-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Io45IUWoAnZGxuplLuTegCrgfL+2R4dGF3qxposqxdYTNRA8/p48TJcQc+fUck8M Vz7dg1mjoI1GSkjtvEGWpQ== 0000931763-97-000370.txt : 19970327 0000931763-97-000370.hdr.sgml : 19970327 ACCESSION NUMBER: 0000931763-97-000370 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970326 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROVIDENT COMPANIES INC /DE/ CENTRAL INDEX KEY: 0000005513 STANDARD INDUSTRIAL CLASSIFICATION: ACCIDENT & HEALTH INSURANCE [6321] IRS NUMBER: 621321664 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11834 FILM NUMBER: 97562958 BUSINESS ADDRESS: STREET 1: 1 FOUNTAIN SQUARE CITY: CHATTANOOGA STATE: TN ZIP: 37402 BUSINESS PHONE: 6157551011 MAIL ADDRESS: STREET 1: ONE FOUNTAIN SQUARE CITY: CHATTANOOGA STATE: TN ZIP: 37402 FORMER COMPANY: FORMER CONFORMED NAME: PROVIDENT LIFE & ACCIDENT INSURANCE CO OF AMERICA DATE OF NAME CHANGE: 19950407 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 Commission file number 1-11834 PROVIDENT COMPANIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 62-1598430 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1 FOUNTAIN SQUARE CHATTANOOGA, TENNESSEE 37402 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (423) 755-1011 Securities registered pursuant to Section 12(b) of the Act: COMMON STOCK, PAR VALUE $1.00 PER SHARE (Title of Class) 8.10% CUMULATIVE PREFERRED STOCK, LIQUIDATION VALUE $150 PER SHARE (Title of Class) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO As of March 10, 1997, there were 45,685,191 shares of the registrant's Common Stock, and 1,041,534 shares of the registrant's 8.10% Cumulative Preferred Stock outstanding. The aggregate market value of the shares of Common Stock and the Depositary shares representing the Preferred Stock based on the closing price of those shares on the New York Stock Exchange, Inc., held by non-affiliates was approximately $ 1,246.0 million and $161.7 million, respectively. Selected material from the Annual Report to Stockholders for the year ended December 31, 1996 and Proxy Statement for the Annual Meeting of Stockholders scheduled for May 7, 1997, have been incorporated by reference into Parts I, II, and III of this Form 10-K. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] PART I ITEM 1. BUSINESS INTRODUCTION Provident Companies, Inc. (the "Company") is a Delaware business corporation that serves as a holding company of Provident Life and Accident Insurance Company ("Accident"), Provident Life and Casualty Insurance Company ("Casualty"), and Provident National Assurance Company ("National") (hereinafter collectively "Provident"). Provident does business in the 50 states, the District of Columbia, Puerto Rico, and ten provinces and two territories of Canada. Provident operates principally in the life and health insurance business. Individual disability income products, individual life products, and individual annuities are reported in the Individual Life and Disability segment and are marketed primarily through personal producing general agents, brokerage offices, and corporate marketing arrangements. Individual annuities and individual disability products are also marketed through financial institutions. The Employee Benefits segment contains products that are sold to or through corporate customers and certain affinity groups, including permanent and term life insurance, disability, cancer, accident and sickness, accidental death and dismemberment protection, and medical stop-loss. The Other Operations segment reports corporate results, primarily investment earnings on capital not specifically allocated to a line of business, and also includes results from products no longer actively marketed, including guaranteed investment contracts ("GICs"), group single premium annuities, and corporate-owned life insurance. This segment also includes the results of the group medical business which was sold effective April 30, 1995. See "Note 13 of the Notes to Consolidated Financial Statements" on page 65 of the Annual Report to Stockholders for the year ended December 31, 1996, incorporated herein by reference. The Company does not conduct any other significant business except for its receipt of dividends from Provident and the payment of dividends to its stockholders (see Item 7 below). The acquisition of The Paul Revere Corporation ("Paul Revere") by the Company is currently pending and is expected to close in the first quarter of 1997. The acquisition is to be effected pursuant to a merger of a newly formed, wholly-owned subsidiary of the Company with and into Paul Revere with Paul Revere becoming a wholly-owned subsidiary of the Company (the "Paul Revere Merger"). The Paul Revere Merger will be accounted for under the purchase method of accounting, pursuant to which the assets and liabilities of Paul Revere will be recorded at their respective fair values and added to those of the Company. Paul Revere is a Massachusetts corporation organized in 1992 as an insurance holding company. Paul Revere's principal operations in the United States and Canada are conducted through its wholly-owned subsidiary, The Paul Revere Life Insurance Company ("Paul Revere Life"), a Massachusetts-domiciled life insurance company licensed in all 50 states, the District of Columbia, and Canada. Paul Revere Life has two wholly-owned subsidiaries, The Paul Revere Variable Annuity Insurance Company ("Paul Revere Variable"), a Massachusetts- domiciled life insurance company licensed in 48 states and the District of Columbia, and The Paul Revere Protective Life Insurance Company ("Paul Revere Protective"), a Delaware-domiciled life insurance company licensed in 40 states and the District of Columbia. Disability insurance has been Paul Revere's -2- primary product line since Paul Revere Life's founding. In addition to its individual and group disability insurance products, Paul Revere also markets individual life insurance, group life insurance, dental insurance, and annuity products. In connection with the Paul Revere Merger, the stockholders of the Company approved issuing up to 14,406,000 shares of the Company's Common Stock to the stockholders of Paul Revere and issuing 9,523,810 to Zurich Insurance Company in connection with financing the Merger. They also approved amending the Company's Certificate of Incorporation to increase from 65,000,000 to 150,000,000 the number of shares of the Company's Common Stock which the Company is authorized to issue. In February 1997, the Company acquired GENEX Services, Inc. and GENEX Services of Canada, Inc. ("GENEX") at a price of approximately $70 million. GENEX is a provider of case management, vocational rehabilitation, and related services to corporations, third party administrators, and insurance companies. These services are utilized in the management of disability and worker's compensation claims. The results of the GENEX operations will be reported in the Employee Benefits segment in future filings. Unless the context otherwise indicates, references in this report to the "Company" include Provident Companies, Inc., and its direct subsidiaries, including Accident, National, and Casualty. Unless the context otherwise indicates, the discussion of the business of the Company will refer to the business and activities of Provident because all of the material business activities of the Company are conducted by Provident. -3- SELECTED DATA OF SEGMENTS The following table reflects for the indicated years selected financial data for the Company's segments.
Year Ended December 31 1996 1995 1994 (in millions of dollars) ------------------------------- Revenue (Excluding Net Realized Investment Gains and Losses) Individual Life and Disability $ 1,047.6 $ 1,019.3 $ 956.6 Employee Benefits 606.1 582.7 555.3 Other Operations 646.8 985.0 1,280.4 --------- --------- --------- Total $ 2,300.5 $ 2,587.0 $ 2,792.3 ========= ========= ========= Income Before Net Realized Investment Gains and Losses and Federal Income Taxes Individual Life and Disability $ 117.3 $ 36.5 $ 53.2 Employee Benefits 56.3 48.6 71.8 Other Operations 61.2 122.6 106.0 --------- --------- --------- Total $ 234.8 $ 207.7 $ 231.0 ========= ========= ========= Revenue (Including Net Realized Investment Gains and Losses) Individual Life and Disability $ 1,056.1 $ 1,024.0 $ 962.4 Employee Benefits 606.2 586.6 556.9 Other Operations 629.6 944.7 1,242.9 --------- --------- --------- Total $ 2,291.9 $ 2,555.3 $ 2,762.2 ========= ========= ========= Income Before Federal Income Taxes Individual Life and Disability $ 125.8 $ 41.2 $ 59.0 Employee Benefits 56.4 52.5 73.4 Other Operations 44.0 82.3 68.5 --------- --------- --------- Total $ 226.2 $ 176.0 $ 200.9 ========= ========= ========= Assets Individual Life and Disability $ 6,051.3 $ 5,746.1 $ 4,597.1 Employee Benefits 1,505.8 1,426.5 1,238.3 Other Operations 7,435.4 9,128.7 11,314.5 --------- --------- --------- Total $14,992.5 $16,301.3 $17,149.9 ========= ========= =========
Total revenue (excluding net realized investment gains and losses) includes premium income, net investment income, and other income. Total revenue (including net realized investment gains and losses) includes premium income, net investment income, net realized investment gains and losses, and other income. Assets have been allocated to the segments based upon identifiable liabilities and allocated stockholders' equity. Additional information regarding the operations of these segments may be found under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 26-35 of the Annual Report to Stockholders for the year ended December 31, 1996, incorporated herein by reference. -4- CONSOLIDATED LIFE INSURANCE IN FORCE The following table sets forth the changes to life insurance in force and the number of policies in force for the Company's business segments. Reinsurance assumed has been included in these figures. Reinsurance ceded has not been deducted.
NUMBER OF FACE AMOUNT POLICIES ------------------------------------------------------------------------------------------- ---------- (in millions of dollars) In force Lapses In force In force Beginning Other and Other End End of Year Sales Increases Deaths Surrenders Decreases of Year of Year --------- --------- --------- ------ ---------- --------- ---------- ---------- 1996 Individual Life and Disability $12,709.1 $1,109.2 $239.6 $48.5 $1,109.9 $314.3 $12,585.2 173,330 Employee Benefits 83,276.3 13,664.0 2,011.8 201.1 11,558.2 113.1 87,079.7 415,394 Other Operations 2,967.2 4.2 66.2 28.8 5.0 4.2 2,999.6 25,597 --------- --------- --------- ------ --------- ------ --------- ------- Total $98,952.6 $14,777.4 $2,317.6 $278.4 $12,673.1 $431.6 $102,664.5 614,321 ========= ========= ======== ====== ========= ====== ========== ======= 1995 Individual Life and Disability $12,683.6 $1,062.7 $260.3 $45.8 $1,050.4 $201.3 $12,709.1 179,310 Employee Benefits 71,460.5 9,133.1 6,287.9 193.6 3,324.3 87.3 83,276.3 367,601 Other Operations 2,641.5 8.9 344.6 12.3 12.2 3.3 2,967.2 25,844 --------- --------- --------- ------ --------- ------ --------- ------- Total $86,785.6 $10,204.7 $6,892.8 $251.7 $4,386.9 $291.9 $98,952.6 572,755 ========= ========= ======== ====== ========= ====== ========== ======= 1994 Individual Life and Disability $12,877.4 $1,299.6 $210.0 $50.9 $1,406.7 $245.8 $12,683.6 185,440 Employee Benefits 68,064.8 7,027.2 1,214.5 188.2 4,342.3 315.5 71,460.5 340,110 Other Operations 2,351.7 5.7 307.0 12.1 10.2 0.6 2,641.5 25,995 --------- --------- --------- ------ --------- ------ --------- ------- Total $83,293.9 $8,332.5 $1,731.5 $251.2 $5,759.2 $561.9 $86,785.6 551,545 ========= ========= ======== ====== ========= ====== ========== =======
-5- INDIVIDUAL LIFE AND DISABILITY The Individual Life and Disability segment offers a variety of disability and life and annuity products to individuals. For a discussion of operating results for the Individual Life and Disability segment, see "Management's Discussion and Analysis of Financial Condition and Results of Operations," pages 27-28, of the Annual Report to Stockholders for the year ended December 31, 1996, incorporated herein by reference. Historically, individual disability income insurance has been a significant contributor to Provident's net income, although in 1993, 1994, and 1995 net income from this line was down materially from earlier years. In 1996, results in this line improved significantly. Provident is among the largest underwriters of individual disability income insurance in the United States based on annualized premiums in force. Until 1995 almost all of Provident's individual disability income insurance was sold on a noncancelable basis. Under a noncancelable policy, as long as the insured continues to pay the fixed annual premium for the policy's duration, the policy cannot be canceled by Provident nor can the premium be raised. Historically, Provident marketed individual disability income insurance primarily to upper income professionals, small business owners, and business executives. As discussed below, Provident has changed the types of policies which it is offering and broadened the market focus for these products. Individual disability income insurance provides the insured with a portion of earned income lost as a result of sickness or injury. Under an individual disability income policy, monthly benefits generally are fixed at the time the policy is written. The benefits typically range from 30 percent to 75 percent of the insured's monthly earned income. Various options with respect to length of benefit periods and waiting periods before payment begins are available and permit tailoring of the policy to a specific policyholder's needs. Provident also markets individual disability income policies which include payments for transfer of business ownership and business overhead expenses. Individual disability income products do not provide for the accumulation of cash values. Premium rates for these products are varied by age, sex, and occupation based on assumptions concerning morbidity, persistency, policy related expenses, and investment income. Provident develops its assumptions based on its own claim experience and published industry tables. Due to the noncancelable, fixed premium nature of the policies marketed in the past, profitability of this part of the business is largely dependent upon achieving the morbidity and interest rate assumptions set in the loss recognition study of the business written in 1993 and prior and in the pricing of business written after 1993. Provident's underwriters evaluate the medical and financial condition of prospective policyholders prior to the issuance of a policy. The Company performed a loss recognition study on its individual disability income business as of September 30, 1993. The study resulted in a $423.0 million pre-tax or $275.0 million after-tax charge to operating earnings. The charge was required under generally accepted accounting principles due to the -6- significant decline in interest rates in 1993 and the increased level of morbidity experienced by the Company. Since 1993, the Company has performed annual loss recognition studies to determine the continued adequacy of the reserves that were established. Based upon the December 1996 loss recognition study, which incorporates management's best estimate for the assumptions used, reserves were adequate at December 31, 1996. To better understand and analyze this business, Provident segments the business by state, branch office, policy form, and occupation and uses the information in the pricing, risk selection, and morbidity control processes as more fully discussed below. Provident has also tightened its underwriting requirements, discontinued sale of noncancelable long-term own-occupation policies with certain exceptions, and issued a new series of loss of earnings ("LE") policies. All claim payments are centralized in the home office for greater control and consistency. Specialization is being emphasized for specific types of claims, such as mental and nervous and orthopedic claims; early intervention in the claim process has been emphasized; and, the number and qualifications of the claims adjudication staff have been increased. The management of the Company initiated a comprehensive analysis of its overall corporate strategy in 1994. An important conclusion related to the individual disability income line was that the combination of noncancelable pricing guarantees and long-term own-occupation coverage is a risk which is very difficult to manage in today's environment. Therefore, in 1995, Provident discontinued selling individual noncancelable contracts with the long-term own- occupation provision (other than conversion policies available under existing contractual arrangements). Additionally, after January 1, 1995, lifetime benefits were not available on any basis, and maximum issue and participation limits of $10,000 were applied to all physicians and dentists. Consistent with the product development strategy begun in 1994, Provident is offering LE contracts instead of the traditional noncancelable long-term own- occupation contracts. The LE contract insures income rather than occupation. Eligibility for benefits under the new LE policy is not based on whether the insured can work in his or her original occupation. Instead, a claimant must satisfy two conditions for benefits to begin: reduced ability to work due to accident or sickness and earnings loss of at least 20 percent. These policies are aimed at repositioning the individual disability income product by making it more attractive to a broader market of individual consumers, including middle to upper income individuals and corporate benefit buyers. These product decisions are an integral part of an intensive, broad-based effort to enhance the profitability and improve the growth prospects of the individual disability line. This effort involves many separate improvement initiatives implemented in 1995 which fall into four main categories. The first major area of emphasis focuses on thoroughly understanding the risk characteristics of the current individual disability income block of business. The second major area of emphasis includes improvements to the claims management process including the addition of resources, the creation of dedicated specialty claim units (including mental and nervous and orthopedic), and enhancements to rehabilitation capabilities. Management believes these efforts will enable the Company to enhance service to its customers by providing a better understanding -7- of the disability underlying the claims and improving further the Company's ability to thoroughly and effectively adjudicate a claim. Through the acquisition of GENEX and the important disability management and rehabilitation skill sets available from its personnel, the Company will be able to provide additional service and benefits to its disability customers. A third category is a complete reengineering of the new-business process in order to achieve a more efficient application and policy issue process. Through the utilization of improved technology and work processes, Provident began the implementation of its refocused customer strategy in 1995. Finally, the fourth area focuses on expanded future product offerings with product modifications continuing to be developed in 1996 as a result of the initiatives outlined above. These strategic actions were expected to result in a period of lower premium income from new sales of individual disability income products, due to the product transition and the premium differential that exists between the new LE contracts and the old noncancelable long-term own-occupation contracts. Although sales declined in the early part of 1996, in the second half of the year annualized new premium exceeded that of the first six months of 1996 and that of the last six months of 1995. Management believes this indicates improving market acceptance of the new products. Provident markets individual disability income insurance primarily through independent agents and brokers who are served by a network of 45 sales offices in the United States (service offices have been consolidated into the home office in Chattanooga, Tennessee) and 4 sales offices and 1 Canadian home office in Canada. The sales offices are staffed with approximately 175 management, sales, and clerical employees. Provident has 8 United States marketing regions which provide support and services to branch and district managers. Also included in this segment is a variety of individual life products offered to the middle and upper income market historically through a distribution system of approximately 700 personal producing general agents ("PPGAs") throughout the United States. These products are also available through the individual brokerage offices. Provident's life insurance offerings include term insurance, universal life, and interest-sensitive life insurance products. Universal life products provide permanent life insurance with adjustable interest rates applied to the cash value and are designed to achieve specific policyholder objectives such as higher accumulation values and/or flexibility with respect to amount of coverage and premium payments. The principal difference between fixed premium and universal life insurance policies centers around policy provisions affecting the amount and timing of premium payments. Under universal life policies, policyholders may vary the frequency and size of their premium payments, and policy benefits may fluctuate accordingly. Premium payments under the fixed premium policies are not variable by the policyholder and, as a result, generally reflect lower administrative costs than universal life products for which extensive monitoring of premium payments and policy benefits is required. The largest number of ordinary life policies sold in 1995 and 1996 were the ten-year level term policies. These products have level premiums for an initial ten-year period after which the policyholder may resubmit to the underwriting process and possibly qualify for a new ten year period at the attained age premiums; otherwise, premiums revert to a yearly renewable term premium which -8- increases annually. When measured by annualized premiums, universal life with the flexibility and features described above was the largest product category sold by Provident in this segment in recent years. Premium rates for Provident's life insurance products are based on assumptions as to future mortality, investment yields, expenses, and lapses. Although a margin for profit is included in setting premium rates, the actual profitability of products is significantly affected by the variation of actual experience from assumed experience. Profitability of fixed premium products is also dependent upon investment income on reserves. The profitability of interest-sensitive products is determined primarily by the ultimate underwriting experience and the ability to maintain anticipated investment spreads. Provident believes that the historical claim experience for these products has been satisfactory. From Provident's viewpoint, the risks involved with interest-sensitive products include actual versus assumed mortality, achieving investment returns that at least equal the current declared rate, competitive position of declared rates on the policies, meeting the contractually guaranteed minimum crediting rate, and recovery of policy acquisition costs. From the policyholder's perspective, the risk involved with interest-sensitive products is whether or not the declared rates on the policy will compare favorably with the returns available elsewhere in the marketplace. In 1994, Provident began distributing individual single premium deferred annuities through banks and other financial institutions using third party marketers specializing in this type of distribution. Provident generated $8.1 million in single premium deferred annuity deposits sold through this channel in 1996 and expects to expand the distribution of these products in 1997. Deposits on annuities sold through other distribution channels were $13.1 million in 1996. Management has created a significant initiative to expand its offering of each of its individual products through each of its marketing channels, including its individual brokerage system, the PPGAs, and its alternative markets group which focuses on sales through non-traditional channels including banks and other financial institutions, affinity groups, and associations. This expansion should further enhance the Company's ability to serve a broader market. EMPLOYEE BENEFITS The Employee Benefits segment offers a variety of group related products such as voluntary benefits, group disability, group life insurance, medical stop-loss insurance, and other products marketed to certain associations and employee groups. These products are sold through consultants, brokers, agents and directly to corporate customers. For a discussion of operating results for the Employee Benefits segment, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 29-30 of the Annual Report to Stockholders for the year ended December 31, 1996, incorporated herein by reference. In recent years, Provident has increased its emphasis on marketing group disability income insurance as a separate coverage, primarily on a fully-insured -9- basis to employers with fewer than 1,000 employees. Disability income insurance provides employees with insurance coverage for loss of income in the event of extended work absences due to sickness or injury. Services are offered to employers and insureds to encourage and facilitate rehabilitation, retraining, and re-employment. Premiums for this product are based on expected claims of a pool of similar risks plus provisions for administrative expenses and profit. Premiums for existing experience rated group disability business are based on the specific claim experience of the client with some credibility for the experience of the specific group. A few accounts are handled on an administrative services only basis with responsibility for funding claim payments remaining with the customer. Profitability of group disability insurance is affected by deviations of actual claims experience from expected claims experience and the ability of Provident to control its administrative expenses. Morbidity is an important factor in disability claim experience. Also important is the general state of the economy; for example, during a recession the incidence of claims tends to increase under this type of insurance. In general, experience rated disability coverage for large groups has narrower profit margins and represents less risk to Provident than business of this type sold to small employers. This is because Provident must bear all of the risk of adverse claim experience in small case coverages while larger employers bear much of this risk themselves. For disability coverages, case management and rehabilitation activities with regard to claims, along with appropriate pricing and expense control, are important factors contributing to profitability. These products are sold by a dedicated field sales organization through consultants and brokers. Successful sales of these products depend upon rehabilitation programs and quality claim servicing which is perceived by customers as justifying a fair price. Group life insurance is marketed by Provident to both large and small employers. The coverage offered consists primarily of renewable term life insurance with the coverages frequently linked to employees' wages. Profitability in group life is affected by deviations of actual claim experience from expected claim experience and the ability of Provident to control administrative expenses. Field sales representatives sell large case group life to employers through consultants, brokers, and independent general agents. Some employers protect themselves against significant adverse claim experience with respect to medical coverage through stop-loss arrangements. Under a variety of stop-loss arrangements, Provident charges a premium in exchange for an obligation that it will absorb (or reimburse the employer or plan) for claims in excess of a stated amount on an aggregate or individual basis. Profitability in medical stop-loss arrangements depends upon the ability of Provident to accurately predict actual claim trends relative to expected trends, predict rates of medical cost inflation, and analyze the claim practices of the underlying plan. -10- To complement its employer paid programs Provident also offers voluntary benefits products through employer-sponsored payroll deduction programs. In addition to universal life and interest-sensitive life products, Provident offers health products, principally intermediate disability income policies. These payroll deduction health products are an integral and growing part of the current marketing efforts in the Employee Benefits segment. Payroll deduction individual life and health insurance is sold through salaried field representatives, who call on large employers, and through independent general agents and brokers. When employer sponsorship is achieved, either independent enrollment specialists or Provident's enrollment team solicits employee participation. Using employer-sponsored payroll deduction methods to distribute life insurance products typically means lower acquisition costs than traditional distribution methods. OTHER OPERATIONS The Other Operations segment consists of GICs, group single premium annuities ("SPAs"), a closed block of corporate-owned life insurance, the medical services business sold in 1995, and any capital and assets that are not allocated to the business segments. GIC products include synthetic GICs, traditional GICs, and separate account GICs. In December 1994, the Company discontinued the sale of traditional GICs, but continues to service its block of existing business. Sales of separate account GICs and synthetic GICs were discontinued in 1996. Sales of group SPAs were also discontinued. Information with respect to the Other Operations segment is included in the Annual Report to Stockholders for the year ended December 31, 1996, under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 30-31, incorporated herein by reference. Traditional GICs have comprised a major portion of this segment's products sold since 1982. Under traditional GICs, Provident guarantees the principal and interest to the contract holder for a specified period, generally three to five years. Provident marketed GICs for use in corporate tax-qualified retirement plans and derives profits from GICs on the spread between the amount of interest earned on invested funds and the fixed rate guaranteed in the GIC. Provident introduced its separate account GIC product in late 1992 and its synthetic GIC in mid-1993. Separate account GICs differ from traditional GICs in that the assets underlying the contract are segregated from the general account of Provident and held solely for the benefit of the specific contract involved. Funds under management for separate account GICs were $68.3 million at December 31, 1996. The synthetic GIC differs from the traditional GIC in that the assets underlying the contract are owned and retained by the trustee of the contract holder. These assets are held in a custodial account in the name of the trustee and are not included in the Company's consolidated statements of financial condition. Under the contract, if the trustee requests a benefit payment be made under the plan, Provident guarantees to provide the benefit payment at book value and, in return for this service, Provident receives a premium calculated primarily with respect to benefit payment exposure and contract size. Funds under management for synthetic GICs at December 31, 1996, were $2,176.6 million. -11- In January 1997, the Company signed a letter of understanding to sell the block of business through an assumptive reinsurance transaction. Group SPAs are used as funding vehicles primarily when defined benefit pension plans are terminated. Provident also offers annuities as an employer- sponsored option for retirees receiving their distributions from 401(k) plans. Pursuant to a group SPA contract, Provident receives a one-time premium payment and in turn agrees to pay a fixed monthly retirement benefit to specified employees. Provident believes that there are three primary sources of risk associated with traditional GICs and group SPAs, assuming that the business has been properly capitalized. Underwriting risk covers the risk that a GIC has been priced properly to reflect the risk of withdrawal and for group SPAs, that the mortality rates and the ages and frequency at which annuitants will retire have been accurately projected. Asset/liability risk covers the risk that the investments purchased to back the GIC or group SPA will adequately match the future cash flows. Investment risk covers the risk that the underlying investments backing the GICs and group SPAs will perform according to the expectations of Provident at the time of purchase. Provident has historically managed its investment risk by investing in quality assets which have an aggregate duration that closely matches the expected duration of the GICs and group SPAs. In late 1994, with Provident's decision to stop marketing traditional GICs, it became necessary to change its investment strategy from a duration matching approach to a cash flow matching approach. More information on the investment portfolio is included under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 34-35 of the Annual Report to Stockholders for the year ended December 31, 1996, incorporated herein by reference. The corporate-owned life insurance ("COLI") product included in this segment is another product no longer actively marketed. In 1983, Provident was among the first insurance companies to market tax-leveraged products for the COLI market. Beginning in 1986, Congress began to enact tax legislation that significantly reduced the ability of policyholders to deduct policy loan interest on these products which detracted from the internal rate of return which heretofore had been available. In 1988, Congress went further by enacting legislation that had adverse tax consequences for distributions/policy loans from modified endowment contracts. Under this legislation, new sales of the majority of Provident's corporate-owned products would have been subject to adverse tax treatment as modified endowment contracts due to their high premium level. As a consequence, many of these products were withdrawn, and revised products which would not be considered modified endowment contracts were introduced. Policies issued prior to June 21, 1986, however, were grandfathered from the modified endowment provisions. In 1996, Congress enacted tax legislation which generally eliminates tax deductions for policy loan interest on COLI products issued on or after June 21, 1986. This legislation is not expected to have a material impact on Provident, since most of Provident's premiums on this business are attributable to policies issued prior to June 21, 1986. This segment also includes the results of the group medical business which was sold effective April 30, 1995. See "Note 13 of the Notes to Consolidated Financial Statements" on page 65 of the Annual Report to Stockholders for the year ended December 31, 1996, incorporated herein by reference. -12- INVESTMENTS Information concerning this part of Provident's business is included under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 34-35 of the Annual Report to Stockholders for the year ended December 31, 1996, incorporated herein by reference. REINSURANCE Provident routinely reinsures portions of its business with other insurance companies. In a reinsurance transaction a reinsurer agrees to indemnify another insurer for part or all of its liability under a policy or policies it has issued for an agreed upon premium. The maximum amount of risk retained by Provident and not reinsured is $1 million on any individual life insured and $150,000 on individual accidental death insurance. The amount of risk retained by Provident on individual disability income products varies by policy type and year of issue. Provident also reinsures against catastrophic losses in the Employee Benefits segment. Since the ceding of reinsurance by Provident does not discharge its primary liability to the policyholder, Provident has control procedures with regard to reinsurance ceded. These procedures include the exchange and review of financial statements filed with regulatory authorities, exchange of Insurance Regulatory Information System results, review of ratings by A.M. Best Co., determination of states in which the reinsurer is licensed to do business, on-site visits before entering a contract to assess the operations and management of the reinsurer, consideration of the need for collateral, such as letters of credit, and audits of Provident's reinsurance activities by its Internal Audit staff. Provident also assumes reinsurance from other insurers. See "Note 10 of the Notes to Consolidated Financial Statements" on page 63 of the Annual Report to Stockholders for the year ended December 31, 1996, incorporated herein by reference. RESERVES The applicable insurance laws under which insurance companies operate require that they report, as liabilities, policy reserves to meet future obligations on their outstanding policies. These reserves are the amounts which, with the additional premiums to be received and interest thereon compounded annually at certain assumed rates, are calculated to be sufficient to meet the various policy and contract obligations as they mature. These laws specify that the reserves shall not be less than reserves calculated using certain specified mortality and morbidity tables, interest rates, and methods of valuation. The reserves reported in the Company's financial statements incorporated herein by reference are calculated based on generally accepted accounting principles and differ from those specified by the laws of the various states and carried in the statutory financial statements of the life insurance subsidiaries. These differences arise from the use of mortality and morbidity -13- tables and interest assumptions which are believed to be more representative of the actual business than those required for statutory accounting purposes and from differences in actuarial reserving methods. See "Note 1 of the Notes to Consolidated Financial Statements" on pages 44-48 of the Annual Report to Stockholders for the year ended December 31, 1996, incorporated herein by reference, for more information. The consolidated statements of income include the annual change in reserves for future policy and contract benefits. The change reflects a normal accretion for premium payments and interest buildup and decreases for policy terminations such as lapses, deaths, and annuity benefit payments. Traditional GICs are over 85 percent of Provident's policyholders' funds balance at December 31, 1996. They are structured with a specific maturity and provide for withdrawals for payment of benefits to contract holders or other beneficiaries. Policyholders' Funds, as shown on the Company's consolidated statements of financial condition as of December 31, 1996, were $3,717.1 million. Of this amount, $3,204.3 million reflected the Company's outstanding GICs, the maturity of which is as follows (in millions of dollars):
1 year or less $1,453.8 Over 1 year but less than 2 years 997.5 Over 2 years but less than 3 years 567.9 Over 3 years but less than 4 years 155.6 Over 4 years but less than 5 years 22.7 Over 5 years 6.8 -------- Total $3,204.3 ========
COMPETITION There is intense competition among insurance companies for the individual and group insurance products of the types sold by Provident. At the end of 1996, there were over 2,000 legal reserve life insurance companies in the United States, many offering one or more insurance products similar to those marketed by Provident. Provident's principal competitors in the employee benefits market include the largest insurance companies in the United States, many of which have substantially greater financial resources and larger staffs than Provident. In addition, in the individual life and annuities markets, Provident competes with banks, investment advisers, mutual funds, and other financial entities for investment of savings and retirement funds in general. In the individual and group disability markets, Provident competes in the United States and Canada with a limited number of major companies and regionally with other companies offering specialty products. All areas of the employee benefits markets are highly competitive due to the yearly renewable term nature of the products and the large number of insurance companies offering products in this market. Provident competes with other companies in attracting and retaining independent agents and brokers to actively market its products. The principal competitive factors affecting Provident's business are price and quality of service. -14- EMPLOYEES At March 20, 1997, Provident had approximately 1,964 full-time employees, including approximately 1,652 at its headquarters in Chattanooga, Tennessee, and GENEX had approximately 1,300 full time employees, including approximately 190 in its home office in Wayne, Pennsylvania. REGULATION The Company and its insurance subsidiaries are subject to detailed regulation and supervision in the jurisdictions in which each does business. With respect to the insurance subsidiaries, such regulation and supervision is primarily for the protection of policyholders rather than for the benefit of investors or creditors. Although the extent of such regulation varies, state insurance laws generally establish supervisory agencies with broad administrative powers. These supervisory and administrative powers relate chiefly to the granting and revocation of the licenses to transact business, the licensing of agents, the approval of policy forms, reserve requirements, and the form and content of required financial statements. As to the type and amounts of its investments, the Company's insurance subsidiaries must meet the standards and tests promulgated by the insurance laws and regulations of Tennessee, New York, and certain other states in which they conduct business. Once the Paul Revere acquisition is completed, Massachusetts and Delaware will also regulate certain of the Company's insurance subsidiaries. The Company and its insurance subsidiaries are required to file various, usually quarterly and/or annual, financial statements and are subject to periodic and intermittent review with respect to their financial condition and other matters by the various departments having jurisdiction in the states in which they do business. The field work related to the last such examination of the insurance subsidiaries was completed on February 4, 1992, and covered operations for the five-year period ending December 31, 1990. No objections were raised by the reviewing authorities as a result of that examination. The examination for the five year period ending December 31, 1995, began in February 1996 and should be completed during the second quarter of 1997. The laws of the states of Tennessee and New York require the registration of and periodic reporting by insurance companies domiciled within their jurisdiction which control or are controlled by other corporations or persons so as to constitute a holding company system. The Company is registered as a holding company system in Tennessee and New York. Following the Paul Revere acquisition, the Company will also be subject to regulation under the holding company laws of Massachusetts and Delaware, the domiciliary states of the Paul Revere insurance subsidiaries. The holding company statutes require periodic disclosure concerning stock ownership and prior approval of certain intercompany transactions within the holding company system. The Company may from time to time be subject to regulation under the insurance and insurance holding company statutes of one or more additional states. Further information is included under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 32-33 of the Annual Report to Stockholders for the year ended December 31, 1996, incorporated herein by reference. -15- The National Association of Insurance Commissioners ("NAIC") and insurance regulators are re-examining existing laws and regulations and their application to insurance companies. In particular, this re-examination has focused on insurance company investment and solvency issues and, in some instances, has resulted in new interpretations of existing law, the development of new laws, and the implementation of non-statutory guidelines. The NAIC has formed committees and appointed advisory groups to study and formulate regulatory proposals on such diverse issues as the use of surplus notes, accounting for reinsurance transactions, and the adoption of risk-based capital rules. The NAIC is currently in the process of recodifying statutory accounting practices, the result of which is expected to standardize prescribed statutory accounting practices. Accordingly, this project, which is expected to be completed in 1997, will likely change, to some extent, prescribed statutory accounting practices and may result in changes to the accounting practices that the Company's insurance subsidiaries use to prepare their statutory financial statements. ITEM 2. PROPERTIES The Company's home office property consists of two connected office buildings totaling 840,000 square feet at 1 Fountain Square, Chattanooga, Tennessee. The office buildings and substantially all of the surrounding 25 acres of land, used primarily as parking lots, are owned by Provident in fee. Provident also leases office space and minor storage space at approximately 66 locations in 32 states and 3 Canadian provinces for its sales and service force. Provident's real property lease payments for 1996 were approximately $3.6 million (net of rents received on subleased property). Management of the Company believes that Provident's properties and the properties which it leases are in good condition and are suitable and adequate for Provident's current business operations. ITEM 3. LEGAL PROCEEDINGS In the ordinary course of its business operations, Provident is involved in routine litigation with policyholders, beneficiaries, and others, and a number of such lawsuits were pending as of the date of this filing. In the opinion of management, the ultimate liability, if any, under these suits would not have a material adverse effect on the consolidated financial condition or the consolidated results of operations of Provident or the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On December 31, 1996, a special meeting of stockholders was held to consider three proposals related to the acquisition by the Company of The Paul Revere Corporation: (1) The issuance of shares of common stock, par value $1.00 per share of the Company ("Provident Common Stock") pursuant to an Amended and Restated Agreement and Plan of Merger, dated as of April 29, 1996 (the "Merger Agreement"), by and among the Company, Patriot Acquisition Corporation, a wholly-owned subsidiary of the Company, ("Newco") and The Paul Revere -16- Corporation ("Paul Revere"), which provides for the merger of Newco with and into Paul Revere. This proposal received the following votes: 39,904,584 FOR, 30,917 AGAINST, and 142,862 ABSTENTIONS or Broker Non-Votes. (2) The issuance of shares of Provident Common Stock pursuant to an Amended and Restated Common Stock Purchase Agreement dated as of May 31, 1996 between the Company and Zurich Insurance Company ("Zurich"), which provides for the purchase of 9,523,810 shares of Provident Common Stock by Zurich. This proposal received the following votes: 39,899,119 FOR, 30,779 AGAINST, and 146,465 ABSTENTIONS or Broker Non-Votes. (3) An amendment to the Company's Amended and Restated Certificate of Incorporation to increase from 65,000,000 to 150,000,000 the number of shares of Provident Common Stock which the Company is authorized to issue. This proposal received the following votes: 39,807,411 FOR, 155,790 AGAINST, and 113,162 ABSTENTIONS or Broker Non-Votes. (4A) EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company, all of whom are also executive officers of one or more of its subsidiaries, were elected to serve in their respective offices for one year or until their successors are chosen and qualified.
Name Age Position - ---------------------- --- ------------------------------------ J. Harold Chandler 47 Chairman, President, Chief Executive Officer, and Director Thomas R. Watjen 42 Executive Vice President and Chief Financial Officer Robert O. Best 47 Senior Vice President and Chief Information Officer Timothy C. Gartland 45 Senior Vice President, Human Resources Thomas B. Heys, Jr. 50 Senior Vice President, Corporate Risk Management Peter C. Madeja 38 Senior Vice President Jeffrey F. Olingy 47 Senior Vice President, Sales and Marketing Ralph A. Rogers, Jr. 48 Vice President and Controller
Mr. Chandler became President and Chief Executive Officer of the Company on November 8, 1993. He was elected Chairman of the Board on April 28, 1996. Immediately prior to his employment with the Company, he served as President of NationsBank Mid-Atlantic Banking Group which includes the NationsBank and Maryland National Corporation entities in the District of Columbia, Maryland, and northern Virginia. He formerly served as President of the Citizen and Southern National Bank of South Carolina, a predecessor of NationsBank. -17- Mr. Watjen became Executive Vice President and Chief Financial Officer of the Company on July 1, 1994. He is also a director of National. Prior to joining the Company, he served as a Managing Director of the investment banking firm, Morgan Stanley & Co., which he joined in 1987. Mr. Best became Senior Vice President and Chief Information Officer of the Company on July 11, 1994. He was previously Senior Vice President and Chief Information Officer at UNUM, which he joined in 1993 following UNUM's acquisition of Colonial Life and Accident Insurance Company. At Colonial, he served as Vice President, Operations and Information Systems, until 1992 when he was named Executive Vice President. Mr. Gartland became Senior Vice President, Human Resources, on August 30, 1996. Prior to joining the Company, he was President of Corporate Insights and Development, Inc., a management consulting firm which he co-founded in 1993. He served as Executive Vice President, Executive and Organizational Development, with NationsBank prior to that time. Mr. Heys became Senior Vice President, Corporate Risk Management, of the Company in August 1994. He served as Vice President and Chief Officer of the Life Department from May 1992 until August 1994. He served as Vice President and Chief Officer, Select Group Benefits, of Accident from November 1990 until May 1992. Mr. Madeja became Senior Vice President of the Company in February 1997 when the Company acquired GENEX Services, Inc. He continues to serve as President and Chief Executive Officer of GENEX, which he joined in 1982. Mr. Olingy became Senior Vice President, Sales and Marketing, of the Company on April 3, 1996. Prior to joining the Company, he was a Retail Banking Director with Bank of Boston which he joined in 1993. He served as Executive Vice President of NationsBank from 1991 to 1993. Mr. Rogers has served as Vice President and Controller of the Company since 1984. -18- PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this Item is included on page 68 of the Registrant's Annual Report to Stockholders for the year ended December 31, 1996, under the caption "Common Stock Information" and is incorporated herein by reference. As of March 10, 1997, there were 1,299 holders of Common Stock and 438 holders of the Depositary Shares. For information on restrictions relating to Provident's ability to pay dividends to the Company see "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 32-33 and "Note 15 of the Notes to Consolidated Financial Statements" on page 66 of the Annual Report to Stockholders for the year ended December 31, 1996, incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information required by this Item is included on pages 36-37 of the Registrant's Annual Report to Stockholders for the year ended December 31, 1996, under the caption "Selected Financial Data" and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item is included on pages 26-35 of the Registrant's Annual Report to Stockholders for the year ended December 31, 1996, under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is included on pages 38-67 of the Registrant's Annual Report to Stockholders for the year ended December 31, 1996, under the captions "Report of Ernst & Young LLP, Independent Auditors," "Consolidated Statements of Income," "Consolidated Statements of Financial Condition," "Consolidated Statements of Stockholders' Equity," "Consolidated Statements of Cash Flows," and "Notes to Consolidated Financial Statements," and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -19- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS The information required by this Item with respect to directors is included under the caption "Information Concerning the Nominees" of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held May 7, 1997, and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is included under the captions "Compensation of Directors" and "Executive Compensation" of the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held May 7, 1997, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is included under the caption "Beneficial Ownership of Company Securities" and under the caption "Security Ownership of Directors and Officers" of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held May 7, 1997, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is included under the caption "Certain Transactions" of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held May 7, 1997, and is incorporated herein by reference. -20- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) List of Documents filed as part of this report (1) Financial Statements The following report and consolidated financial statements of Provident Companies, Inc. and Subsidiaries, included in the Registrant's Annual Report to Stockholders for the year ended December 31, 1996, are incorporated by reference in Item 8: Report of Ernst and Young LLP, Independent Auditors Consolidated Statements of Income for the three years ended December 31, 1996 Consolidated Statements of Financial Condition at December 31, 1996 and 1995 Consolidated Statements of Stockholders' Equity for the three years ended December 31, 1996 Consolidated Statements of Cash Flows for the three years ended December 31, 1996 Notes to Consolidated Financial Statements (2) Schedules Supporting Financial Statements The following financial statement schedules of Provident Companies, Inc. and Subsidiaries are included in Item 14(d):
Page ---- I. Summary of Investments - Other Than Investments in Related Parties (Consolidated) 26 II. Condensed Financial Information of Registrant 27 III. Supplementary Insurance Information (Consolidated) 32 IV. Reinsurance (Consolidated) 34 V. Valuation and Qualifying Accounts (Consolidated) 35
Schedules not referred to have been omitted as inapplicable or because they are not required by Regulation S-X. -21- (3) Exhibits (2.1) Agreement and Plan of Share Exchange between Provident Companies, Inc. and Provident Life and Accident Insurance Company of America (incorporated by reference to Exhibit 2.1 to the Company's Form 10-K filed for fiscal year ended 1995). (2.2) Amended and Restated Agreement and Plan of Merger dated as of April 29, 1996 by and among Patriot Acquisition Corporation, The Paul Revere Corporation and the Company (including exhibits thereto), (incorporated by reference to Exhibit 2.1 of the Company's Form 10-Q and Form 10-Q/A filed for fiscal quarter ended September 30, 1996). (3.1) Amended and Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1 of the Company's Form 10-K for fiscal year ended 1995, as amended by Certificate of Amendment. (3.2) Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Form 10-K filed for fiscal year ended 1995). (4.1) Form of Preferred Stock Certificate relating to the registration of 6,000,000 Depositary Shares each representing a one-sixth interest in a share the 8.10% Cumulative Preferred Stock of America (incorporated by reference to America's Registration Statement on Form S-3, Registration No. 33-5612). (4.2) Form of Depositary Agreement relating to the registration of 6,000,000 Depositary Shares each representing a one-sixth interest in a share the 8.10% Cumulative Preferred Stock of America (incorporated by reference to America's Registration Statement on Form S-3, Registration No. 33- 5612). (4.3) Form of Depositary Receipt relating to the registration of 6,000,000 Depositary Shares each representing a one-sixth interest in a share the 8.10% Cumulative Preferred Stock of America (incorporated by reference to America's Registration Statement on Form S-3, Registration No. 33- 5612). (4.4) Certificate of Amendment of Restated Charter relating to the registration of 6,000,000 Depositary Shares each representing a one- sixth interest in a share the 8.10% Cumulative Preferred Stock of America (incorporated by reference to Exhibit 3.1 in America's Form 10-K filed for the fiscal year ended December 31, 1992 and to America's Registration Statement on Form S-3, Registration No. 33-5612). (4.5) Articles of Share Exchange (incorporated by reference to the Company's Form 10-K filed for fiscal year ended 1995). (10.1) Reinsurance and Administration Agreement by and between Transamerica Occidental Life Insurance Company of Illinois and Accident dated March 18, 1987 (incorporated by reference to Exhibit 10.3 of Capital's Registration Statement on Form S-1, Registration No. 33-17017). -22- (10.2) Tax Indemnification and Guaranty Agreement by and among Transamerica Occidental, Transamerica Corporation and Accident dated March 18, 1987 (incorporated by reference to Exhibit 10.4 to Capital's Registration Statement on Form S-1, Registration No. 33-17017). (10.3) Asset and Stock Purchase Agreement by and between Healthsource and America and its subsidiaries dated December 21, 1994. (incorporated by reference to Exhibit 10.3 to America's Form 10-K filed for fiscal year ended December 31, 1995). (10.4) Annual Management Incentive Compensation Plan (MICP), adopted by stockholders May 4, 1994 (incorporated by reference to Exhibit 10.5 to America's Form 10-K filed for fiscal year ended December 31, 1994), and amended by stockholders May 1, 1996 (incorporated by reference to Exhibit 10.1 of Company's Form 10Q filed for fiscal quarter ended June 30, 1996. (10.5) Stock Option Plan, adopted by stockholders May 3, 1989, as amended by the Compensation Committee on January 10, 1990, and October 29, 1991 (incorporated by reference to Exhibit 10.6 to America's Form 10-K filed for the fiscal year 1991); and as amended by the Compensation Committee on March 17, 1992 and by the stockholders on May 6, 1992 (incorporated by reference to registrant's Form 10-K filed for the fiscal year ended December 31, 1992). Terminated effective December 31, 1993.* (10.6) Accident and Subsidiaries Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.8 to Capital's Registration Statement on Form S-1, Registration No. 33-17017).* (10.7) Form of Surplus Note, dated December 1, 1996, in the amount of $150 million executed by Accident in favor of the Company. (10.8) Reinsurance and Administration Agreement by and between Transamerica Occidental and Accident dated March 18, 1987 (incorporated by reference to Exhibit 10.15 to Capital's Registration Statement on Form S-1, Registration No. 33-17017). (10.9) Form of Severance Agreement offered to selected executive officers (incorporated by reference to Exhibit 10.14 to Capital's Form 10-K filed for fiscal year ended December 31, 1990), revised February 8, 1994 (incorporated by reference to Exhibit 10.14 to registrant's Form 10-K filed for fiscal year ended December 31, 1993). (10.10) Description of Compensation Plan for Non-Employee Directors (incorporated by reference to Amendment No. 1 to registrant's Form 10-K filed January 27, 1993 on Form 8), and amended by the Board of Directors on February 8, 1994 (incorporated by reference to Exhibit 10.15 to America's Form 10-K filed for fiscal year ended December 31, 1993). -23- (10.11) Stock Option Plan, originally adopted by stockholders May 5, 1993, as amended by stockholders on May 1, 1996 (incorporated by reference to Exhibit 10.2 of Company's Form 10-Q for fiscal quarter ended June 30, 1996). (10.12) Employment contract between America and J. Harold Chandler, President and Chief Executive Officer, dated November 8, 1993 (incorporated by reference to Exhibit 10.17 to America's Form 10-K filed for fiscal year ended December 31, 1993).* (10.13) Employee Stock Purchase Plan (of 1995) adopted by stockholders June 13, 1995 (incorporated by reference to the Company's Form 10-K filed for fiscal year ended 1995).* (10.14) Credit Agreement between Provident and a consortium of financial institutions with The Chase Manhattan Bank as Administrative Agent, relating to a revolving loan in the aggregate amount of $800 million maturing on July 30, 2001. (10.15) Amended and Restated Common Stock Purchase Agreement between Provident Companies, Inc. and Zurich Insurance Company dated as of May 31, 1996. (10.16) Amended and Restated Relationship Agreement between Provident Companies, Inc. and Zurich Insurance Company dated as of May 31, 1996. (10.17) Amended and Restated Registration Rights Agreement between Provident Companies, Inc. and Zurich Insurance Company dated as of May 31, 1996. (11) Statement re computation of per share earnings (incorporated herein by reference to "Note 1 of the Notes to Consolidated Financial Statements" on pages 44-48 of the Annual Report to Stockholders for the year ended December 31, 1996). (13) Portions of the Annual Report to Stockholders for year ended December 31, 1996, incorporated by reference as described in Items 1, 5, 6, 7, 8, 10 and 14 hereof, which portions shall be deemed filed as a part hereof. (19) Previously unfiled documents filed herewith include Exhibits 3.1, 10.7, 10,14, 10.15, 10.16, and 10.17. (21) Subsidiaries of the Company. (23) Consent of Independent Auditors. (24) Powers of Attorney. (27) Financial Data Schedule. *Management contract or compensatory plan required to be filed as an exhibit to this form pursuant to Item 14(c) of Form 10-K. -24- (b) Reports on Form 8-K No reports were filed by the registrant during the fourth quarter of 1996. (c) Exhibits See "Item 14(a)(3)" above. (d) Financial Statement Schedules See "Item 14(a)(2)" above. -25- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 24, 1997 PROVIDENT COMPANIES, INC. (Registrant) By: /s/ J. Harold Chandler ------------------------------ J. Harold Chandler Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 24, 1997 /s/ J. Harold Chandler - ------------------------------------ J. Harold Chandler Chairman, President and Chief Executive Officer and a Director (Principal Executive Officer) /s/ Thomas R. Watjen /s/ Ralph A. Rogers, Jr. - ------------------------------------- ----------------------------- Thomas R. Watjen Ralph A. Rogers, Jr. Executive Vice President and Vice President and Controller Chief Financial Officer Signature Title --------- ----- * Director - ------------------------------ WILLIAM L. ARMSTRONG * Director - ------------------------------ CHARLOTTE M. HEFFNER * Director - ------------------------------ HUGH B. JACKS (REMAINDER ON FOLLOWING PAGE) -26- (REMAINDER ON PRECEDING PAGE) * Director - ------------------------------ WILLIAM B. JOHNSON * Director - ------------------------------ HUGH O. MACLELLAN, JR. * Director - ------------------------------ A.S. MACMILLAN * Director - ------------------------------ C. WILLIAM POLLARD * Director - ------------------------------ SCOTT L. PROBASCO, JR. * Director - ------------------------------ STEVEN S REINEMUND *By /s/ Susan N. Roth For all of the Directors ---------------------------- Susan N. Roth Attorney-in-Fact -27- SCHEDULE I--SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES PROVIDENT COMPANIES, INC. AND SUBSIDIARIES December 31, 1996
Amount at which shown in the Fair statement of Type of Investment Cost Value financial position (in millions of dollars) - --------------------------------------------------------------------------------------------------------------- Available-for-Sale Fixed Maturity Securities: Bonds United States Government and Government Agencies and Authorities $ 6.4 $ 7.2 $ 7.2 Foreign Governments 156.5 176.4 176.4 Public Utilities 2,421.5 2,620.5 2,620.5 Mortgage-backed Securities 2,156.9 2,152.0 2,152.0 Convertible Bonds 16.7 16.5 16.5 All Other Corporate Bonds 5,578.9 5,858.5 5,858.5 Redeemable Preferred Stocks 47.4 49.0 49.0 --------- --------- --------- Total 10,384.3 $10,880.1 10,880.1 --------- ========= --------- Held-to-Maturity Fixed Maturity Securities: Bonds United States Government and Government Agencies and Authorities 13.5 $ 15.0 13.5 States, Municipalities, and Political Subdivisions 3.2 3.4 3.2 Mortgage-backed Securities 234.9 230.1 234.9 All Other Corporate Bonds 12.9 14.6 12.9 --------- --------- --------- Total 264.5 $ 263.1 264.5 --------- ========= --------- Equity Securities: Nonredeemable Preferred Stocks 7.2 $ 4.9 4.9 --------- --------- --------- Total 7.2 $ 4.9 4.9 --------- ========= --------- Real Estate Investment Properties 149.0 143.8 * Acquired in Satisfaction of Debt 23.9 7.3 * Policy Loans 1,749.0 1,749.0 Other Long-term Investments 15.5 15.5 Short-term Investments 252.3 252.3 --------- --------- $12,845.7 $13,317.4 ========= =========
* Difference between cost and carrying values results from certain valuation allowances and other temporary declines in value. SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT PROVIDENT COMPANIES, INC. (Parent Company) STATEMENTS OF FINANCIAL CONDITION
December 31 1996 1995 (in millions of dollars) --------------------------- ASSETS Fixed Maturity Securities Available-for-Sale--at fair value (cost: $9.6; $ -) $ 10.3 $ - Short-term Investments 121.5 - Surplus Note of Subsidiary 150.0 - Investment in Subsidiaries 1,659.9 1,652.3 Other Assets 18.2 - ---------- ---------- Total Assets $ 1,959.9 $ 1,652.3 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Long-term Debt $ 200.0 $ - Other Liabilities 21.3 - ---------- ---------- Total Liabilities 221.3 - ---------- ---------- STOCKHOLDERS' EQUITY Preferred Stock 156.2 156.2 Common Stock 45.6 45.4 Additional Paid-in Capital 11.4 5.8 Net Unrealized Gain on Securities, net of deferred federal income taxes ($0.2 ; $ -) 0.5 - Net Unrealized Gain on Investment of Subsidiaries 85.2 97.1 Retained Earnings 1,439.7 1,347.8 ---------- ---------- Total Stockholders' Equity 1,738.6 1,652.3 ---------- ---------- Total Liabilities and Stockholders' Equity $ 1,959.9 $ 1,652.3 ========== ==========
See notes to condensed financial information. SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) PROVIDENT COMPANIES, INC. (Parent Company) STATEMENTS OF NET INCOME
Year Ended December 31 1996 1995 1994 (in millions of dollars) -------------------------------- Dividends from Subsidiaries $ 52.6 $ - $ 70.3 Interest from Subsidiaries 12.3 - - Other Income 1.7 - 1.4 ----- ------- ------ Total Revenue 66.6 - 71.7 ----- ------- ------ Interest Expense on Debt 10.2 - - Other Expenses 1.2 - 1.1 ----- ------- ------ Total Expenses 11.4 - 1.1 ----- ------- ------ Income Before Federal Income Taxes and Equity in Undistributed Earnings of Subsidiaries 55.2 - 70.6 Federal Income Taxes (Credit) 1.1 - (0.1) ----- ------- ------ Income Before Equity in Undistributed Earnings of Subsidiaries 54.1 - 70.7 Equity in Undistributed Earnings of Subsidiaries 91.5 115.6 64.6 ----- ------- ------ Net Income $145.6 $115.6 $135.3 ====== ======== =======
See notes to condensed financial information. SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) PROVIDENT COMPANIES, INC. (Parent Company) STATEMENTS OF CASH FLOWS
Year Ended December 31 1996 1995 1994 (in millions of dollars) ------------------------------------------------ CASH PROVIDED BY OPERATING ACTIVITIES $ 69.7 $ - $ 59.0 -------- --------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Maturities of Fixed Maturity Securities 0.2 - 0.6 Net Purchases of Short-term Investments (120.8) - (1.8) Cash Distribution from Subsidiary 100.0 - - Surplus Note Issued to Subsidiary (3.0) - - Other (2.7) - - -------- --------- ------- CASH USED BY INVESTING ACTIVITIES (26.3) - (1.2) -------- --------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of Common Stock 5.8 - 1.9 Dividends Paid to Stockholders (45.5) - (59.8) Other (3.6) - - -------- --------- ------- CASH USED BY FINANCING ACTIVITIES (43.3) - (57.9) -------- --------- ------- INCREASE (DECREASE) IN CASH $ 0.1 $ - $ (0.1) ======== ========= =======
See notes to condensed financial information. SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) PROVIDENT COMPANIES, INC. (Parent Company) NOTES TO CONDENSED FINANCIAL INFORMATION The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of Provident Companies, Inc. and Subsidiaries. Corporate Reorganization Effective December 27, 1995, Provident Life and Accident Insurance Company of America completed a step in a corporate reorganization which created a new parent holding company, Provident Companies, Inc., a non-insurance holding company incorporated in Delaware. In accordance with the Plan of Share Exchange approved by shareholders at the 1995 annual meeting, each share of Class A and Class B common stock of Provident Life and Accident Insurance Company of America was exchanged for a single class of common stock of Provident Companies, Inc., with each share entitled to one vote. Each depositary share of cumulative preferred stock of Provident Life and Accident Insurance Company of America was also exchanged for an equivalent depositary share of cumulative preferred stock of Provident Companies, Inc. In March 1996, Provident Life and Accident Insurance Company of America and Provident Life Capital Corporation were dissolved and their respective assets and liabilities were distributed to and assumed by Provident Companies, Inc. Assets transferred to the Company had a carrying value of approximately $187.3 million. Liabilities assumed by the Company in connection with the transfer totaled $205.0 million. Provident Life and Accident Insurance Company, Provident National Assurance Company, and Provident Life and Casualty Insurance Company are now direct subsidiaries of Provident Companies, Inc. Basis of Presentation The condensed financial statements represent the top tier company's statements of financial condition and the related statements of income and cash flows. In 1996 and 1995, the top tier company was Provident Companies, Inc. In 1994, the top tier company was Provident Life and Accident Insurance Company of America. Debt During 1996, the Company entered into an $800.0 million five-year revolving credit facility with various domestic and international banks. Interest is variable based upon a London Interbank Offered Rate (LIBOR) plus a margin. At December 31, 1996, the outstanding borrowing under the revolving credit facility was $200.0 million. During 1996, the Company repaid the $200.0 million bank term notes assumed from Provident Life Capital Corporation which were due on or before December 1, 1996. SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) PROVIDENT COMPANIES, INC. (Parent Company) NOTES TO CONDENSED FINANCIAL INFORMATION - CONTINUED Preferred Stock In a public offering completed on February 24, 1993, the Company issued 1,041,667 shares of 8.10% cumulative preferred stock, liquidation preference $150 per share evidenced by depositary receipts for 6,250,002 depositary shares each representing a one-sixth interest of a preferred share, of which 6,249,202 were issued and outstanding as of December 31, 1996. The preferred stock is redeemable at a redemption price of $150 per share (equivalent to $25 per depositary share) at the option of the Company in 1998. Commitment to Acquire The Paul Revere Corporation On April 29, 1996, the Company entered into a definitive agreement to acquire The Paul Revere Corporation, a provider of life and disability insurance products, at a price of approximately $1.2 billion. The transaction is subject to regulatory approval and is expected to close during the first quarter of 1997. For additional information, see Note 14 of the Notes to Consolidated Financial Statements. SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
Future Other Policy Policy Deferred Benefits, Claims Policy Losses, and Acquisition Claims, and Unearned Benefits Premium Segment Costs Loss Expenses Premiums Payable Revenue (in millions of dollars) - -------------------------------------------------------------------------------------------------------- Year Ended December 31, 1996 Individual Life and Disability $ 377.4 $ 4,236.9 $ 52.5 $ 179.9 $ 646.3 Employee Benefits 44.4 777.0 4.1 158.6 501.4 Other Operations 3,037.4 2.2 73.2 28.0 --------- ---------- ------ --------- ---------- Total $ 421.8 $ 8,051.3 $ 58.8 $ 411.7 $ 1,175.7 ========= ========== ====== ========= ========== Year Ended December 31, 1995 Individual Life and Disability $ 227.6 $ 4,098.3 $ 53.1 $ 151.3 $ 647.4 Employee Benefits 44.2 713.7 3.7 152.1 485.9 Other Operations 2,944.2 1.6 80.3 118.6 --------- ---------- ------ --------- ---------- Total $ 271.8 $ 7,756.2 $ 58.4 $ 383.7 $ 1,251.9 ========= ========== ====== ========= ========== Year Ended December 31, 1994 Individual Life and Disability $ 644.9 Employee Benefits 465.6 Other Operations 272.1 ---------- Total $ 1,382.6 ==========
(CONTINUED ON FOLLOWING PAGE) SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION PROVIDENT COMPANIES, INC. AND SUBSIDIARIES (CONTINUED FROM PRECEDING PAGE)
Benefits, Amortization Claims, of Deferred Net Losses and Policy Other Investment Settlement Acquisition Operating Premiums Segment Income* Expenses Costs Expenses Written (in millions of dollars) ------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1996 Individual Life and Disability $ 393.6 $ 697.6 $ 55.6 $ 177.1 $ 581.9 Employee Benefits 97.9 436.6 8.4 104.8 238.6 Other Operations 598.6 527.0 58.6 2.8 --------- --------- ------- -------- Total $ 1,090.1 $ 1,661.2 $ 64.0 $ 340.5 ========= ========= ======= ======== Year Ended December 31, 1995 Individual Life and Disability $ 361.3 $ 747.3 $ 59.0 $ 176.5 $ 583.9 Employee Benefits 90.6 430.2 12.0 91.8 240.2 Other Operations 769.4 727.1 135.4 83.1 --------- --------- ------- -------- Total $ 1,221.3 $ 1,904.6 $ 71.0 $ 403.7 ========= ========= ======= ======== Year Ended December 31, 1994 Individual Life and Disability $ 302.4 $ 679.0 $ 53.0 $ 171.5 $ 578.3 Employee Benefits 85.5 388.2 6.4 88.8 218.3 Other Operations 850.7 914.0 260.4 228.0 --------- --------- ------- -------- Total $ 1,238.6 $ 1,981.2 $ 59.4 $ 520.7 ========= ========= ======= ======== *Net investment income is allocated based upon segmentation. In other words, as cash flow from operations and assigned capital is generated by a segment, the cash is invested in assets with the appropriate characteristics for that segment's liabilities and operating structure. Thus, each segment has its own specifically identified assets and receives the investment income generated by those assets.
