stock, and there is no guarantee that there
will be an active market in shares of Providian Bancorp common stock after the
spin-off.
EXCHANGE RATE
On April 16, 1997, one U.S. Dollar was equal to 1.9425 Dutch Guilders.
10
<PAGE>
SUMMARY HISTORICAL FINANCIAL INFORMATION
AEGON
Information in the Table. In the table below, we provide you with summary
historical consolidated financial data of AEGON. We prepared this information
using the consolidated financial statements of AEGON as of the dates indicated
and for each of the fiscal years in the five-year period ended December 31,
1995 and the six-month periods ended June 30, 1996 and June 30, 1995. The
financial statements as of and for each of the fiscal years in the five-year
period ended December 31, 1995 have been audited by Moret Ernst & Young,
independent auditors. The amounts presented in the table have been prepared
based on Dutch accounting principles.
Other Financial Information. When you read this summary historical
consolidated financial data, it is important that you read the footnotes set
forth below the financial data. You should also read the historical financial
statements and accompanying notes of AEGON that are included in its Annual
Report on Form 20-F for the year ended December 31, 1995 and in its Report on
Form 6-K for the period ended June 30, 1996 (you can obtain these reports by
following the instructions we provide in this Proxy Statement-Prospectus under
"Where You Can Find More Information" on page 96).
It is also important that you read the unaudited pro forma consolidated
financial information and accompanying notes that we have included in this
Proxy Statement-Prospectus under "Unaudited Pro Forma Condensed Consolidated
Financial Information" on page 58.
11
<PAGE>
AEGON SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
----------------- -------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- ------- ------- ------- ------ ------
(AMOUNTS IN MILLION DUTCH GUILDERS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS STATEMENT DATA
Revenue................. 12,680 10,846 20,979 20,832 19,010 15,492 13,776
Net income(1)........... 711 615 1,323 1,151 1,009 913 815
Net income per common
share (1):
Primary............... 2.69 2.34 5.04 4.48 3.98 3.68 3.54
Fully diluted......... 2.59 2.23 4.80 4.26 3.80 3.46 3.28
Dividends per common
share(2)............... 1.26 1.10 2.37 1.94 1.60 1.50 1.47
Weighted average common
shares outstanding..... 263.8 261.1 261.6 255.6 251.4 246.0 227.7
BALANCE SHEET DATA
Total assets............ 166,622 140,605 150,603 137,069 128,209 83,852 71,406
Technical provisions.... 126,044 104,681 113,608 103,945 96,883 59,252 49,187
Long-term liabilities... 10,679 9,906 10,536 9,557 8,427 8,000 8,463
Shareholders'
equity(1).............. 9,812 7,755 8,173 7,899 8,669 6,313 5,727
Shareholders' equity per
common share(1)........ 36.87 29.37 30.86 30.20 34.04 25.18 23.90
</TABLE>
- --------
(1) The amounts presented in the table have been prepared based on Dutch
Accounting Principles (DAP). A reconciliation to U.S. GAAP for net income
and shareholders' equity can be found for each of the years 1991 through
1995 in the applicable Form 20-F and for the six months ended June 30, 1996
in the applicable Form 6-K. In addition, a reconciliation to U.S. GAAP for
net income can be found for the six months ended June 30, 1995 in the
applicable Form 6-K.
(2) AEGON pays an interim dividend each year, in the third or fourth quarter,
and a final dividend in the second quarter of the following year. The
dividends shown are the amounts paid relative to each period's reported
earnings in the case of the fiscal years and are based on a 47% dividend
pay out rate for the six-month periods.
12
<PAGE>
CONVENIENCE TRANSLATION TO U.S. DOLLARS(1)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED
----------------- DECEMBER 31,
1996 1995 1995
-------- -------- ------------
(AMOUNTS IN MILLION U.S.
DOLLARS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
EARNINGS STATEMENT DATA
Revenue......................................... $ 7,423 $ 6,349 $12,281
Net income...................................... 416 360 774
Net income per common share:
Primary....................................... 1.57 1.37 2.95
Fully diluted................................. 1.52 1.31 2.81
Dividends per common share(2)................... .74 .64 1.39
Weighted average common shares outstanding...... 263.8 261.1 261.6
BALANCE SHEET DATA
Total assets.................................... $ 97,542 $ 82,312 $88,165
Technical provisions............................ 73,788 61,281 66,507
Long-term liabilities........................... 6,252 5,799 6,168
Shareholders' equity............................ 5,744 4,540 4,785
Shareholders' equity per common share........... 21.58 17.19 18.07
</TABLE>
- --------
(1) Based upon the exchange ratio at June 30, 1996 of 1 USD = 1.7082 Dutch
Guilders.
(2) AEGON pays an interim dividend each year, in the third or fourth quarter,
and a final dividend in the second quarter of the following year. The
dividends shown are the amounts paid relative to each period's reported
earnings in the case of the fiscal years and are based on a 47% dividend
pay out rate for the six-month periods.
AEGON'S HISTORICAL DIVIDENDS
AEGON has historically paid dividends twice a year. The first dividend is
generally paid each year in the third or fourth quarter and is called the
interim dividend. This is called the interim dividend because it is the first
of two dividends that AEGON pays relating to revenue earned in the year in
which it is paid. The second dividend, called the final dividend, is paid each
year about two or three weeks after AEGON's annual shareholders' meeting,
usually held in May. This is called the final dividend because it relates to
revenue AEGON earned the prior year. The table below sets forth AEGON's interim
and final dividends for the years 1992 through 1996. The amounts have been
translated into U.S. dollars per AEGON Common Share based on the Midpoint Rate
(the exchange rate settled each working day at 2:15 p.m. by the Dutch Central
Bank) on each of the payment dates. From time to time, AEGON shareholders have
had the option to elect to receive dividends payable in cash or in AEGON Common
Shares. There is no assurance that AEGON shareholders will continue to have
this option.
<TABLE>
<CAPTION>
TRANSLATED INTO
U.S. DOLLARS
PER AEGON COMMON
SHARE
YEARS ENDED -------------------
DECEMBER 31, INTERIM FINAL TOTAL INTERIM FINAL TOTAL
------------ ------- ----- ----- ------- ----- -----
(AMOUNTS IN DUTCH (AMOUNTS IN U.S.
GUILDERS PER COMMON DOLLARS PER COMMON
SHARE) SHARE)
<S> <C> <C> <C> <C> <C> <C>
1992................................. 0.44 1.06(1) 1.50 0.27 0.58 0.85
1993................................. 0.46(1) 1.14(1) 1.60 0.25 0.62 0.87
1994................................. 0.52(1) 1.42(1) 1.94 0.30 0.88 1.18
1995................................. 0.62(1) 1.75(1) 2.37 0.39 1.01 1.40
1996................................. 1.18(1) N/A N/A 0.70 N/A N/A
</TABLE>
- --------
(1) Paid, at each shareholder's option, in cash or in stock.
13
<PAGE>
PROVIDIAN
Information in the Tables. In the table below, we provide you with summary
historical consolidated financial data of Providian (including Providian
Bancorp). We prepared this information using the consolidated financial
statements of Providian as of the dates indicated and for each of the fiscal
years in the five-year period ended December 31, 1996. The financial statements
as of and for each of the fiscal years in the five-year period ended December
31, 1996 have been audited by Ernst & Young LLP, independent auditors.
Other Financial Information. When you read this summary historical
consolidated financial data, it is important that you read the footnotes set
forth below the financial data. You should also read the historical financial
statements and accompanying notes of Providian that are included in its Annual
Report on Form 10-K for the year ended December 31, 1996 (you can obtain these
reports by following the instructions we provide in this Proxy Statement-
Prospectus under "Where You Can Find More Information" on page 96).
It is also important that you read the unaudited pro forma consolidated
financial information and accompanying notes that we have included in this
Proxy Statement-Prospectus under "Unaudited Pro Forma Condensed Consolidated
Financial Information" on page 58.
PROVIDIAN SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(AMOUNTS IN MILLION U.S. DOLLARS,
EXCEPT PER COMMON AND COMMON EQUIVALENT SHARE)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Total revenue................ $ 3,622.2 $ 3,388.4 $ 2,959.1 $ 2,879.0 $ 2,837.6
Total benefits and expenses.. 2,998.0 2,882.1 2,518.6 2,391.9 2,385.6
Net income................... 434.7 345.3 300.9 322.7 322.5
Net income applicable to
common stock................ 434.7 345.3 299.7 315.9 315.7
Net income per common and
common equivalent share..... $ 4.64 $ 3.60 $ 3.02 $ 3.12 $ 3.14
BALANCE SHEET DATA
Cash and Investments......... $22,869.5 $21,924.6 $19,268.9 $18,734.4 $16,791.3
Total assets................. 28,993.4 26,838.6 23,613.4 22,929.0 20,588.3
Total policy liabilities..... 16,837.7 16,751.5 16,509.8 15,500.5 13,928.8
Long-term debt issued by:
Corporate.................. 718.2 720.8 694.3 589.3 589.3
Bancorp.................... 50.0 -- -- -- --
Company-obligated mandatorily
redeemable preferred
securities of Providian
LLC......................... 100.0 100.0 100.0 -- --
Total shareholders' equity... 3,089.7 2,961.0 2,121.9 2,492.9 2,185.9
</TABLE>
14
<PAGE>
PROVIDIAN BANCORP
Information in the Tables. In the table below, we provide you with summary
historical financial data of Providian Bancorp. We prepared this information
using the audited financial statements of Providian Bancorp for each of the
fiscal years in the five-year period ended December 31, 1996.
Other Financial Information. When you read this summary historical financial
data, it is important that you read the footnotes set forth below the financial
data. You should also read the consolidated financial statements of Providian
Bancorp and accompanying notes that Providian Bancorp has included in its In-
formation Statement mailed with this Proxy Statement-Prospectus.
It is also important that you read the Providian historical consolidated fi-
nancial statements and accompanying notes discussed under "Providian" above.
PROVIDIAN BANCORP SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(AMOUNTS IN MILLION U.S. DOLLARS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Total revenue................................ $1,008 $ 815 $ 613 $ 561 $ 521
Net income................................... 160 135 110 85 69
BALANCE SHEET DATA
Total assets................................. $4,327 $3,611 $2,663 $2,254 $2,126
Deposits..................................... 3,390 2,158 1,680 1,553 1,385
Borrowings................................... 259 943 533 283 359
Equity....................................... 483 349 326 271 222
</TABLE>
15
<PAGE>
SUMMARY SELECTED UNAUDITED PRO FORMA FINANCIAL INFORMATION
Information in the Tables. In the table below, we present consolidated
balance sheet information for AEGON and Providian as of June 30, 1996, as if
the spin-off and the merger had been completed as of such date. We present
consolidated income statement data for AEGON and Providian for the fiscal year
ended December 31, 1995 and the six months ended June 30, 1996, as if the spin-
off and the merger had been completed on January 1, 1995. We have prepared the
amounts presented in the table based on Dutch accounting principles.
The following information does not necessarily reflect the financial position
or operating results that would have occurred had we completed the merger and
spin-off on the dates or at the beginning of the periods shown in the table.
Assuming completion of the merger, the actual financial position and results
of operations will differ, perhaps significantly, from the pro forma amounts
reflected below because of a variety of factors, including access to additional
information, changes in value and changes in operating results between the
dates of the pro forma financial data and the date on which the merger actually
takes place. For purposes of preparing the AEGON consolidated financial
statements, AEGON will establish a new basis for Providian's assets and
liabilities based on their fair values and the AEGON purchase price, including
the costs of the merger. AEGON has not yet made a final determination of the
required purchase accounting adjustments, including the allocation of the
purchase price to the assets acquired and liabilities assumed based on their
respective fair values. Accordingly, the purchase accounting adjustments made
in connection with the development of the pro forma consolidated financial
information are preliminary and have been made solely for purposes of
developing this pro forma information. AEGON will undertake a study to
determine the fair value of Providian's assets and liabilities and will make
appropriate purchase accounting adjustments upon completion of that study.
Other Financial Information. Please see "Unaudited Pro Forma Condensed
Consolidated Financial Information" on page 58 of this Proxy Statement-
Prospectus for a more detailed explanation of this analysis.
16
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
CONVENIENCE TRANSLATION
TO U.S. DOLLARS(1)
----------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1996 DECEMBER 31, 1995 JUNE 30, 1996 DECEMBER 31, 1995
---------------- ----------------- ---------------- -----------------
(AMOUNTS IN DUTCH GUILDERS) (AMOUNTS IN U.S. DOLLARS)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
EARNING STATEMENT DATA
Revenue................. 14,887 25,203 $ 8,715 $14,754
Net income(2)........... 903 1,609 528 942
Net income per common
share(2):
Primary............... 3.13 5.61 1.83 3.28
Fully diluted......... 2.98 5.29 1.74 3.10
Dividends per common
share(3)............... 1.47 2.64 .86 1.54
Weighted average common
shares outstanding..... 287.4 285.2
BALANCE SHEET DATA (AT
PERIOD END)
Total assets............ 200,839 $117,574
Technical provisions.... 155,159 90,831
Long-term liabilities... 12,018 7,036
Shareholders'
equity(2).............. 11,792 6,903
Shareholders' equity per
common share(2)........ 40.50 23.71
</TABLE>
- --------
(1) Based upon the exchange ratio at June 30, 1996 of 1 USD = 1.7082 Dutch
Guilders.
(2) The amounts presented in the table have been prepared based on Dutch
Accounting Principles (DAP). A reconciliation to U.S. GAAP for net income
and shareholders' equity can be found for each of the years 1991 through
1995 in the applicable Form 20-F and for the six months ended June 30, 1996
in the applicable Form 6-K. In addition, a reconciliation to U.S. GAAP for
net income can be found for the six months ended June 30, 1995 in the
applicable Form 6-K.
(3) AEGON pays an interim dividend during each year, in the third or fourth
quarter, and a final dividend in the second quarter of the following year.
The pro forma dividends shown are the estimated amounts that would have
been paid assuming a 47% pay out rate.
17
<PAGE>
COMPARATIVE PER SHARE DATA
Information in the Tables. In the tables below, we provide you with
historical and unaudited pro forma per share financial information as of and
for the six months ended June 30, 1996, and for the year ended December 31,
1995. Providian historical data and Providian Bancorp data are as of and for
the six months ended June 30, 1996, and for the year ended December 31, 1995.
We prepared the AEGON pro forma consolidated amounts based on purchase
accounting methods under Dutch accounting principles and a preliminary
allocation of the purchase price.
Other Financial Information. It is important that when you read this
information, you read along with it the consolidated financial statements and
accompanying notes of AEGON and Providian included in the documents described
on page 96 of this Proxy Statement-Prospectus under "Where You Can Find More
Information." It is also important that you read the unaudited pro forma
condensed consolidated financial information and accompanying discussion and
notes that we have included in this Proxy Statement-Prospectus on page 58 under
"Unaudited Pro Forma Condensed Consolidated Financial Information."
PROVIDIAN UNAUDITED PRO FORMA PER COMMON SHARE DATA
The table below compares historical amounts per share of Providian with
unaudited pro forma amounts for the fraction of a share of AEGON and the full
share of Providian Bancorp that will be issued for each old Providian share. We
have assumed for this purpose that the Fair Market Value at the Effective Time
of the AEGON common shares is between $61.153 and $66.713 and that AEGON would
issue .457868 of an AEGON common share for each Providian share. The actual
fraction of an AEGON share will be determined using the formula set forth in
the merger agreement and described herein. The amounts presented in the table
have been prepared based on U.S. GAAP accounting principles.
<TABLE>
<CAPTION>
AEGON PROVIDIAN PRO FORMA PROVIDIAN BANCORP
HISTORICAL(1) HISTORICAL (PER PROVIDIAN SHARE)(1)(3) PRO FORMA(2)
------------- ---------- --------------------------- -----------------
(AMOUNTS IN U.S. DOLLARS)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1995
Net income per common
share(3):
Primary............... $2.28 $3.60 $1.19 $1.33
Fully diluted......... 2.21 1.13
Dividends per common
share.................. 1.39 0.90 0.71(4) -- (5)
SIX MONTHS ENDED JUNE
30, 1996
Net income per common
share(3):
Primary............... 1.52 2.16 0.80 0.75
Fully diluted......... 1.33 0.76
Dividends per common
share.................. 0.74 0.50 0.39(4) -- (5)
AS OF JUNE 30, 1996
Shareholders' equity per
common share(3)........ 24.14 29.74 12.52 3.83
</TABLE>
18
<PAGE>
- --------
(1) Based upon the exchange ratio at June 30, 1996 of 1 USD = 1.7082 Dutch
Guilders. The Pro Forma per Providian share amounts are calculated by
applying the fractional share percentage of .457868 and the foreign
currency exchange rate to the U.S. GAAP net income and equity presented in
the "Pro Forma Reconciliation of Dutch Accounting Principles to U.S. GAAP"
on page 77 of this Proxy Statement.
(2) Providian Bancorp's net income per common share and shareholders' equity
per common share are based on the same methodology used in the unaudited
pro forma condensed financial statements included in Providian Bancorp's
Form 10 Registration Statement for the year ended December 31, 1996.
(3) Since the fractional AEGON shares received per Providian share changes at
various stock prices, the following table presents the AEGON pro forma net
income per share and shareholders' equity per share at various price and
fractional share combinations. The Merger Agreement provides for a fixed
exchange ratio of .457868 AEGON common shares for each Providian share if
the average AEGON share price is in excess of $61.153. AEGON has the right
to terminate the merger agreement if the average AEGON share price is
greater than $66.713, unless Providian agrees in such event that the
fractional AEGON common share to be received by Providian stockholders for
each Providian share is calculated by dividing $30.545 by the average AEGON
share price at the time of the merger. We have referred to this as the
"make-whole" option. The last column presents the pro forma information at
an average AEGON share price of $75.00 and assumes the exercise of the
"make-whole" option. There can be no assurance, however, that the "make-
whole" option will be exercised. You should compare the information below
with the third column in the above chart to see what happens when the AEGON
share price changes.
<TABLE>
<CAPTION>
WITH
EXERCISE OF
"MAKE-WHOLE"
OPTION
------------
<S> <C> <C> <C> <C> <C> <C>
AEGON share price....... $44.475 $50.034 $55.594 $61.153 $66.713 $75.00
Fractional share
received............... 0.559619 0.559619 0.503651 0.457868 0.457868 0.407267
YEAR ENDED
DECEMBER 31, 1995:
Primary................ $ 1.46 $ 1.43 $ 1.29 $ 1.19 $ 1.17 $ 1.06
Fully diluted.......... 1.40 1.37 1.23 1.14 1.12 1.01
SIX MONTHS ENDED
JUNE 30, 1996:
Primary................ 0.98 0.97 0.87 0.80 0.79 .71
Fully diluted.......... 0.94 0.92 0.83 0.77 0.76 .68
SHAREHOLDERS' EQUITY
JUNE 30, 1996.......... 14.46 15.02 13.51 12.38 12.76 11.45
</TABLE>
(4) AEGON pays an interim dividend during each year, in the third or fourth
quarter, and a final dividend in the second quarter of the following year.
The pro forma dividends shown are the estimated amounts that would have
been paid assuming a 47% pay out rate using net income based on Dutch
accounting principles.
(5) Providian Bancorp expects to pay quarterly dividends on the shares of
Providian Bancorp common stock after the Distribution. The declaration and
amounts of such dividends will be at the discretion of the Providian
Bancorp Board of Directors. Providian Bancorp expects that the declaration
and amounts of dividends will depend on Providian Bancorp's earnings after
the Distribution and any other factors that the Providian Bancorp Board of
Directors believes are relevant.
19
<PAGE>
AEGON HISTORICAL AND UNAUDITED PRO FORMA COMMON SHARE DATA
<TABLE>
<CAPTION>
CONVENIENCE TRANSLATION
TO U.S. DOLLARS(1)
----------------------------
AEGON AEGON AEGON AEGON
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
-------------- ------------- ------------- ------------
(AMOUNTS IN DUTCH GUILDERS) (AMOUNTS IN U.S. DOLLARS)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1995
Net income per common
share(2):
Primary............... 5.04 5.61 $ 2.95 $ 3.28
Fully diluted......... 4.80 5.29 2.81 3.10
Dividends per common
share(3)............... 2.37 2.64 1.39 1.54
SIX MONTHS ENDED JUNE
30, 1996
Net income per common
share(2):
Primary............... 2.69 3.13 1.57 1.83
Fully diluted......... 2.59 2.98 1.52 1.74
Dividends per common
share(3)............... 1.26 1.47 .74 .86
AS OF JUNE 30, 1996
Shareholders' equity per
common share(2)........ 36.87 40.57 21.58 23.71
</TABLE>
- --------
(1) Based upon the exchange ratio at June 30, 1996 of 1 USD = 1.7082 Dutch
Guilders.
(2) The amounts presented in the table have been prepared based on Dutch
accounting principles (DAP). A reconciliation to U.S. GAAP for net income
and shareholders' equity can be found for each of the years 1991 through
1995 in the applicable Form 20-F and for the six months ended June 30, 1996
in the applicable Form 6-K. In addition, a reconciliation to U.S. GAAP for
net income can be found for the six months ended June 30, 1995 in the
applicable Form 6-K.
(3) AEGON pays an interim dividend during each year, in the third or fourth
quarter, and a final dividend in the second quarter of the following year.
The pro forma dividends shown are the estimated amounts that would have
been paid assuming a 47% pay out rate using net income based on Dutch
accounting principles.
20
<PAGE>
THE ANNUAL MEETING
GENERAL
This Proxy Statement-Prospectus is furnished to holders of the common stock,
par value $1.00 per share ("Providian Common Stock"), of Providian Corporation
("Providian") in connection with the solicitation of proxies by the Board of
Directors of Providian (the "Providian Board") for use at the annual meeting
(the "Meeting") of Providian stockholders to be held for the purposes
described in this document. Each copy of this Proxy Statement-Prospectus
mailed to holders of Providian Common Stock is accompanied by a form of proxy
for use at the Meeting.
This Proxy Statement-Prospectus is also furnished to Providian stockholders
as a prospectus in connection with the issuance by AEGON N.V., a company
formed under the laws of The Netherlands ("AEGON"), of the common shares, par
value of one Dutch Guilder per share, of AEGON (the "AEGON Common Shares") in
connection with the Merger (as defined below). The information statement,
mailed to Providian stockholders along with this Proxy Statement-Prospectus
(the "Information Statement"), is furnished to Providian stockholders as an
information statement in connection with the issuance of the shares of common
stock of Providian Bancorp, Inc. ("Providian Bancorp") in connection with the
Distribution (as defined below).
At the Meeting, Providian stockholders will have the opportunity to vote for
the election of four directors to serve for terms of three years (or until the
Merger is consummated) and for the ratification of Providian's independent
auditors). In addition, at the Meeting, Providian stockholders will be asked
to consider and vote upon a proposal (the "Merger Proposal," and together with
the other proposals described herein, the "Proposals")) to approve and adopt
the Amended and Restated Plan and Agreement of Merger and Reorganization,
dated as of December 28, 1996 (as it may be further amended, supplemented or
modified from time to time, the "Merger Agreement"), among AEGON, LT Merger
Corp., a Delaware corporation and a wholly owned subsidiary of AEGON
International N.V. (a company formed under the laws of The Netherlands and a
wholly owned subsidiary of AEGON), and Providian. Under the Merger Agreement,
conditioned on and immediately following the Distribution, LT Merger Corp.
will merge with and into Providian (the "Merger"), with Providian being the
corporation surviving the Merger (sometimes hereinafter referred to as the
"Surviving Corporation") as a wholly owned indirect subsidiary of AEGON, upon
the terms and conditions contained in the Merger Agreement.
The Proposals and related considerations are described in this Proxy
Statement-Prospectus, including the Appendices hereto. Copies of the Merger
Agreement and the Distribution Agreement (as defined below) are attached as
Appendices A and B to this Proxy Statement-Prospectus. The Merger Agreement
provides that, immediately prior to the Merger, Providian will distribute as a
dividend to its stockholders on a pro rata basis, in a non-taxable
distribution (the "Distribution"), all the shares of common stock, par value
$1.00 per share ("Providian Bancorp Common Stock") of Providian Bancorp, in
accordance with the terms of the Agreement and Plan of Distribution, dated as
of December 28, 1996 (as it may be amended, supplemented or modified from time
to time, the "Distribution Agreement"), between Providian and Providian
Bancorp.
DATE, PLACE AND TIME
The Meeting will be held in The Medallion Room of the Seelbach Hotel, in the
city of Louisville, Kentucky, on Thursday, May 29, 1997, at 11:00 a.m. local
time.
RECORD DATE
The Providian Board has fixed the close of business on April 10, 1997 as the
record date (the "Annual Meeting Record Date") for the determination of the
holders of Providian Common Stock entitled to receive notice of and to vote at
the Meeting.
21
<PAGE>
VOTES REQUIRED
As of April 10, 1997, the Annual Meeting Record Date, there were 94,599,880
shares of Providian Common Stock, par value $1.00 per share, outstanding. Each
share of Providian Common Stock outstanding on such record date is entitled to
one vote upon each matter properly submitted at the Meeting.
Approval of the election of directors and the ratification of auditors and
of all other matters which may come before the Meeting (other than the Merger
Proposal) require the affirmative vote of a majority of votes cast, in person
or by proxy, by persons entitled to vote at the Meeting. The affirmative vote
of at least a majority of the outstanding shares of Providian Common Stock is
required to approve the matters to be considered and voted on at the Meeting
in connection with the Merger Agreement.
Abstentions will be counted as present for purposes of determining whether a
quorum is present. Because the vote on the Merger Proposal requires the
approval of at least a majority of the outstanding shares of Providian Common
Stock, abstentions or the failure to vote will have the same effect as a
negative vote. Under the rules of the NYSE, brokers who hold shares in street
name for customers will not have the authority to vote on the Merger Proposal
unless they receive specific instructions from beneficial owners. Such a
broker non-vote will be counted as present for purposes of a quorum but will
otherwise have the same effect as a vote against the Merger Proposal.
As of March 1, 1997, directors and executive officers of Providian and their
affiliates owned beneficially an aggregate of 1,476,620 shares of Providian
Common Stock (including shares which may be acquired upon exercise of employee
stock options). Directors and executive officers of Providian have indicated
their intention to vote their shares of Providian Common Stock in favor of the
Proposals.
See "The Proposed Transactions--Interests of Certain Persons in the
Transactions."
VOTING AND REVOCATION OF PROXIES
Shares of Providian Common Stock represented by a proxy properly signed and
received at or prior to the Meeting, unless subsequently revoked, will be
voted in accordance with the instructions thereon. IF A PROXY IS SIGNED AND
RETURNED WITHOUT INDICATING ANY VOTING INSTRUCTIONS, SHARES OF PROVIDIAN
COMMON STOCK REPRESENTED BY THE PROXY WILL BE VOTED FOR THE PROPOSALS. If you
vote in favor of the merger or the other proposals, the proxy holders may, in
their discretion, vote your shares to adjourn the Meeting so that they can
solicit additional proxies in favor of the merger or such other proposals. Any
proxy given pursuant to this solicitation may be revoked by the person giving
it at any time before the proxy is voted by the filing of an instrument
revoking it, or of a duly executed proxy bearing a later date, with the
Secretary of Providian, prior to or at the Meeting, or by voting in person at
the Meeting. All written notices of revocation and other communications with
respect to revocation of proxies should be addressed as follows: Providian
Corporation, 400 West Market Street, Post Office Box 32830, Louisville,
Kentucky 40232, Attention: Secretary. Attendance at the Meeting will not in
and of itself constitute revocation of a proxy.
The Providian Board is not currently aware of any business to be acted upon
at the Meeting other than as described herein. If, however, other matters are
properly brought before the Meeting, the persons appointed as proxies will
have discretion to vote or act thereon according to their best judgment.
Stockholders of Providian will not be entitled to present any matters for
consideration at the Meeting.
SOLICITATION OF PROXIES
In addition to solicitation by mail, directors, officers and employees of
Providian, who will not be specifically compensated for such services, may
solicit proxies from the stockholders of Providian, personally or by
telephone, telecopy or telegram or other forms of communication. Brokerage
houses, nominees, fiduciaries and other custodians will be requested to
forward soliciting materials to beneficial owners and will be reimbursed for
their reasonable expenses incurred in sending proxy materials to beneficial
owners.
22
<PAGE>
In addition, Providian has retained Georgeson & Company, Inc. to assist in
the solicitation of proxies from its stockholders. Georgeson & Company, Inc.
will assist by distributing proxy material to banks, brokers and other
institutional holders and by reviewing charges from brokers for forwarding
material to beneficial owners. Georgeson & Company, Inc. will also monitor
returned proxy cards and may assist in sending follow-up letters and in some
cases making phone calls to broker clients and larger record holders. The fees
to be paid to such firm for such services by Providian are not expected to
exceed $8,000, plus reasonable out-of-pocket costs and expenses such as
trucking, air freight and postage, data processing and other miscellaneous
items. In addition, telephone calls to registered stockholders and non-
objecting beneficial owners would be billed at $5.00 per call. Providian will
bear its own expenses in connection with the solicitation of proxies for the
Meeting.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
J.P. Morgan & Co. Incorporated ("J.P. Morgan") has filed a Schedule 13G with
the Securities and Exchange Commission stating that it owned, as of December
31, 1996, 9.8 percent (9,232,799 shares) of the outstanding Providian Common
Stock. J. P. Morgan indicated that it had sole power to vote or direct the
voting of 6,013,939 shares and shared power to vote with respect to 90,605
shares. In addition, Providian believes that, as of March 31, 1997, Fidelity
Investments, Inc. owned 5.9 percent (approximately 5,492,000 shares) of the
outstanding Providian Common Stock.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES OF PERCENT OF COMMON
BENEFICIAL OWNER COMMON STOCK OWNED STOCK OWNED
------------------- ------------------- -----------------
<S> <C> <C>
J.P. Morgan & Co. Incorporated............ 9,232,799 9.8
60 Wall Street
New York, New York 10260
Fidelity Investments, Inc. ............... 5,492,000 5.9
82 Devonshire Street
Boston, Massachusetts 02109
</TABLE>
SECURITY OWNERSHIP OF MANAGEMENT
The number of shares of Providian Common Stock owned by each director and
executive officer named in the Summary Compensation Table in this Proxy
Statement-Prospectus, and directors and executive officers as a group, as of
March 1, 1997, is shown in the following table.
<TABLE>
<CAPTION>
NAME OF DIRECTOR NUMBER PERCENT
OR EXECUTIVE OFFICER OF SHARES OF CLASS
-------------------- --------- --------
<S> <C> <C>
Irving W. Bailey II..................................... 676,149(1) *
John L. Clendenin....................................... 1,803 *
John M. Cranor III...................................... 7,271 *
Lyle Everingham......................................... 10,103 *
Raymond V. Gilmartin.................................... 1,898 *
J. David Grissom........................................ 15,109 *
Watts Hill, Jr.......................................... 53,376 *
Frederick C. Kessell.................................... 125,412(2) *
Ned C. Lautenbach....................................... 2,028 *
F. Warren McFarlan...................................... 7,328 *
Shailesh J. Mehta....................................... 245,419(3) *
Julie A. Montanari...................................... 41,502(4) *
Martha R. Seger......................................... 2,521 *
Larry D. Thompson....................................... 3,955 *
Robert L. Walker........................................ 40,370(5) *
Directors and Executive Officers as a group (22
persons)............................................... 1,468,320(6) 1.6
</TABLE>
23
<PAGE>
- --------
(*) Less than 1%.
(1) Includes 135,806 shares held directly by Mr. Bailey; 7,216 shares held in
Mr. Bailey's account under Providian's Thrift Savings Plan over which Mr.
Bailey holds limited investment power; 28,027 shares held in Mr. Bailey's
account under Providian's Stock Ownership Plan subject to the vesting
requirements set forth in footnote 3 to the Summary Compensation Table;
and 505,100 shares which Mr. Bailey has the right to acquire pursuant to
stock options exercisable within 60 days of the Annual Meeting Record
Date.
(2) Includes 24,771 shares held directly by Mr. Kessell; 2,911 shares held in
Mr. Kessell's account under Providian's Thrift Savings Plan over which Mr.
Kessell holds limited investment power; 8,729 shares held in Mr. Kessell's
account under Providian's Stock Ownership Plan subject to the vesting
requirements set forth in footnote 3 to the Summary Compensation Table;
and 89,001 shares which Mr. Kessell has the right to acquire pursuant to
stock options exercisable within 60 days of the Annual Meeting Record
Date.
(3) Includes 45,516 shares held directly by Mr. Mehta; 611 shares held in Mr.
Mehta's account under the Providian Bancorp 401(k) Plan over which Mr.
Mehta holds limited investment power; 666 shares held in Mr. Mehta's
account under Providian's Thrift Savings Plan over which Mr. Mehta holds
limited investment power; 19,242 shares held in Mr. Mehta's account under
Providian's Stock Ownership Plan subject to vesting requirements set forth
in footnote 3 to the Summary Compensation Table; and 179,384 shares which
Mr. Mehta has the right to acquire pursuant to stock options exercisable
within 60 days of the Annual Meeting Record Date.
(4) As noted in the Summary Compensation Table, Ms. Montanari resigned as
President of Providian Bancorp effective January 31, 1997; includes 11,770
held directly by Ms. Montanari; 932 shares held in Ms. Montanari's account
under the Providian Bancorp 401(k) Plan over which Ms. Montanari holds
limited investment power; 0 shares held in Ms. Montanari's account under
Providian's Stock Ownership Plan subject to vesting requirements set forth
in footnote 3 to the Summary Compensation Table; and 28,800 shares which
Ms. Montanari has the right to acquire pursuant to stock options
exercisable within 60 days of the Annual Meeting Record Date.
(5) Includes 9,697 shares held directly by Mr. Walker; 1,209 shares held in
Mr. Walker's account under Providian's Thrift Savings Plan over which Mr.
Walker holds limited investment power; 5,530 shares held in Mr. Walker's
account under Providian's Stock Ownership Plan subject to vesting
requirements set forth in footnote 3 to the Summary Compensation Table;
and 23,934 shares which Mr. Walker has the right to acquire pursuant to
stock options exercisable within 60 days of the Annual Meeting Record
Date.
(6) Includes 260,912 shares beneficially owned by all executive officers, of
which 19,253 shares are held in such officers' accounts under certain tax-
qualified defined contribution plans over which they hold limited
investment power; and of which 87,784 shares are held in such officers'
accounts under Providian's Stock Ownership Plan subject to the vesting
requirements set forth in footnote 3 to the Summary Compensation Table;
and includes 994,922 shares that the same group of officers has the right
to acquire pursuant to stock options exercisable within 60 days of the
Annual Meeting Record Date.
24
<PAGE>
PROPOSAL 1: ELECTION OF DIRECTORS
Providian's Certificate of Incorporation provides for the classification of
the Board of Directors into three classes with each class of directors serving
staggered three-year terms. Four directors are to be elected at the 1997
Annual Meeting to serve for a term of three years expiring in 2000.
Directors will be elected by a plurality of the votes cast at the Meeting.
All nominees have consented to be named and to serve if elected. The Company
does not presently know of any reason that would preclude any nominee from
serving if elected. If any nominee, for any reason, should become unable or
unwilling to stand for election as a director, either the shares of Providian
Common Stock represented by all proxies authorizing votes for such nominee
will be voted for the election of such other person as the Board of Directors
may recommend, or the number of directors to be elected at the Meeting will be
reduced accordingly. All of the nominees are current directors of Providian.
For each of the four nominees, as well as the seven directors whose terms
continue after the Meeting, information follows as to age, length of service
as a director of Providian, positions and offices with Providian, principal
occupations during the past five years and other directorships of publicly-
held companies.
NOMINEES FOR ELECTION AT THE ANNUAL MEETING:
LYLE EVERINGHAM, 70
Director since 1980.
Retired Chairman and Chief Executive Officer, Kroger Co., and officer of
that corporation or one of its divisions since 1963; Chairman of the
Executive Committee through May, 1991.
Other directorship: Federated Department Stores, Inc.
WATTS HILL, JR., 70
Director since 1974.
Business and Financial Consultant, Watts Hill, Jr. & Associates, 1973 to
present.
NED C. LAUTENBACH, 53
Director since 1995.
Senior Vice President and Group Executive, Sales and Services, IBM
Corporation, 1995 to present; Mr. Lautenbach has been with IBM Corporation
since 1968.(1)
LARRY D. THOMPSON, 51
Director since 1994.
Partner, King & Spalding (a law firm); he has been a partner with the firm
since 1986.(1)
DIRECTORS CONTINUING IN OFFICE WHOSE TERMS EXPIRE IN 1998 ARE:
JOHN M. CRANOR III, 50
Director since 1991.
President and Chief Executive Officer, Long John Silver's Restaurants,
Inc., 1996 to present; President and Chief Executive Officer of KFC
Corporation, 1989 to 1994.
J. DAVID GRISSOM, 58
Director since 1978.
Chairman, Mayfair Capital, 1989 to present.
Other directorships: Churchill Downs, Inc.; Louisville Gas & Electric
Company; and Regal Cinemas, Inc.
- --------
(1) Providian retained King & Spalding during 1996 to perform certain legal
services.
25
<PAGE>
F. WARREN MCFARLAN, PH.D., 59
Director since 1986.
Senior Associate Dean and Professor of Business Administration, Harvard
Business School, 1973 to present; Director External Affairs, Harvard
Business School, 1995 to present; a member of the Harvard faculty since
1964.
Other directorships: Pioneer Hi-Bred International, Inc.; and Computer
Sciences Corporation.
MARTHA R. SEGER, PH.D., 65
Director since 1991.
Distinguished Visiting Professor of Finance, Central Michigan University,
1993 to present; John M. Olin Distinguished Fellow, University of Arizona,
1991 to 1993; Member, Board of Governors of the Federal Reserve System,
1984 to 1991.
Other directorships: Xerox Corp.; Kroger Co.; Johnson Controls, Inc.; Amoco
Co.; Fluor Corp.; and Tucson Electric Power Co.
DIRECTORS CONTINUING IN OFFICE WHOSE TERMS EXPIRE IN 1999 ARE:
IRVING W. BAILEY II, 55
Director since 1987.
Chairman and Chief Executive Officer, Providian Corporation, 1988 to
present; President, 1988 to 1994.
Other directorship: Computer Sciences Corporation
JOHN L. CLENDENIN, 62
Director since 1984.
Chairman, BellSouth Corporation, 1984 to present; Chief Executive Officer,
1984 to 1996.
Other directorships: BellSouth Corporation; Coca-Cola Enterprises, Inc.;
Equifax Inc.; The Home Depot, Inc.; The Kroger Company; National Service
Industries, Inc.; RJR Nabisco, Inc.; Springs Industries, Inc.; and Wachovia
Corporation.
RAYMOND V. GILMARTIN, 56
Director since 1993.
Chairman, President and Chief Executive Officer, Merck & Co., Inc., 1994 to
present; Chairman, President and Chief Executive Officer, Becton Dickinson
& Co., 1989 to 1994.
Other directorships: Merck & Co., Inc. and Public Service Enterprise Group,
Inc.
SHAILESH J. MEHTA, 47
Director since 1994.
President and Chief Operating Officer, Providian Corporation, 1994 to
present; Executive Vice President, 1993 to 1994; Chairman and Chief
Executive Officer, Providian Direct Insurance, 1993 to 1994; Chairman,
President and Chief Executive Officer, Providian Bancorp, 1988 to 1994.
Other directorship: MasterCard International, Inc.
COMMITTEES OF THE BOARD
The Providian Board has several committees which perform various functions,
including those described below.
The AUDIT COMMITTEE makes recommendations to the Board of Directors with
respect to engagement of Providian's independent auditors, reviews with the
independent auditors the plan and results of the auditing engagement, and
reviews Providian's system of internal controls and accounting practices. The
members of the Audit Committee are Messrs. Thompson (Chair), Clendenin,
Grissom and Dr. Seger. The Audit Committee met five times during 1996.
26
<PAGE>
The HUMAN RESOURCES COMMITTEE reviews and approves the compensation and
benefits policies and practices of Providian except that approval of the
salaries and bonuses of the Chairman of the Board, Chief Executive Officer and
President are reserved to the full Board of Directors. The committee also
recommends to the Board nominations for directors of Providian. In addition,
the committee administers Providian's stock option plans and Stock Ownership
Plan. The Human Resources Committee is comprised of Dr. McFarlan (Chair), and
Messrs. Cranor, Everingham, Gilmartin, Hill and Lautenbach. The Human
Resources Committee met six times during 1996.
DIRECTORS' MEETINGS
Providian's Board of Directors held six regular meetings and two special
meetings in 1996. Each director attended at least 75 percent of all Board and
committee meetings held in 1996 during the period when he or she was a
director and committee member.
DIRECTORS' COMPENSATION
Directors who also are officers of Providian receive no additional
compensation for serving on Providian's Board of Directors. All other
directors are paid an annual retainer of $54,000, and may elect to receive all
or a portion of this amount in shares of Providian Common Stock. Directors who
elect to receive all or at least 25 percent of their retainer in Providian
Common Stock will receive an award equal to 25 percent of their retainer in
shares of restricted stock under Providian's Stock Ownership Plan. Such
restricted stock vests one-half after three years, and the balance after six
years, if the director does not dispose of the related shares of unrestricted
Providian Common Stock during such vesting periods. Committee chairs receive
an additional $2,000 annual retainer. Providian's directors also are
reimbursed for necessary and reasonable expenses incurred in the performance
of their duties as directors. In addition to this compensation, Providian has
purchased for each director (other than officers of Providian) from
Commonwealth Life Insurance Company, UniversaLife insurance policies, which
provide a death benefit of $100,000 to a beneficiary designated by the
director. To the extent that these policies create additional taxable income
for these directors, Providian also reimburses each director as necessary to
compensate for any additional taxes.
27
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following table shows information for the last three fiscal years with
regard to compensation for services rendered in all capacities to Providian by
the Chief Executive Officer and the other four most highly compensated
executive officers of Providian.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------- ---------------------------------------------
OTHER LONG TERM
ANNUAL RESTRICTED SECURITIES INCENTIVE ALL OTHER
COMPEN- STOCK UNDERLYING PLAN COMPEN-
NAME AND SALARY BONUS SATION AWARD(S) OPTIONS/ PAYOUTS SATION
PRINCIPAL POSITION YEAR ($)(1) ($) ($)(2) ($)(3)(4) SAR (#) ($) ($)(5)
------------------ ---- ------- --------- ------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Irving W. Bailey II..... 1996 837,019 1,056,100 27,880 323,022 65,000 236,196 27,622
Chairman and CEO 1995 744,615 518,500 26,241 214,784 60,000 340,752 21,717
1994 708,077 462,860 18,979 400,635 210,850 1,139,815 23,366
Shailesh J. Mehta....... 1996 629,327 844,900 28,953 256,647 52,000 181,968 25,763
President and COO 1995 528,755 362,900 26,184 156,851 45,000 264,603 16,808
1994 430,993 363,670 19,289 213,428 156,725(6) 406,635 17,301
Frederick C. Kessell.... 1996 336,692 225,000 2,316 76,270 20,000 80,332 10,661
President--Providian
Capital 1995 291,923 200,000 0 73,590 15,500 94,409 9,183
Management; CIO 1994 273,308 50,000 0 126,463 70,300 455,948 8,631
Julie Montanari(7)...... 1996 310,666 200,000 0 32,514 15,000 130,157 10,055
President--Providian
Bancorp 1995 274,214 180,584(8) 0 73,213(8) 19,600 125,728 9,014
1994 225,919 165,000 0 90,196 71,800(6) 149,413 7,425
Robert L. Walker........ 1996 257,692 250,000 1,428 80,300 12,500 71,531 8,054
Senior Vice President--
CFO 1995 243,462 150,000 0 59,943 11,800 89,830 7,584
1994 217,377 107,100 0 67,827 63,500 164,274 6,521
</TABLE>
- --------
(1) Represents amounts received as salary during the year. Such amounts may
vary in any given year as a result of the number of pay periods during
such year.
(2) Represents amounts reimbursed during the fiscal year for the payment of
taxes.
(3) Represents the dollar value of restricted stock awarded under Providian 's
Stock Ownership Plan ("SOP"). Nonrestricted stock awards under the SOP are
matched with a like number of shares of restricted stock and are intended
to replace a portion of cash amounts previously paid under Providian 's
other incentive plans. One half of such restricted stock will vest if all
nonrestricted shares are held for three years or in the event of death,
disability, or retirement during such three year period. The other half
will vest if such nonrestricted stock is held for six years or in the
event of death, disability or retirement during the final three year
vesting period. In the event of a change in control of Providian, all of
such shares vest immediately.
(4) Dividends are paid on restricted stock awards under the SOP at the same
rate as paid to all stockholders. On December 31,1996, with a stock
closing price of $51.375, Irving W. Bailey II held 24,974 restricted
shares having a then market value of $1,283,039, Shailesh J. Mehta held
16,687 restricted shares having a then market value of $857,295, Frederick
C. Kessell held 8,390 restricted shares having a then market value of
$431,036, Julie A. Montanari held 6,809 restricted shares having a then
market value of $349,812, and Robert L. Walker, held 4,810 restricted
shares having a then market value of $247,114.
(5) Represents Providian contributions or liabilities under Providian's
defined contribution plans, which include a qualified and a nonqualified
plan. Under the qualified plan, the following contributions were made: Mr.
Bailey received $4,950, Mr. Mehta received $4,500, Mr. Kessell received
$4,500, Ms. Montanari received $4,950 and Mr. Walker received $4,500.
Under the nonqualified plan, the increases in Providian's liabilities were
as follows: $22,672 for Mr. Bailey, $21,263 for Mr. Mehta, $6,161 for Mr.
Kessell, $5,105 for Ms. Montanari, and $3,554 for Mr. Walker. With respect
to Ms. Montanari, contributions for 1994, 1995 and 1996 were made under
the 401(k) Plan of Providian Bancorp.
(6) Represents options granted under Providian's 1989 Stock Option Plan and
equity units granted under the Providian Bancorp Equity Unit Plan.
28
<PAGE>
(7) Ms. Montanari served as President--Providian Bancorp until January 1997,
when she resigned to become an external executive consultant to Providian
Bancorp.
(8) Ms. Montanari's 1995 Management Incentive Plan restricted stock award was
revalued six months after it was granted in compliance with the
requirements of Section 83(b) of the Internal Revenue Code.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS (SARS)
The following table contains information concerning the grant of stock
options in 1996 under Providian's 1995 Stock Option Plan to the named
executive officers of Providian. Included is information on potential
realizable value(s) to the named executive officers, all optionees as a group,
and all of Providian's stockholders, assuming growth of Providian Common Stock
at the stated rates of appreciation.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/ POTENTIAL REALIZABLE VALUE
UNDERLYING SARS AT ASSUMED ANNUAL RATES OF
OPTIONS/ GRANTED TO STOCK PRICE APPRECIATION
SARS EMPLOYEES EXERCISE OR BASE FOR OPTION TERM(1)
GRANTED IN FISCAL PRICE EXPIRATION ---------------------------
NAME (#)(2) YEAR ($/SH)(3) DATE 0%($) 5%($) 10%($)
---- ---------- ---------- ---------------- ---------- ----- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Irving W. Bailey II............... 65,000 6.49% 40.3125 08/07/2006 0 1,647,900 4,176,103
Shailesh J. Mehta................. 52,000 5.19% 40.3125 08/07/2006 0 1,318,320 3,340,883
Frederick C. Kessell.............. 20,000 1.99% 40.3125 08/07/2006 0 507,046 1,284,955
Julie A. Montanari................ 15,000 1.49% 40.3125 08/07/2006 0 380,285 963,716
Robert L. Walker.................. 12,500 1.24% 40.3125 08/07/2006 0 316,904 803,097
All Optionees
(Includes above individuals)(4).. 1,001,000 100.00% 40.3125 08/07/2006 0 25,377,652 64,311,948
All Stockholders.................. N/A N/A N/A N/A 0
</TABLE>
- --------
(1) The amounts shown represent certain assumed rates of appreciation only.
Actual gains on stock option exercises, if any, are dependent on the
future performance of Providian Common Stock (and after the Distribution
and the Merger, on the future performance of AEGON Common Shares and
Providian Bancorp Common Stock) and overall condition of the stock market,
as well as the optionholder's continued employment through the vesting
period. The amounts reflected in this table may not necessarily be
achieved.
(2) Denotes options granted under the 1995 Stock Option Plan.
(3) The exercise price of options granted under the 1995 Stock Option Plan is
equal to the average of Providian's high and low price of Providian Common
Stock on the date of grant. With respect to the options granted, options
vest one-third per year and are fully vested after three years and vest
immediately upon the event of death or disability of the optionee or
change in control of Providian, such as completing the Merger. Options
will expire 10 years from the date of grant.
(4) Optionees will realize benefit only upon an increase in the price of
Providian Common Stock, which will benefit all stockholders
commensurately. A zero percentage gain in the stock price appreciation
will result in zero dollars for the optionee.
29
<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to the named
executives concerning the exercise of options during 1996, and unexercised
options and SARs held as of the end of 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT 12-31- IN-THE-MONEY OPTIONS
SHARES 96(#) AT 12-31-96($)(1)
ACQUIRED ON VALUE ------------------------- -------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE
NAME (#) ($) EXERCISABLE UNEXERCISABLE ($) ($)
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Irving W. Bailey II..... 31,120 889,361 505,100 119,950 9,692,045 1,624,062
Shailesh J. Mehta....... 0 0 179,384 94,141 2,226,957 1,285,767
Equity Units (2)....... 0 0 116,727 1,100 15,333,446 94,501
Frederick C. Kessell.... 25,916 610,114 89,001 32,499 1,078,401 426,679
Julie A. Montanari...... 0 0 80,601 30,399 945,708 415,628
Equity Units (2)....... 4,000 474,480 30,667 333 3,906,585 28,637
Robert L. Walker........ 3,600 89,550 85,434 23,366 1,119,239 317,323
</TABLE>
- --------
(1) Based on the average of the high and low price of Providian Common Stock
on December 31, 1996 of $51.5625 per share.
(2) Represents estimated fair market value of $153.35 per Equity Unit
outstanding under the Providian Bancorp Equity Unit Plan as of December
31, 1996.
30
<PAGE>
PENSION PLANS
The following table shows the estimated annual pension benefits payable to a
covered participant upon retirement at age 65 under Providian's qualified
defined benefit pension plan, as well as the nonqualified supplemental pension
plan that provides benefits that would otherwise be denied participants by
reason of certain Internal Revenue Code limitations on qualified plan
benefits. Estimated pension benefits are based on remuneration covered under
the plans for a five-year period ended December 31, 1996 and years of service
with Providian and its subsidiaries.
PROVIDIAN CORPORATION RETIREMENT PLAN
ESTIMATED BENEFIT TABLE
<TABLE>
<CAPTION>
5 YEARS 10 YEARS 15 YEARS 20 YEARS 25 YEARS 30 YEARS
OF OF OF OF OF OF
REMUNERATION SERVICE SERVICE SERVICE SERVICE SERVICE SERVICE
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 400,000 $ 34,517 $ 69,035 $103,552 $138,070 $ 172,587 $ 207,105
500,000 43,267 86,535 129,802 173,070 216,337 259,605
600,000 52,017 104,035 156,052 208,070 260,087 312,105
700,000 60,767 121,535 182,302 243,070 303,837 364,605
800,000 69,517 139,035 208,552 278,070 347,587 417,105
900,000 78,267 156,535 234,802 313,070 391,337 469,605
1,000,000 87,017 174,035 261,052 348,070 435,087 522,105
1,100,000 95,767 191,535 287,302 383,070 478,837 574,605
1,200,000 104,517 209,035 313,552 418,070 522,587 627,105
1,300,000 113,267 226,535 339,802 453,070 566,337 679,605
1,400,000 122,017 244,035 366,052 488,070 610,087 732,105
1,500,000 130,767 261,535 392,302 523,070 653,837 784,605
1,600,000 139,517 279,035 418,552 558,070 697,587 837,105
1,700,000 148,267 296,535 444,802 593,070 741,337 889,605
1,800,000 157,017 314,035 471,052 628,070 785,087 942,105
1,900,000 165,767 331,535 497,302 663,070 828,837 994,605
2,000,000 174,517 349,035 523,552 698,070 872,587 1,047,105
2,100,000 183,267 366,535 549,802 733,070 916,337 1,099,605
2,200,000 192,017 384,035 576,052 768,070 960,087 1,152,105
2,300,000 200,767 401,535 602,302 803,070 1,003,837 1,204,605
2,400,000 209,517 419,035 628,552 838,070 1,047,587 1,257,105
</TABLE>
Based on Normal Retirement Age of 65 as of December 31, 1996; year of birth
1931; Covered Compensation of $27,576.
The compensation covered by the plans includes all compensation in the form
of salary and bonuses as shown in the Summary Compensation Table, plus
deferrals under Providian's Thrift Savings Plan and the Providian Bancorp
401(k) Plan and certain pre-tax contributions to Providian's flexible benefits
plans. The benefits are computed on a straight-life annuity basis and are
subject to deduction for Social Security offset amounts. For purposes of
computing this offset, the table assumes a participant is normal retirement
age (65) as of December 31, 1996. Credited years of service under the plans
and other arrangements as of December 31, 1996 for the named executive
officers were as follows: Mr. Bailey, 16; Mr. Mehta, 9; Mr. Kessell, 12; Ms.
Montanari, 5; Mr. Walker, 9.
31
<PAGE>
HUMAN RESOURCES COMMITTEE
EXECUTIVE COMPENSATION REPORT
Providian's executive compensation programs are administered by the Human
Resources Committee (the "Committee"), a committee of the Board of Directors
composed exclusively of non-employee directors. The Committee either approves
or recommends to the Board of Directors payment amounts and award levels for
Providian's executive officers. None of the non- employee directors has any
interlocking or other relationship with Providian that would call into
question his or her independence as a Committee member.
COMPENSATION PHILOSOPHY
The policies which govern executive compensation continue to align changes
in total compensation with changes in the value created for our shareholders.
These policies require that our executive compensation program:
. reflect a clear risk-based pay-for-performance relationship;
. integrate executive compensation with Providian's annual business
planning and measurement process;
. reward executives with direct ownership in Providian and align their
personal interests with shareholder interests to continually reinforce
building shareholder value; and
. attract and retain key executives critical to Providian's long-term
success.
Providian's executive compensation program has been and continues to be
based on the following three components, each of which supports our overall
compensation philosophy.
BASE SALARY
Providian uses a consistent methodology to determine base salaries for all
employees. Market reference points, e.g. 50th percentile, are determined for
specific positions and job families using relevant salary surveys. Individual
salaries are then established to assure competitive pay given individual
performance. For executive positions, Providian annually participates in
surveys of diversified insurance and financial services companies. In
addition, an independent consulting firm provides an assessment of our
competitive position relative to a comparator group. Currently, this group
includes eight life insurance and seven diversified financial services
companies. This group is subject to periodic review and is modified as
comparators merge or are acquired or as new comparators emerge with sufficient
market capitalization. Base salaries for executives are reviewed by the
Committee relative to competitive pay levels, as well as against individual
performance objectives, with the goal of positioning base salaries near the
50th percentile of our relevant competitive markets.
In May 1995, the Committee reviewed 1994 proxy data on the 15 company
comparator group that indicated that Mr. Bailey's 1995 salary was below the
competitive median after having approved a 4.9% increase in February 1995. In
December 1995, the Committee recommended an increase effective January 1, 1996
of $50,000, or 6.7%, which provided a new base salary of $800,000. In May
1996, the Committee reviewed 1995 proxy data on the comparator group that
revealed a shortfall continued to exist, and recommended an increase effective
July 1, 1996 of $75,000, or 9.4%, to a new base salary of $875,000. These
decisions reflected the Committee's desire to maintain a competitive base
salary for Mr. Bailey.
ANNUAL INCENTIVES
Providian provides annual incentive award opportunities for executives based
upon the operating earnings of Providian and Providian's various business
units, as well as the successful achievement of individual performance
objectives, which are established annually. The earnings plan is set for the
upcoming year as part of Providian's annual business planning process and is
approved by the Committee before the annual performance cycle commences. The
Committee reviews and approves award payouts in the February following the
annual performance cycle, based upon the prior year's performance results. A
portion of annual incentive
32
<PAGE>
awards may be paid to participants in stock, under the provisions of the Stock
Ownership Plan. It has been Providian's policy to set challenging earnings
targets which, if achieved, would position total annual cash compensation
above median competitive levels. Achieving target earnings per share (EPS)
performance would position Mr. Bailey's total annual cash compensation below
the median for chief executive officers of the 15-company peer group. Earnings
performance above or below this target results in a formula-driven award by
the Committee.
In December 1995, the Committee recommended an increase in the leverage of
Mr. Bailey's annual incentive from 150% of the target opportunity to 175%.
This change, effective for the 1996 plan year, was intended to provide a more
competitive total cash compensation opportunity for above target business
results.
Mr. Bailey's annual incentive award for 1996 was based on the degree to
which target EPS for Providian were achieved. We recommended that he receive
an award of $1,056,100, based upon Providian achieving EPS of $4.64 which was
well above the EPS target established for 1996.
LONG TERM INCENTIVES
Providian has provided executives both cash and equity-based long term
incentive opportunities. Under Providian's Long Term Incentive Plan (LTIP),
cash incentive awards are based upon Providian's relative earnings growth and
return on equity (ROE) over three-year performance cycles, as measured against
the company peer group depicted in the Performance Graph in this Proxy
Statement-Prospectus. For participants in business units, awards are, in part,
based on such measures as expense ratio, return on capital and return on
assets relative to predetermined performance levels. Three-year LTIP
performance cycles for 1991-93, 1992-94, and 1993-95 are complete. These
performance cycles resulted in payments to executives in May 1994, 1995 and
1996. Each participant had an award opportunity determined as a percent of
salary in the last year of the performance cycle. Individual opportunities
were based on position, function and responsibilities and typically would
position total compensation at the 60th percentile of our relevant competitive
markets.
In May 1996, Mr. Bailey received a Long-Term Incentive Award for the 1993-95
performance cycle of $236,196. This award was based on Providian achieving an
average ROE of 14.8% for the cycle, ranking eighth among the peer companies
and an average earnings growth rate of 7.9%, ranking twelfth among the peer
group. These performance levels placed Providian below the target rank of
seventh on a combined basis and Mr. Bailey's award was calculated commensurate
with this performance.
Through Providian's Stock Ownership Plan (SOP), a portion (25%) of all
executive incentive awards is paid in Providian Common Stock, based on this
Committee's administration of the Plan. The amount of SOP awards granted to
executives is based on identical performance measures employed by the
Committee to determine annual and long term incentive awards, as described
above. Stock awarded to participants under the SOP is deposited into an
account in the participant's name and matched with an equal number of shares
of restricted stock. Participants are free to withdraw the awarded shares of
Providian Common Stock at any time, but will forfeit all shares of matching
restricted stock if the withdrawal occurs prior to the end of the applicable
restriction period.
In May, we approved an SOP grant equal to 25% of Mr. Bailey's 1993-95 LTIP
incentive plan award, or 1,276 shares at $46.25 per share (the average of the
high and low price of Providian Common Stock on the award date), matched by an
equal number of restricted shares, which will fully vest if Mr. Bailey holds
the awarded shares for a six year period. In February 1997, we approved an SOP
grant equal to 25% of Mr. Bailey's annual incentive award for 1996 or 4,773
shares at $55.3125 price per share, matched by an equal number of restricted
shares, which will fully vest if the awarded shares are held for a six year
period.
Providian also provides grants of stock options under the 1995 Stock Option
Plan to executives and other employees. These option grants tie rewards to the
future performance of Providian Common Stock and provide value only when the
price of Providian Common Stock increases above the option grant price
(determined by
33
<PAGE>
the average of the high and low price of Providian Common Stock on the date of
grant). Options vest in equal amounts over three years and require the
executive to be employed by Providian at the time of vesting. Options
generally expire ten years from the date of grant. Through these grants, we
intend to motivate executives to improve long-term stock performance.
In granting stock options, the Committee takes into account competitive
grant practices within the diversified insurance and financial services
industry, the executive's level of responsibility, individual contribution and
total annualized compensation. The market value of grant at the time of award
reflects a percentage of current base salary for recipients. These
percentages, on average, compare to median values for grant value within the
industry. Mr. Bailey was awarded a grant of 65,000 stock options at an
exercise price of $40.3125 per share on August 7, 1996.
SUMMARY OF CEO COMPENSATION
Overall, we have attempted to ensure that Mr. Bailey's base salary remains
competitive, but continue to place the greater percentage of his total
compensation at risk and related to Providian's performance. The annual and
multi-year cash incentives require sustained financial performance and the
restricted stock and stock options require increased shareholder value.
Human Resources Committee
F. Warren McFarlan (Chair)
John M. Cranor III
Lyle Everingham
Raymond V. Gilmartin
Watts Hill, Jr.
Ned C. Lautenbach
34
<PAGE>
PERFORMANCE GRAPH
Set forth below is a line-graph presentation comparing cumulative, five-year
stockholder returns for Providian Common Stock on an indexed basis with the
Standard & Poor's 500 Stock Index and an index of peer issuers selected by
Providian. The Human Resources Committee of the Board of Directors has
approved a group of 17 publicly-traded life insurance companies as its index
of peer issuers.
[GRAPH]
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
Providian $100.00 $116.02 $121.51 $103.67 $140.05 $180.53
S & P 100.00 107.60 113.39 120.00 164.94 202.71
Peer Group Index 100.00 134.44 141.51 131.87 187.39 235.55
The above graph assumes that the value of the investment in Providian Common
Stock and each index was $100 on December 31, 1991 and that all dividends were
reinvested. The 17 companies used for purposes of peer comparison are: AFLAC
Inc.; American General Corp.; American National Insurance Co.; AON Corp.;
Conseco, Inc.; Equitable of Iowa Companies; Home Beneficial Corp.; Jefferson-
Pilot Corp.; The Liberty Corp.; Lincoln National Corp.; ReliaStar Financial
Corp.; Provident Cos. Inc.; Torchmark Corp.; Transamerica Corp.; Unitrin; UNUM
Corp.; and USLIFE Corp. First Colony Corp. and Independent Insurance Group,
Inc., which were previously among the group of peer issuers, were removed from
the group since they are no longer publicly traded companies.
EXECUTIVE EMPLOYMENT AND CHANGE IN CONTROL AGREEMENTS
Since 1988, Mr. Bailey has served as Chairman and Chief Executive Officer of
Providian pursuant to an employment agreement with Providian. The term of
employment under the agreement currently expires on June 30, 1999, but is
automatically renewable for additional one-year periods unless terminated by
either party pursuant to the terms of the agreement. The agreement provides
for an initial base salary of $475,000, subject to annual review, and entitles
Mr. Bailey to participate in Providian's management incentive compensation
plans. The agreement entitles Mr. Bailey to a supplemental pension to be paid
at age sixty equal to 50 percent of the average of his total cash compensation
(base salary, annual incentives and long term incentives) for the five highest
consecutive years of his employment with Providian in the ten years preceding
the date of his retirement, subject to offset by pension amounts and certain
Social Security benefits otherwise received by Mr. Bailey. If Mr. Bailey's
employment is terminated without cause or he leaves for good reason (as
defined in the agreement),
35
<PAGE>
he will be entitled to salary and bonus payments and participation in
Providian's employee benefit plans through June 30, 2001 (or, if later, for 24
months following such termination, but not beyond his 65th birthday) as well
as a payout with respect to stock options then held by Mr. Bailey. Termination
without cause, for this purpose, will include the provision of notice by
Providian preventing the extension of the employment agreement through June
30, 2001. In the event of termination without cause within three years
following a change in control of Providian (as defined in the agreement and
described below), or in the event Mr. Bailey leaves Providian for any reason
during a 30-day window period following the first anniversary of a change in
control or leaves for good reason at any time within three years after the
change in control, Mr. Bailey will be entitled to a lump sum payment equal to
three times his annual base salary plus highest annual bonus, and continuation
of employee benefits for three years following termination of employment. The
agreement also provides for indemnification by Providian of Mr. Bailey for any
excise taxes if benefits paid pursuant to a change in control trigger adverse
tax consequences to him.
Under the agreement, a change in control occurs when (a) any person (except
Providian, any Providian sponsored or maintained employee benefit plan and any
corporation with an identity of beneficial ownership) becomes the beneficial
owner of 20 percent or more of the outstanding Common Stock or Providian's
outstanding Voting Securities (hereafter defined); (b) the individuals who
were directors on August 9, 1989, including subsequent directors who are
approved by a majority of the incumbent directors, cease to represent a
majority of the Board of Directors; (c) Providian is reorganized, merged or
consolidated such that all or substantially all of the persons beneficially
owning Providian's outstanding Common Stock and outstanding Voting Securities
before the reorganization, merger or consolidation will not beneficially own
more than 60 percent of the outstanding common stock and Voting Securities of
the corporation resulting from the reorganization, merger or consolidation; or
(d) Providian is liquidated, dissolved or sells all or substantially all of
its assets, except to a corporation with an identity of beneficial ownership.
A corporation has an identity of beneficial ownership if more than 60 percent
of its outstanding shares of common stock and its outstanding Voting
Securities will be beneficially owned, after acquiring the threshold 20
percent of Providian's outstanding Common Stock or outstanding Voting
Securities or all or substantially all of Providian's assets, by all or
substantially all of the persons beneficially owning Providian's outstanding
Common Stock and outstanding Voting Securities before the acquisition in
substantially the same proportion. "Voting Securities," as used herein, means
the combined voting power of outstanding voting securities entitled to vote
generally in an election of directors. The consummation of the Merger will
constitute a change in control under the agreement.
Providian has entered into agreements with Messrs. Kessell, Mehta and Walker
and eleven other officers of Providian, six of whom are executive officers,
providing certain benefits upon termination of employment following a change
in control of Providian (as defined in the agreements and described below).
Pursuant to the agreements, if a covered executive's employment is terminated
within three years after the date of a change in control for any reason other
than death, disability, or for cause or if the executive leaves Providian for
any reason during a 30-day window period following the first anniversary of a
change in control or leaves for good reason (as defined in the agreement) at
any time within three years after change in control, the executive is entitled
to severance pay and certain other benefits. The severance payments are based
on the executive's annual base salary and bonus, multiplied by a factor of two
or three, depending on the executive. Under the agreements, a change in
control is defined to include the events described in Mr. Bailey's agreement
except that the date of the Board of Directors membership for purposes of
subsection (b) varies depending on the date of the particular agreement. The
agreements also provide for indemnification by Providian of the executive for
any excise taxes in the event that benefits paid pursuant to a change in
control trigger adverse tax consequences to the executive.
In April 1986, Mr. Mehta joined Providian Bancorp as Executive Vice
President and Chief Operating Officer in accordance with the terms of a
written offer of employment (the "Offer"). Under the terms of the Offer,
Providian Bancorp established a deferred compensation account for Mr. Mehta
and agreed to make contributions to it in an amount equal to 20 percent of Mr.
Mehta's base salary less the cost of any Providian Bancorp employee benefits
elected by Mr. Mehta. Amounts held in the deferred compensation account are to
be paid to Mr. Mehta upon termination of employment. The Offer was amended
August 5, 1992, to discontinue the
36
<PAGE>
obligation to contribute to the deferred compensation account effective July
31, 1992. In lieu thereof, Mr. Mehta became entitled to participate in
Providian's qualified defined benefit pension plan and nonqualified
supplemental pension plan, with his employment commencement date deemed to be
January 1, 1988 for purposes of the nonqualified supplemental pension plan as
reflected in the Providian Corporation Retirement Plan Estimated Benefit
Table. In the event of Mr. Mehta's termination of employment, amounts payable
under these pension plans will be comparable to the continuation of his
original agreement, with any shortfall to be paid to Mr. Mehta in the form of
a nonqualified annuity. In addition, on November 6, 1996, Providian and Mr.
Mehta entered into an agreement providing that, in the event Mr. Mehta's
employment is terminated without cause, or Mr. Mehta is not offered the
position of Chief Executive Officer of Providian by January 1, 1998 and he
resigns within 30 days thereafter, Mr. Mehta will receive (in addition to
accrued or vested salary, bonus and other benefits), continuation of base
salary, vesting of restricted stock and continued participation in benefit
plans, in each case for three years following the date of termination of
employment, and specified payments with respect to stock options. This
agreement supersedes Mr. Mehta's preexisting change in control agreement
(described above) in the event of a termination of employment prior to a
change in control, and is superseded by the preexisting agreement in the event
of a termination of employment following a change in control. In addition, if
Mr. Mehta becomes Chairman and Chief Executive Officer of Providian Bancorp
after the Distribution (as is expected), the provisions of this agreement and
his preexisting change in control agreement will expire.
PROPOSAL 2: TO RATIFY THE APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors, adopting the recommendation of the Audit Committee,
has appointed the certified public accounting firm of Ernst & Young LLP as
Providian's independent auditors for 1997, subject to ratification by the
stockholders at the Meeting. Representatives of the firm are expected to
attend the Meeting to answer appropriate questions and, if they desire, to
make a statement. Ernst & Young LLP has served as Providian's independent
auditors since 1969.
If the appointment of Ernst & Young LLP is not ratified by a majority of the
votes cast at the meeting, or if Ernst & Young LLP declines or is incapable of
acting, the appointment of independent auditors will be submitted to the Board
of Directors for reconsideration.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO RATIFY THE
APPOINTMENT OF ERNST & YOUNG LLP AS PROVIDIAN'S INDEPENDENT AUDITORS.
PROPOSAL 3: THE PROPOSED MERGER
GENERAL
At the Meeting, Providian stockholders will be asked to consider and vote
upon the Merger Proposal. The Merger Proposal and related considerations are
described in this Proxy Statement-Prospectus, including the Appendices hereto.
Copies of the Merger Agreement and the Distribution Agreement are attached as
Appendices A and B to this Proxy Statement-Prospectus. The Merger Agreement
provides that, immediately prior to the Merger, Providian will distribute as a
dividend to its stockholders on a pro rata basis, in a non-taxable
distribution, all the shares of Providian Bancorp, in accordance with the
terms of the Distribution Agreement. At the time the Merger becomes effective
(the "Effective Time"), each share of Providian Common Stock that is issued
and outstanding immediately prior to the Effective Time, other than shares
held by AEGON, Providian or any wholly owned subsidiary of AEGON or Providian,
will be converted into a right to receive a fraction of an AEGON Common Share
determined pursuant to the Exchange Ratio (as defined below) (the "Merger
Consideration"). Holders of Providian Common Stock will receive cash (without
interest) in lieu of fractional AEGON Common Shares. The amount of cash
payable in lieu of any fractional AEGON Common Share will be equal to that
fraction multiplied by the Fair Market Value at the Effective Time (as defined
below).
37
<PAGE>
In the Distribution, holders of Providian Common Stock on the Distribution
Record Date (as defined below) will receive one share of Providian Bancorp
Common Stock for each of their shares of Providian Common Stock. See "The
Distribution."
For purposes of the Merger Agreement, the "Exchange Ratio" is equal to
$28.00 divided by the "AEGON Share Price," which generally is defined as the
average, during the 20 trading days immediately preceding the last business
day before the closing date of the Merger (the "Closing Date"), of the average
daily high and low prices per share of AEGON Common Shares on the New York
Stock Exchange (the "NYSE") (the "Fair Market Value at the Effective Time").
The Exchange Ratio is, however, subject to a collar by which the AEGON Share
Price for purposes of calculating the Exchange Ratio is held to a range within
$61.153 and $50.034, except in connection with the termination rights
described below.
The Merger Agreement may be terminated by Providian if the Fair Market Value
at the Effective Time is less than $44.475, unless AEGON agrees that the
Exchange Ratio shall equal $24.889 divided by the Fair Market Value at the
Effective Time. Likewise, the Merger Agreement may be terminated by AEGON if
the Fair Market Value at the Effective Time is greater than $66.713, unless
Providian agrees in such event that the Exchange Ratio shall be equal to
$30.545 divided by the Fair Market Value at the Effective Time. Providian's
decision whether to terminate the Merger or exercise the "make-whole"
provision will be made by the Providian Board. It is impossible at this time
to determine what the Providian Board would decide because their decision will
depend on the facts and circumstances existing at the time it is faced with
such a decision. See "The Merger Agreement--Terms of the Merger."
In order to implement the transactions contemplated by the Merger Agreement,
immediately prior to, and subject to the satisfaction or waiver of each
condition to the consummation of the Merger as well as each condition to the
consummation of the Distribution, Providian will effect the Distribution of
Providian Bancorp Common Stock, as provided in the Distribution Agreement.
Providian will distribute the Providian Bancorp Common Stock on a pro rata
basis to the common stockholders of Providian of record on June 1, 1997 (the
"Distribution Record Date"), as provided in the Distribution Agreement. All of
the agreements, instruments, understandings, assignments and other
arrangements (excluding the Merger Agreement) entered into in connection with
the transactions contemplated by the Distribution Agreement, including,
without limitation, the Distribution Agreement, the Tax Disaffiliation
Agreement between Providian and Providian Bancorp (the "Tax Disaffiliation
Agreement"), the Employee Benefits Agreement between Providian and Providian
Bancorp (the "Employee Benefits Agreement"), the Transition Services Agreement
between Providian and Providian Bancorp (the "Transition Services Agreement"),
the Trademark License Agreement between Providian Bancorp and Providian (the
"Trademark License Agreement"), the General Intellectual Property Assignment
and Renunciation between Providian and Providian Bancorp (the "General
Intellectual Property Assignment and Renunciation") and the Short-Form
Assignment between Providian and Providian Bancorp, are referred to in this
Proxy Statement-Prospectus collectively as the "Ancillary Agreements."
BACKGROUND OF AND REASONS FOR THE TRANSACTIONS
Providian's management and the Providian Board have regularly looked for
ways in which to improve Providian's operations and thereby provide value to
stockholders. Beginning in and around April 1996, as part of its regular
review process, Providian's management re-examined various strategies for
enhancing Providian's value through both internal operating initiatives and
restructuring strategies, including strategic alliances. In April 1996,
Providian's management retained Goldman, Sachs & Co. ("Goldman Sachs") to
assist with this review. Providian's management provided a summary of its
strategic review to the Providian Board in August 1996. At the meeting, the
Providian Board determined that various potential strategic alternatives
involving the sale or spin-off of one or two, but not all, of Providian's
three insurance operations did not warrant further review. This conclusion was
based primarily on the difficulty of separating the three insurance businesses
from each other, given the intertwined corporate structure of these
operations, and the significant tax liability that would likely be associated
with any sales of the insurance operations as separate businesses.
Concurrently, the Providian Board authorized the continuation of management's
strategic review with the assistance of Goldman Sachs.
On October 6, 1996, Goldman Sachs presented to the Providian Board various
alternatives for enhancing the long-term growth opportunities of Providian
Bancorp and the Providian insurance and related businesses and
38
<PAGE>
thereby increasing stockholder value. These consisted of: (i) continuing with
Providian's existing business plan; (ii) the tax-free spin-off of Providian
Bancorp through which Providian's insurance operations and Providian Bancorp's
banking operations would each become a public, free-standing business; (iii)
an initial public offering of up to 20% of the shares of Providian Bancorp
followed by a tax free spin-off of the remaining Providian Bancorp shares; and
(iv) the tax-free spin-off of Providian Bancorp followed by a subsequent
merger of the insurance operations with a strategic partner (the "Merger/Spin-
Off Transaction").
The Providian Board determined, after review and discussions, that the
Merger/Spin-Off Transaction provided the best opportunity to expand and grow
its insurance business and enhance stockholder value. In particular, the
Providian Board believed that the Merger/Spin-Off Transaction would create a
"pure-play" stand-alone Providian Bancorp, and would generate a price for the
insurance operations that the Providian Board believed would represent a
private market valuation for the insurance operations, which would be in
excess of the historical public market valuation of Providian, based upon
price to earnings ("P/E") ratios. The Providian Board concluded that Providian
Bancorp probably would receive a higher market valuation as a stand-alone
entity than it did as a subsidiary of Providian. This is because the Providian
Board believed that Providian Bancorp's earnings historically have been valued
at a lower P/E ratio as part of Providian than the P/E ratio at which it may
be expected to be valued were Providian Bancorp a stand-alone public company,
based primarily on the P/E ratios of credit card, home equity and consumer
finance companies comparable to Providian Bancorp relative to historical
Providian P/E ratios. See "--Opinion of Financial Advisor--Selected Credit
Card and Finance Companies Analysis." The Providian Board also concluded that
the potential strategic partners for the insurance operations would either not
be interested in acquiring Providian Bancorp or would not be able or willing
to recognize the full potential value of such operations. This conclusion was
based on the composition of the existing business operations of these
potential strategic partners, the Providian Board's belief that the long-term
prospects of Providian Bancorp under its existing management are strong, and
the Providian Board's belief that Providian Bancorp's stand-alone value still
might not be realized as part of a potential insurance acquiror. See "--
Opinion of Financial Advisor--Possible Aggregate Value and Stock Price
Analysis."
After further study, the Providian Board concluded that the Merger/Spin-Off
Transaction was feasible, and authorized management to look for partners with
whom Providian might desire to consummate a merger. With the help of Goldman
Sachs, Providian began to solicit preliminary indications of interest. On
October 7, 1996, Providian contacted AEGON and two other potential bidders.
These three potential bidders were selected as the three parties most likely
to have a strong strategic interest in Providian's insurance operations. The
selection was further based on an analysis of the potential bidders' size,
financial resources to complete an acquisition of this magnitude, business fit
(including participation in home service insurance operations) and perceived
appetite for acquisitions. Each of the three potential bidders executed a
confidentiality agreement with Providian and was provided with confidential
evaluation material, including an actuarial valuation prepared by Milliman &
Robertson, Inc. ("M&R"). See "--Recommendation of the Providian Board of
Directors." Providian also provided the three parties with drafts of proposed
agreements relating to the transaction. Each of the three potential bidders
was requested to submit a preliminary indication of interest by November 8,
1996. The Providian Board met on November 6, 1996, and was informed by Goldman
Sachs and Providian's legal counsel as to the status of the evaluation/bidding
process.
On November 8, 1996, AEGON and the two other parties submitted preliminary
indications of interest for the acquisition of Providian's insurance
operations. Based on the preliminary indications of interest, AEGON and one
other bidder were selected to continue in the process and were requested to
submit definitive bids on November 27, 1996. The third bidder's preliminary
indication of interest was at a price level substantially below the other two,
and that bidder was not invited to continue. Between November 8 and November
27, 1996, the two continuing bidders conducted due diligence with respect to
Providian's insurance operations, including meeting with Providian management
to discuss the insurance operations and reviewing documentation relating to
these operations. In addition, each of the two bidders submitted a preliminary
markup of Providian's proposed draft merger agreement, and legal
representatives of each bidder began discussions with Providian's legal
representatives with respect to these markups.
39
<PAGE>
On November 27, 1996, AEGON submitted a definitive bid for Providian's
insurance operations. The bid also included a definitive markup of Providian's
proposed merger agreement showing AEGON's requested changes to the agreement,
and preliminary comments on Providian's drafts of the related agreements. The
other bidder in the process notified Providian that it would not be submitting
a definitive bid because it had decided it was not interested in acquiring all
of the Providian insurance operations.
AEGON's definitive bid was at a lower price than the low end of the range of
values indicated in its preliminary indication of interest, and
representatives of Providian informed representatives of AEGON that the bid
was unacceptable. During the first two weeks of December 1996, representatives
of Providian and AEGON had a number of discussions with respect to the
possibility of AEGON increasing its bid. The representatives participating in
these discussions included Providian's Chief Executive Officer and AEGON USA's
Chief Executive Officer, as well as representatives of each company's
financial advisors. In addition, Providian began discussions with three other
potential bidders who had contacted Goldman Sachs to express their interest in
Providian's insurance operations. After discussions with AEGON and these other
potential bidders and due diligence with certain of the other potential
bidders, AEGON agreed to increase its bid. Two of the three additional
potential bidders withdrew from discussions, and the third additional
potential bidder was unable to submit a bid or transaction structure that was
competitive with AEGON's increased bid.
Beginning on December 18, 1996, legal and business representatives of
Providian and AEGON met in New York to negotiate the proposed transaction
agreements between the two companies. Except for December 25, 1996, these
negotiations continued daily through December 27, 1996. The participants in
these negotiations included Providian's Vice President--Corporate Planning and
Development and AEGON USA's Executive Vice President. The negotiations focused
on the contract terms of the proposed transaction, including: the precise
terms of the formula for determining the Exchange Ratio; the allocation of
liabilities between Providian and Providian Bancorp; the terms and conditions
of the break-up fee payable to AEGON under certain circumstances; the
restrictions on the businesses of Providian and of AEGON during the period
between signing and completion of the Merger; the non-competition obligations
of Providian Bancorp following the Merger; and the representations and
warranties of the two companies. During the week of December 16, 1996, legal
and business representatives of Providian and AEGON met at the executive
offices of AEGON in the Hague, The Netherlands to discuss the proposed
transaction and to review AEGON's operations. The participants in these
discussions included the Chief Executive Officer of Providian and the Chairman
of AEGON.
On December 23, 1996, the Supervisory Board of AEGON (the "AEGON Supervisory
Board") authorized certain officers of AEGON to enter into definitive
agreements for the acquisition of Providian, within specified parameters. On
December 28, 1996, the Providian Board met to consider the Merger Agreement,
the Distribution Agreement and the transactions contemplated thereby. At this
meeting, Goldman Sachs made a presentation and delivered its oral opinion to
the Providian Board, which was subsequently confirmed in writing, that the
distribution of shares of Providian Bancorp Common Stock to holders of shares
of Providian Common Stock under the Distribution Agreement and the receipt by
such holders of the Merger Consideration under the Merger Agreement, taken
together, were fair to the holders of Providian Common Stock. The full text of
the written opinion of Goldman Sachs, dated as of December 28, 1996, which
sets forth the assumptions made, procedures followed and matters considered
in, and the limitations on the review undertaken in connection with such
opinion, is attached to this Proxy Statement-Prospectus as Appendix C and is
incorporated herein by reference. See "The Proposed Merger--Opinion of
Financial Advisor." Following the presentations and discussion at the meeting,
the Providian Board unanimously approved the Merger Agreement, the
Distribution Agreement and the transactions contemplated thereby. Thereafter
on December 28, 1996, the Merger Agreement and the Distribution Agreement were
executed and delivered.
The Providian Board believes that the Merger with AEGON will provide a
strategic opportunity for Providian to expand and develop its insurance
businesses and that the Distribution will allow Providian Bancorp to continue
to develop its business successfully as a stand-alone entity. Consolidation of
Providian's insurance activities within or as additional operations of AEGON
USA, Inc. will make AEGON one of the largest insurance groups in the United
States ("U.S.") market. On a pro forma basis after giving effect to the
Merger, the AEGON
40
<PAGE>
USA, Inc. insurance group of companies ("AEGON USA") will become the 11th
largest U.S. life insurance group of companies based on assets, and ninth based
on net statutory premium (A.M. Best 1996 Edition of Aggregates and Averages).
AEGON's acquisition of Providian is consistent with AEGON's overall strategy
to expand its life insurance activities through acquisitions. While there can
be no assurance that the integration of AEGON and Providian will be successful
or accomplished in a timely fashion, AEGON believes that the Merger will
generate many significant benefits, including:
. Cost efficiencies through consolidation. AEGON management intends to
fully consolidate the operations of Providian's Providian Agency Group
("PAG") division with AEGON USA's Home Service Group. In AEGON's view,
consolidation of these two divisions will create significant economies of
scale resulting in cost savings. These economies include consolidation of
certain administrative services, field operations, management information
systems and numerous corporate and managerial functions. AEGON expects
that the most significant expense savings will be recognized from the
consolidation of the home service operations of the two companies, with
additional cost reductions occurring with the consolidation of certain
corporate functions, and the integration of support functions in both the
PDI and PCM units (as defined below). AEGON does not expect that full
recognition of potential expense savings will occur until after a
transitional period in which selected operations are integrated. AEGON
USA expects to eliminate 10% of the annual operating costs in the first
full year (approximately $40 million), increasing to 20% in year two ($80
million), with an ultimate reduction of $100 million, or 25% in the third
year.
. Growth through expanded product offerings and distribution
channels. Providian Direct Insurance's ("PDI's") strategy is to look for
high potential markets and identify the types of products that can
profitably serve the needs in those markets. AEGON believes that PDI's
experience in developing new products will increase AEGON's efficiency in
getting new products to the market. AEGON also believes that the
combination of PDI's advanced technology and AEGON's large customer base
may provide significant opportunities for growth. PDI has a broad market
direct response approach, whereas AEGON has been focused on an affinity
group or sponsored market niche. In AEGON's view, the two complement each
other well. AEGON also believes that Providian Capital Management ("PCM")
offers products that are complementary to AEGON's existing product base,
while AEGON will provide additional marketing channels to market an
expanded product portfolio.
. Consolidation of corporate structure. Following the Merger, a number of
the management positions at the corporate level will be consolidated,
resulting in reduced corporate overhead. In addition, AEGON intends to
streamline its corporate structure by merging certain of the AEGON and
Providian subsidiary insurance companies in order to provide certain
economies. AEGON expects that reductions in corporate overhead realized
by elimination of redundant management positions and simplification of
the corporate legal structure will approximate $20 million after a three
year period.
Although AEGON believes that the Merger will result in certain benefits,
there can be no assurance that the operations of AEGON and Providian can be
integrated effectively or in a timely manner. The integration is intended, in
part, to realize cost savings. There can be no assurance of the extent to which
such cost savings will be achieved, if any. The integration of the two
organizations will require the dedication of management resources which may
temporarily distract them from attention to the day-to-day business of the
combined company. The difficulties of integration may be increased by the
necessity of coordinating geographically separated organizations and
integrating personnel. The process of combining the companies may cause an
interruption of, or a loss of momentum in, the activities of either or both of
the companies' businesses. Furthermore, the process of combining the companies
or any delay in closing the Merger could have a material adverse effect on
employee morale of current Providian employees and of employees at divisions of
AEGON to be consolidated with certain Providian operations and on the ability
of the combined company to retain key management, sales and marketing
personnel.
41
<PAGE>
RECOMMENDATION OF THE PROVIDIAN BOARD OF DIRECTORS
On December 28, 1996, the Providian Board approved the Merger with AEGON in
the manner described in this Proxy Statement-Prospectus. The Providian Board
considered the following material factors:
(a) the presentation made by Goldman Sachs analyzing the proposed
transaction and Goldman Sachs' oral opinion, which was subsequently
confirmed in a written opinion dated December 28, 1996, that, as of such
date and based upon and subject to the factors and assumptions set forth in
such opinion, the distribution of shares of Providian Bancorp Common Stock
to holders of shares of Providian Common Stock pursuant to the Distribution
Agreement and the receipt by such holders of the Merger Consideration
pursuant to the Merger Agreement, taken together, were fair to the holders
of Providian Common Stock (see "--Opinion of Financial Advisor"); the
Providian Board believed that this opinion supported its decision to
approve the Merger and the Distribution;
(b) the Providian Board's review with its legal and financial advisors of
the provisions of the Merger Agreement and the Distribution Agreement,
including provisions that do not prevent Providian from considering, or the
Providian Board from approving, an alternative acquisition proposal from a
third party, under certain conditions and payment of a break-up fee of $80
million prior to stockholder approval and $100 million after stockholder
approval (see "The Merger Agreement--Terms of the Merger"); the Providian
Board believed that these terms supported its approval of the transaction
in that they do not preclude a higher offer from another party;
(c) the Providian Board's consideration of, among other things,
presentations by the management of Providian, with respect to the financial
condition, results of operations, business and prospects of Providian,
Providian Bancorp and AEGON on both a historical and a prospective basis,
and the influence of current industry, economic and market conditions; the
Providian Board believed, based on this review, that it would be desirable
to obtain a control premium for Providian's insurance operations, that
Providian Bancorp's prospects are strong, and that the AEGON Common Shares
to be received in the Merger represent fair consideration for Providian's
insurance operations;
(d) the potential efficiencies and synergies to be realized by the
combined business operations, assets and management of AEGON and
Providian's insurance operations which the Providian Board believes would
represent a good strategic fit and which are expected to produce a
favorable impact on the long-term value of both Providian and AEGON as well
as enhance the competitive position of the combined entity and the ability
of all stockholders to maintain an ownership stake in the combined entity
and potentially realize the benefits of the Merger; the Providian Board
believed that these factors supported its approval of the transaction;
(e) historical market prices and trading information with respect to each
of Providian Common Stock and AEGON Common Shares; the Providian Board
believed this information supported the Board's belief that the exchange of
AEGON Common Shares for Providian Common Stock is in the best interests of
Providian stockholders;
(f) the Providian Board's extensive study of strategic alternatives
described above under "--Background of and Reasons for the Transactions,"
which included actuarial analyses of insurance in force and its future
business (the Providian Board believed that none of the strategic
alternatives considered appeared to be as favorable or to provide as much
long-term value to the holders of the shares of Providian Common Stock as
did the Merger/Spin-Off Transaction);
(g) the fact that procedures to elicit proposals for a merger of
Providian's insurance operations had been implemented and that discussions
had been conducted with likely interested parties in the context of a
process designed to increase the value to be received for Providian's
insurance operations; the Providian Board believed that this supported its
view that the Merger and the Distribution are fair;
(h) the treatment of the Merger as a "tax-free reorganization" and the
tax-free treatment of the Distribution for federal income tax purposes (see
"--Material Federal Income Tax Consequences"); the Providian Board believed
that this enhanced the value of the transactions for Providian
stockholders;
42
<PAGE>
(i) the regulatory approvals required to consummate the Merger and the
prospects for receiving all such approvals, which the Providian Board
believed were obtainable; and
(j) the Providian Board's consideration of any interests that members of
Providian's management may have had in connection with a merger with AEGON.
The Providian Board also considered the risks that the AEGON Common Shares
would not perform in the future as well as they have in the past, and the fact
that, because of the Merger, Providian stockholders would participate in the
future results of Providian's insurance operations only indirectly through
their investment in AEGON Common Shares. In addition, the Providian Board
considered the risks applicable to Providian Bancorp following the
Distribution, which are described in the Providian Bancorp Information
Statement accompanying this Proxy Statement-Prospectus. Nevertheless, the
Providian Board believed that the factors described above outweighed these
risks.
Because of the complex considerations involved in determining whether a
transaction such as the Merger is in the best interests of Providian and its
stockholders, the Board did not assign relative weights to the factors
considered in making the decision. Rather, the Board's decision to approve the
Merger was made after reviewing all of the relevant factors taken as a whole.
FOR THE REASONS DISCUSSED ABOVE, THE DIRECTORS OF PROVIDIAN HAVE UNANIMOUSLY
APPROVED THE TERMS OF THE MERGER AGREEMENT AND RECOMMEND THAT PROVIDIAN
STOCKHOLDERS VOTE "FOR" APPROVAL OF THE MERGER PROPOSAL.
In connection with its evaluation of various strategic alternatives,
Providian engaged M&R, a nationwide firm of actuaries and consultants, to
provide Providian with certain actuarial values and estimates. M&R's engagement
was limited to providing an actuarial valuation for Providian's insurance
business, and Providian did not place any limitations on M&R. Although M&R's
actuarial evaluation was only intended for the use of Providian and its
advisors, it was made available to each potential bidder.
M&R's work involved actuarial estimates or projections regarding the future
experience of Providian. It is anticipated that the actual experience will
vary, and may vary significantly, from M&R's estimates. In addition, as part of
its assignment, M&R accepted and utilized both data and projection models
supplied by Providian without independent verification.
M&R made several projections regarding the actuarial value of Providian. An
actuarial value is not a market value, nor is it an attempt to estimate market
value. Rather, an actuarial value is a projection of statutory earnings (under
a series of assumptions) discounted to present value. The actuarial values vary
significantly, depending upon the assumptions used and the discount rate
applied. In its analysis, M&R calculated present values utilizing discount
rates of 8% to 12% for Providian's Agency Group business, 9% to 13% for its
Direct Insurance business and 10% to 14% for its Capital Management business.
The discount rates reflect risk and the general interest rate environment and
vary by business segment to reflect the different relative risks of realizing
the projected profits by business segment. Applying these discount rates, M&R
obtained actuarially calculated present values for the in-force business for
such business segments. To such values, M&R added the present value of assumed
future new business of such business segments, based on assumptions provided by
Providian's management. Subtracting from the combined value of the present and
future business of such business segments the cost of capital required by the
business segments (assuming a 200% risk-based capital ratio, the minimum level
consistent with Providian's claims paying ratings), M&R obtained aggregate
actuarial values for the insurance operations ranging from approximately $3.2
billion to approximately $4.3 billion, prior to deducting the cost of debt and
preferred stock. Goldman Sachs utilized these values to obtain implied equity
values for Providian's
43
<PAGE>
insurance operations as part of the analyses conducted by Goldman Sachs in
connection with its opinion (See "Opinion of Financial Advisor--Analysis of
M&R Appraisal").
M&R's work was summarized in a report dated November 2, 1996 (the "M&R
Appraisal"), a copy of which has been filed as an exhibit to the Registration
Statement of which this Proxy Statement-Prospectus forms a part (see "Where
You Can Find More Information"). As set forth above, M&R's work was subject to
various assumptions, caveats, limitations and explanations. As such, in order
to understand or place any reliance on M&R's work, the M&R Appraisal must be
read in its entirety. Further, M&R advises readers of the M&R Appraisal that
if they are unfamiliar with actuarial estimates and projection techniques,
they should be aided by a professional who is. In the past, M&R has provided
actuarial and other advisory services to Providian and has received fees for
the rendering of such services, however, except for the M&R Appraisal, M&R did
not provide any significant services to Providian in either 1995 or 1996.
Providian expects that it will pay to M&R approximately $1.2 million in fees
relating to the M&R Appraisal.
OPINION OF FINANCIAL ADVISOR
On December 28, 1996, Goldman Sachs delivered its oral opinion to the
Providian Board, which was subsequently confirmed in writing in an opinion
dated December 28, 1996, that, as of such date and based upon and subject to
the factors and assumptions set forth in such written opinion, the
distribution of shares of Providian Bancorp Common Stock to holders of shares
of Providian Common Stock pursuant to the Distribution Agreement and the
receipt by such holders of the Merger Consideration pursuant to the Merger
Agreement, taken together, were fair to the holders of Providian Common Stock.
The full text of the written opinion of Goldman Sachs, dated as of December
28, 1996, which sets forth the assumptions made, procedures followed and
matters considered in, and the limitations on, the review undertaken in
connection with such opinion, is attached to the Proxy Statement-Prospectus as
Appendix C and is incorporated herein by reference. Holders of shares of
Providian Common Stock are encouraged to read such opinion in its entirety and
consider it carefully. The following summary is qualified in its entirety by
reference to the full text of such opinion. Goldman Sachs' opinion was
directed to the Providian Board in connection with, and for the purposes of,
their evaluation of the proposed Distribution and Merger and does not
constitute a recommendation to any stockholder of Providian as to how such
stockholder should vote with respect to the Merger. Goldman Sachs did not make
any recommendation about the amount or form of consideration that Providian's
stockholders will receive in the Merger.
In connection with its opinion, Goldman Sachs reviewed, among other things,
the Merger Agreement; the Distribution Agreement; the M&R Appraisal of
Providian's insurance operations (the "Insurance Operations"); Annual Reports
to Stockholders of Providian and AEGON, respectively, for the five years ended
December 31, 1995; Annual Reports on Form 10-K for Providian and Annual
Reports on Form 20-F for AEGON, respectively, for the five years ended
December 31, 1995; certain interim reports to stockholders and Quarterly
Reports on Form 10-Q for Providian and on Form 6-K for AEGON, respectively;
annual statutory statements for the five years ended December 31, 1995 for
certain of Providian's insurance subsidiaries and for certain of AEGON's U.S.
insurance subsidiaries; certain other communications from Providian to its
stockholders; and certain internal financial analyses and forecasts for
Providian, Providian Bancorp and AEGON prepared by their respective
managements. Goldman Sachs also held discussions with members of the senior
management of Providian, Providian Bancorp and AEGON regarding the past and
current business operations, regulatory relationships, financial condition and
future prospects of their respective companies and the pro forma financial
effect of the Distribution and the Merger on Providian Bancorp and AEGON. In
addition, Goldman Sachs reviewed the reported price and trading activity for
shares of Providian Common Stock on the NYSE and for AEGON Common Shares on
the NYSE and on the Amsterdam Stock Exchange, compared certain financial and,
where applicable, stock market information for Providian, Providian Bancorp
and AEGON with similar information for certain other companies the securities
of which are publicly traded, reviewed the financial terms of certain recent
business combinations in the insurance industry specifically and in other
industries generally and performed such other studies and analyses as Goldman
Sachs considered appropriate.
44
<PAGE>
Goldman Sachs relied, without independent verification, upon the accuracy
and completeness of all of the financial and other information reviewed by
Goldman Sachs for purposes of its opinion. With respect to the financial
forecasts furnished by Providian, Providian Bancorp and AEGON, Goldman Sachs
assumed, with Providian's consent, that they were reasonably prepared and that
they reflected the best estimates and judgment of Providian's, Providian
Bancorp's and AEGON's management currently available as to the expected future
financial performance of Providian, Providian Bancorp or AEGON, as the case
may be. Goldman Sachs did not make an independent evaluation or appraisal of
the assets, including the capitalization of deferred acquisition costs, and
liabilities or reserves of Providian or AEGON or any of their subsidiaries
and, except for the M&R Appraisal, was not furnished with any such evaluation
or appraisal.
Goldman Sachs did not express any opinion with respect to the reserves of
Providian, AEGON or any of their subsidiaries. Goldman Sachs assumed, with
Providian's consent, that the consummation of the Distribution and the Merger
would not result in a downgrade of Providian, AEGON or any of their
subsidiaries, including Providian Bancorp, by any nationally recognized rating
agency or, in the event that any such entity was so downgraded, that such
downgrade would not have a material adverse effect on such entity. Goldman
Sachs did not review individual credit files of Providian Bancorp, nor are
Goldman Sachs experts in the evaluation of loan portfolios for purposes of
assessing the adequacy of the allowances for losses with respect thereto.
Goldman Sachs assumed, with Providian's consent, that such allowances of
Providian Bancorp were adequate to cover all such losses. Similarly, Goldman
Sachs assumed, with Providian's consent, that the obligations of Providian and
Providian Bancorp pursuant to derivatives, swaps, foreign exchange, financial
instruments and off-balance sheet lending-related financial instruments would
not have a material adverse effect which would be relevant to their analysis.
Goldman Sachs' opinion was necessarily based upon financial, economic,
market and other conditions as they existed, and the information made
available to it, as of December 28, 1996. Subsequent developments may affect
such opinion. Goldman Sachs did not express any opinion as to the value of the
shares of Providian Bancorp Common Stock when issued to the holders of shares
of Providian Common Stock pursuant to the Distribution or the prices at which
shares of Providian Bancorp Common Stock would trade subsequent to the
Distribution. Goldman Sachs also did not express any opinion as to the value
of the AEGON Common Shares when issued to the holders of shares of Providian
Common Stock pursuant to the Merger or the prices at which AEGON Common Shares
would trade subsequent to the Merger. Goldman Sachs assumed, with Providian's
consent, that the Distribution and the Merger would comply with applicable
laws, including, without limitation, laws relating to the payment of
dividends, bankruptcy, insolvency, reorganization, fraudulent conveyance,
fraudulent transfer or other similar laws then or thereafter in effect
affecting creditors' rights generally. Goldman Sachs also assumed, with
Providian's consent, that obtaining any regulatory approvals or third-party
consents necessary for the Distribution or the Merger or otherwise would not
have any material adverse effect on Providian, Providian Bancorp or AEGON. In
addition, Goldman Sachs assumed, with Providian's consent, that receipt of
shares of Providian Bancorp Common Stock pursuant to the Distribution and
receipt of the Merger Consideration pursuant to the Merger would be tax-free
for federal income tax purposes to the holders of shares of Providian Common
Stock and that none of Providian, Providian Bancorp and AEGON would recognize
income, gain or loss for tax purposes as a result of the Distribution and the
Merger.
Goldman Sachs, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. Goldman Sachs is
familiar with Providian, having provided certain investment banking services
to Providian from time to time, including acting as managing underwriter of a
public offering of 8 7/8% Cumulative Monthly Income Preferred Shares of an
affiliate of Providian in May 1994, as well as having acted as Providian's
financial advisor in connection with, and having participated in certain of
the negotiations leading to, the Merger Agreement. Goldman Sachs also is
familiar with AEGON, having provided certain investment banking services to
AEGON from time to time, including acting as financial advisor to AEGON USA,
Inc., a wholly owned subsidiary of AEGON, in connection with its investment in
Seguros
45
<PAGE>
Banamex AEGON, and may provide investment banking services to AEGON and
Providian Bancorp in the future. Goldman Sachs is a full-service securities
firm and in the course of its trading activities it may from time to time
effect transactions, for its own account or the account of customers, and hold
positions in securities or options on securities of Providian and AEGON.
The following is a summary of the material financial analyses presented to
the Providian Board on December 28, 1996 in connection with its opinion and
does not purport to be a complete description of the analyses performed by
Goldman Sachs. Goldman Sachs arrived at its opinion based on the results of
all of its analyses assessed as a whole and did not draw any specific
conclusions from or with regard to any one method of analysis.
Selected Life Insurance and Annuity Companies Analysis. Goldman Sachs
reviewed and compared certain financial and stock market information relating
to Providian and certain financial information relating to the Insurance
Operations (based on financial data as of September 30, 1996 and closing stock
market prices on December 26, 1996) to corresponding financial and stock
market information compiled for selected life insurance and annuity companies.
The companies selected for comparison were American General Corporation, The
Equitable Companies Incorporated, Jefferson-Pilot Corporation, The Liberty
Corporation, Lincoln National Corporation, ReliaStar Financial Corp.,
Protective Life Corporation, Provident Companies, Inc., Torchmark Corporation,
USLIFE Corporation and Unitrin, Inc. (collectively, the "Life Insurance
Companies") and Equitable of Iowa Companies, SunAmerica Inc. and Western
National Corporation (collectively, the "Annuity Companies," and together with
the Life Insurance Companies, the "Life Insurance and Annuity Companies
Combined"). The median stock market price per share on December 26, 1996 as a
percentage of the 52-week high stock market price per share for the common
equity of the Life Insurance Companies, Annuity Companies and the Life
Insurance and Annuity Companies Combined, was 98%, 99% and 98%, respectively,
compared to 95% for shares of Providian Common Stock (based on the closing
market price per share of Providian Common Stock on December 26, 1996 of
$52.88). The median estimated P/E ratio for the Life Insurance Companies,
Annuity Companies and the Life Insurance and Annuity Companies Combined was
12.8x, 12.8x and 12.8x, respectively, for 1996 and 11.3x, 11.5x and 11.4x,
respectively, for 1997, compared to 11.6x and 10.6x, respectively, for
Providian for 1996 and 1997, in all cases based on median Institutional Broker
Estimate System ("IBES") earnings estimates as of December 19, 1996 ("IBES
Estimates"). The median historical 5-year growth rate for the Life Insurance
Companies, Annuity Companies and the Life Insurance and Annuity Companies
Combined was 10%, 22% and 10%, respectively, compared to 9% for Providian and
7% for the Insurance Operations. The median projected growth rates for the
Life Insurance Companies, Annuity Companies and the Life Insurance and Annuity
Companies Combined were 13%, 12% and 13%, respectively, for one year (1996 to
1997) and 11%, 13% and 12%, respectively, for the next five years, based on
IBES Estimates, compared to 10% for one year and 10% for the next five years
for Providian, based on IBES Estimates, and 8% for one year and 6% for the
period from 1996 through 1998 for the Insurance Operations, based on
projections provided by Providian's management. The analyses indicated that
the estimated P/E ratios for 1996 and 1997 for Providian were slightly below
the median estimated P/E ratios for the Life Insurance Companies and the
Annuity Companies, and that the historical 5-year growth rate and projected
growth rate of the Insurance Operations were significantly below the ranges
for the projected growth rates of the Life Insurance Companies and the Annuity
Companies. The median market price to adjusted book value (common equity
before adjustment for net unrealized investment gains pursuant to FAS 115)
multiple for the Life Insurance Companies, Annuity Companies and the Life
Insurance and Annuity Companies Combined was 1.6x, 1.9x and 1.6x,
respectively, compared to 1.8x for Providian. The median dividend payout rate
for the Life Insurance Companies, Annuity Companies and the Life Insurance and
Annuity Companies Combined for 1996 was 27%, 17% and 25%, respectively,
compared to 24% for Providian. The median dividend yield for the Life
Insurance Companies, Annuity Companies and the Life Insurance and Annuity
Companies Combined for 1996 was 2.4%, 0.9% and 1.9%, respectively, compared to
2.1% for Providian. The median return on equity (based on 1996 earnings per
share median IBES estimates as a percentage of book value per share) for the
Life Insurance Companies, Annuity Companies and the Life Insurance and Annuity
Companies Combined was 11.6%, 14.4% and 12.9%,
46
<PAGE>
respectively, compared to 14.7% for Providian, based on such IBES earnings per
share estimates, and 11.2% for the Insurance Operations, based on projections
provided by Providian's management.
Analysis of M&R Appraisal. Goldman Sachs reviewed the results of the M&R
Appraisal of the Insurance Operations described under "--Recommendation of the
Providian Board of Directors" above. Without adjusting the aggregate actuarial
values for the Insurance Operations obtained by M&R, Goldman Sachs deducted
from such values outstanding debt and preferred stock of Providian and certain
other amounts (change of control costs, expenses related to the exercise of
options, other intercompany obligations and net cash) to obtain implied equity
valuations for the Insurance Operations. Such implied equity valuations ranged
from approximately $2.2 billion to approximately $3.3 billion in the aggregate
and from $23.00 to $35.20 on a per share basis (based on 93,705,798 shares of
Providian Common Stock outstanding). See page 42 under the caption "--
Recommendation of the Providian Board of Directors" for a discussion of the
various assumptions, caveats, limitations and explanations applicable to the
M&R Appraisal.
Pro Forma Merger Analysis. Goldman Sachs reviewed certain financial
information for Providian, AEGON and the pro forma combined entity resulting
from the Merger (assuming the prior consummation of the Distribution) based on
the earning estimates provided by the managements of Providian and AEGON for
their respective companies. Such analysis was also based on certain
assumptions provided by AEGON including the realization of synergies and the
amortization of intangibles totaling $8.2 million and $14.5 million in 1997
and 1998, respectively, and foregone investment income of $41.0 million, $81.3
million and $87.3 million for 1997, 1998 and 1999, respectively, relating to
the repurchase by AEGON from Vereniging AEGON (the "Association") of AEGON
Common Shares having an aggregate value of approximately $1.2 billion (the
"AEGON Share Repurchase"). Goldman Sachs' analysis, based on such earnings
estimates and assumptions, indicated that holders of AEGON Common Shares would
experience accretions in earnings per share of 5.8%, 10.0% and 8.4%,
respectively, in 1997, 1998 and 1999. Such analysis was based on the following
additional assumptions, also provided by AEGON's management: (a) an aggregate
transaction value for the Merger of approximately $2.6 billion (based on a
value of $28.00 per share of Providian Common Stock and 93.71 million shares
of Providian Common Stock outstanding), (b) an exchange rate (Dutch Guilders
to U.S. Dollars) of 1.75, (c) a per share price of $53.71 for an AEGON Common
Share (the approximate AEGON Common Share price in mid-December 1996), and (d)
a closing date for the Merger of May 31, 1997. The pro forma merger analysis
also reflected the assumption, provided by AEGON's management, that AEGON will
write off 100% of the goodwill arising from the Merger against its capital
account in the year the Merger is consummated in accordance with purchase
accounting methods under Dutch accounting principles.
Selected Transactions Analysis. Goldman Sachs analyzed certain information
relating to selected transactions in the U.S. life insurance industry
involving aggregate consideration in excess of $100 million for the period
from January 1, 1995 to December 26, 1996 (the "Selected Transactions"). Such
analysis indicated for the Selected Transactions, to the extent such
information was available, (a) mean, median, high and low values of aggregate
consideration as a multiple of latest twelve months ("LTM") net income of
16.0x, 13.9x, 30.5x and 10.4x, respectively, compared to corresponding
multiples of 10.6x and 10.0x, respectively, for the Insurance Operations based
on estimates of the pro forma net income of the Insurance Operations for the
twelve months ended June 30, 1996 and December 31, 1996 provided by
Providian's management, (b) mean, median, high and low values of aggregate
consideration as a multiple of tangible GAAP book value of 1.7x, 1.4x, 4.6x
and 0.8x, respectively, compared to a corresponding multiple of 1.1x for the
Insurance Operations based on the pro forma tangible GAAP book value of the
Insurance Operations at September 30, 1996, and (c) mean, median, high and low
values of aggregate consideration as a multiple of book value calculated under
statutory accounting principles of 2.4x, 2.2x, 5.4x and 1.2x, respectively,
compared to a corresponding multiple of 2.1x for the Insurance Operations
based on the book value calculated under statutory accounting principles of
the Insurance Operations at June 30, 1996. These analyses indicated that the
LTM net income multiples represented by the aggregate consideration to be
received for the Insurance Operations pursuant to the Merger, based on the
estimated pro forma net income for the twelve months ended June 30, 1996 and
December 31, 1996, were slightly above and below the low end of the range,
respectively, of the corresponding multiples for the Selected
47
<PAGE>
Transactions, that the multiple of tangible GAAP book value represented by
such aggregate consideration was between the median and the low end of the
range of the corresponding multiples for the Selected Transactions and that
the multiple of book value calculated under statutory accounting principles
represented by such aggregate consideration approximated the median of the
corresponding multiples for the Selected Transactions. The Selected
Transactions included (Acquiring Company/Acquired Company): (Penn Corp.
Financial Group, Inc./Washington National Corporation), (SunAmerica
Inc./Annuity business of John Alden Financial Corporation), (Zurich Insurance
Company and Insurance Partners/Kemper Corporation), (PennCorp Financial Group,
Inc./Southwestern Life Insurance Company, Union Banker Insurance Co. and
Constitution Life Insurance Co.), (SunAmerica Inc./CalFarm Life Insurance Co.
(of Zenith National Insurance Corp.)), (American Annuity Group/Laurentian
Capital Corporation), (Humana Inc./EMPHESYS Financial Group, Inc.),
(Jefferson-Pilot Corporation/Alexander Hamilton Life Insurance Co. of America
(of Household International, Inc.)), (General Electric Capital Corp./AMEX Life
Assurance Co. (of American Express Company)), (PennCorp Financial Group,
Inc./Integon Life Corp.), (Life Partners Group Inc./Lamar Financial Group
Inc.), (American General Corporation/The American Franklin Life Insurance Co.
(of American Brands, Inc.)), and (The NWNL Companies Inc./USLICO Corp.).