SCHEDULE IV--REINSURANCE PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
Percentage Ceded Assumed Amount Gross to Other from Other Net Assumed Amount Companies Companies Amount to Net (in millions of dollars) - ---------------------------------------------------------------------------------------------------------- Year Ended December 31, 1996 Life Insurance in Force $102,227.5 $4,347.9 $ 437.0 $98,316.6 0.4% ========== ======== ======== ========= === Premium Income: Individual Life and Disability $ 659.2 $ 48.2 $ 35.3 $ 646.3 5.5% Employee Benefits 517.1 31.9 16.2 501.4 3.2% Other Operations 253.4 225.4 28.0 ---------- -------- -------- --------- Total $ 1,429.7 $ 305.5 $ 51.5 $ 1,175.7 ========== ======== ======== ========= Year Ended December 31, 1995 Life Insurance in Force $ 98,492.4 $4,258.5 $ 460.2 $94,694.1 0.5% ========== ======== ======== ========= === Premium Income: Individual Life and Disability 658.3 $ 47.8 $ 36.9 $ 647.4 5.7% Employee Benefits 500.4 29.9 15.4 485.9 3.2% Other Operations 290.1 171.5 118.6 ---------- -------- -------- --------- Total $ 1,448.8 $ 249.2 $ 52.3 $ 1,251.9 ========== ======== ======== ========= Year Ended December 31, 1994 Life Insurance in Force $ 86,286.4 $4,202.6 $ 499.2 $82,583.0 0.6% ========== ======== ======== ========= === Premium Income: Individual Life and Disability $ 646.8 $ 41.0 $ 39.1 $ 644.9 6.1% Employee Benefits 484.1 18.9 0.4 465.6 0.1% Other Operations 273.5 1.4 272.1 ---------- -------- -------- --------- Total $ 1,404.4 $ 61.3 $ 39.5 $ 1,382.6 ========== ======== ======== =========
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
Additions Deductions for Charged to Amounts Applied Balance at Realized to Specific Loans Balance at Beginning Investment at Time of Sale/ End of Description of Period Losses Foreclosure Period (in millions of dollars) - ------------------------------------------------------------------------------------------------------------ Year Ended December 31, 1996 Mortgage loan loss reserve $12.0 $ - $11.0 $ 1.0 Real estate reserve $19.1 $ 2.4 $21.5 Year Ended December 31, 1995 Mortgage loan loss reserve $49.0 $ 3.0 $40.0 $12.0 Real estate reserve $18.3 $ 0.8 $19.1 Year Ended December 31, 1994 Mortgage loan loss reserve $55.3 $11.2 $17.5 $49.0 Real estate reserve $12.7 $ 5.6 $18.3
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 EXHIBITS to FORM 10-K PROVIDENT COMPANIES, INC. INDEX OF EXHIBITS EXHIBIT PAGE ------- ---- (3.1) Certificate of Incorporation of the Company, as amended........ (10.7) Form of Surplus Note, dated December 1, 1996................... (10.14) Credit Agreement between Provident and a consortium of financial institutions with The Chase Manhattan Bank as Administrative Agent, relating to a revolving loan in the aggregate amount of $800 million maturing on July 30, 2001. (10.15) Amended and Restated Common Stock Purchase Agreement between Provident Companies, Inc. and Zurich Insurance Company dated as of May 31, 1996............................... (10.16) Amended and Restated Relationship Agreement between Provident Companies, Inc. and Zurich Insurance Company dated as of May 31, 1996.............. (10.17) Amended and Restated Registration Rights Agreement between Provident Companies, Inc. and Zurich Insurance Company dates as of May 31, 1996.............. (13) Portions of the Annual Report to Stockholders for year ended December 31, 1996.............................................. (21) Subsidiaries of the Company.................................... (23) Consent of Independent Auditors................................ (24) Powers of Attorney............................................. (27) Financial Data Schedule........................................ All other Exhibits are incorporated by reference as explained in the list in Item 14(a)(3). EX-3.1 2 CERTIFICATE OF INCORPORATION Exhibit 3.1 Certificate of Incorporation of the Company, as amended (attached) CERTIFICATE OF AMENDMENT OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF PROVIDENT COMPANIES, INC. PROVIDENT COMPANIES, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify: First: That at a meeting of the Board of Directors of Provident Companies, Inc. ("Provident") resolutions were adopted approving a proposed amendment to the Amended and Restated Certificate of Incorporation of said corporation to increase from 65,000,000 to 150,000,000 the number of shares of Provident Common Stock that Provident is authorized to issue, declaring said amendment to be advisable and calling for a meeting of the stockholders of Provident for consideration thereof. Second: That thereafter, pursuant to resolution of its board of directors, a special meeting of the stockholders of Provident was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware at which meeting the necessary number of shares as required by the statute were voted in favor of the amendment. Third: That the following amendment to the corporation's Amended and Restated Certificate of Incorporation was duly adopted in accordance with the provisions of Section 242(b) of the Delaware Corporation Law and shall become effective upon filing: Article IV, Section 4.1 is amended by deleting "90,000,000" and inserting in its place "175,000,000" and deleting "65,000,000" and inserting in its place "150,000,000", so that said section shall be and read as follows: "Section 4.1. Total Number of Shares of Stock. The total number of shares of stock of all classes that the Corporation shall have authority to issue is 175,000,000. The authorized capital stock is divided into 25,000,000 shares of Preferred Stock, of the par value of $1.00 each (the "Preferred Stock"), and 150,000,000 shares of Common Stock of Common Stock of the par value of $1.00 each (the "Common Stock")." Fourth: That the capital of Provident shall not be reduced under or by reason of said amendment. THE UNDERSIGNED, being the President of the Corporation, for the purpose of amending the Amended and Restated Certificate of the Corporation pursuant to the Delaware General Corporation Law, do make this Certificate, hereby declaring and certifying that this is the act and deed of the Corporation and that the facts herein stated are true, and accordingly have hereunto set my hand as of this 10th day of February, 1997. /s/J. Harold Chandler ------------------------------------- J. Harold Chandler Chairman, President and Chief Executive Officer ATTEST: /s/Susan N. Roth - ------------------------------- Susan N. Roth, Secretary EX-10.7 3 FORM OF SURPLUS NOTE Exhibit 10.7 Form of Surplus Note, dated December 1, 1996 (attached) PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY ---------------------------------------------- SURPLUS NOTE ------------ $150,000,000.00 December 1, 1996 Chattanooga, Tennessee PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY, a corporation and life insurance company duly organized and existing under the laws of Tennessee (the "Company"), for value received, hereby promises to pay to PROVIDENT COMPANIES, INC. ("PCI"), or its assigns, the principal sum of One Hundred Fifty Million and 00/100 Dollars ($150,000,000.00) on December 1, 2006, and to pay interest thereon from December 1, 1996, semiannually on June 1 and December 1 in each year (each an "Interest Payment Date"), at the applicable rate per annum specified below, until the principal hereof is paid. The first interest payment will be made on June 1, 1997. All principal and interest shall be paid, at the principal corporate office of the Company or such other place, which shall be acceptable to the Company, as the holder hereof shall designate in writing to the Company, in collected and immediately available funds in lawful money of the United States of America. The interest rate hereunder shall never exceed the maximum rate permitted by law in the State of Tennessee. Principal and interest shall be payable on the terms and conditions set forth below: PCI agrees, on the terms of this Surplus Note, to make one or more term loans to the Company in Dollars ("Loans") on December 1, 1996 in an amount up to but not exceeding One Hundred Fifty Million and 00/100 Dollars ($150,000,000.00). 1 1. Advance approval of the Tennessee Commissioner of Insurance (the "Commissioner") shall be required for each payment of principal and interest on this Surplus Note. 2. Interest. The Company hereby promises to pay to PCI interest on the --------- unpaid principal amount of each Loan made by PCI hereunder on each Interest Payment Date for the Semiannual Period that commenced on the next preceding Interest Payment Date from and including the date of such Loan to but excluding the date such Loan shall be paid in full, at the rate per annum which equals the per annum rate paid by PCI on its long-term debt plus one percent per annum; provided however, that this rate shall not exceed 12 (twelve) percent per annum unless prior approval has been received from the Commissioner. As used in this section 2, "Semiannual Period" shall mean each six month period that has elapsed since the next preceding Interest Payment Date, e.g., December 1 through May 31 or June 1 through November 30. 3. "Event of Default", wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) default in the payment of any interest upon this Surplus Note when it becomes due and payable, and continuance of such default for a period of 30 days, except to the extent the Commissioner prohibits such interest payment pursuant to section 1 hereof; and 2 (b) default in the payment of the principal of this Surplus Note at its maturity, except to the extent the Commissioner prohibits such principal payment pursuant to section 1 hereof; or (c) default in the performance, or breach, of any covenant or warranty of the Company in this Surplus Note (other than a covenant or warranty a default in whose performance or whose breach is elsewhere in this section 8 specifically dealt with), and continuance of such default or breach for a period of 90 days after there has been given to the Company by the holder of this Surplus Note a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (d) a default under any bond, debenture, note or other evidence of indebtedness in excess of $10,000,000 for money borrowed by the Company or under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness in excess of $10,000,000 for money borrowed by the Company, whether such indebtedness now exists or shall hereafter be created, which default shall have resulted in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, without such indebtedness having been discharged or such acceleration having been rescinded or annulled within a period of 10 days after there shall have been given to the Company by the holder of this Surplus Note a written note specifying such default and requiring the Company to cause such acceleration to be rescinded or annulled and stating that such notice is a "Notice of Default" hereunder; or (e) the entry of a decree or order by a court having jurisdiction in the premises adjudging the Company insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in 3 respect of the Company under any applicable Federal or State law, or appointing a receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of 90 consecutive days, or (f) the institution by the Company of proceedings to be adjudicated a bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under Federal bankruptcy law or any other applicable Federal or State law, or the consent by it to the filing of such petition or to the appointment of a receiver, liquidator, assignee, trustee, sequestrator or similar official of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such action. 4. If an Event of Default occurs and is continuing, the holder of this Surplus Note may declare the principal of this Surplus Note to be due and payable immediately, by a notice in writing to the Company, and upon any such declaration such principal shall become immediately due and payable, subject to the provisions of section 1 hereof. 5. To the extent that the Commissioner prohibits payment of all or a portion of the principal or interest of this Surplus Note pursuant to the provisions of section 1 hereof, the failure by the Company to make a principal or interest payment hereunder shall not constitute an Event of Default. The prohibition by the Commissioner of principal or interest payments shall not be considered to be a forgiveness of the indebtedness hereunder and within 30 days 4 after the removal of such prohibition the Company shall make payment of all amounts owing hereunder. 6. No delay or failure on the part of the holder of this Surplus Note in the exercise of any right, power or privilege granted under this Surplus Note, or otherwise available by agreement, at law or in equity, shall impair any such right, power or privilege or be construed as a waiver of any Event of Default or any acquiescence therein. No single or partial exercise of any such right, power or privilege shall preclude the further exercise of such right, power or privilege. No waiver will be valid against the holder of this Surplus Note unless made in writing and signed by the holder of this Surplus Note, and then only to the extent expressly specified therein. 7. The Company covenants that if (a) default is made in the payment of any installment of interest on this Surplus Note when such interest becomes due and payable and such default continues for a period of 30 days, other than to the extent the Commissioner prohibits such interest payment pursuant to section 1 hereunder, or (b) default is made in the payment of the principal of this Surplus Note at the maturity hereof, other than to the extent the Commissioner prohibits such principal payment pursuant to section 1 hereunder, the Company will, upon demand by the holder of this Surplus Note, and subject to the provisions of section 1 hereof, pay to it the whole amount then due and payable on this Surplus Note for principal and interest, with interest upon the overdue principal and, to the extent that payment of such interest shall be legally enforceable, upon overdue installments of interest, at the rate borne by this Surplus Note; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including reasonable attorneys' fees. 5 Subject to the provisions of section 1 hereof, if the Company fails to pay such amounts forthwith upon such demand, the holder of this Surplus Note may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon this Surplus Note and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon this Surplus Note, wherever situated. Subject to the provisions of section 1 hereof, if an Event of Default occurs and is continuing, the holder of this Surplus Note may in its discretion proceed to protect and enforce its rights by such appropriate judicial proceedings as it shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Surplus Note or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. 8. The Company covenants that it shall not consolidate with or merge into any other corporation or convey, transfer or lease its properties and assets substantially as an entirety to any Person, and the Company shall not permit any Person to consolidate with or merge into the Company or convey, transfer or lease its properties and assets substantially as an entirety to the Company, unless: (a) in case the Company shall consolidate with or merge into another corporation or convey, transfer or lease its properties and assets substantially as an entirety to any Person, the corporation formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases the properties and assets of the Company substantially as an entirety shall be a corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia and shall expressly assume, in a manner satisfactory to the holder of this Surplus 6 Note, the due and punctual payment of the principal of and interest on this Surplus Note and the performance of every covenant of this Surplus Note on the part of the Company to be performed or observed; (b) immediately after giving effect to such transactions, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing; and (c) if, as a result of any such consolidation or merger or such conveyance, transfer or lease, capital stock of the Company would become subject to a pledge, lien or other encumbrance, the Company or such successor corporation or Person, as the case may be, shall take such steps as shall be necessary effectively to secure this Surplus Note equally and ratably with (or prior to) all indebtedness secured thereby. Upon any consolidation of the Company with or merger of the Company into any other corporation or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety to any Person in accordance with this section 8, the successor corporation formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Surplus Note with the same effect as if such successor corporation had been named as the Company herein. For purposes of this section 8, "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. 9 As long as this Surplus Note remains outstanding, the Company will not pay, or set apart any funds or property for the payment of, any dividend on, or 7 make any distribution to the holders of, any shares of capital stock of the Company (other than dividends or distributions payable in its capital stock or warrants or rights to purchase capital stock), and the Company will not purchase, redeem or otherwise acquire or retire for value any shares of capital stock of the Company, if, at the time of such declaration, payment, distribution, purchase, redemption, other acquisition or retirement, an Event of Default shall have occurred and be continuing or a prohibition by the Commissioner of payment of a principal or interest amount otherwise due is in effect. 10. In the event of reorganization, dissolution, liquidation, receivership, insolvency or bankruptcy of the Company, the claims of the holder of this Surplus Note shall be subordinated to policyholder, claimant and beneficiary claims as well as debts owed to all other classes of creditors other than the holder. The claims of the holder of this Surplus Note shall be superior to claims of the Company's common and preferred shareholders. 11. Subject to the provisions of section 1 hereof, this Surplus Note, may be repaid, in whole at any time or in part from time to time, without premium or penalty and with interest to the date of payment only. 12. Except for the events described in sections 1 and 6 above, no provisions of this Surplus Note shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Surplus Note at the times, place and rate, and in the coin or currency, herein prescribed. No provision of this Surplus Note shall extinguish ultimate liability for the payment of principal and interest hereunder. 13. Time is of the essence hereunder. This Surplus Note shall be governed by the laws of the State of Tennessee. 8 IN WITNESS WHEREOF, the Company has caused this Surplus Note to be executed in its name and attested to by its authorized officers, and its corporate seal to be hereunto affixed, all as of the date first written above. PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY By: /s/ Thomas R. Watjen _____________________________ Executive Vice President and Chief Financial Officer ATTEST: /s/ Susan N. Roth - ----------------- Secretary 9 EX-10.14 4 CREDIT AGREEMENT Exhibit 10.14 Credit Agreement between Provident and a consortium of Financial Institutions (attached) ================================================================================ PROVIDENT COMPANIES, INC. _____________________________ CREDIT AGREEMENT Dated as of July 30, 1996 ______________________________ $800,000,000 ______________________________ THE CHASE MANHATTAN BANK, as Administrative Agent ================================================================================ TABLE OF CONTENTS
Page ---- Section 1. Definitions and Accounting Matters 1 1.01 Certain Defined Terms 1 1.02 Accounting Terms and Determinations 18 1.03 Types of Loans 19 1.04 Moody's Ratings and S&P Ratings 19 1.05 Moody's Claims Ratings and S&P Claims Ratings 19 Section 2. Commitments, Loans, Notes and Prepayments 20 2.01 Loans 20 2.02 Borrowings 20 2.03 Changes of Commitments 20 2.04 Facility Fee 21 2.05 Lending Offices 23 2.06 Several Obligations; Remedies Independent 23 2.07 Notes 23 2.08 Optional Prepayments and Conversions or Continuations of Loans 24 2.09 Mandatory Prepayments and Reductions of Commitments 24 Section 3. Payments of Principal and Interest 25 3.01 Repayment of Loans 25 3.02 Interest 25 Section 4. Payments; Pro Rata Treatment; Computations; Etc. 26 4.01 Payments 26 4.02 Pro Rata Treatment 27 4.03 Computations 27 4.04 Minimum Amounts 28 4.05 Certain Notices 28 4.06 Non-Receipt of Funds by the Administrative Agent 29 4.07 Sharing of Payments, Etc. 30 Section 5. Yield Protection, Etc. 31 5.01 Additional Costs 31 5.02 Limitation on Types of Loans 34 5.03 Illegality 35 5.04 Treatment of Affected Loans 35 5.05 Compensation 36 5.06 U.S. Taxes 37 5.07 Replacement of Bank 38
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Page ---- Section 6. Conditions Precedent 39 6.01 Initial Loan 39 6.02 Acquisition/Post-Acquisition Loans 41 6.03 Initial and Subsequent Loans 43 Section 7. Representations and Warranties 43 7.01 Corporate Existence 43 7.02 Financial Condition 44 7.03 Litigation 45 7.04 No Breach 45 7.05 Action 45 7.06 Approvals 46 7.07 Use of Credit 46 7.08 ERISA 46 7.09 Taxes 46 7.10 Investment Company Act 47 7.11 Public Utility Holding Company Act 47 7.12 Credit Agreements 47 7.13 Hazardous Materials 47 7.14 Subsidiaries, Etc. 47 7.15 True and Complete Disclosure 48 7.16 Capitalization 48 7.17 Purchase Agreement 48 Section 8. Covenants of the Company 49 8.01 Financial Statements 49 8.02 Litigation 53 8.03 Existence, Etc. 54 8.04 Insurance 54 8.05 Limitation of Fundamental Changes 55 8.06 Certain Obligations Respecting Subsidiaries 56 8.07 Limitation on Liens 56 8.08 Investments 59 8.09 Dividend Payments 59 8.10 Minimum Adjusted Statutory Surplus 60 8.11 Consolidated Funded Debt 60 8.12 Ratio of Cash Sources to Cash Uses 60 8.13 Authorized Control Level Risk Based Capital Ratio 60 8.14 Lines of Business 60 8.15 Transactions with Affiliates 60 8.16 Use of Proceeds 61 8.17 Pari Passu 61 Section 9. Events of Default 62 Section 10. The Administrative Agent 65 10.01 Appointment, Powers and Immunities 65
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Page ---- 10.02 Reliance by Administrative Agent 66 10.03 Defaults 66 10.04 Rights as a Bank 67 10.05 Indemnification 67 10.06 Non-Reliance on Administrative Agent and Other Banks 68 10.07 Failure to Act 68 10.08 Resignation or Removal of Administrative Agent 68 10.09 Agency Fee 69 10.10 Consents under Basic Documents 69 Section 11. Miscellaneous 69 11.01 Waiver 69 11.02 Notices 69 11.03 Expenses, Etc. 70 11.04 Amendments, Etc. 71 11.05 Successors and Assigns 72 11.06 Assignments and Participations 72 11.07 Survival 74 11.08 Captions 74 11.09 Counterparts 74 11.10 Governing Law; Submission to Jurisdiction 75 11.11 Waiver of Jury Trial 75 11.12 Treatment of Certain Information Confidentiality 75 SCHEDULE I - Credit Agreements SCHEDULE II - Subsidiaries SCHEDULE III- Investment Companies EXHIBIT A - Form of Note EXHIBIT B - Form of Opinion of Counsel to the Company EXHIBIT C - Form of Opinion of Special New York Counsel to the Banks EXHIBIT D - Form of Confidentiality Agreement
CREDIT AGREEMENT dated as of July 30, 1996, between: PROVIDENT COMPANIES, INC., a corporation duly organized and validly existing under the laws of the State of Delaware (the "Company"); each of the lenders that is a ------- signatory hereto identified under the caption "BANKS" on the signature pages hereto or that, pursuant to Section 11.06(b) hereof, shall become a "Bank" hereunder (individually, a "Bank" and, collectively, the "Banks"); and THE CHASE ---- ----- MANHATTAN BANK, a New York banking corporation, as agent for the Banks (in such capacity, together with its successors in such capacity, the "Administrative -------------- Agent"). - ----- The Company is engaged in the business of insurance, and in related businesses, and in furnishing the required supplies, services, equipment, credit and other facilities for such operation. The Company has requested the Banks to make loans to the Company in an aggregate principal amount at any time outstanding not exceeding $800,000,000 to finance the operations of the Company, to enable certain acquisitions by the Company, and for other purposes. To induce the Banks to make such loans, the Company, the Banks and the Administrative Agent propose to enter into this Agreement pursuant to which the Banks will make loans to the Company. Accordingly, the parties hereto agree as follows: Section 1. Definitions and Accounting Matters. ---------------------------------- 1.01 Certain Defined Terms . As used herein, the following terms ---------------------- shall have the following meanings (all terms defined in this Section 1.01 or in other provisions of this Agreement in the singular to have the same meanings when used in the plural and vice versa): ---- ----- "Acquisition" shall mean the acquisition by the Company of Paul Revere ----------- as provided in the Purchase Agreement. "Acquisition Date" shall mean the date the Acquisition is effective. ---------------- "Adjusted Statutory Surplus" shall mean, at any time, for any -------------------------- Insurance Subsidiary calculated in accordance with SAP, the sum of (x) the amount by which assets exceed liabilities at such time (which amount for PLAIC as at December 31, 1995, by way of example, is shown on the 1995 Annual Statement, Statement of Liabilities, Surplus and Other Funds, page 3, column 1, line 38, of PLAIC) plus (y) the consolidated asset valuation reserves of such ---- Insurance Subsidiary as at such time (which amount for PLAIC as at December 31, 1995, by way of example, is shown on the 1995 Annual Statement, Statement of Liabilities, Surplus and Other Funds, page 3, column 1, line 24.1). "Affiliate" shall mean any Person that directly or indirectly --------- controls, or is under common control with, or is controlled by, the Company. As used in this definition, "control" (including, with its correlative meanings, ------- "controlled by" and "under common control with") shall mean possession, directly - -------------- ------------------------- or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise), provided that, in any event, any -------- Person that owns directly or indirectly securities having 25% or more of the voting power for the election of directors or other governing body of a corporation or 10% or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to control such corporation or other Person. Notwithstanding the foregoing, (a) no individual shall be an Affiliate solely by reason of his or her being a director, officer or employee of the Company or any of its Subsidiaries and (b) none of the Subsidiaries of the Company shall be Affiliates. "Applicable Insurance Regulatory Authority" shall mean, for each ----------------------------------------- Insurance Subsidiary, the insurance department or similar administrative authority or agency located in the State in which such Insurance Subsidiary is domiciled (or otherwise having jurisdiction thereover). "Applicable Lending Office" shall mean, for each Bank and for each ------------------------- Type of Loan, the "Lending Office" of such Bank (or of an affiliate of such Bank) designated for such Type of Loan on the signature pages hereof or such other office of such Bank (or of an affiliate of such Bank) as such Bank may from time to time specify to the Administrative Agent and the Company as the office by which its Loans of such Type are to be made and maintained. "Applicable Margin" shall mean, subject to the following sentence: ----------------- (a) with respect to Base Rate Loans, 0% per annum; and (b) with respect to Eurodollar Loans, as at any date of determination, the sum of (x) the Utilization Premium, if any, and (y) the percentage per annum (expressed in number of basis points) determined by reference to the Moody's Rating and the S&P Rating as at such date:
Category Moody's Rating S&P Rating Applicable Margin - ---------- -------------- ------------------- ----------------- (a) A3 or higher A- or higher 20 basis points (b) Less than A3 Less than A- but 22.5 basis points but equal to equal to or greater or greater than BBB+ than Baa1 (c) Less than Baa1 Less than BBB+ 30 basis points but equal to but equal to or or greater greater than BBB than Baa2 (d) Less than Baa2 Less than BBB 35 basis points but equal to but equal to or or greater greater than BBB- than Baa3 (e) Less than Baa3 Less than BBB- 50 basis points
provided, however, that in order to qualify for a particular category of - -------- Applicable Margin (other than in the case of clause (e) above) both the Moody's Rating and the S&P Rating required for that category of Applicable Margin must be attained and, accordingly, if one rating is lower than the other, the Applicable Margin shall be determined on the basis of the lower of the two ratings. Each change in any Applicable Margin in respect of Eurodollar Loans resulting from a change in the Moody's Rating or the S&P Rating shall take effect at the time of the public announcement of such change in the Moody's Rating or the S&P Rating, as the case may be. If either a Moody's Rating or an S&P Rating shall not be available, the "Applicable Margin" with respect to Eurodollar Loans, as at any date of determination, shall be the sum of (x) the Utilization Premium, if any, and (y) the percentage per annum (expressed in number of basis points) determined by reference to the Moody's Claims Rating and the S&P Claims Rating as at such date:
Category Moody's Claims S&P Claims Rating Applicable Margin - -------- -------------- ----------------- ----------------- Rating ------ (a) Aa3 or higher AA- or higher 20 basis points (b) Less than Aa3 Less than AA- but 22.5 basis points but equal to equal to or greater or greater than A+ than A1 (c) Less than A1 Less than A+ 30 basis points but equal to but equal to or or greater greater than A than A2 (d) Less than A2 Less than A 35 basis points but equal to but equal to or or greater greater than A- than A3 (e) Less than A3 Less than A- 50 basis points
provided, however, that in order to qualify for a particular category of - -------- Applicable Margin (other than in the case of clause (e) above) both the Moody's Claims Rating and the S&P Claims Rating required for that category of Applicable Margin must be attained and, accordingly, if one rating is lower than the other, the Applicable Margin shall be determined on the basis of the lower of the two ratings. Each change in any Applicable Margin in respect of Eurodollar Loans resulting from a change in the Moody's Claims Rating or the S&P Claims Rating shall take effect at the time of the public announcement of such change in the Moody's Claims Rating or the S&P Claims Rating, as the case may be. "Bankruptcy Code" shall mean the Federal Bankruptcy Code of 1978, as --------------- amended from time to time. "Base Rate" shall mean, for any day, a rate per annum equal to the --------- higher of (a) the Federal Funds Rate for such day plus 1/2 of 1% and (b) the Prime Rate for such day. Each change in any interest rate provided for herein based upon the Base Rate resulting from a change in the Base Rate shall take effect at the time of such change in the Base Rate. "Base Rate Loans" shall mean Loans that bear interest at rates based --------------- upon the Base Rate. "Basel Accord" shall mean the proposals for risk-based capital ------------ framework described by the Basel Committee on Banking Regulations and Supervisory Practices in its paper entitled "International Convergence of Capital Measurement and Capital Standards" dated July 1988, as amended, modified and supplemented and in effect from time to time or any replacement thereof. "Basic Documents" shall mean, collectively, this Agreement and the --------------- Notes. "Business Day" shall mean (a) any day on which commercial banks are ------------ not authorized or required to close in New York City and (b) if such day relates to a borrowing of, a payment or prepayment of principal of or interest on, a Conversion of or into, or an Interest Period for, a Eurodollar Loan or a notice by the Company with respect to any such borrowing, payment, prepayment, Conversion or Interest Period, any day on which dealings in Dollar deposits are carried out in the London interbank market. "Capital Lease Obligations" shall mean, for any Person, all ------------------------- obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) Property to the extent such obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP (including Statement of Financial Accounting Standards No. 13 of the Financial Accounting Standards Board), and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP (including such Statement No. 13). "Cash Sources" shall mean, as at the last day of any fiscal quarter of ------------ the Company commencing with the fiscal quarter ending December 31, 1996, the statutory net income of the Insurance Subsidiaries on a combined basis determined in accordance with SAP for the one year period (or, prior to September 30, 1997, such number of fiscal quarterly periods since October 1, 1996 as shall have elapsed) ending on such date. "Cash Uses" shall mean, as at the last day of any fiscal quarter of --------- the Company commencing with the fiscal quarter ending December 31, 1996, the aggregate amount paid, expended, disbursed and/or distributed by the Company in respect of principal (other than the repayment of principal of the Refinanced Debt made pursuant to Section 6.01(f) hereof), Interest Expense payable in connection with Indebtedness and Dividend Payments for the one year period (or, prior to September 30, 1997, such number of fiscal quarterly periods since October 1, 1996 as shall have elapsed) ending on such date. "Chase" shall mean The Chase Manhattan Bank. ----- "Closing Date" shall mean the date upon which the initial Loan ------------ hereunder is made. "Code" shall mean the Internal Revenue Code of 1986, as amended from ---- time to time. "Commitment" shall mean, for each Bank, the obligation of such Bank to ---------- make Loans in an aggregate amount at any one time outstanding up to but not exceeding the amount set opposite the name of such Bank on the signature pages hereof under the caption "Commitment" (as the same may be reduced from time to time pursuant to Section 2.03 hereof), subject, in the case of any assignment contemplated by Section 11.06(b) hereof, to the provisions of such Section 11.06(b). "Commitment Termination Date" shall mean July 30, 2001. --------------------------- "Consolidated Capital" shall mean, at any time and as to the Company, -------------------- the aggregate of the capital stock, capital surplus, paid-in capital, retained earnings and unrealized gains (or losses) on equity securities (net of deferred taxes) of the Company and its Consolidated Subsidiaries on a consolidated basis (calculated without giving effect to SFAS 115), less the sum of treasury stock ---- and capital stock subscribed and unissued and the book value of good will, formula, patents, trademarks, service marks, trade names, copyrights, charters, franchises, certificates, permits and licenses, prepaid expenses, prepaid taxes, organizational expenses, unamortized debt discount and any other intangible assets of the Company other than (x) unamortized deferred policy acquisition costs and (y) value of business acquired plus the Consolidated Funded Debt. ---- "Consolidated Funded Debt" shall mean Funded Debt of the Company and ------------------------ its Consolidated Subsidiaries on a consolidated basis. "Consolidated Subsidiary" shall mean, for any Person, each Subsidiary ----------------------- of such Person (whether now existing or hereafter created or acquired) the financial statements of which shall be (or should have been) consolidated with the financial statements of such Person in accordance with GAAP. "Continue", "Continuation" and "Continued" shall refer to the -------- ------------ --------- continuation pursuant to Section 2.08 hereof of a Eurodollar Loan as a Eurodollar Loan from one Interest Period to the next Interest Period for such Loan. "Convert", "Conversion" and "Converted" shall refer to a conversion ------- ---------- --------- pursuant to Section 2.08 hereof of one Type of Loans into another Type of Loans, which may be accompanied by the transfer by a Bank (at its sole discretion) of a Loan from one Applicable Lending Office to another. "Corporate Acquisition" shall have the meaning assigned to such term --------------------- in Section 8.05 hereof. "Debt Issuance" shall mean any issuance or sale by the Company or any ------------- of its Subsidiaries after the Closing Date of any Indebtedness of the type described in clause (a) of the definition thereof. "Default" shall mean an Event of Default or an event that with notice ------- or lapse of time or both would become an Event of Default. "Derivatives Obligations" of any Person shall mean all obligations of ----------------------- such Person in respect of any rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity swap or equity index swap, equity option or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of the foregoing transactions) or any combination of the foregoing transactions. "Dividend Payment" shall mean dividends (in cash, Property or ---------------- obligations) on, or other payments or distributions on account of, or the setting apart of money for a sinking or other analogous fund for, or the purchase, redemption, retirement or other acquisition of, any shares of any class of stock of the Company or of any warrants, options or other rights to acquire the same (or to make any payments to any Person, such as "phantom stock" payments, where the amount thereof is calculated with reference to the fair market or equity value of the Company or any of its Subsidiaries), but excluding dividends payable solely in shares of common stock of the Company. "Dollars" and "$" shall mean lawful money of the United States of ------- - America. "Environmental Laws" shall mean any and all present and future ------------------ Federal, state, local and foreign laws, rules or regulations, and any orders or decrees, in each case as now or hereafter in effect, relating to the regulation or protection of human health, safety or the environment or to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals or toxic or hazardous substances or wastes into the indoor or outdoor environment, including, without limitation, ambient air, soil, surface water, ground water, wetlands, land or subsurface strata, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, chemicals or toxic or hazardous substances or wastes. "Equity Issuance" shall mean, except for the issuance of the Company's --------------- common stock in connection with the Acquisition and the Zurich Investment, (a) any issuance or sale by the Company or any of its Subsidiaries after the Closing Date of (i) any capital stock (other than any capital stock issued to directors, officers or employees of the Company or any of its Subsidiaries), (ii) any Equity Rights (other than any warrants or options issued to directors, officers or employees of the Company or any of its Subsidiaries and any capital stock of the Company issued upon the exercise of such warrants) or (iii) any other security or instrument representing an equity interest (or the right to obtain any equity interest) in the issuing or selling Person or (b) the receipt by the Company or any of its Subsidiaries after the Closing Date of any capital contribution received (whether or not evidenced by any equity security issued by the recipient of such contribution); provided that Equity Issuance shall not -------- include (I)(x) any such issuance or sale by any Subsidiary of the Company to the Company or any Wholly Owned Subsidiary of the Company or (y) any capital contribution by the Company or any Wholly Owned Subsidiary of the Company to any Subsidiary of the Company and (II) any such issuance or sale the proceeds of which are invested by the Company in the Company's and its Subsidiaries' business and no special Dividend Payment is declared or made with (or related to) the proceeds thereof. "Equity Rights" shall mean, with respect to any Person, any ------------- outstanding subscriptions, options, warrants, commitments, preemptive rights or agreements of any kind (including, without limitation, any stockholders' or voting trust agreements) for the issuance, sale, registration or voting of, or outstanding securities convertible into, any additional shares of capital stock of any class, or partnership or other ownership interests of any type in, such Person. "ERISA" shall mean the Employee Retirement Income Security Act of ----- 1974, as amended from time to time. "ERISA Affiliate" shall mean any corporation or trade or business that --------------- is a member of any group of organizations (i) described in Section 414(b) or (c) of the Code of which the Company is a member and (ii) solely for purposes of potential liability under Section 302(c)(11) of ERISA and Section 412(c)(11) of the Code and the lien created under Section 302(f) of ERISA and Section 412(n) of the Code, described in Section 414(m) or (o) of the Code of which the Company is a member. "Eurodollar Base Rate" shall mean, for any Interest Period for any -------------------- Eurodollar Loan, the arithmetic mean (rounded upwards, if necessary, to the nearest 1/16 of 1%), as determined by the Administrative Agent, of the respective rates per annum quoted by the respective Reference Banks at approximately 11:00 a.m. London time (or as soon thereafter as practicable) on the date two Business Days prior to the first day of such Interest Period for the offering by the respective Reference Banks to leading banks in the London interbank market of Dollar deposits having a term comparable to such Interest Period and in an amount comparable to the Eurodollar Loans to be made by the respective Reference Banks. If any Reference Bank is not participating in any Eurodollar Loan during any Interest Period therefor, the Eurodollar Base Rate for such Interest Period shall be determined by reference to the amount of the Loan that such Reference Bank would have made or had outstanding had it been participating in such Loan during such Interest Period. If any Reference Bank does not timely furnish such information for determination of any Eurodollar Base Rate, the Administrative Agent shall determine such Eurodollar Base Rate on the basis of the information timely furnished by the remaining Reference Banks. "Eurodollar Loans" shall mean Loans the interest rates on which are ---------------- determined on the basis of rates referred to in the definition of "Eurodollar Base Rate" in this Section 1.01. "Eurodollar Rate" shall mean, for any Interest Period for any --------------- Eurodollar Loan, a rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by the Administrative Agent to be equal to the Eurodollar Base Rate for such Interest Period divided by 1 minus the Reserve Requirement for such Interest Period. "Event of Default" shall have the meaning assigned to such term in ---------------- Section 9 hereof. "Federal Funds Rate" shall mean, for any day, the rate per annum ------------------ (rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (a) if the day for which such rate is to -------- be determined is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day and (b) if such rate is not so published for any Business Day, the Federal Funds Rate for such Business Day shall be the average rate charged to Chase on such Business Day on such transactions as determined by the Administrative Agent. "Funded Debt" shall mean, for any Person, all indebtedness created, ----------- issued or incurred by such Person for borrowed money (whether by loan or the issuance and sale of debt securities or the sale of Property to another Person subject to an understanding or agreement, contingent or otherwise, to repurchase such Property from such Person), or any Guarantee issued by such Person in respect of any of the foregoing, but excluding any Indebtedness attributable to and resulting from a transaction described in Section 8.07(a)(vii) hereof. "GAAP" shall mean generally accepted accounting principles applied on ---- a basis consistent with those that, in accordance with the last sentence of Section 1.02(a) hereof, are to be used in making the calculations for purposes of determining compliance with this Agreement. "Guarantee" shall mean a guarantee, an endorsement, a contingent --------- agreement to purchase or to furnish funds for the payment or maintenance of, or otherwise to be or become contingently liable under or with respect to, the Indebtedness, other obligations, net worth, working capital or earnings of any Person, or a guarantee of the payment of dividends or other distributions upon the stock or equity interests of any Person, or an agreement to purchase, sell or lease (as lessee or lessor) Property, products, materials, supplies or services primarily for the purpose of enabling a debtor to make payment of such debtor's obligations or an agreement to assure a creditor against loss, and including, without limitation, causing a bank or other financial institution to issue a letter of credit or other similar instrument for the benefit of another Person, but excluding endorsements for collection or deposit in the ordinary course of business. The terms "Guarantee" and "Guaranteed" used as a verb shall --------- ---------- have a correlative meaning. "Indebtedness" shall mean, for any Person: (a) obligations created, ------------ issued or incurred by such Person for borrowed money (whether by loan, the issuance and sale of debt securities or the sale of Property to another Person subject to an understanding or agreement, contingent or otherwise, to repurchase such Property from such Person); (b) obligations of such Person to pay the deferred purchase or acquisition price of Property or services, other than trade accounts payable (other than for borrowed money) arising, and accrued expenses incurred, in the ordinary course of business so long as such trade accounts payable are payable within 90 days of the date the respective goods are delivered or the respective services are rendered; (c) Indebtedness of others secured by a Lien on the Property of such Person, whether or not the respective indebtedness so secured has been assumed by such Person; (d) obligations of such Person in respect of letters of credit or similar instruments issued or accepted by banks and other financial institutions for account of such Person; (e) Capital Lease Obligations of such Person; and (f) Indebtedness of others Guaranteed by such Person. "Insurance Subsidiary" shall mean any Subsidiary regulated by an -------------------- insurance department or similar administrative authority or agency. "Interest Expense" shall mean, for any period, the sum, for the ---------------- Company and its Consolidated Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP), of the following: (a) all interest in respect of Indebtedness accrued or capitalized during such period (whether or not actually paid during such period) plus (b) the net amounts ---- payable (or minus the net amounts receivable) under Derivatives Obligations ----- related to Indebtedness accrued during such period (whether or not actually paid or received during such period). "Interest Period" shall mean, for any Eurodollar Loan, each period --------------- commencing on the date such Eurodollar Loan is made or Converted from a Loan of another Type or the last day of the next preceding Interest Period for such Loan and ending on the numerically corresponding day in the first, third or sixth calendar month thereafter, as the Company may select as provided in Section 4.05 hereof, except that each Interest Period for a Eurodollar Loan that commences on the last Business Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month. Notwithstanding the foregoing: (i) if any Interest Period would otherwise end after the Commitment Termination Date, such Interest Period shall end on the Commitment Termination Date; (ii) each Interest Period that would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day (or, in the case of an Interest Period for a Eurodollar Loan, if such next succeeding Business Day falls in the next succeeding calendar month, on the next preceding Business Day); and (iii) notwithstanding clause (i) above, no Interest Period shall have a duration of less than one month and, if the Interest Period for any Eurodollar Loan would otherwise be a shorter period, such Loan shall not be available hereunder for such period. "Investment" shall mean, for any Person: (a) the acquisition (whether ---------- for cash, Property, services or securities or otherwise) of capital stock, bonds, notes, debentures, partnership or other ownership interests or other securities of any other Person or any agreement to make any such acquisition (including, without limitation, any "short sale" or any sale of any securities at a time when such securities are not owned by the Person entering into such short sale); (b) the making of any deposit with, or advance, loan or other extension of credit to, any other Person (including the purchase of Property from another Person subject to an understanding or agreement, contingent or otherwise, to resell such Property to such Person, but excluding any such advance, loan or extension of credit having a term not exceeding 90 days representing the purchase price of inventory or supplies sold by such Person in the ordinary course of business); or (c) the entering into of any Guarantee of, or other contingent obligation with respect to, Indebtedness or other liability of any other Person and (without duplication) any amount committed to be advanced, lent or extended to such Person. "Lien" shall mean, with respect to any Property, any mortgage, lien, ---- pledge, charge, security interest or encumbrance of any kind in respect of such Property. For purposes of this Agreement and the other Basic Documents, a Person shall be deemed to own subject to a Lien any Property that it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement (other than an operating lease) relating to such Property. "Loans" shall mean the loans provided for by Section 2.01 hereof, ----- which may be Base Rate Loans and/or Eurodollar Loans. "Majority Banks" shall mean, subject to the last paragraph of Section -------------- 11.04 hereof, Banks having more than 50% of the aggregate amount of the Commitments or, if the Commitments shall have terminated, Banks holding more than 50% of the aggregate unpaid principal amount of the Loans. "Margin Stock" shall mean "margin stock" within the meaning of ------------ Regulations G, T, U and X. "Material Adverse Effect" shall mean a material adverse effect on (a) ----------------------- the Property, business, operations, financial condition, liabilities or capitalization of the Company and its Subsidiaries taken as a whole (which, in the case of Section 7.03 hereof, shall mean an effect thereon equal to or exceeding (individually or in the aggregate) $50,000,000 and, in the case of the third sentence of Section 8.05 hereof, shall be in respect of at least 10% of the Company's assets in the aggregate), (b) the ability of the Company to perform its obligations under any of the Basic Documents, (c) the validity or enforceability of any of the Basic Documents, (d) the rights and remedies of the Banks and the Administrative Agent under any of the Basic Documents or (e) the timely payment of the principal of or interest on the Loans or other amounts payable in connection therewith. "Moody's Claims Rating" shall mean, as at any date of determination, --------------------- the rating assigned by Moody's Investors Service, Inc. to PLAIC's claims paying ability as at such date. "Moody's Rating" shall mean, as at any date of determination, the -------------- rating assigned by Moody's Investors Service, Inc. to the Company's senior unsecured long term debt rating (unsupported by any credit enhancement) as at such date. "Multiemployer Plan" shall mean a multiemployer plan defined as such ------------------ in Section 3(37) of ERISA to which contributions have been made by the Company or any ERISA Affiliate and that is covered by Title IV of ERISA. "NAIC" shall mean the National Association of Insurance Commissioners ---- or any successor thereto. "NAIC Ratings" shall mean the quality ratings assigned by the ------------ Securities Valuation Office of the NAIC to investments of the Company and its Consolidated Subsidiaries. References in this Agreement to particular NAIC Ratings are references to such ratings as currently defined and classified by the Securities Valuation Office of the NAIC and if such rating system is changed then each reference to a particular rating in this Agreement shall be deemed to be a reference to the rating under such changed rating system which most closely approximates the credit quality of the particular rating as defined on the date of this Agreement. "Net Available Proceeds" shall mean, in the case of any Equity ---------------------- Issuance or Debt Issuance, the aggregate amount of all cash and cash equivalents received by the Company and its Subsidiaries in respect of such Equity Issuance or Debt Issuance net of reasonable expenses (including underwriting commissions and discounts) incurred by the Company and its Subsidiaries in connection therewith. "Notes" shall mean the promissory notes provided for by Section ----- 2.07(a) hereof and all promissory notes delivered in substitution or exchange therefor, in each case as the same shall be modified and supplemented and in effect from time to time. "Paul Revere" means The Paul Revere Corporation, a Massachusetts ----------- corporation. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any ---- entity succeeding to any or all of its functions under ERISA. "Person" shall mean any individual, corporation, company, voluntary ------ association, partnership, limited liability company, joint venture, trust, unincorporated organization or government (or any agency, instrumentality or political subdivision thereof). "PLAIC" shall mean Provident Life and Accident Insurance Company, a ----- Tennessee insurance corporation, and its successors. "Plan" shall mean an employee benefit or other plan established or ---- maintained by the Company or any ERISA Affiliate and that is covered by Title IV of ERISA, other than a Multiemployer Plan. "Post-Default Rate" shall mean, in respect of any principal of any ----------------- Loan or any other amount under this Agreement, any Note or any other Basic Document that is not paid when due (whether at stated maturity, by acceleration, by optional or mandatory prepayment or otherwise), a rate per annum during the period from and including the due date to but excluding the date on which such amount is paid in full equal to 2% plus the Base Rate as in effect from time to ---- time plus the Applicable Margin for Base Rate Loans (provided that, if the ---- -------- amount so in default is principal of a Eurodollar Loan and the due date thereof is a day other than the last day of the Interest Period therefor, the "Post- Default Rate" for such principal shall be, for the period from and including such due date to but excluding the last day of the Interest Period, a rate per annum equal to 2% plus the interest rate for such Loan as provided in Section ---- 3.02(b) hereof and, thereafter, the rate provided for above in this definition). "Prime Rate" shall mean the rate of interest from time to time ---------- announced by Chase at the Principal Office as its prime commercial lending rate. "Principal Office" shall mean the principal office of Chase, located ---------------- on the date hereof at 1 Chase Manhattan Plaza, New York, New York 10081. "Property" shall mean any right or interest in or to property of any -------- kind whatsoever, whether real, personal or mixed and whether tangible or intangible. "Purchase Agreement" means the Agreement and Plan of Merger dated as ------------------ of April 29, 1996 among the Company, Patriot Acquisition Corporation and Paul Revere, as amended from time to time. "Quarterly Dates" shall mean the last day of each March, June, --------------- September and December in each year, the first of which shall be the first such day after the date hereof; provided that if any such day is not a Business Day, -------- then such Quarterly Date shall be the next preceding Business Day. "Reference Banks" shall mean Chase, First Chicago NBD Corp. and --------------- Wachovia Bank (or their respective Applicable Lending Offices, as the case may be). "Refinanced Debt" shall mean the Indebtedness outstanding under the --------------- Credit Agreement dated as of December 1, 1994 among the Company, the lenders party thereto, and Chase, as agent, as in effect on the date hereof. "Regulations A, D, G, T, U and X" shall mean, respectively, ------------------------------- Regulations A, D, G, T, U and X of the Board of Governors of the Federal Reserve System (or any successor), as the same may be modified and supplemented and in effect from time to time. "Regulatory Change" shall mean, with respect to any Bank, any change ----------------- after the date hereof in Federal, state or foreign law or regulations (including, without limitation, Regulation D) or the adoption or making after such date of any interpretation, directive or request applying to a class of banks including such Bank of or under any Federal, state or foreign law or regulations (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "Reserve Requirement" shall mean, for any Interest Period for any ------------------- Eurodollar Loan, the average maximum rate at which reserves (including, without limitation, any marginal, supplemental or emergency reserves) are required to be maintained during such Interest Period under Regulation D by member banks of the Federal Reserve System in New York City with deposits exceeding one billion Dollars against "Eurocurrency liabilities" (as such term is used in Regulation D). Without limiting the effect of the foregoing, the Reserve Requirement shall include any other reserves required to be maintained by such member banks by reason of any Regulatory Change with respect to (i) any category of liabilities that includes deposits by reference to which the Eurodollar Base Rate for any Interest Period for any Eurodollar Loans is to be determined as provided in the definition of "Eurodollar Base Rate" in this Section 1.01 or (ii) any category of extensions of credit or other assets that includes Eurodollar Loans. "SAP" shall mean, with respect to any Insurance Subsidiary, the --- accounting procedures and practices prescribed or permitted by the Applicable Insurance Regulatory Authority, applied on a basis consistent with those that, in accordance with the last sentence of Section 1.02(a) hereof, are to be used in making the calculations for purposes of determining compliance with certain terms of this Agreement. "S&P Claims Rating" shall mean, as at any date of determination, the ----------------- rating assigned by Standard & Poor's Ratings Group to PLAIC's claims paying ability as at such date. "S&P Rating" shall mean, as at any date of determination, the rating ---------- assigned by Standard & Poor's Ratings Group to the Company's senior unsecured long term debt rating (unsupported by any credit enhancement) as at such date. "SFAS 115" shall mean the Statement of Financial Accounting Standards -------- No. 115 "Accounting for Certain Investments in Debt and Equity Securities" issued by the Financial Accounting Standards Board. "Subsidiary" shall mean, for the Company, any corporation, partnership ---------- or other entity of which at least a majority of the securities or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or other persons performing similar functions of such corporation, partnership or other entity (irrespective of whether or not at the time securities or other ownership interests of any other class or classes of such corporation, partnership or other entity shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by the Company or one or more Subsidiaries of the Company or by the Company and one or more Subsidiaries of the Company. "Substantial Part" shall mean, as at any date of determination, 10% or ---------------- more of the assets of the Company and its Consolidated Subsidiaries on a consolidated basis. "Textron" shall mean Textron Inc., a Delaware corporation. ------- "Type" shall have the meaning assigned to such term in Section 1.03 ---- hereof. "Utilization Premium" shall mean, as at any date of determination, ------------------- five (5) basis points if, as at such time, the aggregate outstanding principal amount of the Loans is equal to or more than one-half of the aggregate Commitments. "Wholly-Owned Subsidiary" shall mean any Subsidiary of which all of ----------------------- such securities or other ownership interests (other than, in the case of a corporation, directors' qualifying shares) are so owned or controlled. "Zurich Investment" shall mean the issuance by the Company and the ----------------- purchase by the Zurich Insurance Company of 9,523,810 shares of the Company's common stock pursuant to a Common Stock Purchase Agreement dated as of May 31, 1996 between the Company and Zurich Insurance Company. 1.02 Accounting Terms and Determinations. ------------------------------------ (a) Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Banks hereunder shall (unless otherwise disclosed to the Banks in writing at the time of delivery thereof in the manner described in Section 1.02(b) hereof) be prepared, in accordance with generally accepted accounting principles or statutory accounting principles, as the case may be, applied on a basis consistent with those used in the preparation of the latest financial statements furnished to the Banks hereunder (which, prior to the delivery of the first financial statements under Section 8.01 hereof, shall mean the financial statements as at December 31, 1995 referred to in Section 7.02 hereof). All calculations made for the purposes of determining compliance with this Agreement shall (except as otherwise expressly provided herein) be made by application of generally accepted accounting principles or statutory accounting principles, as the case may be, applied on a basis consistent with those used in the preparation of the latest annual or quarterly financial statements furnished to the Banks pursuant to Section 8.01 hereof (or, prior to the delivery of the first financial statements under said Section 8.01, used in the preparation of the financial statements as at December 31, 1995 referred to in Section 7.02 hereof) unless (i) the Company shall have objected to determining such compliance on such basis at the time of delivery of such financial statements or (ii) the Majority Banks shall so object in writing within 30 days after delivery of such financial statements, in either of which events such calculations shall be made on a basis consistent with those used in the preparation of the latest financial statements as to which such objection shall not have been made (which, if objection is made in respect of the first financial statements delivered under Section 8.01 hereof, shall mean the audited financial statements referred to in Section 7.02 hereof). (b) The Company shall deliver to the Banks at the same time as the delivery of any annual or quarterly financial statement under Section 8.01 hereof (i) a description in reasonable detail of any material variation between the application of accounting principles employed in the preparation of such statement and the application of accounting principles employed in the preparation of the next preceding annual or quarterly financial statements as to which no objection has been made in accordance with the last sentence of Section 1.02(a) hereof and (ii) reasonable estimates of the difference between such statements arising as a consequence thereof. (c) To enable the ready and consistent determination of compliance with the covenants set forth in Section 8 hereof, the Company will not change the last day of its fiscal year from December 31 of each year, or the last days of the first three fiscal quarters in each of its fiscal years from March 31, June 30 and September 30 of each year, respectively. 1.03 Types of Loans. Loans hereunder are distinguished by "Type". --------------- The "Type" of a Loan refers to whether such Loan is a Base Rate Loan or a Eurodollar Loan, each of which constitutes a Type. 1.04 Moody's Ratings and S&P Ratings. All references in this -------------------------------- Agreement to particular Moody's Ratings and S&P Ratings are references to such ratings as currently defined by Moody's Investors Service, Inc. and Standard & Poor's Ratings Group and in the event either such rating service changes its ratings system, each reference to a particular rating of such rating service set forth in this Agreement shall be deemed to be a reference to the rating under such changed rating system which, in the reasonable judgment of the Administrative Agent, after consultation with the rating service involved, most closely approximates the senior unsecured long term debt rating (unsupported by any credit enhancement) associated with the particular rating of such rating service as currently defined. 1.05 Moody's Claims Ratings and S&P Claims Ratings. All references ---------------------------------------------- in this Agreement to particular Moody's Claims Ratings and S&P Claims Ratings are references to such ratings as currently defined by Moody's Investors Service, Inc. and Standard & Poor's Ratings Group and in the event either such rating service changes its ratings system, each reference to a particular rating of such rating service set forth in this Agreement shall be deemed to be a reference to the rating under such changed rating system which, in the reasonable judgment of the Administrative Agent, after consultation with the rating service involved, most closely approximates the claims paying ability rating associated with the particular rating of such rating service as currently defined. If for any reason a Moody's Claims Rating or an S&P Claims Rating is not available then the level of Applicable Margin shall be determined by the Majority Banks after consultation with the Company, based on the Majority Banks' good faith estimates of what such rating would have been had it been available, the determination of the Majority Banks in such regard to be final and conclusive. Section 2. Commitments, Loans, Notes and Prepayments. ----------------------------------------- 2.01 Loans. Each Bank severally agrees, on the terms and conditions ------ of this Agreement, to make loans to the Company in Dollars during the period from and including the Closing Date to but not including the Commitment Termination Date in an aggregate principal amount at any one time outstanding up to but not exceeding the amount of the Commitment of such Bank as in effect from time to time, provided that in no event shall the aggregate principal amount of -------- all Loans exceed the aggregate amount of the Commitments as in effect from time to time; provided further that, prior to the Acquisition Date, the aggregate principal amount of the Loans shall not exceed $400,000,000. Subject to the terms and conditions of this Agreement, during such period the Company may borrow, repay and reborrow the amount of the Commitments by means of Base Rate Loans and Eurodollar Loans and may Convert Loans of one Type into Loans of another Type (as provided in Section 2.08 hereof) or Continue Loans of one Type as Loans of the same Type (as provided in said Section 2.08); provided that no -------- more than seven separate Interest Periods in respect of Eurodollar Loans from each Bank may be outstanding at any one time. 2.02 Borrowings. The Company shall give the Administrative Agent ----------- (which shall promptly notify the Banks) notice of each borrowing hereunder as provided in Section 4.05 hereof. Not later than 1:00 p.m. New York time on the date specified for each borrowing hereunder, each Bank shall make available the amount of the Loan or Loans to be made by it on such date to the Administrative Agent, at account number NYAO-DI-900-9-000002 maintained by the Administrative Agent with Chase at the Principal Office (or to such other account as the Administrative Agent shall notify the Banks), in immediately available funds, for account of the Company. The amount so received by the Administrative Agent shall, subject to the terms and conditions of this Agreement, be made available to the Company by depositing the same, in immediately available funds, in an account of the Company maintained with Chase at the Principal Office designated by the Company. 2.03 Changes of Commitments. ----------------------- (a) The aggregate amount of the Commitments shall be automatically reduced to zero on the Commitment Termination Date. (b) The Company shall have the right at any time or from time to time (i) so long as no Loans are outstanding, to terminate the Commitments and (ii) to reduce the aggregate unused amount of the Commitments; provided that (x) the -------- Company shall give notice of each such termination or reduction as provided in Section 4.05 hereof and (y) each partial reduction shall be in an aggregate amount at least equal to $10,000,000 or in multiples of $1,000,000 in excess thereof. (c) The Commitments are subject to mandatory reduction as provided in Section 2.09 hereof. (d) The Commitments once terminated or reduced may not be reinstated. 2.04 Facility Fee. The Company shall pay to the Administrative ------------- Agent for account of each Bank a facility fee on the daily average amount of such Bank's Commitment, whether used or unused, for the period from and including July 30, 1996 to but not including the earlier of (x) the date such Commitment is terminated and (y) the Commitment Termination Date, at a rate per annum (expressed in number of basis points) equal to the amount determined by reference to the S&P Rating and Moody's Rating as at such date:
Category Moody's Rating S&P Rating Facility Fee - ---------- -------------- ------------------- ----------------- (a) A3 or higher A- or higher 10 basis points (b) Less than A3 Less than A- but 12.5 basis points but equal to equal to or greater or greater than BBB+ than Baa1 (c) Less than Baa1 Less than BBB+ 15 basis points but equal to but equal to or or greater greater than BBB than Baa2 (d) Less than Baa2 Less than BBB 20 basis points but equal to but equal to or or greater greater than BBB- than Baa3 (e) Less than Baa3 Less than BBB- 25 basis points
provided, however, that in order to qualify for a particular category of - -------- facility fee (other than in the case of clause (e) above) both the Moody's Rating and the S&P Rating required for that category of facility fee must be attained and, accordingly, if one rating is lower than the other, the facility fee shall be determined on the basis of the lower of the two ratings. Each change in any facility fee resulting from a change in the Moody's Rating or the S&P Rating shall take effect at the time of the public announcement of such change in the Moody's Rating or the S&P Rating, as the case may be. If either a Moody's Rating or an S&P Rating shall not be available, the facility fee, as at any date of determination, shall be the percentage per annum (expressed in number of basis points) determined by reference to the Moody's Claims Rating and the S&P Claims Rating as at such date:
Category Moody's Claims S&P Claims Rating Facility Fee - ---------- -------------- ------------------- ----------------- Rating -------------- (a) Aa3 or higher AA- or higher 10 basis points (b) Less than Aa3 Less than AA- but 12.5 basis points but equal to equal to or greater or greater than A+ than A1 (c) Less than A1 Less than A+ 15 basis points but equal to but equal to or or greater greater than A than A2 (d) Less than A2 Less than A 20 basis points but equal to but equal to or or greater greater than A- than A3 (e) Less than A3 Less than A- 25 basis points