Selected Credit Card and Finance Companies Analysis. Goldman Sachs reviewed
and compared certain financial and stock market information relating to
Providian and certain financial information relating to Providian Bancorp
(based on financial data as of September 30, 1996 and closing stock market
prices on December 26, 1996), to corresponding financial and stock market
information for selected companies in the credit card, consumer finance and
home equity businesses. The companies selected were Advanta Corp., Capital One
Financial Corp., First USA Inc. and MBNA Corporation (collectively, the
"Credit Card Companies"), Beneficial Corporation, Household International,
Inc. and Associates First Capital Corp. (collectively, the "Consumer Finance
Companies") and Aames Financial Corp., Green Tree Financial Corporation, Money
Store Inc. and United Companies Financial Corporation (collectively, the "Home
Equity Companies," and together with the Credit Card Companies and the
Consumer Finance Companies, the "Credit Card and Finance Companies Combined").
The median stock market price per share on December 26, 1996 as a percentage
of the 52-week high stock market price per share for the common equity of the
Credit Card Companies, Consumer Finance Companies, Home Equity Companies and
the Credit Card and Finance Companies Combined was 98%, 94%, 75% and 92%,
respectively, compared to 95% for shares of Providian Common Stock (based on
the closing stock market price per share of Providian Common Stock on December
26, 1996 of $52.88). The median estimated P/E ratio for the Credit Card
Companies, Consumer Finance Companies, Home Equity Companies and the Credit
Card and Finance Companies Combined was 16.3x, 17.4x, 14.9x and 16.9x,
respectively, for 1996 and 13.4x, 14.2x, 11.3x and 13.1x, respectively, for
1997 compared to 11.6x and 10.6x, respectively, for Providian in 1996 and
1997, in each case based on IBES Estimates. The median historical 5-year
growth rate for the Credit Card Companies, Consumer Finance Companies, Home
Equity Companies and the Credit Card and Finance Companies Combined was 40%,
19%, 38% and 37%, respectively, compared to 9% for Providian and 24% for
Providian Bancorp. The median projected growth rate for the Credit Card
Companies, Consumer Finance Companies, Home Equity Companies and the Credit
Card and Finance Companies Combined was 22%, 19%, 23% and 21%, respectively,
for one year (1996 to 1997) and 22%, 18%, 20%, and 20%, respectively, for the
next five years, based on IBES Estimates, compared to 10% for one year and 10%
for five years for Providian, also based on IBES Estimates, and 21% for one
year and 22% for 1996 through 1998 for Providian Bancorp, based on projections
provided by Providian Bancorp's management. The median market price to
adjusted book value (common equity before adjustment for net unrealized
investment gains pursuant to FAS 115) multiple for the Credit Card Companies,
Consumer Finance Companies, Home Equity Companies and the Credit Card and
Finance Companies Combined was 2.9x, 2.9x, 3.9x and 3.2x, respectively,
compared to 1.8x for Providian. The median dividend payout rate for the Credit
Card Companies, Consumer Finance Companies, Home Equity Companies and the
Credit Card and Finance Companies Combined for 1996 was 13%, 30%, 10% and 14%,
respectively, compared to 24% for Providian. The median dividend yield for the
Credit Card Companies, Consumer Finance Companies, Home Finance Companies and
the Credit Card and Finance Companies Combined for 1996 was 1.0%, 1.9%, 0.7%
and 0.9%, respectively, compared to 2.1% for Providian. The median return on
equity (based on 1996 earnings per share median IBES estimates as a percentage
of book
48
<PAGE>
value per share) for the Credit Card Companies, Consumer Finance Companies,
Home Equity Companies and the Credit Card and Finance Companies Combined was
21.3%, 18.4%, 22.4% and 19.1%, respectively, compared to 14.7% for Providian
(based on such IBES estimates) and 38.8% for Providian Bancorp (based on
projections provided by Providian Bancorp's management).
Comparison of Credit Card Operating Statistics. Goldman Sachs reviewed and
compared certain operating statistics relating to Providian Bancorp to
corresponding statistics of the Credit Card Companies and the Consumer Finance
Companies. Goldman Sachs' analysis was based on financial information
available as of September 30, 1996, except for LTM data and equity/managed
assets multiple data for Providian Bancorp which were based on financial
information available as of June 30, 1996. The median return on managed assets
for the Credit Card Companies, Consumer Finance Companies and the Credit Card
and Finance Companies together was 1.37%, 1.75% and 1.41%, respectively, for
LTM and 1.16%, 1.30% and 1.30%, respectively, five-year average, compared to
1.91% LTM and 1.86% 5-year average for Providian Bancorp. The median return on
equity for the Credit Card Companies, Consumer Finance Companies and the
Credit Card and Finance Companies together was 25.6%, 17.2% and 23.5%,
respectively, for LTM and 25.1%, 14.0% and 15.5%, respectively, five-year
average, compared to 38.8% LTM and 33.2% five-year average for Providian
Bancorp. The median LTM net interest margin for the Credit Card Companies,
Consumer Finance Companies and the Credit Card and Finance Companies together
was 6.09%, 7.84% and 6.19%, respectively, compared to 11.85% for Providian
Bancorp. The median allowances as a percentage of managed receivables for the
Credit Card Companies, Consumer Finance Companies and the Credit Card and
Finance Companies together was 0.61%, 2.54% and 1.16%, respectively, for LTM
and 2.60%, 2.79% and 2.78%, respectively, five-year average, compared to 2.61%
LTM and 3.52% five-year average for Providian Bancorp. The median LTM losses
as a percentage of average managed receivables for the Credit Card Companies,
Consumer Finance Companies and the Credit Card and Finance Companies together
was 0.65%, 2.27% and 1.91%, respectively, compared to 4.49% for Providian
Bancorp. The median delinquencies as a percentage of managed receivables for
the Credit Card Companies, Finance Companies and the Credit Card and Finance
Companies together was 4.62%, 3.71% and 4.00%, respectively, for the latest
quarter and 3.86%, 2.94% and 3.68%, respectively, five-year average, compared
to 3.71% for the latest quarter and 4.02% five-year average for Providian
Bancorp. The median earnings growth rate for the last five years for the
Credit Card Companies, Consumer Finance Companies and the Credit Card and
Finance Companies together was 39.5%, 19.8% and 31.9%, respectively, compared
to 26.7% for Providian Bancorp. The median projected earnings growth rate for
the next five years for the Credit Card Companies, Consumer Finance Companies
and the Credit Card and Finance Companies together, based on IBES Estimates,
was 21.3%, 15.0% and 20.0%, compared to 22% for 1996 through 1998, for
Providian Bancorp, based on projections provided by Providian Bancorp's
management. The median value of equity as a multiple of managed assets for the
Credit Card Companies, Consumer Finance Companies and the Credit Card and
Finance Companies together was 4.20x, 9.31x and 4.60x, respectively, compared
to 4.90x for Providian Bancorp. Goldman Sachs also compared the delinquency
rate of Providian Bancorp to the median delinquency rate of the Credit Card
Companies for the four quarters ended 1995 and for the first three quarters of
1996. Providian Bancorp's delinquency rate was 3.02%, 2.67%, 2.94% and 3.22%,
respectively, for quarters one through four of 1995, compared to a median
delinquency rate of the Credit Card Companies for the same periods of 2.90%,
3.02%, 3.33% and 3.64%. Providian Bancorp's delinquency rate was 3.46%, 3.41%
and 3.71%, respectively, for quarters one through three of 1996, compared to a
median delinquency rate of the Credit Card Companies for the same time periods
of 3.95%, 4.10% and 4.52%. Goldman Sachs also compared the charge-off rate of
Providian Bancorp to the median charge-off rate of the Credit Card Companies
for the four quarters ended in 1995, the year ended December 31, 1995 and the
first three quarters of 1996. Providian Bancorp's charge-off rate for quarters
one through four of 1995 and the year ended December 31, 1995 was 4.29%,
4.52%, 4.38%, 4.75% and 4.49%, respectively, compared to a median charge-off
rate of the Credit Card Companies for the same periods of 2.17%, 2.52%, 2.71%,
2.77% and 2.63%. Providian Bancorp's charge-off rate for the first three
quarters of 1996 was 5.07%, 5.49% and 5.53%, respectively, compared to a
median charge-off rate of the Credit Card Companies for the same time periods
of 3.32%, 3.72% and 3.95%.
49
<PAGE>
Possible Aggregate Value and Stock Price Analysis. Goldman Sachs discussed
with the Providian Board possible market values on a fully distributed basis
in the aggregate and on a per share basis for shares of Providian Bancorp
Common Stock ranging from $2.2 billion to $2.65 billion and from $23.48 to
$28.28 per share, respectively. Goldman Sachs makes no assurance or
representation that shares of Providian Bancorp Common Stock will trade within
such range subsequent to the Distribution. In discussing a range of possible
values for shares of Providian Bancorp Common Stock with the Providian Board,
Goldman Sachs took into account the following ratios which this range produced
(i) market value to net income multiples ranging from 13.9x to 16.8x, 11.5x to
13.8x and 11.0x to 13.3x, for Providian Bancorp's 1996, 1997 and revised 1997
estimated earnings, respectively, (ii) market value to GAAP equity (book
value) multiples ranging from 4.91x to 5.92x (based on Providian Bancorp's
GAAP equity at September 30, 1996 which was estimated by Goldman Sachs based
on Providian Bancorp's GAAP equity at year-end 1995 and Providian Bancorp's
estimated GAAP equity at year-end 1996, in the latter case, based on
projections provided by Providian Bancorp's management), and (iii) dividend
yields for shares of Providian Bancorp Common Stock ranging from 1.44% to
1.19% and 0.72% to 0.60%, based on assumed aggregate dividend payments with
respect to such shares of 20% of estimated 1996 earnings ($31.6 million) and
10% of estimated 1996 earnings ($15.8 million), respectively, and compared
such ratios to comparable ratios for the Credit Card and Finance Companies
Combined (see "Selected Credit Card and Finance Companies Analysis" above).
Goldman Sachs did not express any opinion as to the value of the shares of
Providian Bancorp Common Stock when issued to the holders of shares of
Providian Common Stock pursuant to the Distribution or the prices at which
shares of Providian Bancorp Common Stock would trade subsequent to the
Distribution. Goldman Sachs then analyzed the effect of aggregating the range
of such possible aggregate values and per share prices for shares of Providian
Bancorp Common Stock with the $2.6 billion in aggregate value and $28.00 per
share to be received by holders of shares of Providian Common Stock in the
form of AEGON Common Shares pursuant to the Merger. This analysis resulted in
combined aggregate values (the "Combined Aggregate Values") and combined per
share prices for shares of Providian Common Stock and Providian Bancorp Common
Stock post-Distribution, ranging from approximately $4.8 billion to
approximately $5.3 billion and from $51.48 to $56.28 per share, respectively.
This analysis indicated, in addition, a range of implied premiums over the
stock market price of shares of Providian Common Stock at October 3, 1996 of
$43.38 from 18.7% to 29.8% and over such stock market price at December 26,
1996 of $52.88 from (2.6%) to 6.4%. Goldman Sachs' analysis also resulted in
implied market value to net income multiples ranging from 11.5x to 12.5x for
1996 and from 10.2x to 11.1x for 1997, based in both cases on Providian's
earnings estimates for Providian and Providian Bancorp as stand-alone
entities. Goldman Sachs also applied the Combined Aggregate Values to the
aggregate adjusted GAAP equity value for Providian and Providian Bancorp which
resulted in market value to adjusted GAAP equity multiples ranging from 1.7x
to 1.9x.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying Goldman Sachs' opinion. In arriving at its fairness opinion,
Goldman Sachs considered the results of all such analyses and did not
attribute any particular weight to any analysis or factor considered by it;
rather Goldman Sachs made its determination as to fairness on the basis of its
experience and professional judgment, after considering the results of all
such analyses. No company or transaction used in the above analyses as a
comparison is identical to Providian, Providian Bancorp or AEGON or the
Distribution or the Merger. The analyses were prepared solely for the purpose
of Goldman Sachs providing its opinion to the Providian Board as to the
fairness to holders of shares of Providian Common Stock of the distribution to
such holders of shares of Providian Bancorp Common Stock pursuant to the
Distribution Agreement and the receipt by such holders of the Merger
Consideration pursuant to the Merger Agreement, taken together, and do not
purport to be appraisals or necessarily reflect the prices at which businesses
or securities actually may be sold. Analyses based upon forecasts of future
results are not necessarily indicative of actual future results, which may be
significantly more or less favorable than suggested by such analyses. Because
such analyses are inherently subject to uncertainty, being based upon numerous
factors or events beyond the control of the parties or their respective
advisors, none of Providian, Providian Bancorp, AEGON, Goldman Sachs or any
other person assumes responsibility if future results are materially different
from those forecasted. As described above, Goldman Sachs' opinion to the
Providian Board
50
<PAGE>
was one of many factors taken into consideration by the Providian Board in
making its determination to approve the Merger Agreement. The foregoing
summary does not purport to be a complete description of the analyses
performed by Goldman Sachs and is qualified by reference to the written
opinion of Goldman Sachs set forth in Appendix C to this Proxy Statement-
Prospectus and incorporated herein by reference.
The projections furnished to Goldman Sachs for each of Providian, Providian
Bancorp and AEGON were prepared by the respective managements of each company.
None of such companies publicly discloses internal management projections of
the type provided to Goldman Sachs in connection with Goldman Sachs' review of
the Distribution and Merger, and such projections were not prepared with a
view toward public disclosure. In addition, the projections were based on
numerous variables and assumptions that are inherently uncertain, including,
without limitation, factors related to general economic and competitive
conditions, many of which are beyond the control of the managements of
Providian, Providian Bancorp and AEGON. Accordingly, actual results could vary
significantly from those set forth in such projections. None of Goldman Sachs
or any party to whom any of these projections were provided assumes any
responsibility for the accuracy of such information.
Pursuant to a letter agreement dated November 13, 1996 (the "Engagement
Letter"), Providian engaged Goldman Sachs to act as its financial advisor in
connection with, among other things, the possible distribution of shares of
Providian Bancorp to holders of shares of Providian Common Stock and the
possible sale by merger, tender offer, sale of assets or stock or otherwise
(the "Sale") of the remainder of Providian. Pursuant to the terms of the
Engagement Letter, Providian has agreed to pay to Goldman Sachs in connection
with the Distribution, a transaction fee of $1,000,000, $250,000 of which
became payable upon the public announcement of the Distribution, and the
balance of which will become payable upon completion of the Distribution. With
respect to a Sale, Providian has agreed to pay Goldman Sachs a transaction fee
of 0.42% of the aggregate consideration paid in such Sale, less any advisory
fees previously paid by Providian to Goldman Sachs pursuant to a letter
agreement dated September 16, 1996 between Goldman Sachs and Providian. Such
transaction fee will be payable upon consummation of the Merger. Providian has
agreed to reimburse Goldman Sachs for its reasonable out-of-pocket expenses,
including the fees and disbursements of its attorneys, arising in connection
with Goldman Sachs' engagement and to indemnify Goldman Sachs against certain
liabilities, including certain liabilities under the federal securities laws.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
General. The following discussion describes the material U.S. federal income
tax consequences of the Distribution and the Merger. The discussion is based
on the Internal Revenue Code of 1986, as amended (the "Code"), U.S. Treasury
regulations promulgated thereunder, and judicial and administrative
interpretations thereof, all as in effect on the date hereof, and is subject
to any changes in these or other laws occurring after such date. The
discussion generally does not address the effects of any state, local or
foreign tax laws.
The tax treatment of a stockholder may vary depending upon his or her
particular situation, and certain stockholders (including individuals who hold
restricted stock of Providian, individuals who hold options in respect of
Providian Common Stock, insurance companies, tax-exempt organizations,
financial institutions or broker-dealers, persons who do not hold the
Providian Common Stock as capital assets and persons who are neither citizens
nor residents of the U.S., who are foreign corporations, foreign partnerships
or foreign estates or trusts as to the U.S. or who own immediately after the
Merger at least 5% of either the total voting power or the total value of the
outstanding AEGON Common Shares) may be subject to special rules not discussed
below.
EACH STOCKHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES TO HIM OR HER OF THE TRANSACTIONS DESCRIBED
HEREIN, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN
TAX LAWS, AND OF CHANGES IN ANY APPLICABLE TAX LAWS.
Federal Income Tax Consequences of the Transactions. Consummation of the
Distribution and the Merger is conditioned upon the receipt of a private
letter ruling (the "IRS Ruling") from the Internal Revenue Service (the "IRS")
substantially to the effect that (i) the Distribution will qualify as a tax-
free distribution under Section
51
<PAGE>
355 of the Code, (ii) the Merger will qualify as a "reorganization" under
Section 368(a) of the Code, (iii) the exchange in the Merger of Providian
Common Stock for AEGON Common Shares will not result in any gain or loss to
the Providian stockholders (except to the extent of the cash received) and
(iv) neither Providian nor LT Merger Corp. will recognize any gain or loss as
a result of the Merger. The request for the IRS Ruling was filed with the IRS
on January 30, 1997 and was supplemented on March 3, 1997 and April 3, 1997.
In addition, if the transactions so qualify, then:
(a) No gain or loss will be recognized by Providian or Providian Bancorp
as a result of the Distribution.
(b) No gain or loss will be recognized by (and no amount will be included
in the income of) the Providian stockholders as a result of their receipt
of Providian Bancorp Common Stock in the Distribution.
(c) The aggregate basis of Providian Bancorp Common Stock and Providian
Common Stock in the hands of Providian's stockholders immediately after the
Distribution will be the same as the aggregate basis of Providian Common
Stock held immediately before the Distribution, and such tax basis will be
allocated between the Providian Bancorp Common Stock and Providian Common
Stock based upon their relative fair market values at the time of the
Distribution.
(d) The holding period of Providian Bancorp Common Stock received by a
Providian stockholder in the Distribution will include the period during
which such stockholder held Providian Common Stock, provided that the
Providian Common Stock was held as a capital asset.
(e) A Providian stockholder's tax basis for the AEGON Common Shares
received in the Merger, including any fractional share interest for which
cash is received, will equal such stockholder's basis in the Providian
Common Stock surrendered in the Merger (determined immediately following
the Distribution, adjusted in the manner described in paragraph (c) above).
(f) A Providian stockholder's holding period for the AEGON Common Shares
received in the Merger, including any fractional share interest for which
cash is received, will include the period for which the shares of Providian
Common Stock surrendered in the Merger were held, provided such shares were
held as capital assets.
(g) Providian stockholders who receive cash in lieu of fractional AEGON
Common Shares will recognize gain or loss measured by the difference
between the basis of the fractional share interest and the cash received.
The gain or loss will be a capital gain or loss, provided the Providian
Common Stock exchanged is a capital asset in the hands of the Providian
stockholder.
AEGON and Providian will not complete the Distribution and the Merger unless
they receive, or waive the receipt of, the IRS Ruling. Stockholders should be
aware, however, that the IRS Ruling will be based upon certain representations
as to factual matters made by, among others, Providian, Providian Bancorp and
AEGON which, if incorrect in certain material respects, would jeopardize the
validity of the IRS Ruling. Neither Providian, Providian Bancorp nor AEGON is
currently aware of any facts and circumstances which would cause any such
representations to be untrue or incorrect in any material respect. In
addition, Providian, Providian Bancorp and AEGON have made certain
representations and agreed to certain covenants restricting their respective
future actions to provide further assurances that the Merger and the
Distribution will be tax-free.
Providian and AEGON may by mutual agreement choose to waive the condition
that they receive the IRS Ruling and instead rely on opinions from their
respective tax counsel to the same effect. In the event Providian and AEGON
agree to waive the receipt of the IRS Ruling, we intend to resolicit your vote
as to whether we should proceed with the Merger. If Providian and AEGON rely
on opinions from tax counsel, there can be no assurance that the IRS will not
challenge the Merger/Spin-Off Transaction as a taxable transaction and if
challenged whether the Distribution and the Merger will remain tax-free.
On February 6, 1997, the President's budget recommendations to Congress
called for new legislation, generally effective for distributions occurring on
or after the date of the first committee action which, if enacted, would
require Providian to recognize taxable gain upon the consummation of the
Distribution and the Merger
52
<PAGE>
equal to the excess of the value of the Providian Bancorp Common Stock
distributed to the stockholders over Providian's basis in such stock. Such
legislation has not yet been introduced in Congress.
Netherlands Dividend Withholding Tax. Under the income tax treaty currently
in force between The Netherlands and the U.S. (the "Treaty"), any dividend
paid by AEGON to a resident of the U.S. (as defined under the Treaty) will be
subject to a Dutch withholding tax that in most cases will equal 15% of the
gross amount of the dividend. Subject to certain limitations, an AEGON
shareholder who is subject to such withholding tax should be allowed a credit
or deduction for such withholding tax against his U.S. income tax liability.
For more information on the Dutch withholding tax, see "Taxation" in AEGON's
1995 Annual Report on Form 20-F (the "1995 Form 20-F") (you can obtain this
report by following the instructions we provide in this Proxy Statement-
Prospectus under "Where You Can Find More Information" on page 96).
U.S. Backup Withholding Tax. Under the backup withholding rules, a holder of
Providian Bancorp Common Stock and, under proposed Treasury Regulations, a
holder of AEGON Common Shares may be subject to backup withholding at the rate
of 31% with respect to dividends and proceeds of a redemption, unless such
stockholder (a) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact or (b) provides a
correct taxpayer identification number, certifies as to no loss of exemption
from backup withholding and otherwise complies with applicable requirements of
the backup withholding rules. Any amount withheld under these rules would be
credited against the stockholder's federal income tax liability. Providian
Bancorp or AEGON may require holders of Providian Bancorp Common Stock or
AEGON Common Shares to establish an exemption from backup withholding or to
make arrangements satisfactory to Providian Bancorp or AEGON with respect to
the payment of backup withholding. A stockholder who does not provide
Providian Bancorp or AEGON with his or her current taxpayer identification
number may be subject to penalties imposed by the IRS.
APPRAISAL RIGHTS
Holders of shares of Providian Common Stock are not entitled to dissenters'
appraisal rights which would give them the right to obtain the payment of cash
in exchange for their Providian Common Stock as a result of the Distribution
or the Merger.
STOCK EXCHANGE LISTING
It is a condition to the Merger that the AEGON Common Shares to be issued
pursuant to the Merger Agreement be authorized for listing on the NYSE,
subject to official notice of issuance. Application has been made for listing
on the NYSE of the AEGON Common Shares to be issued in the Merger.
HSR ACT, INSURANCE REGULATORY APPROVALS AND OTHER REGULATORY APPROVALS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
and the rules and regulations promulgated thereunder (the "HSR Act"), certain
transactions, including the Merger, may not be consummated unless certain
waiting period requirements have been satisfied. AEGON and Providian have
obtained clearance from the U.S. Department of Justice (the "DOJ") indicating
compliance with this requirement. However, at any time before or after the
Effective Time, the U.S. Federal Trade Commission (the "FTC"), the DOJ or any
other person could take action under the antitrust laws, including seeking to
enjoin the consummation of the Merger or seeking the divestiture by AEGON of
all or any part of Providian. Although AEGON and Providian do not believe that
there are substantive grounds for such challenge, there can be no assurance
that a challenge to the Merger on antitrust grounds will not be made or that,
if such a challenge is made, it would not be successful.
Providian is engaged in writing life and accident and health insurance.
Generally, a person seeking to acquire voting securities, such as shares of
Providian Common Stock, in an amount that would result in such person
controlling, directly or indirectly, a U.S. insurer must, together with any
person ultimately controlling
53
<PAGE>
such person, file with the relevant insurance commissioners an application
seeking approval of the change of control. Providian owns insurance companies
domiciled in Kentucky, North Carolina, Missouri, New York, Illinois, New
Jersey and Texas. Accordingly, the obligations of Providian and AEGON to
consummate the Merger are conditioned, among other things, upon the relevant
commissioner of insurance approving the change of control. The Kentucky, North
Carolina, Missouri, New York, Illinois, New Jersey and Texas insurance
statutes require a determination by the commissioner of insurance of each
state as to certain factual matters with respect to the proposed acquisition.
Public hearings concerning the transaction may be required in each state.
AEGON and Providian have filed applications for such approvals, but there can
be no assurance as to when or if the required approvals will be obtained.
In addition, Providian Bancorp has received a no-action letter from the
Board of Governors of the Federal Reserve System to the effect that it may
continue to operate as a grandfathered institution under the Competitive
Equality Banking Act of 1987.
The Merger Agreement provides that, subject to certain terms and conditions,
the parties to the Merger Agreement shall take, or cause to be taken, all
actions and do, or cause to be done, all things necessary, proper or
advisable, without the imposition of any conditions which would have a
material adverse effect on such party, to consummate and make effective as
promptly as practicable the transactions contemplated by the Merger Agreement,
including, but not limited to, (a) obtaining the written consent or approval
of each and every governmental authority and other regulatory body required in
order to permit the parties to consummate the transactions contemplated by the
Merger Agreement and the Distribution Agreement and (b) effecting all
necessary filings and submissions of information requested by governmental
authorities.
ACCOUNTING TREATMENT
The Merger will be accounted for by AEGON as a purchase for financial
accounting purposes in accordance with Dutch accounting principles.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
In considering the recommendations of the Providian Board, stockholders
should be aware that, as described below, certain members of management of
Providian and of the Providian Board may have certain interests in the
transactions that are in addition to the interests of stockholders generally
and which may create potential conflicts of interest. The Providian Board was
aware of and discussed these potential conflicts of interest when it approved
the Distribution and the Merger and did not believe it was necessary to take
any further action with regard to these interests.
Providian's Restated Certificate of Incorporation provides for
indemnification of Providian's directors and officers arising out of actions
or omissions taken (or not taken) during such individuals' terms of office.
Such indemnification would apply to liabilities arising out of the approval of
the transactions. In addition, certain employees of Providian currently hold
options to acquire 3,626,321 shares of Providian Common Stock which will be
assumed by AEGON pursuant to the Merger Agreement, with the exception of
options to acquire 538,066 shares of Providian Common Stock held by persons
who are officers of Providian Bancorp immediately following the Distribution.
All Providian stock options held by employees of Providian will vest
immediately upon the change in control of Providian. In addition, all
restricted securities of Providian held by employees of Providian or Providian
Bancorp will also vest upon the change in control resulting in compensation
expenses of $5,973,000 and $1,962,000 to Providian and Providian Bancorp,
respectively. Providian stock options, relating to an aggregate of up to
285,000 shares of Providian Common Stock, held by Mr. Irving W. Bailey II, the
Chairman and Chief Executive Officer of Providian, may, to the extent
Providian, Providian Bancorp and
54
<PAGE>
Mr. Bailey so agree, be assumed by Providian Bancorp pursuant to the Employee
Benefits Agreement as a result of Mr. Bailey becoming a director of Providian
Bancorp.
Providian has had and continues to have agreements with certain of its
officers providing benefits upon termination of employment following a change
in control of Providian. If any one of these officers who remains employed by
Providian at the time of the Merger is terminated within a specified time
after the Merger for any reason other than death, disability or cause or if
such officer terminates his or her own employment for any reason in the first
30 days following the first anniversary of the Merger, the officer is entitled
to severance pay and certain other benefits. The severance payments are based
on the officer's annual base salary and bonus, multiplied by a factor of two
or three, depending on the officer. See "Executive Compensation and Other
Information--Executive Employment and Change in Control Agreements" in this
Proxy Statement-Prospectus and in the Information Statement which was mailed
with this Proxy Statement-Prospectus.
It is also anticipated that Mr. Bailey will become a member and Vice
Chairman of the Board of Directors of AEGON USA, Inc., a subsidiary of AEGON,
following the Closing.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Providian and AEGON have made forward-looking statements in this document
that are subject to risks and uncertainties. These statements are based on
management's belief and assumptions, and on information currently available to
management. Forward-looking statements include the information concerning
possible or assumed future results of operations of Providian and AEGON set
forth under "Summary," "The Proposed Merger--Background of and Reasons for the
Transactions," "--Recommendation of the Providian Board of Directors," "--
Opinion of Financial Advisor" and "Unaudited Pro Forma Condensed Consolidated
Financial Information" and those preceded by, followed by or that include the
words "believes," "expects," "anticipates" or similar expressions. Forward-
looking statements also include statements in which we use words such as
"expect," "anticipate," "intend," "plan," "believe," "estimate" or similar
expressions.
Forward-looking statements are not guarantees of future performance. They
involve risks, uncertainties and assumptions. Providian's and AEGON's future
results and shareholder values may differ materially from those expressed in
these forward-looking statements. Many of the factors that will determine
these results and values are beyond our ability to control or predict. We
caution you not to put undue reliance on any forward-looking statements. In
addition, we do not have any intention or obligation to update forward-looking
statements after we distribute this document, even if new information, future
events or other circumstances have made them incorrect or misleading. For
those statements, Providian and AEGON claim the protection of the safe harbor
for forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995.
Stockholders of Providian should understand that the following important
factors, in addition to those discussed elsewhere in this document and in the
documents which are incorporated by reference herein, could affect the future
results of Providian and AEGON, and could cause those results to differ
materially from those expressed in such forward-looking statements: (i) the
effect of economic conditions; (ii) the ability of AEGON to successfully
integrate the insurance operations of Providian into AEGON; (iii) the impact
of competitive products and pricing; (iv) changes in claims paying or debt
ratings by one or more of the nationally recognized rating agencies; (v)
product development; (vi) changes in laws and regulations, including changes
in accounting standards; (vii) customer demand; (viii) effectiveness of
advertising and marketing spending or programs; (ix) consumer perception of
insurance-related issues; and (x) foreign economic conditions, including
currency rate fluctuations. For a discussion of other specific factors that
could affect Providian Bancorp's operations, see "Risk Factors" in the
Information Statement which was mailed with this Proxy Statement-Prospectus.
FEDERAL SECURITIES LAW CONSEQUENCES
All AEGON Common Shares received by Providian stockholders in the Merger
will be freely transferable, except that AEGON Common Shares that are received
by persons who are deemed to be "affiliates" (as such
55
<PAGE>
term is defined under the Securities Act of 1933 (the "Securities Act")) of
Providian prior to the Merger may be resold by them only in transactions
permitted by the resale provisions of Rule 145 promulgated under the
Securities Act (or Rule 144 in the case of such persons who become affiliates
of AEGON) or as otherwise permitted under the Securities Act. It is presently
anticipated that the affiliates of Providian will be able to sell such shares
without registration, subject to the volume and other applicable limitations
under the Securities Act and the rules and regulations thereunder. The
obligation of AEGON to consummate the Merger is conditioned upon Providian
having used commercially reasonable efforts to cause each of Providian's
affiliates to deliver to AEGON on or prior to the Closing Date a written
agreement in terms satisfactory to AEGON, that such person will not offer to
sell, transfer or otherwise dispose of any of the AEGON Common Shares issued
to such person pursuant to the Merger, except in accordance with the
applicable provisions of Rule 145, and except in other transactions that are
not in violation of the Securities Act.
MARKETS AND MARKET PRICES
The principal market for AEGON Common Shares is the Amsterdam Exchanges (the
"Amsterdam Stock Exchange"). The AEGON Common Shares are also listed on the
NYSE (under the symbol "AEG") and the Tokyo, London and Zurich Stock
Exchanges. Providian Common Stock is listed under the symbol "PVN" on the
NYSE. Providian Common Stock is also listed on the Pacific Stock Exchange.
Application will be made to list the Providian Bancorp Common Stock on the
NYSE. There is currently no public trading market for the Providian Bancorp
Common Stock, and there can be no assurance that an active trading market will
develop or, if a trading market develops, that such a market will be
maintained, or as to the prices at which trading in the Providian Bancorp
Common Stock will occur after the transactions. Unless the Providian Bancorp
Common Stock is fully distributed and an orderly market develops, the prices
at which trading in the Providian Bancorp Common Stock occurs may fluctuate
significantly. Prices at which the AEGON Common Shares and the Providian
Bancorp Common Stock may trade cannot be predicted.
On December 31, 1996, there were 9,552 holders of record of Providian Common
Stock and 93,767,699 shares of Providian Common Stock outstanding. On December
31, 1996, there were 265,233,665 outstanding AEGON Common Shares. On December
27, 1996, the last trading date prior to the public announcements by Providian
and AEGON of the signing of the Merger Agreement, the last reported sale
prices on the NYSE Composite Tape were $57 per AEGON Common Share and $52 3/4
per share for Providian Common Stock. On April 16, 1997, the last reported
sale prices on the NYSE Composite Tape were $68.375 per AEGON Common Share and
$55.375 per share for Providian Common Stock.
56
<PAGE>
The following table sets forth for the calendar quarters indicated (ended
March 31, June 30, September 30 and December 31) (i) the range of high and low
sale prices of AEGON Common Shares and Providian Common Stock as reported on
the NYSE Composite Tape and the dividends per share declared on AEGON Common
Shares and Providian Common Stock and (ii) the high and low closing prices of
AEGON Common Shares on the Amsterdam Stock Exchange as reported by the
"Officiele Prijscourant," the official daily newspaper of the association of
brokers and securities dealers in The Netherlands. AEGON's per share amounts
have been adjusted for the 2.5 for 1 stock-split effective June 1, 1995.
<TABLE>
<CAPTION>
AEGON
COMMON SHARES AEGON PROVIDIAN
ON AMSTERDAM COMMON SHARES COMMON STOCK
STOCK EXCHANGE(1) ON THE NYSE(2) ON THE NYSE
----------------- --------------- --------------
(IN DUTCH (IN U.S. (IN U.S.
GUILDERS) DOLLARS) DOLLARS)
CALENDAR QUARTER HIGH LOW HIGH LOW DIVIDENDS(1) HIGH LOW DIVIDENDS
- ---------------- ----------------- ------- ------- ------------ ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994
1st Qtr................ 44.12 37.20 22.70 19.90 -- 38.13 31.00 .20
2nd Qtr................ 40.56 36.44 21.85 19.75 .62 33.13 28.75 .20
3rd Qtr................ 42.00 36.68 23.70 20.70 -- 34.00 28.63 .20
4th Qtr................ 44.88 39.20 25.50 22.45 .30 33.50 29.88 .20
1995
1st Qtr................ 45.52 43.20 28.60 25.40 -- 36.88 30.88 .225
2nd Qtr................ 54.00 43.80 35.13 28.25 .88 37.50 33.50 .225
3rd Qtr................ 59.40 53.60 37.00 33.25 -- 41.88 34.75 .225
4th Qtr................ 71.00 57.80 44.13 35.75 .39 42.88 37.75 .225
1996
1st Qtr................ 78.00 66.90 47.38 41.25 -- 47.13 40.50 .25
2nd Qtr................ 87.30 76.60 50.00 44.75 1.01 46.63 41.38 .25
3rd Qtr................ 85.80 71.10 51.38 42.38 -- 44.25 38.13 .25
4th Qtr................ 110.10 85.10 63.25 49.88 .70 55.38 42.50 .25
1997
1st Qtr................ 140.30 108.80 73.38 61.38 -- 60.25 49.50 .275
2nd Qtr
(through April 16,
1997)................. 134.40 121.70 69.25 64.625 -- 56.375 52.625 --
</TABLE>
- --------
(1) AEGON per share amounts have been adjusted for a 2.5 for 1 stock-split
effective June 1, 1995.
(2) Based upon a U.S. Dollar/Dutch Guilder exchange rate at the date of
payment. AEGON pays an interim dividend during each year, in the third or
fourth quarter, and a final dividend in the second quarter of the
following year.
No assurance can be given as to the market price of AEGON Common Shares or
Providian Common Stock at, or, in the case of AEGON Common Shares, after the
Effective Time. STOCKHOLDERS ARE ADVISED TO OBTAIN CURRENT MARKET QUOTATIONS
FOR AEGON COMMON SHARES AND PROVIDIAN COMMON STOCK.
AEGON Common Shares (262,940,236 outstanding at June 30, 1996) are held by
shareholders worldwide in bearer and registered form. In The Netherlands
119,814,521 shares are in registered form (of which 104,787,515 shares are
held by the Association, AEGON's largest shareholder). In the U.S. 3,959,977
shares are "Shares of New York Registry" ("New York Shares"). Based on
information that has been collected from custodians and registrars, AEGON
estimates that U.S. shareholders in total hold approximately 22 million AEGON
Common Shares.
Fluctuations in the exchange rate between the Dutch Guilder and the U.S.
Dollar will affect the U.S. Dollar equivalent of the Dutch Guilder price of
the AEGON Common Shares traded on the Amsterdam Stock Exchange and, as a
result, are likely to affect the market price of the AEGON Common Shares in
the U.S. Such fluctuations will also affect any U.S. Dollar amounts received
by holders of AEGON Common Shares on conversion of any cash dividends paid in
Dutch Guilders on the AEGON Common Shares.
57
<PAGE>
The following table sets forth for the periods indicated the high, low,
average and period-end noon buying rate in New York City for cable transfers
in foreign currencies as certified for customs purposes by the Federal Reserve
Bank of New York, which are not materially different from the Midpoint Rate
(the rate settled each working day at 2:15 p.m. hours by the Dutch Central
Bank), used in computing AEGON's financial statements. The average rate means
the average of the exchange rates on the last day of each month during a year.
<TABLE>
<CAPTION>
HIGH LOW AVERAGE PERIOD-END
-------- -------- --------- ------------
(DUTCH GUILDER PER ONE U.S. DOLLAR)
<S> <C> <C> <C> <C>
1992.................................... 1.8893 1.5684 1.7572 1.8190
1993.................................... 1.9612 1.7617 1.8652 1.9472
1994.................................... 1.9750 1.6727 1.8077 1.7360
1995.................................... 1.7494 1.5192 1.5976 1.6035
1996.................................... 1.7560 1.6075 1.6889 1.7271
June 30, 1996........................... 1.7315 1.6075 1.6741 1.7060
1997 (through April 16, 1997)........... 1.9497 1.7300 1.8701 1.9425
</TABLE>
AEGON's bearer shares and registered shares may be exchanged on a one for
one basis. On the Amsterdam Stock Exchange only bearer shares may be traded
and on the New York Stock Exchange only New York Shares may be traded.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma information set forth below gives effect to the
Distribution and the Merger as if they had been consummated on June 30, 1996
for balance sheet presentation purposes and January 1, 1995 for income
statement purposes, subject to the assumptions and adjustments in the
accompanying notes to the pro forma financial information.
The pro forma adjustments reflecting the consummation of the Merger are
based on purchase accounting methods under Dutch accounting principles and
upon the assumptions set forth in the Notes hereto, including the exchange of
all the outstanding shares of Providian Common Stock for an aggregate of
approximately 42.8 million AEGON Common Shares. This pro forma financial
information should be read in conjunction with the financial data appearing
under "Summary--Selected Historical Financial Information" and the historical
financial statements of AEGON and Providian which have been incorporated
herein by reference. See "Where You Can Find More Information." This pro forma
financial information should also be read in conjunction with the historical
financial statements and accompanying notes that Providian Bancorp has
included in the Information Statement.
The pro forma adjustments do not reflect any operating efficiencies and cost
savings that may be achievable with respect to the combined companies. The pro
forma adjustments do not include any adjustments to historical sales for any
future price changes nor any adjustments to selling and marketing expenses for
any future operating changes.
The following information is not necessarily indicative of the financial
position or operating results that would have occurred had the Distribution
and Merger been consummated on the date, or at the beginning of the periods,
for which the consummation of the Distribution and Merger is being given
effect. For purposes of preparing the AEGON consolidated financial statements,
AEGON will establish a new basis for Providian's assets and liabilities based
upon the fair values thereof and the AEGON purchase price, including the costs
of the Merger. A final determination of required purchase accounting
adjustments, including the allocation of the purchase price to the
identifiable tangible and intangible assets acquired and liabilities assumed
based on their respective fair values, has not yet been made. Accordingly, the
purchase accounting adjustments made in connection with the development of the
pro forma consolidated financial information are preliminary and have been
made solely for purposes of developing such pro forma consolidated financial
information. AEGON will
58
<PAGE>
undertake a study to determine the fair value of certain of Providian's assets
and liabilities and will make appropriate purchase accounting adjustments upon
completion of that study. Although significant adjustments are not expected,
the actual financial position and results of operations will differ, perhaps
significantly, from the pro forma amounts reflected herein because of a
variety of factors, including access to additional information, changes in
value and changes in operating results between the dates of the pro forma
financial data and the date on which the Merger takes place. If the actual
financial position and results of operations differ from the information
contained in the pro forma data, Providian is not required to resolicit
stockholder approval of the Merger and does not currently anticipate that it
would do so.
The Unaudited Pro Forma Condensed Consolidated Statements include the
following columns:
"Providian Corporation Historical" represents Providian as previously
reported in semiannual and annual reports.
"Distribution--Historical Providian Bancorp" includes previously presented
semiannual and annual report information as disclosed in Providian's reports.
The "Pro Forma Adjustments" column reflects transactions required by the
Merger Agreement.
"Pro Forma Providian Corporation after Distribution" represents the portion
of Providian purchased by AEGON.
"Pro Forma Adjustments Relating to the Merger" disclosed the balance sheet
and income statement purchase accounting adjustments related to the Merger.
The financial statement notes include descriptions explaining each adjustment.
"Dutch Adjustments and Reclassifications" discloses income statement
adjustments and reclassifications to conform with Dutch accounting principles.
The financial statement notes include descriptions explaining each adjustment
and reclassification.
"AEGON NV Historical" represents AEGON as previously reported in semiannual
and annual reports.
"AEGON NV Pro Forma Combined" represents the combined financial statements
as if the Merger had been consummated on June 30, 1996, for balance sheet
presentation purposes and January 1, 1995, for income statement purposes.
"Convenience Translation to US Dollars AEGON NV Pro Forma Combined" is
consistent with the prior column, except all amounts have been translated to
U.S. Dollars using the June 30, 1996 exchange rate of 1.7082 NLG per U.S.
Dollar.
59
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(AMOUNTS IN MILLION DUTCH GUILDERS)
(UNAUDITED)
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
DISTRIBUTION TO US DOLLARS
---------------------- -------------
PRO FORMA
PROVIDIAN PRO FORMA
PROVIDIAN HISTORICAL CORPORATION ADJUSTMENTS AEGON NV AEGON NV
CORPORATION PROVIDIAN PRO FORMA AFTER RELATING TO AEGON NV PRO FORMA PRO FORMA
HISTORICAL (A) BANCORP ADJUSTMENTS DISTRIBUTION THE MERGER HISTORICAL COMBINED COMBINED (1)
-------------- ---------- ----------- ------------ ----------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Investments..... 35,119 (5,714) 29,405 (1,846)(D) 93,077 120,636 $ 70,622
Investments for
the account of
policyholders.. 4,187 4,187 65,785 69,972 40,962
Other assets.... 3,474 (640) 198 (B) 2,865 65 (E) 7,760 10,231 5,990
(167)(C) (353)(F)
(106)(G)
------ ------ ---- ------ ------ ------- ------- --------
Total assets..... 42,780 (6,354) 31 36,457 (2,240) 166,622 200,839 $117,574
====== ====== ==== ====== ====== ======= ======= ========
Shareholders'
equity.......... 4,751 (719) 111 (B) 4,138 (4,138)(H) 9,812 11,792 $ 6,903
(5)(C) 4,473 (I)
(1,846)(D)
(712)(J)
65 (E)
Perpetual
cumulative
subordinated
loans........... 1,250 1,250 732
Subordinated
(convertible)
loans........... 2,579 2,579 1,510
Company-Obligated
Mandatorily
Redeemable
Preferred
Securities of
Providian LLC... 171 171 7 (K) 178 104
Technical
provisions...... 24,988 24,988 3,042 (L) 60,259 85,187 49,869
(3,273)(M)
171 (M)
Technical
provisions with
Investment for
the account of
policyholders... 4,187 4,187 65,785 69,972 40,962
Long-term
liabilities..... 1,360 (85) (162)(C) 1,113 48 (K) 6,850 8,011 4,690
Other
liabilities..... 7,323 (5,550) 87 (B) 1,860 560 (N) 20,087 21,870 12,804
(637)(O)
------ ------ ---- ------ ------ ------- ------- --------
Total liabilities
and
shareholders'
equity.......... 42,780 (6,354) 31 36,457 (2,240) 166,622 200,839 $117,574
====== ====== ==== ====== ====== ======= ======= ========
</TABLE>
- --------
(1) Based upon the exchange ratio at June 30, 1996 of 1 USD = 1.7082 Dutch
Guilders.
60
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(AMOUNTS IN MILLION DUTCH GUILDERS, EXCEPT PER SHARE DATA)(1)
(UNAUDITED)
<TABLE>
<CAPTION>
CONVENIENCE
PRO TRANSLATION
PRO FORMA DUTCH FORMA TO US
PRO FORMA PROVIDIAN ADJUST- ADJUST- AEGON DOLLARS
PROVIDIAN ADJUSTMENTS CORPORATION MENTS MENTS NV PRO AEGON NV
CORPORATION RELATING TO AFTER & RECLASSI- RELATING TO AEGON FORMA PRO FORMA
HISTORICAL(A) DISTRIBUTION(B) DISTRIBUTION FICATIONS MERGER NV HISTORICAL COMBINED COMBINED(2)
------------- --------------- ------------ ----------- ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Gross premiums... 1,015 1,015 117 (P) 8,848 9,980 $5,842
Investment
income.......... 1,568 (472) 1,096 64 (Q) (12)(T) 3,236 4,311 2,524
(10)(R) (63)(D)
Income from
banking
activities...... 203 (203) 0 596 596 349
----- ---- ----- --- ---- ------------- ------------- ------
Total revenue.... 2,786 (675) 2,111 171 (75) 12,680 14,887 8,715
BENEFITS AND
EXPENSES
Premiums to
reinsurers...... 66 (P) 481 54 320
Benefits paid and
provided........ 1,446 (111) 1,335 51 (Q) (6)(M) 8,092 9,486 5,554
14 (S)
Profit sharing
rebates......... 706 706 413
Commissions and
expenses for own
account......... 918 (427) 491 50 (Q) (7)(F) 1,698 2,181 1,277
(14)(S) (9)(G)
(201)(U)
173 (U)
Interest......... 107 (49) 58 (3)(K) 693 748 438
Miscellaneous
income and
expenditure..... (168) 99 (69) 14 (P) 95 40 23
----- ---- ----- --- ---- ------------- ------------- ------
Total Benefits
and expenses.... 2,303 (488) 1,815 181 (53) 11,765 13,708 8,025
----- ---- ----- --- ---- ------------- ------------- ------
Income before
tax............. 483 (187) 296 (10) (22) 915 1,179 690
Corporation tax.. 145 (65) 80 (3)(O) (5)(O) 204 276 162
----- ---- ----- --- ---- ------------- ------------- ------
Net income....... 338 (122) 216 (7) (17) 711 903 $ 528
===== ==== ===== === ==== ============= ============= ======
PER SHARE
INFORMATION
Net Income per
share:
Primary(3)...... 2.69 3.13 $ 1.83
Fully
diluted(4)..... 2.59 2.98 1.74
Weighted average
number of shares
outstanding:
Primary(3)...... 263.8 million 287.4 million
Fully
diluted(4)..... 284.9 million 311.3 million
</TABLE>
- -------
(1) U.S. Dollar amounts have been converted to Dutch Guilders at the average
exchange rate for the six month period of 1.675.
(2) Convenience translation is based on balance sheet rate at June 30, 1996 of
1.7082.
(3) Primary shares have been increased to include an additional 23,613,239
shares issued as part of the transaction. In calculating the primary
earnings per share the income is reduced by preferred stock dividends of
NLG 3.4 million.
(4) Fully diluted shares have been increased by the 23,613,239 of newly issued
shares plus an additional 2,825,953 shares for stock options awarded to
Providian employees in exchange for their Providian stock options. The
options have an average remaining term of six years and none are assumed
to be exercised during the pro forma period. In calculating fully diluted
earnings per share an interest adjustment is added back of NLG 27 million.
61
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1995
(AMOUNTS IN MILLION DUTCH GUILDERS, EXCEPT PER SHARE DATA)(1)
(UNAUDITED)
<TABLE>
<CAPTION>
CONVENIENCE
PRO FORMA TRANSLATION TO
PRO FORMA PROVIDIAN PRO FORMA US DOLLARS
PROVIDIAN ADJUSTMENTS CORPORATION DUTCH ADJUSTMENTS AEGON NV AEGON NV
CORPORATION RELATING TO AFTER ADJUSTMENTS & RELATING TO AEGON NV PRO FORMA PRO FORMA
HISTORICAL(A) DISTRIBUTION DISTRIBUTION RECLASSIFICATIONS THE MERGER HISTORICAL COMBINED COMBINED(2)
------------- ------------ ------------ ----------------- ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Gross premiums.. 1,918 1,918 249 (P) 13,768 15,935 9,328
Investment
income......... 2,876 (770) 2,106 109 (Q) (18)(T) 5,983 8,040 4,707
............... (15)(R) (125)(D)
Income from
banking
activities..... 401 (401) 0 1,228 1,228 719
----- ------ ----- ------ ------- ------------- ------------- ------
Total revenue... 5,195 (1,171) 4,024 343 (143) 20,979 25,203 14,754
Benefits and
expenses
Premiums to
reinsurers..... 129(P) 820 949 556
Benefits paid
and provided... 2,820 (169) 2,651 120(P) (11)(M) 12,678 15,461 9,051
............... 23(S)
Profit Sharing
and rebates.... 1,222 1,222 715
Commissions and
expenses for
own account.... 1,626 (729) 897 86(Q) (13)(F) 2,973 3,866 2,263
(23)(S) (18)(G)
(362)(U)
326(U)
Interest........ 194 (85) 109 (5)(K) 1,396 1,500 878
Miscellaneous
income and
expenditure.... (242) 138 (104) 23(Q) 170 89 52
----- ------ ----- ------ ------- ------------- ------------- ------
Total benefits
and expenses... 4,398 (845) 3,553 358 (83) 19,259 23,087 13,515
----- ------ ----- ------ ------- ------------- ------------- ------
Income before
tax............ 797 (326) 471 (15) (60) 1,720 2,116 1,239
Corporation
tax............ 244 (113) 131 (5)(O) (16)(O) 397 507 297
----- ------ ----- ------ ------- ------------- ------------- ------
Net income...... 553 (213) 340 (10) (44) 1,323 1,609 942
----- ------ ----- ------ ------- ------------- ------------- ------
Per share
information:
Net income per
share:
Primary(3)...... 5.04 5.61 3.28
Fully
diluted(4)..... 4.80 5.29 3.10
Weighted average
number of
shares
outstanding:
Primary(3)...... 261.6 million 285.2 million
Fully
diluted(4)..... 289.2 million 315.6 million
</TABLE>
- -------
(1) U.S. Dollar amounts have been converted to Dutch Guilders at the average
exchange rate for the year of 1.605.
(2) Convenience translation is based on balance sheet rate at June 30, 1996 of
1.7082.
(3) Primary shares have been increased to include an additional 23,613,239
shares issued as part of the transaction. In calculating the primary
earnings per share the income is reduced by preferred stock dividends of
NLG 9.4 million.
(4) Fully diluted shares have been increased by the 23,613,239 of newly issued
shares plus an additional 2,825,953 shares for stock options awarded to
Providian employees in exchange for their Providian stock options. The
options have an average remaining term of six years and none are assumed
to be exercised during the pro forma period. In calculating fully diluted
earnings per share an interest adjustment is added back of NLG 71 million.
62
<PAGE>
PRO FORMA RECONCILIATION OF DUTCH ACCOUNTING
PRINCIPLES TO US GAAP
(AMOUNTS IN MILLION DUTCH GUILDERS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NET INCOME
-------------------------------
SHAREHOLDERS' SIX MONTHS
EQUITY YEAR ENDED ENDED
JUNE 30, 1996 DECEMBER 31, 1995 JUNE 30, 1996
------------- ----------------- -------------
<S> <C> <C> <C>
Amounts in accordance with Dutch
accounting principles(1)....... 11,792 1,609 903
REAL ESTATE..................... (909) (67) (36)
The Netherlands: carried at
original cost for first five
years and appraisal increments
recognized thereafter
U.S.: cost less depreciation
DEBT SECURITIES (FAS115)
The Netherlands: debt securities
are valued at amortized cost
The U.S.: Debt securities are
classified as available for
sale and valued at market val-
ues. The impact is shown net of
amounts to satisfy policyholder
commitments, adjustment of de-
ferred policy acquisition costs
and applicable taxes
Unrealized gain on debt secu-
rities....................... 1,434
Amount required to satisfy
policyholders................ (958)
Adjustment of deferred policy
acquisition costs............ (25)
Deferred tax adjustment....... (77)
GOODWILL (ARISING FROM ACQUISI- 1,981 (168) (93)
TIONS).........................
The Netherlands: directly
charged to shareholders' equity
in the year of acquisition
The U.S.: deferred and amortized
over a period not to exceed 40
years
TECHNICAL PROVISIONS............ 1,083 67 (14)
The Netherlands: calculated on
recent assumptions
The U.S.: calculated on assump-
tions when the policy was is-
sued or recent assumptions
REALIZED GAINS AND LOSSES....... 75 (19) 278
The Netherlands: deferred and
released to income over time
The U.S.: recognized as income
when realized
DEFERRED TAXATION (INCLUDING
TAXATION ON
US GAAP ADJUSTMENTS)........... (1,039) (33) 11
The Netherlands: calculated us-
ing discounted tax rates
The U.S.: calculated using nomi-
nal tax rates
REDEMPTION OF CONVERTIBLE DEBT.. (29) (150)
The Netherlands: Accounted for
as conversion
The U.S.: Accounted for as an
extinguishment of debt
BALANCE OF OTHER ITEMS.......... 73 (82) (33)
------ ----- ----
Certain expenses are recorded in
different periods on the two
basis of accounting
Amounts in accordance with US
accounting principles
(GAAP)(1)...................... 13,430 1,278 866
====== ===== ====
US GAAP approximate net income
per share (in NLG)
Primary....................... 4.45 3.00
Fully diluted................. 4.24 2.86
</TABLE>
- --------
(1) For Dutch accounting purposes the NLG 147 million cost of the option to
receive additional shares from the Association has been included in the
purchase price and recorded as goodwill which was subsequently written off
to shareholders' equity. See note N to Notes to Unaudited Pro Forma
Condensed Financial Statements for a further description of the option.
For US GAAP accounting purposes the cost of the option is not considered
part of the purchase price but is considered an equity instrument and
pursuant to EITF 96-13 the cost is charged directly to shareholders'
equity. Although the detail entries to record the cost of the option are
different under Dutch and US GAAP accounting the impact on shareholders'
equity is the same.
63
<PAGE>
AEGON NV PRO FORMA COMBINED
SUMMARY BALANCE SHEET
(AMOUNTS IN MILLION DUTCH GILDERS)
(UNAUDITED)
<TABLE>
<CAPTION>
DUTCH US GAAP
ACCOUNTING ACCOUNTING
BASIS ADJUSTMENTS BASIS
---------- ----------- ----------
<S> <C> <C> <C>
Investments................................. 120,636 525 A 121,161
Investments for the account of policyhold-
ers........................................ 69,972 69,972
Other assets................................ 10,231 2,054 B 12,285
Deferred acquisition costs.................. 10,186 E 10,186
------- ------ -------
Total assets.............................. 200,839 12,765 213,604
Technical provisions........................ 85,187 (100)C 95,273
10,186 E
Technical provisions with investment risk
for the account of policyholders........... 69,972 69,972
Long-term liabilities....................... 8,011 8,011
Other liabilities........................... 21,870 1,041 D 22,911
Debt........................................ 4,007 4,007
Shareholders' Equity........................ 11,792 1,638 13,430
------- ------ -------
Total liabilities and shareholders' Equi-
ty....................................... 200,839 12,765 213,604
======= ====== =======
</TABLE>
Notes:
<TABLE>
<C> <S> <C>
A --Adjust real estate to depreciated cost from appraised value... (909)
Adjust debt securities to market value from amortized cost (FAS
115)............................................................ 1,434
------
525
------
B --Restore goodwill charged off to equity for Dutch accounting... 1,981
Capitalize and amortize certain items expensed for Dutch
accounting...................................................... 73
------
2,054
------
C --Adjustment of technical provision for portion of market value
adjustment of debt securities required to satisfy policyholder
commitments (FAS 115)........................................... 958
Adjustment of deferred acquisition cost related to market value
adjustment of debt securities (FAS 115)......................... 25
Reduce reserve for differences in valuation assumptions......... (1,083)
------
(100)
------
D --Adjustment of deferred tax related to market value adjustment
of debt securities (FAS 115).................................... 77
Record deferred tax at undiscounted amount and reflect tax on
other US GAAP adjustments....................................... 1,039
Recognize gains deferred under Dutch accounting................. (75)
------
1,041
------
--Reclassify deferred acquisition costs from a reduction of
E technical provisions to an asset................................ 10,186
------
</TABLE>
64
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma condensed consolidated financial statements are
presented in Dutch guilders (NLG). The Providian balance sheet amounts have
been converted to Dutch guilders at the June 30, 1996, exchange rate of 1.7082
guilders per U.S. dollar. The income statements have been converted using the
average exchange rate during each period, which was 1.605 for the year 1995
and 1.675 for the six month period ended June 30, 1996. A convenience
translation to U.S. dollars column has been provided on the balance sheet and
income statements using the June 30, 1996 exchange rate of 1.7082.
PRO FORMA ADJUSTMENTS
TRANSACTIONS RELATING TO THE MERGER
The Merger will be accounted for under the purchase method of accounting,
which requires the total acquisition costs to be allocated to the assets and
liabilities acquired based on fair value. Any excess of purchase cost over the
fair value of the acquired assets less the fair value of the acquired
liabilities will be recorded as goodwill and charged to shareholders' equity.
In the Merger, holders of Providian stock will receive in exchange for each
share of Providian common stock a fraction of an AEGON Common Share equal to
$28.00 divided by the AEGON Share Price. However, the AEGON Share Price is
subject to a collar, for the purposes of calculating the exchange ratio, which
provides that the AEGON Share Price will be deemed to be $61.153 if such
average price is equal to or greater than $61.153 and will be deemed to be
$50.034 if such average price is equal to or less than $50.034. The Merger
Agreement also contains certain termination rights on the part of AEGON or
Providian, as the case may be, if the Fair Market Value at the Effective Time
is more than $66.713 or less than $44.475, unless the other party agrees to a
"make-whole" provision. Pursuant to the "make-whole" provisions, the exchange
ratio would be determined as follows: for prices below $44.475, divide $24.889
by the Fair Market Value at the Effective Time; for prices above $66.713,
divide $30.545 by the Fair Market Value at the Effective Time. For purposes of
these unaudited pro forma condensed consolidated financial statements, an
assumed issuance of 42.8 million common shares with a value of NLG 4,473
million will be issued. Of these, an assumed 23.6 million shares will be newly
issued shares while 19.2 million shares will be acquired from the Association
and reissued to Providian stockholders in the Merger.
In connection with the Merger, AEGON has entered into three related
agreements with the Association, its largest shareholder which has voting
control of AEGON, whereby the Association will provide a portion of the
required common shares necessary to complete the transaction. The first
agreement is to purchase up to 21.1 million common shares (19.2 million shares
are assumed for purposes of these pro forma statements) from the Association
at the average market price for the ten days preceding the Merger Agreement of
NLG 96.744 per common share, which purchase price will be paid upon delivery
of the common shares at the closing of the Merger. No consideration has been
paid for this forward purchase agreement since the funding costs during this
period are offset by the receipt of dividends on the shares and other
benefits. The second agreement provides that the Association will deliver up
to an additional 5.2 million shares to AEGON if necessary to complete the
Merger. At the closing of the Merger, the Association will be paid a fee of
NLG 147 million for this agreement. The third agreement provides for the
issuance to the Association of preferred stock at a price of NLG 1.00 per
share (the par value) in an amount to preserve its voting control in AEGON.
See notes D, E and N for a discussion of the pro forma adjustments related to
these agreements.
The cost to acquire Providian is comprised of the following (NLG in
millions):
<TABLE>
<S> <C>
Assumed issuance of 42.8 million AEGON Common Shares................ 4,473
Vest outstanding Providian stock options............................ 119
Professional fees and other direct transaction expenses............. 38
-----
Total cost to acquire Providian..................................... 4,630
</TABLE>
As part of the Merger, AEGON will assume Providian's outstanding debt, which
was NLG 1,284 million at June 30, 1996.
65
<PAGE>
The cost to acquire Providian will be lower if the Fair Market Value at the
Effective Time is above $66.713 and Providian agrees to the "make-whole"
provision. The total value of the shares to be received by Providian
stockholders, however, would remain the same. If the Fair Market Value at the
Effective Time is $75 the number of shares required to complete the Merger is
reduced by 4.7 million shares. This would result in an increase to the
shareholders' equity of AEGON of about 2% while net income and net income per
share would increase slightly more than 1%.
The purchase price has been allocated to tangible and intangible assets and
liabilities as follows (NLG in millions):
<TABLE>
<S> <C>
Investments.................................................... 29,405
Investments for the account of policyholders................... 4,187
Other assets................................................... 2,406
Goodwill....................................................... 712
Company-Obligated Mandatorily Redeemable
Preferred Securities of Providian LLC......................... (178)
Technical Provisions (net of acquired insurance in force of NLG
3,273)........................................................ (24,928)
Technical provisions with Investment for the account of policy-
holders....................................................... (4,187)
Long-term liabilities.......................................... (1,161)
Other liabilities.............................................. (1,626)
-------
Shareholders' equity........................................... 4,630
=======
</TABLE>
In accordance with FAS 115, Providian's investments in bonds (fixed
maturities) are already carried at market, which is NLG 171 million
(approximately 1%) more than amortized cost. Mortgage loans, real estate and
other investments are included at book value, which approximates market.
Therefore, no additional market value adjustments related to invested assets
have been included in the balance sheet.
Adjustments to the unaudited pro forma consolidated balance sheet and income
statements to give effect to the Merger as of June 30, 1996, and January 1,
1995, respectively, are summarized below.
(A) Certain accounts have been reclassified in the balance sheet and income
statements to conform with the Dutch basis financial statement presentation.
The following is a summary of classification differences between Dutch
accounting principles and US GAAP which have no effect on reported net income
or shareholders' equity.
<TABLE>
<CAPTION>
US GAAP DUTCH
-------------------------------- ----------------------------------
<S> <C> <C>
Balance Sheet Items:
Deferred acquisition
costs................. Deferred acquisition costs asset Reduction of technical provisions
Owned and occupied real
estate................ Property and equipment Investments
Reinsurance recoverable
on paid claims........ Other Assets Reduction of technical provisions
Nonredeemable preferred
stocks................ Equity securities Fixed maturities
Liquid assets.......... Maturities of 3 or less months Maturities of less than 1 year
Income Statement Items:
Earnings of affili-
ates.................. Specific item, net of taxes Investment income and other income
Premiums collected on
Universal Life type
contracts............. Deposit in liabilities Premium revenue
Premiums to reinsur-
ers................... Reduction of premiums Separate expense item
Change in unearned pre-
miums................. Premium revenue Benefit expense
Real estate rentals,
owner occupied........ Transactions eliminated Rental income and rental expense
Cost of processing
claims................ Expenses Benefit expenses
Investment expenses.... Reduction in investment income Expenses
</TABLE>
66
<PAGE>
(B) Providian Bancorp will settle intercompany balances with Providian
immediately prior to the Distribution (NLG in millions):
<TABLE>
<S> <C>
Repurchase preferred stock from Providian Corporation................. 111
---
Total shareholders' equity adjustments.............................. 111
Repay intercompany note to Providian Corporation...................... 87
---
Total cash adjustments.............................................. 198
===
</TABLE>
No pro forma adjustment was made to the income statements since such
repayment and redemption by Providian Bancorp was assumed to have occurred in
1995 and that earnings on the additional funds offset the lost earnings on the
intercompany note and preferred stock dividends.
Included in the column "Pro Forma Adjustment Relating to the Distribution"
(Providian Bancorp) of the Unaudited Pro Forma Condensed Consolidated Income
Statements is an adjustment of NLG 4 for the year 1995 and NLG 1 for the six
months ended June 30, 1996, which removes general and administrative costs,
and related tax effects, of Providian's Chief Operating Officer and Strategic
Planning Officer who, according to the Distribution Agreement, will be
transferring to Providian Bancorp.
(C) Redeem 8.75% Sinking Fund Debenture at a price of NLG 167 million, net
of related tax effects, due to the early repayment required by the
Distribution.
(D) Purchase 19.2 million common shares at NLG 96.095 from the Association
with available cash and the proceeds from the sale of liquid assets.
Investment income has been reduced NLG 125 million for 1995 and NLG 63 million
for the six months ended June 30, 1996 to reflect the reduction in assets.
(E) Preferred stock valued at NLG 65 million will be issued and sold to
AEGON's primary shareholder, the Association, to maintain its majority voting
interest.
(F) Eliminate Providian historical goodwill in the balance sheet and the
related amortization expense in the income statement.
(G) Eliminate or writedown intangible assets and fixed assets to market
values in the balance sheet. Reverse the related amortization and depreciation
in the income statement.
<TABLE>
<CAPTION>
INCOME STATEMENT INCREASES
---------------------------
MARKET VALUE
AT YEAR ENDED SIX MONTHS ENDED
6/30/96 12/31/95 6/30/96
------------ ---------- ----------------
<S> <C> <C> <C>
Intangible Assets................ 15 1 0
Fixed assets..................... 12 1 1
Software......................... 79 16 8
--- --- ---
Total............................ 106 18 9
--- --- ---
</TABLE>
(H) Eliminate Providian historical equity.
(I) Issue an assumed 42.8 million common shares with a value of NLG 4,473
million for the Merger.
(J) Goodwill associated with the Merger has been charged to shareholders'
equity.
(K) Company-Obligated Mandatorily Redeemable Preferred Securities of
Providian LLC and long-term liabilities will be increased to reflect the fair
value at the balance sheet date using current market rates. Interest expense
has been reduced to reflect the premium amortization.
(L) Providian's historical deferred policy acquisition cost and acquired
insurance in force are eliminated and replaced with the acquired insurance in
force purchased in the Merger. Acquired insurance in force
67
<PAGE>
represents the fair value of Providian's business in force that has been
estimated by discounting future after tax cash flows from the acquired
policies at 11% and adjusted to a pre-tax basis using applicable tax rates.
The discount rate reflects the rate of return required by AEGON to invest in
the business being acquired. Factors considered in determining the rate
include:
. Expected rates of return on similar newly written business.
. Risks associated with the actuarial assumptions in determining expected
cash flows.
. Possibility of insurance regulations and tax laws changing.
. Cost of capital available to fund the acquisition.
The value assigned to the acquired insurance in force purchased is based on
a preliminary valuation, which may be adjusted upon final determination of the
estimated discounted cash flows. Expected gross amortization of such value
using current assumptions and accretion of interest based on an interest rate
equal to the average liability rate of 7.75% for each of the years in the
five-year period ending June 30, 2001, are as follows (NLG in millions):
<TABLE>
<CAPTION>
YEAR
ENDING BEGINNING GROSS ACCRETION OF NET ENDING
JUNE 30, BALANCE AMORTIZATION INTEREST AMORTIZATION BALANCE
-------- --------- ------------ ------------ ------------ -------
<S> <C> <C> <C> <C> <C>
1997.................... 3,273 576 241 335 2,938
1998.................... 2,938 514 215 299 2,639
1999.................... 2,639 451 198 253 2,386
2000.................... 2,386 410 176 234 2,152
2001.................... 2,152 372 159 213 1,939
</TABLE>
(M) Increase the balance sheet technical provisions to reflect certain
interest rate and mortality assumptions related to purchase accounting. Reduce
"Benefits paid and provided" in the income statement for the amortization of
this increase in technical provisions.
(N) Recognize additional liabilities related to the Merger (NLG in
millions), which will increase goodwill (adjustment (H)):
<TABLE>
<S> <C>
Anticipated costs due to change of ownership........................ 179
Vest outstanding Providian stock options............................ 119
Purchase option from the Association to provide additional shares if
needed for the acquisition......................................... 147
Taxes on new shares issued and foreign acquisitions................. 43
Lease termination costs............................................. 34
Professional fees................................................... 38
---
Total "Other liabilities" adjustment.............................. 560
---
</TABLE>
A capital tax of 1% is levied on all capital contributed, in shares or in
surplus, in cash or in kind, to a company resident in The Netherlands. The
capital tax is deductible for the Netherlands corporation tax. Except for the
fact that the capital tax decreases the taxable profit of a company, the tax
has no effect on the shareholders. Besides the capital tax there is a one-time
increase in corporate taxable earnings for equity allocated to a foreign
acquired company based on The Netherlands corporate tax law.
Generally, if an employee terminates during the change of control period,
Providian's change of control plan will provide certain severance benefits. An
estimate was made for employee terminations that may occur during the two
years following the Merger.
68
<PAGE>
Providian employees will receive about 2.8 million fully vested AEGON stock
options in exchange for currently held Providian options. The liability
reflects the fair value of the options of $24.60 per share calculated using a
binomial option valuation model based upon an estimated average life of five
years.
The agreement to purchase shares from the Association, AEGON's largest
shareholder, includes an option to provide the additional shares required for
the acquisition of Providian at the lower AEGON share prices. The option
reduces the amount of share dilution that would be created through the
issuance of more shares, and is only effective for this Merger. A binomial
model, which includes historical volatility of the AEGON New York shares was
used in determining the option price. The cost of the option was calculated
based upon a seven month put option on 47.2 million shares between a price of
$55.594 and $50.034.
(O) The applicable pro forma balance sheet and income statement adjustments
have been tax affected at the appropriate rates.
(P) Premium related reclasses to conform to the Dutch basis income statement
presentation (NLG in millions):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
12/31/95 6/30/96
---------- ----------
<S> <C> <C>
Increase "Benefits paid and provided" for univer-
sal life and variable life net deposits......... 120 51
Separately state "Premiums paid to reinsurers"... 129 66
--- ---
Total "Gross premium" adjustment............... 249 117
</TABLE>
(Q) Investment income related reclasses to conform to the Dutch basis income
statement presentation (NLG in millions):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
12/31/95 6/30/96
---------- ----------
<S> <C> <C>
Include investment management expenses in "Commis-
sions and expenses for own account".............. 86 50
Include asset default losses in "Miscellaneous
income and expenditures".......................... 23 14
--- ---
Total "Investment income" adjustment.............. 109 64
=== ===
</TABLE>
(R) Realized investment gains and losses have been deferred and amortized
over the estimated remaining maturity term of the assets sold. No balance
sheet adjustment has been recorded since the deferred gains and losses have no
current market value at the time of the Merger.
(S) The cost of processing claims has been reclassified to "Benefits paid
and provided" from "Commissions and expenses for own account" to conform to
the Dutch basis income statement presentation.
(T) Investment income of Providian has been adjusted to include the effect
of amortization of market value adjustments, although the assets had already
been stated at their estimated fair value. Also, interest earnings have been
reduced to reflect the cash outflow of funds used to pay acquisition costs.
(U) Amortization of the deferred policy acquisition costs and acquired
insurance in force prior to the Merger has been replaced with the amortization
of the acquired insurance in force purchased (amortized in relation to
estimated premiums on traditional type products and in relation to gross
profits for nontraditional type products with interest equal to the liability
rate assumptions of 7.75%).
69
<PAGE>
THE MERGER AGREEMENT
THIS SECTION OF THE PROXY STATEMENT-PROSPECTUS DESCRIBES CERTAIN ASPECTS OF
THE MERGER AGREEMENT AND THE PROPOSED MERGER. THE FOLLOWING DESCRIPTION DOES
NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE MERGER AGREEMENT, WHICH IS ATTACHED AS APPENDIX A TO THIS PROXY STATEMENT-
PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. ALL STOCKHOLDERS ARE URGED
TO READ THE MERGER AGREEMENT IN ITS ENTIRETY.
TERMS OF THE MERGER
General. At the Effective Time, AEGON, Providian and LT Merger Corp., a
wholly owned indirect subsidiary of AEGON, will consummate the Merger, in
which LT Merger Corp. will merge into Providian and the separate corporate
existence of LT Merger Corp. will cease. Providian will be the Surviving
Corporation in the Merger as a wholly owned indirect subsidiary of AEGON and
will continue to be governed by the laws of the State of Delaware. The name of
the Surviving Corporation will be "Providian Corporation." The Surviving
Corporation has agreed to use reasonable efforts to change its name and that
of its subsidiaries as promptly as reasonably practicable. Pursuant to the
Trademark License Agreement, Providian and its insurance subsidiaries will
have the right to the use of this name until the earlier of (i) their receipt
of all necessary regulatory approvals to effect a name change and transition
to usage of a new name or (ii)(A) six months from the Closing Date with
respect to Providian and (ii)(B) 18 months from the Closing Date with respect
to the insurance subsidiaries.
Certificate of Incorporation and By-laws. The Merger Agreement provides that
the certificate of incorporation and by-laws of LT Merger Corp. in effect at
the Effective Time will be the certificate of incorporation and by-laws of the
Surviving Corporation.
Directors and Officers. The Merger Agreement provides that the directors and
officers of LT Merger Corp. at the Effective Time will be the directors and
officers of the Surviving Corporation, until the earlier of their resignation
or removal or until their respective successors are duly elected and
qualified.
Conversion of Providian Common Stock. Pursuant to the Merger Agreement, as
of the Effective Time, each issued and outstanding share of Providian Common
Stock, other than shares held by AEGON, Providian or any wholly owned
subsidiary of AEGON or Providian, will be converted into the right to receive
a number of shares of AEGON Common Shares pursuant to the Exchange Ratio.
Exchange Ratio. The Exchange Ratio is equal to $28.00 divided by the AEGON
Share Price, which is equal to the average, during the 20 trading days
immediately preceding the last business day before the Closing Date, of the
average daily high and low prices per AEGON Common Share on the NYSE. The
Exchange Ratio is, however, subject to a collar by which the AEGON Share Price
for purposes of calculating the Exchange Ratio is held to a range within
$61.153 and $50.034. The Merger Agreement also contains certain termination
rights on the part of AEGON or Providian, as the case may be, if the Fair
Market Value at the Effective Time is more than $66.713 or less than $44.475,
unless the other party agrees to a "make-whole" provision. See "--Termination;
Certain Fees."
Fractional Shares. No fractional AEGON Common Shares will be issued in the
Merger. Instead, each holder of Providian Common Stock who would otherwise be
entitled to receive fractional shares of AEGON Common Shares will be entitled
to receive in its place cash (without interest) in an amount equal to the
fraction of a share to which such holder would otherwise have been entitled
multiplied by the Fair Market Value at the Effective Time.
EFFECTIVE TIME; CLOSING
The Merger Agreement provides that the Merger will become effective and the
Effective Time will occur immediately following the Distribution upon the
filing of a certificate of merger or other appropriate documents (in any such
case, the "Certificate of Merger") with the Secretary of State of the State of
Delaware or at such
70
<PAGE>
other time as Providian and AEGON agree. The Merger Agreement provides that,
unless otherwise agreed by the parties, the closing of the Merger (the
"Closing") will take place on the later of (a) June 1, 1997 and (b) the second
business day after the satisfaction or waiver of the conditions to the Merger
described in the Merger Agreement (other than, but subject to, those
conditions to be performed at the Closing). See "--Conditions."
EXCHANGE OF SHARES
Pursuant to the Merger Agreement, as of the Effective Time, AEGON will
deposit with Morgan Guaranty Trust Company of New York or such other financial
institution chosen by AEGON (the "Exchange Agent"), certificates representing
the AEGON Common Shares (together with any dividends or distributions payable
with respect thereto, the "Exchange Fund") issuable pursuant to the Merger
Agreement in exchange for certificates formerly representing outstanding
shares of Providian Common Stock. As soon as reasonably practicable after the
Effective Time, AEGON and the Surviving Corporation will cause the Exchange
Agent to mail a transmittal form and instructions to each holder of record of
certificates which immediately prior to the Effective Time represented
outstanding shares of Providian Common Stock (the "Certificates"), which form
and instructions are to be used in forwarding the Certificates for surrender
and exchange for (a) certificates representing the number of whole AEGON
Common Shares which such holder has the right to receive pursuant to the
Merger and (b) cash for any fractional shares of AEGON Common Shares to which
such holders otherwise would be entitled. PROVIDIAN STOCKHOLDERS ARE REQUESTED
NOT TO SURRENDER THEIR CERTIFICATES FOR EXCHANGE UNTIL SUCH TRANSMITTAL FORM
AND INSTRUCTIONS ARE RECEIVED. Until surrendered as provided above,
Certificates will be deemed to represent the right to receive certificates
representing the number of AEGON Common Shares into which the shares of
Providian Common Stock formerly represented by such Certificates were
converted in the Merger and a cash payment in lieu of any fractional shares,
and the holders of Certificates will not be entitled to receive dividends or
any other distributions from AEGON until such Certificates are so surrendered.
Upon surrender of a Certificate, there will be paid to the person in whose
name such AEGON Common Shares are issued any dividends or other distributions
which have a record date after the Effective Time and which became payable
prior to surrender with respect to such AEGON Common Shares. After such
surrender, there will also be paid to the person in whose name the AEGON
Common Shares are issued any dividends or other distributions on such shares
which have a record date after the Effective Time and prior to such surrender
and a payment date after such surrender, and such payment will be made on the
payment date. In no event will the persons entitled to receive such dividends
or other distributions be entitled to receive interest on such dividends or
other distributions. In addition, prior to the Merger, all of the preferred
stock of Providian, all of which is held by a subsidiary of Providian, will be
converted into voting preferred stock which will remain outstanding following
the Merger.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains certain representations and warranties of the
parties thereto. The Merger Agreement includes representations and warranties
by Providian as to (a) the corporate organization, standing and power of
Providian and its subsidiaries, (b) Providian's capitalization, (c)
Providian's ownership of the securities of its subsidiaries free and clear of
all liens, charges, pledges, security interests or other encumbrances, (d) the
authorization, execution, delivery, performance and enforceability of the
Merger Agreement, subject to stockholder approval, approval by insurance
regulatory authorities and banking regulatory authorities,
(e) noncontravention of laws and agreements and Providian's by-laws and
certificate of incorporation and the absence of the need (except as specified)
for governmental or third-party consents, (f) the accuracy of Providian's
financial statements, and certain other matters in connection with Providian's
filings with the Securities and Exchange Commission (the "SEC"), (g) the
accuracy of the annual statements of each subsidiary of Providian engaged in
the insurance business filed with state insurance regulatory authorities, (h)
the conduct of Providian's business in the ordinary course and the absence of
any material adverse change with respect to Providian and its subsidiaries or
any declaration, setting aside or payment of any dividend or other
distribution with respect to any of Providian's outstanding capital stock
except regular quarterly cash dividends with respect to Providian Common Stock
or any split, combination or reclassification of any of Providian's capital
stock or any issuance or the authorization of any issuance of any other
securities in respect of, in lieu of or in substitution for shares of
71
<PAGE>
Providian's outstanding capital stock, (i) the accuracy and timely filing of
all tax returns, (j) the absence of tax sharing or material tax indemnity
agreements, (k) the amounts to be received by employees that would be
characterized as "excess parachute payments" under the Code, (l) pending or
threatened litigation, (m) notice of default under material contracts, (n) the
accuracy of information to be supplied by Providian for inclusion in this
Proxy Statement-Prospectus and in certain other filings with the SEC, (o)
certain matters relating to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and other employment and labor relations matters,
(p) brokers and finders employed by Providian, (q) compliance with applicable
laws by Providian and its insurance subsidiaries, (r) indebtedness for
borrowed money, (s) the receipt of a fairness opinion from Goldman Sachs, (t)
certain matters relating to the operation and condition of real estate owned
by Providian and its subsidiaries, (u) the waiver of Delaware business
combination restrictions, (v) the taking of action that would jeopardize the
Distribution as a tax-free distribution or the Merger as a tax-free
reorganization, (w) the required vote to obtain approval of the transaction by
Providian's stockholders, (x) the business operating condition of Providian
and its insurance subsidiaries, (y) title to assets, (z) ownership and use of
computer software and intellectual property, (aa) permits, licenses and
franchises of Providian and its insurance subsidiaries, (bb) operation of the
insurance business, (cc) threats of cancellation of policies, (dd) liabilities
and reserves, (ee) separate accounts maintained by the insurance subsidiaries
of Providian, (ff) operating of mutual funds sponsored by Providian's
insurance subsidiaries, (gg) insurance coverage and (hh) solvency of Providian
Bancorp.
The Merger Agreement also includes representations and warranties by AEGON
and LT Merger Corp. as to (a) the corporate organization, standing and power
of AEGON and its subsidiaries, (b) AEGON's capitalization, (c) AEGON's
ownership of the securities of its subsidiaries free and clear of all liens,
charges, pledges, security interests or other encumbrances, (d) the
authorization, execution, delivery, performance and enforceability of the
Merger Agreement, subject to Providian's stockholder approval, approval by
insurance regulatory authorities and banking regulatory authorities, (e)
noncontravention of laws, agreements and organizational documents and the
absence of the need (except as specified) for governmental or third-party
consents, (f) the accuracy of AEGON's financial statements, and certain of the
matters in connection with AEGON's filings with the SEC, (g) the accuracy of
the annual statements of each subsidiary of AEGON engaged in the insurance
business filed with state insurance regulatory authorities, (h) the conduct of
AEGON's business in the ordinary course and the absence of any material
adverse change with respect to AEGON and its subsidiaries, (i) the
declaration, setting aside or payment of any dividends or other distributions
(except regular quarterly cash dividends with respect to the AEGON Common
Shares), any split, combination or reclassification of capital stock, (j) the
accuracy and timely filing of all tax returns, (k) pending or threatened
litigation, (l) notice of default under material contracts, (m) the accuracy
of information to be supplied by AEGON for inclusion in this Proxy Statement-
Prospectus and any other documents to be filed with the SEC, (n) certain
matters relating to ERISA and other employment and labor relations matters,
(o) brokers and finders employed by AEGON, (p) compliance with applicable laws
relating to the regulation of the business of insurance by AEGON and its
insurance subsidiaries, (q) indebtedness for borrowed money, (r) certain
matters relating to environmental liabilities, (s) ownership of Providian
Common Stock, (t) the interim operations of LT Merger Corp., (u) the taking of
action that would jeopardize the Distribution as a tax-free distribution or
the Merger as a tax-free reorganization, (v) the business operating condition
of AEGON and its insurance subsidiaries, (w) title to assets, (x) ownership
and use of computer software and intellectual property, (y) permits, licenses
and franchises of AEGON and its insurance subsidiaries, (z) operation of the
insurance business and (aa) liabilities and reserves.
BUSINESS OF PROVIDIAN PENDING THE MERGER
The Merger Agreement provides that, during the period from the date of the
Merger Agreement and continuing until the Effective Time, except for the
Distribution and the other transactions expressly provided for in the
Distribution Agreement, as expressly contemplated or permitted by the Merger
Agreement, or to the extent that AEGON otherwise consents in writing,
Providian and its subsidiaries will operate their business only in the
ordinary course, except where the failure to so operate their businesses will
not be material to any of Providian's principal business units taken as a
whole, and, consistent with such operation, Providian and its subsidiaries
will use reasonable efforts consistent with past practices to preserve their
business organizations intact and maintain
72
<PAGE>
the goodwill of their agents, third party administrators, policyholders,
customers and others with whom business relationships exist so that their
goodwill and ongoing businesses will not be impaired in any material respect.
Subject to certain exceptions, the Merger Agreement also includes limitations,
prohibitions and other provisions relating to Providian's conduct of business
during this period with respect to (a) charter or bylaw amendments, (b) the
issuance of capital stock and payment of dividends, (c) levels of
indebtedness, (d) mortgages and pledges of assets, (e) amendments to employee
benefit or retirement plans, (f) contracts and agreements outside the ordinary
course, (g) changes in underwriting standards, retention limits and
administrative practices, (h) collective bargaining agreements, (i) changes in
accounting principles, policies and procedures, (j) payments, loans and
advances to affiliates, (k) acquisitions, joint ventures and partnerships, (l)
tax elections that could have a material adverse effect on Providian, (m) the
payment, discharge, settlement or satisfaction of material claims, liabilities
and obligations and (n) material changes in the mix of Providian's investment
assets or the profile of its insurance liabilities.
BUSINESS OF AEGON PENDING THE MERGER
The Merger Agreement provides that, during the period from the date of the
Merger Agreement and continuing until the Effective Time, except as expressly
contemplated or permitted by the Merger Agreement, or to the extent Providian
otherwise consents in writing, AEGON and its subsidiaries will operate their
businesses only in the ordinary course, except where the failure to do so
would have a material adverse effect on AEGON and its subsidiaries taken as a
whole. Subject to certain exceptions, the Merger Agreement also includes
limitations, prohibitions and other provisions relating to AEGON's conduct of
business during this period with respect to: (a) charter or bylaw amendments,
(b) capital stock and payment of dividends, (c) mergers or consolidations if
such merger or consolidation could reasonably be expected to have a material
adverse effect on the ability of AEGON to complete the Merger, (d)
acquisitions, joint ventures and partnerships if such acquisitions, joint
ventures or partnerships, individually or in the aggregate, would materially
delay the closing of the Merger past June 1, 1997 or otherwise effect the
ability of AEGON to complete the Merger, (e) levels of indebtedness, (f)
mortgages and pledges of assets, (g) contracts and agreements outside the
ordinary course, (h) payments, loans and advances to affiliates and (i)
ownership of Providian common stock.
NO SOLICITATION OF THIRD PARTY ACQUISITION PROPOSALS
Pursuant to the Merger Agreement, Providian will not, nor permit any
subsidiary, nor authorize any officer, director, employee of, or any
investment broker, attorney or other advisor or representative or agent of
Providian or its subsidiaries to, directly or indirectly, solicit, initiate or
encourage any inquiries, proposals, negotiations or discussions from or with
any person (other than AEGON) or such person's directors, officers, employees,
representatives and agents that constitute, or could reasonably be expected to
lead to an Acquisition Proposal or participate in any discussions or
negotiations regarding, or furnish to any person any information with respect
to, or take any other action to facilitate any inquiries or the making of any
proposal that constitutes, or may reasonably be expected to lead to, any
Acquisition Proposal. An "Acquisition Proposal" means any bona fide proposal
with respect to a merger, consolidation, share exchange or similar transaction
involving Providian or any of its insurance subsidiaries or any purchase of
all, or any significant portion of Providian's assets or of the assets of any
of Providian's insurance business units. The Merger Agreement provides,
however, that Providian may furnish or cause to be furnished to persons making
an Acquisition Proposal information (pursuant to reasonably customary
confidentiality arrangements) and may participate in such discussions and
negotiations if: (a) the members of the Providian Board, after consultation
with and based upon the advice of counsel, determine in good faith that such
action is necessary for the Board members to comply with their fiduciary
duties under applicable law and (b) the Acquisition Proposal contains an offer
of consideration superior to AEGON's. Providian has agreed to notify AEGON as
soon as practicable if any such inquiries or proposals are received by, any
such information is requested from or any such negotiations or discussions are
sought to be initiated or continued with it, which notice will provide the
identity of the third party or parties and the terms and conditions of any
such proposal or proposals. In such case, Providian must keep AEGON informed
of the status of the Acquisition Proposal and negotiate with AEGON to make
adjustments necessary to enable AEGON and Providian to proceed with the
Merger. The Merger Agreement provides that the Providian Board may withdraw
73
<PAGE>
or modify its recommendation of the Merger Agreement in connection with any
vote of its stockholders, or recommend any other offer or proposal, if the
Providian Board, following consultation with and based on the advice of its
outside counsel, determines in good faith that the withdrawal or modification
of such recommendation, or the approval or recommendation of another offer or
proposal, is necessary in order for the Providian Board to comply with its
fiduciary duties to stockholders under applicable law. In such event,
notwithstanding anything contained in the Merger Agreement to the contrary,
any such withdrawal or modification of the Merger or the recommendation of
another offer or proposal, or the entering by Providian into an agreement with
respect to another Acquisition Proposal, will not constitute a breach of the
Merger Agreement by Providian. As a consequence of taking such actions,
however, Providian will be required to pay to AEGON a termination fee. See "--
Termination; Certain Fees."
TERMINATION; CERTAIN FEES
The Merger Agreement may be terminated:
(a) by mutual written consent of AEGON and Providian;
(b) by Providian if:
(i) the Merger is not consummated on or before August 31, 1997,
unless the failure of such occurrence is due to the failure of
Providian to perform or observe the covenants, agreements and
conditions in the Merger Agreement to be performed or observed
by it at or before the Effective Time,
(ii) events occur which render impossible the satisfaction of the
conditions to the obligations of Providian in the Merger
Agreement, unless the failure of such occurrence shall be due
to the failure of Providian to perform or observe the
covenants, agreements and conditions to be performed or
observed by it at or before the Effective Time,
(iii) Providian is enjoined or restrained by any governmental
authority from consummating the Merger Agreement or any of the
transactions contemplated thereby and such injunction or
restraint shall not have been withdrawn by the earlier of
sixty days after the date on which such injunction or
restraint was first issued or August 31, 1997,
(iv) the Providian Board shall have determined, after consultation
with and based upon the advice of counsel, in the manner
described in the Merger Agreement that the transactions
contemplated by the Merger Agreement violate its fiduciary
duties to its stockholders under applicable law,
(v) the stockholders of Providian do not approve the Merger; or
(vi) the Fair Market Value at the Effective Time of an AEGON Common
Share is less than $44.475, unless AEGON agrees in such event
that the Exchange Ratio shall be determined by dividing $24.889
by the Fair Market Value at the Effective Time per AEGON Common
Share; and
(c) by AEGON if:
(i) the Merger is not consummated on or before August 31, 1997,
unless the failure of such occurrence is due to the failure of
AEGON or its subsidiaries to perform or observe the covenants,
agreements and conditions in the Merger Agreement to be
performed or observed by them at or before the Effective Time,
(ii) events occur which render impossible the satisfaction of the
conditions to the obligations of AEGON in the Merger Agreement,
unless the failure of such occurrence shall be due to the
failure of AEGON to perform or observe the covenants,
agreements and conditions to be performed or observed by it at
or before the Effective Time,
(iii) AEGON is enjoined or restrained by any governmental authority
from consummating the Merger Agreement or any of the
transactions contemplated thereby and such injunction or
restraint shall not have been withdrawn by the earlier of
sixty days after the date on which such injunction or
restraint was first issued or August 31, 1997,
74
<PAGE>
(iv) the stockholders of Providian do not approve the Merger,
(v) the Providian Board shall have withdrawn or materially modified
in a manner adverse to AEGON its recommendation of the Merger
Agreement and the Merger or the Providian Board shall have
approved or recommended another Acquisition Proposal, or
(vi) the Fair Market Value at the Effective Time of an AEGON Common
Share is greater than $66.713, unless Providian agrees in such
event that the Exchange Ratio shall be determined by dividing
$30.545 by the Fair Market Value at the Effective Time per
AEGON Common Share. In the event the Fair Market Value at the
Effective Time of an AEGON Common Share exceeds $66.713 and
AEGON seeks to terminate the Merger Agreement, the Providian
Board will decide whether to exercise the "make-whole"
provision or allow AEGON to terminate the Merger. Providian is
not required by the Merger Agreement or by Delaware law, and
does not intend, to seek the consent of the holders of
Providian Common Stock in connection with this decision.
Moreover, Providian believes that the impact of this possible
decision on Providian's stockholders is fully disclosed in this
Proxy Statement. In voting to approve the Merger, Providian
stockholders are authorizing the Providian Board to exercise
the "make-whole" provision if it deems appropriate. That
decision, however, will be made by the Providian Board at the
time (which may be after the annual meeting), and there can be
no assurance that the Providian Board will exercise the "make-
whole" provision.
If Providian enters into a merger agreement with a third-party or the Merger
Agreement is terminated because the Providian Board, following consultation
with and based on the advice of outside counsel, believes that it is necessary
to do so in order to comply with its fiduciary duties as described in the
Merger Agreement to its stockholders under applicable law, Providian shall pay
to AEGON upon demand (i) $80,000,000 if termination occurs on or prior to the
date of the Meeting or (ii) $100,000,000 if termination occurs after the date
of the Meeting, as liquidated damages and not as a penalty. If Providian fails
to promptly pay such fees, Providian shall pay the costs and expenses
(including reasonable fees and expenses) in connection with any action,
including the filing of any lawsuit or other legal action, taken to collect
payment, together with interest on the amount of any unpaid fee at the
publicly announced prime rate of Citibank, N.A. in effect from time to time
from the date such fee was required to be paid.
CERTAIN OTHER COVENANTS
Distribution. The Merger Agreement provides that, prior to the Closing,
Providian will use its commercially reasonable efforts to divest its interest
in Providian Bancorp to the stockholders of Providian subject to the terms and
conditions of the Distribution Agreement. Prior to the Effective Time,
Providian will not agree to or permit any modification, amendment, supplement
or waiver of the Distribution Agreement without the prior written consent of
AEGON. In addition, the Merger Agreement provides that unless approved by
AEGON or as contemplated by the Merger Agreement or Distribution Agreement,
there shall not be any new agreements between Providian Bancorp and Providian
or any of its subsidiaries nor any material amendment to any existing
agreements between Providian Bancorp and Providian or any of its subsidiaries
that survives the date as of which the Distribution is effective (the
"Distribution Date").
Amendment to Rights Plan. The Merger Agreement requires Providian to amend
its 1987 Stockholder Rights Agreement, as amended (the "Providian Rights
Agreement"), so that AEGON will not become an "Acquiring Person" as a result
of the Merger and no "Shares Acquisition Date" or "Distribution Date" (as such
terms are defined in the Providian Rights Agreement) will occur as a result of
the Merger and all outstanding Providian Common Stock Purchase Rights issued
and outstanding under the Providian Rights Agreement will expire immediately
prior to the Effective Time. Providian amended the Providian Rights Agreement
in accordance with this provision of the Merger Agreement on December 28,
1996.
Indemnification of Officers and Directors; Insurance. The Merger Agreement
requires the Surviving Corporation to provide to each present and former
director and officer of Providian and its subsidiaries the indemnification
rights which such parties had immediately prior to the Merger. In addition,
AEGON is required
75
<PAGE>
to maintain, for a period of six years after the Effective Time, the current
policies of directors' and officers' liability insurance maintained by
Providian and its subsidiaries (or policies of at least the same coverage and
amounts containing terms and conditions which are no less favorable) with
respect to claims arising from facts or events which occurred on or prior to
the Effective Time. AEGON shall, however, not be required to expend on an
annual basis more than 250% of the current annual premiums paid by Providian
and its subsidiaries for such insurance.
Employee Benefits. The Merger Agreement provides that the Surviving
Corporation will honor all obligations and commitments under Providian's
employee benefit plans, programs, arrangements, practices and contracts which
provide benefits or compensation to or on behalf of employees. AEGON will, and
will cause the Surviving Corporation to, waive any limitations regarding
preexisting conditions under any welfare or other employee benefit plan
maintained by either of them for the benefit of employees of Providian and its
subsidiaries and will treat service by all of Providian's and its
subsidiaries' employees with Providian and its subsidiaries as service with
AEGON, except to the extent such treatment would result in a duplication of
benefits.
Stock Options. At the Effective Time, each outstanding option to purchase
shares of Providian Common Stock (a "Providian Stock Option") and each
outstanding stock appreciation right (a "Providian SAR") issued pursuant to
any incentive or stock option program of Providian (the "Providian Plan"),
whether vested or unvested, shall be assumed by AEGON, except for options or
stock appreciation rights assumed by Providian Bancorp pursuant to the
Distribution Agreement. Each Providian Stock Option shall be deemed to
constitute an option to acquire, on the same terms and conditions as were
applicable under such Providian Stock Option, a number of AEGON Common Shares
equal to (x) the number of shares of Providian Common Stock covered by such
Providian Stock Option, multiplied by (y) the Option Adjustment Ratio (as
defined below), at a price per share equal to (A) the exercise price of such
Providian Stock Option immediately prior to the Distribution, multiplied by
(B) (1) one divided by (2) the Option Adjustment Ratio; provided, however,
that in the case of any option to which Section 421 of the Code applies by
reason of its qualification under Section 422 of the Code ("incentive stock
options"), the option price, the number of shares purchasable pursuant to such
option and the terms and conditions of exercise of such option shall be
determined in order to comply with Section 424(a) of the Code. For purposes of
the foregoing, the "Option Adjustment Ratio" shall mean the amount obtained by
dividing (i) the average of the daily high and low trading prices on the NYSE
for the Providian Common Stock on each of the 20 trading days prior to the ex-
dividend date for the Distribution by (ii) the average of the daily high and
low trading prices on the NYSE for AEGON Common Shares on each of the same 20
trading days. Each holder of a Providian SAR shall be entitled to that number
of stock appreciation rights of AEGON ("AEGON SARs"), determined in the same
manner as set forth above with respect to Providian Stock Options assumed by
AEGON. At the Effective Time, the agreements evidencing the grants of
Providian Stock Options and Providian SARs assumed by AEGON shall be amended
to provide that the right of a holder to exercise Providian Stock Options and
Providian SARs shall continue beyond the termination of such holder's
employment, if such holder's employment is terminated without cause or such
holder leaves employment for good reason, until the later of (x) the second
anniversary of the effective time of the Merger, (y) 90 days after such
holder's termination of employment, and (z) the end of the period for exercise
of such Providian Stock Options or Providian SARs as provided in any
employment or severance agreement between the Providian and such holder.
AEGON USA Guaranty. The Merger Agreement provides that at Closing, AEGON
will cause AEGON USA, Inc. to enter into a Guaranty Agreement with Providian
and Providian Bancorp (the "Guaranty Agreement") pursuant to which AEGON USA,
Inc. will guarantee the obligations of Providian in the Merger Agreement
regarding employee benefits and the indemnification of officers and directors
and all of the obligations of Providian in the Distribution Agreement and the
Ancillary Agreements. The aggregate amount required to be paid by AEGON USA,
Inc. under the Guaranty Agreement will not exceed the amount in U.S. dollars
equal to the stockholders' equity of Providian, determined in accordance with
generally accepted accounting principles, as of the latest quarter ended prior
to the Closing, adjusted to give effect to the Distribution.
76
<PAGE>
AEGON Exchange Transaction. The Merger Agreement provides that prior to the
Closing Date, AEGON will purchase approximately 8% of the currently
outstanding AEGON Common Shares from the Association and simultaneously sell a
number of shares of the existing class of Preferred Stock, par value one Dutch
Guilder per share (the "AEGON Preferred Shares"), to the Association which
will enable the Association to maintain its current voting control in AEGON.
AEGON has agreed in the Merger Agreement that, except as set forth in the
preceding sentence, prior to the Closing Date, AEGON will not issue or sell
any shares of its capital stock to the Association, except that AEGON may
issue or sell to the Association during such period a maximum of 500,000
shares of capital stock in connection with certain other transactions.
Stock Exchange Listing. The Merger Agreement provides that AEGON will use
all commercially reasonable efforts to cause the AEGON Common Shares to be
issued in the Merger to be approved for listing on the NYSE, subject to
official notice of issuance, prior to the Closing Date.
FEES AND EXPENSES
Except as provided in the Merger Agreement with respect to termination of
the Merger Agreement under certain circumstances, the Merger Agreement
provides that AEGON and Providian will each pay its own respective expenses
incident to preparing for, entering into and carrying out the Merger Agreement
and to consummating the Merger, whether or not the Merger is consummated,
except that, if the Merger Agreement is terminated for any reason, (a)
expenses incurred in connection with printing and mailing this Proxy
Statement-Prospectus and the related registration statement of AEGON to which
this Proxy Statement-Prospectus is a part (the "AEGON Registration Statement")
and (b) all filing or registration fees paid by Providian or AEGON, will be
shared equally by AEGON and Providian. The fees and expenses incurred in
connection with the Merger relate primarily to fees paid to professional
advisors for investment banking, legal, actuarial and accounting expertise,
along with regulatory filing fees. AEGON and Providian estimate that these
expenses will be approximately $8.0 million and $17.9 million, respectively.
CONDITIONS
The respective obligations of each party to the Merger Agreement to effect
the Merger is subject to the satisfaction or waiver on or prior to the Closing
Date of a number of conditions, including the following: (a) approval and
adoption of the Merger Agreement by the affirmative vote or consent of the
holders of Providian Common Stock representing a majority of the shares
entitled to vote; (b) the receipt by AEGON and Providian of all requisite
approvals of, or satisfaction of all requisite filing requirements with,
governmental entities in connection with the transactions contemplated by the
Merger Agreement, including all requisite approvals under, and the expiration
of all waiting periods in respect of, the HSR Act; (c) the receipt by AEGON
and Providian of all authorizations, consents, waivers and approvals from
third parties required to be obtained in connection with the Merger Agreement
and the Distribution Agreement; (d) the absence of any order, injunction or
other legal restraint or prohibition preventing the consummation of the Merger
or the Distribution; (e) the effectiveness of the AEGON Registration Statement
under the Securities Act and the absence of any stop order or pending
proceedings by a governmental entity seeking a stop order with respect to the
AEGON Registration Statement; (f) receipt from the Internal Revenue Service of
a private letter ruling to the effect that the distribution will qualify as a
tax-free distribution, the Merger will qualify as a tax-free reorganization,
the exchange of Providian Common Stock for AEGON Common Shares will not give
rise to a gain or loss for federal income tax purposes to the stockholders of
Providian and neither Providian nor LT Merger Corp. will recognize a gain or
loss as a consequence of the Merger; (g) the approval for listing on the NYSE,
subject to official notice of issuance, of the AEGON Common Shares issuable to
Providian's stockholders pursuant to the Merger Agreement; and (h) the
effecting of the Distribution in accordance with the terms of the Distribution
Agreement.
The obligation of Providian to effect the Merger is further subject to the
following conditions, unless waived in writing by Providian: (a) the
truthfulness and correctness in all material respects of the representations
and warranties of AEGON set forth in the Merger Agreement; (b) the performance
by AEGON and LT Merger Corp. in all material respects of all obligations
required to be performed by AEGON and LT Merger Corp. under the Merger
Agreement at or prior to the Closing Date; (c) the receipt by Providian of a
letter dated the Closing Date
77
<PAGE>
from a nationally recognized appraisal firm in form and substance acceptable
to Providian which supports the conclusion that after giving effect to the
Merger and the Distribution, Providian will not be insolvent or be rendered
insolvent by the transactions contemplated by the Merger Agreement or the
Distribution Agreement, will not be left with unreasonably small capital with
which to engage in their business and will not have incurred debts beyond its
ability to pay such debts as they mature; (d) the receipt by Providian of
letters dated the date of the AEGON Registration Statement and the Closing
Date with respect to certain financial information of AEGON; and (e) the
receipt by Providian of opinions of the General Counsel of AEGON and the
General Counsel of AEGON USA, Inc. concerning certain legal matters relating
to the Merger Agreement and the transactions contemplated thereby.
The obligation of AEGON to effect the Merger is further subject to the
following conditions, unless waived in writing by AEGON: (a) the truthfulness
and correctness in all material respects of the representations and warranties
of Providian set forth in the Merger Agreement; (b) the performance by
Providian in all material respects of all obligations required to be performed
by Providian under the Merger Agreement at or prior to the Closing Date; (c)
the receipt of AEGON of letters dated the date of this Proxy Statement-
Prospectus and the Closing Date with respect to certain financial information
of Providian; (d) the receipt by AEGON of an opinion of King & Spalding,
counsel to Providian, concerning certain legal matters relating to the Merger
Agreement and the transactions contemplated thereby; and (e) that Providian
shall have used its commercially reasonable efforts to cause each person who
is an affiliate for purposes of Rule 145 under the Securities Act to deliver
to AEGON on or prior to the Closing Date, a written agreement satisfactory to
AEGON that such person will not offer to sell, transfer or otherwise dispose
of any shares of AEGON Common Shares except in accordance with the provisions
of Rule 145 or in another transaction not in violation of the Securities Act.
All of these conditions are waivable with the consent of both Providian and
AEGON, except that the approval by Providian stockholders and certain
governmental approvals cannot legally be waived. It is not anticipated that
the other governmental approvals and third party approvals would be waived if
they would have a material impact on Providian or AEGON. In addition,
Providian and AEGON will not waive the condition that they receive a private
letter ruling from the IRS and rely on opinions from their tax counsel that
the distribution and the Merger will not be taxable without resoliciting
approval of the Merger by Providian's stockholders. Except as noted herein,
such waivers or modifications do not require the consent of Providian
stockholders, and Providian does not anticipate that it would solicit such
consent.
THE DISTRIBUTION
This section of the Proxy Statement-Prospectus describes certain aspects of
the proposed Distribution. The following descriptions do not purport to be
complete and are qualified in their entirety by reference to the Distribution
Agreement or the applicable Ancillary Agreement, as the case may be. A copy of
the Distribution Agreement is attached as Appendix B to this Proxy Statement-
Prospectus, and is incorporated herein by reference. Copies of the other
Ancillary Agreements have been filed as exhibits to the Registration
Statement. All Providian stockholders are urged to read the Distribution
Agreement and the other Ancillary Agreements in their entirety.
BACKGROUND OF AND REASONS FOR THE DISTRIBUTION
The Distribution is intended to facilitate the reorganization of Providian,
wherein the stockholders of Providian will receive a direct interest in
Providian Bancorp, and to make possible the Merger by divesting Providian of
the businesses and operations conducted by Providian Bancorp in a tax-free
distribution to Providian stockholders.
Providian stockholders are being asked to vote on the Merger only, and are
not being asked to vote on the Distribution. Although the Distribution will
not be effected unless the Merger is approved and about to occur, the
Distribution is separate from the Merger and the Providian Bancorp Common
Stock to be received by holders of Providian Common Stock in the Distribution
will not constitute a part of the Merger Consideration. The terms of the
Distribution Agreement and the other Ancillary Agreements can be modified by
agreement of Providian
78
<PAGE>
and Providian Bancorp and the consent of AEGON. Such modification and
subsequent continuation with the Merger and Distribution would not require the
consent of the holders of Providian Common Stock, and Providian does not
anticipate that it would solicit such consent.
TERMS OF THE DISTRIBUTION AGREEMENT
General Description of the Distribution. Pursuant to the terms of the
Distribution Agreement, Providian will distribute the common stock of
Providian Bancorp to its stockholders in the Distribution. The Distribution
will be made pro rata to the stockholders of Providian, as described below
under "--Method of Effecting the Distribution." Immediately after the
Distribution, AEGON will acquire Providian pursuant to the Merger Agreement.
Intercompany Accounts. The Distribution Agreement provides that on or before
the Distribution Date, Providian and Providian Bancorp will pay, or otherwise
settle, intercompany loans, payables, receivables and accounts between
Providian and Providian Bancorp.
Representations and Warranties of Providian Bancorp. In the Distribution
Agreement, Providian Bancorp makes certain representations and warranties to
Providian with respect to: (a) its due organization, good standing and
corporate power; (b) its power and authority to execute the Distribution
Agreement and the other Ancillary Agreements to which it is or will be party
and to consummate the transactions contemplated thereby; (c) the
enforceability of the Distribution Agreement and the other Ancillary
Agreements to which it is or will be party; (d) the noncontravention of laws
and agreements and the absence of the need for governmental or third-party
consents in connection with the execution, delivery and performance by it of
the Distribution Agreement and the other Ancillary Agreements to which it is
or will be party; and (e) the absence of undisclosed claims by Providian
Bancorp against Providian arising out of events, circumstances or actions
prior to the Distribution Date.
Method of Effecting the Distribution. The Distribution Agreement provides
that, immediately prior to the Effective Time, Providian will distribute all
outstanding shares of Providian Bancorp Common Stock to each holder of record
of Providian Common Stock on the Distribution Record Date on the basis of one
share of Providian Bancorp Common Stock for each share of Providian Common
Stock outstanding on the Distribution Record Date.
Indemnification. Pursuant to the Distribution Agreement, Providian and
Providian Bancorp agreed to indemnify each other for losses, damages, claims
or liabilities (including reasonable attorneys' fees and disbursements)
(collectively, "Losses"), arising from certain matters. The indemnification
provided by the Distribution Agreement will also apply to the indemnified
parties' respective affiliates, successors and assigns and the officers,
directors, partners, employees, agents and representatives of any of them.
Specifically, Providian Bancorp has agreed to indemnify Providian against
Losses arising from the following:
(a) the operation of the businesses of, or relating to, Providian Bancorp
or any other member of the Providian Bancorp group (the "Providian Bancorp
Group") (including those Losses arising due to the failure of Providian
Bancorp or any other member of the Providian Bancorp Group to pay, perform
or otherwise discharge its obligations under the Distribution Agreement or
arising out of or connected with the Providian Bancorp business);
(b) any breach of or inaccuracy in any representation or warranty
(subject to materiality qualifications in certain cases) made by Providian
Bancorp in the Distribution Agreement;
(c) subject to the limitations described below, any material breach of
any covenant made in the Distribution Agreement or any other Ancillary
Agreement by Providian; and
(d) any disclosure contained in or omitted from Providian Bancorp's
Registration Statement on Form 10 (including the Information Statement),
the AEGON Registration Statement, this Proxy Statement-Prospectus or any
other document filed with the SEC in connection with the transactions
contemplated in the Distribution Agreement or any preliminary or final form
thereof or any amendment or supplement thereto (collectively, the "SEC
Documents") to the extent such disclosures or omissions relate to any
member of the Providian Bancorp Group or the Providian Bancorp business.
79
<PAGE>
Providian has agreed to indemnify Providian Bancorp against Losses arising
from the following:
(a) the operation of the businesses of, or relating to, Providian or any
other member of the Providian group (the "Providian Group") (including
those Losses arising due to the failure of Providian or any other member of
the Providian Group to pay, perform or otherwise discharge its obligations
under the Distribution Agreement or arising out of or connected with the
Providian business);
(b) any breach of or inaccuracy in any representation or warranty
(subject to materiality qualifications in certain cases) made by Providian
in the Distribution Agreement;
(c) subject to the limitations described below, any material breach of
any covenant made in the Distribution Agreement or any other Ancillary
Agreement by Providian; and
(d) any disclosure contained in or omitted from any SEC Documents to the
extent such disclosures or omissions do not relate to any member of the
Providian Bancorp Group or the Providian Bancorp business.
The indemnification obligations described above will be subject to the
following limitations:
(a) the indemnification obligations will not include any Losses (i)
relating to any Tax (as defined in the Tax Disaffiliation Agreement), which
shall be covered exclusively by the Tax Disaffiliation Agreement,
(ii) relating to matters for which indemnification is provided in any of
the other Ancillary Agreements or (iii) relating to matters governed by any
of the surviving intercompany agreements, which, in each case, will be
covered exclusively by the applicable provisions of such agreements; and
(b) the indemnification obligations will not be deemed to create any
obligation, or expand the scope of any existing obligation on the part of
any party to the Distribution Agreement to indemnify or hold harmless such
party's own officers, directors, partners, employees, agents or
representatives.
If any indemnification described above is unavailable for any reason, the
parties have agreed to contribute in respect of the applicable Losses on an
equitable basis.
Non-Competition. Pursuant to the Distribution Agreement, Providian Bancorp
has agreed that, for a period of two years after December 28, 1996, neither it
nor any of its affiliates will, anywhere in the U.S., directly or indirectly,
(a) sell or offer life insurance and related products through the home service
channel; (b) offer, sell or otherwise provide to the non-individual market (i)
guaranteed investment contracts or (ii) other funding agreements directly
competitive with products offered as of December 28, 1996 by Providian Capital
Management; or (c) sell or offer life insurance products directly competitive
with products offered as of December 28, 1996 by Providian Direct Insurance
except, in the case of this clause (c), for offers or sales of accidental
death and dismemberment insurance and offers or sales to current or future
Providian Bancorp customers of life insurance products that are incremental to
a product that is currently being offered by Providian Bancorp. Providian
Bancorp further agrees that, for a period of eighteen months after December
28, 1996, neither it nor any of its affiliates will, anywhere in the U.S.,
directly or indirectly, use, with respect to any life insurance product or the
offer or sale of any such product, the name Providian, or any derivative
thereof, in conjunction with the term "insurance", "assurance" or any similar
insurance related term, as the name of an entity, joint venture or similar
marketing arrangement.