provided, however, that in order to qualify for a particular category of - -------- facility fee (other than in the case of clause (e) above) both the Moody's Claims Rating and the S&P Claims Rating required for that category of facility fee must be attained and, accordingly, if one rating is lower than the other, the facility fee shall be determined on the basis of the lower of the two ratings. Each change in any facility fee resulting from a change in the Moody's Claims Rating or the S&P Claims Rating shall take effect at the time of the public announcement of such change in the Moody's Claims Rating or the S&P Claims Rating, as the case may be. Accrued facility fee shall be payable on each Quarterly Date and on the earlier of the date the Commitments are terminated and the Commitment Termination Date. 2.05 Lending Offices. The Loans of each Type made by each Bank ---------------- shall be made and maintained at such Bank's Applicable Lending Office for Loans of such Type. 2.06 Several Obligations; Remedies Independent. The failure of any ------------------------------------------ Bank to make any Loan to be made by it on the date specified therefor shall not relieve any other Bank of its obligation to make its Loan on such date, but neither any Bank nor the Administrative Agent shall be responsible for the failure of any other Bank to make a Loan to be made by such other Bank, and no Bank shall have any obligation to the Administrative Agent or any other Bank for the failure by such Bank to make any Loan required to be made by such Bank. The amounts payable by the Company at any time hereunder and under the Notes to each Bank shall be a separate and independent debt and each Bank shall be entitled to protect and enforce its rights arising out of this Agreement and the Notes, and it shall not be necessary for any other Bank or the Administrative Agent to consent to, or be joined as an additional party in, any proceedings for such purposes. 2.07 Notes. ------ (a) The Loans made by each Bank shall be evidenced by a single promissory note of the Company substantially in the form of Exhibit A hereto, dated the date hereof, payable to such Bank in a principal amount equal to the amount of its Commitment as originally in effect and otherwise duly completed. (b) The date, amount, Type, interest rate and duration of Interest Period (if applicable) of each Loan made by each Bank to the Company, and each payment made on account of the principal thereof, shall be recorded by such Bank on its books and, prior to any transfer of the Note held by it, endorsed by such Bank on the schedule attached to such Note or any continuation thereof; provided -------- that the failure of such Bank to make any such recordation or endorsement shall not affect the obligations of the Company to make a payment when due of any amount owing hereunder or under such Note in respect of such Loans. (c) No Bank shall be entitled to have its Note subdivided, by exchange for promissory notes of lesser denominations or otherwise, except in connection with a permitted assignment of all or any portion of such Bank's Commitment, Loans and Note pursuant to Section 11.06(b) hereof. 2.08 Optional Prepayments and Conversions or Continuations of Loans. --------------------------------------------------------------- Subject to Section 4.04 hereof, the Company shall have the right to prepay Loans, or to Convert Loans of one Type into Loans of another Type or Continue Loans of one Type as Loans of the same Type, at any time or from time to time, provided that: (a) the Company shall give the Administrative Agent notice of - -------- each such prepayment, Conversion or Continuation as provided in Section 4.05 hereof (and, upon the date specified in any such notice of prepayment, the amount to be prepaid shall become due and payable hereunder); and (b) if any Eurodollar Loan is prepaid or Converted other than on the last day of an Interest Period for such Loan, the Company shall pay to the Administrative Agent for account of each Bank the amounts, if any, required to be paid pursuant to Section 5.05 hereof. Notwithstanding the foregoing, and without limiting the rights and remedies of the Banks under Section 9 hereof, in the event that any Event of Default shall have occurred and be continuing, the Administrative Agent may (and at the request of the Majority Banks shall) suspend the right of the Company to Convert any Loan into a Eurodollar Loan, or to Continue any Loan as a Eurodollar Loan, in which event all Loans shall be Converted (on the last day(s) of the respective Interest Periods therefor) into, or Continued as, as the case may be, Base Rate Loans. 2.09 Mandatory Prepayments and Reductions of Commitments. Upon any ---------------------------------------------------- Debt Issuance or Equity Issuance, (a) the Company shall prepay the Loans, and (b) the Commitments shall be subject to automatic reduction, in either case in an aggregate amount equal to 100% of the Net Available Proceeds thereof. Any such prepayment shall be paid to the Administrative Agent for account of the Banks and shall be accompanied by the aggregate amount of accrued interest and facility fee thereon, together with any amounts payable under Section 5.05 hereof. Section 3. Payments of Principal and Interest. ---------------------------------- 3.01 Repayment of Loans. The Company hereby promises to pay to the ------------------- Administrative Agent for account of each Bank the entire outstanding principal amount of such Bank's Loans, and each Loan shall mature, on the Commitment Termination Date. 3.02 Interest. The Company hereby promises to pay to the --------- Administrative Agent for account of each Bank interest on the unpaid principal amount of each Loan made by such Bank for the period from and including the date of such Loan to but excluding the date such Loan shall be paid in full, at the following rates per annum: (a) during such periods as such Loan is a Base Rate Loan, the Base Rate (as in effect from time to time) plus the Applicable Margin; and ---- (b) during such periods as such Loan is a Eurodollar Loan, for each Interest Period relating thereto, the Eurodollar Rate for such Interest Period plus the Applicable Margin. ---- Notwithstanding the foregoing, the Company hereby promises to pay to the Administrative Agent for account of each Bank interest at the applicable Post- Default Rate on any principal of any Loan made by such Bank and on any other amount payable by the Company hereunder or under the Note held by such Bank to or for account of such Bank, that shall not be paid in full when due (whether at stated maturity, by acceleration, by mandatory prepayment or otherwise), for the period from and including the due date thereof to but excluding the date the same is paid in full. Accrued interest on each Loan shall be payable (i) in the case of a Base Rate Loan, quarterly on the Quarterly Dates, (ii) in the case of a Eurodollar Loan, on the last day of each Interest Period therefor and, if such Interest Period is longer than three months, at three-month intervals following the first day of such Interest Period, and (iii) in the case of any Loan, upon the payment or prepayment thereof or the Conversion of such Loan to a Loan of another Type (but only on the principal amount so paid, prepaid or Converted), except that interest payable at the Post-Default Rate shall be payable from time to time on demand. Promptly after the determination of any interest rate provided for herein or any change therein, the Administrative Agent shall give notice thereof to the Banks to which such interest is payable and to the Company. Section 4. Payments; Pro Rata Treatment; Computations; Etc. ------------------------------------------------ 4.01 Payments. --------- (a) Except to the extent otherwise provided herein, all payments of principal, interest and other amounts to be made by the Company under this Agreement and the Notes, and, except to the extent otherwise provided therein, all payments to be made by the Company under any other Basic Document, shall be made in Dollars, in immediately available funds, without deduction, set-off or counterclaim, to the Administrative Agent at account number NYAO-DI-900-9-000002 maintained by the Administrative Agent with Chase at the Principal Office (or to such other account as the Administrative Agent shall notify the Company), not later than 1:00 p.m. New York time on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). (b) If any Event of Default shall be continuing, any Bank for whose account any such payment is to be made may (but shall not be obligated to) debit the amount of any such payment that is not made by such time to any ordinary deposit account of the Company with such Bank (with notice to the Company and the Administrative Agent), provided that such Bank's failure to give such notice -------- shall not affect the validity thereof. (c) Subject to Section 4.02 hereof, the Company shall, at the time of making each payment under this Agreement or any Note for account of any Bank, specify to the Administrative Agent (which shall so notify the intended recipient(s) thereof) the Loans or other amounts payable by the Company hereunder to which such payment is to be applied (and in the event that the Company fails to so specify, or if an Event of Default has occurred and is continuing, the Administrative Agent may distribute such payment to the Banks for application in such manner as it or the Majority Banks, subject to Section 4.02 hereof, may determine to be appropriate). (d) Each payment received by the Administrative Agent under this Agreement or any Note for account of any Bank shall be paid by the Administrative Agent promptly to such Bank, in immediately available funds, for account of such Bank's Applicable Lending Office for the Loan or other obligation in respect of which such payment is made. (e) If the due date of any payment under this Agreement or any Note would otherwise fall on a day that is not a Business Day, such date shall be extended to the next succeeding Business Day, and interest shall be payable for any principal so extended for the period of such extension. 4.02 Pro Rata Treatment. Except to the extent otherwise provided ------------------- herein: (a) each borrowing from the Banks under Section 2.01 hereof shall be made from the Banks, each payment of facility fee under Section 2.04 hereof shall be made for account of the Banks, and each termination or reduction of the amount of the Commitments under Sections 2.03 and 2.09 hereof shall be applied to the respective Commitments of the Banks, pro rata according to the amounts of their respective Commitments; (b) except as otherwise provided in Section 5.04 hereof, Loans having the same Interest Period shall be allocated pro rata among the Banks according to the amounts of their respective Commitments (in the case of making of Loans) or their respective Loans (in the case of Conversions and Continuations of Loans); (c) each payment or prepayment of principal of Loans by the Company shall be made for account of the Banks pro rata in accordance with the respective unpaid principal amounts of the Loans held by them, provided that -------- if immediately prior to giving effect to any such payment in respect of any Loans the outstanding principal amount of the Loans shall not be held by the Banks pro rata in accordance with their respective Commitments in effect at the time such Loans were made (by reason of a failure of a Bank to make a Loan hereunder in the circumstances described in the last paragraph of Section 11.04 hereof), then such payment shall be applied to the Loans in such manner as shall result, as nearly as is practicable, in the outstanding principal amount of the Loans being held by the Banks pro rata in accordance with their respective Commitments; and (d) each payment of interest on Loans by the Company shall be made for account of the Banks pro rata in accordance with the amounts of interest on such Loans then due and payable to the respective Banks. 4.03 Computations. Interest on Eurodollar Loans and facility fee ------------- shall be computed on the basis of a year of 360 days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable and interest on Base Rate Loans shall be computed on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable. Notwithstanding the foregoing, for each day that the Base Rate is calculated by reference to the Federal Funds Rate, interest on Base Rate Loans shall be computed on the basis of a year of 360 days and actual days elapsed. 4.04 Minimum Amounts. Except for mandatory prepayments made ---------------- pursuant to Section 2.09 hereof and Conversions or prepayments made pursuant to Section 5.04 hereof, each borrowing, Conversion and partial prepayment of principal of Loans shall be in an aggregate amount at least equal to $10,000,000 (or, in the case of a borrowing of a Base Rate Loan, $5,000,000) or in multiples of $1,000,000 in excess thereof (borrowings, Conversions or prepayments of or into Loans of different Types or, in the case of Eurodollar Loans, having different Interest Periods at the same time hereunder to be deemed separate borrowings, Conversions and prepayments for purposes of the foregoing, one for each Type or Interest Period). Anything in this Agreement to the contrary notwithstanding, the aggregate principal amount of Eurodollar Loans having the same Interest Period shall be in an amount at least equal to $10,000,000 or in multiples of $1,000,000 in excess thereof and, if any Eurodollar Loans would otherwise be in a lesser principal amount for any period, such Loans shall be Base Rate Loans during such period. 4.05 Certain Notices. Notices by the Company to the Administrative ---------------- Agent of terminations or reductions of the Commitments, of borrowings, Conversions, Continuations and optional prepayments of Loans, of Types of Loans and of the duration of Interest Periods shall be irrevocable and shall be effective only if received by the Administrative Agent not later than 10:00 a.m. New York time on the number of Business Days prior to the date of the relevant termination, reduction, borrowing, Conversion, Continuation or prepayment or the first day of such Interest Period specified below:
Number of Business Notice Days Prior - -------------------------------------- ---------- Termination or reduction of Commitments 2 Borrowing or prepayment of, or Conversions into, Base Rate Loans 0 Borrowing or prepayment of, Conversions into, Continuations as, or duration of Interest Period for, Eurodollar Loans 3
Each such notice of termination or reduction shall specify the amount of the Commitments to be terminated or reduced. Each such notice of borrowing, Conversion, Continuation or optional prepayment shall specify the Loans to be borrowed, Converted, Continued or prepaid and the amount (subject to Section 4.04 hereof) and Type of each Loan to be borrowed, Converted, Continued or prepaid (and, in the case of a Conversion, the Type of Loan to result from such Conversion) and the date of borrowing, Conversion, Continuation or optional prepayment (which shall be a Business Day). Each such notice of the duration of an Interest Period shall specify the Loans to which such Interest Period is to relate. The Administrative Agent shall promptly notify the Banks of the contents of each such notice. In the event that the Company fails to select the Type of Loan, or the duration of any Interest Period for any Eurodollar Loan, within the time period and otherwise as provided in this Section 4.05, such Loan (if outstanding as a Eurodollar Loan) will be automatically Converted into a Base Rate Loan on the last day of the then current Interest Period for such Loan or (if outstanding as a Base Rate Loan) will remain as, or (if not then outstanding) will be made as, a Base Rate Loan. 4.06 Non-Receipt of Funds by the Administrative Agent. Unless the ------------------------------------------------- Administrative Agent shall have been notified by a Bank or the Company (the "Payor") prior to the date on which the Payor is to make payment to the - ------ Administrative Agent of (in the case of a Bank) the proceeds of a Loan to be made by it hereunder or (in the case of the Company) a payment to the Administrative Agent for account of one or more of the Banks hereunder (such payment being herein called the "Required Payment"), which notice shall be -------- ------- effective upon receipt, that the Payor does not intend to make the Required Payment to the Administrative Agent, the Administrative Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient(s) on such date and, if the Payor has not in fact made the Required Payment to the Administrative Agent, the recipient(s) of such payment shall, on demand, repay to the Administrative Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the Administrative Agent until the date the Administrative Agent recovers such amount at a rate per annum equal to the Federal Funds Rate for such day and, if such recipient(s) shall fail promptly to make such payment, the Administrative Agent shall be entitled to recover such amount, on demand, from the Payor, together with interest as aforesaid. 4.07 Sharing of Payments, Etc. -------------------------- (a) The Company agrees that, in addition to (and without limitation of) any right of set-off, banker's lien or counterclaim a Bank may otherwise have, each Bank shall be entitled, at its option if an Event of Default shall be continuing, to offset balances held by it for account of the Company at any of its offices, in Dollars or in any other currency, against any principal of or interest on any of such Bank's Loans or any other amount payable to such Bank hereunder, that is not paid when due (regardless of whether such balances are then due to the Company), in which case it shall promptly notify the Company and the Administrative Agent thereof, provided that such Bank's failure to give such -------- notice shall not affect the validity thereof. (b) If any Bank shall obtain from the Company payment of any principal of or interest on any Loan owing to it or payment of any other amount under this Agreement or any other Basic Document through the exercise of any right of set-off, banker's lien or counterclaim or similar right or otherwise (other than from the Administrative Agent as provided herein), and, as a result of such payment, such Bank shall have received a greater percentage of the principal of or interest on the Loans or such other amounts then due hereunder or thereunder by the Company to such Bank than the percentage received by any other Bank, it shall promptly purchase from such other Banks participations in (or, if and to the extent specified by such Bank, direct interests in) the Loans or such other amounts, respectively, owing to such other Banks (or in interest due thereon, as the case may be) in such amounts, and make such other adjustments from time to time as shall be equitable, to the end that all the Banks shall share the benefit of such excess payment (net of any expenses that may be incurred by such Bank in obtaining or preserving such excess payment) pro rata in accordance with the unpaid principal of and/or interest on the Loans or such other amounts, respectively, owing to each of the Banks, provided that if -------- at the time of such payment the outstanding principal amount of the Loans shall not be held by the Banks pro rata in accordance with their respective Commitments in effect at the time such Loans were made (by reason of a failure of a Bank to make a Loan hereunder in the circumstances described in the last paragraph of Section 11.04 hereof), then such purchases of participations and/or direct interests shall be made in such manner as will result, as nearly as is practicable, in the outstanding principal amount of the Loans being held by the Banks pro rata according to the amounts of such Commitments. To such end all the Banks shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored. (c) The Company agrees that any Bank so purchasing such a participation (or direct interest) may exercise all rights of set-off, banker's lien, counterclaim or similar rights with respect to such participation as fully as if such Bank were a direct holder of Loans or other amounts (as the case may be) owing to such Bank in the amount of such participation. (d) Nothing contained herein shall require any Bank to exercise any such right or shall affect the right of any Bank to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of the Company. If, under any applicable bankruptcy, insolvency or other similar law, any Bank receives a secured claim in lieu of a set-off to which this Section 4.07 applies, such Bank shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Banks entitled under this Section 4.07 to share in the benefits of any recovery on such secured claim. Section 5. Yield Protection, Etc. ---------------------- 5.01 Additional Costs. ----------------- (a) The Company shall pay directly to each Bank from time to time such amounts as such Bank may determine to be necessary to compensate such Bank for any costs that such Bank determines are attributable to its making or maintaining of any Eurodollar Loans or its obligation to make any Eurodollar Loans hereunder, or any reduction in any amount receivable by such Bank hereunder in respect of any of such Loans or such obligation (such increases in costs and reductions in amounts receivable being herein called "Additional ---------- Costs"), resulting from any Regulatory Change that: (i) changes the basis of taxation of any amounts payable to such Bank under this Agreement or its Note in respect of any of such Loans (other than taxes imposed on or measured by the overall net income of such Bank or of its Applicable Lending Office for any of such Loans by the jurisdiction in which such Bank has its principal office or such Applicable Lending Office); or (ii) imposes or modifies any reserve, special deposit or similar requirements (other than the Reserve Requirement used in the determination of the Eurodollar Rate for any Interest Period for such Loan) relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, such Bank (including, without limitation, any of such Loans or any deposits referred to in the definition of "Eurodollar Base Rate" in Section 1.01 hereof), or any commitment of such Bank (including, without limitation, the Commitment of such Bank hereunder); or (iii) imposes any other condition affecting this Agreement or its Note (or any of such extensions of credit or liabilities) or its Commitment. If any Bank requests compensation from the Company under this Section 5.01(a), the Company may, by notice to such Bank (with a copy to the Administrative Agent), suspend the obligation of such Bank thereafter to make or Continue Eurodollar Loans, or to Convert Loans of any other Type into Eurodollar Loans, until the Regulatory Change giving rise to such request ceases to be in effect (in which case the provisions of Section 5.04 hereof shall be applicable), provided that such suspension shall not affect the right of such Bank to receive - -------- the compensation so requested. (b) Without limiting the effect of the provisions of Section 5.01(a) hereof, in the event that, by reason of any Regulatory Change, any Bank either (i) incurs Additional Costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of such Bank that includes deposits by reference to which the interest rate on Eurodollar Loans is determined as provided in this Agreement or a category of extensions of credit or other assets of such Bank that includes Eurodollar Loans or (ii) becomes subject to restrictions on the amount of such a category of liabilities or assets that it may hold, then, if such Bank so elects by notice to the Company (with a copy to the Administrative Agent), the obligation of such Bank to make or Continue, or to Convert Loans of any other Type into, Eurodollar Loans hereunder shall be suspended until such Regulatory Change ceases to be in effect (in which case the provisions of Section 5.04 hereof shall be applicable). (c) Without limiting the effect of the foregoing provisions of this Section 5.01 (but without duplication), the Company shall pay directly to each Bank from time to time on request such amounts as such Bank may determine to be necessary to compensate such Bank (or, without duplication, the bank holding company of which such Bank is a subsidiary) for any costs that it determines are attributable to the maintenance by such Bank (or any Applicable Lending Office or such bank holding company), pursuant to any law or regulation or any interpretation, directive or request (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) of any court or governmental or monetary authority (i) following any Regulatory Change or (ii) implementing any risk-based capital guideline or other requirement (whether or not having the force of law and whether or not the failure to comply therewith would be unlawful) heretofore or hereafter issued by any government or governmental or supervisory authority implementing at the national or supra- national level the Basel Accord (including, without limitation, the Final Risk- Based Capital Guidelines of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 208, Appendix A; 12 C.F.R. Part 225, Appendix A) and the Final Risk-Based Capital Guidelines of the Office of the Comptroller of the Currency (12 C.F.R. Part 3, Appendix A)), of capital in respect of its Commitment or Loans (such compensation to include, without limitation, an amount equal to any reduction of the rate of return on assets or equity of such Bank (or any Applicable Lending Office or such bank holding company) to a level below that which such Bank (or any Applicable Lending Office or such bank holding company) could have achieved but for such law, regulation, interpretation, directive or request). (d) Each Bank shall notify the Company of any event occurring after the date hereof entitling such Bank to compensation under Section 5.01(a) or (c) hereof as promptly as practicable, but in any event within 45 days, after such Bank obtains actual knowledge thereof; provided that (i) if any Bank fails to -------- give such notice within 45 days after it obtains actual knowledge of such an event, such Bank shall, with respect to compensation payable pursuant to this Section 5.01 in respect of any costs resulting from such event, only be entitled to payment under this Section 5.01 for costs incurred from and after the date 45 days prior to the date that such Bank does give such notice and (ii) each Bank will designate a different Applicable Lending Office for the Loans of such Bank affected by such event if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the sole opinion of such Bank, be disadvantageous to such Bank, except that such Bank shall have no obligation to designate an Applicable Lending Office located in the United States of America. Each Bank will furnish to the Company a certificate setting forth the basis and amount of each request by such Bank for compensation under Section 5.01(a) or (c) hereof. Determinations and allocations by any Bank for purposes of this Section 5.01 of the effect of any Regulatory Change pursuant to Section 5.01(a) hereof, or of the effect of capital maintained pursuant to Section 5.01 hereof, on its costs or rate of return of maintaining Loans or its obligation to make Loans, or on amounts receivable by it in respect of Loans, and of the amounts required to compensate such Bank under this Section 5.01, shall be conclusive, provided that such determinations and allocations are made on a -------- reasonable basis. 5.02 Limitation on Types of Loans. Anything herein to the contrary ----------------------------- notwithstanding, if, on or prior to the determination of the Eurodollar Base Rate for any Interest Period for any Eurodollar Loan: (a) the Administrative Agent determines, which determination shall be conclusive, that quotations of interest rates for the relevant deposits referred to in the definition of "Eurodollar Base Rate" in Section 1.01 hereof are not being provided in the relevant amounts or for the relevant maturities for purposes of determining rates of interest for Eurodollar Loans as provided herein; or (b) the Majority Banks determine, which determination shall be conclusive, and notify the Administrative Agent that the relevant rates of interest referred to in the definition of "Eurodollar Base Rate" in Section 1.01 hereof upon the basis of which the rate of interest for Eurodollar Loans for such Interest Period is to be determined are not likely adequately to cover the cost to such Banks of making or maintaining Eurodollar Loans for such Interest Period; then the Administrative Agent shall give the Company and each Bank prompt notice thereof and, so long as such condition remains in effect, the Banks shall be under no obligation to make additional Eurodollar Loans, to Continue Eurodollar Loans or to Convert Loans of any other Type into Eurodollar Loans, and the Company shall, on the last day(s) of the then current Interest Period(s) for the outstanding Eurodollar Loans, either prepay such Loans or Convert such Loans into another Type of Loan in accordance with Section 2.08 hereof. 5.03 Illegality. Notwithstanding any other provision of this ----------- Agreement, in the event that it becomes unlawful for any Bank or its Applicable Lending Office to honor its obligation to make or maintain Eurodollar Loans hereunder (and, in the sole opinion of such Bank, the designation of a different Applicable Lending Office would either not avoid such unlawfulness or would be disadvantageous to such Bank), then such Bank shall promptly notify the Company thereof (with a copy to the Administrative Agent) and such Bank's obligation to make or Continue, or to Convert Loans of any other Type into, Eurodollar Loans shall be suspended until such time as such Bank may again make and maintain Eurodollar Loans (in which case the provisions of Section 5.04 hereof shall be applicable). Subject to the first parenthetical in the preceding sentence, any Bank subject to any such illegality shall use reasonable efforts to designate a different Applicable Lending Office to avoid such illegality. 5.04 Treatment of Affected Loans. If the obligation of any Bank to ---------------------------- make Eurodollar Loans or to Continue, or to Convert Base Rate Loans into, Eurodollar Loans shall be suspended pursuant to Section 5.01 or 5.03 hereof, such Bank's Eurodollar Loans shall be automatically Converted into Base Rate Loans on the last day(s) of the then current Interest Period(s) for Eurodollar Loans (or, in the case of a Conversion required by Section 5.01(b) or 5.03 hereof, on such earlier date as such Bank may specify to the Company with a copy to the Administrative Agent) and, unless and until such Bank gives notice as provided below that the circumstances specified in Section 5.01 or 5.03 hereof that gave rise to such Conversion no longer exist: (a) to the extent that such Bank's Eurodollar Loans have been so Converted, all payments and prepayments of principal that would otherwise be applied to such Bank's Eurodollar Loans shall be applied instead to its Base Rate Loans; and (b) all Loans that would otherwise be made or Continued by such Bank as Eurodollar Loans shall be made or Continued instead as Base Rate Loans, and all Loans of such Bank that would otherwise be Converted into Eurodollar Loans shall remain as Base Rate Loans. If such Bank gives notice to the Company with a copy to the Administrative Agent that the circumstances specified in Section 5.01 or 5.03 hereof that gave rise to the Conversion of such Bank's Eurodollar Loans pursuant to this Section 5.04 no longer exist (which such Bank agrees to do promptly upon such circumstances ceasing to exist) at a time when Eurodollar Loans made by other Banks are outstanding, such Bank's Base Rate Loans shall be automatically Converted, on the first day(s) of the next succeeding Interest Period(s) for such outstanding Eurodollar Loans, to the extent necessary so that, after giving effect thereto, all Loans held by the Banks holding Eurodollar Loans and by such Bank are held pro rata (as to principal amounts, Types and Interest Periods) in accordance with their respective Commitments. 5.05 Compensation. The Company shall pay to the Administrative ------------- Agent for account of each Bank, upon the request of such Bank through the Administrative Agent, such amount or amounts as shall be sufficient (in the reasonable opinion of such Bank) to compensate it for any loss, cost or expense that such Bank determines is attributable to: (a) any payment, mandatory or optional prepayment or Conversion of a Eurodollar Loan made by such Bank for any reason (including, without limitation, the acceleration of the Loans pursuant to Section 9 hereof) on a date other than the last day of the Interest Period for such Loan; or (b) any failure by the Company for any reason (including, without limitation, the failure of any of the conditions precedent specified in Section 6 hereof to be satisfied) to borrow, Continue or Convert into a Eurodollar Loan from such Bank on the date for such borrowing, Continuation or Conversion specified in the relevant notice of borrowing, Continuation or Conversion given pursuant to Section 2.02 or 4.05 hereof. Without limiting the effect of the preceding sentence, such compensation shall include an amount equal to the excess, if any, of (i) the amount of interest that otherwise would have accrued on the principal amount so paid, prepaid, Converted or not borrowed for the period from the date of such payment, prepayment, Conversion or failure to borrow to the last day of the then current Interest Period for such Loan (or, in the case of a failure to borrow, the Interest Period for such Loan that would have commenced on the date specified for such borrowing) at the applicable rate of interest for such Loan provided for herein over (ii) the amount of interest that otherwise would have accrued on such principal amount at a rate per annum equal to the interest component of the amount such Bank would have bid in the London interbank market for Dollar deposits of leading banks in amounts comparable to such principal amount and with maturities comparable to such period (as reasonably determined by such Bank). 5.06 U.S. Taxes. ----------- (a) The Company agrees to pay to each Bank that is not a U.S. Person such additional amounts as are necessary in order that the net payment of any amount due to such non-U.S. Person hereunder and under its Note after deduction for or withholding in respect of any U.S. Taxes imposed with respect to such payment (or in lieu thereof, payment of such U.S. Taxes by such non-U.S. Person), will not be less than the amount stated herein to be then due and payable, provided that the foregoing obligation to pay such additional amounts -------- shall not apply: (i) to any payment to any Bank hereunder unless such Bank is, on the date hereof (or on the date it becomes a Bank hereunder as provided in Section 11.06(b) hereof) and on the date of any change in the Applicable Lending Office of such Bank, either entitled to submit a Form 1001 (relating to such Bank and entitling it to a complete exemption from withholding on all interest to be received by it hereunder in respect of the Loans) or Form 4224 (relating to all interest to be received by such Bank hereunder in respect of the Loans), or (ii) to any U.S. Taxes imposed solely by reason of the failure by such non-U.S. Person to comply with applicable certification, information, documentation or other reporting requirements concerning the nationality, residence, identity or connections with the United States of America of such non-U.S. Person if such compliance is required by statute or regulation of the United States of America as a precondition to relief or exemption from such U.S. Taxes. For the purposes of this Section 5.06(a), (A) "U.S. Person" shall mean a ----------- citizen, national or resident of the United States of America, a corporation, partnership or other entity created or organized in or under any laws of the United States of America or any State thereof, or any estate or trust that is subject to Federal income taxation regardless of the source of its income, (B) "U.S. Taxes" shall mean any present or future tax, assessment or other charge or - ----------- levy imposed by or on behalf of the United States of America or any taxing authority thereof or therein, (C) "Form 1001" shall mean Form 1001 (Ownership, --------- Exemption, or Reduced Rate Certificate) of the Department of the Treasury of the United States of America and (D) "Form 4224" shall mean Form 4224 (Exemption --------- from Withholding of Tax on Income Effectively Connected with the Conduct of a Trade or Business in the United States) of the Department of the Treasury of the United States of America. Each of the Forms referred to in the foregoing clauses (C) and (D) shall include such successor and related forms as may from time to time be adopted by the relevant taxing authorities of the United States of America to document a claim to which such Form relates. (b) Within 30 days after paying any amount to the Administrative Agent or any Bank from which it is required by law to make any deduction or withholding, and within 30 days after it is required by law to remit such deduction or withholding to any relevant taxing or other authority, the Company shall deliver to the Administrative Agent for delivery to such non-U.S. Person evidence satisfactory to such Person of such deduction, withholding or payment (as the case may be). 5.07 Replacement of Bank. Provided that no Default shall have -------------------- occurred and be continuing, the Company may, at any time, replace any Bank that has requested compensation from the Company pursuant to Section 5.01(a) or (c) or Section 5.06 hereof or has invoked Section 5.03 hereof and whose Commitment at such time (together with the Commitments of all other Banks being replaced at such time) does not exceed 30% of the aggregate amount of the Commitments at such time, by giving not less than ten (10) Business Days' prior written notice to the Administrative Agent (which shall promptly notify such Bank), that it intends to replace such Bank with respect to its Commitment with one or more financial institutions (including, but not limited to, any other Bank under this Agreement) selected by the Company and acceptable to the Administrative Agent (acting reasonably). Upon the effective date of any replacement, the Company shall pay (or cause to be paid) to the Bank being replaced any amounts owing to such Bank hereunder (including, without limitation, the aggregate principal amount of its Loans, accrued interest thereon, any accrued facility fee, amounts payable pursuant to Section 5.05 hereof and any amounts payable under Section 5.01 or 5.06 hereof, collectively, the "Termination Costs"), whereupon each ----------------- replacement bank shall become a "Bank" for all purposes of this Agreement having a Commitment in the amount of such Bank's Commitment assumed by it, and such Commitment of the Bank being replaced shall be terminated upon such effective date and all of such Bank's rights and obligations under this Agreement shall terminate (provided that the obligations of the Company under Section 5.01, 5.05 and 11.03 hereof to such Bank shall survive such replacement as provided in Section 11.07 hereof). Section 6. Conditions Precedent. -------------------- 6.01 Initial Loan. The obligation of any Bank to make its initial ------------- Loan hereunder is subject to (i) the condition precedent that such Loan shall be made on or before November 1, 1996, (ii) in respect of documentary matters, the receipt by the Administrative Agent of the following documents, each of which shall be satisfactory to the Administrative Agent (and to the extent specified below, to each Bank) in form and substance and (iii) in respect of nondocumentary matters, the satisfaction of the specified condition precedent to the satisfaction of the Administrative Agent (and, to the extent specified below, each Bank): (a) Corporate Documents. The following documents, each certified as ------------------- indicated below: (i) for the Company, a copy of the certificate of incorporation, as amended and in effect, of the Company certified as of a recent date by the Secretary of State of its jurisdiction of incorporation, and a certificate from such Secretary of State dated as of a recent date as to the good standing of and charter documents filed by the Company; (ii) for the Company, a certificate of the Secretary or an Assistant Secretary of the Company, dated the Closing Date and certifying (A) that attached thereto is a true and complete copy of the by-laws of the Company as amended and in effect at all times from the date on which the resolutions referred to in clause (B) below were adopted to and including the date of such certificate, (B) that attached thereto is a true and complete copy of resolutions duly adopted by the board of directors of the Company authorizing the execution, delivery and performance of such of the Basic Documents to which the Company is or is intended to be a party and the Loans hereunder, and that such resolutions have not been modified, rescinded or amended and are in full force and effect, (C) that the charter of the Company has not been amended since the date of the certification thereto furnished pursuant to clause (i) above, and (D) as to the incumbency and specimen signature of each officer of the Company executing such of the Basic Documents to which the Company is intended to be a party and each other document to be delivered by the Company from time to time in connection therewith (and the Administrative Agent and each Bank may conclusively rely on such certificate until it receives notice in writing from the Company); and (iii) for the Company, a certificate of another officer of the Company as to the incumbency and specimen signature of the Secretary or Assistant Secretary, as the case may be, of the Company. (b) Officer's Certificate. A certificate of a senior officer of the --------------------- Company, dated the Closing Date, to the effect set forth in the first sentence of Section 6.03 hereof. (c) Opinion of Counsel to the Company. An opinion, dated the Closing --------------------------------- Date, of Glenn P. Felton, Vice President and Managing Corporate Counsel of the Company, substantially in the form of Exhibit B hereto and covering such other matters as the Administrative Agent or any Bank may reasonably request (and the Company hereby instructs such counsel to deliver such opinion to the Banks and the Administrative Agent). (d) Opinion of Special New York Counsel to the Banks. An opinion, ------------------------------------------------ dated the Closing Date, of Vedder, Price, Kaufman, Kammholz & Day, special New York counsel to the Banks, substantially in the form of Exhibit C hereto. (e) Notes. The Notes, duly completed and executed. ----- (f) Repayment of Refinanced Debt. Evidence of the concurrent ---------------------------- repayment of the Company's Refinanced Debt (the "Refinancing") and the ----------- termination of the commitments thereunder. (g) Payment of Fees and Expenses. Evidence of the payment by the ---------------------------- Company of (i) the upfront fee, if any, payable to each Bank as separately agreed by such Bank and Chase, (ii) such fees as the Company shall have separately agreed to pay to Chase and (iii) amounts owing under Section 11.03 hereof to the extent it has received invoices therefor on or before the date of the initial borrowing hereunder. (h) Insurance. A certificate of a senior officer of the Company --------- describing in reasonable detail the types and amounts of insurance maintained by the Company and its Subsidiaries, which types and amounts shall be satisfactory to the Banks. (i) Reserves. An opinion of the senior actuaries of the Insurance -------- Subsidiaries as to the adequacy of the Insurance Subsidiaries' reserves. (j) Litigation. The Banks' satisfaction with any litigation or ---------- proceedings affecting the Company or any of its Subsidiaries and deemed material by the Banks. (k) Other Documents. Such other documents as the Administrative Agent --------------- or any Bank or special New York counsel to the Banks may reasonably request. 6.02 Acquisition/Post-Acquisition Loan. The obligation of any Bank ---------------------------------- to make any Loan hereunder on (or its first Loan to be made at any time after) the Acquisition Date is subject to (i) in respect of documentary matters, the receipt by the Administrative Agent of the following documents, each of which shall be satisfactory to the Administrative Agent (and to the extent specified below, to each Bank) in form and substance and (ii) in respect of nondocumentary matters, the satisfaction of the specified condition precedent to the satisfaction of the Administrative Agent (and, to the extent specified below, each Bank): (a) Acquisition. The Banks' review and satisfaction with the terms ----------- and conditions of the Acquisition and the Zurich Investment, the other transactions contemplated hereby and thereby and the documentation relating to each thereof, including, without limitation, the Purchase Agreement, and the Acquisition and the Zurich Investment shall be concurrently, or shall have become, effective. (b) Projections. The Banks' review of and satisfaction with the ----------- Company's projections and pro forma financial statements reflecting the forecasted financial condition, income and expenses of the Company and its Subsidiaries after giving effect to the borrowings hereunder, the Acquisition and the other transactions contemplated hereby. (c) Purchase Agreement. A certified copy of the Purchase Agreement ------------------ (together with all exhibits and schedules thereto), which shall have been duly approved by the boards of directors of the Company and Paul Revere and shall have been duly executed and delivered by the parties thereto and shall be in full force and effect. All conditions to the Acquisition contained in the Purchase Agreement shall have been met in all material respects or waived with the concurrence of the Banks, acting reasonably. (d) Available Cash. Evidence that the aggregate amount of the funds -------------- available to the Company in the form of Loans that may be borrowed utilizing available Commitments hereunder and available cash and cash equivalents shall be sufficient to consummate the Acquisition and the Refinancing. (e) Margin Regulations. The Banks' satisfaction that the borrowings ------------------ hereunder shall be in full compliance with all legal requirements, including, without limitation, Regulations G, T, U and X. (f) Legal Compliance. Evidence of compliance with all applicable U.S. ---------------- federal, state and local laws and regulations, where such compliance is material, and evidence that all material and necessary licenses, permits and governmental and third-party consents, filings and notices to effect the Acquisition shall have been obtained and shall be in full force and effect, including without limitation: (i) the approval of the Commissioners of Insurance of the Commonwealth of Massachusetts and the State of Delaware; (ii) any consents which may be required under the insurance laws of any state in which Paul Revere or any of its subsidiaries conducts any business or owns any assets; and (iii) filings pursuant by the Hart-Scott- Rodino Antitrust Improvements Act of 1976, as amended, shall have been made and the waiting period thereunder shall have expired or been terminated without any injunction or enforcement action having been taken by the Federal Trade Commission or the Department of Justice in respect thereof. (g) Litigation. The Banks' satisfaction with any litigation or other ---------- proceedings with respect to the Acquisition or the other transactions contemplated thereby. (h) Due Diligence. Satisfactory completion of other due diligence ------------- customary for a transaction of this type. (i) Capital. Evidence that the Company's capital structure is as ------- reflected in Section 7.16 hereof. (j) Other Documents. Such other documents as the Administrative --------------- Agent or any Bank or special New York counsel to the Banks may reasonably request. 6.03 Initial and Subsequent Loans. The obligation of the Banks to ----------------------------- make any Loan to the Company upon the occasion of each borrowing hereunder (including the initial borrowing) is subject to the further conditions precedent that, both immediately prior to the making of such Loan and also after giving effect thereto and to the intended use thereof: (a) no Default shall have occurred and be continuing; and (b) the representations and warranties made by the Company in Section 7 hereof and in the other Basic Documents shall be true and complete on and as of the date of the making of such Loan with the same force and effect as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date). Each notice of borrowing by the Company hereunder shall constitute a certification by the Company to the effect set forth in the preceding sentence (both as of the date of such notice and, unless the Company otherwise notifies the Administrative Agent prior to the date of such borrowing, as of the date of such borrowing). Section 7. Representations and Warranties. The Company represents ------------------------------ and warrants to the Administrative Agent and the Banks that: 7.01 Corporate Existence. Each of the Company and its Subsidiaries: -------------------- (a) is a corporation, partnership or other entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization; (b) has all requisite corporate or other power, and has all material governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted; and (c) is qualified to do business and is in good standing in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify could (either individually or in the aggregate) have a Material Adverse Effect. 7.02 Financial Condition. -------------------- (a) The consolidated and, in the case of the Company only, unconsolidated statements of financial condition of the Company and its Consolidated Subsidiaries as at December 31, 1995 and the related consolidated and unconsolidated statements of operations, stockholders' equity and changes in cash flows of the Company and its Consolidated Subsidiaries for the fiscal year ended on said date, with the opinion thereon (in the case of said consolidated statement of financial condition and statements) of Ernst & Young LLP and the unaudited consolidated and unconsolidated statements of financial condition of the Company and its Consolidated Subsidiaries as at March 31, 1996 and the related consolidated and unconsolidated statements of operations, stockholders' equity and cash flows of the Company and its Consolidated Subsidiaries for the three-month period ended on such date, heretofore furnished to each of the Banks, are complete and correct and fairly present in all material respects the consolidated financial position of the Company and its Consolidated Subsidiaries, and the unconsolidated financial condition of the Company, as at said dates and the consolidated and, in the case of the Company only, unconsolidated results of their operations and their cash flows for the fiscal year and three-month period ended on said dates (subject, in the case of such financial statements as at March 31, 1996, to normal year-end audit adjustments), all in accordance with generally accepted accounting principles and practices applied on a consistent basis. Neither the Company nor any of its Subsidiaries had on said dates any material contingent liabilities, liabilities for taxes, unusual forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments, except as referred to or reflected or provided for in said statements of financial condition as at said dates. Since December 31, 1995, there has been no material adverse change in the consolidated financial condition, operations, business, assets (and nature thereof), liabilities (including, without limitation, tax, ERISA and environmental liabilities) or prospects taken as a whole of the Company and its Consolidated Subsidiaries from that set forth in said financial statements as at said date. (b) With respect to each Insurance Subsidiary, the statutory financial statements of such Insurance Subsidiary as at December 31, 1995, as filed with its Applicable Insurance Regulatory Authority, and the quarterly statement for the three-month period ended on March 31, 1996, heretofore furnished to each of the Banks, present in all material respects the financial condition of such Insurance Subsidiary as at said dates and its results of operations for its fiscal year and three-month period ended on said dates, in each case, in accordance with statutory reporting practices prescribed or permitted by its Applicable Insurance Regulatory Authority for the preparation of financial statements and other financial reports by insurance corporations of the type of such Insurance Subsidiary. 7.03 Litigation. There are no legal or arbitral proceedings, or ----------- any proceedings by or before any governmental or regulatory authority or agency, now pending or (to the knowledge of the Company) threatened against the Company or any of its Subsidiaries in which there is a reasonable possibility of an adverse determination or contingent liability not reflected on the Company's financial statements referred to in Section 7.02 hereof that could have a Material Adverse Effect. 7.04 No Breach. None of the execution and delivery of this ---------- Agreement, the Notes and the Purchase Agreement, the consummation of the transactions herein and therein contemplated, including the Acquisition, or compliance with the terms and provisions hereof and thereof will conflict with or result in a breach of, or require any consent under, the charter or by-laws of the Company, or any applicable law or regulation, or any order, writ, injunction or decree of any court or governmental authority or agency, or any agreement or instrument to which the Company or any of its Subsidiaries is a party or by which any of them or any of their Property is bound or to which any of them is subject, or constitute a default under any such agreement or instrument, or result in the creation or imposition of any Lien upon any Property of the Company or any of its Subsidiaries pursuant to the terms of any such agreement or instrument. 7.05 Action. The Company has all necessary corporate power, ------- authority and legal right to execute, deliver and perform its obligations under each of the Basic Documents and the Purchase Agreement; the execution, delivery and performance by the Company of each of the Basic Documents and the Purchase Agreement have been duly authorized by all necessary corporate action on its part (including, without limitation, any required shareholder approvals); and this Agreement has been duly and validly executed and delivered by the Company and constitutes, and each of the Notes, the other Basic Documents and the Purchase Agreement when executed and delivered by the Company (in the case of the Notes, for value) will constitute, its legal, valid and binding obligation, enforceable against the Company in accordance with its terms, except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or similar laws of general applicability affecting the enforcement of creditors' rights and (b) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 7.06 Approvals. No authorizations, approvals or consents of, and no ---------- filings or registrations with, any governmental or regulatory authority or agency, or any securities exchange, are necessary for the execution, delivery or performance by the Company of (x) the Basic Documents or for the legality, validity or enforceability hereof or thereof or (y) except as specified in Section 6.02(f) hereof, the Purchase Agreement, and, as at the Acquisition Date, each of such authorizations, approvals, consents, filings and registrations referred to in said Section 6.02(f) will be in full force and effect and will not have been not withdrawn or modified. 7.07 Use of Credit. Neither the Company nor any of its Subsidiaries -------------- is engaged principally, or as one of its important activities, in the business of extending credit for the purpose, whether immediate, incidental or ultimate, of buying or carrying Margin Stock, and no part of the proceeds of any Loan hereunder will be used to buy or carry any Margin Stock. Not more than 10% of the value of the Properties of the Company and its Consolidated Subsidiaries (determined on a consolidated basis) is attributable to Margin Stock. 7.08 ERISA. The Company and the ERISA Affiliates have fulfilled ------ their respective obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and are in compliance in all material respects with the presently applicable provisions of ERISA and the Code, and have not incurred any liability to the PBGC or any Plan or Multiemployer Plan (other than to make contributions in the ordinary course of business). 7.09 Taxes. United States Federal income tax returns of the Company ------ and its Subsidiaries have been examined and closed to further assessment through the fiscal year of the Company ended December 31, 1985. The Company and its Subsidiaries have filed all United States Federal income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Company or any of its Subsidiaries. The charges, accruals and reserves on the books of the Company and its Subsidiaries in respect of taxes and other governmental charges are, in the opinion of the Company, adequate. 7.10 Investment Company Act. Except for those Subsidiaries ----------------------- specified on Schedule III hereto, neither the Company nor any of its Subsidiaries is an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. 7.11 Public Utility Holding Company Act. Neither the Company nor ----------------------------------- any of its Subsidiaries is a "holding company", or an "affiliate" of a "holding company" or a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. 7.12 Credit Agreements. Schedule I hereto is a complete and correct ------------------ list, as of the date of this Agreement, of each credit agreement, loan agreement, indenture, purchase agreement, Guarantee or other arrangement providing for or otherwise relating to any Indebtedness or any extension of credit (or commitment for any extension of credit) to, or Guarantee by, the Company or any of its Consolidated Subsidiaries the aggregate principal or face amount of which equals or exceeds (or may equal or exceed) $1,000,000 and the aggregate principal or face amount outstanding or which may become outstanding under each such arrangement is correctly described in said Schedule I. 7.13 Hazardous Materials. The Company and each of its Subsidiaries -------------------- have obtained all permits, licenses and other authorizations which are required under all Environmental Laws, except to the extent failure to have any such permit, license or authorization would not have a Material Adverse Effect. The Company and each of its Subsidiaries are in compliance with the terms and conditions of all such permits, licenses and authorizations, and are also in compliance with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in any applicable Environmental Law or in any regulation, code, plan, order, decree, judgment, injunction, notice or demand letter issued, entered, promulgated or approved thereunder, except to the extent failure to comply would not have a Material Adverse Effect. 7.14 Subsidiaries, Etc. Set forth in Schedule II hereto is a ------------------- complete and correct list, as of the date of this Agreement, of all Subsidiaries of the Company (and the respective jurisdiction of organization of each such Subsidiary) and of all Investments held by the Company or any of its Subsidiaries in any joint venture. Except as disclosed in Schedule II hereto the Company owns, free and clear of Liens, all outstanding shares of such Subsidiaries (and each such Subsidiary owns, free and clear of Liens, all outstanding equity interests of its Subsidiaries) and all such shares are validly issued, fully paid and non-assessable and the Company (or the respective Subsidiary) also owns, free and clear of Liens, all such Investments. 7.15 True and Complete Disclosure. The information, reports, ----------------------------- financial statements, exhibits and schedules furnished in writing by or on behalf of the Company to the Administrative Agent or any Bank in connection with the negotiation, preparation or delivery of this Agreement and the other Basic Documents or included herein or therein or delivered pursuant hereto or thereto, when taken as a whole do not contain any untrue statement of material fact or omit to state any material fact necessary to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. All written information furnished after the date hereof by the Company and its Subsidiaries to the Administrative Agent and the Banks in connection with this Agreement and the other Basic Documents and the transactions contemplated hereby and thereby will be true, complete and accurate in every material respect, or (in the case of projections) based on reasonable estimates, on the date as of which such information is stated or certified. There is no fact known to the Company that could have a Material Adverse Effect that has not been disclosed herein, in the other Basic Documents or in a report, financial statement, exhibit, schedule, disclosure letter or other writing furnished to the Banks for use in connection with the transactions contemplated hereby or thereby. 7.16 Capitalization. As of the Closing Date, the authorized capital --------------- stock of the Company consists of (i) 65,000,000 shares of common stock, par value $1.00 per share, of which approximately 45,544,430 shares are duly and validly issued and outstanding and (ii) 25,000,000 shares of preferred stock, par value $1.00 per share, of which 1,041,534 shares of 8.10% cumulative preferred stock, liquidation value of $150 per share, are duly and validly issued and outstanding, each of which issued and outstanding shares are fully paid and nonassessable. On the Acquisition Date, the authorized capital stock of the Company will consist of (i) 150,000,000 shares of common stock, par value $1.00 per share and (ii) 25,000,000 shares of preferred stock, par value $1.00 per share. In connection with the Zurich Investment, the Company will issue 9,523,810 shares of common stock of the Company. In connection with the Acquisition, the Company will issue no less than 6,644,518 nor more than 14,414,414 shares of common stock of the Company, each of which will be fully paid and nonassessable. As of the Acquisition Date, (x) except for employee benefit and salary plans, there will be no outstanding Equity Rights with respect to the Company and (y) except for employee benefit and salary plans, there will be no outstanding obligations of the Company or any of its Subsidiaries to repurchase, redeem, or otherwise acquire any shares of capital stock of the Company nor will there be any outstanding obligations of the Company or any of its Subsidiaries to make payments to any Person, such as "phantom stock" payments, where the amount thereof is calculated with reference to the fair market value or equity value of the Company or any of its Subsidiaries. 7.17 Purchase Agreement. The Company has delivered to the ------------------- Administrative Agent true and complete copies of the Purchase Agreement (including all schedules and exhibits thereto). Section 8. Covenants of the Company. The Company covenants and ------------------------ agrees with the Banks and the Administrative Agent that, so long as any Commitment or Loan is outstanding and until payment in full of all amounts payable by the Company hereunder: 8.01 Financial Statements. The Company shall deliver to each of the --------------------- Banks: (a) as soon as available and in any event within 45 days after the end of each quarterly fiscal period ending March 31, June 30 and September 30 of each fiscal year of the Company, consolidated statements of operations and cash flow of the Company and its Consolidated Subsidiaries for such period and for the period from the beginning of the respective fiscal year to the end of such period, setting forth in each case in comparative form the corresponding consolidated figures for the corresponding period in the preceding fiscal year, and the related consolidated statements of financial condition as at the end of such period and as at the previous year end, accompanied by a certificate of a senior financial officer of the Company, which certificate shall state that said financial statements fairly present in all material respects the consolidated financial position and results of operations and cash flows of the Company and its Consolidated Subsidiaries, in accordance with generally accepted accounting principles, consistently applied, as at the end of, and for, such period (subject to normal year-end audit adjustments); (b) as soon as available and in any event within 90 days after the end of each fiscal year of the Company, consolidated statements of operations, stockholders' equity and cash flow of the Company and its Consolidated Subsidiaries for such year and, in the case of the Company only, unconsolidated statements of operations and cash flows for such year and the related consolidated and unconsolidated statements of financial condition as at the end of such year, setting forth in each case in comparative form the corresponding consolidated and unconsolidated figures for the preceding fiscal year, and accompanied (i) in the case of said consolidated statements and statements of financial condition, by an unqualified opinion thereon of independent certified public accountants of recognized national standing, which opinion shall state that said consolidated financial statements fairly present in all material respects the consolidated financial position and results of operations and cash flows of the Company and its Consolidated Subsidiaries as at the end of, and for, such fiscal year in conformity with generally accepted accounting principles, and a certificate of such accountants stating that, in making the examination necessary for their opinion, they obtained no knowledge, except as specifically stated, of any Default arising from the breach of any of Sections 8.07 through 8.13 hereof (inclusive), and (ii) in the case of said unconsolidated statements and statement of financial condition, by a certificate of a senior financial officer of the Company, which certificate shall state that said unconsolidated financial statements fairly present in all material respects the unconsolidated financial position and results of operations and cash flows of the Company in conformity with generally accepted accounting principles, consistently applied, as at the end of, and for, such fiscal year; (c) as soon as available and in any event not later than 60 days after the end of each fiscal year of each Insurance Subsidiary, (i) the Annual Statements of such Insurance Subsidiary (prepared in accordance with the statutory accounting practices required or permitted by its Applicable Insurance Regulatory Authority) for such fiscal year as filed with such Applicable Insurance Regulatory Authority, together with the opinion thereon of a senior financial officer of such Insurance Subsidiary stating that such Annual Statements present the statutory financial condition of such Insurance Subsidiary in accordance with statutory accounting practices required or permitted by such Applicable Insurance Regulatory Authority and (ii) an opinion of the appointed actuary of such Insurance Subsidiary or independent certified public accountants of recognized national standing affirming the adequacy of the insurance reserves of such Insurance Subsidiary; in addition, no later than April 1 following the end of each fiscal year of each Insurance Subsidiary, the management's discussion and analysis relating to the Annual Statements of such Insurance Subsidiary for such fiscal year; (d) as soon as available and in any event not later than the May 1 following the end of each fiscal year of the Company, the Consolidated Annual Statement of the Company's Insurance Subsidiaries (prepared in accordance with the statutory accounting practices required or permitted by the Applicable Insurance Regulatory Authority for the Company) for such fiscal year as filed with such Applicable Insurance Regulatory Authority, together with the opinion thereon of a senior financial officer of the Company stating that such Annual Statement of the Company's Insurance Subsidiaries was prepared in accordance with statutory accounting practices required or permitted by such Applicable Insurance Regulatory Authority; (e) as soon as available and in any event within 45 days after the end of each fiscal quarter ending March 31, June 30 and September 30 of each Insurance Subsidiary, quarterly statutory financial statements of such Insurance Subsidiary (prepared in accordance with statutory accounting practices required or permitted by its Applicable Insurance Regulatory Authority) for such fiscal quarter as filed with such Applicable Insurance Regulatory Authority, together with the opinion thereon of a senior financial officer of such Insurance Subsidiary stating that such statutory financial statements present the statutory financial condition of such Insurance Subsidiary in accordance with statutory accounting practices required or permitted by such Applicable Insurance Regulatory Authority; (f) promptly upon their becoming available, copies of all registration statements and regular periodic reports, if any, that the Company shall have filed with the Securities and Exchange Commission (or any governmental agency substituted therefor) or any national securities exchange; (g) promptly upon the mailing thereof to the shareholders of the Company generally, copies of all financial statements, reports and proxy statements so mailed; (h) as soon as possible, and in any event within ten days after the Company knows or has reason to believe that any of the events or conditions specified below with respect to any Plan or Multiemployer Plan has occurred or exists, a statement signed by a senior financial officer of the Company setting forth details respecting such event or condition and the action, if any, that the Company or its ERISA Affiliate proposes to take with respect thereto (and a copy of any report or notice required to be filed with or given to the PBGC by the Company or an ERISA Affiliate with respect to such event or condition): (i) any reportable event, as defined in Section 4043(b) of ERISA and the regulations issued thereunder, with respect to a Plan, other than (x) any reportable event for which the PBGC has by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event (provided that a -------- failure to meet the minimum funding standard of Section 412 of the Code or Section 302 of ERISA, including, without limitation, the failure to make on or before its due date a required installment under Section 412(m) of the Code or Section 302(e) of ERISA, shall be a reportable event regardless of the issuance of any waivers in accordance with Section 412(d) of the Code) or (y) a reportable event for which notice to the PBGC is waived or penalties have been waived under PBGC Technical Update 95-3; (ii) the filing under Section 4041 of ERISA of a notice of intent to terminate any Plan or any action taken by the Company or an ERISA Affiliate to terminate any Plan that would result in a liability to the Company; (iii) the institution by the PBGC of proceedings under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan; (iv) the complete or partial withdrawal by the Company or any ERISA Affiliate from a Multiemployer Plan that results in liability under Section 4201 or 4204 of ERISA (including the obligation to satisfy secondary liability as a result of a purchaser default) or the receipt by the Company or any ERISA Affiliate of notice from a Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or that it intends to terminate or has terminated under Section 4041A of ERISA; and (v) the institution of a proceeding by a fiduciary of any Multiemployer Plan against the Company or any ERISA Affiliate to enforce Section 515 of ERISA, which proceeding is not dismissed within 30 days; (i) promptly after the Company knows or has reason to believe that any Default has occurred, a notice of such Default (and stating that such notice is a "Notice of Default") describing the same in reasonable detail and, together with such notice or as soon thereafter as possible, a description of the action that the Company has taken or proposes to take with respect thereto; (j) from time to time such other information regarding the financial condition, operations, business or prospects of the Company or any of its Subsidiaries (including, without limitation, any Plan or Multiemployer Plan and any reports or other information required to be filed under ERISA) as any Bank or the Administrative Agent may reasonably request; and (k) notice of any change in the Moody's Rating, Moody's Claims Rating, S&P Rating, S&P Claims Rating or any Insurance Subsidiary's A.M. Best rating promptly after the same shall have occurred. The Company will furnish to the Administrative Agent on behalf of each Bank, at the time it furnishes each set of financial statements pursuant to Section 8.01(a), (b), (d) or (e) hereof, a certificate of a senior financial officer of the Company (i) to the effect that no Default has occurred and is continuing (or, if any Default has occurred and is continuing, describing the same in reasonable detail and describing the action that the Company has taken or proposes to take with respect thereto) and (ii) setting forth in reasonable detail the computations necessary to determine whether the Company is in compliance with Sections 8.07 through 8.13 hereof (inclusive) as of the end of the respective quarterly fiscal period or fiscal year. 8.02 Litigation. The Company will promptly give to each Bank notice ----------- of all legal or arbitral proceedings, and of all proceedings by or before any governmental or regulatory authority or agency, and any material development in respect of such legal or other proceedings, affecting the Company or any of its Subsidiaries, except proceedings in which there is no reasonable possibility of an adverse determination that could have a Material Adverse Effect. 8.03 Existence, Etc. The Company will, and will cause each of its ---------------- Subsidiaries to: (a) preserve and maintain its legal existence and all of its material rights, privileges, licenses and franchises (provided that nothing in this -------- Section 8.03 shall prohibit any transaction expressly permitted under Section 8.05 hereof); (b) comply with the requirements of all applicable laws, rules, regulations and orders of governmental or regulatory authorities if failure to comply with such requirements could (either individually or in the aggregate) have a Material Adverse Effect; (c) pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its Property prior to the date on which penalties attach thereto, except for any such tax, assessment, charge or levy the payment of which is being contested in good faith and by proper proceedings and against which adequate reserves are being maintained; (d) maintain all of its Properties used or useful in its business in good working order and condition, ordinary wear and tear excepted; and (e) permit representatives of any Bank or the Administrative Agent, during normal business hours, to examine, copy and make extracts from its books and records, to inspect any of its Properties, and to discuss its business and affairs with its officers, all to the extent reasonably requested by such Bank or the Administrative Agent (as the case may be). 8.04 Insurance. The Company shall, and shall cause each of its ---------- Subsidiaries to, maintain worker's compensation insurance, liability insurance and insurance on its properties, assets and business, now owned or hereafter acquired, against such casualties, risks and contingencies, and in such types and amounts, as are consistent with customary practices and standards of companies engaged in similar businesses. Except in respect of errors and omissions policies, the Company shall not permit the types or amounts of self- insurance maintained by it and its Subsidiaries to be materially increased beyond the types and amounts thereof set forth in the certificate referred to in Section 6.01(h) hereof. 8.05 Limitation of Fundamental Changes. The Company will not, nor ---------------------------------- will it permit any of its Subsidiaries to, enter into any transaction of merger or consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution). Except for the Acquisition, the Company will not, and will not permit any of its Subsidiaries to, acquire any business or assets from, or capital stock of, or be a party to any acquisition of, any Person (each, a "Corporate Acquisition") except for purchases of inventory and --------------------- other assets to be sold or used in the ordinary course of business and Investments permitted under Section 8.08 hereof. The Company will not, and will not permit any of its Subsidiaries to, convey, sell, lease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or a Substantial Part of its business or assets, whether now owned or hereafter acquired (including, without limitation, shares of stock and indebtedness of Subsidiaries, receivables and leasehold interests); and any conveyance, sale, lease, transfer or other disposition not prohibited by this sentence shall be on an arm-length basis. Notwithstanding the foregoing provisions of this Section 8.05: (a) the Subsidiaries of the Company may enter into reinsurance transactions in respect of individual disability policies in the ordinary course of business if both the liability in respect of such policies and their associated assets are transferred pursuant to such reinsurance policies on an arms-length basis and (b) if no Default exists or would result therefrom (including, without limitation, in respect of Section 8.14 hereof): (i) the Company may be merged or consolidated with or into any other Person so long as the Company is the surviving corporation; (ii) any Subsidiary of the Company may be merged or consolidated with or into: (x) the Company if the Company shall be the continuing or surviving corporation or (y) any other such Subsidiary; provided that if any such transaction shall be between a Subsidiary and a Wholly-Owned Subsidiary, the Wholly-Owned Subsidiary shall be the continuing or surviving corporation; (iii) any such Subsidiary may sell, lease, transfer or otherwise dispose of any or all of its assets (upon voluntary liquidation or otherwise) to the Company or a Wholly-Owned Subsidiary of the Company; (iv) any Subsidiary of the Company may change its domicile from one state in the United States of America to another state in the United States of America; (v) the Company or any Subsidiary may (x) convey, sell, lease, transfer or otherwise dispose of any Investments in connection with a bulk sale thereof if the proceeds of such disposition are reinvested by the Company or such Subsidiary in Investments of the same or higher investment quality or (y) sell, transfer or otherwise dispose of any Subsidiary that is an insurance company, the assets (or substantially all of the assets) of which have been disposed of pursuant to clause (iii) above; (vi) the Company or any Subsidiary may effect a Corporate Acquisition unless effecting the same would have Material Adverse Effect; and (vii) the Company or any Subsidiary may convey, sell, transfer or otherwise dispose of all or any portion of their respective group pension business so long as any such disposition is to a non-Affiliate of the Company, is effected on an arms length basis and no special Dividend Payment is declared or made with (or related to) the proceeds thereof. 8.06 Certain Obligations Respecting Subsidiaries. Subject to the -------------------------------------------- provisions of Section 8.05 hereof, the Company will, and will cause each of its Subsidiaries to, take such action from time to time as shall be necessary to ensure that it at all times owns at least the same percentage of the issued and outstanding shares of each class of stock of each of its Subsidiaries as is owned on the date of the initial Loans hereunder. Without limiting the generality of the foregoing, the Company will not, nor will it permit any of its Subsidiaries to, sell, transfer or otherwise dispose of any shares of stock in any Subsidiary owned by them (except for a sale, transfer or other disposition permitted under Section 8.05 hereof) and the Company will not, nor will it permit any of its Subsidiaries to, issue any shares of stock of any class whatsoever to any Person (except directors' qualifying shares). 