Surviving Intercompany Agreements. Pursuant to the Distribution Agreement,
all contracts, licenses, agreements, joint marketing test programs and other
arrangements, formal or informal, between the Providian Group, on the one
hand, and the Providian Bancorp Group, on the other, in existence as of the
Distribution Date, pursuant to which either Group provides to any member of
the other Group services (including management, administration, legal,
financial, accounting, data processing, insurance or technical support), or
the use of any asset of any member of the other Group or any employee, or
pursuant to which any rights, privileges or benefits are afforded to members
of either Group as an affiliate of the other Group, shall terminate as of the
close of business on the day prior to the Distribution Date, except that
certain contracts shall survive the Distribution including: (i) an
intercompany services agreement relating to remittance processing services
performed for Providian Bancorp by a member of the Providian Group, (ii) a
lease relating to Providian Bancorp's telemarketing facility space leased from
a member of the Providian Group in St. Louis, Missouri, (iii) a
80
<PAGE>
telemarketing service agreement relating to certain support and infrastructure
services provided to Providian Bancorp in connection with its St. Louis,
Missouri telemarketing facility, (iv) licensing agreements permitting members
of the Providian Group to offer customers Providian Bancorp's FHA products,
(v) a loan servicing agreement relating to the servicing of First Deposit
National Bank's fixed rate mortgage portfolio by a member of the Providian
Group and (vi) a loan servicing agreement for the servicing of Providian
Credit Corporation's fixed rate mortgage loans by a member of the Providian
Group.
TAX DISAFFILIATION AGREEMENT
The Tax Disaffiliation Agreement between Providian and Providian Bancorp,
which will be entered into prior to the Distribution Date, generally provides
for the allocation between Providian and Providian Bancorp of the tax
liability for certain periods and events and for the parties' responsibilities
for filing tax returns, handling audits, retaining records, etc.
The Tax Disaffiliation Agreement provides that Providian is obligated to
file all tax returns with respect to the Providian Bancorp Group (a) that are
filed on a consolidated, combined or unitary basis, (b) that include Providian
Bancorp or any of its subsidiaries and Providian or any of its subsidiaries
and (c) that are required to be filed for any period beginning before the
Distribution.
Under the Tax Disaffiliation Agreement, Providian Bancorp is liable for, and
will hold Providian harmless against, any taxes attributable to the Providian
Bancorp Group (which includes Providian Bancorp and its subsidiaries) for any
period before or after the Distribution. Conversely, Providian is liable for,
and will hold Providian Bancorp harmless against, any tax liability
attributable to Providian or any of its subsidiaries (excluding Providian
Bancorp and its subsidiaries) for any period before or after the Distribution.
The Tax Disaffiliation Agreement also contains a number of representations
that Providian and Providian Bancorp will make relating to events that could
disqualify the Distribution under Section 355 of the Code. If Providian or
Providian Bancorp violates one or more of these representations and the
nonrecognition treatment of the Distribution under Section 355 of the Code is
disallowed as a result thereof, the party breaching the representation will
bear 100% of the tax liability resulting from the breach. If the tax-free
treatment of the Distribution is disallowed for a reason other than the breach
of one of these representations, Providian will bear the liability for any
taxes relating to the disqualification.
The Tax Disaffiliation Agreement further provides that no member of the
Providian Bancorp Group will be entitled to carry back a net operating loss or
other tax attribute (unless the carryback is required by law) from a period
after the Distribution to a period before the Distribution without the consent
of Providian.
Finally, each of Providian and Providian Bancorp will have sole
responsibility for audits of the tax returns it is required to file unless a
proposed adjustment in the audit could result in liability for the other party
as an indemnitor under the Tax Disaffiliation Agreement. In that case, the
indemnitor will have the sole right to contest the proposed adjustment;
provided that if the proposed adjustment cannot be separated from the
consolidated, combined, or similar return of the other party, the indemnitor
may not settle the proposed adjustment without the consent of the other party,
which consent may not be unreasonably withheld.
EMPLOYEE BENEFITS AGREEMENT
The Employee Benefits Agreement will be entered into on or prior to the
Distribution Date by and between Providian and Providian Bancorp for the
purposes of allocating employee benefit assets and obligations between
Providian and Providian Bancorp. Except as otherwise expressly provided in the
Employee Benefits Agreement, each party will assume or retain, as the case may
be, and be solely responsible for, all Liabilities (as defined in the Employee
Benefits Agreement) arising under its own employee benefit plans and for all
liabilities relating to its own employees. Employees transferring to Providian
Bancorp from Providian in connection with the Distribution will not be deemed
to have experienced a severance or termination for purposes of employment and
81
<PAGE>
benefit policies and plans, and such employees' service with Providian will be
recognized as service with Providian Bancorp for purposes of these policies
and plans.
Each Providian stock option held by Providian Bancorp employees, former
employees and their respective beneficiaries and dependents (the "Providian
Bancorp Participants") will be rolled over as of the Distribution Date with a
Providian Bancorp stock option with respect to a number of shares of Providian
Bancorp Common Stock equal to the number of shares of Providian Common Stock
subject to such Providian stock option immediately before such replacement,
multiplied by the Ratio and with a per-share exercise price equal to the per-
share exercise price of such Providian stock option, divided by the Ratio. For
purposes of the foregoing, the "Ratio" is equal to the average of the daily
high and low trading prices on the NYSE of Providian Common Stock on each of
the ten trading days prior to the ex-dividend date for the Distribution
divided by the average of the daily high and low trading prices on the NYSE
for the Providian Bancorp Common Stock on each of the ten trading days
beginning with the ex-dividend date for the Distribution. Such Providian
Bancorp stock option will otherwise have the same terms and conditions as the
corresponding Providian stock option. Providian stock options, relating to an
aggregate of up to 285,000 shares of Providian Common Stock, held by Mr.
Irving W. Bailey II may also be converted into Providian Bancorp stock options
to the extent Providian, Providian Bancorp and Mr. Bailey so agree, in which
event Providian will reimburse Providian Bancorp for the spread on these
options.
Providian will assume or reimburse Providian Bancorp for liabilities to
Providian employees under the Providian Bancorp equity unit plan. Providian
Bancorp intends to terminate the equity unit plan prior to the Distribution
and to make payments in settlement of equity units held by participants at
that time. The equity unit plan provides for the grant of units to
participating employees at a specific equity unit grant price, and
participants are then entitled to the appreciation of the equity unit price
(based on the estimated market value of Providian Bancorp) above the grant
price. In addition, all Providian restricted stock held by Providian Bancorp
Participants, which would otherwise vest only over specified periods of time,
will vest immediately before the Distribution and such stock will be
distributed at that time to the holders. Providian Bancorp will assume and be
solely responsible for all liabilities of Providian to or relating to
Providian Bancorp Participants under the Providian deferred compensation plans
(under which certain amounts of compensation may be deferred and paid at a
later time). Assets held in Providian's master trust for Providian Bancorp's
401(k) plan will be transferred to a Providian Bancorp trust. Assets held in
Providian's rabbi trust will be transferred to Providian Bancorp, or to a
trust or other entity designated by Providian Bancorp, on a pro rata basis, in
the same proportion as the contributions to such rabbi trust charged to
Providian Bancorp as of the Distribution Date bear to the total contributions
made to such rabbi trust. Providian will also make a cash payment to Providian
Bancorp of $6.55 million immediately prior to the Distribution in recognition
of the reallocation of employee costs effected by the Employee Benefits
Agreement.
TRANSITION SERVICES AGREEMENT
The Transition Services Agreement between Providian and Providian Bancorp
will be entered into on or prior to the Distribution Date.
For a period of 180 days beginning on the Distribution Date (the "Transition
Period"), Providian will make certain administrative services available to
Providian Bancorp, including, but not limited to, services relating to
financial, tax, accounting, legal, human resources and other administrative
services (the "Transition Services"). In consideration for the Transition
Services, Providian Bancorp will pay to Providian an amount equal to the
allocable overhead and any reasonable out-of-pocket expenses incurred by
Providian in providing the Transition Services.
The Transition Services Agreement provides that Providian will have no
liability to Providian Bancorp with respect to its furnishing any of the
Transition Services other than for its gross negligence or willful misconduct.
Moreover, Providian will make no warranties, express or implied, with respect
to the Transition Services to be provided under the Transition Services
Agreement.
82
<PAGE>
GENERAL INTELLECTUAL PROPERTY ASSIGNMENT AND RENUNCIATION
The General Intellectual Property Assignment and Renunciation between
Providian and Providian Bancorp will be entered into on or prior to the
Distribution Date. Pursuant to this agreement, Providian will assign, transfer
and convey to Providian Bancorp, its successors, legal representatives and
assigns, any and all worldwide rights, title and interest of Providian in the
"Providian" name and logo and certain other Proprietary Rights (as defined in
the General Intellectual Property Assignment and Renunciation). Such
Proprietary Rights include certain marks, trade names and trade dress that
include any form of the word "Providian" or the prefix "Pro" as well as works,
confidential information, inventions and other rights and privileges relating
to the Providian Bancorp business and the business or services conducted under
the trademark, service mark or trade name that includes the word "Providian,"
or the "Pro" prefix or other forms of the word "Providian."
Providian will also cooperate as reasonably necessary with Providian Bancorp
in connection with perfecting Providian Bancorp's ownership of the Proprietary
Rights and in connection with perfecting the transfer of all rights to and the
vesting of full and complete title and ownership in Providian Bancorp to the
Proprietary Rights.
TRADEMARK LICENSE AGREEMENT
The Trademark License Agreement will be entered into on or prior to the
Distribution Date by and between Providian and Providian Bancorp. It will
effectuate the license by Providian Bancorp to Providian of certain service
marks, trademarks, trade names and/or trade dress and the registrations and
applications for registrations relating thereto (collectively, the "Service
Marks") in order to give Providian and Providian's insurance subsidiaries time
to obtain the necessary regulatory approvals for a name change. These Service
Marks will have previously been assigned to Providian Bancorp by Providian
pursuant to the General Intellectual Property Assignment and Renunciation. The
license will be royalty-free and will not require the payment of any material
consideration by Providian.
Licenses. Effective on or prior to the Distribution Date, Providian Bancorp
will grant to Providian and its insurance subsidiaries a non-exclusive,
royalty-free right to use the Service Marks throughout the U.S. in connection
with the Company Business (as defined in the Distribution Agreement) until the
earlier of (i) the receipt by Providian and its insurance subsidiaries of all
necessary regulatory approvals to effect a name change and transition to usage
of a new name or (ii)(A) six months from the date the Trademark License
Agreement is executed with respect to Providian and (B) 18 months from the
date the Trademark License Agreement is executed with respect to the insurance
subsidiaries. Providian and its insurance subsidiaries will agree to effect
the name change as promptly as reasonably practicable after the Trademark
License Agreement is executed. The license term relating to the use of the
Service Marks by Providian's insurance subsidiaries may be extended with the
consent of Providian Bancorp, which consent will not be unreasonably withheld.
Indemnity. The Trademark License Agreement provides that Providian and its
insurance subsidiaries will indemnify Providian Bancorp against Losses
incurred pursuant to claims of third parties arising out of the use of the
Service Marks in connection with the Company Business or the provision of
services by Providian or its insurance subsidiaries under the Service Marks,
provided that such indemnity will not extend to Losses incurred by claims of
third parties related to the validity of Providian Bancorp's rights in the
Service Marks. In addition, such Losses incurred by Providian Bancorp shall be
subject, but not in addition, to the indemnification provisions set forth in
the Distribution Agreement.
DESCRIPTION OF CAPITAL STOCK OF AEGON
Set forth below is a summary of certain information concerning AEGON's
capital stock, including brief descriptions of certain provisions contained in
the Articles of Incorporation of AEGON, as amended on May 31, 1995 and July
17, 1995. Such summaries and descriptions do not purport to be complete
statements of these provisions.
83
<PAGE>
A shareholder of a company incorporated under the laws of The Netherlands
cannot sue individual members of the supervisory board or executive board
derivatively (i.e., in the name of and for the benefit of AEGON) and moreover,
under Dutch law, the duties owed by members of the supervisory board and
executive board are owed primarily to AEGON, not to its shareholders. This may
limit the rights of the shareholders of a Dutch company to sue AEGON or
members of its supervisory or executive boards. Dutch law does not provide for
class action suits, such as a suit by one shareholder for his benefit and the
benefit of others similarly situated against a company or its supervisory or
executive directors.
Because of the absence of a convention between the U.S. and The Netherlands
providing for the reciprocal recognition and enforcement of judgments in civil
and commercial matters, a judgment rendered by a court of competent
jurisdiction in the U.S. in favor of the claimant against a Dutch company will
not be recognized and enforced by the courts of The Netherlands. In order to
obtain a judgment which is enforceable against a company in The Netherlands,
the claimant will have to file its claim against the company with the
competent court in The Netherlands, and the claimant may submit in the courts
of these proceedings the judgment rendered by a court in the U.S. If and to
the extent that the court in The Netherlands is of the opinion that fairness
and good faith so require, it will give binding effect to a foreign judgment,
unless such foreign judgment contravenes principles of public policy in The
Netherlands.
SHARE CAPITAL
At December 31, 1996, the total authorized capital stock of AEGON consisted
of 525,000,000 AEGON Common Shares, par value one Dutch Guilder per share,
350,000,000 Preferred Shares, par value one Dutch Guilder per share and
125,000,000 preferred shares convertible into AEGON Common Shares, par value
one Dutch Guilder per share (the "Convertible Shares"). At the same date,
there were outstanding 265,233,665 AEGON Common Shares, 80,000,000 AEGON
Preferred Shares and no Convertible Shares. After giving effect to the Merger
(assuming an exchange ratio of .457868), there would be 288,846,904 AEGON
Common Shares, 145,000,000 AEGON Preferred Shares and no Convertible Shares
outstanding.
GENERAL
All of AEGON's issued Common Shares are fully paid and not subject to calls
for additional payments of any kind. The Common Shares are held in bearer and
registered form. Holders of shares of New York Registry hold their Common
Shares in registered form.
DIVIDENDS
Under Dutch law and AEGON's Articles of Incorporation, the holders of AEGON
Common Shares are entitled to payment of dividends out of the profits
remaining after the creation of a reserve account, if any, and payment of
dividends to the holders of Preferred Shares and to the holders of Convertible
Shares. Preferred dividends are payable on the capital actually paid in on the
Preferred Shares at a rate equal to 2% over the rate of discount for
promissory notes applied by De Nederlandsche Bank (Central Bank of The
Netherlands) plus any additional interest charged on current account debit
balances by one of the banks in The Netherlands, all determined as of the
first Amsterdam Stock Exchange working day of the financial year in which the
dividend is distributed. Dividends on the Convertible Shares are payable in an
amount for each share equal to the total dividend paid on an AEGON Common
Share in the fiscal year preceding the year of first issuance of Convertible
Shares to the extent such amounts are available from the remaining profit
after payment of dividends to the Preferred Shares. Any amounts remaining
after the above payments may be paid as a dividend on the AEGON Common Share
if approved by the general meeting of shareholders, provided that the total
dividend paid on a Convertible Share will be twenty cents (0.20 Dutch
Guilders) more than the total dividend paid on an AEGON Common Share. If any
optional dividend payments are made to the AEGON Common Shares, the dividend
paid on the Convertible Shares must be cash only. The Executive Board of AEGON
(the "AEGON Executive Board") may determine the dividend payment date for the
AEGON Common Shares, Preferred Shares and Convertible Shares, which may vary
for registered and bearer shares, the record date for payment applicable to
84
<PAGE>
holders of registered AEGON Common Shares and, with the approval of the AEGON
Supervisory Board, the currency or currencies in which dividends will be paid.
For dividends on New York Shares, therefore, AEGON is empowered to make
payment in dollars.
VOTING RIGHTS AND APPOINTMENT OF SUPERVISORY AND EXECUTIVE BOARDS
General Meeting of Shareholders. All holders of AEGON Common Shares,
Preferred Shares and Convertible Shares are entitled to attend personally or
by proxy any general meeting of shareholders upon compliance with the
procedures hereinafter mentioned. A holder of AEGON Common Shares, Preferred
Shares and Convertible Shares is entitled to one vote for each share held by
him and represented at the meeting. A general meeting of shareholders is
required to be held not later than June 30 in each year. General meetings of
shareholders are called by the AEGON Supervisory Board or the AEGON Executive
Board and are required to be held in The Hague, The Netherlands or certain
other cities in The Netherlands. In order to attend a general meeting of
shareholders, holders of bearer shares must deposit their share certificates
with one of the depositaries designated in the notice of the meeting. The
holders of registered shares are required to notify AEGON in writing prior to
the date specified in the notice of a general meeting of the shareholders of
their desire to attend the meeting in person or by proxy and must specify the
serial numbers of their share certificates, if any. Action is taken at such
meetings by an absolute majority of the votes cast unless a larger majority is
explicitly provided by law or by the Articles of Incorporation.
Control of AEGON. As of December 31, 1996, the Association held
approximately 39.5% of the common shares and 100% of the preferred shares of
AEGON. These holdings give the Association approximately 53.5% of AEGON's
voting shares and thus voting control of AEGON. The Association is a
membership association under Dutch law. One of the principal characteristics
of a membership association is that it has no share capital. The major
objective of the Association is to promote the direct and indirect interests
of companies subsidiary to or associated with AEGON, as well as insured
parties, employees, shareholders and other relations of those companies to be
achieved, among other things, by obtaining and executing voting control in
AEGON.
The majority of AEGON's common shares is in bearer form. The AEGON Common
Shares held by the Association are registered and represent about 87% of all
registered common shares in AEGON's shareholders' register (which excludes the
registered New York Shares). The holding of 100% of the preferred stock is
also registered. The table below shows the ownership percentage of the
Association as of December 31, 1996.
<TABLE>
<CAPTION>
TITLE OF CLASS NUMBER OWNED PERCENT OF CLASS
-------------- ------------ ----------------
<S> <C> <C>
Common Shares.............................. 104,787,515 39.5%
Preferred Shares........................... 80,000,000 100.0%
</TABLE>
The Association has two administrative bodies: the general meeting of
members and the executive committee. The general meeting of members currently
consists of 20 individuals who were elected as members of the Association. Of
these 20 individuals, 16 represent a broad cross-section of Dutch society,
they are called elected members. No one can be elected into this category if
an (or former) employee of AEGON or its subsidiaries. Of the other four
members, two were elected from the AEGON Supervisory Board and two from the
AEGON Executive Board.
Appointment of the AEGON Supervisory Board and the AEGON Executive
Board. Large Dutch companies are required by Dutch law to have a two-tier
management system consisting of an executive board and a supervisory board.
Members of the AEGON Supervisory Board and the AEGON Executive Board are
appointed by the AEGON Supervisory Board. The number of members of the AEGON
Supervisory Board is determined from time to time by the AEGON Supervisory
Board but may not consist of less than seven members. Reference is made to
"Item 10. Directors and Officers of Registrant" of the 1995 Form 20-F.
Shareholder Proposals. Proposals by shareholders are required to be placed
on the agenda of a general meeting of shareholders, but only if such proposals
have been signed by the holder or holders of at least 10% of
85
<PAGE>
the total Common Shares and Convertible Shares issued and are submitted to
AEGON at least 30 days prior to each general meeting of shareholders.
Amendment of Articles. The Articles of Incorporation of AEGON may be amended
at any general meeting of shareholders where at least 50% of the issued
capital is represented, by an absolute majority of the votes cast. If the
required quorum is not represented at the shareholder meeting, the amendment
may be approved at a subsequent meeting to be called and held within four
weeks with the same required vote, but without such quorum requirement. Any
such amendment must have been proposed by the AEGON Executive Board which
proposal must have been approved by the AEGON Supervisory Board.
Annual Accounts and Dividends. The AEGON Supervisory Board adopts annually
AEGON's annual accounts with respect to the previous calendar year,
accompanied by a certificate of an independent accountant certifying such
annual accounts. The annual accounts are submitted for approval to the annual
general meeting of shareholders by the AEGON Executive Board, and the AEGON
Executive Board is also required to present to the annual general meeting of
shareholders a report of management with respect to the previous calendar
year.
LIQUIDATION RIGHTS
In the event of the liquidation of AEGON, the general meeting of
shareholders determines the remuneration of the liquidators and of the members
of the AEGON Supervisory Board. The assets remaining after payment of all
debts, liquidation expenses and taxes are to be distributed first to the
holders of Preferred Shares in the amount of their paid-in capital. The amount
left after such payment will be distributed to the holders of AEGON Common
Shares and Convertible Shares, provided that the amount paid to the
Convertible Shares shall not exceed the amount of their paid-in capital,
including any surplus paid-in capital.
ISSUANCE OF ADDITIONAL SHARES
Shares of AEGON's authorized but unissued capital stock may be issued at
such times and on such conditions as may be determined at a general meeting of
shareholders or by the AEGON Executive Board if authorized by the
shareholders. At the general meeting of shareholders of AEGON held on May 15,
1996, the AEGON Executive Board was designated, for a period of three years
effective January 1, 1997, by a resolution approved by the shareholders, as
the Company Body which shall, subject to the approval of the AEGON Supervisory
Board, be authorized: (a) to decide upon the issue of shares and to grant
rights to acquire shares up to the authorized capital; and (b) to limit or
exclude the pre-emption rights of the shareholders with regard to the issuance
of shares and the granting of rights to acquire shares. In respect of the
issuance of common and convertible shares without pre-emption rights, the
authority given under (a) shall be limited to (i) 10% of the capital, plus;
(ii) 20% of the capital, but only if the issuance happens to occur in
connection with the acquisition of an enterprise or a corporation. For the
purposes of the designation by the shareholders, the term capital means the
par value amount of the common and the convertible share capital issued at the
moment this authority is used for the first time in a certain year. The
designation described above may only be withdrawn by a resolution of the
general meeting of shareholders following a proposal by the AEGON Executive
Board which has been approved by the AEGON Supervisory Board.
PREEMPTIVE RIGHTS
Except in certain instances prescribed by law, the holders of AEGON Common
Shares and Convertible Shares have preemptive rights on a pro rata basis to
purchase the number of AEGON Common Shares or Convertible Shares to be issued.
Holders of AEGON Preferred Shares, as such, have no preemptive rights in
respect of any AEGON Common Shares.
Preemptive rights in respect of AEGON Common Shares and Convertible Shares
may be limited or precluded by a resolution passed by the general meeting of
shareholders. In the notice of the meeting, the reasons for the proposal to
limit or preclude the preemptive rights in respect of AEGON Common Shares and
the
86
<PAGE>
intended issue price must be explained in writing. Preemptive rights may also
be limited or precluded by the AEGON Executive Board if a resolution is passed
by the general meeting of shareholders which confers such power on the AEGON
Executive Board for a maximum of five years. This power may from time to time
be extended, but never for a period longer than five years. A resolution
passed at the general meeting of shareholders or taken by the AEGON Executive
Board to limit or preclude the preemptive rights in respect of AEGON Common
Shares requires the approval of the AEGON Supervisory Board. If AEGON makes a
rights offering to the holders of AEGON Common Shares, the rights of holders
of AEGON's New York Shares to exercise the rights so offered is subject to a
restriction which permits AEGON to sell such rights in a manner to be
determined by the AEGON Executive Board and to remit the cash proceeds of such
sale to such holders if the additional AEGON Common Shares are not registered
under the Securities Act. AEGON Common Shares to be issued in connection with
the Merger will be issued without preemptive rights.
REPURCHASE BY AEGON OF ITS OWN SHARES
Subject to certain restrictions contained in the Laws of The Netherlands and
AEGON's Articles of Incorporation, the AEGON Executive Board may cause AEGON
to purchase its own fully-paid shares, provided that the total number of AEGON
shares so repurchased may not exceed, in the aggregate, 10% of the issued
capital. Such purchase may be made only upon authorization by the general
meeting of shareholders, which authorization is valid for a maximum of
eighteen months and must include the number of shares to be acquired, the way
in which they may be acquired and the minimum and maximum purchase price.
CERTIFICATES FOR COMMON SHARES AND THEIR TRANSFER
Certificates evidencing AEGON Common Shares are issuable, subject to the
restrictions described below, in bearer or registered form, as the holder may
elect. Certificates issued by the New York registrar are in registered form
and are printed in the English language. Bearer shares are evidenced by
certificates printed only in the Dutch language. AEGON Common Shares in bearer
form and New York Shares may be held by residents as well as non-residents of
The Netherlands. Only AEGON Common Shares in bearer form may be traded on the
Amsterdam, London and Zurich Stock Exchanges. Only New York Shares may be
traded on a stock exchange in the U.S. Upon presentation of a bearer
certificate to AEGON's Dutch transfer agent, accompanied by a request that the
shares evidenced by such certificate be transferred to New York Shares, the
Dutch transfer agent will cancel such bearer share and will instruct AEGON's
New York transfer agent to issue a New York Share certificate evidencing such
shares. Similarly, upon presentation to the New York transfer agent of New
York Shares accompanied by an appropriate request, the New York transfer agent
will cancel such New York Shares and will instruct the Dutch transfer agent to
issue a bearer share certificate evidencing such shares. Transfers of AEGON
Common Shares in bearer form are accomplished by delivery of the share
certificates. New York Shares may be transferred on the books of AEGON at the
office of the New York transfer agent by surrendering the New York Shares with
the deed of transfer on the New York Shares or in a separate instrument
completed in full and signed by the transferor. Upon surrender, AEGON, acting
through its New York transfer agent, will either note the transfer on the
surrendered New York Shares or issue replacement New York Shares registered in
the name of the new owner. In addition to the foregoing, a shareholder is
entitled, upon written request to AEGON and the surrender for cancellation of
any share certificate previously issued, to have his name entered in the
register of shareholders with respect to the share or shares owned by him and
to receive, in lieu of a certificate, a non-negotiable declaration of
registration of such share or shares.
COMPARISON OF CERTAIN RIGHTS OF STOCKHOLDERS OF PROVIDIAN AND AEGON
As a result of the Merger, stockholders of Providian will become
shareholders of AEGON, and their rights will be governed by the Articles of
Incorporation of AEGON which differs in certain material respects from the
Restated Certificate of Incorporation of Providian (the "Providian
Certificate") and the Providian by-laws (the "Providian By-laws"). The
following is a summary of certain material differences between the rights of
holders of Providian Common Stock and holders of AEGON Common Shares. These
differences arise from differences
87
<PAGE>
between the Delaware General Corporation Law (the "DGCL") and the Dutch Civil
Code as well as from differences between the governing documents. This summary
is not, and does not purport to be, complete and does not purport to identify
all differences that may, under given situations, be material to Providian
stockholders. This summary is qualified in its entirety by reference to the
corporate laws of Delaware and The Netherlands and the governing instruments
of Providian and AEGON. This summary should be read in conjunction with
"Description of Capital Stock of Aegon."
VOTING RIGHTS
Under the DGCL, each stockholder is entitled to one vote per share of stock,
unless the certificate of incorporation provides otherwise. In addition, the
certificate of incorporation may provide for cumulative voting at all
elections of directors of the corporation. Either the certificate of
incorporation or the by-laws may specify the number of shares and/or the
amount of other securities that must be represented at a meeting in order to
constitute a quorum, but in no event will a quorum consist of less than one-
third of the shares entitled to vote at a meeting.
The Providian Certificate provides for one vote per share of Providian
Common Stock, but does not provide for cumulative voting. In general, except
as otherwise provided by law, holders of each series of Providian preferred
stock have no voting rights. Holders of Providian preferred stock are entitled
to one vote per share for the election of additional directors upon certain
defaults in dividend payments, on certain matters affecting the rights of such
series of the preferred stock and on a merger, consolidation or sale of
substantially all of the assets of Providian. Under the Providian By-laws, the
presence in person, or by properly executed proxy, of holders of a majority of
the outstanding shares of each class of stock entitled to vote at the meeting
is required to constitute a quorum at stockholder meetings of Providian.
Under Dutch law, each shareholder is entitled to one vote per share, unless
the articles of incorporation of the company provide otherwise. All
shareholder resolutions are taken by an absolute majority of the votes cast,
unless the articles or the law prescribe otherwise. The validity of
shareholder decisions is not dependent on a quorum, unless the law or the
articles stipulate otherwise.
The Articles of Incorporation of AEGON provide for one vote per AEGON Common
Share. Generally, all resolutions may be adopted by an absolute majority of
the total votes cast, and there are no quorum requirements. A quorum of at
least half of the issued capital is required for amendments to the Articles of
Incorporation or dissolution of AEGON.
AMENDMENT OF CHARTER DOCUMENTS
Under the DGCL, amendments to a corporation's certificate of incorporation
require a resolution of the board of directors, followed by a majority vote of
the holders of the outstanding stock entitled to vote on such amendment and,
in certain circumstances, of the holders of a majority of the outstanding
stock of each class entitled to vote on such amendment as a class, unless a
greater number or proportion is specified in the certificate of incorporation
or by other provisions of the DGCL.
The Providian Certificate requires the approval of 80% of the voting power
of the shares entitled to vote generally in the election of directors, to
alter, amend, adopt any provision inconsistent with or to repeal certain
provisions of the Providian By-laws and the Providian Certificate relating to
stockholder meetings and to the board of directors.
Under Dutch law, shareholders of a Dutch company may resolve to amend the
company's articles of incorporation, although the prior approval of the Dutch
Ministry of Justice is required for any such amendment.
Under AEGON's Articles of Incorporation, the general meeting of shareholders
may pass a resolution for an amendment to the Articles of Incorporation only
upon a proposal of the AEGON Executive Board which proposal requires the
approval of the AEGON Supervisory Board, and it must be approved by an
absolute
88
<PAGE>
majority of the votes cast at a meeting at which at least 50% of the issued
capital is represented. If the required quorum is not represented, then the
amendment may be approved at a subsequent meeting to be called and held within
four weeks with the same required vote but without such quorum requirement.
APPRAISAL RIGHTS
The DGCL provides for appraisal rights in connection with certain mergers
and consolidations. Appraisal rights are not available for any shares of stock
of the constituent corporation surviving the merger if the merger did not
require for its approval the vote of the holders of the surviving corporation.
In addition, unless otherwise provided in the charter, no appraisal rights are
available to holders of shares of any class of stock which, as of the record
date, is either: (a) listed on a national securities exchange or designated as
a national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. (the "NASD") or (b) held of
record by more than 2,000 holders, unless such holders are required by the
terms of the merger to accept anything other than: (i) shares of stock of the
surviving corporation; (ii) shares of stock of another corporation which are
or will be so listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by the NASD
or held of record by more than 2,000 holders; (iii) cash in lieu of fractional
shares of such stock; or (iv) any combination thereof. The Providian
Certificate has no provision relating to appraisal rights.
Dutch law does not recognize the concept of appraisal or dissenters' rights
and, accordingly, holders of stock in a Dutch company have no appraisal
rights.
PREEMPTIVE RIGHTS
Under the DGCL, stockholders have no preemptive rights to subscribe to
additional issues of stock or to any security convertible into such stock
unless, and except to the extent that, such rights are expressly provided for
in the certificate of incorporation. The Providian Certificate does not
provide for preemptive rights.
Under Dutch law, holders of common shares in a Dutch company have preemptive
rights with respect to newly issued common shares in proportion to the
aggregate nominal value of their shareholdings (with the exception of shares
to be issued to employees). Such preemptive rights in respect of newly issued
common shares may be excluded by approval of the shareholders at the General
Meeting of Shareholders. Unless the articles of incorporation state otherwise,
holders of preferred shares have no preemptive rights. The Articles of
Incorporation of AEGON conform to Dutch law and authorize the general meeting
of shareholders or the AEGON Executive Board, if so designated by the general
meeting of shareholders, to limit or eliminate preemptive rights for holders
of AEGON Common Shares and Convertible Shares, subject to the approval of the
AEGON Supervisory Board.
ACTION BY WRITTEN CONSENT OF SHAREHOLDERS
The DGCL provides that, unless otherwise provided in a corporation's
certificate of incorporation, any action that may be taken at a meeting of
stockholders may be taken without a meeting, without prior notice and without
a vote, if the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize such action at a meeting,
consent in writing. The Providian Certificate provides that any action
required or permitted to be taken by Providian stockholders must be effected
at a duly called annual or special meeting of the stockholders of Providian
and may not be effected by any consent in writing by such stockholders.
Under Dutch law, resolutions may be adopted by shareholders in writing
without holding a meeting of shareholders, provided the articles of
incorporation expressly so allow and provided no bearer shares are issued. As
AEGON's Articles of Incorporation do not contain such express provision and
AEGON has issued bearer shares, shareholders of AEGON may not adopt
resolutions outside a meeting of shareholders.
89
<PAGE>
SHAREHOLDERS' MEETINGS
Under the DGCL, an annual meeting of stockholders must be held for the
election of directors on a date and at a time designated by or in the manner
provided in the by-laws. Any other proper business may be transacted at the
annual meeting. The Providian By-laws provide that the Board shall fix the
date, time and place of the meeting.
Under Dutch law, a company must hold at least one annual general meeting, to
be held not later than six months after the end of the fiscal year. Pursuant
to the Articles of Incorporation of AEGON, general meetings may also be held
as often as the AEGON Executive Board or the AEGON Supervisory Board deems
necessary. In addition, under Dutch law, shareholders representing at least
one-tenth of the issued share capital may request the AEGON Executive Board or
the AEGON Supervisory Board to convene a general meeting of shareholders. If
the AEGON Executive Board or the AEGON Supervisory Board has not convened a
meeting within a certain period, the persons who have made the request are
authorized to convene such a meeting under the specific requirements of Dutch
law. The Articles of Incorporation of AEGON specify the places where general
meetings of shareholders may be held, all of which are located in The
Netherlands.
ELECTION OF DIRECTORS
Under the DGCL, the board of directors of a corporation must consist of one
or more members. The number of directors must be fixed by, or in the manner
provided in, the by-laws, unless the certificate of incorporation fixes the
number of directors. Each director shall hold office until his or her
successor is elected and qualified or until his or her earlier resignation or
removal. The directors are elected at the annual meeting of stockholders. The
directors may be divided into one, two or three classes. The Providian By-laws
provide that the number of directors shall be fixed from time to time by the
board of directors. The Providian Board is divided into three classes, as
nearly equal in number as possible, with the term of office of one class
expiring at each annual meeting of stockholders.
Under Dutch law, the executive board of a company must consist of at least
one member. Under Dutch law, members of the executive board are appointed for
an indefinite period of time and their appointment is not staggered. Members
of the supervisory board are appointed for a period of four years and may be
re-elected. A Dutch company may provide in its articles of association that
the appointment and resignation of members of the executive board and the
supervisory board will be staggered.
The Articles of Incorporation of AEGON provide that the AEGON Supervisory
Board will consist of at least seven members and do not specify the number of
members of the AEGON Executive Board which shall be determined by the AEGON
Supervisory Board. Under AEGON's Articles of Incorporation, the AEGON
Supervisory Board appoints the members of the AEGON Executive Board and
determines the terms of employment of such members. The executive board of a
Dutch company is in charge of the management of the company. The supervisory
board members are in charge of supervising the management as conducted by the
executive board. The supervisory board members also are appointed by the AEGON
Supervisory Board, unless objected to on certain grounds by the general
meeting of shareholders or the workers' council. AEGON's supervisory directors
are elected for renewable periods of four years.
REMOVAL OF DIRECTORS
Under the DGCL, any director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of the shares
then entitled to vote at an election of directors, except (a) if the
certificate of incorporation provides otherwise, in the case of a corporation
whose board is classified, stockholders may effect such removal only for
cause, or (b) in the case of a corporation having cumulative voting, if less
than the entire board is to be removed, no director may be removed without
cause if the votes cast against his removal would be sufficient to elect him
if then cumulatively voted at an election of the entire board of directors,
or, if there are classes of directors, at an election of the class of
directors of which he is a part.
90
<PAGE>
The Providian By-laws provide that any one or more of the directors of
Providian may be removed at any time, only with cause, by the vote of the
holders of at least eighty percent of the voting power of all of the then-
outstanding shares of stock of Providian entitled to vote generally in the
election of directors, voting as a single class.
Under Dutch law and AEGON's Articles of Incorporation, the AEGON Supervisory
Board has the authority to remove members of the AEGON Executive Board. A
member of the AEGON Executive Board can be removed by the AEGON Supervisory
Board only after having consulted with the general meeting of shareholders on
the intended dismissal. Removal without cause is possible but may be contrary
to the principles of reasonableness and fairness which are imposed under Dutch
law. Any removal without cause therefore could be declared null and void.
Members of the AEGON Supervisory Board may be removed by the court upon
petition by the general meeting of shareholders or the workers' council.
FILLING OF VACANCIES
The DGCL provides that vacancies and newly-created directorships may be
filled by a majority of the directors then in office (even though less than a
quorum) unless (i) otherwise provided in the certificate of incorporation or
by-laws of the corporation or (ii) the certificate of incorporation directs
that a particular class of stock is to elect such director, in which case any
other directors elected by such class, or a sole remaining director elected by
such class, shall fill such vacancy. The Providian Certificate provides that
upon certain defaults in dividend payments, holders of each series of
preferred stock in arrears voting together as a class are entitled to elect
two newly-created directorships.
Under Dutch law, a decision to appoint a new member of the executive board
must be taken by the supervisory board. The supervisory board must notify the
general meeting of shareholders of an intended appointment. Vacancies on the
supervisory board are filled by the supervisory board.
SHAREHOLDER NOMINATIONS
The Providian By-laws provide that stockholders may nominate individuals for
election to the board of directors at a meeting of Providian stockholders
entitled to vote for the election of directors. In order to nominate an
individual, a stockholder must deliver written notice to the Secretary of
Providian not less than 60 days nor more than 90 days prior to the meeting;
provided, however, that in the event that less than 70 days' notice or prior
public disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder to be timely must be so received not later than the
close of business on the tenth day following the day on which such notice of
the date of the meeting was mailed or such public disclosure was made. The
written notice must set forth (a) as to each person whom the stockholder
proposes to nominate for election or re-election as a director, (i) the name,
age, business address and residence address of such person, (ii) the principal
occupation or employment of such person, (iii) the class and number of shares
of Providian which are beneficially owned by such person and (iv) any other
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required
(including without limitation such person's written consent to being named in
the proxy statement as a nominee and to serving as a director if elected) and
(b) as to the stockholder giving the notice of the nomination (i) the
stockholder's name and address as they appear on Providian's books and (ii)
the class and number of shares of Providian that are beneficially owned by
such stockholder. If the chairman of the meeting determines that a nomination
was not made in accordance with the prescribed procedures, the chairman must
so declare to the meeting and the defective nomination will be disregarded.
The Articles of Incorporation of AEGON provide that the general meeting of
shareholders, the AEGON Executive Board and the workers' council may recommend
individuals to the AEGON Supervisory Board for appointment as members. The
recommendation must state the nominee's age, occupation, the value of the
shares he holds in AEGON's share capital and the positions he occupies or has
occupied, insofar as the latter are of importance to the performance of duties
as a member of the AEGON Supervisory Board. The recommendation
91
<PAGE>
must also list the companies for which the nominee serves as a member of a
supervisory board and must state the grounds for the recommendation. The
members of the AEGON Executive Board are individually appointed by the AEGON
Supervisory Board.
DIVIDENDS
Under the DGCL, a Delaware corporation may pay dividends out of its surplus
(the excess of net assets over capital), or in case there is no surplus, out
of its net profits for the fiscal year in which the dividend is declared
and/or the preceding fiscal year (provided that the amount of the capital of
the corporation is not less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets). In determining the amount of
surplus of a Delaware corporation, the assets of the corporation, including
stock of subsidiaries owned by the corporation, must be valued at their fair
market value as determined by the board of directors, without regard to their
historical book value.
Dutch law provides that dividends may only be distributed after adoption of
the annual accounts by the supervisory board and approval of the company's
annual accounts by its shareholders. Moreover, dividends may be distributed
only to the extent that net assets exceed the sum of the amount of issued and
paid-up capital and reserves which must be maintained under the law or the
articles of incorporation. Interim dividends may be declared as provided for
in the articles of incorporation and may be distributed to the extent that net
assets exceed the amount of the issued and paid-up capital plus required legal
reserves. Under Dutch law, the articles of incorporation may prescribe that
the executive board and/or the supervisory board decide what portion of the
profits are to be held as reserves.
RIGHTS OF PURCHASE
Under the DGCL, a corporation may redeem or repurchase its own shares,
except that a corporation cannot generally make such a purchase or redemption
if it would cause impairment of its capital.
Under Dutch law, a company may not subscribe for newly issued shares in its
own capital. A Dutch company may, subject to certain restrictions, purchase
shares in its own capital, provided the nominal value of the shares acquired
by the company (or its subsidiaries) does not exceed 10% of the issued share
capital.
LIMITATION OF DIRECTORS' LIABILITY/INDEMNIFICATION OF OFFICERS AND DIRECTORS
The DGCL permits a corporation to include in its certificate of
incorporation a provision eliminating or limiting a director's personal
liability to the corporation or its stockholders for monetary damages for
breaches of fiduciary duty. However, the DGCL expressly provides that the
liability of a director may not be eliminated or limited for (i) breaches of
his or her duty of loyalty to the corporation or its stockholders, (ii) acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) the unlawful purchase or redemption of stock
or unlawful payment of dividends or (iv) any transaction from which the
director derived an improper personal benefit. The DGCL further provides that
no such provision shall eliminate or limit the liability of a director for any
act or omission occurring prior to the date when such provision becomes
effective. The Providian Certificate contains a provision eliminating director
liability to the extent permitted by the DGCL.
Generally, the DGCL permits a corporation to indemnify certain persons made
a party to any action, suit or proceeding by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation or enterprise provided that such
person acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation. To the extent that
person has been successful in any such matter, that person shall be
indemnified against expenses actually and reasonably incurred by him. In the
case of an action by or in the right of the corporation, no indemnification
may be made in respect of any matter as to which that person was adjudged
liable to the corporation unless and only to the extent that
92
<PAGE>
the Delaware Court of Chancery or the court in which the action was brought
determines that despite the adjudication of liability that person is fairly
and reasonably entitled to indemnity for proper expenses.
The concept of indemnification of directors of a company for liabilities
arising from their actions as members of the executive or supervisory boards
is, in principle, accepted in The Netherlands and sometimes is provided for in
a company's articles of incorporation. Although, neither the laws of The
Netherlands nor the Articles of Incorporation of AEGON contain any provisions
in this respect, AEGON has contractually agreed to indemnify members of the
AEGON Executive and Supervisory Boards and officers of AEGON.
SPECIAL MEETINGS
Under the DGCL, a special meeting of stockholders may be called by the board
of directors or by any other person authorized in the certificate of
incorporation or the by-laws. The DGCL does not provide stockholders with an
automatic right to call special meetings of stockholders. The Providian
Certificate and the Providian By-laws provide that a special meeting of
stockholders may be called only by the board of directors pursuant to a
resolution adopted by a majority of the total number of authorized directors.
Under Dutch law, special general meetings of shareholders may be convened by
the executive board or the supervisory board, but the articles of
incorporation may also vest this power in other persons. In addition, one or
more shareholders, who own together at least 10%--or such lesser amount as is
provided by the articles of incorporation--of the issued capital, can be
authorized by the President of the District Court with competent jurisdiction
to call a special general meeting of shareholders.
Pursuant to the Articles of Incorporation of AEGON, special general meetings
of shareholders may be held whenever the AEGON Executive Board or the AEGON
Supervisory Board calls such meetings, subject to the specific requirements
under Dutch law.
SHAREHOLDER VOTES ON CERTAIN REORGANIZATIONS
Under the DGCL, the vote of a majority of the outstanding shares of capital
stock entitled to vote thereon generally is necessary to approve a merger,
such as the Merger, or consolidation. The DGCL permits a corporation to
include in its certificate of incorporation a provision requiring for any
corporate action the vote of a larger portion of the stock or of any class or
series thereof than would otherwise be required. The Providian Certificate
requires the approval of 80% of the voting power of the then outstanding
shares of capital stock entitled to vote generally in the election of
directors, voting together as a single class, to effect certain mergers,
consolidations and other transactions involving an "interested stockholder"
(defined to include an entity that owns more than 10% of Providian's voting
stock or an affiliate of Providian that owned 10% or more of Providian's
voting stock within two years of the date in question and certain transferees
thereof).
Under the DGCL, no vote of the stockholders of a surviving corporation to a
merger is needed, however, unless required by the certificate of
incorporation, if (i) the agreement of merger does not amend in any respect
the certificate of incorporation of the surviving corporation, (ii) the shares
of stock of the surviving corporation are not changed in the merger and (iii)
the number of shares of common stock of the surviving corporation into which
any other shares, securities or obligations to be issued in the merger may be
converted does not exceed 20% of the surviving corporation's common shares
outstanding immediately prior to the effective date of the merger. In
addition, stockholders may not be entitled to vote in certain mergers with
other corporations that own 90% or more of the outstanding shares of each
class of stock of such corporation.
Under Dutch law, the general meeting of shareholders must approve any merger
in which the company would not be the surviving entity.
AEGON's Articles of Incorporation do not expressly require the approval of
the general meeting of shareholders or reorganizations or mergers in which
AEGON would not be the surviving entity, but by virtue of the application of
Dutch statutory law, a merger or reorganization involving AEGON and in which
AEGON
93
<PAGE>
would not be the surviving entity is subject to the approval of the general
meeting of shareholders by a majority of the votes cast at such meeting.
CERTAIN PROVISIONS RELATING TO BUSINESS COMBINATIONS
The DGCL generally prevents a corporation from entering into certain
business combinations with an "interested stockholder" (defined generally to
include any person or entity that is the beneficial owner of at least 15% of a
corporation's outstanding voting stock or certain of its affiliates within a
three year period immediately prior to the time that such stockholder became
an "interested stockholder"), unless (i) the business combination or the
transaction which resulted in the stockholder becoming an "interested
stockholder" is approved by the board of directors of the corporation, prior
to such time as the stockholder became an "interested stockholder", (ii) the
interested stockholder acquired at least 85% of the corporation's voting stock
in the same transaction in which it became an "interested stockholder" or
(iii) at or subsequent to such time in which the stockholder became an
"interested stockholder", the business combination is approved by the board of
directors and authorized at an annual or special meeting of stockholders, and
not by written consent, by a vote of 66 2/3% of the outstanding voting stock
not owned by the interested stockholder.
Neither Dutch law nor AEGON's Articles of Incorporation specifically prevent
business combinations with interested shareholders.
RIGHTS OF INSPECTION
Under the DGCL, any stockholder may inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders and its other books and
records during the corporation's usual hours for business.
Under Dutch law, the annual accounts of a company are submitted to the
general meeting of shareholders for their approval. Under Dutch law, the
shareholders' register is available for inspection by the shareholder. The
register for holders of New York Shares is available for inspection at the
office of AEGON's New York register. Members of the supervisory board of a
Dutch company are authorized to inspect the books and records of the company,
and they are permitted access to the buildings and premises of the company
during normal business hours.
SHAREHOLDER SUITS
Under the DGCL, a stockholder may bring a derivative action on behalf of the
corporation to enforce the rights of the corporation. An individual also may
commence a class action suit on behalf of himself and other similarly situated
stockholders where the requirements for maintaining a class action under
Delaware law have been met. A person may institute and maintain such a suit
only if such person was a stockholder at the time of the transaction which is
the subject of the suit. Additionally, under Delaware case law, the plaintiff
generally must be a stockholder not only at the time of the transaction which
is the subject of the suit, but also through the duration of the derivative
suit. Delaware law also requires that the derivative plaintiff make a demand
on the directors of the corporation to assert the corporate claim before the
suit may be prosecuted by the derivative plaintiff, unless such demand would
be futile.
Dutch law does not provide for derivative suits or class actions.
SHAREHOLDER PROPOSALS
The Providian By-laws provide that stockholder proposals of business may be
made at an annual meeting pursuant to the notice of meeting, by or at the
direction of the board of directors or by a stockholder. To bring a proposal
of business before an annual meeting, the stockholder must give notice in
writing to the Secretary of Providian not less than 60 days nor more than 90
days prior to the meeting; provided, however, that in the event that less than
70 days' notice or prior public disclosure of the date of the meeting is given
or made to stockholders, notice by the stockholder to be timely must be so
received not later than the close of business on
94
<PAGE>
the tenth day following the day on which such notice of the date of the annual
meeting was mailed or such public disclosure was made. The written notice must
contain (a) a brief description of the business desired to be brought before
the annual meeting and the reasons for conducting such business at the annual
meeting, (b) the name and address of the stockholder proposing such business,
(c) the class and number of shares of Providian which are beneficially owned
by the stockholder and (d) any material interest of the stockholder in such
business. If the chairman of an annual meeting determines that business was
not properly brought before the meeting, the chairman must so declare to the
meeting and any such business not properly brought before the meeting will not
be transacted.
The Articles of Incorporation of AEGON provide that in order to be dealt
with at a general meeting of shareholders, shareholder proposals must be
signed by one or more shareholders who together represent at least 10% of the
total Common and Convertible Shares and be received in writing at the office
of AEGON at least 30 days before the date on which the meeting will be held.
CONFLICT-OF-INTEREST TRANSACTIONS
The DGCL generally permits transactions involving a Delaware corporation and
an interested director of that corporation if (a) the material facts as to his
relationship or interest are disclosed and a majority of disinterested
directors consents, (b) the material facts are disclosed as to his
relationship or interest and a majority of shares entitled to vote thereon
consents or (c) the transaction is fair to the corporation at the time it is
authorized by the board of directors, a committee or the stockholders.
Under Dutch law, unless the articles of incorporation of a company provide
otherwise, the corporation will be represented by the supervisory board in
case of a conflict of interest between the corporation and one or more of its
executive board members. The Articles of Incorporation of AEGON have no
specific provision on conflicts of interest.
FINANCIAL INFORMATION AVAILABLE TO SHAREHOLDERS
AEGON and Providian are each required to file periodic reports with the SEC
containing certain financial information. Providian files annual reports on
Form 10-K which contain audited financial statements prepared in accordance
with U.S. generally accepted accounting principles ("U.S. GAAP") and quarterly
reports on Form 10-Q which contain quarterly financial statements prepared in
accordance with U.S. GAAP. AEGON files annual reports on Form 20-F which
contain annual financial statements prepared in accordance with Dutch
accounting principles together with a reconciliation to U.S. GAAP and periodic
reports on Form 6-K which contain financial statements for the six-months
ended June 30 prepared in accordance with Dutch accounting principles together
with a reconciliation to U.S. GAAP. In addition, AEGON also produces nine-
month financial reports; however, such reports are not published in the U.S.
or reconciled to U.S. GAAP.
EXPERTS
The consolidated financial statements of Providian incorporated by reference
in Providian's Annual Report (Form 10-K) for the year ended December 31, 1996,
have been audited by Ernst & Young LLP ("Ernst & Young"), independent
auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such consolidated financial statements have
been incorporated herein by reference in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of AEGON and its subsidiaries included
in the 1995 Form 20-F incorporated by reference herein have been audited by
Moret Ernst & Young, independent auditors, to the extent and for the periods
indicated in their reports thereon and have been incorporated by reference
herein in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.
95
<PAGE>
Representatives of Ernst & Young are expected to be present at the Meeting.
These representatives will have an opportunity to make statements if they so
desire and will be available to respond to appropriate questions.
LEGAL MATTERS
The validity of the AEGON Common Shares to be issued pursuant to the Merger
will be passed upon for AEGON by N.W. van Vliet, AEGON's General Counsel. As
of January 31, 1997, Mr. van Vliet owned an amount of AEGON Common Shares
equal to less than one one-hundredth of one percent of the total number
outstanding of AEGON Common Shares.
OTHER PROPOSED ACTION
Providian knows of no business to come before the Meeting other than the
matters described above. Should any other business properly come before the
Meeting, stockholders' proxies will be voted in accordance with the judgment
of the person or persons voting the proxies.
STOCKHOLDER PROPOSALS
Any stockholder may submit a proposal for consideration at an annual
meeting. If the Merger is not effected, stockholder proposals to be included
in the proxy statement for the 1998 Annual Meeting must be received in writing
by December 18, 1997, by the Secretary, Providian Corporation, Post Office Box
32830, Louisville, Kentucky 40232. The Board of Directors will decide, subject
to the rules of the Securities and Exchange Commission, whether such proposals
are to be included in the proxy and proxy statement.
Stockholders also may recommend candidates for directors. The Human
Resources Committee of the Board of Directors, which serves as the nominating
committee for the Board in recommending nominations for directors of
Providian, will consider such recommendations for the 1998 Annual Meeting, if
held, and subsequent annual meetings. Recommendations should be submitted in
writing no later than October 31 of each year to the Human Resources
Committee, c/o Secretary, Providian Corporation, Post Office Box 32830,
Louisville, Kentucky 40232.
In addition to these requirements, Providian's By-laws impose notice
requirements on a stockholder nominating a director or submitting a proposal
to an annual meeting. Such notice shall be submitted to the Secretary of
Providian no earlier than 90, nor later than 60, days before an annual
meeting, and shall contain the information prescribed by the By-laws, copies
of which are available from the Secretary. These requirements apply even if
the stockholder does not desire to have his or her nomination or proposal
included in Providian's proxy statement.
WHERE YOU CAN FIND MORE INFORMATION
AEGON and Providian file annual, quarterly and special reports, proxy
statements and other information with the SEC. Following the Distribution,
Providian Bancorp will also make these filings with the SEC. You may read and
copy any reports, statements or other information that the companies file at
the SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available
to the public from commercial document retrieval services and at the Internet
web site maintained by the SEC at "http://www.sec.gov".
AEGON filed the AEGON Registration Statement on Form F-4 to register with
the SEC the AEGON Common Shares to be issued to Providian stockholders in the
Merger. This Proxy Statement-Prospectus is a part of that Registration
Statement and constitutes a prospectus of AEGON, as well as being a proxy
statement of
96
<PAGE>
Providian for the Meeting. In addition, Providian Bancorp has filed a
Registration Statement on Form 10 to register with the SEC the Providian
Bancorp Common Stock to be issued to Providian stockholders in the
Distribution.
As allowed by SEC rules, this Proxy Statement-Prospectus does not contain
all the information you can find in the AEGON Registration Statement or the
exhibits to that Registration Statement. Similarly, Providian Bancorp's
Information Statement does not contain all the information you can find in
Providian Bancorp's Registration Statement.
The SEC allows us to "incorporate by reference" information into this Proxy
Statement-Prospectus, which means that we can disclose important information
to you by referring you to another document filed separately with the SEC. The
information incorporated by reference is deemed to be part of this Proxy
Statement-Prospectus, except for any information superseded by information
contained directly in the Proxy Statement-Prospectus. This Proxy Statement-
Prospectus incorporates by reference the documents set forth below that we
have previously filed with the SEC. These documents contain important
information about our companies and their financial condition.
<TABLE>
<CAPTION>
AEGON SEC FILINGS (FILE NO. 0-
14071) PERIOD
- ------------------------------ ------
<S> <C>
Annual Report on Form 20-F...... Year ended December 31, 1995
Reports on Form 6-K............. Filed on September 20, 1996 and April 3, 1997
Form 8-A........................ Filed on October 4, 1991
<CAPTION>
PROVIDIAN SEC FILINGS (FILE NO. 1-
6701) PERIOD
- ---------------------------------- ------
<S> <C>
Annual Report on Form 10-K...... Year ended December 31, 1996
Current Reports on Form 8-K..... Filed on February 12, 1997
</TABLE>
We incorporate by reference additional documents Providian and AEGON may
file with the SEC from the date of this Proxy Statement-Prospectus to the date
of the Meeting. These include periodic reports, such as Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well
as proxy statements and any Annual Report on Form 20-F and, to the extent
specifically designated therein, certain Reports on Form 6-K filed by AEGON
with the SEC from the date of this Proxy Statement-Prospectus to the date of
the Meeting.
AEGON has supplied all information contained or incorporated by reference in
this Proxy Statement-Prospectus relating to AEGON, and Providian has supplied
all such information relating to Providian.
If you are a stockholder, we may have sent you some of the documents
incorporated by reference, but you can obtain any of them through us, the SEC
or the SEC's Internet web site as described above. Documents incorporated by
reference are available from us without charge, excluding all exhibits unless
we have specifically incorporated by reference an exhibit in this Proxy
Statement-Prospectus. Stockholders may obtain documents incorporated by
reference in this Proxy Statement-Prospectus by requesting them in writing or
by telephone from the appropriate company at the following addresses:
AEGON N.V.
Attention: Corporate Public Relations
Mariahoeveplein 50
P.O. Box 202, 2501 CE The Hague
The Netherlands
Tel: 011/(31-70) 344 32 10
97
<PAGE>
PROVIDIAN CORPORATION
Attention: Secretary
Providian Center
400 West Market Street
P.O. Box 32830
Louisville, Kentucky 40202
Tel: (502) 560-2000
If you would like to request documents from us, please do so by May 21, 1997
to receive them before the Meeting. If you request any incorporated documents
from us we will mail them to you by first-class mail, or other equally prompt
means, within one business day of receipt of your request.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT-PROSPECTUS TO VOTE ON THE MERGER. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM
WHAT IS CONTAINED IN THIS PROXY STATEMENT-PROSPECTUS. THIS PROXY STATEMENT-
PROSPECTUS IS DATED APRIL 18, 1997. YOU SHOULD NOT ASSUME THAT THE INFORMATION
CONTAINED IN THE PROXY STATEMENT-PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER
THAN THAT DATE, AND NEITHER THE MAILING OF THIS PROXY STATEMENT-PROSPECTUS TO
STOCKHOLDERS NOR THE ISSUANCE OF AEGON COMMON SHARES IN THE MERGER SHALL
CREATE ANY IMPLICATION TO THE CONTRARY.
98
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
DEFINED TERM PAGE
- ------------ ----
<S> <C>
1995 Form 20-F............................................................. 53
Acquisition Proposal....................................................... 73
AEGON...................................................................... 21
AEGON Common Shares........................................................ 21
AEGON Executive Board...................................................... 84
AEGON Preferred Shares..................................................... 77
AEGON Registration Statement............................................... 77
AEGON SARs................................................................. 76
AEGON Share Price.......................................................... 38
AEGON Share Repurchase..................................................... 47
AEGON Supervisory Board.................................................... 40
AEGON USA.................................................................. 41
Ancillary Agreements....................................................... 38
Annual Meeting Record Date................................................. 21
Annuity Companies.......................................................... 46
Association................................................................ 47
Certificate of Merger...................................................... 70
Certificates............................................................... 71
Closing.................................................................... 71
Closing Date............................................................... 38
Code....................................................................... 51
Combined Aggregate Values.................................................. 50
Committee.................................................................. 32
Consumer Finance Companies................................................. 48
Convertible Shares......................................................... 84
Credit Card Companies...................................................... 48
Credit Card and Finance Companies Combined................................. 48
DGCL....................................................................... 88
Distribution............................................................... 21
Distribution Agreement..................................................... 21
Distribution Date.......................................................... 75
Distribution Record Date................................................... 38
DOJ........................................................................ 53
Effective Time............................................................. 37
Employee Benefits Agreement................................................ 38
Engagement Letter.......................................................... 51
ERISA...................................................................... 72
Ernst & Young.............................................................. 95
Exchange Agent............................................................. 71
Exchange Fund.............................................................. 71
Exchange Ratio............................................................. 38
Fair Market Value at the Effective Time.................................... 38
FTC........................................................................ 53
General Intellectual Property Assignment and Renunciation.................. 38
Goldman Sachs.............................................................. 38
Guaranty Agreement......................................................... 76
Home Equity Companies...................................................... 48
HSR Act.................................................................... 53
IBES....................................................................... 46
</TABLE>
99
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM PAGE
- ------------ ----
<S> <C>
IBES Estimates............................................................. 46
Information Statement...................................................... 21
Insurance Operations....................................................... 44
IRS........................................................................ 51
IRS Ruling................................................................. 51
J.P. Morgan................................................................ 23
Life Insurance Companies................................................... 46
Life Insurance and Annuity Companies Combined.............................. 46
Losses..................................................................... 79
LTM........................................................................ 47
Meeting.................................................................... 21
Merger..................................................................... 21
Merger Agreement........................................................... 21
Merger Consideration....................................................... 37
Merger Proposal............................................................ 21
Merger/Spin-Off Transaction................................................ 39
M&R........................................................................ 39
M&R Appraisal.............................................................. 44
NASD....................................................................... 89
New York Shares............................................................ 57
NYSE....................................................................... 38
Offer...................................................................... 36
Option Adjustment Ratio.................................................... 76
PAG........................................................................ 41
PCM........................................................................ 41
PDI........................................................................ 41
P/E........................................................................ 39
Proposals.................................................................. 21
Providian.................................................................. 21
Providian Bancorp.......................................................... 21
Providian Bancorp Group.................................................... 79
Providian Bancorp Common Stock............................................. 21
Providian Bancorp Participants............................................. 82
Providian Board............................................................ 21
Providian By-laws.......................................................... 87
Providian Certificate...................................................... 87
Providian Common Stock..................................................... 21
Providian Group............................................................ 80
Providian Plan............................................................. 76
Providian Rights Agreement................................................. 75
Providian SAR.............................................................. 76
Providian Stock Option..................................................... 76
Ratio...................................................................... 82
Sale....................................................................... 51
SEC........................................................................ 71
SEC Documents.............................................................. 79
Securities Act............................................................. 56
Selected Transactions...................................................... 47
Service Marks.............................................................. 83
SOP........................................................................ 28
Surviving Corporation...................................................... 21
</TABLE>
100
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM PAGE
- ------------ ----
<S> <C>
Tax Disaffiliation Agreement............................................... 38
Trademark License Agreement................................................ 38
Transition Period.......................................................... 82
Transition Services Agreement.............................................. 38
Transition Services........................................................ 82
Treaty..................................................................... 53
U.S........................................................................ 40
U.S. GAAP.................................................................. 95
Voting Securities.......................................................... 36
</TABLE>
101
<PAGE>
APPENDIX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AMENDED AND RESTATED
PLAN AND AGREEMENT OF
MERGER AND REORGANIZATION
AMONG
AEGON N.V.,
LT MERGER CORP.
AND
PROVIDIAN CORPORATION
DECEMBER 28, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE 1
THE SPIN-OFF............................................................. 1
1.1 The Spin-off......................................................... 1
1.2 Amendments to the Distribution Agreement............................. 1
1.3 Further Agreements with Spinco....................................... 2
ARTICLE 2
PLAN OF MERGER........................................................... 2
2.1 The Merger........................................................... 2
2.2 Conversion of Shares................................................. 2
2.3 Exchange of Certificates............................................. 3
2.4 Dividends............................................................ 4
2.5 Escheat Laws......................................................... 4
2.6 Closing of Company Transfer Books.................................... 5
ARTICLE 3
CLOSING.................................................................. 5
3.1 Time and Place of Closing............................................ 5
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF COMPANY................................ 5
4.1 Organization, Good Standing and Power................................ 5
4.2 Capitalization....................................................... 5
4.3 Company Subsidiaries; Voting Trusts.................................. 6
4.4 Authority; Enforceability............................................ 6
4.5 Non-Contravention; Consents.......................................... 6
4.6 SEC Reports; Company Financial Statements............................ 7
4.7 Statutory Statements................................................. 8
4.8 Absence of Certain Changes or Events................................. 8
4.9 Taxes and Tax Returns................................................ 9
4.10 Litigation.......................................................... 10
4.11 Contracts and Commitments........................................... 10
4.12 Registration Statement, Etc......................................... 10
4.13 Employee Benefit Plans.............................................. 10
4.14 Collective Bargaining; Labor Disputes; Compliance................... 12
4.15 Brokers and Finders................................................. 12
4.16 No Violation of Law................................................. 12
4.17 Indebtedness for Borrowed Money..................................... 13
4.18 Fairness Opinion.................................................... 13
4.19 Real Estate Operations.............................................. 13
4.20 DGCL Section 203.................................................... 14
4.21 Spin-off; Merger.................................................... 14
4.22 Voting Requirements................................................. 15
4.23 Business Operating Condition........................................ 15
4.24 Assets.............................................................. 15
4.25 Computer Software................................................... 15
4.26 Intellectual Property............................................... 16
4.27 Permits, Licenses and Franchises.................................... 16
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
4.28 Insurance Business.................................................. 16
4.29 Threats of Cancellation............................................. 16
4.30 Liabilities and Reserves............................................ 16
4.31 Separate Accounts................................................... 17
4.32 Funds............................................................... 17
4.33 Insurance........................................................... 17
4.34 Solvency of Spinco.................................................. 17
4.35 Investigation by Company............................................ 17
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF MERGER PARTNER AND SUB................. 18
5.1 Organization, Good Standing and Power................................ 18
5.2 Capitalization....................................................... 18
5.3 Merger Partner Subsidiaries; Voting Trusts........................... 19
5.4 Authority; Enforceability............................................ 19
5.5 Non-Contravention; Consents.......................................... 19
5.6 SEC Reports; Merger Partner Financial Statements..................... 20
5.7 Statutory Statements................................................. 21
5.8 Absence of Certain Changes or Events................................. 21
5.9 Taxes and Tax Returns................................................ 21
5.10 Litigation.......................................................... 22
5.11 Contracts and Commitments........................................... 22
5.12 Registration Statement, Etc......................................... 22
5.13 Employee Benefit Plans.............................................. 23
5.14 Collective Bargaining; Labor Disputes; Compliance................... 24
5.15 Brokers and Finders................................................. 24
5.16 No Violation of Law................................................. 24
5.17 Indebtedness for Borrowed Money..................................... 25
5.18 Environmental Liabilities........................................... 25
5.19 Merger Partner Ownership of Company Common Stock.................... 25
5.20 Interim Operations of Sub........................................... 25
5.21 Spin-off; Merger.................................................... 25
5.22 Business Operating Condition........................................ 26
5.23 Assets.............................................................. 26
5.24 Computer Software................................................... 26
5.25 Intellectual Property............................................... 26
5.26 Permits, Licenses and Franchises.................................... 26
5.27 Liabilities and Reserves............................................ 27
5.28 Insurance........................................................... 27
5.29 Investigation by Merger Partner..................................... 27
ARTICLE 6
CONDUCT AND TRANSACTIONS PRIOR TO EFFECTIVE TIME; CERTAIN COVENANTS...... 27
6.1 Access and Information............................................... 27
6.2 Conduct of Business Pending Merger................................... 28
6.3 Fiduciary Duties..................................................... 32
6.4 Certain Fees......................................................... 32
6.5 Amendment to Rights Plan............................................. 33
6.6 Takeover Statutes.................................................... 33
6.7 Consents............................................................. 33
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
6.8 Further Assurances................................................... 33
6.9 NYSE Listing......................................................... 34
6.10 Notice; Efforts to Remedy........................................... 34
6.11 Registration Statement; Stockholder Approvals....................... 34
6.12 Expenses............................................................ 34
6.13 Press Releases; Filings............................................. 35
6.14 Indemnification of Officers and Directors........................... 35
6.15 Tax Treatment....................................................... 35
6.16 Employee Benefits................................................... 35
6.17 Stock Options....................................................... 36
6.18 Aegon USA Guaranty.................................................. 37
6.19 Determination of Comparable Benefits................................ 37
6.20 Merger Partner Exchange Transaction................................. 37
6.21 Company Contracts................................................... 38
6.22 Agents.............................................................. 38
6.23 Litigation.......................................................... 39
6.24 Certain Reporting Requirements...................................... 39
6.25 Investment Company Act.............................................. 39
6.26 Ruling Request...................................................... 39
ARTICLE 7
CONDITIONS PRECEDENT TO MERGER........................................... 39
7.1 Conditions to Each Party's Obligations............................... 39
7.2 Conditions to Obligations of Company................................. 40
7.3 Conditions to Obligations of Merger Partner.......................... 41
ARTICLE 8
TERMINATION AND ABANDONMENT OF THE MERGER................................ 42
8.1 Termination.......................................................... 42
8.2 Effect of Termination and Abandonment................................ 43
ARTICLE 9
MISCELLANEOUS............................................................ 43
9.1 Waiver and Amendment................................................. 43
9.2 Non-Survival of Representations, Warranties and Agreements........... 43
9.3 Notices.............................................................. 43
9.4 Descriptive Headings; Interpretation................................. 45
9.5 Counterparts......................................................... 45
9.6 Entire Agreement..................................................... 45
9.7 GOVERNING LAW........................................................ 45
9.8 Severability......................................................... 45
9.9 Enforcement of Agreement............................................. 45
9.10 Assignment.......................................................... 46
9.11 Limited Liability................................................... 46
9.12 CONSENT TO JURISDICTION; SERVICE OF PROCESS......................... 46
</TABLE>
iii
<PAGE>
DEFINITION
<TABLE>
<S> <C>
Acquisition Proposal.................................. 6.2(f)
Agreement............................................. Introductory Paragraph
Association........................................... 5.4
Certificate........................................... 2.2(c)
Certificate of Merger................................. 2.1(a)
Closing............................................... 3.1
Closing Date.......................................... 3.1
Code.................................................. Recitals
Company............................................... Introductory Paragraph
Company Business Unit................................. 4.8
Company Collective Bargaining Agreements.............. 4.14
Company Common Stock.................................. 2.2(b)
Company Consolidated Financial Statements............. 4.6(b)
Company Controlled Group Liability.................... 4.13(b)
Company Employee Plans................................ 4.13(a)
Company Employees..................................... 6.16(b)
Company Entities...................................... 4.3
Company Insurance Contracts........................... 4.28
Company Insurance Subsidiary.......................... 4.7
Company Investment Assets............................. 4.24(a)
Company Permitted Liens and Encumbrances.............. 4.24(a)
Company Plan.......................................... 6.17(a)
Company Reports....................................... 4.6(a)
Company Rights........................................ 6.5
Company Rights Agreement.............................. 6.5
Company SAR........................................... 6.17(a)
Company Separate Accounts............................. 4.31(a)
Company Stock Option.................................. 6.17(a)
Company Subsidiaries.................................. 4.3
Confidentiality Agreements............................ 6.1(a)
DGCL.................................................. Recitals
Distribution Agreement................................ Recitals
Effective Time........................................ 2.1(a)
Environmental Laws.................................... 4.19(c)
ERISA................................................. 4.13(a)
Exchange Act.......................................... 4.6(a)
Exchange Agent........................................ 2.3(a)
Exchange Fund......................................... 2.3(a)
Exchange Ratio........................................ 2.2(c)
Fair Market Value at the Effective Time............... 2.2(c)
Fee Payment Event..................................... 6.3
Funds................................................. 4.32(a)
Goldman Sachs......................................... 4.15
HSR Act............................................... 4.4
Indemnified Parties................................... 6.14(a)
Insurance Laws........................................ 4.16(a)
IRS................................................... 4.9(c)
Knowledge of Company.................................. Introduction to Article 4
Knowledge of Merger Partner........................... Introduction to Article 5
Lender................................................ 4.19(g)
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C>
Manager.................................................. 4.32(b)
Material Adverse Effect on Company....................... 4.1
Material Adverse Effect on Merger Partner................ 5.1
Material to Merger Partner............................... 6.2(e)(xii)
Merger................................................... Recitals
Merger Partner........................................... Introductory Paragraph
Merger Partner Collective Bargaining Agreements.......... 5.14
Merger Partner Common Stock.............................. 2.2(c)
Merger Partner Consolidated Financial Statements......... 5.6(b)
Merger Partner Controlled Group Liability................ 5.13(b)
Merger Partner Employee Plans............................ 5.13(a)
Merger Partner Entities.................................. 5.3
Merger Partner Insurance Subsidiary...................... 5.7
Merger Partner Investment Assets......................... 5.23
Merger Partner Permitted Liens and Encumbrances.......... 5.23
Merger Partner Preferred Stock........................... 5.2
Merger Partner Reports................................... 5.6(a)
Merger Partner Subsidiary................................ 5.3
Merger Partner SARs...................................... 6.17(a)
1940 Act................................................. 4.31(a)
NYSE..................................................... 2.2(c)
Option Adjustment Ratio.................................. 6.17(a)
Outstanding Company Preferred Stock...................... 2.2(b)
Person................................................... 4.24(a)
Pivot Price.............................................. 2.2(c)
Plan..................................................... 6.1(b)
Process Agent............................................ 9.12(b)
Proxy Statement.......................................... 4.12
Real Estate Assets....................................... 4.19(a)
Registration Statement................................... 4.12
Retirement Plan.......................................... 6.2(c)(xii)
Ruling................................................... 7.1(g)
Ruling Request........................................... 6.26
SEC...................................................... 4.6(a)
Section 6.4 Fee.......................................... 6.4
Securities Act........................................... 4.6(a)
Share Price.............................................. 2.2(c)
Significant Brokers...................................... 6.22
Spinco................................................... Recitals
Spin-off................................................. Recitals
Spin-off Adjusted Financial Statements................... 4.6(c)
Stockholders' Meeting.................................... 4.12
Sub...................................................... Introductory Paragraph
Subsidiaries............................................. 6.1(a)
Surviving Corporation.................................... 2.1(a)
</TABLE>
v
<PAGE>
AMENDED AND RESTATED
PLAN AND AGREEMENT OF
MERGER AND REORGANIZATION
AMENDED AND RESTATED PLAN AND AGREEMENT OF MERGER AND REORGANIZATION (this
"Agreement"), dated as of December 28, 1996, by and among AEGON N.V., a
company formed under the laws of The Netherlands ("Merger Partner"), LT MERGER
CORP., a Delaware corporation and a wholly owned subsidiary of Merger Partner
("Sub"), and PROVIDIAN CORPORATION, a Delaware corporation ("Company"),
pursuant to the Amendment No. 1 and Consent, dated as of April 2, 1997,
between Merger Partner, Sub and Company, amending and restating the Plan and
Agreement of Merger, dated as of December 28, 1996, between Merger Partner,
Sub and Company.
WHEREAS, the Board of Directors of Company has approved a plan of
distribution embodied in the form of the agreement attached hereto as Exhibit
A and to be signed concurrently with this Agreement (the "Distribution
Agreement") which distribution, subject to the terms and conditions of the
Distribution Agreement, will be effected prior to the Effective Time (as
defined in Section 2.1(a)) and pursuant to which all of the shares of capital
stock of Providian Bancorp, Inc., a Delaware corporation and wholly owned
subsidiary of Company ("Spinco"), will be distributed on a pro rata basis to
Company's stockholders as provided in the Distribution Agreement (the "Spin-
off");
WHEREAS, Merger Partner has formed Sub as a wholly owned subsidiary
corporation under the Delaware General Corporation Law (the "DGCL") for the
purpose of Sub merging with and into Company following the Spin-off pursuant
to the applicable provisions of the DGCL (the "Merger") so that Company will
continue as the surviving corporation of the Merger and will become a wholly
owned subsidiary of Merger Partner;
WHEREAS, the respective Boards of Directors of Company, Merger Partner and
Sub have approved and declared advisable the Merger, the terms and provisions
of this Agreement and the transactions contemplated hereby;
WHEREAS, the respective Boards of Directors of Merger Partner and Company
have determined that the Merger is in furtherance of and consistent with their
respective long-term business strategies and is fair to and in the best
interests of their respective stockholders;
WHEREAS, for federal income tax purposes, it is intended that (a) the Spin-
off shall qualify as a tax-free distribution within the meaning of Section 355
of the Internal Revenue Code, as amended (the "Code"), and (b) the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Code, and this Agreement is intended to be and is adopted as a plan of
reorganization; and
WHEREAS, the Merger described herein is subject to the approval of the
stockholders of Company and applicable state and federal authorities, and
satisfaction of certain other conditions described in this Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
representations, warranties, covenants and agreements herein contained, the
parties agree as follows:
ARTICLE 1
THE SPIN-OFF
1.1 The Spin-off. Upon the terms and subject to the conditions of the
Distribution Agreement, Company shall use commercially reasonable efforts to
divest its interest in Spinco prior to the Effective Time through the
distribution of all of the outstanding shares of capital stock of Spinco on a
pro rata basis to the stockholders of Company as provided in the Distribution
Agreement.
1.2 Amendments to the Distribution Agreement. No amendments to the
Distribution Agreement shall be executed without the approval of Merger
Partner, which approval shall not be unreasonably withheld.
<PAGE>
1.3 Further Agreements with Spinco. Unless otherwise approved by Merger
Partner, which approval shall not be unreasonably withheld, except as
contemplated by this Agreement or the Distribution Agreement or as set forth
in Schedule 1.3, neither any new agreement between Spinco and Company or any
Company Subsidiary (as defined in Section 4.3) nor any material amendment to
any existing agreements between Spinco and Company or any Company Subsidiary
which survive the Distribution Date (as defined in the Distribution Agreement)
shall be executed.
ARTICLE 2
PLAN OF MERGER
2.1 The Merger
(a) Upon the terms and subject to the conditions of this Agreement, at the
Effective Time and in accordance with the provisions of this Agreement and the
DGCL, Sub shall be merged with and into Company, which shall be the surviving
corporation (sometimes referred to hereinafter as the "Surviving Corporation")
in the Merger, and the separate corporate existence of Sub shall cease.
Subject to the provisions of this Agreement, a certificate of merger (the
"Certificate of Merger") shall be duly prepared, executed and acknowledged by
Company, on behalf of the Surviving Corporation, and thereafter delivered to
the Secretary of State of the State of Delaware, for filing, as provided in
the DGCL on the Closing Date (as defined in Section 3.1). The Merger shall
become effective immediately following the Spin-off upon the filing of the
Certificate of Merger with the Secretary of State of the State of Delaware or
at such time thereafter as is provided in the Certificate of Merger (the
"Effective Time").
(b) From and after the Effective Time, the Merger shall have all the effects
set forth in the DGCL. Without limiting the generality of the foregoing, and
subject thereto, by virtue of the Merger and in accordance with the DGCL, all
of the properties, rights, privileges, powers and franchises of Company and
Sub shall vest in the Surviving Corporation and all of the debts, liabilities
and duties of Company and Sub shall become the debts, liabilities and duties
of the Surviving Corporation.
(c) The Certificate of Incorporation of Sub in effect immediately prior to
the Effective Time shall be the Certificate of Incorporation of the Surviving
Corporation until thereafter amended in accordance with the provisions thereof
and the DGCL.
(d) The Bylaws of Sub in effect immediately prior to the Effective Time
shall be the Bylaws of the Surviving Corporation until altered, amended or
repealed as provided therein, in the Certificate of Incorporation of the
Surviving Corporation and the DGCL.
(e) The officers and directors of Sub immediately prior to the Effective
Time shall be the initial officers and directors of the Surviving Corporation,
in each case until their respective successors are duly elected and qualified.
2.2 Conversion of Shares. As of the Effective Time, by virtue of the Merger
and without any action on the part of any holder thereof:
(a) Each share of capital stock of Sub that is issued and outstanding
immediately prior to the Effective Time shall be converted into and become
one fully paid and nonassessable share of Common Stock, par value $1 per
share, of the Surviving Corporation.
(b) All shares of common stock, par value $1 per share, of Company
("Company Common Stock") or other capital stock of Company that are owned
by Company as treasury stock or by any wholly owned Company Subsidiary
(other than the outstanding shares of Company Preferred Stock, par value $5
per share (the "Outstanding Company Preferred Stock"), and any shares of
Company Preferred Stock issued in exchange for the Outstanding Company
Preferred Stock) and any shares of Company Common Stock owned by Merger
Partner, Sub or any other wholly owned Merger Partner Subsidiary (as
defined in Section 5.3) shall be canceled and retired and shall cease to
exist and no stock of Merger Partner or other consideration
A-2
<PAGE>
shall be delivered in exchange therefor. Any shares of Outstanding Company
Preferred Stock (or any shares of Preferred Stock of Company issued in
exchange for, or upon conversion of, the Outstanding Company Preferred
Stock) which are outstanding immediately prior to the Merger shall continue
to be outstanding immediately following the Merger.
(c) Subject to Section 2.3(c), each share of Company Common Stock that is
issued and outstanding immediately prior to the Effective Time (other than
shares to be canceled in accordance with Section 2.2(b)) shall be converted
into a right to receive a number (the "Exchange Ratio") of shares, or
fraction thereof, of voting common stock, par value of one Dutch Guilder
per share, of Merger Partner ("Merger Partner Common Stock") determined by
dividing $28.00 by the Share Price (as defined below), subject to the
provisions of Section 8.1(b)(vi) or 8.1(c)(vi), if applicable. All such
shares of Company Common Stock, when so converted, shall no longer be
outstanding and shall automatically be canceled and retired and shall cease
to exist, and each certificate previously representing any such shares (a
"Certificate") shall thereafter represent the right to receive that number
of shares of Merger Partner Common Stock into which such shares of Company
Common Stock have been converted. Certificates previously representing
shares of Company Common Stock shall be exchanged for certificates
representing whole shares of Merger Partner Common Stock, and cash in lieu
of any fractional share, issued in consideration therefor upon the
surrender of such certificates in accordance with Section 2.3, without
interest. For purposes of this Agreement, (i) the term "Share Price" shall
be equal to the Fair Market Value at the Effective Time of one share of
Merger Partner Common Stock; provided, however, that if such Fair Market
Value at the Effective Time is less than $50.034, then the Share Price
shall be $50.034, and if such Fair Market Value at the Effective Time is
greater than $61.153, then the Share Price shall be $61.153; and (ii) the
term "Fair Market Value at the Effective Time" of one share of Merger
Partner Common Stock shall be the average during the 20 trading days
immediately preceding the last business day before the date of the
Effective Time of the average daily high and low prices per share of Merger
Partner Common Stock on the New York Stock Exchange ("NYSE").
(d) If after the date hereof and prior to the Effective Time, Merger
Partner shall have declared a stock split (including a reverse split) of
Merger Partner Common Stock or a dividend payable in Merger Partner Common
Stock or any other similar transaction, then the Exchange Ratio shall be
appropriately adjusted to reflect such stock split or dividend or similar
transaction.
(e) Each Company Stock Option (as defined in Section 6.17) and each
Company SAR (as defined in Section 6.17) shall be converted in accordance
with Section 6.17.
2.3 Exchange of Certificates.
(a) As of the Effective Time, Merger Partner shall deposit with Morgan
Guaranty Trust Company of New York, or such other bank or trust company
designated by Merger Partner and reasonably acceptable to Company (the
"Exchange Agent"), for the benefit of the holders of shares of Company Common
Stock, for exchange in accordance with this Article 2 through the Exchange
Agent, certificates representing the shares of Merger Partner Common Stock
(such shares of Merger Partner Common Stock, together with any dividends or
distributions with respect thereto or cash deposited by Merger Partner in
accordance with this Section 2.3, being hereinafter referred to as the
"Exchange Fund") issuable pursuant to Section 2.2 in exchange for outstanding
shares of Company Common Stock, together with cash to be paid in lieu of
fractional shares. The aggregate number of shares of Merger Partner Common
Stock which shall be issuable shall be a number of such shares equal to the
Exchange Ratio multiplied by the total number of outstanding shares of Company
Common Stock as of the Effective Time, subject to adjustments for nonissuance
of fractional shares as provided herein.
(b) As soon as practicable after the Effective Time, Merger Partner and the
Surviving Corporation shall cause the Exchange Agent to mail to each holder of
record of a Certificate or Certificates (i) a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to
the Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent accompanied by a properly executed letter of transmittal and
shall be in such form and have such other provisions as Merger Partner and
Company may reasonably
A-3
<PAGE>
specify), and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for certificates representing shares of Merger
Partner Common Stock. Upon the surrender to the Exchange Agent of one or more
Certificates for cancellation, together with such letter of transmittal, duly
executed, the holder will be entitled to receive certificates representing
that number of whole shares of Merger Partner Common Stock to be issued in
respect of the aggregate number of such shares of Company Common Stock
previously represented by the stock certificates surrendered based upon the
Exchange Ratio.
(c) No certificate or scrip representing fractional shares of Merger Partner
Common Stock shall be issued upon the surrender for exchange of Certificates,
and such fractional share interests will not entitle the owner thereof to vote
or to any rights as a stockholder of Merger Partner. All fractional shares of
Merger Partner Common Stock that a holder of Company Common Stock would
otherwise be entitled to receive as a result of the Merger shall be aggregated
and if a fractional share results from such aggregation, such holder shall be
entitled to receive, in lieu thereof, an amount in cash determined by
multiplying (i) the Fair Market Value at the Effective Time of one share of
Merger Partner Common Stock, by (ii) the fraction of a share of Merger Partner
Common Stock to which such holder would otherwise have been entitled. Merger
Partner shall timely make available to the Exchange Agent any cash necessary
to make payments in lieu of fractional shares as aforesaid. No such cash in
lieu of fractional shares of Merger Partner Common Stock shall be paid to any
holder of Company Common Stock until Certificates are surrendered and
exchanged in accordance with Section 2.3(a).
(d) If a certificate for Merger Partner Common Stock is to be sent to a
person other than the person in whose name the Certificates for shares of
Company Common Stock surrendered for exchange are registered, it shall be a
condition of the exchange that the person requesting such exchange shall pay
to the Exchange Agent any transfer or other taxes required by reason of the
delivery of such Certificate to a person other than the registered holder of
the Certificate surrendered, or shall establish to the satisfaction of the
Exchange Agent that such tax has been paid or is not applicable.
(e) The cash paid and shares of Merger Partner Common Stock issued upon the
surrender of Certificates in accordance with the terms hereof shall be deemed
to have been paid and issued in full satisfaction of all rights pertaining to
such shares of Company Common Stock.
2.4 Dividends. No dividends or other distributions that are declared or made
after the Effective Time with respect to Merger Partner Common Stock payable
to holders of record thereof after the Effective Time shall be paid to a
Company stockholder entitled to receive certificates representing Merger
Partner Common Stock until such stockholder has properly surrendered such
stockholder's Certificates. Upon such surrender, there shall be paid to the
stockholder in whose name the certificates representing such Merger Partner
Common Stock shall be issued any dividends which shall have become payable
with respect to such Merger Partner Common Stock between the Effective Time
and the time of such surrender, without interest. After such surrender, there
shall also be paid to the stockholder in whose name the certificates
representing such Merger Partner Common Stock shall be issued any dividend on
such Merger Partner Common Stock that shall have a record date subsequent to
the Effective Time and prior to such surrender and a payment date after such
surrender; provided that such dividend payments shall be made on such payment
dates. In no event shall the stockholders entitled to receive such dividends
be entitled to receive interest on such dividends. Any portion of the Exchange
Fund which remains undistributed to the stockholders of Company for six months
after the Effective Time pursuant to this Section 2.4 shall be returned by the
Exchange Agent to Merger Partner which shall thereafter act as Exchange Agent,
subject to the rights of holders of unsurrendered Certificates under this
Article 2.
2.5 Escheat Laws. Notwithstanding any other provision of this Article 2,
none of Merger Partner, Sub, Company, the Surviving Corporation, the Exchange
Agent or any other party hereto shall be liable to any holder of Company
Common Stock for any Merger Partner Common Stock, or dividends or
distributions thereon or cash in lieu of fractional shares, delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar laws.
A-4
<PAGE>
2.6 Closing of Company Transfer Books. At the Effective Time, the stock
transfer books of Company shall be closed and no transfer of Company Common
Stock shall thereafter be made. If, after the Effective Time, Certificates are
presented to the Surviving Corporation, they shall, when accompanied by proper
documentation, be exchanged for Merger Partner Common Stock in the manner
provided in this Article 2.
ARTICLE 3
CLOSING
3.1 Time and Place of Closing. Unless otherwise mutually agreed upon in
writing by Merger Partner and Company, the closing of the Merger (the
"Closing") will be held at 10:00 a.m., local time, on the later of (i) June 1,
1997, and (ii) the second business day following the date that all of the
conditions precedent specified in this Agreement have been (or can be at the
Closing) satisfied or waived by the party or parties permitted to do so (such
date being referred to hereinafter as the "Closing Date"). The place of
Closing shall be at the offices of King & Spalding, 191 Peachtree Street,
N.E., Atlanta, Georgia 30303, or at such other place as may be agreed between
Merger Partner and Company.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF COMPANY
Company hereby represents and warrants to Merger Partner as follows (the
words "to the Knowledge of Company" or "to Company's Knowledge" and any words
of similar import shall mean that any one of the persons listed in Exhibit B
has actual knowledge of the matter):
4.1 Organization, Good Standing and Power. Company is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Delaware and has all requisite corporate power and authority to own, lease
and operate its properties and to carry on its business as now being
conducted. Company is duly qualified or licensed to do business and is in good
standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties make such qualification or licensing
necessary, except where the failure to be so qualified or licensed or to be in
good standing would not, individually or in the aggregate, have a Material
Adverse Effect on Company (as defined below). Company has delivered to Merger
Partner complete and correct copies of its Certificate of Incorporation and
all amendments thereto to the date hereof and its Bylaws as amended to the
date hereof. As used in this Agreement, the phrase "Material Adverse Effect on
Company" means a material adverse effect on (a) the financial condition,
business or results of operations of Company and the Company Subsidiaries on a
consolidated basis or (b) the ability of Company to consummate the
transactions contemplated by this Agreement.
4.2 Capitalization. The authorized capital stock of Company as of the date
hereof consists of 300,000,000 shares of Common Stock, par value $1 per share,
of which as of December 20, 1996, 93,765,999 shares were issued and
outstanding, 6,000,000 shares of Preferred Stock, par value $5 per share, of
which as of the date hereof no shares are issued and outstanding (other than
467,400 shares which are held by a Company Subsidiary), and 25,000,000 shares
of Preference Stock, par value $.01 per share, of which as of the date hereof
no shares are issued or outstanding. All outstanding shares of Company Common
Stock are, and all shares which may be issued prior to the Effective Time
pursuant to any outstanding Company Stock Options will be, when issued, duly
authorized, validly issued, fully paid and nonassessable and not subject to
any preemptive rights. Except as set forth above, as of December 20, 1996,
there were no shares of capital stock or other equity securities of Company
outstanding, and, except as set forth in Schedule 4.2, there are no
outstanding options, warrants or rights to purchase or acquire from Company
any capital stock of Company, there are no existing registration covenants
with Company with respect to outstanding shares of Company Common Stock, and
there are no convertible securities or other contracts, commitments,
agreements, understandings, arrangements or restrictions by which Company is
bound to issue any additional shares of its capital stock or other securities.
A-5
<PAGE>
4.3 Company Subsidiaries; Voting Trusts. Schedule 4.3 sets forth a correct
and complete list of each corporation, association, subsidiary or other entity
of which Company owns or controls, directly or indirectly, more than 20% of
the outstanding equity securities (other than equity securities acquired in
the ordinary course of business for investment purposes which constitute more
than 20% but less than 35% of the outstanding equity securities of such issuer
and which, in the case of equity securities acquired prior to December 31,
1995, are listed in the annual statements of the Company Insurance
Subsidiaries), but excluding Spinco and any subsidiary, corporation,
association or other entity in which Company owns an indirect equity interest
exclusively through Spinco of which Spinco owns or controls, directly or
indirectly, more than 20% of the outstanding equity securities (such entities,
excluding Spinco and any entities so owned or controlled by Spinco, are
hereinafter referred to as "Company Entities"). Any Company Entity of which
Company owns or controls, directly or indirectly, more than 50% of the
outstanding equity securities is hereinafter referred to individually as a
"Company Subsidiary" and such entities are referred to collectively as the
"Company Subsidiaries." Except as disclosed in Schedule 4.3, Company owns,
directly or indirectly, the securities of each Company Entity held by Company,
free and clear of all liens, charges, pledges, security interests or other
encumbrances. All of the capital stock of each Company Subsidiary has been
duly authorized, and is validly issued, fully paid and nonassessable. There
are no outstanding options or rights to subscribe to, or any contracts or
commitments to issue or sell any shares of the capital stock or any securities
or obligations convertible into or exchangeable for, or giving any person any
right to acquire, any shares of the capital stock of any Company Entity to
which Company or any Company Subsidiary is a party. There are no voting trusts
or other agreements or understandings with respect to the voting of capital
stock of Company or any Company Subsidiary to which Company or any Company
Subsidiary is a party. Each Company Subsidiary is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation, and has the corporate power and authority
necessary for it to own or lease its properties and assets and to carry on its
business as it is now being conducted, except where the failure to be so
organized, existing or in good standing or to have such power and authority
would not, individually or in the aggregate, have a Material Adverse Effect on
Company. Each Company Subsidiary is duly qualified or licensed to do business
and is in good standing in each jurisdiction in which the nature of its
business or the ownership or leasing of its properties makes such
qualification or licensing necessary, except where the failure to be so
qualified or licensed or to be in good standing would not, individually or in
the aggregate, have a Material Adverse Effect on Company.
4.4 Authority; Enforceability. Company has the corporate power and authority
to enter into this Agreement and to consummate the transactions contemplated
hereby, subject to the approval of this Agreement by the stockholders of
Company and approval of this Agreement and the Distribution Agreement by
insurance regulatory authorities and banking regulatory authorities, and
subject to compliance with the provisions of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"). Subject to such
approvals and compliance, the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Company, and this Agreement
has been duly executed and delivered by Company and constitutes the valid and
binding obligation of Company, enforceable against it in accordance with its
terms, (i) except as may be limited by bankruptcy, insolvency, moratorium or
other similar laws affecting or relating to enforcement of creditors' rights
generally and (ii) subject to general principles of equity.
4.5 Non-Contravention; Consents.
(a) Except as set forth in Schedule 4.5(a), neither the execution, delivery
and performance by Company of this Agreement or the Distribution Agreement,
nor the consummation by Company of the transactions contemplated hereby or the
Spin-off, nor compliance by Company with any of the provisions hereof or the
Distribution Agreement, will:
(i) violate, conflict with, result in a breach of any provision of,
constitute a default (or an event that, with notice or lapse of time or
both, would constitute a default) under, result in the termination of,
accelerate the performance required by, or result in a right of termination
or acceleration, or the creation of any lien, security interest, charge or
encumbrance upon any of the properties or assets of Company, under any of
the
A-6
<PAGE>
terms, conditions or provisions of, (x) its Certificate of Incorporation or
Bylaws, or (y) any note, bond, mortgage, indenture, deed of trust, license,
lease, contract, agreement or other instrument or obligation to which
Company or any of the Company Subsidiaries is a party, or by which Company
or any of the Company Subsidiaries may be bound, or to which Company or any
of the Company Subsidiaries or the properties or assets of any of them may
be subject, and that would, in any such event specified in this clause (y),
have, individually or in the aggregate, a Material Adverse Effect on
Company; or
(ii) subject to compliance with the statutes and regulations referred to
in Section 4.5(b), violate any valid and enforceable judgment, ruling,
order, writ, injunction, decree, or any statute, rule or regulation
applicable to Company or any of the Company Subsidiaries or any of their
respective properties or assets where such violation would, individually or
in the aggregate, have a Material Adverse Effect on Company.
(b) Except as set forth in Schedule 4.5(b) and other than notices, filings,
authorizations, exemptions, consents or approvals, the failure of which to
give or obtain would not, individually or in the aggregate, have a Material
Adverse Effect on Company, no notice to, filing with, authorization of,
exemption by, or consent or approval of, any governmental authority or other
regulatory body is necessary for the consummation by Company of the
transactions contemplated by this Agreement.
4.6 SEC Reports; Company Financial Statements.
(a) Since January 1, 1995, Company has timely filed all reports,
registration statements, proxy statements or information statements and all
other documents, together with any amendments required to be made thereto,
required to be filed with the Securities and Exchange Commission ("SEC") under
the Securities Act of 1933 (the "Securities Act") or the Securities Exchange
Act of 1934 (the "Exchange Act") (collectively, the "Company Reports").
Company has heretofore made available to Merger Partner true copies of all the
Company Reports, together with all exhibits thereto, that Merger Partner has
requested. Included in such Company Reports are (i) audited consolidated
balance sheets of Company and its subsidiaries at December 31, 1994 and 1995
and the related consolidated statements of income, stockholders' equity and
cash flows for the years then ended, and the notes thereto and (ii) the
unaudited consolidated balance sheets of Company and its subsidiaries at March
31, 1996, June 30, 1996 and September 30, 1996 and the related unaudited
consolidated statements of income, stockholders' equity and cash flows for the
periods then ended and the notes thereto.
(b) All of the financial statements included in the Company Reports (which
are collectively referred to herein as the "Company Consolidated Financial
Statements") fairly presented in all material respects the consolidated
financial position of Company and its subsidiaries as at the dates mentioned
and the consolidated results of operations, changes in stockholders' equity
and cash flows for the periods then ended in conformity with generally
accepted accounting principles applied on a consistent basis (subject to any
exceptions as to consistency specified therein or as may be indicated in the
notes thereto or in the case of the unaudited statements, as may be permitted
by Form 10-Q of the SEC and subject, in the case of unaudited statements, to
normal, recurring audit adjustments). As of their respective dates, the
Company Reports complied in all material respects with all applicable rules
and regulations promulgated by the SEC and did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading. Except as set
forth in the Company Reports, neither Company nor any Company Subsidiary has
any liabilities or obligations of any nature (whether accrued, absolute,
contingent or otherwise) required by generally accepted accounting principles
to be set forth on a consolidated balance sheet of Company and its
consolidated subsidiaries or in the notes thereto, other than liabilities or
obligations which would not individually or in the aggregate reasonably be
expected to have a Material Adverse Effect on Company.
(c) Company has delivered to Merger Partner an unaudited pro forma
consolidated balance sheet of Company and the Company Subsidiaries
(specifically excluding Spinco and its subsidiaries) at September 30, 1996 and
the related unaudited pro forma consolidated statements of income and
stockholders' equity for the period then ended, and the notes thereto (the
"Spin-off Adjusted Financial Statements"). Such Spin-Off
A-7
<PAGE>
Adjusted Financial Statements fairly presented in all material respects the
consolidated pro forma financial position of Company and the Company
Subsidiaries (specifically excluding Spinco and its subsidiaries) as at the
date mentioned and the consolidated pro forma results of operations and pro
forma changes in stockholders' equity for the period then ended in conformity
with generally accepted accounting principles applied on a consistent basis
(subject to any exceptions as to consistency specified therein or as may be
indicated in the notes thereto or as may be permitted by Form 10-Q of the SEC
and subject to normal, recurring audit adjustments).
4.7 Statutory Statements. Company has previously furnished to Merger Partner
the annual statements of each Company Subsidiary that is engaged in the
business of insurance (a "Company Insurance Subsidiary") for the years ended
December 31, 1994 and December 31, 1995, which have been filed with the
insurance regulatory authority of the jurisdiction of organization of such
Company Insurance Subsidiary, and statutory statements, where required, for
each such company for the periods ended March 31, 1996, June 30, 1996 and
September 30, 1996, and Company shall promptly furnish to Merger Partner all
statutory statements for any calendar years or quarters ending thereafter but
prior to the Effective Time. Except as set forth in Schedule 4.7, such
statutory statements present or will present fairly in all material respects
the admitted assets, liabilities and surplus of each Company Insurance
Subsidiary at the end of each of the periods then ended, and the results of
its operations and changes in its surplus for each of the periods then ended
in conformity with accounting practices prescribed or permitted by the
insurance regulatory authority of the jurisdiction of organization of such
Company Insurance Subsidiary, applied on a consistent basis as and to the
extent described in such statutory statements.
4.8 Absence of Certain Changes or Events. Except as disclosed in Schedule
4.8 and the Company Reports and except for transactions contemplated by this
Agreement or the Distribution Agreement, since December 31, 1995, Company and
the Company Subsidiaries have conducted their business in all material
respects only in the ordinary course, and there has not been (i) any change in
the business, financial condition or results of operations of Company and
Company Subsidiaries which has had a Material Adverse Effect on Company, (ii)
any declaration, setting aside or payment of any dividend or other
distribution (whether in cash, stock or property) with respect to any of
Company's outstanding capital stock, except regular quarterly cash dividends
with respect to the Company Common Stock, (iii) any split, combination or
reclassification of any of Company's outstanding capital stock or any issuance
or the authorization of any issuance of any other securities in respect of, in
lieu of or in substitution for shares of Company's outstanding capital stock,
(iv) (x) any granting by Company or any Company Subsidiary to any executive
officer or other employee of Company or any Company Subsidiary of any increase
in compensation, except for increases which in the aggregate are in the
ordinary course of business consistent with prior practice or as was required
under employment agreements in effect as of December 31, 1995, (y) any
granting by Company or any Company Subsidiary to any such executive officer or
other employee of any increase in severance or termination pay, except (A) for
obligations which have been satisfied prior to the date hereof, (B) for
increases in the ordinary course of business in any one case not in excess of
$25,000, or (C) as was required under any employment, severance or termination
agreements in effect as of December 31, 1995 or (z) any entry by Company or
any Company Subsidiary into any new severance or termination agreement with
any such executive officer or other employee (other than (A) for obligations
which have been satisfied prior to the date hereof, and (B) new severance or
termination obligations in the ordinary course of business in any one case not
in excess of $25,000), (v) any significant change in accounting methods,
principles or practices by Company or any Company Subsidiary materially
affecting its assets, liabilities or business, except insofar as may be
appropriate to conform to changes in statutory accounting rules or generally
accepted accounting principles, or (vi) except for changes in a manner
consistent with past practice or consistent with industry standards, any
material change in the underwriting, pricing, actuarial or investment
practices or policies of any Company Business Unit (as defined below).
Notwithstanding the foregoing, the representation contained in this Section
4.8 shall not apply to any change or development, or combination of changes or
developments, to the extent such changes and developments are the result of
adverse changes in general economic conditions, stock market fluctuations or
conditions or adverse changes in or affecting the insurance industry
generally. As used in this Agreement, the term "Company Business Unit" shall
mean the business segments of the Company identified as of the date hereof as
Providian Direct Insurance, Providian Agency Group and Providian Capital
Management.
A-8
<PAGE>
4.9 Taxes and Tax Returns.Except as disclosed in Schedule 4.9 or as otherwise
disclosed to Merger Partner in writing:
(a) Company and the Company Subsidiaries have (i) duly filed (or there has
been filed on their behalf) with appropriate governmental authorities all tax
returns required to be filed by them, on or prior to the date hereof, except to
the extent that any failure to file would not, individually or in the
aggregate, have a Material Adverse Effect on Company, and (ii) duly paid in
full or made provisions in accordance with generally accepted accounting
principles (or there has been paid or provision has been made on their behalf)
for the payment of all taxes for all periods ending on or prior to the date
hereof, except to the extent that any failure to fully pay or make provision
for the payment of such taxes would not, individually or in the aggregate, have
a Material Adverse Effect on Company;
(b) no federal, state, local or foreign audits or other administrative
proceedings or court proceedings are presently pending with regard to any taxes
or tax returns of Company or the Company Subsidiaries wherein an adverse
determination or ruling in any one such proceeding or in all such proceedings
in the aggregate would have a Material Adverse Effect on Company;
(c) the federal income tax returns of Company and the Company Subsidiaries
have been examined by the Internal Revenue Service ("IRS") (or the applicable
statutes of limitation for the assessment of federal income taxes for such
periods have expired) for all periods through and including December 31, 1992,
and no material deficiencies were asserted as a result of such examinations
that have not been resolved and fully paid. Neither Company nor any of the
Company Subsidiaries has granted any requests, agreements, consents or waivers
to extend the statutory period of limitations applicable to the assessment of
any taxes with respect to any tax returns of Company or any of the Company
Subsidiaries;
(d) neither Company nor any of the Company Subsidiaries is a party to any tax
sharing or material tax indemnity agreement;
(e) any amount that could be received (whether in cash or property or the
vesting of property) as a result of any of the transactions contemplated by
this Agreement by any employee, officer or director of Company or any Company
Subsidiary who is a "disqualified individual" (as such term is defined in
proposed Treasury Regulation Section 1.280G-1) under any employment, severance
or termination agreement, other compensation arrangement or Company Benefit
Plan currently in effect would not be characterized as an "excess parachute
payment" (as such term is defined in Section 280G(b)(1) of the Code). In
addition, Section 162(m) of the Code will not apply to any amount paid or
payable by Company or any Company Subsidiary under any contract or Company
Employee Plan currently in effect;
(f) all annuity contracts and life insurance policies issued by a Company
Insurance Subsidiary meet all definitional or other requirements for
qualification under the Code applicable (or intended to be applicable) to such
annuity contracts or life insurance policies, including, without limitation,
the following: (A) any life insurance policies meet the requirements of
Sections 101(f) or 7702 of the Code, as applicable; (B) any annuity contracts
that are intended to qualify as "annuity contracts" (excluding contracts that
are described in Section 72(s) of the Code) meet the requirements of Section
72(s) of the Code; (C) any annuity contracts that are intended to qualify under
Sections 130, 403(a), 403(b) or 408(b) of the Code contain all provisions
required for qualification under such sections of the Code; and (D) any annuity
contracts that are marketed as, or in connection with, plans that are intended
to qualify under Sections 401, 403, 408 or 457 of the Code comply with the
requirements of such sections; except in the case of any of the foregoing to
the extent that any failure to so meet such requirements has not and would not,
individually or in the aggregate, have a material adverse effect on (A) the
financial condition, business or results of operations of any Company Business
Unit or (B) the ability of Company to consummate the transactions contemplated
by this Agreement; and
(g) as used in this Agreement, "taxes" shall include all Federal, state,
local and foreign income, property, premium, sales, excise, employment,
payroll, withholding and other taxes.
A-9
<PAGE>
4.10 Litigation. Except as disclosed in Schedule 4.10 or in the Company
Reports, neither Company nor any Company Subsidiary is a party to any pending
or, to the Knowledge of Company, threatened claim, action, suit, investigation
or proceeding which would reasonably be expected to have, either individually
or in the aggregate, a Material Adverse Effect on Company. Except as disclosed
in Schedule 4.10, at the date of this Agreement, neither Company nor any
Company Insurance Subsidiary has received actual notice of any proceeding,
claim or investigation pending or threatened against Company or any Company
Insurance Subsidiary before any insurance department or agency which would
reasonably be expected to have, either individually or in the aggregate, a
Material Adverse Effect on Company. Except as disclosed in Schedule 4.10, at
the date of this Agreement there is no outstanding order, writ, judgment,
stipulation, injunction, decree, determination, award or other decision
against Company or any Company Subsidiary which, either individually or in the
aggregate, has had or would have a Material Adverse Effect on Company.
4.11 Contracts and Commitments. Neither Company nor any Company Subsidiary
has received notice from any person alleging that Company or any Company
Subsidiary is in default under any contracts within the scope of Section 6.21
as to which it is reasonably foreseeable that an adverse determination would
result, individually or in the aggregate, in a Material Adverse Effect on
Company.
4.12 Registration Statement, Etc. None of the information supplied or to be
supplied by Company for inclusion or incorporation by reference in (a) the
Registration Statement to be filed by Merger Partner with the SEC in
connection with the Merger Partner Common Stock to be issued in the Merger
(the "Registration Statement"), (b) the Proxy Statement (the "Proxy
Statement") to be mailed to Company's stockholders in connection with the
meeting (the "Stockholders' Meeting") to be called to consider the Merger, and
(c) any other documents to be filed with the SEC in connection with the
transactions contemplated hereby (including the Registration Statement on Form
10 or, if applicable, Form S-1 to be filed in connection with the Spin-off)
will, at the respective times such documents are filed and at the time such
documents become effective or at the time any amendment or supplement thereto
becomes effective contain any untrue statement of a material fact, or omit to
state any material fact required or necessary in order to make the statements
therein not misleading; and, in the case of the Registration Statement, when
it becomes effective or at the time any amendment or supplement thereto become
effective, cause the Registration Statement or such supplement or amendment to
contain any untrue statement of a material fact, or omit to state any material
fact required to be stated therein or necessary in order to make the
statements therein not misleading; or, in the case of the Proxy Statement,
when first mailed to the stockholders of Company, or in the case of the Proxy
Statement or any amendment thereof or supplement thereto, at the time of the
Stockholders' Meeting, cause the Proxy Statement or any amendment thereof or
supplement thereto to contain any untrue statement of a material fact, or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading. All documents that Company is responsible for
filing with the SEC and any other regulatory agency in connection with the
Merger will comply as to form in all material respects with the provisions of
applicable law and any applicable rules or regulations thereunder, except that
no representation is made by Company with respect to statements made therein
based on information supplied by Merger Partner or with respect to information
concerning Merger Partner or Sub which is incorporated by reference in the
Registration Statement or the Proxy Statement.
4.13 Employee Benefit Plans.
(a) Schedule 4.13 contains a list of each material plan, program,
arrangement, practice or contract which is maintained by Company or any
Company Subsidiary or to which Company or any Company Subsidiary is obligated
to make contributions and which provides benefits or compensation to or on
behalf of employees, including but not limited to executive arrangements (for
example, any bonus, incentive compensation, stock option, deferred
compensation, commission, severance, golden parachute or other executive
compensation plans, programs, contracts or arrangements) and "employee benefit
plans" as defined in Section 3(1) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"). All such plans, programs, arrangements,
practices or contracts are referred to herein as "Company Employee Plans."
Company has made available to Merger Partner the plan documents or other
writing constituting each Company Employee Plan and, if applicable,
A-10
<PAGE>
the trust, insurance contract or other funding arrangement, the ERISA summary
plan description and the most recent Forms 5500 and annual reports for each
such plan. Company has identified those Company Employee Plans which Company
intends to satisfy the requirements of Section 401 of the Code and has made
available to Merger Partner accurate copies of the most recent favorable
determination letters for such plans.
(b) With respect to each Company Employee Plan that is subject to Title IV
or Section 302 of ERISA or Section 412 or 4971 of the Code: (i) there does not
exist any accumulated funding deficiency within the meaning of Section 412 of
the Code or Section 302 of ERISA, whether or not waived; (ii) no reportable
event within the meaning of Section 4043(c) of ERISA with respect to which the
30-day notice period has not been waived has occurred before the date of this
Agreement, nor will any such event occur after the date of this Agreement
except by reason of the Spin-off; and (iii) all premiums required to be paid
to the Pension Benefit Guaranty Corporation have been timely paid in full.
There does not now exist, nor do any circumstances exist that could result in,
any Company Controlled Group Liability (as defined below) that would be a
liability of Company or any Company Subsidiary following the Effective Time.
"Company Controlled Group Liability" means any and all liabilities under (i)
Title IV of ERISA, (ii) Section 302 of ERISA, (iii) Sections 412 and 4971 of
the Code and (iv) the continuation coverage requirements of Section 601 et
seq. of ERISA and Section 4980B of the Code, other than such liabilities that
arise solely out of, or relate solely to, the Company Employee Plans.
(c) Neither Company nor any Company Subsidiary is, or has been, a
participant in a multi-employer plan (within the meaning of ERISA Section
3(37)). Except as set forth in Schedule 4.13, neither Company nor any Company
Subsidiary maintains or has at any time maintained a Company Employee Plan
which is subject to Title IV of ERISA. Except as set forth in Schedule 4.13,
neither Company nor any Company Subsidiary is obligated to provide post
employment or retirement medical benefits or any other unfunded welfare
benefits to or on behalf of any person who is no longer an employee of Company
or any Company Subsidiary, except for health continuation coverage as required
by Section 4980B of the Code or Part 6 of Title I of ERISA.