8.07 Limitation on Liens. (a) The Company will not, nor will it -------------------- permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon any of its Property, whether now owned or hereafter acquired, except (subject to paragraph (b) of this Section 8.07): (i) Liens imposed by any governmental authority for taxes, assessments or charges not yet due or which are being contested in good faith and by appropriate proceedings if adequate reserves with respect thereto are maintained on the books of the Company or any of its Subsidiaries, as the case may be, in accordance with GAAP; (ii) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 30 days or which are being contested in good faith and by appropriate proceedings and Liens securing judgments but only to the extent, for an amount and for a period not resulting in an Event of Default under Section 9(h) hereof; (iii) pledges or deposits under worker's compensation, unemployment insurance and other social security legislation; (iv) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations (including those in respect of insurance company qualification requirements), surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (v) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business and encumbrances consisting of zoning restrictions, easements, licenses, restrictions on the use of Property or minor imperfections in title thereto which, in the aggregate, are not material in amount, and which do not in any case materially detract from the value of the Property subject thereto or interfere with the ordinary conduct of the business of the Company or any of its Subsidiaries; (vi) Liens upon personal Property securing obligations arising out of Derivatives Obligations entered into solely for hedging purposes; (vii) Liens on (A) marketable direct obligations issued or unconditionally guaranteed or insured by the United States of America or any agency or instrumentality thereof and backed by the full faith and credit of the United States of America sold by the Company or any of its Subsidiaries under a repurchase agreement with a bank or a primary dealer of United States government securities (a "Repo Counterparty ") maturing ----------------- within 30 days from the date of sale, provided that the terms of such agreement comply with the guidelines set forth in the Federal Financial Institutions Examination Council Supervisory Policy -- Repurchase Agreements of Depositary Institutions With Securities Dealers and Others, as adopted by the Comptroller of the Currency on October 31, 1985 (or any successor guidelines) and (B) other marketable debt securities under a repurchase agreement and/or securities lending agreement with a bank or a primary dealer of such securities (the "Counterparty") maturing within 30 ------------ days from the date of sale if the terms of such agreement comply with such guidelines; provided that, in the case of any mortgage-backed security subject to such an arrangement, the Counterparty thereof may, in lieu of returning such security, return another mortgage-backed security of the same value, yield and rating, and otherwise having comparable economic terms; provided further that the Company and its Subsidiaries will continue their policies in effect on the date hereof requiring collateral from their Repo Counterparties and Counterparties; (viii) Liens on (x) Property acquired or (y) Property of any Person which is subject to a Corporate Acquisition, in each case, after the date of this Agreement, provided that such Liens are in existence at the time such acquisition and were not created in anticipation thereof; provided further, the aggregate Indebtedness secured thereby shall not exceed $25,000,000 in the aggregate at any one time outstanding; (ix) additional Liens upon real and/or personal Property, provided that, the aggregate Indebtedness secured thereby shall not exceed $25,000,000 in the aggregate at any one time outstanding; and (x) any extension, renewal or replacement of the foregoing, provided, however, that the Liens permitted hereunder shall not be spread to cover any additional Indebtedness or Property (other than a substitution of like Property). (b) Notwithstanding subparagraphs (a)(i) through (a)(x) of this Section 8.07, the Company will not, nor will it permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon any stock issued by any Insurance Subsidiary. 8.08 Investments. The Company will not permit to remain ------------ outstanding: (a) any Investments that consist of capital stock, partnership or other ownership interests or other equity securities in any Person (other than a Subsidiary or Affiliate of the Company) in an aggregate amount (for all such Investments) in excess of 10% of the total investments of the Company and its Subsidiaries (determined on consolidated basis in accordance with GAAP, but excluding the value of any investments of the Company in any of its Subsidiaries or Affiliates); (b) any Investments that are Non-Investment Grade Investments (as defined below) in an aggregate amount (for all such Investments) in excess of 10% of the total investments of the Company and its Subsidiaries (determined on a consolidated basis in accordance with GAAP, but excluding the value of any investments of the Company in any of its Subsidiaries or Affiliates); and (c) any Investments that consist of real estate (excluding Company occupied properties) and mortgage loans in an aggregate amount (for all such Investments) in excess of 10% of the total investments of the Company and its Subsidiaries (determined on a consolidated basis in accordance with GAAP, but excluding the value of any investments of the Company in any of its Subsidiaries or Affiliates); provided that the Company may, and may permit its Subsidiaries to, make and maintain Investments in Wholly-Owned Subsidiaries of the Company. For purposes of this Section 8.08, "Non-Investment Grade Investments" shall mean bonds, -------------------------------- debentures, notes or other evidence of, or other obligations to repay, Indebtedness bearing interest at a fixed rate that (i) have been designated by the Securities Valuation Office of the NAIC as having a lower quality than '2' or (ii) do not have a quality designation by said Securities Valuation Office (except in the case of any such Indebtedness that does not have such rating due to its being newly issued (and such failure to have a rating does not exceed 60 days) and if the Company reasonably believes that such Indebtedness would have an NAIC Rating of at least 2). 8.09 Dividend Payments. The Company will not declare or make any ------------------ Dividend Payment at any time; provided, however, that the Company may declare and make Dividend Payments in cash, subject to the satisfaction of the following condition on the date of such Dividend Payment and after giving effect thereto: the aggregate amount of Dividend Payments made in the then current fiscal year of Company, including the amount of such Dividend Payment, shall not exceed (i) in the case of the Company's common stock, (x) through December 31, 1997, $0.85 per share and (y) thereafter, $1 per share (provided that any increase in the number of outstanding common stock shares of the Company resulting from (x) a stock split or stock dividend of such shares or (y) the issuance of such shares where the proceeds thereof are utilized to make (or are related to the making of) a special Dividend Payment, shall result in a commensurate proportional decrease in the allowable per share common stock Dividend Payment) and (ii) in the case of the Company's outstanding (as at the date hereof) 8.10% cumulative preferred stock, $13,000,000; provided further, that if the Applicable Margin is at any time during any year computed by reference to category (e) in the definition thereof, the aggregate amount of Dividend Payments made in the then current fiscal year of the Company shall not exceed 30% of the statutory net income of the Insurance Subsidiaries on a combined basis determined in accordance with SAP for the most recently ended fiscal year of the Company. 8.10 Minimum Adjusted Statutory Surplus. The Company will not ----------------------------------- permit at any time the combined Adjusted Statutory Surplus for all of its directly owned Insurance Subsidiaries to be less than (I) prior to the Acquisition, $600,000,000 and (II) from and after the Acquisition, (i) through December 30, 1998, $875,000,000 and (ii) thereafter, $925,000,000. 8.11 Consolidated Funded Debt Ratio. The Company will not permit at ------------------------------- any time Consolidated Funded Debt to exceed 35.00% of the Consolidated Capital. 8.12 Ratio of Cash Sources to Cash Uses. The Company will maintain ----------------------------------- a ratio of Cash Sources to Cash Uses in excess of 1.5 to 1. 8.13 Authorized Control Level Risk Based Capital Ratio. The Company -------------------------------------------------- will not as at the last day of any fiscal quarter permit PLAIC's or, from and after the Acquisition, Paul Revere Life Insurance Company's Total Adjusted Capital (as defined in the NAIC's Risk-Based Capital for life and/or Health Insurers Model Act (as then currently in effect), as so adopted (and including any instructions thereunder, the "Model Act") to be less than (x) through --------- December 30, 1998, 300% and (y) thereafter, 350% of its Authorized Control Level RBC (as defined in the Model Act). 8.14 Lines of Business. The Company will continue, and cause each ------------------ of its Consolidated Subsidiaries to continue, to engage in a business of the same general type as conducted by it on the date of this Agreement. 8.15 Transactions with Affiliates. Except as expressly permitted by ----------------------------- this Agreement, the Company will not, nor will it permit any of its Subsidiaries to, directly or indirectly: (a) make any Investment in an Affiliate; (b) transfer, sell, lease, assign or otherwise dispose of any Property to an Affiliate; (c) merge into or consolidate with or purchase or acquire Property from an Affiliate; or (d) enter into any other transaction directly or indirectly with or for the benefit of an Affiliate (including, without limitation, guarantees and assumptions of obligations of an Affiliate); provided that (x) any Affiliate who is an individual may serve as a director, officer or employee of the Company or any of its Subsidiaries and receive reasonable compensation for his or her services in such capacity and (y) the Company and its Subsidiaries may enter into transactions (other than extensions of credit by the Company or any of its Subsidiaries to an Affiliate) providing for the leasing of Property, the rendering or receipt of services or the purchase or sale of inventory and other Property in the ordinary course of business (which may include the purchase of related businesses) if the monetary or business consideration arising therefrom would be substantially as advantageous to the Company and its Subsidiaries as the monetary or business consideration which would obtain in a comparable transaction with a Person not an Affiliate. 8.16 Use of Proceeds. The Company will use the proceeds of the ---------------- Loans hereunder solely (i) to pay a portion of the purchase price for the Acquisition, (ii) to pay the principal of the Refinanced Debt, (iii) to pay certain of the fees, commissions and expenses payable in connection with the foregoing and (iv) for general corporate purposes (including the repurchase by the Company of any of its outstanding preferred stock); provided that (i) none of the proceeds shall be paid over to, or used to fund the operations of, any Subsidiary referred to in Schedule III hereto and (ii) neither the Administrative Agent nor any Bank shall have any responsibility as to the use of any of such proceeds. 8.17 Pari Passu. The Company will not permit any of its ----------- Indebtedness to creditors not constituting its Subsidiaries to be guaranteed or otherwise supported by, or to have direct access to any assets of, any of its Subsidiaries. Section 9. Events of Default. If one or more of the following events ----------------- (herein called "Events of Default") shall occur and be continuing: ----------------- (a) The Company shall default in the payment when due of (i) any principal of or interest on any Loan, or (ii) any fee or any other amount payable by it hereunder or under any Note and such default in respect of any such fee or other amount shall have continued unremedied for more than three Business Days; or (b) The Company or any of its Consolidated Subsidiaries shall default in the payment when due of any amount of principal of any of its other Indebtedness the aggregate amount of which other Indebtedness is $10,000,000 or more or shall default in the payment when due of any interest on any such Indebtedness or on any amount payable under any Derivatives Obligation and such default in the payment of interest or amount shall remain unremedied for three or more Business Days; or any event specified in any note, agreement, indenture or other document evidencing or relating to any such Indebtedness or any Derivatives Obligation shall occur if the effect of such event is to cause, or (with the giving of any notice or the lapse of time or both) to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause, such Indebtedness to become due, or to be prepaid in full (whether by redemption, purchase, offer to purchase or otherwise), prior to its stated maturity or to have the interest rate thereon reset to a level so that securities evidencing such Indebtedness trade at level specified in relation to the par value thereof or, in the case of an Derivatives Obligations, to permit the payments owing under such Derivatives Obligations to be liquidated; or (c) Any representation, warranty or certification made or deemed made herein or in any other Basic Document (or in any modification or supplement hereto or thereto) by the Company, or any certificate furnished to any Bank or the Administrative Agent pursuant to the provisions hereof or thereof, shall prove to have been false or misleading as of the time made or furnished in any material respect; or (d) The Company shall default in the performance of any of its obligations under any of Sections 8.01(i), 8.05 through 8.13 (inclusive), 8.16 and 8.17 hereof; or the Company shall default in the performance of any of its other obligations in this Agreement or any other Basic Document and such default shall continue unremedied for a period of 30 days after notice thereof to the Company by the Administrative Agent or any Bank (through the Administrative Agent); or (e) The Company or any of its Subsidiaries shall admit in writing its inability to, or be generally unable to, pay its debts as such debts become due; or (f) The Company or any of its Subsidiaries shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee, examiner or liquidator of itself or of all or a substantial part of its Property, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the Bankruptcy Code, (iv) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, rehabilitation, supervision, conservatorship, liquidation, dissolution, arrangement or winding-up, or composition or readjustment of debts, (v) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code or (vi) take any corporate action for the purpose of effecting any of the foregoing; or (g) A proceeding, order or case shall be commenced, without the application or consent of the Company or any of its Subsidiaries, in any court of competent jurisdiction, or by any applicable insurance regulatory authority seeking (i) its reorganization, rehabilitation, supervision, conservatorship, liquidation, dissolution, arrangement or winding-up, or the composition or readjustment of its debts, (ii) the appointment of a receiver, custodian, trustee, examiner, liquidator or the like of the Company or such Subsidiary or of all or any substantial part of its Property, or (iii) similar relief in respect of the Company or such Subsidiary under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 60 or more days; or an order for relief against the Company or such Subsidiary shall be entered in an involuntary case under the Bankruptcy Code; or (h) A final judgment or judgments for the payment of money in excess of $10,000,000 in the aggregate (exclusive of judgment amounts fully covered by insurance where the insurer has admitted liability in writing in respect of such judgment) shall be rendered by one or more courts, administrative tribunals or other bodies having jurisdiction against the Company or any of its Subsidiaries and the same shall not be discharged (or provision shall not be made for such discharge), or a stay of execution thereof shall not be procured, within 30 days from the date of entry thereof and the Company or the relevant Subsidiary shall not, within said period of 30 days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal; or (i) An event or condition specified in Section 8.01(h) hereof shall occur or exist with respect to any Plan or Multiemployer Plan and, as a result of such event or condition, together with all other such events or conditions, the Company or any ERISA Affiliate shall incur or in the opinion of the Majority Banks shall be reasonably likely to incur a liability to a Plan, a Multiemployer Plan or the PBGC (or any combination of the foregoing) that, in the determination of the Majority Banks, would (either individually or in the aggregate) have a Material Adverse Effect; or (j) except as expressly permitted by Section 8.05 hereof: (i) any Person (other than Zurich Insurance Company) or two or more Persons acting in concert shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 30% or more of the outstanding shares of voting stock of the Company; or (ii) during any period of 25 consecutive calendar months, individuals who were directors of the Company on the first day of such period shall no longer constitute a majority of the board of directors (excluding any directors that replaced individuals who ceased to be directors during such period by reason of death or retirement (voluntary or mandatory) and any directors who were appointed or whose election was approved by a majority of the board of directors holding office at the time of such election) of the Company; THEREUPON: (1) in the case of an Event of Default other than one referred to in clause (e), (f) or (g) of this Section 9 with respect to the Company, the Administrative Agent may and, upon request of the Majority Banks will, by notice to the Company, terminate the Commitments and/or declare the principal amount then outstanding of, and the accrued interest on, the Loans and all other amounts payable by the Company hereunder and under the Notes (including, without limitation, any amounts payable under Section 5.05 hereof) to be forthwith due and payable, whereupon such amounts shall be immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Company; and (2) in the case of the occurrence of an Event of Default referred to in clause (e), (f) or (g) of this Section 9 with respect to the Company, the Commitments shall automatically be terminated and the principal amount then outstanding of, and the accrued interest on, the Loans and all other amounts payable by the Company hereunder and under the Notes (including, without limitation, any amounts payable under Section 5.05 hereof) shall automatically become immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Company. Section 10. The Administrative Agent. ------------------------ 10.01 Appointment, Powers and Immunities. Each Bank hereby ----------------------------------- irrevocably appoints and authorizes the Administrative Agent to act as its agent hereunder and under the other Basic Documents with such powers as are specifically delegated to the Administrative Agent by the terms of this Agreement and of the other Basic Documents, together with such other powers as are reasonably incidental thereto. The Administrative Agent (which term as used in this sentence and in Section 10.05 hereof and the first sentence of Section 10.06 hereof shall include reference to its affiliates and its own and its affiliates' officers, directors, employees and agents): (a) shall have no duties or responsibilities except those expressly set forth in this Agreement and in the other Basic Documents, and shall not by reason of this Agreement or any other Basic Document be a trustee for any Bank; (b) shall not be responsible to the Banks for any recitals, statements, representations or warranties contained in this Agreement or in any other Basic Document, or in any certificate or other document referred to or provided for in, or received by any of them under, this Agreement or any other Basic Document, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, any Note or any other Basic Document or any other document referred to or provided for herein or therein or for any failure by the Company or any other Person to perform any of its obligations hereunder or thereunder; (c) shall not be required to initiate or conduct any litigation or collection proceedings hereunder or under any other Basic Document; and (d) shall not be responsible for any action taken or omitted to be taken by it hereunder or under any other Basic Document or under any other document or instrument referred to or provided for herein or therein or in connection herewith or therewith, except for its own gross negligence or willful misconduct. The Administrative Agent may deem and treat the payee of any Note as the holder thereof for all purposes hereof unless and until a notice of the assignment or transfer thereof shall have been filed with the Administrative Agent, together with the consent of the Company to such assignment or transfer (to the extent provided in Section 11.06(b) hereof). 10.02 Reliance by Administrative Agent. The Administrative Agent --------------------------------- shall be entitled to rely upon any certification, notice or other communication (including, without limitation, any thereof by telephone, telecopy, telex, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the Administrative Agent. As to any matters not expressly provided for by this Agreement or any other Basic Document, the Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder or thereunder in accordance with instructions given by the Majority Banks, and such instructions of the Majority Banks and any action taken or failure to act pursuant thereto shall be binding on all of the Banks. 10.03 Defaults. The Administrative Agent shall not be deemed to --------- have knowledge or notice of the occurrence of a Default (other than the non- payment of principal of or interest on Loans or of facility fees) unless the Administrative Agent has received notice from a Bank or the Company specifying such Default and stating that such notice is a "Notice of Default". In the event that the Administrative Agent receives such a notice of the occurrence of a Default, the Administrative Agent shall give prompt notice thereof to the Banks (and shall give each Bank prompt notice of each such non-payment). The Administrative Agent shall (subject to Section 10.07 hereof) take such action with respect to such Default as shall be directed by the Majority Banks, provided that, unless and until the Administrative Agent shall have received - -------- such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall deem advisable in the best interest of the Banks except to the extent that this Agreement expressly requires that such action be taken, or not be taken, only with the consent or upon the authorization of the Majority Banks or all of the Banks. 10.04 Rights as a Bank. With respect to its Commitment and the ----------------- Loans made by it, Chase (and any successor acting as Administrative Agent) in its capacity as a Bank hereunder shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not acting as the Administrative Agent, and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include the Administrative Agent in its individual capacity. Chase (and any successor acting as Administrative Agent) and its affiliates may (without having to account therefor to any Bank) accept deposits from, lend money to, make investments in and generally engage in any kind of banking, trust or other business with the Company (and any of their Subsidiaries or Affiliates) as if it were not acting as the Administrative Agent, and Chase and its affiliates may accept fees and other consideration from the Company for services in connection with this Agreement or otherwise without having to account for the same to the Banks. 10.05 Indemnification. The Banks agree to indemnify the ---------------- Administrative Agent (to the extent not reimbursed under Section 11.03 hereof, but without limiting the obligations of the Company under said Section 11.03) ratably in accordance with their respective Commitments (and, after the Commitments have been terminated, ratably in accordance with the aggregate principal amount of the Loans held by the Banks), for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever that may be imposed on, incurred by or asserted against the Administrative Agent (including by any Bank) arising out of or by reason of any investigation in or in any way relating to or arising out of this Agreement or any other Basic Document or any other documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby (including, without limitation, the costs and expenses that the Company is obligated to pay under Section 11.03 hereof, but excluding, unless a Default has occurred and is continuing, normal administrative costs and expenses incident to the performance of its agency duties hereunder) or the enforcement of any of the terms hereof or thereof or of any such other documents, provided that no Bank shall be liable for any of the -------- foregoing to the extent they arise from the gross negligence or willful misconduct of the party to be indemnified. 10.06 Non-Reliance on Administrative Agent and Other Banks. Each ----------------------------------------------------- Bank agrees that it has, independently and without reliance on the Administrative Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Company and its Subsidiaries and decision to enter into this Agreement and that it will, independently and without reliance upon the Administrative Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement. The Administrative Agent shall not be required to keep itself informed as to the performance or observance by the Company of this Agreement or any of the other Basic Documents or any other document referred to or provided for herein or therein or to inspect the Properties or books of the Company or any of its Subsidiaries. Except for notices, reports and other documents and information expressly required to be furnished to the Banks by the Administrative Agent hereunder, the Administrative Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the affairs, financial condition or business of the Company or any of its Subsidiaries (or any of their affiliates) that may come into the possession of the Administrative Agent or any of its affiliates. 10.07 Failure to Act. Except for action expressly required of the --------------- Administrative Agent hereunder and under the other Basic Documents, the Administrative Agent shall in all cases be fully justified in failing or refusing to act hereunder and thereunder unless it shall receive further assurances to its satisfaction from the Banks of their indemnification obligations under Section 10.05 hereof against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. 10.08 Resignation or Removal of Administrative Agent. Subject to ----------------------------------------------- the appointment and acceptance of a successor Administrative Agent as provided below, the Administrative Agent may resign at any time by giving notice thereof to the Banks and the Company, and the Administrative Agent may be removed at any time with or without cause by the Majority Banks. Upon any such resignation or removal, the Majority Banks shall have the right to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Majority Banks and shall have accepted such appointment within 30 days after the retiring Administrative Agent's giving of notice of resignation or the Majority Banks' removal of the retiring Administrative Agent, then the retiring Administrative Agent may, on behalf of the Banks, appoint a successor Administrative Agent, that shall be a bank having an office in the continental United States with a combined capital and surplus of at least $1,000,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After any retiring Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Section 10 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Administrative Agent. 10.09 Agency Fee. So long as the Commitments are in effect and ----------- until payment in full of the principal of and interest on the Loans and all other amounts payable by the Company hereunder, the Company will pay to the Administrative Agent an agency fee payable in such amounts and at such times as separately agreed. Such fee, once paid, shall be non-refundable. 10.10 Consents under Basic Documents. Except as otherwise provided ------------------------------- in Section 11.04 hereof with respect to this Agreement, the Administrative Agent may, with the prior consent of the Majority Banks (but not otherwise), consent to any modification, supplement or waiver under any of the Basic Documents. Section 11. Miscellaneous. ------------- 11.01 Waiver. No failure on the part of the Administrative Agent or ------- any Bank to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under this Agreement or any Note shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under this Agreement or any Note preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. 11.02 Notices. All notices, requests and other communications -------- provided for herein (including, without limitation, any modifications of, or waivers or consents under, this Agreement) shall be given or made in writing (including, without limitation, by telex or telecopy), delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof; or, as to any party, at such other address as shall be designated by such party in a notice to each other party. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telex or telecopier or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid. 11.03 Expenses, Etc. The Company agrees to pay or reimburse each of --------------- the Banks and the Administrative Agent for paying: (a) all reasonable out-of- pocket costs and expenses of the Administrative Agent actually incurred (including, without limitation, the reasonable fees and expenses of Vedder, Price, Kaufman, Kammholz & Day, special New York counsel to the Banks), in connection with (i) the negotiation, preparation, execution and delivery of this Agreement and the other Basic Documents and the Loans hereunder and (ii) any modification, supplement or waiver of any of the terms of this Agreement or any of the other Basic Documents; (b) all reasonable costs and expenses of the Banks and the Administrative Agent actually incurred (including, without limitation, reasonable counsels' fees) in connection with (i) any Default and any enforcement or collection proceedings resulting therefrom or in connection with the negotiation of any restructuring or "work-out" (whether or note consummated), or the obligations of the Company hereunder and (ii) the enforcement of this Section 11.03; and (c) all transfer, stamp, documentary or other similar taxes, assessments or charges levied by any governmental or revenue authority in respect of this Agreement or any of the other Basic Documents or any other document referred to herein or therein and all costs, expenses, taxes, assessments and other charges incurred in connection with any filing, registration, recording or perfection of any security interest contemplated by any Basic Document or any other document referred to therein. The Company hereby agrees (i) to indemnify the Administrative Agent and each Bank and their respective directors, officers, employees, attorneys and agents from, and hold each of them harmless against, any and all losses, liabilities, claims, damages or expenses incurred by any of them (including, without limitation, any and all losses, liabilities, claims, damages or expenses incurred by the Administrative Agent to any Bank, whether or not the Administrative Agent or any Bank is a party thereto) arising out of or by reason of any investigation or litigation or other proceedings (including any threatened investigation or litigation or other proceedings) relating to the Loans hereunder or any actual or proposed use by the Company or any of its Subsidiaries of the proceeds of any of the Loans hereunder, including, without limitation, the reasonable fees and disbursements of counsel actually incurred in connection with any such investigation or litigation or other proceedings (but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified) and (ii) not to assert any claim against the Administrative Agent, any Bank, any of their affiliates, or any of their respective directors, officers, employees, attorneys and agents, on any theory of liability, for special, indirect, consequential or punitive damages arising out of or otherwise relating to any of the transactions contemplated herein or in any other Basic Document. 11.04 Amendments, Etc. Except as otherwise expressly provided in ----------------- this Agreement, any provision of this Agreement may be modified or supplemented only by an instrument in writing signed by the Company, the Administrative Agent and the Majority Banks, or by the Company and the Administrative Agent acting with the consent of the Majority Banks, and any provision of this Agreement may be waived by the Majority Banks or by the Administrative Agent acting with the consent of the Majority Banks; provided that: (a) no modification, supplement -------- or waiver shall, unless by an instrument signed by all of the Banks or by the Administrative Agent acting with the consent of all of the Banks: (i) increase, or extend the term of the Commitments, or extend the time or waive any requirement for the reduction or termination of the Commitments, (ii) extend the date fixed for the payment of principal of or interest on any Loan or any fee hereunder, (iii) reduce the amount of any such payment of principal, (iv) reduce the rate at which interest is payable thereon or any fee is payable hereunder, (v) alter the rights or obligations of the Company to prepay Loans, (vi) alter the manner in which payments or prepayments of principal, interest or other amounts hereunder shall be applied as between the Banks or Types of Loans, (vii) alter the terms of this Section 11.04 or any other provision of this Agreement requiring consent of all Banks, (viii) modify the definition of the term "Majority Banks", or modify in any other manner the number or percentage of the Banks required to make any determinations or waive any rights hereunder or to modify any provision hereof, or (ix) waive any of the conditions precedent set forth in Section 6 hereof; and (b) any modification or supplement of Section 10 hereof shall require the consent of the Administrative Agent. Anything in this Agreement to the contrary notwithstanding, if at a time when the conditions precedent set forth in Section 6 hereof to any Loan hereunder are, in the opinion of the Majority Banks, satisfied, any Bank shall fail to fulfill its obligations to make such Loan then, for so long as such failure shall continue, such Bank shall (unless the Majority Banks, determined as if such Bank were not a "Bank" hereunder, shall otherwise consent in writing) be deemed solely for all purposes relating to amendments, modifications, waivers or consents under this Agreement or any of the other Basic Documents (including, without limitation, under this Section 11.04 and under Section 10.10 hereof) to have no Loans or Commitment, shall not be treated as a "Bank" hereunder when performing the computation of Majority Banks, and shall have no rights under the preceding paragraph of this Section 11.04; provided that any action taken by the other Banks with respect to the matters referred to in clause (a) of the preceding paragraph shall not be effective as against such Bank. 11.05 Successors and Assigns. This Agreement shall be binding upon ----------------------- and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 11.06 Assignments and Participations. ------------------------------- (a) The Company may not assign any of its rights or obligations hereunder or under the Notes without the prior consent of all of the Banks and the Administrative Agent. (b) Each Bank may assign any of its Loans, its Note, its Commitment (but only with the consent of, in the case of its outstanding Commitment, the Administrative Agent and, so long as no Default shall be continuing, the Company, which consents shall not be unreasonably withheld); provided that (i) -------- no such consent by the Company or the Administrative Agent shall be required in the case of any assignment to another Bank (or a banking Affiliate of such assigning Bank or any other Bank); (ii) any such partial assignment shall be in an amount at least equal to $5,000,000; and (iii) each such assignment by a Bank of its Loans, Note or Commitment shall be made in such manner so that the same portion of its Loans, Note and Commitment is assigned to the respective assignee. Upon execution and delivery by the assignee to the Company and the Administrative Agent of an instrument in writing pursuant to which such assignee agrees to become a "Bank" hereunder (if not already a Bank) having the Commitment and Loans specified in such instrument, and upon consent thereto by the Company and the Administrative Agent, to the extent required above, the assignee shall have, to the extent of such assignment (unless otherwise provided in such assignment with the consent of the Company and the Administrative Agent, the obligations, rights and benefits of a Bank hereunder holding the Commitment and Loans (or portions thereof) assigned to it (in addition to the Commitment and Loans, if any, theretofore held by such assignee) and the assigning Bank shall, to the extent of such assignment, be released from the Commitment (or portion thereof) so assigned. Upon each such assignment the assigning Bank shall pay the Administrative Agent an assignment fee of $3,000. (c) A Bank may sell or agree to sell to one or more other Persons a participation in all or any part of any Loans held by it, or in its Commitment, in which event each purchaser of a participation (a "Participant") shall be ----------- entitled, to the extent necessary to comply with applicable banking laws and regulations, to the rights and benefits of the provisions of Section 8.01(j) hereof with respect to its participation in such Loans and Commitment as if (and the Company shall be directly obligated to such Participant under such provisions as if) such Participant were a "Bank" for purposes of said Section, but, except as otherwise provided in Section 4.07(c) hereof, shall not have any other rights or benefits under this Agreement or any Note or any other Basic Document (the Participant's rights against such Bank in respect of such participation to be those set forth in the agreements executed by such Bank in favor of the Participant). All amounts payable by the Company to any Bank under Section 5 hereof in respect of such Loans and Commitment shall be determined as if such Bank had not sold or agreed to sell any participations in such Loans and Commitment, and as if such Bank were funding each of such Loans and Commitment in the same way that it is funding the portion of such Loans and Commitment in which no participations have been sold. In no event shall a Bank that sells a participation agree with the Participant to take or refrain from taking any action hereunder or under any other Basic Document except that such Bank may agree with the Participant that it will not, without the consent of the Participant, agree to (i) increase or extend the term, or extend the time or waive any requirement for the reduction or termination, of such Bank's Commitment, (ii) extend the date fixed for the payment of principal of or interest on the related Loan or Loans or any portion of any fee hereunder payable to the Participant, (iii) reduce the amount of any such payment of principal, (iv) reduce the rate at which interest is payable thereon, or any fee hereunder payable to the Participant, to a level below the rate at which the Participant is entitled to receive such interest or fee, (v) alter the rights or obligations of the Company to prepay the related Loans or (vi) consent to any modification, supplement or waiver hereof or of any of the other Basic Documents to the extent that the same, under Section 10.10 or 11.04 hereof, requires the consent of each Bank. (d) In addition to the assignments and participations permitted under the foregoing provisions of this Section 11.06, any Bank may (without notice to the Company, the Administrative Agent or any other Bank and without payment of any fee) assign and pledge all or any portion of its Loans and its Note to any Federal Reserve Bank as collateral security pursuant to Regulation A and any Operating Circular issued by such Federal Reserve Bank. No such assignment shall release the assigning Bank from its obligations hereunder. (e) A Bank may furnish any information concerning the Company or any of its Subsidiaries in the possession of such Bank from time to time to assignees and participants (including prospective assignees and participants), subject, however, to the provisions of Section 11.12(b) hereof. (f) Anything in this Section 11.06 to the contrary notwithstanding, no Bank may assign or participate any interest in any Loan held by it hereunder to the Company or any of its Affiliates or Subsidiaries without the prior written consent of each Bank. 11.07 Survival. The obligations of the Company under Sections 5.01, --------- 5.05, 5.06 and 11.03 hereof and the obligations of the Banks under Section 10.05 hereof shall survive the repayment of the Loans and the termination of the Commitments. In addition, each representation and warranty made, or deemed to be made by a notice of any Loan, herein or pursuant hereto shall survive the making of such representation and warranty, and no Bank shall be deemed to have waived, by reason of making any Loan hereunder, any Default that may arise by reason of such representation or warranty proving to have been false or misleading, notwithstanding that such Bank or the Administrative Agent may have had notice or knowledge or reason to believe that such representation or warranty was false or misleading at the time such Loan was made. 11.08 Captions. The table of contents and captions and section --------- headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. 11.09 Counterparts. This Agreement may be executed in any number of ------------- counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart. 11.10 Governing Law; Submission to Jurisdiction. This Agreement and ------------------------------------------ the Notes shall be governed by, and construed in accordance with, the law of the State of New York. The Company hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York state court sitting in New York City for the purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. The Company irrevocably waives, to the fullest extent permitted by applicable law, any objection that it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. 11.11 Waiver of Jury Trial. EACH OF THE COMPANY, THE ADMINISTRATIVE --------------------- AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 11.12 Treatment of Certain Information; Confidentiality. -------------------------------------------------- (a) The Company acknowledges that from time to time financial advisory, investment banking and other services may be offered or provided to the Company or one or more of its Subsidiaries (in connection with this Agreement or otherwise) by any Bank or by one or more subsidiaries or affiliates of such Bank and the Company hereby authorizes each Bank to share any information delivered to such Bank by the Company and its Subsidiaries pursuant to this Agreement, or in connection with the decision of such Bank to enter into this Agreement, to any such subsidiary or affiliate, it being understood that any such subsidiary or affiliate receiving such information shall be bound by the provisions of Section 11.12(b) hereof as if it were a Bank hereunder. Such authorization shall survive the repayment of the Loans and the termination of the Commitments. (b) Each Bank and the Administrative Agent agrees (on behalf of itself and each of its affiliates, directors, officers, employees and representatives) to use reasonable precautions to keep confidential, in accordance with their customary procedures for handling confidential information of this nature and in accordance with safe and sound banking practices, any non- public information supplied to it by the Company pursuant to this Agreement that is identified by the Company as being confidential at the time the same is delivered to the Banks or the Administrative Agent, provided that nothing herein -------- shall limit the disclosure of any such information (i) after such information shall have become public (other than through a violation of this Section 11.12), (ii) to the extent required by statute, rule, regulation or judicial process, (iii) to counsel for any of the Banks or the Administrative Agent, (iv) to bank examiners (or any other regulatory authority having jurisdiction over any Bank or the Administrative Agent), auditors or accountants, (v) to the Administrative Agent or any other Bank (or to Chase Securities, Inc.), (vi) in connection with any litigation to which any one or more of the Banks or the Administrative Agent is a party, or in connection with the enforcement of rights or remedies hereunder or under any other Basic Document, (vii) to a subsidiary or affiliate of such Bank as provided in Section 11.12(a) hereof or (viii) to any assignee or participant (or prospective assignee or participant) so long as such assignee or participant (or prospective assignee or participant) first executes and delivers to the respective Bank a Confidentiality Agreement substantially in the form of Exhibit D hereto (or executes and delivers to such Bank an acknowledgement to the effect that it is bound by the provisions of this Section 11.12(b), which acknowledgement may be included as part of the respective assignment or participation agreement pursuant to which such assignee or participant acquires an interest in the Loans hereunder); provided, further, that in no event shall -------- ------- any Bank or the Administrative Agent be obligated or required to return any materials furnished by the Company. The obligations of any assignee that has executed a Confidentiality Agreement in the form of Exhibit D hereto shall be superseded by this Section 11.12 upon the date upon which such assignee becomes a Bank hereunder pursuant to Section 11.06(b) hereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. PROVIDENT COMPANIES, INC. By /s/ George Shell --------------------------------- Title: Treasurer Address for Notices: Provident Companies, Inc. One Fountain Square Chattanooga, TN 37402 Attention: Treasurer Telecopier No.: (423) 755-1671 Telephone No.: (423) 755-1011 BANKS ----- Commitment THE CHASE MANHATTAN BANK - ---------- $44,000,000 By /s/ Heather Lindstrom --------------------------------- Title: Vice President Lending Office for all Loans: The Chase Manhattan Bank 1 Chase Manhattan Plaza New York, New York 10081 Address for Notices: The Chase Manhattan Bank 1 Chase Manhattan Plaza New York, New York 10081 Attention: Dennis Cogan Telecopier No.: (212) 552-1999 Telephone No.: (212) 552-4600 Commitment AMSOUTH BANK OF ALABAMA - ---------- $42,000,000 By /s/ John J. Hooker --------------------------------- Title: Commercial Banking Officer Lending Office for All Loans: Amsouth Bank of Alabama 1900 5th Avenue North Birmingham, AL 35203 Address for Notices: Amsouth Bank of Alabama 1900 5th Avenue North Birmingham, AL 35203 Attention: John J. Hooker Telecopier No.: (205) 326-5601 Telephone No.: (205) 307-4139 Commitment THE FIRST NATIONAL BANK OF CHICAGO - ---------- $42,000,000 By /s/ Paul T. Schultz --------------------------------- Title: Managing Director Lending Office for All Loans: The First National Bank of Chicago One First National Plaza Suite 0085 Chicago, IL 60670-0085 Address for Notices: The First National Bank of Chicago One First National Plaza Suite 0085 Chicago, IL 60670-0085 Attention: Paul T. Schultz Telecopier No.: (312) 732-4033 Telephone No.: (312) 732-7074 Commitment FIRST UNION NATIONAL BANK OF - ---------- NORTH CAROLINA $42,000,000 By /s/ James M. Kipp --------------------------------- Title: Senior Vice President Lending Office for All Loans: First Union National Bank of North Carolina 301 S. College Street, DC-5 Charlotte, NC 28288-0735 Address for Notices: First Union National Bank of North Carolina 301 S. College Street, DC-5 Charlotte, NC 28288-0735 Attention: Robert Mayer Telex No.: 684-3115/Funcha Telecopier No.: (704) 383-9144 Telephone No.: (704) 374-6628 Commitment FLEET NATIONAL BANK - ---------- $42,000,000 By /s/ Thomas E. McKinlay --------------------------------- Title: Senior Vice President Lending Office for All Loans: Fleet National Bank 777 Main Street Ins. Industry CJ/MO/0250 Hartford, CT 06115 Address for Notices: Fleet National Bank 777 Main Street Ins. Industry CJ/MO/0250 Hartford, CT 06115 Attention: Thomas McKinlay Telecopier No.: (860) 986-1094 Telephone No.: (860) 986-4139 Commitment MELLON BANK, N.A. - ---------- $42,000,000 By /s/ Timothy J. Marchando --------------------------------- Title: Assistant Vice President Lending Office for All Loans: Mellon Bank, N.A. Three Mellon Bank Center Room 2302 Pittsburgh, PA 15230 Address for Notices: Mellon Bank, N.A. One Mellon Bank Center Room 370 Pittsburgh, PA 15258-0001 Attention: Timothy J. Marchando Telecopier No.: (412) 234-8087 Telephone No.: (412) 234-7922 Commitment ROYAL BANK OF CANADA - ---------- $42,000,000 By /s/ Yvonne J. Bernard --------------------------------- Title: Manager Lending Office for All Loans: Royal Bank of Canada One Financial Square - 23rd Floor New York, NY 10005-3531 Address for Notices: Royal Bank of Canada One Financial Square - 24th Floor New York, NY 10005-3531 Attention: Gary Overton Telecopier No.: (212) 809-7468 Telephone No.: (212) 428-6277 Commitment SUNTRUST BANK, Atlanta - ---------- $42,000,000 By /s/ Frank R. Callison --------------------------------- Title: Vice President Lending Office for All Loans: SunTrust Bank Mail Code 118 P.O. Box 4418 Atlanta, GA 30302 Address for Notices: SunTrust Bank Mail Code 118 P.O. Box 4418 Atlanta, GA 30302 Attention: Frank R. Callison Telecopier No.: (404) 588-8066 Telephone No.: (404) 658-4905 Commitment BANK OF MONTREAL - ---------- $30,000,000 By /s/ J. Donald Higgins --------------------------------- Title: Managing Director Lending Office for All Loans: Bank of Montreal 115 S. LaSalle 12th Floor - West Chicago, IL 60603 Address for Notices: Bank of Montreal 115 S. LaSalle 12th Floor - West Chicago, IL 60603 Attention: Bruce Cox Telecopier No.: (312) 750-4352 Telephone No.: (312) 750-3891 Commitment BANK OF TOKYO-MITSUBISHI - ---------- TRUST COMPANY $30,000,000 By /s/ Dane E. Holmes --------------------------------- Title: Attorney-In-Fact Lending Office for All Loans: Bank of Tokyo-Mitsubishi Trust Company 1251 Avenue of the Americas 12th Floor New York, NY 10020-1104 Address for Notices: Bank of Tokyo-Mitsubishi Trust Company 1251 Avenue of the Americas 12th Floor New York, NY 10020-1104 Attention: Dane E. Holmes Telecopier No.: (212) 782-4935 Telephone No.: (212) 782-4354 Commitment DEUTSCHE BANK AG, New York - ---------- and/or Cayman Islands Branches $30,000,000 By /s/ Louis Caltavuturo --------------------------------- Title: Associate By /s/ Eckhard Osenberg --------------------------------- Title: Assistant Vice President Lending Office for Base Rate Loans: Deutsche Bank AG New York Branch 31 West 52nd Street New York, NY 10019 Lending Office for Eurodollar Loans: Deutsche Bank AG Cayman Islands Branch 31 West 52nd Street New York, NY 10019 Address for Notices: Deutsche Bank AG New York Branch 31 West 52nd Street New York, NY 10019 Attention: CFS, Cheryl Mandelbaum Telex No.: 429166/DEUT BK NY Telecopier No.: (212) 469-7880 Telephone No.: (212) 469-8426 Commitment DRESDNER BANK A.G. New York Branch - ---------- and Grand Cayman Branch $30,000,000 By /s/ Lloyd C. Stevens --------------------------------- Title: Assistant Vice President By /s/ Latisha Azweem --------------------------------- Title: Assistant Treasurer Lending Office for Base Rate Loans: Dresdner Bank A.G. New York Branch 75 Wall Street New York, New York 10005-2889 Lending Office for Eurodollar Loans: Dresdner Bank A.G. Grand Cayman Branch 75 Wall Street New York, New York 10005-2889 Address for Notices: Dresdner Bank A.G. New York Branch 75 Wall Street New York, New York 10005-2889 Attention: Lora Lam Telex No.: 421 750 DRESUZ Telecopier No.: (212) 429-2130 Telephone No.: (212) 429-2288 Commitment NATIONSBANK, N.A. (South) - ---------- $30,000,000 By /s/ William R. Herrell --------------------------------- Title: Officer Lending Office for All Loans: NationsBank, N.A. 101 N. Tryon Street Charlotte, NC 28255 Address for Notices: NationsBank, N.A. 101 N. Tryon Street Charlotte, NC 28255 Attention: Cathy Matthews Telecopier No.: (704) 386-8694 Telephone No.: (704) 388-1110 Commitment THE SANWA BANK, LIMITED - ---------- Atlanta Agency $30,000,000 By /s/ Shelley Browne --------------------------------- Title: President Lending Office for All Loans: The Sanwa Bank, Limited 55 E. 52nd Street New York, New York 10055 Address for Notices: The Sanwa Bank, Limited 55 E. 52nd Street New York, New York 10055 Attention: Ms. Renka Hara Telex No.: 4611830 Telecopier No.: (212) 754-2368 Telephone No.: (212) 339-6390 Commitment THE BANK OF NOVA SCOTIA - ---------- $30,000,000 By /s/ P.M. Brown --------------------------------- Title: Relationship Manager Lending Office for All Loans: The Bank of Nova Scotia 600 Peachtree St., N.E. Suite 2700 Atlanta, GA 30308 Address for Notices: The Bank of Nova Scotia 600 Peachtree St., N.E. Suite 2700 Atlanta, GA 30308 Attention: Patrick M. Brown Telex No.: 542319/Scotiabk Atl Telecopier No.: (404) 888-8998 Telephone No.: (404) 877-1506 Commitment THE SUMITOMO BANK, LIMITED, - ---------- Atlanta Agency $30,000,000 By /s/ Masayuki Fukushima --------------------------------- Title: Joint General Manager Lending Office for All Loans: The Sumitomo Bank, Limited Atlanta Agency 133 Peachtree Street Suite 3210 Atlanta, Georgia 30303 Address for Notices: The Sumitomo Bank, Limited Atlanta Agency 133 Peachtree Street Suite 3210 Atlanta, Georgia 30303 Attention: Tom Lawson Telecopier No.: (404) 523-0547 Telephone No.: (404) 526-8513 Commitment ABN AMRO BANK N.V., New York Branch - ---------- $20,000,000 By /s/ Parker H. Douglas --------------------------------- Title: Group Vice President By /s/ David W. Eastep --------------------------------- Title: Assistant Vice President Lending Office for All Loans: ABN Amro Bank N.V. 500 Park Avenue New York, New York 10022 Address for Notices: ABN Amro Bank N.V. 500 Park Avenue New York, New York 10022 Attention: Victor J. Fennon Telex No.: 423-721 amro ur Telecopier No.: (212) 446-4335 Telephone No.: (212) 446-4230 Commitment BANQUE NATIONALE DE PARIS - ---------- $20,000,000 By /s/ Phil Truesdale --------------------------------- Title: Vice President By /s/ Barry S. Feigenbaum --------------------------------- Title: Senior Vice President Lending Office for All Loans: Banque Nationale De Paris 499 Park Avenue New York, New York 10022 Address for Notices: Banque Nationale De Paris 499 Park Avenue New York, New York 10022 Attention: Phil Truesdale Telex No.: 824209 Telecopier No.: (212) 415-9695 Telephone No.: (212) 415-9719 Commitment CREDIT LYONNAIS New York Branch - ---------- $20,000,000 By /s/ Renaud d'Herbes --------------------------------- Title: Senior Vice President Lending Office for All Loans: Credit Lyonnais New York Branch 1301 Avenue of Americas New York, New York 10019 Address for Notices: Credit Lyonnais New York Branch 1301 Avenue of Americas New York, New York 10019 Attention: Peter Rasmussen Telex No.: 62410 YLRC Telecopier No.: (212) 261-3401 Telephone No.: (212) 261-7710 Commitment THE DAI-ICHI KANGYO BANK, LIMITED - ---------- Atlanta Agency $20,000,000 By /s/ Takao Mochizuki --------------------------------- Title: General Manager Lending Office for All Loans: The Dai-Ichi Kangyo Bank, Limited Marquis Two Tower, Suite 2400 285 Peachtree Center Avenue, N.E. Atlanta, Georgia 30303 Address for Notices: The Dai-Ichi Kangyo Bank, Limited Marquis Two Tower, Suite 2400 285 Peachtree Center Avenue, N.E. Atlanta, Georgia 30303 Attention: Michael L. Turner Telex No.: 544173 Telecopier No.: (404) 222-9657 Telephone No.: (404) 581-0200 Commitment PNC BANK, N.A. $20,000,000 By /s/ Eileen McDonald --------------------------------- Title: Assistant Vice President Lending Office for All Loans: PNC Bank, N.A. 2 Tower Center East Brunswick, NJ 08816 Address for Notices: PNC Bank, N.A. 2 Tower Center East Brunswick, NJ 08816 Attention: Eileen M. McDonald Telecopier No.: (908) 220-3270 Telephone No.: (908) 220-3265 Commitment THE SAKURA BANK, LIMITED, - ---------- Atlanta Agency $20,000,000 By /s/ Hiroyasu Imanishi --------------------------------- Title: Vice President and Senior Manager Lending Office for All Loans: The Sakura Bank, Limited 245 Peachtree Center Avenue, N.E. Suite 2703 Atlanta, Georgia 30303 Address for Notices: The Sakura Bank, Limited 245 Peachtree Center Avenue, N.E. Suite 2703 Atlanta, Georgia 30303 Attention: Charles S. Zimmerman Telecopier No.: (404) 521-1133 Telephone No.: (404) 521-3111 Commitment SOCIETE GENERALE, New York Branch - ---------- $20,000,000 By /s/ Laura A. Hope --------------------------------- Title: Vice President Lending Office for All Loans: Societe Generale 1221 Avenue of the Americas New York, New York 10020 Address for Notices: Societe Generale 1221 Avenue of the Americas New York, New York 10020 Attention: Lisa Kim Telex No.: 428802 Telecopier No.: (212) 278-7153 Telephone No.: (212) 278-6850 Commitment STATE STREET BANK & TRUST COMPANY - ---------- $20,000,000 By /s/ Edward M. Anderson --------------------------------- Title: Vice President Lending Office for All Loans: State Street Bank & Trust Company 108 Myrtle Street No. Quincy, MA 02171 Credit Services AH-2 Address for Notices: State Street Bank & Trust Company 108 Myrtle Street No. Quincy, MA 02171 Credit Services AH-2 Attention: Edward M. Anderson Telecopier No.: (617) 985-2176 Telephone No.: (617) 985-5301 Commitment WACHOVIA BANK OF GEORGIA, N.A. - ---------- $42,000,000 By /s/ Karin E. Reel --------------------------------- Title: Banking Officer Lending Office for All Loans: Wachovia Bank of Georgia, N.A. 191 Peachtree St., NE MC GA-3940 Atlanta, GA 30303 Address for Notices: Wachovia Bank of Georgia, N.A. 191 Peachtree St., NE MC GA-3940 Atlanta, GA 30303 Attention: Karin Reel Telecopier No.: (404) 332-5016 Telephone No.: (404) 332-5187 Commitment FUJI BANK, LIMITED, Atlanta Agency - ---------- $20,000,000 By /s/ Toshihiro Mitsui --------------------------------- Title: Vice President and Manager Lending Office for All Loans: Fuji Bank, Limited, Atlanta Agency Marquis One Tower 245 Peachtree Center Ave. NE Suite 2100 Atlanta, GA 30303 Address for Notices: Fuji Bank, Limited, Atlanta Agency Marquis One Tower 245 Peachtree Center Ave. NE Suite 2100 Atlanta, GA 30303 Attention: Eddie Hunter Telecopier No.: (404) 653-2119 Telephone No.: (404) 653-3133 THE CHASE MANHATTAN BANK, as Administrative Agent By /s/ Heather Lindstrom --------------------------------- Title: Vice President Address for Notices to Chase as Administrative Agent: The Chase Manhattan Bank 4 Chase MetroTech Center 13th Floor Brooklyn, New York 11245 Attention: Laura Rebecca New York Agency Telex No.: 6720516 (Answerback: CMB NYA UW) Telecopier No.: (718) 242-6909 SCHEDULE III Investment Companies -------------------- [To be supplied, if applicable] EXHIBIT A [Form of Note] PROMISSORY NOTE $ _______________ July __, 1996 New York, New York FOR VALUE RECEIVED, PROVIDENT COMPANIES, INC., a Delaware corporation (the "Company"), hereby promises to pay to __________________ (the "Bank"), for ------- ---- account of its respective Applicable Lending Offices provided for by the Credit Agreement referred to below, at the principal office of The Chase Manhattan Bank at 1 Chase Manhattan Plaza, New York, New York 10081, the principal sum of _______________ Dollars (or such lesser amount as shall equal the aggregate unpaid principal amount of the Loans made by the Bank to the Company under the Credit Agreement), in lawful money of the United States of America and in immediately available funds, on the dates and in the principal amounts provided in the Credit Agreement, and to pay interest on the unpaid principal amount of each such Loan, at such office, in like money and funds, for the period commencing on the date of such Loan until such Loan shall be paid in full, at the rates per annum and on the dates provided in the Credit Agreement. The date, amount, Type, interest rate and duration of Interest Period (if applicable) of each Loan made by the Bank to the Company, and each payment made on account of the principal thereof, shall be recorded by the Bank on its books and, prior to any transfer of this Note, endorsed by the Bank on the schedule attached hereto or any continuation thereof, provided that the failure -------- of the Bank to make any such recordation or endorsement shall not affect the obligations of the Company to make a payment when due of any amount owing under the Credit Agreement or hereunder in respect of the Loans made by the Bank. This Note is one of the Notes referred to in the Credit Agreement dated as of July 30, 1996 (as modified and supplemented and in effect from time to time, the "Credit Agreement") between the Company, the lenders named therein ---------------- and The Chase Manhattan Bank, as Administrative Agent, and evidences Loans made by the Bank thereunder. Terms used but not defined in this Note have the respective meanings assigned to them in the Credit Agreement. The Credit Agreement provides for the acceleration of the maturity of this Note upon the occurrence of certain events and for prepayments of Loans upon the terms and conditions specified therein. Except as permitted by Section 11.06(b) of the Credit Agreement, this Note may not be assigned by the Bank to any other Person. This Note shall be governed by, and construed in accordance with, the law of the State of New York. PROVIDENT COMPANIES, INC. By_________________________ Title: SCHEDULE OF LOANS This Note evidences Loans made, Continued or Converted under the within-described Credit Agreement to the Company, on the dates, in the principal amounts, of the Types, bearing interest at the rates and having Interest Periods (if applicable) of the durations set forth below, subject to the payments, Continuations, Conversions and prepayments of principal set forth below:
Amount Date Prin- Paid, Made, cipal Duration Prepaid, Unpaid Continued Amount Type of Continued Prin- or of of Interest Interest or cipal Notation Converted Loan Loan Rate Period Converted Amount Made by - ----------- ------ ---- -------- -------- --------- ------ --------
EXHIBIT B [Form of Opinion of Counsel to the Company] July ___, 1996 To: The Banks party to the Credit Agreement referred to below and The Chase Manhattan Bank, as Administrative Agent Ladies and Gentlemen: I am Vice President-General Counsel of Provident Companies, Inc., a corporation organized under the laws of the State of Delaware (the "Company") in ------- connection with the Credit Agreement dated as of July 30, 1996 (the "Credit ------ Agreement") among the Company, the financial institutions named therein and The - --------- Chase Manhattan Bank, as Administrative Agent, providing for loans to be made by said banks to the Company in an aggregate principal amount not exceeding $800,000,000 at any one time outstanding. Terms defined in the Credit Agreement are used herein as defined therein. As used herein, the term "Loan Documents" refers, collectively, to the Credit Agreement and the Notes. In rendering the opinions expressed below, I have examined: (i) the Credit Agreement; (ii) the Notes; and (iii) such corporate records of the Company and such other documents as I have deemed necessary as a basis for the opinions expressed below. In my examination, I have assumed the genuineness of all signatures, the authenticity of all documents submitted to me as originals and the conformity with authentic original documents of all documents submitted to me as copies. When relevant facts were not independently established, I have relied upon statements of governmental officials and upon representations made in or pursuant to the Loan Documents and certificates of appropriate representatives of the Company. In rendering the opinions expressed below, I have assumed, with respect to all of the documents referred to in this opinion letter, that (except, to the extent set forth in the opinions expressed below, as to the Company): (i) such documents have been duly authorized by, have been duly executed and delivered by, and constitute legal, valid, binding and enforceable obligations of, all of the parties to such documents; (ii) all signatories to such documents have been duly authorized; and (iii) all of the parties to such documents are duly organized and validly existing and have the power and authority (corporate or other) to execute, deliver and perform such documents. Based upon and subject to the foregoing and subject to the comments and qualifications set forth below, I am of the opinion that: 1. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. To my knowledge, no governmental authority has asserted that the Company or any Subsidiary is required to be licensed or qualified in any foreign jurisdiction in which the Company or such Subsidiary is not now licensed or qualified. 2. The Company has all requisite corporate power to execute and deliver, and to perform its obligations under, the Credit Agreement, the Notes and the Purchase Agreement and to borrow under the Credit Agreement. 3. The execution, delivery and performance by the Company of the Credit Agreement, the borrowings under the Credit Agreement and the consummation of the Acquisition (i) have been duly authorized by all necessary corporate action on the part of the Company and (ii) do not and will not (a) violate any provision of the charter or by-laws of the Company, (b) violate any applicable law, rule or regulation, (c) violate any order, writ, injunction or decree of any court or governmental authority or agency or any arbitral award applicable to the Company or any of its Subsidiaries of which I have knowledge (after due inquiry) or (d) result in a breach of, constitute a default under, require any consent under, or result in the acceleration or required prepayment of any indebtedness pursuant to the terms of, any agreement or instrument of which I have knowledge (after due inquiry) to which the Company or any of its Subsidiaries is a party or by which any of them is bound or to which any of them is subject, or result in the creation or imposition of any Lien upon any Property of the Company or any of its Subsidiaries pursuant to the terms of any such agreement or instrument. 4. Each of the Loan Documents (assuming, in the case of the Notes, execution and delivery thereof for value) and the Purchase Agreement constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights of creditors generally and except as the enforceability of the Loan Documents is subject to the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law), including, without limitation, (a) the possible unavailability of specific performance, injunctive relief or any other equitable remedy and (b) concepts of materiality, reasonableness, good faith and fair dealing. 5. Except for [list], each of which is in full force and effect, no authorization, approval or consent of, and no filing or registration with, any governmental or regulatory authority or agency of the United States of America or the States of Delaware or Tennessee is required on the part of the Company for the execution, delivery or performance by the Company of the Loan Documents or the Purchase Agreement. 6. I have no knowledge (after due inquiry) of any legal or arbitral proceedings, or any proceedings by or before any governmental or regulatory authority or agency, now pending or threatened against the Company or any of its Subsidiaries or any of their respective Properties that, if adversely determined, could have a Material Adverse Effect. 7. Under the law of the State of Tennessee, a foreign corporation is not required solely as a lender holding Indebtedness, to procure a certificate of authority to transact business or otherwise qualify to do business. As such, neither the Administrative Agent nor any of the Banks, solely by reason of the making of the extensions of credit contemplated by the Credit Agreement, will (a) be required to qualify to do business in the State of Tennessee or to comply with the requirements of any foreign registration or qualification statute of the State of Tennessee, (b) be subject to taxation by the State of Tennessee or any political subdivision of said State or (c) be required to make any filing with any court or other judicial administrative body in or of the State of Tennessee preceding enforcement in order to carry out any of the transactions contemplated by the Credit Agreement or to avail itself of any of the remedies provided by the Credit Agreement. The foregoing opinions are subject to the following comments and qualifications: A. The enforceability of Section 11.03 of the Credit Agreement may be limited by laws rendering unenforceable indemnification contrary to Federal or state securities laws and the public policy underlying such laws. B. The enforceability of provisions in the Credit Agreement to the effect that terms may not be waived or modified except in writing may be limited under certain circumstances. C. I express no opinion as to (i) the effect of the laws of any jurisdiction in which any Bank is located (other than Tennessee) that limit the interest, fees or other charges such Bank may impose, (ii) Section 4.07(c) of the Credit Agreement and (iii) the second sentence of Section 11.10 of the Credit Agreement, insofar as such sentence relates to the subject matter jurisdiction of the United States District Court for the Southern District of New York to adjudicate any controversy related to the Loan Documents. The foregoing opinions are limited to matters involving the Federal laws of the United States, the Delaware General Corporation Law and the law of the State of Tennessee and I do not express any opinion as to the laws of any other jurisdiction. This opinion letter is, pursuant to Section 6.01(c) of the Credit Agreement, provided to you by me in my capacity as counsel to the Company and may not be relied upon by any Person for any purpose other than in connection with the transactions contemplated by the Credit Agreement without, in each instance, my prior written consent. Very truly yours, EXHIBIT C [Form of Opinion of Special New York Counsel to the Banks] July __, 1996 To: The Banks party to the Credit Agreement referred to below and The Chase Manhattan Bank, as Administrative Agent Ladies and Gentlemen: We have acted as special New York counsel to the Banks in connection with the Credit Agreement (the "Credit Agreement") dated as of July 30, 1996, between ---------------- Provident Companies, Inc. (the "Company"), the financial institutions named ------- therein and The Chase Manhattan Bank, as Administrative Agent, providing for loans to be made by said banks to the Company in an aggregate principal amount not exceeding $800,000,000 at any one time outstanding. Terms defined in the Credit Agreement are used herein as defined therein. We have assumed for purposes of our opinion hereinafter set forth that the Credit Agreement has been duly authorized, executed and delivered by the Company, each Bank and the Administrative Agent, and that the Company is duly incorporated and validly existing under the laws of Delaware and has full power, authority and legal right to make and perform the Credit Agreement and the Notes. We have examined originals or copies authenticated to our satisfaction of all such corporate records of the Company, agreements and other instruments, certificates of public officials and of officers and representatives of the Company and other documents, as we have deemed necessary in connection with the opinions hereinafter expressed. In such examination we have assumed the genuineness of all signatures, the authenticity of documents submitted to us as originals, the conformity with the originals of all documents submitted to us as certified or photostatic copies, and the authenticity of the originals of such latter documents. As to questions of fact material to such opinions we have, when relevant facts were not independently established, relied upon representations and certificates of the Company and its officers. Based upon the foregoing and subject to the comments and qualifications set forth below, we are of the opinion that the Credit Agreement constitutes, and the Notes when executed and delivered for value will constitute, valid and binding obligations of the Company enforceable in accordance with their respective terms, except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or other similar laws of general applicability affecting the enforcement of creditors' rights and (b) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law), and except that we express no opinion as to (i) Section 4.07(c) of the Credit Agreement, (ii) the effect of the law of any jurisdiction (other than the State of New York) wherein any Bank (including any of its Applicable Lending Offices) may be located which limits rates of interest which may be charged or collected by such Bank, (iii) whether a Federal or state court outside of the State of New York would give effect to the choice of New York law provided for in the Credit Agreement and the Notes, (iv) the second sentence of Section 11.10 of the Credit Agreement, insofar as such sentence relates to the subject matter jurisdiction of the United States District Court for the Southern District of New York to adjudicate any controversy related to the Credit Agreement or the Notes, (v) the waiver of inconvenient forum set forth in Section 11.10 of the Credit Agreement with respect to proceedings in the United States District Court for the Southern District of New York or (vi) Section 11.11 of the Credit Agreement. In connection with the above, we wish to point out that provisions of the Credit Agreement which permit the Administrative Agent or any Bank to take action or make determinations, or to benefit from indemnities and similar undertakings of the Company, may be subject to a requirement that such action be taken or such determinations be made, and that any action or inaction by the Administrative Agent or a Bank which may give rise to a request for payment under such an undertaking be taken or not taken, on a reasonable basis and in good faith. We are members of the bar of the State of New York and we do not herein intend to express any opinion as to any matters governed by any laws other than the law of the State of New York and the Federal law of the United States of America. Very truly yours, EXHIBIT D [Form of Confidentiality Agreement] CONFIDENTIALITY AGREEMENT [Date] [Insert Name and Address of Prospective Participant or Assignee] Re: Credit Agreement dated as of July 30, 1996, between Provident Companies, Inc. (the "Company"), the financial institutions named ------- therein and The Chase Manhattan Bank, as Administrative Agent. Dear _____________: As a Bank party to the above-referenced Credit Agreement (the "Credit ------ Agreement"), we have agreed with Provident Companies, Inc. (the "Company") - --------- ------- pursuant to Section 11.12 of the Credit Agreement to use reasonable precautions to keep confidential, except as otherwise provided therein, all non-public information identified by the Company as being confidential at the time the same is delivered to us pursuant to the Credit Agreement. As provided in said Section 11.12, we are permitted to provide you, as a prospective [holder of a participation in the Loans (as defined in the Credit Agreement)][assignee Bank], with certain of such non-public information subject to the execution and delivery by you, prior to receiving such non-public information, of a Confidentiality Agreement in this form. Such information will not be made available to you until your execution and return to us of this Confidentiality Agreement. Accordingly, in consideration of the foregoing, you agree (on behalf of yourself and each of your affiliates, directors, officers, employees and representatives) that (A) such information will not be used by you except in connection with the proposed [participation] [assignment] mentioned above and (B) you shall use reasonable precautions, in accordance with your customary procedures for handling confidential information and in accordance with safe and sound banking practices, to keep such information confidential, provided that nothing herein shall limit the disclosure of any such information (i) to the extent required by statute, rule, regulation or judicial process, (ii) to your counsel or to counsel for any of the Banks or the Administrative Agent, (iii) to bank examiners, auditors or accountants, (iv) to the Administrative Agent or any other Bank (or to Chase Securities, Inc.), (v) in connection with any litigation to which you or any one or more of the Banks or the Administrative Agent are a party, (vi) to a subsidiary or affiliate of yours as provided in Section 11.12(a) of the Credit Agreement or (vii) to any assignee or participant (or prospective assignee or participant) so long as such assignee or participant (or prospective assignee or participant) first executes and delivers to you a Confidentiality Agreement substantially in the form hereof, and provided further that in no event shall you be obligated to return any materials furnished to you pursuant to this Confidentiality Agreement. Would you please indicate your agreement to the foregoing by signing at the place provided below the enclosed copy of this Confidentiality Agreement. Very truly yours, [Insert Name of Bank] By ______________________________ The foregoing is agreed to as of the date of this letter [Insert name of prospective participant or assignee] By EX-10.15 5 COMMON STOCK PURCHASE AGREEMENT Exhibit (10.15) Amended and Restated Common Stock Purchase Agreement between Provident Companies, Inc. and Zurich Insurance Company dated as of May 31, 1996 (attached) AMENDED AND RESTATED COMMON STOCK PURCHASE AGREEMENT between PROVIDENT COMPANIES, INC. and ZURICH INSURANCE COMPANY Dated as of May 31, 1996 TABLE OF CONTENTS Page SECTION 1. THE SHARES...................................................... 