(d) Except as set forth in Schedule 4.13, (i) each Company Employee Plan has
at all times been maintained, by its terms and in operation, in accordance
with all applicable laws, and (ii) each of those Company Employee Plans which
are intended to be qualified under Section 401 of the Code has at all times
been maintained, by its terms and in operation, in accordance with Section 401
of the Code, in each case except where a failure to be so maintained would not
have a Material Adverse Effect on Company. Except as set forth in Schedule
4.13, as of December 31, 1995, neither Company nor any of the Company
Subsidiaries had any liability under any Company Employee Plan that was not
reflected in the Company audited consolidated balance sheet at December 31,
1995 or disclosed in the notes thereto, other than liabilities which
individually or in the aggregate would not have a Material Adverse Effect on
Company.
(e) Except as set forth in Schedule 4.13, to the Knowledge of Company, no
prohibited transaction has occurred with respect to any Company Employee Plan
maintained by Company or any of the Company Subsidiaries that would result,
directly or indirectly, in the imposition of an excise tax or other liability
under the Code or ERISA, except for such a tax or other liability that would
not have a Material Adverse Effect on Company.
(f) Except as set forth in Schedule 4.13, all contributions or premium
payments with respect to the Company Employee Plans due for any period ending
on or before the Effective Time have been or will be timely paid by Company.
Except as set forth in Schedule 4.13, the execution of or performance of the
transactions contemplated by this Agreement will not create, accelerate or
increase any obligations under the Company Employee Plans which would have a
Material Adverse Effect on Company.
(g) Neither Spinco nor any entity owned or controlled by Spinco is, or has
been, a participant in a multi-employer plan (within the meaning of ERISA
Section 3(37)) or has maintained or contributed to a plan that is subject to
Title IV of ERISA.
A-11
<PAGE>
4.14 Collective Bargaining; Labor Disputes; Compliance. The only collective
bargaining agreements to which Company or any of the Company Subsidiaries is a
party are set forth in Schedule 4.14 (the "Company Collective Bargaining
Agreements"). Except as set forth in Schedule 4.14, to the Knowledge of
Company, the employees of Company and the Company Subsidiaries are not
represented by any unions other than the unions which are parties to the
Company Collective Bargaining Agreements. Except as set forth in Schedule
4.14, neither Company nor any of the Company Subsidiaries is currently, nor
has been during the past three years, the subject of any certification or
decertification organization drive. Neither Company nor any of the Company
Subsidiaries is currently, nor has been during the past three years, the
subject of any strike relating to Company or any of the Company Subsidiaries
nor, to the Knowledge of Company, is any such activity threatened. Each of
Company and each Company Subsidiary has complied with all laws relating to the
employment and safety of labor, including provisions relating to wages, hours,
benefits, collective bargaining and all applicable occupational safety and
health acts, laws and regulations except, in each case, where the failure to
be in compliance would not, individually or in the aggregate, have a Material
Adverse Effect on Company. Each of Company and the Company Subsidiaries has
complied with the terms of each collective bargaining agreement to which it is
a party or is bound, except where the failure to so comply would not have,
individually or in the aggregate, a Material Adverse Effect on Company.
4.15 Brokers and Finders. Neither Company nor any of the Company
Subsidiaries, nor any of their respective officers, directors or employees,
has employed any broker or finder or incurred any liability for any financial
advisory fees, brokerage fees, commissions, or finder's fees, and no broker or
finder has acted directly or indirectly for Company or any of the Company
Subsidiaries, in connection with this Agreement or any of the transactions
contemplated hereby, except that Company has retained Goldman, Sachs & Co.
("Goldman Sachs") as its financial advisor, whose fees and expenses will be
paid by Company.
4.16 No Violation of Law.
(a) The business and operations of the Company Insurance Subsidiaries have
been conducted in compliance with all applicable statutes and regulations
regulating the business of insurance and all applicable orders and directives
of insurance regulatory authorities and market conduct recommendations
resulting from market conduct examinations of insurance regulatory authorities
(collectively, "Insurance Laws"), except where the failure to so conduct such
business and operations would not individually or in the aggregate have a
Material Adverse Effect on Company. Notwithstanding the generality of the
foregoing, except where the failure to do so would not have, individually or
in the aggregate, a Material Adverse Effect on Company and except as set forth
in Schedule 4.16, each Company Insurance Subsidiary and its agents have
marketed, sold and issued insurance products in compliance, in all material
respects, with all statutes, laws, ordinances, rules, orders and regulations
applicable to the business of such Company Insurance Subsidiary and in the
respective jurisdictions in which such products have been sold, including,
without limitation, in compliance with (i) all applicable prohibitions against
"redlining," (ii) all applicable requirements relating to the disclosure of
the nature of insurance products as policies of insurance and (iii) all
applicable requirements relating to insurance product projections. In
addition, except as set forth in Schedule 4.16, (i) there is no pending or, to
the Knowledge of Company, threatened charge by any insurance regulatory
authority that any of the Company Insurance Subsidiaries has violated, nor any
pending or, to the Knowledge of Company, threatened investigation by any
insurance regulatory authority with respect to possible violations of, any
applicable Insurance Laws where such violations would have individually or in
the aggregate a Material Adverse Effect on Company; (ii) none of the Company
Insurance Subsidiaries is subject to any order or decree of any insurance
regulatory authority relating specifically to such Company Insurance
Subsidiary (as opposed to insurance companies generally) which would have
individually or in the aggregate a Material Adverse Effect on Company; and
(iii) the Company Insurance Subsidiaries have filed all reports required to be
filed with any insurance regulatory authority on or before the date hereof as
to which the failure to file such reports would have individually or in the
aggregate a Material Adverse Effect on Company.
(b) In addition to Insurance Laws, the business and operations of Company
and the Company Subsidiaries have been conducted in compliance with all other
applicable laws, ordinances, regulations and orders of all governmental
entities and other regulatory bodies (including, without limitation, laws,
ordinances, regulations
A-12
<PAGE>
and orders relating to zoning, environmental matters and the safety and health
of employees), except where such noncompliance, individually or in the
aggregate, would not have a Material Adverse Effect on Company. Except as set
forth in Schedule 4.16, in addition to Insurance Laws, (i) neither Company nor
any Company Subsidiary has been charged with or, to the Knowledge of Company,
is now under investigation with respect to, a violation of any applicable law,
regulation, ordinance, order or other requirement of a governmental entity or
other regulatory body, which violations or penalties would have, individually
or in the aggregate, a Material Adverse Effect on Company, (ii) neither
Company nor any Company Subsidiary is a party to or bound by any order,
judgment, decree or award of a governmental entity or other regulatory body
which has or will have, individually or in the aggregate, a Material Adverse
Effect on Company; and (iii) Company and the Company Subsidiaries have filed
all reports required to be filed with any governmental entity or other
regulatory body on or before the date hereof as to which the failure to file
such reports would result, individually or in the aggregate, in a Material
Adverse Effect on Company. Company and the Company Subsidiaries have all
permits, certificates, licenses, approvals and other authorizations required
in connection with the operation of the business of Company and the Company
Subsidiaries, except for permits, certificates, licenses, approvals and other
authorizations the failure of which to have would not, individually or in the
aggregate, have a Material Adverse Effect on Company and except for such
permits, certificates, licenses, approvals and other authorizations required
to be obtained in connection with the consummation of the transactions
contemplated hereby.
4.17 Indebtedness for Borrowed Money. Company has made available to Merger
Partner the instruments or other documents relating to all indebtedness of
Company or any Company Subsidiary for borrowed money the principal balance of
which is $10 million or more, whether such indebtedness is direct or indirect,
primary or secondary, by guarantee or otherwise.
4.18 Fairness Opinion. The Board of Directors of Company has received an
opinion dated December 28, 1996 from Goldman Sachs to the effect that as of
such date the consideration to be received by the stockholders of Company
pursuant to the Spin-off and the Merger, taken together, is fair to such
stockholders.
4.19 Real Estate Operations. Except as otherwise would not have a Material
Adverse Effect on Company:
(a) Schedules A, B, BA and D of the statutory statements of the Company
Insurance Subsidiaries for the year ended December 31, 1995 contain true
and complete disclosures of all "Real Estate Owned" (Schedule A Assets),
"Mortgage Loans" (Schedule B Assets), "Partnership Interests" in
partnerships owning real estate (Schedule BA Assets) and "Credit Tenant
Loans and Industrial Revenue Bonds with Publicly Traded Borrowers"
(Schedule D) owned by the Company Insurance Subsidiaries as of December 31,
1995. All Real Estate Owned, Mortgage Loans and Partnership Interests owned
by Company or any Company Subsidiaries are collectively hereinafter
referred to as "Real Estate Assets." All information concerning the Real
Estate Assets in the statutory statements of the Company Insurance
Subsidiaries for the year ended December 31, 1995 is true and complete in
all material respects in the opinion of Company; all values expressed in
such statements fairly represent Company's opinion of the value of the Real
Estate Owned and Partnership Interests; and reserves taken in respect of
impairment to value of the Mortgage Loans are in the opinion of Company
adequate to fairly represent such impairment.
(b) All Real Estate Assets comply with all regulations of the applicable
authorities of the domiciliary jurisdiction of the Company Insurance
Subsidiary owning such assets to qualify as "admitted assets" pursuant to
the laws and regulations of such domicile.
(c) To the Knowledge of Company without inspection or inquiry other than
the most recent property inspection report, each Real Estate Owned asset
and all activities upon, or use or occupancy of, such assets are in
material compliance with all applicable laws, including Environmental Laws
(as defined below). For each Real Estate Owned asset and commercial
mortgage loan originated since 1989, Company has obtained an environmental
report covering the environmental condition of the asset. As used in this
Agreement, the term "Environmental Laws" shall mean all state, federal and
local laws and all rules and regulations promulgated thereunder governing
or in any way relating to the generation, handling, manufacturing,
A-13
<PAGE>
treatment, storage, use, transportation, spillage, leakage, dumping,
release, discharge or disposal of any contaminant, pollutant or hazardous
or toxic substance, material or waste, or other environmentally regulated
material including, but not limited to, those substances, materials and
wastes listed in the United States Department of Transportation Table (49
CRF 172.101) or by the Environmental Protection Agency as a hazardous
substance, material or waste or which is or becomes regulated under any
applicable local, state or federal law and all rules and regulations
promulgated thereunder, including, without limitation, any of the following
materials, wastes or substances: (i) petroleum and petroleum products, (ii)
asbestos in any form, (iii) polychlorinated biphenyls, (iv) urea
formaldehyde, (v) atmospheric radon at levels over four (4) picocuries per
cubic liter, (vi) those designated as a "hazardous substance" pursuant to
Section 311 of the Clean Water Act, 33 U.S.C. Section 1251 et seq. (33
U.S.C. Section 1321) or listed pursuant to Section 307 of the Clean Water
Act (33 U.S.C. Section 1317), (vii) those defined as a "hazardous
substance" pursuant to Section 1004 of the Resource Conservation and
Recovery Act, 42 U.S.C. Section 6901 et seq. (42 U.S.C. Section 6903), or
(viii) those defined as a "hazardous substance" pursuant to Section 101 of
the Comprehensive Environmental Response, Compensation and Liability Act,
42 U.S.C. Section 9601 et seq. (42 U.S.C. Section 9601). Neither Company
nor any Company Subsidiary has participated in the management of any of the
partnership properties or of the borrowers under the Mortgage Loans or has
participated in the management or operation of the real property encumbered
by any of the Mortgage Loans or any of the improvements located on said
real property. As used in this Section 4.19(c) "participated in the
management" shall have the meaning ascribed to such phrase in the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996
and "operation" shall have the meaning ascribed in 42 U.S.C. 6901 et. seq.
(d) Based solely on opinions from partnership counsel obtained upon the
acquisition of such partnership interests, all Schedule BA assets are valid
limited partnership interests in partnerships which are legally formed.
(e) Company or a Company Subsidiary is owner of a fee simple interest in
all Real Estate Owned assets and such assets are free and clear of prior
monetary liens and encumbrances, except for Company Permitted Liens and
Encumbrances (as defined in Section 4.24), and except as disclosed in the
statutory statements.
(f) Company or a Company Subsidiary is the sole named insured on a policy
of title insurance with respect to each of the Real Estate Assets (other
than Partnership Interests), and each of said title insurance policies
insures Company as the holder of a first priority mortgage in regard to
Mortgage Loans and as the fee simple owner in regard to Real Estate Owned.
(g) Company or the Company Subsidiary owning each Mortgage Loan asset
(hereinafter sometimes referred to as "Lender") has possession of the
original promissory note or notes creating such Mortgage Loan debt and all
other documents creating, evidencing or modifying the Mortgage Loan or its
terms and conditions. The lien associated with each Mortgage Loan
constitutes a first priority lien against the property purported to be
encumbered, subject to certain exceptions.
(h) To the Knowledge of Company, none of the Mortgage Loans is cross-
defaulted or cross-collateralized with a loan owned by Spinco.
4.20 DGCL Section 203. Assuming the accuracy of Merger Partner's
representations and warranties contained in Section 5.19, prior to the date
hereof Company has taken all appropriate actions so that the restrictions on
business combinations contained in DGCL Section 203 will not apply with
respect to or as a result of this Agreement, the Distribution Agreement, the
Merger or the Spin-off.
4.21 Spin-off; Merger. Neither Company nor any Company Subsidiary has taken
any action or failed to take any action which action or failure to take action
would jeopardize the Spin-off as a tax-free distribution within the meaning of
Section 355 of the Code or the Merger as a reorganization within the meaning
of Section 368(a) of the Code.
A-14
<PAGE>
4.22 Voting Requirements. The affirmative vote of the holders of a majority
of the shares of Company Common Stock with respect to this Agreement and the
Merger is the only vote of the holders of any class or series of Company's
capital stock necessary to approve this Agreement and the transactions
contemplated by this Agreement.
4.23 Business Operating Condition. Except as listed in Schedule 4.23 and
except as otherwise would not have a Material Adverse Effect on Company, all
furniture, fixtures, machinery and equipment necessary to conduct the
businesses and operations of Company and the Company Insurance Subsidiaries in
substantially the same manner as such businesses and operations are carried on
currently by Company and the Company Insurance Subsidiaries are in the
possession of Company and in good working order and condition for the purposes
for which they are currently used.
4.24 Assets.
(a) Except as set forth in Schedule 4.24 or as otherwise would not have a
Material Adverse Effect on Company and except for Company Permitted Liens and
Encumbrances (as defined below), Company and/or the Company Subsidiaries have
good and valid title to all personal property (including, without limitation,
Company Investment Assets (as defined below)) that was carried as an asset on
the Spin-off Adjusted Financial Statements or acquired in the ordinary course
of business since September 30, 1996, other than with respect to those assets
which have been disposed of in the ordinary course of business or redeemed in
accordance with their terms since such date or with respect to statutory
deposits which are subject to certain restrictions on transfer. As used in
this Agreement, "Company Permitted Liens and Encumbrances" means, as to any
assets or property, any (i) liens or encumbrances securing taxes, assessments
or other governmental charges which are not yet due or which are being
diligently contested in good faith by appropriate proceedings if adequate
reserves have been established in accordance with generally accepted
accounting principles or the statutory accounting principles and practices
prescribed or permitted by the insurance department of the state of domicile
of a Company Insurance Subsidiary, as appropriate, or, in the case of Mortgage
Loans, funds are held in escrow sufficient to discharge such liens or the
borrower has posted a bond in the amount of such lien, (ii) liens or
encumbrances imposed by law or incurred in the ordinary course of business
with respect to the claims of materialmen, mechanics, carriers, warehousemen,
landlords and other Persons (as defined below) which (A) are not yet due and
payable and which do not materially detract from the value of such property or
assets or materially impair the use thereof by Company and the Company
Subsidiaries in the operation of their respective businesses, or (B) are being
diligently contested in good faith and by proper proceedings if adequate
reserves have been established with respect thereto in accordance with
generally accepted accounting principles or the statutory accounting
principles and practices prescribed or permitted by the insurance department
of the state of domicile of a Company Insurance Subsidiary, as appropriate,
and (iii) liens and encumbrances that would not, individually or in the
aggregate, have a Material Adverse Effect on Company. As used in this
Agreement "Company Investment Assets" means bonds, stocks, mortgage loans or
other investments that are carried on the books and records of Company and the
Company Insurance Subsidiaries. As used in this Agreement, "Person" means any
individual, corporation, partnership, firm, joint venture, association, joint-
stock company, trust, unincorporated organization, governmental, judicial or
regulatory body, business unit, division or other entity.
(b) The annual statement of each Company Insurance Subsidiary for the year
ended December 31, 1995 sets forth a list, which list is accurate and complete
in all material respects, of all Company Investment Assets owned by such
Company Insurance Subsidiary as of December 31, 1995, together with the cost
basis book or amortized value, as the case may be, of such Company Investment
Assets as of December 31, 1995.
4.25 Computer Software. Company owns, or possesses valid license rights to,
all computer software programs that are material to the conduct of the
business of Company and the Company Insurance Subsidiaries taken as a whole.
Except as listed in Schedule 4.25, there are no infringement suits, actions or
proceedings pending or, to the Knowledge of Company, threatened against
Company or any Company Insurance Subsidiary with respect to any software owned
or licensed by Company or any Company Subsidiary, which, if determined
adversely, would have, either individually or in the aggregate, a Material
Adverse Effect on Company.
A-15
<PAGE>
4.26 Intellectual Property. Company owns, or possesses valid license rights
to, all intellectual property that is material to the conduct of the business
of Company and the Company Insurance Subsidiaries taken as a whole. Except as
listed in Schedule 4.26, Company has not received any notice of any conflict
with or violation or infringement of, any asserted rights of any other Person
with respect to any such intellectual property owned or licensed by Company or
any Company Insurance Subsidiary, which, if determined adversely, would have,
either individually or in the aggregate, a Material Adverse Effect on Company.
4.27 Permits, Licenses and Franchises. Schedule 4.27 lists (i) all
jurisdictions in which each Company Insurance Subsidiary is licensed to
transact the business of insurance and (ii) the lines of business which each
Company Insurance Subsidiary is authorized to transact in each such
jurisdiction. Except as listed in Schedule 4.27, to the Knowledge of Company,
except as otherwise would not have a material adverse effect on the financial
condition, business or results of operation of any Company Business Unit taken
as a whole, neither Company nor any Company Insurance Subsidiary has engaged
in any activity which would cause revocation or suspension of any license to
transact the business of insurance and no action or proceeding looking to or
contemplating the revocation or suspension of any license to transact the
business of insurance is pending or threatened.
4.28 Insurance Business. Except as listed in Schedule 4.28 and except as
otherwise would not have a Material Adverse Effect on Company, all policies,
binders, slips, certificates, annuity contracts and participation agreements
and other agreements of insurance, whether individual or group, in effect as
of the date hereof (including all supplements, endorsements, riders and
ancillary agreements in connection therewith) that are issued by the Company
Insurance Subsidiaries (the "Company Insurance Contracts"), are, to the extent
required under applicable law, on forms approved by applicable insurance
regulatory authorities or which have been filed and not objected to by such
authorities within the period provided for objection, and such forms comply in
all material respects with the insurance statutes, regulations and rules
applicable thereto. Premium rates established by the Company Insurance
Subsidiaries that are required to be filed with or approved by insurance
regulatory authorities have been so filed or approved, the premiums charged
conform thereto in all material respects, and such premiums comply in all
material respects with the insurance statutes, regulations and rules
applicable thereto, except where the failure to be so filed or approved, or to
so conform or comply, would not, individually or in the aggregate, have a
Material Adverse Effect on Company.
4.29 Threats of Cancellation. Except as disclosed in Schedule 4.29 and
except for terminations at maturity or in the ordinary course of business,
since January 1, 1996 and through the date hereof, no individual policyholder
(or individual party to a joinder agreement) which accounted for $5 million or
more in premium income and policyholder deposits for the year ended December
31, 1995 has terminated or, to the Knowledge of Company, has given written
notice of termination of, its relationship with any Company Insurance
Subsidiary.
4.30 Liabilities and Reserves.
(a) The reserves carried on the books of each Company Insurance Subsidiary
for the year ended December 31, 1995 for future insurance policy benefits,
losses, claims and similar purposes are in compliance in all material respects
with the requirements for reserves established by the insurance departments of
the state of domicile of such Company Insurance Subsidiary, were determined in
all material respects in accordance with generally accepted actuarial
standards consistently applied, and are fairly stated in all material respects
in accordance with sound actuarial principles. Company has delivered to Merger
Partner true, correct and complete copies of the actuarial valuation reports
delivered to the insurance department of the domiciliary state of each Company
Insurance Subsidiary for the years ended December 31, 1995 and 1994.
(b) Company has delivered to Merger Partner true, complete and correct
copies of all analyses, reports and other data prepared or submitted by any
Company Insurance Subsidiary to insurance regulatory authorities relating to
risk based capital calculations for the years ended December 31, 1995 and
1994.
(c) Except for regular periodic assessments in the ordinary course of
business or except as set forth in Schedule 4.30(c), no claim or assessment is
pending nor, to the Knowledge of Company, threatened against any
A-16
<PAGE>
Company Insurance Subsidiary by any state insurance guaranty association in
connection with such association's fund relating to insolvent insurers which
if determined adversely, would have, either individually or in the aggregate,
a Material Adverse Effect on Company.
4.31 Separate Accounts.
(a) Each separate account maintained by a Company Insurance Subsidiary is
listed in Schedule 4.31 (collectively, the "Company Separate Accounts").
Except as otherwise would not, individually or in the aggregate, have a
Material Adverse Effect on Company, each Company Separate Account is duly and
validly established and maintained under the laws of its state of formation
and is either excluded from the definition of an investment company pursuant
to Section 3(c)(11) of the Investment Company Act of 1940 (the "1940 Act") or
is duly registered as an investment company under the 1940 Act. Except as
otherwise would not, individually or in the aggregate, have a Material Adverse
Effect on Company, each such Company Separate Account, if registered, is
operated in compliance with the 1940 Act, has filed all reports and amendments
of its registration statement required to be filed, and has been granted all
exemptive relief necessary for its operations as presently conducted. Except
as otherwise would not, individually or in the aggregate, have a Material
Adverse Effect on Company, the Company Insurance Contracts under which Company
Separate Account assets are held are duly and validly issued and are either
exempt from registration under the Securities Act pursuant to Section 3(a)(2)
of the Securities Act or were sold pursuant to an effective registration
statement under the Securities Act, and any such registration statement is
currently in effect to the extent necessary to allow the appropriate Company
Insurance Subsidiary to receive contributions under such policies.
(b) Except as otherwise would not, individually or in the aggregate, have a
Material Adverse Effect on Company, to the extent required, the assets of each
Company Separate Account are adequately diversified within the meaning of
Section 817(h) of the Code.
4.32 Funds.
(a) Each of the mutual funds presently intended to be sponsored by a Company
Insurance Subsidiary is listed on Schedule 4.32 (the "Funds"). Except as
listed on Schedule 4.32 and except as otherwise would not have a Material
Adverse Effect on Company, (i) each Fund will be duly registered with the SEC
as an open-end management investment company under the 1940 Act, (ii) each
Fund will be in material compliance with the 1940 Act and the SEC regulations
promulgated thereunder, including the requirements to file semi-annual or
annual reports on N-SAR with the SEC, (iii) all shares of the Funds will be
duly registered under the Securities Act and any applicable state securities
laws, and (iv) each of the Funds will be duly incorporated and in good
standing under the laws of the state of its incorporation or will be a validly
existing business trust under the laws of the jurisdiction in which it was
formed.
(b) Except as otherwise would not have a Material Adverse Effect on Company,
Providian Investment Advisors, Inc. (the "Manager") is duly registered under
the Investment Advisers Act of 1940.
4.33 Insurance. The insurance maintained by Company and the Company
Subsidiaries insures against risks and liabilities to the extent and in the
manner reasonably deemed appropriate and sufficient by Company or such Company
Subsidiary, and the coverage provided thereunder will not be materially and
adversely affected by the Merger. Schedule 4.33 sets forth a list of the
insurance policies held by Company relating to directors' and officers'
liability insurance.
4.34 Solvency of Spinco. After giving effect to the Spin-off, Spinco will
not be insolvent and will not be rendered insolvent by the transactions
contemplated by this Agreement or the Distribution Agreement.
4.35 Investigation by Company. Company has conducted its own independent
review and analysis of the businesses, assets, condition, operations and
prospects of Merger Partner and the Merger Partner Subsidiaries and
acknowledges that Company has been provided access to the properties, premises
and records of Merger Partner and the Merger Partner Subsidiaries for this
purpose. In entering into this Agreement, Company has
A-17
<PAGE>
relied solely upon its own investigation and analysis and the representations
and warranties contained herein, and Company:
(a) acknowledges that none of Merger Partner, the Merger Partner
Subsidiaries or any of their respective directors, officers, employees,
affiliates, agents or representatives makes any representation or warranty,
either express or implied, as to the accuracy or completeness of any of the
information provided or made available to Company or their agents or
representatives prior to the execution of this Agreement; and
(b) agrees, to the fullest extent permitted by law, that none of Merger
Partner, the Merger Partner Subsidiaries or any of their respective
directors, officers, employees, affiliates, agents or representatives shall
have any liability or responsibility whatsoever to Company on any basis
(including, without limitation, in contract or tort, under federal or state
securities laws or otherwise) based upon any information provided or made
available, or statements made, to Company prior to the execution of this
Agreement,
except that the foregoing shall not apply (i) to the extent Merger Partner
makes the specific representations and warranties set forth in Article 5 of
this Agreement and in the Disclosure Schedules, but always subject to the
limitations and restrictions contained in this Agreement and in such
Disclosure Schedules, or (ii) to the extent Merger Partner, the Merger Partner
Subsidiaries or any of their respective directors, officers, employees,
affiliates, agents or representatives commits fraud with respect to the
information that it provides or makes available to the Company.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF
MERGER PARTNER AND SUB
Each of Merger Partner and Sub hereby represents and warrants to Company as
follows (the words "to the Knowledge of Merger Partner" or "to Merger
Partner's Knowledge" and any words of similar import shall mean that any one
of the persons listed in Exhibit C has actual knowledge of the matter):
5.1 Organization, Good Standing and Power. Merger Partner is a corporation
duly organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its
business as now being conducted. Merger Partner is duly qualified or licensed
to do business and is in good standing in each jurisdiction in which the
nature of its business or the ownership or leasing of its properties make such
qualification or licensing necessary, except where the failure to be so
qualified or licensed or to be in good standing would not, individually or in
the aggregate, have a Material Adverse Effect on Merger Partner (as defined
below). Merger Partner has delivered to Company complete and correct copies of
its articles or certificate of incorporation, bylaws or other organizational
documents and all amendments thereto to the date hereof. As used in this
Agreement, the phrase "Material Adverse Effect on Merger Partner" means a
material adverse effect on (a) the financial condition, business or results of
operations of Merger Partner and the Merger Partner Subsidiaries on a
consolidated basis or (b) the ability of Merger Partner or Sub to consummate
the transactions contemplated by this Agreement.
5.2 Capitalization. The authorized capital stock of Merger Partner consists
of 525,000,000 shares of Common Stock, par value of one Dutch Guilder per
share, of which as of November 30, 1996, 265,176,630 shares were issued and
outstanding, 350,000,000 shares of Preferred Stock, par value one Dutch
Guilder per share ("Merger Partner Preferred Stock"), of which as of the date
hereof 80,000,000 shares are issued and outstanding and 125,000,000 shares of
Preferred Stock convertible into Merger Partner Common Stock, par value one
Dutch Guilder per share, none of which is issued or outstanding. All
outstanding shares of Merger Partner Common Stock are, and all shares which
may be issued prior to the Effective Date pursuant to any outstanding stock
options issued by Merger Partner will be, when issued, duly authorized,
validly issued, fully paid and nonassessable and not subject to preemptive
rights. All of the shares of Merger Partner Common Stock to be issued in
exchange for Company Common Stock at the Effective Time in accordance with
this Agreement will
A-18
<PAGE>
be, when so issued, duly authorized, validly issued, fully paid and
nonassessable and free of preemptive rights. Except as set forth above, as of
November 30, there were no shares of capital stock or other equity securities
of Merger Partner outstanding, and, except as set forth in Schedule 5.2, there
are no outstanding options, warrants or rights to purchase or acquire from
Merger Partner any capital stock of Merger Partner, there are no existing
registration covenants with Merger Partner with respect to outstanding shares
of Merger Partner Common Stock, and there are no convertible securities or
other contracts, commitments, agreements, understandings, arrangements or
restrictions by which Merger Partner is bound to issue any additional shares
of its capital stock or other securities.
5.3 Merger Partner Subsidiaries; Voting Trusts. Schedule 5.3 sets forth a
correct and complete list of each corporation, association, subsidiary or
other entity of which Merger Partner owns or controls, directly or indirectly,
more than 20% of the outstanding equity securities and which is material to
the operations of Merger Partner and its subsidiaries, taken as a whole (such
entities are hereinafter referred to as "Merger Partner Entities"). Any Merger
Partner Entity of which Merger Partner owns or controls, directly or
indirectly, more than 50% of the outstanding equity securities is hereinafter
referred to individually as a "Merger Partner Subsidiary" and such entities
are referred to collectively as the "Merger Partner Subsidiaries." Except as
disclosed in Schedule 5.3, Merger Partner owns, directly or indirectly, the
securities of each Merger Partner Entity held by Merger Partner, free and
clear of all liens, charges, pledges, security interests or other
encumbrances. All of the capital stock of each Merger Partner Subsidiary has
been duly authorized, and is validly issued, fully paid and nonassessable.
Except as disclosed in Schedule 5.3, there are no outstanding options or
rights to subscribe to, or any contracts or commitments to issue or sell any
shares of the capital stock or any securities or obligations convertible into
or exchangeable for, or giving any person any right to acquire, any shares of
the capital stock of any Merger Partner Entity to which Merger Partner or any
Merger Partner Subsidiary is a party. Except as disclosed in Schedule 5.3,
there are no voting trusts or other agreements or understandings with respect
to the voting of capital stock of Merger Partner or any Merger Partner
Subsidiary to which Merger Partner or any Merger Partner Subsidiary is a
party. Each Merger Partner Subsidiary is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation, and has the corporate power and authority necessary for it to
own or lease its properties and assets and to carry on its business as it is
now being conducted, except where the failure to be so organized, existing or
in good standing or to have such power and authority would not, individually
or in the aggregate, have a Material Adverse Effect on Merger Partner. Each
Merger Partner Subsidiary is duly qualified or licensed to do business and is
in good standing in each jurisdiction in which the nature of its business or
the ownership or leasing of its properties makes such qualification or
licensing necessary, except where the failure to be so qualified or licensed
or to be in good standing would not, individually or in the aggregate, have a
Material Adverse Effect on Merger Partner.
5.4 Authority; Enforceability. Each of Merger Partner and Sub has the
corporate power and authority to enter into this Agreement and to consummate
the transactions contemplated hereby, subject to the approval of this
Agreement by insurance regulatory authorities and banking regulatory
authorities and subject to compliance with the provisions of the HSR Act.
Subject to such approvals and compliance, the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of each of
Merger Partner and Sub (including all necessary approvals on the part of
Vereniging AEGON (the "Association")), and this Agreement has been duly
executed and delivered by Merger Partner and Sub and constitutes the valid and
binding obligation of each such party, enforceable against it in accordance
with its terms, (i) except as may be limited by bankruptcy, insolvency,
moratorium or other similar laws affecting or relating to enforcement of
creditors' rights generally and (ii) subject to general principles of equity.
5.5 Non-Contravention; Consents.
(a) Except as set forth in Schedule 5.5, neither the execution, delivery and
performance by Merger Partner or Sub of this Agreement, nor the consummation
by Merger Partner or Sub of the transactions contemplated hereby, nor
compliance by Merger Partner or Sub with any of the provisions hereof, will:
A-19
<PAGE>
(i) violate, conflict with, result in a breach of any provision of,
constitute a default (or an event that, with notice or lapse of time or
both, would constitute a default) under, result in the termination of,
accelerate the performance required by, or result in a right of termination
or acceleration, or the creation of any lien, security interest, charge or
encumbrance upon any of the properties or assets of Merger Partner or Sub,
under any of the terms, conditions or provisions of, (x) its respective
organizational documents, or (y) any note, bond, mortgage, indenture, deed
of trust, license, lease, agreement or other instrument or obligation to
which Merger Partner or any of the Merger Partner Subsidiaries is a party,
or by which Merger Partner or any of the Merger Partner Subsidiaries may be
bound, or to which Merger Partner or any of the Merger Partner Subsidiaries
or the properties or assets of any of them may be subject, and that would,
in any such event, specified in this clause (y) have, individually or in
the aggregate, a Material Adverse Effect on Merger Partner; or
(ii) subject to compliance with the statutes and regulations referred to
in Section 5.5, violate any valid and enforceable judgment, ruling, order,
writ, injunction, decree, or any statute, rule or regulation applicable to
Merger Partner or any of the Merger Partner Subsidiaries or any of their
respective properties or assets where such violation would, individually or
in the aggregate, have a Material Adverse Effect on Merger Partner.
(b) Except as set forth in Schedule 5.5 and other than notices, filings,
authorizations, exemptions, consents or approvals, the failure of which to
give or obtain would not, individually or in the aggregate, have a Material
Adverse Effect on Merger Partner, no notice to, filing with, authorization of,
exemption by, or consent or approval of, any governmental authority or other
regulatory body is necessary for the consummation by Merger Partner or Sub of
the transactions contemplated by this Agreement.
5.6 SEC Reports; Merger Partner Financial Statements.
(a) Since January 1, 1995, Merger Partner has timely filed all reports,
registration statements, proxy statements or information statements and all
other documents, together with any amendments required to be made thereto,
required to be filed with the SEC under the Securities Act or the Exchange Act
(collectively, the "Merger Partner Reports"). Merger Partner has heretofore
made available to Company true copies of all the Merger Partner Reports,
together with all exhibits thereto, that Company has requested. Included in
such Merger Partner Reports are (i) audited consolidated balance sheets of
Merger Partner and its subsidiaries at December 31, 1994 and 1995 and the
related consolidated statements of income, stockholders' equity and cash flows
for the years then ended, and the notes thereto and (ii) the unaudited balance
sheets of Merger Partner and its subsidiaries at March 31, 1996, June 30, 1996
and September 30, 1996 and the related unaudited statements of income,
stockholders' equity and cash flows for the periods then ended and the notes
thereto, each consolidated to the extent indicated therein.
(b) All of the financial statements included in the Merger Partner Reports
(which are collectively referred to herein as the "Merger Partner Consolidated
Financial Statements") fairly presented in all material respects the
consolidated financial position of Merger Partner and its subsidiaries as at
the dates mentioned and the consolidated results of operations, changes in
stockholders' equity and cash flows for the periods then ended in conformity
with Dutch accounting principles with a reconciliation on an annual basis to
United States generally accepted accounting principles applied on a consistent
basis (subject to any exceptions as to consistency specified therein or as may
be indicated in the notes thereto or in the case of the unaudited statements,
as may be permitted by Form 6-K of the SEC and subject, in the case of
unaudited statements, to normal, recurring audit adjustments). As of their
respective dates, the Merger Partner Reports complied in all material respects
with all applicable rules and regulations promulgated by the SEC and did not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. Except as set forth in the Merger Partner Reports, neither
Merger Partner nor any Merger Partner Subsidiary has any liabilities or
obligations of any nature (whether accrued, absolute, contingent or otherwise)
required by Dutch accounting principles to be set forth on a consolidated
balance sheet of Merger Partner and its consolidated subsidiaries or in the
notes thereto, other than
A-20
<PAGE>
liabilities or obligations which would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect on Merger Partner.
5.7 Statutory Statements. Merger Partner has previously furnished to Company
the annual statements (or equivalent statements) of each Merger Partner
Insurance Subsidiary (as defined below) that is engaged in the business of
insurance in the United States, the United Kingdom and The Netherlands for the
years ended December 31, 1994 and December 31, 1995, which have been filed
with the insurance regulatory authority of the jurisdiction of organization of
such Merger Partner Insurance Subsidiary, and statutory statements, where
required, for each such Merger Partner Insurance Subsidiary for the periods
ended March 31, 1996, June 30, 1996 and September 30, 1996, and Merger Partner
shall promptly furnish to Company all statutory statements for any calendar
years or quarters ending thereafter but prior to the Effective Time. As used
herein, the term "Merger Partner Insurance Subsidiary" means each Merger
Partner Subsidiary that is engaged in the business of insurance. Except as set
forth in Schedule 5.7, such statutory statements (or equivalent statements)
present or will present fairly in all material respects the admitted assets,
liabilities and surplus of each Merger Partner Insurance Subsidiary at the end
of each of the periods then ended, and the results of its operations and
changes in its surplus for each of the periods then ended in conformity with
accounting practices prescribed or permitted by the insurance regulatory
authority of the jurisdiction of organization of such Merger Partner Insurance
Subsidiary, applied on a consistent basis as and to the extent described in
such statutory statements (or equivalent statements).
5.8 Absence of Certain Changes or Events. Except as disclosed in Schedule
5.8 and the Merger Partner Reports and except for the transactions
contemplated by this Agreement or the Distribution Agreement, since December
31, 1995, Merger Partner and the Merger Partner Subsidiaries have conducted
their business in all material respects only in the ordinary course, and there
has not been (i) any change in the business, financial condition or results of
operations of Merger Partner and the Merger Partner Subsidiaries which has had
a Material Adverse Effect on Merger Partner, (ii) any declaration, setting
aside or payment of any dividend or other distribution (whether in cash, stock
or property) with respect to any of Merger Partner's outstanding capital
stock, except regular cash and stock dividends with respect to its capital
stock, or (iii) any split, combination or reclassification of any of Merger
Partner's outstanding capital stock or any issuance or the authorization of
any issuance of any other securities in respect of, in lieu of or in
substitution for shares of Merger Partner's outstanding capital stock.
Notwithstanding the foregoing, the representation contained in this Section
5.8 shall not apply to any change or development, or combination of changes or
developments, to the extent such changes and developments are the result of
adverse changes in general economic conditions, stock market fluctuations or
conditions or adverse changes in or affecting the insurance industry
generally.
5.9 Taxes and Tax Returns. Except as disclosed in Schedule 5.9:
(a) Merger Partner and the Merger Partner Subsidiaries have (i) duly
filed (or there has been filed on their behalf) with appropriate
governmental authorities all tax returns required to be filed by them, on
or prior to the date thereof, except to the extent that any failure to file
would not, individually or in the aggregate, have a Material Adverse Effect
on Merger Partner, and (ii) duly paid in full or made provisions in
accordance with Dutch generally accepted accounting principles (or there
has been paid or provision has been made on their behalf) for the payment
of all material taxes for all periods ending through the date hereof,
except to the extent that any failure to pay or make provision for the
payment of such taxes would not, individually or in the aggregate, have a
Material Adverse Effect on Merger Partner;
(b) no federal, state, local or foreign audits or other administrative
proceedings or court proceedings are presently pending with regard to any
taxes or tax returns of Merger Partner or the Merger Partner Subsidiaries
wherein an adverse determination or ruling in any one such proceeding or in
all such proceedings in the aggregate would have a Material Adverse Effect
on Merger Partner;
(c) the United States federal income tax returns of each Merger Partner
Subsidiary have been examined by the IRS (or the applicable statutes of
limitation for the assessment of federal income taxes for such periods have
expired) for all periods through and including December 31, 1987. No
deficiencies have
A-21
<PAGE>
been asserted as a result of such examinations (or as a result of
examinations by any non-United States taxing authorities) that have not
been resolved and fully paid which would have, individually or in the
aggregate, a Material Adverse Effect on Merger Partner. Neither Merger
Partner nor any Merger Partner Subsidiary has granted any requests,
agreements, consents or waivers to extend the statutory period of
limitations applicable to the assessment of any taxes with respect to any
tax returns of such Merger Partner Subsidiary; and
(d) all annuity contracts and life insurance policies issued by a Merger
Partner Insurance Subsidiary in the United States meet all definitional or
other requirements for qualification under the Code applicable (or intended
to be applicable) to such annuity contracts or life insurance policies,
including, without limitation, the following: (A) any life insurance
policies that meet the requirements of Sections 101(f) or 7702 of the Code,
as applicable; (B) any annuity contracts that are intended to qualify as
"annuity contracts" (excluding contracts that are described in Section
72(s) of the Code) meet the requirements of Section 72(s) of the Code; (C)
any annuity contracts that are intended to qualify under Sections 130,
403(a), 403(b) or 408(b) of the Code contain all provisions required for
qualification under such sections of the Code; and (D) any annuity
contracts that are marketed as, or in connection with, plans that are
intended to qualify under Sections 401, 403, 408 or 457 of the Code comply
with the requirements of such sections; except in the case of any of the
foregoing to the extent that any failure to so meet such requirements has
not and would not, individually or in the aggregate, have a material
adverse effect on the financial condition, business or results of
operations of the United States operations of Merger Partner.
5.10 Litigation. Except as disclosed in Schedule 5.10 or in the Merger
Partner Reports, neither Merger Partner nor any Merger Partner Subsidiary is a
party to any pending or, to the Knowledge of Merger Partner, threatened,
claim, action, suit, investigation or proceeding which would reasonably be
expected to have, either individually or in the aggregate, a Material Adverse
Effect on Merger Partner. Except as disclosed in Schedule 5.10, at the date of
this Agreement, neither Merger Partner nor any Merger Partner Insurance
Subsidiary has received actual notice of any proceeding, claim or
investigation pending or threatened against Merger Partner or any Merger
Partner Insurance Subsidiary before any insurance department or agency which
would reasonably be expected to have, either individually or in the aggregate,
a Material Adverse Effect on Merger Partner. Except as disclosed in Schedule
5.10, at the date of this Agreement there is no outstanding order, writ,
judgment, stipulation, injunction, decree, determination, award or other
decision against Merger Partner or any Merger Partner Subsidiary which, either
individually or in the aggregate, has had or would have a Material Adverse
Effect on Merger Partner.
5.11 Contracts and Commitments. Except as set forth in Schedule 5.11,
neither Merger Partner nor any Merger Partner Subsidiary has received notice
from any person alleging that Merger Partner or any Merger Partner Subsidiary
is in default under any contracts, agreements, leases, commitments,
assignments in other interests which are material to Merger Partner and the
Merger Partner Subsidiaries as a whole as to which it is reasonably
foreseeable that an adverse determination would result, individually or in the
aggregate, in a Material Adverse Effect on Merger Partner.
5.12 Registration Statement, Etc. None of the information supplied or to be
supplied by Merger Partner for inclusion or incorporation by reference in (a)
the Registration Statement, (b) the Proxy Statement and (c) any other
documents to be filed with the SEC in connection with the transactions
contemplated hereby (including the Registration Statement on Form 10 or, if
applicable, Form S-1, to be filed in connection with the Spin-off) will, at
the respective times such documents are filed, and, in the case of the
Registration Statement, when it becomes effective, cause the Registration
Statement to contain any untrue statement of a material fact, or omit to state
any material fact necessary in order to make the statements therein not
misleading, or, in the case of the Proxy Statement, when first mailed to the
stockholders of Company, or in the case of the Proxy Statement or any
amendment thereof or supplement thereto, at the time of the Stockholders'
Meeting, cause the Proxy Statement or any amendment thereof or supplement
thereto to contain any untrue statement of a material fact, or omit to state
any material fact necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading. All documents
that Merger Partner is responsible for filing with the SEC
A-22
<PAGE>
and any other regulatory agency in connection with the Merger will comply as
to form in all material respects with the provisions of applicable law, except
that no representation is made by Merger Partner with respect to statements
made therein based on information supplied by Company or with respect to
information concerning Company or Sub which is incorporated by reference in
the Registration Statement or the Proxy Statement.
5.13 Employee Benefit Plans.
(a) Schedule 5.13 contains a list of each material plan, program,
arrangement, practice or contract which is maintained by Merger Partner or any
Merger Partner Subsidiary or to which Merger Partner or any Merger Partner
Subsidiary is obligated to make contributions and which provides benefits or
compensation to or on behalf of persons employed in the United States,
including but not limited to executive arrangements (for example, any bonus,
incentive compensation, stock option, deferred compensation, commission,
severance, golden parachute or other executive compensation plans, programs,
contracts or arrangements) and "employee benefit plans" as defined in Section
3(1) of ERISA. All such plans, programs, arrangements, practices or contracts
are referred to herein as "Merger Partner Employee Plans." Merger Partner has
made available to Company the plan documents or other writing constituting
each Merger Partner Employee Plan and, if applicable, the trust, insurance
contract or other funding arrangement, the ERISA summary plan description and
the most recent Forms 5500 and annual reports for each such plan. Merger
Partner has identified those Merger Partner Employee Plans which Merger
Partner intends to satisfy the requirements of Section 401 of the Code and has
made available to Company accurate copies of the most recent favorable
determination letters for such plans.
(b) With respect to each Merger Partner Employee Plan that is subject to
Title IV or Section 302 of ERISA or Section 412 or 4971 of the Code: (i) there
does not exist any accumulated funding deficiency within the meaning of
Section 412 of the Code or Section 302 of ERISA, whether or not waived; (ii)
no reportable event within the meaning of Section 4043(c) of ERISA with
respect to which the 30-day notice period has not been waived has occurred;
and (iii) all premiums required to be paid to the Pension Benefit Guaranty
Corporation have been timely paid in full. There does not now exist, nor do
any circumstances exist that could result in, any Merger Partner Controlled
Group Liability (as defined below) that would be a liability of Merger Partner
or any Merger Partner Subsidiary following the Effective Time. "Merger Partner
Controlled Group Liability" means any and all liabilities under (i) Title IV
of ERISA, (ii) Section 302 of ERISA, (iii) Sections 412 and 4971 of the Code
and (iv) the continuation coverage requirements of Section 601 et seq. of
ERISA and Section 4980B of the Code, other than such liabilities that arise
solely out of, or relate to, the Merger Partner Employee Plans.
(c) Neither Merger Partner nor any Merger Partner Subsidiary is, or has
been, a participant in a multi-employer plan (within the meaning of ERISA
Section 3(37)). Except as set forth in Schedule 5.13, neither Merger Partner
nor any Merger Partner Subsidiary maintains or has at any time maintained a
Merger Partner Employee Plan which is subject to Title IV of ERISA. Except as
set forth in Schedule 5.13, neither Merger Partner nor any Merger Partner
Subsidiary is obligated to provide post employment or retirement medical
benefits or any other unfunded welfare benefits to or on behalf of any person
who is no longer an employee of Merger Partner or any Merger Partner
Subsidiary, except for health continuation coverage as required by Section
4980B of the Code or Part 6 of Title I of ERISA.
(d) Except as set forth in Schedule 5.13, (i) each Merger Partner Employee
Plan has at all times been maintained, by its terms and in operation, in
accordance with all applicable laws, and (ii) each of those Merger Partner
Employee Plans which are intended to be qualified under Section 401 of the
Code has at all times been maintained, by its terms and in operation, in
accordance with Section 401 of the Code, except where a failure to be so
maintained would not have a Material Adverse Effect on Merger Partner. Except
as set forth in Schedule 5.13, as of December 31, 1995, neither Merger Partner
nor any of the Merger Partner Subsidiaries had any liability under any Merger
Partner Employee Plan that was not reflected in the Merger Partner audited
consolidated balance sheet at December 31, 1995 or disclosed in the notes
thereto, other than liabilities which individually or in the aggregate would
not have a Material Adverse Effect on Merger Partner.
(e) Except as set forth in Schedule 5.13, to the Knowledge of Merger
Partner, no prohibited transaction has occurred with respect to any Merger
Partner Employee Plan maintained by Merger Partner or any of the Merger
A-23
<PAGE>
Partner Subsidiaries that would result, directly or indirectly, in the
imposition of an excise tax or other liability under the Code or ERISA, except
for such a tax or other liability that would not have a Material Adverse
Effect on Merger Partner.
(f) Except as set forth in Schedule 5.13, all contributions or premium
payments with respect to the Merger Partner Employee Plans due for any period
ending on or before the Effective Time have been or will be timely paid by
Merger Partner. Except as set forth in Schedule 5.13, the execution of or
performance of the transactions contemplated by this Agreement will not
create, accelerate or increase any obligations under the Merger Partner
Employee Plans which would have a Material Adverse Effect on Merger Partner.
5.14 Collective Bargaining; Labor Disputes; Compliance. The only collective
bargaining agreements to which Merger Partner or any of the Merger Partner
Subsidiaries is a party with respect to persons employed in the United States
are set forth in Schedule 5.14 (the "Merger Partner Collective Bargaining
Agreements"). Except as set forth in Schedule 5.14, to the Knowledge of Merger
Partner, the employees of Merger Partner and the Merger Partner Subsidiaries
employed in the United States are not represented by any unions other than the
unions which are parties to the Merger Partner Collective Bargaining
Agreements. Except as set forth in Schedule 5.14, neither Merger Partner nor
any of the Merger Partner Subsidiaries is currently, nor has been during the
past three years, the subject of any certification or decertification
organization drive with respect to persons employed in the United States.
Neither Merger Partner nor any of the Merger Partner Subsidiaries is
currently, nor has been during the past three years, the subject of any strike
by persons employed in the United States relating to the Merger Partner or any
of the Merger Partner Subsidiaries nor, to the Knowledge of Merger Partner, is
any such activity threatened. Merger Partner and each Merger Partner
Subsidiary have complied in all material respects with all laws relating to
the employment and safety of labor, including provisions relating to wages,
hours, benefits, collective bargaining and all applicable occupational safety
and health acts, laws and regulations except, in each case, where the failure
to be in compliance would not have, individually or in the aggregate, a
Material Adverse Effect on Merger Partner.
5.15 Brokers and Finders. Neither Merger Partner nor any of the Merger
Partner Subsidiaries, nor any of their respective officers, directors or
employees, has employed any broker or finder or incurred any liability for any
financial advisory fees, brokerage fees, commissions, or finder's fees, and no
broker or finder has acted directly or indirectly for Merger Partner or any of
the Merger Partner Subsidiaries, in connection with this Agreement or any of
the transactions contemplated hereby, except that Merger Partner has retained
UBS Securities LLP as its financial advisor, whose fees and expenses will be
paid by Merger Partner.
5.16 No Violation of Law.
(a) The business and operations of the Merger Partner Insurance Subsidiaries
have been conducted in compliance with all applicable Insurance Laws, except
where the failure to so conduct such business and operations would not
individually or in the aggregate have a Material Adverse Effect on Merger
Partner. Notwithstanding the generality of the foregoing, except where the
failure to do so would not have, individually or in the aggregate, a Material
Adverse Effect on Merger Partner and except as set forth in Schedule 5.16,
each Merger Partner Insurance Subsidiary and its agents have marketed, sold
and issued insurance products in compliance, in all material respects, with
all statutes, laws, ordinances, rules, orders and regulations applicable to
the business of such Merger Partner Insurance Subsidiary and in the respective
jurisdictions in which such products have been sold, including, without
limitation, in compliance with (i) all applicable prohibitions against
"redlining," (ii) all applicable requirements relating to the disclosure of
the nature of insurance products as policies of insurance and (iii) all
applicable requirements relating to insurance product projections. In
addition, except as set forth in Schedule 5.16, (i) there is no pending or, to
the Knowledge of Merger Partner, threatened charge by any insurance regulatory
authority that any of the Merger Partner Insurance Subsidiaries has violated,
nor any pending or, to the Knowledge of Merger Partner, threatened
investigation by any insurance regulatory authority with respect to possible
violations of, any applicable Insurance Laws where such violations would have
individually or in the aggregate a Material Adverse Effect on Merger Partner;
(ii) none of the Merger Partner Insurance Subsidiaries is subject to any order
or decree of any insurance regulatory authority relating specifically
A-24
<PAGE>
to such Merger Partner Insurance Subsidiary (as opposed to insurance companies
generally) which would have individually or in the aggregate a Material
Adverse Effect on Merger Partner; and (iii) the Merger Partner Insurance
Subsidiaries have filed all reports required to be filed with any insurance
regulatory authority on or before the date hereof as to which the failure to
file such reports would have individually or in the aggregate a Material
Adverse Effect on Merger Partner.
(b) In addition to Insurance Laws, the business and operations of Merger
Partner and the Merger Partner Subsidiaries have been conducted in compliance
with all other applicable laws, ordinances, regulations and orders of all
governmental entities and other regulatory bodies (including, without
limitation, laws, ordinances, regulations and orders relating to zoning,
environmental matters and the safety and health of employees), except where
such noncompliance, individually or in the aggregate, would not have a
Material Adverse Effect on Merger Partner. Except as set forth in Schedule
5.16, in addition to Insurance Laws, (i) neither Merger Partner nor any Merger
Partner Subsidiary has been charged with or, to the Knowledge of Merger
Partner, is now under investigation with respect to, a violation of any
applicable law, regulation, ordinance, order or other requirement of a
governmental entity or other regulatory body, which violations or penalties
would have, individually or in the aggregate, a Material Adverse Effect on
Merger Partner, (ii) neither Merger Partner nor any Merger Partner Subsidiary
is a party to or bound by any order, judgment, decree or award of a
governmental entity or other regulatory body which has or will have,
individually or in the aggregate, a Material Adverse Effect on Merger Partner;
and (iii) Merger Partner and the Merger Partner Subsidiaries have filed all
reports required to be filed with any governmental entity or other regulatory
body on or before the date hereof as to which the failure to file such reports
would result, individually or in the aggregate, in a Material Adverse Effect
on Merger Partner. Merger Partner and the Merger Partner Subsidiaries have all
permits, certificates, licenses, approvals and other authorizations required
in connection with the operation of the business of Merger Partner and the
Merger Partner Subsidiaries, except for permits, certificates, licenses,
approvals and other authorizations the failure of which to have would not
have, individually or in the aggregate, a Material Adverse Effect on Merger
Partner and except for such permits, certificates, licenses, approvals and
other authorizations required to be obtained in connection with the
consummation of the transactions contemplated hereby.
5.17 Indebtedness for Borrowed Money. Merger Partner has made available to
Company the instruments or other documents relating to all indebtedness of
Merger Partner or any Merger Partner Subsidiary for borrowed money the
principal balance of which is $250 million or more, whether such indebtedness
is direct or indirect, primary or secondary, by guarantee or otherwise.
5.18 Environmental Liabilities. To the Knowledge of Merger Partner, except
as disclosed in Schedule 5.18, as of the date hereof, neither Merger Partner
nor any Merger Partner Subsidiary has any liability or obligation of any kind
arising out of any law or regulation relating to environmental protection,
including obligations relating to removal, remediation, clean up or
improvement of any property owned by Merger Partner or any Merger Partner
Subsidiaries, which individually or in the aggregate would have a Material
Adverse Effect on Merger Partner.
5.19 Merger Partner Ownership of Company Common Stock. Merger Partner does
not "own" and has not within the past three years "owned" (as such terms are
defined in Section 203 of the DGCL), and does not "beneficially own" (as such
term is defined in the Company Rights Agreement) three percent (3%) or more of
the outstanding shares of Company Common Stock. Merger Partner agrees to vote
or cause to be voted any shares of Company Common Stock owned by it or the
Merger Partner Subsidiaries in favor of the Spin-off and the Merger.
5.20 Interim Operations of Sub. Sub was formed solely for the purpose of
engaging in the transactions contemplated hereby, has engaged in no other
business activities and has conducted its operations only as contemplated
hereby.
5.21 Spin-off; Merger. Neither Merger Partner nor any Merger Partner
Subsidiary has taken any action or failed to take any action which action or
failure to take action would jeopardize the Spin-off as a tax-free
A-25
<PAGE>
distribution within the meaning of Section 355 of the Code or the Merger as a
reorganization within the meaning of Section 368(a) of the Code.
5.22 Business Operating Condition. Except as otherwise would not have a
Material Adverse Effect on Merger Partner, all furniture, fixtures, machinery
and equipment necessary to conduct the businesses and operations of Merger
Partner and the Merger Partner Insurance Subsidiaries in substantially the
same manner as such businesses and operations are carried on currently by
Merger Partner and the Merger Partner Insurance Subsidiaries are in the
possession of Merger Partner and in good working order and condition for the
purposes for which they are currently used.
5.23 Assets. Except as otherwise would not have a Material Adverse Effect on
Merger Partner and except for Merger Partner Permitted Liens and Encumbrances
(as defined below), Merger Partner and/or the Merger Partner Subsidiaries have
good and valid title to all personal property (including, without limitation,
Merger Partner Investment Assets (as defined below)) that was carried as an
asset on the Merger Partner Consolidated Financial Statements or acquired in
the ordinary course of business since September 30, 1996, other than with
respect to those assets which have been disposed of in the ordinary course of
business or redeemed in accordance with their terms since such date or with
respect to statutory deposits which are subject to certain restrictions on
transfer. As used in this Agreement, "Merger Partner Permitted Liens and
Encumbrances" means, as to any assets or property, any (i) liens or
encumbrances securing taxes, assessments or other governmental charges which
are not yet due or which are being diligently contested in good faith by
appropriate proceedings if adequate reserves have been established in
accordance with generally accepted accounting principles or the statutory
accounting principles and practices prescribed or permitted by the insurance
department of the state of domicile of a Merger Partner Insurance Subsidiary,
as appropriate, or, in the case of mortgage loans, funds are held in escrow
sufficient to discharge such liens or the borrower has posted a bond in the
amount of such lien, (ii) liens or encumbrances imposed by law or incurred in
the ordinary course of business with respect to the claims of materialmen,
mechanics, carriers, warehousemen, landlords and other Persons which (A) are
not yet due and payable and which do not materially detract from the value of
such property or assets or materially impair the use thereof by Merger Partner
and the Merger Partner Subsidiaries in the operation of their respective
businesses, or (B) are being diligently contested in good faith and by proper
proceedings if adequate reserves have been established with respect thereto in
accordance with generally accepted accounting principles or the statutory
accounting principles and practices prescribed or permitted by the insurance
department of the state of domicile of a Merger Partner Insurance Subsidiary,
as appropriate, and (iii) liens and encumbrances that would not, individually
or in the aggregate, have a Material Adverse Effect on Merger Partner. As used
in this Agreement "Merger Partner Investment Assets" means bonds, stocks,
mortgage loans or other investments that are carried on the books and records
of Merger Partner and the Merger Partner Insurance Subsidiaries.
5.24 Computer Software. Merger Partner owns, or possesses valid license
rights to, all computer software programs which are material to the conduct of
the business of Merger Partner and the Merger Partner Insurance Subsidiaries
taken as a whole. There are no infringement suits, actions or proceedings
pending or, to the Knowledge of Merger Partner, threatened against Merger
Partner or any Merger Partner Insurance Subsidiary with respect to any
software owned or licensed by Merger Partner or any Merger Partner Subsidiary,
which, if determined adversely, would have, either individually or in the
aggregate, a Material Adverse Effect on Merger Partner.
5.25 Intellectual Property. Merger Partner owns, or possesses valid license
rights to, all intellectual property which is material to the conduct of the
business of Merger Partner and the Merger Partner Insurance Subsidiaries taken
as a whole. Merger Partner has not received any notice of any conflict with or
violation or infringement of, any asserted rights of any other Person with
respect to any such intellectual property owned or licensed by Merger Partner
or any Merger Partner Insurance Subsidiary, which, if determined adversely,
would have, either individually or in the aggregate, a Material Adverse Effect
on Merger Partner.
5.26 Permits, Licenses and Franchises. To the Knowledge of Merger Partner,
except as otherwise would not have a Material Adverse Effect on Merger
Partner, neither Merger Partner nor any Merger Partner Insurance
A-26
<PAGE>
Subsidiary has engaged in any activity which would cause revocation or
suspension of any license to transact the business of insurance and no action
or proceeding looking to or contemplating the revocation or suspension of any
license to transact the business of insurance is pending or threatened.
5.27 Liabilities and Reserves. The reserves carried on the books of each
Merger Partner Insurance Subsidiary for the year ended December 31, 1995 for
future insurance policy benefits, losses, claims and similar purposes are in
compliance in all material respects with the requirements for reserves
established by the insurance departments of the jurisdiction of domicile of
such Merger Partner Insurance Subsidiary, were determined in all material
respects in accordance with generally accepted actuarial standards
consistently applied, and are fairly stated in all material respects in
accordance with sound actuarial principles.
5.28 Insurance. The insurance maintained by Merger Partner and the Merger
Partner Subsidiaries insures against risks and liabilities to the extent and
in the manner reasonably deemed appropriate and sufficient by Merger Partner
or such Merger Partner Subsidiary, and the coverage provided thereunder will
not be materially and adversely affected by the Merger.
5.29 Investigation by Merger Partner. Merger Partner has conducted its own
independent review and analysis of the businesses, assets, condition,
operations and prospects of Company and the Company Subsidiaries and
acknowledges that Merger Partner has been provided access to the properties,
premises and records of Company and the Company Subsidiaries for this purpose.
In entering into this Agreement, Merger Partner has relied solely upon its own
investigation and analysis and the representations and warranties contained
herein, and Merger Partner:
(a) acknowledges that none of Company, the Company Subsidiaries or any of
their respective directors, officers, employees, affiliates, agents or
representatives makes any representation or warranty, either express or
implied, as to the accuracy or completeness of any of the information
provided or made available to Merger Partner or their agents or
representatives prior to the execution of this Agreement; and
(b) agrees, to the fullest extent permitted by law, that none of Company,
the Company Subsidiaries or any of their respective directors, officers,
employees, affiliates, agents or representatives shall have any liability
or responsibility whatsoever to Merger Partner on any basis (including,
without limitation, in contract or tort, under federal or state securities
laws or otherwise) based upon any information provided or made available,
or statements made, to Merger Partner prior to the execution of this
Agreement,
except that the foregoing shall not apply (i) to the extent Company makes the
specific representations and warranties set forth in Article 4 of this
Agreement and in the Disclosure Schedules, but always subject to the
limitations and restrictions contained in this Agreement and in the Disclosure
Schedules, or (ii) to the extent Company, the Company Subsidiaries or any of
their respective directors, officers, employees, affiliates, agents or
representatives commits fraud with respect to the information that it provides
or makes available to Company.
ARTICLE 6
CONDUCT AND TRANSACTIONS PRIOR TO
EFFECTIVE TIME; CERTAIN COVENANTS
6.1 Access and Information.
(a) Subject to the restrictions contained in confidentiality agreements to
which such party is subject and subject to Section 6.1(b), upon reasonable
notice, each of Company and Merger Partner shall (and shall cause each of
their respective Subsidiaries (as defined below) to) give to the other and to
the respective accountants, counsel and other representatives of such other
party reasonable access during normal business hours throughout the period
prior to the Effective Time to all of its and its Subsidiaries' properties,
books, contracts, commitments and records (including tax returns and insurance
policies) and shall permit them to consult with its and its Subsidiaries'
respective officers, employees, auditors, actuaries, attorneys and agents;
provided, however, that
A-27
<PAGE>
any such investigation or consultation shall be conducted in such a manner as
not to interfere unreasonably with the business or operations of the other
party or its Subsidiaries. In addition, Company shall cause Spinco to provide
to Merger Partner and to Merger Partner's accountants, counsel and other
representatives reasonable access during normal business hours throughout the
period prior to the Effective Time to all records in Spinco's possession
relating to the business and operations of the Company Subsidiaries; provided,
however that any such investigation shall be conducted in such a manner as not
to interfere unreasonably with the business or operations of Spinco or its
subsidiaries. All confidential information provided pursuant to this Section
6.1 will be subject to the Confidentiality Agreement dated as of October 28,
1996 and the Confidentiality Agreement dated as of December 17, 1996 (the
"Confidentiality Agreements"), in each case between Company and Merger
Partner. Notwithstanding the foregoing, no party shall have access to
information or documents subject to the attorney/client privilege to the
extent that providing such access would, in the opinion of counsel to Company
or Merger Partner, as the case may be, constitute a waiver of such privilege.
As used in this Agreement, the term "Subsidiaries" shall mean (i) when used
with reference to Company, the Company Subsidiaries, and (ii) when used with
reference to Merger Partner, the Merger Partner Subsidiaries.
(b) As soon as practicable after the date of this Agreement, Company and
Merger Partner shall cooperate in good faith in an effort to develop a plan
(the "Plan") with respect to the communications with their respective
employees and the employees of their respective Subsidiaries regarding the
transactions contemplated by this Agreement and the Distribution Agreement.
Notwithstanding any other provision of this Section 6.1, neither Merger
Partner or Company, nor any of their respective Subsidiaries, nor any employee
or other representative of Merger Partner or Company, or any of their
respective Subsidiaries, shall contact or communicate with any employee of the
other party or such other party's Subsidiaries, with respect to the
transactions contemplated by this Agreement, unless pursuant to the Plan or
with the prior consent of such other party, which consent will not be
unreasonably withheld or delayed. Except pursuant to the Plan or with the
prior consent of the other party, which consent will not be unreasonably
withheld or delayed, neither Merger Partner or Company, nor any of their
respective Subsidiaries, nor any employee or other representative of Merger
Partner or Company, or any of their respective Subsidiaries, shall have any
communication or contact with any employee of the other party or such other
party's Subsidiaries concerning, relating to or in any way bearing upon (i)
future employment or terms or conditions of employment of such employee or any
other employee of the other party, or (ii) any closing or relocation of or
reduction in size, staff or function of any present facility of the other
party.
6.2 Conduct of Business Pending Merger.
(a) Company agrees that from the date hereof to the Effective Time, except
as contemplated by this Agreement or the Distribution Agreement or to the
extent that Merger Partner shall otherwise consent in writing (which consent
will not be unreasonably withheld or delayed), Company and the Company
Subsidiaries will operate their businesses only in the ordinary course, except
where the failure to so operate their businesses will not individually or in
the aggregate be material to any of the Company Business Units taken as a
whole; and, consistent with such operation, will use reasonable efforts
consistent with past practices to preserve their business organizations
intact, to keep available to them the goodwill of their agents, third party
administrators, policyholders, customers and others with whom business
relationships exist to the end that their goodwill and ongoing business shall
not be impaired in any material respect at the Effective Time, and will
further exercise reasonable efforts to maintain their existing relationships
with their employees in general.
(b) Company agrees that from the date hereof to the Effective Time, except
as otherwise consented to by Merger Partner in writing (which consent will not
be unreasonably withheld or delayed) or as permitted, required or contemplated
by this Agreement or the Distribution Agreement, (i) neither it nor any
Company Subsidiary will change any provision of its Certificate of
Incorporation or Bylaws or similar governing documents; (ii) it will not make,
declare or pay any dividend, except regular quarterly cash dividends with
respect to the Company Common Stock (not to exceed $0.275 per share per
quarter) and regular dividends on the Company's Preferred Stock in accordance
with its terms and except in connection with the Spin-off; and (iii) except in
connection with (v) the Spin-off, (w) the exchange rights on the part of
former shareholders of Durham Corporation and Southlife Corporation who have
not tendered their shares in connection with the mergers pursuant to which
such
A-28
<PAGE>
companies were acquired, (x) the issuance of capital stock under the Company
Rights Agreement pursuant to its terms, (y) the issuance of new employee stock
options after July 31, 1997 in the ordinary course of business consistent with
past practice and (z) the issuance of shares of common stock pursuant to (A)
the exercise of presently outstanding employee stock options or new stock
options granted after July 31, 1997 as contemplated above or (B) any stock
ownership plan, 401(k) plan, dividend reinvestment plan or similar plan (which
in the case of this clause (B) does not involve in the aggregate the issuance
of more than 250,000 shares), it will not make any distribution or directly or
indirectly sell, issue, redeem, purchase or otherwise acquire, any shares of
its outstanding capital stock, change the number of shares of its authorized
or issued capital stock or issue or grant any option, warrant, call,
commitment, subscription, right to purchase or agreement of any character
relating to its authorized or issued capital stock or any securities
convertible into shares of such stock.
(c) Company agrees that from the date hereof to the Effective Time it will
not take or permit any Company Subsidiary to take any of the following
actions, except to the extent consented to by Merger Partner in writing (which
consent will not be unreasonably withheld or delayed) or permitted, required
or contemplated by this Agreement or the Distribution Agreement or except as
set forth in Schedule 6.2:
(i) except in the ordinary course of business, enter into any agreement
representing an obligation for indebtedness for borrowed money or increase
the principal amount of indebtedness under any existing agreement or
assume, guarantee, endorse or otherwise become responsible for the
obligations of any other individual, firm or corporation (except a
guarantee of the obligation of a Subsidiary), except and to the extent all
such obligations in the aggregate do not exceed $10,000,000;
(ii) except in the ordinary course of business, mortgage or pledge any of
its properties or assets;
(iii) except as may be required by law or except in the ordinary course
of business, take any action to amend or terminate any Company Employee
Plan or increase the compensation of any of its executive officers or
employees (other than increases which are in the aggregate in the ordinary
course) or adopt any other material plan, program, arrangement or practice
providing new or increased benefits or compensation to its employees,
provided that this covenant shall not apply to variable payments pursuant
to Company's Management Incentive Plan or Variable Pay Plan or to actions
in the ordinary course of business taken with respect to employees who are
not directors or officers of Company;
(iv) materially amend or cancel or agree to the material amendment or
cancellation of any agreement, treaty or arrangement which is material to
any of the Company Business Units taken as a whole, or enter into any new
material agreement, treaty or arrangement which is material to any of the
Company Business Units taken as a whole (other than the renewal of any
existing agreements, treaties or arrangements);
(v) make any material changes in its underwriting standards, retention
limits or administrative practices with respect to additions to (new
business) or deletions from (policy terminations) any policy master files
which would have a substantive effect on such files;
(vi) enter into any negotiation with respect to, or adopt or amend in any
material respect, any Collective Bargaining Agreement without prior notice
to the other party;
(vii) make any significant change in any accounting methods or systems of
internal accounting controls, except as may be appropriate to conform to
changes in statutory accounting rules or generally accepted accounting
principles;
(viii) pay, loan or advance (other than the payment of compensation,
directors' fees or reimbursements of expenses in the ordinary course of
business and other than as may be required by any agreement in effect as of
the date hereof) any amount to, or sell, transfer or lease any properties
or assets (real, personal or mixed, tangible or intangible) to, or enter
into any material agreement or arrangement with, any of its officers or
directors or any "affiliate" or "associate" of any of its officers or
directors (as such terms are defined in Rule 405 promulgated under the
Securities Act);
A-29
<PAGE>
(ix) acquire, form or commence the operations of any business or any
corporation, partnership, joint venture, marketing arrangement, association
or other business organization or division thereof which in any case is
material to any of the Company Business Units taken as a whole;
(x) make any tax election or settle or compromise tax liability that
would reasonably be expected to have a Material Adverse Effect on Company;
(xi) pay, discharge, settle or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise) which are material to Company and the Company Subsidiaries as a
whole, other than the payment, discharge or satisfaction of liabilities (i)
reflected or reserved against in, or contemplated by, the financial
statements (or the notes thereto) of Company included in the Company
Reports or (ii) incurred since December 31, 1995 in the ordinary course of
business consistent with past practice;
(xii) increase the benefits payable under the Providian Corporation
Retirement Plan (the "Retirement Plan") pursuant to the provisions of
Section 9.1 of the Retirement Plan;
(xiii) other than consistent with past practice (or following
consultation with the Merger Partner, consistent with industry standards),
materially alter the mix of Company Investment Assets or the duration or
credit quality of such assets;
(xiv) other than consistent with past practice (or following consultation
with the Merger Partner, consistent with industry standards), materially
alter the profile of its insurance liabilities or materially alter the
Company's pricing practices or policies; or
(xv) enter into any agreement to take any of the actions described in
Section 6.2(b) or elsewhere in this Section 6.2(c).
(d) Merger Partner agrees that from the date hereof to the Effective Time,
except as contemplated by this Agreement or to the extent that Company shall
otherwise consent in writing, it will, and will cause each Merger Partner
Subsidiary to, operate its business only in the ordinary course, except where
the failure to so operate its business will not individually or in the
aggregate be material to Merger Partner and the Merger Subsidiaries taken as a
whole.
(e) Merger Partner agrees that from the date hereof to the Effective Time it
will not take, or permit any Merger Partner Subsidiary to take, any of the
following actions, except to the extent consented to by Company in writing
(which consent will not unreasonably be withheld or delayed) or permitted,
required or contemplated by this Agreement or as set forth in Schedule 6.2:
(i) adopt or propose any change in its governing documents that would
have any adverse impact on the transactions contemplated by this Agreement
or which would amend or modify the terms or provisions of the capital stock
of Merger Partner;
(ii) effect any combination, reclassification, recapitalization, division
or similar transaction with respect to any class or series of capital stock
of Merger Partner (other than a stock split, stock dividend or similar
transaction contemplated by Section 2.2(d));
(iii) merge or consolidate with any other Person if such merger or
consolidation could reasonably be expected to have a material impact on the
ability of Merger Partner to consummate the transactions contemplated by
this Agreement;
(iv) make, declare, set aside or pay any dividend or other distribution
with respect to shares of capital stock of Merger Partner, except the
regular declaration and payment of cash or stock dividends with respect to
the Merger Partner Common Stock (not to exceed, in the aggregate between
the date of this Agreement and the Closing Date, $2.00 per share in cash
and market value of Merger Partner Common Stock), and the regular
declaration and payment of dividends with respect to Merger Partner
Preferred Stock in accordance with its terms;
A-30
<PAGE>
(v) issue, sell, grant, pledge or otherwise encumber any shares of the
Merger Partner Common Stock, any other voting securities or any securities
convertible into such shares, if any such action could, individually or in
the aggregate, reasonably be expected to (A) require the consent of the
stockholders of Merger Partner, (B) delay materially the date of mailing of
the Proxy Statement such that the Closing would be delayed past June 1,
1997, (C) if it were to occur after such date of mailing, require an
amendment of the Proxy Statement such that the Closing would be delayed
past June 1, 1997 or (D) have a material adverse effect on the ability of
Merger Partner to consummate the transactions contemplated by this
Agreement;
(vi) acquire any business or any corporation, partnership, joint venture,
association or other business organization or division thereof, in each
case if any such action could, individually or in the aggregate, reasonably
be expected to (A) be material to Merger Partner, (B) delay materially the
date of mailing of the Proxy Statement such that the Closing would be
delayed past June 1, 1997, (C) if it were to occur after such date of
mailing, require an amendment of the Proxy Statement such that the Closing
would be delayed past June 1, 1997 or (D) have a material adverse effect on
the ability of Merger Partner to consummate the transactions contemplated
by this Agreement;
(vii) except in the ordinary course of business, enter into any agreement
representing an obligation for indebtedness for borrowed money or increase
the principal amount of indebtedness under any existing agreement or
assume, guarantee, endorse or otherwise become responsible for the
obligations of any other individual, firm or corporation (except a
guarantee of the obligation of a Subsidiary), except and to the extent all
such obligations in the aggregate are not material to Merger Partner;
(viii) mortgage or pledge any of its properties or assets, except to the
extent that the aggregate amount of assets subject to such mortgages and
pledges is not material to Merger Partner;
(ix) except in the ordinary course of business, materially amend or
cancel or agree to the amendment or cancellation of any agreement, treaty
or arrangement, or enter into any new agreement, treaty or arrangement
(other than the renewal of any existing agreements, treaties or
arrangements), except and to the extent that the aggregate amount involved
with respect to such agreements, treaties or arrangements is not material
to Merger Partner;
(x) pay, loan or advance (other than the payment of compensation,
directors' fees or reimbursements of expenses in the ordinary course of
business and other than as may be required by any agreement in effect as of
the date hereof) any amount to, or sell, transfer or lease any properties
or assets (real, personal or mixed, tangible or intangible) to, or enter
into any agreement or arrangement with, any of its officers or directors or
any "affiliate" or "associate" of any of its officers or directors (as such
terms are defined in Rule 405 promulgated under the Securities Act), except
and to the extent that the aggregate amount involved with respect to such
transactions is not material to Merger Partner;
(xi) (A) prior to the twenty-fifth trading day before the Effective Time
acquire record or beneficial ownership of any shares of Company Common
Stock such that Merger Partner "beneficially owns" three percent (3%) or
more of the outstanding shares of Company Common Stock, or (B) during the
twenty-five trading days before the Effective Time, acquire record or
beneficial ownership of any shares of Company Common Stock; or
(xii) authorize any of, or commit or agree to take any of, the foregoing
actions.
As used in this Section 6.2(e), the phrase "material to Merger Partner"
means a matter or action that would (i) have a Material Adverse Effect on
Merger Partner or (ii) involve amounts in excess of ten percent (10%) of the
assets of Merger Partner and its subsidiaries, taken as a whole, as reflected
on the consolidated balance sheet of Merger Partner and its subsidiaries at
December 31, 1995 included in the Merger Partner Reports.
(f) Company shall not, nor shall it permit any Company Subsidiary to, nor
shall it authorize or permit any officer, director or employee of, or any
investment banker, attorney or other advisor or representative or agent of,
Company or any Company Subsidiary to, directly or indirectly, (i) solicit,
initiate or encourage the submission
A-31
<PAGE>
of any Acquisition Proposal (as hereinafter defined) or (ii) participate in
any discussions or negotiations regarding, or furnish to any person any
information with respect to, or take any other action to facilitate any
inquiries or the making of any proposal that constitutes, or may reasonably be
expected to lead to, any Acquisition Proposal; provided, however, that nothing
contained in this Section 6.2(f) shall prohibit the Board of Directors of
Company (and its authorized representatives) from furnishing information to,
or entering into discussions or negotiations with, any person or entity that
makes an unsolicited Acquisition Proposal if, and only to the extent that (A)
the Board of Directors of Company after consultation with and based on the
advice of outside counsel, determines in good faith that in order for the
Board of Directors of Company to comply with its fiduciary duties to
stockholders under applicable law it should take such action, (B) prior to
taking such action, Company receives from such person or entity an executed
agreement in reasonably customary form relating to the confidentiality of
information to be provided to such person or entity, and (C) the Acquisition
Proposal contains an offer of consideration that is superior to the
consideration set forth herein. Notwithstanding anything in this Agreement to
the contrary, Company shall (i) promptly advise Merger Partner orally and in
writing of (A) the receipt by it (or any of the other entities or persons
referred to above) after the date hereof of any Acquisition Proposal, or any
inquiry which could reasonably be expected to lead to any Acquisition
Proposal, (B) the material terms and conditions of such Acquisition Proposal
or inquiry, and (C) the identity of the person making any such Acquisition
Proposal or inquiry, (ii) keep Merger Partner reasonably informed of the
status and details of any such Acquisition Proposal or inquiry and (iii)
negotiate with Merger Partner to make such adjustments in the terms and
conditions of this Agreement as would enable Company to proceed with the
transactions contemplated herein. Without limiting the foregoing, it is
understood that any violation of the restrictions set forth in the first
sentence of this Section 6.2(f) by any officer, director or employee of
Company or any Company Subsidiary or any investment banker, attorney or other
advisor, representative or agent of Company or any Company Subsidiary, whether
or not such person is purporting to act on behalf of Company or any Company
Subsidiary or otherwise, shall be deemed to be a breach of this Section 6.2(f)
by Company. For purposes of this Agreement, "Acquisition Proposal" means any
bona fide proposal with respect to a merger, consolidation, share exchange or
similar transaction involving Company or any Company Insurance Subsidiary, or
any purchase of all or any significant portion of the assets of Company or any
Company Business Unit other than the transactions contemplated hereby.
6.3 Fiduciary Duties. Except as set forth below, the Board of Directors of
Company shall not (i) withdraw or modify in a manner materially adverse to
Merger Partner, the approval or recommendation by such Board of Directors of
this Agreement or the Merger, or (ii) approve, recommend or cause Company to
enter into any agreement with respect to any Acquisition Proposal.
Notwithstanding the foregoing, if Company receives an unsolicited Acquisition
Proposal and the Board of Directors of Company determines in good faith,
following consultation with and based on the advice of outside counsel, that
it is necessary to do so in order to comply with its fiduciary duties to
stockholders under applicable law, the Board of Directors may (w) withdraw or
modify its approval or recommendation of this Agreement and the Merger, (x)
approve or recommend such Acquisition Proposal, (y) cause Company to enter
into an agreement with respect to such Acquisition Proposal or (z) terminate
this Agreement pursuant to Section 8.1(b). If the Board of Directors of
Company takes any action described in clause (y) or (z) of the preceding
sentence or Merger Partner exercises its right to terminate this Agreement
under Section 8.1(c) based on the Board of Directors of Company having taken
any action described in clause (w) or (x) of the preceding sentence, Company
shall, concurrently with the taking of such action or such termination (a "Fee
Payment Event"), as applicable, pay to Merger Partner the Section 6.4 Fee (as
hereinafter defined). Notwithstanding anything contained in this Agreement to
the contrary, any action by the Board of Directors of Company permitted by
this Section 6.3 shall not constitute a breach of this Agreement by Company.
6.4 Certain Fees. Company shall pay to Merger Partner upon demand (i) $80
million if the Fee Payment Event occurs on or prior to the date of the
Stockholders' Meeting, or (ii) $100 million if the Fee Payment Event occurs
after the date of the Stockholders' Meeting (the "Section 6.4 Fee"), payable
in same-day funds, as liquidated damages and not as a penalty, if the Section
6.4 Fee is payable pursuant to Section 6.3. If Company fails to promptly pay
to Merger Partner any amounts due under this Section 6.4, Company shall pay
the costs
A-32
<PAGE>
and expenses (including reasonable legal fees and expenses) in connection with
any action, including the filing of any lawsuit or other legal action, taken
to collect payment, together with interest on the amount of any unpaid fee at
the publicly announced prime rate of Citibank, N.A. in effect from time to
time from the date such fee was required to be paid.
6.5 Amendment to Rights Plan. Prior to the Effective Time, the Board of
Directors of Company shall amend the 1987 Stockholder Rights Agreement as
amended on November 4, 1992 (the "Company Rights Agreement") between Company
and First Chicago Trust Company of New York, so that (i) Merger Partner will
not become an "Acquiring Person" as a result of the consummation of the
transactions contemplated by this Agreement, (ii) no "Shares Acquisition Date"
or "Distribution Date" (as such terms are defined in the Company Rights
Agreement) will occur as a result of the consummation of the transactions
contemplated by this Agreement, and (iii) all outstanding Company Common Stock
Purchase Rights (the "Company Rights") issued and outstanding under the
Company Rights Agreement will expire immediately prior to the Effective Time.
6.6 Takeover Statutes. If any "fair price," "moratorium," "control share
acquisition," "business combination," "stockholder protection" or similar
antitakeover statute or regulation enacted under state or Federal law shall
become applicable to the Merger, the Spin-off or any of the other transactions
contemplated hereby, each of Company and Merger Partner and the Board of
Directors of each of Company and Merger Partner shall grant such approvals and
take such commercially reasonable actions as are within its authority and
consistent with its fiduciary obligations to its stockholders as determined in
good faith by such Board so that the Merger, the Spin-off and the other
transactions contemplated hereby may be consummated as promptly as practicable
on the terms contemplated hereby and otherwise use commercially reasonable
efforts, subject to such fiduciary duties, to eliminate or minimize the
effects of such statute or regulation on the Merger, the Spin-off and the
other transactions contemplated hereby.
6.7 Consents. Company and Merger Partner will use commercially reasonable
efforts to obtain the written consent or approval of each and every
governmental authority and other regulatory body, including, without
limitation, each applicable banking and insurance regulatory authority, the
consent or approval of which shall be required in order to permit Merger
Partner, Sub and Company to consummate the transactions contemplated by this
Agreement and the Distribution Agreement. Company will use commercially
reasonable efforts to obtain the written consent or approval, in form and
substance reasonably satisfactory to Merger Partner, of each person whose
consent or approval shall be required in order to permit Merger Partner, Sub
and Company to consummate the transactions contemplated by this Agreement and
the Distribution Agreement, except for any contracts of Company as to which
the failure to obtain any required written consent or approval thereunder
would not individually or in the aggregate result in a Material Adverse Effect
on Company. Merger Partner will use commercially reasonable efforts to obtain
the written consent or approval, in form and substance reasonably satisfactory
to Company, of each person whose consent or approval shall be required in
order to permit Merger Partner, Sub and Company to consummate the transactions
contemplated by this Agreement and the Distribution Agreement, except for any
contracts of Merger Partner as to which the failure to obtain any required
written consent or approval thereunder would not individually or in the
aggregate result in a Material Adverse Effect on Merger Partner.
6.8 Further Assurances. Subject to the terms and conditions herein provided,
each of the parties hereto will promptly file and prosecute diligently the
applications and related documents required to be filed by such party with the
applicable regulatory authorities in order to effect the transactions
contemplated hereby, including filings under the HSR Act requesting early
termination of the applicable waiting period and filings with state banking
and insurance authorities. Each party hereto agrees to use all commercially
reasonable efforts to take, or cause to be taken, all action and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement. In case at any time after the Effective Time
any further action is necessary or desirable to carry out the purposes of this
Agreement, the proper officers and directors of each corporation which is a
party to this Agreement shall take all such necessary action. Each of the
parties hereto agrees to defend vigorously against
A-33
<PAGE>
any actions, suits or proceedings in which such party is named as defendant
which seeks to enjoin, restrain or prohibit the transactions contemplated
hereby or seeks damages with respect to such transactions.
6.9 NYSE Listing. Merger Partner will use all commercially reasonable
efforts to cause to be approved for listing on the NYSE, subject to official
notice of issuance, a sufficient number of shares of Merger Partner Common
Stock to be issued in the Merger and pursuant to Company Stock Options (as
defined in Section 6.17).
6.10 Notice; Efforts to Remedy. Each party hereto shall promptly give
written notice to the other parties hereto upon becoming aware of the
impending occurrence of any event which would cause or constitute a breach of
any of the representations, warranties or covenants of such party contained in
this Agreement and shall use all commercially reasonable efforts to prevent or
promptly remedy the same. During the period from the date of this Agreement to
the Effective Time, Company and Merger Partner each shall cause one or more of
its representatives to confer on a regular and frequent basis with
representatives of the other and to report on the general status of its
ongoing operations. Company shall promptly notify Merger Partner of any
material change in each case on a consolidated basis in the normal course of
Company's or the Company Subsidiaries' businesses or in the operation of its
or their properties and of the receipt by Company or the Company Subsidiaries
of notice of any governmental complaints, investigations or hearings (or
communications indicating that the same may be contemplated) or the receipt by
Company or the Company Subsidiaries of a notice of the institution or the
threat of litigation involving Company or any of the Company Subsidiaries
which, individually or in the aggregate, would have a Material Adverse Effect
on Company, and will keep Merger Partner fully informed with respect to such
events. Merger Partner shall promptly notify Company of any material change in
each case on a consolidated basis in the normal course of Merger Partner's or
the Merger Partner Subsidiaries' businesses or in the operation of its or
their properties, and of the receipt by Merger Partner or the Merger Partner
Subsidiaries of notice of any governmental complaints, investigations or
hearings (or communications indicating that the same may be contemplated) or
the receipt by Merger Partner or the Merger Partner Subsidiaries of a notice
of the institution or the threat of litigation involving Merger Partner or any
of the Merger Partner Subsidiaries which, individually or in the aggregate,
would have a Material Adverse Effect on Merger Partner and will keep Company
fully informed with respect to any such events.
6.11 Registration Statement; Stockholder Approvals.
(a) As soon as is reasonably practicable after the execution of this
Agreement, Merger Partner shall prepare and file with the SEC the Registration
Statement (in which the Proxy Statement will be included as a prospectus) and
Company shall prepare and file with the SEC the Proxy Statement (which shall
also include the Information Statement relating to the Spin-off). Merger
Partner shall use all commercially reasonable efforts to cause the
Registration Statement to become effective under the Securities Act as
promptly as practicable after such filing and shall take all commercially
reasonable actions required to be taken under any applicable state blue sky or
securities laws in connection with the issuance of the shares of Merger
Partner Common Stock pursuant to this Agreement. Each party hereto shall
furnish all information concerning it and the holders of its capital stock as
the other party hereto may reasonably request in connection with such actions.
(b) Company shall call a Stockholders' Meeting to be held as soon as
practicable after the date hereof for the purpose of voting upon the Merger
and this Agreement. In connection with the Stockholders' Meeting, Company and
Merger Partner shall prepare and file the Proxy Statement with the SEC.
Subject to Section 6.3, (i) Company shall mail the Proxy Statement to its
stockholders, (ii) the Board of Directors of Company shall recommend to its
stockholders the approval of the Merger and this Agreement, and (iii) Company
shall use commercially reasonable efforts to obtain such stockholder approval.
Without limiting the generality of the foregoing, Company agrees that, subject
to its right to terminate this Agreement pursuant to Section 6.3, its
obligations pursuant to this Section 6.11(b) shall not be affected by the
commencement, public proposal, public disclosure or communication to Company
of any Acquisition Proposal.
6.12 Expenses. If this Agreement is terminated for any reason without breach
by any party, each party hereto shall pay its own expenses incident to
preparing for, entering into, and carrying out this Agreement and to
A-34
<PAGE>
consummating the Merger, except that Company and Merger Partner shall divide
equally the following expenses: (a) the costs incurred in connection with the
printing and mailing of the Registration Statement, the Proxy Statement and
related documents; and (b) all filing or registration fees paid by Company or
Merger Partner, including state securities laws filing or registration fees,
if any.
6.13 Press Releases; Filings. Without the consent of the other parties, none
of the parties shall issue any press release or make any public announcement
with regard to this Agreement, the Distribution Agreement, the Merger or the
Spin-off or any of the transactions contemplated hereby or thereby; provided,
however, that nothing in this Section 6.13 shall be deemed to (i) prohibit
Company, Merger Partner or Spinco from making any disclosures, press releases
or announcements relating to their respective businesses or operations, or
(ii) prohibit any party hereto from making any disclosure which its counsel
deems necessary or advisable in order to fulfill such party's disclosure
obligations imposed by law or the rules of any national securities exchange or
automated quotation system. Each of Company and Merger Partner shall promptly
notify the other of each report, schedule and other document filed by it or
any of its respective Subsidiaries with the SEC and of any other document
pertaining to the transactions contemplated hereby filed with any other
governmental authorities.
6.14 Indemnification of Officers and Directors.
(a) Until such time as the applicable statute of limitations shall have
expired, the Surviving Corporation shall provide with respect to each present
or former director and officer of Company and its subsidiaries (both present
and past) (the "Indemnified Parties"), the indemnification rights (including
any rights to advancement of expenses) which such Indemnified Parties had,
whether from Company or such subsidiary, immediately prior to the Merger,
whether under the DGCL or the bylaws of Company or such subsidiary or
otherwise.
(b) Immediately following the Effective Time, Merger Partner shall cause to
be in effect the current policies of directors' and officers' liability
insurance maintained by Company or any Company Subsidiary (provided Merger
Partner may substitute therefor policies of at least the same coverage and
amounts containing terms and conditions which are no less advantageous) with
respect to claims arising from facts or events which occurred at or before the
Effective Time, and Merger Partner shall maintain such coverage for a period
of six years after the Effective Time; provided, however, that in no event
shall Merger Partner be required to expend pursuant to this Section 6.14(b) on
an annual basis more than an amount equal to 250% of the current annual
premiums paid by Company and the Company Subsidiaries for such insurance and,
in the event the cost of such coverage shall exceed that amount, Merger
Partner shall purchase as much coverage as possible for such amount.
(c) This Section 6.14 shall survive the Closing and is intended to benefit
Company, the Surviving Corporation and each of the Indemnified Parties and his
or her heirs and representatives (each of whom shall be entitled to enforce
this Section 6.14 against Merger Partner or the Surviving Corporation to the
extent specified herein) and shall be binding on all successors and assigns of
Merger Partner and the Surviving Corporation.
6.15 Tax Treatment. Merger Partner and Company agree to treat the Spin-off
as a tax-free distribution within the meaning of Section 355 of the Code and
the Merger as a reorganization within the meaning of Section 368(a) of the
Code. During the period from the date of this Agreement through the Effective
Time, unless the parties shall otherwise agree in writing, none of Merger
Partner, Company or any of their respective Subsidiaries shall knowingly take
or fail to take any action which action or failure to act would jeopardize
qualification of the Spin-off as a tax-free distribution within the meaning of
Section 355 of the Code or the Merger as a reorganization within the meaning
of Section 368(a) of the Code.
6.16 Employee Benefits.
(a) From and after the Effective Time, the Surviving Corporation shall honor
all obligations and commitments under the plans, programs, arrangements,
practices and contracts which are maintained by Company or any of the Company
Subsidiaries or to which Company or any Company Subsidiary is obligated to
make contributions and which provide benefits or compensation to or on behalf
of employees, including but not limited to executive arrangements and
"employee benefit plans" as defined in Section 3(1) of ERISA, in each
A-35
<PAGE>
case in accordance with their terms as in effect at the Effective Time, with
only such amendments as are permitted by the terms thereof as in effect at the
Effective Time.
(b) Merger Partner shall take, and shall cause the Surviving Corporation and
its subsidiaries and all other affiliates of Merger Partner to take, the
following actions: (i) waive any limitations regarding pre-existing conditions
under any welfare or other employee benefit plan maintained by any of them for
the benefit of employees of Company or any of its subsidiaries (the "Company
Employees") or in which Company Employees participate after the Effective
Time, and (ii) for all purposes under all compensation and benefit plans and
policies applicable to employees of any of them, treat all service by Company
Employees with Company or any affiliates of Company before the Effective Time
as service with Merger Partner and its affiliates, except to the extent such
treatment would result in duplication of benefits.
(c) From and after the Effective Time, the Surviving Corporation shall
assume all obligations of Company under Company's Management Incentive Plan
and Variable Pay Plan and shall make all payments owed by Company pursuant to
the Management Incentive Plan and the Variable Pay Plan in respect of periods
through December 31, 1996 in accordance with Company's past practices.
(d) Effective as of the Effective Time: (i) the Pension Trustees of the
Retirement Plan shall appoint as their successors pursuant to Section 6.1 of
the Retirement Plan individuals and/or entities selected by Merger Partner and
shall resign as Pension Trustees; (ii) Section 6.1 of the Retirement Plan
shall be amended to delete the second and third sentences thereof; (iii)
Section 9.1 of the Retirement Plan shall be amended to delete the
parenthetical phrase in the first sentence thereof; and (iv) Section 13.2 of
the Retirement Plan shall be amended to clarify that a merger of the
Retirement Plan with a defined benefit pension plan in accordance with Section
414(e) of the Code and all other applicable law will not be considered a
termination of the Retirement Plan for purposes of Section 13.12 thereof. The
amendments adopted pursuant to the preceding sentence shall be in form and
substance satisfactory to Merger Partner. Before the Effective Time, the
Company and Merger Partner shall take all steps necessary and appropriate to
comply with the requirements of Section 29.14 thereof for continuation of the
Retirement Plan after the Effective Time.
6.17 Stock Options.
(a) At the Effective Time, each outstanding option to purchase shares of
Company Common Stock (a "Company Stock Option") and each outstanding stock
appreciation right (a "Company SAR") issued pursuant to any incentive or stock
option program of Company (the "Company Plan"), whether vested or unvested,
shall be assumed by Merger Partner, provided that the foregoing shall not
apply to options or stock appreciation rights assumed by Spinco pursuant to
the Distribution Agreement and such options and stock appreciation rights
assumed by Spinco shall not constitute Company Stock Options or Company SARs
for purposes of this Agreement. Each Company Stock Option shall be deemed to
constitute an option to acquire, on the same terms and conditions as were
applicable under such Company Stock Option, a number of shares of Merger
Partner Common Stock equal to (x) the number of shares of Company Common Stock
covered by such Company Stock Option, multiplied by (y) the Option Adjustment
Ratio, at a price per share equal to (A) the exercise price of such Company
Stock Option immediately prior to the Spin-off, multiplied by (B) (1) one
divided by (2) the Option Adjustment Ratio; provided, however, that in the
case of any option to which Section 421 of the Code applies by reason of its
qualification under Section 422 of the Code ("incentive stock options"), the
option price, the number of shares purchasable pursuant to such option and the
terms and conditions of exercise of such option shall be determined in order
to comply with Section 424(a) of the Code. For purposes of the foregoing, the
"Option Adjustment Ratio" shall mean the amount obtained by dividing (i) the
average of the daily high and low trading prices on the New York Stock
Exchange for the Company Common Stock on each of the 20 trading days prior to
the ex-dividend date for the Spin-off by (ii) the average of the daily high
and low trading prices on the New York Stock Exchange for the Merger Partner
Common Stock on each of the same 20 trading days. Each holder of a Company SAR
shall be entitled to that number of stock appreciation rights of Merger
Partner ("Merger Partner SARs"), determined in the same manner as set forth
above with respect to Company Stock Options assumed by Merger Partner. At the
Effective Time, the agreements evidencing the grants of Company
A-36
<PAGE>
Stock Options and Company SARs assumed by Merger Partner shall be amended to
provide that the right of a holder to exercise Company Stock Options and
Company SARs shall continue beyond the termination of such holder's
employment, if such holder's employment is terminated without Cause or such
holder leaves employment for Good Reason (as such terms are defined in the
Company's change of control policy as in effect immediately prior to the
Effective Time or, if applicable, such holder's employment agreement or change
of control severance agreement), until the later of (x) the second anniversary
of the Effective Time, (y) 90 days after such holder's termination of
employment, and (z) the end of the period for exercise of such Company Stock
Options or Company SARs as provided in any employment or severance agreement
between the Company and such holder.
(b) As soon as practicable after the Effective Time, Merger Partner shall
deliver to the holders of Company Stock Options and Company SARs appropriate
notices setting forth such holders' rights pursuant to the Company Plan and
the agreements evidencing the grants of such Company Stock Options or Company
SARs, as the case may be, shall continue in effect on the same terms and
conditions (subject to the adjustments required by this Section 6.17 after
giving effect to the Merger and the assumption by Merger Partner as set forth
above). If necessary, Merger Partner shall comply with the terms of the
Company Plan and ensure, to the extent required by, and subject to the
provisions of, such Plan, that Company Stock Options which qualified as
incentive stock options prior to the Effective Time continue to qualify as
incentive stock options of Merger Partner after the Effective Time.
(c) Merger Partner shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Merger Partner Common Stock for
delivery upon exercise of Company Stock Options assumed by it in accordance
with this Section 6.17. As soon as practicable after the Effective Time,
Merger Partner shall file a registration statement on Form S-3 or Form S-8, as
the case may be (or any successor or other appropriate forms), or another
appropriate form with respect to the shares of Merger Partner Common Stock
subject to such options and shall use all reasonable efforts to maintain the
effectiveness of such registration statement or registration statements (and
maintain the current status of the prospectus or prospectuses contained
therein) for so long as such options remain outstanding. With respect to those
individuals who subsequent to the Merger will be subject to the reporting
requirements under Section 16(a) of the Exchange Act, where applicable, Merger
Partner shall administer each Company Plan assumed pursuant to this Section
6.17 in a manner that complies with Rule 16b-3 promulgated under the Exchange
Act to the extent the Company Plan complied with such rule prior to the
Merger.
6.18 AEGON USA Guaranty. At the Closing, Merger Partner shall cause AEGON
USA, Inc. to enter into a Guaranty Agreement with Company and Spinco in
substantially the form of Exhibit D pursuant to which AEGON USA, Inc. will
guarantee the obligations of Company pursuant to Section 6.14 and Section 6.16
of this Agreement and the obligations of Company under the Distribution
Agreement and the Other Agreements (as defined in the Distribution Agreement).
6.19 Determination of Comparable Benefits. Prior to the Closing Date,
Company and Merger Partner shall work together in good faith to determine
whether the employee benefit plans and employee welfare plans currently
maintained by Company and the Company Subsidiaries for their employees are, in
the aggregate, at least as favorable as such plans currently maintained by
Merger Partner and the Merger Partner Subsidiaries, as contemplated in the
definition of "Good Reason" contained in Company's Change in Control Plan. The
determination of Company and Merger Partner, if any, shall be reduced to
writing, which shall be signed by both parties.
6.20 Merger Partner Exchange Transaction. Prior to the Closing Date, Merger
Partner shall effect, in one or more arm's length transactions which will
occur contemporaneously, (i) the purchase by Merger Partner of approximately
8% of the currently outstanding shares of Merger Partner Common Stock from the
Association, and (ii) the sale of such number of shares of the existing class
of Merger Partner Common Stock to the Association, such that the Association
shall maintain its percentage of voting control as of the date hereof, subject
to increases such that the Association's percentage of voting control shall
not exceed historical percentages of
A-37
<PAGE>
voting control within the last five years. Merger Partner agrees that, except
as set forth in the preceding sentence, between the date hereof and the
Closing Date Merger Partner will not issue or sell any shares of capital stock
of Merger Partner to the Association, except that Merger Partner may issue or
sell to the Association during such period a maximum of 500,000 shares of
capital stock in connection with other transactions.
6.21 Company Contracts. Within 28 days after the date of this Agreement,
Company shall furnish to Merger Partner access to and copies of listings of
contracts, agreements, leases, commitments, arrangements or other instruments
hereinafter described in this Section 6.21 to which the Company or any Company
Subsidiary is a party or by or to which it or any of its assets or properties
are bound except for (i) agreements, commitments, arrangements, leases or
other instruments disclosed in the Company Annual Report on Form 10-K for the
year ended December 31, 1995, (ii) the Distribution Agreement (and the other
agreements contemplated thereby), and (iii) insurance, reinsurance and agency
contracts entered into or to be entered into in the normal course of business:
(a) contracts and other agreements with any current or former officer,
director, employee, consultant or other representative (other than an
insurance agent or broker) of Company or any Company Subsidiary pursuant to
which Company or any Company Subsidiary has ongoing obligations calling for
payments in any one year of more than $250,000 in any one case, other than
such contracts and other agreements that are terminable at will by Company
or such Company Subsidiary,
(b) contracts and other agreements for the purchase or sale of equipment
or services or to make capital expenditures (whether through the purchase
of real or personal property or otherwise), other than in the ordinary
course of business (including agreements for ordinary maintenance of
equipment), calling for a purchase price or payments in any one year of
more than $2.5 million,
(c) contracts and other agreements for the sale of any of its assets or
properties or for the grant to any Person of any preferential rights to
purchase or use any of its assets or properties in each case involving
assets or properties with a book value in excess of $2.5 million, other
than those entered into in the ordinary course of business,
(d) joint venture, partnership and marketing agreements which are
material to any of the Company Business Units taken as a whole,
(e) contracts and other agreements containing covenants of Company or any
Company Subsidiary not to compete with any Person which are material to
Company and the Company Subsidiaries as a whole or which following the
Effective Time will be material to Merger Partner and the Merger Partner
Subsidiaries taken as a whole,
(f) contracts and other agreements relating to the making of any loan in
excess of $1 million in any one case, other than Investment Assets and
Company Employee Plan loans made in the ordinary course of business and
other than intercompany loans between or among Company and/or the Company
Subsidiaries,
(g) contracts or other agreements for or relating to computer equipment
or computer services calling for a purchase price or payment in any one
case during any one year of more than $1 million,
(h) contracts or other agreements relating to any derivative instruments
or securities or any "off-balance sheet" financing transaction, other than
those entered into in the ordinary course of business for bona fide hedging
purposes, and
(i) to the Knowledge of Company, any other contract or other agreement
whether or not made in the ordinary course of business calling for payments
in any one year of more than $2.5 million in any one case.
6.22 Agents. Within 28 days after the date of this Agreement, Company shall
furnish to Merger Partner (a) a list of Company's agents and brokers as of the
date hereof who have acted as agent or broker with respect to insurance
contracts of Company which are in force and who were paid commissions in
excess of $500,000 by any Company Insurance Subsidiary within the past twelve
months ("Significant Brokers"), (b) a list of and
A-38
<PAGE>
copies of the standard forms of agreements between each Company Insurance
Subsidiary and its insurance agents and brokers, (c) a list of those
Significant Brokers as to which such agreements specified in clause (b) of
this Section 6.22 are in effect and (d) a list of those Significant Brokers
who have entered into other agency agreements with any Company Insurance
Subsidiary that are in effect.
6.23 Litigation. Subject to the restrictions set forth in Section 6.1(a),
during the period from the date hereof until the Effective Time, Company
shall, and shall cause the Company Subsidiaries to, give Merger Partner and
its representatives access to and copies of listings of claims, actions,
suits, investigations and proceedings to which Company or any Company
Subsidiary is subject, to the extent such listings are in the possession of
the Company or the Company Subsidiaries and are reasonably requested by Merger
Partner. It is understood and agreed that the provision of any such listings
shall not be deemed to modify the representations of the Company set forth in
Section 4.10.
6.24 Certain Reporting Requirements. After the Effective Time, Merger
Partner shall cause the Surviving Corporation to comply with the reporting
requirements of Section 6038B of the Code and the regulations thereunder.
6.25 Investment Company Act. Merger Partner covenants and agrees that it
will comply in all material respects with any requirements imposed by Section
15(f) of the 1940 Act with respect to the Manager.
6.26 Ruling Request. Prior to the filing of a request (the "Ruling Request")
for a Ruling (as defined in Section 7.1(g)) with the IRS, Company will permit
Merger Partner to review and comment on the Ruling Request and will consult
with Merger Partner regarding such Ruling Request. In addition, Company will
promptly make available for review by Merger Partner all written
correspondence that Company receives from the IRS concerning the Ruling
Request and will allow Merger Partner to participate in discussions with the
IRS. Merger Partner agrees to use all commercially reasonable efforts to
cooperate with Company in connection with such Ruling Request. Company shall
be responsible for all costs and expenses (including IRS user fees) relating
to the Ruling Request, except for costs and expenses relating to Merger
Partner's review of the Ruling Request and participation in such process.
ARTICLE 7
CONDITIONS PRECEDENT TO MERGER
7.1 Conditions to Each Party's Obligations. The respective obligations of
each party to effect the Merger shall be subject to the satisfaction on or
prior to the Closing Date of each of the following conditions:
(a) This Agreement and the Merger shall have been approved and adopted by
the affirmative vote or consent of the holders of at least a majority of
the outstanding shares of Company Common Stock.
(b) All consents, authorizations, orders and approvals of (or filings or
registrations with) any governmental authority or other regulatory body
required in connection with the execution, delivery and performance of this
Agreement and the Distribution Agreement, the failure to obtain which would
prevent the consummation of the Merger or the Spin-off or have a Material
Adverse Effect on Company or a Material Adverse Effect on Merger Partner,
shall have been obtained without the imposition of any conditions which
would have, individually or in the aggregate, a Material Adverse Effect on
Company or a Material Adverse Effect on Merger Partner.
(c) All authorizations, consents, waivers and approvals from parties to
contracts or other agreements to which any of Company or Merger Partner (or
their respective Subsidiaries) is a party, or by which either is bound, as
may be required to be obtained by them in connection with the performance
of this Agreement and the Distribution Agreement, the failure to obtain
which would prevent the consummation of the Merger
A-39
<PAGE>
or the Spin-off or have, individually or in the aggregate, a Material
Adverse Effect on Company or, individually or in the aggregate, a Material
Adverse Effect on Merger Partner, shall have been obtained.
(d) Early termination shall have been granted or applicable waiting
periods shall have expired under the HSR Act.
(e) No governmental authority or other regulatory body (including any
court of competent jurisdiction) shall have enacted, issued, promulgated,
enforced or entered any law, rule, regulation, executive order, decree,
injunction or other order (whether temporary, preliminary or permanent)
which is then in effect and has the effect of making illegal, materially
restricting or in any way preventing or prohibiting the Merger, the Spin-
off or the transactions contemplated by this Agreement or the Distribution
Agreement.
(f) The Registration Statement shall have become effective under the
Securities Act and no stop order suspending the effectiveness of the
Registration Statement shall be in effect and no proceedings for such
purpose, or under the proxy rules of the SEC pursuant to the Exchange Act
and with respect to the transactions contemplated hereby, shall be pending
before or threatened by the SEC. At the effective date of the Registration
Statement, the Registration Statement shall not contain any untrue
statement of a material fact, or omit to state any material fact necessary
in order to make the statements therein not misleading, and, at the mailing
date of the Proxy Statement and the date of the Stockholders' Meeting, the
Proxy Statement shall not contain any untrue statement of a material fact,
or omit to state any material fact necessary in order to make the
statements therein not misleading.
(g) The parties shall have received a private letter ruling from the IRS
(the "Ruling") to the effect that (i) the Spin-off will qualify as a tax-
free distribution within the meaning of Section 355 of the Code, (ii) the
Merger will constitute a reorganization within the meaning of Section
368(a) of the Code, (iii) the exchange in the Merger of Company Common
Stock for Merger Partner Common Stock will not give rise to gain or loss
for federal income tax purposes to the stockholders of Company with respect
to such exchange (except to the extent of the cash received), and (iv)
neither Company nor Sub will recognize gain or loss as a consequence of the
Merger.
(h) The shares of Merger Partner Common Stock to be issued pursuant to
this Agreement and pursuant to the Company Stock Options shall have been
authorized for listing on the NYSE, subject to official notice of issuance.
(i) The Spin-off shall have been effected.
7.2 Conditions to Obligations of Company. The obligations of Company to
effect the Merger shall be subject to the satisfaction on or prior to the
Closing Date of each of the following conditions unless waived by Company:
(a) The representations and warranties of Merger Partner set forth in
this Agreement shall be true and correct in all material respects at and as
of the date of this Agreement and at and as of the Closing Date as though
made at and as of the Closing Date, except to the extent such
representations and warranties (i) speak as of a specified date and except
to the extent contemplated or permitted by this Agreement; or (ii) are
already qualified by materiality, in which event such representations and
warranties shall be true and correct in all respects.
(b) Merger Partner and Sub each shall have performed in all material
respects all covenants and agreements required to be performed by them
under this Agreement at or prior to the Closing Date.
(c) Merger Partner shall furnish Company with a certificate of its
appropriate officers as to compliance with the conditions set forth in
Sections 7.2(a) and (b).
(d) Company shall have received a letter addressed to Company, dated the
Closing Date, from a nationally recognized appraisal firm, which letter
shall be in form and substance reasonably satisfactory to Company and shall
support the conclusions that, after giving effect to the Merger and the
Spin-off,
A-40
<PAGE>
Company will not be insolvent and will not be rendered insolvent by the
transactions contemplated hereby or by the Distribution Agreement, will not
be left with unreasonably small capital with which to engage in their
businesses and will not have incurred debts beyond its ability to pay such
debts as they mature.
(e) Company shall have received from Moret Ernst & Young letters dated
(i) the effective date of the Registration Statement and (ii) the Closing
Date, with respect to certain financial information regarding Merger
Partner included in the Registration Statement, in each case in form and
substance reasonably satisfactory to Company and customary in scope and
substance for letters delivered by independent public accountants in
connection with registration statements similar to the Registration
Statement.
(f) Company shall have received opinions, dated the Closing Date, of the
General Counsel of Merger Partner and the General Counsel of AEGON USA,
Inc., in form and substance reasonably satisfactory to Company, with
respect to the matters set forth in Exhibit E.