2 Section 1.1. Issuance, Sale and Purchase of the Shares.......... 2 Section 1.2. Closing............................................ 2 Section 1.3. Further Action..................................... 2 Section 1.4. Anti-Dilution Provisions........................... 2 SECTION 2. REPRESENTATIONS AND WARRANTIES.................................. 3 Section 2.1. Representations and Warranties of the Company...... 3 Section 2.1.1. Organization, Good Standing and Qualification...... 3 Section 2.1.2. Authorization, Enforceability...................... 4 Section 2.1.3. No Conflict........................................ 4 Section 2.1.4. Capitalization..................................... 5 Section 2.1.5. Valid Issuance of Securities....................... 6 Section 2.1.6. Litigation......................................... 6 Section 2.1.7. Consents........................................... 6 Section 2.1.8. Compliance with Law and Other Instruments.......... 7 Section 2.1.9. SEC Documents; Financial Statements................ 7 Section 2.1.10. Absence of Certain Changes or Events............... 9 Section 2.1.11. No Regulatory Disqualifications.................... 9 Section 2.1.12. Registration Rights................................ 9 Section 2.1.13. Acquisition Agreements............................. 9 Section 2.1.14. Rating Agency......................................10 Section 2.1.15. Brokers............................................10 Section 2.1.16. Environmental Protection...........................10 Section 2.1.17. Delaware Law.......................................11 Section 2.1.18. Incorporation of Representations and Warranties from the Merger Agreement........................11 Section 2.2. Representations, Warranties and Covenants of the Purchaser ................................12 Section 2.2.1. Organization.......................................12 Section 2.2.2. Authorization......................................12 Section 2.2.3. Purchase for Investment............................12 Section 2.2.4. Restricted Securities..............................12 Section 2.2.5. No Regulatory Disqualifications....................13 Section 2.2.6. Purchaser Information..............................13 Section 2.2.7. Consents...........................................13 Section 2.2.8. Brokers............................................14 SECTION 3. CERTAIN AGREEMENTS OF THE PARTIES...............................14 Section 3.1. Conduct of Business of the Company.................14 Section 3.2. Covenants of the Purchaser.........................16 Section 3.3. Proxy Statement; Stockholder Approval..............17 Section 3.4. Approvals, Etc.....................................17 Section 3.5. Exclusivity........................................17 Section 3.6. Publicity .........................................17 Section 3.7. Modification of Other Agreements...................17 Section 3.8. Exchange Listing...................................18 Section 3.9. Investigation and Confidentiality..................18 Section 3.10. State Takeover Laws; Charter Provisions............18 Section 3.11. Use of Proceeds....................................19 Section 3.12. Marketing Agreement................................19 Section 3.13. Restrictive Agreements Prohibited..................19 SECTION 4. CLOSING CONDITIONS .............................................19 Section 4.1. Conditions to Obligation of Purchaser..............19 Section 4.1.1. Representations and Warranties Complete and Correct......................................19 Section 4.1.2. Compliance with this Agreement.....................19 Section 4.1.3. Officers' Certificate..............................19 Section 4.1.4. Consents; Etc......................................20 Section 4.1.5. Supporting Documents...............................20 Section 4.1.6. HSR Act............................................20 Section 4.1.7. Merger Closing.....................................20 Section 4.1.8. Other Agreements...................................20 Section 4.1.9. Material Adverse Change............................21 Section 4.1.10. Illegality, Etc....................................21 Section 4.1.11. Stockholder Approval...............................21 Section 4.1.12. Exchange Listing...................................21 Section 4.1.13. Financing of Cash Payments in Merger...............21 Section 4.1.14. Maclellan Family Agreement.........................21 Section 4.1.15. Legal Opinions ....................................21 Section 4.2. Conditions to the Obligations of the Company.......21 Section 4.2.1. Compliance with the Agreement......................22 Section 4.2.2. Purchaser's Representations and Warranties Complete and Correct.............................22 Section 4.2.3. Officer's Certificate..............................22 Section 4.2.4. Consents; Etc......................................22 Section 4.2.5. HSR Act............................................22 Section 4.2.6. Merger Closing.....................................22 Section 4.2.7. Illegality, Etc....................................22 Section 4.2.8. Stockholder Approval...............................22 Section 4.2.9. Exchange Listing...................................23 Section 4.2.10. Financing of Cash Payments in Merger...............23 Section 4.2.11. Legal Opinions.....................................23 SECTION 5. TERMINATION ....................................................23 Section 5.1. Termination........................................23 Section 5.2. Effect of Termination..............................24 Section 5.3. Termination Fee....................................24 SECTION 6. MISCELLANEOUS...................................................24 Section 6.1. Expenses and Indemnification.......................24 Section 6.2. Survival of Agreements.............................26 Section 6.3. Parties in Interest................................26 Section 6.4. Notices............................................26 Section 6.5. Governing Law......................................27 Section 6.6. Entire Agreement...................................27 Section 6.7. Counterparts.......................................27 Section 6.8. Amendments.........................................27 Section 6.9. Severability.......................................28 Section 6.10. Titles and Subtitles...............................28 Section 6.11. Further Assurances.................................28 Exhibit 1 Terms for Marketing Agreement Exhibit 2 Certificate of Incorporation Exhibit 3 By-laws Exhibit 4 Amended and Restated Family Stockholders Agreement Exhibit 5 Form of Opinion of Company Counsel Exhibit 6 Form of Opinion of Purchaser's Counsel AMENDED AND RESTATED COMMON STOCK PURCHASE AGREEMENT dated as of May 31, 1996 between Provident Companies, Inc., a Delaware corporation (the "Company"), and Zurich Insurance Company, a Swiss corporation ("Zurich" and, solely for purposes of the provisions of this Agreement relating to the rights of the Purchaser hereunder, together with such affiliates of Zurich as Zurich may designate in accordance with Section 1.1 hereof, collectively the "Purchaser"). RECITALS: WHEREAS, on May 31, 1996 the parties hereto signed the original Common Stock Purchase Agreement and such parties desire to amend and restate such Agreement as of such date; and WHEREAS, this Amended and Restated Common Stock Purchase Agreement is being executed on November 27, 1996 as of May 31, 1996; and WHEREAS, the Company wishes to issue and sell to the Purchaser an aggregate of 9,523,810 shares (the "Shares") of the authorized but unissued common stock, par value $1.00 per share (the "Common Stock"), of the Company; and WHEREAS, the Purchaser wishes to purchase the Shares on the terms and subject to the conditions set forth in this Agreement; and WHEREAS, the purchase and sale of the Shares is intended to be consummated in connection with, and contingent upon, the acquisition by the Company of all the outstanding common stock of The Paul Revere Corporation ("Revere") through a merger transaction (the "Merger"), all pursuant to an Amended and Restated Agreement and Plan of Merger, entered into as of November 5, 1996, and dated as of April 29, 1996, between the Company, Patriot Acquisition Corporation and Revere (as the same may be amended or supplemented in accordance with the terms of this Agreement, the "Merger Agreement"); and WHEREAS, in connection with the execution and delivery of this Agreement, the Company and the Purchaser are entering into (i) an Amended and Restated Registration Rights Agreement dated as of May 31, 1996 (as the same may be amended or supplemented from time to time, the "Registration Agreement") providing for certain rights in favor of the Purchaser with respect to the registration of the Shares under the federal securities laws and (ii) an Amended and Restated Relationship Agreement dated as of May 31, 1996 (as the same may be amended or supplemented from time to time, the "Relationship Agreement") providing for certain agreements with respect to Shares acquired hereunder; and WHEREAS, on or prior to the Closing Date (as defined in Section 1.2) the Company and the Purchaser will enter into a Marketing Agreement (as the same may be amended or supplemented from time to time, the "Marketing Agreement") relating to a proposed strategic relationship between the Purchaser and its affiliates and the Company, which agreement shall include the terms set forth on Exhibit 1 (the Marketing Agreement, the Registration Agreement and the Relationship Agreement are referred to herein collectively as the "Ancillary Agreements"). NOW, THEREFORE, in consideration of the premises and the mutual covenants contained in this Agreement, the parties agree as follows: SECTION 1. THE SHARES Section 1.1. Issuance, Sale and Purchase of the Shares. In reliance upon the representations and warranties made herein and subject to the satisfaction or waiver of the conditions set forth herein, the Company agrees to issue and sell to the Purchaser (and/or such affiliates (as defined in the Relationship Agreement) of the Purchaser as it may designate in writing to the Company prior to the Closing (as defined below)), and the Purchaser agrees to purchase (or to cause such affiliates to purchase) from the Company 9,523,810 Shares, for a purchase price of $31.50 per Share, or an aggregate purchase price equal to $300,000,000. Section 1.2. Closing. The closing shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom, One Beacon Street, Boston, Massachusetts, on the date the Merger becomes effective in accordance with the terms and conditions of the Merger Agreement, or at such other location, date and time as may be agreed upon between the Purchaser and the Company (such closing being called the "Closing" and such date and time being called the "Closing Date"). At the Closing, the Company shall issue and deliver to the Purchaser (or its affiliates), a stock certificate or certificates in definitive form, registered in the name of the Purchaser (or such affiliates), representing the Shares being purchased at the Closing. As payment in full for the Shares being purchased under this Agreement, and against delivery of the stock certificate or certificates therefor on the Closing Date, the Purchaser shall (or shall cause its affiliates to) wire transfer in accordance with the Company's instructions funds in the amount of $300,000,000. Section 1.3. Further Action. During the period from the date hereof to the Closing Date, each of the Company and the Purchaser shall use all reasonable efforts to take all action necessary or appropriate to satisfy the closing conditions contained in Section 4 hereof and to cause its respective representations and warranties contained in Section 2 to be complete and correct in all material respects as of the Closing Date, after giving effect to the transactions contemplated by this Agreement, as if made on and as of such date. Section 1.4. Anti-Dilution Provisions. In the event the Company changes the number of shares of Common Stock issued and outstanding prior to the Closing as a result of a stock split, stock dividend, or similar recapitalization with respect to such stock and the record date therefor (in the case of a stock dividend) or the effective date thereof (in the case of a stock split or similar recapitalization for which a record date is not established) shall be prior to the Closing, the number of Shares to be purchased and the purchase price per Share shall be proportionately adjusted, without any corresponding adjustment to the aggregate purchase price for the Shares. SECTION 2. REPRESENTATIONS AND WARRANTIES Section 2.1. Representations and Warranties of the Company. The Company represents and warrants to the Purchaser as follows: Section 2.1.1. Organization, Good Standing and Qualification. (a) Each of the Company and each of its subsidiaries (the "Company Subsidiaries") is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all requisite power and authority under such laws to own or lease and operate its properties and to carry on its business as now conducted. Each of the Company and each of the Company Subsidiaries is duly qualified or licensed to do business as a foreign corporation in good standing in each jurisdiction in which the nature of the business transacted by it or the character of the properties owned or leased by it requires it to so qualify or be licensed, except where the failure to so qualify or be licensed or be in good standing would not (i) have a material adverse effect on the results of operations, assets, liabilities or financial condition of the Company and the Subsidiaries considered as a single enterprise or (ii) impair in any material respect the ability of the Company to perform any of its obligations or agreements hereunder or under the Ancillary Agreements or consummate the transactions contemplated hereby or thereby (collectively, a "Material Adverse Effect"). Subject to the requisite approvals of the Company's stockholders as described in Section 2.1.2, the Company has the corporate power and authority to execute, deliver and perform this Agreement and the Ancillary Agreements, and to issue, sell and deliver the Shares. (b) The Company conducts its insurance operations through Provident Life and Accident Insurance Company, Provident National Assurance Company and Provident Life and Casualty Insurance Company (collectively, the "Company Insurance Subsidiaries"). Except as disclosed in Schedule 2.1.1, each of the Company Insurance Subsidiaries is (i) duly licensed or authorized as an insurance company in its jurisdiction of incorporation, (ii) duly licensed or authorized as an insurance company in each other jurisdiction where it is required to be so licensed or authorized, and (iii) duly authorized in its jurisdiction of incorporation and each other applicable jurisdiction to write each line of business reported as being written in the Company SAP Statements (as hereinafter defined), except, in any such case, where the failure to be so licensed or authorized is not reasonably likely to result in a Material Adverse Effect. (c) Except for the Company Subsidiaries (including Revere after consummation of the Merger) and as set forth in the 1995 SAP Statements or in Schedule 2.1.1, the Company does not directly or indirectly own any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity that directly or indirectly conducts any activity which is material to the Company. Section 2.1.2. Authorization, Enforceability. Except for the affirmative vote of a majority of the votes cast by holders of shares of Common Stock present in person or represented by proxy at the Stockholders' Meeting (as defined in Section 3.3) (provided that the votes cast by such holders constitute a majority of the votes entitled to be cast by holders of the outstanding shares of Common Stock) to authorize the issuance of the Shares hereunder and the shares of Common Stock to be issued under the Merger Agreement and except for the affirmative vote of the holders of sixty-six and two thirds percent of the shares of Common Stock outstanding with respect to the Charter Amendment (as defined in Section 5.3 of the Merger Agreement), all corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement and the Ancillary Agreements, the performance of all obligations of the Company hereunder and thereunder and the authorization, issuance, sale and delivery of the Shares has been taken. This Agreement, the Registration Agreement and the Relationship Agreement have been (and the Marketing Agreement, when executed and delivered, will be) duly authorized, executed and delivered by the Company and constitute (and, in the case of the Marketing Agreement, when executed and delivered, will constitute) the valid and legally binding obligations of the Company, enforceable in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity (whether enforcement is sought by proceedings in equity or at law). Section 2.1.3. No Conflict. The execution and delivery by the Company of this Agreement and the Ancillary Agreements, the performance by the Company of its obligations hereunder and thereunder, the issuance, sale and delivery of the Shares, will not violate any provision of (i) the Amended and Restated Certificate of Incorporation, as amended or supplemented (the "Certificate of Incorporation"), or By-laws, as amended (the "By-laws"), of the Company, or (ii) any law or any order of any court or other agency of government, or conflict with, result in a breach of or constitute (with notice or lapse of time or both) a default under any indenture, agreement or other instrument by which the Company or any of its properties or assets is bound, or result in the creation or imposition of any lien, charge, restriction, claim or encumbrance of any nature whatsoever known to the Company upon any of the properties or assets of the Company, except for violations, conflicts, breaches or defaults which are not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect. True and correct copies of the Certificate of Incorporation and By-laws, as in effect on the date hereof, are attached hereto as Exhibits 2 and 3, respectively. Section 2.1.4. Capitalization. (a) The authorized capital stock of the Company consists of (i) 25,000,000 shares of Preferred Stock, par value $1.00 per share (the "Preferred Stock"), which may be issued in series; and (ii) 65,000,000 shares of Common Stock. As of the Closing Date, assuming the Charter Amendment is approved by the Company's stockholders, the authorized number of shares of Common Stock will be increased to at least 75,000,000 shares. (b) As of April 29, 1996, there were issued and outstanding (i) 45,465,135 shares of Common Stock, (ii) 1,041,667 shares of 8.10% Cumulative Preferred Stock, evidenced by depositary receipts for 6,250,002 depositary shares each representing a one-sixth interest in one share of the 8.10% Cumulative Preferred Stock, and (iii) options to purchase 1,837,145 shares of Common Stock under the Company's Stock Option Plan of 1994, as amended (the "1994 Plan") out of a total of 3,500,000 options authorized to be issued under the 1994 Plan. As of the Closing Date (and after giving effect to the Merger and the transactions contemplated by this Agreement), there will be outstanding 67,540,281 shares of Common Stock (not including shares of Common Stock issued pursuant to the exercise of options granted under the 1994 Plan and assuming 12,492,617 shares of Common Stock are issued to stockholders of Revere by virtue of the Merger). (c) Except as set forth in Schedule 2.1.4 or as provided in this Agreement and the Merger Agreement, there are not outstanding any options, warrants, rights (including conversion, exchange or preemptive rights) or agreements or commitments, orally or in writing, for the purchase or acquisition from the Company of any shares of its capital stock. (d) Except as set forth in Schedule 2.1.4, the Company has no obligation (contingent or other) to purchase, redeem or otherwise acquire any of its equity securities or any interest therein or to pay any dividend (other than cumulative dividends on the 8.10% Cumulative Preferred Stock in accordance with the terms thereof) or make any other distribution in respect thereof. Section 2.1.5. Valid Issuance of Securities. (a) The Shares, when issued, sold and delivered in accordance with the terms hereof for the consideration expressed herein, will be duly authorized, validly issued, fully paid and nonassessable. (b) The outstanding shares of Common Stock and 8.10% Cumulative Preferred Stock are, and the shares of Common Stock issuable pursuant to the Merger Agreement will be when issued, duly authorized, validly issued, fully paid and nonassessable. (c) The issuance, sale and delivery of the Shares is not subject to any preemptive right of stockholders of the Company arising under law or the Certificate of Incorporation or By-laws or to any contractual right of first refusal or other right in favor of any person. Section 2.1.6. Litigation. There is no action, suit, proceeding or investigation pending or, to the knowledge of the Company, currently threatened against the Company or any of the Company Subsidiaries that questions the validity of this Agreement or any of the Ancillary Agreements or the right of the Company to enter into, or to consummate, the transactions contemplated hereby or thereby, or that is reasonably likely, either individually or in the aggregate, to have a Material Adverse Effect, nor does the Company have knowledge that there is any basis for any of the foregoing. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality that specifically names the Company, any of the Company Subsidiaries and as to which either compliance or noncompliance is reasonably likely to have a Material Adverse Effect. Except as set forth on Schedule 2.1.6, there is no action, suit, proceeding or investigation by the Company or any of the Company Subsidiaries currently pending or which the Company or any Company Subsidiary intends to initiate that is material to the operations of the Company and the Company Subsidiaries considered as a whole. Section 2.1.7. Consents. Assuming the accuracy of the representations and warranties of the Purchaser set forth in this Agreement, except as set forth on Schedule 2.1.7, no consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any governmental authority, agency or body or any other person on the part of the Company is required in connection with the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements, except for (i) required blue sky filings, if any, which will be effected in accordance with such laws, (ii) filings required under the Securities Act of 1933 (the "Securities Act") in connection with the Registration Agreement, (iii) the filing of a Pre-Merger Notification Form and related documents under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), (iv) the filing of appropriate documents with, and the approval of, the Superintendent of Insurance of the State of New York and the Commissioners of Insurance of the Commonwealth of Massachusetts, the States of Delaware and Tennessee and any other state or jurisdiction in which the Company or any of the Company Insurance Subsidiaries is domiciled or does business (the "Insurance Regulators") for the issuance of the Shares to the Purchaser, (v) such consents, approvals, notices or waivers as may be required under the law of Canada or any of the provinces thereof; (vi) the approval of the NYSE (as defined in Section 3.8) for the listing of the Shares on the NYSE, subject to official notice of issuance; and (vii) such consents, approvals, orders, authorizations, registrations, qualifications, designations, declarations or filings which if not obtained or made, as the case may be, are not reasonably likely to have a Material Adverse Effect. Section 2.1.8. Compliance with Law and Other Instruments. The Company and the Company Subsidiaries are not in conflict with, or in default or violation of, (i) any law, rule, regulation, order, judgment or decree applicable to any of them or by which any of their property or assets is bound or affected, or (ii) any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which any of them is a party or by which the Company or any of the Company Subsidiaries or any of their property or assets is bound or affected, except for any such conflicts, defaults or violations that are not reasonably likely, individually or in the aggregate, to have a Material Adverse Effect. Section 2.1.9. SEC Documents; Financial Statements. Except as set forth in Schedule 2.1.9: (a) There are no agreements, understandings or proposed transactions between the Company or any of the Subsidiaries and any of their respective officers, directors or affiliates, or any affiliate thereof, of a type that would be required to be disclosed on Form 10-K for the year ending on December 31, 1995 other than the agreements, understandings or proposed transactions disclosed in the SEC Documents (as hereinafter defined). (b) The Company has timely filed all reports required to be filed by it with the SEC since January 1, 1994 pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the rules and regulations thereunder. The Company has provided the Purchaser with copies of (i) the Company's annual reports on Form 10-K for the years ended December 31, 1994 and 1995, (ii) the Proxy Statement filed by the Company with the SEC on April 1, 1996 with respect to the Annual Meeting of Stockholders of the Company held on May 1, 1996 and (iii) the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1996 (collectively, together with any other reports or filings made by the Company since January 1, 1994 or which are made after the date hereof and on or prior to the Closing Date with the SEC pursuant to the requirements of the Securities Act or the Exchange Act or the rules and regulations thereunder, including, without limitation, the Registration Statement and the Proxy Statement (as those terms are defined in Section 2.2.6), the "SEC Documents"). As of their respective dates, the SEC Documents complied (or, as to SEC Documents filed after the date hereof, will comply) in all material respects with the requirements of the Exchange Act, the Securities Act and the rules and regulations of the SEC promulgated thereunder. Except to the extent that information contained in any SEC Document has been revised or superseded by a later filed SEC Document (which was filed prior to the date of this Agreement), none of the SEC Documents contains (or, as to SEC Documents filed after the date hereof, will contain) any untrue statement of a material fact or omits 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. The Registration Statement will not, at the time it becomes effective, 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. The Proxy Statement will not, at the time of the mailing of the Proxy Statement to the Company's stockholders (or, in the case of any amendment or supplement thereto, at the time of mailing of such amendment or supplement, as the case may be) and at the time of the Stockholders' Meeting and at the Effective Time (as defined in the Merger Agreement) 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. (c) The financial statements of the Company included in the SEC Documents comply (or, as to SEC Documents filed after the date hereof, will comply) as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with generally accepted accounting principles, except, in the case of unaudited statements as permitted by Form 10-Q, applied on a consistent basis during the periods involved and fairly present the consolidated financial position of the Company and its subsidiaries as of the date thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). Except as set forth in the SEC Documents, neither the Company nor any of the Company Subsidiaries has any material liabilities or obligations which, individually or in the aggregate, are reasonably likely to have a Material Adverse Effect. (d) Each Company Insurance Subsidiary has filed all annual or quarterly statements, together with all exhibits and schedules thereto, required to be filed or submitted to the appropriate regulatory authorities of the jurisdiction in which it is domiciled on forms prescribed or permitted by such authority (the "SAP Statements"). The financial statements included in the SAP Statements, including the notes thereto, have been prepared in all material respects in accordance with accounting practices prescribed or permitted by applicable state regulatory authorities in effect as of the date of the respective statements (and such accounting practices have been applied on a consistent basis throughout the periods involved, except as expressly set forth in the notes or schedules thereto), and present fairly the respective statutory financial position and results of operation of each of the Company Insurance Subsidiaries as of their respective dates and for the respective periods prescribed therein. Section 2.1.10. Absence of Certain Changes or Events. Except as disclosed in the SEC Documents, or as set forth in Schedule 2.1.10 or as a consequence of, or as contemplated by, this Agreement or the Merger Agreement, since March 31, 1996, (i) the business of the Company has been carried on only in the ordinary and usual course, (ii) there has not occurred any change which has resulted or is reasonably likely to result in a Material Adverse Effect and (iii) neither the Company nor any Company Subsidiary has taken any action of the type described in clauses (g), (h), (i) or (j) of Section 3.1. Section 2.1.11. No Regulatory Disqualifications. To the knowledge of the Company, no event has occurred or condition exists or, to the extent it is within the reasonable control of the Company, will occur or exist with respect to the Company that, in connection with obtaining any approvals from any Insurance Regulator required in connection with the transactions contemplated by this Agreement or the Merger Agreement, would cause the Company or any Company Subsidiary to fail to satisfy on its face any applicable statute or written regulation of any Insurance Regulator, which is reasonably likely to adversely affect the Company's ability to consummate the transactions contemplated hereby or thereby. Section 2.1.12. Registration Rights. Except for the Registration Agreement, the registration rights granted pursuant to the Registration Rights Agreement, dated April 29, 1996, between the Company and Textron Inc. and the registration rights agreement with members of the Family Group (as defined in the Registration Agreement), the Company has not granted or agreed to grant any registration rights, including piggyback rights, to any person or entity. Section 2.1.13. Acquisition Agreements. True and correct copies of (i) the Merger Agreement and any agreements executed by the Company (or any of its affiliates) and Revere in connection therewith (the "Merger Documents") and (ii) any agreement, letter of intent, commitment letter or similar agreement or document relating to any financing proposed to be incurred by the Company in connection with the Merger, other than this Agreement and the Ancillary Agreements (the "Company Financing Agreements"), have been furnished to the Purchaser. Section 2.1.14. Rating Agency. From December 31, 1995 through the date hereof, except as disclosed on Schedule 2.1.14, no rating agency has (i) imposed conditions (financial or otherwise) on retaining any rating assigned to the Company or any Company Insurance Subsidiary or (ii) threatened to downgrade any rating assigned to the Company or any Company Insurance Subsidiary. Section 2.1.15. Brokers. Other than its financial advisor, Goldman, Sachs & Company, the Company has not employed any investment banker, broker, finder, or intermediary in connection with the sale of the Shares, and the Company is under no obligation to pay any investment banking, brokerage, finder's or similar fee or commission in connection with such transactions, other than certain fees payable to Goldman, Sachs & Company, which fees are the obligation of the Company. Section 2.1.16. Environmental Protection. (a) For purposes of this Section 2.1.16, the following terms shall be defined as follows: "Environmental Laws" means any federal, state or local statute, code, ordinance, rule, regulation, permit, consent, approval, license, judgment, order, writ, decree, injunction or other authorization and any amendments thereto, relating to: (i) emissions, discharges, release or threatened releases of pollutants, contaminants or hazardous or toxic materials or wastes into indoor or ambient air, surface water, ground water, publicly owned treatment works, septic systems or land; (ii) the treatment, storage, disposal, handling, manufacturing, transportation, or shipment of Hazardous Water or hazardous and/or toxic wastes, material, substances, products or by-products as defined in the Comprehensive Environmental Response Compensation and Liability Act as amended by the Superfund Amendments and Reauthorization Act, as amended, 42 U.S.C. ss. 9601 et seq.; the Resource Conservation Recovery Act, as amended, 42 U.S.C. ss. 6901 et seq. and the Toxic Substances Control Act, as amended, 15 U.S.C. ss. 2601 et seq. as amended from time to time and corresponding state legislation and all regulations promulgated thereunder; or (iii) otherwise relating to the pollution or protection of health or the environment; and "Hazardous Waste" (a) means any chemical substance or material including, but not limited to wastes, petroleum and petroleum-derived substances, asbestos, urea formaldehyde foam insulation, transformer equipment containing dielectric fluid with levels of polychlorinated biphenyls, radon gas, radioactive materials or other pollutants or contaminants which have the characteristic of hazardous waste as set forth in or which are now or hereafter included or regulated by the Clean Water Act, 33 U.S.C. ss. 1251 et seq.; the Clear Act, as amended, 42 U.S.C. ss. 7401, et seq.; the Federal Water Pollution Control Act, as amended, 33 U.S.C. ss. 1251 et seq.; CERCLA; RCRA; and TSCA. (b) The Company and the Company Subsidiaries are not in violation of any Environmental Laws, other than such violations which have not had and are reasonably expected not to have a Material Adverse Effect and have, and are in compliance with all terms and conditions of, all permits, licenses and authorizations necessary for the conduct of their respective businesses, other than such instances of non-compliance which are not reasonably likely to have a Material Adverse Effect. (c) Except as set forth on Schedule 2.1.16, there is no site which is listed on either the National Priorities List pursuant to CERCLA or a similar state or local law list with respect to which the Company has received notice from the United States Environmental Protection Agency or a state or local agency that the Company is considered to be a potentially responsible party by reason of arranging for disposal, owning or operating any facility or site or transporting any Hazardous Waste. Section 2.1.17. Delaware Law. The Company has elected not to be governed by the provisions of Section 203 of the Delaware General Corporation Law ("DGCL") and such election is effective as of the date hereof and such Section 203 (a) is not applicable to the transactions contemplated hereby and by the Ancillary Agreements and (b) will not be applicable to any future transactions between the Company, on the one hand, and the Purchaser and/or any of its affiliates, on the other hand. The Company has taken all action so that the entering into of this Agreement and the consummation of the sale of the Shares and the other transactions contemplated by this Agreement do not and will not result in the grant of any rights to any person under the Certificate of Incorporation, By-laws or other governing instruments of the Company or restrict or impair the ability of the Purchaser to vote, or otherwise to exercise the rights of a stockholder with respect to, shares of the Company that may be directly or indirectly acquired or controlled by the Purchaser. Section 2.1.18. Incorporation of Representations and Warranties from the Merger Agreement. Without qualifying any of the other representations and warranties set forth in this Agreement, the representations and warranties of the Company set forth in Sections 5.3, 5.4, 5.9, 5.11, 5.12, 5.13, 5.14, 5.16, 5.17, 5.18, 5.19 and 5.20 of the Merger Agreement (including any related definitions) shall be deemed to be incorporated by reference herein as if fully set forth herein. Section 2.2. Representations, Warranties and Covenants of the Purchaser. The Purchaser represents and warrants to the Company that: Section 2.2.1. Organization. The Purchaser is a corporation duly organized and validly existing under the laws of Switzerland. Section 2.2.2. Authorization. The Purchaser has full power and authority to enter into this Agreement and the Ancillary Agreements. Each of this Agreement, the Registration Agreement and the Relationship Agreement constitute (and the Marketing Agreement, when executed and delivered, will constitute) its valid and legally binding obligation, enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity (whether enforcement is sought by proceedings in equity or at law). Section 2.2.3. Purchase for Investment. The Shares will be acquired for investment for the Purchaser's (or its affiliates') own account and not with a view to the resale or distribution of any part thereof, except in compliance with the provisions of the Securities Act or an exemption therefrom. Section 2.2.4. Restricted Securities. The Purchaser understands that the Shares are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such shares may be resold without registration under the Securities Act only in certain limited circumstances. The Purchaser further agrees that each certificate representing the Shares shall be stamped or otherwise imprinted with a legend substantially in the following form: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE (I) HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS IT HAS BEEN REGISTERED UNDER THAT ACT OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE, AND (II) ARE SUBJECT TO THE PROVISIONS OF A RELATIONSHIP AGREEMENT, DATED AS OF MAY 31, 1996, BETWEEN THE COMPANY AND THE PURCHASER, COPIES OF WHICH ARE ON FILE AT THE PRINCIPAL EXECUTIVE OFFICES OF THE COMPANY." A certificate shall not bear such legend if the Purchaser shall have delivered to the Company an opinion of counsel reasonably satisfactory to the Company to the effect that the securities being sold may be publicly sold without registration under the Securities Act. The foregoing shall not be deemed to affect the obligations of the Company under the Registration Agreement. Section 2.2.5. No Regulatory Disqualifications. To the knowledge of the Purchaser, no event has occurred or condition exists or, to the extent it is within the reasonable control of the Purchaser, will occur or exist with respect to the Purchaser that, in connection with obtaining any approvals from any Insurance Regulator required in connection with the transactions contemplated by this Agreement, would cause the Purchaser to fail to satisfy on its face any applicable statute or written regulation of any Insurance Regulator, which would be reasonably likely to adversely affect the Purchaser's ability to consummate the transactions contemplated hereby or thereby. Section 2.2.6. Purchaser Information. None of the information regarding the Purchaser supplied by the Purchaser in writing specifically for inclusion in (i) the registration statement to be filed by the Company as contemplated by Section 4.10 of the Merger Agreement (the "Registration Statement") or (ii) the proxy statement-prospectus to be filed by the Company as contemplated by Section 6.4 of the Merger Agreement (the "Proxy Statement") will, in the case of the Registration Statement, at the time it becomes effective 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, at the time of the mailing of the Proxy Statement to the Company's stockholders (or, in the case of any amendment or supplement thereto, at the time of mailing of such amendment or supplement, as the case may be) and at the time of the Stockholders' Meeting and at the Effective Time (as defined in the Merger Agreement) 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. Section 2.2.7. Consents. Assuming the accuracy of the representations and warranties of the Company set forth in this Agreement, no consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any governmental authority, agency or body or any other person on the part of the Purchaser is required in connection with the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements, except for (i) the filing of a Pre-Merger Notification Form and related documents under the HSR Act, (ii) the filing of appropriate documents with, and approval of, the Insurance Regulators and the Commissioners of Insurance of any state or jurisdiction in which the Purchaser or any of its insurance subsidiaries is domiciled or does business, (iii) such consents, approvals, notices or waivers as may be required under the laws of Canada or any of the provinces thereof, (iv) filings required under the Securities Act or the Securities Exchange Act of 1934, as amended, or (v) such consents, approvals, orders, authorizations, registrations, qualifications, designations, declarations or filings, which if not obtained or made, as the case may be, are not reasonably likely to impair in any material respect the ability of the Purchaser to perform any of its obligations or agreements hereunder or under the Ancillary Agreements or consummate the transactions contemplated hereby or thereby. Section 2.2.8. Brokers. Other than Donaldson, Lufkin & Jenrette Securities Corporation, the Purchaser has not employed any investment banker, broker, finder, or intermediary in connection with the transactions contemplated by this Agreement, and the Purchaser is under no obligation to pay any investment banking, brokerage, finder's or similar fee or commission in connection with such transactions, other than certain fees payable to Donaldson, Lufkin & Jenrette Securities Corporation, which are the obligation of the Purchaser (except to the extent otherwise provided in Section 6.1). SECTION 3. CERTAIN AGREEMENTS OF THE PARTIES Section 3.1. Conduct of Business of the Company. Except as set forth in Schedule 3.1, from the date of this Agreement until the earlier of the Closing or the termination of this Agreement, unless the prior written consent of the Purchaser shall have been obtained, and except as otherwise contemplated by this Agreement, the Company will conduct its operations according to its ordinary and usual course of business consistent with past practice and shall use all reasonable efforts to preserve intact its current business organizations, keep available the service of its current officers and employees, maintain its material permits and contracts and preserve its relationships with customers, suppliers and others having business dealings with it. Without limiting the generality of the foregoing, and except as otherwise contemplated by this Agreement or as set forth in Schedule 3.1, the Company will not, without the prior written consent of the Purchaser (which consent shall not be unreasonably withheld): (a) issue, sell, grant, dispose of, pledge or otherwise encumber, or authorize or propose the issuance, sale, disposition or pledge or other encumbrance of (i) any additional shares of capital stock of capital stock of any class (including shares of Common Stock), or any securities or rights convertible into, exchangeable for, or evidencing the right to subscribe for any shares of capital stock, or any rights, warrants, options, calls, commitments or any other agreements of any character to purchase or acquire any shares of capital stock or any securities or rights convertible into, exchangeable for, or evidencing the right to subscribe for, any shares of capital stock or (ii) any other securities in respect of, in lieu of, or in substitution for, shares of Common Stock outstanding on the date hereof; (b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or otherwise acquire, any of its outstanding shares of Common Stock; (c) split, combine, subdivide or reclassify any shares of Common Stock or declare, set aside for payment or pay any dividend, or make any other actual, constructive or deemed distribution in respect of any capital stock of the Company or otherwise make any payments to stockholders in their capacity as such, other than the declaration and payment of regular quarterly cash dividends on the Common Stock in an amount no greater than $.18 per share and in accordance with past dividend policy and except for dividends by a direct or indirect wholly owned Company Subsidiary; (d) adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of the Company or any of the Company Subsidiaries (other than the Merger); (e) adopt any amendments to its Certificate of Incorporation or Bylaws or alter through merger, liquidation, reorganization, restructuring or in any other fashion the corporate structure or ownership of any direct or indirect Company Subsidiary, except for Company Subsidiaries which are not material to the assets, liabilities, financial condition or results of operations of the Company and the Company Subsidiaries taken as a whole; (f) make, or permit any Company Subsidiary to make, any material acquisition, by means of merger, consolidation or otherwise, or material disposition, of assets or securities; (g) other than in the ordinary course of business consistent with past practice, incur, or permit any Company Subsidiary to incur, any material indebtedness for borrowed money or guarantee any such indebtedness or make any material loans, advances, or capital contributions to, or other material investments in, any person other than the Company or any Company Subsidiary; (h) change any method of accounting or accounting practice by the Company or any Company Subsidiary, except for such required change in GAAP or applicable statutory accounting principles; (i) permit any Company Insurance Subsidiary to materially change its investment guidelines or policies or conduct transactions in investments except in material compliance with the investment guidelines and policies of such Company Insurance Subsidiary and all applicable insurance laws; (j) enter, or permit any Company Insurance Subsidiary to enter, into any material reinsurance, coinsurance or similar agreement, whether as reinsurer or reinsured, except in the ordinary course of business consistent with past practice; (k) (x) take, or agree or commit to take, or permit any Company Subsidiary to take, or agree or commit to take, any action that would make any representation and warranty of the Company hereunder inaccurate in any material respect at the Closing (except for representations and warranties which speak as of a particular date, which need be accurate only as of such date), (y) omit, or agree or commit to omit, or permit any Company Subsidiary to omit, or agree or commit to omit, to take any action necessary to prevent any such representation and warranty from being inaccurate in any material respect at the Closing (except for representations and warranties which speak as of a particular date, which need be accurate only as of such date), provided however that the Company shall be permitted to take or omit to take such action which can be cured, and in fact is cured, at or prior to the Closing, or (z) any action that would result in, or would be reasonably likely to result in, any of the conditions set forth in Section 4 not being satisfied; or (l) authorize, recommend, propose or announce an intention to do any of the foregoing, or enter into any contract, agreement, commitment or arrangement to do any of the foregoing. Section 3.2. Covenants of the Purchaser. Except as otherwise contemplated by this Agreement, the Purchaser will not, without the prior written consent of the Company, which consent shall not be unreasonably withheld, (x) take, or agree or commit to take, any action that would make any representation and warranty of the Purchaser hereunder inaccurate in any material respect at the Closing (except for representations and warranties which speak as of a particular date, which need be accurate only as of such date), (y) omit, or agree or commit to omit, to take any action necessary to prevent any such representation and warranty from being inaccurate in any material respect at the Closing (except for representations and warranties which speak as of a particular date, which need be accurate only as of such date), provided however that the Purchaser shall be permitted to take or omit to take such action which can be cured, and in fact is cured, at or prior to the Closing, or (z) any action that would result in, or would be reasonably likely to result in, any of the conditions set forth in Section 4 not being satisfied. Section 3.3. Proxy Statement; Stockholder Approval. The Company shall call a special meeting of its stockholders (the "Stockholders' Meeting"), to be held as soon as reasonably practicable after the date of this Agreement, for the purpose of voting upon approval of the sale of Shares pursuant to this Agreement, the issuance of shares of Company Common Stock pursuant to the Merger Agreement, the Charter Amendment (as defined in the Merger Agreement) and such other related matters as it deems appropriate. In connection with the Stockholders' Meeting, (i) the Company shall prepare and file with the SEC a Proxy Statement and mail such Proxy Statement to its stockholders, (ii) the Board of Directors of the Company shall recommend to its stockholders the approval of the sale of Shares pursuant to this Agreement and (subject to the terms of the Merger Agreement) the issuance of shares of Common Stock pursuant to the Merger Agreement and the Charter Amendment and (iii) the Board of Directors and officers of the Company shall use their reasonable efforts to obtain such stockholders' approval (subject to the terms of the Merger Agreement). Section 3.4. Approvals, Etc. Subject to the terms and conditions provided herein, each of the parties hereto agrees to (i) promptly effect all registrations, submissions and filings, including but not limited to, filings under the HSR Act, submissions to the Insurance Regulators and filings required under the Registration Agreement, which may be necessary or required in connection with the consummation of the transactions contemplated by this Agreement and, in the case of the Company, the Merger Agreement, (ii) to use all reasonable efforts to take all other action and to do all other things necessary, proper or advisable to consummate and make effective as promptly as practicable the transactions contemplated by this Agreement and, in the case of the Company, the Merger Agreement and (iii) use all reasonable efforts to obtain all other necessary or appropriate waivers, consents and approvals with respect to the transactions contemplated by this Agreement and, in the case of the Company, the Merger Agreement. Section 3.5. Exclusivity. The Company hereby agrees that, prior to the Closing Date, the Company shall not solicit or accept alternative sources for the investment contemplated by this Agreement. The Company further agrees that it will not utilize any funds or other sources of financing to finance the Merger without first consummating the full purchase and sale provided hereunder. Section 3.6. Publicity. Neither the Company nor the Purchaser shall make any public announcement concerning this Agreement or the other transactions contemplated hereby without the prior written consent of the other, except as may be required by law or stock exchange rule. Section 3.7. Modification of Other Agreements. Without the prior written consent of the Purchaser, the Company shall not amend in any material respect any provision of, or waive any condition to the performance by the Company or its affiliates of any of their respective obligations under, any of the Merger Documents or the Company Financing Agreements. Section 3.8. Exchange Listing. The Company shall as promptly as practicable prepare and submit to the New York Stock Exchange ("NYSE") a listing application covering the Shares, and shall use all reasonable efforts to obtain, prior to the Closing, approval for the listing of the Shares on the NYSE, subject to official notice of issuance. Section 3.9. Investigation and Confidentiality. (a) Prior to the Closing, the Company shall keep the Purchaser advised of all material developments relevant to its business and to consummation of the Merger and the sale of the Shares and shall permit the Purchaser to make or cause to be made such investigation of its business and properties and of its financial and legal condition as the Purchaser reasonably requests, provided that such investigation shall be reasonably related to the transactions contemplated hereby and shall not interfere unnecessarily with normal operations. The Purchaser agrees that it will not, and will cause its officers, employees and agents not to, use any information obtained pursuant to this Section 3.9 for any purpose unrelated to the performance of the obligations under, or the consummation of the transactions contemplated by, this Agreement or the Ancillary Agreements. (b) The Purchaser agrees that the Confidentiality Agreement, dated December 3, 1995, by and between Provident Life and Accident Insurance Company of America and Centre ReSource Limited (the "Confidentiality Agreement"), shall be binding upon the Purchaser and shall apply with respect to information furnished by the Company or any of its Subsidiaries, or any of their respective officers, employees, counsel, accountants and other authorized representatives hereunder. (c) Notwithstanding the provisions hereof, during the period prior to the Closing Date, the parties shall take appropriate precautions to ensure that competitively sensitive information is not exchanged in a manner which is inconsistent with applicable law. Section 3.10. State Takeover Laws; Charter Provisions. Each of the Company and the Company Subsidiaries shall take all necessary action to ensure that the entering into of this Agreement and the consummation of the sale of the Shares and the other transactions contemplated hereby do not and will not result in the grant of any rights to any Person under the Certificate of Incorporation, Bylaws or other governing instruments of the Company or restrict or impair the ability of the Purchaser to vote, or otherwise to exercise the rights of a stockholder with respect to, shares of the Company that may be directly or indirectly acquired or controlled by the Purchaser. Section 3.11. Use of Proceeds. The proceeds from the sale of the Shares shall be used to fund payments required to be made by the Company in connection with the Merger. Section 3.12. Marketing Agreement. The parties hereto agree to negotiate in good faith, and execute prior to the Closing, the Marketing Agreement, which agreement shall (i) be effective as of the Closing, (ii) have terms consistent with the summary of terms attached hereto as Exhibit 1 and (iii) have such other terms as the parties may agree to. Section 3.13. Restrictive Agreements Prohibited. The Company shall not become a party to any agreement which by its terms violates the terms of this Agreement or any of the Ancillary Agreements. SECTION 4. CLOSING CONDITIONS Section 4.1. Conditions to Obligation of Purchaser. The obligation of the Purchaser to purchase the Shares shall be subject to its satisfaction or waiver of the following conditions on or before the Closing Date: Section 4.1.1. Representations and Warranties Complete and Correct. The representations and warranties of the Company contained in Section 2.1 hereof which are qualified as to materiality or a Material Adverse Effect shall have been true and correct when made and shall be true and correct at and as of the Closing Date, after giving effect to the transactions contemplated by this Agreement and the Merger Agreement, as if made on and as of such date (except for representations and warranties which are confined to a specified date, which shall be true and correct as of such date). The representations and warranties of the Company contained in Section 2.1 hereof which are not qualified as to materiality or a Material Adverse Effect shall have been true and correct in all material respects when made and shall be true and correct in all material respects at and as of the Closing Date, after giving effect to the transactions contemplated by this Agreement and the Merger Agreement, as if made on and as of such date (except for representations and warranties which are confined to a specified date, which shall be true and correct in all material respects as of such date). Section 4.1.2. Compliance with this Agreement. The Company shall have performed and complied in all material respects with all agreements, covenants and conditions contained herein which are required to be performed or complied with by it on or before the Closing Date. Section 4.1.3. Officers' Certificate. The Purchaser shall have received a certificate, dated the Closing Date and signed by the President or any Vice President and attested by the Secretary of the Company, certifying that the conditions set forth in Sections 4.1.1 and 4.1.2 are satisfied on and as of such date. Section 4.1.4. Consents; Etc. The Company shall have received all consents, approvals and other authorizations that may be required from, and made all such filings and declarations that may be required with, any governmental authority or agency pursuant to any law, statute, regulation or rule (federal, state, local and foreign), or pursuant to any agreement, order or decree by which the Company or any of its assets is bound, in connection with the transactions contemplated by this Agreement. Section 4.1.5. Supporting Documents. The Purchaser shall have received copies of the following documents: (i) (A) the Certificate of Incorporation, certified as of a recent date by the appropriate authority of the Company's jurisdiction of incorporation; and (B) a certificate of such authority dated as of a recent date as to the due incorporation and good standing of the Company, and listing all documents of the Company on file with said authority; and (ii) a certificate of the Secretary or an Assistant Secretary of the Company dated the Closing Date and certifying: (A) that attached thereto is a true and complete copy of the Bylaws of the Company as in effect on the date of such certification; (B) that attached thereto is a true and complete copy of all resolutions adopted by the Board of Directors or the stockholders of the Company authorizing the execution, delivery and performance of this Agreement and the Ancillary Agreements, the issuance, sale and delivery of the Shares, and that all such resolutions are in full force and effect and are all the resolutions adopted in connection with the transactions contemplated by this Agreement, the Marketing Agreement and the Registration Agreement; (C) that the Certificate of Incorporation has not been amended since the date of the last amendment referred to in the certificate delivered pursuant to clause (i)(B) above; and (D) that the Bylaws have not been amended since the date of the last amendment referred to in such certificate pursuant to subclause (ii)(A) above. Section 4.1.6. HSR Act. Any required waiting periods under the HSR Act relating to the transactions to be consummated on the Closing Date shall have expired or been terminated. Section 4.1.7. Merger Closing. The closing under the Merger Agreement shall have occurred or shall occur simultaneously with the Closing hereunder. Section 4.1.8. Other Agreements. The Company shall have complied with all agreements required to be complied with by it on or before the Closing Date under the Ancillary Agreements. Section 4.1.9. Material Adverse Change. Except as disclosed in the SEC Documents filed prior to the date hereof, or as set forth in Schedule 2.1.10 or as a consequence of, or as contemplated by, this Agreement or the Merger Agreement, since December 31, 1995, there shall not have occurred any change, and no additional information shall have been disclosed to the Purchaser, which is reasonably likely to have a material adverse effect on the financial condition, results of operations, assets or liabilities of the Company and the Company Subsidiaries, taken as a whole, or a material adverse effect on the financial condition, results of operations, assets or liabilities of Revere and its subsidiaries, taken as a whole. Section 4.1.10. Illegality, Etc. No statute, rule or regulation, or order, decree or injunction enacted, entered, promulgated or enforced by any court or governmental authority shall be in effect which prohibits or restricts the consummation of the transactions contemplated hereby. Section 4.1.11. Stockholder Approval. Each of the sale of Shares pursuant to this Agreement, the issuance of shares of Common Stock pursuant to the Merger Agreement and the Charter Amendment shall have been duly approved by the stockholders of the Company entitled to vote with respect thereto in accordance with applicable law and the Certificate of Incorporation and Bylaws of the Company and, in the case of the issuance of shares of Common Stock pursuant to the Merger Agreement and the sale of the Shares, the rules of the NYSE. Section 4.1.12. Exchange Listing. The Shares shall have been approved for listing on the NYSE, subject to official notice of issuance. Section 4.1.13. Financing of Cash Payments in Merger. The Company shall have obtained financing for the aggregate cash payments to be made to stockholders of Revere in the Merger pursuant to the Company Financing Agreements. Section 4.1.14. Maclellan Family Agreement. The Purchaser shall have entered into an agreement with the members of the Maclellan family, in form and substance substantially in the form attached hereto as Exhibit 4. Section 4.1.15. Legal Opinions. The Purchaser shall have received an opinion or opinions of counsel to the Company, dated as of the Closing, covering the matters set forth in Exhibit 5. Section 4.2. Conditions to the Obligations of the Company. The Company's obligation to sell the Shares shall be subject to the satisfaction or waiver by it of the following conditions on or before the Closing Date: Section 4.2.1. Compliance with the Agreement. The Purchaser shall have performed and complied in all material respects with all agreements and conditions contained herein which are required to be performed or complied with by it on or before the Closing Date. Section 4.2.2. Purchaser's Representations and Warranties Complete and Correct. The Purchaser's representations and warranties contained in Section 2.2 of this Agreement shall be true and correct in all material respects when made and shall be true and correct in all material respects at and as of the Closing Date, after giving effect to the transactions contemplated by this Agreement, as if made on and as of such date. Section 4.2.3. Officer's Certificate. The Company shall have received a certificate, dated the Closing Date and signed by a duly authorized officer of the Purchaser, certifying that the conditions set forth in Section 4.2.2 are satisfied on and as of such date. Section 4.2.4. Consents; Etc. The Company shall have received all consents, approvals and other authorizations that may be required from, and made all such filings and declarations that may be required with, any governmental authority or agency pursuant to any law, statute, regulation or rule (federal, state, local and foreign), or pursuant to any agreement, order or decree by which the Company or any of its assets is bound, in connection with the transactions contemplated by this Agreement. Section 4.2.5. HSR Act. Any required waiting periods under the HSR Act relating to the transactions to be consummated on the Closing Date shall have expired or been terminated. Section 4.2.6. Merger Closing. The closing under the Merger Agreement shall have occurred or shall occur simultaneously with the Closing hereunder. Section 4.2.7. Illegality, Etc. No statute, rule or regulation, or order, decree or injunction enacted, entered, promulgated or enforced by any court or governmental authority shall be in effect which prohibits or restricts the consummation of the transactions contemplated hereby. Section 4.2.8. Stockholder Approval. Each of the sale of Shares pursuant to this Agreement, the issuance of shares of Common Stock pursuant to the Merger Agreement and the Charter Amendment shall have been duly approved by the stockholders of the Company entitled to vote with respect thereto in accordance with applicable law and the Certificate of Incorporation and Bylaws of the Company and, in the case of the issuance of shares of Common Stock pursuant to the Merger Agreement and the sale of the Shares, the rules of the NYSE. Section 4.2.9. Exchange Listing. The Shares shall have been approved for listing on the NYSE, subject to official notice of issuance. Section 4.2.10. Financing of Cash Payments in Merger. The Company shall have obtained financing for the aggregate cash payments to be made to stockholders of Revere in the Merger pursuant to the Company Financing Agreements. Section 4.2.11. Legal Opinions. The Company shall have received an opinion or opinions of counsel to the Purchaser, dated as of the Closing, covering the matters set forth in Exhibit 6. SECTION 5. TERMINATION Section 5.1. Termination. This Agreement may be terminated as follows: (a) by mutual written consent of the Company and the Purchaser; (b) by either party if the Closing shall not have occurred by May 28, 1997 (and the failure of the Closing to occur is not due to the breach by either party of this Agreement); (c) by either party if the Merger Agreement is terminated; (d) by either party (provided that the terminating party is not then in material breach of any representation, warranty, covenant or other agreement contained in this Agreement) in the event of a breach by the other party of any representation or warranty contained in this Agreement which cannot be or has not been cured within 30 days after the giving of written notice to the breaching Party of such breach and which breach would cause (i) in the case of a breach by the Company, the conditions set forth in Section 4.1.1 not to be satisfied (assuming the Closing were to occur on the date of such termination), and (ii) in the case of a breach by the Purchaser, the conditions set forth in Section 4.2.2 not to be satisfied (assuming the Closing were to occur on the date of such termination); or (e) by either party (provided that the terminating party is not then in material breach of any representation, warranty, covenant or other agreement contained in this Agreement) in the event of a material breach by the other party of any covenant or agreement contained in this Agreement which cannot be or has not been cured within 30 days after the giving of written notice to the breaching party of such breach; or (f) by either party (provided that the terminating party is not then in material breach of any representation, warranty, covenant or other agreement contained in this Agreement) in the event any court of competent jurisdiction in the United States or some other governmental body or regulatory authority shall have issued an order permanently restraining, enjoining or otherwise prohibiting the sale of the Shares and such order shall have become final and nonappealable; provided that the party seeking to terminate this Agreement pursuant to this Section 5.1(f) shall have used all reasonable efforts to remove such order; or (g) by either party, if the sale of the Shares, the issuance of shares of Common Stock in the Merger and the Charter Amendment shall have been voted on by stockholders of the Company and the vote shall not have been sufficient to satisfy the conditions set forth in Sections 4.1.11 and 4.2.8. Section 5.2. Effect of Termination. In the event of the termination of this Agreement pursuant to Section 5.1, this Agreement shall forthwith become void and have no effect, without any liability on the part of any party hereto, other than the provisions of Sections 3.6, 3.9(b), 5.2, 5.3 and 6.1, which shall survive any such termination. Nothing contained in this Section 5.2 shall relieve any party from liability for any willful breach of this Agreement. Section 5.3. Termination Fee. The Company hereby agrees that if the Merger Agreement (or any similar agreement entered into by the Company (and/or one or more of its affiliates) and Revere (or one or more of its affiliates) which contemplates a business combination involving the Company and Revere or sale of a majority of the equity interests or assets of the Company or Revere to the other) is terminated and, in connection with such termination, the Company (or any of its affiliates) receives a termination or similar fee (a "Termination Fee"), the Company shall pay to the Purchaser, on the date a Termination Fee is paid to the Company (or such affiliates), a cash fee in an amount equal to 20% of the aggregate Termination Fee, payable in immediately available funds to an account specified by the Purchaser. SECTION 6. MISCELLANEOUS Section 6.1. Expenses and Indemnification. (a) The Company hereby agrees to pay or reimburse the Purchaser and its affiliates for all out-of-pocket expenses (including the reasonable fees and disbursements of legal counsel and investment and other advisors and consultants and expenses incurred in connection with the preparation of the letter agreement dated April 27, 1996 (the "Commitment Letter"), this Agreement and the Ancillary Agreements) incurred by any of them in connection with the Purchaser's consideration of various proposed financing and other transactions between the Purchaser and/or its affiliates and the Company and the transactions referred to herein, including, without limitation, the transactions contemplated hereby and by the Merger Agreement, whether incurred before or after the date hereof and whether or not such transactions are made or effected; provided that the aggregate of such amounts shall not exceed $1,500,000 and the Company shall not be obligated to make such payment or reimbursement prior to the earlier of (i) the Closing Date and (ii) termination of this Agreement. Any such amounts shall be paid or reimbursed promptly after invoicing thereof by the Purchaser which invoicing shall be accompanied by supporting detail evidencing such expenses. (b) In addition to the foregoing the Company agrees to indemnify and hold harmless the Purchaser and any of its officers, partners, members, directors, employees and affiliates (direct or indirect) from and against all actions, suits, proceedings (including any investigations or inquiries), claims, losses, damages, liabilities or expenses of any kind or nature whatsoever ("Claims") which may be incurred by or asserted against or involve the Purchaser, or any of its officers, partners, members, directors, employees or affiliates (direct or indirect) as a result of any third party claim arising out of the transactions contemplated hereby and, upon demand by the Purchaser or any such officer, partner, member, director, employee or affiliates, pay or reimburse any of the Purchaser or such officers, partners, members, directors, employees or affiliates for any reasonable out-of-pocket legal or other expenses, and other internal costs incurred by the Purchaser or its officers, partners, members, directors, employees or affiliates (direct or indirect) in connection with the investigation, defending or preparing to defend any such Claim, provided that the foregoing indemnity shall not apply to the extent any Claim arises from any material breach by the Purchaser of this Agreement or the gross negligence or willful misconduct of an indemnified party. (c) Each person entitled to indemnification under Section 6.1(b) (each an "Indemnified Party") shall give notice to the Company promptly after such Indemnified Party has actual knowledge of any Claim as to which indemnity may be sought, and shall permit the Company to assume the defense of any such Claim; provided, that counsel for the Company, who shall conduct the defense of such Claim, shall be approved by the Indemnified Party (which approval shall not be unreasonably withheld) and the Indemnified Party may participate in such defense at such party's expense (unless the Indemnified Party shall have reasonably concluded that there is a conflict of interest between the Indemnified Party and the Company in such action, in which case the reasonable fees and expenses for one such counsel for all Indemnified Parties (and one local counsel) shall be at the expense of the Company), and provided, further, that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Company of its obligations under Section 6.1(b) or this Section 6.1(c) unless the Company is materially prejudiced thereby. The Company may not, in the defense of any such Claim, except with the consent of each Indemnified Party (which consent shall not be unreasonably withheld or delayed), consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof thegiving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect of such Claim. Each Indemnified Party shall furnish such information regarding itself or the Claim in question as the Company may reasonably request in writing and as shall be reasonably required in connection with the defense of such Claim. Section 6.2. Survival of Agreements. The representations and warranties (i) of the Company set forth in Sections 2.1.1, 2.1.2, 2.1.3, 2.1.4, 2.1.5, 2.1.7, 2.1.12, 2.1.15 and 2.1.17 hereof and (ii) of the Purchaser set forth in Sections 2.2.1, 2.2.2, 2.2.3, 2.2.4, 2.2.6, 2.2.7 and 2.2.8 shall survive the Closing indefinitely. None of the other agreements, representations or warranties made in this Agreement, or any certificate or instrument delivered to the Purchaser pursuant to or in connection therewith shall survive the Closing; provided, however, that this Section 6.2 shall not limit any (x) covenant or agreement of the parties hereto which by its terms contemplates performance after the Closing Date or (y) rights or remedies otherwise available to the Company or the Purchaser at law or in equity; provided, further, that the Confidentiality Agreement shall survive any termination of this Agreement. Section 6.3. Parties in Interest. All representations, covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not; provided that the Purchaser shall not assign its rights to purchase shares of Common Stock under this Agreement to any non affiliate without first obtaining the prior written consent of the Company, which consent may be withheld by the Company in its sole discretion. Section 6.4. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be delivered in person or mailed by certified or registered mail, return receipt requested, or sent by facsimile transmission, addressed as follows: (a) if to the Company: Provident Companies, Inc. 1 Fountain Square Chattanooga, Tennessee 37402 Attention: Chief Financial Officer Fax No.: (423) 755-2590 with a copy to: Alston & Bird 1201 W. Peachtree Street Atlanta, Georgia 30309 Attention: F. Dean Copeland, Esq. Fax No.: (404) 881-7777 (b) if to the Purchaser: Zurich Insurance Company Mythenquai 2 P.O. Box Ch-8022 Zurich, Switzerland Attention: General Counsel Fax No.: 011-411-202-1063 with copies to: Zurich Center Resource Limited One Chase Manhattan Plaza New York, New York 10005 Attention: General Counsel Fax No.: (212) 898-5002 Willkie Farr & Gallagher 153 East 53rd Street New York, New York 10022 Attention: Thomas M. Cerabino, Esq. Fax No.: (212) 821-8111 or, in any such case, at such other address or addresses as shall have been furnished in writing by such party to the others. All notices, requests, consents and other communications hereunder shall be deemed to have been duly given or served on the date on which personally delivered or on the date actually received, if sent by mail or telex, with receipt acknowledged. Section 6.5. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to conflicts of law principles thereof. Section 6.6. Entire Agreement. This Agreement, including the Schedules and Exhibits hereto, constitutes the sole and entire agreement of the parties with respect to the subject matter hereof. All Schedules and Exhibits hereto are hereby incorporated herein by reference. The Commitment Letter shall hereby be deemed to be terminated. Section 6.7. 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. Section 6.8. Amendments. This Agreement may not be amended or modified, and no provisions hereof may be waived, without the written consent of the Company and the Purchaser. Section 6.9. Severability. If any provision of this Agreement shall be declared void or unenforceable by any judicial or administrative authority, the validity of any other provision and of the entire Agreement shall not be affected thereby. Section 6.10. Titles and Subtitles. The titles and subtitles used in this Agreement are for convenience only and are not to be considered in construing or interpreting any term or provision of this Agreement. The term "date of this Agreement" and words of similar import (such as "date hereof") shall mean and refer to May 31, 1996. Section 6.11. Further Assurances. From and after the date of this Agreement, upon the request of the Purchaser or the Company, the Company and the Purchaser shall execute and deliver such instruments, documents and other writings as may be reasonably necessary or desirable to confirm and carry out and to effectuate fully the intent and purposes of this Agreement and the Preferred Shares. IN WITNESS WHEREOF, the Company and the Purchaser have executed this Agreement as of the day and year first above written. PROVIDENT COMPANIES, INC. By:/s/ Thomas R. Watjen Name: Thomas R. Watjen Title: Executive Vice President ZURICH INSURANCE COMPANY By:/s/ Steven M. Gluckstern Name: Steven M. Gluckstern Title: Representative EXHIBIT 1 Strategic Relationship Overview of Terms The strategic relationship described herein will be set forth in a "Marketing Agreement" entered into by the parties. The concepts listed below require further discussions to develop them fully, but it is contemplated that the Marketing Agreement would include the following: 1. Provident intends to continue to offer a wide range of Individual and Employee Benefit products to its customers, through multiple distributions channels. Provident would agree to utilize products developed by Zurich whenever possible to meet its customers' needs. In the Individual marketplace, these products opportunities may include term life, whole life, universal life, variable universal life, individual property and casualty insurance products, and fixed and variable annuities. When a "Zurich product" is sold, Provident would expect to receive consideration "normal and customary" for the business and would expect to have reasonable opportunity to participate as a reinsurer on this business. 2. Provident intends to expand its offerings of retirement/asset accumulation products to its Individual and Employee Benefits customers. It would be Provident's intent, depending on the products' design and features, to offer to its customers mutual funds and institutional asset management services offered by Zurich. As Provident considers integrating life and investment product features into its Disability products, Provident would intend to utilize Zurich's products, as appropriate, in these new product offerings. Provident would again expect "normal and customary" consideration when placing business in this capacity. 3. Zurich would agree to market Provident's Individual Disability product through its U.S. marketing channels whenever possible, including Kemper. The terms of such an agreement would be similar to those used in other "Corporate Agreements", where Zurich would receive consideration for acting as an intermediary. Provident would also intend to offer Zurich the opportunity to reinsure a portion of this business if appropriate. 4. Zurich and Provident would jointly explore opportunities to market Individual and Group Disability products outside the U.S. In general it would be expected that Provident would contribute its product and risk management expertise, while Zurich would contribute its local market knowledge and marketing capabilities. 5. Zurich and Provident would jointly explore opportunities which may exist in linking Group Long-Term Disability coverage with Workers Compensation coverage. Both companies recognize the potential market for a "24 hour" coverage and would commit the resources necessary to investigate whether a mutually acceptable opportunity may exist. 6. Zurich and Provident would continue to seek other opportunities to leverage each other's strengths, and to bring better value and service to both organizations' customers. This may include reinsurance transactions and potential investment management ventures. 7. If Provident elects to engage in a significant reinsurance transaction with respect to its Individual Disability block of business, Provident will give Zurich the right to provide such reinsurance on market terms. Provident agrees to offer to Zurich the opportunity to propose other reinsurance transactions and investment management arrangements and to consider such proposals in good faith. The strategic initiatives outlined above would not be finalized prior to the closing of the other "Investor Transactions" described in the letter agreement to which this Exhibit is attached. Provident and Zurich would however expect to refine the understanding noted above and have such an understanding documented in a general "Marketing Agreement". Each of Zurich and Provident would commit up to $1.5 million to a joint marketing/development program to fund the expenses and/or hire dedicated staff to pursue the relationship. EX-10.16 6 RELATIONSHIP AGREEMENT EXHIBIT 10.16 AMENDED AND RESTATED RELATIONSHIP AGREEMENT BETWEEN PROVIDENT COMPANIES, INC. AND ZURICH INSURANCE COMPANY DATED AS OF MAY 31, 1996. (attached) EXHIBIT 10.16 AMENDED AND RESTATED RELATIONSHIP AGREEMENT THIS AMENDED AND RESTATED RELATIONSHIP AGREEMENT (this "Agreement") is made and entered into as of May 31, 1996, by and between PROVIDENT COMPANIES, INC., a corporation organized and existing under the laws of the State of Delaware (the "Company"), and ZURICH INSURANCE COMPANY, a corporation organized and existing under the laws of Switzerland (the "Investor"). WHEREAS, on May 31, 1996 the parties hereto signed the original Relationship Agreement and such parties desire to amend and restate such Agreement as of such date; and WHEREAS, this Amended and Restated Relationship Agreement is being executed on November 27, 1996 as of May 31, 1996; NOW, THEREFORE, in consideration of the mutual warranties, representations, covenants and agreements set forth herein, the parties, intending to be legally bound, agree as follows: ARTICLE ONE DEFINITIONS As used in this Agreement and any amendments hereto, the following terms shall have the following meanings respectively: "Affiliate" shall have the meaning set forth in regulations of the SEC included in 17 C.F.R. ss. 230.405. "Beneficial owner" (and various derivations of such term such as "beneficially owned") shall have the meaning set forth in the regulations of the SEC included in 17 C.F.R. ss. 240.13d-3; provided that for purposes of this Agreement, any option, warrant, right, conversion privilege or arrangement to purchase, acquire or vote Company Voting Securities regardless of the time period during or at which it may be exercised and regardless of the consideration paid shall be deemed to give the holder thereof beneficial ownership of the Company Voting Securities to which it relates (excluding, however, First Offer Shares (as defined in the Amended and Restated Family Stockholder Agreement (as the same may be amended or supplemented from time to time, the "Family Agreement") to be dated as of the Closing (as defined in the Purchase Agreement) among the Investors and the holders of Family Shares (the "Family Stockholders") until such time as such First Offer Shares are acquired by the Investor or an affiliate thereof pursuant to the Family Agreement). Any Company Voting Securities which are subject to such options, warrants, rights, conversion privileges or other arrangements shall be deemed to be outstanding for purposes of computing the percentage of outstanding securities owned by such Person but shall not be deemed to be outstanding for the purpose of computing the percentage of outstanding securities owned by any other Person. "Common Stock" shall mean the $1.00 par value common stock of the Company and any security which is exchanged or substituted for such common stock. "Company Voting Securities" shall mean all classes of capital stock of the Company which are then entitled to vote generally in the election of directors and any securities exchanged or substituted for such classes of capital stock and any securities convertible into or exchangeable or exercisable for (whether or not presently convertible, exchangeable or exercisable) such classes of capital stock. For purposes of determining the amount or percentage of outstanding Company Voting Securities beneficially owned by a Person, and for purposes of calculating the aggregate voting power relating to such Company Voting Securities, securities that are deemed to be outstanding shall be included to the extent provided in the definition of "beneficial owner." "Effective Time" shall have the meaning set forth in the Merger Agreement (as defined below). "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Family Representatives" shall mean initially Hugh O. Maclellan, Jr., Charlotte M. Heffner, Kathrina H. Maclellan and The Maclellan Foundation, Inc. (the "Foundation"), or such other persons as shall have been appointed by written notice to the Company and the Investor as the representatives of the holders of the Family Shares for purposes of this Agreement; provided, however, that the number of Family Representatives shall not exceed four at any time. "Family Shares" shall mean any Company Voting Securities beneficially owned by the Foundation, trusts for the benefit of the Foundation or those members of the Maclellan family and other trusts and foundations identified on Schedule A attached hereto. "Initial Threshold" shall mean that percentage of the Outstanding Voting Power equal to the percentage of the Company Voting Securities beneficially owned by the Investor as of the Closing (as defined in the Purchase Agreement), after giving effect to the transactions contemplated by the Purchase Agreement and the Merger Agreement (as defined in the Purchase Agreement). "Outstanding Voting Power" shall mean total number of votes which may be cast in the election of directors of the Company at any meeting of stockholders of the Company if all Company Voting Securities then outstanding were present and voted at such meeting, other than votes that may be cast only by one class or series of stock (other than the Common Stock) or upon the happening of a contingency. "Purchase Agreement" shall mean that certain Common Stock Purchase Agreement, dated as of even date herewith, by and between the Company and the Investor, as the same may be amended. "Party" shall mean either the Company, on the one hand, or the Investor, on the other hand, and "Parties" shall mean the Company and the Investor. "Person" shall mean a natural person or any legal, commercial or governmental entity, such as, but not limited to, a corporation, general partnership, joint venture, limited partnership, limited liability company, trust, business association, group (within the meaning of Section 13(d)(3) of the Exchange Act), or any person acting in a representative capacity. "Purchase Agreement" shall mean the Amended and Restated Common Stock Purchase Agreement, entered into as of November 27, 1996 and dated as of May 31, 1996, by and between the Investor and the Company, as the same may be amended. "Qualifying Tender Offer" shall mean an offer to purchase or exchange for cash or other consideration any Company Voting Securities (whether pursuant to a tender offer within the meaning of Section 14(d) of the Exchange Act or otherwise) (i) which is made by or on behalf of the Company or (ii) which is made by or on behalf of any other Person and which is approved by the Board of Directors of the Company or not opposed by the Board of Directors of the Company by two business days prior to the expiration of such offer. "Registration Rights Agreement" shall mean the Amended and Restated Registration Rights Agreement, dated as of May 31, 1996, between the Investor and the Company, as the same may be amended. "SEC" shall mean the Securities and Exchange Commission. "Securities Act" shall mean the Securities Act of 1933, as amended. "Standstill Agreement" shall mean the Standstill Agreement, dated as of April 29, 1996, by and between the Company and Textron. "Subsidiary" shall mean any "Subsidiary" of the Company as defined in Regulation S-X under the Exchange Act. "Textron" shall mean Textron Inc. and its successors and assigns. "Textron Shares" shall mean (i) all of the shares of Common Stock issued to Textron in the Merger and (ii) any Company Voting Securities issued in respect of any subdivision, split or dividend on the shares of Common Stock described in subparagraph (i). ARTICLE TWO COVENANTS AND AGREEMENTS 2.1 Directors. (a) Effective as of the Closing, the Company shall take such action as may be necessary to increase by two the number of members of the Board of Directors of the Company and to elect to fill such newly created vacancies two persons designated by the Investor. So long as the Investor is the beneficial owner of Company Voting Securities representing 10% or more of the Outstanding Voting Power, the Investor shall be entitled to designate two persons to serve as directors of the Company. So long as the Investor and its Affiliates are the beneficial owners of Company Voting Securities representing 5% or more but less than 10% of the Outstanding Voting Power, the Investor shall be entitled to designate one person to serve as a director of the Company. In the event that the Investor and its Affiliates are the beneficial owners of Company Voting Securities representing less than 5% of the Outstanding Voting Power, the Investor shall not be entitled to designate any person to serve as a director of the Company. Each of the persons designated by the Investor pursuant to this Section 2.1(a) is referred to herein as an "Investor Designee." (b) The Company shall use all reasonable efforts to cause the election of the required number of Investor Designees to the Board of Directors of the Company including taking the following actions: (i) at each annual meeting of Company stockholders at which an Investor Designee's term as a director expires or at any other meeting of the Company's stockholders at which directors are to be elected, if the Investor is still entitled to designate one or more persons to serve as a director of the Company in accordance with this Agreement, the Investor Designees shall be included in the slate of nominees recommended by the Company's Board of Directors to the stockholders for election as directors, unless either (x) an Investor Designee requests not to be so included in the slate of nominees, in which case such Investor Designee shall not be so included, or (y) service by an Investor Designee as a director or his nomination for election as a director is violative of applicable law or regulation (provided that, in such case, the Investor shall be provided an opportunity to designate an alternate person to serve as a director). and (ii) in the event that an Investor Designee is unable to serve, or once having commenced to serve, is removed or withdraws from the Board of Directors of the Company, the Investor will have the right to designate such person's replacement and the Company agrees to take all reasonable action within its power to cause the election of the substitute Investor Designee to the Board of Directors of the Company as soon as possible following such person's designation. (c) In the event that, any time after an annual meeting of Company stockholders in connection with which the Investor was entitled to designate two Investor Designees and such Investor Designees were elected as directors, such Investor Designees are still serving as directors, and prior to the next annual meeting of Company stockholders the Investor shall beneficially own Company Voting Securities representing less than 10% but 5% or more of the Outstanding Voting Power, then, at the request of the Company (provided Investor at the time of such request shall still beneficially own Company Voting Securities representing less than 10% but 5% or more of the Outstanding Voting Power), the Investor shall use all reasonable efforts to cause one of the Investor Designees then in office to resign as a director. In the event that, any time after an annual meeting of Company stockholders in connection with which the Investor was entitled to designate one or more Investor Designees, such Investor Designees were elected as directors and such Investor Designees are still serving as directors at such time prior to the next annual meeting of Company stockholders when the Investor shall beneficially own Company Voting Securities representing less than 5% of the Outstanding Voting Power, then, at the request of the Company (provided Investor at the time of such request still beneficially owns Company Voting Securities representing less than 5% of the Outstanding Voting Power), the Investor shall use all reasonable efforts to cause all Investor Designees then in office to resign as directors. (d) At the request of the Investor, the Company shall cause the Investor Designees then required to be included in the slate of nominees recommended by the Company's Board of Directors for the election to the Company's Board of Directors to be elected to serve on the Board of Directors of each Subsidiary. (e) So long as the Investor beneficially owns Company Voting Securities representing 5% or more of the Outstanding Voting Power, the Company shall effect all action necessary to appoint one Investor Designee to the Executive Committee of the Board of Directors (or other committee or group performing similar functions) (the "Executive Committee") of the Company and each Subsidiary having such a committee or group on which an Investor Designee serves as a director. (f) If after the Closing, the Company takes corporate action to classify the Board of Directors of the Company, the Investor Designees (if the Investor is then entitled to designate two directors) shall be designated to serve on different classes. (g) So long as the Investor is entitled to designate at least one member of the Board of Directors of the Company, during any period that the requisite number of Investor Designees are not members of the Board of Directors, the Company shall cause one person (to be designated by the Investor in its sole discretion) to be permitted to attend all meetings of the Board of Directors of the Company and all meetings of the Executive Committee of the Company. The Company shall take all action necessary to ensure that (i) the Investor is notified of all meetings of the Board of Directors in accordance with and at the times prescribed by the notice provisions of the by-laws of the Company applicable to directors of the Company and (ii) that the Investor is furnished with all information and materials furnished to directors of the Company in connection with any meetings of the Board of Directors or the Executive Committee at the time such information and materials are furnished to the directors. 2.2 Acquisition of Voting Securities. (a) Neither the Investor or any of its Affiliates shall, directly or indirectly, in any manner, acquire any Company Voting Securities, if, after giving effect to such acquisition, the Investor and its Affiliates would beneficially own, in the aggregate, Company Voting Securities representing more than the Initial Threshold; provided, however, that this Section 2.2 shall not prohibit the acquisition by the Investor or any of its Affiliates of any Company Voting Securities the acquisition of which would cause the Investor and its Affiliates to beneficially own Company Voting Securities in excess of the Initial Threshold if (i) such securities (x) are Family Shares, (y) are other than Family Shares if the Investor is unable to exercise the right of first offer set forth in Section 2 of the Family Agreement due to the restrictions set forth in clause (ii) of this Section 2.2(a) without giving effect to the proviso to such clause (ii) or (z) are purchased from Textron (provided that (1) the number of Company Voting Securities purchased from Textron do not exceed one-half of the Textron Shares and (2) the Investor or such Affiliate shall have first offered to the Family Representatives, on behalf of the holders of the Family Shares, a right to sell the same number of Company Voting Securities to the Investor or such Affiliate on the same terms as those offered to Textron, which offer shall not have been irrevocably accepted in full by each of the Family Representatives, on behalf of all of the holders of the Family Shares, within 15 business days after such notice is given to each of the Family Representatives, which acceptance shall identify the selling holders of Family Shares) and (ii) after giving effect to any such acquisition, the Investor and its Affiliates would beneficially own Company Voting Securities representing not more than 40% of the Outstanding Voting Power; provided, further, that, notwithstanding the foregoing, the Investor and its Affiliates may acquire Family Shares as would result in the Investor and its Affiliates beneficially owning Company Voting Securities representing more than 40% of the Outstanding Voting Power if the Investor or its Affiliates first offer to purchase all of the issued and outstanding Company Voting Securities at the price offered to be paid for such Family Shares pursuant to either a tender offer to all holders of Company Voting Securities or a definitive merger agreement (provided, that if the Company's Board of Directors recommends that the holders of the Company Voting Securities accept such offer and tender their shares, such offer shall be made pursuant to a definitive merger agreement (or a tender offer followed by a merger) on the same terms). (b) No provision contained in this Agreement shall require the Investor or any of its Affiliates to dispose of any Company Voting Securities if the aggregate percentage of the Outstanding Voting Power represented by Company Voting Securities beneficially owned by the Investor and its Affiliates is increased as a result of a recapitalization of the Company or a repurchase of securities by the Company or any other action taken by the Company or any of its Affiliates (other than the Investor or its Affiliates). (c) The agreements of the Investor set forth in this Section 2.2 shall terminate on the seventh anniversary of the Closing and neither the Investor nor any of its Affiliates shall have any further obligations or liabilities hereunder or in respect hereof. 2.3 Exercise of Right of First Refusal. So long as the Investor and its Affiliates have complied with the provisions of Section 2.2(a) hereof, (a) the Company shall not exercise any of the rights set forth in Section 3.4 of the Standstill Agreement with respect to any proposed sale or transfer of Company Voting Securities by Textron or any of its Subsidiaries (as defined in the Standstill Agreement) to the Investor or any of its Affiliates and (b) if the Company receives notice of a proposed sale or transfer of the Textron Shares to any Person other than the Investor or any of its Affiliates and if requested in writing by the Investor, the Company shall take such actions as are within its control to cause the Investor or an Affiliate thereof designated by the Investor to be the Person designated by the Company to purchase such securities in accordance with the provisions of Section 3.4(b) of the Standstill Agreement; provided that any such request by the Investor shall be accompanied by evidence reasonably satisfactory to the Company that any such sale or transfer to the Investor or its Affiliates will comply with Section 2.2(a). 2.4 Sales of Company Voting Securities. During the period commencing on the Closing and ending on the seventh anniversary thereof, neither the Investor nor any of its Affiliates shall sell, transfer, assign or otherwise dispose of ("Transfer") its beneficial interest in any Company Voting Securities, except: (a) to the Company or to any Person approved in a resolution adopted by a majority of the Board of Directors of the Company; (b) in conversion, exchange or otherwise pursuant to the terms of such Company Voting Securities; (c) in a merger or consolidation in which the Company is acquired, in a plan of liquidation of the Company, or pursuant to a Qualifying Tender Offer; (d) pursuant to a bona fide underwritten public offering including a public sale pursuant to a registration under the Registration Rights Agreement; (e) pursuant to Rule 144 under the Securities Act; (f) to the Investor or an Affiliate of the Investor, provided that such Affiliate shall expressly assume in a writing duly executed by it and delivered to the Company all of the obligations and restrictions contained in this Agreement pertaining to the Investor and shall agree to transfer such Company Voting Securities to the Investor or another Affiliate of the Investor if such Affiliate ceases to be an Affiliate of the Investor; (g) to Insurance Partners, L.P. or Insurance Partners Offshore (Bermuda), L.P. or one or more Affiliates of either of them (each, an "IP Entity" and collectively, the "IP Entities"), provided that (i) all voting rights with respect to such Company Voting Securities are retained by the Investor or an Affiliate thereof until the IP Entity holding such Company Voting Securities Transfers such Company Voting Securities in accordance with this Section 2.4 and (ii) each IP Entity acquiring such shares shall expressly assume in a writing duly executed by it and delivered to the Company the obligations and restrictions contained in this Section 2.4 pertaining to the Investor, provided, further, that notwithstanding any provision of this Section 2.4 to the contrary, with respect to the shares of Company Voting Securities (not to exceed 3,174,604 shares) acquired from the Investor by the IP Entities following the acquisition of such shares by the Investor or an Affiliate of the Investor pursuant to the Purchase Agreement (including any shares issued in respect of any subdivision, split or dividend on such shares, the "Original IP Shares"), (A) each IP Entity shall be permitted to Transfer its beneficial interest in Original IP Shares free and clear of any restrictions or obligations contained in this Section 2.4 if such Transfer is required pursuant to the terms of any of the documents, instruments or agreements (the "Loan Documentation") entered into in connection with the financing of the purchase by any of the IP Entities of such Original IP Shares (a "Financing") and (B) nothing contained in this Section 2.4 shall restrict the ability of any lender providing Financing from exercising any remedies provided for in the Loan Documentation applicable to such Financing, including, without limitation, Transferring any Original IP Shares to which such Financing relates free and clear of any of the restrictions and obligations contained in this Section 2.4; and (h) in any other manner, provided that prior to making any offer to sell, sale or other transfer to any Person pursuant to this clause (h) of Company Voting Securities representing beneficial ownership of more than two percent (2%) of the Outstanding Voting Power, the Investor shall give the Company the opportunity to purchase, or to designate an alternative purchaser of, such Company Voting Securities in the following manner: (i) The proposed transferor of such Company Voting Securities shall give to the Company written notice (the "Transfer Notice") of the proposed transfer, specifying the proposed transferee, the number of Company Voting Securities proposed to be disposed of, the proposed consideration to be received in exchange therefor, and the other material terms of the proposed transfer. (ii) The Company shall have the right, exercisable by written notice given to the Person which gave the Transfer Notice within seven (7) business days after receipt of such Notice, to purchase (or to cause another Person designated by the Company to purchase) all, but not less than all, of the Company Voting Securities specified in such Notice for cash at the purchase price set forth therein. If the consideration specified in the Transfer Notice includes any property other than cash, such purchase price shall be deemed to be the amount of any cash included as part of such consideration plus the value (as jointly determined by a nationally recognized investment banking firm selected by each Party or, in the event such firms are unable to agree, a third nationally recognized investment banking firm to be selected by the first two such firms) of such other property included in such consideration and the date on which the Company must exercise its right of first refusal shall be extended until five (5) business days after the determination of the value of property included in the consideration. (iii) If the Company exercises its right of first refusal hereunder, the closing of the purchase of the Company Voting Securities with respect to which such right has been exercised shall take place within five (5) business days after the Company gives notice of such exercise; provided that if any approval of or notice to any governmental authority or agency is required in connection with such purchase of Company Voting Securities, the parties shall use all reasonable efforts to obtain such approvals or to make such notices and the closing shall take place within two (2) business days after receipt of the last such approval and expiration of any required waiting periods. If the Company does not exercise its right of first refusal hereunder within the time specified for such exercise, the Person giving the Transfer Notice shall be free during the period of six months following the expiration of such time for exercise to sell the Company Voting Securities specified in such Notice to any Person for the consideration specified therein (or at any price in excess thereof). ARTICLE THREE MISCELLANEOUS 3.1 Further Assurances. From time to time after the execution of this Agreement, as and when requested by the Company and the Investor and to the extent permitted by Delaware law, the Parties shall take or cause to be taken such further or other action as shall be necessary to carry out the purposes of this Agreement. 3.2 Effectiveness of Agreement. The respective rights and obligations of the Parties under this Agreement shall arise from and after the Closing. 3.3 Remedies. The Parties recognize and hereby acknowledge that it may be difficult to accurately measure the amount of damages that would result to a Party by reason of a failure of the other Party to perform any of the obligations imposed on it by this Agreement. The Parties accordingly agree that each such Party shall be entitled to an injunction 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, in addition to any other remedies to which such Party may be entitled at law or in equity in accordance with this Agreement. 3.4 Notices. Any notices or other communications required or permitted under this Agreement shall be effective only if it is in writing and delivered personally, by facsimile transmission, or by registered or certified mail, postage pre-paid, addressed as follows: The Company: Provident Companies, Inc. 1 Fountain Square Chattanooga, Tennessee 37402 Telecopy: (423) 755-2590 Attention: Chief Financial Officer Copy to Counsel: Alston & Bird One Atlantic Center 1201 West Peachtree Street Atlanta, Georgia 30309-3424 Telecopy: (404) 881-7777 Attention: F. Dean Copeland The Investor: Zurich Insurance Company Mythenquai 2 P.O. Box Ch-8022 Zurich, Switzerland Telecopy: 011-411-205-1063 Attention: General Counsel With Copies to: Zurich Center Resource Limited One Chase Manhattan Plaza New York, New York 10005 Telecopy: (212) 898-5002 Attention: General Counsel Willkie Farr & Gallagher One Citicorp Center 153 East 53rd Street New York, New York 10022 Telecopy: (212) 821-8111 Attention: Thomas M. Cerabino, Esq. Family Stockholders: Hugh O. Maclellan, Jr. Suite 501 Provident Building One Fountain Square Chattanooga, TN 37402 Telephone: (423)755-8141 Facsimile: (423)755-1640 A.S. MacMillan Team Resources Suite 425 River Edge One 5500 Interstate North Parkway Atlanta, GA 30328 Telephone: (770)955-5135 Facsimile: (770)955-1602 Charlotte M. Heffner 3655 Randall Hall, NW Atlanta, GA 30327 Telephone and Facsimile: (404)233-7238 Kathrina H. Maclellan 125 Fairy Trail Lookout Mountain, Tennessee 37350 With a Copy To: King & Spalding 120 West 45th Street New York, NY 10036 Telephone: (212) 556-2100 Facsimile: (212) 556-2222 Attention: E. William Bates, II or such other address as shall be furnished in writing by any of the Parties. Any such notice or communication shall be deemed to have been given as of the date so personally delivered or mailed. 3.5 Amendments. This Agreement may be amended by a subsequent writing signed by both Parties upon the approval of each of the Parties. 3.6 Counterparts. This Agreement may be executed in two or more counterparts all of which shall be one and the same Agreement and shall become effective when one or more counterparts have been signed by each Party and delivered to the other Party. 3.7 Headings. The headings in this Agreement are for convenience only and shall not affect the construction or interpretation of this Agreement. 3.8 Successors and Assigns. All terms and conditions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by any successor to the Investor and any successor to the Company. Except as otherwise provided in this Section 3.8, any assignment of the rights and obligations of the Parties under this Agreement shall be effective upon a written agreement signed by all the Parties. 3.9 Severability. If any provision of this Agreement shall be held to be illegal, invalid or unenforceable, such illegality, invalidity or unenforceability shall attach only to such provision and shall not in any manner affect or render illegal, invalid or unenforceable any other provision of this Agreement, and this Agreement shall be carried out as if any such illegal, invalid or unenforceable provision were not contained herein. 3.10 Entire Agreement. This Agreement constitutes the entire understanding between and among the Parties with respect to the subject matter hereof and shall supersede any prior agreements and understandings among the Parties with respect to such subject matter. 3.11 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to conflicts of law principles thereof. 3.12 No Third Party Beneficiaries. Except for the Family Representatives solely with respect to the provisions of Section 2.2 applicable to the holders of Family Shares, this Agreement is not intended to confer upon any Person any rights or remedies hereunder. IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be duly executed and delivered as of the date above written. PROVIDENT COMPANIES, INC. By: /s/ Thomas R. Watjen Name: Thomas R. Watjen Title: Executive Vice President ZURICH INSURANCE COMPANY By: /s/ Steven M. Gluckstern Name: Steven M. Gluckstern Title: Representative SCHEDULE A
SHARES OWNED AS OF FAMILY SHAREHOLDERS 3/4/96 ------------------- ------------ Suntrust Trust, D. Porter Jr., K.H. Maclellan & R.H. Maclellan, TTEES UAW R.J. Maclellan for R.L. Maclellan Family Trust (#2151) 538,345 Suntrust Trust, D. Porter Jr., K.H. Maclellan & R.H. Maclellan, TTEES UAW R.J. Maclellan for R.L. Maclellan Family Trust Inv. Inc. (#215109) 116,425 Suntrust Trust, H.O. Maclellan Jr., C.M. Heffner & T.H. McCallie III, TTEES UAW R.J. Maclellan Tr. for H.O. Maclellan Sr. Fam. (#2152) 522,615 Suntrust Trust, H.O. Maclellan Jr., C.M. Heffner & T.H. McCallie III, TTEES UAW R.J. Maclellan Tr. for H.O. Maclellan Sr. Fam. Inv. Inc. (#215209) 120,675
SHARES OWNED AS OF FAMILY SHAREHOLDERS 3/4/96 ------------------- ------------ Suntrust Trust, D. Porter Jr., K.H. Maclellan & R.H. Maclellan, TTEES UAW Cora L. Maclellan Tr. For R.L. Maclellan Fam. (#2155) 535,820 Suntrust Trust, D. Porter Jr., K.H. Maclellan & R.H. Maclellan, TTEES UAW Cora L. Maclellan Tr. For R.L. Maclellan Fam. Inv. Inc. (#215509) 97,520 Suntrust Trust, H.O. Maclellan Jr., C.M. Heffner & T.H. McCallie III, TTEES UAW Cora L. Maclellan for H.O. Maclellan Sr. Fam. Tr. (#2156) 518,695 Suntrust Trust, H.O. Maclellan Jr., C.M. Heffner & T.H. McCallie III, TTEES UAW Cora L. Maclellan for H.O. Maclellan Sr. Fam. Tr. Inv. Inc. (#215609) 91,110 Suntrust Trust, H.O. Maclellan Jr., D. Porter Jr. & K.H. Maclellan, TTEES for R.J. Maclellan Trust for the Maclellan Foundation Inc. (#2150) 3,470,123
SHARES OWNED AS OF FAMILY SHAREHOLDERS 3/4/96 ------------------- ------------ Suntrust Trust, H.O. Maclellan Jr., D. Porter Jr. & K.H. Maclellan, TTEES for Cora L. Maclellan Trust for the Maclellan Foundation Inc. (#2154) 34,538 The Maclellan Foundation Inc. 8,115,514 Christian Education Charitable Trust 711,100 H.O. Maclellan Jr., C.M. Heffner, Henry A. Henegar, Lee S. Anderson, Frank A. Brock TTEES U/A Dtd 4/23/93, Hugh & Charlotte Maclellan Charitable Trust 392,706 Helen M. Tipton Charitable Trust 1,565,842 Estate of Hugh O. Maclellan Sr. 50,000
SHARES OWNED AS OF FAMILY SHAREHOLDERS 3/4/96 ------------------- ------------ Mrs. Charlotte F. Maclellan 390,725 C.M. Heffner, H.O. Maclellan Jr. & US Tr. Co. of FL TTEES UTA Dtd 8/2/52 with C.F. Maclellan for the Primary Benefit of Charlotte M. Heffner 67,200 J.P. Gaither, H.O. Maclellan Jr. & C.M. Heffner, TTEES UTA Dtd 6/2/52 with C.F. Maclellan for H.O. Maclellan Jr. 69,200 Hugh O. Maclellan Jr. & Charlotte M. Heffner Co-TTEES U/A H.O. Maclellan Sr. FBO Great-grandchildren 60,000 Mrs. Kathrina H. Maclellan 1,389,344 Trust U/W Anne Maclellan Munford (Cede & Co.) 585,000 US Trust Company of NY, Successor TTEE for Lara L. Munford U/A with Kathrina H. Maclellan Dtd 8/5/76 2,000
SHARES OWNED AS OF FAMILY SHAREHOLDERS 3/4/96 ------------------- ------------ US Trust Company as Corporate TTEE Charitable Remainder Unitrust of Kathrina H. Maclellan 8/11/76 50,000 Suntrust Trust, Trustee UAW Robert Howze Maclellan Dtd 9/22/88 (US-TTEE 249,507; ANB-DTC 19,523) 259,230 Suntrust Trust, C/F J.F. Decosimo & J.N. Irvine, Co-TTEES UAW Robert H. Maclellan for Heather Howze Maclellan (ST-Summit) 2,397 Suntrust Trust, C/F J.F. Decosimo & J.N. Irvine, Co-TTEES UAW Robert H. Maclellan for Ian Llewellyn Maclellan (ST-Summit) 2,397 Trust for R.L. Maclellan & K.H. Maclellan Foundation U/A Mrs. Kathrina H. Maclellan Dtd 1/4/73 (Cede & Co.) 45,416 K.H. Maclellan & US Trust Company of NY, TTEES for Second Charitable Remainder Unitrust of K.H. Maclellan Dtd 12/17/81 Their Successor in Tr. & Assign 27,500
SHARES OWNED AS OF FAMILY SHAREHOLDERS 3/4/96 ------------------- ------------ Hugh O. Maclellan Jr. 827,150 Hugh O. Maclellan Jr. & Suntrust Bank TTEES UTA 12/08/48 for Hugh O. Maclellan Jr. 299,916 Hugh O. Maclellan Jr. TTEE FBO Catherine H. Maclellan Dtd 11/19/66 UTS H.O. Maclellan 51,091 Hugh O. Maclellan Jr. TTEE FBO Daniel O. Maclellan Dtd 7/8/68 UTA H.O. Maclellan Sr. 51,060 Hugh O. Maclellan Jr. TTEE FBO Christopher H. Maclellan UTA H.O. Maclellan Sr. 47,435
SHARES OWNED AS OF FAMILY SHAREHOLDERS 3/4/96 ------------------- ------------ H.O. Maclellan Jr. & Suntrust Trust, TTEES UITA of H.O. Maclellan Sr. FBO Catherine H. Maclellan & Her Descs Dtd 5/29/70 (#4629) 100,612 H.O. Maclellan Jr. & Suntrust Trust, TTEES UITA of H.O. Maclellan Sr. FBO Daniel O. Maclellan & His Descs Dtd 5/29/70 (#4630) 100,523 H.O. Maclellan Jr. & Suntrust Trust, TTEES UITA of H.O. Maclellan Sr. FBO Christopher H. Maclellan & His Descs Dtd 5/29/70 (#4631) 100,715 Hugh O. Maclellan Jr. & Charlotte M. Heffner, TTEES for Hugh O. Maclellan Sr. Dtd 1/31/67 1,740 C.F. Maclellan, H.O. Maclellan Jr., L.S. Anderson & J.C. Stophel, TTEES of the H.O.M. Sr. Char. Inc. Tr. Dtd 12/31/76 FBO Elizabeth Maclellan 158,190 H.O. Maclellan Jr., C.M. Heffner, L.S. Anderson & J.C. Stophel, TTEES of the H.O. Maclelland Sr. Dtd 12/31/76 FBO Christoper H. Maclellan 136,665
SHARES OWNED AS OF FAMILY SHAREHOLDERS 3/4/96 ------------------- ------------ H.O. Maclellan Jr., C.M. Heffner, L.S. Anderson & J.C. Stophel, TTEES of the H.O. Maclelland Sr. Dtd 12/31/76 FBO Catherine H. Maclellan 136,665 H.O. Maclellan Jr., C.M. Heffner, L.S. Anderson & J.C. Stophel, TTEES of the H.O. Maclelland Sr. Dtd 12/31/76 FBO Daniel O. Maclellan 136,665 H.O. Maclellan Jr., C.M. Heffner, L.S. Anderson & J.C. Stophel, TTEES of the H.O. Maclellan Sr. Dtd 12/31/76 FBO Elizabeth Maclellan 136,670 Hugh O. Maclellan Jr., TTEE UTA Dtd 12/15/83 FBO Elizabeth Maclellan 3,320 Hugh O. Maclellan Jr. C/F Elizabeth Maclellan UTUGTMA 5,329 Hugh O. Maclellan Jr. C/F Hugh Owner III UTUGTMA 5,079
SHARES OWNED AS OF FAMILY SHAREHOLDERS 3/4/96 ------------------- ------------ Hugh O. Maclellan Jr. C/F Morgan Christopher Maclellan UTUGTMA 5,079 Christopher Hugh Maclellan (52+120, nominee name) 44,059 Christopher Hugh Maclellan, Cust. for Morgan Christopher Maclellan 688 Christopher Hugh Maclellan, Cust. for Hugh Owner Maclellan III 688 Christopher Hugh Maclellan, Cust. for Robert Browne Baclellan 688
SHARES OWNED AS OF FAMILY SHAREHOLDERS 3/4/96 ------------------- ------------ Susan Maclellan (352 Nominee name) 3,652 Daniel Owen Maclellan 29,800 Daniel O. Maclellan Cust. for Jacqueline Hannah Maclellan 688 Leslie Stophel Maclellan (746 nominee name) 1,518 Catherine Maclellan Heald 40,617 Catherine Maclellan Heald C/F Frances Anne Heald 3,130 Catherine Maclellan Heald C/F Hallie Elizabeth Heald 2,806
SHARES OWNED AS OF FAMILY SHAREHOLDERS 3/4/96 ------------------- ------------ Catherine Maclellan Heald C/F Hamilton Reed Heald 688 Haryl Heald 1,432 Nancy Browne Maclellan 24,964 Nancy B. Maclellan & John P. Gaither, TTEES UTA Hugh O. Maclellan Jr. Dtd 1/31/67 17,600 Charlotte Maclellan Heffner & NationsBank as Co-TTEES U/A H.O. Maclellan Sr. Dtd 9/8/72 FBO Richard L. Heffner Jr. 74,170 Charlotte Maclellan Heffner & NationsBank as Co-TTEES U/A H.O. Maclellan Sr. Dtd 9/8/72 FBO Richard L. Heffner Jr. 74,170 H.O. Maclellan Jr., C.M. Heffner, L.S. Anderson & J.C. Stophel, TTEES UTA H.O. Maclellan Sr. Dtd 12/31/76 FBO Richard L. Heffner Jr. 136,665
SHARES OWNED AS OF FAMILY SHAREHOLDERS 3/4/96 ------------------- ------------ H.O. Maclellan Jr., C.M. Heffner, L.S. Anderson & J.C. Stophel, TTEES UTA H.O. Maclellan Sr. Dtd 12/31/76 FBO Thomas M. Heffner 136,670 Charlotte M. Heffner & Suntrust Bank CO-TTEES UTA Hugh O. Maclellan Sr. 12/09/48 FBO Charlotte M. Heffner 294,695 Charlotte M. Heffner and Richard L. Heffner Sr. TTEES FBO Richard L. Heffner Sr. UA Dtd 1/26/95 300,000 Charlotte M. Heffner 457,455 Richard L. Heffner Sr. 9,482
SHARES OWNED AS OF FAMILY SHAREHOLDERS 3/4/96 ------------------- ------------ Richard L. Heffner, Jr. 45,499 Christina M. Heffner 3,172 Thomas Maclellan Heffner 42,349 Irrevocable Trust 12/3/64 U/A H.O. Maclellan Sr. FBO Thomas Maclellan Heffner, R.L. Heffner Sr., Trustee 11,675 Irrevocable Trust 6/1/62 U/A H.O. Maclellan Sr. FBO Richard L. Maclellan Jr., R.L. Heffner Sr., Trustee 11,675 Jean B. (Mrs. Jere) Tipton 61,000 ------------ TOTAL SHARES 23,967,036
EX-10.17 7 REGISTRATION RIGHTS AGREEMENT EXHIBIT 10.17 AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT BETWEEN PROVIDENT COMPANIES, INC. AND ZURICH INSURANCE COMPANY DATED AS OF MAY 31, 1996. (attached) EXHIBIT 10.17 PROVIDENT COMPANIES, INC. AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT, dated as of May 31, 1996, between Zurich Insurance Company, a Swiss corporation ("Zurich" and, together with any purchaser of Common Stock (as defined below) pursuant to the Stock Purchase Agreement (as defined below) collectively, the "Investor"), and Provident Companies, Inc., a Delaware corporation (the "Company"). R E C I T A L S WHEREAS, on May 31, 1996 the aprties hereto signed the original Registration Rights Agreement as such parties desire to amend and restate such Agreement as of such date; and WHEREAS, this Amended and Restated Registration Rights Agreement is being executed on November 27, 1996 as of May 31, 1996; and WHEREAS, the Investor has, pursuant to the terms of an Amended and Restated Common Stock Purchase Agreement, entered into as of November 27, 1996 and dated as of May 31, 1996, by and among the Company and the Investor (as the same may be amended or supplemented from time to time, the "Stock Purchase Agreement"), agreed to purchase shares of Common Stock, par value $1.00 per share, of the Company (the "Common Stock"); and WHEREAS, the Company has agreed, as a condition precedent to the Investor's obligations under the Stock Purchase Agreement, to grant the Investor certain registration rights; and WHEREAS, the Company and the Investor desire to define the registration rights of the Investor on the terms and subject to the conditions herein set forth. NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the parties hereby agree as follows: 1. DEFINITIONS As used in this Agreement, the following terms have the respective meanings set forth below: Commission: shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act; Exchange Act: shall mean the Securities Exchange Act of 1934, as amended; Existing Holder: shall mean Textron, Inc. or any member of the Family Group, and shall include any transferees thereof who are entitled to registration rights from the Company pursuant to agreements between the Company and Textron, Inc. or the Company and the members of the Family Group. Family Group: shall mean the stockholders of the Company set forth on Exhibit A hereto. Holder: shall mean any holder of Registrable Securities; Initiating Holder: shall mean any Holder or Holders who in the aggregate are Holders of more than 10% of the then outstanding Registrable Securities; Person: shall mean an individual, partnership, joint-stock company, corporation, trust or unincorporated organization, and a government or agency or political subdivision thereof; register, registered and registration: shall mean a registration effected by preparing and filing a registration statement in compliance with the Securities Act (and any post-effective amendments filed or required to be filed) and the declaration or ordering of effectiveness of such registration statement; Registrable Securities: shall mean (A) the shares of Common Stock issued under the Stock Purchase Agreement, (B) any additional shares of Common Stock acquired by the Investor and (C) any stock of the Company issued as a dividend or other distribution with respect to, or in exchange for or in replacement of, the shares of Common Stock referred to in clause (A) or (B); provided, that Registrable Securities shall not include (i) securities with respect to which a registration statement with respect to the sale of such securities has become effective under the Securities Act and all such securities have been disposed of in accordance with such registration statement, or (ii) such securities as are actually sold pursuant to Rule 144 (or any successor provision thereto) under the Securities Act; Registration Expenses: shall mean all expenses incurred by the Company in compliance with Sections 2(a), (b) and (c) hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company, fees and expenses of one counsel for all the Holders, blue sky fees and expenses and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company, which shall be paid in any event by the Company); Security, Securities: shall have the meaning set forth in Section 2(1) of the Securities Act; Securities Act: shall mean the Securities Act of 1933, as amended; and Selling Expenses: shall mean all underwriting discounts and selling commissions applicable to the sale of Registrable Securities and all fees and disbursements of counsel for each of the Holders other than fees and expenses of one counsel for all the Holders. 2. REGISTRATION RIGHTS (a) Requested Registration. (i) Request for Registration. If the Company shall receive from an Initiating Holder, at any time, a written request that the Company effect any registration with respect to all or a part of the Registrable Securities, the Company will: (A) promptly give written notice of the proposed registration, qualification or compliance to all other Holders; and (B) as soon as practicable, use its reasonable best efforts to effect such registration (including, without limitation, the execution of an undertaking to file post-effective amendments, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request received by the Company within 10 business days after written notice from the Company is given under Section 2(a)(i)(A) above; provided that the Company shall not be obligated to effect, or take any action to effect, any such registration pursuant to this Section 2(a): (u) Solely with respect to underwritten registrations requested pursuant to this Agreement, if the Company shall have previously effected an underwritten registration with respect to Registrable Securities pursuant to Section 2(b) hereof, the Company shall not be required to effect any underwritten registration pursuant to this Section 2(a) until a period of 180 days shall have elapsed from the effective date of the most recent such previous registration; provided that if, in the most recent such previous registration, participation pursuant to Section 2(b) hereof shall not have been to the extent requested pursuant to Section 2(b) hereof, then the Company shall not be required to effect any underwritten registration pursuant to this Section 2 (a) until a period of 90 days shall have elapsed from the effective date of the most recent such previous registration; (v) If, upon receipt of a registration request pursuant to this Section 2(a), the Company is advised in writing (with a copy to the Initiating Holder) by a recognized national independent investment banking firm selected by the Company that, in such firm's opinion, a registration at the time and on the terms requested would adversely affect any public offering of securities of the Company by the Company (other than in connection with benefit and similar plans) or by or on behalf of any shareholder of the Company exercising a demand registration right (collectively, a "Company Offering") with respect to which the Company has commenced preparations for a registration prior to the receipt of a registration request pursuant to this Section 2(a), the Company shall not be required to effect a registration pursuant to this Section 2(a) until the earlier of (i) 30 days after the completion of such Company Offering, (ii) promptly after any abandonment of such Company Offering or (iii) 60 days after the date of receipt of a registration request pursuant to this Section 2(a); provided, however, that the periods during which the Company shall not be required to effect a registration pursuant to this Section 2(a) together with any periods of suspension under Section 2(i) hereof may not exceed 90 days in the aggregate during any period of 12 consecutive months; (w) If the Registrable Securities requested by all Holders to be registered pursuant to such request are included in, and eligible for sale under, the Shelf Registration (as defined below); (x) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act or applicable rules or regulations thereunder; (y) After the Company has effected three (3) such registrations pursuant to this Section 2(a) (in the aggregate for all Holders) and such registrations have been declared or ordered effective and the sales of such Registrable Securities shall have closed; provided, that Holders shall not have the right to request an underwritten registration pursuant to this Section 2(a) more than one (1) time in any six-month period; or (z) If the Registrable Securities requested by all Holders to be registered pursuant to such request do not have an anticipated aggregate public offering price (before any underwriting discounts and commissions) of not less than $10,000,000. The registration statement filed pursuant to the request of the Initiating Holders may, subject to the provisions of Section 2(a)(ii) below, include other Securities of the Company which are held by Persons who, by virtue of agreements with the Company, are entitled to include their Securities in any such registration ("Other Stockholders"). (ii) Underwriting. If the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to Section 2(a). If Other Stockholders request inclusion in any such registration, the Holders shall offer to include the securities of such Other Stockholders in the underwriting and may condition such offer on their acceptance of the further applicable provisions of this Section 2. The Holders whose shares are to be included in such registration and the Company shall (together with all Other Stockholders proposing to distribute their securities through such underwriting) enter into underwriting and related agreements in customary form with the representative of the underwriter or underwriters selected for such underwriting by the Initiating Holders and reasonably acceptable to the Company. Such underwriting agreement will contain such representations and warranties by the Company and such other terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions, including, without limitation, indemnities and contribution to the effect and to the extent provided in Section 2(f) hereof and the provision of opinions of counsel and accountants' letters to the effect and to the extent provided in Section 2(e) hereof, and the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of the Holders. The Company shall cooperate fully with the Holders and the underwriters in connection with any underwritten offering. Notwithstanding any other provision of this Section 2(a), if the representative advises the Holders in writing that marketing factors require a limitation on the number of shares to be underwritten, the securities of the Company held by Other Stockholders shall be excluded from such registration to the extent so required by such limitation. If, after the exclusion of such shares, further reductions are still required, the number of shares included in the registration by each Holder shall be reduced on a pro rata basis (based on the number of shares held by such Holder), by such minimum number of shares as is necessary to comply with such request. No Registrable Securities or any other securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. If any Other Stockholder who has requested inclusion in such registration as provided above disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the underwriter and the Initiating Holders. The securities so withdrawn shall also be withdrawn from registration. If the underwriter has not limited the number of Registrable Securities or other securities to be underwritten, the Company and officers and directors of the Company may include its or their securities for its or their own account in such registration if the representative so agrees and if the number of Registrable Securities and other securities which would otherwise have been included in such registration and underwriting will not thereby be limited. (b) Company Registration. (i) If the Company shall determine to register any of its equity securities either for its own account or for the account of Other Stockholders, other than a registration relating solely to benefit plans, or a registration relating solely to a Commission Rule 145 transaction, or a registration on any registration form which does not permit secondary sales or does not include substantially the same information as would be required to be included in a registration statement covering the sale of Registrable Securities, the Company will: (A) promptly give to each of the Holders a written notice thereof (which shall include a list of the jurisdictions in which the Company intends to attempt to qualify such securities under the applicable blue sky or other state securities laws); and (B) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made by the Holders within ten (10) business days after the giving of the written notice from the Company described in clause (i) above, except as set forth in Section 2(b)(ii) below. Such written request shall specify the amount of Registrable Securities intended to be disposed of by a Holder and may specify all or a part of the Holders' Registrable Securities. Notwithstanding the foregoing, if, at any time after giving such written notice of its intention to effect such registration and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register such equity securities the Company may, at its election, give written notice of such determination to the Holders and thereupon the Company shall be relieved of its obligation to register such Registrable Securities in connection with the registration of such equity securities (but not from its obligation to pay Registration Expenses to the extent incurred in connection therewith as provided herein), without prejudice, however, to the rights (if any) of Holders immediately to request that such registration be effected as a registration under Section 2(a) hereof. (ii) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise each of the Holders as a part of the written notice given pursuant to Section 2(b)(i)(A). In such event, the right of each of the Holders to registration pursuant to this Section 2(b) shall be conditioned upon such Holders' participation in such underwriting and the inclusion of such Holders' Registrable Securities in the underwriting to the extent provided herein. The Holders whose shares are to be included in such registration shall (together with the Company and the Other Stockholders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected for the underwriting by the Company or such Other Stockholders, as the case may be. Such underwriting agreement will contain such representations and warranties by the Company and such other terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions, including, without limitation, indemnities and contribution to the effect and to the extent provided in Section 2(f) hereof and the provision of opinions of counsel and accountants' letters to the effect and to the extent provided in Section 2(e), and the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of the Holders whose shares are to be included in such registration. Notwithstanding any other provision of this Section 2(b), if the representative determines that marketing factors require a limitation on the number of shares to be underwritten, the Company shall so advise all holders of securities requesting registration, and the number of shares of securities that are entitled to be included in the registration and underwriting shall be allocated in the following manner: The securities of the Company held by officers, directors and Other Stockholders of the Company (other than securities held by Existing Holders or holders who by contractual right demanded such registration ("Demanding Holders")) shall be excluded from such registration and underwriting to the extent required by such limitation, and, if a limitation on the number of shares is still required, the number of shares that may be included in the registration and underwriting by each of the Holders, Existing Holders which are not Demanding Holders with respect to such registration and Demanding Holders with respect to such registration which are not Existing Holders shall be reduced, on a pro rata basis (based on the number of shares held by such holder), by such minimum number of shares as is necessary to comply with such limitation; provided, however, that in the event that an Existing Holder is a Demanding Holder with respect to such registration, the number of shares of Registrable Securities proposed to be included in any such registration by each Holder shall be reduced on a pro rata basis (based on the number of shares held by such holder) prior to any reduction in the number of shares to be included in such registration by such Demanding Holder. If any of the Holders or any officer, director or Other Stockholder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Company and the underwriter. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. (c) Shelf Registration. (i) On or before the earlier of December 15, 1996, or ten business days following the effectiveness of the Company's Registration Statement on Form S-4 containing the Joint Proxy Statement/Prospectus to be circulated in connection with the Merger (as defined in the Purchase Agreement) the Company shall file a "shelf" registration statement pursuant to Rule 415 under the Securities Act (the "Shelf Registration") with respect to the Registrable Securities to be issued under the Stock Purchase Agreement. The Company shall (A) use its reasonable best efforts to have the Shelf Registration declared effective on or before the Closing Date (as defined in the Stock Purchase Agreement) or as soon thereafter as practicable and (B) subject to Section 2(i) hereof, use its reasonable best efforts to keep the Shelf Registration continuously effective from the date such Shelf Registration is declared effective until the date of termination of this Agreement pursuant to Section 2(j) hereof in order to permit the prospectus forming a part thereof to be usable by Holders during such period. Except as set forth in Section 2(c)(iii) below, the Shelf Registration may not include other securities of the Company which are held by Other Stockholders. (ii) Subject to Section 2(i) hereof, the Company shall supplement or amend the Shelf Registration, (A) as required by the registration form utilized by the Company or by the instructions applicable to such registration form or by the Securities Act or the rules and regulations promulgated thereunder, (B) to include in such Shelf Registration any additional securities that become Registrable Securities by operation of the definition thereof and (C) following the written request of an Initiating Holder pursuant to Section 2(c)(iii) below, to cover offers and sales of all or a part of the Registrable Securities by means of an underwriting including the incorporation of any information required pursuant to Section 2(e)(x) below. The Company shall furnish to the Holders of the Registrable Securities to which the Shelf Registration relates copies of any such supplement or amendment sufficiently in advance (but in no event less than five business days in advance) of its use and/or filing with the Commission to allow the Holders a meaningful opportunity to comment thereon. (iii) The Holders may, at their election and upon written notice by an Initiating Holder to the Company, subject to the limitations set forth in clauses (u), (v), (x), (y) and (z) of Section 2(a)(i)(B) hereof, effect offers and sales under the Shelf Registration by means of one or more underwritten offerings, in which case the provisions of Section 2(a)(ii) above shall apply to any such underwritten distribution of securities under the Shelf Registration and such underwriting shall, if sales of Registrable Securities pursuant thereto shall have closed, be regarded as the exercise of one of the registration rights contemplated by Section 2(a) hereof. In the event of such an election, and, without the consent of the Holders of a majority of the then outstanding Registrable Securities, under no other circumstances, the Shelf Registration may, subject to Section 2(a)(ii) above, be amended to include other shares of Common Stock which are held by Other Stockholders. (d) Expenses of Registration. All Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to this Section 2 (including all Registration Expenses incurred in connection with the Shelf Registration and any supplements or amendments thereto, whether or not it becomes effective, and whether all, none or some of the Registrable Securities are sold pursuant to the Shelf Registration) shall be borne by the Company, and all Selling Expenses shall be borne by the Holders of the securities so registered pro rata on the basis of the number of their shares so registered; provided, however, that if, as a result of the withdrawal of a request for registration by any of the Holders, as applicable, the registration statement does not become effective, the Holders and Other Stockholders requesting registration may elect to bear the Registration Expenses (pro rata on the basis of the number of their shares so included in the registration request, or on such other basis as such Holders and Other Stockholders may agree), in which case such registration shall not be counted as a registration pursuant to Section 2(a)(i)(B)(y). (e) Registration Procedures. In the case of each registration effected by the Company pursuant to this Section 2, the Company will keep the Holders, as applicable, advised in writing as to the initiation of each registration and as to the completion thereof. At its expense, the Company will: (i) other than the Shelf Registration, the obligations in respect of which are set forth in Section 2(c)(i)(B) above, keep such registration effective for a period of one hundred eighty (180) days or until the Holders, as applicable, have completed the distribution described in the registration statement relating thereto, whichever first occurs; (ii) furnish to each Holder, and to any underwriter before filing with the Commission, copies of any registration statement (including all exhibits) and any prospectus forming a part thereof and any amendments and supplements thereto (including all documents incorporated or deemed incorporated by reference therein prior to the effectiveness of such registration statement and including each preliminary prospectus, any summary prospectus or any term sheet (as such term is used in Rule 434 under the Securities Act)) and any other prospectus filed under Rule 424 under the Securities Act, which documents, other than documents incorporated or deemed incorporated by reference, will be subject the review of the Holders and any such underwriter for a period of at least five business days, and the Company shall not file any such registration statement or such prospectus or any amendment or supplement to such registration statement or prospectus to which any Holder or any such underwriter shall reasonably object within five business days after the receipt thereof; a Holder or such underwriter(s), if any, shall be deemed to have reasonably objected to such filing only if the registration statement, amendment, prospectus or supplement, as applicable, as proposed to be filed, contains a material misstatement or omission; (iii) furnish to each Holder and to any underwriter, such number of conformed copies of the applicable registration statement and of each amendment and supplement thereto (in each case including all exhibits) and such number of copies of the prospectus forming a part of such registration statement (including each preliminary prospectus, any summary prospectus or any term sheet (as such term is used in Rule 434 under the Securities Act)) and any other prospectus filed under Rule 424 under the Securities Act, in conformity with the requirements of the Securities Act, and such other documents, including without limitation documents incorporated or deemed to be incorporated by reference prior to the effectiveness of such registration, as each of the Holders or any such underwriter, from time to time may reasonably request; (iv) to the extent practicable, promptly prior to the filing of any document that is to be incorporated by reference into any registration statement or prospectus forming a part thereof subsequent to the effectiveness thereof, and in any event no later than the date such document is filed with the Commission, provide copies of such document to the Holders, if requested, and to any underwriter, make representatives of the Company available for discussion of such document and other customary due diligence matters, and include such information in such document prior to the filing thereof as any Holder or any such underwriter reasonably may request; (v) make available at reasonable times for inspection by the Holders, any underwriter participating in any disposition pursuant to such registration and any attorney or accountant retained by the Holders or any such underwriter, all financial and other records, pertinent corporate documents and properties of the Company and cause the officers, directors and employees of the Company to supply all information reasonably requested by the Holders and any such underwriters, attorneys or accountants in connection with such registration subsequent to the filing of the applicable registration statement and prior to the effectiveness of the applicable registration statement; (vi) use its reasonable best efforts (x) to register or qualify all Registrable Securities and other securities covered by such registration under such other securities or blue sky laws of such States of the United States of America where an exemption is not available and as the sellers of Registrable Securities covered by such registration shall reasonably request, (y) to keep such registration or qualification in effect for so long as the applicable registration statement remains in effect, and (z) to take any other action which may be reasonably necessary or advisable to enable such sellers to consummate the disposition in such jurisdictions of the securities to be sold by such sellers, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction where it is not so qualified, or to subject itself to taxation in any such jurisdiction, or to execute a general consent to service of process in effecting such registration, qualification or compliance, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act or applicable rules or regulations thereunder; (vii) use its reasonable best efforts to cause all Registrable Securities covered by such registration statement to be registered with or approved by such other federal or state governmental agencies or authorities as may be necessary in the opinion of counsel to the Company and counsel to the Holders of Registrable Securities to enable the Holders thereof to consummate the disposition of such Registrable Securities; (viii) subject to Section 2(i) hereof, promptly notify each Holder of Registrable Securities covered by a registration statement (A) upon discovery that, or upon the happening of any event as a result of which, the prospectus forming a part of such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, (B) of the issuance by the Commission of any stop order suspending the effectiveness of such registration statement or the initiation of proceedings for that purpose, (C) of any request by the Commission for (1) amendments to such registration statement or any document incorporated or deemed to be incorporated by reference in any such registration statement, (2) supplements to the prospectus forming a part of such registration statement or (3) additional information, (D) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation of any proceeding for such purpose, and at the request of any such Holder promptly prepare and furnish to it a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ix) use its reasonable best efforts to obtain the withdrawal of any order suspending the effectiveness of any such registration, or the lifting of any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction; (x) if requested by any Initiating Holder, or any underwriter, promptly incorporate in such registration statement or prospectus, pursuant to a supplement or post-effective amendment if necessary, such information as the Initiating Holder and any underwriter may reasonably request to have included therein, including, without limitation, information relating to the "plan of distribution" of the Registrable Securities, information with respect to the principal amount or number of shares of Registrable Securities being sold to such underwriter, the purchase price being paid therefor and any other terms of the offering of the Registrable Securities to be sold in such offering and make all required filings of any such prospectus supplement or post-effective amendment as soon as practicable after the Company is notified of the matters to be incorporated in such prospectus supplement or post-effective amendment; (xi) furnish to the Holders, addressed to them, an opinion of counsel for the Company, dated the date of the closing under the underwriting agreement, if any, or the date of effectiveness of the registration statement if such registration is not an underwritten offering, and use its reasonable best efforts to furnish to the Holders, addressed to them, a "cold comfort" letter signed by the independent certified public accountants who have certified the Company's financial statements included in such registration, covering substantially the same matters with respect to such registration (and the prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities and such other matters as the Holders may reasonably request; (xii) provide promptly to the Holders upon request any document filed by the Company with the Commission pursuant to the requirements of Section 13 and Section 15 of the Exchange Act; and (xiii) use its reasonable best efforts to cause all Registrable Securities included in any registration pursuant hereto to be listed on each securities exchange on which securities of the same class are then listed or, if not then listed on any securities exchange, to be eligible for trading in any over-the-counter market or trading system in which securities of the same class are then traded. (f) Indemnification. (i) The Company will indemnify each of the Holders, as applicable, each of its officers, directors, members and partners, and each person controlling each of the Holders, with respect to each registration which has been effected pursuant to this Section 2, and each underwriter, if any, and each person who controls any underwriter, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Securities Act or the Exchange Act or any rule or regulation thereunder applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse each of the Holders, each of its officers, directors, members and partners, and each person controlling each of the Holders, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating and defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by the Holders or underwriter and stated to be specifically for use therein. (ii) Each of the Holders will, if Registrable Securities held by it are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers and each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter, each Other Stockholder and each of their officers, directors, members and partners, and each person controlling such Other Stockholder against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document made by such Holder, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements by such Holder therein not misleading, and will reimburse the Company and such Other Stockholders, directors, officers, partners, members, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by such Holder and stated to be specifically for use therein; provided, however, that the obligations of each of the Holders hereunder and under clause (vi) below shall be limited to an amount equal to the net proceeds to such Holder of securities sold as contemplated herein. (iii) Each party entitled to indemnification under this Section 2(f) (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom; provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld) and the Indemnified Party may participate in such defense at such party's expense (unless the Indemnified Party shall have reasonably concluded that there may be a conflict of interest between the Indemnifying Party and the Indemnified Party in such action, in which case the fees and expenses of one such counsel for all Indemnified Parties shall be at the expense of the Indemnifying Party), and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 2 unless the Indemnifying Party is materially prejudiced thereby. No Indemnifying Party, in the defense of any such claim or litigation shall, except with the consent of each Indemnified Party (which consent shall not be unreasonably withheld or delayed), consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with the defense of such claim and litigation resulting therefrom. (iv) If the indemnification provided for in this Section 2(f) is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage or expense referred to herein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the statements or omissions which resulted in such loss, liability, claim, damage or expense, as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by reference to, among other things, whether the untrue (or alleged untrue) statement of a material fact or the omission (or alleged omission) to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. (v) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with any underwritten public offering contemplated by this Agreement are in conflict with the foregoing provisions, the provisions in such underwriting agreement shall be controlling. (vi) The foregoing indemnity agreement of the Company and Holders is subject to the condition that, insofar as they relate to any loss, claim, liability or damage made in a preliminary prospectus but eliminated or remedied in the amended prospectus on file with the Commission at the time the registration statement in question becomes effective or the amended prospectus filed with the Commission pursuant to Commission Rule 424(b) (the "Final Prospectus"), such indemnity or contribution agreement shall not inure to the benefit of any underwriter or Holder (but only if such Holder was required to deliver such Final Prospectus) if a copy of the Final Prospectus was furnished to the underwriter and was not furnished to the person asserting the loss, liability, claim or damage at or prior to the time such action is required by the Securities Act. (g) Information by the Holders. Each of the Holders holding securities included in any registration shall furnish to the Company such information regarding such Holder and the distribution proposed by such Holder as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Section 2. (h) Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the Commission which may permit the sale of restricted securities to the public without registration, the Company agrees to: (i) make and keep public information available as those terms are understood and defined in Rule 144 under the Securities Act ("Rule 144"), at all times; (ii) use its best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (iii) so long as the Holder owns any Registrable Securities, furnish to the Holder upon request, a written statement by the Company as to its compliance with the reporting requirements of Rule 144, and of the Securities Act and the Exchange Act, a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed as the Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing the Holder to sell any such securities without registration. (i) Holdback Agreement; Postponement. Notwithstanding the provisions of Sections 2(a),(b) and (c), if the Board of Directors of the Company determines in good faith that it is in the best interests of the Company (A) not to disclose the existence of facts surrounding any proposed or pending acquisition, disposition, strategic alliance or financing transaction involving the Company or (B) for any purpose, to suspend the registration rights set forth herein, the Company may, by notice to the Holders in accordance with Section 4(a), (1) suspend the rights of the Holders to make sales pursuant to the Shelf Registration and (2) postpone any registration which is requested pursuant to Section 2(a), in each case for such a period of time as the Board of Directors may determine; provided that (x) such periods of suspension together with any periods of suspension effected pursuant to Section 2(a)(i)(B)(v) hereof may not exceed 90 days in the aggregate during any period of 12 consecutive months and (y) the Company may not impose such a suspension or a postponement pursuant to Section 2(a)(i)(B)(v) following the printing and distribution of a preliminary prospectus in any underwritten public offering of Registrable Securities pursuant to Section 2(a)(i) or 2(c)(iii) (except such suspension, not to exceed 10 days, which results from an event that is not within the reasonable control of the Company). Notwithstanding the provisions of Section 2(a)(i)(B)(v) or this Section 2(i), the Company shall not suspend the registration rights set forth herein at any time during which any similar rights of the Existing Holders are not similarly suspended. (j) Termination. The registration rights set forth in Section 2(a) shall not be available to any Holder if, in the opinion of counsel to the Company, all of the Registrable Securities then owned by such Holder could be sold in any 90-day period pursuant to Rule 144 (without giving effect to the provisions of Rule 144(k)). (k) Assignment. The registration rights set forth in Section 2 hereof may be assigned, in whole or in part, to any transferee of Registrable Securities (who shall be considered thereafter to be a Holder (provided that any transferee who is not an affiliate of Investor shall be a Holder only with respect to such Registrable Securities so acquired and any stock of the Company issued as a dividend or other distribution with respect to, or in exchange for or in replacement of, such Registrable Securities) and shall be bound by all obligations and limitations of this Agreement). 3. INTERPRETATION OF THIS AGREEMENT (a) Directly or Indirectly. Where any provision in this Agreement refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person. (b) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed entirely within such State. (c) Section Headings. The headings of the sections and subsections of this Agreement are inserted for convenience only and shall not be deemed to constitute a part thereof. 4. MISCELLANEOUS (a) Notices. (i) All communications under this Agreement shall be in writing and shall be delivered by facsimile or by hand or mailed by overnight courier or by registered or certified mail, postage prepaid: (A) if to the Company, to Provident Companies, Inc., 1 Fountain Square, Chattanooga, Tennessee 37402, Fax No.: (423) 755-2590, Attention: Chief Financial Officer, or at such other address as it may have furnished in writing to the Investors; (B) if to the Investor, at the address listed on Schedule I hereto, or at such other address as may have been furnished the Company in writing. (ii) Any notice so addressed shall be deemed to be given: if delivered by hand, on the date of such delivery; if mailed by courier, on the first business day following the date of such mailing; and if mailed by registered or certified mail, on the third business day after the date of such mailing. (b) Reproduction of Documents. This Agreement and all documents relating thereto, including, without limitation, any consents, waivers and modifications which may hereafter be executed may be reproduced by the Investor by any photographic, photostatic, microfilm, microcard, miniature photographic or other similar process and the Investors may destroy any original document so reproduced. The parties hereto agree and stipulate that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by the Investors in the regular course of business) and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. (c) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties. (d) Entire Agreement; Amendment and Waiver. This Agreement constitutes the entire understanding of the parties hereto and supersedes all prior understanding among such parties. This Agreement may be amended, and the observance of any term of this Agreement may be waived, with (and only with) the written consent of the Company and the Holders of a majority of the then outstanding Registrable Securities. (e) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall be considered one and the same agreement. (f) No Inconsistent Agreements. The Company will not hereafter enter into any agreement with respect to its securities which is inconsistent with the rights granted to the Holders of Registrable Securities in this Agreement. (g) Remedies. Each Holder of Registrable Securities, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. (h) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be in any way impaired thereby, it being intended and understood that all of the rights and privileges of each of the Holders shall be enforceable to the fullest extent permitted by law. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first set forth above. PROVIDENT COMPANIES, INC. By:/s/ Thomas R. Watjen Name: Thomas R. Watjen Title: Executive Vice President INVESTOR: ZURICH INSURANCE COMPANY By: /s/ Steven M. Gluckstern Name: Steven M. Gluckstern Title: Representative SCHEDULE I Name and Address of Investor ZURICH INSURANCE COMPANY Mythenquai 2 P.O. Box Ch-8022 Zurich, Switzerland Attention: General Counsel with copies to: Zurich Center Resource Limited One Chase Manhattan Plaza New York, New York Facsimile No.: (212) 898-5002 Attention: General Counsel Willkie Farr & Gallagher One Citicorp Center 153 East 53rd Street New York, New York 10022 Facsimile No.: (212) 821-8111 Attention: Thomas M. Cerabino EX-13 8 ANNUAL REPORT TO STOCKHOLDERS Exhibit (13) Portions of the Annual Report to Stockholders for year ended December 31, 1996 (attached) PROVIDENT COMPANIES, INC. AND SUBSIDIARIES SELECTED FINANCIAL DATA