7.3 Conditions to Obligations of Merger Partner. The obligations of Merger
Partner to effect the Merger shall be subject to the satisfaction on or prior
to the Closing Date of each of the following conditions unless waived by
Merger Partner:
(a) The representations and warranties of Company set forth in this
Agreement shall be true and correct in all material respects at and as of
the date of this Agreement and at and as of the Closing Date as though made
at and as of the Closing Date, except to the extent such representations
and warranties (i) speak as of a specified date and except to the extent
contemplated or permitted by this Agreement or the Distribution Agreement;
and (ii) are already qualified by materiality, in which event such
representations and warranties shall be true and correct in all respects.
(b) Company shall have performed in all material respects all covenants
and agreements required to be performed by it under this Agreement at or
prior to the Closing Date.
(c) Company shall furnish Merger Partner with a certificate of its
appropriate officers as to compliance with the conditions set forth in
Sections 7.3(a) and (b).
(d) Merger Partner shall have received from Ernst & Young LLP letters
dated (i) the date of the Proxy Statement and (ii) the Closing Date, with
respect to certain financial information regarding Company included in the
Proxy Statement, in each case in form and substance reasonably satisfactory
to Merger Partner and customary in scope and substance for letters
delivered by independent public accountants in connection with proxy
statements similar to the Proxy Statement.
(e) Company shall have used commercially reasonable efforts to cause each
person who Company believes, at the time the Merger is submitted to a vote
of the stockholders of Company, is an "affiliate" for purposes of Rule 145
under the Securities Act, to deliver to Merger Partner on or prior to the
Closing Date a written agreement in terms satisfactory to Merger Partner,
that such person will not offer to sell, transfer or otherwise dispose of
any of the shares of Merger Partner Common Stock issued to such person
pursuant to the Merger, except in accordance with the applicable provisions
of Rule 145, and except in other transactions that are not in violation of
the Securities Act. Exhibit F sets forth a list of those persons who the
Company believes, at the date hereof, are "affiliates" for purposes of Rule
145 under the Securities Act.
(f) Merger Partner shall have received an opinion, dated the Closing
Date, of King & Spalding, counsel to Company, in form and substance
reasonably satisfactory to Merger Partner, with respect to the matters set
forth in Exhibit G.
A-41
<PAGE>
ARTICLE 8
TERMINATION AND ABANDONMENT OF THE MERGER
8.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after the approval by the stockholders of
Company:
(a) by the mutual written consent of Merger Partner and Company;
(b) by Company if:
(i) the Merger is not consummated on or before August 31, 1997 (or
such later date as shall have been approved by Merger Partner and
Company), unless the failure of such occurrence shall be due to the
failure of Company to perform or observe the covenants, agreements and
conditions hereof to be performed or observed by it at or before the
Effective Time;
(ii) events occur which render impossible the satisfaction of one or
more of the conditions set forth in Sections 7.1 and 7.2 and such
conditions are not waived by Company, unless the failure of such
occurrence shall be due to the failure of Company to perform or observe
the covenants, agreements and conditions hereof to be performed or
observed by it at or before the Effective Time;
(iii) Company is enjoined or restrained by any governmental authority
or other regulatory body (including any court), such injunction or
restraining order prevents the performance by Company of its
obligations hereunder and such injunction shall not have been withdrawn
by the earlier to occur of the date 60 days after the date on which
such injunction was first issued or August 31, 1997;
(iv) the Board of Directors of Company shall have exercised any of
its rights set forth in Section 6.3;
(v) the stockholders of Company do not approve this Agreement and the
Merger at the Stockholders' Meeting; or
(vi) the Fair Market Value at the Effective Time of one share of
Merger Partner Common Stock (assuming the Effective Time were to occur
on the Closing Date) would be less than $44.475, unless Merger Partner
agrees in such event that the Exchange Ratio shall be determined by
dividing $24.889 by the Fair Market Value at the Effective Time of one
share of Merger Partner Common Stock.
(c) by Merger Partner if:
(i) the Merger is not consummated on or before August 31, 1997 (or
such later date as shall have been approved by Company and Merger
Partner), unless the failure of such occurrence shall be due to the
failure of Merger Partner or Sub to perform or observe the covenants,
agreements and conditions hereof to be performed or observed by them at
or before the Effective Time;
(ii) events occur which render impossible the satisfaction of one or
more of the conditions set forth in Sections 7.1 and 7.3 and such
conditions are not waived by Merger Partner, unless the failure of such
occurrence shall be due to the failure of Merger Partner or Sub to
perform or observe the covenants, agreements and conditions hereof to
be performed or observed by them at or before the Effective Time;
(iii) Merger Partner is enjoined or restrained by any governmental
authority or other regulatory body (including any court), such
injunction or restraining order prevents the performance by Merger
Partner of its obligations hereunder and such injunction shall not have
been withdrawn by the earlier to occur of the date 60 days after the
date on which such injunction was first issued or August 31, 1997;
(iv) the stockholders of Company do not approve this Agreement and
the Merger at the Stockholders' Meeting;
A-42
<PAGE>
(v) the Board of Directors of Company shall have withdrawn or
materially modified in a manner adverse to Merger Partner its
recommendation of this Agreement and the Merger or the Board of
Directors shall have approved or recommended another Acquisition
Proposal; or
(vi) the Fair Market Value at the Effective Time of one share of
Merger Partner Common Stock (assuming the Effective Time were to occur
on the Closing Date) would be greater than $66.713, unless the Company
agrees in such event that the Exchange Ratio shall be determined by
dividing $30.545 by the Fair Market Value at the Effective Time of one
share of Merger Partner Common Stock.
8.2 Effect of Termination and Abandonment. In the event of the termination
and abandonment of this Agreement under Section 8.1, this Agreement shall
become void and have no effect, without any liability on the part of any party
or its directors, officers or stockholders except (i) as provided in the third
sentence of Section 6.1(a), and in Sections 6.4 and 6.12 and (ii) to the
extent that such termination results from the willful breach by any party
hereto of any material representation, warranty or covenant hereunder.
ARTICLE 9
MISCELLANEOUS
9.1 Waiver and Amendment. Any term or provision of this Agreement may be
waived in writing at any time by the party which is, or whose stockholders
are, entitled to the benefits thereof, and any term or provision of this
Agreement may be amended or supplemented at any time by action of the
respective Boards of Directors (or its authorized representative) of Merger
Partner or Company without action of the stockholders, whether before or after
the Stockholders' Meeting; provided, however, that after approval of the
stockholders of Company no such amendment shall reduce the amount or change
the form of the consideration to be delivered to Company's stockholders as
contemplated by this Agreement or otherwise materially adversely affect the
interests of such stockholders unless such amendment is approved by Company's
stockholders. No amendment to this Agreement shall be effective unless it has
been executed by Company, Merger Partner and Sub.
9.2 Non-Survival of Representations, Warranties and Agreements. Except for
the agreements contained in Sections 2.2, 2.3, 2.4, 2.5, 2.6, 6.8, 6.14, 6.15,
6.16, 6.17, 6.18, 6.24 and 6.25 and Article 9 and the representations and
warranties contained in Sections 4.35 and 5.29, none of the representations,
warranties and agreements of Company, Merger Partner or Sub in this Agreement,
or in any instrument or certificate delivered pursuant to this Agreement,
shall survive the Merger nor shall their respective stockholders, directors or
officers have any liability to the other after the Effective Time on account
of any breach of warranty or failure or the incorrectness of any of the
representations or warranties contained herein or in any certificate or other
instrument delivered pursuant to this Agreement. The sole right and remedy
arising from a misrepresentation or breach of warranty, from the failure of
any of the conditions of the Merger to be met, or from the failure to perform
any promise or discharge any obligation in this Agreement shall be termination
of this Agreement by the aggrieved party and the remedies provided in Section
8.2.
9.3 Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered
personally, telecopied (if confirmed) or sent by registered or certified mail,
postage prepaid, return receipt requested, addressed as follows:
If to Company:
Providian Center
400 West Market Street
Louisville, Kentucky 40202
Attention: Mr. Irving W. Bailey II
Telecopy No.: (502) 584-5960
A-43
<PAGE>
With a copy to:
King & Spalding
120 West 45th Street
New York, New York 10036
Attention: Mr. E. William Bates, II
Telecopy No.: (212) 556-2222
and to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Mr. Steven A. Rosenblum
Telecopy No.: (212) 403-2000
If to Merger Partner:
(via mail):
P.O. Box 202
2501 CE The Hague
The Netherlands
Attention: Mr. Kees J. Storm
Telecopy No.: (31-70) 347-7929
(via hand delivery):
Mariahoeveplein 50
2591 TV The Hague
The Netherlands
Attention: Mr. Kees J. Storm
Telecopy No.: (31-70) 347-7929
With a copy to:
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street
New York, New York 10019-5389
Attention: Mr. Donald B. Henderson, Jr.
Telecopy No.: (212) 424-8500
If to Merger Sub:
4333 Edgewood Road, NE
Cedar Rapids, Iowa 52499
Attention: Mr. Craig D. Vermie
Telecopy No.: (319) 369-2206
With a copy to:
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street
New York, New York 10019-5389
Attention: Mr. Donald B. Henderson, Jr.
Telecopy No.: (212) 424-8500
A-44
<PAGE>
9.4 Descriptive Headings; Interpretation. The descriptive headings are for
convenience of reference only and shall not control or affect the meaning or
construction of any provision of this Agreement. When a reference is made in
this Agreement to Sections, such reference shall be to a Section of this
Agreement unless otherwise indicated. The phrase "made available" in this
Agreement shall mean that the information referred to has been made available
if requested by the party to whom such information is to be made available.
The phrases "the date of this Agreement", "the date hereof", and terms of
similar import, unless the context otherwise requires, shall be deemed to
refer to December 28, 1996. Notwithstanding anything to the contrary contained
in this Agreement or in any of the Schedules, any information disclosed on one
Schedule shall be deemed to be disclosed in all Schedules provided that the
context makes clear that such information relates to the other Schedule or
Schedules. Certain information set forth in the Schedules is included solely
for informational purposes and may not be required to be disclosed pursuant to
this Agreement. As between Company or Merger Partner, as applicable, and third
parties, the disclosure of any information shall not be deemed to constitute
an acknowledgment that such information is required to be disclosed in
connection with the representations and warranties made by Company and in this
Agreement. The foregoing two sentences shall nevertheless not affect the
rights or obligations of Company or Merger Partner as set forth herein. In
addition, it is understood and agreed that the inclusion of information in any
Disclosure Schedule which is not required to be disclosed in such Schedule
shall not give rise to any inference that any comparable information is
required to be disclosed and shall not give rise to any breach by a party due
to the failure to disclose comparable information which is also otherwise not
required to be disclosed.
9.5 Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement. This Agreement shall become effective when one or more counterparts
have been signed by each of the parties and delivered to the other parties, it
being understood that the parties need not sign the same counterpart.
9.6 Entire Agreement. This Agreement and the Confidentiality Agreements
contain the entire agreement between Merger Partner, Sub and Company with
respect to the Merger, and supersede all prior arrangements or understandings
with respect to the subject matter hereof. Except as otherwise contemplated in
the covenants listed in Section 9.2 (which covenants shall be enforceable by
the person or persons affected thereby following the Effective Time), this
Agreement is not intended to confer upon any person other than the parties
hereto any rights or remedies hereunder.
9.7 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE (WITHOUT REGARD TO ANY
APPLICABLE CONFLICTS OF LAW PROVISIONS THEREOF).
9.8 Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby are not affected in any
manner materially adverse to any party. Upon such determination that any term
or other provision is invalid, illegal or incapable of being enforced, the
parties shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in a mutually
acceptable manner in order that the transactions be consummated as originally
contemplated to the fullest extent possible.
9.9 Enforcement of Agreement. The parties agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction
or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any court of the United States
or any state having jurisdiction, this being in addition to any other remedy
to which they are entitled at law or in equity.
A-45
<PAGE>
9.10 Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto (whether
by operation of law or otherwise) without the prior written consent of the
other parties, and any attempt to make any such assignment without such
consent shall be null and void. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties hereto and their respective successors and assigns.
9.11 Limited Liability. Notwithstanding any other provision of this
Agreement or the Distribution Agreement, no stockholder, director, officer,
affiliate or representative of Company or Merger Partner shall have any
personal liability in respect of or relating to the covenants, obligations,
representations or warranties of such party under this Agreement or the
Distribution Agreement or in respect of any certificate delivered with respect
hereto or thereto, except to the extent that such person or entity has engaged
in fraud with respect to such matters. Except as set forth in the preceding
sentence, to the fullest extent legally permissible, each of Company and
Merger Partner, for itself and its stockholders, directors, officers and
affiliates, waives and agrees not to seek to assert or enforce any such
liability that any such person otherwise might have pursuant to applicable
law.
9.12 Consent to Jurisdiction; Service of Process.
(a) Each party irrevocably consents and agrees that any legal action, suit
or proceeding by or against it with respect to its rights, obligations or
liabilities under this Agreement or any other agreement executed in connection
with this agreement shall be brought by such party only in the United States
District Court for the District of Delaware or, if (but only if) such court
does not have subject matter jurisdiction over such action, suit or proceeding
(including, without limitation, claims for interim relief, counterclaims,
actions with multiple defendants and actions in which such party is implied).
Each party irrevocably and unconditionally waives any right that it may have
to a jury trial in any legal action, suit or proceeding with respect to, or
arising out of or in connection with this Agreement or any other agreement
executed in connection with this Agreement.
(b) Merger Partner hereby irrevocably designates CT Corporation system in
such capacity, the "Process Agent"), with an office at 1209 Orange Street,
Wilmington, Delaware 19801 as its designee, appointee and agent to receive,
for and on its behalf service of process in such jurisdiction in any legal
action or proceedings with respect to this agreement or any other agreement
executed in connection with this Agreement, and such service shall be deemed
complete upon delivery thereof to the process agent, provided that in the case
of any such service upon the process agent, the party effecting such service
shall also deliver a copy thereof to Merger Partner in the manner provided in
Section 9.3. Merger Partner shall take all such action as may be necessary to
continue said appointment in full force and effect or to appoint another agent
so that Merger Partner will at all times have an agent for service of process
for the above purposes in Delaware. In the event of the transfer of all or
substantially all of the assets and business of the process agent to any other
corporation by consolidation, merger, sale of assets or otherwise, such other
corporation shall be substituted hereunder for the process agent with the same
effect as if named herein in place of CT Corporation system. Merger Partner
further irrevocably consents to the service of process out of any of the
aforementioned courts in any such action or proceeding by the mailing of
copies thereof by registered airmail, postage prepaid, to such party at its
address set forth in this agreement, such service of process to be effective
upon acknowledgment of receipt of such registered mail. Nothing herein shall
affect the right of any party to serve process in any other manner permitted
by applicable law. Merger Partner expressly acknowledges that the foregoing
waiver is intended to be irrevocable under the laws of the state of Delaware
and of the United States of America.
A-46
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed and delivered by its respective duly authorized officers, all as
of the date first above written.
AEGON N.V.
/s/ Donald J. Shepard
By: _________________________________
Name: Donald J. Shepard
Title:Member of Executive Board
LT MERGER CORP.
/s/ Patrick S. Baird
By: _________________________________
Name: Patrick S. Baird
Title:President
PROVIDIAN CORPORATION
/s/ Irving W. Bailey II
By: _________________________________
Name: Irving W. Bailey II
Title:Chairman of the Board and
Chief Executive Officer
A-47
<PAGE>
APPENDIX B
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF DISTRIBUTION
BETWEEN
PROVIDIAN CORPORATION
AND
PROVIDIAN BANCORP, INC.
DECEMBER 28, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE/
SECTION PAGE
-------- ----
ARTICLE I
DEFINITIONS
<C> <S> <C>
1.01. Definitions.................................................... 1
ARTICLE II
RECAPITALIZATION OF SPINCO;
MECHANICS AND TIMING OF THE DISTRIBUTION
2.01. Recapitalization of Spinco..................................... 5
2.02. Timing of the Distribution..................................... 5
2.03. Mechanics of the Distribution.................................. 5
2.04. Changes; Amendments to Various Agreements...................... 5
ARTICLE III
CERTAIN TRANSACTIONS PRIOR TO THE DISTRIBUTION
3.01. Certificate of Incorporation; By-laws; Rights Plan............. 5
3.02. Other Agreement 5
3.03. Registration and Listing....................................... 6
3.04. Spinco Board................................................... 6
3.05. Intercompany Accounts.......................................... 6
3.06. Certain Transactions........................................... 7
3.07. External Financing of Spinco................................... 7
3.08. Certain Company Agreements..................................... 8
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SPINCO
4.01. Spinco Representations......................................... 8
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
5.01. Company Representations........................................ 9
ARTICLE VI
SURVIVAL AND INDEMNIFICATION
6.01. Survival of Agreements and Representations and Warranties...... 10
6.02. Indemnification................................................ 10
6.03. Procedure for Indemnification for Third Party Claims........... 12
6.04. Remedies Cumulative............................................ 13
ARTICLE VII
CERTAIN ADDITIONAL COVENANTS
7.01. Notices to Third Parties....................................... 14
7.02. Intercompany Agreements........................................ 14
7.03. Further Assurances............................................. 14
7.04. Mutual Release, Etc........................................... 14
</TABLE>
(i)
<PAGE>
<TABLE>
<CAPTION>
ARTICLE/
SECTION PAGE
-------- ----
ARTICLE VIII
ACCESS TO INFORMATION
<C> <S> <C>
8.01. Provision of Corporate Records.................................. 15
8.02. Access to Information........................................... 15
8.03. Retention of Records............................................ 15
8.04. Reimbursement; Other Matters.................................... 16
8.05. Production of Witnesses......................................... 16
8.06. Confidentiality................................................. 16
8.07. Ownership of Information........................................ 17
8.08. Non-Competition................................................. 17
ARTICLE IX
INSURANCE
9.01. Policies and Rights Included Within Transferred Assets.......... 18
9.02. Post-Distribution Date Claims................................... 18
9.03. Administration; Other Matters................................... 18
9.04. Agreement for Waiver of Conflict and Shared Defense............. 20
9.05. Cooperation..................................................... 20
ARTICLE X
MISCELLANEOUS
10.01. Conditions to Obligations....................................... 20
10.02. Complete Agreement.............................................. 21
10.03. Expenses........................................................ 21
10.04. Governing Law................................................... 21
10.05. Notices......................................................... 21
10.06. Specific Performance............................................ 23
10.07. Amendment and Modification...................................... 23
10.08. Successors and Assigns; Third-Party Beneficiaries............... 23
10.09. Counterparts.................................................... 24
10.10. Interpretation.................................................. 24
10.11. Severability.................................................... 24
10.12. References; Construction........................................ 24
10.13. Termination..................................................... 24
</TABLE>
SCHEDULES
- ---------
Schedule 1.01--List of Spinco Subsidiaries
Schedule 3.05--Intercompany Payments
Schedule 3.06(a)--Transferred Assets
Schedule 3.07--External Financing Agreements
Schedule 3.08--Certain Company Agreements
Schedule 4.01(c)--Spinco Conflicts
Schedule 4.01(d)--Required Approvals for Spinco
Schedule 4.01(e)--Spinco Insurance Policies
Schedule 5.01(c)--Company Conflicts
Schedule 5.01(d)--Required Approvals for the Company
(ii)
<PAGE>
SCHEDULES
- ---------
Schedule 7.02--Surviving Intercompany Agreements
Schedule 8.03(d)--Policies-Deductibles
EXHIBITS
- --------
Exhibit A--Tax Disaffiliation Agreement
Exhibit B--Employee Benefits Agreement
Exhibit C--Transition Services Agreement
Exhibit D--Trademark License Agreement
Exhibit E--General Intellectual Property Assignment and Renunciation Agreement
Exhibit F--Short-Form Assignment Agreement
Exhibit G--Form of SEC No-Action Letter
(iii)
<PAGE>
AGREEMENT AND PLAN OF DISTRIBUTION, dated as of December 28, 1996 (this
"Agreement"), by and between Providian Corporation, a Delaware corporation
(the "Company"), and Providian Bancorp, Inc., a Delaware corporation and a
wholly owned subsidiary of the Company ("Spinco").
RECITALS
A. The Merger Transaction. The Company, AEGON N.V., a company organized
under the laws of The Netherlands ("Merger Partner"), and LT Merger Corp., a
Delaware corporation and a wholly owned subsidiary of Merger Partner ("Sub"),
have entered into a Plan and Agreement of Merger and Reorganization, dated as
of December 28, 1996 (the "Merger Agreement"), providing for the Merger (as
defined in the Merger Agreement) of Sub with and into the Company, with the
Company as the surviving corporation.
B. The Distribution. Immediately prior to the Effective Time (as defined in
the Merger Agreement), the Company intends to distribute (the "Distribution")
as a dividend to the holders of the Company's common stock, par value $1.00
per share ("Company Common Stock"), on a pro rata basis, all of the then
outstanding shares of common stock, par value $1.00 per share ("Spinco Common
Stock"), of Spinco.
C. Purpose. The purpose of the Distribution is to facilitate the
reorganization of the Company, wherein the stockholders of the Company will
continue to own and operate Spinco, and to make possible the Merger by
divesting the Company of the businesses and operations conducted by Spinco in
a tax-free distribution to the Company's stockholders. This Agreement sets
forth or provides for certain agreements between the Company and Spinco in
consideration of the separation of their ownership.
NOW, THEREFORE, in consideration of the premises and of the respective
covenants and agreements set forth herein, the parties hereto hereby agree as
follows:
ARTICLE I
DEFINITIONS
1.01. Definitions. As used in this Agreement, the following terms shall have
the following respective meanings (capitalized terms used but not defined
herein shall have the respective meanings ascribed thereto in the Merger
Agreement):
"Claims Administration" shall mean the processing of claims made under the
Shared Policies, including the reporting of claims to the insurance carriers,
management and defense of claims and providing for appropriate releases upon
settlement of claims.
"Company" shall have the meaning specified in the preamble to this Agreement
and shall mean any successors by way of merger or otherwise.
"Company Business" shall have the meaning specified in Section 6.02.
"Company Common Stock" shall have the meaning specified in the recitals to
this Agreement.
"Company Group" shall mean the Company and all of the Company Subsidiaries
(which shall not include Spinco and the members of the Spinco Group).
"Distribution" shall have the meaning specified in the recitals to this
Agreement.
"Distribution Date" shall mean the date as of which the Distribution is
effective.
"Employee Benefits Agreement" shall have the meaning specified in Section
3.02.
<PAGE>
"Form F-4" shall mean the Registration Statement on Form F-4 filed by Merger
Partner pursuant to the Merger Agreement.
"Group" shall mean either the Spinco Group or the Company Group, as the case
may be.
"Indemnified Party" shall have the meaning specified in Section 6.03.
"Indemnifying Party" shall have the meaning specified in Section 6.03.
"Information" shall have the meaning specified in Section 8.02.
"Information Statement" shall mean the information statement included in the
Registration Statement and sent to the holders of shares of Company Common
Stock in connection with the Distribution, including any amendment or
supplement thereto.
"Insurance Administration" shall mean, with respect to each Shared Policy,
the accounting for (i) premiums, (ii) defense costs, (iii) indemnity payments,
(iv) deductibles and (v) retentions, as appropriate, under the terms and
conditions of each of the Shared Policies; and the reporting to excess
insurance carriers of any losses or claims which may cause the per-occurrence,
per claim or aggregate limits of any Shared Policy to be exceeded, and the
distribution of Insurance Proceeds as contemplated by this Agreement.
"Insurance Proceeds" shall mean those monies (i) received by an insured from
an insurance carrier or (ii) paid by an insurance carrier on behalf of an
insured, in either case net of any applicable premium adjustment, deductible,
retention, or cost of reserve paid or held by or for the benefit of such
insured.
"Insured Claims" shall mean those Liabilities that, individually or in the
aggregate, are covered within the terms and conditions of any of the Shared
Policies, whether or not subject to deductibles, co-insurance,
uncollectibility or retrospectively-rated premium adjustments.
"Liabilities" shall mean all debts, liabilities and obligations, whether
absolute or contingent, matured or unmatured, liquidated or unliquidated,
accrued or unaccrued, known or unknown, whenever arising, and whether or not
the same would properly be reflected on a balance sheet.
"Losses" shall have the meaning specified in Section 6.02.
"Merger Partner" shall have the meaning specified in the recitals to this
Agreement.
"Other Agreements" shall have the meaning specified in Section 3.02.
"person" shall mean any natural person, corporation, business trust, joint
venture, association, company, limited liability company, partnership or
government, or any agency or political subdivision thereof.
"Policies" shall mean insurance policies and insurance contracts of any kind
(other than life and benefits policies or contracts), including primary,
excess and umbrella policies, comprehensive commercial general liability
policies, director and officer liability, fiduciary liability, automobile,
aircraft, property and casualty, workers' compensation and employee dishonesty
insurance policies, bonds and self-insurance and captive insurance company
arrangements, together with the rights, benefits and privileges thereunder.
"Proxy Statement" shall mean the proxy statement of the Company provided for
in the Merger Agreement.
"Record Date" shall have the meaning specified in Section 2.03.
"Registration Statement" shall have the meaning specified in Section 3.03.
"SEC" shall mean the United States Securities and Exchange Commission.
B-2
<PAGE>
"SEC Documents" shall have the meaning specified in Section 6.02.
"Shared Policies" shall mean all Policies, current, past or future to the
extent such Policies are entered into between the date hereof and the
Distribution Date, that are owned or maintained by or on behalf of the Company
or any member of the Company Group that relate, whether in whole or in part,
to the Spinco Business.
"Spinco" shall have the meaning specified in the preamble to this Agreement
and shall mean any successors by merger or otherwise.
"Spinco Business" shall have the meaning specified in Section 6.02.
"Spinco Common Stock" shall have the meaning specified in the recitals to
this Agreement.
"Spinco Group" shall mean Spinco and those subsidiaries listed on Schedule
1.01, including any subsidiaries transferred to Spinco pursuant to Section
3.06.
"Spinco Policies" shall mean all Policies, current or past, which are owned
or maintained by or on behalf of any member of the Company Group, which relate
to the Spinco Business but do not relate to the Company Business.
"Spinco Preferred Stock" shall have the meaning specified in Section 2.01.
"Tax Disaffiliation Agreement" shall have the meaning specified in Section
3.02.
"Third Party Claim" shall have the meaning specified in Section 6.03.
"Trademark License Agreement" shall have the meaning specified in Section
3.02.
"Transfer Agent" shall mean First Chicago Trust Company of New York, the
transfer agent for the Company Common Stock.
"Transferred Assets" shall have the meaning specified in Section 3.06(a).
"Transition Services Agreement" shall have the meaning specified in Section
3.02.
ARTICLE II
RECAPITALIZATION OF SPINCO;
MECHANICS AND TIMING OF THE DISTRIBUTION
2.01. Recapitalization of Spinco. The authorized capital stock of Spinco
currently consists of 5,000 shares of Spinco Common Stock, all of which are
issued and outstanding and owned beneficially and of record by the Company,
and sixty-three thousand two hundred sixty-nine (63,269) shares of preferred
stock (the "Spinco Preferred Stock"), all of which shares are issued and
outstanding and owned beneficially and of record by the Company. Prior to the
Distribution Date, the parties hereto shall take all steps necessary so that,
prior to the Distribution, the number of shares of Spinco Common Stock
outstanding and held by the Company shall equal the number of shares of
Company Common Stock outstanding on the Record Date and all shares of Spinco
Preferred Stock shall have been redeemed by Spinco in accordance with the
terms of the Spinco Preferred Stock.
2.02. Timing of the Distribution. Subject to the terms and conditions
hereof, the Board of Directors of the Company shall formally declare the
Distribution and, immediately prior to the Effective Time, pay it by delivery
of certificates for Spinco Common Stock to the Transfer Agent for delivery to
the holders entitled thereto. The Distribution shall be deemed to be effective
upon notification by the Company to the Transfer Agent
B-3
<PAGE>
that the Distribution has been declared and that the Transfer Agent is
authorized to proceed with the distribution of the certificates representing
shares of Spinco Common Stock.
2.03. Mechanics of the Distribution. The Distribution shall be effected by
the distribution to each holder of record of the Company Common Stock, as of
the close of the stock transfer books on the record date designated by, or
pursuant to the authorization of, the Board of Directors of the Company (the
"Record Date"), of certificates representing the number of shares of Spinco
Common Stock equal to the number of shares of Company Common Stock held by
such holder. All shares of Spinco Common Stock delivered in the Distribution
shall be duly authorized, validly issued, fully paid, non-assessable and free
of preemptive rights.
2.04. Changes; Amendments to Various Agreements. The parties hereto agree
that without the written consent of Merger Partner, which written consent
shall not be unreasonably withheld, no changes, amendments, modifications,
waivers or supplements may be made by either party hereto to this Agreement or
any of the Other Agreements. In addition, each of the Company and Spinco
agrees to furnish to Merger Party copies of drafts of the Registration
Statement and all supplements and amendments thereto and all other SEC
Documents, and such other documents contemplated in Section 3.03(d) hereunder,
prior to the filing of the Registration Statement, such supplements or
amendments, or such other documents, with the SEC in connection with the
transactions contemplated hereunder.
ARTICLE III
CERTAIN TRANSACTIONS PRIOR TO THE DISTRIBUTION
3.01. Certificate of Incorporation; By-laws; Rights Plan. Prior to the
Distribution Date, the parties hereto shall take all action necessary so that
(i) the Certificate of Incorporation and By-laws of Spinco shall be amended as
specified by Spinco prior to the Distribution Date, and (ii) Spinco shall
adopt a rights plan in the form as specified by Spinco prior to the
Distribution Date.
3.02. Other Agreements. On or prior to the Distribution Date, the Company
and Spinco shall enter into the Tax Disaffiliation Agreement, substantially in
the form attached hereto as Exhibit A (the "Tax Disaffiliation Agreement"),
the Employee Benefits Agreement, substantially in the form attached hereto as
Exhibit B (the "Employee Benefits Agreement"), the Transition Services
Agreement, substantially in the form attached hereto as Exhibit C (the
"Transition Services Agreement"), the Trademark License Agreement,
substantially in the form attached hereto as Exhibit D (the "Trademark License
Agreement"), and such other agreements as may be advisable in connection with
the Distribution, including agreements with respect to restructuring, transfer
of assets and assumption of liabilities and other matters, all such other
agreements to be on terms reasonably acceptable to the Company, Spinco and
Merger Partner (the Tax Disaffiliation Agreement, the Employee Benefits
Agreement, the Transition Services Agreement, the Trademark License Agreement
and such other agreements being collectively referred to herein as the "Other
Agreements").
3.03. Registration and Listing. On or prior to the Distribution Date:
(a) The Company and Spinco shall prepare and file with the SEC a
Registration Statement on Form 10, or such other form as Spinco may deem
appropriate, with respect to the Spinco Common Stock (the "Registration
Statement"), and each of them shall use reasonable efforts to have the
Registration Statement declared effective such that the Distribution can
occur upon the satisfaction of the other conditions to the Merger
Agreement.
(b) The parties hereto shall use reasonable efforts to take all such
action as may be necessary or appropriate under state securities and blue
sky laws in connection with the transactions contemplated by this
Agreement.
B-4
<PAGE>
(c) Spinco shall prepare, and Spinco shall file and seek to make
effective, an application for the listing of the Spinco Common Stock on the
New York Stock Exchange, or such other exchange or quotations system as
Spinco may determine in its discretion, subject to official notice of
issuance.
(d) The parties hereto shall cooperate in preparing, filing with the SEC
and causing to become effective any other registration statements or
amendments thereto that are necessary or appropriate in order to effect the
transactions contemplated hereby or to reflect the establishment of, or
amendments to, any employee benefit plans contemplated by the Employee
Benefits Agreement requiring registration under the Securities Act.
3.04. Spinco Board. Prior to the Distribution Date, the parties hereto shall
use reasonable efforts to take all steps necessary so that, effective
immediately after the Distribution, the Board of Directors of Spinco shall be
comprised of those individuals so named in the Information Statement.
3.05. Intercompany Accounts. On or before the Distribution Date, the parties
shall pay, or otherwise settle, intercompany loans, payables, receivables and
accounts between the Company Group, on the one hand, and the Spinco Group on
the other, all as more specifically provided for on Schedule 3.05. From the
date hereof through the Distribution Date, any increases in such accounts,
loans, payables and receivables shall only be made in the ordinary course of
business consistent with past practice. Notwithstanding the foregoing, any
amounts required to be paid after the date hereof pursuant to the agreements
set forth on Schedule 7.02 (except for the accumulated amounts with respect to
such agreements that are set forth on Schedule 3.05) shall be paid in
accordance with the terms of such agreements.
3.06. Certain Transactions. (a) On or prior to the Distribution Date, or as
soon as reasonably practicable thereafter, the Company shall:
(i) assign, transfer and convey, or cause to be assigned, transferred or
conveyed, to Spinco, or the appropriate member of the Spinco Group
designated by Spinco, all of the Company's or such member of the Company
Group's respective right, title and interest to the assets, contracts,
permits, licenses, authorizations and agreements listed or described on
Schedule 3.06(a);
(ii) assign, transfer and convey to Spinco all of the Company's right,
title and interest in and to the "Providian" name and logo and related
tradenames and marks pursuant to the Assignment Agreements attached hereto
as Exhibits E and F; and
(iii) assign, transfer and convey to Spinco, any and all other assets,
properties, claims and rights, whether real or personal, tangible or
intangible, primarily relating to the Spinco Business and not required by
the Company for the conduct of, and in the ordinary course of, the Company
Business, to the extent such assets, properties, claims or rights are not
owned by a member of the Spinco Group as of the Distribution Date (all of
items in (i)--(iii) being referred to herein as the "Transferred Assets").
(b) From and after the Distribution Date, Spinco shall assume, pay, perform
and discharge all Liabilities arising from or with respect to the Transferred
Assets, except for any Liabilities with respect to the Transferred Assets
arising out of or relating to the Company Business, whether or not such
Liabilities were incurred before or after the Distribution Date.
(c) To the extent that any transfers contemplated by this Section 3.06 shall
not have been consummated on or prior to the Distribution Date, the parties
shall cooperate to effect such transfers as promptly following the
Distribution Date as shall be practicable. In the event that any such transfer
of Transferred Assets, including the assumption of all Liabilities arising
from or with respect to such Transferred Assets to the extent provided for in
Section 3.06(b), has not been consummated, from and after the Distribution
Date the Company shall hold such Transferred Asset in trust for the use and
benefit of Spinco (at Spinco's expense) upon receipt of an undertaking from
Spinco to assume the Liabilities relating to such transfer, and take such
other actions as may be reasonably requested in order to place Spinco, insofar
as is reasonably possible, in the same position as would have existed had such
Transferred Assets been transferred and such Liabilities assumed as
contemplated hereby.
B-5
<PAGE>
3.07. External Financing of Spinco. The Company agrees to use its reasonable
efforts to assist Spinco in obtaining waivers or other necessary modifications
to the external financing agreements to which Spinco or any member of the
Spinco Group is a party and which are listed on Schedule 3.07 in order to
effect the Distribution.
3.08. Certain Company Agreements. The Company and Spinco shall cooperate and
use their reasonable efforts to negotiate separate agreements with the third
parties listed on Schedule 3.08 in order to permit the Company Group and the
Spinco Group to each have the benefits of such agreements after the
Distribution; provided that with respect to any agreements that cannot be
separated, such agreements will remain with the Company and will be terminated
as to Spinco as of the Distribution Date or as soon as practicable thereafter.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SPINCO
4.01. Spinco Representations. Spinco represents and warrants to the Company
as follows:
(a) Organization. Spinco is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and
has all requisite corporate power and authority to own and operate its
properties and to carry on its business as now being conducted.
(b) Authority. Spinco has the corporate power and authority to execute
this Agreement and the Other Agreements, and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this
Agreement and the Other Agreements and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by all necessary
corporate action on the part of Spinco. This Agreement has been, and the
Other Agreements, when executed and delivered by Spinco will be, duly
executed and delivered by Spinco and constitute legal, valid and binding
obligations of Spinco enforceable against it in accordance with their
terms, (i) except as may be limited by bankruptcy, insolvency, moratorium
or other similar laws affecting or relating to the enforcement of
creditors' rights generally, and (ii) subject to general principles of
equity.
(c) No Conflict. Except as set forth on Schedule 4.01(c), the execution,
delivery and performance by Spinco of this Agreement and the Other
Agreements will not contravene, violate, result in a breach or constitute a
default under (i) any provision of the certificate of incorporation or by-
laws of Spinco, (ii) any judgment, order, decree, statute, law, ordinance,
rule or regulation applicable to Spinco or any of its properties or assets,
or (iii) any material contract or agreement to which Spinco is a party or
by which any of its properties or assets is bound, except where such
contravention, violation, breach or default would not have a material
adverse effect on (i) the financial condition, business or results of
operations of Spinco or (ii) the ability of Spinco to consummate the
transactions contemplated by this Agreement and the Other Agreements (a
"Material Adverse Effect on Spinco").
(d) Approvals. Except as set forth on Schedule 4.01(d) and other than
consents, approvals, orders, authorizations, registrations, declarations or
filings, the failure of which to give or obtain would not individually or
in the aggregate have a Material Adverse Effect on Spinco, no consent,
approval, order, authorization of, or registration, declaration or filing
with, any governmental authority is required in connection with the making
or performance by Spinco of this Agreement or the Other Agreements, subject
to compliance with applicable securities or banking laws.
(e) Spinco Insurance Policies. Except as set forth on Schedule 4.01(e),
there are no Policies directly owned or maintained by or on behalf of
Spinco or the Spinco Business.
(f) Claims, Etc. Except for this Agreement, the Other Agreements, the
agreements listed on Schedules 3.05 and 7.02 and the transactions
contemplated hereby and thereby, Spinco has no debts, demands, actions,
causes of action, suits, accounts, covenants, contracts, agreements,
damages, claims or other liabilities, either in law or equity as against
any of the Company or its officers, directors, agents, affiliates, record
or beneficial securityholders, advisors or representatives that arise out
of or relate to events, circumstances or actions taken by the Company prior
to the Distribution Date.
B-6
<PAGE>
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
5.01. Company Representations. The Company represents and warrants to Spinco
as follows:
(a) Organization. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and
has all requisite corporate power and authority to own and operate its
properties and to carry on its business as now being conducted.
(b) Authority. The Company has the corporate power and authority to
execute this Agreement and the Other Agreements, and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and the Other Agreements and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by
all necessary corporate action on the part of the Company. This Agreement
has been, and the Other Agreements, when executed and delivered by the
Company will be, duly executed and delivered by the Company and constitute
legal, valid and binding obligations of the Company enforceable against it
in accordance with their terms, (i) except as may be limited by bankruptcy,
insolvency, moratorium or other similar laws affecting or relating to the
enforcement of creditors' rights generally, and (ii) subject to general
principles of equity.
(c) No Conflict. Except as set forth on Schedule 5.01(c), the execution,
delivery and performance by the Company of this Agreement and the Other
Agreements will not contravene, violate, result in a breach or constitute a
default under (i) any provision of or the certificate of incorporation or
by-laws of the Company, (ii) any judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to the Company or any of its
properties or assets, or (iii) any material contract or agreement to which
the Company is a party or by which any of its properties or assets is
bound, except where such contravention, violation, breach or default would
not have a Material Adverse Effect on Company.
(d) Approvals. Except as set forth on Schedule 5.01(d) and other than
consents, approvals, orders, authorizations, registrations, declarations or
filings, the failure of which to give or obtain would not, individually or
in the aggregate, have a Material Adverse Effect on Company, no consent,
approval, order, authorization of, or registration, declaration or filing
with, any governmental authority is required in connection with the making
or performance by the Company of this Agreement or the Other Agreements,
subject to compliance with applicable securities or insurance laws.
(e) Claims, Etc. Except for this Agreement, the Other Agreements, the
agreements listed on Schedules 3.05 and 7.02 and the transactions
contemplated hereby and thereby, the Company has no debts, demands,
actions, causes of action, suits, accounts, covenants, contracts,
agreements, damages, claims or other liabilities, either in law or equity
as against any of Spinco or its officers, directors, agents, affiliates,
record or beneficial securityholders, advisors or representatives that
arise out of or relate to events, circumstances or actions taken by Spinco
prior to the Distribution Date.
ARTICLE VI
SURVIVAL AND INDEMNIFICATION
6.01. Survival of Agreements and Representations and Warranties. All
covenants, agreements, representations and warranties of each of the Company
and Spinco contained in this Agreement shall survive the Distribution Date for
the duration of any applicable statute of limitations with respect thereto.
6.02. Indemnification. (a) Spinco agrees to indemnify and hold harmless the
Company, and its affiliates, successors and assigns and the officers,
directors, partners, employees, agents and representatives of any of them,
from and against any and all losses, damages, claims or Liabilities, including
reasonable attorneys' fees and disbursements (collectively "Losses"), arising
out of, based upon, or resulting from (i) the operation of the businesses of,
or relating to, Spinco or any other member of the Spinco Group (the "Spinco
Business")
B-7
<PAGE>
(including those Losses arising due to the failure of Spinco or any other
member of the Spinco Group to pay, perform or otherwise discharge its
obligations under this Agreement or arising out of or connected with the
Spinco Business), (ii) any breach of or inaccuracy in any representation or
warranty of Spinco contained in Sections 4.01(a)--(d) of this Agreement, or
any material breach of or material inaccuracy in any representation or
warranty of Spinco contained in Sections 4.01(e) and (f) of this Agreement and
(iii) subject to Section 6.02(c), any material breach of any covenant
contained in this Agreement or the Other Agreements.
Without limiting the generality of the foregoing, Spinco agrees to indemnify
and hold harmless the Company, its officers, directors, partners, employees,
agents and representatives of any of them, each person, if any, who controls
the Company within the meaning of Section 15 of the Securities Act or Section
20(a) of the Exchange Act, and each of the heirs, executors, successors and
assigns of any of the foregoing, from and against any and all Losses arising
out of or based upon any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (including the
Information Statement), the Form F-4, the Proxy Statement or any other
document filed with the SEC in connection with the transactions contemplated
hereby or any preliminary or final form thereof or any amendment or supplement
thereto (collectively, the "SEC Documents") or any omission or alleged
omission to state in any SEC Document a material fact required to be stated
therein or necessary to make the statements made therein not misleading, but
in each case only to the extent such untrue statement or omission or alleged
untrue statement or omission relates to any member of the Spinco Group or the
Spinco Business.
(b) The Company agrees to indemnify and hold harmless Spinco, its
affiliates, successors and assigns and the officers, directors, partners,
employees, agents and representatives of any of them from and against any and
all Losses arising out of, based upon, or resulting from (i) the operation of
the businesses of, or relating to, the Company or any other member of the
Company Group (the "Company Business") (including those Losses arising due to
the failure of the Company or any other member of the Company Group to pay,
perform or otherwise discharge its obligations under this Agreement or arising
out of or connected with the Company Business), (ii) any breach of or
inaccuracy in any representation or warranty of the Company contained in
Sections 5.01(a)-(d) of this Agreement or any material breach or material
inaccuracy in the representation and warranty contained in Section 5.01(e), or
(iii) subject to Section 6.02(c), any material breach of any covenant
contained in this Agreement or the Other Agreements.
Without limiting the generality of the foregoing, the Company agrees to
indemnify and hold harmless Spinco, its officers, directors, partners,
employees, agents and representatives of any of them, each person, if any, who
controls Spinco within the meaning of Section 15 of the Securities Act or
Section 20(a) of the Exchange Act, and each of the heirs, executors,
successors and assigns of any of the foregoing, from and against any and all
Losses arising out of or based upon any untrue statement or alleged untrue
statement of a material fact contained in any SEC Document or any omission or
alleged omission to state in any SEC Document a material fact required to be
stated therein or necessary to make the statements made therein not
misleading, but in each case only to the extent such untrue statement or
omission or alleged untrue statement or omission does not relate to any member
of the Spinco Group or the Spinco Business.
(c) The indemnification provided by this Section 6.02 shall not include any
Losses (i) relating to any Tax (as defined in the Tax Disaffiliation
Agreement), which shall be covered exclusively by the Tax Disaffiliation
Agreement, (ii) relating to matters for which indemnification is provided in
any of the Other Agreements or (iii) relating to matters governed by any of
the agreements listed on Schedule 7.02, which, in each case, shall be covered
exclusively by the applicable provisions of such agreements.
(d) If any indemnification provided in paragraph (a) or (b) of this Section
6.02 is unavailable for any reason, the parties shall contribute in respect of
the applicable Losses on an equitable basis.
(e) Any indemnification or contribution pursuant to this Section 6.02 shall
be paid net of the amount of any insurance (other than any insurance paid for
by the applicable indemnitee) or other amounts that would be payable by any
third party to the indemnified party in the absence of this Agreement. The
parties hereto expressly
B-8
<PAGE>
agree that no insurer or other third party shall be (i) entitled to any
benefit if such entity would not be entitled to receive such benefit in the
absence of the foregoing indemnification and contribution provisions, (ii)
relieved of the responsibility to pay any claims for which it is under an
obligation to pay or (iii) entitled to any subrogation rights with respect to
any obligation hereunder.
(f) Notwithstanding any other provision hereof to the contrary, this Section
6.02 shall not be deemed to create any obligation, or expand the scope of any
existing obligation on the part of any party to this Agreement to indemnify or
hold harmless such party's own officers, directors, partners, employee, agents
or representatives.
(g) (i) The amount of any indemnifiable Loss shall be (x) increased to take
into account any net Tax cost actually incurred by the Indemnified Party
arising from any payments received from the Indemnifying Party (grossed up for
such increase) and (y) reduced to take account of any net Tax benefit actually
realized by the Indemnified Party arising from the incurrence or payment of
any such indemnifiable Loss. In computing the amount of such Tax cost or Tax
benefit, the Indemnified Party shall be deemed to have recognized all other
items of income, gain, loss, deduction or credit before recognizing any item
arising from the receipt of any payment with respect to an indemnifiable Loss
or the incurrence or payment of any indemnifiable Loss.
6.03. Procedure for Indemnification for Third Party Claims. (a) Any person
seeking any indemnification provided for under this Agreement (the
"Indemnified Party") in respect of, arising out of or involving a claim made
by any person against the Indemnified Party (a "Third-Party Claim"), shall
notify in writing (and to the extent received, deliver copies of all related
notices and documents, including court papers), to the party from whom
indemnification is sought (the "Indemnifying Party") of the Third-Party Claim
within 15 days after receipt by such Indemnified Party of written notice of
the Third-Party Claim; provided, however, that failure to give such
notification (or make such delivery) shall not affect the indemnification
provided hereunder except to the extent that the Indemnifying Party shall have
been actually prejudiced as a result of such failure.
(b) If a Third-Party Claim is made against an Indemnified Party, the
Indemnifying Party shall be entitled to participate in the defense thereof
and, if it so chooses (except as provided below), to assume the defense
thereof with counsel selected by the Indemnifying Party and reasonably
satisfactory to the Indemnified Party. Should the Indemnifying Party so elect
to assume the defense of a Third Party Claim, the Indemnifying Party shall not
be liable to the Indemnified Party for any legal expenses (except as provided
below) subsequently incurred by the Indemnified Party in connection with the
defense thereof. Notwithstanding the Indemnifying Party's election to assume
the defense of such Third Party Claim, the Indemnified Party shall have the
right to employ separate counsel and to participate in the defense of such
action at its own expense; provided, however, that the Indemnifying Party
shall bear the reasonable fees, costs, and expenses of such separate counsel
if (i) the use of counsel chosen by the Indemnifying Party to represent the
Indemnified Party would present such counsel with a conflict of interest that
would preclude such counsel from representing the Indemnified Party pursuant
to legal canons of ethics or other applicable law; (ii) the Indemnifying Party
shall not have employed counsel reasonably satisfactory to the Indemnified
Party to represent it within 30 days after notice to the Indemnifying Party of
the institution of such Third Party Claim or (iii) the Indemnifying Party
shall authorize the Indemnified Party to employ separate counsel at the
Indemnifying Party's expense. If the Indemnifying Party chooses to defend a
Third Party Claim, each party hereto shall cooperate in the defense thereof.
Such cooperation shall include the retention and (upon the Indemnifying
Party's request) the provision to the Indemnifying Party of records and
information which are reasonably relevant to such Third Party Claim, and
making employees available (subject to reimbursement by the Indemnifying Party
of actual expenses incurred therewith) on a mutually convenient basis to
provide additional information and explanation of any material provided
hereunder. If the Indemnifying Party chooses to defend any Third Party Claim,
the Indemnifying Party shall have the right to agree to a settlement,
compromise or discharge of such Third Party Claim which by its terms obligates
the Indemnifying Party to pay the full amount of the liability in connection
with such Third Party Claim and releases the Indemnified Party completely in
connection with such Third Party Claim; provided that such settlement,
compromise or discharge shall be subject to the prior written consent of the
Indemnified Party, which consent may not be unreasonably withheld, unless, (A)
there is no finding or admission of any violation of law or any violation of
the rights of any person and no effect on any other claims that may be made
against the Indemnified
B-9
<PAGE>
Party, and (B) the sole relief provided is monetary damages that are paid in
full by the Indemnifying Party. Whether or not the Indemnifying Party shall
have assumed the defense of a Third Party Claim, so long as the Indemnifying
Party acknowledges in writing its obligation to indemnify the Indemnified
Party with respect to the applicable claims, the Indemnified Party shall not
admit any liability with respect to, or settle, compromise or discharge, such
Third Party Claim without the Indemnifying Party's prior written consent,
which consent may not be withheld unless, in the Indemnifying Party's good-
faith judgment, such settlement, compromise or discharge is unreasonable in
light of such Third Party Claim against, and defenses available to, the
Indemnified Party.
(c) In no event shall an Indemnifying Party be liable for the fees and
expenses of more than one counsel for all Indemnified Parties in connection
with any one action, or separate but similar or related actions, in the same
jurisdiction arising out of the same general allegations or circumstances.
6.04. Remedies Cumulative. The remedies provided in this Article VI shall be
cumulative and shall not preclude assertion by any Indemnified Party of any
other rights or the seeking of any other remedies against any Indemnifying
Party; provided, however, that the procedures set forth in Section 6.03 shall
be the exclusive procedures governing any indemnity action brought under this
Agreement or otherwise and relating to a Third-Party Claim, except as
otherwise specifically provided in any of the Other Agreements.
ARTICLE VII
CERTAIN ADDITIONAL COVENANTS
7.01 Notices to Third Parties. The members of the Company Group and the
Spinco Group shall cooperate to make all filings and give notice to and use
their reasonable efforts to obtain consents from all third parties that may
reasonably be required to consummate the transactions contemplated by this
Agreement and the Other Agreements.
7.02 Intercompany Agreements. All contracts, licenses, agreements,
commitments, joint marketing test programs and other arrangements, formal or
informal, between any member of the Spinco Group, on the one hand, and any
member of the Company Group, on the other, in existence as of the Distribution
Date, pursuant to which any member of either Group provides to any member of
the other Group services (including management, administrative, legal,
financial, accounting, data processing, insurance or technical support), or
the use of any assets of any member of the other Group, or the secondment of
any employee, or pursuant to which any rights, privileges or benefits are
afforded to members of either Group as an affiliate of the other Group, shall
terminate as of the close of business on the day prior to the Distribution
Date, except as specifically provided herein or on Schedule 7.02 hereto or in
the Other Agreements. From and after the Distribution Date, no member of
either Group shall have any rights under any such contract, license,
agreement, commitment or arrangement with any member of the other Group,
except as specifically provided herein or on Schedule 7.02 hereto or in the
Other Agreements.
7.03 Further Assurances. In addition to the actions specifically provided
for elsewhere in this Agreement, each of the parties hereto shall use
reasonable efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, all things reasonably necessary, proper or advisable under
applicable laws, regulations and agreements to consummate and make effective
the transactions contemplated by this Agreement and the Other Agreements.
Without limiting the foregoing, each party hereto shall cooperate with the
other party, and execute and deliver, or use reasonable efforts to cause to be
executed and delivered, all instruments, and to make all filings with, and to
obtain all consents, approvals or authorizations of, any governmental or
regulatory authority or any other person under any permit, license, agreement,
indenture or other instrument, and take all such other actions as such party
may reasonably be requested to take by any other party hereto from time to
time, including cooperating in identifying and establishing other mutually
satisfactory interim arrangements between the parties, consistent with the
terms of this Agreement and the Other Agreements, in order to effectuate the
provisions and purposes of this Agreement.
B-10
<PAGE>
7.04. Mutual Release, Etc. Effective upon the Distribution and except as
otherwise specifically set forth in this Agreement, each of the Company and
Spinco releases and forever discharges the other, and its affiliates,
successors and assigns and the officers, directors, employees, partners,
agents and representatives of any of them, of and from all debts, demands,
actions, causes of action, suits, accounts, covenants, contracts, agreements,
damages, and any and all claims, demands and liabilities whatsoever of every
name and nature, both in law and in equity, against such other party or any of
its successors or assigns, that the releasing party has or ever had, that
arise out of or relate to events, circumstances or actions taken by such other
party prior to the Distribution Date; provided, however, that the foregoing
general release shall not apply to this Agreement, the Other Agreements or any
of the agreements listed on Schedule 7.02 or the transactions contemplated
hereby or thereby and shall not affect either party's right to enforce this
Agreement, any of the Other Agreements or any of the agreements listed on
Schedule 7.02, in each case in accordance with its terms. Each party
understands and agrees that, except as otherwise specifically provided herein,
neither the other party nor any of its affiliates, successors and assigns or
the officers, directors, employees, partners, agents and representatives of
any of them, in this Agreement or any of the Other Agreements, is representing
or warranting to such party in any way as to the assets, business or
liabilities transferred, assumed or licensed as contemplated hereby or
thereby, it being agreed and understood that each party shall take or keep all
of its assets "as is" and that it shall bear the economic and legal risk that
conveyance or licensing of such assets shall prove to be insufficient or that
the title to any assets conveyed or licensed shall be other than good and
marketable and free from encumbrances.
ARTICLE VIII
ACCESS TO INFORMATION
8.01 Provision of Corporate Records. Prior to or as promptly as practicable
after the Distribution Date, the Company shall deliver to Spinco all corporate
books and records of the Spinco Group and the Spinco Business in its
possession, including all active agreements, planning and product approval
documents, active litigation files and government filings. From and after the
Distribution Date, all such books, records and copies shall be the property of
Spinco.
8.02 Access to Information. From and after the Distribution Date, each of
the Company and Spinco shall afford to the other and to the other's authorized
representatives reasonable access and duplicating rights during normal
business hours to all records, books, contracts, instruments, computer
database, magnetic or optical media and any form of recorded, computer
generated or stored information and other data and information ("Information")
within the possession or control of such party's Group relating to the other
party's Group's pre-Distribution business or liabilities or relating to or
arising in connection with the relationship between the Groups on or prior to
the Distribution Date, insofar as such access is reasonably required by such
other party for a reasonable purpose, including, without limitation, audit,
accounting, tax and litigation purposes.
8.03 Retention of Records. Except as otherwise agreed in writing or as
otherwise provided in the Other Agreements, each of the Company and Spinco
shall retain all Information in such party's possession or under its control
relating directly and primarily to the pre-Distribution business of the other
party that is less than seven years old until such Information is at least
seven years old except that if, prior to the expiration of such period, either
party wishes to destroy or dispose of any such Information, prior to
destroying or disposing of any of such Information, (a) the party who is
proposing to dispose of or destroy any such Information shall provide no less
than 30 days' prior written notice to the other party, specifying the
Information proposed to be destroyed or disposed of, and (b) if, prior to the
scheduled date for such destruction or disposal, the other party requests in
writing that any of the Information proposed to be destroyed or disposed of be
delivered to such other party, the party who is proposing to dispose of or
destroy such Information promptly shall arrange for the delivery of the
requested Information to a location specified by, and at the expense of, the
requesting party.
8.04 Reimbursement; Other Matters. Except to the extent otherwise
contemplated by any Other Agreement, a party providing records or access to
information to the other party under this Article VIII shall be
B-11
<PAGE>
entitled to receive from the recipient, upon the presentation of invoices
therefor, payments for such amounts, relating to supplies, disbursements and
other out-of-pocket expenses (which shall be deemed to exclude costs of
salaries and benefits of employees who provide such services), as may be
reasonably incurred in providing such records or access to information.
8.05 Production of Witnesses. From and after the Distribution Date each
party hereto shall, and shall cause the members of the Group of which it is a
member to, use reasonable efforts to make available to the other party or any
member of the other party's Group, upon written request, its officers,
directors, employees and agents as witnesses to the extent that any such
person may reasonably be required in connection with any legal, administrative
or other proceedings in which the requesting party may from time to time be
involved. A party providing witness services to the other party under this
Section shall be entitled to receive from the recipient of such services, upon
the presentation of invoices therefor, payments for such amounts, relating to
disbursements and other out-of-pocket expenses (which shall be deemed to
exclude costs of salaries and benefits of employees who are witnesses), as may
be reasonably incurred in providing such witness services.
8.06 Confidentiality. From and after the Distribution Date, the Company and
Spinco shall hold, and cause their respective affiliates, directors, officers,
employees, agents, consultants, advisors (including the members of the Group
of which it is a member), and representatives to hold, in strict confidence,
and shall not make use of, divulge or otherwise disclose any Information
concerning the other party's Business obtained by it prior to the Distribution
Date, including any trade secret or other similar proprietary data, or
furnished to it by such other party pursuant to this Agreement or the Other
Agreements and shall not release or disclose such Information to any other
person, except its directors, officers, employees, agents, consultants,
advisors, affiliates and representatives, who (in the case of agents,
consultants, advisors and representatives) shall execute an agreement agreeing
to be bound by the provisions of this Section 8.06, and each party shall be
responsible for a breach by any of such persons or representatives; provided,
however, that the Company or Spinco, or any of their respective affiliates,
may disclose such Information to the extent that (a) disclosure is compelled
by an order of a court of competent jurisdiction or is required by law to be
disclosed to a governmental authority, (b) such party can show that such
Information was (i) available to such person on a nonconfidential basis (other
than from the other party or its affiliates or representatives) prior to its
disclosure by the other party, (ii) in the public domain through no fault of
such person or (iii) lawfully acquired by such person from another source
after the time that it was furnished to such person by the other party, and
not acquired from such source subject to any confidentiality obligation on the
part of such source, or on the part of the acquiror and (c) the applicable
party uses reasonable efforts to notify the other party prior to (and, to the
extent practicable, at least 10 days prior to) any disclosure of Information
pursuant to the foregoing clause (a), except to the extent that the giving of
such notice would be unlawful or violate any order, ruling or directive of any
governmental authority.
8.07 Ownership of Information. Any Information owned by one party or any of
its subsidiaries that is provided to a requesting party pursuant to this
Article VIII shall be deemed to remain the property of the providing party;
provided, however, that the Company and Spinco shall each be entitled to the
unrestricted use of any and all corporate-wide administration policies and
procedures in use at the Company prior to the Distribution Date, including
corporate-wide policies, training materials, preventive law procedures and
corporate-wide planning methodologies. Unless specifically set forth herein,
nothing contained in this Agreement shall be construed as granting or
conferring rights of license or otherwise in any such Information.
8.08 Non-Competition. Spinco agrees that, for a period of two years after
the date hereof, neither it nor any of its affiliates shall, anywhere in the
United States of America, directly or indirectly, (a) sell or offer life
insurance and related products through the home service channel, (b) offer,
sell or otherwise provide to the non-individual market (i) guaranteed
investment contracts or (ii) other funding agreements directly competitive
with products offered as of the date hereof by Providian Capital Management,
(c) sell or offer life insurance products directly competitive with products
offered as of the date hereof by Providian Direct Insurance except, in the
case of this clause (c), for offers or sales of accidental death and
dismemberment insurance and offers or sales to current or future Spinco
customers of life insurance products that are incremental to a product that is
currently being offered by Spinco. Spinco further agrees that, for a period of
eighteen months after the date hereof, neither
B-12
<PAGE>
it nor any of its affiliates shall, anywhere in the United States of America,
directly or indirectly, use, with respect to any life insurance product or the
offer or sale of any such product, the name Providian, or any derivative
thereof, in conjunction with the term "insurance", "assurance" or any similar
insurance related term, as the name of an entity, joint venture or similar
marketing arrangement.
ARTICLE IX
INSURANCE
9.01. Policies and Rights Included Within Transferred Assets. The
Transferred Assets shall include (i) any and all rights of an insured party
under each of the Shared Policies, subject to the terms of such Shared
Policies and any limitations or obligations of Spinco contemplated by this
Article IX, specifically including rights of indemnity and the right to be
defended by or at the expense of the insurer, with respect to all claims,
suits, actions, proceedings, injuries, losses, liabilities, damages and
expenses incurred or claimed to have been incurred prior to the Distribution
Date by any party in or in connection with the conduct of the Spinco Business
or, to the extent any claim is made against Spinco or any member of the Spinco
Group, the conduct of the Company Business, and which claims, suits, actions,
proceedings, injuries, losses, liabilities, damages and expenses may arise out
of an insured or insurable occurrence under one or more of such Shared
Policies; provided, however, that nothing in this clause shall be deemed to
constitute an assignment of such Shared Policies, or any of them, to Spinco,
and (ii) the Spinco Policies.
9.02. Post-Distribution Date Claims. If, subsequent to the Distribution
Date, any person shall assert a claim against Spinco or any member of the
Spinco Group (including where Spinco or any member of the Spinco Group is a
joint defendant with any person other than a member of the Company Group) with
respect to any claim, suit, action, proceeding, injury, loss, liability,
damage or expense incurred or claimed to have been incurred prior to the
Distribution Date in, or in connection with, the conduct of the Spinco
Business or, to the extent any claim is made against Spinco or any member of
the Spinco Group (including where any member of the Spinco Group is a joint
defendant with any person other than a member of the Company Group), in, or in
connection with, the conduct of the Company Business, and which claim, suit,
action, proceeding, injury, loss, liability, damage or expense may arise out
of an insured or insurable occurrence under one or more of the Shared
Policies, the Company shall, at the time such claim is asserted, to the extent
any such Policy may require that Insurance Proceeds thereunder be collected
directly by the named insured be deemed to designate, without need of further
documentation, Spinco as the agent and attorney-in-fact to assert and to
collect any related Insurance Proceeds under such Shared Policy, and shall
further be deemed to assign, without need of further documentation, to Spinco
any and all rights of an insured party under such Shared Policy with respect
to such asserted claim, specifically including rights of indemnity and the
right to be defended by or at the expense of the insurer and the right to any
applicable Insurance Proceeds thereunder; provided, however, that nothing in
this Section 9.02 shall be deemed to constitute an assignment of the Shared
Policies, or any of them, to Spinco.
9.03. Administration; Other Matters. (a) Except as otherwise provided in
Section 9.02 hereof, from and after the Distribution Date, the Company shall
be responsible for Insurance Administration of, and Claims Administration
under, the Shared Policies; provided that the retention of such
responsibilities by the Company is in no way intended to limit, inhibit or
preclude any right to insurance coverage for any Insured Claim of a named
insured under such Policies as contemplated by the terms of this Agreement;
and provided further that the Company's retention of the administrative
responsibilities for the Shared Policies shall not relieve Spinco, when
submitting any Insured Claim, of its responsibility for reporting such Insured
Claim accurately, completely and in a timely manner or of Spinco's authority
to settle any such Insured Claim within any period permitted or required by
the relevant Policy. The Company may discharge its administrative
responsibilities under this Section 9.03 by contracting for the provision of
services by independent parties. Each of the parties hereto shall administer
and pay any costs relating to defending its respective Insured Claims under
Shared Policies to the extent such defense costs are not covered under such
Policies and shall be responsible for obtaining or reviewing the
appropriateness of releases upon settlement of its respective Insured Claims
under Shared Policies. Spinco
B-13
<PAGE>
shall reimburse the Company for its reasonable out-of-pocket expenses and
direct and indirect costs of employees or agents of the Company relating to
Claims Administration and Insurance Administration contemplated by this
Section 9.03(a).
(b) Except for Losses that are subject to the indemnification provisions of
Section 6.02, the Company and Spinco shall not be liable to one another for
claims not reimbursed by insurers for any reason not within the control of the
Company or Spinco, as the case may be, including coinsurance provisions,
deductibles, quota share deductibles, self-insured retentions, bankruptcy or
insolvency of an insurance carrier, Shared Policy limitations or restrictions,
any coverage disputes, any failure to timely claim by the Company or Spinco or
any defect in such claim or its processing.
(c) In the event that the aggregate limits on any Shared Policies are
exceeded by the aggregate of outstanding Insured Claims filed by the parties
hereto with respect to the period of coverage under such Shared Policy, the
parties agree to allocate the Insurance Proceeds received thereunder based
upon their respective percentage of the total of their bona fide claims that
were covered under such Shared Policy with respect to such coverage period
(the "allocable portion of insurance proceeds"), and any party who has
received Insurance Proceeds in excess of such party's allocable portion of
such Insurance Proceeds shall pay to the other party the appropriate amount so
that each party will have received its allocable portion of such Insurance
Proceeds pursuant hereto. Each of the parties agrees to use reasonable efforts
to maximize available coverage under the Shared Policies, and to take all
reasonable steps to recover from all other responsible parties in respect of
an Insured Claim to the extent coverage limits under a Shared Policy have been
exceeded or would be exceeded as a result of such Insured Claim.
(d) In the event that each party has bona fide claims under any Shared
Policy for which a deductible is payable with respect to the period of
coverage under such Shared Policy, the parties agree that the aggregate amount
of the deductible paid shall be borne by the parties in the same proportion
that the Insurance Proceeds received by each such party with respect to such
coverage period bears to the total Insurance Proceeds received under the
applicable Shared Policy (the "allocable share of the deductible"), and any
party that has paid more than such share of the deductible shall be entitled
to receive from the other party an appropriate amount such that each party has
borne its allocable share of the deductible pursuant hereto. For purposes of
this paragraph 9.03(d), the amount of the relevant deductible under any Shared
Policy shall be that set forth in Schedule 9.03(d) hereto.
9.04. Agreement for Waiver of Conflict and Shared Defense. In the event that
Insured Claims of both parties hereto exist relating to the same occurrence,
the parties shall jointly defend and waive any conflict of interest necessary
to the conduct of the joint defense. Nothing in this Article IX shall be
construed to limit or otherwise alter in any way the obligations of the
parties to this Agreement, including those created by this Agreement or the
Other Agreements, by operation of law or otherwise.
9.05. Cooperation. The parties agree to use their reasonable efforts to
cooperate with respect to the various insurance matters contemplated by this
Agreement.
ARTICLE X
MISCELLANEOUS
10.01. Conditions to Obligations. (a) The obligations of the parties hereto
to consummate the Distribution are subject to the satisfaction or waiver of
each of the following conditions:
(i) The Other Agreements shall have been executed and delivered by each
of the Company and Spinco;
(ii) The Company shall have received a favorable no-action letter with
respect to those issues on which the Company proposes to ask the SEC to
rule in a letter to the SEC, substantially in the form of the letter
attached hereto as Exhibit G;
B-14
<PAGE>
(iii) The representations and warranties of each of the Company and of
Spinco set forth in this Agreement shall be true and correct in all
material respects as of the date hereof and as of the Distribution Date;
(iv) Spinco shall have obtained the approval of the Board of Governors of
the Federal Reserve System to, or shall have received a no-action letter to
the effect that it may, continue to operate as a grandfathered institution
under the Competitive Equality Banking Act of 1987 or Spinco shall have
been registered as a bank holding company;
(v) The Registration Statement shall have become effective under the
Exchange Act;
(vi) The Spinco Common Stock shall have been approved for listing on the
New York Stock Exchange, or such other exchange or quotations system as
Spinco may determine in its discretion, subject to official notice of
issuance;
(vii) No governmental authority or regulatory body (including any court
of competent jurisdiction) shall have enacted, issued, promulgated,
enforced or entered any law, rule, regulation, executive order, decree,
injunction or other order (whether temporary, preliminary or permanent) to
prevent or prohibit the Distribution;
(viii) All conditions to the Merger set forth in the Merger Agreement
shall have been satisfied or waived prior to or contemporaneously with the
Effective Time; and
(ix) All other agreements or conditions set forth and described in
Article III shall have been satisfied or waived.
(b) Any determination made by the Board of Directors of the Company on
behalf of either party hereto prior to the Distribution Date concerning the
satisfaction or waiver of any or all of the conditions set forth in this
Section shall be conclusive.
10.02. Complete Agreement. This Agreement, the Exhibits and Schedules hereto
and the agreements and other documents referred to herein, including the Other
Agreements, shall constitute the entire agreement between the parties hereto
with respect to the subject matter hereof (other than the Merger Agreement and
the Schedules and Exhibits thereto) and shall supersede all previous
negotiations, commitments and writings with respect to such subject matter.
10.03. Expenses. Spinco shall bear all fees and expenses of outside counsel
to Spinco in connection with the preparation, review and filing of the
Registration Statement and Information Statement, all filing fees, printing
and mailing expenses in connection with the Registration Statement and
Information Statement, all exchange listing fees with respect to Spinco Common
Stock, and any fees of transfer agents and registrars in connection with the
Distribution. The Company shall bear all other costs and expenses with respect
to the transactions contemplated hereby, by the Merger Agreement and the Other
Agreements, including, without limitation, all fees and disbursements of
Goldman, Sachs & Co. relating to the transactions contemplated hereby, by the
Merger Agreement and the Other Agreements.
10.04. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware (other than the laws
regarding choice of laws and conflicts of laws that would apply the
substantive laws of any other jurisdiction) as to all matters, including
matters of validity, construction, effect, performance and remedies.
10.05. Notices. All notices, requests, claims, demands and other
communications that are required or permitted hereunder shall be in writing
and shall be sufficient if delivered in person, by overnight courier, by hand
delivery, telecopied with confirmation of receipt, or sent by registered or
certified mail, postage prepaid, return receipt requested, to the addresses
set forth below, or to such other addresses of which either party shall notify
the other party in accordance with this Section 10.05, and shall be deemed
given as of the time of such delivery.
B-15
<PAGE>
If to the Company prior to the Distribution Date:
Providian Center
400 West Market Street
Louisville, Kentucky 40207
Attention: Irving W. Bailey II
Telecopy No.: 502-584-5960
with a copy to:
King & Spalding
120 West 45th Street
New York, New York 10036
Attention: Mr. E. William Bates, II
Telecopy No.: (212) 556-2222
and
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Mr. Steven A. Rosenblum
Telecopy No.: (212) 403-2000
If to the Company after the Distribution Date:
(VIA MAIL)
AEGON N.V.
P.O. Box 202 2501 CE The Hague
The Netherlands
Attention: Mr. Kees J. Storm
Telecopy No.: (31-70) 347-7929
(VIA HAND DELIVERY)
AEGON N.V.
Mariahoeveplein 50
2591 TV The Hague
The Netherlands
Attention: Mr. Kees J. Storm
Telecopy No.: (31-70) 347-7929
and
LeBoeuf, Lamb, Greene & MacCrae, L.L.P.
125 West 55th Street
New York, New York 10019-5389
Attention: Mr. Donald B. Henderson, Jr.
Telecopy No.: (212) 474-8500
If to Spinco:
201 Mission Street
San Francisco, California 94105
Attention: Chief Financial Officer
Telecopy No.: 415-278-6028
B-16
<PAGE>
with a copy to:
Providian Bancorp, Inc.
201 Mission Street
San Francisco, California 94105
Attention: General Counsel
Telecopy No.: 415-278-6046
or to such other address as any party hereto may have furnished to the other
parties by a notice in writing in accordance with this Section.
10.06. Specific Performance. Each party hereto acknowledges that there is no
adequate remedy at law for failure by such party to comply with the provisions
of this Agreement and that such failure would cause immediate harm that would
not be adequately compensable in damages, and therefore each party agrees that
its agreements contained herein may be specifically enforced without the
requirement of posting a bond or other security, in addition to all other
remedies available to the parties hereto under this Agreement.
10.07. Amendment and Modification. This Agreement may be amended, modified
or supplemented only by a written agreement signed by the parties hereto.
10.08. Successors and Assigns; Third-Party Beneficiaries. This Agreement and
all of the provisions hereof shall be binding upon and inure to the benefit of
the parties hereto and their successors and permitted assigns, but neither
this Agreement nor any of the rights, interests and obligations hereunder
shall be assigned by any party hereto without the prior written consent of the
other party. Except for the provisions of Sections 6.02 and 6.03 relating to
indemnities, which are also for the benefit of the applicable Indemnified
Party, this Agreement is solely for the benefit of the parties hereto, and is
not intended to confer upon any other persons any rights or remedies
hereunder, except that, prior to the Distribution Date, Merger Partner shall
be a third party beneficiary of and shall be entitled to enforce the rights of
the Company hereunder.
10.09. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
10.10. Interpretation. (a) The Article and Section headings contained in
this Agreement are solely for the purpose of reference, are not part of the
agreement of the parties hereto and shall not in any way affect the meaning or
interpretation of this Agreement.
(b) The parties hereto intend that the Distribution shall be a distribution
pursuant to the provisions of Section 355 of the Code, so that no gain or loss
shall be recognized for federal income tax purposes as a result of such
transaction, and all provisions of this Agreement shall be so interpreted.
10.11. Severability. If any provision of this Agreement or the application
thereof to any person or circumstance is determined by a court of competent
jurisdiction to be invalid, void or unenforceable, the remaining provisions
hereof, or the application of such provision to persons or circumstances other
than those as to which it has been held invalid or unenforceable, shall remain
in full force and effect and shall in no way be affected, impaired or
invalidated thereby, so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any manner adverse to any
party.
10.12. References; Construction. References to any "Article", "Exhibit",
"Schedule" or "Section", without more, are to Articles, Exhibits, Schedules
and Sections to or of this Agreement. Unless otherwise expressly stated,
clauses beginning with the term "including" set forth examples only and in no
way limit the generality of the matters thus exemplified.
10.13. Termination. Notwithstanding any provision hereof, following
termination of the Merger Agreement, this Agreement may be terminated and the
Distribution abandoned at any time prior to the
B-17
<PAGE>
Distribution Date by and in the sole discretion of the Board of Directors of
the Company without the approval of any other party hereto or of the Company's
shareholders. In the event of such termination, no party hereto or to any
Other Agreement shall have any liability to any person by reason of this
Agreement or any Other Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date first above written.
Providian Corporation
/s/ Irving W. Bailey II
By: _________________________________
Name: Irving W. Bailey II
Title:Chairman of the Board and
Chief Executive Officer
Providian Corporation
/s/ Shailesh J. Mehta
By: _________________________________
Name: Shailesh J. Mehta
Title:Chief Executive Officer
B-18
<PAGE>
APPENDIX C
LOGO
PERSONAL AND CONFIDENTIAL
December 28, 1996
Board of Directors
Providian Corporation
400 West Market Street
Louisville, Kentucky 40202
Ladies and Gentlemen:
We understand that Providian Corporation (the "Company") has entered into (i)
a Plan and Agreement of Merger and Reorganization, dated as of December 28,
1996 (the "Agreement"), with AEGON N.V. ("Merger Partner") and a wholly-owned
subsidiary of Merger Partner (the "Sub"), and (ii) an Agreement and Plan of
Distribution, dated as of December 28, 1996 (the "Distribution Agreement"),
with Providian Bancorp, a wholly-owned subsidiary of the Company ("Bancorp").
The transactions contemplated by the Agreement and the Distribution Agreement
are collectively referred to herein as the "Transactions". We understand that,
pursuant to the Agreement and the Distribution Agreement, among other things:
(i) prior to the Distribution (as hereinafter defined), Bancorp will
redeem approximately $63 million of preferred stock currently held by the
Company and will repay to the Company certain intercompany indebtedness as
described in the Distribution Agreement;
(ii) prior to the Merger (as hereinafter defined), the Company will
distribute to the holders of the outstanding shares of common stock, par
value $1.00 per share, of the Company (the "Company Shares") all of the
outstanding shares of common stock, par value $1.00 per share, of Bancorp
(the "Distribution"); and
(iii) the Sub will merge with and into the Company (the "Merger")
pursuant to which the Company, as the surviving corporation of the Merger,
will become a wholly-owned subsidiary of Merger Partner and each Company
Share will be converted into the right to receive, on the terms and subject
to the conditions specified in the Agreement, a number of shares of common
stock, par value of 1.00 Dutch Guilder per share, of Merger Partner (the
"Aegon Shares") determined by dividing $28.00 by the Share Price (as
defined in the Agreement) of Aegon Shares, subject to a maximum and minimum
number of Aegon Shares per Company Share and other price-related
provisions, as set forth in the Agreement (the "Stock Consideration").
You have requested our opinion as to the fairness to the holders of Company
Shares of the distribution to such holders of shares of Bancorp common stock
(the "Bancorp Shares") pursuant to the Distribution Agreement and the receipt
by such holders of the Stock Consideration pursuant to the Agreement, taken
together.
LOGO
<PAGE>
Goldman, Sachs & Co., as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. We are familiar with the Company having provided certain investment
banking services to the Company from time to time, including acting as
managing underwriter of a public offering of 8 7/8% Cumulative Monthly Income
Preferred Shares of an affiliate of the Company in May 1994, as well as having
acted as the Company's financial advisor in connection with, and having
participated in certain if the negotiations leading to, the Agreement. We also
are familiar with Merger Partner, having provided certain investment banking
services to Merger Partner from time to time, including acting as financial
advisor to AEGON USA, a wholly owned subsidiary of Merger Partner, in
connection with its investment in Seguros Banamex AEGON, and may provide
investment banking services to Merger Partner in the future. Goldman, Sachs &
Co. is a full service securities firm and in the course of its trading
activities it may from time to time effect transactions, for its own account
or the account of customers, and hold positions in securities or options on
securities of the Company and Merger Partner.
In connection with this opinion, we have reviewed, among other things, the
Agreement; the Distribution Agreement; the actuarial appraisal of the
Company's insurance operations prepared by Milliman & Robertson, Inc. (the
"Appraisal"); Annual Reports to Stockholders of the Company and of Merger
Partner, respectively, for the five years ended December 31, 1995; Annual
Reports on Form 1 0-K of the Company and Annual Reports on Form 20-F for
Merger Partner respectively, for the five years ended December 31, 1995;
certain interim reports to stockholders and Quarterly Reports on Form 10-Q for
the Company and on Form 6-K for Merger Partner, respectively; annual statutory
statements for the five years ended December 31, 1995, for certain of the
Company's insurance subsidiaries and for certain of Merger Partner's U.S.
insurance subsidiaries; certain other communications from the Company to its
stockholders; and certain internal financial analyses and forecasts for the
Company, Bancorp and Merger Partner prepared by their respective managements.
We also have held discussions with members of the senior management of the
Company, Bancorp and Merger Partner regarding the past and current business
operations, regulatory relationships, financial condition and future prospects
of their respective companies. We have also discussed the pro forma financial
effect of the Transactions on Merger Partner and Bancorp. In addition, we have
reviewed the reported price and trading activity for the Company Shares on the
New York Stock Exchange and for the Aegon Shares on the New York Stock
Exchange and on the Amsterdam stock exchange, compared certain financial and,
where applicable, stock market information for the Company, Bancorp, and
Merger Partner with similar information for certain other companies the
securities of which are publicly traded, reviewed the financial terms of
certain recent business combinations in the insurance industry specifically
and in other industries generally and performed such other studies and
analyses as we considered appropriate.
We have relied without independent verification upon the accuracy and
completeness of all of the financial and other information reviewed by us for
purposes of this opinion. With respect to the financial forecasts furnished by
the Company, Bancorp and Merger Partner, we have assumed, with your consent,
that they have been reasonably prepared and reflect the best currently
available estimates and judgment of the Company's, Bancorp's and Merger
Partner's management as to the expected future financial performance of the
Company, Bancorp or Merger Partner, as the case may be. In addition, we have
not made an independent evaluation or appraisal of the assets, including the
capitalization of deferred acquisition costs, and liabilities or reserves of
the Company or Merger Partner or any of their subsidiaries and, except for the
Appraisal referred to in the fourth paragraph of this opinion, we have not
been furnished with any such evaluation or appraisal. We are not expressing
any opinion with respect to the reserves of the Company, Merger Partner or any
of their subsidiaries. We have assumed, with your consent, that the
consummation of the Distribution and the Merger will not result in a
downgrading of the Company, Merger Partner or any of their subsidiaries,
including Bancorp, by any nationally recognized rating agency or, in the event
that any such entity is downgraded, that such downgrading will not have any
material adverse effect on such entity.
We have not reviewed individual credit files of Bancorp, nor are we experts
in the evaluation of loan portfolios for purposes of assessing the adequacy of
the allowances for losses with respect thereto; we have
C-2
<PAGE>
assumed, with your consent, that such allowances of Bancorp are adequate to
cover all such losses. Similarly, we have assumed, with your consent, that the
obligations of the Company and Bancorp pursuant to derivatives, swaps, foreign
exchange, financial instruments and off-balance sheet lending-related
financial instruments will not have an adverse effect which would be relevant
to our analysis.
Our opinion is necessarily based upon financial, economic, market and other
conditions as they exist and can be evaluated on the date hereof. We are not
expressing any opinion as to the value of the Bancorp Shares when issued to
the holders of Company Shares pursuant to the Distribution or the prices at
which such Bancorp Shares will trade subsequent to the Distribution. We are
also not expressing any opinion as to the value of the Aegon Shares when
issued to the holders of Company Shares pursuant to the Merger or the prices
at which such Aegon Shares will trade subsequent to the Merger.
We have assumed, with your consent, that the Transactions will comply with
applicable laws, including, without limitation, laws relating to the payment
of dividends, bankruptcy, insolvency, reorganization, fraudulent conveyance,
fraudulent transfer or other similar laws now or hereafter in effect affecting
creditors' rights generally. We also have assumed, with your consent, that
obtaining any regulatory approvals or third-party consents necessary for the
Distribution or the Merger or otherwise will not have any material adverse
effect on Bancorp, the Company or Merger Partner. We have assumed, with your
consent, that receipt of the Bancorp Shares and the Stock Consideration will
be tax-free for federal income tax purposes to the holders of Company Shares
and that none of the Company, Bancorp and Merger Partner will recognize
income, gain or loss for tax purposes as a result of the Transactions.
Our opinion is directed to the Board of Directors of the Company for
purposes of their evaluation of the proposed Distribution and Merger and does
not constitute a recommendation to any of the Company's stockholders as to how
such stockholder should vote with respect to the Merger.
Based upon and subject to the foregoing and based upon such other matters as
we consider relevant, it is our opinion that as of the date hereof the
distribution of Bancorp Shares to holders of Company Shares pursuant to the
Distribution Agreement and the receipt by such holders of the Stock
Consideration pursuant to the Agreement, taken together, are fair to the
holders of Company Shares.
Very truly yours,
/s/ Goldman, Sachs & Co.
-------------------------------------
Goldman, Sachs & Co.
C-3
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company has agreed to indemnify each member of the Executive Board and
the Supervisory Board and each officer of the Company if, in the course of
carrying out his duties, such person incurs personal liability under civil law
for the financial consequences thereof, subject to the Company's reservation
of its rights to recover payment made under the indemnity from each such
person to the fullest extent permitted by applicable laws. The Company
maintains an insurance policy with a third party insurer insuring officers and
directors against the foregoing liability.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The following documents are filed as exhibits to the Registration
Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 Amended and Restated Plan and Agreement of Merger and Reorganization
dated as of December 28, 1996 among AEGON N.V., LT Merger Corp. and
Providian Corporation (included as Appendix A to the Proxy
Statement/Prospectus included in this Registration Statement)
(Exhibits A and D included as Exhibits 2.2 and 2.9, respectively)
2.2 Agreement and Plan of Distribution dated December 28, 1996 between
Providian Corporation and Providian Bancorp Inc. (included as Appendix
B to the Proxy Statement/Prospectus included in this Registration
Statement) (Exhibits A through F included as Exhibits 2.3 through 2.8)
2.3 Form of Tax Disaffiliation Agreement
2.4 Form of Employee Benefits Agreement
2.5 Form of Transition Services Agreement
2.6 Form of Trademark License Agreement
2.7 Form of General Intellectual Property Assignment and Renunciation
Agreement
2.8 Form of Short-Form Assignment Agreement
2.9 Form of Guarantee Agreement
5.1 Opinion of Willem Van Vliet, General Counsel to the Company, regarding
the legality of the Common Shares
23.1 Consent of Ernst & Young LLP
23.2 Consent of Moret Ernst & Young
23.3 Consent of Willem Van Vliet (included in Exhibit 5.1)
23.4 Consent of Milliman & Robertson, Inc.
23.5 Consent of Goldman, Sachs & Co.
24.1 Powers of Attorney (included on signature page to Registration
Statement)
99.1 Opinion of Goldman, Sachs & Co. (included as Appendix C to the Proxy
Statement/Prospectus included in this Registration Statement)
99.2 Milliman & Robertson, Inc. Actuarial Appraisal of the Insurance
Operations of Providian Corporation
99.3 Form of Proxy for holders of Providian Corporation Common Stock
</TABLE>
(b) Schedules
Not required.
II-1
<PAGE>
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933 (the "Act"), each
filing of the Registrant's annual report pursuant to section 13(a) or section
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to section 15(d)
of the Securities Exchange Act of 1934) that is incorporated by reference in
the Registration Statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at the time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
The Registrant undertakes that every prospectus (i) that is filed pursuant
to the immediately preceding paragraph, or (ii) that purports to meet the
requirements of section 10(a) (3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
The Registrant hereby undertakes: (i) to respond to requests for information
that is incorporated by reference into the prospectus pursuant to Items 4,
10(b), 11, or 13 of this Form, within one business day of receipt of such
request and to send the incorporated documents by first class mail or other
equally prompt means; and (ii) to arrange or provide for a facility in the
U.S. for the purpose of responding to such requests. The undertaking in
subparagraph (i) above includes information contained in documents filed
subsequent to the effective date of the Registration Statement through the
date of responding to the request.
The Registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction and the company being
acquired involved herein, that was not the subject of any included in the
Registration Statement when it became effective.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in The Hague, The Netherlands on April
16, 1997.
AEGON N.V.
/s/ K.J. Storm
By: ___________________________________
Name: K.J. Storm
Title: Chairman of the Executive
Board
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints K.J. Storm, D.J. Shepard and Craig D. Vermie,
and each of them (with full power to each of them to act alone), his true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement and to file the same with all
exhibits thereto and other documents in connection therewith with the
Securities and Exchange Commission granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
following capacities on April 16, 1997.
NAME TITLE
/s/ K.J. Storm Chairman of the Executive Board
- ------------------------------------- (Chief Executive Officer)
K.J. STORM
/s/ H.B. Van Wijk Executive Board Member (Principal
- ------------------------------------- Financial and Accounting Officer)
H.B. VAN WIJK
Executive Board Member (Executive
- ------------------------------------- Officer)
P. VAN DE GEIJN
Executive Board Member
- -------------------------------------
D.J. SHEPARD
/s/ G. Van Schaik Chairman of the Supervisory Board
- ------------------------------------- of Directors
G. VAN SCHAIK
/s/ H. De Ruiter Supervisory Board Member (Vice
- ------------------------------------- Chairman)
H. DE RUITER
II-3
<PAGE>
NAME TITLE
/s/ F.J. de Wit Supervisory Board Member
- -------------------------------------
F.J. DE WIT
Supervisory Board Member
- -------------------------------------
O.J. OLCAY
/s/ W. Scholten Supervisory Board Member
- -------------------------------------
W. SCHOLTEN
/s/ M. Tabaksblat Supervisory Board Member
- -------------------------------------
M. TABAKSBLAT
/s/ K.M.H. Peijs Supervisory Board Member
- -------------------------------------
K.M.H. PEIJS
/s/ A. Leysen Supervisory Board Member
- -------------------------------------
A. LEYSEN
/s/ J.F.M. Peters Supervisory Board Member
- -------------------------------------
J.F.M. PETERS
- ------------------------------------- Supervisory Board Member
SIR MICHAEL JENKINS
Supervisory Board Member
- -------------------------------------
R.H. ROTH
II-4
<PAGE>
AUTHORIZED REPRESENTATIVE
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on April 16, 1997 by the
undersigned as the duly authorized representative of AEGON N.V. in the United
States.
/s/ Craig D. Vermie
---------------------------------------
Cedar Rapids, Iowa
II-5
<PAGE>
EXHIBITS INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
2.1 Amended and Restated Plan and Agreement of Merger and
Reorganization dated as of December 28, 1996 among
AEGON N.V., LT Merger Corp. and Providian Corporation
(included as Appendix A to the Proxy
Statement/Prospectus included in this Registration
Statement) (Exhibits A and D included as Exhibits 2.2
and 2.9, respectively)
2.2 Agreement and Plan of Distribution dated December 28,
1996 between Providian Corporation and Providian
Bancorp Inc. (included as Appendix B to the Proxy
Statement included in this Registration Statement)
(Exhibits A through F included as Exhibits 2.3 through
2.8)
2.3 Form of Tax Disaffiliation Agreement
2.4 Form of Employee Benefits Agreement
2.5 Form of Transition Services Agreement
2.6 Form of Trademark License Agreement
2.7 Form of General Intellectual Property Assignment and
Renunciation Agreement
2.8 Form of Short-Form Assignment Agreement
2.9 Form of Guarantee Agreement
5.1 Opinion of Willem Van Vliet, General Counsel to the
Company, regarding the legality of the Common Shares
23.1 Consent of Ernst & Young LLP
23.2 Consent of Moret Ernst & Young
23.3 Consent of Willem Van Vliet (included in Exhibit 5.1)
23.4 Consent of Milliman & Robertson, Inc.
23.5 Consent of Goldman, Sachs & Co.
24.1 Powers of Attorney (included on signature page to
Registration Statement)
99.1 Opinion of Goldman, Sachs & Co. (included as Appendix C
to the Proxy Statement/Prospectus included in this
Registration Statement)
99.2 Milliman & Robertson, Inc. Actuarial Appraisal of the
Insurance Operations of Providian Corporation
99.3 Form of Proxy for holders of Providian Corporation
Common Stock
</TABLE>
II-6
<PAGE>
EXHIBIT 2.3
EXHIBIT A TO
DISTRIBUTION AGREEMENT
TAX DISAFFILIATION AGREEMENT dated as of _______________, 199__ by and among
PROVIDIAN CORPORATION, a Delaware corporation ("Company"), and PROVIDIAN
BANCORP, INC., a Delaware corporation and a direct wholly owned subsidiary of
Company ("Spinco").
RECITALS
WHEREAS:
A. Company is the common parent of an affiliated group of corporations
(the "Company Affiliated Group") within the meaning of Section 1504(a) of the
Code (as hereinafter defined), and the members of the Company Affiliated Group
have heretofore joined in filing consolidated Federal income tax returns.
B. Company expects, pursuant to the Agreement and Plan of Distribution
dated as of December 28, 1996 (the "Distribution Agreement") between Company and
Spinco and subject to the terms thereof, to distribute its entire interest in
Spinco to its shareholders. In furtherance of this decision, among other things
(and as more fully set forth in the Distribution Agreement), (i) Spinco intends
to undertake a recapitalization so that the number of shares of Spinco Common
Stock (as defined in the Distribution Agreement) outstanding and held by the
Company immediately prior to the Distribution Date (as hereinafter defined)
shall equal the number of shares of Company Common Stock (as defined in the
Distribution Agreement) outstanding on the Record Date (as defined in the
Distribution Agreement) and (ii) Company intends to distribute on the
Distribution Date pro rata to the holders of Company Common Stock all of the
outstanding shares of Spinco Common Stock (the "Distribution").
C. Immediately after the Distribution, Company will merge with LT Merger
Corp., a Delaware corporation ("Sub"), with Company surviving (the "Merger"), as
contemplated by the Plan and Agreement of Merger and Reorganization dated as of
December 28, 1996 (the "Merger Agreement") between AEGON N.V., a company formed
under the laws of The Netherlands ("Merger Partner"), Sub, and Company, in
connection with which the holders of Company Common Stock will receive common
stock of Merger Partner in a transaction intended to qualify as a reorganization
under Section 368(a) of the Code.
D. Company and Spinco intend the Distribution to be a transaction
described in Section 355 of the Code, after which neither Spinco nor any of its
Subsidiaries (as hereinafter defined) will be a member of the Company Affiliated
Group for Federal income tax purposes.
E. Company and Spinco desire on behalf of themselves, their respective
Subsidiaries and their successors to set forth their rights and obligations with
respect to Taxes (as hereinafter defined) due for periods before and after the
Distribution.
<PAGE>
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
For the purposes of this Agreement,
1.1 "Code" shall mean the Internal Revenue Code of 1986, as amended.
1.2 "Company Group" shall mean, for any period, Company and its then
Subsidiaries.
1.3 "Distribution Date" shall mean the day on which, due to the
distribution of the shares of Spinco Common Stock to the holders of the Company
Common Stock, Spinco could no longer be considered a member of the Company
Affiliated Group.
1.4 "Event of Loss" shall mean the incurrence by the Company Group of any
liability for Taxes which arise as a result of the Distribution and related
transactions failing to qualify as a reorganization under Section 368(a)(1)(D)
of the Code and as a tax-free spinoff under Section 355 of the Code.
1.5 "Final Determination" shall mean with respect to any issue (i) a
decision, judgment, decree or other order by any court of competent
jurisdiction, which decision, judgment, decree or other order has become final
and not subject to further appeal, (ii) a closing agreement entered into under
Section 7121 of the Code or any other binding settlement agreement (whether or
not with the Internal Revenue Service (the "Service")) entered into in
connection with or in contemplation of an administrative or judicial proceeding,
or (iii) the completion of the highest level of administrative proceedings if a
judicial contest is not available or is no longer available.
1.6 "Indemnitor" shall have the meaning set forth in Section 5.2.
1.7 "Overlap Period" shall have the meaning set forth in Section 2.5(b).
1.8 "Period After Distribution" shall mean any taxable year or other
taxable period beginning after the Distribution Date and, in the case of any
taxable year or other taxable period that begins before and ends after the
Distribution Date, that part of the taxable year or other taxable period that
begins after the close of the Distribution Date.
1.9 "Period Before Distribution" shall mean any taxable year or other
taxable period that ends on or before the Distribution Date and, in the case of
any taxable year or other taxable period that begins before and ends after the
Distribution Date, that part of the taxable year or other taxable period through
the close of the Distribution Date.
2
<PAGE>
1.10 "Spinco Group" shall mean, for any period, Spinco and its then
Subsidiaries.
1.11 "Subsidiary" shall mean a corporation, partnership, joint venture or
other business entity where 50% or more of the outstanding equity or voting
power of such entity is owned directly or indirectly by another corporation. In
determining whether a Subsidiary is a Subsidiary of Spinco or Company for any
period, Spinco shall not be considered a Subsidiary of Company, and any
Subsidiary of Spinco shall be considered a Subsidiary of Spinco, not Company,
for such period.
1.12 "Tax" or "Taxes" whether used in the form of a noun or adjective,
shall mean taxes on or measured by or with respect to income, franchise, gross
receipts, sales, use, excise, payroll, personal property, real property, ad-
valorem, value-added, leasing, leasing use and shall also include all other
taxes, levies, imposts, duties, charges or withholdings of any nature. Whenever
the term "Tax" or "Taxes" is used (including, without limitation, regarding any
duty to reimburse another party for indemnified Taxes or refunds or credit of
Taxes) it shall include penalties, fines, additions to Tax and interest thereon.
1.13 "Tax Returns" shall mean all returns or reports to be filed or that
may be filed for any period with any taxing authority (whether domestic or
foreign) in connection with any Tax (whether domestic or foreign).
1.14 "Tax Sharing Agreements" shall mean (i) the Tax Allocation Agreement
between Company and First Deposit National Bank, dated as of May 12, 1994; (ii)
the Tax Allocation Agreement between Company and Providian Credit Services,
Inc., dated as of May 12, 1994; and (iii) the Tax Allocation Agreement between
Company and Providian National Bank, dated as of May 12, 1994.
ARTICLE II
TAX RETURNS, TAX PAYMENTS, EVENT OF LOSS
AND TAX SHARING AGREEMENTS
2.1 Obligation to File Tax Returns. Company shall timely file or cause to
be filed all Tax Returns with respect to the Spinco Group that (a) are filed on
a consolidated, combined or unitary basis, (b) include Spinco or any of its
Subsidiaries and Company or any of its Subsidiaries, and (c) are required to be
filed (i) for any Period Before Distribution, or (ii) for any taxable year or
period of the Company Group that begins before and ends after the Distribution
Date. Spinco shall timely file or cause to be filed any other Tax Return with
respect to the Spinco Group.
2.2 Obligation to Remit Taxes. Company and Spinco shall each remit or
cause to be remitted on a timely basis any Taxes due in respect of any Tax for
which it is required to file a Tax Return or which is otherwise due and shall be
entitled to reimbursement for such payments only to the extent provided in
Section 2.3.
3
<PAGE>
2.3 Certain Tax Sharing Obligations and Prior Agreements.
(a) Spinco shall be liable for and shall hold the Company Group harmless
against any liability attributable to Spinco or to any Subsidiary that is a
member of the Spinco Group for Taxes, regardless of whether attributable to a
Period Before Distribution or a Period After Distribution, including any
liability asserted against any member of the Company Group under the provisions
of Treas. Reg. 1.1502-6(a) that impose several liability on members of an
affiliated group of corporations that files consolidated returns, or similar
provisions of any foreign, state or local law, in respect of Taxes of any member
of the Spinco Group. Spinco shall be entitled to any refund or credit of Taxes
for any period that is attributable to losses, deductions, credits, adjustments
to income or other tax attributes of the Spinco Group. Refunds or credits of
Taxes generated by losses, deductions, credits, adjustments to income or other
tax attributes of the Company Group shall not be treated as attributable to the
Spinco Group, even where such losses, deductions, credits, adjustments to income
or other tax attributes are used to offset income or Tax liability of the Spinco
Group. Any liability for Taxes or right to a refund under this Section 2.3(a)
shall be measured in accordance with the methods contained in the Tax Sharing
Agreements as implemented by the Company and Spinco prior to the date hereof.
(b) Company shall be liable for and shall hold the Spinco Group harmless
against (i) any liability attributable to Company or to any Subsidiary that is a
member of the Company Group for Taxes, regardless of whether attributable to a
Period Before Distribution or a Period After Distribution, including any
liability asserted against any member of the Spinco Group under the provisions
of Treas. Reg. 1.1502-6(a) that impose several liability on members of an
affiliated group of corporations that files consolidated returns, or similar
provisions of any foreign, state or local law, in respect of Taxes of any member
of the Company Group and (ii) any Tax liability for gain required to be
recognized by the Company as a result of the Distribution of the Spinco stock
failing to qualify under Section 355 of the Code, other than a Tax liability
resulting from the breach by Spinco of a representation contained in Section
2.4(c)(i) of this Agreement. Company shall be entitled to any refund of Taxes
for any period that is attributable to losses, deductions, credits, adjustments
to income or other tax attributes of Company Group. Refunds or credits of Taxes
generated by losses, deductions, credits, adjustments to income or other tax
attributes of the Spinco Group shall not be treated as attributable to the
Company Group, even where such losses, deductions, credits, adjustments to
income or other tax attributes are used to offset income or Tax liability of the
Company Group. Any liability for Taxes or right to a refund under this Section
2.3(b) shall be measured in accordance with the methods contained in the Tax
Sharing Agreements as implemented by the Company and Spinco prior to the date
hereof.
(c) Except for obligations between Company and First Deposit National
Bank, Providian Credit Services, Inc., or Providian National Bank under Sections
2 and 3 of the Tax Sharing Agreements and equivalent arrangements with the other
members of the Spinco Group for taxable periods ending on or before the
Distribution Date and except as set forth herein, the Tax Sharing Agreements and
any and all other tax sharing agreements or practices between any member of the
4
<PAGE>
Company Group and any member of the Spinco Group shall be terminated as of the
Distribution Date.
2.4 Event of Loss.
(a) Notwithstanding anything in Section 2.3 of this Agreement to the
contrary, to the extent that an Event of Loss is caused by an act (other than an
act required by the Distribution Agreement or the Merger Agreement) or omission
of the Spinco Group or the Spinco Group's shareholders that constitutes a breach
of Spinco's representation contained in Section 2.4(c)(i) of this Agreement,
Spinco shall indemnify and hold harmless each member of the Company Group from
and against such Event of Loss.
(b) Notwithstanding anything in Section 2.3 of this Agreement to the
contrary, to the extent that an Event of Loss is caused by an act (other than an
act required by the Distribution Agreement or the Merger Agreement) or omission
of the Company Group or the shareholders of the Company Group that constitutes a
breach of Company's representation contained in Section 2.4(c)(ii) of this
Agreement, Company shall indemnify and hold harmless each member of the Spinco
Group from and against such Event of Loss.
(c) (i) Spinco represents that, except as otherwise provided in the
Distribution Agreement or the Merger Agreement, it has no plan or intention, as
of the date hereof, to participate in any of the following described events or
transactions: a reorganization, consolidation or merger; the sale or disposition
of more than an immaterial portion of its assets other than in the ordinary
course of business; ceasing to engage in the active conduct of a trade or
business; the acquisition or disposition of shares of stock of Spinco by any
person or persons; the redemption or repurchase of shares of its stock by Spinco
or any successor; the recapitalization or other reclassification of the shares
of its stock by Spinco or any successor; exercising, transferring or
repurchasing rights distributed pursuant to a stock purchase rights plan; or any
other act or omission of Spinco which would result in the failure to comply with
each representation and statement made to the Service in connection with any
rulings received with respect to the Distribution or made to tax counsel in
connection with any tax opinions received with respect to the Distribution.
(ii) Company represents that, except as otherwise provided in the
Distribution Agreement or the Merger Agreement, it has no plan or intention, as
of the date hereof, to participate in any of the following described events or
transactions: a reorganization, consolidation or merger; the sale or
disposition of more than an immaterial portion of its assets other than in the
ordinary course of business; ceasing to engage in the active conduct of a trade
or business; the acquisition or disposition of shares of stock of Company by any
person or persons; the redemption or repurchase of shares of its stock by
Company or any successor; the recapitalization or other reclassification of the
shares of its stock by Company or any successor; exercising, transferring or
repurchasing rights distributed pursuant to a stock purchase rights plan; or any
other act or omission of Company which would result in the failure to comply
with each representation and statement made to the Service in
5
<PAGE>
connection with any rulings received with respect to the Distribution or made to
tax counsel in connection with any tax opinions received with respect to the
Distribution.
(iii) Spinco or Company, as the case may be, may engage in acts or
transactions described in paragraphs (i) or (ii) of this Section 2.4(c): (x) if
the act or transaction occurs after the expiration of two years from the
Distribution Date, (y) if the act or transaction consists of the sale, exchange
or disposition of assets having a fair market value on the Distribution Date of
10 percent or less of the fair market value of the total assets of the Company
or Spinco, as the case may be; or (z) if the other party to this Agreement
consents in writing in advance to such act or transactions (which consent may be
given or withheld in the sole discretion of such party), or if Spinco or
Company, as the case may be, at its discretion obtains a ruling from the
Service, or obtains an unqualified opinion from a nationally recognized tax
counsel or "Big Six" accounting firm, which ruling or opinion states, in form
satisfactory to the other party to this Agreement in its sole discretion, that
such action will not cause the Company Group to experience an Event of Loss, and
that any Service ruling obtained remains in full force and effect and may
continue to be relied upon by Spinco or Company, as the case may be, and their
respective shareholders. Any acts or transactions permitted under clauses (x) or
(y) of this paragraph (iii) of this Section 2.4(c) will not be treated as a
breach of the representations of Spinco or Company, as the case may be, for
purposes of applying the indemnification provisions of this Section 2.4 unless
there is a Final Determination that those acts or transactions result in an
Event of Loss. In addition, any acts or transactions permitted under clause (z)
of this paragraph (iii) of this Section 2.4(c) will not be treated as a breach
of the representations of Spinco or Company, as the case may be, for purposes of
applying the indemnification provisions of this Section 2.4.
2.5 Period that Includes the Distribution Date.
(a) To the extent permitted by law or administrative practice, the taxable
year or other taxable period of the Spinco Group shall be treated as closing at
the closing of the Distribution Date.
(b) If a taxable year or other taxable period (the "Overlap Period")
cannot be treated as closing at the closing of the Distribution Date under
Section 2.5(a) hereof, and if it is necessary for purposes of this Agreement to
determine the tax liability of any member of the Spinco Group or of the Company
Group for the period of time in such Overlap Period that either ends at the
closing of the Distribution Date or begins on the day after the Distribution
Date, such determination shall be made by assuming that such Overlap Period
ended at the close of the Distribution Date and that another taxable year or
other taxable period begins on the day after the Distribution Date and ends at
the end of the Overlap Period, except that exemptions, allowances or deductions
that are calculated for the full Overlap Period shall be apportioned on a per
diem basis.
6
<PAGE>
ARTICLE III
CARRYBACKS
Without the prior consent of Company, no member of the Spinco Group shall
carry back any net operating loss or other Tax attribute (unless required to
carry back such loss or Tax attribute by law) from a Period After Distribution
to a Period Before Distribution. Provided that Company consents to the carryback
or if the carryback is required by law, Company (or any other member of the
Company Group receiving such refund) shall promptly remit to Spinco any refunds
it receives with respect to any such carryback.
ARTICLE IV
PAYMENTS
4.1 Payments. Payments due to a party under Article II hereof shall be
paid not later than 30 days after the receipt or crediting of a refund or the
receipt of notice of a Final Determination which results in one of the parties
hereto becoming obligated to make a payment hereunder to the other party hereto.
4.2 Notice. Company and Spinco shall give each other reasonable notice of
any payment that may be due under this Agreement.
ARTICLE V
TAX AUDITS
5.1 General. Except as provided in Section 5.2, each of Spinco and
Company shall have sole responsibility for all audits or other proceedings with
respect to Tax Returns that it is required to file under Section 2.1.
5.2 Indemnified Claims. Company or Spinco shall promptly notify the other
in writing within 30 days of receiving any proposed adjustment to a Tax Return
that may result in liability of the other party (the "Indemnitor") under this
Agreement. The Indemnitor shall have the sole right to contest the proposed
adjustment, and to employ counsel of its choice at its expense; provided,
however, that if the proposed adjustment involves a consolidated, combined or
similar Tax Return for which the other party is responsible and cannot be
separated from the Tax Return under applicable law, the Indemnitor shall not
settle the proposed adjustment without the consent of the other party, which
consent shall not be unreasonably withheld. The Indemnitor shall provide the
other party with information concerning the proposed adjustments and, in the
sole discretion of the Indemnitor, may permit the other party to participate in
the proceeding.
7
<PAGE>
ARTICLE VI
COOPERATION
Company and Spinco shall cooperate with each other in the filing of any Tax
Returns and the conduct of any audit or other proceeding and each shall execute
and deliver such powers of attorney and make available such other documents as
are necessary to carry out the intent of this Agreement. Each party agrees to
notify the other party of any audit adjustments which do not result in Tax
liability but can be reasonably expected to affect Tax Returns of the other
party, or any of its Subsidiaries, for a Period After Distribution. Each party
agrees to treat the Distribution for all income tax purposes as a tax-free
spinoff under Section 355 of the Code unless and until there has been a Final
Determination that the Distribution is not a tax-free spinoff under Section 355
of the Code.
ARTICLE VII
RETENTION OF RECORDS; ACCESS
The Company Group and the Spinco Group shall (a) in accordance with their
current record retention policy, retain records, documents, accounting data and
other information (including computer data) necessary for the preparation and
filing of all Tax Returns in respect of Taxes of the Company Group or of the
Spinco Group or for the audit of such Tax Returns; and (b) give to the other
reasonable access to, and allow for the copying of, such records, documents,
accounting data and other information (including computer data) and give access
to its personnel (insuring their cooperation) and premises, for the purpose of
the review or audit of such Tax Returns to the extent relevant to an obligation
or liability of a party under this Agreement.
ARTICLE VIII
DISPUTES
If Company and Spinco cannot agree on any calculation of any liability
under this Agreement, such calculation shall be made by any "Big Six" accounting
firm acceptable to both Company and Spinco. The decision of such firm shall be
final and binding on both Company and Spinco. The fees and expenses incurred in
connection with such calculation shall be borne ratably, in accordance with the
determination of the allocation of the disputed liability between Company and
Spinco.
8
<PAGE>
ARTICLE IX
MISCELLANEOUS PROVISIONS
9.1 Notices and Governing Law. All notices required or permitted to be
given pursuant to this Agreement shall be given, and the applicable law
governing the interpretation of this Agreement shall be determined, by the
applicable provisions of the Distribution Agreement.
9.2 Treatment of Payments. The parties hereto shall treat any payments
made pursuant to the terms of this Agreement as a capital transaction for all
tax purposes.
9.3 Binding Effect; No Assignment; Third Party Beneficiaries. This
Agreement shall be binding on, and shall inure to the benefit of, the parties
and their respective successors and assigns, including Merger Partner. Company
and Spinco hereby guarantee the performance of all actions, agreements and
obligations provided for under this Agreement of each member of the Company
Group and of the Spinco Group, respectively. Company and Spinco shall, upon the
written request of the other, cause any of their respective Subsidiaries to
execute this Agreement. Company or Spinco shall not assign any of its rights or
delegate any of its duties under this Agreement without the prior written
consent of the other party. No person (including, without limitation, any
employee of a party or any stockholder of a party) shall be, or shall be deemed
to be, a third party beneficiary of this Agreement.
9.4 Coordination with Employee Benefits Agreement. All rights,
obligations, and liabilities relating to any Company Plan (as defined in the
Employee Benefits Agreement Between Company and Spinco, Dated as of
____________, 199___ (the "Employee Benefits Agreement")) or Spinco Plan (as
defined in the Employee Benefits Agreement) shall be determined solely under the
Employee Benefits Agreement. This Tax Disaffiliation Agreement shall in no way
affect such rights, obligations, and liabilities as determined under the
Employee Benefits Agreement.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above written.
PROVIDIAN CORPORATION
BY:________________________
Name:
Title:
PROVIDIAN BANCORP, INC.
BY:_________________________
Name:
Title:
10
<PAGE>
EXHIBIT 2.4
EXHIBIT B TO THE
DISTRIBUTION AGREEMENT
EMPLOYEE BENEFITS AGREEMENT
BETWEEN
PROVIDIAN CORPORATION
AND
PROVIDIAN BANCORP, INC.
DATED AS OF __________ __, 1997
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I DEFINITIONS.......................................... 1
1.01. Definitions.............................................. 1
1.02. Schedules, Etc........................................... 4
ARTICLE II GENERAL............................................. 4
2.01. Transfers of Employees................................... 4
2.02. Liabilities Under Plans.................................. 4
ARTICLE III STOCK-BASED PLANS.................................. 5
3.01. Stock Options............................................ 5
3.02. Stock Ownership Plan..................................... 5
3.03 Spinco Equity Units...................................... 6
ARTICLE IV OTHER PLANS......................................... 6
4.01. Deferred Compensation.................................... 6
4.02. Severance Pay............................................ 7
4.03. Master Savings Trust..................................... 7
ARTICLE V OTHER LIABILITIES.................................... 7
5.01. Other Liabilities and Obligations........................ 7
ARTICLE VI MISCELLANEOUS....................................... 8
6.01. Recognition of Company Employment Service, etc........... 8
6.02. Indemnification.......................................... 8
6.03. Guarantee of Subsidiaries' Obligations................... 8
6.04. Sharing of Information................................... 8
6.05. Amendments............................................... 8
6.06. Successors and Assigns................................... 8
6.07. Termination.............................................. 8
6.08. Rights to Amend or Terminate Plans; No Third Party
Beneficiaries............................................ 9
6.09. Payments Under Other Agreements.......................... 9
6.10. Incorporation by Reference............................... 9
SCHEDULE A List of Company Plans
SCHEDULE B List of Spinco Plans
SCHEDULE C Employees Transferring to Spinco
SCHEDULE D Employees Referred to in Section 3.01(c)
SCHEDULE E Company Employees in Spinco Equity Unit Plan
SCHEDULE F Allocation of Rabbi Trust Assets
(i)
<PAGE>
EMPLOYEE BENEFITS AGREEMENT
EMPLOYEE BENEFITS AGREEMENT, dated as of _________ __, 1997 (this
"Agreement"), by and between Providian Corporation, a Delaware corporation (the
"Company"), and Providian Bancorp, Inc., a Delaware corporation and a wholly
owned subsidiary of the Company ("Spinco").
RECITALS
A. The Merger Transaction. The Company, AEGON N.V., a Dutch
----------------------
corporation ("Merger Partner"), and LT Merger Corp., a Delaware corporation and
a wholly owned subsidiary of Merger Partner ("Sub"), have entered into a Plan
and Agreement of Merger and Reorganization, dated as of December 28, 1996 (the
"Merger Agreement"), providing for the Merger (as defined in the Merger
Agreement) of Sub with and into the Company, with the Company as the surviving
corporation.
B. The Distribution. Immediately prior to the Effective Time (as
----------------
defined in the Merger Agreement), the Company intends to distribute (the
"Distribution") as a dividend to the holders of the Company's common stock, par
value $1.00 per share ("Company Common Stock"), on a pro rata basis, all of the
then outstanding shares of common stock, par value $1.00 per share ("Spinco
Common Stock"), of Spinco.
C. Purpose. The purpose of the Distribution is to facilitate the
-------
reorganization of the Company, wherein the shareholders of the Company will
continue to own and operate Spinco, and to make possible the Merger by divesting
the Company of the businesses and operations conducted by Spinco in a tax-free
distribution to the Company's shareholders. The Company and Spinco have entered
into an Agreement and Plan of Distribution (the "Distribution Agreement"), which
sets forth or provides for certain agreements between the Company and Spinco in
consideration of the separation of their ownership.
D. This Agreement. Among other things, the Distribution Agreement
--------------
provides that the Company and Spinco will enter into this Employee Benefits
Agreement regarding certain liabilities and obligations relating to employees.
NOW, THEREFORE, in consideration of the premises and of the respective
covenants and agreements set forth herein, the parties hereto hereby agree as
follows:
ARTICLE I
DEFINITIONS
1.01. Definitions. As used in this Agreement, the following terms
-----------
shall have the following respective meanings (capitalized terms used but not
defined herein (other than the names of Company employee benefit plans) shall
have the respective meanings ascribed thereto in the Distribution Agreement):
"Agreement" shall have the meaning specified in the first paragraph
hereof.
1
<PAGE>
"Company" shall have the meaning specified in the first paragraph
hereof.
"Company Annual Bonus Plan" shall mean the Company's Management
Incentive Plan.
"Company Common Stock" shall have the meaning specified in paragraph B
of the recitals to this Agreement.
"Company Deferred Compensation Plans" shall mean the Company's
Deferred Compensation Plan, effective as of January 1, 1988 and amended and
restated effective as of January 1, 1992; the Company's Deferred Compensation
Plan for Deferral of Payments under the Management Incentive Plan, effective as
of January 1, 1992; and the Company's Operating and Policy Committee Deferred
Compensation Plan.
"Company Employee" shall mean any individual who is employed by any
member of the Company Group immediately before the Distribution Date and who is
not a Spinco Employee.
"Company Former Employee" shall mean any individual who is,
immediately before the Distribution Date, a former employee of any member of the
Company Group who has not been an employee of any member of the Spinco Group
since his or her most recent active employment with any member of the Company
Group.
"Company Option" shall mean an option to purchase shares of Company
Common Stock granted pursuant to the Company's 1981 Stock Option Incentive Plan,
1981 Tax-Qualified Stock Option Plan, 1989 Stock Option Plan or 1995 Stock
Option Plan.
"Company Participants" shall mean Company Employees, Company Former
Employees, and their respective beneficiaries and dependents.
"Company Plan" shall mean the plans, policies, programs and other
arrangements maintained by, contributed to or sponsored by any member of the
Company Group providing benefits to employees, former employees or non-employee
directors of any member of the Company Group listed on Schedule A hereto.
"Company Restricted Stock" shall mean restricted shares of Company
Common Stock granted pursuant to, and subject to forfeiture under, the Company's
Stock Ownership Plan.
"Company Subsidiary" shall mean any of the subsidiaries of the Company
other than those listed on Schedule 1.01 to the Distribution Agreement.
"Distribution" shall have the meaning specified in paragraph B of the
recitals to this Agreement.
"Distribution Agreement" shall have the meaning specified in paragraph
C of the recitals to this Agreement.
-2-
<PAGE>
"Distribution Year" shall mean the calendar year in which the
Distribution Date occurs.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
"Liabilities" shall mean any and all losses, claims, charges, debts,
demands, actions, causes of action, suits, damages, obligations, payments, costs
and expenses, indemnities and similar obligations, covenants, contracts,
controversies, agreements, promises, guarantees, make whole agreements and
similar obligations, and other liabilities, including all contractual
obligations, whether absolute or contingent, matured or unmatured, liquidated or
unliquidated, accrued or unaccrued, known or unknown, whenever arising.
"Merger Agreement" shall have the meaning specified in paragraph A of
the recitals to this Agreement.
"Pre-Distribution Year" shall mean the calendar year immediately
preceding the Distribution Year.
"Ratio" shall mean the amount obtained by dividing the average of the
daily high and low trading prices on the New York Stock Exchange for the Company
Common Stock on each of the ten trading days prior to the ex-dividend date for
the Distribution by the average of the daily high and low trading prices on the
New York Stock Exchange for the Spinco Common Stock on each of the ten trading
days beginning with the ex-dividend date for the Distribution.
"Spinco" shall have the meaning set forth in the first paragraph
hereof.
"Spinco Common Stock" shall have the meaning specified in paragraph B
of the recitals to this Agreement.
"Spinco Deferred Compensation Plan" shall mean any Deferred
Compensation Plan of Spinco in effect immediately prior to the Distribution.
"Spinco Employee" shall mean any individual who, immediately before
the Distribution Date, is employed by any member of the Spinco Group.
"Spinco Equity Unit Plan" shall mean the Equity Unit Plan of Spinco.
"Spinco Equity Units" shall mean Equity Units granted under, and as
defined in, the Spinco Equity Unit Plan.
"Spinco Former Employee" shall mean any individual who is, immediately
before the Distribution Date, a former employee of any member of the Spinco
Group who has not been an employee of any member of the Company Group since his
or her most recent active employment with any member of the Spinco Group.
"Spinco Option" shall mean an option to purchase from Spinco shares of
Spinco Common Stock provided to a Spinco Participant pursuant to Section 3.01.
-3-
<PAGE>
"Spinco Participants" shall mean Spinco Employees, Spinco Former
Employees, and their respective beneficiaries and dependents.
"Spinco Plans" shall mean any plan, policy, program, payroll practice,
ongoing arrangement, trust, insurance policy or other agreement or funding
vehicle maintained by, contributed to or sponsored by any member of the Spinco
Group providing benefits to employees, former employees or non-employee
directors of any member of the Spinco Group, including without limitation the
plans listed on Schedule B hereto; provided, however, that the term "Spinco
Plans" shall not include any Company Plans.
"Spinco Subsidiary" shall mean any of the subsidiaries of Spinco
listed on Schedule 1.01 to the Distribution Agreement.
Welfare Plan" shall mean an "employee welfare benefit plan" as defined
in Section 3(1) of ERISA (whether or not such plan is subject to ERISA).
1.02. Schedules, Etc. References to a "Schedule" are, unless
---------------
otherwise specified, to one of the Schedules attached to this Agreement, and
references to a "Section" are, unless otherwise specified, to one of the
Sections of this Agreement.
ARTICLE II
GENERAL
2.01. Transfers of Employees. Before the Distribution Date, the
----------------------
individuals listed on Schedule C hereto shall be transferred from the employ of
members of the Company Group to the employ of Spinco or any other member of the
Spinco Group designated by Spinco. Schedule C hereto may be amended by Spinco
at any time or from time to time before the Distribution Date with the consent
of the Company, which consent shall not be unreasonably withheld.
2.02. Liabilities Under Plans. From and after the Distribution Date,
-----------------------
except as otherwise specifically set forth in this Agreement, the Spinco Group
shall assume or retain, as the case may be, and shall be solely responsible for,
all Liabilities arising under, resulting from or relating to the Spinco Plans
(whether to Company Participants or to Spinco Participants), whether incurred
before, on or after the Distribution Date, and the Company Group shall assume or
retain, as the case may be, and shall be solely responsible for, all Liabilities
arising under, resulting from or relating to the Company Plans (whether to
Company Participants or to Spinco Participants), whether incurred before, on or
after the Distribution Date.
-4-
<PAGE>
ARTICLE III
STOCK-BASED PLANS
-----------------
3.01. Stock Options. (a) The Company and Spinco shall take all
-------------
action necessary or appropriate (including obtaining the consent of the holders
of Company Options, if required) so that each Company Option held by a Spinco
Participant that is outstanding as of the Distribution Date shall be replaced
as of the Distribution Date with a Spinco Option with respect to a number of
shares of Spinco Common Stock equal to the number of shares of Company Common
Stock subject to such Company Option immediately before such replacement,
multiplied by the Ratio (rounded down to the nearest whole share if necessary),
and with a per-share exercise price equal to the per-share exercise price of
such Company Option immediately before such replacement, divided by the Ratio
(rounded up to the nearest cent). Such Spinco Option shall otherwise have the
same terms and conditions as the corresponding Company Option, except that
references to the Company shall be changed to refer to Spinco.
(b) Effective as of the Distribution Date, the Spinco Group shall
assume and be solely responsible for all Liabilities of the Company Group to or
with respect to Spinco Participants arising out of or relating to Company
Options that are outstanding as of the Distribution Date. Spinco and the Spinco
Subsidiaries shall be solely responsible for all Liabilities arising out of or
relating to Spinco Options.
(c) To the extent the Company, Spinco and the affected holder or
holders of Company Options so agree, Company Options held by the Company
Employees listed on Schedule D hereto relating to up to an aggregate of 285,000
shares of Company Common Stock may be replaced as of the Distribution Date with
Spinco Options. Each such Spinco Option shall cover a number of shares of
Spinco Common Stock equal to the number of shares of Company Common Stock
subject to the Company Option so replaced immediately before such replacement,
multiplied by the Ratio (rounded down to the nearest whole share if necessary),
and with a per-share exercise price equal to the per-share exercise price of
such Company Option immediately before such replacement, divided by the Ratio
(rounded up to the nearest cent). Each such Spinco Option shall otherwise have
the same terms and conditions as the corresponding Company Option, except that
references to the Company shall be changed to refer to Spinco. As soon as
practicable after the Distribution Date, the Company shall pay to Spinco an
amount equal to the aggregate of the Spread with respect to all shares of
Company Common Stock subject to Company Options converted into Spinco Options
pursuant to this Section 3.01(c). The "Spread" with respect to any share of
Company Common Stock covered by a Company Option shall mean the excess (if any)
of (i) the average of the daily high and low per share trading prices on the New
York Stock Exchange for Company Common Stock on each of the ten trading days
prior to the ex-dividend date for the Distribution over (ii) the per share
exercise price for such Company Option.
3.02. Stock Ownership Plan. The Company shall take all action
--------------------
necessary so that all restrictions applicable to each award of Company
Restricted Stock held by a Spinco Participant that is outstanding as of the
Distribution Date shall terminate effective immediately before the Distribution
and certificates representing the shares subject thereto, as well as
-5-
<PAGE>
certificates representing the related shares of Company Common Stock on deposit,
are immediately distributed to such Spinco Participant (together with
certificates for any Spinco Common Stock distributed with respect thereto in the
Distribution).
3.03. Spinco Equity Units. The Spinco Equity Unit Plan may be
-------------------
terminated by Spinco, in Spinco's sole discretion, on or before the Distribution
Date. In such event, all participants therein shall be entitled to receive
payments, in a lump sum or in installments, in settlement of their Spinco Equity
Units. Effective as of the earlier of the date of termination of the Spinco
Equity Unit Plan (the "Termination Date") or the Distribution Date: (i) the
Company Group shall assume or retain, as applicable, and be solely responsible
for all Liabilities to or with respect to Company Employees arising out of or
relating to Spinco Equity Units; and (ii) the Spinco Group shall assume or
retain, as applicable, and be solely responsible for all other Liabilities
arising out of or relating to the Spinco Equity Unit Plan, whether arising
before, on or after the Termination Date or the Distribution Date.
Notwithstanding the foregoing: (i) each Company Employee who holds Spinco
Equity Units as of the Termination Date and who has elected to receive payments
with respect thereto in installments shall be permitted to elect to receive such
installment payments from Spinco rather than the Company; (ii) Spinco shall
assume and be solely responsible for all Liabilities to or with respect to each
such Company Employee who so elects (an "Electing Company Employee") arising out
of or relating to Spinco Equity Units; and (iii) the Company shall pay to
Spinco, as soon as practicable after the Termination Date, the aggregate
principal amount of the payments to be made with respect to Spinco Equity Units
of Electing Company Employees. The Company Employees who are, or will be, as of
the earlier of the Termination Date or the Distribution Date, participants in
the Spinco Equity Unit Plan are listed on Schedule E hereto.
ARTICLE IV
OTHER PLANS AND ARRANGEMENTS
4.01. Deferred Compensation. (a) Effective as of the Distribution
---------------------
Date, the Company shall amend the Company Deferred Compensation Plans, if
necessary, so that no Spinco Employee who is a participant therein shall be
deemed to have terminated employment as a result of the Distribution or as a
result of becoming a Spinco Employee in connection with the Distribution;
provided, however, that Spinco shall assume and be solely responsible for all
- -------- -------
Liabilities of the Company Group to or relating to Spinco Participants under the
Company Deferred Compensation Plans. Spinco and the Company shall cooperate in
taking all actions necessary or appropriate to accomplish the foregoing and to
ensure that as of the Distribution Date, the Company Group and the Company
Subsidiaries cease to have any Liabilities to or relating to the Spinco
Participants under the Company Deferred Compensation Plans, including, but not
limited to, amending the Company Deferred Compensation Plans or any grant
thereunder and obtaining any necessary consents of affected participants.
(b) Effective as of the Distribution Date, Spinco shall amend the
Spinco Deferred Compensation Plans, if necessary, so that no Company Employee
who is a participant therein shall be deemed to have terminated employment as a
result of the Distribution or as a result of becoming a Company Employee in
connection with the Distribution (with the
-6-
<PAGE>
result that such Company Employee shall continue as a participant in such Spinco
Deferred Compensation Plans in accordance with the terms of such plans).
4.02. Severance Pay. (a) Spinco and the Company agree that
-------------
individuals who, on or prior to the Distribution Date, in connection with the
Distribution, cease to be Company Employees and become Spinco Employees shall
not be deemed to have experienced a termination or severance of employment from
the Company and its subsidiaries for purposes of any policy, plan, program or
agreement of the Company or any of its subsidiaries that provides for the
payment of severance, salary continuation or similar benefits.
(b) The Spinco Group shall assume and be solely responsible for all
Liabilities of the Company Group in connection with claims made by or on behalf
of Spinco Employees in respect of severance pay, salary continuation and similar
obligations relating to the termination or alleged termination of any such
person's employment on or after the Distribution Date.
4.03. Master Savings Trust, The Company and Spinco shall take all
--------------------
steps necessary or appropriate so that, effective on or before the Distribution
Date, all assets of Spinco's 401(k) Plan that are held in the Master Long-Term
Savings Trust are transferred to one or more trustees appointed by Spinco to be
held in one or more separate trusts established by Spinco in connection with
Spinco's 401(k) Plan.
ARTICLE V
OTHER LIABILITIES
5.01. Other Liabilities and Obligations. (a) As of the Distribution
---------------------------------
Date: (i) the Spinco Group shall assume and be solely responsible for all
Liabilities of the Company Group not otherwise provided for in this Agreement to
or relating to Spinco Participants arising out of or relating to employment by
any of the Company Group or the Spinco Group, or any predecessors thereof; and
(ii) the Company Group shall assume and be solely responsible for all
Liabilities of the Spinco Group not otherwise provided for in this Agreement to
or relating to Company Participants arising out of or relating to employment by
any of the Company Group or the Spinco Group, or any predecessors thereof.
(b) In consideration of the reallocation of certain employee costs
from the Company to Spinco effected by this Agreement, in addition to the
payments contemplated by Sections 3.01(c) and 3.03, the Company shall make a
cash payment to Spinco, immediately prior to the Distribution, in the amount of
$6.55 million.
(c) At the Distribution, or as promptly as practicable thereafter,
the Company shall cause the Company's rabbi trust to transfer to Spinco, or to a
trust or other entity designated by Spinco, a pro rata share of the assets held
by the Company's rabbi trust, in the same proportion as the contributions to
such rabbi trust charged to Spinco as of the Distribution Date bear to the total
contributions made to such rabbi trust (it being understood that all such
contribution charges between the date of the Merger Agreement and the
Distribution Date will be on a basis consistent with past practice), except to
the extent not permitted under the terms of the Company's rabbi trust; provided,
that if the terms of the Company's rabbi trust do not permit such transfer, the
Company shall use best
-7-
<PAGE>
efforts to amend such terms to permit such transfer. Schedule F hereto sets
forth as of January 1, 1996 and on an estimated basis as of January 1, 1997 the
allocation of rabbi trust assets between the Company and Spinco based on the
allocation of rabbi trust contribution charges as contemplated by the foregoing
provisions.
ARTICLE VI
MISCELLANEOUS
6.01. Recognition of Company Employment Service, etc. To the extent
----------------------------------------------
applicable, the Spinco Plans shall recognize service by a Spinco Employee before
the Distribution with the Company Group as service with the Spinco Group. The
foregoing provision shall not, however, be construed to require Spinco or any
member of the Spinco Group to adopt or continue any specific employee benefit
plans or arrangements.
6.02. Indemnification. All Liabilities retained or assumed by or
---------------
allocated to the Spinco Group pursuant to this Agreement shall be deemed to be
Losses arising out of the Spinco Business, as defined in the Distribution
Agreement, and all Liabilities retained or assumed by or allocated to the
Company Group pursuant to this Agreement shall be deemed to be Losses arising
out of the Company Business, as defined in the Distribution Agreement and, in
each case, shall be subject to the indemnification provisions set forth in
Article IV thereof.
6.03. Guarantee of Subsidiaries' Obligations. Each of the parties
--------------------------------------
hereto shall cause to be performed, and hereby guarantees the performance and
payment of, all actions, agreements, obligations and liabilities set forth
herein to be performed or paid by any subsidiary of such party which is
contemplated by the Distribution Agreement to be a subsidiary of such party on
or after the Distribution Date.
6.04. Sharing of Information. Each of the Company and Spinco shall,
----------------------
and shall cause the other members of their respective Groups to, provide to the
other all such information in its possession as the other may reasonably request
to enable it to administer its employee benefit plans and programs, and to
determine the scope of, and fulfill, its obligations under this Agreement. Such
information shall, to the extent reasonably practicable, be provided in the
format and at the times and places requested, but in no event shall the party
providing such information be obligated to incur any direct expense not
reimbursed by the party making such request, nor to make such information
available outside its normal business hours and premises.
6.05. Amendments. This Agreement may be amended, modified or
----------
supplemented only by a written agreement signed by all of the parties hereto.
6.06. Successors and Assigns. This Agreement and all of the
----------------------
provisions hereof shall be binding upon and inure to the benefit of the parties
and their respective successors and permitted assigns.
6.07. Termination. This Agreement shall be terminated in the event
-----------
that the Distribution Agreement is terminated and the Distribution abandoned
prior to the Distribution
-8-
<PAGE>
Date. In the event of such termination, neither party shall have any liability
of any kind to the other party.
6.08. Rights to Amend or Terminate Plans; No Third Party
--------------------------------------------------
Beneficiaries. No provision of this Agreement shall be construed (a) to limit
- -------------
the right of any member of the Company Group or any member of the Spinco Group
to amend any plan or terminate any plan, or (b) to create any right or
entitlement whatsoever in any employee or beneficiary including, without
limitation, a right to continued employment or to any benefit under a plan or
any other benefit or compensation (it being understood that this Agreement will
also not be construed to limit any right or entitlement of any employee or
beneficiary existing without reference to this Agreement). This Agreement is
solely for the benefit of the parties hereto and their respective subsidiaries
and should not be deemed to confer upon third parties any remedy, claim,
liability, reimbursement, claim of action or other right in excess of those
existing without reference to this Agreement.
6.09. Payment Under Other Agreements. No payment made by one party
------------------------------
to the other pursuant to this Agreement will affect in any manner any payments
required to be made under the Distribution Agreement or any other agreement
between the parties hereto, including, without limitation, the settlement of
intercompany payables and receivables provided for in the Distribution
Agreement.
6.10. Incorporation by Reference. The following provisions of the
--------------------------
Distribution Agreement are hereby incorporated into this Agreement by reference
(except that references therein to the Distribution Agreement shall be deemed to
be references to this Agreement): Section 8.06 (Confidentiality); Section 10.04
(Governing Law); Section 10.05 (Notices); Section 10.09 (Counterparts); Section
10.10 (Interpretation); Section 10.11 (Severability); and Section 10.12
(References; Construction).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
PROVIDIAN CORPORATION
By:
----------------------
Name:
Title:
PROVIDIAN BANCORP, INC.
By:
----------------------
Name:
Title:
-9-
<PAGE>
SCHEDULE A TO THE EMPLOYEE BENEFITS AGREEMENT
LIST OF COMPANY PLANS
1. 1995 Stock Option Plan
2. 1989 Stock Option Plan
3. 1981 Stock Option Incentive Plan
4. 1981 Tax Qualified Incentive Stock Option Plan
5. Arts Activities ticket subsidy
6. Attendance Bonus Program
7. Base Pay Deferred Compensation Plan
8. Bereavement Leave
9. Change in Control Plan
10. Child Care and Eldercare Resources Service
11. Educational Assistance Plan: Plan Number 502
12. Employee Assistance Program: Plan Number 612
13. Executive Physical Program
14. Family Medical Leave
15. Friday Business Casual Day and Summer Business Casual from Memorial Day to
Labor Day
16. Holidays
17. Insurance education expenses, cash awards and graduation conference trip
for completion of programs to achieve the following designations:
. FLMI
. CLU
. CHFC
. FALU
. HIAA
. CPCU
. ALHC
. FLM/M
. ACS
. IIA
18. Jury Duty Leave
19. Management Incentive Deferred Compensation Plan
20. Management Incentive Plan
21. Matching Gift Program
22. Medical Plan/Dental Plan: Plan Number 610
23. Non-Qualified Supplemental Defined Benefit Plan
24. Non-Qualified Supplemental Defined Contribution Plan
25. Personal Days
26. Relocation Program
27. Retirement Gift Fund
28. Retirement Plan: Plan Number 001
<PAGE>
29. Section 125 Plan: Plan Number 700; includes
. Health Care Account
. Dependent Care Assistance Plan
30. Senior Officer luncheon club memberships
31. Service Award Program
32. Severance Plan
33. Stock Ownership Plan
34. Stock Purchase Plan
35. Survivor Benefits Plan and Long-Term Disability Plan: Plan Number 611;
includes
. Employee Basic Life Insurance
. Employee Additional Life Insurance
. Business Travel Accident Insurance
. Accidental Death and Dismemberment Insurance
. Spouse's Life Insurance
. Child(ren)'s Life Insurance
36. TARC ticket subsidy
37. Temporary Disability Program
38. Thrift Savings Plan: Plan Number 002
39. Vacation
40. Variable Pay Plan
41. Various sales commission arrangements, such as COMPASS Compensation
Program, Life Universal Offer Model Sales Commission Plan, Life Universal
Telemarketing Compensation Plan, Military Home Office Commission Plan for
Assistant Regional Vice Presidents, P&C Inbound Sales Incentive Plan
42. Executive Travel - personal use of jet by Irving W. Bailey II up to 17,000
miles per year and by Shailesh Mehta up to 9,000 miles per year.
-2-
<PAGE>
SCHEDULE B TO THE EMPLOYEE BENEFITS AGREEMENT
LIST OF SPINCO PLANS
SPINCO PLANS
Providian Bancorp Health and Welfare Plan: Plan #502
(This plan includes the following contracts or arrangements)
John Hancock Medical
PCS Prescription Coverage
Health Net HMO
Healthsource HMO
Matthew Thornton HMO
John Hancock Dental
John Hancock Life & Dependent Life Insurance
VSP Vision
Preferred Works Short-term Disability
Met Life Long-term Disability
Hartford AD&D Insurance
Health Care FSA
Dependent Care FSA
Providian Bancorp 401(k) Plan: Plan #001
includes:
Employer Match
Retirement Contribution
Providian Bancorp Timebank Plan: Plan #503
Sabbatical Program
Workers Compensation Self Insured Program
Sentry Workers Compensation Insurance (Company Plan)
Providian Bancorp Equity Unit Plan
Providian Bancorp Deferred Compensation Plan
Providian Bancorp Supplemental Defined Contribution Plan
Phone Channel Variable Pay Program
U.S. Savings Bond Payroll Deduction
Holidays
Bereavement Leave
Jury Duty Leave
Military Leave
Family Medical Leave Policy
Tuition Reimbursement Program
Matching Gift Program
Employee Referral Award Program
<PAGE>
Commuter Checks
Meal Allowance
Annual Holiday Party
Annual Picnic
Friday and Summer Casual Attire
-2-
<PAGE>
SCHEDULE C TO THE EMPLOYEE BENEFITS AGREEMENT
TRANSFERRING EMPLOYEES
1. Shailesh Mehta
2. James Rowe
<PAGE>
SCHEDULE D TO THE EMPLOYEE BENEFITS AGREEMENT
EMPLOYEES REFERRED TO IN SECTION 3.01(C)
Irving W. Bailey, II
-2-
<PAGE>
SCHEDULE E TO THE EMPLOYEE BENEFITS AGREEMENT
COMPANY EMPLOYEES IN SPINCO EQUITY UNIT PLAN
Larry Pitterman
Jim Elliott
Kathy Fritzsche
Dennis Brady
Tammy Owens
<PAGE>
SCHEDULE F TO THE EMPLOYEE BENEFITS AGREEMENT
ALLOCATION OF RABBI TRUST ASSETS
1. AS OF JANUARY 1, 1996
Company $55,913,709
Spinco 3,272,319
-----------
Total $59,186,028
===========
2. ESTIMATED AS OF JANUARY 1, 1997
Company $68,707,290
Spinco 4,558,880
-----------
Total $73,266,170
===========
<PAGE>
EXHIBIT 2.5
EXHIBIT C TO
DISTRIBUTION AGREEMENT
TRANSITION SERVICES AGREEMENT
BETWEEN
PROVIDIAN CORPORATION
AND
PROVIDIAN BANCORP, INC.
Dated as of _______, 1997
<PAGE>
TRANSITION SERVICES AGREEMENT
TRANSITION SERVICES AGREEMENT, dated as of ____, 199_ (this "Agreement"),
by and between Providian Corporation, a Delaware corporation (the "Company"),
and Providian Bancorp, Inc., a Delaware corporation and a wholly owned
subsidiary of the Company ("Spinco").
RECITALS
A. The Merger Transaction. The Company, AEGON N.V., a company organized
under the laws of The Netherlands ("Merger Partner"), and LT MERGER CORP., a
Delaware corporation and a wholly owned subsidiary of Merger Partner ("Sub"),
have entered into a Plan and Agreement of Merger and Reorganization, dated as of
December 28, 1996 (the "Merger Agreement"), providing for the Merger (as defined
in the Merger Agreement) of Sub with and into the Company, with the Company as
the surviving corporation.
B. The Distribution. Immediately prior to the Effective Time (as defined
in the Merger Agreement), the Company intends to distribute (the "Distribution")
as a dividend to the holders of the Company's common stock, par value $1.00 per
share, on a pro rata basis, all of the then outstanding shares of common stock,
par value $1.00 per share, of Spinco.
C. Purpose. The purpose of the Distribution is to facilitate the
reorganization of the Company, and to make possible the Merger by divesting the
Company of the businesses and operations conducted by Spinco in a tax-free
distribution to the Company's stockholders. The Company and Spinco have entered
into an Agreement and Plan of Distribution (the "Distribution Agreement"), which
sets forth or provides for certain agreements between the Company and Spinco in
consideration of the separation of their ownership.
D. This Agreement. Among other things, the Distribution Agreement
provides that the Company and Spinco will enter into this Transition Services
Agreement regarding certain administrative and operational functions of the
businesses conducted by the Company and Spinco for a transition period after the
Distribution Date.
NOW, THEREFORE, in consideration of the premises and of the respective
covenants and agreements set forth herein, the parties hereto hereby agree as
follows:
ARTICLE I
DEFINITIONS
Section 1.01. Definitions. As used in this Agreement, the following terms
shall have the following respective meanings (capitalized terms used but not
defined herein shall have the respective meanings ascribed thereto in the
Distribution Agreement):
"Agreement" shall have the meaning specified in the first paragraph hereof.
<PAGE>
2
"Company" shall have the meaning specified in the first paragraph hereof.
"Distribution" shall have the meaning specified in the recitals to this
Agreement.
"Distribution Agreement" shall have the meaning specified in the recitals
to this Agreement.
"Merger Agreement" shall have the meaning specified in the recitals to this
Agreement.
"Spinco" shall have the meaning set forth in the first paragraph hereof.
"Transition Period" shall have the meaning specified in Section 2.01.
"Transition Services" shall have the meaning specified in Section 2.01.
ARTICLE II
TRANSITION SERVICES
Section 2.01. Transition Period. For a period of 180 days beginning on
the Distribution Date (the "Transition Period"), the Company shall make
available to Spinco the services described below in Section 2.03 (the
"Transition Services"). The Company shall only be obligated to provide
Transition Services during normal business hours and in a manner that will not
interfere with the Company's business operations.
Section 2.02. Fees. Spinco shall reimburse the Company for the Company's
allocable overhead and any reasonable out-of-pocket expenses (including the
reasonable costs of salaries and benefits of employees providing such services)
incurred by the Company in providing the Transition Services. Any payments
required to be made hereunder shall be due and payable within 30 days of date of
invoice.
Section 2.03. Transition Services. During the Transition Period, the
Company shall make available to Spinco certain administrative services relating
to financial, tax, accounting, legal, human resources and other administrative
services, as set forth on Schedule 2.03 hereto (the "Transition Services").
Section 2.04. Performance of Transition Services. The Company agrees to
perform the Transition Services to be provided hereunder in a professional and
competent manner, using at least the same standard of care that it uses in
performing such services in its own affairs.
<PAGE>
3
ARTICLE III
NO WARRANTIES; LIMITATION ON LIABILITY
Section 3.01. No Warranties. THE COMPANY MAKES NO WARRANTIES, EXPRESS OR
IMPLIED, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTIES OF MERCHANTABILITY
OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE TRANSITION SERVICES TO
BE PROVIDED HEREUNDER.
Section 3.02. Limitation on Liability. In no event shall the Company be
liable for any incidental or consequential damages to Spinco arising from the
provision of the Transition Services by the Company hereunder, other than for
the Company's gross negligence or willful misconduct.
ARTICLE IV
MISCELLANEOUS
Section 4.01. Cooperation. The parties hereto shall cooperate with each
other and shall cause their officers, employees, agents, auditors and
representatives to cooperate with each other during the Transition Period to
facilitate the orderly transition of the separation of the Company Business and
the Spinco Business and to minimize any disruption to the respective Businesses
that might result from the transactions contemplated by the Distribution
Agreement and hereby.
Section 4.02. Relationship of the Parties. The parties hereto agree that,
after the Distribution Date, nothing herein shall constitute, be construed to
be, or create a partnership, joint venture or similar relationship between them,
and that any actions performed by or on behalf of another party hereunder shall
be as an agent for such other party.
Section 4.03. Amendments. This Agreement may be amended, modified or
supplemented only by a written agreement signed by all of the parties hereto.
Section 4.04. Successors and Assigns. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
and their respective successors and permitted assigns.
Section 4.05. Termination. This Agreement shall be terminated in the
event that the Distribution Agreement is terminated and the Distribution is
abandoned prior to the Distribution Date. In the event of such termination,
neither party shall have any liability of any kind to the other party.
Section 4.06. Incorporation by Reference. The following provisions of the
Distribution Agreement are hereby incorporated into this Agreement by reference
(except that references therein to the Distribution Agreement shall be deemed to
be references to this Agreement): Section 8.06 (Confidentiality); Section 10.04
(Governing Law); Section 10.05 (Notices); Section
<PAGE>
4
10.09 (Counterparts); Section 10.10 (Interpretation); Section 10.11
(Severability); Section 10.12 (References; Construction).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
PROVIDIAN CORPORATION
By:
----------------------------------------
Name:
Title:
PROVIDIAN BANCORP, INC.
By:
----------------------------------------
Name:
Title:
<PAGE>
SCHEDULE 2.03
TO TRANSITION SERVICES AGREEMENT
Transition Services
-------------------
I. Human Resources
A. Employee benefit program administration and development, including
with respect to:
1. stock purchase plan
2. bonus program
3. deferred compensation
4. stock options
5. claims paying
II. Accounting/Controller
A. SEC accounting advice
B. Financial audit relationship with Ernst and Young
C. Tax administrative accounting activities, with respect to providing
information regarding:
1. sharing agreements
2. services and advice
3. records
4. liability for prior years
D. General financial record keeping
E. Purchasing
III. Corporate
A. Insurance administration
<PAGE>
IV. Legal
A. Tax law
V. Miscellaneous
A. Network integration and protocol administration services
B. Providian Home Loans Louisville office space, facilities, maintenance
and services
<PAGE>
Exhibit 2.6
EXHIBIT D
TO DISTRIBUTION
AGREEMENT
TRADEMARK LICENSE AGREEMENT
This AGREEMENT, entered into this ___ day of ___________, 199_ by and
between PROVIDIAN BANCORP, INC., a Delaware corporation, having offices at 201
Mission Street, San Francisco, California (the "LICENSOR") and PROVIDIAN
CORPORATION, a Delaware corporation, having offices at 400 West Market Street,
Louisville, Kentucky (the "LICENSEE");
WHEREAS, LICENSOR has adopted and is using the words PROVIDIAN, PROVIDIAN
_______________, and a logo Design as service marks, trademarks, trade names
and/or trade dress for _____________________ [describe] throughout the United
States and is the owner of U.S. Trademark Registrations Nos._________________
[fill in] and U.S. Trademark Application Serial Nos. _________ [fill in], copies
of which are attached hereto as Exhibits A and B (hereinafter collectively
referred to as the "SERVICE MARKS"); and
WHEREAS, prior to the date hereof, SPINCO was a wholly owned subsidiary of
COMPANY and, pursuant to the General Intellectual Property Assignment and
Renunciation referred to in the Agreement and Plan of Distribution between
LICENSOR and LICENSEE, dated December 28, 1996 (the "Distribution Agreement"),
COMPANY assigned to SPINCO the SERVICE MARKS;
WHEREAS, LICENSEE is the owner of certain insurance subsidiaries identified
on Exhibit C to this Agreement (the "LICENSEE'S SUBSIDIARIES");
WHEREAS, in accordance with the Distribution Agreement, LICENSEE and
LICENSEE'S SUBSIDIARIES intend to change their names and have agreed to cease
using COMPANY in their names and to cease using said SERVICE MARKS;
WHEREAS, LICENSEE'S SUBSIDIARIES need to obtain regulatory approval to
change their names;
WHEREAS, LICENSEE and LICENSEE'S SUBSIDIARIES are desirous of licensing
said SERVICE MARKS for use in connection with their respective businesses for
the periods set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants of the parties and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties hereby agree as follows:
1. LICENSE. LICENSOR grants to LICENSEE and LICENSEE'S SUBSIDIARIES
a license to use the SERVICE MARKS throughout the United States of
<PAGE>
2
America in connection with the Company Business, as defined in Article VI
of the Distribution Agreement (hereinafter, the "COMPANY BUSINESS").
2. QUALITY OF SERVICES. LICENSOR acknowledges that it has reviewed
LICENSEE'S and LICENSEE'S SUBSIDIARIES services, and the advertising
related thereto, and agrees that they meet LICENSOR'S quality standards.
LICENSEE agrees, and shall cause LICENSEE'S SUBSIDIARIES, to maintain the
quality of the services, and advertising related thereto, substantially at
the current level.
3. INSPECTION. LICENSEE and LICENSEE'S SUBSIDIARIES will permit duly
authorized representatives of LICENSOR to inspect the use of the SERVICE
MARKS by LICENSEE and LICENSEE'S SUBSIDIARIES at their respective offices,
at all reasonable times and on reasonable notice, for the purpose of
ascertaining or determining compliance with Paragraphs 1 and 2 hereof.
4. USE OF SERVICE MARKS. LICENSEE and LICENSEE'S SUBSIDIARIES shall,
at the request of LICENSOR on reasonable notice and to the extent that
LICENSOR has reasonable cause to believe that LICENSEE or LICENSEE'S
SUBSIDIARIES is not complying with its obligations under Paragraphs 1 and 2
hereof, provide LICENSOR with samples of all literature, brochures, signs
and advertising material prepared by LICENSEE or LICENSEE'S SUBSIDIARIES,
provided that LICENSOR shall pay 50% of LICENSEE'S and LICENSEE'S
SUBSIDIARIES' costs in providing such samples. When using the SERVICE MARKS
under this AGREEMENT, LICENSEE and LICENSEE'S SUBSIDIARIES undertake to
comply substantially with all laws pertaining to service marks in force at
any time. This provision includes compliance with marking requirements.
5. EXTENT OF LICENSE. The right granted in Paragraph 1 hereof shall
be nonexclusive and shall not be transferable (except, after notice to
LICENSOR, to successor entities in connection with internal reorganizations
of LICENSEE and LICENSEE'S SUBSIDIARIES, provided that such successor
entities remain direct or indirect wholly owned subsidiaries of Merger
Partner (as defined in the Distribution Agreement)) without LICENSOR'S
prior written consent. The LICENSOR shall have the right to use the SERVICE
MARKS and to license its use to any other designee, subject to Section 8.08
of the Distribution Agreement. Except as stated herein, the license granted
shall not be assignable or transferable in any manner whatsoever, nor shall
the LICENSEE or LICENSEE'S SUBSIDIARIES have the right to grant any
sublicenses, except by prior written consent of LICENSOR.
6. INDEMNITY. LICENSOR assumes no liability to LICENSEE or
LICENSEE'S SUBSIDIARIES or to third parties with respect to the performance
characteristics of the services rendered by LICENSEE or LICENSEE'S
SUBSIDIARIES under the SERVICE MARKS. LICENSEE and LICENSEE'S SUBSIDIARIES
shall
<PAGE>
3
indemnify LICENSOR against Losses (as defined in the Distribution
Agreement) incurred pursuant to claims of third parties against LICENSOR
arising out of the use of the SERVICE MARKS in connection with the COMPANY
BUSINESS or the provision of services by LICENSEE or LICENSEE'S
SUBSIDIARIES under the SERVICE MARKS, provided that such indemnity shall
not extend to Losses incurred by claims of third parties related to the
validity of LICENSOR'S rights in the SERVICE MARKS. LICENSOR and LICENSEE
further agree that any and all losses incurred by LICENSOR that are subject
to the foregoing indemnification shall be considered "Losses," as defined
in Article VI of the Distribution Agreement, and subject, but not in
addition, to the indemnification provisions set forth therein.
7. TERMINATION. LICENSEE and LICENSEE'S SUBSIDIARIES agree to effect
the change in the name of LICENSEE and LICENSEE'S SUBSIDIARIES as promptly
as reasonably practicable after the date hereof, to use reasonable efforts
to obtain all necessary regulatory approvals to effect such name change,
and to transition, as promptly as reasonably practicable, to usage of a new
name and to cease usage of the COMPANY name and the other SERVICE MARKS.
The license granted herein shall remain in effect only until said
transition is complete, or (i) six months from the date hereof with respect
to LICENSEE and (ii) 18 months from the date hereof with respect to
LICENSEE'S SUBSIDIARIES. Notwithstanding the foregoing, with respect to the
LICENSEE'S SUBSIDIARIES, if, despite reasonable efforts on the part of
LICENSEE to obtain regulatory approval for the name change of the
LICENSEE'S SUBSIDIARIES by the end of the 18-month period, such period may
be extended with the consent of LICENSOR, which consent shall not be
unreasonably withheld. LICENSOR shall also be entitled to terminate this
Agreement if LICENSEE and LICENSEE'S SUBSIDIARIES fail to comply with their
obligations hereunder in all material respects, subject to notice to
LICENSEE from LICENSOR and an opportunity for LICENSOR to cure such failure
within thirty days.
8. OWNERSHIP OF SERVICE MARKS. LICENSEE, LICENSEE'S SUBSIDIARIES and
all parties to this AGREEMENT acknowledge LICENSOR'S exclusive right, title
and interest in and to the SERVICE MARKS, except for the license granted
herein, and any registrations that have issued or may issue thereon, and
will not at any time do or cause to be done any act or thing contesting or
in any way impairing or tending to impair any part of such right, title and
interest. In connection with the use of the SERVICE MARKS, neither LICENSEE
nor LICENSEE'S SUBSIDIARIES nor any other party hereto shall in any manner
represent that he or it has any ownership in the SERVICE MARKS or
registrations thereof, and all parties acknowledge that LICENSEE'S and
LICENSEE'S SUBSIDIARIES use of the SERVICE MARKS shall enure to the benefit
of the LICENSOR. On termination of this AGREEMENT in any manner provided
herein, the LICENSEE and LICENSEE'S SUBSIDIARIES will cease and desist from
all use of the SERVICE MARKS in any way and will destroy all material and
paper upon which the SERVICE MARKS appear, other than for standard record
retention requirements, and furthermore, LICENSEE and LICENSEE'S
SUBSIDIARIES will not at any time adopt or use without LICENSOR'S prior
<PAGE>
4
written consent, any word or mark which is similar to or likely to be
confused with the SERVICE MARKS.
9. The following provisions of the Distribution Agreement are
incorporated herein by reference: Section 10.05 (Governing Laws), Section
10.06 (Notices), Section 10.09 (Counterparts), Section 10.10
(Interpretation), Section 10.11 (Severability), Section 10.12 (References;
Construction); Section 8.06 (Confidentiality).
PROVIDIAN BANCORP, INC.
201 Mission Street
San Francisco, California 94105
By: _______________________________ Dated: _____________________________
, Its
PROVIDIAN CORPORATION
400 West Market Street
Louisville, Kentucky 40202
By: _______________________________ Dated: _____________________________
, Its
<PAGE>
Exhibit 2.7
EXHIBIT E TO
DISTRIBUTION AGREEMENT
GENERAL INTELLECTUAL PROPERTY ASSIGNMENT AND RENUNCIATION
WHEREAS, PROVIDIAN CORPORATION ("COMPANY") is a Delaware corporation,
having offices at 400 West Market Street, Louisville, Kentucky;
WHEREAS, PROVIDIAN BANCORP, INC. ("SPINCO") is a Delaware corporation,
having offices at 201 Mission Street, San Francisco, California, and prior to
_________, 199_ was a wholly owned subsidiary of COMPANY;
WHEREAS, COMPANY and SPINCO, in connection with a reorganization of
COMPANY, executed an Agreement and Plan of Distribution between COMPANY and
SPINCO on December 28, 1996 (hereinafter, the "Distribution Agreement");
WHEREAS, COMPANY is desirous of assigning, transferring and conveying to
SPINCO any and all right, title and interest of COMPANY in and to certain
PROPRIETARY RIGHTS as hereinafter defined;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, COMPANY does hereby assign, transfer and convey to SPINCO its
successors, legal representatives and assigns, any and all world-wide rights,
title and interest of COMPANY in and to the following (hereinafter the
"PROPRIETARY RIGHTS"):
1. MARKS AND TRADE DRESS, which shall mean any and all trademarks,
service marks, trade names, trade dress and other proprietary terms, words,
designations, designs, colors, color combinations, product configurations
and indicia used, or as to which an application based on a bona fide
intention to use has been filed with the U.S. Patent and Trademark Office
in connection with SPINCO, the Spinco Business, as defined in ARTICLE VI of
the Distribution Agreement (hereinafter, the "SPINCO BUSINESS"), and/or the
business or services conducted by or provided by COMPANY under the
trademark, service mark or trade name that includes the word "PROVIDIAN",
or the "PRO" prefix, or other forms of the word "PROVIDIAN"; any and all
trademark applications filed and trademark registrations received for any
of the foregoing in the United States, the individual states thereof, or
any foreign county, as set forth in the attached Exhibits A and B; the
goodwill of the business appurtenant to and connected with said MARKS AND
TRADE DRESS; any non-privileged information, research and investigations
conducted in connection with the selection of said MARKS; and the right to
apply for, register, renew, protect, defend and enforce any and all rights
to the foregoing including the right to sue for past infringement thereof,
the right to enforce any and all rights of the COMPANY related to the
foregoing and causes of action therefor, presently known or unknown and
inuring to SPINCO, and the right to recover all claims for damages or for
<PAGE>
2
compensation for past infringement arising out of any cause of action,
whether presently known, unknown, accrued or to accrue.
2. WORKS, which shall mean any and all fixed expressions of concepts
and ideas created, used or published by or for SPINCO or COMPANY for
business or services conducted under the trademark, service mark or trade
name that includes the word "PROVIDIAN", the "PRO" prefix or other forms of
the word "PROVIDIAN" solely relating to the SPINCO BUSINESS, including
without limitation any and all marketing, advertising and promotional
materials in printed or other form, whether or not the same constitute
"Works of Authorship" under the United States copyright laws; and any and
all copyright applications filed and copyright registrations received for
any of the foregoing in the United States or any foreign country, as set
forth in the attached Exhibit C;
3. CONFIDENTIAL INFORMATION, which shall mean any and all
information, comprising trade secrets, proprietary information, formulas,
products, protocols, forms, procedures, methods for operating business,
marketing and advertising practices and plans and financial data, whether
or not any of the foregoing is embodied in written or otherwise recorded
form, that was developed or obtained by SPINCO or COMPANY solely for the
SPINCO BUSINESS and solely relating to business or services conducted under
the trademark, service mark or trade name that includes the word
"PROVIDIAN", the "PRO" prefix or other forms of the word "PROVIDIAN;"
4. INVENTIONS, which shall mean any and all discoveries, concepts,
developments and ideas, whether or not protectable under the patent laws or
other laws, conceived, reduced to practice, or developed by, or for, SPINCO
or COMPANY solely relating to the SPINCO BUSINESS and solely for the
business or services conducted under the trademark, service mark or trade
name that includes the word "PROVIDIAN", the "PRO" prefix or other forms of
the word "PROVIDIAN", including without limitation proprietary designs,
methods, formulas, techniques, articles of manufacture, processes and
procedures, as well as improvements and know-how relating thereto; and any
and all patent applications filed and patents obtained for any of the
foregoing in the United States or any foreign country as set forth in the
attached Exhibit D; and
5. Any and all other rights and privileges provided under the
copyright, patent, trademark, unfair competition, trade secret and other
laws of the United States, the individual states thereof and any foreign
country with respect to the foregoing, provided that such rights and
privileges are related solely to the SPINCO BUSINESS; any and all grants of
rights to and under any and all licenses and other agreements and documents
relating to any of the foregoing, provided that such rights are related
solely to the SPINCO BUSINESS; and any and all grants of rights of
<PAGE>
3
publicity and waivers of privacy rights of any and all persons whose names,
images, licenses and other identifying indicia are included in the subject
matter to which the foregoing relates, provided that such grants and
waivers are related solely to the SPINCO BUSINESS.
COMPANY does hereby waive, renounce and relinquish any and all claims of
ownership, rights, title and interest in the PROPRIETARY RIGHTS, and COMPANY
agrees that no rights in any of the PROPRIETARY RIGHTS are retained by COMPANY.
COMPANY agrees to cooperate as reasonably necessary with SPINCO (at
SPINCO's expense and without further consideration to COMPANY) in connection
with perfecting SPINCO's ownership of the PROPRIETARY RIGHTS, and in connection
with perfecting the transfer of all rights to and the vesting of full and
complete title and ownership in SPINCO to the PROPRIETARY RIGHTS, including
execution of the Short-Form Assignment attached as Exhibit F to the Distribution
Agreement. COMPANY further agrees to cooperate as reasonably necessary with
SPINCO (at SPINCO's expense and without further consideration to COMPANY) in
connection with, enforcing and defending the rights transferred, and executing
any and all instruments deemed by SPINCO to be reasonably necessary or desirable
to implement and accomplish the transfer, enforcement and/or defense of rights
granted by COMPANY hereunder in the United States and foreign jurisdictions.
COMPANY and SPINCO agree that any and all Losses, as defined in Article IV
of the Distribution Agreement, arising out of use of the MARKS AND TRADE DRESS
prior to the Distribution Date, as defined in the Distribution Agreement, shall
be governed by the indemnification provision set forth in Article VI thereof.
This Agreement shall be binding upon and shall inure to the benefit of the
parties, and their respective officers, directors, employees, agents,
affiliates, attorneys, legal representatives, heirs, successors and assigns.
This instrument shall be governed by and construed and enforced in
accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, COMPANY has executed this Assignment by the hand of its
duly authorized representative.
PROVIDIAN CORPORATION
By: Dated:
------------------------------- ------------------------------
, Its
<PAGE>
Exhibit 2.8
EXHIBIT F TO
DISTRIBUTION AGREEMENT
SHORT-FORM ASSIGNMENT
WHEREAS, PROVIDIAN CORPORATION, a Delaware corporation, having offices at
400 West Market Street, Louisville, Kentucky (the "ASSIGNOR"), has used in its
business and is the owner of the entire right, title and interest in and to the
trademarks set forth in the attached Exhibit A, and the goodwill appurtenant to
said marks; and the United States Trademark Registrations and Applications for
said marks;
WHEREAS PROVIDIAN BANCORP, INC. is a Delaware corporation, having offices
at 201 Mission Street, San Francisco, California (the "ASSIGNEE").
WHEREAS ASSIGNEE is desirous of acquiring ASSIGNOR's entire right, title
and interest in and to said trademarks, the appurtenant goodwill, the federal
trademark registrations and applications for said marks and the rights at common
law in and to said marks;
WHEREAS ASSIGNOR desires to assign said trademarks, trademark registrations
and trademark applications to ASSIGNEE so that they follow the associated
business of SPINCO;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged; ASSIGNOR hereby assigns, transfers and conveys to ASSIGNEE, it
successors, legal representatives and assigns, ASSIGNOR's entire right, title
and interest in and to each of the service marks identified in Exhibit A, the
goodwill of the business appurtenant to and connected with the marks, the United
States Trademark Registrations and Applications for said marks, and all rights
at common law in the marks.
IN WITNESS WHEREOF, ASSIGNOR has executed this Assignment by the hand of
its duly authorized representative.
PROVIDIAN CORPORATION
By: Dated:
--------------------------------- ----------------------------
, Its
<PAGE>
EXHIBIT 2.9
EXHIBIT D
TO MERGER AGREEMENT
GUARANTEE AGREEMENT
This GUARANTEE AGREEMENT (this "Guarantee") is made and entered into as of
___________, 1997 by and between AEGON USA, INC. (the "Guarantor"), a Delaware
corporation and wholly owned subsidiary of AEGON N.V., a company formed under
the laws of The Netherlands ("Merger Partner"), PROVIDIAN CORPORATION, a
Delaware corporation ("Company"), and PROVIDIAN BANCORP, INC., a Delaware
corporation and wholly owned subsidiary of Company ("Spinco").
WHEREAS, Merger Partner, Company and LT Merger Corp., a Delaware
corporation and wholly owned subsidiary of Merger Partner ("Sub"), have entered
into a Plan and Agreement of Merger and Reorganization dated December 28, 1996
(the "Merger Agreement"), which provides for the merger of Sub into Company with
the result that Company will survive as a wholly owned subsidiary of Merger
Partner;
WHEREAS, Company and Spinco have entered into an Agreement and Plan of
Distribution, dated December 28, 1996 (the "Distribution Agreement") in
connection with the spin-off of Spinco by Company immediately prior to the
Merger; and
WHEREAS, as an inducement to Spinco and Company to enter into the
Distribution Agreement and to Company to enter into the Merger Agreement,
Guarantor has agreed to enter into this Guarantee;
NOW THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
1. The Guarantor hereby unconditionally and irrevocably guarantees to
Spinco and to the other Protected Parties (as defined below) (a) the due,
punctual and full payment by Company of all amounts payable by Company under the
Distribution Agreement and the Other Agreements (as defined in the Distribution
Agreement) and under Sections 6.14 and 6.16 of the Merger Agreement as and when
the same shall become due and payable in accordance with the terms thereof and
(b) the due, prompt and faithful performance of, and compliance with, all other
obligations, covenants, terms, conditions and undertakings of Company contained
in the Distribution Agreement and the Other Agreements and under Sections 6.14
and 6.16 of the Merger Agreement in accordance with the terms thereof; provided,
however, that, notwithstanding the foregoing, the aggregate amount required to
be paid by the Guarantor as a result of its liabilities and obligations under
this Agreement shall not exceed [insert at the Closing: the amount in U.S.
dollars equal to the shareholders' equity of Company, determined in accordance
with generally accepted accounting principles, as of the latest quarter ended
prior to the Closing, adjusted to give effect to the spin-off of Spinco by the
Company on the Distribution Date]. As used in this Agreement, the term
"Protected Parties"
<PAGE>
shall mean Spinco and each person who is entitled to the benefits of Section
6.14 or Section 6.16 of the Merger Agreement.
2. This guarantee is a guarantee of payment, performance and compliance
when due, and is in no way conditional or contingent upon any attempt to collect
from Company or upon any other event, contingency or circumstance whatsoever
(other than the condition that Company fail to pay or perform its obligations
when due or when required to be performed).
3. The covenants and agreements of the Guarantor set forth in this
Guarantee and the Guarantor's obligations under this Agreement shall be absolute
and unconditional, shall not be subject to any counterclaim, setoff, deduction,
diminution, abatement, recoupment, suspension, deferment, reduction or defense
(other than full and strict compliance by the Guarantor with its obligations
hereunder) based upon any claim that the Guarantor or any other person or entity
have against Company or any other person or entity, and shall remain in full
force and effect without regard to, and shall not be released, discharged or in
any way affected by, any circumstance or condition whatsoever (whether or not
the Guarantor shall have any knowledge or notice thereof). Subject to the
proviso to the first sentence of Section 1 of this Agreement, the obligations of
the Guarantor set forth in this Guarantee constitute the full recourse
obligations of the Guarantor enforceable against it to the full extent of all of
the Guarantor's assets and properties, notwithstanding any provision in any
agreement limiting the liability of any other person or entity.
4. The Guarantor hereby waives notice of, and consents to, any change in
the time, manner or place of payment or performance, and any other amendment or
waiver, or any consent to departure or other indulgence, from time to time
granted to Company by Spinco or any other Protected Party with respect to the
matters guaranteed hereunder, and the Guarantor hereby waives notice of
nonperformance or nonpayment, and, except as provided herein, all other notices
and demands whatsoever and any requirement that Spinco or any other Protected
Party protect, secure, perfect or insure any security interest or lien or any
property subject thereto or exhaust any right.
5. No amendment or waiver of any provision of this Guarantee nor any
consent to any departure by the Guarantor herefrom shall in any event be
effective unless the same shall be in writing and signed by the party or parties
against whom such amendment or waiver is sought to be enforced, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given. No failure on the part of any party to
exercise or delay in exercising any right hereunder shall operate as a waiver of
any of, nor shall any single or partial exercise of any right hereunder preclude
any other or further exercise thereof or the exercise of, any other right. The
remedies herein provided are cumulative and not exclusive of any remedies
provided by law.
6. The Guarantor represents and warrants to Spinco and to the other
Protected Parties as follows:
(a) The Guarantor is a corporation duly organized, validly existing
and in good standing under the laws of the State of Iowa. The Guarantor is duly
qualified to do business in each
-2-
<PAGE>
jurisdiction in which the ownership of properties by the Guarantor and the
business and activities of the Guarantor require such qualification, except
where the failure to be so qualified would not have a material adverse effect on
the financial condition, business or results of operation of the Guarantor or on
the ability of the Guarantor to perform its obligations under this Guarantee;
(b) The Guarantor has full power, authority and legal right to own its
properties and to carry on its business as now conducted and is duly authorized
and empowered to execute, deliver and perform its obligations under this
Guarantee; and
(c) This Guarantee has been duly authorized, executed and delivered by
the Guarantor and constitutes a legal, valid and binding instrument, enforceable
against the Guarantor in accordance with its terms, subject in the case of the
enforcement of remedies to applicable bankruptcy, insolvency, reorganization,
moratorium and other similar laws affecting the enforceability of creditors'
rights generally.
7. This Guarantee is a continuing guarantee and shall remain in full
force and effect until payment in full of the obligations and all other amounts
payable under this Guarantee, and shall (a) be binding upon the Guarantor, its
successors and assigns, and (b) inure to the benefit of and be enforceable by
(i) any successors of Spinco or any transferee of all or substantially all of
the assets of Spinco, and (ii) any successors, heirs, executors or beneficiaries
of any of the other Protected Parties.
8. Any provision of this Guarantee which is prohibited or unenforceable in
any jurisdiction shall be, as to such jurisdiction, ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition on unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
9. This Guarantee shall be governed, construed, applied and enforced in
accordance with the laws of the State of Delaware, and no defense given or
allowed by the laws of any other state or country shall be interposed in any
action hereon unless such defense is also given or allowed by the laws of the
State of Delaware.
10. This Agreement is not intended to confer upon any person other than
the parties hereto and the other Protected Parties any rights or remedies
hereunder.
11. This Guarantee may be executed in any number of counterparts, and each
such counterpart shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one agreement. This Guarantee shall
become effective when one or more counterparts have been signed by each of the
parties and delivered to the other parties, it being understood that the parties
need not sign the same counterpart.
-3-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Guarantee to
be executed on its behalf by its duly authorized officer.
AEGON USA, INC.
By:
-----------------------------
Name:
Title:
PROVIDIAN CORPORATION
By:
-----------------------------
Name:
Title:
PROVIDIAN BANCORP, INC.
By:
-----------------------------
Name:
Title:
-4-
<PAGE>
EXHIBIT 5.1
[LOGO] AEGON INSURANCE GROUP AEGON N.V.
---------------------------------------------
P.O. Box 202
2501 CE The Hague (the Netherlands)
Telephone +31 70 344 32 10
Telex 31657, Telefax +31 70 347 52 38
April 16, 1997
Re: AEGON N.V.
Registration Statement on Form F-4
----------------------------------
Ladies and Gentlemen:
I am General Counsel to AEGON N.V. ("AEGON"), a Netherlands corporation and
am issuing this opinion in connection with the registration of 52,939,890
shares of Common Shares, par value 1 NLG per share, (the "Shares") of AEGON
under the Securities Act of 1933, as amended, pursuant to the above-referenced
registration statement (the "Registration Statement").
I have not investigated the laws of any jurisdiction but The Netherlands, and
do not express an opinion on the laws of any jurisdiction but The Netherlands.
I have examined originals or copies, certified or otherwise identified to our
satisfaction, of such documents, corporate records, certificates of public
officials and other instruments as I have deemed necessary or advisable for the
purpose of rendering this opinion, including the Articles of Incorporation of
AEGON.
Based upon the foregoing, I am of the opinion that:
(i) AEGON is duly incorporated, validly existing and in good standing
under the laws of The Netherlands; and
(ii) upon approval of the issuance of the Shares by the shareholders of
AEGON, the Shares will have been duly authorized and, when issued and
delivered thereof pursuant to the merger as described in the Registration
Statement, will be validly issued, fully paid and non-assessable.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and to the reference to my name under the caption
"Legal Matters" in the Prospectus contained in the Registration Statement.
This opinion is rendered solely to you in connection with the filing of the
Registration Statement. This opinion may not be relied upon by you for any
other purpose or relied upon by or furnished to any other person without my
prior written consent.
Very truly yours,
/s/ Willem Van Vliet
--------------------
Willem Van Vliet
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Experts" and
"Providian Summary Financial Data" and to the incorporation by reference in
the Proxy Statement of Providian Corporation, that is made a part of the
Registration Statement (Form F-4) and Prospectus of AEGON N.V. for the
registration of AEGON N.V. common shares to be issued for the acquisition of
Providian Corporation, of our report dated February 4, 1997, with respect to
the consolidated financial statements and schedules of Providian Corporation
included in its Annual Report (Form 10-K) for the year ended December 31,
1996, filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Louisville, Kentucky
April 11, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Summary Historical Financial Information" and to the incorporation by
reference in the Proxy Statement of the Providian Corporation, that is made a
part of the Registration Statement (Form F-4) and Prospectus of AEGON N.V. for
the registration of its common shares to be issued for the acquisition of the
Providian Corporation, of our report dated March 28, 1996, with respect to the
consolidated financial statements and schedules of AEGON N.V. included in its
Annual Report (Form 20-F) for the year ended December 31, 1995, filed with the
Securities and Exchange Commission.
/s/ Moret Ernst & Young
Moret Ernst & Young
Moret Ernst & Young Accountants
The Hague, The Netherlands
April 11, 1997
<PAGE>
[LOGO]
MILLIMAN & ROBERTSON, INC. 1947-1997
Actuaries & Consultants 50
Internationally WOODROW MILLIMAN years of
40th Floor, 55 West Monroe Street excellence
Chicago, Illinois 60603-5011
Telephone: 312/726-0677
Fax: 312/726-5225
EXHIBIT 23.4
CONSENT OF MILLIMAN & ROBERTSON, INC.
We consent to the reference to our firm and its work and to the use of our
report dated November 2, 1996, in the Providian Corporation Proxy
Statement/Prospectus and the associated AEGON N.V. Registration Statement on
Form F-4 in connection with the merger between Providian Corporation and AEGON
N.V.
MILLIMAN & ROBERTSON, INC.
/s/ John Schreiner
By: ____________________________________
John Schreiner
Name: __________________________________
Equity Principal
Title: _________________________________
Chicago, Illinois
April 15, 1997
<PAGE>
EXHIBIT 23.5
Goldman, Sachs & Co. | 85 Broad Street | New York, New York 10004
Tel: 212-902-1000
GOLDMAN[LOGO]
SACHS
PERSONAL AND CONFIDENTIAL
April 18, 1997
400 West Market Street
Louisville, Kentucky 40202
Re: Registration Statement, dated April 18, 1997, on Form F-4 of AEGON N.V.
Ladies and Gentlemen:
Reference is made to our opinion letter dated December 28, 1996 (the
"Opinion") with respect to the fairness to the holders of outstanding shares of
common stock of Providian Corporation of the distribution of Bancorp Shares to
such holders pursuant to the Distribution Agreement and the receipt by such
holders of the Stock Consideration pursuant to the Agreement, taken together
(each term as defined in the Opinion).
The foregoing opinion letter is provided for the information and assistance
of the Board of Directors of the Company in connection with its consideration
of the transactions contemplated therein (the "Transactions") and is not to be
used, circulated, quoted or otherwise referred to for any other purpose, nor is
it to be filed with, included in or referred to in whole or in part in any
registration statement, proxy statement or any other document, except in
accordance with our prior written consent. We understand that the Company has
determined to include our opinion letter in the Proxy Statement-Prospectus
related to the Transactions.
In that regard, we hereby consent to the references to the opinion of our
Firm in the Proxy Statement-Prospectus which forms part of the Registration
Statement on Form F-4 (the "F-4") to be filed with the Securities and Exchange
Commission (the "SEC") on April 18, 1997 in connection with the Merger under
the captions "Summary--Opinion of Providian's Financial Advisor," "PROPOSAL 3:
THE PROPOSED MERGER--Background and Reasons for the Transactions," "PROPOSAL 3:
THE PROPOSED MERGER--Recommendation of the Providian Board of Directors," and
"PROPOSAL 3: THE PROPOSED MERGER--Opinion of Financial Advisor" and to the
inclusion of the foregoing opinion as "Appendix C" to the above-mentioned Proxy
Statement-Prospectus. In giving such consent, we do not hereby admit that we
come within the category of persons whose consent is required under Section 7
of the Securities Act of 1933 or the rules and regulations of the Securities
and Exchange Commission thereunder.
Very truly yours,
/s/ GOLDMAN, SACHS & CO.
<PAGE>
Exhibit 99.2
ACTUARIAL APPRAISAL OF
THE INSURANCE OPERATIONS
OF PROVIDIAN CORPORATION
Prepared For:
Providian Corporation
Prepared By:
Christine E. Dugan, F.S.A., M.A.A.A.
Kathleen M. Dziedzic, A.S.A., M.A.A.A.
Dawn E. Helwig, F.S.A., M.A.A.A.
Gary R. Josephson, F.C.A.S., M.A.A.A.
Donald E. Michalko, A.S.A., M.A.A.A.
Edward P. Mohoric, F.S.A., M.A.A.A.
Floyd R. Radach, F.C.A.S., M.A.A.A.
John R. Roeger, A.S.A.
Raymond T. Schlude, F.S.A., M.A.A.A.
John P. Schreiner, F.S.A., M.A.A.A.
James G. Stoltzfus, A.S.A., M.A.A.A.
Bruce W. Winterhof, F.S.A., M.A.A.A.
Laird D. Zacheis, F.S.A., M.A.A.A.
November 2, 1996
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C> <C>
I Introduction and Qualifications 1
II Summary of Results 9
III Development of Adjusted Statutory Book 36
IV Methodology, Models and Actuarial Assumptions for 40
Existing Business
V Methodology, Models and Actuarial Assumptions for Future 48
Business
Appendix
- --------
A Summary of Asset and Investment Assumptions and Capital A-1
Formula
B Providian Agency Group Liability Models and Assumptions B-1
C Providian Direct Insurance Group Liability Models and C-1
Assumptions
D Providian Capital Management Group Liability Models and D-1
Assumptions
E Detailed Statutory Projection Output Attached
</TABLE>
<PAGE>
SECTION I
---------
Introduction and Qualifications
-------------------------------
Milliman & Robertson, Inc. (M&R) was retained by Providian Corporation to
perform certain actuarial analyses with respect to the insurance operations of
Providian. Specifically, our assignment has been to develop projected statutory
earnings arising from the existing and potential future business for the
insurance operations of Providian, as of June 30, 1996, and to calculate present
values of these future earnings.
Providian Corporation, directly or indirectly, owns and controls the following
insurance companies.
Commonwealth Life Insurance Company
Peoples Security Life Insurance Company
Capital Security Life Insurance Company
Providian Life and Health Insurance Company
First Providian Life and Health Insurance Company
Veterans Life Insurance Company
Academy Life Insurance Company
Pension Life Insurance Company of America
First Deposit Life Insurance Company
Providian Property and Casualty Insurance Company
Providian Fire Insurance Company
Providian Auto and Home Insurance Company
All of the above insurance companies are included in our analysis with the
exception of First Deposit Life Insurance Company. First Deposit Life Insurance
Company is a wholly owned subsidiary of Providian Bancorp, Inc.
-1-
<PAGE>
Providian has several non-insurance company subsidiaries, the most notable being
Providian Bancorp, Inc. Our analyses exclude the assets and liabilities at
Providian Corporation and exclude the non-insurance operations of Providian with
the exception of certain fee based non-insurance products, described later in
this report, that are marketed by the insurance operations.
Providian's insurance operations are divided into three major segments:
Providian Agency Group (PAG)
----------------------------
This segment consists primarily of individual life insurance sold through a
captive home service agent distribution system. PAG also distributes and
underwrites individual health, annuities, and several other miscellaneous
product lines through the home service distribution system. PAG has
developed partnerships with third-party insurance companies and marketing
organizations providing and underwriting insurance products for these third
parties.
The business in PAG resides in Commonwealth Life Insurance Company, Peoples
Security Life Insurance Company, and Capital Security Life Insurance
Company.
Providian Direct Insurance (PDI)
--------------------------------
Business offered by this segment includes life insurance, health insurance
and automobile insurance. The majority of PDI sales are direct using
telephone and direct mail solicitation (Core Business). Historically, PDI
has also used television as a method of distribution but has de-emphasized
this method for current sales. PDI also distributes in the military market
using agents.
-2-
<PAGE>
The life and health business of PDI resides in Providian Life and Health
Insurance Company, Veterans Life Insurance Company, First Providian Life
and Health Insurance Company (New York business), and Academy Life
Insurance Company (military business). Pension Life Insurance Company of
America and First Deposit Life Insurance Company contain minimal business.
The property-casualty business (primarily automobile) is in Providian Auto
and Home Insurance Company, Providian Property and Casualty Insurance
Company, and Providian Fire Insurance Company.
Providian Capital Management (PCM)
----------------------------------
This segment consists of fixed and floating rate guaranteed investment
contracts, fixed and variable deferred annuities, single premium life
insurance, payout annuities, and synthetic GICs. The business has been
distributed through financial institutions, financial planners and other
investment professionals, and specialized brokers.
The insurance business of PCM resides in Commonwealth Life Insurance
Company, Peoples Security Life Insurance Company, and Providian Life and
Health Insurance Company.
M&R is frequently engaged to prepare such analyses of insurance companies. The
approach followed in this situation is consistent with methodology we have
generally employed in previous engagements.
We have prepared this report for the internal use of Providian Corporation. This
report is intended to provide certain actuarial information and analyses as of
June 30, 1996 that would assist a qualified actuary, technically competent in
the area of actuarial appraisals, to develop an estimate of (1) the adjusted
statutory
-3-
<PAGE>
book value of the Providian insurance operations as of June 30, 1996; (2) the
projected amounts and present values of future statutory profits from insurance
inforce at June 30, 1996; and (3) the projected statutory earnings and present
values from insurance written after June 30, 1996.
This report may not be distributed, disclosed, copied or otherwise furnished to
any party without our prior consent. Any distribution of this report must be in
its entirety, and M&R must be informed of such distribution.
Nothing included in this report is to be used in any filings with any public
body, such as but not limited to the Securities and Exchange Commission or State
Insurance Departments, without prior written consent from M&R.
We have projected future statutory profits computed according to regulatory
reporting criteria. The validity of these projections depends on how well future
experience conforms to our assumptions. Our assumptions for future mortality,
persistency, morbidity, casualty losses, expenses, investment return and other
actuarial factors are based upon our evaluation of recent experience of
Providian's insurance operations, management's expectations for the future and
our knowledge of general industry experience within the segments in which
Providian operates. The approach employed to develop the projection assumptions
is described below.
1. Persistency, mortality, and morbidity assumptions for life, health and
annuity business are based upon the Company's experience and pricing
assumptions.
-4-
<PAGE>
2. Claim assumptions on the property-casualty business are based upon
Company plans modified to reflect our expectations for the maturity
period of achieving an ultimate stable loss ratio for a seasoned book
of business.
3. New business sales assumptions were provided by Providian.
4. Total expenses equal budgeted expenses of Providian's insurance
operations and were projected as a combination of: a) allowables based
upon unit costs used in pricing, with certain adjustments for recent
and expected experience; and b) expenses which equal the excess of
total budgeted expenses over projected allowables.
5. Future investment income reflects the run-off of the June 30, 1996
portfolio and new investments based on assumptions for asset yield,
quality, and maturity provided by PCM. The projections are based upon
the September 30, 1996 interest rate environment.
6. Initial credited rates equal actual credited rates. Future credited
rates are based upon the Company's target spreads, credited rate
strategy, and index guarantees.
Actual experience may differ from that assumed in these projections.
Sensitivity of results to changes in assumptions is provided as part of Section
II, Summary of Results.
-5-
<PAGE>
Rationale for Statutory Approach
- --------------------------------
Our development of the projected amounts and actuarial values in this report
reflect statutory accounting practices. Two reasons why we believe it is
appropriate to analyze a life company using the statutory approach are:
1. Statutory accounting determines the availability of earnings for
dividends to insurance company shareholders.
2. Statutory surplus constitutes the funds available for investments in
new business or other ventures requiring capital.
Relationship to Market Value
- ----------------------------
An actuarial appraisal does not necessarily represent the value of a company's
stock in the open market. Rather, it is derived from a carefully constructed
projection of future earnings and therefore reflects the value of a company's
earnings potential under a specific set of assumptions. Assignment of a value to
any business enterprise is also a matter of informed judgement. In an actual
transaction, purchase or sale price is determined by the parties involved, based
on their respective evaluations of all relevant factors including:
. the perspective of the buyer and the seller and the level of confidence
regarding the assumptions underlying projected earnings,
. the desired rate of return and the associated cost of capital,
. the degree of urgency associated with a transaction,
-6-
<PAGE>
. economies of scale and scope associated with a potential transaction,
and
. significant tax or other consequences, unique to a proposed transaction,
which can have an effect on fair market value.
Data Reliance
- -------------
We have relied upon data and information supplied by Providian as well as on
published financial information. We performed no audits or independent
verification of the information furnished to us. To the extent that there are
any material errors in the information provided, the results of our analysis
will be affected as well. The principal materials relied upon include:
1. Information contained in the public and internal financial statements
of Providian and its insurance company subsidiaries.
2. Inventories of Providian's insurance and annuity policies inforce as
of June 30, 1995 and June 30, 1996, as supplied by Providian.
3. Information on policies inforce, including schedules or computer tapes
of gross premiums, cash values, statutory reserve factors, policy
benefits, charges, commission rates, and other policy information as
supplied by Providian.
4. Information on financial reinsurance amounts for treaties currently in
place.
-7-
<PAGE>
5. Information and analysis on recent mortality, morbidity, persistency,
and policy loss experience along with assumptions as to future expected
experience as incorporated in Company pricing and business plan.
6. Information regarding expected fee income and loss experience on
synthetic GIC contracts, both in place and those expected to be
produced.
7. Information provided by Providian on invested assets, interest rate
swaps, hedging strategies, market values and other investment
assumptions for assets in place at June 30, 1996. Providian also
provided assumptions for mortgage defaults and investment of positive
net cash flow.
8. Information on future budgeted expenses.
9. Information on certain tax items such as loss carry forwards,
statutory/tax reserve differences and tax DAC outstanding as of June
30, 1996 and other information with respect to federal income taxes.
10. Information regarding new business production levels, as supplied by
Providian.
11. Information on the expected profitability of the fee based non-
insurance products sold by the Providian insurance operations.
-8-
<PAGE>
SECTION II
----------
Summary of Results
------------------
Summary of Actuarial Appraisal Values
- -------------------------------------
The following tables summarize the results of our analysis of the components of
value as of June 30, 1996. We have shown results for the insurance operations in
total (Table 1) along with results for each of the separate segments; PAG (Table
1A), PDI (Table 1B), and PCM (Table 1C). The items included are: 1) Adjusted
Statutory Book Value for the entire insurance operations along with an
allocation of statutory capital to each of the insurance operations; 2) the
present value of future statutory profits from business inforce at June 30,
1996; 3) the present value of future statutory profits for business written for
the ten year period after June 30, 1996.
Future business production was valued based upon ten years of new business
writings. Details regarding the new business production assumptions are provided
later in this section.
Tables 2 and 3 provide a summary of ten years of projected after-tax statutory
profits. The ten-year projections reflect an assumption that earnings in excess
of required capital funding are distributed from the insurance operations.
Required capital is projected as 200% of NAIC Company Action Level risk based
capital (RBC). The projections are provided for the three major segments
separately.
Summaries of actuarial appraisal values and assumptions for each line of
business are provided in Sections IV, V, and the appendices. Detailed
projections of annual statutory profits and present values of profit by line of
business are provided in Appendix E.
-9-
<PAGE>
TABLE 1
<TABLE>
<CAPTION>
=================================================================================
Providian Corporation - Insurance Operations
Summary of Actuarial Values
As of June 30, 1996
(in millions)
=================================================================================
Discount Rate *
- ---------------------------------------------------------------------------------
Component of Value Low Middle High
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
1) Adjusted Statutory Book Value
Business Units Capital 1,130.2 1,130.2 1,130.2
IMR 31.6 29.7 28.0
Additional Capital 529.2 529.2 529.2
------- ------- -------
Total Adjusted Book Value 1,691.0 1,689.1 1,687.4
- ---------------------------------------------------------------------------------
2) Value of Business Inforce as of June 30, 1996
Providian Agency Group (PAG) 1,788.4 1,555.3 1,373.1
Providian Direct Insurance (PDI) 1,088.1 990.3 907.7
Providian Capital Management (PCM) 746.9 687.6 637.3
- ---------------------------------------------------------------------------------
Subtotal Pre-Tax Existing Business 3,623.3 3,233.3 2,918.1
Federal Income Taxes ** (1,135.1) (1,018.5) (923.9)
------- ------- -------
Subtotal After-Tax Existing Business 2,488.2 2,214.8 1,994.2
- ---------------------------------------------------------------------------------
3) Subtotal (1) plus (2)
Pre-Tax 5,314.3 4,922.4 4,605.6
After-Tax 4,179.2 3,903.9 3,681.7
- ---------------------------------------------------------------------------------
4) Ten Years of New Business from June 30, 1996
Providian Agency Group (PAG) 180.7 82.9 13.5
Providian Direct Insurance (PDI) 441.0 310.8 213.2
Providian Capital Management (PCM) 699.3 556.0 447.7
- ---------------------------------------------------------------------------------
Subtotal Pre-Tax Future Business 1,321.0 949.7 674.5
Federal Income Taxes (602.7) (469.9) (368.5)
------- ------- -------
Subtotal After-Tax Future Business 718.3 479.9 305.9
- ---------------------------------------------------------------------------------
5) Total Actuarial Values (3) plus (4)
Pre-Tax 6,635.2 5,872.1 5,280.0
After-Tax 4,897.5 4,383.7 3,987.6
=================================================================================
</TABLE>
*Note: The discount rates vary by insurance segment as shown on the following
tables. The values shown under the low, middle, and high discount rate
in this table represent the sum of the values for each of the three
business segments under the respective low, middle, and high discount
rate for each segment.
**Note: Total taxes do not equal the sum of the three business segments due to
the inclusion of the Huddleston Amendment tax benefit.
-10-
<PAGE>
TABLE 1A
<TABLE>
<CAPTION>
================================================================================
Providian Agency Group (PAG)
Summary of Actuarial Values
As of June 30, 1996
(in millions)
- -------------------------------------------------------------------------------
Discount Rate
- -------------------------------------------------------------------------------
Component of Value 8.0% 10.0% 12.0%
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1) Adjusted Statutory Book Value 166.2 166.2 166.2
- -------------------------------------------------------------------------------
2) Value of Business Inforce as of June 30, 1996
Industrial Life Premium-Paying 35.7 31.7 28.4
Industrial Life Paid Up and ETI 152.1 133.4 118.5
Ordinary Premium-Paying 751.2 658.3 584.6
Ordinary Paid Up and ETI 183.1 160.3 142.2
Universal Life 319.3 272.0 235.9
Interest Sensitive Whole Life 73.2 63.8 56.5
Accident & Health 66.9 65.0 62.7
Miscellaneous Lines 92.4 81.6 72.9
Fee-Based Non-Insurance Product 6.6 6.1 5.6
ETI on Future Surrenders 107.9 83.2 65.7
- -------------------------------------------------------------------------------
Subtotal Pre-Tax Existing Business 1,788.4 1,555.3 1,373.1
Federal Income Taxes (592.0) (517.3) (458.8)
------- ------- -------
Subtotal After-Tax Existing Business 1,196.3 1,038.0 914.3
- -------------------------------------------------------------------------------
3) Subtotal (1) plus (2)
Pre-Tax 1,954.6 1,721.5 1,539.3
After-Tax 1,362.5 1,204.2 1,080.5
- -------------------------------------------------------------------------------
4) Ten Years of New Business from June 30, 1996
Traditional Life 355.7 278.9 222.1
Interest Sensitive Life 239.5 197.7 164.4
Accident & Health 34.0 26.6 21.1
Fee-Based Non-Insurance Product 19.1 15.6 12.9
ETI on Future Surrenders 8.8 5.9 4.0
Unallocated Expense (476.4) (441.6) (411.0)
- -------------------------------------------------------------------------------
Subtotal Pre-Tax Future Business 180.7 82.9 13.5
Federal Income Taxes (92.3) (57.0) (31.2)
------- ------- -------
Subtotal After-Tax Future Business 88.4 25.9 (17.6)
- -------------------------------------------------------------------------------
5) Total Actuarial Values (3) plus (4)
Pre-Tax 2,135.2 1,804.5 1,552.9
After-Tax 1,450.9 1,230.2 1,062.8
===============================================================================
</TABLE>
-11-
<PAGE>
TABLE 1B
<TABLE>
<CAPTION>
Providian Direct Insurance (PDI)
Summary of Actuarial Values
As of June 30, 1996
(in millions)
================================================================================
Discount Rate
- -------------------------------------------------------------------------------
Component of Value 9.0% 11.0% 13.0%
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1) Adjusted Statutory Book Value 159.1 159.1 159.1
- -------------------------------------------------------------------------------
2) Value of Business Inforce as of June 30, 1996
Academy Traditional Life 79.1 71.7 65.4
Academy Interest Sensitive Life 63.7 58.4 53.8
Academy Accident & Health 16.7 15.4 14.3
Core Traditional Life 509.1 464.3 426.2
Core Accident & Health 249.1 227.7 209.6
Property & Casualty 158.8 143.3 130.3
ETI on Future Surrenders 11.6 9.6 8.0
- -------------------------------------------------------------------------------
Subtotal Pre-Tax Existing Business 1,088.1 990.3 907.7
Federal Income Taxes (340.5) (312.5) (288.6)
------- ------- -------
Subtotal After-Tax Existing Business 747.6 677.8 619.1
- -------------------------------------------------------------------------------
3) Subtotal (1) plus (2)
Pre-Tax 1,247.2 1,149.4 1,066.8
After-Tax 906.7 836.9 778.2
- -------------------------------------------------------------------------------
4) Ten Years of New Business from June 30, 1996
Academy Interest Sensitive Life 17.2 6.7 (1.0)
Academy Accident & Health 0.4 0.4 0.3
Core Traditional Life 297.9 221.5 163.9
Core Accident & Health 184.2 141.7 109.4
Property & Casualty 0.0 0.0 0.0
ETI on Future Surrenders 11.4 8.3 6.2
Unallocated Expense (70.7) (68.3) (66.0)
Unallocated Marketing Costs 0.6 0.5 0.4
- -------------------------------------------------------------------------------
Subtotal Pre-Tax Future Business 441.0 310.8 213.2
Federal Income Taxes (229.7) (181.5) (143.8)
------- ------- -------
Subtotal After-Tax Future Business 211.4 129.3 69.5
- -------------------------------------------------------------------------------
5) Total Actuarial Values (3) plus (4)
Pre-Tax 1,688.2 1,460.2 1,280.0
After-Tax 1,118.0 966.2 847.7
===============================================================================
</TABLE>
-12-
<PAGE>
TABLE 1C
<TABLE>
<CAPTION>
Providian Capital Management (PCM)
Summary of Actuarial Values
As of June 30, 1996
(in millions)
===============================================================================
Discount Rate
- -------------------------------------------------------------------------------
Component of Value 10.0% 12.0% 14.0%
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1) Adjusted Statutory Book Value 804.9 804.9 804.9
- -------------------------------------------------------------------------------
2) Value of Business Inforce as of June 30, 1996
SPWL 63.8 57.9 53.0
General Account Deferred Annuity 299.2 276.1 256.1
Separate Account TRAC 3.4 3.3 3.3
Separate Account Deferred Annuity 54.1 48.0 43.0
SPIA (74.1) (64.5) (57.1)
General Account GIC 312.8 289.4 269.6
Trust GIC 87.5 77.5 69.4
- -------------------------------------------------------------------------------
Subtotal Pre-Tax Existing Business 746.9 687.6 637.3
Federal Income Taxes (240.5) (220.8) (204.2)
------- ------- -------
Subtotal After-Tax Existing Business 506.3 466.8 433.1
- -------------------------------------------------------------------------------
3) Subtotal (1) plus (2)
Pre-Tax 1,551.8 1,492.5 1,442.2
After-Tax 1,311.2 1,271.7 1,238.0
- -------------------------------------------------------------------------------
4) Ten Years of New Business from June 30, 1996
General Account Deferred Annuity 114.9 90.7 72.2
Separate Account Deferred Annuity 219.8 164.4 124.3
SPIA 79.8 61.2 47.6
General Account GIC 236.2 205.3 179.7
Trust GIC 55.2 40.8 30.3
Unallocated Expense (6.6) (6.5) (6.5)
- -------------------------------------------------------------------------------
Subtotal Pre-Tax Future Business 699.3 556.0 447.7
Federal Income Taxes (280.7) (231.4) (193.5)
------- ------- -------
Subtotal After-Tax Future Business 418.5 324.6 254.1
- -------------------------------------------------------------------------------
5) Total Actuarial Values (3) plus (4)
Pre-Tax 2,251.0 2,048.5 1,889.9
After-Tax 1,729.8 1,596.3 1,492.1
- -------------------------------------------------------------------------------
</TABLE>
-13-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
TABLE 2A
17CPL13-5 Providian Agency Group (PAG) 11/01/96
CPLCOMP Line of Business Statutory Projection 10:39 AM
(post-tax; in millions of dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ending June 30, 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Existing Business at 06/30/96
Industrial Life Premium-Paying 5.4 5.0 4.6 4.3 4.0 3.8 3.5 3.3 3.1 2.9
Industrial Life Paid Up
and ETI 20.5 19.2 18.2 17.3 16.4 15.8 14.9 14.2 13.6 13.0
Ordinary Premium-Paying 97.4 96.8 90.8 86.5 82.8 79.5 75.1 71.3 67.1 63.2
Ordinary Paid Up and ETI 24.8 22.7 21.7 20.6 19.7 18.9 17.8 17.0 16.3 15.6
Universal Life 29.0 37.6 35.9 33.5 30.4 27.9 25.1 23.9 23.7 25.8
Interest Sensitive Whole
Life 9.3 9.4 8.9 8.3 7.6 7.1 6.8 6.8 6.4 5.9
Accident & Health 15.2 15.9 15.8 14.5 12.5 10.9 9.1 7.4 5.8 4.1
Miscellaneous Lines 13.0 12.9 11.9 11.0 10.3 9.7 9.0 8.5 7.9 7.5
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Existing Business 214.5 219.5 207.8 196.1 183.9 173.7 161.4 152.5 143.8 138.0
- ------------------------------------------------------------------------------------------------------------------------------------
New Business from 06/30/96
Traditional Life (4.9) (3.2) 5.3 12.7 19.5 26.1 33.0 40.1 47.2 54.4
Interest Sensitive Life (5.9) (5.4) 0.7 9.5 20.5 29.8 38.1 45.6 51.9 54.5
Accident & Health (0.8) 0.2 0.9 1.4 1.8 2.3 2.9 3.6 4.3 5.0
----- ----- ----- ----- ----- ----- ------ ----- ----- -----
Total New Business (11.6) (8.5) 6.9 23.5 41.7 58.3 74.1 89.2 103.3 113.9
- ------------------------------------------------------------------------------------------------------------------------------------
Unallocated Expense (78.4) (72.2) (67.1) (67.1) (66.7) (66.3) (65.6) (64.8) (63.8) (62.5)
- ------------------------------------------------------------------------------------------------------------------------------------
Fee-Based Non-Insurance
Product 1.0 1.3 1.7 2.0 2.4 2.8 3.1 3.4 3.7 3.9
- ------------------------------------------------------------------------------------------------------------------------------------
Interest of Capital,
Surplus, & AVR 12.5 14.6 14.9 15.2 15.6 16.0 16.4 16.9 17.4 17.9
- ------------------------------------------------------------------------------------------------------------------------------------
Total Pre-Tax Earnings 137.9 154.7 164.2 169.7 177.0 184.4 189.3 197.2 204.4 211.2
====================================================================================================================================
Federal Income Tax (35.0%) (60.1) (56.2) (58.7) (59.7) (62.3) (65.3) (67.6) (70.9) (73.5) (76.3)
- ------------------------------------------------------------------------------------------------------------------------------------
After-Tax Earnings 77.8 98.5 105.4 110.0 114.7 119.1 121.7 126.3 130.9 135.
====================================================================================================================================
Distributed Earnings 49.3 95.0 101.1 105.0 109.3 113.3 115.5 119.6 123.7 127.2
====================================================================================================================================
Liabilities 2,835.2 2,899.3 2,951.4 3,007.2 3,067.5 3,130.3 3,197.1 3,268.1 3,344.1 3,425.1 3,513.6
- ------------------------------------------------------------------------------------------------------------------------------------
Capital, Surplus & AVR 166.2 194.7 198.3 202.6 207.6 213.0 218.8 225.0 231.7 238.8 246.6
- ------------------------------------------------------------------------------------------------------------------------------------
RBC Ratio (Company Action
Level) 173.6% 200.0% 200.0% 200.0% 200.0% 200.0% 200.0% 200.0% 200.0% 200.0% 200.0%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Interest on Capital, Surplus, & AVR is based on a net earnings
rate of 7.50%
-14-
<PAGE>
TABLE 2B
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
17CPL13-5 Providian Direct Insurance (PDI) 11/01/96
CPLCOMP Line of Business Statutory Projection 11:38AM
(post-tax; in millions of dollars)
- ------------------------------------------------------------------------------------------------------------------------------
Year Ending June 30, 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
==============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Existing Business at
06/30/96
Academy Traditional
Life 13.9 12.7 12.1 11.1 10.0 9.2 8.5 7.8 7.1 6.5
Academy Interest
Sensitive Life 12.5 11.8 10.8 9.7 8.6 7.1 6.2 5.7 5.2 4.9
Academy Accident &
Health 3.5 3.3 2.9 2.6 2.3 2.1 1.9 1.7 1.6 1.5
Care Traditional Life 100.1 86.2 79.4 73.5 68.3 61.9 54.8 48.5 42.6 37.1
Core Accident & Health 55.6 44.4 38.4 34.1 30.4 27.1 24.3 21.8 19.7 17.7
Property & Casualty 22.3 26.3 25.6 24.3 21.6 19.1 17.3 15.7 14.3 13.0
Total Existing ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Business 207.8 184.7 169.0 155.2 141.2 126.6 112.9 101.2 90.5 80.8
- ------------------------------------------------------------------------------------------------------------------------------
New Business from 06/30/96
Academy Interest
Sensitive Life (12.3) (11.4) (9.2) (6.9) (4.4) (2.4) (0.6) 1.0 2.6 4.1
Academy Accident &
Health (0.0) 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1
Core Traditional Life (28.2) (32.3) (20.1) (11.2) 1.9 13.5 24.6 35.6 46.4 57.3
Core Accident & Health (10.8) (14.9) (8.2) (1.4) 6.5 13.3 19.6 25.7 31.4 36.9
Property & Casualty 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
--- --- --- --- --- --- --- --- --- ---
Total New Business (51.3) (58.6) (37.4) (19.5) 4.1 24.4 43.6 62.3 80.5 98.5
- ------------------------------------------------------------------------------------------------------------------------------
Unallocated Expense (26.1) (20.1) (14.5) (11.0) (7.4) (4.1) (0.9) 0.0 0.0 0.0
- ------------------------------------------------------------------------------------------------------------------------------
Unallocated Marketing Costs (2.7) 3.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
- ------------------------------------------------------------------------------------------------------------------------------
Interest on Capital,
Surplus, & AVR 11.9 14.5 14.3 14.0 14.0 14.2 14.5 14.8 15.3 15.8
- ------------------------------------------------------------------------------------------------------------------------------
Total Pre-Tax Earnings 139.6 124.1 131.4 138.8 151.8 161.1 170.2 178.3 186.3 195.0
==============================================================================================================================
Federal Income Tax (35.0%) (53.0) (52.0) (57.2) (61.4) (66.9) (70.6) (74.1) (77.2) (80.1) (82.8)
- ------------------------------------------------------------------------------------------------------------------------------
After-Tax Earnings 86.6 72.1 74.2 77.5 84.9 90.5 96.1 101.1 106.2 112.2
==============================================================================================================================
Distributed Earnings 52.7 74.5 78.1 77.6 82.3 86.6 91.4 95.4 99.7 105.0
==============================================================================================================================
Liabilities 1,095.4 1,124.3 1,155.0 1,189.5 1,232.2 1,284.8 1,347.1 1,417.3 1,494.4 1,577.0 1,663.7
- ------------------------------------------------------------------------------------------------------------------------------
Capital, Surplus & AVR 159.1 193.0 190.6 186.7 186.6 189.1 193.0 197.8 203.5 210.0 217.2
- ------------------------------------------------------------------------------------------------------------------------------
RBC Ratio (Company Action 166.1% 200.0% 200.0% 200.0% 200.0% 200.0% 200.0% 200.0% 200.0% 200.0% 200.0%
Level)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Interest on Capital, Surplus, & AVR is based on a net earnings rate of
7.50%. Beginning Capital, Surplus, & AVR consists of $76.8 million from
Academy and Core, and $82.3 from P&C.
-15-
<PAGE>
TABLE 2C
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
17CPL13-5 Providian Capital Management (PCM) 11/01/96
CPLCOMP Line of Business Statutory Projection 10:39AM
(post-tax; in millions of dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ending June 30, 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Existing Business at
06/30/96
SPWL 11.8 11.3 10.4 9.5 8.7 7.7 7.0 6.3 5.8 5.3
General Account
Deferred Annuity 65.3 64.0 54.7 47.1 41.8 34.4 29.2 24.7 21.8 18.9
Separate Account TRAC 3.0 0.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Separate Account
Deferred Annuity 7.6 7.6 7.5 7.3 7.0 6.5 6.1 5.8 5.5 5.3
SPIA (9.8) (8.9) (8.6) (8.4) (7.7) (8.9) (8.9) (9.0) (8.2) (7.6)
General Account GIC 97.3 75.0 50.0 37.9 29.8 21.5 21.1 19.1 18.1 17.1
Trust GIC 9.5 10.0 9.7 14.7 14.3 13.1 12.0 11.0 10.1 9.3
----- ----- ----- ----- ---- ---- ---- ---- ---- ----
Total Existing Business 184.7 159.9 123.7 108.2 93.8 74.3 66.6 58.0 53.1 48.3
- ------------------------------------------------------------------------------------------------------------------------------------
New Business from
06/30/96
General Account
Deferred Annuity (3.6) (3.6) (2.2) 1.1 5.8 8.9 12.5 17.2 21.9 26.3
Separate Account
Deferred Annuity (4.6) (6.0) (5.8) (2.9) 2.0 7.1 12.1 19.0 26.8 35.4
SPIA (3.1) (2.0) (0.8) 0.9 3.4 5.7 8.1 10.4 12.6 14.8
General Account GIC (2.4) 10.9 22.1 32.6 43.4 47.5 45.8 45.6 46.1 46.6
Trust GIC (4.3) (3.6) (2.5) (1.2) 0.2 2.3 4.8 7.1 9.3 11.2
----- ----- ----- ----- ---- ---- ---- ---- ----- -----
Total New Business (18.1) (4.3) 10.8 30.5 54.7 71.6 83.3 99.3 116.6 134.2
- ------------------------------------------------------------------------------------------------------------------------------------
Unallocated Expense (6.9) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
- ------------------------------------------------------------------------------------------------------------------------------------
Guarantee Fund
Assessments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
- ------------------------------------------------------------------------------------------------------------------------------------
Interest on Capital,
Surplus, & AVR 60.4 62.2 64.8 68.7 75.4 79.7 80.6 82.6 85.0 87.1
- ------------------------------------------------------------------------------------------------------------------------------------
Total Pre-Tax Earnings 220.1 217.8 199.4 207.4 223.9 225.7 230.5 240.0 254.7 269.7
====================================================================================================================================
Federal Income
Tax (35.0%) (81.9) (80.8) (77.8) (81.5) (84.2) (86.1) (87.5) (89.9) (93.7) (97.6)
- ------------------------------------------------------------------------------------------------------------------------------------
After-Tax Earnings 138.2 137.1 121.5 125.9 139.7 139.6 143.0 150.1 161.0 172.1
====================================================================================================================================
Distributed Earnings 113.8 102.7 69.6 36.6 81.3 128.5 115.8 118.5 132.4 146.2
====================================================================================================================================
General Account +
TRAC Liabilities* 12,345.4 12,583.0 12,843.6 13,370.2 14,560.8 15,256.7 15,121.7 15,290.2 15,564.0 15,813.5 16,037.2
- ------------------------------------------------------------------------------------------------------------------------------------
Separate Account
Liabilities 1,898.1 2,827.6 4,131.5 5,774.4 7,567.9 9,344.9 11,090.9 12,781.0 14,393.2 15,917.0 17,352.1
- ------------------------------------------------------------------------------------------------------------------------------------
Capital, Surplus
& AVR 804.9 829.2 863.6 915.6 1,004.9 1,063.3 1,074.3 1,101.5 1,133.1 1,161.8 1,187.7
- ------------------------------------------------------------------------------------------------------------------------------------
RBC Ratio
(Company Action
Level) 194.3% 200.0% 200.0% 200.0% 200.0% 200.0% 200.0% 200.0% 200.0% 200.0% 200.0%
- ------------------------------------------------------------------------------------------------------------------------------------
* GIC + TRAC
Liabilities 6,749.4 6,939.9 7,037.7 7,260.8 8,043.8 8,341.2 7,838.6 7,665.2 7,641.5 7,635.0 7,629.0
Other General
Account
Liabilities 5,596.0 5,643.1 5,805.9 6,109.4 6,517.0 6,915.5 7,283.1 7,625.0 7,922.5 8,178.5 8,408.2
Trust GIC
Liabilities 12,494.3 13,779.6 15,040.9 16,199.2 17,257.6 18,228.6 19,119.7 19,936.7 20,686.0 21,373.0 22,003.0
</TABLE>
Note: Interest on Capital, Surplus, & AVR is based on a net earnings rate of
7.50%.
-16-
<PAGE>
<TABLE>
<CAPTION>
TABLE 3A
- ----------------------------------------------------------------------------------------------------------------------
Providian Agency Group (PAG)
Projected Statutory Operating Results
(in millions of dollars)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ending June 30, 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
======================================================================================================================
Existing and New Business
Premium Income 483.8 496.9 516.3 539.4 564.5 591.1 619.5 650.0 682.7 717.8
Investment Income 248.8 252.7 255.5 258.6 262.8 267.9 270.7 276.7 282.4 289.6
Other Income 1.0 1.3 1.7 2.0 2.4 2.8 3.1 3.4 3.7 3.9
- ----------------------------------------------------------------------------------------------------------------------
Total Income 733.6 751.0 773.4 800.1 829.7 861.8 893.3 930.1 968.8 1,011.2
- ----------------------------------------------------------------------------------------------------------------------
Death Benefits 198.9 204.6 210.7 218.5 228.1 239.0 250.9 263.9 277.6 292.1
Surrender and Other Benefits 110.0 112.4 111.4 111.5 113.7 115.3 117.5 120.1 123.5 127.4
Reserve Increase 68.0 56.3 59.8 64.4 67.2 71.4 75.6 80.5 85.9 93.5
Expense 134.3 129.5 126.1 128.3 130.4 132.7 134.9 137.3 139.7 142.2
Commission 84.5 93.4 101.3 107.7 113.3 119.1 125.0 131.1 137.7 144.9
- ----------------------------------------------------------------------------------------------------------------------
Total Benefits and Expenses 595.7 596.3 609.3 630.3 652.8 677.4 704.0 732.9 764.4 800.0
- ----------------------------------------------------------------------------------------------------------------------
Total Pre-Tax Earnings 137.9 154.7 164.2 169.7 177.0 184.4 189.3 197.2 204.4 211.2
======================================================================================================================
Federal Income Tax (35.0%) (60.1) (56.2) (58.7) (59.7) (62.3) (65.3) (67.6) (70.9) (73.5) (76.3)
- ----------------------------------------------------------------------------------------------------------------------
After-Tax Earnings 77.8 98.5 105.4 110.0 114.7 119.1 121.7 126.3 130.9 135.0
======================================================================================================================
Distributed Earnings 49.3 95.0 101.1 105.0 109.3 113.3 115.5 119.6 123.7 127.2
======================================================================================================================
</TABLE>
Note: Interest on Capital, Surplus, & AVR is based on a net earnings rate of
7.50%.
-17-
<PAGE>
<TABLE>
<CAPTION>
TABLE 3B
- ------------------------------------------------------------------------------------------------------------------------------
Providan Direct Insurance (PDI)
Projected Statutory Operating Results
(in millions of dollars)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ending June 30, 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
- ------------------------------------------------------------------------------------------------------------------------------
Existing and New Business
Premium Income 732.2 747.9 776.5 817.0 860.3 902.7 945.6 991.9 1,040.9 1,091.3
Investment Income 97.5 98.7 99.1 99.5 101.6 103.9 107.4 112.0 117.4 123.2
- ------------------------------------------------------------------------------------------------------------------------------
Total Income 820.6 846.6 875.6 916.5 961.6 1,006.6 1,053.0 1,104.0 1,158.2 1,214.4
- ------------------------------------------------------------------------------------------------------------------------------
Death Benefits 395.9 385.8 382.6 385.2 394.3 406.3 419.7 435.6 454.2 474.4
Surrender and Other Benefits 46.5 51.9 53.5 55.0 56.8 59.1 62.1 65.6 69.5 73.8
Reserve Increase 32.5 42.2 43.1 51.7 60.4 69.0 76.6 83.8 89.5 93.7
Expense 171.6 205.7 225.5 243.4 253.7 264.5 275.8 290.1 306.1 322.8
Commission 34.7 36.9 39.7 42.4 44.6 46.6 48.6 50.6 52.6 54.8
- ------------------------------------------------------------------------------------------------------------------------------
Total Benefits and Expenses 681.1 722.5 744.3 777.7 809.8 845.5 882.8 925.7 971.9 1,019.4
- ------------------------------------------------------------------------------------------------------------------------------
Total Pre-Tax Earnings 139.5 124.1 131.3 138.8 151.8 161.1 170.2 178.3 186.3 195.0
==============================================================================================================================
Federal Income Tax (35.0%) (53.0) (52.0) (57.2) (61.4) (66.9) (70.6) (74.1) (77.2) (80.1) (82.8)
- ------------------------------------------------------------------------------------------------------------------------------
After-Tax Earnings 86.5 72.1 74.1 77.4 84.9 90.5 96.1 101.1 106.2 112.2
===============================================================================================================================
Distributed Earnings 52.7 74.5 78.1 77.6 82.3 86.6 91.4 95.4 99.7 105.0
==============================================================================================================================
</TABLE>
Note: Interest on Capital, Surplus, & AVR is based on a net earnings rate of
7.50%.
-18-
<PAGE>
<TABLE>
<CAPTION>
TABLE 3C
- ------------------------------------------------------------------------------------------------------------------------------------
Providan Capital Management (PCM)
Projected Statutory Operating Results
(in millions of dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ending June 30, 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
General Account
Premium Income 2,172.1 2,020.1 2,014.5 2,070.3 2,069.2 2,068.4 2,067.7 2,067.1 2,066.6 2,066.2
Investment Income
(Incl Interest on ABV) 962.3 986.0 991.7 1,041.6 1,130.9 1,167.9 1,165.7 1,178.2 1,199.9 1,219.6
- -----------------------------------------------------------------------------------------------------------------------------------
Total Income 3,134.4 3,006.0 3,006.3 3,111.8 3,200.1 3,236.3 3,233.3 3,245.3 3,266.5 3,285.8
- ------------------------------------------------------------------------------------------------------------------------------------
Death Benefits 83.1 84.4 86.0 87.9 89.3 89.7 89.6 89.3 88.6 87.6
Surrender and Other
Benefits 1,958.6 2,236.6 2,079.7 1,571.5 2,140.7 3,010.3 2,704.6 2,609.4 2,648.8 2,689.1
Reserve Increase 829.1 417.1 582.9 1,190.6 695.9 (135.0) 168.5 273.7 249.6 223.6
Expense (Incl Unallocated 46.4 47.4 55.1 60.5 63.0 65.3 67.0 68.6 70.1 71.5
& Separate Account)
Commission 21.7 30.5 36.4 39.3 39.3 39.2 39.1 39.1 39.1 39.1
- ------------------------------------------------------------------------------------------------------------------------------------
Total Benefits and
Expenses 2,939.0 2,816.0 2,840.1 2,949.8 3,028.3 3,069.4 3,068.8 3,080.1 3,096.2 3,110.8
- ------------------------------------------------------------------------------------------------------------------------------------
Statutory Profits on
General Account Business 195.4 190.0 166.2 162.1 171.8 166.9 164.6 165.2 170.3 175.0
====================================================================================================================================
Separate Account
Fees on TRAC 3.2 0.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
- ------------------------------------------------------------------------------------------------------------------------------------
Fees on Separate Account
Annuities 10.7 14.6 19.8 25.5 31.2 36.8 42.4 49.8 58.1 67.2
- ------------------------------------------------------------------------------------------------------------------------------------
Fees on Trust GIC 10.8 12.3 13.4 19.8 20.9 22.0 23.5 25.0 26.3 27.5
- ------------------------------------------------------------------------------------------------------------------------------------
Statutory Profits on 24.6 27.8 33.2 45.3 52.1 58.8 65.9 74.8 84.4 94.6
Separate Account Business
====================================================================================================================================
Total Pre-Tax Earnings 220.1 217.8 199.4 207.4 223.9 225.7 230.5 240.0 254.7 269.7
====================================================================================================================================
Federal Income Tax (35.0%) (81.9) (80.8) (77.8) (81.5) (84.2) (86.1) (87.5) (89.9) (93.7) (97.6)
- ------------------------------------------------------------------------------------------------------------------------------------
After-Tax Earnings 138.2 137.1 121.5 125.9 139.7 139.6 143.0 150.1 161.0 172.1
====================================================================================================================================
Distributed Earnings 113.8 102.7 69.6 36.6 81.3 128.5 115.8 118.5 132.4 146.2
====================================================================================================================================
</TABLE>
Note: Interest on Capital, Surplus, & AVR is based on a net earnings rate of
7.50%.
-19-
<PAGE>
Discount Rates
- --------------
The actuarial appraisal values were developed using discount rates which varied
by business segment. Table 1 illustrates the importance of the discount rate in
the determination of the value of profits from existing and future business. The
discount rates are summarized below.
<TABLE>
<CAPTION>
Discount Rate
--------------------------------
Segment Low Medium High
--------------------------------
<S> <C> <C> <C>
PAG 8% 10% 12%
PDI 9 11 13
PCM 10 12 14
--------------------------------
</TABLE>
We did not use discount rates in developing the Adjusted Statutory Book Value.
The amount of Adjusted Statutory Book Value is equal to the market value of
assets supporting statutory capital and surplus and related items. Assets
allocated to capital and surplus are summarized in Appendix A.
IMR
- ---
The amounts shown in the table of consolidated actuarial values for IMR reflect
the actual amortization schedule for the June 30, 1996 IMR, investment income on
the annual outstanding balance, and discount rates equal to a 9%, 11%, and 13%
discount rate for the low, middle, and high discount rates respectively.
Statutory Surplus Levels, Cost of Required Capital, and Risk Based Capital
- --------------------------------------------------------------------------
The approach used to project yearly profits underlying the present values
reflects an assumption that all future earnings from inforce business and from
business to be produced over the next ten years are paid out as reported. No
recognition has been given to the minimum level of statutory net worth required
in order to continue favorable regulatory and rating agency treatment. The
values for new business developed in our analysis reflect an assumption that
adequate capital will be available to fund the projected new business volumes.
Table II provides a projection of capital, surplus, and AVR levels assuming all
statutory
-20-
<PAGE>
earnings are paid out in excess of the funds required to maintain a 200% RBC
ratio. Projected NAIC RBC (Risk Based Capital - Company Action Level) ratios are
illustrated based on the current asset portfolio distribution.
The actuarial values presented in Tables 1 do not include any specific provision
for the cost of retaining capital in the Companies in order to support the
ongoing insurance operations. The cost of retaining capital will depend on a)
the level of capital believed necessary for the risks inherent in Providian's
insurance operations and to achieve desired ratings from various rating
agencies; and b) the differential between the rate of return realized on
retained capital and a buyer's desired rate of return for an acquisition.
For purposes of this report we have illustrated required capital based upon an
approximation of 175% and alternatively 200% of NAIC Company Action Level RBC
for the life, health, and annuity operations. We used a 2/1 premium to capital
ratio to estimate the property-casualty operation's required capital, and 75 bp
to estimate required capital for variable annuities in the 200% RBC cost of
capital calculation and 75% of those factors for the 175% RBC illustration. The
cost of capital is shown on the following pages.
The factors used to estimate NAIC RBC are shown in Appendix A.