(in millions of dollars, except share data) 1996 1995 1994 1993 1992 - -------------------------------------------- ------------ ------------ ------------ ------------ ------------ STATEMENT OF OPERATIONS DATA Premium Income $ 1,175.7 $ 1,251.9 $ 1,382.6 $ 1,400.2 $ 1,490.7 Net Investment Income 1,090.1 1,221.3 1,238.6 1,318.7 1,241.8 Net Realized Investment Gains (Losses) (8.6) (31.7) (30.1) 43.6 (30.8) Other Income 34.7 113.8 171.1 175.5 165.0 ----------- ----------- ----------- ----------- ----------- Total Revenue 2,291.9 2,555.3 2,762.2 2,938.0 2,866.7 Benefits and Changes in Reserves 1,661.2 1,904.6 1,981.2 2,502.8 2,102.6 Operating Expenses 404.5 474.7 580.1 575.3 584.3 ----------- ----------- ----------- ----------- ----------- Income (Loss) Before Federal Income Taxes 226.2 176.0 200.9 (140.1) 179.8 Federal Income Taxes (Credit) 80.6 60.4 65.6 (58.9) 67.2 ----------- ----------- ----------- ----------- ----------- Net Income (Loss) $ 145.6 $ 115.6 $ 135.3 $ (81.2) $ 112.6 =========== =========== =========== =========== =========== Net Income (Loss) Per Common Share $ 2.92 $ 2.27 $ 2.71 $ (2.03) $ 2.49 =========== =========== =========== =========== =========== Weighted Average Common Shares Outstanding 45,522,417 45,381,373 45,311,053 45,200,914 45,175,980 =========== =========== =========== =========== =========== Assets $ 14,992.5 $ 16,301.3 $ 17,149.9 $ 16,891.9 $ 15,925.1 Long-term Debt Including Capital Lease Obligations $ 200.0 $ 200.0 $ 202.5 $ 247.6 $ 206.2 Stockholders' Equity $ 1,738.6 $ 1,652.3 $ 1,169.1 $ 1,401.6 $ 1,387.5 Stockholders' Equity Per Common Share $ 34.68 $ 32.95 $ 22.33 $ 27.51 $ 30.74 Stockholders' Equity Per Common Share Excluding SFAS 115 Adjustment(1) $ 32.69 $ 30.65 $ 28.91 $ 27.51 $ 30.74 Dividends Per Common Share $ .72 $ .72 $ 1.04 $ 1.04 $ 1.00 Life Insurance Sales (Amount of Insurance) $ 14,777.4 $ 10,204.7 $ 8,332.5 $ 7,819.3 $ 5,964.0 Life Insurance in Force (Amount of Insurance) $ 102,664.5 $ 98,952.6 $ 86,785.6 $ 83,293.9 $ 80,893.3
(1) Adoption of Statement of Financial Accounting Standards No. 115 effective January 1, 1994. CONSOLIDATED STATEMENTS OF INCOME BY SEGMENT
Year Ended December 31 1996 1995 1994 --------- -------- -------- (in millions of dollars) Premium Income Individual Life and Disability $646.3 $647.4 $644.9 Employee Benefits 501.4 485.9 465.6 Other Operations 28.0 118.6 272.1 ------- ------- ------- 1,175.7 1,251.9 1,382.6 Net Investment Income and Other Income Individual Life and Disability 401.3 371.9 311.7 Employee Benefits 104.7 96.8 89.7 Other Operations 618.8 866.4 1,008.3 ------- ------- ------- 1,124.8 1,335.1 1,409.7 Total Revenue (Excluding Net Realized Investment Gains and Losses) Individual Life and Disability 1,047.6 1,019.3 956.6 Employee Benefits 606.1 582.7 555.3 Other Operations 646.8 985.0 1,280.4 ------- ------- ------- 2,300.5 2,587.0 2,792.3 Benefits and Expenses Individual Life and Disability 930.3 982.8 903.4 Employee Benefits 549.8 534.1 483.5 Other Operations 585.6 862.4 1,174.4 ------- ------- ------- 2,065.7 2,379.3 2,561.3 Income Before Net Realized Investment Gains and Losses and Federal Income Taxes Individual Life and Disability 117.3 36.5 53.2 Employee Benefits 56.3 48.6 71.8 Other Operations 61.2 122.6 106.0 ------- ------- ------- 234.8 207.7 231.0 Net Realized Investment Losses (8.6) (31.7) (30.1) ------- ------- ------- Income Before Federal Income Taxes 226.2 176.0 200.9 Federal Income Taxes 80.6 60.4 65.6 ------- ------- ------- Net Income $145.6 $115.6 $135.3 ======= ======= =======
OPERATING RESULTS Revenue excluding net realized investment gains and losses (hereinafter "revenue") declined $286.5 million in 1996, or 11.1 percent, to $2.30 billion in 1996 from $2.59 billion in 1995. Revenue includes premium income, net investment income, and other income. This decline resulted from decreased revenue in the Other Operations segment ($338.2 million). This decline was partly offset by increased revenue in the Individual Life and Disability segment ($28.3 million) and Employee Benefits segment ($23.4 million). In 1995, revenue declined $205.3 million, or 7.4 percent, to $2.59 billion from $2.79 billion in 1994. This decline resulted from decreased revenue in the Other Operations segment ($295.4 million). This decline was partly offset by increased revenue in the Individual Life and Disability segment ($62.7 million) and Employee Benefits segment ($27.4 million). Income before net realized investment gains and losses and federal income taxes (hereinafter "income") increased $27.1 million, or 13.0 percent, to $234.8 million in 1996 from $207.7 million in 1995. The increase resulted from higher income in the Individual Life and Disability segment ($80.8 million) and Employee Benefits segment ($7.7 million). These increases were partly offset by decreased income in the Other Operations segment ($61.4 million). In 1995, income was $207.7 million, compared to $231.0 million in 1994. The decline resulted from decreased income in the Employee Benefits segment ($23.2 million) and Individual Life and Disability segment ($16.7 million). These declines were only partly offset by increased income in the Other Operations segment ($16.6 million). Net income totaled $145.6 million in 1996, compared to $115.6 million in 1995 and $135.3 million in 1994. Net realized investment losses after federal income taxes were $5.4 million in 1996, $20.7 million in 1995, and $22.5 million in 1994. INDIVIDUAL LIFE AND DISABILITY OPERATING RESULTS Revenue in the Individual Life and Disability segment increased $28.3 million, or 2.8 percent, to $1,047.6 million in 1996 from $1,019.3 million in 1995. Net investment income increased $32.3 million, or 8.9 percent, to $393.6 million in 1996 from $361.3 million in 1995. This increase was primarily the -1- INDIVIDUAL LIFE AND DISABILITY OPERATING RESULTS
Year Ended December 31 1996 1995 1994 ---------- ----------- --------- (in millions of dollars) REVENUE EXCLUDING NET REALIZED INVESTMENT GAINS Premium Income Individual Disability Income $582.8 $584.5 $578.7 Individual Life and Annuities 63.5 62.9 66.2 ------- -------- ------ Total Premium Income 646.3 647.4 644.9 Net Investment Income 393.6 361.3 302.4 Other Income 7.7 10.6 9.3 ------- -------- ------ TOTAL 1,047.6 1,019.3 956.6 ------- -------- ------ BENEFITS AND EXPENSES Policy and Contract Benefits 477.1 443.7 381.3 Change in Reserves for Future Policy and Contract Benefits and Policyholders' Funds 220.5 303.6 297.6 Amortization of Deferred Policy Acquisition Costs 55.6 59.0 53.0 Other Expenses 177.1 176.5 171.5 ------- -------- ------ TOTAL 930.3 982.8 903.4 ------- -------- ------ INCOME BEFORE NET REALIZED INVESTMENT GAINS AND FIT 117.3 36.5 53.2 NET REALIZED INVESTMENT GAINS 8.5 4.7 5.8 ------- -------- ------ INCOME BEFORE FIT $125.8 $41.2 $59.0 ======= ======== ====== SALES - ANNUALIZED NEW PREMIUMS Individual Disability Income $45.1 $55.2 $65.0 Individual Life $6.7 $7.1 $9.2 DEPOSITS - DEFERRED ANNUITIES $21.2 $82.4 $141.8 LIFE INSURANCE IN FORCE $12,585.2 $12,709.1 $12,683.6
result of an increased allocation of capital to the individual disability income line of business. Premium income in this segment declined $1.1 million or 0.2 percent, to $646.3 million in 1996 from $647.4 million in 1995. In the individual disability income line of business, premium income declined $1.7 million, or 0.3 percent, to $582.8 million in 1996 from $584.5 million in 1995. In the individual life line of business, premium income increased $0.4 million, or 0.6 percent, to $63.3 million in 1996 from $62.9 million in 1995. In 1995, revenue in the Individual Life and Disability segment increased $62.7 million, or 6.6 percent, to $1,019.3 million from $956.6 million in 1994. This increase was primarily the result of higher net investment income. Net investment income in this segment increased $58.9 million, or 19.5 percent, due to an increased allocation of capital to the individual disability income line of business and higher investment income from the individual annuity line of business. Premium income in this segment increased $2.5 million to $647.4 million in 1995 from $644.9 million in 1994. In the individual disability income line, premium income was $584.5 million in 1995, compared to $578.7 million in 1994, while the individual life line of business experienced a decline in premium income from $66.2 million in 1994 to $62.9 million in 1995. In November 1994, the Company announced its intention to discontinue selling individual noncancelable disability contracts with long-term own- occupation provisions (other than conversion policies available under existing contractual arrangements). The Company is focusing on replacing the traditional noncancelable long-term own-occupation contracts with "loss of earnings" contracts which insure income rather than occupation. During the transition to the new products, revenue in this line was expected to decline as a result of a period of lower premiums associated with the new products. The magnitude and duration of the expected decline are dependent on the response of customers and competitors in the industry. In 1996, annualized new premiums for individual disability income declined $10.1 million, or 18.3 percent, to $45.1 million, from $55.2 million in 1995. In the second half of 1996, annualized new premiums totaled $24.6 million compared to $20.5 million in the first half of 1996 and $21.5 million in the second half of 1995, indicating improving market acceptance of the new products. Income in the Individual Life and Disability segment increased $80.8 million to $117.3 million in 1996 from $36.5 million in 1995. The improvement is primarily due to improved results in the individual disability income and the individual life lines of business. In the individual disability income line, -2- income increased $78.2 million to $91.3 million in 1996, from $13.1 million in 1995. This significant improvement is primarily due to a lower level of new claims in the third and fourth quarters of 1996 along with higher levels of claim resolutions. Management believes substantial investments in the individual disability claims management process since the first quarter of 1995 helped produce the significant improvement in results in this line. The major elements of this investment include an emphasis on early intervention to better respond to the specific nature of the claims, increased specialization to properly adjudicate the increasingly specialized nature of disability claims, and an increased level of staffing with experienced claim adjusters. In addition, net investment income in this line increased due to a higher allocation of capital to this line of business. Income in the individual life line of business increased $3.2 million, or 15.3 percent, to $24.1 million in 1996 from $20.9 million in 1995, while the individual annuities line of business produced income of $1.9 million in 1996 compared to $2.5 million in 1995. In 1995, income in the Individual Life and Disability segment declined $16.7 million, or 31.4 percent, to $36.5 million, compared to $53.2 million in 1994. The decline was primarily due to the individual disability income line which produced income of $13.1 million in 1995, compared to $27.1 million in 1994. Poor results in the first quarter of 1995 from adverse claim experience on individual noncancelable disability income contracts with long-term own- occupation provisions which were issued between 1983 and 1989 were the primary reason for the decline. Specifically, the average size of new claims in the first quarter of 1995 was higher than the average level experienced for all of 1994, and the level of claim resolutions was lower relative to 1994. During the last three quarters of 1995, claim resolutions were higher relative to the first quarter of 1995 and all of 1994. Management believes that the improvement in the final three quarters of 1995 was primarily the result of the allocation of significant resources to the Company's disability claims management unit. Lower income from the individual life and individual annuities lines of business also contributed to the decreased income in this segment. Income in the individual life line declined to $20.9 million in 1995, compared to $22.9 million in 1994, while income from the individual annuities line declined to $2.5 million in 1995 from $3.2 million in 1994. Deposits on deferred annuities sold through financial institutions totaled $8.1 million in 1996, compared to $78.2 million in 1995 and $131.8 million in 1994. This decline was primarily the result of the termination of certain marketing relationships. Deposits on annuities sold through other distribution -3- channels were $13.1 million in 1996, compared to $4.2 million in 1995 and $10.0 million in 1994. The Company performed a loss recognition study on its individual disability income business as of September 30, 1993. The study resulted in a $423.0 million pre-tax or $275.0 million after-tax charge to operating earnings. The charge was required under generally accepted accounting principles due to the significant decline in interest rates in 1993 and the increased level of morbidity experienced by the Company. Since 1993, the Company has performed annual loss recognition studies to determine the continued adequacy of the reserves that were established. Based upon the December 1996 loss recognition study, which incorporates management's best estimate for the assumptions used, reserves were adequate at December 31, 1996. The Company has engaged outside consultants to work with its personnel in refining its methodology for analyzing frequency and severity rates, as well as other factors that may affect reserve adequacy. Management intends to continue to work to provide the Company with a better methodology for anticipating changes in morbidity rates and a better methodology for reflecting those changes in the management of its business. Significant testing of any methodology must be undertaken. Early indicators suggest a sufficiency in the Company's reserves. It is not possible to predict with certainty whether morbidity, interest rates, and expenses will continue at a level consistent with the assumptions used in the loss recognition study, improve, or deteriorate; however, the current assumptions as to these factors represent management's best estimates in light of present circumstances. Additional increases to reserves would be required if there is material deterioration in morbidity, interest rates, and/or expenses. As part of its ongoing management of this line of business, the Company will conduct a loss recognition study annually to validate the continued adequacy of current reserves. EMPLOYEE BENEFITS OPERATING RESULTS Revenue in the Employee Benefits segment increased $23.4 million, or 4.0 percent, to $606.1 million in 1996 from $582.7 million in 1995. The increase is primarily due to higher premium income which increased $15.5 million, or 3.2 percent, to $501.4 million in 1996 from $485.9 million in 1995. The increase was primarily the result of higher premium income in the voluntary benefits, group -4- EMPLOYEE BENEFITS OPERATING RESULTS
Year Ended December 31 1996 1995 1994 --------- --------- ---------- (in millions of dollars) REVENUE EXCLUDING NET REALIZED INVESTMENT GAINS Premium Income Voluntary Benefits $70.6 $66.3 $58.7 Group Life 177.8 167.0 167.6 Medical Stop-Loss 49.4 62.2 66.9 Group Disability 69.4 59.5 53.6 Packaged Products 134.2 130.9 118.8 -------- -------- --------- Total Premium Income 501.4 485.9 465.6 Net Investment Income 97.9 90.6 85.5 Other Income 6.8 6.2 4.2 -------- -------- --------- TOTAL 606.1 582.7 555.3 -------- -------- --------- BENEFITS AND EXPENSES Policy and Contract Benefits 362.9 382.2 334.2 Change in Reserves for Future Policy and Contract Benefits and Policyholders' Funds 73.7 48.1 54.1 Amortization of Deferred Policy Acquisition 8.4 12.0 6.4 Other Expenses 104.8 91.8 88.8 -------- -------- --------- TOTAL 549.8 534.1 483.5 -------- -------- --------- INCOME BEFORE NET REALIZED INVESTMENT GAINS AND FIT 56.3 48.6 71.8 NET REALIZED INVESTMENT GAINS 0.1 3.9 1.6 -------- -------- --------- INCOME BEFORE FIT $56.4 $52.5 $73.4 ======== ======== ========= SALES - ANNUALIZED NEW PREMIUMS Voluntary Benefits $23.0 $20.2 $20.6 Group Life $37.8 $24.2 $16.7 Group LTD $16.5 $10.7 $14.4 LIFE INSURANCE IN FORCE $87,079.7 $83,276.3 $71,460.5
life, group disability, and packaged products lines of business, which more than offset lower premium income in the medical stop-loss line of business. Net investment income in this segment increased $7.3 million, or 8.1 percent, to $97.9 million in 1996 from $90.6 million in 1995. In 1995, revenue in the Employee Benefits segment increased $27.4 million, or 4.9 percent, to $582.7 million from $555.3 million in 1994. Premium income increased $20.3 million, or 4.4 percent, to $485.9 million in 1995 from $465.6 million in 1994. The increase in premium income in this segment was primarily the result of higher premium income in the voluntary benefits, group disability, and packaged products lines of business, which more than offset lower premium income in the group life and medical stop-loss lines of business. Net investment income in this segment increased $5.1 million, or 6.0 percent, to $90.6 million in 1995, compared to $85.5 million in 1994. Income in the Employee Benefits segment increased $7.7 million, or 15.8 percent, to $56.3 million in 1996 from $48.6 million in 1995. The increase is primarily due to improved results in the voluntary benefits and group disability lines of business. Income in the voluntary benefits line was $14.7 million in 1996 compared to $7.9 million in 1995. Income in the group disability line was $2.9 million in 1996 compared to a loss of $12.8 million in 1995. Both lines benefited from improved profitability following repricing actions in 1995. The improvement in income in these lines of business was partly offset by lower income in the group life, medical stop-loss, and packaged products lines of business. In 1995, income in the Employee Benefits segment declined to $48.6 million, compared to $71.8 million in 1994. This decline was primarily the result of lower income in the medical stop-loss and group disability lines of business. Income in the medical stop-loss line declined to $16.4 million in 1995, compared to $26.6 million in 1994, primarily as a result of lower premium income and higher loss ratios. Income in the group disability line declined to a loss of $12.8 million in 1995 from a loss of $4.5 million in 1994, primarily due to higher claim incidence and severity. These losses were primarily attributable to business associated with the medical and legal occupations. During the first quarter of 1995, the Company notified the existing group disability customers in the medical and legal occupational categories that coverages would be terminated under the terms of the existing contracts during 1995, and the Company would no longer accept proposals for group disability coverage of new medical or legal groups. This action impacted approximately 15 percent of the group disability -5- block of business. The group life and voluntary benefits lines of business also produced lower income in 1995 compared to 1994, while the packaged products line reported an increase in income. -6- OTHER OPERATIONS OPERATING RESULTS
Year Ended December 31 1996 1995 1994 --------- --------- --------- (in millions of dollars) REVENUE EXCLUDING NET REALIZED INVESTMENT LOSSES Premium Income Corporate-Owned Life $23.6 $24.8 $26.1 Group Single Premium Annuities 1.9 0.5 4.7 Other 2.5 93.3 241.3 -------- -------- --------- Total Premium Income 28.0 118.6 272.1 Net Investment Income 598.6 769.4 850.7 ASO Fees -- 37.2 110.9 Gain on Sale of Group Medical Business -- 21.8 -- Other Income 20.2 38.0 46.7 -------- -------- --------- TOTAL 646.8 985.0 1,280.4 -------- -------- --------- BENEFITS AND EXPENSES Policy and Contract Benefits 376.5 593.8 791.3 Change in Reserves for Future Policy and Contract Benefits and Policyholders' Funds 150.5 133.2 122.7 Other Expenses 58.6 135.4 260.4 -------- -------- --------- TOTAL 585.6 862.4 1,174.4 -------- -------- --------- INCOME BEFORE NET REALIZED INVESTMENT LOSSES AND FIT 61.2 122.6 106.0 NET REALIZED INVESTMENT LOSSES (17.2) (40.3) (37.5) -------- -------- --------- INCOME BEFORE FIT $44.0 $82.3 $68.5 ======== ======== ========= FUNDS UNDER MANAGEMENT AND EQUIVALENTS AT END OF YEAR Group Single Premium Annuities $1,188.1 $1,197.8 $1,209.5 Traditional GICs 3,204.3 4,838.0 7,042.6 Separate Account GICs 68.3 146.1 138.9 Synthetic GICs 2,176.6 2,571.9 1,626.8 Other 304.7 301.1 275.5 -------- -------- --------- Total $6,942.0 $9,054.9 $10,293.3 ======== ======== ========= LIFE INSURANCE IN FORCE - CORPORATE-OWNED LIFE $2,999.6 $2,967.2 $2,641.5
OTHER OPERATIONS OPERATING RESULTS The Other Operations segment includes the Company's group pension products, its corporate-owned life insurance ("COLI") products, corporate (unallocated) capital and assets, and the medical services business sold in 1995 (see Note 13 of the Notes to Consolidated Financial Statements). The group pension and COLI blocks of business are essentially closed blocks of business which have been segregated for reporting and monitoring purposes. The group pension products include the Company's traditional guaranteed investment contracts ("GICs"), group single premium annuities ("SPAs"), and synthetic GICs. Revenue in the Other Operations segment declined $338.2 million, or 34.3 percent, to $646.8 million in 1996 from $985.0 million in 1995. The decline was partially due to the sale of the medical services line of business, which, prior to its sale on April 30, 1995, contributed operating revenue of $146.1 million and a gain from the sale of the business of $21.8 million. In addition, revenue in the group pension line of business declined $177.2 million, or 30.3 percent, to $408.4 million in 1996 from $585.6 million in 1995 due to a decrease in funds under management resulting from the strategic decision to discontinue the sale of traditional GICs. Premium income in this segment declined $90.6 million, or 76.4 percent, to $28.0 million in 1996 from $118.6 million in 1995. This decline is due to the sale of the medical services line of business, which produced $90.9 million of premium income prior to its sale in the second quarter of 1995. In 1995, revenue in the Other Operations segment declined $295.4 million, or 23.1 percent, to $985.0 million, compared to $1,280.4 million in 1994. Premium income in this segment declined $153.5 million to $118.6 million in 1995 compared to $272.1 million in 1994. The primary reason for this decline was the sale of the medical services business which produced premium income of $241.3 million in 1994 and $90.9 million in 1995 prior to its sale effective April 30, 1995. Net investment income declined $81.3 million to $769.4 million in 1995 from $850.7 million in 1994. The primary reason for this decline was the decrease in funds under management in the group pension line of business. Net investment income in the group pension line declined $80.0 million to $574.2 million in 1995, compared to $654.2 million in 1994. In addition, net investment income from corporate (unallocated) capital and assets declined due to additional capital being allocated to the individual disability income line of business. Administrative services only fees associated with the medical -7- services business declined due to the sale of the medical services business in 1995. These fees totaled $110.9 million in 1994 and $37.2 million in 1995. The Company announced in December 1994, that it would discontinue the sale of traditional GICs. Funds under management for the group pension line excluding deposits for synthetic GICs totaled $4.77 billion at December 31, 1996, compared to $6.48 billion at December 31, 1995, a decrease of 26.5 percent. In 1995, funds under management decreased 25.2 percent, from $8.67 billion at December 31, 1994. In 1995, the Company extended an offer to GIC contract holders to surrender their contracts on a more favorable basis than would otherwise be available to them. Contracts with a book value of $291.7 million were surrendered under the offer. The Company has no plans for another offer of this kind. Early surrenders of traditional GICs totaled $40.8 million in 1996 and $662.1 million in 1995. The Company does not anticipate significant early withdrawals on its remaining GICs as virtually all of the contracts are subject to a market value adjustment for early withdrawal. In keeping with management's strategic desire to focus its resources in the other two segments, the Company decided to discontinue the sale of synthetic GICs and in January 1997, signed a letter of understanding to sell the block of business through an assumptive reinsurance transaction. Accumulated funds from the sale of the Company's synthetic GICs totaled $2.18 billion at December 31, 1996, $2.57 billion at December 31, 1995, and $1.63 billion at December 31, 1994. Revenue in this segment is expected to continue to decline as a result of the discontinuance of the sales of traditional GICs and group SPAs and the run- off of the funds under management. As the traditional GICs mature, capital will be available for use by the Company as amounts allocated to this line are released. Income in 1996 declined $61.4 million to $61.2 million in 1996 from $122.6 million in 1995. This decline is partially due to the 1995 sale of the medical services line of business, which produced operating income of $3.2 million and a gain from the sale of $21.8 million during 1995. In addition, the decline in this segment was due to lower income in the group pension line of business, which declined $26.1 million, or 35.4 percent, to $47.6 million in 1996 from $73.7 million in 1995. The decline in this line was primarily the result of lower funds under management and lower income from a reduced amount of capital allocated to this line. Income from the corporate-owned life insurance line of -8- business declined slightly to $19.7 million in 1996, compared to $20.5 million in 1995. Income in this segment increased $16.6 million to $122.6 million in 1995 from $106.0 million in 1994. Higher income in the group pension line of business and the gain from the sale of the medical services line were the primary reasons for the increase in income. The group pension line produced income of $73.7 million in 1995, compared to $48.8 million in 1994. This line of business benefited from an improvement in the spread between interest credited on contracts and the interest earned on the invested assets, as well as income from bond call premiums, early surrender penalties, and lower expenses. Income from the block of corporate-owned life insurance declined slightly to $20.5 million in 1995 from $21.1 million in 1994. This decline in income was primarily attributable to a decline in premium income in this line of business. Income from the medical services line of business declined to $3.2 million for the four months of 1995 from $16.9 million for the year 1994. In addition, the Other Operations segment in 1995 included an unusually high level of corporate expenses related to several initiatives underway within the Company. Management expects that income in 1997 from the group pension line will decline from the levels recorded in 1996 as the funds under management decline. Management also expects that the level of corporate expenses related to this segment will be lower in 1997 than in 1996. -9- LIQUIDITY AND CAPITAL RESOURCES As a holding company, the Company is dependent upon payments from its wholly-owned insurance subsidiaries, Provident Life and Accident Insurance Company ("Accident"), Provident Life and Casualty Insurance Company ("Casualty"), and Provident National Assurance Company ("National") (collectively "Provident") and its recently acquired wholly-owned subsidiaries GENEX Services, Inc. and GENEX Services of Canada, Inc. (collectively "GENEX") to pay dividends to its shareholders and to pay its expenses. These payments by Provident and GENEX may take the form of either dividends or interest payments on amounts loaned to Provident or GENEX by the Company. State insurance laws generally restrict the ability of insurance companies to pay cash dividends or make other payments to their affiliates in excess of certain prescribed limitations. In Tennessee, Provident's state of domicile, regulatory approval is required if an insurance company seeks to make loans to affiliates in amounts equal to or in excess of three percent of the insurer's admitted assets, or to pay cash dividends in excess of the greater of such company's net gain from operations of the preceding year or ten percent of its surplus as regards policyholders, as determined at the end of the preceding year in accordance with prescribed or permitted accounting practices. In November 1996, National made an extraordinary cash distribution in the amount of $100.0 million to the Company. An aggregate of $107.0 million would be available in 1997 for the payment of dividends or other distributions by Accident, National, and Casualty without regulatory approval. The Company's requirements are met primarily by cash flow provided from operations, principally in Provident. Premium and investment income as well as maturities and sales of invested assets provide the primary sources of cash. Cash flow from operations was sufficient in 1996. Cash is applied to the payment of policy benefits, costs of acquiring new business (principally commissions) and operating expenses, as well as purchases of new investments. The Company has established an investment strategy that management believes will provide for adequate cash flow from operations. The Company expects no material adverse effect on its liquidity as a result of the discontinuance of sales of traditional GICs. While traditionally the investment strategy for this product line has been to match the effective asset durations with the related expected liability durations, the Company has moved to a cash flow matching strategy. -10- In May 1995, the Company sold 26 restructured mortgage loans with a principal amount of $147.5 million and a book value of $122.6 million. The transaction resulted in a before-tax realized investment loss of $23.1 million. In October 1995, the Company completed the sale of commercial mortgage loans with a principal amount and a book value of $962.4 million through a securitization collateralized by 366 loans. The transaction resulted in a before-tax realized investment gain of $8.9 million. In February 1996, the Company sold 24 mortgage loans with a principal amount of $81.6 million and a book value of $75.9 million, realizing a before-tax investment loss of $5.7 million. These transactions increased the liquidity of the investment portfolio and facilitated the move to a cash flow matching strategy for the GIC portfolios. The proceeds from the mortgage sales were reinvested in fixed maturity securities and were also used to fund the limited-time GIC surrender offer in 1995 described in Other Operations. The sale of the mortgage loans is expected to result in lower investment income in the future, as well as lower net realized investment losses and lower investment expenses. Overall, the Company expects these transactions to have a positive effect on net income in future years. Management also expects the transactions to improve asset quality, liquidity, asset/liability management, and the capital adequacy ratios. On April 29, 1996, the Company announced that it had entered into an Agreement and Plan of Merger ("Agreement") with The Paul Revere Corporation ("Paul Revere") pursuant to which the Company would acquire Paul Revere at a price of approximately $1.2 billion. The Company and Paul Revere's 83 percent shareholder, Textron Inc. ("Textron"), announced on November 6, 1996, that Textron had agreed to provide additional capital to Paul Revere and that the parties would make certain other adjustments relating to the Company's acquisition of Paul Revere. This followed the announcement by Paul Revere of a $244.3 million after-tax reserve strengthening in its individual disability insurance segment in the third quarter of 1996. The strengthening reflected the results of a previously announced comprehensive reserve study prepared in accordance with generally accepted accounting principles which was completed in early November 1996. The financial terms of the acquisition are unchanged to Paul Revere's public shareholders from those of the original Agreement. Under the terms of the Amended and Restated Agreement and Plan of Merger (the "Amended Agreement"), -11- Textron was committed to make a capital contribution to Paul Revere of between $100 million and $180 million. The amount of the contribution, determined by the amount of statutory reserve strengthening required by the Commonwealth of Massachusetts Division of Insurance as a condition to consenting to the acquisition of Paul Revere by the Company, was $121.0 million on an after-tax basis, of which $83.5 million was contributed to Paul Revere as of December 31, 1996, and $37.5 million was contributed on February 18, 1997. Textron also agreed to the resetting of the Exchange Ratio to be used in computing the number of shares of Company stock that will constitute the stock portion of the merger consideration Textron will receive for its 37.5 million shares of Paul Revere stock. The Exchange Ratio for Textron as defined in the original Agreement was to be no lower than 0.0295, compared to a minimum Textron Exchange Ratio of 0.0263 under the Amended Agreement. This change may reduce the number of shares of the Company's stock that Textron will receive. Additional consideration totaling approximately $35 million will also be paid to the Company or contributed to Paul Revere by Textron. The Amended Agreement contains certain limited purpose hold harmless provisions pursuant to which Textron has agreed to indemnify the Company from specified damages. The transaction was approved by the required vote of the shareholders of the Company and Paul Revere on December 31, 1996. It remains subject to the approval of the Commonwealth of Massachusetts Division of Insurance. A hearing was held by the Division on March 6, 1997, to consider the Company's application to acquire Paul Revere, and a decision by the Commissioner is expected shortly. The foregoing discussion of the Amended Agreement is a summary of the terms of the Amended Agreement and is qualified in its entirety by reference to the Amended Agreement and the joint press release of the Company and Textron dated November 6, 1996, which have been previously filed with the Securities and Exchange Commission, together with a more complete description of the terms of the merger. The acquisition will be financed through common equity issuance to Zurich Insurance Company, a Swiss insurer, or one or more of its affiliates, common equity issuance to Paul Revere shareholders, debt, and internally generated funds. Contractual commitments are in place for the debt issuance. For additional information, see Note 6 of the Notes to Consolidated Financial Statements. The Company believes the cash flows from the combined operations will be sufficient to meet its operating and financing cash flow requirements. -12- On February 28, 1997, the Company acquired GENEX Services, Inc. and GENEX Services of Canada, Inc., subsidiaries of First Data Corporation, at a price of approximately $70.0 million. GENEX is a leading provider of case management, vocational rehabilitation, and related services to corporations, third party administrators, and insurance companies. These services are utilized in the management of disability and worker's compensation claims. As a result of the release of capital generated by the run-off of the GIC portfolio, the sale of the commercial mortgage loans, the sale of the medical services line, and other corporate actions, the Company has increased its available capital to support the growth of its businesses, including assisting in the financing of the two acquisitions discussed above. Management continues to analyze potential opportunities to utilize the capital to further enhance shareholder value, including exploring options that would support the Company's growth initiatives. -13- INVESTMENTS Investment activities are an integral part of the Company's business, and profitability is significantly affected by investment results. Invested assets are segmented into portfolios which support the various product lines. Generally, the investment strategy for the portfolios is to match the effective asset durations with related expected liability durations and to maximize investment returns, subject to constraints of quality, liquidity, diversification, and regulatory considerations. This discussion should be read in connection with Note 3 of the Notes to Consolidated Financial Statements. The following table provides the distribution of invested assets for the years indicated.
- ----------------------------------------------------------------------------------- December 31 1996 1995 1994 - ----------------------------------------------------------------------------------- Investment-Grade Fixed Maturity Securites 77.0% 79.3% 72.6% Below-Investment-Grade Fixed Maturity Securities 6.7 6.2 4.6 Equity Securities 0.1 --- 0.1 Mortgage Loans --- 0.7 10.0 Real Estate 1.1 1.4 1.6 Policy Loans 13.1 10.7 9.1 Other 2.0 1.7 2.0 - ----------------------------------------------------------------------------------- Total 100.0% 100.0% 100.0% - -----------------------------------------------------------------------------------
The following table provides certain investment information and results for the years indicated.
- ----------------------------------------------------------------------------------- Year Ended December 31 1996 1995 1994 - ----------------------------------------------------------------------------------- (in millions of dollars) - ----------------------------------------------------------------------------------- Average Cash and Invested Assets $14,056.3 $14,914.4 $15,047.3 Net Investment Income $ 1,090.1 $ 1,221.3 $ 1,238.6 Average Yield* 7.8% 8.2% 8.2% Net Realized Investment Losses $ (8.6) $ (31.7) $ (30.1) - -----------------------------------------------------------------------------------
*Average yield is determined by dividing net investment income by the average cash and invested assets for the year. Excluding net unrealized gains and losses on securities, the yield is 8.1%, 8.3%, and 8.3% for 1996, 1995, and 1994, respectively. See Notes 1 and 3 of the Notes to Consolidated Financial Statements. -14- For the past three years, the Company's exposure to non-current investments has improved significantly from prior years. These non-current investments are primarily foreclosed real estate and mortgage loans which became more than thirty days past due in their principal and interest payments. Non-current investments, comprised of foreclosed real estate, totaled $7.3 million at December 31, 1996, or 0.05 percent of invested assets. Non-current investments at year-end 1995 were $31.9 million, or 0.22 percent of invested assets, compared to $88.5 million, or 0.59 percent of invested assets at year-end 1994. As previously discussed under Liquidity and Capital Resources, the Company sold a substantial portion of its commercial mortgage loan portfolio in 1995. The remaining exposure of $104.8 million of mortgage loans was liquidated during 1996. During 1996, the Company sold four foreclosed properties with a book value of $11.8 million. During 1995, the Company sold twelve foreclosed properties with a book value of $39.6 million at the date of sale. The Company's investment in mortgage-backed securities totaled $2.4 billion on an amortized cost basis at December 31, 1996, and $2.9 billion at December 31, 1995. At December 31, 1996, the mortgage-backed securities had an average life of 8.3 years and effective duration of 6.0 years. The mortgage-backed securities are valued on a monthly basis using valuations supplied by the brokerage firms that are dealers in these securities. The primary risk involved in investing in mortgage-backed securities is the uncertainty of the timing of cash flows from the underlying loans due to prepayment of principal. The Company uses models which incorporate economic variables and possible future interest rate scenarios to predict future prepayment rates. The Company has not invested in mortgage-backed derivatives, such as interest-only, principal-only or residuals, where market values can be highly volatile relative to changes in interest rates. As with most other fixed income investments, below-investment-grade bonds are subject to the effects of changes in the overall level of interest rates, which can affect both capital and reinvestment return. Below-investment-grade bonds are inherently more risky than investment-grade bonds since the risk of default by the issuer, by definition and as exhibited by bond rating, is higher. Also, the secondary market for certain below-investment-grade issues can be highly illiquid. Management does not anticipate any liquidity problem being caused by the investments in below-investment-grade securities, nor does it -15- expect these investments to adversely affect its ability to hold its other investments to maturity. The Company's exposure to below-investment-grade fixed maturity securities at December 31, 1996, was $891.1 million, representing 6.7 percent of invested assets, below the internal limit of 7.5 percent of invested assets for this type of investment. The Company's exposure to below-investment-grade fixed maturities at December 31, 1995, was $911.8 million, representing 6.2 percent of invested assets. Included in the below-investment-grade portfolio was the Company's holding of $100.0 million of Healthsource 6.25% preferred stock, received as part of the consideration for the sale of the group medical services business. The preferred stock was redeemed in cash at par by Healthsource during 1996. Changes in interest rates and individuals' behavior affect the amount and timing of asset and liability cash flows. Management has added resources in the investment area to address modeling and testing of all asset and liability portfolios to improve interest rate risk management and net yields. Testing the asset and liability portfolios under various interest rate and economic scenarios allows management to choose the most appropriate investment strategy as well as to prepare for the most disadvantageous outcomes. This analysis is the precursor to the Company's activities in derivative financial instruments (see Note 4 of the Notes to Consolidated Financial Statements). -16- REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders Provident Companies, Inc. We have audited the accompanying consolidated statements of financial condition of Provident Companies, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Provident Companies, Inc. and Subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, during 1994 the Company changed its method of accounting for certain debt and equity securities. ERNST & YOUNG LLP Chattanooga, Tennessee February 10, 1997, except for Note 16, as to which the date is February 28, 1997 -1- CONSOLIDATED STATEMENTS OF INCOME PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
Year Ended December 31 1996 1995 1994 (in millions of dollars, except share data) ---------------------------------------------- REVENUE Premium Income $ 1,175.7 $ 1,251.9 $ 1,382.6 Net Investment Income 1,090.1 1,221.3 1,238.6 Net Realized Investment Losses (8.6) (31.7) (30.1) Other Income 34.7 113.8 171.1 ----------- ----------- ----------- TOTAL REVENUE 2,291.9 2,555.3 2,762.2 ----------- ----------- ----------- BENEFITS AND EXPENSES Policy and Contract Benefits 1,216.5 1,419.7 1,506.8 Change in Reserves for Future Policy and Contract Benefits and Policyholders' Funds 444.7 484.9 474.4 Amortization of Deferred Policy Acquisition Costs 64.0 71.0 59.4 Salaries 77.3 99.8 160.2 Commissions 124.0 131.9 121.8 Other Operating Expenses 139.2 172.0 238.7 ----------- ----------- ----------- TOTAL BENEFITS AND EXPENSES 2,065.7 2,379.3 2,561.3 ----------- ----------- ----------- INCOME BEFORE FEDERAL INCOME TAXES 226.2 176.0 200.9 FEDERAL INCOME TAXES 80.6 60.4 65.6 ----------- ----------- ----------- NET INCOME $ 145.6 $ 115.6 $ 135.3 =========== =========== =========== NET INCOME PER COMMON SHARE $ 2.92 $ 2.27 $ 2.71 =========== =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 45,522,417 45,381,373 45,311,053 =========== =========== ===========
See notes to consolidated financial statements. -2- CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
December 31 1996 1995 (in millions of dollars) --------------------------- ASSETS INVESTMENTS Fixed Maturity Securities Available-for-Sale - at fair value (amortized cost: $10,384.3; $11,458.3) $10,880.1 $12,318.6 Held-to-Maturity - at amortized cost (fair value: $263.1; $321.1) 264.5 299.0 Equity Securities - at fair value (cost: $7.2; $9.2) 4.9 5.3 Mortgage Loans - 104.8 Real Estate 151.1 203.7 Policy Loans 1,749.0 1,574.6 Other Long-term Investments 15.5 14.0 Short-term Investments 252.3 231.0 --------- --------- TOTAL INVESTMENTS 13,317.4 14,751.0 OTHER ASSETS Cash and Bank Deposits 19.3 24.8 Accounts Receivable 40.1 41.3 Premiums Receivable 72.3 75.5 Reinsurance Receivable 468.3 435.3 Accrued Investment Income 268.3 277.4 Deferred Policy Acquisition Costs 421.8 271.8 Property and Equipment - at cost less accumulated depreciation 59.0 49.2 Miscellaneous 25.5 17.2 Separate Account Assets 300.5 357.8 --------- --------- TOTAL ASSETS $14,992.5 $16,301.3 ========= =========
See notes to consolidated financial statements. -3- CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
December 31 1996 1995 (in millions of dollars) --------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Policy and Contract Benefits $ 411.7 $ 383.7 Reserves for Future Policy and Contract Benefits 8,051.3 7,756.2 Unearned Premiums 58.8 58.4 Experience Rating Refunds 164.0 157.8 Policyholders' Funds 3,717.1 5,334.6 Federal Income Tax Liability Current 34.6 29.9 Deferred 14.5 37.2 Long-term Debt 200.0 200.0 Other Liabilities 301.4 333.4 Separate Account Liabilities 300.5 357.8 --------- --------- TOTAL LIABILITIES 13,253.9 14,649.0 --------- --------- COMMITMENTS AND CONTINGENT LIABILITIES--NOTE 14 STOCKHOLDERS' EQUITY--NOTE 7 Preferred Stock 156.2 156.2 Common Stock, $1 par Authorized: 150,000,000 shares Issued: 45,627,629 and 45,397,886 shares 45.6 45.4 Additional Paid-in Capital 11.4 5.8 Net Unrealized Gain on Securities 90.9 101.9 Foreign Currency Translation Adjustment (5.2) (4.8) Retained Earnings 1,439.7 1,347.8 --------- --------- TOTAL STOCKHOLDERS' EQUITY 1,738.6 1,652.3 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $14,992.5 $16,301.3 ========= =========
See notes to consolidated financial statements. -4- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
Year Ended December 31 1996 1995 1994 (in millions of dollars) -------------------------------- PREFERRED STOCK Balance at Beginning and End of Year $ 156.2 $ 156.2 $ 156.2 -------- -------- -------- COMMON STOCK Balance at Beginning of Year 45.4 45.4 45.2 Issued During Year 0.2 - 0.2 -------- -------- -------- Balance at End of Year 45.6 45.4 45.4 -------- -------- -------- ADDITIONAL PAID-IN CAPITAL Balance at Beginning of Year 5.8 4.8 3.1 Contributions During Year 5.6 1.0 1.7 -------- -------- -------- Balance at End of Year 11.4 5.8 4.8 -------- -------- -------- NET UNREALIZED GAIN (LOSS) ON SECURITIES Balance at Beginning of Year 101.9 (302.3) (2.1) Adjustment for the Initial Application of SFAS 115 - - 244.9 Change During Year (11.0) 404.2 (545.1) -------- -------- -------- Balance at End of Year 90.9 101.9 (302.3) -------- -------- -------- FOREIGN CURRENCY TRANSLATION ADJUSTMENT Balance at Beginning of Year (4.8) (5.4) (3.9) Change During Year (0.4) 0.6 (1.5) -------- -------- -------- Balance at End of Year (5.2) (4.8) (5.4) -------- -------- -------- RETAINED EARNINGS Balance at Beginning of Year 1,347.8 1,270.4 1,203.1 Net Income 145.6 115.6 135.3 Dividends to Stockholders (Paid Per Common Share: $0.72; $0.72; $1.04) (53.7) (38.2) (68.0) -------- -------- -------- Balance at End of Year 1,439.7 1,347.8 1,270.4 -------- -------- -------- TOTAL STOCKHOLDERS' EQUITY $1,738.6 $1,652.3 $1,169.1 ======== ======== ========
See notes to consolidated financial statements. -5- CONSOLIDATED STATEMENTS OF CASH FLOWS PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
Year Ended December 31 1996 1995 1994 (in millions of dollars) ----------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 145.6 $ 115.6 $ 135.3 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Policy Acquisition Costs Capitalized (71.4) (88.1) (95.1) Amortization of Policy Acquisition Costs 64.0 71.0 59.4 Depreciation and Amortization 11.1 24.3 42.2 Net Realized Investment Losses 8.6 31.7 30.1 Premiums Receivable 3.2 (13.2) 2.4 Reinsurance Receivable (33.0) 2.0 (56.4) Accrued Investment Income 9.1 4.1 (17.4) Insurance Reserves and Liabilities 546.8 581.8 563.6 Federal Income Taxes (11.9) (11.4) (25.7) Other (11.5) (42.9) 8.0 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 660.6 674.9 646.4 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Sales of Investments Available-for-Sale Securities 1,592.6 1,359.9 693.7 Other Investments 141.8 1,172.5 50.2 Proceeds from Maturities of Investments Available-for-Sale Securities 1,115.7 880.8 2,023.6 Held-to-Maturity Securities 100.5 0.7 2.2 Other Investments 13.0 248.7 382.9 Purchase of Investments Available-for-Sale Securities (1,630.7) (1,680.1) (3,453.4) Held-to-Maturity Securities (48.6) (183.9) (0.2) Other Investments (177.5) (236.6) (266.9) Net (Purchases) Sales of Short-term Investments (21.5) 58.7 66.4 Disposition of Group Medical Business - (48.9) - Other (75.5) (67.0) 63.5 --------- --------- --------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES $ 1,009.8 $ 1,504.8 $ (438.0) --------- --------- ---------
See notes to consolidated financial statements. -6- CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
Year Ended December 31 1996 1995 1994 (in millions of dollars) ----------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Deposits to Policyholder Accounts $ 392.5 $ 530.6 $ 1,691.0 Maturities and Benefit Payments from Policyholder Accounts (2,023.8) (2,663.5) (1,779.7) Net Short-term Debt Repayments (1.4) (13.0) (14.6) Issuance of Common Stock 5.8 1.0 1.9 Dividends Paid to Stockholders (45.5) (45.3) (59.8) Other (3.5) - (43.9) --------- --------- --------- NET CASH USED BY FINANCING ACTIVITIES (1,675.9) (2,190.2) (205.1) --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND BANK DEPOSITS (5.5) (10.5) 3.3 CASH AND BANK DEPOSITS AT BEGINNING OF YEAR 24.8 35.3 32.0 --------- --------- --------- CASH AND BANK DEPOSITS AT END OF YEAR $ 19.3 $ 24.8 $ 35.3 ========= ========= =========
See notes to consolidated financial statements. -7- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 1--SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION: The accompanying financial statements have been prepared on the basis of generally accepted accounting principles. Such accounting principles differ from statutory accounting practices prescribed or permitted by state regulatory authorities (see Note 15). The consolidated financial statements include the accounts of Provident Companies, Inc. and its wholly- owned subsidiaries (the Company), including Provident Life and Accident Insurance Company, Provident Life and Casualty Insurance Company, and Provident National Assurance Company (see Note 7). Material intercompany transactions have been eliminated. OPERATIONS: The Company does business in the fifty states, the District of Columbia, Puerto Rico, and ten provinces and two territories of Canada. The Company operates principally in the life and health insurance business. Individual life products, individual disability income products, and individual annuities are reported in the Individual Life and Disability segment and are marketed primarily through personal producing general agents, brokerage offices, and corporate marketing arrangements. Individual annuities are also marketed through financial institutions. The Employee Benefits segment contains products that are sold to or through corporate customers and certain affinity groups, including permanent and term life insurance, disability, medical stop-loss, cancer, accident and sickness, and accidental death and dismemberment protection. The Other Operations segment reports corporate results, primarily investment earnings not specifically allocated to a line of business, and also includes results from products no longer actively marketed, including guaranteed investment contracts (GICs), group single premium annuities, and corporate- owned life insurance. This segment also includes the results of the group medical business which was sold effective April 30, 1995 (see Note 13). USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein. INVESTMENTS: Investments are reported in the consolidated statements of financial condition as follows: Available-for-Sale Fixed Maturity Securities are reported at fair value. Held-to-Maturity Fixed Maturity Securities are generally reported at amortized cost. Equity Securities are reported at fair value. Mortgage Loans are generally carried at the unpaid balance. Mortgage loans that are considered impaired are carried at the lower of the unpaid balance or the fair value of the collateral. Real Estate that the Company expects to hold and use is carried at cost less accumulated depreciation which is calculated using principally the straight-line method. Real estate to be disposed of is carried at the lower of cost less accumulated depreciation or fair value less cost to sell. Policy Loans are presented at unpaid balances. Other Long-term Investments are carried at cost plus the Company's equity in undistributed net earnings since acquisition. Short-term Investments are carried at cost. -8- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 1--SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Fixed maturity securities include bonds and redeemable preferred stocks. Equity securities include common stocks and nonredeemable preferred stocks. Fixed maturity and equity securities not bought and held for the purpose of selling in the near term but for which the Company does not have the positive intent and ability to hold to maturity are classified as available-for-sale. Fixed maturity securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity. The Company determines the appropriate classification of fixed maturity securities at the time of purchase. Realized investment gains and losses, which are reported as a component of revenue in the consolidated statements of income, are based upon specific identification of the investments sold and do not include amounts allocable to separate accounts. At the time a decline in the value of an investment is determined to be other than temporary, a loss is recorded which is included in realized investment gains and losses. DERIVATIVE FINANCIAL INSTRUMENTS: Interest Rate Swap Agreements are agreements in which two parties agree to exchange, at specified intervals, interest payment streams calculated on an agreed-upon notional principal amount with at least one stream based on a specified variable rate. The underlying notional principal is not exchanged between the parties. The Company has certain forward interest rate swap agreements where the exchange of interest payments does not begin until a specified future date. The Company intends to settle the forward interest rate swap agreements prior to the commencement of the exchange of interest payment streams. The fair values of interest rate swap agreements which hedge available-for-sale securities are reported in the consolidated statements of financial condition as a component of fixed maturity securities. The fair values of interest rate swap agreements which hedge liabilities are not reported in the consolidated statements of financial condition. Amounts to be paid or received pursuant to interest rate swap agreements are accrued and recognized in the consolidated statements of income as an adjustment to net investment income for asset hedges or as an adjustment to policy and contract benefits for liability hedges. The Company accounts for all of its interest rate swap agreements as hedges. Accordingly, any gains or losses realized on closed or terminated interest rate swap agreements are deferred and amortized to net investment income for asset hedges or policy and contract benefits for liability hedges over the expected remaining life of the hedged item. If the hedged item matures or terminates earlier than anticipated, the remaining unamortized gain or loss is amortized to net investment income or policy and contract benefits in the current period. Gains or losses realized on interest rate swap agreements which are terminated when the hedged assets are sold or which are terminated because the hedged anticipated transaction is no longer likely to occur are reported in the consolidated statements of income as a component of net realized investment gains and losses. The Company regularly monitors the effectiveness of its hedging programs. In the event a hedge becomes ineffective, it is marked-to-market, resulting in a charge or credit to net investment income or policy and contract benefits. -9- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 1--SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Futures and Forwards contracts are commitments to either purchase or sell a financial instrument at a specific future date for a specified price. The Company invests only in futures and forwards contracts which have U.S. Treasury securities as the underlying investments. Changes in the market value of contracts are generally settled on a daily basis. The notional amount of futures and forwards contracts represent the extent of the Company's involvement but not the future cash requirements, as the Company intends to close out open positions prior to settlement. All of the Company's futures and forwards contracts are accounted for as hedges. The fair values of futures and forwards which hedge available-for-sale securities are reported in the consolidated statements of financial condition as a component of fixed maturity securities. The fair values of futures and forwards which hedge liabilities are not reported in the consolidated statements of financial condition. Gains or losses realized on the termination of futures and forwards contracts are accounted for in the same manner as interest rate swap agreements. Options contracts give the owner the right, but not the obligation, to buy or sell a financial instrument at an agreed-upon price on or before a specific date. The purchasing counterparty pays a premium to the selling counterparty for this right. The notional amounts of contracts represent the Company's involvement but not the future cash requirements, as the Company intends to close out contracts prior to the expiration date when the market price of the underlying financial instrument exceeds the option price or allow contracts to expire if the option price exceeds the market price. All of the Company's options contracts are accounted for as hedges. The book and fair values of options contracts are reported in the statements of financial condition in a manner similar to the underlying hedged item. Gains or losses on the termination of options contracts are accounted for in the same manner as interest rate swap agreements. DEFERRED POLICY ACQUISITION COSTS: Certain costs of acquiring new business which vary with and are primarily related to the production of new business have been deferred. Such costs include commissions, other agency compensation, certain selection and policy issue expenses, and certain field expenses. Deferred policy acquisition costs are subject to recoverability testing at the time of policy issue and loss recognition testing subsequent to the year of issue. Deferred policy acquisition costs related to traditional individual life and individual disability income are amortized over the premium paying period of the related policies in proportion to the ratio of the present value of annual expected premium income to the present value of total expected premium income. Adjustments are made each year to recognize actual persistency experience as compared to assumed experience. Deferred policy acquisition costs related to interest-sensitive individual life and individual annuity policies are amortized over the lives of the policies in relation to the present value of estimated gross profits from surrender charges and mortality, investment, and expense margins. Adjustments are made each year to reflect actual experience for assumptions which deviate significantly compared to assumed experience. The amortization periods do not exceed 25 years for traditional and interest- sensitive individual life policies, 20 years for individual disability income policies, and 15 years for individual annuity policies. Loss recognition is performed when, in the judgment of management, adverse deviations from original assumptions have occurred and may be likely to continue such that recoverability of deferred policy acquisition costs on a line of business is questionable. Insurance contracts are grouped on a basis consistent with the Company's manner of acquiring, servicing, and measuring profitability of the contracts. If loss recognition testing indicates that deferred policy acquisition costs are not recoverable, the deficiency is charged to expense. Once a loss recognition adjustment is required, loss recognition testing is generally performed on an annual basis using then current assumptions until the line of business becomes immaterial or results improve significantly. The assumptions used in loss recognition testing represent management's best estimates of future experience. -10- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 1--SIGNIFICANT ACCOUNTING POLICIES - CONTINUED PROPERTY AND EQUIPMENT: Property and equipment is depreciated on the straight- line method over its estimated useful life. The accumulated depreciation for property and equipment was $84.4 million and $87.6 million as of December 31, 1996 and 1995, respectively. REVENUE RECOGNITION: For traditional life and accident and health products, the amounts collected from policyholders are recognized as premium income over the premium paying period and are reported net of experience rating refunds and unearned premiums. For interest-sensitive products, the amounts collected from policyholders are considered deposits, and only the deductions during the period for cost of insurance, policy administration, and surrenders are included in revenue. Policyholders' funds represent funds deposited by contract holders and are not included in revenue. POLICY AND CONTRACT BENEFITS: Policy and contract benefits, principally related to accident and health insurance policies, are based on reported losses and estimates of incurred but not reported losses for traditional life and accident and health products. For interest-sensitive products, benefits are the amounts paid and expected to be paid on insured claims in excess of the policyholders' policy fund balances. RESERVES FOR FUTURE POLICY AND CONTRACT BENEFITS: Active life reserves for future policy and contract benefits on traditional life and accident and health products have been provided on the net level premium method. The reserves are calculated based upon assumptions as to interest, withdrawal, morbidity, and mortality that were appropriate at the date of issue. Withdrawal assumptions are based on actual Company experience. Morbidity and mortality assumptions are based upon industry standards adjusted as appropriate to reflect actual Company experience. The assumptions vary by plan, year of issue, and policy duration and include a provision for adverse deviation. Disabled lives reserves for future policy and contract benefits on disability income policies are calculated based upon assumptions as to interest and claim termination rates that are currently appropriate. Termination rate assumptions are based upon industry standards adjusted as appropriate to reflect actual Company experience. The assumptions vary by year of claim incurral. Reserves for future policy and contract benefits on group single premium annuities have been provided on a net single premium method. The reserves are calculated based upon assumptions as to interest, mortality, and retirement that were appropriate at the date of issue. Mortality assumptions are based upon industry standards adjusted as appropriate to reflect actual Company experience. The assumptions vary by year of issue and include a provision for adverse deviation. The interest rate assumptions used to calculate reserves for future policy and contract benefits are as follows:
December 31 1996 1995 --------------------------------- ACTIVE LIFE RESERVES - CURRENT YEAR ISSUES Traditional Life 7.25% to 10.00% 7.25% to 10.00% Individual Disability Income 7.00% to 7.75% 7.50% to 7.75% DISABLED LIVES RESERVES - CURRENT YEAR CLAIMS Individual Disability Income 8.00% 8.25% Group Disability Income 7.00% 6.75% DISABLED LIVES RESERVES - PRIOR YEAR CLAIMS Individual Disability Income 8.00% 8.25% Group Disability Income 6.00% to 7.00% 6.00% to 7.00%
-11- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 1--SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Interest assumptions for active life reserves are generally graded downward over a period of years. Reserves for future policy and contract benefits on interest-sensitive products are principally policyholder account values determined on the retrospective deposit method. The Company performed a loss recognition study as of December 31, 1996, for the individual disability income business. In a loss recognition study, the Company uses its best estimates as to future experience with regard to interest rates, morbidity rates, lapse rates, expenses, and other factors to determine if reserves currently held plus the present value of future cash inflows (primarily from premiums and investment income) are projected to be sufficient to meet the present value of future cash outflows (primarily for benefits and expenses) and the amortization of deferred policy acquisition costs. If they are not sufficient, an additional provision must be recorded either as a reduction of deferred policy acquisition costs or as an increase in reserve liabilities. Based upon current assumptions which represent management's best estimates, reserves were adequate at December 31, 1996. POLICYHOLDERS' FUNDS: Policyholders' funds represent customer deposits plus interest credited at contract rates. The Company controls its interest rate risk by investing in quality assets which have an aggregate duration that closely matches the expected duration of the liabilities. For GICs, the Company has changed its investment strategy from a duration matching approach to a cash flow matching approach. The change was necessitated by the Company's announcement in 1994 that it had discontinued the sale of new traditional GIC business. The Company will continue to service all of its existing GICs. The liability for GICs comprises over 85 percent of the liability balance shown on the consolidated statements of financial condition. The interest rate credited on a contract is dependent upon the time to maturity with most contracts issued having a three to five year maturity. Generally, if a policyholder terminates a GIC prior to maturity, there is a surrender charge imposed which is based on the length of the remaining life of the GIC and the change in interest rates from the date the GIC was issued to the date of termination. In 1995, the Company extended an offer to GIC policyholders to surrender their contracts on a more favorable basis than would otherwise be available to them. Contracts with a book value of $291.7 million were surrendered under the offer. Interest credited on GICs is reported as a part of policy and contract benefits in the consolidated statements of income. The interest credited on GICs and the average interest crediting rates are presented below.