-21-
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Providian Corporation - Insurance Operations
Illustrated Cost of Capital Based on 200% of NAIC RBC
As of June 30, 1996
(in millions)
- --------------------------------------------------------------------------------
Discount Rate
- --------------------------------------------------------------------------------
Low Middle High
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Capital at June 30, 1996 1,211.5 1,211.5 1,211.5
- --------------------------------------------------------------------------------
Existing Business Cost of Capital 281.3 369.8 441.7
- --------------------------------------------------------------------------------
New Business (10 Yrs) Cost of Capital 257.4 308.0 340.0
- --------------------------------------------------------------------------------
Total Existing & New Cost of Capital 538.7 677.8 781.8
================================================================================
================================================================================
Providian Agency Group (PAG)
Illustrated Cost of Capital
As of June 30, 1996
(in millions)
- --------------------------------------------------------------------------------
Discount Rate
- --------------------------------------------------------------------------------
8.0% 10.0% 12.0%
- --------------------------------------------------------------------------------
Net Capital at June 30, 1996 191.5 191.5 191.5
- --------------------------------------------------------------------------------
Existing Business Cost of Capital 55.7 79.5 97.3
- --------------------------------------------------------------------------------
New Business (10 Yrs) Cost of Capital 13.3 17.3 19.4
- --------------------------------------------------------------------------------
Total Existing & New Cost of Capital 68.9 96.8 116.7
================================================================================
================================================================================
Providian Direct Insurance (PDI)
Illustrated Cost of Capital
As of June 30, 1996
(in millions)
- --------------------------------------------------------------------------------
Discount Rate
- --------------------------------------------------------------------------------
9.0% 11.0% 13.0%
- --------------------------------------------------------------------------------
Net Capital at June 30, 1996 191.6 191.6 191.6
- --------------------------------------------------------------------------------
Existing Business Cost of Capital 47.2 63.1 76.1
- --------------------------------------------------------------------------------
New Business (10 Yrs) Cost of Capital 23.3 28.5 31.5
- --------------------------------------------------------------------------------
Total Existing & New Cost of Capital 70.4 91.7 107.6
================================================================================
================================================================================
Providian Capital Management (PCM)
Illustrated Cost of Capital
As of June 30, 1996
(in millions)
- --------------------------------------------------------------------------------
Discount Rate
- --------------------------------------------------------------------------------
10.0% 12.0% 14.0%
- --------------------------------------------------------------------------------
Net Capital at June 30, 1996 828.5 828.5 828.5
- --------------------------------------------------------------------------------
Existing Business Cost of Capital 178.5 227.2 268.3
- --------------------------------------------------------------------------------
New Business (10 Yrs) Cost of Capital 220.8 262.2 289.1
- --------------------------------------------------------------------------------
Total Existing & New Cost of Capital 399.3 489.4 557.4
================================================================================
</TABLE>
-22-
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Providian Corporation - Insurance Operations
Illustrated Cost of Capital Based on 175% of NAIC RBC
As of June 30, 1996
(in millions)
- --------------------------------------------------------------------------------
Discount Rate
- --------------------------------------------------------------------------------
Low Middle High
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Capital at June 30, 1996 1,060.1 1,060.1 1,060.1
- --------------------------------------------------------------------------------
Existing Business Cost of Capital 246.2 323.6 386.5
- --------------------------------------------------------------------------------
New Business (10 Yrs) Cost of Capital 225.2 269.5 297.5
- --------------------------------------------------------------------------------
Total Existing & New Cost of Capital 471.3 593.1 684.1
================================================================================
</TABLE>
<TABLE>
<CAPTION>
================================================================================
Providian Agency Group (PAG)
Illustrated Cost of Capital
As of June 30, 1996
(in millions)
- --------------------------------------------------------------------------------
Discount Rate
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
8.0% 10.0% 12.0%
- --------------------------------------------------------------------------------
Net Capital at June 30, 1996 167.5 167.5 167.5
- --------------------------------------------------------------------------------
Existing Business Cost of Capital 48.7 69.6 85.2
- --------------------------------------------------------------------------------
New Business (10 Yrs) Cost of Capital 11.6 15.1 16.9
- --------------------------------------------------------------------------------
Total Existing & New Cost of Capital 60.3 84.7 102.1
================================================================================
</TABLE>
<TABLE>
<CAPTION>
================================================================================
Providian Direct Insurance (PDI)
Illustrated Cost of Capital
As of June 30, 1996
(in millions)
- --------------------------------------------------------------------------------
Discount Rate
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
9.0% 11.0% 13.0%
- --------------------------------------------------------------------------------
Net Capital at June 30, 1996 167.7 167.7 167.7
- --------------------------------------------------------------------------------
Existing Business Cost of Capital 41.3 55.2 66.6
- --------------------------------------------------------------------------------
New Business (10 Yrs) Cost of Capital 20.4 25.0 27.6
- --------------------------------------------------------------------------------
Total Existing & New Cost of Capital 61.6 80.2 94.2
================================================================================
</TABLE>
<TABLE>
<CAPTION>
================================================================================
Providian Capital Management (PCM)
Illustrated Cost of Capital
As of June 30, 1996
(in millions)
- --------------------------------------------------------------------------------
Discount Rate
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
10.0% 12.0% 14.0%
- --------------------------------------------------------------------------------
Net Capital at June 30, 1996 724.9 724.9 724.9
- --------------------------------------------------------------------------------
Existing Business Cost of Capital 156.2 198.8 234.8
- --------------------------------------------------------------------------------
New Business (10 Yrs) Cost of Capital 193.2 229.4 253.0
- --------------------------------------------------------------------------------
Total Existing & New Cost of Capital 349.4 428.2 487.8
================================================================================
</TABLE>
-23-
<PAGE>
Investments
Providian provided detailed information on the investment portfolios as of June
30, 1996. Substantially all of the bonds and mortgages were allocated to the
modeled liabilities. Assets were allocated based on Providian's internal
segmentation to PAG, PCM, and PDI. Policy loans were allocated to the associated
policy liabilities. Preferred stock, common stock, Schedule BA assets, real
estate, and certain Schedule D assets were allocated to capital, surplus, and
AVR.
The actuarial values and projections are based on a level interest scenario and
the September 30, 1996 yield curve. Details on the asset allocation, re-
investment strategy, and other asset assumptions are provided in Appendix A.
Interest sensitivity testing related to defined shifts in the yield curve is
summarized later in this Section.
Federal Income Taxes
The actuarial appraisal values summarized in Table I have been adjusted for the
effect of Federal income taxes, for the insurance company operating units,
assuming a 35% rate and the tax characteristics of Providian's insurance
operations discussed below:
. The impact of the Deferred Acquisition Cost (DAC) proxy tax is based on the
establishment of an asset for purposes of calculating taxable income equal
to 7.70% of individual life and health insurance premium, 2.05% of group
life and health insurance premium and 1.75% of non-qualified annuity
premium in future years.
-24-
<PAGE>
The resulting tax asset is amortized over ten years. A corresponding
reduction in taxes due to the amortization of the existing tax DAC balance
of $285 million in the Providian companies as of June 30, 1996 is reflected
as well, as supplied by Providian.
. Capital gains and losses are capitalized into the Interest Maintenance
Reserve (IMR) on incurred. The tax on capital gains and losses is reflected
in full in the year it is incurred.
. The statutory reserves exceeded tax reserves by approximately $319 million
at June 30, 1996 in the life companies. This difference represents reserves
which will eventually flow into statutory income but not tax income. We
projected the run-off of the existing difference along with future excess
of statutory reserves over tax reserves on new business.
. The statutory basis of assets exceeded the tax basis of assets by
approximately $45 million at June 30, 1996. This difference represents
future taxable income in excess of statutory income. We have recognized
this tax immediately on assets allocated to statutory book value and have
recognized the tax on the remaining assets in the projection of inforce.
. The insurance operations had future deductions of $14.1 million related to
amortization of VIF related to purchased blocks of insurance, along with
$5.2 million of loss carry forwards. We have reflected these future
deductions in our projections.
-25-
<PAGE>
. The P&C operations invest primarily in tax-exempt securities. We have
assumed the following adjustments to pre-statutory income to arrive at tax
income based upon guidance from Providian:
1) 85% of investment income is tax exempt;
2) 90% of the increase in loss and LAE reserves are tax deductible;
3) 80% of the increase in unearned premium reserve is tax deductible.
. Providian's taxes are impacted by the "Huddleston Amendment" which
essentially provides for a tax credit of $3.7 million per year. We have
reflected this credit in all years of our existing business projection.
We have not reflected tax deductions arising from the interest payments from
Capital Liberty Limited Partnership, other than the deduction related to the
Huddleston Amendment, nor have we reflected the tax on the associated income at
Providian Corporation or any of its non-insurance subsidiaries.
Future Business Values and Production Levels
The values for business written after June 30, 1996 reflect ten years of new
business production. The following table provides annualized issued and paid for
premium production levels by major category as provided by the Providian
business units. The appendices include projections for a single year of new
business to facilitate analysis of alternative production scenarios.
-26-
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Providian Insurance Operations
New Business Production
(millions)
- --------------------------------------------------------------------------------
Projection Year Ending June 30,
------------------------------- Growth
1997 1998 1999 2000 Thereafter
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Providian Agency Group
Life - Commonwealth/Peoples $ 38 $ 42 $ 44 $ 47 /(1)/
- Capital Security 14 15 16 17 /(1)/
Health 2 3 3 4 /(1)/
Partners Life 15 20 25 27 /(1)/
- --------------------------------------------------------------------------------
Providian Direct Insurance
Core Life $ 48 $ 84 $ 97 $ 109 5%
Core Health 17 36 42 48 5%
Military Life 13 15 17 19 5%
- --------------------------------------------------------------------------------
Providian Capital Management
Traditional GICs $1,700 $1,375 $1,233 $1,215 Level
Synthetic GICs 2,415 2,500 2,500 2,500 Level
Deferred Annuity
- Variable 935 1,315 1,663 1,825 Level
- Fixed 300 450 550 600 Level
SPIA 163 188 225 250 Level
================================================================================
</TABLE>
/(1)/ Approximately 6% on life, 7% on health and 6% on Partners.
Additional details on production by product are provided in the appendices.
We have not included any provision for future property-casualty production.
Our analysis includes profits from non-insurance products distributed by PDI and
PAG. These products include fee based non-indemnity products generally developed
by Providian Bancorp. The most notable of these products to date is a discount
prescription card. These products are expected to contribute directly to
Providian's profits, and to generate sales opportunities for Agency and PDI
distribution.
-27-
<PAGE>
The amount of premium expected to be issued by the non-insurance operations,
and included in the future business values is summarized below:
<TABLE>
<CAPTION>
===============================================================================
Providian Non-Insurance Operations
New Business Production
(millions)
- -------------------------------------------------------------------------------
Projection Year Ending June 30,
- -------------------------------------------------------------
<S> <C> <C> <C> <C> Approximate Annual
1997 1998 1999 2000 Growth Thereafter
- -------------------------------------------------------------------------------
Providian Agency Group $ 3.1 $ 3.3 $ 3.6 $ 3.8 3%
- -------------------------------------------------------------------------------
Providian Direct Insurance $ 5.9 $ 7.4 $ 8.7 $ 9.1 5%
===============================================================================
</TABLE>
General Expenses and Premium Taxes, Licenses, and Fees
- ------------------------------------------------------
Budgeted expenses were provided by Providian and were projected as a combination
of allowable expenses using unit costs and expenses in excess of allowables. The
unit expense assumptions used in the projections for PCM and PDI generally
reflect pricing levels targeted by Providian's insurance units. For PAG, we
utilized marginal expense factors developed and provided to us by PAG as
appropriate for the unit expenses under a consolidation with another large home
service provider. For the P&C operations, we used an estimate of marginal
expense for the inforce business. These unit expenses do not fully cover the
current expense levels based upon current inforce and production.
The budgeted expenses were adjusted by Providian to eliminate certain items such
as expenses allocated to non-modeled business, non-recurring expenses and the
portion of the Corporate Service Fees not directly allocable to service provided
to the business segment. The budgeted expenses were provided for a three year
period along with a growth factor thereafter.
-28-
<PAGE>
The following table summarizes the budgeted expenses provided by PAG and amounts
in excess of allowables based on the unit costs underlying the projections. The
amounts exclude provision for premium taxes which is built directly into the
projections.
<TABLE>
<CAPTION>
================================================================================
Providian Agency Group
Projected Expenses
(in millions)
- --------------------------------------------------------------------------------
Year Ending Total Expense in Excess
June 30, Budgeted Expense of Allowables
- --------------------------------------------------------------------------------
<S> <C> <C>
1997 $127.0 $78.4
1998 122.0 72.2
1999 118.4 67.1
2000 120.2 67.1
2001 122.0 66.7
2002 123.8 66.3
2003 125.7 65.6
2004 127.6 64.8
2005 129.5 63.8
2006 131.4 62.5
================================================================================
</TABLE>
Note: Amounts in years ending June 30, 2000 and later reflect 1.5% annual
growth in expenses.
PDI provided us with an expense budget, for direct response business, which
identified direct marketing expenses.
-29-
<PAGE>
The budgeted expenses provided in the following table exclude direct marketing
expenses for Core Life and Health. The table also excludes provision for premium
taxes, which is built directly into the projections.
<TABLE>
<CAPTION>
================================================================================
Providian Direct Insurance
Projected Expenses
(in millions)
- --------------------------------------------------------------------------------
Core Life and Health
---------------------------------------------
Year Total Expense in
Ending Budgeted Excess of
June 30, Expense Allowables
- --------------------------------------------------------------------------------
<S> <C> <C>
1997 $69.8 $26.1
1998 66.5 20.1
1999 66.0 14.5
2000 68.0 11.0
2001 70.0 7.4
2002 72.1 4.1
2003 74.3 0.9
2004 76.5 0.0
2005 78.8 0.0
2006 81.2 0.0
- --------------------------------------------------------------------------------
</TABLE>
Note: The amounts for years ending June 30, 2000 and later reflect 3% annual
growth in expenses.
The Academy life unit expenses closely match actual expenses providing for no
excess over allowables.
Our projections also reflect the following PDI direct marketing and issue
expenses, as provided by the Company.
<TABLE>
<CAPTION>
================================================================================
Direct Marketing Expenses as a
Percentage of Premium Written
---------------------------------------------
Projection Year Core Health Core Life
- --------------------------------------------------------------------------------
<S> <C> <C>
1 70.2% 88.3%
2 59.8 82.1
3-on 62.4 85.3
================================================================================
</TABLE>
-30-
<PAGE>
The property casualty operations were projected as a run-off book of business
with 4.5% of premium provision for general expenses including premium tax. No
adjustment was made for actual expenses in excess of allowables for the P&C
operations.
PCM budgeted expenses, as provided by the Company are summarized below.
<TABLE>
<CAPTION>
================================================================================
Providian Capital Management
Projected Expenses
(in millions)
- --------------------------------------------------------------------------------
Year Ending Total Expense in Excess
June 30, Budgeted Expense of Allowables
- --------------------------------------------------------------------------------
<S> <C> <C>
1997 $46.4 $6.9
1998 46.6 0
1999 47.6 0
2000 49.0 0
2001 50.5 0
2002 52.0 0
2003 53.6 0
2004 55.2 0
2005 56.8 0
2006 58.5 0
- --------------------------------------------------------------------------------------------
</TABLE>
Note: The amounts for years ending June 30, 2000 and later reflect 3% annual
growth in expenses.
The present value of expense in excess of allowables is shown separately in the
actuarial values and projected profits previously illustrated in this Section.
-31-
<PAGE>
Sensitivity Testing
- -------------------
The actuarial appraisal values illustrated in Table I reflect a constant
interest rate environment. We have analyzed the impact of certain defined
changes in the interest environment on inforce general account business.
Liability assumptions for the interest environment sensitivities are consistent
with the base projections except for changes to credited interest rates and
changes to lapse rates on interest sensitive products. The formulas for credited
rates and interest sensitive lapse rates are provided in the appendices. Results
are shown in the following table.
<TABLE>
<CAPTION>
================================================================================
Providian Insurance Operations
Interest Rate Sensitivity Testing of Inforce General Account Business
Present Value of Statutory Profits
Middle Discount Rate
(after-tax in millions)
- --------------------------------------------------------------------------------
Interest Sensitivity PAG PDI PCM Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1) Level Interest Rates $929.0 $521.4 $363.5 $1,813.9
- --------------------------------------------------------------------------------
2) Rates increase 1.5% immediately 950.8 525.8 260.0 1,736.6
- --------------------------------------------------------------------------------
3) Rates increase .25% per year for ten
years, then level 937.1 521.9 293.5 1,752.5
- --------------------------------------------------------------------------------
4) Rates increase .50% per year for
five years, then decrease .50% per
year for five years, then level 952.2 525.0 280.2 1,757.4
- --------------------------------------------------------------------------------
5) Rates fall 1.50% immediately 894.6 507.5 402.6 1,804.7
- --------------------------------------------------------------------------------
6) Rates fall .25% per year for ten
years, then level 891.2 510.0 388.5 1,789.7
- --------------------------------------------------------------------------------
7) Rates fall .50% per year for five
years, then rise .50% per year for
five years then level 888.6 509.1 392.3 1,790.0
================================================================================
</TABLE>
-32-
<PAGE>
We also analyzed the sensitivity of existing business values to the following
changes in base assumptions:
1) 10% higher/lower mortality and morbidity. 10% higher/lower loss ratios
on auto business.
2) 20% higher/lower base lapse rates (e.g., a 10% lapse rate is adjusted
to 8% or 12%) on PAG life insurance, PDI life and health insurance, and
all of PCM.
3) A 25 bp increase/decrease in investment income on general account
liabilities. For declared rate products and for the PAG indexed
products, this sensitivity is assumed to result in a 25 bp
increase/decrease in spread.
4) A 25% increase/decrease in unit expenses without an impact on
unabsorbed expenses.
The table below illustrates the impact on the after-tax, after cost of capital,
values reflected in Table I under the above changes to assumptions. The change
in value is based upon the middle discount rate used in our analysis.
-33-
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Providian Insurance Operations
Sensitivity Analysis - Existing Business
Change in Present Value of Profits
(after-tax, in millions)
- --------------------------------------------------------------------------------
Change in Middle
Discount Rate
Sensitivity Test Segment Present Value
- --------------------------------------------------------------------------------
<S> <C> <C>
10% lower mortality, morbidity, auto loss ratio PAG
Life $ 70.5
Health 25.7
PDI
Life 53.1
Health 52.4
Auto 50.7
----------------------------
Total $ 252.4
- --------------------------------------------------------------------------------
10% higher mortality, morbidity, auto loss ratio PAG
Life $ (68.4)
Health (25.7)
PDI
Life (51.5)
Health (52.4)
Auto (50.7)
----------------------------
Total $(248.7)
- --------------------------------------------------------------------------------
20% lower lapse rate PAG $ 40.0
PDI 23.7
PCM
Group 23.2
Individual 27.9
----------------------------
Total $ 114.8
- --------------------------------------------------------------------------------
20% higher lapse rate PAG $ (35.6)
PDI (19.7)
PCM
Group (17.2)
Individual (22.0)
----------------------------
Total $ (94.5)
- --------------------------------------------------------------------------------
</TABLE>
-34-
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Providian Insurance Operations
Sensitivity Analysis - Existing Business
Change in Present Value of Profits
(after-tax, in millions)
- --------------------------------------------------------------------------------
Change in Middle
Discount Rate
Sensitivity Test Segment Present Value
- --------------------------------------------------------------------------------
<S> <C> <C>
25bp increase in earned rate/spread on general PAG $ 41.9
account liabilities PDI
Life 9.4
Health 1.0
Auto 1.3
PCM
Group 27.2
Individual 45.3
----------------------------
Total $ 126.1
- --------------------------------------------------------------------------------
25bp decrease in earned rate/spread on general PAG $ (41.9)
account liabilities PDI
Life (9.4)
Health (1.0)
Auto (1.3)
PCM
Group (27.2)
Individual (45.3)
----------------------------
Total $(126.1)
- --------------------------------------------------------------------------------
25% increase in unit expenses PAG $ 42.8
PDI
Life 22.2
Health 17.3
Auto 5.7
PCM
Group 3.0
Individual 8.1
----------------------------
Total $ 99.1
- --------------------------------------------------------------------------------
25% decrease in unit expense PAG $ (42.8)
PDI
Life (22.2)
Health (17.3)
Auto (5.7)
PCM
Group (3.0)
Individual (8.1)
- --------------------------------------------------------------------------------
</TABLE>
-35-
<PAGE>
================================================================================
Providian Insurance Operations
Sensitivity Analysis - Existing Business
Change in Present Value of Profits
----------------------------------
(after-tax, in millions)
- --------------------------------------------------------------------------------
Change in Middle
Discount Rate
Sensitivity Test Segment Present Value
- --------------------------------------------------------------------------------
Total $ (99.1)
================================================================================
SECTION III
-----------
Development of Adjusted Statutory Book Values
---------------------------------------------
The following table summarizes the development of the Adjusted Statutory Book
Value as of June 30, 1996 for Providian's insurance operations.
<TABLE>
<CAPTION>
========================================================================
Providian Insurance Operations
Adjusted Statutory Book Value
June 30, 1996
------------------------------------------------------------------------
Component Amounts in millions
------------------------------------------------------------------------
<S> <C>
Capital and surplus $1,237.3
Asset Valuation Reserve 254.5
Non-admitted Assets 41.8
Financial Reinsurance (18.5)
Over funding of Employee Benefit Plans 133.7
Mark-to-Market on Assets Backing Surplus 10.6
-----------------------------------------------------------------------
Total $1,659.4
=======================================================================
</TABLE>
The capital, surplus, and AVR is developed on a consolidated basis for the
insurance operations later in this Section. For purposes of valuing each
segment, the adjusted statutory book value was allocated to PAG, PDI, and PCM
based upon internal allocations of capital, by line of business, developed by
Providian. The excess of total adjusted book value over that allocated to the
major segments is shown as an addition to the sum of the value for PAG, PDI, and
PCM in the Section II Summary of Results.
-36-
<PAGE>
We included a value for statutory non-admitted, non-invested assets based upon
amounts provided by Providian.
Financial reinsurance adjusted for tax is deducted from book value. Financial
reinsurance after-tax is $14.4 million in PAG and $4.1 million in PDI.
Providian has several employee benefit plans on which the Company believes
assets are held in excess of best-estimate liabilities. These include:
a) Providian's Qualified Retirement Plan for the insurance operations is
over funded by $183.2 million based upon June 30, 1996 Company
estimates. We tax-effected this over funding at a 35% rate to arrive
at $119.1 million.
b) PAG Companies hold statutory reserves in excess of GAAP reserves on
employee life and long term disability. That excess is $5.1 million
pre-tax, or $3.3 million after-tax at a 35% tax rate.
c) The Companies medical plan assets are held in a VEBA (Voluntary
Employee Benefits Account) trust. The Company estimates a $2.5 million
pre-tax, or $1.6 million after-tax surplus in that account.
d) The Company has accrued a liability for post retirement medical and
life benefits equal to $9.7 million at June 30, 1996. Our projections
reflect budgeted expenses which include for the estimated pay as you
go cost and hence the Company believes this reserve is redundant. This
is not a tax deductible liability.
-37-
<PAGE>
The total excess of assets over liabilities, net of tax, is estimated by the
Company to be $133.7 million.
The mark-to-market on assets backing capital, surplus, and AVR is based upon the
difference in statutory carrying value and market value, as supplied by
Providian, on assets allocated to capital, surplus, and AVR. This difference was
tax effected at a 35% rate taking into account the difference between statutory
and tax basis of assets allocated to capital, surplus, and AVR. Assets allocated
to capital, surplus, and AVR are summarized below.
<TABLE>
<CAPTION>
================================================================================
Asset Allocated to Capital, Surplus, AVR
(millions)
- --------------------------------------------------------------------------------
Asset Category Statutory Carrying Value Market Value
- --------------------------------------------------------------------------------
<S> <C> <C><C>
Common Stock/(1)/ $ 933.0 $943.0
Preferred Stock 269.3 268.2
Real Estate 123.9 141.1
Schedule BA Assets 354.4 334.1
Affiliated Bonds 29.1 29.1
CMOs 6.3 6.1
Distressed Mortgages 70.2 62.5
NAIC 5 and 6 Bonds .9 .9
Other Schedule D Assets 285.7 295.5
Consolidating Adjustments (580.9)/(1)/ (580.9)/(1)/
- -------------------------------------------------------------------------------
$1,491.8 $1,499.6
===============================================================================
</TABLE>
Tax basis of assets allocated to capital, surplus, and AVR exceeded the
statutory carrying values by approximately $16 million.
The capital and surplus, along with the appropriate consolidating adjustments,
for each of the insurance companies is shown in the following tables.
- --------------------
1 Reflects elimination of Common Stock and Schedule BA assets through
consolidation.
-38-
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================
Providian Life Companies
Statutory Capital and Surplus
As of June 30, 1996
- -------------------------------------------------------------------------------------------------
NAIC 6/30/96
Statement Page 3, Consolidating Consolidated
Line 38 Adjustments Capital and Surplus
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commonwealth $ 262,415,737 $ 53,241,991/(b)/ $ 209,173,746
Capital Security 28,169,907 28,169,907
Peoples Security 270,615,961 13,310,578/(c)/ 257,305,383
- -------------------------------------------------------------------------------------------------
Academy $ 18,306,352 $ 18,306,352
First Providian Life & Health 80,380,455 80,380,455
Pension Life 7,994,100 7,994,100
Providian Life & Health 637,216,222 $382,117,596/(d)/ 255,098,626
Veterans 382,117,596 80,380,455/(e)/ 301,737,141
- -------------------------------------------------------------------------------------------------
Total Life Companies $1,687,216,330 $529,050,620 $1,158,165,710
=================================================================================================
=================================================================================================
Providian Life Companies
Statutory Capital and Surplus
As of June 30, 1996
- -------------------------------------------------------------------------------------------------
NAIC 6/30/96
Statement Page 3, Consolidating Consolidated
Line 38 Adjustments Capital and Surplus
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Providian P&C $ 18,818,510 $ 6,717,887/(f)/ $ 12,100,623
Providian Fire 6,717,887 6,717,887
Providian Auto & Home 105,458,887 45,118,962/(g)/ 60,339,925
- ------------------------------------------------------------------------------------------------
Total P&C Companies $ 130,995,284 $ 51,836,849 $ 79,158,435
================================================================================================
</TABLE>
b CLICO owns 61% of the common stock of Providian Life and Health
directly and holds an additional investment in Providian Life and
Health indirectly through its partnership interest in Capital Liberty
Limited Partnership.
c PSI owns 15% of the common stock of Providian Life and Health directly
and holds an additional investment in Providian Life and Health
indirectly through its partnership interest in Capital Liberty Limited
Partnership.
d Providian Life & Health owns 100% of Veterans.
e Veterans owns 100% of First Providian Life & Health.
f Providian P&C owns 100% of Providian Fire.
g Providian Auto and Home owns 100% of Academy Insurance Group. The
balance shown is equal to capital and surplus of Academy Life and
Pension Life which are wholly owned subsidiaries of Academy Insurance
Group, along with the capital and surplus of Providian P&C which is
100% owned by Providian Auto and Home.
-39-
<PAGE>
SECTION IV
----------
Methodology, Models, and Actuarial Assumptions for Existing Business
--------------------------------------------------------------------
Additional breakdown of the present values shown in the Summary of Results
section is provided below.
<TABLE>
<CAPTION>
======================================================================
Providian Insurance Operations - PAG
Summary of Pre-tax Values
As of June 30, 1996
-------------------
(in millions)
- ----------------------------------------------------------------------
Discount Rate
------------------------------
Line of Business 8% 10% 12%
- ----------------------------------------------------------------------
Commonwealth and Peoples
- ------------------------
<S> <C> <C> <C>
Industrial Premium Paying $ 25.1 $ 22.3 $ 20.0
Traditional Premium Paying Ordinary 635.4 556.6 494.3
Universal Life - Core 199.3 169.9 147.7
Interest Sensitive Whole Life - Core 73.2 63.8 56.5
Partners 120.0 102.1 88.2
Paid Up 266.2 232.7 206.2
ETI 34.7 31.0 28.0
Individual Health 59.2 57.7 55.7
Miscellaneous Lines 85.2 75.2 67.2
------------------------------
Subtotal Commonwealth & Peoples $1,498.3 $1,311.3 $1,163.8
------------------------------
Capital Security
- ----------------
Industrial Premium Paying $ 10.6 $ 9.4 $ 8.4
Traditional Premium Paying Ordinary 115.8 101.6 90.4
Paid Up 25.5 22.1 19.4
ETI 8.8 7.9 7.1
Individual Health 7.6 7.3 7.1
Miscellaneous Lines 7.2 6.4 5.7
------------------------------
Subtotal Capital Security $ 175.5 $ 154.7 $ 138.1
------------------------------
Future ETI $ 107.9 $ 83.2 $ 65.7
------------------------------
Fee-Based Non-Insurance Product $ 6.6 $ 6.1 $ 5.6
------------------------------
Subtotal Agency $1,788.3 $1,555.3 $1,373.2
======================================================================
</TABLE>
-40-
<PAGE>
<TABLE>
<CAPTION>
Providian Insurance Operations - PDI
Summary of Pre-tax Values
As of June 30, 1996
(in millions)
- --------------------------------------------------------------------------------
Discount Rate
--------------------------------
Line of Business 9% 11% 13%
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Direct Insurance
Academy Traditional Life $ 79.1 $ 71.7 $ 65.4
Academy Interest Sensitive Life 63.7 58.4 53.8
Academy Health 16.7 15.4 14.3
Core Life 509.1 464.3 426.2
Core Health 249.1 227.7 209.6
Property-Casualty 158.8 143.3 130.3
Future ETI 11.6 9.6 8.0
</TABLE>
- --------------------------------------------------------------------------------
Subtotal Direct Insurance $1,088.1 $990.4 $907.6
================================================================================
<TABLE>
<CAPTION>
Providian Insurance Operations - PCM
Summary of Pre-tax Values
As of June 30, 1996
(in millions)
- --------------------------------------------------------------------------------
Discount Rate
--------------------------------
Line of Business 10% 12% 14%
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital Management
Single Premium Whole Life $ 63.8 $ 57.9 $ 53.0
General Account SPDA 299.2 276.1 256.1
TRAC 3.4 3.3 3.3
Variable Annuities 54.1 48.0 43.0
Payout Annuities (74.1) (64.5) (57.1)
Traditional GIC 312.8 289.4 269.6
Trust GIC 87.5 77.5 69.4
- --------------------------------------------------------------------------------
Subtotal Capital Management $746.7 $687.7 $637.3
================================================================================
</TABLE>
Models
The existing business models were developed by selecting major plans inforce as
model plans and modeling other similar plans into the model plans. The business
was further segmented by issue age range and year of issue.
-41-
<PAGE>
The models generally reflect the distribution systems in which the inforce was
sold (e.g. premium notice ordinary vs. debit ordinary within Agency Group and
direct response vs. military business within Direct Insurance Group).
Summary of actual inforce amounts, included in our analysis, by the major
segments are shown below. These amounts do not include certain miscellaneous
modelled lines. A more detailed description of the models is in the appendices.
<TABLE>
<CAPTION>
================================================================================
Modeled Amounts
(in millions)
================================================================================
Segment Insurance Statutory
Amount Premium Reserve
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
PAG
Traditional Life $13,779 $ 221 $1,939
Interest Sensitive Life 18,496 186 592
Health N/A 59 93
- --------------------------------------------------------------------------------
PDI
Core Life $11,443 $ 276 $ 518
Core Health N/A 148 109
Military Life 7,496 66 217
Military Health N/A 14 6
Property-Casualty N/A 165 182
- --------------------------------------------------------------------------------
PCM
Traditional GIC/1/ N/A N/A $6,749
Deferred Annuity N/A N/A 2,625
Single Premium Life N/A N/A 695
Payout Annuity N/A N/A 1,499
Variable Annuity N/A N/A 1,880
MVA N/A N/A 792
Synthetic GICs/2/ 21
================================================================================
</TABLE>
- -----------------------------
/1/ Includes $804 million of TRAC product reserve.
/2/ Off Balance Sheet account value of $12,473 million.
-42-
<PAGE>
A brief description of the principal products follows below. Detailed product
descriptions for each major segment appear in the appendices.
Agency Group
Traditional Life: The traditional premium paying business consists
primarily of whole life type plans, limited pay plans, endowment plans, and
term insurance sold by home service agents. In addition the traditional
business contains a very substantial amount of business in a paid-up status
or on extended term. Within the traditional life model we segmented the
business by regular ordinary, monthly debit ordinary, and industrial. We
also segmented the business by Capital Security and Peoples
Security/Commonwealth. The business has been restructured by legal entity
such that Capital Security's business is characterized by relatively low
policy sizes within the home service market, while the Peoples/Commonwealth
business is characterized by higher policy sizes within Providian's home
service market.
Interest Sensitive Life: The inforce is comprise of several front loaded
universal life plans generally issued through 1985 along with back loaded
plans issued after 1985. The Company also has fixed premium interest
sensitive whole life inforce. The business is sold both through the
company's career agents and through various partnership arrangements
described below. The segmentation of the home service business was the same
as for the traditional business.
Partners Business: Agency Group has formed partnerships with several
independent marketing groups and insurance companies. Generally these
partnerships market a universal life product. The largest partnership has
been with PEBSCO, which markets payroll deduction universal life to public
employees (state, country, and local) unions and organizations.
-43-
<PAGE>
Individual Health: The majority of PAG's individual health business is
cancer The business also includes hospital indemnity, accident, and long
term care insurance.
Direct Insurance
PDI markets products through direct media. This includes direct mail,
television, print, and telephone. Most of the current efforts are focused on
mail and telephone. This is done primarily on a broad market basis but some of
the business is third party endorsed. PDI also sells to the military market on
military bases using counselors (commissioned salesmen) through the Non-
Commissioned Officers Association (NCOA). A small amount of Medicare Select
product is distributed through independent agents.
The direct response life business in force consists primarily of a): guaranteed
issue Graded Death Benefit whole life and term products; and b): simplified
underwritten (short form 3-4 question application) level premium, step-rated
premium and decreasing face amount term products. Most current marketing efforts
are going into the Universal Model product which is a Whole Life and Accidental
Death combination; for a given premium level the split between life and AD is
determined on response to underwriting questions.
The majority of direct response health products in force consists of the
following fixed benefit products: Hospital Indemnity (HIP), Hospital Accident
(HAP), and Accidental Death Benefit (ADB). A large Medicare Supplement block is
also inforce. Hospital Accident Plan represents the largest amount of current
sales.
The military market consists of both fixed and flexible premium interest
sensitive life along with traditional permanent and term insurance life
products.
-44-
<PAGE>
Capital Management
Providian Capital Management's insurance operations reflect a wide variety of
products. In the retail (individual) market these include general account
deferred annuities, variable annuities, single premium life, structured
settlements and other payout annuities. Institutional products include, fixed
and floating rate GICs, GICs tied to the S&P 500 or Lehman bond indexes, and an
off balance sheet synthetic GIC.
Investments
Net investment earnings rates are based upon a projection of the Providian
Insurance operations existing general account asset portfolio as of June 30,
1996. Historically, Providian has maintained segmentation accounts for its
assets by major line of business. For purposes of this analysis we followed
Providian's segmentation with certain minor adjustments. The assets and
liabilities for each segment (PAG, PDI, PCM) were projected independently of the
other segments. Projecting all segments in total would likely produce somewhat
more favorable results than what is shown in this analysis.
Separate account assets were assumed to grow at 9% per year before mortality and
expense risk charges and other insurance company charges.
The allocation of assets and other detailed investment assumptions are
summarized in Appendix A.
-45-
<PAGE>
Credited Rate Strategies and Spreads
Based on PCM practice, credited rates on discretionary rate products were
determined based on the segmented portfolio net earnings rate and PCM's target
spreads. Those products which guarantee a credited rate at least equal to an
external index were projected to be credited that index, based on PCM practice.
Credited rates in PDI (Academy) were projected based on its segmented portfolio
net earnings rates and target spreads provided by PDI. Credited rates in PAG
reflect the current level of credited rate with an adjustment to credited rate
as the portfolio yield declines to reflect target spreads. Current spreads in
PAG are in excess of target.
Mortality and Morbidity
Mortality and morbidity assumptions for the PAG and PDI segments are based upon
Providian's recent experience. Mortality and morbidity assumptions for new
business are based upon Providian's pricing which is consistent with experience.
No future improvement in mortality is assumed.
Mortality for PCM accumulation products is based upon industry mortality tables.
Mortality for payout annuity reflect PCM's GAAP assumptions as detailed in their
schedule of projected benefits.
Detailed mortality and morbidity assumptions are included in the appendices.
-46-
<PAGE>
Persistency
Lapse and surrender assumptions are based upon our review of experience for the
calendar year 1995 and the twelve months ending June 30, 1996, along with
discussions with Providian management and our knowledge of experience within
companies with similar block of business. The assumptions for benefit responsive
withdrawals on GICs and termination rates on GICs without stated maturities were
based upon recent PCM experience and management expectations.
Expenses
Expenses are based upon unit expenses outlined in appendices B, C, and D.
Projected expenses based upon unit expenses were compared to the insurance
operation's projected budgeted expense. The budgeted expenses were adjusted to
eliminate certain items not directly allocable to the business lines (e.g.,
certain corporate service fees).
We reflected the excess of projected budgeted expense over projected unit
expense in the actuarial appraisal values developed. Projected budgeted expense
in excess of projected unit expense was included in the actuarial appraisal
values for the same number of years of projected new business.
Business Not Modeled
Certain miscellaneous segments were not modeled. Although we would expect
positive statutory profits from this business, the level of profit is not
expected to be material relative to the entire insurance operations. We did not
include third party fee income earned by PCM on investment management. PCM
estimates this income to be approximately $3 million per year.
-47-
<PAGE>
SECTION V
---------
Summary of Methodology, Models, and Actuarial Assumptions
---------------------------------------------------------
For Future Business
-------------------
Additional breakdown of the present values shown in the Summary of Results
section is provided below for ten years of production.
<TABLE>
<CAPTION>
=================================================================================================================
Providian Insurance Operations - PAG
Summary of Pre-Tax Values
As of June 30, 1996
-------------------
(in millions)
- ----------------------------------------------------------------------------------------------------------------
Discount Rate
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Line of Business 8% 10% 12%
- ----------------------------------------------------------------------------------------------------------------
Agency Group
- ------------
Commonwealth and Peoples
- ------------------------
Traditional Life $274.9 $214.9 $170.8
Interest Sensitive Life - Direct 97.6 78.7 64.5
Interest Sensitive Life - Partners 141.9 118.9 99.9
Individual Health 29.7 23.2 18.4
Capital Security
- ----------------
Traditional Life 80.8 63.9 51.4
Individual Health 4.2 3.4 2.7
Future ETI 8.8 5.9 4.0
Fee-Based Non-Insurance Product 19.1 15.6 12.9
- -----------------------------------------------------------------------------------------------------------------
Subtotal Agency $657.0 $524.5 $424.6
=================================================================================================================
</TABLE>
-48-
<PAGE>
<TABLE>
<CAPTION>
=================================================================================
Providian Insurance Operations - PDI
Summary of Pre-Tax Values
As of June 30, 1996
-------------------
(in millions)
- ---------------------------------------------------------------------------------
Line of Business Discount Rate
---------------------------------------
9% 11% 13%
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Direct Insurance
- ----------------
Academy Life $ 17.2 $ 6.7 $(1.0)
Academy Health 0.4 0.4 0.3
Core Life 297.9 221.5 163.9
Core Health 184.2 141.7 109.4
Future ETI 11.4 8.3 6.2
- ----------------------------------------------------------------------------------
Subtotal Direct Insurance $511.1 $378.6 $278.8
==================================================================================
</TABLE>
<TABLE>
<CAPTION>
==================================================================================
Providian Insurance Operations - PCM
Summary of Pre-Tax Values
As of June 30, 1996
-------------------
(in millions)
- ----------------------------------------------------------------------------------
Discount Rate
----------------------------------------
Line of Business 10% 12% 14%
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital Management
- ------------------
General Account SPDA $114.9 $ 90.7 $ 72.2
Variable Annuities 219.8 164.4 124.3
Payout Annuities 79.8 61.2 47.6
Traditional GICs (incl. TRAC) 236.2 205.3 179.7
Synthetic GICs 55.2 40.8 30.3
- ----------------------------------------------------------------------------------
Subtotal Capital Management $705.9 $562.4 $454.1
==================================================================================
</TABLE>
Models and Products
- -------------------
The future business model reflects products currently being issued. New business
premium, by product was provided by the business units. Distribution within each
product by issue age, sex and average policy size reflects actual sales for the
twelve month period ending June 30, 1996 for business inforce at that date.
-49-
<PAGE>
Assumptions underlying the new business projections are generally consistent
with those used for existing business. Detailed assumptions are in the
appendices.
PAG
---
The following premium distribution, which reflects actual 1995 sales by
plan of insurance, was used to distribute future issues in all years of the
projection.
<TABLE>
<CAPTION>
=============================================================
Commonwealth/Peoples Security Life
-------------------------------------------------------------
Product Premium Distribution
-------------------------------------------------------------
<S> <C>
Universal Life 20.1%
Whole Life (5,000 MDO) 13.4
Whole Life (10,000 MDO) 6.3
Whole Life (5,000 PNO) 4.6
Whole Life (10,000 PNO) 2.0
Select WL (MDO) 9.6
Select WL (PNO) 9.7
Easy Acceptance (MDO) 11.1
Easy Acceptance (PNO) 6.6
Term 12.7
Child Rider 3.9
--------------------------------------------------------------
Total 100.0%
==============================================================
</TABLE>
-50-
<PAGE>
<TABLE>
<CAPTION>
===========================================================
Capital Security Life
-----------------------------------------------------------
Product Premium Distribution
-----------------------------------------------------------
<S> <C>
Whole Life (10,000) 33.6%
Whole Life (5,000) 23.7
Easy Acceptance 26.6
Term 5.6
Child Rider 5.5
Other 4.9
-----------------------------------------------------------
Total 100.0%
===========================================================
</TABLE>
Aggregate production levels were provided by PAG split between core life and
health and marketing partnership sales. Calendar year amounts were interpolated
to convert to a projection year basis as provided in the table below.
<TABLE>
<CAPTION>
=============================================================================================
PAG Premium Production
(in millions)
- ---------------------------------------------------------------------------------------------
Commonwealth/Peoples Capital Security
Year Ending --------------------------------------------- Marketing
June 30, Life Health Life Health Partnerships
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 $38.2 $2.0 $14.1 $1.0 $14.6
1998 41.8 2.7 15.1 1.0 20.2
1999 44.0 3.2 15.9 1.0 25.0
2000 46.6 3.5 16.8 1.1 27.3
2001 50.3 3.9 18.1 1.2 28.7
- ---------------------------------------------------------------------------------------------
2002 54.1 4.2 19.5 1.3 30.2
2003 57.3 4.5 20.6 1.5 31.8
2004 60.8 4.8 21.8 1.6 33.6
2005 64.5 5.1 23.1 1.8 35.4
2006 68.4 5.5 24.4 2.0 37.4
=============================================================================================
</TABLE>
PDI
- ---
Premium issued was provided by PDI by a combination of product and market types.
We assigned model plans as follows:
-51-
<PAGE>
<TABLE>
<CAPTION>
==========================================================================
Core Life Production
--------------------
(000)
- --------------------------------------------------------------------------
Year Ending June 30,
--------------------------------------
1997 1998 1999 2000
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Level Term Underwritten $ 8,519 $13,105 $14,520 $ 15,840
Simplified Underwritten Whole Life 8,530 12,786 14,366 15,573
Universal Model 22,119 48,164 57,500 66,625
ADB Rider 4,202 5,088 5,687 6,173
Whole Life 4,957 4,673 4,588 4,703
- --------------------------------------------------------------------------
Total $48,327 $83,816 $96,661 $108,913
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
==========================================================================
Core Health Production
----------------------
(000)
- --------------------------------------------------------------------------
Year Ending June 30,
--------------------------------------
1997 1998 1999 2000
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ADD $ 5,373 $ 8,367 $ 9,983 $11,483
HIP 1,739 6,281 7,326 8,780
HAP 5,851 13,759 17,616 20,120
Medicare Select 3,685 7,749 7,564 7,878
Fee Base Non-Insurance Production 5,913 7,402 8,650 9,123
- --------------------------------------------------------------------------
Total $22,561 $43,557 $51,140 $57,384
==========================================================================
</TABLE>
New premium is projected to grow at 5% annually after the period ending June 30,
2000.
New premium for military business is summarized below.
<TABLE>
<CAPTION>
===============================================
Military Business Production
----------------------------
(000)
-----------------------------------------------
Year Ending
June 30, Life Health
-----------------------------------------------
<S> <C> <C>
1997 $12.9 $.2
1998 14.8 .2
1999 17.0 .2
2000 18.7 .2
===============================================
</TABLE>
-52-
<PAGE>
The life business was split 77% GS-4 and 23% GS-1. The health new business was
based on recent CHAMPUS Supplement pricing.
PCM
- ---
The following table summarizes future PCM production amounts in the model. We
interpolated the calendar year amounts supplied by Providian to convert to
projection year amounts.
<TABLE>
<CAPTION>
===========================================================================
PCM Production
--------------
(in millions)
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Line & Business 1996 1997 1998 1999 & Later
- ---------------------------------------------------------------------------
Floating GIC $ 385 $ 150 $ 150 $ 150
Fixed GIC (5 year bullet) 1,287 1,150 900 865
TRAC 230 200 200 200
SPDA (Tax Smart) 50 250 350 450
NASL 150 150 150 150
SPIA 150 175 200 250
Vanguard 500 600 700 800
Advisors Edge 75 250 350 450
Marquee 165 280 450 575
Trust GIC 2,330 2,500 2,500 2,500
===========================================================================
</TABLE>
-53-
<PAGE>
APPENDIX A
----------
Providian Corporation
Summary of Assets and Investment Assumptions
--------------------------------------------
Asset Portfolio
- ---------------
General account assets were allocated among PCM, PDI, Agency, and Academy based
on Providian's internal allocations. Amounts are summarized below.
<TABLE>
<CAPTION>
================================================================================
PCM General Account Portfolio
As of June 30, 1996
-------------------
(dollars in millions)
- --------------------------------------------------------------------------------
Book Effective Market Par
Investment Type Value Yield Value Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed Rate
. Bonds $ 3,934.8 8.00% $ 3,901.6 $ 4,077.4
. ABS 510.5 7.64 504.6 508.1
. CMO 321.8 7.80 320.3 322.9
. Commercial Loans 1,258.0 8.93 1,266.8 1,258.3
. Residential Loans 739.5 7.81 725.7 738.4
- --------------------------------------------------------------------------------
Floating Rate
. Bonds $ 347.7 7.53% $ 357.7 $ 395.9
. ABS 568.8 6.82 570.7 536.1
. CMO 645.4 6.89 639.3 636.0
. Commercial Loans 541.0 7.40 537.6 541.0
. Residential Loans 1,916.7 7.97 1,942.2 1,912.9
Cash & Short Term 309.9 5.78 309.9 309.9
- --------------------------------------------------------------------------------
Subtotal Invested $11,094.1 7.71% $11,076.4 $11,236.9
- --------------------------------------------------------------------------------
Policy Loans $ 130.6 4.71% $ 130.6 $ 130.6
Net Deferred Premium 0.0 - 0.0 0.0
Due & Accrued Inv. Income 102.0 - 102.0 102.0
- --------------------------------------------------------------------------------
Total Assets $11,326.7 7.68% $11,309.0 $11,469.5
================================================================================
</TABLE>
A-1
<PAGE>
================================================================================
PAG Portfolio
As of June 30, 1996
-------------------
(dollars in millions)
- --------------------------------------------------------------------------------
Book Effective Market Par
Investment Type Value Yield Value Value
- --------------------------------------------------------------------------------
Fixed Rate
. Bonds $1,813.6 8.86% $1,884.9 $1,788.0
. ABS 29.1 8.86 30.0 30.1
. CMO 131.6 8.95 138.1 142.5
. Commercial Loans 575.8 9.01 587.6 576.0
. Residential Loans 4.0 9.17 4.0 4.0
- --------------------------------------------------------------------------------
Floating Rate
. Bonds $ 8.6 7.54% $ 8.4 $ 8.6
. ABS 0.0 - 0.0 0.0
. CMO 5.8 7.90 5.8 5.8
. Commercial Loans 16.8 7.47 16.6 16.8
. Residential Loans 0.1 8.50 0.1 0.1
Cash & Short Term 0.0 - 0.0 0.0
- --------------------------------------------------------------------------------
Subtotal Invested $2,585.6 8.88% $2,675.5 $2,571.9
- --------------------------------------------------------------------------------
Policy Loans $ 196.7 6.21% $ 196.7 $ 196.7
Net Deferred Premium 50.1 - 50.1 50.1
Due & Accrued Inv. Income 53.0 - 53.0 53.0
- --------------------------------------------------------------------------------
Total Assets $2,885.4 8.69% $2,975.3 $2,871.7
================================================================================
A-2
<PAGE>
================================================================================
PDI Portfolio: Core and Academy
As of June 30, 1996
-------------------
(dollars in millions)
- --------------------------------------------------------------------------------
Book Effective Market Par
Investment Type Value Yield Value Value
- --------------------------------------------------------------------------------
Fixed Rate
. Bonds $590.2 8.02% $ 615.6 $ 593.6
. ABS 37.6 7.45 37.1 37.4
. CMO 49.3 9.14 51.2 52.3
. Commercial Loans 147.7 8.76 149.1 147.8
. Residential Loans 1.4 10.32 1.4 1.3
- --------------------------------------------------------------------------------
Floating Rate
. Bonds $ 0.0 - $ 0.0 $ 0.0
. ABS 0.0 - 0.0 0.0
. CMO 0.0 - 0.0 0.0
. Commercial Loans 1.0 9.65% 1.0 1.0
. Residential Loans 0.0 - 0.0 0.0
Cash & Short Term 0.0 - 0.0 0.0
- --------------------------------------------------------------------------------
Subtotal Invested $827.1 8.20% $ 855.4 $ 833.4
- --------------------------------------------------------------------------------
Policy Loans $ 53.1 5.74% $ 53.1 $ 53.1
Net Deferred Premium 84.6 - 84.6 84.6
Due & Accrued Inv. Income 33.0 - 33.0 33.0
- --------------------------------------------------------------------------------
Total Assets $997.8 8.05% $1,026.1 $1,004.1
================================================================================
================================================================================
PDI Portfolio: P&C
As of June 30, 1996
-------------------
(dollars in millions)
- --------------------------------------------------------------------------------
Book Effective Market Par
Investment Type Value Yield Value Value
- --------------------------------------------------------------------------------
Fixed Rate
. Bonds $171.9 6.63% $179.7 $177.7
. ABS 8.8 6.53 9.2 8.8
. CMO 1.4 12.13 1.5 1.4
. Commercial Loans 0.3 10.43 0.3 0.3
. Residential Loans 0.0 - 0.0 0.0
- --------------------------------------------------------------------------------
Total Assets $182.4 6.67% $190.7 $188.2
================================================================================
A-3
<PAGE>
Corporate bonds, mortgage pass-throughs, and asset-backed securities were
projected on a seriatim basis, recognizing call features and anticipated levels
of prepayments. CMO's were projected using the Global Advanced Technology (GAT)
Precision software.
Assets allocated to surplus and AVR are summarized below.
=========================================================
Assets Allocated to Capital, Surplus and AVR
As of June 30, 1996
-------------------
(dollars in millions)
---------------------------------------------------------
Book Market
Investment Type Value Value
---------------------------------------------------------
Common Stock (Including Affiliates) $ 933.0 $ 943.0
Preferred Stock 269.3 268.2
Real Estate 123.9 141.1
Schedule BA 354.4 334.1
Affiliated Bonds 29.1 29.1
CMOs 6.3 6.1
Distressed Mortgages 70.2 62.5
NAIC 5 or 6 Bonds 0.9 0.9
Other Schedule D Assets 285.7 295.5
---------------------------------------------------------
Total $2,072.8 $2,080.5
=========================================================
Swaps
- -----
Providian generally employs swaps to adjust its asset/liability match profile.
Swaps are typically entered into to convert new fixed rate GICs to floating rate
liabilities. Certain deferred annuity blocks have swaps specifically allocated
to them, as well. Outstanding swap amounts are summarized below.
<TABLE>
<CAPTION>
===================================================================================
Outstanding Swaps
As of June 30, 1996
- -----------------------------------------------------------------------------------
Line of Business Notional Market Value Pay Receive
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed Rate GIC $3,698.2 million $10.5 million LIBOR Fixed
Bond TRAC 184.8 0.0 LIBOR Lehman Brothers Index
Providian MTN 50.0 0.0 Fixed Lehman Brothers Index
NASL 393.4 (3.8) LIBOR Fixed
- -- 104.5 (0.4) Prime LIBOR
Structured GIC 158.5 1.7 LIBOR Fixed
Spread Lock II 250.0 0.2 Fixed LIBOR
Synthetic Floater 60.4 0.8 Fixed LIBOR
===================================================================================
</TABLE>
A-4
<PAGE>
The outstanding swaps for the fixed rate GICs, structured GIC, and NASL were
projected on a seriatim basis under the illustrated interest rate environments.
Gains or losses were allocated to the PCM line of business, based on Providian's
internal allocations and strategy. The Bond TRAC swaps were reflected on a net
basis by projecting a net cost of funds. The other swaps in place are not
material, and have not been reflected in this analysis.
Alternative Investment Strategies (AIS)
- ---------------------------------------
PCM employees certain alternative investment strategies to enhance yield for the
portfolio. As of June 30, 1996, $457.5 million was held under credit and other
alternative strategies, with an expected yield of approximately 10.5%. This
enhanced yield is allocated across the PCM portfolio internally. For purposes
of these projections, the benefit from AIS was reflected as a net enhancement to
yield of 12 bp for all of PCM's inforce business. This enhanced yield was
developed and provided to us by PCM. No benefit from AIS was reflected in the
future business projections or for PDI or PAG.
Reinvestment Assumptions
- ------------------------
The following is representative of the future investment strategy for positive
cash flow, as specified by Providian.
<TABLE>
<CAPTION>
================================================================================
Reinvestment Strategy
- --------------------------------------------------------------------------------
Percentage of Cashflow
---------------------------------
Years to Spread to
Asset Type Maturity Treasury/1/ PCM PAG PDI P&C
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 Year ARM 30 1 YT + 190 bp 18% -- -- --
5/1 Residential 5 3 YT + 150 bp 5 -- -- --
7/1 Residential 7 5 YT + 155 bp 4 -- 14% --
Fixed Commercial 5 5 YT + 130 bp 12 30% 22 --
Floating Commercial 10 3 ML + 150 bp 3 -- -- --
Fixed Bond - Public A 5 5 YT + 50 bp 14 -- 32 --
Fixed Bond - Public A 10 10 YT + 70 bp -- 30 32 --
Fixed Bond - Public A 30 30 YT + 80 bp 14 20 -- --
Fixed Bond - Private A 5 5 YT + 100 bp 5 -- -- --
Fixed Bond - Private A 10 10 YT + 120 bp 5 20 -- --
Floating Bond(ABS) 10 3 ML + 60 bp 14 -- -- --
Fixed Bond - BB rated 10 10 YT + 275 bp 6 -- -- --
Tax-exempt 5 5 YT - 30 bp -- -- -- 100%
Cash 0 3 ML -- -- -- --
================================================================================
</TABLE>
/1/ "3ML" represents 3-month LIBOR. "YT" represents -year Treasury.
A-5
<PAGE>
Resulting new money rates are illustrated in the following table.
<TABLE>
<CAPTION>
Yield on Future Investments
Based on September 30, 1996 Yield Curve
================================================================================
Rate Assumed on
Business Unit Gross Effective Yield Net Effective Yield Future Issues
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
PAG 7.86% 7.58% 7.60%
PDI 7.61 7.33 7.35
PCM 7.74 7.33 6.50 (GIC)
7.75 (SPIA)
7.35 (Other)
- --------------------------------------------------------------------------------
</TABLE>
Assets are assumed to be purchased at zero discount, i.e., coupon rates are
equal to statutory yields.
A cash balance of 5% in PCM and 2% in the other business units is maintained
before net positive cash flow is reinvested. Assets are not liquidated in order
to meet this constraint.
Disinvestment Assumptions
- -------------------------
Assets are liquidated in order of minimum capital gain or loss as sales are
needed in order to fund net cash outflow. Investment-grade bonds are assumed to
be liquid and available for sale. CMOs, while liquid, were not sold for
purposes of these projections. Non-investment grade bonds are assumed to be
illiquid. Capital gains and losses were amortized into income through the
Interest Maintenance Reserve (IMR).
Prepayment Provisions
- ---------------------
Corporate Bonds: Initial call dates and premiums on existing bonds were
provided by Providian. The call premium is assumed to grade to zero at
maturity. Bonds are assumed to be called if the market price of the bond,
excluding the impact of the call provision, exceeds the call price by 3% or
more for investment grade bonds or 5% or more for non-investment grade
bonds.
Mortgage Backed Securities: Prepayment rates on mortgage pass-throughs are
based on the following formula, subject to a maximum of 600% of PSA (for
spreads in excess of 2.25%), and a minimum of 100% PSA (for spreads below
.45%).
Prepayment Rate = [-2.06 + 6.98 . Arctan (sp)] . PSA
where, SP = spread between coupon on collateral and the current market
coupon for a comparable mortgage, as a percent.
PSA = Public Securities Association (PSA) standard prepayment model.
The model grades linearly from 0% to 6% over the first two and
a half years of the mortgage lifetime, and remains at 6%
thereafter.
A-6
<PAGE>
Prepayment rates on CMOs are based on the standard GAT
Precision payment model consistent with the projected interest
rate environments.
Floating Rate MBS: ARMs are assumed to prepay at a rate of 18%
per year. Fixed rate mortgage (5/1, 7/1, and 10/1) are assumed
to prepay entirely after the guaranteed rate period.
Commercial Mortgage Loans: Commercial mortgage loans are
assumed to repay at the balloon payment date. The mortgage loan
portfolio is generally protected from prepayments by make whole
provisions. Any cost incurred by refinancing at below market
rates following the balloon date is assumed to be covered by
general default provision.
Floating Rate ABS: Floating rate ABS, which are primarily SBA
loans, are assumed to prepay at a rate of 10% per year.
Default Cost
- ------------
Annual default costs on fixed income securities were based on Edward Altman
studies of historical defaults during the period 1971-1994. Mortgage loan
default rates were provided by Providian. Rates are summarized below.
=========================================
S&P Annual
Bond Rating Default Cost
-----------------------------------------
Cash 0.0 basis points
Treasuries 0.0
AAA 0.8
AA 3.0
A 5.0
BBB 21.0
BB 95.0
B 307.0
CCC 690.0
Commercial Mortgages 35.0
Residential Mortgages 10.0
=========================================
Investment Expenses
- -------------------
Investment expenses are assumed to be 10 basis points on cash and bonds.
Expenses on direct mortgage loans are assumed to be 16 basis points for
commercial loans and 22 basis points for residential loans.
The cost to trade a bond due to the bid/ask spread is assumed to be 5 basis
points.
Treasury Yield Curve (Corporate Bond Equivalent)
- ------------------------------------------------
A-7
<PAGE>
The projections are based on a current yield curve. Yields on intermediate
Treasuries were interpolated.
============================================
Treasury Yield Curve
--------------------------------------------
Maturity September 30, 1996
--------------------------------------------
90-day 5.03%
1 year 5.71
2 year 6.10
3 year 6.28
5 year 6.46
7 year 6.60
10 year 6.72
20 year 7.06
30 year 6.93
============================================
============================================
Index Rates
As of September 30, 1996
--------------------------------------------
3-month LIBOR 5.63%
6-month LIBOR 5.73
CP 30-day 5.44
CP 90-day 5.49
CD 90-day 5.51
CD 180-day 5.51
10-year Industrial AAA 7.02
10-year Utility AA 7.15
10-year Utility A 7.23
Prime 8.25
============================================
Separate Account Funds
- ----------------------
Based on the distribution of separate account amounts among funds and long term
average returns by fund type, separate account funds are assumed to grow 9% per
year net of mutual fund fees.
A-8
<PAGE>
NAIC Risk Based Capital
- -----------------------
The factors employed to illustrate future risk based capital amounts are
summarized below.
<TABLE>
<CAPTION>
============================================================
Risk Based Capital Factors - General Account Liabilities
(100% of NAIC Company Action Level)
- ------------------------------------------------------------
Risk Component Base Factor
- ------------------------------------------------------------
<S> <C> <C>
C-1 Liabilities 2.300%
C-2 Net Amount at Risk (PDI Life) .096
Net Amount at Risk (PAG Life) .088
Premium (PDI Health) 9.000
Premium (PAG Health) 12.000
Claim Reserve (Health) 5.000
C-3 Liabilities
- Life 0.500
- Deferred Annuity 1.667
- SPIA 0.750
- GIC 0.500
C-4 Premium
- Life and G.A. Annuity 2.000
- Health 0.500
- GIC and S.A. Annuity 0.000
============================================================
</TABLE>
The factors are based upon the actual mix of assets and liabilities currently in
the Companies.
The cost of capital calculation is based on the cost of retaining capital to
support the liabilities of Providian, assuming earnings on capital at the after-
tax net new money rate of 4.875%.
Modified separate account liabilities (MVP and TRAC) are assumed to be treated
as general account funds. In addition, we treated required capital on variable
annuities as 75 bp, and maintained a 2/1 premium to capital ratio for the
property casualty operations for purposes of capital requirements at a 200% RBC
level.
Off balance sheet liabilities, i.e. Trust GIC, are assumed to have zero capital
requirement beyond the statutory reserve held.
A-9
<PAGE>
APPENDIX B
----------
Providian Agency Group
----------------------
Liability Model and Assumptions
-------------------------------
Life Insurance Models and Assumptions
- -------------------------------------
The models for existing traditional life insurance inforce were separated into
the following major categories:
. Industrial
. Monthly Debit Ordinary
. Regular Ordinary
The business within Peoples Security and Commonwealth was projected separately
from the business with Capital Security. The Capital Security business
represents the smaller policy sizes in the debit market and contains relatively
little regular ordinary. Peoples and Commonwealth contain generally the higher
policy sizes in the debit market along with regular ordinary and the partnership
business.
Within each of these major groupings, we prepared several separate projections
which reflect characteristics such as marketing differences, issue eras, term
vs. permanent, paid up vs. premium paying, etc. Assumptions used in the profit
studies vary by the characteristics of the business and are based generally on
PAG's product development assumptions which reflect experience.
For premium paying plans, model issue ages were based on the distribution of
inforce business by issue age within model plan. In force for paid up, reduced
paid up and extended term insurance was distributed by attained age in the
model.
For extended term, we had available the number of years to run and calculated an
attained age based on actual reserve per $1,000 relationships. A summary of
model plans and modelled policies, insurance amount, reserves and premium is
provided on the following pages.
Actual inforce (i.e., amounts from the computer tapes supplied by PAG) was
compared to expected amounts to validate the model. The ratios of actual to
modelled as of June 30, 1996 for policy count, insurance amount, statutory
reserve and gross premium are summarized in the following table.
B-1
<PAGE>
================================================================================
Providian Agency Life Insurance Operations
Summary of Traditional Life Model Fit
June 30, 1996 Modeled Inforce
-----------------------------
($ amounts in millions)
- --------------------------------------------------------------------------------
Life Policy Insurance Statutory Premium
Segment Count Amount Reserve Inforce
- --------------------------------------------------------------------------------
Industrial
- ----------
Actual 1,945,421 $ 876.9 $ 449.3 $ 8.7
Model 1,941,470 871.9 448.8 8.1
A/M 100.2% 100.6% 100.1% 108.0%
- --------------------------------------------------------------------------------
Ordinary
- --------
Actual 2,043,578 $12,891.8 $1,489.4 $212.1
Model 2,026,739 12,588.0 1,490.4 215.8
A/M 100.8% 102.4% 99.9% 98.3%
- --------------------------------------------------------------------------------
Total Traditional
- -----------------
Actual 3,988,999 $13,768.7 $1,938.7 $220.8
Model 3,968,209 13,459.9 1,939.2 223.9
A/M 100.5% 102.3% 100.0% 98.6%
================================================================================
B-2
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
CAPITAL SECURITY LIFE INSURANCE COMPANY
---------------------------------------
Ordinary Inforce as of 6/30/96
------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Regular Billed Debit Billed
--------------------------------------------------------------------------------
Statutory Annual Statutory Annual
SAP Insurance Reserves Premium Insurance Reserves Premium
Insurance Type Code Description Policies ($1,000) ($1,000) ($1,000) Policies ($1,000) ($1,000) ($1,000)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Whole Life 1700AX WL, 1958 CSO ALB 3.0% 5,691 37,131 14,471 894 32,637 74,646 21,957 2,557
1100AA WL, 1958 CSO ALB 4.0% 1,524 6,242 1,433 234 43,827 98,434 17,884 4,007
110LAA LP95, 1958 CSO ALB 4.5% 1,043 12,066 2,069 230 19,503 117,954 12,694 2,780
110KCJ LP90, 1980 CSO S&U 4.5% 1,940 20,554 577 490 53,758 375,834 7,833 9,801
110KC3 LP90, 1980 CSO S&U 5.5% 1,305 8,114 727 278 22,085 113,948 6,508 3,399
1100X9 WL, 1941 CSO ANB 3.0% 1,255 6,103 3,648 120 3,907 5,270 2,524 144
- -----------------------------------------------------------------------------------------------------------------------------------
Life Paid @ 65 170FAC LP65, 1958 CSO ALB 4.5% 42 464 23 8 2,354 20,829 810 402
170FEC LP65, 1958 CSO ALB 4.0% 1,168 7,601 2,425 130 7,989 20,761 4,401 555
- ------------------------------------------------------------------------------------------------------------------------------------
Limited Pay 1103C1 10 Pay Life, 1980 CSO 5.0% 862 6,178 277 152 11,881 68,756 2,562 1,597
1705FK 20 Pay Life, 1980 CSO 5.0% 694 5,844 181 124 13,584 91,523 2,430 2,076
1105AA 20 Pay Life, 1958 CSO
ALB 4.0% 847 3,678 939 95 9,953 30,439 5,512 958
- ------------------------------------------------------------------------------------------------------------------------------------
Indeterminate
Prem. 1A0LAE LP95 Capitalizer, 1958
CSO ALB 4.5% 1,127 16,181 2,571 237 5,923 66,193 7,840 830
- ------------------------------------------------------------------------------------------------------------------------------------
Easy Acceptance 14CPC1 20 Pay, 1980 CSO
Unisex 5.5% 334 971 177 116 4,235 8,224 1,337 1,210
Life 14CPC6 20 Pay, 1980 CSO
Unisex 5.0% 1,804 3,339 885 719 29,457 37,259 9,127 8,113
- ------------------------------------------------------------------------------------------------------------------------------------
Endowments 27FOAC Endowment @ 65, 1958
CSO ANB 3.0% 830 3,424 1,833 85 9,899 20,022 6,563 595
- ------------------------------------------------------------------------------------------------------------------------------------
Family Plan 44FK4C Family Plan 4 35 7 5 103 447 96 9
- ------------------------------------------------------------------------------------------------------------------------------------
Decreasing Term 6177C6 Decreasing Mortgage Term 465 15,617 172 116 688 17,535 174 141
- ------------------------------------------------------------------------------------------------------------------------------------
R&C Term 0133IG 10 Year Renewal Term 1,804 113,229 524 548 8,473 201,830 804 1,458
- ------------------------------------------------------------------------------------------------------------------------------------
Child Term
Rider 54UAC1 Child Term Rider 0 24,428 47 72 0 494,804 698 1,474
- ------------------------------------------------------------------------------------------------------------------------------------
Par Plan 1P00IA Participating Whole Life 815 11,757 1,898 183 838 8,536 538 167
- ------------------------------------------------------------------------------------------------------------------------------------
Paid Up 1958 CSO ANB 3.0% 10,478 24,514 9,975 - 43,071 36,168 13,722 -
- ------------------------------------------------------------------------------------------------------------------------------------
Extended Term 1958 CET ANB 3.0% 2,618 13,306 1,410 - 52,886 140,063 7,469 -
- ------------------------------------------------------------------------------------------------------------------------------------
Total Traditional Ordinary 36,650 340,774 46,268 4,833 377,051 2,049,474 133,486 42,273
====================================================================================================================================
</TABLE>
B-3
<PAGE>
<TABLE>
<CAPTION>
CAPITAL SECURITY LIFE INSURANCE COMPANY
Industrial Inforce as of 6/30/96
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Statutory Annual
Insurance Reserves Premium
Policies ($1,000) ($1,000) ($1,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Industrial Paying 17006E 88 Whole Life 67,444 47,581 15,322 2,121
18732C Life Paid Up @ 74 13,002 10,201 3,890 429
27F02E Endowment @ 65 9,727 8,337 3,028 387
- ------------------------------------------------------------------------------------------------------------------------------------
Paid Up 1941 Standard Industrial Age Next 3.0% 89,587 45,071 25,084 -
- ------------------------------------------------------------------------------------------------------------------------------------
Extended Term 1961 CIET Age Next 3.5% 53,856 42,105 5,483 -
- ------------------------------------------------------------------------------------------------------------------------------------
Total Industrial 233,616 153,295 52,807 2,937
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
B-4
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
PEOPLES AND COMMONWEALTH
Ordinary Inforce as of 6/30/96
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Regular Billed Debit Billed
----------------------------------------------------------------------------------
Statutory Annual Statutory Annual
SAP Insurance Reserves Premium Insurance Reserves Premium
Insurance Type Code Description Policies ($1,000) ($1,000) ($1,000) Policies ($1,000) ($1,000) ($1,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Whole Life 110LGM LP95, 1980 CSO 5.5% 21,534 88,513 9,756 4,413 57,577 200,945 14,664 9,000
1100AF WL, 1958 CSO ALB 36,271 210,219 47,191 6,282 132,818 376,605 81,722 15,428
4.0%
1700KV WL, 1958 CSO ALB 50,777 332,720 124,054 7,503 102,881 279,859 97,108 8,465
3.0%
110LGN LP95, 1988 CSO 4.5% 29,137 279,101 4,564 7,816 75,629 516,331 6,054 13,919
1100KH WL, 1941 CSO ANB 29,168 147,979 83,796 2,588 18,657 51,601 27,748 1,016
3.0%
1100NL WL, 1958 CSO 2.75% 11,083 116,660 44,269 2,796 5,425 42,727 13,827 907
- ------------------------------------------------------------------------------------------------------------------------------------
Limited Pay @ 65 110FLK LP65, 1958 CSO ALB 31,203 208,125 66,359 3,276 46,999 161,770 43,429 3,440
3.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Limited Pay 1105NS 20 Pay Life, 1958 19,226 69,403 19,432 1,819 78,054 186,238 46,894 6,117
ALB 4.0%
1105GM 20 Pay Life, 1980 19,569 116,499 4,560 3,422 46,700 228,318 7,254 6,940
CSO 5.5%
1103GM 10 Pay Life, 1980 4,012 22,801 1,899 707 7,297 35,488 1,606 933
CSO S&U 5.5%
- ------------------------------------------------------------------------------------------------------------------------------------
Indeterminate 1A0LA5 LP95 Capitalizer NS, 10,455 182,635 34,368 2,703 13,349 164,273 24,123 2,333
1958 CSO ALB 4.5%
Premium 1AOLA4 LP95 Capitalizer SK, 3,095 45,774 6,073 598 7,595 90,317 9,440 1,105
1958 CSO ALB 4.5%
- ------------------------------------------------------------------------------------------------------------------------------------
Easy Acceptance 14CPGT 20 Pay, 1980 CSO 20,960 50,687 7,929 7,244 32,064 51,478 7,943 9,234
Unisex 5.5%
Life 14CPBG 20 Pay, 1980 CSO 9,882 19,097 6,392 3,575 25,877 39,621 14,103 7,284
Unisex 4.5%
- ------------------------------------------------------------------------------------------------------------------------------------
Endowments 27F0KB Endt. @ 65, 1958 12,441 56,979 36,006 1,442 11,266 34,905 16,872 972
CSO ALB 3.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Family Plan 44FGUW Family Plan 1,234 14,591 2,505 163 2,278 23,448 3,991 285
- ------------------------------------------------------------------------------------------------------------------------------------
Decreasing Term 6155GG Decreasing Mortgage 6,139 270,026 1,999 1,752 2,153 92,842 714 498
Term
- ------------------------------------------------------------------------------------------------------------------------------------
R&C Term 0133GG 10 Year Renewal Term 35,575 2,357,372 9,700 9,121 21,018 590,529 2,134 3,322
-----------------------------------------------------------------------------------------------------------------------------------
Child Term Rider 54UAGR Child Term Rider 1 262,244 285 952 0 1,180,687 538 2,198
- ------------------------------------------------------------------------------------------------------------------------------------
Par Plan 1P00IA Participating WL 8,158 115,225 18,291 1,804 8,833 85,800 6,352 1,662
- ------------------------------------------------------------------------------------------------------------------------------------
Paid Up 1941 CSO ANB 3.0% 125,419 156,564 105,920 - 53,216 56,625 36,479 -
American Experience 2,634 2,081 1,583 - 178 178 125 -
(Craig) ANB 3.0%
1958 CSO ALB 3.0% 70,206 167,925 74,619 - 172 207,193 95,126 -
- ------------------------------------------------------------------------------------------------------------------------------------
Extended Term 1958 CET ALB 3.0% 27,321 122,885 12,853 - 122,343 387,625 26,962 -
- ------------------------------------------------------------------------------------------------------------------------------------
Total Traditional Ordinary 585,500 5,416,105 724,403 69,976 1,044,377 5,085,435 585,207 95,058
====================================================================================================================================
</TABLE>
B-5
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================
PEOPLES AND COMMONWEALTH
------------------------
Industrial Inforce as of 6/30/96
--------------------------------
- --------------------------------------------------------------------------------------------------------------------
Statutory Annual
Insurance Reserves Premium
Policies ($1,000) ($1,000) ($1,000)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premium Paying 11006Q Whole Life Funeral 65,798 27,997 14,696 890
110H2K Life Paid Up @ 75 107,740 57,205 27,798 1,960
17006N 23 Whole Life 62,410 42,646 20,606 2,170
17056N 20 Pay Life 12,835 14,015 6,566 766
- --------------------------------------------------------------------------------------------------------------------
Paid Up 1941 Standard Industrial 3.0% 689,927 272,006 180,635 -
American Experience (Craig), 3.5% 491,152 111,069 76,162 -
1961 CSI ALB 3.0% 136,894 101,311 53,145 -
- --------------------------------------------------------------------------------------------------------------------
Extended Term 1961 CIET ALB 3.0% 96,095 97,362 16,882 -
- --------------------------------------------------------------------------------------------------------------------
Total Industrial 1,662,851 723,611 396,490 5,786
====================================================================================================================
</TABLE>
B-6
<PAGE>
The model for existing interest sensitive business reflects several products.
Within each product we divided inforce by sex, issue age, year of issue, size
band, and relative account value size. For relative account value size we looked
at each policy and calculated the account value per thousand. We split the
policies into relatively low funded (policies in lowest 25 percentile as
measured by account value per thousand of insurance), relatively high funded
(policies in highest 25 percentile as measured by account value per thousand of
insurance), and all others. This segmentation of universal life business by
funding level can be critical in some blocks of universal life although we
believe this differentiation is less important in PAG's market.
The model inforce is summarized later in this section by major product.
Major interest sensitive life products are described below.
CLI/PSI/CSI
- -----------
UL1 is a front end loaded universal life product issued from 1981 through 1982.
A monthly per policy and per unit administrative fee was assessed in the first
twelve months with a 8% premium load in all years. A surrender charge was
assessed if surrender was in the first policy year.
UL2 is a front end loaded universal life product issued from 1982 through 1983.
A monthly per unit administrative fee was assessed in the first twelve months
with a 8% premium load in all years. No charge is assessed on surrenders.
UL3 is a front end loaded universal life product issued in 1983 through 1984. A
monthly per unit administrative fee assessed in the first twelve months and a 9%
premium load in all years. No charge is assessed on surrenders. A $750 interest
corridor is credited the guaranteed rate of 4% with account values in excess of
$750 credited the current rate.
UL4 is a front end loaded universal life product issued in 1984 through 1985. A
monthly per unit administrative fee was assessed in the first twelve months. A
premium load and monthly per policy fee is charged in all policy years dependent
on policy size at issue. A surrender charge is assessed on surrenders in the
first three policy years.
BUL is a back end loaded universal life product introduced in 1985. A 5% premium
load and monthly per policy administrative fee is charged in all years.
Surrender charges are per unit for nineteen years through issue age 45, to
attained age 65 for issue ages 46-55, and a 10 year surrender charge for issue
ages 56 and older. In addition to the per unit surrender charge, a charge equal
to amount of interest credited in excess of the guaranteed minimum for the
previous twelve months is assessed.
The BUL product has two additional benefits. First, if the policyholder
continues to pay the target premium for the first ten years, the policy is
guaranteed to stay inforce regardless of cash value being less than zero just so
the policyholder's account value remains positive. Second, there is a 25%
increase in death benefit if death occurs in the first policy year.
TBUL is a back end loaded universal life product introduced in 1989. TBUL is
essentially the BUL product modified for the tax limitations imposed by the
enactment of TAMRA.
B-7
<PAGE>
The current TBUL being issued is a variation of the previous TBUL product.
Additional monthly policy fees are charged for premium payments of less than $50
per month or if the policyholder is directly billed on a quarterly or monthly
basis. For policy sizes under $250,000 the target premium must continue to be
paid or the policyholder will be assessed the guaranteed cost of insurance
charges as well as being credited the minimum rate of interest. Other than the
previously mentioned changes, the policy features remain the same.
The majority of the universal life inforce has a non-guaranteed index. The index
currently produces a credited rate of 5.37%. PAG plans to soon replace the
current index with a less generous index that also will not be guaranteed. The
planned new index would be the lesser of a ten year treasury minus 250 bp, or
75% of a ten year treasury. The contracts also include a 4% guaranteed minimum
rate. This new index will establish a floor interest rate, for as long as it is
in place, with PAG establishing credited rates based upon management judgement.
Management's minimum target spread is 250 bp. Our projections reflect the
current credited rates of 5.37% held constant until the portfolio rate minus 250
bp produces a lower rate, at which time we drop credited rates to maintain a
minimum target spread of 250 bp.
ISWL is an interest sensitive whole life product began issuing in 1985 through
the present. Expense loads are the modally loaded gross premiums less the net
premium. Surrender charges are per unit for nineteen years or until attainment
of age 65. Whole life minimum cash values are provided as well as account value
less surrender charge. Policies issued after age 65 have a nine year surrender
charge period.
Durham
- ------
The Durham product is a back end loaded fixed premium universal life product
issued from 1988 through 1992. A monthly per unit fee is assessed in all years.
Policyholders are billed a stipulated premium including a policy fee and are
modally loaded. If premium payments are discontinued, it is considered a lapse
of the policy. Surrender charges are per unit for the first fifteen policy
years. Credited interest is currently based on the AAA Industrial Index less a
spread with a guaranteed minimum of 4%. The spread is dependent on policy size
at issue.
ISWL is an interest sensitive whole life product issued from 1984 through 1989.
Expense loads are the modally loaded gross premiums less net premiums. Surrender
charges are a percent of account value.
PEBSCO
- ------
BUL is a back end loaded universal life product which began being issued in
1983. This product is sold primarily through payroll deduction to public
employees (state, county, local). A 5% premium load and monthly administrative
fee is assessed in all years. The product was updated for TAMRA and started
being issued in 1989. A 3% premium load is charged but with slightly higher
monthly policy fees than the previous BUL. Both products are modelled after the
Providian back loaded plans with similar surrender charges per unit, excess
interest charge on surrender and ten year policy continuation of coverage. Death
benefits were not increased in the first policy year as with the Providian
product.
The current TBUL product being issued is similar to the previous PEBSCO product.
Surrender charges are per unit for ten years which is a slight variation from
the past surrender charges.
B-8
<PAGE>
Fortis
- ------
The Fortis product is a back end loaded universal life product that is currently
being sold by the Fortis agents. The product is issued on Fortis paper with 100%
reinsurance to PAG. A monthly per policy fee and monthly per unit fee which
varies by policy year is assessed. A premium load of 6% is charged in all policy
years. A per unit surrender charge is assessed on surrenders in the first
fifteen policy years. Credited rates are portfolio less a projected spread of
1.4% in policy years 1-10 and .9% thereafter with a guaranteed minimum of 4%.
The Fortis product includes a bonus to account value on the 10th, 15th and 20th
policy anniversaries. The bonus is expressed as a percentage return of total
accumulated COI charges paid to date less any bonus previously credited. The
percentage is based on sex, issue age, policy year and amount of premiums paid.
B-9
<PAGE>
<TABLE>
<CAPTION>
Insurance Account Statutory Cash
Policy Amount Value Reserve Value
Product Count (000's) (000's) (000's) (000's) Premium
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CLI/PSI/CSI UL1 6,576 $ 453,994 $ 51,974 $ 51,974 $ 51,974
UL2 11,456 701,388 50,315 50,315 50,315
UL3 11,288 651,289 41,273 41,273 41,273
UL4 10,289 527,600 42,861 42,861 42,861
BUL 44,705 2,771,764 159,903 125,371 110,028
TBUL 71,955 4,274,946 85,594 52,577 29,605
ISWL 85,084 2,045,157 62,826 54,054 30,869
Durham TBUL 30,189 675,095 31,668 26,721 21,028
ISWL 12,293 309,801 33,746 34,437 29,086
PEBSCO BUL 43,053 1,900,118 77,258 54,443 40,820
TBUL 49,301 1,756,858 19,268 9,014 3,710
Other Marketing Partnerships 7,691 988,336 59,517 49,175 N/A
Other Insured Riders - 1,459,696 - - -
- ---------------------------------------------------------------------------------------------------------------
Total 383,880 $18,496,042 $716,203 $592,215 $451,569 $185,911
================================================================================================================
</TABLE>
B-10
<PAGE>
Mortality
- ---------
The mortality assumptions used to project PAG business are expressed as
multiples of PAG's own mortality tables. The base mortality tables themselves
vary for CLI/PSI and CSI as well as for PNO vs. MAO sold business. The tables
are band and sex distinct as well as distinguish between smokers and nonsmokers
where applicable. The tables are banded as summarized below.
<TABLE>
<CAPTION>
===============================
Mortality Table Bands
-------------------------------
Band Insurance Amount
-------------------------------
<S> <C>
1 $ 0 - $2,499
2 2,500 - 4,999
3 5,000 - 9,999
4 10,000 - 14,999
5 15,000 - 24,999
6 25,000 - 49,999
7 50,000 - 99,999
8 100,000 and over
===============================
</TABLE>
Separate mortality tables are used for the Easy Acceptance Plan which is a
graded death benefit whole life product.
Providian's own actual to expected mortality studies were used to develop our
mortality assumption. The mortality assumption is expressed as multiples of
PAG's base tables. A study of death claims occurring during 1992-1994 was used
for CLI/PSI and CSI. Separate mortality studies for 1993-1994 were used for the
Durham Life business which, historically, has had slightly less favorable
experience than CLI/PSI.
Multiples of PAG base tables are illustrated below. We have utilized an
aggregate mortality multiple which varies for the select period (years 1-15)
compared to the ultimate period (years 16-on) and also reflects an adjustment
for paid up business.
B-11
<PAGE>
<TABLE>
<CAPTION>
================================================================================
CLI/PSI Mortality Multiples
(multiples of PAG tables which vary by band)
- --------------------------------------------------------------------------------
Regular Underwritten Business
- --------------------------------------------------------------------------------
PNO MAO
------------------------------------------------------
Select Ultimate Select Ultimate
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Male Insureds 101.74% 82.72%* 99.20% 83.84%*
Female Insureds 102.39 93.71* 99.03 96.65*
- --------------------------------------------------------------------------------
</TABLE>
* Note: Ultimate mortality multiples are reduced by 15% in the paid up period
for limited pay plans to reflect more favorable paid up experience.
Fully Paid Up and Reduced Paid Up: Males - 70%
Females - 80%
Extended Term: Males and Females - 50%
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Easy Acceptance Plan
- --------------------------------------------------------------------------------
Issue Age
-------------------------------------------------
Policy Year 45 55 65 75
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 80% 80% 80% 80%
2 80 80 80 80
3-5 100 100 100 95
6-15 GR120 GR130 GR105 95
16-on GR95 GR95 GR95 95
- --------------------------------------------------------------------------------
</TABLE>
Industrial
- --------------------------------------------------------------------------------
Premium Paying 80%
Paid Up/RPU - 55%
Extended Term - 35%
================================================================================
B-12
<PAGE>
<TABLE>
<CAPTION>
================================================================================
CSI Mortality Multiples
(multiples of PAG tables which vary by band)
- --------------------------------------------------------------------------------
Regular Underwritten Business
- --------------------------------------------------------------------------------
PNO MAO
------------------------------------------------------
Select Ultimate Select Ultimate
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Male Insureds 101.42% 89.57%* 100.08% 84.14%*
Female Insureds 118.97 82.62* 100.14 104.66
- --------------------------------------------------------------------------------
</TABLE>
* Note: Ultimate mortality multiples are reduced by 20% in the paid up period
for limited pay plans to reflect more favorable paid up experience.
Fully Paid Up and Reduced Paid Up: Males - 50%
Females - 70%
Extended Term: Males and Females - 35%
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Easy Acceptance Plan
- --------------------------------------------------------------------------------
Policy Year 45 55 65 75
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 90% 90% 90% 90%
2 90 90 90 90
3-5 120 100 100 100
6-10 120 105 105 95
1-15 GR95 GR95 GR95 GR80
16-on 95 95 95 80
- --------------------------------------------------------------------------------
</TABLE>
Industrial
- --------------------------------------------------------------------------------
Premium Paying - 100%
Paid Up/RPU - 50%
Extended Term - 25%
================================================================================
B-13
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Durham Mortality Multiples
UL and ISWL Plans
- --------------------------------------------------------------------------------
PNO MAO
------------------------------------------------------
Select Ultimate Select Ultimate
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Male Insureds 107.95% 97.15% 114.68% 93.21%
Female Insureds 116.15 100.59% 114.52 88.65
- --------------------------------------------------------------------------------
</TABLE>
Separate mortality assumptions were used for the partners universal life (PEBSCO
and Fortis). PEBSCO mortality is based upon PAG's mortality studies for this
business. The Fortis mortality assumption is based upon pricing assumptions.
Lapse Assumptions
- -----------------
Lapse assumptions were developed based on our review of lapse studies provided
by termination studies prepared using June 30, 1995 and June 30, 1996 modelled
inforce and assumptions used by PAG in recent pricing work. Lapse assumptions
vary by company and for PNO vs MAO sales, as well as by plan and issue age.
Lapse assumptions used in the projections are illustrated below.
B-14
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================
CLI/PSI
Ordinary Lapse Assumptions - Whole Life, Life Paid Up @ 65 Plans
- --------------------------------------------------------------------------------------------------
PNO By Issue Age MAO By Issue Age
Policy ----------------------------------------------------------------------------------------
Year 0 5 15 25 35 45 55 65 75 0 5 15 25 35 45 55 65 75
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 20% 20% 25% 30% 30% 22% 17% 12% 12% 38% 38% 50% 60% 55% 45% 35% 20% 14%
2 15 14 17 18 16 13 10 6 5 19 19 25 25 25 20 13 6 5
3 11 11 11 13 11 9 6 5 5 17 13 18 20 18 13 9 5 5
4 9 9 11 11 9 7 5 4 4 13 11 15 15 14 8 6 4 4
5 8 8 10 10 9 6 4 4 4 10 10 12 13 11 7 5 4 4
6 7 8 10 10 8 6 4 3 3 9 9 11 9 9 6 4 3 3
7 6 8 9 9 8 5 4 3 3 9 9 10 8 8 5 4 3 3
8 6 7 8 8 8 5 4 3 3 8 8 9 8 7 5 3 3 3
9 6 6 7 7 7 5 4 3 3 7 7 8 7 7 4 3 3 3
10 6 6 6 6 6 5 4 3 3 6 6 7 7 7 4 3 3 3
11 5 5 5 6 5 5 4 3 3 5 5 6 6 6 4 3 3 3
12 5 5 5 6 5 4 4 3 3 5 5 5 5 5 4 3 3 3
13 5 5 5 6 4 4 4 3 3 5 5 5 5 5 4 3 3 3
14-15 5 5 5 5 4 3 3 3 3 5 5 5 5 4 3 3 3 3
16-25 5 5 4 4 4 3 3 3 3 5 5 4 4 4 3 3 3 3
26-35 5 4 4 4 3 3 3 3 3 5 4 4 4 3 3 3 3 3
36-45 4 4 4 3 3 3 3 3 3 4 4 4 3 3 3 3 3 3
46-55 4 4 3 3 3 3 3 3 3 4 4 3 3 3 3 3 3 3
56-65 4 3 3 3 3 3 3 3 3 4 3 3 3 3 3 3 3 3
66-on 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
- --------------------------------------------------------------------------------------------------
Paid Up 2.5% - All Years
==================================================================================================
</TABLE>
Note: Above lapse assumptions also apply to Indeterminate Premium Whole Life,
Endowment, Family Plan, Child Term Rider and Par plans.
B-15
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================
CLI/PSI
Lapse Assumptions - 10 Pay Life, 20 Pay Life Plans
- --------------------------------------------------------------------------------------------------
PNO By Issue Age MAO By Issue Age
Policy ----------------------------------------------------------------------------------------
Year 0 5 15 25 35 45 55 65 75 0 5 15 25 35 45 55 65 75
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 20% 20% 20% 25% 25% 18% 15% 12% 12% 30% 30% 40% 45% 45% 35% 30% 18% 12%
2 10 12 15 15 15 12 10 6 5 17 17 20 25 20 18 12 6 5
3 8 9 9 10 10 9 6 5 5 13 13 13 16 14 12 9 5 5
4 7 7 8 9 9 7 5 4 4 9 10 11 11 11 8 6 4 4
5 6 6 7 9 9 6 4 4 4 7 9 10 10 9 7 5 4 4
6 5 6 6 8 8 6 4 3 3 6 8 9 9 9 6 4 3 3
7 5 5 5 7 7 5 4 3 3 5 7 8 8 8 5 4 3 3
8 5 5 5 7 7 5 4 3 3 5 6 7 7 7 4 3 3 3
9 4 5 5 7 7 5 4 3 3 4 6 6 6 7 3 3 3 3
10 4 4 4 6 6 4 4 3 3 4 5 6 6 6 3 3 3 3
11 4 4 4 5 5 4 4 3 3 4 5 5 5 5 3 3 3 3
12 4 4 4 4 4 3 3 3 3 4 4 5 4 4 3 3 3 3
13 3 3 3 4 4 3 3 3 3 3 3 4 4 4 3 3 3 3
14-on 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
- --------------------------------------------------------------------------------------------------
Paid Up 2.5% - All Years
==================================================================================================
</TABLE>
B-16
<PAGE>
<TABLE>
<CAPTION>
======================================================================
CLI/PSI
Ordinary Lapse Assumptions - Graded Death Benefit Whole Life
----------------------------------------------------------------------
PNO By Issue Age MAO By Issue Age
Policy ---------------------------------------------------------------
Year 35 45 55 65 75 35 45 55 65 75
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 35% 30% 25% 20% 15% 55% 50% 45% 35% 26%
2 15 13 10 8 6 22 17 15 12 8
3 8 8 7 6 5 12 11 9 7 5
4 7 6 6 5 4 10 8 6 5 4
5 7 5 5 4 4 9 6 5 4 4
6 7 4 4 3 3 8 5 4 3 3
7 6 4 4 3 3 7 5 4 3 3
8 6 4 4 3 3 7 5 4 3 3
9 6 4 4 3 3 6 5 4 3 3
10 6 4 4 3 3 6 5 4 3 3
11 5 4 3 3 3 5 4 3 3 3
12 5 4 3 3 3 5 4 3 3 3
13 5 4 3 3 3 5 4 3 3 3
14-15 4 3 3 3 3 4 3 3 3 3
16-25 4 3 3 3 3 4 3 3 3 3
26-on 3 3 3 3 3 3 3 3 3 3
======================================================================
===================================================================
CLI/PSI
Ordinary Lapse Assumptions - Decreasing Term
-------------------------------------------------------------------
PNO By Issue Age MAO By Issue Age
Policy ------------------------------------------------------------
Year 25 35 45 55 25 35 45 55
-------------------------------------------------------------------
1 40% 40% 35% 30% 65% 55% 50% 45%
2 30 25 18 18 45 40 35 30
3 20 15 15 15 20 20 20 15
4 14 14 14 14 19 19 19 15
5 13 13 13 13 18 18 18 15
6 12 12 12 12 17 17 17 15
7 11 11 11 11 16 16 16 15
8 10 10 10 10 15 15 15 15
9 10 10 10 10 15 15 15 15
10 10 10 10 10 15 15 15 15
11 10 10 10 10 15 15 15 15
12-on 10 10 10 10 15 15 15 15
==================================================================
</TABLE>
B-17
<PAGE>
<TABLE>
<CAPTION>
======================================================================
CLI/PSI
Ordinary Lapse Assumptions - Other Term
----------------------------------------------------------------------
PNO By Issue Age MAO By Issue Age
Policy ---------------------------------------------------------------
Year 15 25 35 45 55 15 25 35 45 55
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 35% 35% 30% 25% 25% 55% 60% 55% 50% 40%
2 25 25 20 20 20 35 30 25 20 15
3 20 20 17 15 15 20 20 20 15 15
4 17 17 15 12 12 18 18 18 14 14
5 15 15 15 10 10 16 16 16 12 12
6 15 15 15 10 10 14 14 14 10 10
7 15 15 15 10 10 12 12 12 8 8
8 15 15 15 10 10 10 10 10 6 6
9 15 15 15 10 10 8 8 8 6 6
10 15 15 15 10 10 8 8 8 6 6
11 15 15 15 10 10 8 8 8 6 6
12 15 15 15 10 10 8 8 8 6 6
13 15 15 15 10 10 8 8 8 6 6
14 15 15 15 10 10 8 8 8 6 6
15-on 15 15 15 10 10 8 8 8 6 6
======================================================================
</TABLE>
<TABLE>
<CAPTION>
======================================================================
CSI
Ordinary Lapse Assumptions - Whole Life and Limited Pay Plans
----------------------------------------------------------------------
Policy Issue Age
Year ----------------------------------------------------------------
0 5 15 25 35 45 55 64 75
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 45% 45% 55% 70% 65% 60% 45% 30% 25%
2 20 20 25 30 30 23 20 10 10
3 15 15 18 20 20 15 12 8 6
4 13 13 15 16 15 11 9 7 5
5 11 11 13 14 12 9 7 6 4
6 10 10 11 12 10 8 6 5 4
7 9 9 10 10 9 7 5 4 4
8 8 8 9 9 8 6 5 4 4
9 7 7 8 8 7 6 4 4 4
10 7 7 7 7 6 6 4 4 4
11 7 7 6 6 6 5 4 4 4
12 7 7 6 6 5 4 4 4 4
13-25 6 6 6 5 4 4 4 4 4
26-35 5 5 5 4 4 4 4 4 4
36-on 4 4 4 4 4 4 4 4 4
----------------------------------------------------------------------
Paid Up - 2% all years
======================================================================
</TABLE>
Note: Above lapse assumptions apply to Indeterminate Premium Whole Life,
Endowment, Family Plan, Child Term Rider and Par plans.
B-18
<PAGE>
<TABLE>
<CAPTION>
======================================================================
CSI
Ordinary Lapse Assumptions - Graded Death Benefit Whole Life
----------------------------------------------------------------------
Issue Age
Policy --------------------------------------------------------------
Year 35 45 55 65 75
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 65% 60% 60% 50% 45%
2 25 20 18 15 12
3 20 12 11 10 9
4 15 8 8 7 6
5 12 7 7 6 5
6 10 6 6 5 4
7 9 6 5 4 4
8 8 6 5 4 4
9 7 5 5 4 4
10 6 5 5 4 4
11 5 5 5 4 4
12 5 5 5 4 4
13-on 4 4 4 4 4
======================================================================
</TABLE>
<TABLE>
<CAPTION>
======================================================================
CSI
Ordinary Lapse Assumptions - Decreasing Term
----------------------------------------------------------------------
Issue Age
Policy --------------------------------------------------------------
Year 25 35 45 55
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 65% 60% 55% 50%
2 35 30 25 20
3 20 20 20 20
4 19 19 19 19
5 18 18 18 18
6 17 17 17 17
7 16 16 16 16
8 15 15 15 15
9 14 14 14 14
10 13 13 13 13
11 12 12 12 12
12 11 11 11 11
13-on 10 10 10 10
======================================================================
</TABLE>
B-19
<PAGE>
<TABLE>
<CAPTION>
CSI
Ordinary Lapse Assumptions - Other Term
- --------------------------------------------------------------------------------
Issue Age
Policy --------------------------------------------------------------------
Year 15 25 35 45
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 55% 65% 60% 55%
2 25 35 30 25
3 20 20 20 20
4 16 16 16 16
5 13 13 13 13
6 11 11 11 11
7-on 10 10 10 10
- --------------------------------------------------------------------------------
Industrial Lapse Assumptions
- --------------------------------------------------------------------------------
CLI/PSI: Premium Paying Same as MAO Whole Life During Premium Paying Period
Paid Up/ETI 2% all years
CSI: Premium Paying Same as CSI Whole Life During Premium Paying Period
Paid Up/ETI 2% all years
- --------------------------------------------------------------------------------
</TABLE>
The inforce we were provided included policies within the grace period at June
30, 1996. To reflect the fact that PAG will not collect premium on the majority
of these policies we applied the following factors to premium, commissions, and
premium taxes in our projection.
<TABLE>
<CAPTION>
Inforce Business One Years Issue New Business
----------------------------------------------------------
Projection Policy
Year Factor Year Factor
----------------------------------------------------------
<S> <C> <C> <C>
1 .985 1 .943
2 .987 2 .967
3 .988 3 .972
4 .989 4 .977
5-on .990 5 .980
6 .983
7-on same as inforce
----------------------------------------------------------
</TABLE>
The factors were developed based upon an assumption that grace period policies
represent approximately 1/6 of the annual projected lapsed policies. We did not
adjust surrender and deaths paid for uncollected premium as this is thought to
be immaterial.
Universal life lapse rates are summarized on the following page.
B-20
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Universal Life
Lapse Assumptions
- --------------------------------------------------------------------------------
Issue Age
Policy -----------------------------------------------------------------------
Year 5 15 25 35 45 55 65
- --------------------------------------------------------------------------------
Low AV Bucket
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 21% 22% 32% 25% 20% 11% 9%
2 16 16 17 15 12 10 8
3 15 15 15 14 11 10 8
4 14 14 14 13 10 10 8
5 13 13 13 12 10 10 8
6 12 12 12 11 10 10 8
7 10 10 10 9 8 8 6
8 8 8 8 7 7 7 6
9 6.5 6.5 6.5 6 6 6 5
10-on 5 5 5 5 5 5 5
- --------------------------------------------------------------------------------
Middle AV Bucket
- --------------------------------------------------------------------------------
1 16% 17% 20% 18% 15% 10% 8%
2 11 11 12 10 8 7 6
3 10 10 10 9 7 6 5
4 9 9 9 8 6 5 4
5 8 8 8 7 5 4 3
6 7 7 7 6 4 3 3
7 6 6 6 5 3 3 3
8 5 5 5 4 3 3 3
9 4 4 4 3 3 3 3
10-on 3 3 3 3 3 3 3
- --------------------------------------------------------------------------------
High AV Bucket
- --------------------------------------------------------------------------------
1 9% 10% 13% 11% 8% 4% 3%
2 8 8 9 7 5 4 3
3 7 7 7 6 4 3 3
4 6 6 6 5 3 3 3
5 5 5 5 4 3 3 3
6 4 4 4 3 3 3 3
7 3 3 3 3 3 3 3
8 3 3 3 3 3 3 3
9 3 3 3 3 3 3 3
10-on 3 3 3 3 3 3 3
================================================================================
</TABLE>
B-21
<PAGE>
================================================
Fortis UL
------------------------------------------------
Policy Year Lapse Assumption
------------------------------------------------
1 15%
2 13
3 11
4 9
5-on 7
================================================
B-22
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Interest Sensitive Whole Life
- --------------------------------------------------------------------------------
Issue Age
Policy -------------------------------------------------------------
Year 5 15 25 35 45 55 65
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 38% 45% 50% 50% 40% 30% 15%
2 20 25 25 25 20 15 10
3 15 18 18 18 12 10 9
4 10 12 12 12 8 8 8
5 9 10 10 10 8 7 7
6 8 9 9 9 8 6 6
7 7 8 8 8 7 6 6
8 6 7 7 7 6 6 6
9 6 6 6 6 6 6 6
10 6 6 6 6 6 6 6
11 6 6 6 6 6 6 6
12 6 6 6 6 6 6 6
13-on 6 6 6 6 6 6 6
- --------------------------------------------------------------------------------
Note: Durham ISWL/UL - same as interest sensitive whole life above.
================================================================================
</TABLE>
The above lapse rates for universal life and ISWL are subject to the following
interest sensitive lapse adjustment, as a percent:
(MR - CR - SC/4)/2/ if MR Greater-than CR + SC
--
4
0 if CR Less-than MR Less-than CR + SC
--
4
(MR - CR)/2/ if MR Less-than CR
where, MR = The market competitor rate, as a percent. This was modelled as
the Seven Year Treasury rate.
CR = The current credited rate, as a percent.
SC = The surrender charge, as a percent of account value.
Premium Suspension
- ------------------
Premium suspension rates were based upon PAG's experience and consistent with
the assumptions. Premium suspension has been extremely favorable. On the back-
loaded products this is likely a result of the ten year no lapse guarantee as
long as premium is paid. Premium suspension rates are summarized in the table
below.
B-23
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Policy Front Load Policy Back Load
Year Product Year Product
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1 5% 1 5%
2 5 2-10 0
3 5 11 10
4-on 0 12-on 0
================================================================================
</TABLE>
Commissions
- -----------
Commission rates were provided by PAG and reflect actual amounts paid exclusive
of amounts for employee benefits which are provided and reported as part of
general expenses. We did provide for projected agent subsidies which are
accounted for as commissions. Commission assumptions are illustrated below.
B-24
<PAGE>
<TABLE>
<CAPTION>
============================================================================================================
CLI/PSI
Commission Rates
(Applicable to Model Issue Ages 0-65)
- ------------------------------------------------------------------------------------------------------------
Select Whole Easy Acceptance
Traditional Whole Life Life (GDBWL)
----------------------------------------------------------
$5,000 $10,000 Child Interest
Policy --------------------------- Term Universal Sensitive
Year PNO MAO PNO MAO PNO MAO PNO MAO Term Rider Life Whole Life
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 78.7% 86.2% 96.1% 103.7% 87.4% 91.1% 61.2% 68.8% 78.7% 102.1% 85.1% 85.1%
2 7.0 16.4 7.0 16.4 8.0 12.5 7.0 16.4 7.0 14.8 6.0 6.0
3 6.2 16.4 6.2 16.4 6.2 12.5 6.2 16.4 6.2 14.8 5.6 5.6
4 6.0 16.4 6.0 16.4 6.0 12.5 6.0 16.4 6.0 14.8 5.4 5.4
5 5.7 16.4 5.7 16.4 5.7 12.5 5.7 16.4 5.7 14.8 5.3 5.3
6-10 5.5 16.4 5.5 16.4 5.5 12.5 5.5 16.4 5.5 14.8 5.2 5.2
11-on 2.9 16.4 2.9 16.4 2.9 12.5 2.9 16.4 2.9 14.8 3.9 3.9
- ------------------------------------------------------------------------------------------------------------
Note: Excludes Agent Employee Benefits EBP. Additional one percentage point was added to above rates to
reflect subsidies.
============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
============================================================================================
CSI
Commission Rates
(Applicable to Model Issue Ages 0-65
- --------------------------------------------------------------------------------------------
Traditional Easy Acceptance Child Term Universal Interest Sensitive
Whole Life (GDBWL) Term Rider Life Whole Life
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 92.5% 70.8% 83.3% 92.5% 89.4% 83.0%
2 18.9 18.9 18.9 18.9 4.7 7.2
3 18.9 18.9 18.9 18.9 4.7 6.7
4 18.9 18.9 18.9 18.9 4.7 6.5
5 18.9 18.9 18.9 18.9 4.7 6.2
6-10 18.9 18.9 18.9 18.9 4.7 4.9
11-on 18.9 18.9 18.9 18.9 3.4 3.4
- --------------------------------------------------------------------------------------------
Note: Excludes EBP. Additional one percentage point was added to above rates to reflect
subsidies.
============================================================================================
</TABLE>
B-25
<PAGE>
Credited Rates
- --------------
Credited rates are based upon the portfolio rate minus a target spread. Target
spreads are summarized below.
<TABLE>
<CAPTION>
=========================================
Product Target Spread
-----------------------------------------
<S> <C>
PEBSCO 250 bp (1-10), 150 bp (11+)
Fortis 140 bp (1-10), 90 bp (11+)
All Other 250 bp
=========================================
</TABLE>
Credited rates were adjusted in the interest sensitivity analysis to lag the
market up and follow the market down.
For new sales of core universal life the Company has changed COIs and reduced
target spreads to 50 bp. This is included in our analysis.
General Expenses and Taxes, Licenses and Fees
- ---------------------------------------------
Unit expense rates used to project the life business were developed and provided
by PAG. These unit expenses are designed to reflect the marginal expenses
associated with operating PAG under a consolidation with another large home
service carrier. The unit expenses are summarized below:
<TABLE>
<CAPTION>
=======================================================================================
Unit Expenses
- ---------------------------------------------------------------------------------------
Interest Sensitive
Expense Description Industrial Ordinary Life Universal Life Whole Life
- ---------------------------------------------------------------------------------------
Maintenance per Policy
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PNO Premium Paying NA $6.95 $17.60 $14.29
Paid Up NA 1.14 -- --
MAO Premium Paying $2.38 2.38 -- 10.00
Paid Up .36 .36 -- --
- ---------------------------------------------------------------------------------------
Sales Support, Meetings and Sales Support Maintenance - % of premium in all years
- ---------------------------------------------------------------------------------------
.92% .92% .92% .92%
- ---------------------------------------------------------------------------------------
Employee Benefit Plan - % of Commissions in all years
- ---------------------------------------------------------------------------------------
13% 13% 13% 13%
- ---------------------------------------------------------------------------------------
Premium Taxes - % of premium
- ---------------------------------------------------------------------------------------
1.5% 1.5% 1.5% 1.5%
- ---------------------------------------------------------------------------------------
Issue Expense - Per Policy Issued
- ---------------------------------------------------------------------------------------
N/A $14.29 $35.71 $35.71
=======================================================================================
</TABLE>
B-26
<PAGE>
In addition to the above unit expenses, there are unit expenses built into the
model for deaths, surrenders/maturities and expiries per PAG's specifications.
These expenses generally range from $25 to $43 per death claim plus $1.30 -
$3.08 per $1,000 of death benefit, from $17 to $26 per surrender, and from $1.67
to $2.62 per lapse depending upon distribution and band size.
As discussed in the report, aggregate expense amounts produced by the unit
expense assumptions were adjusted to reproduce total budgeted expenses as
provided by PAG for the first ten years of the projection consistent with ten
years of new business.
Gross Premiums, Policy Fees and Modal Distributions and Loadings
- ----------------------------------------------------------------
Gross premiums, policy fees, and modal loadings were developed from rate books
and other information provided by PAG. Modal distributions reflect the actual
distributions for PAG's inforce.
ETI from Existing Business
- --------------------------
Upon surrender, not all of the surrender value is paid out in cash but rather
some of the cash is retained within the Company under nonforfeiture options
other than cash surrender. The vast majority of PAG's non-cash nonforfeiture
elections are for extended term insurance, which is the automatic option.
To reflect the profit from extended term expected to arise from the June 30,
1996 in force, as well as from new business written, we applied two factors to
every dollar of projected surrender value paid from traditional premium paying
business.
The first factor reflects the proportion of surrender values we assume will be
retained by the Company as extended term. This factor was developed based upon
PAG's valuation of how much business went into extended term as a percentage of
total gross surrender values paid (before reflecting amounts going on to
extended term). The factor was estimated as 35% for traditional ordinary
insurance and for industrial and weekly insurance.
The second factor reflects the present value of profit per dollar of cash value
which is retained as extended term or reduced paid-up. We calculated this based
on the relationship of present value of profit to reserve that resulted from the
existing business projections of extended term included in this analysis.
The pre-tax value then attributable to extended term arising from the June 30,
1996 in force is:
<TABLE>
<CAPTION>
================================================================================
(2) (3) (4) = (1) x (2) x (3)
(1) Proportion of P.V. Profit per P.V. Profit of
P.V. of Gross (1) Retained As $1.00 Retained Extended Term
Discount Cash Surrenders Extended Term As Extended Arising From
Rate Projected Insurance Term Insurance Existing Inforce
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8% $513.9 million .35 .60 $107.9 million
10% 440.2 .35 .54 83.2
12% 383.2 .35 .49 65.7
================================================================================
</TABLE>
B-27
<PAGE>
The amounts from surrenders arising from projected new sales was similarly
developed as shown below.
<TABLE>
<CAPTION>
================================================================================
(2) (3) (4) = (1) x (2) x (3)
(1) Proportion of P.V. Profit per P.V. Profit of
P.V. of Gross (1) Retained As $1.00 Retained Extended Term
Discount Cash Surrenders Extended Term As Extended Arising From
Rate Projected Insurance Term Insurance Existing Inforce
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8% $41.8 million .35 .60 $8.8 million
10% 31.1 .35 .54 5.9
12% 23.6 .35 .49 4.0
================================================================================
</TABLE>
Statutory Reserves, Net Premiums and Cash Values
- ------------------------------------------------
Reserves, net premiums and cash values were supplied by PAG on tape.
Insurance Schedules
- -------------------
Insurance schedules for model plans with death benefits other than a level
$1,000 per unit were provided by PAG.
Investment Income
- -----------------
Investment income was based upon investments allocated to PAG, along with a new
money assumption on cash flow. Those assumptions are detailed in Appendix A. The
starting portfolio yield is 8.88% gross effective before investment expenses and
default cost and provision for policy loans. The traditional line also has
policy loans equal to $197 million at June 30, 1996 with a composite yield of
6.2%. The gross effective yield assumed on new money is 7.86%.
Miscellaneous Benefits and Other Reserves
- -----------------------------------------
PAG has a variety of miscellaneous benefits for which we constructed a simple
model to calculate projected profits on inforce business.
Specifically, we applied an incurred (paid claims, plus increase in reserve)
loss ratio to projected premium for miscellaneous benefits. The incurred loss
ratio is based upon PAG experience. We also included investment income on
reserve at the PAG projected earnings rate, along with projected premium tax and
commissions at PAG's aggregate rate. We ran the inforce off in proportion to the
runoff of the traditional premium paying inforce.
B-28
<PAGE>
The starting amounts and loss ratios are summarized below:
<TABLE>
<CAPTION>
Miscellaneous Benefits
- ------------------------------------------------------------------------
ADB Waiver Dismemberment Substandard
Active Lives Extra
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premium $8.3 million $3.6 million $0.6 million $4.1 million
Reserve 17.8 7.5 8.4 2.0
- ------------------------------------------------------------------------
Loss Ratio 45% 85% 85% 45%
- ------------------------------------------------------------------------
</TABLE>
PAG also has the following miscellaneous reserves which generally have a
required interest rate less than the portfolio rate. We projected these
reserves to runoff at the aggregate ordinary inforce termination rate. PAG
believes the reserves are sufficient at the required interest rate (i.e., no
gain or loss from mortality or morbidity), thus we projected profits based upon
earning the PAG portfolio rate and crediting the required reserve rate. Those
reserves are:
<TABLE>
<CAPTION>
Required
Reserve Amount Interest
- -------------------------------------------------------------
<S> <C> <C>
IBNR and ICOS $21.7 million 0%
Exhibit 10 Individual Life Amounts 18.0 4
Exhibit 8 Disabled Lives 40.2 4
Exhibit 8 Supplemental Contracts 5.8 4
Exhibit 8 Credit Life 4.0 4
- -------------------------------------------------------------
$89.7 million 3.03%
- -------------------------------------------------------------
</TABLE>
Finally, we included the relatively small block of individual annuity reserves
in the miscellaneous lines. The majority of these reserves have a surrender
charge of 9% in policy year one grading off 1% per year. The key assumptions
used to project this run-off business are.
<TABLE>
<CAPTION>
Inforce Amounts
- -------------------------------------------------------
<S> <C>
Policy Count 13,977
Account Value $111.8 million
Surrender Value 110.5
Statutory Reserve 111.2
- -------------------------------------------------------
Surrenders: 10% minus surrender charge percent
- -------------------------------------------------------
Mortality: 100% 1983 Basic Table
- -------------------------------------------------------
Credited Rate Level 5.37%
- -------------------------------------------------------
Earned Rate PAG portfolio rate
- -------------------------------------------------------
</TABLE>
B-29
<PAGE>
PAG Individual Health Model and Assumptions
- -------------------------------------------
The following table summarizes the policies inforce and the annualized premiums
inforce as of the end of June 1996, for each projection cell, along with the
1995 and first half 1996 premiums and loss ratios.
<TABLE>
<CAPTION>
========================================================================================
6/30/96 1995 1st H'96 1st H'96
Line of Prem. 6/30/96 1995 Prem. Incurred Prem. Incurred
Business Inforce Policies Earned* Loss Earned* Loss
(000's) Inforce (000's) Ratio** (000's) Ratio**
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CLICI/PSI:
Cancer $35,188 259,405 $33,837 61.6% $17,035 62.9%
Accident 3,038 100,152 3,170 23.2 1,500 14.2
All Other 3,898 25,263 4,248 64.2 1,930 46.5
CSI:
Cancer $ 1,272 18,499 $ 1,310 88.6 $ 641 64.6
Accident 1,029 31,534 1,077 17.2 494 18.4
All Other 3,993 47,322 4,379 25.1 1,969 28.3
Partners:
Med. Supp. $ 1,803 1,109 $ 2,479 76.5 $ 961 67.0
Long Term
Care 8,735 2,792 9,925 124.5 4,627 136.0
- ----------------------------------------------------------------------------------------
Total $58,956 486,076 $60,425 67.9% $29,157 68.0%
========================================================================================
</TABLE>
* Premiums earned = premium written less change in UPR
** Incurred loss ratios exclude change in additional (active life) reserves
Policies and premiums inforce were developed from data supplied by Providian.
Premiums inforce include modal loads and policy fees, if any. Policy counts for
the cancer line include rider counts.
For the Partners long term care block of business, we relied on the "high
estimate" projections made a couple of years ago by another M&R office.
According to Providian, actual emerging experience has been favorable relative
to those projections.
Assumptions
- -----------
Morbidity
- ---------
Claim costs were developed for each policy modelled by M&R, based on pricing we
have done for similar policies. The aggregate claim costs for each model were
validated to the actual claim levels incurred in calendar year 1995 and the
first half of 1996. These claim costs were then "aged" based on the average
current duration and the claim cost curve developed by the asset share modeling.
For the cancer and "all
B-30
<PAGE>
other" lines, additional costs were added in for the second half of 1996, for
1997, and for 1998, to reflect the impact of claims antiselection from policies
moving out of their early policy durations.
The cancer and Medicare Supplement lines of business were assumed to be subject
to annual inflationary trends. For the cancer lines, this was assumed to be 12%
per year; for Med. Supp., a 10% annual trend was used. In addition to trend,
the CLICI/PSI claims were assumed to increase another 3% in 1997, due to
antiselection from the planned "Wave 7" rate increases, and 2% for each of 1998
and 1999, due to expected above-trend rate increases in those years.
Providian's accident and "all other" lines of business were assumed to not be
subject to the impact of inflation. Some HIP products may have benefitted from
negative secular trends over the recent past, since hospitalization rates and
hospital length of stays have been declining. These negative secular trends
have not been reflected in the projections.
Issue Ages
- ----------
The age at issue of the policies inforce as of June 30, 1996 was used in our
asset share modelling, in order to determine the claims aging curve. For
policies sold with optional spouse and child coverage, estimates were made of
the number of additional insureds added, so that the age distribution of the
insureds could be used.
Termination Rates
- -----------------
Lapse rate assumptions were developed so that voluntary lapses plus mortality
would tie to actual historical termination rates by policy for the blocks of
business being projected, as summarized in amortization schedule work supplied
by Providian. Mortality was added to voluntary lapse for policy years 3 and
later and was assumed to be equal to US life mortality (79-81 Basic Tables
Unisex). Lapse rates for years 1 and 2 were developed to include mortality.
The following table summarizes, by policy year, the voluntary lapse assumption
used for each product line:
<TABLE>
<CAPTION>
==============================================================================
Voluntary Lapse Rates for Policy Year (%):
--------------------------------------------------------
Product: 1 2 3 4 5 6 7 8 9 10-on
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLICI/PSI Cancer 26 16 12 11 11 11 10 10 9 9
CLICI/PSI Acc. &
Other 42 26 21 17 14 12 12 12 11 11
CSI Cancer 49 23 18 14 13 12 11 11 11 10
CSI Acc. & Other 50 30 23 19 15 14 13 13 13 12
Partners Med. Supp. 30 20 15 10 8 8 8 8 8 8
==============================================================================
</TABLE>
B-31
<PAGE>
The effect of lapse and mortality combined throughout the term of the projection
is dependent on the mix of business by duration. The following table summarizes
the effective lapse plus mortality rate by projection cell, for each of the next
5 calendar years.
<TABLE>
<CAPTION>
=====================================================================
Composite Lapse Plus Mortality Rate (%)
Assumed for:
--------------------------------------------
Business Segment 1996 1997 1998 1999 2000
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLICI/PSI Cancer 11.9 10.8 10.4 10.3 10.3
CLICI/PSI Acc. 12.8 12.1 11.8 11.7 11.7
CLICI/PSI Other 13.1 12.4 12.1 11.9 11.9
CSI Cancer 14.1 12.4 12.1 12.0 12.0
CSI Acc. 15.2 13.8 13.5 13.4 13.3
CSI Other 14.8 14.0 13.8 13.7 13.7
Partners Med. Supp. 14.8 15.1 15.5 16.0 16.5
=====================================================================
</TABLE>
In additional to the above, an extra 6% lapse was added for 1997 for the
CLICI/PSI Cancer product, to reflect shock lapse from the Wave 7 rate increases,
and an extra 4%/year was added to all 3 companies for 1998 and 1999 shock
lapses.
Premium Increases
- -----------------
For the cancer products, no rate increases were assumed for the second half of
1996. For the CLICI/PSI block, as 23% rate increase was assumed for 1997,
followed by 20% rate increases in 1998 and 1999. Annual rate increases equal to
trend (12%) were assumed thereafter. For the CSI cancer products, no rate
increases were assumed until 1998; 20% rate increases were assumed for 1998 and
1999; trend increases were assumed thereafter.
Annual increases equal to trend (10%) were assumed for the Medicare Supplement
policy.
We have not assumed any premium reductions or benefit increases being made on
policies that have lower loss ratio experience than what was assumed in pricing.
B-32
<PAGE>
Expenses/Commissions
- --------------------
The following table summarizes the commissions assumed.
<TABLE>
<CAPTION>
==================================================================
Commission as a Percent of Premium:
------------------------------------------------------------------
Business Segment 1996 1997 1998+
------------------------------------------------------------------
<S> <C> <C> <C>
CLICI/PSI Cancer 10.0% 8.5% 7.0%
CLICI/PSI Acc. 13.7 13.2 12.6
CLICI/PSI Other 13.1 12.9 12.6
CSI Cancer 16.7 15.7 14.6
CSI Acc. 16.4 15.5 14.6
CSI Other 15.2 14.9 14.6
Partners Med. Supp.* 9.1 8.0 7.0
==================================================================
</TABLE>
* Med. Supp. commissions were assumed to continue decreasing by 12% per
year, due to a portion of the commission being paid based on original
premium.
The above commissions were developed, based on the assumed distribution of
business by first year and renewal, and assuming the following policy year
commission scales:
CLICI/PSI Cancer - 63.1% first year, 7% renewal
CLICI/PSI Accident and All Other - 63.6% first year, 12.6% renewal
CSI Cancer, Accident and All Other - 63.6% first year, 14.6% renewal
These commission assumptions have been reduced by 25% to exclude employee
benefits and have had 2.4 percentage points subtracted for subsidies. (These
costs were added into the expenses shown below.)
Unit expenses were assumed to be as follows:
1.5% premium taxes
2.69% of premium
36.22% of commissions
$4.70 per policy
4.0% of claims
B-33
<PAGE>
Reserves
- --------
The following table summarizes the starting (6/30/96) unearned premium reserves
(UPR), claim reserves and additional policy reserves.
<TABLE>
<CAPTION>
=====================================================================
6/30/96 6/30/96
6/30/96 Claim Additional
UPR Reserve Reserves
Projection Cell: (000) (000) (000)
----------------------------------------------------------------------
<S> <C> <C> <C>
CLICI/PSI Cancer $4,138 $32,202 $37,318
CLICI/PSI Acc. 308 227 4,267
CLICI/PSI Other 314 3,616 4,519
CSI Cancer 118 596 1,171
CSI Acc. 69 65 623
CSI Other 280 387 1,903
Partners Med. Supp.* 533 443 0
======================================================================
</TABLE>
UPR reserves were modelled to be a consistent percentage of premiums inforce.
Claim reserves were modelled assuming that they stay constant as a percent of
claims incurred, and that there are no margins being released.
Additional policy reserves were modelled based on the reserve pattern developed
from our asset share modeling. We assumed the cancer reserves were gradually
strengthened over the next ten years.
Investment Income
- -----------------
Net investment earnings rates are based upon assets allocated to PAG.
B-34
<PAGE>
APPENDIX C
----------
Providian Direct Insurance Liability and Models
-----------------------------------------------
Property-Casualty Models and Assumptions
- ----------------------------------------
Providian's property & casualty operations (Providian) reflect personal lines
coverages, primarily private passenger automobile. The group's products are
distributed through three companies:
Providian Auto & Home Insurance Company
Providian Property & Casualty Insurance Company
Providian Fire Insurance Company
The group's core business is generated through its Direct Response programs,
utilizing direct mailings and telephone solicitation. Retention and growth of
this business is the group's primary strategic objective for the near future.
The book of business is actively reunderwritten at each renewal to more
accurately price the risk on a basis which is consistent with the exposure to
loss. This reunderwriting process has resulted in an improved loss ratio for
the retained book of business.
An additional business segment for private passenger business is administered by
Response International Corporation (RISC). This book of business was acquired
form Skandia Insurance Company in 1994. The company is also engaged in
retaining and growing this business segment.
The group also has a relatively small segment of business written through agency
channels, largely as an accommodation product for life insurance products
offered by affiliated companies. This business segment is not accepting new
risks. Any subsequent accommodation business will be placed with another
private passenger insurer.
The company has historically provided personal property coverage, however it
does not represent a significant proportion of the book of business. The
company is not accepting new personal property business and is in the process of
implementing an exit strategy for personal property coverage.
As a writer of private passenger exposure, the company has a participation in
assigned risk business.
Projected Underwriting Results
- ------------------------------
Direct response marketing requires that a significant amount of up-front costs
are expended in developing and maintaining the mailing lists and marketing
materials. In addition, personal lines business in general and direct response
business specifically is characterized by loss ratios on renewal business
typically being lower than loss ratios on new business. As such, a key
component in achieving future earnings projections is the ability to meet the
growth targets and achieve pricing improvements upon renewal.
The Company has provided a projection of the expected statutory underwriting
results for 1996 through 1999. In addition, a forecast for the runoff of the
in-force book of business as of December 31, 1996 was provided by Providian.
Using these estimates as a baseline, we have modified some of the assumptions
C-1
<PAGE>
and developed additional assumptions in order to project the expected results
for the runoff book. We developed calendar year projections and interpolated on
these to arrive at projected June 30th fiscal year projections. The change in
assumptions reflect M&R's analysis of the provided historical results and are
confined mainly in the expected maturity period for achieving an ultimate stable
loss ratio for a seasoned book of business.
Model Assumptions
- -----------------
The runoff forecast was developed by separately modeling five business segments
for Providian, namely: direct voluntary automobile, RISC automobile, assigned
risk automobile, agency automobile and personal property, including other
miscellaneous lines.
The following assumptions were determined directly from the historical
experience of Providian. At times the analysis of historical experience and
ultimate selection of a specific assumption was supplemented by Providian's
expected future provision for an item.
. provision for allocated & unallocated loss adjustment expense
. provision for salvage & subrogation
. loss and loss adjustment payment patterns
. salvage & subrogation payment patterns
. cost and performance of ceded reinsurance
. persistency curve
. premium taxes
. commissions
. earnings pattern
. service fees (premium financing)
In many of the above assumptions there were differences between the business
segments. For example, the loss & loss adjustment and salvage payment patterns
were determined by business segment.
General expenses are projected as 4.5% of premium. This level reflects
anticipated expenses which would arise from a consolidation with another large
automobile insurance provider.
Investment income reflects assets equal to unearned premium reserves plus loss
and LAE reserves. Investment earnings rates reflect the actual PDI portfolio
plus reinvestment of new money. The starting portfolio yield is 6.67% gross
effective. The majority of bonds are tax-exempt. The gross effective yield
assumed on new money is 5 Year Treasury minus 30 bp. These also are assumed to
be tax-exempt. Investment assumptions are detailed in Appendix A.
Core Life Models and Assumptions
- --------------------------------
The table on the following page provides a summary of the model used to project
the direct response life business in future years. Similar but separate models
were developed for the direct business and the CUNA Mutual business.
Additionally, some small blocks, such as old agency business, were projected
separate from the overall model. Issue ages within model plan were selected
based on the relative amounts of inforce by age. Minor plans were modelled into
the model plans which were most similar to the minor plan being modelled.
C-2
<PAGE>
A summary of overall model fit for insurance amount, policies, premium and
reserves is provided below.
<TABLE>
<CAPTION>
==========================================================================
PDI
Direct Response Life
Model Validation
----------------
June 30, 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Core CUNA
Business Mutual ETI Total
- --------------------------------------------------------------------------
Face: Actual $7,851,903 3,444,705 146,602 11,443,210
(000s) Model 7,849,927 3,374,225 146,602 11,370,754
Actual/Model 99.97% 102.09% 100.0% 99.37%
- --------------------------------------------------------------------------
Policies: Actual 959,648 190,316 34,199 1,184,163
Model 961,507 189,097 34,199 1,184,803
Actual/Model 100.19% 100.64% 100.0% 100.05%
- --------------------------------------------------------------------------
Annualized Actual 235,980 40,252 0 276,232
Premium: Model 235,925 40,019 0 275,944
(000s) Actual/Model 100.00% 100.58% 100.0% 100.10%
- --------------------------------------------------------------------------
Reserve: Actual 458,031 48,684 10,828 517,543
(000s) Model 457,989 47,547 11,111 516,647
Actual/Model 99.99% 102.39% 97.45% 99.83%
==========================================================================
</TABLE>
The CUNA Mutual business is 50% assumed by PDI. The ULLICO business is modelled
into the core block and is at 80% which is the percent assumed by PDI. The CUNA
Mutual model is not precise as we could not obtain detailed data as of June 30,
1996. We worked from available inforce data at December 31, 1995 and total data
only for June 30, 1996.
C-3
<PAGE>
<TABLE>
<CAPTION>
=========================================================================================
Providian Direct Insurance
Traditional Life Insurance Model
- -----------------------------------------------------------------------------------------
Providian
M&R Major Model
Model Plan Plan Code Description Issue Ages
- -----------------------------------------------------------------------------------------
Segment: Life
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
PR01 082 Whole Life - 1980 CSO 45,55,65,75
PR02 050 Whole Life- 1958 CSO 5,15,25,35,45,55,65
PR03 053 GBL - 58 CSO modified 45,55,65,75
PR04 60C GBL Substandard - 58 CSO modified 45,55,65,75
PR05* 6A2 GBL - 80 CSO modified 45,55,65,75
PR06 639 Whole Life - 1980 CSO Rider 45,55,65,75
PR07 608 Juvenile - Whole Life - 1980 CSO 5,15,25
PR08 642 Whole Life - Simplified Underwriting 55,65,75
- -----------------------------------------------------------------------------------------
Segment: Family Plan
- -----------------------------------------------------------------------------------------
PR09 650 Child Rider 5
- -----------------------------------------------------------------------------------------
Segment: Level Term
- -----------------------------------------------------------------------------------------
PR10 15A Substandard Step Rated Term to Age 70 25,35,45,55
PR11* 150 Step Rated Term to Age 70 25,35,45,55
PR12* 193 Term to Age 75 35,45,55,65,75**
- -----------------------------------------------------------------------------------------
Segment: Other Term
- -----------------------------------------------------------------------------------------
PR13 680 Decreasing Term, Graded DB first two 35,45,55,65
years, Guaranteed Issue
==========================================================================================
</TABLE>
* CUNA Mutual model plan also
** Age 75 treated as ten year term
Assumptions
- -----------
Assumptions used to project the direct response life business are based on our
review of recent PDI experience as well as industry experience. The assumptions
are described below.
Mortality -- Mortality assumptions are based on PDI's historic experience
levels with greater weight being given to recent experience. Mortality
multiples are expressed as percentages of either the 1969-71 U.S.
Population Table (for Guaranteed Issue business) or the 1965-70 Select and
Ultimate Table (for underwritten business).
PDI changed their underwriting procedures and improved their market
targeting in 1994. They believe the 94-96 life business may have better
mortality than would be recognized by reviewing historic experience. If
this emerges, actual results may be better than our projections.
C-4
<PAGE>
The following assumptions were used for the core life business:
<TABLE>
<CAPTION>
=======================================================================
Model Plan: PR12
Level Term Underwritten Mortality Assumptions
Multiples of 1965-70 Select and Ultimate
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Male for Ages Under Female for Ages under
Duration ------------------------------------------------------------
54 59 64 99 54 59 64 99
- -----------------------------------------------------------------------
1 3.44 2.92 2.42 2.00 2.99 3.10 2.41 2.00
2 3.33 2.87 2.44 2.14 3.06 3.11 2.18 1.84
3 3.25 2.81 2.45 2.18 3.05 3.11 2.13 1.83
4 2.79 2.51 2.21 1.95 2.72 2.76 1.89 1.60
5 2.46 2.30 2.05 1.77 2.50 2.58 1.67 1.43
6 2.33 2.25 2.02 1.70 2.46 2.56 1.56 1.37
7 2.25 2.22 1.99 1.66 2.38 2.52 1.55 1.35
8 2.16 2.17 1.92 1.58 2.25 2.33 1.56 1.29
9 2.09 2.11 1.84 1.51 2.11 2.11 1.57 1.25
10 2.04 2.03 1.76 1.47 2.03 2.00 1.57 1.22
11 1.95 1.92 1.65 1.42 1.96 1.94 1.50 1.18
12 1.83 1.78 1.53 1.37 1.89 1.84 1.38 1.13
13 1.70 1.65 1.40 1.31 1.81 1.65 1.24 1.08
14 1.61 1.56 1.34 1.27 1.71 1.47 1.10 1.03
15 1.53 1.48 1.29 1.22 1.61 1.32 1.00 1.00
16 1.44 1.39 1.23 1.18 1.51 1.17 0.92 1.00
17 1.36 1.31 1.17 1.13 1.40 1.10 0.92 1.00
18 1.27 1.22 1.11 1.09 1.30 1.03 0.92 1.00
19 1.19 1.14 1.06 1.04 1.20 0.98 0.92 1.00
20+ 1.10 1.05 1.00 1.00 1.10 0.95 0.92 1.00
=======================================================================
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
=====================================================================================
Model Plan: PR13
Guaranteed Issue GT2/GLT Mortality Assumptions
Multiples of 1969-71 White Population
- -------------------------------------------------------------------------------------
Male for Ages Under Female for Ages Under
- -------------------------------------------------------------------------------------
Duration 47 52 57 62 67 47 52 57 62 67
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3.36 2.03 1.75 1.19 1.05 3.22 1.86 1.47 1.09 0.74
2 3.96 2.64 2.16 1.50 1.32 3.18 2.64 1.86 1.56 1.20
3 4.13 2.85 2.18 1.80 1.50 3.15 2.55 2.03 1.73 1.43
4 3.23 2.40 1.95 1.73 1.43 2.85 1.95 1.80 1.65 1.43
5 2.63 2.25 1.88 1.65 1.35 2.55 1.88 1.73 1.58 1.35
6 2.40 2.10 1.80 1.58 1.35 2.33 1.80 1.73 1.50 1.35
7 2.10 1.95 1.73 1.50 1.35 2.10 1.73 1.65 1.50 1.35
8 1.89 1.81 1.60 1.38 1.31 1.81 1.60 1.60 1.38 1.31
9 1.75 1.68 1.47 1.26 1.26 1.61 1.47 1.47 1.33 1.26
10 1.69 1.62 1.42 1.22 1.22 1.55 1.42 1.42 1.28 1.22
11 1.63 1.56 1.37 1.17 1.17 1.50 1.37 1.37 1.24 1.17
12 1.56 1.50 1.31 1.13 1.13 1.44 1.31 1.31 1.19 1.13
13 1.50 1.44 1.26 1.08 1.08 1.38 1.26 1.26 1.14 1.08
14 1.44 1.38 1.22 1.04 1.04 1.34 1.21 1.21 1.09 1.04
15 1.39 1.33 1.19 0.99 0.99 1.30 1.16 1.16 1.05 0.99
16 1.33 1.27 1.15 0.99 0.99 1.26 1.13 1.12 1.04 0.99
17 1.27 1.22 1.11 0.99 0.99 1.22 1.11 1.07 1.03 0.99
18 1.21 1.16 1.07 0.99 0.99 1.18 1.09 1.06 1.02 0.99
19 1.16 1.11 1.04 0.99 0.99 1.14 1.07 1.03 1.01 0.99
20+ 1.10 1.05 1.00 0.99 0.99 1.10 1.05 1.00 1.00 0.99
=====================================================================================
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
=================================================================================
Model Plans: PR10, PR11
Term 70 Mortality Assumptions
Multiples of 1965-70 Select and Ultimate
- ---------------------------------------------------------------------------------
Male for Ages Under Female for Ages Under
--------------------------------------------------------------------
Duration 29 39 49 70 29 39 49 70
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 1.88 1.38 1.47 1.33 1.37 0.96 1.24 1.40
2 1.92 1.60 1.42 1.29 1.11 0.88 1.10 1.29
3 2.33 2.10 1.68 1.64 1.47 1.36 1.54 1.71
4 1.86 1.82 1.29 1.27 1.27 1.16 1.29 1.49
5 1.74 1.73 1.20 1.22 1.21 1.16 1.24 1.43
6 1.66 1.66 1.13 1.18 1.16 1.16 1.19 1.37
7 1.60 1.56 1.04 1.13 1.16 1.11 1.15 1.31
8 1.52 1.52 1.00 1.08 1.11 1.11 1.10 1.31
9 1.44 1.41 0.95 1.08 1.11 1.11 1.05 1.26
10 1.35 1.37 0.91 1.03 1.05 1.05 1.00 1.26
11 1.34 1.37 0.96 1.04 1.08 1.08 1.04 1.22
12 1.32 1.37 1.02 1.06 1.12 1.11 1.06 1.18
13 1.30 1.36 1.08 1.07 1.15 1.15 1.09 1.14
14 1.27 1.36 1.10 1.08 1.17 1.17 1.13 1.10
15 1.26 1.36 1.19 1.09 1.20 1.20 1.15 1.06
16 1.24 1.33 1.18 1.09 1.20 1.20 1.15 1.06
17 1.22 1.30 1.18 1.09 1.20 1.20 1.15 1.06
18 1.21 1.27 1.18 1.09 1.20 1.20 1.15 1.06
19 1.19 1.25 1.18 1.08 1.20 1.20 1.15 1.06
20+ 1.16 1.22 1.18 1.08 1.20 1.20 1.15 1.06
=================================================================================
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
===========================================================================
Model Plan: PR08
Simplified Issue Whole Life Mortality Assumptions
Multiples of 1965-70 Select and Ultimate
- ---------------------------------------------------------------------------
Male for Ages Under Female for Ages Under
--------------------------------------------------------------
Duration 59 69 79 59 69 79
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 2.98 2.47 2.04 3.12 2.43 2.01
2 2.88 2.45 2.15 3.11 2.19 1.84
3 2.81 2.45 2.18 3.11 2.13 1.83
4 2.51 2.21 1.95 2.76 1.89 1.60
5 2.30 2.05 1.77 2.58 1.67 1.43
6 2.25 2.02 1.70 2.56 1.56 1.37
7 2.22 1.99 1.60 2.52 1.55 1.35
8 2.15 1.90 1.57 2.31 1.55 1.31
9 2.13 1.86 1.53 2.14 1.58 1.26
10 2.05 1.78 1.49 2.02 1.58 1.23
11 1.94 1.67 1.44 1.96 1.51 1.19
12 1.80 1.55 1.39 1.86 1.39 1.14
13 1.67 1.42 1.32 1.66 1.25 1.09
14 1.53 1.29 1.25 1.48 1.11 1.04
15 1.40 1.18 1.18 1.33 1.01 0.99
16 1.33 1.15 1.15 1.18 0.93 0.95
17 1.26 1.13 1.13 1.11 0.93 0.95
18 1.19 1.10 1.10 1.04 0.92 0.95
19 1.12 1.08 1.08 0.99 0.92 0.95
20+ 1.05 1.05 1.05 0.96 0.92 0.95
===========================================================================
</TABLE>
C-8
<PAGE>
<TABLE>
<CAPTION>
================================================================================================
Model Plans: PR01, PR02, PR06
Whole Life Mortality Assumptions
Multiples of 1965-70 Select and Ultimate
- ------------------------------------------------------------------------------------------------
Male for Ages Under Female for Ages Under
-----------------------------------------------------------------------------------
Duration 29 39 49 59 99 29 39 49 59 99
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2.97 2.27 2.49 2.10 2.03 2.00 1.33 2.00 1.78 1.68
2 2.48 1.97 2.28 1.91 1.82 1.60 1.18 1.75 1.48 1.38
3 2.18 1.83 2.16 1.82 1.75 1.38 1.13 1.58 1.38 1.20
4 1.99 1.71 2.04 1.73 1.66 1.30 1.10 1.48 1.33 1.15
5 1.87 1.62 1.92 1.63 1.56 1.25 1.10 1.40 1.28 1.13
6 1.75 1.53 1.80 1.54 1.49 1.20 1.05 1.35 1.25 1.08
7 1.65 1.44 1.68 1.45 1.42 1.18 1.05 1.30 1.20 1.08
8 1.56 1.35 1.59 1.38 1.13 1.13 1.04 1.25 1.18 1.08
9 1.50 1.31 1.53 1.35 1.12 1.11 1.04 1.23 1.17 1.08
10 1.44 1.28 1.47 1.31 1.12 1.10 1.03 1.20 1.15 1.08
11 1.38 1.24 1.41 1.28 1.11 1.08 1.02 1.18 1.14 1.07
12 1.32 1.21 1.36 1.25 1.10 1.07 1.01 1.16 1.13 1.07
13 1.27 1.18 1.31 1.22 1.10 1.05 1.01 1.14 1.12 1.07
14 1.22 1.15 1.26 1.19 1.09 1.04 1.00 1.11 1.10 1.07
15 1.17 1.11 1.21 1.16 1.08 1.02 0.99 1.09 1.09 1.06
16 1.12 1.08 1.16 1.13 1.07 1.01 0.99 1.07 1.07 1.05
17 1.08 1.06 1.12 1.10 1.05 1.00 0.98 1.05 1.06 1.04
18 1.03 1.03 1.07 1.07 1.03 0.98 0.97 1.03 1.04 1.03
19 0.99 1.00 1.03 1.03 1.02 0.97 0.97 1.01 1.02 1.01
20+ 0.95 0.97 0.99 1.00 1.00 0.95 0.97 0.99 1.01 1.00
================================================================================================
</TABLE>
C-9
<PAGE>
<TABLE>
<CAPTION>
========================================================================================
Model Plans: PR03, PR04, PR05
GBL Mortality Assumptions
Multiples of 1969-71 White Population
- ----------------------------------------------------------------------------------------
Male for Model Ages Female for Model Ages
----------------------------------------------------------------------------
Duration 47 52 57 62 67 47 52 57 62 67
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 5.70 3.47 2.95 2.00 1.81 5.46 3.14 2.47 1.81 1.24
2 3.99 2.70 2.19 1.50 1.20 3.24 2.64 1.90 1.55 1.15
3 3.40 2.36 1.83 1.46 1.14 2.61 2.15 1.67 1.36 1.14
4 2.61 1.88 1.57 1.31 1.12 2.36 1.57 1.46 1.31 1.12
5 2.09 1.78 1.46 1.25 1.10 2.09 1.46 1.36 1.25 1.10
6 1.91 1.75 1.43 1.25 1.09 1.91 1.43 1.31 1.25 1.09
7 1.64 1.64 1.31 1.21 1.08 1.64 1.31 1.25 1.21 1.08
8 1.53 1.53 1.25 1.15 1.06 1.43 1.25 1.25 1.15 1.06
9 1.48 1.67 1.20 1.14 1.05 1.37 1.25 1.20 1.14 1.05
10 1.43 1.37 1.20 1.08 1.05 1.32 1.20 1.20 1.08 1.05
11 1.40 1.35 1.19 1.08 1.04 1.31 1.19 1.19 1.08 1.04
12 1.38 1.32 1.18 1.08 1.04 1.30 1.19 1.18 1.08 1.04
13 1.36 1.30 1.17 1.07 1.03 1.28 1.18 1.17 1.07 1.03
14 1.34 1.28 1.16 1.07 1.03 1.27 1.18 1.16 1.07 1.03
15 1.31 1.26 1.15 1.07 1.02 1.26 1.17 1.15 1.07 1.02
16 1.29 1.24 1.14 1.06 1.02 1.25 1.17 1.14 1.06 1.02
17 1.27 1.22 1.13 1.06 1.01 1.24 1.16 1.13 1.06 1.01
18 1.24 1.19 1.12 1.06 1.01 1.21 1.16 1.13 1.06 1.01
19 1.22 1.17 1.11 1.05 1.00 1.20 1.15 1.11 1.05 1.00
20+ 1.20 1.15 1.10 1.05 1.00 1.20 1.15 1.10 1.05 1.00
========================================================================================
</TABLE>
<TABLE>
<CAPTION>
==============================================================
Model Plan: PR07
Juvenile Whole Life
Mortality Assumptions
Multiples of 1969-71 White Population
--------------------------------------------------------------
Scaling Factor
Duration (Applied to all ages)
--------------------------------------------------------------
<S> <C>
1 67%
2 70
3 75
4 80
4 85
5+ 90
==============================================================
</TABLE>
Mortality assumptions for the Child Rider plan (PR09) are the same as those
used for the Academy Children's Term Rider plan discussed later in this
section.
C-10
<PAGE>
For the three CUNA Mutual plans, only a male life model was constructed. To
compensate for the better CUNA Mutual experience and the 66% of the CUNA Mutual
business that is female, we utilized the following scaling factors applied to
the overall mortality:
<TABLE>
<CAPTION>
==============
<S> <C>
GBL 44%
-------------
Term 70 55%
-------------
LTU 44%
==============
</TABLE>
ETI Mortality: 70% of 1958 CET Table.
RPU Mortality: 100% of 1969-71 White population.
Lapse rates
- -----------
Lapse assumptions were developed based on termination studies provided by PDI
and a review of assumptions being utilized in recent pricing.
A summary of the PDI direct response life lapse assumptions is provided below.
<TABLE>
<CAPTION>
===========================================================================
Lapse Rates -- Direct Business
- ---------------------------------------------------------------------------
Model Plans
- ---------------------------------------------------------------------------
PR10,PR11 PR01,PR02PR06,PR07 PR08
Policy Year Term 70 Whole Life Simplified Issue Whole Life
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
1 40% 22% 26%
2 20 11 12
3 15 8 8
4 14 7 7
5 13 6 6
6-10 10 5 5
11+ 8 3 3
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
===================================================================
Model Plans
-------------------------------------------------------------------
PR03,PR04,PR05 PR13
Policy Year PR12 LTU GBL GIT/GLT
-------------------------------------------------------------------
<S> <C> <C> <C>
1 33% 30% 35%
2 15 12 14
3 10 8 11
4 8 6 10
5 8 4 9
6-10 8 3 9
11+ 8 3 9
===================================================================
</TABLE>
C-11
<PAGE>
Lapse assumptions for the Child Rider plan are the same as those used for the
Academy Children's Term Rider plan discussed later in this section.
<TABLE>
<CAPTION>
==================================
Lapse Rates Cuna Mutual
----------------------------------
Policy Year Term 70 LTU GBL
----------------------------------
<S> <C> <C> <C>
1 25% 20% 25%
2 18 8 8
3 15 7 4
4 12 6 3
5 10 6 3
6-10 9 6 2
11+ 9 6 3
==================================
</TABLE>
RPU Lapse: 2% all years.
ETI Lapse: 0% all years.
ETI from Existing Business
- --------------------------
Upon surrender, not all of the surrender value is paid out in cash but rather
some of the cash is retained within the Company under nonforfeiture options
other than cash surrender. The vast majority of PDI's non-cash nonforfeiture
elections are for extended term insurance, which is the automatic option.
To reflect the profit from extended term expected to arise from the June 30,
1996 in force, as well as from new business written, we applied two factors to
every dollar of projected surrender value paid from core life premium paying
business.
The first factor reflects the proportion of surrender values we assume will be
retained by the Company as extended term. This factor was developed based upon
PDI's valuation of how much business went into extended term as a percentage of
total gross surrender values paid (before reflecting amounts going on to
extended term). The factor was estimated as 35% for core life.
The second factor reflects the present value of profit per dollar of cash value
which is retained as extended term or reduced paid-up. We calculated this based
on the relationship of present value of profit to reserve that resulted from the
existing business projections of extended term included in this analysis.
C-12
<PAGE>
The pre-tax value then attributable to extended term arising from the June 30,
1996 in force is:
<TABLE>
<CAPTION>
=====================================================================================
(1) (2) (3) (4) = (1) x (2) x (3)
P.V. of Gross Proportion of P.V. Profit per P.V. Profit of
Cash (1) Retained As $1.00 Retained Extended Term
Discount Surrenders Extended Term As Extended Arising From
Rate Projected Insurance Term Insurance Existing Inforce
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
9% $101.3 .35 .33 $11.7
11% 89.9 .35 .31 9.7
13% 80.6 .35 .28 7.9
=====================================================================================
</TABLE>
The amounts from surrenders arising from projected new sales was similarly
developed as shown below.
<TABLE>
<CAPTION>
=====================================================================================
(1) (2) (3) (4) = (1) x (2) x (3)
P.V. of Gross Proportion of P.V. Profit per P.V. Profit of
Cash (1) Retained As $1.00 Retained Extended Term
Discount Surrenders Extended Term As Extended Arising From
Rate Projected Insurance Term Insurance Existing Inforce
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
9% $99.0 .35 .33 $11.4
11% 77.8 .35 .31 8.4
13% 61.9 .35 .28 6.1
=====================================================================================
</TABLE>
Expense and Commissions
- -----------------------
Expense assumptions were based on PDI pricing assumptions. These do not cover
all expenses of PDI. PDI also provided a total expense projection including
corporate overhead, direct marketing costs and indirect marketing costs.
Projected total expenses in excess of those produced by the following expense
factors are detailed in Section II.
<TABLE>
<CAPTION>
Expenses
===========================================================================
<S> <C>
Maintenance $9.65/policy ($10 for ETI)
Claims $80/claim (except $335 for years 1, 2)
Premium Taxes 3%
Other Percent of Premium Expenses 2.5%
Commissions .8% of premium
Expense Inflation 3%
===========================================================================
</TABLE>
C-13
<PAGE>
Direct marketing costs were projected as the following percent of annualized
premium issued:
<TABLE>
<CAPTION>
===========================================
Projection Direct
Year Marketing Expenses
-------------------------------------------
<S> <C>
1 88.3%
2 82.1
3-on 85.3
===========================================
=======================================================================
Expenses -- Cuna Mutual
- -----------------------------------------------------------------------
Maintenance $8.25/policy GLT and LTU;
$7.50/policy T-370 and GBL
Claims 0
Premium Taxes 3%
Other Percent of Premium Expenses 2.0% for GLT; 1% for T-70 and GBL;
1.7% for LTU
Commissions Year 1: 6.25%
Year 2+: 3.25%
Expense Inflation 3%
- -----------------------------------------------------------------------
</TABLE>
Gross Premiums and Modal Distribution
- -------------------------------------
We used the annualized premium for the modelled plan cell as provided on tape to
M&R by PDI. We reviewed the modal distributions and selected a monthly mode
which is representative of the inforce.
Reserves, Cash Values, Net Premium
- ----------------------------------
Reserves, cash values, and net premiums incorporated into the models were
provided to M&R on tape by PDI.
Investment Income
- -----------------
Investment income was calculated based upon investments allocated to PDI, along
with a new money assumption on cash flow. The starting portfolio yield, before
policy loans, is 8.20% gross effective. The gross effective yield on new money
is 7.61%. Asset assumptions are detailed in Appendix A.
Policy loans were assumed to remain at a level percent (7.76%) of cash value
based on the aggregate amounts at June 30, 1996. Policy loans are assumed to
earn an average rate of 5.74%.
C-14
<PAGE>
Planned Rate Increase
- ---------------------
PDI currently is reviewing the rates on their T-70 Veterans Business. They
expect that they will file and implement a 15-20% rate increase on this $41.2
million premium block early in 1997. We tested the impact of a 15% rate increase
assuming a) 90% approval, b) an effective date of the policy anniversary after
July 1, 1997, c) a 4.5% shock lapse and d) a 2.3% increase in mortality
(resulting from the shock lapse) grading off over five years. Using these
assumptions, we computed that the implementation of a 15% rate increase could
increase the pretax actuarial values as follows:
<TABLE>
<CAPTION>
========================================
Value Increase from 15%
Discount Rate T-70 Rate Increase
----------------------------------------
<C> <S>
9% $20.9 million
11 18.4 million
13 16.3 million
========================================
</TABLE>
New Business
- ------------
New business was assumed to consist of the following five plans (with average
size shown):
<TABLE>
<CAPTION>
===========================================
Plan Average Size
-------------------------------------------
<S> <C>
LTU-75 $3,650
-------------------------------------------
Simplified Issue Whole Life 2,410
-------------------------------------------
Whole Life 3,760
-------------------------------------------
ADB Rider N/A
-------------------------------------------
Universal Model $1,600 Term
$8,400 ADD
===========================================
</TABLE>
Assumptions were kept consistent with those of existing business with the
exceptions that:
A. Universal Model uses PDI pricing assumptions
B. ADB Rider was modelled like the health ADB plan
C. The Whole Life reflects conversion of inforce business. We used
mortality assumptions consistent with the simplified underwritten whole
life plan for this business.
C-15
<PAGE>
Policy issue and marketing costs were provided by PDI:
<TABLE>
<CAPTION>
========================================
Percent of Paid
Issue Period for Premium Issued
- ----------------------------------------
<S> <C>
7/96-6/97 88.3%
7/97-6/98 82.1
7/99+ 85.3
- ----------------------------------------
</TABLE>
Premium issued was provided by PDI by a combination of product and market types.
We assigned model plans as follows:
<TABLE>
<CAPTION>
======================================================================
Year Ending
---------------------------------------------------
6/97 6/98 6/99 6/00
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
LTU $ 8,519 $13,105 $14,520 $ 15,840
SUWL 8,530 12,786 14,366 15,573
Universal Model 22,119 48,164 57,500 66,625
ADB Rider 4,202 5,088 5,687 6,173
Whole Life 4,957 4,673 4,588 4,703
- ----------------------------------------------------------------------
Total $48,327 $83,816 $96,661 $108,913
======================================================================
</TABLE>
For subsequent years, 5% growth is assumed.
Minor Plans and Miscellaneous Reserves
- --------------------------------------
Old Agency -- PDI has a small block of agency business consisting of $8.9
million of annuity reserves and $16.8 million of life reserves. We projected
these in aggregate using a combination of a) the past several years actual
experience and b) assumptions and projections provided by PDI.
Miscellaneous Reserves -- We ran off $6.1 million of non-deduction reserves,
$5.8 million of IPC reserves and $4.7 million of a special AIDS adjustment
reserve in proportion to the traditional business.
C-16
<PAGE>
Non-Projected Business
- ----------------------
The following reserves were not projected:
<TABLE>
<CAPTION>
=========================================================================
Providian First
Life & Health Veterans Life Providian
- -------------------------------------------------------------------------
(in millions)
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Paid-Up Business $ 1.6 $ .3 $ .1
Supplemental Benefits 1.8 2.1
Supplemental Contracts .5
Extra Life .3 .3 .2
Disabled Life Reserve .3
Waiver of Premium .1
Union Privilege Block 3.4
Agency Universal Life 2.3
Kroger Life 1.0
Healthy Life Annuity .7
SPDA .1
Laurier Life 1.7
Ceded Business (.4)
- -------------------------------------------------------------------------
11.4 4.4 .3
- -------------------------------------------------------------------------
Total not Projected $16.1
=========================================================================
</TABLE>
Core Health Model and Assumptions
- ---------------------------------
The following table summarizes the policies inforce and the annualized premiums
inforce as of June 30, 1996 for each projection model plan.
<TABLE>
<CAPTION>
=========================================================================
6/30/96
Premiums 6/30/96
Plan Inforce Policies
Line of Business Name (000s) Inforce
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Accidental Death & Dismemberment ADD 27,386 304,365
Hospital Accident Plan HAP 16,766 179,781
Hospital Indemnity Plan HIP 49,511 284,712
Medicare Supplement MSUP 48,536 37,120
FHA Prescription Drugs & Dental FEEB 5,393 14,347
=========================================================================
</TABLE>
C-17
<PAGE>
Policies and premiums inforce and reserves were obtained from data tapes
supplied by PDI. For ADD, HAP, and HIP we pro-rated the inforce premium down by
$4 million from the tape data due to the fact that the tape contains policies up
to 85 days past due date and only a small portion of these policies are expected
to remain inforce. Claim reserves and UPR were not available by plan so
aggregate assumptions were utilized. The following describes special policy
provisions utilized and model ages used:
<TABLE>
<CAPTION>
=======================================================================
M&R Model Plan Model Ages Special Benefit Provisions
-----------------------------------------------------------------------
<S> <C> <C>
ADD 25,35,45,55,62 Benefits reduce 50% at age 75
-----------------------------------------------------------------------
HAP 25,35,45,55,62,70 Benefits reduce 50% at age 70
-----------------------------------------------------------------------
HIP 25,35,45,55,62,70 Benefits reduce 50% at age 65
for first 60 hospital days
(effective 47% reduction)
-----------------------------------------------------------------------
MSUP 67,72,77,82 Modelled as Plan C; includes
Medicare Select
-----------------------------------------------------------------------
FEEB 50 (age not relevant) --
=======================================================================
</TABLE>
Assumptions
- -----------
Assumptions used to project the direct response health business are based on our
review of recent PDI experience as well as industry experience. The assumptions
are described below.
Morbidity
---------
Claim cost curves were developed for each modelled policy based on PDI's
pricing curves modified by our review of recent experience. The aggregate
claim costs for each model plan were then validated to the actual levels
currently produced by that product with consideration of trends, recent
rate increases, and removal of adjustments to claim levels.
Following shows the initial and first projection year incurred loss ratios
for each model plan:
<TABLE>
<CAPTION>
=====================================
Initial First
Loss Ratio Projection Year
-------------------------------------
<S> <C> <C>
ADD 39.6% 37.5%
HAP 19.7 19.9
HIP 44.0 44.7
MSUP 66.9 67.5
FEEB N/A N/A
=====================================
</TABLE>
For FEEB there are no claim costs as this is a prescription drug discount
card program.
C-18
<PAGE>
For MSUP we included a trend for claims inflation (including utilization)
and anticipated rate increases. These are:
<TABLE>
<CAPTION>
============================================
Year Ending Rate Increases Inflation
--------------------------------------------
<S> <C> <C>
6/97 13.5% 7.51%
6/98 9.0 7.00
6/99 and later 9.0 7.00
============================================
</TABLE>
The rate increase timing and claims inflation are assumed to occur half way
through the projection year.
Termination Rates
-----------------
Lapse rate assumptions were developed so that so that voluntary lapses plus
mortality would tie to actual historical termination rates for the blocks
of business being projected. No explicit mortality factor was included. The
following table summarizes, by policy year, the voluntary lapse assumption
used for each model plan:
<TABLE>
<CAPTION>
=================================================
Duration ADD HAP HIP MSUP FEEB
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 35% 50% 60% 23% 55%
2 25 30 22 18 40
3 15 20 18 15 33
4 13 18 17 15 33
5 11 16 16 15 33
Grade to 11+ 11 10 14 15 33
=================================================
</TABLE>
Expenses and Commissions
------------------------
Expense assumptions were based on PDI pricing assumptions. These do not
cover all expenses of PDI. PDI also provided a total expense projection
including overhead, direct marketing costs and indirect marketing costs.
Projected total expenses in excess of those produced by the following
expense factors are detailed in Section II.
Direct marketing costs were projected as the following percent of
annualized premium issued.
<TABLE>
<CAPTION>
==========================
Direct
Projection Marketing
Year Expenses
---------------------------
<S> <C>
1 70.2%
2 59.8
3-on 62.4
==========================
</TABLE>
C-19
<PAGE>
Maintenance
-----------
ADD $16.43 per policy and rider, plus 2% of premium
HAP $20.50 per policy and rider, plus 2% of premium
HIP $22.34 per policy and rider, plus 2% of premium
MSUP $41.20 per policy, plus 1.5% of premium
FEEB $ 5.77 per policy and rider, plus 2% of premium
Premium Tax
-----------
3.0% of premium (0% for FEEB)
Expense Inflation
-----------------
3% annually applied to per policy expenses.
Commissions
-----------
Medicare Select:
<TABLE>
<CAPTION>
==============================
Percent of
Year First Year Premium*
-------------------------------
<S> <C>
1 30.75%
2-6 27.00
7-10 10.00
11+ 6.00
==============================
</TABLE>
* commission is expressed as a percent of premium at issue; with
inflation the effective commission decreases over time.
FEEB: 17% of premium (for this product the commission covers the bank
payment and any expenses of customer management; there are no claims
in this product.
ADD/HAP/HIP/Other MSUP: 5% of premium
Premiums and Mode
-----------------
Premiums per policy unit derived by M&R from the tape provided by PDI and
used to develop the model.
All modal payments were assumed to be monthly except for MSUP for which we
used the pricing assumption of:
<TABLE>
<CAPTION>
==================
<S> <C>
Monthly 40%
Quarterly 20%
Annual 40%
==================
</TABLE>
C-20
<PAGE>
Reserves
--------
Unearned premium reserves were modelled as a constant percent of June 30
premiums inforce. Claim reserves were modelled assuming that they stay
constant as a percent of claims incurred, and that there are no margins
being released.
Additional policy reserve factors were provided by PDI. The level of
reserves were adjusted to validate the model. Mid-terminal reserves are
established in addition to the gross unearned premium reserves.
The following table summarizes the starting (6/30/96) unearned premium
reserve (UPR), claim reserve and additional policy reserves that were
assumed for the projection:
<TABLE>
<CAPTION>
==================================================================
6/96 UPR 6/96 Claim Reserve 6/96 Policy Reserves
Model Plan (000s) (000s) (000s)
------------------------------------------------------------------
<S> <C> <C> <C>
ADD $3,476 $ 5,393 $ 1,246
HAP 3,169 1,237 6,179
HIP 7,884 8,115 41,286
MSUP 4,845 10,545 15,557
FEEB N/A N/A N/A
==================================================================
</TABLE>
Investment Income
-----------------
Investment income was calculated based upon investments allocated to PDI,
along with a new money assumption on cash flow. The starting portfolio
yield is 8.20% gross effective. The gross effective yield on new money is
7.61%. Asset assumptions are detailed in Appendix A.
C-21
<PAGE>
New Business
------------
New business utilized the same five model plans as of existing business.
Assumptions were kept consistent with those of existing business with the
exception off:
a) HAP termination rate in year 1 is 40%, year 2 is 25%, reflecting
the removal of television promotion,
b) Medicare Supplement was projected with an ultimate rate increase
of 8% (1% over trend) to recognize expected maintenance of a 65%
lifetime loss ratio,
c) policy issue and direct marketing costs which were provided by
PDI.
<TABLE>
<CAPTION>
=======================================
Percent of
Issue Period Paid for Premium Issued
----------------------------------------
<S> <C>
7/96-6/97 70.2%
7/97-6/98 59.8
7/99+ 62.4
=======================================
</TABLE>
Premium to be written was provided by PDI by a combination of product and
market type. We assigned model plans as follows:
<TABLE>
<CAPTION>
=====================================================
6/97 6/98 6/99 6/00
-----------------------------------------------------
<S> <C> <C> <C> <C>
ADD $ 5,373 $ 8,367 $ 9,983 $11,483
HIP 1,739 6,281 7,326 8,780
HAP 5,851 13,759 17,616 20,120
Medicare Select 3,685 7,749 7,564 7,878
Fee Base 5,913 7,402 8,650 9,123
-----------------------------------------------------
Total $22,561 $43,557 $51,140 $57,384
=====================================================
</TABLE>
For subsequent years, 5% growth is assumed.
Minor Plans
-----------
Old Agency PDI -- has a small block of agency business consisting of about
$1.6 million of health premium. We projected this in aggregate using a
combination of the past several years actual experience and assumptions and
projections provided by PDI.
Garden State -- PDI has a small block of Medicare Supplement business which
they assumed from Garden State Life Insurance Company which consists of
about $3.2 million of premium. We projected this in aggregate using annual
rate increases of 7%, claims trend of 7.51% in 1997, and 7% thereafter. All
other assumptions are the same as Medicare Supplement.
C-22
<PAGE>
Rate Increase Reserve -- at June 30, 1996 Providian is holding a reserve of
$4,992,000 for the fact that reserve factors are not adjusted when rate
increases are taken. We projected this to run off in proportion to
reserves.
Non-Projected Business
All the PDI health business was projected.
Academy and Pension Life Model and Assumptions
PDI purchased Academy Life Insurance Company and Pension Life Insurance Company
in 1992. The business in these companies is mainly business sold through the
Non-Commissioned Officers Association (NCOA) to current and former military
personnel. Some Student, old direct response, and other business is also in
these companies. We modelled these companies in five segments:
1. Interest Sensitive Military Life
2. Deposit Funds and Dividend Accumulations
3. Old Military Life and other Traditional Life
4. Health
5. Miscellaneous Other Business
For descriptive purposes in this section, the term "Academy" encompasses the
business written in both Academy Life and Pension Life.
Interest Sensitive Life Insurance Model and Assumptions
The Interest Sensitive Life Insurance Business (UL) for Academy consists of
$52.6 million of annualized premium and $5,751 million of insurance inforce
at June 30, 1996. The inforce block of business includes business issued
under four plans since 1987 as well as converted policies from Academy's
traditional life insurance block of business. This business is offered only
to military personnel.
This business also includes a spouse rider which can be attached to each
plan. We projected the spouse rider with the traditional life business.
For most plans, a majority of the premium is collected under monthly
government allotment mode. Therefore, although much of the interest
sensitive business consists of flexible premium products, they function
like fixed premium products.
GS-1 is a fixed premium, high cash value plan. The policyholder's
accumulation value is credited with a fund premium which is the gross
premium less a percent of premium expense load. The policyholder is
provided a vanishing premium option when the net surrender value exceeds
the guaranteed cash value by at least the amount of one annual premium due.
Children's Term Insurance, Option to Buy Additional Insurance, Waiver of
Premium, and the ability to participate in the Retirement/Premium Deposit
fund are provided with no explicit premiums or cost of insurance charges to
the policyholder. All policies issued after August 8, 1991 include a
Military Service Benefit (50% of face if death in war), a POW/MIA benefit
(waives premium), and
C-23
<PAGE>
Permanent Change of Status (PCS) rider (10% of face while in transit to new
status) with no additional explicit cost of insurance charges or premiums.
GS-2 is a flexible premium UL plan. The policyholder is given a guarantee that
the policy will not lapse in the first five years if the basic premium amount
for the policy is paid (even though the cash surrender value could be zero).
Children's Term Insurance, Option to Buy Additional Insurance, Waiver of
Premium, and the ability to participate in Retirement/Premium Deposit fund are
provided with no explicit premiums or cost of insurance charges to the
policyholder.
GS-4 is a flexible premium plan. GS-4 is designed to appeal to both the younger
and older military market, with military benefits and a bonus feature to
emphasize long term savings. The product has non-smoker/smoker distinct COIs.
GS-3 is modelled into this plan as there have been few GS-3 sales. As with GS-2,
the policyholder is given a guarantee that the policy will not lapse in the
first five years if the minimum premium amount is paid (even though the cash
surrender value could be zero).
All policies issued after August 8, 1991 include a Military Service Benefit, a
POW/MIA benefit, and PCS identical to those provided in GS-1 with no additional
explicit cost of insurance charges or premiums.
Interest Sensitive Life Insurance Model
Table V-1 provides the gross and net annualized premiums, face amount and
reserves as of June 30, 1996.
<TABLE>
<CAPTION>
Table V-1
Interest Sensitive Life Model As Of June 30, 1996
-------------------------------------------------
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
<S> <C>
Before Reinsurance
-------------------------------------------------------
GS-1 Annualized Premiums 11,117
Statutory Reserves 28,357
Face Amount 1,010,450
-------------------------------------------------------
GS-2 Annualized Premiums 24,879
Statutory Reserves 56,506
Face Amount 2,891,335
-------------------------------------------------------
GS-4 Annualized Premiums 11,415
Statutory Reserves 3,798
Face Amount 1,849,602
-------------------------------------------------------
Total Annualized Premiums 47,411
Statutory Reserves 88,661
Face Amount 5,751,387
=======================================================
</TABLE>
C-24
<PAGE>
For modeling purposes, we ignored the surplus relief run-off and treated it as
an adjustment to the Statutory book value.
The following table summarizes the model plan ages in the interest sensitive
projections.
<TABLE>
<CAPTION>
=================================
Interest Sensitive Life Insurance
Model of Business Inforce
---------------------------------
Model Plan Model Ages
---------------------------------
<S> <C>
GS-1 17,22,27,32,37,42
GS-2 17,22,27,32,37,42
GS-4 17,22,27,32,37,42
=================================
</TABLE>
Reinsurance
Portions of the GS-1 and GS-2 business are coinsured to Providian Life and
Health Insurance Company. For the projection we ignored reinsurance among legal
entities within the Providian Group and treated all direct business as inside
Academy.
Mortality
Mortality assumptions are based on industry experience, consideration of
underwriting levels and to some degree on plan experience to date. For the
interest sensitive products, actual experience is not very credible. Company
results from 1993-1995 aggregates to 101.7% of the original assumptions before
considering war risk. This aggregate consisted of actual-to-expected ratios of
84% in 1993, 100% in 1994 and 119% in 1995. 1996 experience appears to be
continuing at the 1995 level which would move the 4 year average to about 5%
above original pricing. We reflected this additional 5% in our assumptions.
The mortality table for GS-1 and GS-2 is the 1975-80 Select and Ultimate Table
Male, ALB. Also for GS-1 and GS-2 no adjustment was made for female mortality,
i.e., male rates were used regardless of sex. No explicit provision was made for
AIDS in the mortality assumption.
Scaling factors were applied to produce durational adjustments to the base
mortality table for GS-1 and GS-2. The following shows the mortality scaling
factors by plan category and age group.
<TABLE>
<CAPTION>
=======================================================
Mortality Scaling Factors
-------------------------------------------------------
Plan: GS-1
-------------------------------------------------------
<S> <C> <C> <C> <C>
Policy Issue Age Issue Age Issue Age Issue Age
Year 17,22 27 32 37,42
-------------------------------------------------------
</TABLE>
C-25
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1-5 125% 110% 100% 100%
6 121 109 101 101
7 117 108 102 102
8 113 107 103 103
9 109 106 104 104
10+ 105 105 105 105
========================================================
===================================================================
Plan: GS-2
-------------------------------------------------------------------
Policy Issue Age Issue Age Issue Age Issue Age Issue Age
Year 17, 22 27 32 37 42
-------------------------------------------------------------------
All 95% 96% 99% 96% 100%
===================================================================
</TABLE>
For GS-4 we used M&R's smoker/non-smoker adjustments to the 1975-80 Select &
Ultimate ALB Mortality table with no additional select factors. This is loaded
by 15% plus $.05/1000. GS-4 also uses combined male and female mortality
assuming 75% male and also explicitly adjusts for the child benefit by building
in an assumption of two children average per policy, using mortality at 90% of
the 1975-80 table and a benefit equal to 5% of base (1/2 benefit for first six
months after birth). Children are assumed born at insured ages 22 and 27.
An additional cost of 15.4c per $1,000 of face amount is added to the interest
sensitive policies to reflect the assumed impact of war risk. This number was
used as it is the current reinsurance cost per $1,000 for the Military Service
Benefit.
Cost of Insurance Charges
All products are projected using the current cost of insurance charges. For GS-
1, the cost of insurance charges equal 110% of the 58 CSO Male Mortality Table,
ALB. For GS-2, COI charges equal 100% of the 80 CSO Male Mortality Table, ALB
for ages under 39 and slightly higher above 39. For GS-4, cost of insurance
rates are based on the 80 CSO Blended Mortality Table B, ALB (80% male). For
non-smokers, current charges are 95% of this table except that guaranteed
charges are used on the first $10,000 net amount at risk. For smokers, current
charges are 100% of this table.
Expense Charges
The account value for GS-2 and GS-4 policies is reduced for contractual expense
charges. The expense charges reflected in the projections include a per policy,
a percent of premium and a per thousand of face amount component. The components
are:
Per Policy: $4 per month per policy for GS-2
$8 per month per policy for GS-4
C-26
<PAGE>
Percent of Premium: 8% of premium up to basic premium and 4% of the excess per
year. After 20 years, this reduces to 4% on all premium.
C-27
<PAGE>
Per Thousand: For GS-2, in the first policy year only
<TABLE>
<CAPTION>
Age Per Thousand Per Month
--- ----------------------
<S> <C>
17 .20
22 .22
27 .24
32 .26
37 .28
42 .31
</TABLE>
For GS-4, the per thousand charges are $.25 per 1,000 per month
in the first policy year.
Surrender Charges
Each of the policies have back-end loads in the form of surrender charges. GS-1
surrender charges equal a percent of the sum of all fund premiums collected. The
percentages are as follows:
<TABLE>
<CAPTION>
====================================================================
GS-1 Surrender Charge as Percent of Cumulative Fund Premiums
--------------------------------------------------------------------
Policy Issue Issue Issue Issue Issue Issue
Year Age 17 Age 22 Age 27 Age 32 Age 37 Age 42
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 125% 125% 125% 125% 125% 125%
2 100 100 100 100 97 85
3 94 90 85 80 70 60
4 88 80 70 65 57 45
5 80 72 65 55 50 38
6 72 64 60 53 47 35
7 64 59 55 50 43 30
8 56 55 50 47 40 27
9 53 50 47 45 37 25
10 50 47 45 43 35 20
11 49 46 43 41 33 18
12 47 45 41 38 30 16
13 45 40 38 35 27 14
14 40 35 35 30 25 12
15 35 30 30 25 20 10
16 30 25 25 20 15 8
17 20 20 20 15 10 6
18 10 10 10 10 7 4
19 5 5 5 5 3 2
20+ 0 0 0 0 0 0
===================================================================
</TABLE>
C-28
<PAGE>
Surrender charges for GS-2 are assessed per thousand of face amount. The
surrender charges reflected in the projection are:
<TABLE>
<CAPTION>
========================================================
GS-2 Surrender Charge Per Thousand of Face Amount
--------------------------------------------------------
Policy Issue Issue Issue Issue Issue Issue
Year Age 17 Age 22 Age 27 Age 32 Age 37 Age 44
--------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1-5 $15.00 $16.00 $17.00 $20.00 $23.00 $26.00
6 14.50 15.50 16.50 19.50 22.25 25.25
7 14.25 15.25 16.25 18.75 21.50 24.50
8 13.75 14.75 15.75 18.25 20.50 23.50
9 13.50 14.50 15.50 17.50 19.75 22.75
10 13.00 14.00 15.00 17.00 19.00 22.00
11 12.25 13.00 13.75 15.25 16.75 19.00
12 11.50 12.00 12.50 13.50 14.50 16.00
13 10.75 11.00 11.25 11.75 12.25 13.00
14 10.00 10.00 10.00 10.00 10.00 10.00
15+ 0.00 0.00 0.00 0.00 0.00 0.00
=======================================================
</TABLE>
Surrender charges for GS-4 are assessed per thousand of face amount. The
surrender charges reflected in the projection are:
<TABLE>
<CAPTION>
================================================================================
GS-4 Surrender Charge Per Thousand of Face Amount
- --------------------------------------------------------------------------------
Issue Ages
Policy Year 17, 22 Issue Age 27 Issue Age 32 Issue Age 37 Issue Age 42
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 $12.00 $13.00 $14.60 $16.40 $19.00
2-10 10.80 11.70 13.14 14.76 17.10
11 9.60 10.40 11.68 13.12 15.20
12 7.20 7.80 8.76 9.84 11.40
13 4.80 5.20 5.84 6.56 7.60
14 2.40 2.60 2.92 3.28 3.80
15+ 0.00 0.00 0.00 0.00 0.00
================================================================================
</TABLE>
GS-4 surrender charges are the same for smokers and non-smokers. GS-4 surrender
charges are constrained such that the resulting surrender value at the end of a
policy year is at least the product of:
. Number of years inforce
. 1/12 the premium paid in the past year.
C-29
<PAGE>
Lapses
Base lapse rates were developed after reviewing recent company experience for
each interest sensitive plan. The base lapse rates used in the projections
varied by plan, issue age and duration and are summarized below:
<TABLE>
<CAPTION>
============================================================
Base Lapse Rates
Plan: GS-1
------------------------------------------------------------
<S> <C> <C> <C> <C>
Issue Age Issue Age Issue Age Issue Age
Policy Year 17,22 27 32 37,42
------------------------------------------------------------
1 35% 33% 29% 25%
2 25 22 20 15
3 20 20 18 14
4 18 18 17 14
5 17 17 16 13
6 16 16 15 12
7 15 15 14 11
8 15 15 14 10
9 14 14 13 9
10 13 13 12 8
11 11 11 10 8
12+ 10 10 9 8
============================================================
</TABLE>
C-30
<PAGE>
<TABLE>
<CAPTION>
====================================================================
Plan: GS-2
--------------------------------------------------------------------
Policy Issue Age Issue Age Issue Age Issue Age Issue Age
Year 17,22 27 32 37 42
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 36% 31% 27% 22% 22%
2 28 25 20 15 15
3 22 20 15 14 14
4 18 15 13 13 13
5 15 14 12 12 12
6 14 13 12 11 11
7 13 12 12 10 10
8 13 11 12 10 10
9 12 10 11 10 10
10 11 10 11 10 10
11 10 10 10 9 9
12+ 9 10 9 9 9
====================================================================
====================================================================
Plan: GS-4
--------------------------------------------------------------------
Policy Issue Age Issue Age Issue Age Issue Age Issue Age
Year 17,22 27 32 37 42
--------------------------------------------------------------------
1 33.0% 31.0% 27.0% 23.0% 20%
2 23.0 21.0 17.0 13.0 11
3 18.0 15.5 12.0 10.0 9
4 15.5 14.0 10.5 8.5 8
5 13.5 12.0 10.0 8.5 8
6 12.0 11.5 9.5 8.5 8
7 11.5 11.0 9.5 8.5 8
8 11.0 10.5 9.0 8.5 8
9 10.5 10.0 9.0 8.0 8
10 10.0 9.5 9.0 8.0 8
11 9.5 9.0 8.5 8.0 8
12+ 9.0 9.0 8.5 8.0 8
===================================================================
</TABLE>
C-31
<PAGE>
Interest Sensitive Lapses
We have adjusted the base lapses by the following formula to reflect the
sensitivity of lapses to changing interest rate environments:
Increment to Base Lapse:
Cash Value /2/
1 - ----------
Account Value
1.5 [(MR - CR) - ------------- ]
4
where
MR = market or competitors rate
CR = credited rate
The above formula is constrained so that (1) total lapses will not exceed 50%
and (2) the increment to base lapses are not less than minus 2%.
The above is less sensitive to interest changes than many Universal Life
products because of the government allotment mode of collection generally used.
We believe that the nature of these sales to military personnel will make
overall lapses less sensitive to the interest rate than many other life
policies.
Premium Suspension
<TABLE>
<CAPTION>
===================
Year GS-2 GS-4
-------------------
<S> <C> <C>
1 0% 0%
2-6 5 1
7-19 5 2
20+ 5 0
===================
</TABLE>
Credited Interest Rates
GS-1 guarantees (cumulatively) 6% for ten years and 4% thereafter. GS-2 and
GS-4 guarantee 4% interest. Each contract may credit excess interest at the
company's discretion. The credited rate for GS-1 is guaranteed for a policy
year. For GS-4 the excess interest is applied after an initial corridor of $500
of account value. At June 30, 1996 the credited interest rate for inforce
business was:
GS-1: 6.00%
GS-2: 6.25%
GS-4: 7.00% (7.50% for first year)
C-32
<PAGE>
The company's crediting strategy will be to generally credit a rate at a spread
below the net earned rate on the portfolio. For projection purposes, we set the
credited rate for the upcoming year based on the portfolio net earned rate of
the prior year-end. The credited to earned spread targeted is:
GS-1: 150 basis points
GS-2: 125 basis points
GS-4: 125 basis points
The spreads are constrained such that they will never be more than 200 basis
points above or less than 100 basis points below that of competitors' rates.
Competitors' rates are defined as five year treasuries.
Persistency Bonus
GS-1 and GS-2 issues after June 1991 are projected to pay a non-guaranteed bonus
payable beginning in the 16th policy anniversary and continuing until the later
of age 70 or the 20th policy anniversary if the policy is inforce and premium
paying. This bonus level is a predefined function by age and duration.
For GS-1 and GS-2 issues before July 1991, PDI is planning no bonus.
GS-4 is projected to pay a non-guaranteed bonus at the 20th policy anniversary
and at age 65. The bonus rate for the 20th policy anniversary accumulates at 2%.
A second non-guaranteed bonus accumulates at 2% for 20 years and 4% subsequently
until age 65. This second bonus is transferred to the account value at 20% at
age 60, 40% of remaining at age 62 and 100% of remaining at age 65.
Expenses
Expense assumptions were based on recent pricing expenses as developed by
Providian:
Acquisition and Issue: 20% of annualized premium plus $65/policy
Per Policy Maintenance: $48 per policy plus 2% of premium
Premium Tax: 3% of premium
NCOA Fees: 1% of premium
The per policy maintenance expense was assumed to inflate at 3% per year. No per
policy expenses were assumed separately on the spouse rider.
Commissions
Commission for the UL business reflects agent, area manager and regional manager
commissions, performance bonuses, deferred compensation and miscellaneous
benefit costs. Commissions are paid on all premiums in the first three policy
years. The second and third year commission is based on the annualized 13th
month and 25th month premium respectively. The percent of premium commission
reflected in the projections is:
C-33
<PAGE>
<TABLE>
<CAPTION>
====================================================================
GS-1, GS-2 GS-1, GS-2
Policy Year (Issues Before 1994)* (Issues After 1993)
--------------------------------------------------------------------
<S> <C> <C>
1 82.6% 84.0%
2 22.7 10.0
3 16.8 0
4+ 0.0 0
====================================================================
</TABLE>
*NOTE: creates no commission in the projection
<TABLE>
<CAPTION>
================================================================================
GS-4
- --------------------------------------------------------------------------------
Percent of Percent of
Percent of Percent of Annualized Annualized
Year Target Premium Excess Premium Target Premium Excess Premium
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 12% 2.7% 69% 29.75%
2 0 0 10% 3.3%
3 0 0 0 0
================================================================================
</TABLE>
Inherent Benefits
The interest sensitive policies provide the policyholder with waiver of premium
or monthly deduction, option to buy additional insurance, child's term
insurance, a premium deposit fund, PCS, POW/MIA coverage and a Military Service
Benefit. There is no additional explicit premium or cost of insurance charge
assessed to provide for the cost of these benefits. The most costly of these
benefits is estimated to be the Military Service Benefit. This rider will pay
the policyholder 50% of the base policy face amount if the insured dies while
serving in the U.S. Armed Forces. This rider was introduced in 1991. We have
reflected an assumed cost of this benefit for all business issued after August
8, 1990, equal to $0.077 per thousand of face amount.
Policy Loans
Policy loans were provided by PDI for each policy. A portion of the loans are
APL (Automatic Premium Loans). We assumed the initial utilization rate equal to
actual. This consists of 75% related to cash value and 25% related to premium
level. We assumed future utilization will grade to 50% cash value related loans
and 50% premium related loans.
Policy loans earn 100 basis points above the credited rate.
C-34
<PAGE>
Deposit Fund and Dividend Accumulation Assumptions
Deposit Funds
We projected $55.2 million of deposit funds as of June 30, 1996 ($53.0 million
in ALIC and $2.2 million in PLIC). ALIC and PLIC policyholders are allowed to
make deposits to or withdrawals from these funds. The aggregate outstanding
balance is increased for deposits and credited interest and decreased for
withdrawals.
New deposits have been $14-15 million per year for ALIC and $.6 million per year
for PLIC. To project a closed block of business we assumed $14.0 million
deposited for ALIC and $.6 million for PLIC in the first projection year, each
decreasing by 10% per year.
The interest credited rate varies based on the underlying insurance product to
which the funds are attached. We assumed this to be 6.25% at June 1996. Future
credited rate on deposit funds are based on the net earned rate less a spread.
The targeted spread is 150 basis points.
Withdrawals are charged the amount of interest credited for the calendar year.
Therefore, for the projections, we assumed withdrawals in a calendar year lose
an average of one-half year's interest.
We used a base withdrawal rate of 29% and an interest sensitive adjustment of
(MR - CR)
where both MR and CR are defined as for the GS-2 product.
No expenses are applied to the deposit funds as all expenses are allocated to
the life products.
Dividend Accumulations
We projected $18.5 million of dividend accumulations as of June 30, 1996 ($17.8
million in ALIC and $.7 million in PLIC). We assumed a base lapse of 7% of the
beginning of the year dividend accumulation is surrendered each year. We added
an interest sensitive lapse rate equal to (MR -CR) as defined above.
We assumed dividend accumulations are increased by 60% of dividends paid each
year plus interest credited. The initial interest credited rate to dividend
accumulation is 5.5%. We assumed a 200 basis point spread to the net earned rate
would be used in the projection.
No expenses are applied to the dividend accumulation as all expenses are
allocated to the life products.
C-35
<PAGE>
Old Military and Other Traditional Life Assumptions
The Traditional Life Insurance model consists of three major blocks: military,
direct response, and extended term. Table VI-1 summarizes the model plans used
in our projections. Table VI-2 compares model amounts to actual as of June 30,
1996 for annualized premiums, face amount and statutory reserves.
The traditional military segment inforce is dominated by a participating whole
life product known as the Career Option plan which represents nearly $94.5
million of the $138.4 million of reserves modelled. Dividends per thousand
dollars of face amount have been frozen on this product since the later of 1990
or the fifth policy anniversary.
This block includes spouse riders attached to military traditional policies. The
spouse rider provides decreasing term insurance with a level premium. This same
product is also attached to the interest sensitive products and is discussed in
Section V of this report. The riders attached to interest sensitive products are
not included in this block.
In addition to the plans listed in Table VI-1, the military segment includes
paid-up additions, reduced paid-up insurance and one year term (OYT) insurance
riders. The one year term rider attaches to policies with a ten year term rider.
When the ten year term expires, the policyholder may continue a level amount of
coverage with the OYT rider. These three plans currently consist of $150.8
million of face amount and $6.3 million of reserve.
The majority of the inforce for the direct response group consists of graded
benefit whole life products and a level premium decreasing term plan known as
the Family Security plan. The business was issued primarily on a guaranteed
issue basis.
C-36
<PAGE>
<TABLE>
<CAPTION>
==============================================================================
Table VI-1
Academy Life Insurance Company
Traditional Life Insurance Model
- ------------------------------------------------------------------------------
Model Academy
Plan Plan Code Description Model Ages
- ------------------------------------------------------------------------------
Military
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
AL01 130-141-U25 Spouse Rider 17,22,27,32,37,42
AL02 130-163-U04 Mod 70 Whole Life 22,32,42,52,57
AL03 130-166-U01 Non Par Whole Life 22,32,42,52
AL04 13A-1C6-TO1 Non Par Whole Life - 80 CSO 22,37,47,52,57,65
AL05 130-163-U33 Mortgage Term -25 Years 27,32,37,42
AL06 130-141-V32 Family Insurance Rider 17,27,37,47
AL11 13B-1C3-T25 Spouse Rider - 80 CSO 17,22,27,32,37,42
AL12 13O-143-U27 6th Dividend Option 7,17,22,27,32,37,42,47
AL15 120-143-U16 Career Option Plan (COP) 12,22,27,32,37,42
AL16 120-143-U22 Career Option Plan (CXP) 7,17,22,27,32,37,42,47
AL17 12A-1C3-T22 Career Option Plan - 80 CSO 7,17,22,27,32,37
AL18 12A-1C3-T23 Career Option Plan (CPA) 7,17,22,27,32,37
AL19 130-141-U23 Children's Term Rider 7
AL21 13A-1B3-T92 Step Term Rider 27,32,37,43
- ------------------------------------------------------------------------------
Direct Response
- ------------------------------------------------------------------------------
AL07 13S-183-U48 Graded Benefit Whole Life (GBWL) 45,54,63,70
AL08 13S-181-U85 Family Security Plan 47,51,57,61,67,72
AL09 13S-183-U80 GBWL with Excess Interest 45,52,62,70
AL13 13A-189-U93 Money Back E95 - High CV 22,27,32,37,42,50
- ------------------------------------------------------------------------------
AL24 EXTENDED TERM INSURANCE Attained Age
- ------------------------------------------------------------------------------
AL25 Paid-up/RPU Attained Age
- ------------------------------------------------------------------------------
AL26 One Year Term Rider Attained Age
==============================================================================
</TABLE>
C-37
<PAGE>
<TABLE>
<CAPTION>
===============================================================================
Table VI-2
Reconciliation of Traditional Life Model
As of June 30, 1996
(in thousands of dollars)
- -------------------------------------------------------------------------------
Model Actual Model To Actual
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Traditional Military
- --------------------
Annualized Premiums 15,146 15,266 99.21%
Statutory Reserves 113,425 112,607 100.73
- -------------------------------------------------------------------------------
Direct Response
- ---------------
Annualized Premiums 3,970 3,974 99.90%
Statutory Reserves 16,116 15,325 106.16
- -------------------------------------------------------------------------------
Total
- -----
Annualized Premiums 19,116 19,240 99.36%
Statutory Reserves 129,541 127,932 101.26
Face Amount 1,647,405 1,745,457 94.38*
===============================================================================
</TABLE>
* Actual face amounts received on tape were at original rather than current
levels for some plans. Therefore the "actual" is overstated.
We projected $11.1 million of reserve and $146.6 million of face amount as of
June 30, 1996 for extended term insurance (ETI).
Mortality
- ---------
The following sections summarize the mortality assumptions for the traditional
life block.
A. Model Plans: AL01, AL11 (Spouse Rider)
--------------------------------------
The following scaling factors are applied to 1975-80 Select and Ultimate Male
or Female ALB Table:
Issue Ages 17, 22: 120% in policy years 1 through 5, grading
linearly to 100% in years 10 and later.
Issue Age 27: 105% in policy years 1 through 5, grading
linearly to 100% in years 10 and later.
Issue Ages 32, 37, 42: 95% in policy years 1 through 5, grading
linearly to 100% in years 10 and later.
C-38
<PAGE>
B. Model Plans: AL02, AL03, AL04, AL05, AL12, AL15, AL16, AL17, AL18, AL19,
AL21 (Military)
125% of the 1975-80 Select and Ultimate Male and Female ANB for policy
years 1 through 5, grading linearly to 100% in years 10 and later. In
addition to the above, we added .154 per thousand of net amount at risk
each year to reflect war risk.
C. Model Plan: AL06 (Family Insurance Rider)
125% of the 1975-80 Select and Ultimate Male and Female ANB for policy
years 1 through 5, grading linearly to 100% in years 10 and later.
D. Model Plans: AL07, AL08, AL09, AL13 (Direct Response)
The following scaling factors are applied to 1969-71 U.S. White Male
Population Table:
<TABLE>
<CAPTION>
=================
Issue Age Scaler
-----------------
<S> <C>
0-49 130
50-59 120
60-69 90
70+ 80
==================
</TABLE>
E. Paid Up, RPU, OYT
100% of the 1975-80 Ultimate Male ANB Table
F. Extended Term
100% of the CET Table.
C-39
<PAGE>
Lapses
- ------
The following tables summarize lapse assumptions.
A. Military - Model Plans: AL01, AL02, AL03, AL04, AL05, AL06, AL11, AL12,
AL15, AL16, AL17, AL18, AL19, AL21
<TABLE>
<CAPTION>
=======================================
Issue Ages
--------------------------
Policy Year 0-24 25-29 30-34 35+
---------------------------------------
<S> <C> <C> <C> <C>
1* 18% 16% 14% 12%
2* 15 14 12 11
3* 15 14 12 10
4* 14 13 11 10
5* 14 13 11 9
6+ 13 12 10 9
=======================================
</TABLE>
* minimal exposure
B. Direct Response
<TABLE>
<CAPTION>
==================================
Model Plan
---------------------
Policy Year AL08 AL07,AL09,AL13
----------------------------------
<S> <C> <C>
All 10% 5%
==================================
</TABLE>
C. Paid Up Additions, One Year Term
10% in all years.
Expenses
- --------
A. Military Policies: Model Plans: AL02, AL03, AL04, AL05, AL15, AL16, AL17,
AL18
$43.71 per policy
B. Direct Response - Model Plans: AL07, AL08, AL09, AL13
$18.63 per policy
C. Extended Term, RPU
$10 per policy
C-40
<PAGE>
All per policy expenses assume inflation of 3% per year. No per policy
expenses are assumed on riders. All lines assume 3% premium tax.
Commissions
- -----------
A. Model Plans: AL01, AL02, AL03, AL04, AL06, AL11, AL12, AL15, AL16,
AL17, AL17, AL19, AL21
<TABLE>
<CAPTION>
========================= =========================
Issues Prior to 4/1/87/2/ Issues After 3/31/87/1,3/
------------------------- -------------------------
Policy Year Rate Policy Year Rate
------------------------- -------------------------
<S> <C> <C> <C>
1 90% 1 82.6%
2-10 7 2 22.7
11+ 3.5 3 16.8
4+ 0
======================== ========================
</TABLE>
B. Model Plan: AL05/1/
<TABLE>
<CAPTION>
========================= =======================
Issues Prior to 4/1/87/1/ Issues After 3/31/87/2/
------------------------- -----------------------
Policy Year Rate Policy Year Rate
------------------------- -----------------------
<S> <C> <C> <C>
1 50% 1 82.6%
2-10 5 2 22.7
11+ 0 3 16.8
4+ 0
========================= =======================
</TABLE>
Modal Distribution
- ------------------
100% monthly
Dividends
- ---------
Plans AL15, AL16, AL17, AL18 dividends remain at the current level.
Investment Income
- -----------------
Investment income was calculated based upon investments allocated to PDI, along
with a new money assumption on cash flow. The starting portfolio yield, before
policy loans, is 8.00% gross effective. The gross effective yield on new money
is 7.61%. Policy loans at June 30, 1996 were $24.2 million earnings 5.74%. We
assumed policy loans remained a constant percentage of reserves. Asset
assumptions are detailed in Appendix A.
- -----------------
/2/ Model uses 7/1/87 break date
/3/ Creates no commission in the projection
C-41
<PAGE>
Health Assumptions
- ------------------
The Military Health consists primarily of CHAMPUS Supplement plans sold to
members of the NCOA. It includes Medicare Supplement plans used as conversions
from CHAMPUS. A small old block of Direct Response Health consisting of HIP and
other supplemental plans is included here.
Because of the size of these blocks, we projected them in aggregate. The
following table summarizes the initial validation points and assumptions used:
<TABLE>
<CAPTION>
================================================================================
CHAMPUS Old
& Medicare Supplement Direct Response
---------------------------------------
(in millions)
- --------------------------------------------------------------------------------
<S> <C> <C>
Annualized Premium Inforce $13.0 $ 1.3
- --------------------------------------------------------------------------------
Initial UPR 1.9 .2
- --------------------------------------------------------------------------------
Initial Claim Reserve 3.3 .4
- --------------------------------------------------------------------------------
Initial Additional Reserve -- --
- --------------------------------------------------------------------------------
Initial Incurred Loss Ratio 71.0% 61.3%
================================================================================
</TABLE>
The CHAMPUS and Medicare Supplement are assumed to have:
. Lapses at 22% first projection year and 20% thereafter (net of rate
increases). Lapse rates are assumed to remain at current experience levels
due to the implementation of the TRICARE program.
. A level ultimate loss ratio of 68.3% in all years reflecting rate increases
sufficient to offset trending. Trending of premiums and claims was assumed
to be 4% (2% inflationary and 2% utilization and cumulative antiselection).
. Commissions of .3% of premium
. Expenses of $30 per policy inflated at 3% plus 3% of premium.
The Old Direct Response are assumed to have:
. Lapses at 17% level
. A loss ratio slope equal to 61% increasing by .5% per year to reflect
utilization and aging.
. Commissions of .3% of premium
. Expenses of $20 per policy inflated at 3% plus 3% of premium.
C-42
<PAGE>
Other Business Assumptions
- --------------------------
Bollinger -- Academy also contains some Student Life, Accident and Health
business sold by the C.W. Bollinger Agency and administered by the agency.
Health rates are set and revised by the Bollinger Agency. On the Health, ALIC
receives a based projected profit of 6% (before expenses) and a profit sharing
arrangement for amounts above 6% based on the following profit sharing formula:
2/3 x [94% of earned premium - claims - commissions]
The Student Life block is level term to age 21 at which point the policyholder
may convert to LPU 65. We projected the Bollinger Health business using a level
premium for 10 years and the Life business with a net 2% annual decrease in
premium for 10 years. This is a group projection approach which we used where it
is difficult to distinguish between new and existing business.
We projected both the health and life claims and expenses consistent with recent
experience. This produces annual profit margins as a percent of premium of 6.3%
for health and about 74% for life.
Future Issues
- -------------
New business production was supplied by PDI and is assumed to be:
<TABLE>
<CAPTION>
===========================================
Year Ending $ Millions of Premium
-------------------------------------------
<S> <C> <C>
Life 6/97 $12.9
6/98 14.8
6/99 17.0
6/00 18.7
-------------------------------------------
Health All years .2
===========================================
</TABLE>
Years after 2000 assume 5% annual growth in production. The life new issues
consist of 23% GS-1 and 77% GS-4. The health new business is based on recent
CHAMPUS Supplement pricing.
Miscellaneous Reserves
- ----------------------
We did not project $5.3 million of miscellaneous direct reserves. These reserves
represent business shown in Exhibit 8, Sections B through G, and includes $1.6
million of annuities.
C-43
<PAGE>
APPENDIX D
----------
Providian Capital Management
Summary of Models and Assumptions
---------------------------------
Summary of Current Inforce
- --------------------------
The following table summarizes the modeled inforce, based on seriatim data
provided by Providian. Additional detail for the individual deferred annuity
model is provided on the following page. The PCM liabilities were projected for
a thirty-year period.
<TABLE>
<CAPTION>
=============================================================================================
PCM Inforce
As of June 30, 1996
-------------------
(dollars in millions)
- ---------------------------------------------------------------------------------------------
Account Statutory Face
Line of Business Count Value Cash Value Reserve Amount
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Individual
- ----------
Deferred Annuity
. General Account 101,403 $ 2,624.7 $ 2,579.2 $ 2,624.7 --
. Separate Account 5,777 222.4 215.4 222.5 --
Single Premium Life
. General Account 14,342 676.3 671.1 676.3 $1,086.0
. Separate Account 505 18.5 18.4 18.5 36.6
Vanguard Annuity 31,000 1,655.5 1,655.5 1,657.1 --
MVP 4,700 209.8 206.1 209.8 --
SPIA -- -- -- 1,498.8 --
NASL 22,945 598.3 575.9 581.8 --
- ---------------------------------------------------------------------------------------------
Group
- -----
GIC
. Fixed Rate -- $ 3,825.5 $ 3,825.5 $ 3,825.5 --
. Floating Rate -- 2,119.6 2,119.6 2,119.6 --
TRAC -- 804.3 804.3 804.3 --
- ---------------------------------------------------------------------------------------------
Off - Balance Sheet
- -------------------
Trust GIC -- $12,473.1 $12,473.1 $ 21.2 --
- ---------------------------------------------------------------------------------------------
Subtotals
- ---------
General Account Liability $11,326.7
Modified S.A. Liability 1,014.1
Separate Account Liability 1,898.1
Off-Balance Sheet Liability 21.2
=============================================================================================
</TABLE>
Inforce amounts for the individual deferred annuity model were split by duration
from issue, sex, guarantee period and decennial age group, beginning at central
age 25 and ending at age 75. Payments, on fixed GICs were projected on a
seriatim basis. Payments by contract on the individual SPIA block of business
were provided by Providian.
D-1
<PAGE>
<TABLE>
<CAPTION>
Providian Corp
Retail and Variable Annuities as of 06/30/1996
Variable Variable
Company Model Policy General Cash Account Cash
Code Plan Count Account Value Value Value Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NHL 01 - MVP 4,700 209,812,089 206,078,357 0 0
02 - Personal 2000 8,343 191,246,141 188,317,608 0 0
03 - Personal 2000 Plus 30,449 693,982,569 679,429,051 0 0
04 - PVN Flex Plus 18,372 461,607,949 439,293,609 0 0
05 - Special Offer Prod 1,613 65,685,236 65,685,236 0 0
06 - Personal 1 & 3 6,892 202,306,029 201,623,938 0 0
07 - SPDA Personal Ind 25,561 860,790,436 857,595,437 0 0
08 - SPL Floor Product 4,326 193,343,031 158,084,977 0 0
09 - Pacer Annuity 551 874,943 871,003 26,471,773 26,378,715
10 - Pacer Life 505 24,282,566 20,365,001 0 0
11 - PVN Advisor's Edge 463 705,066 700,397 39,903,683 39,903,683
12 - PVN Marquee A 423 10,268,007 10,270,954 4,300,234 4,300,234
13 - PVN Marquee B 1,819 6,180,752 5,875,957 108,245,612 102,515,129
14 - PVN PRISM A 1,434 28,783,940 28,779,205 10,565,596 10,565,596
15 - PVN PRISM B 1,111 1,178,345 1,122,879 32,916,932 31,686,044
16 - IRA 2,706 24,821,639 24,821,639 0 0
17 - SPL Index Product 10,016 477,157,956 380,173,696 0 0
------- ------------- ------------- ----------- -----------
119,284 3,453,026,693 3,269,088,945 222,403,830 215,349,401
======= ============= ============= =========== ===========
NNY 06 - Personal 1 & 3 2,699 75,458,177 74,048,881 0 0
07 - SPDA Personal Ind 44 836,503 801,993 0 0
------- ------------- ------------- ----------- -----------
2,743 76,294,680 74,850,874 0 0
======= ============= ============= =========== ===========
======= ============= ============= =========== ===========
122,027 3,529,321,373 3,343,939,819 222,403,830 215,349,401
======= ============= ============= =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Previous Market Average
Company Model Insurance Year Loan Value Credited
Code Plan Amount Premium Balance Adjustment Rate
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NHL 01 - MVP 0 1,513,718 0 699,230 6.77%
02 - Personal 2000 0 933,310 0 0 5.01%
03 - Personal 2000 Plus 0 4,627,884 0 0 5.02%
04 - PVN Flex Plus 0 5,603,664 0 0 5.11%
05 - Special Offer Prod 0 59,793 0 0 5.50%
06 - Personal 1 & 3 0 202,856 0 0 5.00%
07 - SPDA Personal Ind 0 535,747 0 -121,259 5.55%
08 - SPL Floor Product 308,899,774 0 34,869,889 0 4.50%
09 - Pacer Annuity 0 76,465 0 0 0.00%
10 - Pacer Life 48,037,835 0 3,776,491 0 5.00%
11 - PVN Advisor's Edge 0 31,208,532 0 -2,956 0.00%
12 - PVN Marquee A 0 10,547,143 0 3,958 0.00%
13 - PVN Marquee B 0 81,161,438 0 5,239 0.00%
14 - PVN PRISM A 0 7,637,482 0 -2,981 0.00%
15 - PVN PRISM B 0 5,679,459 0 -2,286 0.00%
16 - IRA 0 202,687 0 0 5.02%
17 - SPL Index Product 765,669,169 0 95,707,914 0 4.44%
------------- ----------- ----------- ------- -----
1,122,606,778 149,990,179 134,354,294 578,945 5.10%
============= =========== =========== ======= =====
NNY 06 - Personal 1 & 3 0 0 0 0 5.07%
07 - SPDA Personal Ind 0 193,361 0 0 5.18%
------------- ----------- ----------- ------- -----
0 193,361 0 0 5.07%
============= =========== =========== ======= =====
============= =========== =========== ======= =====
1,122,606,778 150,183,539 134,354,294 578,945 5.10%
============= =========== =========== ======= =====
</TABLE>
D-2
<PAGE>
The following major product lines comprise the insurance operations of PCM.
Individual Annuities: Individual SPDA's consist primarily of general account
funds. Most of the products inforce contain either bailout provisions or
guaranteed rates tied to various indexes. PCM has recently shifted production
to variable annuity products, and offers both no-load products, sold through
independent financial advisors, and front-end commission products. PCM has an
affiliation with the Vanguard mutual fund group under which Vanguard markets
and administers low load variable annuity business through Providian Life.
Payout Annuities: This block consists of structured settlements, pension buy
out blocks, and retail immediate annuities. Benefits are locked in at issue.
Guaranteed Investment Contracts (GIC): PCM has large blocks of fixed-rate and
floating-rate GICs in force, and continues to market these products actively.
Fixed rate contracts typically have scheduled payments and maturity dates,
with limited withdrawal facilities. Floating rate contracts can be surrendered
at any time, subject to a 90-day to 180-day delay after notification.
Historically, the practice in PCM has been to enter into fixed-for-floating
swap contracts against each fixed rate contract, or block of contracts, in
order to create a net floating rate liability. TRAC is a unique GIC marketed
by PCM which guarantees an index return, either Shearson-Lehman bond index or
S&P 500 equity index, plus a 10bp to 25bp enhancement. PCM enters into swap
and futures contracts to convert these guarantees to floating interest rate
liabilities, as well.
Trust GIC (Synthetic GIC): PCM enters into contracts with pension funds to
guarantee book value benefit responsive payments for the fund in exchange for
an annual fee of 12bp to 15 bp. Assets are retained by the pension fund and do
not appear on Providian's balance sheet. The contracts are structured so that
PCM believed its risk exposure is extremely limited, but the pension fund is
allowed to maintain book value accounting.
Single Premium Life: This block consists of products sold primarily in the
late 1980's. The cost of mortality for most of the block is covered through
additional spread. Much of the block has credited rates tied to external
indexes.
North American Security Life (NASL): In 1995, PCM purchased the general
account portion of NASL's variable annuity products. The block is a mixture of
one-year guarantee bonds and MVA products with guarantees primarily of six
years. PCM maintains an on-going relationship with NASL, and receives the
general account portions of the new sales.
D-3
<PAGE>
Future Production
- -----------------
The following table summarizes future PCM production amounts, as provided by
Providian.
<TABLE>
<CAPTION>
=================================================================
Production Amounts
------------------
(in millions)
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Line & Business 1996 1997 1998 1999 & Later
- -----------------------------------------------------------------
Floating GIC $ 385 $ 150 $ 150 $ 150
Fixed GIC (5 year bullet) 1,287 1,148 901 865
TRAC 230 200 200 200
SPDA (Tax Smart) 50 250 350 450
NASL 150 150 150 150
SPIA 150 175 200 250
Vanguard 500 600 700 800
Advisors Edge 75 250 350 450
Marquee 165 280 450 575
Trust GIC 2,330 2,500 2,500 2,500
==================================================================
</TABLE>
D-4
<PAGE>
Lapse Rates
- -----------
Lapse rates are based on a comparison of June 30, 1995 and June 30, 1996 inforce
tapes and on internal company studies. Lapse assumptions are summarized as
follows:
<TABLE>
<CAPTION>
===================================================================================================================================
Base Lapse Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Providian Marquee/2/ Prism/2/
Personal Flex Plus, ---------- --------
Policy 2000/ Special SPDA Pacer Pacer Advisor's Tax
Duration MVP Plus/1/ Offer Personal SPL Annuity Life Edge A B A B IRA Vanguard NASL Smart
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3% 5% 5% 4% 6% 4% 5% 4% 4% 4% 4% 4% 15% 6% 15% 3%
- ------------------------------------------------------------------------------------------------------------------------------------
2 3% 6% 5% 5% 6% 4% 5% 5% 5% 5% 5% 5% 15% 7% 15% 4%
- ------------------------------------------------------------------------------------------------------------------------------------
3 3% 7% 5% 6% 6% 4% 5% 6% 6% 6% 6% 6% 15% 8% 15% 4%
- ------------------------------------------------------------------------------------------------------------------------------------
4 3% 8% 5% 6% 6% 4% 5% 7% 7% 7% 7% 7% 15% 9% 15% 5%
- ------------------------------------------------------------------------------------------------------------------------------------
5 3% 9% 5% 6% 6% 4% 5% 8% 8% 8% 8% 8% 15% 10% 15% 8%
- ------------------------------------------------------------------------------------------------------------------------------------
6 3% 25% 5% 6% 6% 4% 5% 9% 9% 9% 9% 9% 15% 11% 15% 30%
- ------------------------------------------------------------------------------------------------------------------------------------
7 50% 20% 5% 25% 6% 35% 5% 10% 10% 20% 10% 20% 15% 12% 15% 20%
- ------------------------------------------------------------------------------------------------------------------------------------
8 12% 12% 30% 20% 6% 25% 5% 10% 11% 15% 11% 15% 15% 12% 15% 15%
- ------------------------------------------------------------------------------------------------------------------------------------
9 12% 12% 25% 12% 6% 12% 5% 10% 12% 12% 12% 12% 15% 12% 15% 15%
- ------------------------------------------------------------------------------------------------------------------------------------
10 12% 12% 12% 12% 6% 12% 5% 10% 12% 12% 12% 12% 15% 12% 15% 15%
- ------------------------------------------------------------------------------------------------------------------------------------
11 12% 12% 12% 12% 6% 12% 5% 10% 12% 12% 12% 12% 15% 12% 15% 15%
- ------------------------------------------------------------------------------------------------------------------------------------
12+ 12% 12% 12% 12% 6% 12% 5% 10% 12% 12% 12% 12% 15% 12% 15% 15%
===================================================================================================================================
</TABLE>
- --------------
/1/ Duration 5 and later business has already pierced the bailout and
exhibited shock lapses. Therefore, the lapse assumption on this business
in durations 6 and 7 is assumed to be 15%.
/2/ Lapse rates on the GEO option, which does not allow surrender during
each five year period, are as follows: 0%, 0%, 0%, 0%, 27%, 0%, 0%, 0%,
0%, 44% (52% on B units), and 12% annually thereafter.
D-5
<PAGE>
The above lapse rates are subject to the following interest sensitive lapse
adjustment, as a percent:
SC
Z x (MR - CR - SC/4)/2/ if MR (greater than) CR + --
4
SC
0 if CR (less than) MR (less than) CR + --
4
-Z x (MR - CR)/2/ if MR (less than) CR
where, MR = The market competitor rate, as a percent.
CR = The current credited rate, as a percent.
SC = The surrender charge, as a percent of account value.
Z = 2 for deferred annuities
= 1 for SPWL
= 0 for separate account funds and GEO
= 0 for group annuities
Lapse rates are subject to a maximum of 75% for deferred annuities. Lapse rates
are subject to a minimum of one-half the base rate. No interest sensitive
adjustment is assumed for separate account funds.
Lapse rates on group funds as summarized below.
<TABLE>
<CAPTION>
Lapse Rates - Group
==========================================================
<S> <C>
Floating Rate GIC 12%
----------------------------------------------------------
Fixed Rate GIC 100% at end of term;
scheduled payments; 3.5%
benefit responsive payments
----------------------------------------------------------
TRAC 100% at end of term
----------------------------------------------------------
Trust GIC 15%
==========================================================
</TABLE>
D-6
<PAGE>
Partial Withdrawal Rates
- ------------------------
Free partial withdrawal utilization is assumed to be 10% of the maximum free
partial withdrawal amounts available during the surrender charge period. Free
partial withdrawal provisions are summarized below.
<TABLE>
<CAPTION>
================================================================================
Free Partial Withdrawal Provisions
- --------------------------------------------------------------------------------
Product Type
- --------------------------------------------------------------------------------
<S> <C>
MVP, Personal 2000, 10% of Account Value Each Policy Year
Personal 2000 Plus, SPL, Tax Smart
- --------------------------------------------------------------------------------
Providian Flex Plus, 15% of Account Value Each Policy Year
Special Offer Product
- --------------------------------------------------------------------------------
SPDA Personal 1,3, SPDA 10% of Account Value Each Policy Year,
Index Cumulative
================================================================================
</TABLE>
The NASL block is assumed to exhibit partial withdrawals of 2% of account value
each year.
Premium Suspension
- ------------------
Projected premiums are based on renewal premiums paid in the twelve months
ending June 30, 1996. Premium suspension of 5% per year is applied going
forward.
Mortality
- ---------
Mortality as deferred annuities is assumed to equal 100% of the 1983 Basic
table.
Mortality rates for SPL are assumed to equal 100% of the 1975-1980 Select and
Ultimate table.
Mortality rates on SPIA business are equal to the GAAP mortality assumption.
Expenses
- --------
Unit expense allowables are based on internal Company studies, as follows:
D-7
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================
Unit Expense Allowables
- ----------------------------------------------------------------------------------------------------
Line of Business Maintenance Acquisition
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Individual
Deferred annuity and SPL $45 per policy $100 per policy, 1.5% of premium
Variable annuity $60 per policy $130 per policy, 1.5% of premium
Payout annuity 18 bp of reserve 145 bp of premium
Vanguard 3 bp of fund $0
Group
GIC, TRAC 4.5 bp of account value 50 bp of premium
Trust GIC 1.5 bp of account value 15 bp of premium
====================================================================================================
</TABLE>
Expense allowances paid to NASL under the reinsurance agreement in place are
15 bp of account value maintenance and 28 bp of premium acquisition. In
addition, there is a $30 per policy expense allowance spread pro-rata over fixed
and separate accounts, which is offset by a $30 policy fee, so neither has been
reflected in this analysis.
Credited Interest Rates
- -----------------------
Credited interest rates for the remainder of 1996 are assumed to equal current
credited rates. Thereafter, credited rates are assumed to move as described
below.
Individual spread products: Credited rates are based on the net effective
portfolio earnings rate less the following target spreads:
<TABLE>
<CAPTION>
=====================================================================
Target Spreads
--------------------------------------------------------------------
<S> <C> <C>
In Surrender Out of Surrender
Product Charge Period Charge Period
--------------------------------------------------------------------
MVP 195 bp 195 bp
Personal 2000, Personal 2000 Plus 280 260
Providian Flex Plus 225 240
Special Office Product N/A 200
SPDA Personal 1,3 265 250
SPL Floor N/A 325
NASL 235 235
=====================================================================
</TABLE>
Individual index products: Credit the index in all years, as follows:
D-8
<PAGE>
<TABLE>
<CAPTION>
==============================================================
Actual
------------------------------------
Product Index Spread
<S> <C> <C>
- --------------------------------------------------------------
SPDA Index:
Multi 20 year Treasury 150 bp
Other AAA Industrial 200
- --------------------------------------------------------------
IRA AAA Utility 250
- --------------------------------------------------------------
SPL 20 year Treasury 238*
- --------------------------------------------------------------
Pacer, Advisor's 90% of 1 year 0
Edge Treasury
==============================================================
</TABLE>
* Represents a weighted average of spreads by plan; actual spreads are 200 bp,
225 bp or 250 bp depending on plan code.
D-9
<PAGE>
Future Business
- ---------------
Future business pricing spreads are summarized in the following table.
<TABLE>
<CAPTION>
=========================================
Future Business
- -----------------------------------------
<S> <C> <C>
Line of Business Spread Cost of Funds
- -----------------------------------------
SPIA 115 bp
NASL 215 bp
Tax Smart 225 bp
GIC 80 bp LIBOR + 15bp
TRAC 80 bp LIBOR + 15 bp
=========================================
</TABLE>
Bail-Out Provisions
- -------------------
Personal 2000, Personal 2000 Plus and SPDA Personal 1,3 plans have bail-out
rates equal to the initial credited rate less 1%.
The bail-out rate on the SPDA product and 1992 and prior issues of the P2000
were pierced prior to the valuation date. The lapse assumption for these
products reflect this event.
Guaranteed Equity Option (GEO)
- ------------------------------
The Marquee and Prism products offer an equity guarantee option which provides
for 100% of the growth in the S&P 500 index (including dividends) over five
years. A minimum return of 3% is guaranteed on the principal. No amounts can be
withdrawn during the five year period. The cost of hedging this option is
assumed to be 3.50% per year, based on a Black-Scholes estimate.
Guaranteed Minimum Death Benefit (GMDB)
- ---------------------------------------
GMDB provisions for the variable annuity products, and the associated cost, are
summarized in the following table.
<TABLE>
<CAPTION>
================================================================
GMDB Provisions
- ----------------------------------------------------------------
<S> <C> <C>
Product Guaranteed Death Benefit Assumed Cost
- ----------------------------------------------------------------
Vanguard Principal only 5 bp
Other Variable Annuity Six-year ratchet 7 bp
================================================================
</TABLE>
TRAC
- ----
The TRAC funds were projected based on a net effective earnings rate of LIBOR +
80 bp and a cost of funds of LIBOR + 15 bp, for a net spread of 65 bp.
D-10
<PAGE>
Market Rates
- ------------
The rates on competitor products are represented by the following nominal
treasury yields:
=============================================
Product Market Rate
---------------------------------------------
Deferred Annuity 7-year Treasury less .5%
---------------------------------------------
SPL 7-year Treasury less 1.0%
---------------------------------------------
MVA 5-year Treasury less 1.0%
=============================================
Policy Loan
- -----------
The SPL and VL products offer zero-spread loans. Loan amounts are projected
based on loans outstanding at June 30, 1996 as a constant percent of free loan
available.
Reserves
- --------
Reserves on inforce deferred annuities, SPL, and GICs were assumed equal to
account value, with the exception of the NASL block of business where reserve is
based on a CARVM calculation.
Reserves on future deferred annuity issues are assumed to equal cash surrender
value. The company intends to either (1) hold account value for statutory
reserve and tax reserve, if it can get rating agency credit for the excess
reserve; or (2) change practice to hold cash surrender value as statutory and
tax reserve.
Reserves on Trust GIC are equal to the following:
==================================================================
Trust GIC Reserve
------------------------------------------------------------------
Existing Business: 6/96 reserve of 17 bp growing 7.5 bp
per year to a maximum of 41 bp.
Future Business: 7.5 bp increase in reserve per year,
growing to maximum of 41 bp.
==================================================================
D-11
<PAGE>
Product Specifications
- ----------------------
Commissions
- -----------
=====================================================
Commission Rates
=====================================================
Plan Percent of Premium Percent of Fund
-----------------------------------------------------
Tax Smart 6% --
Advisors Edge 0 --
Marquee 6 --
NASL 7 25 bp years 6 +
GIC 0 --
=====================================================
An additional trail commission of 4.5 bp is charged on existing general account
individual annuity and SPL funds.
Mortality and Expense Charges
- -----------------------------
====================================================
Plan M & E Charge
----------------------------------------------------
Advisor's Edge 50 bp
----------------------------------------------------
Marquee - A Units 65 bp
----------------------------------------------------
Marquee - B Units 125 bp
----------------------------------------------------
PRISM - A Units 65 bp
----------------------------------------------------
PRISM - B Units 125 bp
----------------------------------------------------
Pacer Annuity 120 bp
----------------------------------------------------
Pacer Life 70 bp
----------------------------------------------------
Vanguard 37.5 bp
----------------------------------------------------
Vanguard Future Issues 30.0 bp
====================================================
In addition, PCM currently receives 4 bp on average from the investment fund
managers for the Advisors Edge, Marquee and PRISM products.
D-12
<PAGE>
Front End Sales Loads
- ---------------------
The Marquee - A Units and PRISM - A Units plans have the following sales loads
as a percentage of deposit:
===============================================================================
Marquee-A and Prism-A
- -------------------------------------------------------------------------------
Deposit Amount Load
- -------------------------------------------------------------------------------
Lesser-than $100,000 5.75%
- -------------------------------------------------------------------------------
$100,000 to $249,999 4.75%
- -------------------------------------------------------------------------------
$250,000 to $499,999 3.75%
- -------------------------------------------------------------------------------
$500,000 to $1,000,000 2.75%
- -------------------------------------------------------------------------------
Greater-than $1,000,000 1.75%
===============================================================================
Administrative Charges
- ----------------------
Advisor's Edge, Marquee (A and B Units) and PRISM (A and B Units) plans charge
the following fees on separate account business to cover administrative
expenses:
. .15% of fund value
. $30 per policy
Pacer products charge 0.3% of fund value for administrative costs.
D-13
<PAGE>
Surrender Charges
- -----------------
Surrender charges by plan are summarized in the tables below.
================================================================
Surrender Charge - Percent of Account Value
- ----------------------------------------------------------------
Policy Year
---------------------------------------
Plan 1 2 3 4 5 6 7 8 9 10+
- ----------------------------------------------------------------
MVP 6% 5% 4% 3% 2% 1% 0% 0% 0% 0%
- ----------------------------------------------------------------
Personal 2000 5% 4% 3% 2% 1% 0% 0% 0% 0% 0%
- ----------------------------------------------------------------
Personal 2000 Plus 5% 5% 4% 3% 2% 0% 0% 0% 0% 0%
- ----------------------------------------------------------------
Providian Flex Plus 7% 7% 7% 7% 7% 7% 7% 0% 0% 0%
- ----------------------------------------------------------------
Special Offer Product 7% 7% 7% 7% 7% 7% 7% 0% 0% 0%
- ----------------------------------------------------------------
SPDA Personal 1,3 5% 5% 5% 5% 5% 5% 0% 0% 0% 0%
- ----------------------------------------------------------------
SPDA Personal Index 5% 5% 5% 5% 5% 5% 0% 0% 0% 0%
- ----------------------------------------------------------------
SPL Floor 5% 5% 5% 5% 5% 5% 0% 0% 0% 0%
- ----------------------------------------------------------------
SPL Index 5% 5% 5% 5% 5% 4% 3% 2% 1% 0%
- ----------------------------------------------------------------
Pacer Annuity 6% 6% 6% 6% 6% 6% 0% 0% 0% 0%
- ----------------------------------------------------------------
Pacer Life 8% 8% 7% 6% 5% 4% 3% 2% 1% 0%
- ----------------------------------------------------------------
Marquee - B 6% 5% 4% 3% 2% 1% 0% 0% 0% 0%
- ----------------------------------------------------------------
PRISM - B 6% 5% 4% 3% 2% 1% 0% 0% 0% 0%
- ----------------------------------------------------------------
Tax Smart 6% 5% 4% 3% 2% 0% 0% 0% 0% 0%
- ----------------------------------------------------------------
NASL 6% 6% 5% 5% 4% 3% 2% 0% 0% 0%
================================================================
Note that surrender charges are not applicable for the following plans:
Advisor's Edge, Marquee-A Units and PRISM - A Units.
The IRA business is all out of the surrender charge period and therefore
surrender charges are not applicable.
Duration 5 and later P2000 business has pierced the bailout and therefore has no
surrender charge in effect.
Trust GIC Fees
- --------------
Fees charged on Trust GIC are assumed to equal 15 bp of notional amount grading
to 12 bp over five years on existing business, and 12 bp on future issues. Zero
cost is associated with the guarantees on Trust GICs based on the lack of
historical cost and the underwriting practices in place at the Company.
D-14
<PAGE>
Market Value Adjustment - MVP
- -----------------------------
The market value adjustment on the MVP products equals the change in the Merrill
Lynch Mortgage Master Index (from the premium payment date to the surrender
date) multiplied by a timing factor. The timing factor is based on the time
remaining in the surrender charge period and grades to zero at the end of the
surrender charge period. We have modelled this provision based on data provided
to us by Providian and the market-value adjustment outstanding as of June 30,
1996.
Guaranteed Interest Rates:
- --------------------------
=====================================================
Plan Number Plan Description Guaranteed Rate
- -----------------------------------------------------
1 MVP 4.0%
- -----------------------------------------------------
2 Personal 2000 4.0%
- -----------------------------------------------------
3 Personal 2000 Plus 4.0%
- -----------------------------------------------------
4 Providian Flex Plus 4.0%
- -----------------------------------------------------
5 Special Offer Product 4.0%
- -----------------------------------------------------
6 SPDA Personal 1,3 4.0%
- -----------------------------------------------------
7 SPDA Personal Index 4.0%
- -----------------------------------------------------
8 SPL 4.0%
- -----------------------------------------------------
9 Pacer Annuity N/A
- -----------------------------------------------------
10 Pacer Life N/A
- -----------------------------------------------------
11 Advisor's Edge 3.0%
- -----------------------------------------------------
12 Marquee - A Units 3.0%
- -----------------------------------------------------
13 Marquee - B Units 3.0%
- -----------------------------------------------------
14 PRISM - A Units 3.0%
- -----------------------------------------------------
15 PRISM - B Units 3.0%
- -----------------------------------------------------
16 IRA 4.0%
=====================================================
D-15
<PAGE>
EXHIBIT 99.3
PROVIDIAN CORPORATION
P P.O. BOX 32830
R LOUISVILLE, KENTUCKY 40232
O THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
X
Y The undersigned appoints Irving W. Bailey II, J. David Grissom and John M.
Cranor III, and each of them, proxies with power of substitution to vote
all shares of Common Stock which the undersigned would be entitled to vote
at the Annual Meeting of Providian Corporation (the "Company") on May 29,
1997 at 11:00 a.m., Eastern Time, and any adjournments thereof, upon the
matters set forth below and any other business that may properly come
before the meeting.
1. Election of four Directors. Nominees for directors are Lyle Everingham,
Watts Hill, Jr., Ned C. Lautenbach and Larry D. Thompson.
2. Approval of the appointment by the Board of Directors of Ernst & Young
LLP as the Company's independent auditors for 1997.
3. Approval of the proposal to approve the Amended and Restated Plan and
Agreement of Merger and Reorganization, dated as of December 28, 1996,
among AEGON N.V., LT Merger Corp. and the Company.
See Reverse Side
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE>
[X] Please mark your [9863
votes as in this
example
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR ALL PROPOSALS
The Board of Directors recommends a vote FOR all proposals.
1. Election of Directors
FOR WITHHELD
[_] [_]
2. Approval of Independent Auditors
FOR AGAINST ABSTAIN
[_] [_] [_]
3. Approval of Merger
FOR AGAINST ABSTAIN
[_] [_] [_]
For, except vote withheld from the following nominee(s):
- --------------------------------------------------------
SIGNATURE(S) DATE:
----------------------------------- ----------------
Please sign exactly as your name appears on this proxy card. Joint owners should
each sign. When signing as attorney, executor, administrator, trustee or
guardian, please give full title as such.
- --------------------------------------------------------------------------------
PLEASE DETACH HERE, COMPLETE, SIGN AND RETURN CARD
PROVIDIAN CORPORATION
Annual Meeting of Stockholders
May 29, 1997
11:00 a.m.
Seelbach Hotel, Medallion Room
500 Fourth Avenue
Louisville, Kentucky 40202