Interest Credited Average Interest (in millions of dollars) Crediting Rate -------------------------------------------- Year Ended December 31 1996 $249.4 6.40% 1995 393.5 6.65 1994 499.2 6.94
-12- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 1--SIGNIFICANT ACCOUNTING POLICIES - CONTINUED SYNTHETIC GICS: In May 1996, the Company discontinued accepting new synthetic GIC deposits. Prior to this time, the Company issued synthetic GICs to trustees of employee benefit plans pursuant to the terms of which the trustees own and retain the assets related to these contracts. Such assets are not included in the Company's consolidated statements of financial condition. The Company guarantees to provide benefit payments in the event of plan benefit requests and, in return for this guarantee, receives a premium based on such elements as benefit payment exposure and contract size. The trustees may either reimburse the Company for such benefit payments with interest, either at a fixed or floating rate, from future plan and asset cash flows or from the sale of securities. In certain circumstances, the Company may realize a gain or loss upon the sale of the securities by the trustees. The Company underwrote the plans for the possibility of having to make benefit payments and must agree to investment guidelines to ensure appropriate asset quality and the matching of asset and liability durations. Accumulated funds from the sale of synthetic GICs were $2,176.6 million and $2,571.9 million at December 31, 1996 and 1995, respectively. FEDERAL INCOME TAXES: Deferred taxes have been recorded for significant temporary differences between financial statement income and taxable income. SEPARATE ACCOUNTS: The separate account amounts shown in the accompanying financial statements represent contributions by contract holders to variable- benefits and fixed-benefits pension plans. The contract purchase payments and the assets of the separate accounts are segregated from other Company funds for both investment and administrative purposes. Contract purchase payments received under variable annuity contracts are subject to deductions for sales and administrative fees. Also, the sponsoring company of the separate accounts receives management fees which are based on the net asset values of the separate accounts. TRANSLATION OF FOREIGN CURRENCY: Revenues and expenses of the Company's Canadian operations are translated at average exchange rates. Assets and liabilities are translated at the rates of exchange on the balance sheet date. The translation gain or loss is generally reported in stockholders' equity, net of deferred tax credits of $2.8 million and $2.7 million at December 31, 1996 and 1995, respectively. EARNINGS PER SHARE: Earnings per common share are computed using net income less preferred stock dividends divided by the weighted average number of common shares outstanding. There is no significant difference between earnings per share on a primary or fully diluted basis. -13- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 1--SIGNIFICANT ACCOUNTING POLICIES - CONTINUED CHANGES IN ACCOUNTING PRINCIPLES: STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121 (SFAS 121), ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF In 1996, the Company adopted the provisions of SFAS 121 which require that long- lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Measurement of an impairment loss for long-lived assets and identifiable intangibles that an entity expects to hold and use should be based on the fair value of the asset. SFAS 121 also requires that long-lived assets and certain intangibles to be disposed of generally be reported at the lower of the carrying amount or fair value less cost to sell. The primary assets of the Company which are subject to SFAS 121 are investment real estate and property and equipment used in the Company's daily operations. The effect of the adoption of SFAS 121 on the Company's financial position and results of operations was immaterial. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 (SFAS 123), ACCOUNTING FOR STOCK-BASED COMPENSATION SFAS 123 defines a fair value based method of accounting for stock-based employee compensation plans. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. SFAS 123 also allows an entity to continue to measure compensation cost using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25 (Opinion 25), Accounting for Stock Issued to Employees. Under this method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock. SFAS 123 requires entities electing to continue accounting for stock-based employee compensation plans under Opinion 25 to make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting defined under SFAS 123 had been applied. The Company adopted the disclosure provisions of SFAS 123 in 1996 (see Note 9), but elected to continue to measure compensation cost for stock-based compensation under the expense recognition provisions of Opinion 25. The adoption of SFAS 123, therefore, did not have an effect on the Company's financial position or results of operations. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 114 (SFAS 114), ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN AND STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 118 (SFAS 118), ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN - INCOME RECOGNITION AND DISCLOSURES In 1995, the Company adopted the provisions of SFAS 114 and SFAS 118. SFAS 114 requires that certain impaired loans of creditors be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, at the loan's observable market price, or at the fair value of the collateral if the loan is collateral dependent. SFAS 118 amends SFAS 114 and eliminates its provisions regarding how a creditor should report income on an impaired loan. SFAS 118 allows the Company to continue to use its existing method for recognizing income on impaired loans. The adoptions of SFAS 114 and SFAS 118 did not affect the Company's financial position or results of operations. -14- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 1--SIGNIFICANT ACCOUNTING POLICIES - CONTINUED STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 115 (SFAS 115), ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES SFAS 115 addresses the accounting and reporting for investments in fixed maturity securities and for equity securities with readily determinable fair values. SFAS 115 requires these investments to be classified into three categories and accounted for as follows: (1) Fixed maturity securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. (2) Fixed maturity and equity securities that are bought and held principally for the purpose of selling in the near term are classified as trading securities and reported at fair value, with changes in unrealized holding gains and losses included in results of operations. (3) Fixed maturity and equity securities classified neither as held-to- maturity securities nor as trading securities are classified as available-for-sale securities and reported at fair value, with unrealized holding gains and losses reported as a separate component of stockholders' equity. The issuance of SFAS 115 changed the previous definition of what constituted a security being held-to-maturity. Due to the significant restrictions placed on securities classified as held-to-maturity, the Company believes that prudent asset management requires a major portion of debt securities to be classified as available-for-sale. The Company adopted the provisions of SFAS 115 as of January 1, 1994, and classified over 99 percent of its fixed maturity securities as available-for- sale with the remainder reported as held-to-maturity. In addition to reporting available-for-sale securities at fair value, the Securities and Exchange Commission expressed its belief and requirement that registrants also adjust deferred policy acquisition costs and certain policyholder liabilities to reflect the changes that would have been necessary if the unrealized investment gains and losses related to the available-for-sale securities had been realized. Therefore, where applicable, the Company has reflected those adjustments in the asset and liability balances with the offset as a direct adjustment to stockholders' equity. In accordance with SFAS 115, prior period financial statements were not restated to reflect the change in accounting principle. The changes required by SFAS 115 and the Securities and Exchange Commission did not result in any changes to the net income of the Company. The Company has not changed its investment policies or strategies as a result of the implementation of the new accounting requirements. ACCOUNTING PRONOUNCEMENTS OUTSTANDING: STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 125 (SFAS 125), ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES AND STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 127 (SFAS 127), DEFERRAL OF THE EFFECTIVE DATE OF CERTAIN PROVISIONS OF FASB STATEMENT NO. 125 In 1996, the Financial Accounting Standards Board (FASB) issued SFAS 125 which provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Those standards are based on consistent application of a financial-components approach that focuses on control. SFAS 125 also establishes new rules for determining whether a transfer of financial assets constitutes a sale and, if so, the determination of any resulting gain or loss. The provisions of SFAS 125 were to be applied to transactions occurring after December 31, 1996. However, SFAS 127 was issued which defers the effective date one year for those provisions of SFAS 125 that deal with securities lending, repurchase and dollar repurchase agreements, and the recognition of collateral. The Company does not expect the adoptions of SFAS 125 and SFAS 127 to have a material effect on its financial position or results of operations. -15- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED PROVIDENT COMPANIES, INC AND SUBSIDIARIES NOTE 2--FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying amounts and fair values of the Company's financial instruments are as follows:
December 31 (in millions of dollars) --------------------------------------------- 1996 1995 CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE --------------------------------------------- ASSETS Fixed Maturity Securities Available-for-Sale $10,859.9 $10,859.9 $12,337.4 $12,337.4 Derivatives Hedging Available-for-Sale 20.2 20.2 (18.8) (18.8) Held-to-Maturity 264.5 263.1 299.0 321.1 Equity Securities 4.9 4.9 5.3 5.3 Mortgage Loans - - 104.8 104.8 Policy Loans 1,749.0 2,080.5 1,574.6 2,005.7 Short-term Investments 252.3 252.3 231.0 231.0 Cash and Bank Deposits 19.3 19.3 24.8 24.8 LIABILITIES Policyholders' Funds GICs 3,204.3 3,230.9 4,838.0 4,980.7 Deferred Annuity Products 281.4 266.0 263.1 247.7 Supplementary Contracts without Life Contingencies 61.1 61.1 44.7 44.7 Long-term Debt 200.0 200 0 200.0 200.0 Derivatives Hedging Liabilities - 3.0 - 0.6
The following methods and assumptions were used by the Company in estimating the fair values of its financial instruments: Fixed Maturity Securities: Fair values for fixed maturity securities are based on quoted market prices, where available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services or, in the case of private placements, are estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality, and maturity of the investments. See Note 3 for the amortized cost and fair values of securities by security type and by maturity date. Equity Securities: Fair values for equity securities are based on quoted market prices. Mortgage Loans: At December 31, 1995, the fair value for mortgage loans to be sold was based on the expected sales price as of that date. For mortgage loans which were in the process of foreclosure, the fair value was the appraised value of collateral for the loan. Policy Loans: Fair values for policy loans are estimated using discounted cash flow analyses, using interest rates currently being offered. -16- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 2--FAIR VALUES OF FINANCIAL INSTRUMENTS - CONTINUED Short-term Investments and Cash and Bank Deposits: Carrying amounts for short- term investments and cash and bank deposits approximate fair value. Policyholders' Funds: Fair values of the Company's liability for GICs are estimated using discounted cash flow calculations, based on current market interest rates available for similar contracts with maturities consistent with those remaining for the contracts being valued. Fair values of the Company's liability for deferred annuity products are estimated using the cash surrender values of the annuity contracts. The carrying amounts for supplementary contracts without life contingencies approximate fair value. Fair values for the Company's insurance contracts other than investment contracts are not required to be disclosed. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company's overall management of interest rate risk, which minimizes exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts. Long-term Debt: The carrying amounts for long-term debt approximate fair value. Derivatives: Fair values of the Company's derivative financial instruments are based on market quotes, pricing models, or formulas using current interest rates and assumptions and represent the net amount of cash the Company would have received or paid if the contracts had been settled or closed on December 31. -17- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 3--INVESTMENTS SECURITIES The amortized cost and fair values of securities by security type are as follows:
December 31, 1996 (in millions of dollars) -------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------------------------------------------- AVAILABLE-FOR-SALE SECURITIES United States Government and Government Agencies and Authorities $ 6.4 $ 0.8 $ - $ 7.2 Foreign Governments 156.5 19.9 - 176.4 Public Utilities 2,421.5 206.4 7.4 2,620.5 Mortgage-backed Securities 2,156.9 28.4 33.3 2,152.0 All Other Corporate Bonds 5,595.6 306.2 26.8 5,875.0 Redeemable Preferred Stocks 47.4 2.1 0.5 49.0 --------- ------ ----- --------- Total Fixed Maturity Securities 10,384.3 563.8 68.0 10,880.1 Equity Securities 7.2 - 2.3 4.9 --------- ------ ----- --------- $10,391.5 $563.8 $70.3 $10,885.0 ========= ====== ===== ========= HELD-TO-MATURITY SECURITIES United States Government and Government Agencies and Authorities $ 13.5 $ 1.5 $ - $ 15.0 States, Municipalities, and Political Subdivisions 3.2 0.2 - 3.4 Mortgage-backed Securities 234.9 3.3 8.1 230.1 All Other Corporate Bonds 12.9 1.7 - 14.6 --------- ------ ----- --------- $ 264.5 $ 6.7 $ 8.1 $ 263.1 ========= ====== ===== =========
-18- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 3--INVESTMENTS - CONTINUED
December 31, 1995 (in millions of dollars) -------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------------------------------------------- AVAILABLE-FOR-SALE SECURITIES United States Government and Government Agencies and Authorities $ 5.4 $ 9.5 $ - $ 14.9 Foreign Governments 159.2 17.1 0.5 175.8 Public Utilities 2,679.8 345.9 2.0 3,023.7 Mortgage-backed Securities 2,738.5 48.4 15.4 2,771.5 All Other Corporate Bonds 5,805.5 530.8 76.9 6,259.4 Redeemable Preferred Stocks 69.9 3.7 0.3 73.3 --------- ------ ----- --------- Total Fixed Maturity Securities 11,458.3 955.4 95.1 12,318.6 Equity Securities 9.2 0.1 4.0 5.3 --------- ------ ----- --------- $11,467.5 $955.5 $99.1 $12,323.9 ========= ====== ===== ========= HELD-TO-MATURITY SECURITIES United States Government and Government Agencies and Authorities $ 13.3 $ 2.8 $ - $ 16.1 States, Municipalities, and Political Subdivisions 3.4 0.3 - 3.7 Mortgage-backed Securities 170.3 16.7 - 187.0 All Other Corporate Bonds 12.0 2.3 - 14.3 Redeemable Preferred Stocks 100.0 - - 100.0 --------- ------ ----- --------- $ 299.0 $ 22.1 $ - $ 321.1 ========= ====== ===== =========
-19- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 3--INVESTMENTS - CONTINUED The amortized cost and fair values of fixed maturity securities by maturity date are shown below. The maturity dates have not been adjusted for possible calls or prepayments.
December 31, 1996 (in millions of dollars) -------------------------- Amortized Fair Cost Value -------------------------- AVAILABLE-FOR-SALE SECURITIES 1 year or less $ 668.4 $ 706.5 Over 1 year through 5 years 1,610.5 1,693.2 Over 5 years through 10 years 2,308.7 2,419.5 Over 10 years 3,639.8 3,908.9 --------- --------- 8,227.4 8,728.1 Mortgage-backed Securities 2,156.9 2,152.0 --------- --------- $10,384.3 $10,880.1 ========= ========= HELD-TO-MATURITY SECURITIES 1 year or less $ 1.2 $ 1.3 Over 1 year through 5 years 2.0 2.1 Over 5 years through 10 years 0.9 1.0 Over 10 years 25.5 28.6 --------- --------- 29.6 33.0 Mortgage-backed Securities 234.9 230.1 --------- --------- $ 264.5 $ 263.1 ========= =========
The adjustments related to SFAS 115 are as follows:
December 31 1996 1995 (in millions of dollars) --------------------------- ASSETS Fixed Maturity Securities $ 495.8 $ 860.3 Equity Securities (2.3) (3.9) Deferred Policy Acquisition Costs (240.9) (383.5) LIABILITIES Reserve for Future Policy and 112.8 316.1 Contract Benefits Deferred Federal Income Taxes 48.9 54.9 STOCKHOLDERS' EQUITY Net Unrealized Gain on Securities 90.9 101.9
-20- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 3--INVESTMENTS - CONTINUED At December 31, 1996, the total investment in below-investment-grade fixed maturity securities (securities rated below Baa3 by Moody's Investors Services or an equivalent internal rating) was $891.1 million or 6.7 percent of invested assets. The amortized cost of these securities was $869.2 million. MORTGAGE LOANS As of December 31, 1996, the recorded investment in mortgage loans was $1.0 million with a related loss reserve of $1.0 million. Changes in the mortgage loan loss reserve are as follows:
1996 1995 1994 (in millions of dollars) ---------------------------- BALANCE AT JANUARY 1 $ 12.0 $ 49.0 $ 55.3 Additions Charged to Realized Investment Losses - 3.0 11.2 Release Due to Sale or Direct Write-Down of Loans (11.0) (40.0) (17.5) ------ ------ ------ BALANCE AT DECEMBER 31 $ 1.0 $ 12.0 $ 49.0 ====== ====== ======
In February 1996, the Company sold 24 mortgage loans with a principal amount of $81.6 million and a book value of $75.9 million. In October 1995, the Company sold commercial mortgage loans with a principal amount and a book value of $962.4 million through a securitization collateralized by 366 loans. In May 1995, the Company sold 26 restructured mortgage loans with a principal amount of $147.5 million and a book value of $122.6 million. The transactions resulted in before-tax realized investment gains (losses) of $(5.7) million, $8.9 million, and $(23.1) million, respectively. REAL ESTATE Accumulated depreciation on real estate was $28.5 million and $33.6 million as of December 31, 1996 and 1995, respectively. -21- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 3--INVESTMENTS - CONTINUED NET INVESTMENT INCOME Sources for net investment income are as follows:
Year Ended December 31 1996 1995 1994 (in millions of dollars) ------------------------------ Fixed Maturity Securities $ 900.2 $ 961.4 $ 946.2 Equity Securities 0.4 0.4 0.6 Mortgage Loans 2.6 100.7 159.0 Real Estate 25.8 29.6 38.0 Policy Loans 182.8 163.9 137.9 Other Long-term Investments 3.9 4.3 3.6 Short-term Investments 7.4 6.9 8.4 -------- -------- -------- Gross Investment Income 1,123.1 1,267.2 1,293.7 Investment Expenses 33.0 45.9 55.1 -------- -------- -------- Net Investment Income $1,090.1 $1,221.3 $1,238.6 ======== ======== ========
REALIZED INVESTMENT GAINS AND LOSSES Realized investment gains (losses) are as follows:
Year Ended December 31 1996 1995 1994 (in millions of dollars) ---------------------------- Fixed Maturity Securities $ 37.1 $ 14.9 $ (1.3) Equity Securities (1.3) 0.2 2.0 Mortgage Loans and Real Estate (3.7) (26.9) (30.2) Real Estate Partnerships and Other Invested Assets 0.1 - (0.4) Derivatives (40.8) (19.9) (0.2) ------ ------ ------ $ (8.6) $(31.7) $(30.1) ====== ====== ======
Net realized investment losses include writedowns and changes in the reserve for losses on mortgage loans and foreclosed real estate of $(5.0) million, $(29.0) million, and $16.8 million for 1996, 1995, and 1994, respectively. -22- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 3--INVESTMENTS - CONTINUED Proceeds from sales of fixed maturity and equity securities and the related gross gains and losses realized on those sales are as follows:
Year Ended December 31 1996 1995 1994 (in millions of dollars) ---------------------------- PROCEEDS FROM SALES Available-for-Sale Fixed Maturity Securities $1,592.0 $1,353.1 $686.3 Equity Securities 0.6 6.8 7.4 GROSS GAINS Available-for-Sale Fixed Maturity Securities 50.1 35.3 19.0 Equity Securities - 1.3 2.4 GROSS LOSSES Available-for-Sale Fixed Maturity Securities 13.0 20.4 20.3 Equity Securities 1.3 1.1 0.4
NOTE 4--DERIVATIVE FINANCIAL INSTRUMENTS The Company uses interest rate swaps and exchange-traded interest rate futures contracts to hedge interest rate risks and to match assets with its insurance liabilities. Other derivatives, such as options and interest rate forward contracts, are also used to some extent in the hedging process. DERIVATIVE RISKS The basic types of risks associated with derivatives are market risk (that the value of the derivative will be adversely impacted by changes in the market, primarily the change in interest rates) and credit risk (that the counterparty will not perform according to the terms of the contract). The market risk of the derivatives should generally offset the market risk associated with the hedged financial instrument or liability. To help limit the credit exposure of the derivatives, the Company has entered into master netting agreements with its counterparties whereby contracts in a gain position can be offset against contracts in a loss position. The Company also typically enters into bilateral, cross-collateralization agreements with its counterparties to help limit the credit exposure of the derivatives. These agreements require the counterparty in a loss position to submit acceptable collateral with the other counterparty in the event the net loss position meets or exceeds an agreed upon amount. The Company's current credit exposure on derivatives, which is limited to the value of those contracts in a net gain position, was $3.0 million at December 31, 1996. -23- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 4--DERIVATIVE FINANCIAL INSTRUMENTS - CONTINUED HEDGING ACTIVITY The table below summarizes by notional amounts the activity for each category of derivatives.
Interest Rate Swaps ----------------------------- Receive Receive Variable/ Fixed/ Pay Fixed Pay Variable Forwards Futures Options Total (in millions of dollars) ------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1993 $ - $525.0 $ 22.0 $ 21.0 $ - $ 568.0 Additions 800.0 201.0 178.5 1,464.5 - 2,644.0 Terminations - - 200.5 1,280.5 - 1,481.0 ------ ------ -------- -------- ------- -------- BALANCE AT DECEMBER 31, 1994 800.0 726.0 - 205.0 - 1,731.0 Additions 300.0 495.0 - 947.5 820.0 2,562.5 Terminations 200.0 359.8 - 1,137.5 820.0 2,517.3 ------ ------ -------- -------- ------- -------- BALANCE AT DECEMBER 31, 1995 900.0 861.2 - 15.0 - 1,776.2 Additions - 400.0 - 477.0 - 877.0 Terminations 600.0 463.6 - 482.0 - 1,545.6 ------ ------ -------- -------- ------- -------- BALANCE AT DECEMBER 31, 1996 $300.0 $797.6 $ - $ 10.0 $ - $1,107.6 ====== ====== ======== ======== ======= ========
Additions and terminations reported above for futures include roll activity, which is the closing out of an old contract and initiation of a new one when the futures contract is about to mature but the need for it still exists. The following table summarizes the timing of anticipated settlements of interest rate swaps outstanding at December 31, 1996, and the related weighted average interest receive rate or pay rate assuming current market conditions.
1997 1998 1999 2000 2001 2002 Total (in millions of dollars) ------------------------------------------------------------ RECEIVE VARIABLE/PAY FIXED Notional value $300.0 - - - - - $ 300.0 Weighted average receive rate 5.56% - - - - - 5.56% Weighted average pay rate 6.99 - - - - - 6.99 RECEIVE FIXED/PAY VARIABLE Notional value $113.9 - $333.7 $170.0 $160.0 $20.0 $ 797.6 Weighted average receive rate 6.16% - 7.12% 7.79% 7.81% 7.44% 7.27% Weighted average pay rate 5.50 - 5.54 5.56 5.56 5.50 5.54 TOTAL INTEREST RATE SWAPS $413.9 - $333.7 $170.0 $160.0 $20.0 $1,097.6 TOTAL WEIGHTED AVERAGE RECEIVE RATE 5.73% - 7.12% 7.79 7.81% 7.44% 6.81% TOTAL WEIGHTED AVERAGE PAY RATE 6.58 - 5.54 5.56 5.56 5.50 5.94
-24- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 4--DERIVATIVE FINANCIAL INSTRUMENTS - CONTINUED Derivative activity falls under five hedging programs as follows: PROGRAM 1 The Company routinely uses forwards and futures to protect margins by reducing the risk of changes in interest rates between the time of asset purchase and the associated sale of an asset or sale of new business. Prior to 1995, this activity was primarily associated with new GIC sales. The majority of the 1995 activity ($500.0 million) was a hedge of the reinvestment of the proceeds from the securitization of the Company's commercial mortgage loan portfolio (see Note 3). Gains or losses on termination of these forwards and futures are deferred and reported as an adjustment of the carrying amount of the hedged asset or liability and amortized into earnings over the lives of the hedged items. The net deferred gain associated with this activity was $29.3 million and $31.8 million at December 31, 1996 and 1995, respectively. The deferred gain from this program was amortized into income in the consolidated statements of income as follows:
Year Ended December 31 1996 1995 1994 (in millions of dollars) ----------------------------------------- Net Investment Income $ 1.0 $ 0.2 $ 0.1 Policy and Contract Benefits 1.2 3.8 1.9 ----- ----- ----- $ 2.2 $ 4.0 $ 2.0 ===== ===== =====
At December 31, 1996, the Company had no open futures contracts under this program. PROGRAM 2 In 1994 and 1993 the Company created $101.0 million of synthetic fixed rate assets consisting of variable rate mortgage-backed securities combined with index amortizing swaps (receive fixed/pay variable). These synthetic fixed rate assets back fixed rate GICs. During this time, the Company also created $625.0 million of synthetic variable rate GICs consisting of fixed rate GICs combined with index amortizing swaps (receive fixed/pay variable), which were then backed by variable rate mortgage-backed securities. The notional amount of index amortizing swaps associated with this program was $197.6 million and $366.2 million at December 31, 1996 and 1995, respectively. The notional amount of these swaps reduces based on an amortization schedule indexed to a constant maturity treasury rate. Under market conditions at December 31, 1996, the remaining swaps are expected to amortize fully over the next three years. -25- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 4--DERIVATIVE FINANCIAL INSTRUMENTS - CONTINUED Income (expense) from settlements of payment streams on these interest rate swap agreements as reported in the consolidated statements of income were as follows:
Year Ended December 31 1996 1995 1994 (in millions of dollars) -------------------------------- Net Investment Income $ - $ 0.9 $ 0.4 Policy and Contract Benefits 0.3 (4.7) 3.9 ----- ------ ----- $ 0.3 $(3.8) $ 4.3 ===== ====== =====
PROGRAM 3 In December 1994, the Company announced that it would discontinue the sale of traditional GICs. At that time, the Company decided to convert from a duration matching investment approach to a cash flow matching investment approach for its GIC business. The Company hedged the risk that a rise in interest rates would reduce the price on future sales of assets which would be necessary to fund maturing liabilities by entering into $1.1 billion notional amount of forward interest rate swaps (receive variable/pay fixed) and $205.0 million notional amount of short interest rate futures contracts. The majority of this hedge was initiated in 1994, with the last $300.0 million of swaps initiated in 1995. The $205.0 million futures position was terminated in 1995 as planned when $208.7 million of fixed maturity securities were sold to fund maturing GICs. The Company realized a $0.1 million before-tax investment gain on the futures and a $5.6 million before-tax investment loss on the fixed maturity securities, a net result which was consistent with the original hedge expectations. The first $200.0 million swap position was terminated in 1995; however, fixed maturity securities sales did not occur as originally anticipated because the Company had adequate cash flow from other sources to fund the maturing GICs. The primary source of this other cash flow was the securitization of the commercial mortgage loan portfolio which had not been anticipated at the time this hedge was initiated (see Note 3). The Company realized a $20.0 million before-tax investment loss on termination of this swap position in 1995. During 1996, the Company terminated $600.0 million of these forward swaps as scheduled, realizing a $36.1 million before-tax investment loss. In addition, the Company used offsetting futures contracts to partially remove the hedge as fixed maturities were sold prior to the termination date of the interest rate swaps. The Company realized a $5.3 million before-tax investment loss on the termination of these futures contracts. The Company sold $423.0 million of fixed maturity securities associated with this hedge, realizing a $19.6 million before-tax investment gain. The remaining fixed maturity sales did not occur as originally anticipated because the Company had adequate cash flow from other sources to fund the maturing GICs. The last $300.0 million of these swaps will be terminated as scheduled in 1997. At December 31, 1996, the Company had an unrealized loss of $4.5 million on these outstanding interest rate swaps and an unrealized gain of $5.1 million on the associated fixed maturity securities. PROGRAM 4 In 1995, the Company purchased $820.0 million in put options on treasury securities to hedge the risk that a rise in interest rates would reduce the price realized on the securitization of the commercial mortgage loan portfolio. The options expired without value, and the $7.6 million price of the option was reported as an adjustment to the net realized investment gain from the mortgage loan sale. -26- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 4--DERIVATIVE FINANCIAL INSTRUMENTS - CONTINUED PROGRAM 5 During 1995, the Company executed a series of cash flow hedges in the individual disability income portfolio, hedging $495.0 million of expected cash flows in the years 1996 through 2000 using forward interest rate swaps (receive fixed/pay variable). During 1996, the Company added $200.0 million of forward interest rate swaps to the individual disability income portfolio and initiated a $200.0 million forward interest rate swap position in the group single premium annuity portfolio. The purpose of these actions was to lock in the reinvestment rates on future cash flows and protect the Company from the potential adverse impact of declining interest rates on the associated policy reserves. During 1996, the Company terminated $295.0 million of these interest rate swaps, $160.0 million of which were terminated in conjunction with the purchase of $160.0 million of fixed maturity securities. The $3.6 million before-tax investment gain realized on the termination of the swaps was deferred as an adjustment to the book value of the purchased fixed maturity securities. In addition, the Company used offsetting futures contracts to partially remove the hedge as fixed maturities were purchased prior to the termination date of the interest rate swaps. The $3.6 million before-tax investment gain realized on the termination of these futures contracts was deferred as an adjustment to the book value of the purchased fixed maturity securities. Interest rate swaps of $120.0 million were terminated when it was determined that the hedged anticipated cash flows were no longer likely to occur. The resulting $0.5 million before-tax gain on this termination is reported as a component of realized investment gains and losses. The remaining $15.0 million of interest rate swaps were replaced with $15.0 million of interest rate futures contracts to maintain the hedge until the fixed maturity securities are purchased. In 1996, the Company amortized into net investment income $0.1 million of the deferred gain from this program. At December 31, 1996, the Company had an unrealized gain of $24.7 million on the open forward interest rate swaps and interest rate futures. These derivatives are scheduled to be terminated in the years 1997 through 2002 as assets are purchased with the future anticipated cash flows. NOTE 5--FEDERAL INCOME TAXES A reconciliation of the income tax attributable to continuing operations computed at U.S. federal statutory tax rates to the income tax expense as included in the consolidated statements of income follows:
Year Ended December 31 1996 1995 1994 ---------------------------------- Statutory Federal Income Tax Rate 35.0% 35.0% 35.0% Tax-preferred Investment Income (1.1) (2.1) (2.4) Net Prior Years Tax Refunds (0.1) (0.8) (2.4) Other Items, Net 1.8 2.2 2.5 ---- ---- ---- Effective Tax Rate 35.6% 34.3% 32.7% ==== ==== ====
-27- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 5--FEDERAL INCOME TAXES - CONTINUED Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes. Significant components of the Company's deferred federal income tax liability are as follows:
December 31 1996 1995 (in millions of dollars) ---------------------------------- DEFERRED TAX LIABILITY Deferred Policy Acquisition Costs $133.6 $140.5 Bond Market Discount 11.2 10.7 Net Unrealized Investment Gains 48.9 54.9 Cost of Business Acquired 2.3 2.3 Property and Equipment 9.8 6.7 Other 13.4 11.3 ------ ------ Total Deferred Tax Liability 219.2 226.4 ------ ------ DEFERRED TAX ASSET Reserves 105.5 106.1 Realized Investment Gains and Losses 44.7 32.5 Postretirement Benefits 20.9 23.8 Other Employee Benefits 24.4 21.1 Other 9.2 5.7 ------ ------ Total Deferred Tax Asset 204.7 189.2 ------ ------ NET DEFERRED TAX LIABILITY $ 14.5 $ 37.2 ====== ======
The Company is required to establish a valuation allowance for any portion of the deferred tax asset that management believes will not be realized. In the opinion of management, it is more likely than not that the Company will realize the benefit of the deferred tax asset and, therefore, no such valuation allowance has been established. -28- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 5--FEDERAL INCOME TAXES - CONTINUED Under the Life Insurance Company Tax Act of 1959, life companies were required to maintain a policyholders' surplus account containing the accumulated portion of current income which had not been subjected to income tax in the year earned. The Deficit Reduction Act of 1984 requires that no future amounts be added after 1983 to the policyholders' surplus account. Further, any future distributions from the account would become subject to federal income taxes at the general corporate federal income tax rate then in effect. The amount of the policyholders' surplus account at December 31, 1996, is approximately $125.0 million. Future distributions from the policyholders' surplus account are deemed to occur if a statutorily prescribed maximum for the account is less than the value of the account or if dividend distributions exceed the total amount accumulated as currently taxable income in the year earned. If the entire policyholders' surplus account were deemed distributed in 1997, this would result in a tax of approximately $43.8 million. No current or deferred federal income taxes have been provided on these amounts because management considers the conditions under which such taxes would be paid to be remote. In 1996, the Company received a refund that had been accrued in 1995 relating to the final settlement of litigation for tax years 1980 through 1983. The refund of taxes was $1.5 million and interest on the refund was $4.2 million. The Company also received a refund that had been accrued in 1994 relating to a final settlement of the remaining issues in dispute for the 1984 and 1985 tax years. The refund of taxes was $3.1 million and related interest was $5.9 million. During 1996, the Internal Revenue Service concluded its examination of the Company's federal income tax returns for tax years 1990 through 1992 and issued a Revenue Agents' Report proposing a tax deficiency of $26.0 million for these years. Although this proposed deficiency has been appealed, the Company made an additional payment for these years of $13.0 million tax and $5.2 million interest to preclude the accrual of interest at punitive rates on any portion of the proposed deficiency that the Company could possibly lose. Net income for 1996 was increased by $0.9 million as a result of these tax refunds and payments. In 1995, the Company received a refund that was previously accrued in 1994 relating to a final settlement of the remaining issues in litigation for the 1966 through 1979 tax years. The refund of taxes was $1.1 million and interest on the refund was $4.8 million. The Company also accrued refunds of federal income tax of $1.5 million and related interest of $3.5 million attributable to a final settlement of the remaining issues in litigation for tax years 1980 through 1983. Overall, including interest received, net income in 1995 was increased by $4.0 million as a result of the receipt and accrual of these refunds. In 1994, the Company accrued refunds of federal income tax of $4.3 million and related interest of $9.6 million. The refunds related to the 1984 and 1985 tax years and to a final settlement of court proceedings for the remaining issues in dispute for tax years 1966 through 1979. Also, during 1994, the Internal Revenue Service concluded its examination of the Company's federal income tax returns for tax years 1988 and 1989 and issued a Revenue Agent's Report reflecting a proposed deficiency of $17.5 million for these years. The Company paid $6.6 million of tax and interest in response to this proposed deficiency to preclude the possible accrual of interest at punitive rates. Net income for 1994 was increased by $10.5 million as a result of these items. During the year, the Internal Revenue Service began its examination of the Company's federal income tax returns for tax years 1993 through 1995. Management believes this examination will have no material impact on the Company's financial statements. Federal income taxes paid during 1996, 1995, and 1994 were $92.5 million, $71.8 million, and $91.3 million, respectively. -29- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 6--DEBT During 1996, the Company entered into an $800.0 million five-year revolving credit facility with various domestic and international banks. The purpose of this arrangement was to provide partial financing for the purchase of The Paul Revere Corporation (see Note 14), to refinance the existing bank term notes of $200.0 million, and for general corporate uses. Interest is variable based upon a London Interbank Offered Rate (LIBOR) plus a margin. At December 31, 1996, the outstanding borrowing under the revolving credit facility was $200.0 million. During 1996, the Company repaid the $200.0 million bank term notes which were due on or before December 1, 1996. There was no short-term debt outstanding at December 31, 1996. Short-term debt outstanding at December 31, 1995 was $1.4 million. Interest paid on short- and long-term debt during 1996, 1995, and 1994 was $17.1 million, $22.4 million, and $27.3 million, respectively. Interest expense during 1996, 1995, and 1994 was $17.8 million, $22.3 million, and $25.9 million, respectively. NOTE 7--STOCKHOLDERS' EQUITY CORPORATE REORGANIZATION Effective December 27, 1995, Provident Life and Accident Insurance Company of America completed a step in a corporate reorganization which created a new parent holding company, Provident Companies, Inc., a non-insurance holding company incorporated in Delaware. In accordance with the Plan of Share Exchange approved by shareholders at the 1995 annual meeting, each share of Class A and Class B common stock of Provident Life and Accident Insurance Company of America was exchanged for a single class of common stock of Provident Companies, Inc., with each share entitled to one vote. Each depositary share of cumulative preferred stock of Provident Life and Accident Insurance Company of America was also exchanged for an equivalent depositary share of cumulative preferred stock of Provident Companies, Inc. In March 1996, Provident Life and Accident Insurance Company of America and Provident Life Capital Corporation were dissolved and their respective assets and liabilities were distributed to and assumed by Provident Companies, Inc. Provident Life and Accident Insurance Company, Provident National Assurance Company, and Provident Life and Casualty Insurance Company are now direct subsidiaries of Provident Companies, Inc. -30- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 7--STOCKHOLDERS' EQUITY - CONTINUED PREFERRED AND COMMON STOCK In 1996, the Company's shareholders approved an amendment to the Company's Amended and Restated Certificate of Incorporation to increase from 65,000,000 to 150,000,000 the number of shares of common stock which the Company is authorized to issue. In 1993, the Company issued 1,041,667 shares of 8.10% cumulative preferred stock, liquidation preference $150 per share evidenced by depositary receipts for 6,250,002 depositary shares each representing a one-sixth interest of a preferred share, of which 6,249,202 and 6,250,002 were issued and outstanding as of December 31, 1996 and 1995, respectively. The preferred stock is redeemable at a redemption price of $150 per share (equivalent to $25 per depositary share) at the option of the Company in 1998. NOTE 8--RETIREMENT BENEFITS PENSION PLAN The Company provides a self-administered, defined benefit pension plan for eligible salaried employees. The benefits are based on years of service and the employee's highest consecutive five years of compensation. The Company's funding policy is to contribute amounts to the plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as the Company may determine to be appropriate. Plan assets are invested in two separate accounts of a subsidiary of the Company, one of which invests in listed equity securities and the other in corporate obligations and U.S. bonds. The pension plan's funded status and the amount recognized in the Company's consolidated statements of financial condition are as follows:
December 31 1996 1995 (in millions of dollars) ---------------------------------- Actuarial present value of benefit obligation - vested $160.8 $147.9 ====== ====== Accumulated benefit obligation $161.6 $149.0 ====== ====== Projected benefit obligation $189.8 $177.6 Plan assets at fair value 220.2 200.5 ------ ------ Plan assets in excess of projected benefit obligation 30.4 22.9 Unrecognized net actuarial gains (29.9) (26.3) Unrecognized prior service cost 2.4 2.6 Unrecognized net transition obligation 0.6 0.7 ------ ------ Accrued pension asset (liability) $ 3.5 $ (0.1) ====== ====== Weighted-average discount rate used in determining the projected benefit obligation 7.25% 7.75% Weighted-average rate of compensation increase 4.50% 5.00%
-31- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 8--RETIREMENT BENEFITS - CONTINUED Net periodic pension cost (benefit) included the following components:
Year Ended December 31 1996 1995 1994 (in millions of dollars) ----------------------------- Service cost $ 4.0 $ 5.7 $ 7.8 Interest cost 12.6 12.6 10.0 Actual return on plan assets (28.1) (43.1) (9.8) Net amortization and deferral 7.5 26.5 (4.1) Curtailment cost - 1.0 - ------ ------ ----- $ (4.0) $ 2.7 $ 3.9 ====== ====== ===== Expected long-term rate of return on plan assets 8.50% 7.75% 7.75%
POSTRETIREMENT PLANS The Company sponsors two defined benefit postretirement plans other than pensions for full-time employees who have ten years of credited service with the Company and have reached age 55. One plan provides medical and dental benefits, and the other provides life insurance benefits. The postretirement health care plan is contributory, with retiree contributions adjusted annually, and contains other cost-sharing features such as deductibles and coinsurance. It is the Company's expressed intent to increase the health care plan's retiree contribution rate annually as the cost of health care increases. The life insurance plan is noncontributory and is fully funded through a life insurance contract issued by the Company. The health care plan is unfunded. The following tables show the accumulated postretirement benefit obligation, the amount recognized in the Company's consolidated statements of financial condition, and the net periodic postretirement benefit cost.
December 31 1996 1995 (in millions of dollars) ---------------------------- Accumulated postretirement benefit obligation: Retirees $43.2 $42.9 Fully eligible active plan participants 1.7 2.4 Other active plan participants 14.3 15.4 ----- ----- 59.2 60.7 Plan assets at fair value 8.5 7.7 ----- ----- Accumulated postretirement benefit obligation in excess of plan assets 50.7 53.0 Unrecognized net gain 7.6 7.3 ----- ----- Accrued postretirement benefit liability $58.3 $60.3 ===== ===== Weighted-average discount rate used in determining the accumulated postretirement benefit obligation 7.25% 8.50%
-32- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 8--RETIREMENT BENEFITS - CONTINUED Net periodic postretirement benefit cost included the following components:
Year Ended December 31 1996 1995 1994 (in millions of dollars) ----------------------------------- Service cost $ 1.5 $ 1.9 $ 4.1 Interest cost 4.0 4.6 5.0 Actual return on plan assets (0.5) (0.5) (0.6) Net amortization and deferral (3.0) (3.4) (1.2) ----- ----- ----- $ 2.0 $ 2.6 $ 7.3 ===== ===== ===== Expected long-term rate of return on plan assets 8.50% 8.50% 8.50%
The postretirement benefit costs for 1996, 1995, and 1994 assume a weighted- average annual rate of increase in the per capita cost of covered health care benefits of 9 percent, 12 percent, and 12 percent, respectively, decreasing gradually to 5 percent for 2004 and thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1996, by $7.1 million and the aggregate of net periodic postretirement benefit cost for 1996 by $0.8 million. CURTAILMENT GAINS During 1995, the Company recognized curtailment gains of $16.6 million and $7.7 million in its pension plan and postretirement plans, respectively. The gains resulted from the sale of the group medical business (see Note 13) and the consequent termination of participation in the Company's benefit plans of certain employees. The gains were included in the determination of the total gain recognized on the sale. NOTE 9--INCENTIVE COMPENSATION AND STOCK PURCHASE PLANS MANAGEMENT INCENTIVE COMPENSATION PLAN The Company has in effect a two-part management incentive compensation plan, the first part of which is cash-based and is designed to encourage achievement of specific annual goals in which key employees participate. The compensation cost recognized in the consolidated statements of income for this part of the plan is $3.6 million, $2.9 million, and $2.5 million for 1996, 1995, and 1994, respectively. The second part of this plan is a stock option plan. The Company applies Opinion 25 and related interpretations in accounting for the stock option plan. For those stock options subject to stock price performance, the compensation cost recognized in the consolidated statements of income is $2.0 million and $2.4 million for 1996 and 1995, respectively. No cost was recognized for 1994. Under the 1994 stock plan, the Company may grant options of up to 3,500,000 shares of common stock. The exercise price of each option equals the market price of the Company's stock on the date of grant. The options cannot be exercised until at least one year after the date of grant and have a maximum term of ten years after the date of grant. A portion of the options are also subject to stock price performance requirements being met prior to exercise. In January 1997, the Compensation Committee of the Company's Board of Directors amended the number of options which may be granted under the 1994 plan to 5,000,000 shares, subject to approval by the Company's shareholders. -33- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 9--INCENTIVE COMPENSATION AND STOCK PURCHASE PLANS - CONTINUED Options granted prior to 1994 were granted under the 1989 stock option plan. Under that plan, the Company could grant options of up to 700,000 shares of common stock over the five year term of the plan which ended effective December 31, 1993. The exercise price of each option equaled the market price of the Company's stock on the date of grant. The options outstanding under this plan are currently exercisable and have a maximum term of ten years after the date of grant. Summaries of the Company's stock options are as follows:
1996 1995 1994 ------------------------- ------------------------- ------------------------- Shares Weighted-Average Shares Weighted-Average Shares Weighted-Average (000) Exercise Price (000) Exercise Price (000) Exercise Price ------- ---------------- ------- ---------------- ------- ---------------- Outstanding at January 1 1,648 $24.82 885 $27.35 564 $25.11 Granted 674 31.13 1,003 22.70 481 29.13 Exercised (161) 24.17 (49) 20.72 (88) 20.74 Forfeited (31) 30.81 (103) 26.05 (51) 30.75 Expired (10) 29.30 (88) 26.89 (21) 27.57 ----- ----- ---- Outstanding at December 31 2,120 26.77 1,648 24.82 885 27.35 ===== ===== ==== December 31 1996 1995 1994 (shares in thousands) ----------------------------------------------------------- Exercisable 1,477 476 265 Exercisable based on additional service 643 975 460 Exercisable based on stock price performance 0 197 160 ----- ----- ---- Outstanding 2,120 1,648 885 ===== ===== ====
December 31, 1996 ------------------------------------------------------------------------- Options Outstanding Options Exercisable ------------------------------------------- ---------------------------- Weighted-Average Range of Shares Remaining Weighted-Average Shares Weighted-Average Exercise Prices (000) Contractual Life Exercise Price (000) Exercise Price - ------------------ ------- ---------------- ---------------- ------- ------------------ $18.00 to 24.99 931 5.0 years $22.52 931 $22.52 25.00 to 31.99 1,145 5.8 29.91 546 28.85 32.00 to 51.99 44 8.1 34.75 - - ----- ----- 18.00 to 51.99 2,120 5.5 26.77 1,477 24.86 ===== =====
-34- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 9--INCENTIVE COMPENSATION AND STOCK PURCHASE PLANS - CONTINUED EMPLOYEE STOCK PURCHASE PLAN In 1995, the Company established an employee stock purchase plan to promote and maintain widespread employee stock ownership. The plan became effective in the fourth quarter of 1995 and conforms to Internal Revenue Code Section 423. Under the plan, the Company is authorized to issue up to 1,000,000 shares of common stock to its employees, nearly all of whom are eligible to participate. Under the terms of the plan, eligible employees may purchase common stock of the Company at the end of each three-month financial quarter. The purchase price of the stock is 85 percent of the lower of its beginning of the quarter or end of the quarter market price. The maximum amount of stock a participating employee may purchase under the plan in any one calendar year is limited to $25,000 in fair market value of the stock as determined at the beginning of each purchase period. The Company sold 34,311 and 31,935 shares to employees with a weighted- average exercise price of $29.36 and $23.06 per share in 1996 and 1995, respectively. The Company applies Opinion 25 and related interpretations in accounting for the stock purchase plan. Accordingly, no compensation cost has been recognized. COMPENSATION COST UNDER THE FAIR VALUE APPROACH (SFAS 123) Compensation cost for the Company's management incentive compensation plan and employee stock purchase plan under the fair value approach was estimated as of the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions:
Year Ended December 31 1996 1995 ---------------------------- Volatility 18.2% 19.1% Risk-free rate of return 5.7% 7.6% Dividend payout rate per share $0.72 $0.72 Time of exercise Management Incentive Compensation Plan Executives 7 years 5 years Non-executives 6 years 4 years Employee Stock Purchase Plan 3 months 3 months Weighted-average fair value of options granted during the year Management Incentive Compensation Plan $7.36 $4.92 Employee Stock Purchase Plan $6.77 $5.26
Had compensation cost for the two plans been determined in accordance with the provisions of SFAS 123, the Company's pro forma net income for the years ended December 31, 1996 and 1995 would have been $143.6 million and $114.2 million, respectively. There are no significant differences between earnings per common share as reported and pro forma earnings per common share on a primary or fully diluted basis for the years ended December 31, 1996 and 1995. -35- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 10--REINSURANCE The Company routinely assumes and cedes reinsurance with other insurance companies. The primary purpose of ceded reinsurance is to limit losses from large exposures; however, if the reinsurer is unable to meet its obligations, the originating issuer of the insurance coverage retains the liability. Premium income, policy and contract benefits, and change in reserves for future policy and contract benefits and policyholders' funds are presented in the consolidated statements of income net of reinsurance ceded. On May 1, 1995, the Company entered into an indemnity and assumption reinsurance agreement with Healthsource Insurance Company in connection with the sale of the group medical business (see Note 13). Under the terms of the reinsurance agreement, the Company cedes to Healthsource Insurance Company premium income and associated obligations and liabilities arising with respect to medical indemnity and dental and vision insurance issued by the Company in certain states where Healthsource Insurance Company is not currently licensed and approved to transact this type of business. Total premium income and policy and contract benefits ceded under this reinsurance agreement were $224.6 million and $188.5 million, respectively, for the year ended December 31, 1996, and $170.6 million and $137.5 million, respectively, for the year ended December 31, 1995. Once Healthsource Insurance Company obtains the necessary licenses and approvals to transact this business in all states, the group medical reinsurance agreement will be terminated. The total amounts deducted for reinsurance ceded are as follows:
Year Ended December 31 1996 1995 1994 (in millions of dollars) -------------------------- Premium Income $305.5 $249.2 $61.3 Policy and Contract Benefits 265.5 202.7 49.2 Change in Reserves for Future Policy and Contract Benefits and Policyholders' Funds 26.4 44.7 53.2
-36- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 10--REINSURANCE - Continued Reinsurance ceded and assumed consists of the following:
Year Ended December 31 1996 1995 1994 (in millions of dollars) ------------------------------ CEDED Life Insurance in Force (Amount of Insurance) $4,347.9 $4,258.5 $4,202.6 Premium Income Individual Life and Disability 48.2 47.8 41.0 Employee Benefits 31.9 29.9 18.9 Other Operations 225.4 171.5 1.4 ASSUMED Life Insurance in Force (Amount of Insurance) $ 437.0 $ 460.2 $ 499.2 Premium Income Individual Life and Disability 35.3 36.9 39.1 Employee Benefits 16.2 15.4 0.4
-37- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 11-- LIABILITY FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES Changes in the liability for unpaid claims and claim adjustment expenses were as follows:
1996 1995 1994 (in millions of dollars) --------------------------------- BALANCE AT JANUARY 1 $2,824.7 $2,472.9 $2,143.9 Less Reinsurance Recoverables 343.2 237.6 180.9 -------- -------- -------- Net Balance at January 1 2,481.5 2,235.3 1,963.0 -------- -------- -------- Incurred Related to: Current Year 910.6 960.0 1,062.4 Prior Years 107.8 123.9 115.9 -------- -------- -------- Total Incurred 1,018.4 1,083.9 1,178.3 -------- -------- -------- Paid Related to: Current Year 322.4 359.0 456.3 Prior Years 502.1 478.7 449.7 -------- -------- -------- Total Paid 824.5 837.7 906.0 -------- -------- -------- Net Balance at December 31 2,675.4 2,481.5 2,235.3 Plus Reinsurance Recoverables 372.1 343.2 237.6 -------- -------- -------- BALANCE AT DECEMBER 31 $3,047.5 $2,824.7 $2,472.9 ======== ======== ========
The majority of the net balances are related to disabled lives claims with long- tail payouts on which interest earned on assets backing liabilities is an integral part of pricing and reserving. The incurred amounts shown above have not been adjusted for interest. Prior year claim reserves include strengthening (reserve releases) of $(2.0) million, $(33.5) million, and $35.1 million for 1996, 1995, and 1994, respectively. -38- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 12--SEGMENT INFORMATION Selected data by segment is as follows:
Year Ended December 31 1996 1995 1994 (in millions of dollars) -------------------------------------- REVENUE (EXCLUDING NET REALIZED INVESTMENT GAINS AND LOSSES) Individual Life and Disability $ 1,047.6 $ 1,019.3 $ 956.6 Employee Benefits 606.1 582.7 555.3 Other Operations 646.8 985.0 1,280.4 --------- --------- --------- Total $ 2,300.5 $ 2,587.0 $ 2,792.3 ========= ========= ========= INCOME BEFORE NET REALIZED INVESTMENT GAINS AND LOSSES AND FEDERAL INCOME TAXES Individual Life and Disability $ 117.3 $ 36.5 $ 53.2 Employee Benefits 56.3 48.6 71.8 Other Operations 61.2 122.6 106.0 --------- --------- --------- Total $ 234.8 $ 207.7 $ 231.0 ========= ========= ========= REVENUE (INCLUDING NET REALIZED INVESTMENT GAINS AND LOSSES) Individual Life and Disability $ 1,056.1 $ 1,024.0 $ 962.4 Employee Benefits 606.2 586.6 556.9 Other Operations 629.6 944.7 1,242.9 --------- --------- --------- Total $ 2,291.9 $ 2,555.3 $ 2,762.2 ========= ========= ========= INCOME BEFORE FEDERAL INCOME TAXES Individual Life and Disability $ 125.8 $ 41.2 $ 59.0 Employee Benefits 56.4 52.5 73.4 Other Operations 44.0 82.3 68.5 --------- --------- --------- Total $ 226.2 $ 176.0 $ 200.9 ========= ========= ========= ASSETS Individual Life and Disability $ 6,051.3 $ 5,746.1 $ 4,597.1 Employee Benefits 1,505.8 1,426.5 1,238.3 Other Operations 7,435.4 9,128.7 11,314.5 --------- --------- --------- Total $14,992.5 $16,301.3 $17,149.9 ========= ========= =========
Total revenue (excluding net realized investment gains and losses) includes premium income, net investment income, and other income. Total revenue (including net realized investment gains and losses) includes premium income, net investment income, net realized investment gains and losses, and other income. Assets have been allocated to the segments based upon identifiable liabilities and allocated stockholders' equity. -39- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 13--SALE OF A PORTION OF A LINE OF BUSINESS In December 1994, the Company entered into an Asset and Stock Purchase Agreement with Healthsource, Inc. (Healthsource) whereby Healthsource agreed to acquire certain assets and assume certain liabilities of the Company's group medical business. The sale was completed on May 31, 1995, effective April 30, 1995. The Company received $131.0 million in cash and $100.0 million of a new issue of Healthsource 6.25% preferred stock which was redeemed at par in the first quarter of 1996. Pursuant to the Asset and Stock Purchase Agreement, assets were transferred to Healthsource which had a carrying value of approximately $297.5 million. Liabilities assumed by Healthsource in connection with the transferred business totaled $221.5 million. Total revenue and income before federal income taxes for the group medical business were $146.2 million and $3.3 million, respectively, for the four month period ended April 30, 1995. The gain on sale of the Company's group medical business increased 1995 operating earnings by $21.8 million ($0.48 per common share) before taxes and $14.2 million ($0.31 per common share) after taxes. NOTE 14--COMMITMENTS AND CONTINGENT LIABILITIES COMMITMENT TO ACQUIRE THE PAUL REVERE CORPORATION On April 29, 1996, the Company entered into a definitive agreement (the Agreement) to acquire The Paul Revere Corporation (Paul Revere), a provider of life and disability insurance products, at a price of approximately $1.2 billion. The public shareholders of Paul Revere may elect to receive per share $26 in cash; a combination of $20 cash and a number of shares of the Company's common stock equal to the product of 6 and the Exchange Ratio; or a number of shares of the Company's common stock equal to the product of 26 and the Exchange Ratio. The public shareholders' Exchange Ratio (as defined in the Agreement) is based on the Company's common stock price during a defined period prior to closing and is subject to certain maximum and minimum share amounts. On November 4, 1996, the Company entered into an amended definitive agreement (Amended Agreement). The Amended Agreement affected only the terms related to the acquisition of Textron Inc.'s 83 percent ownership interest in Paul Revere. Under the terms of the Amended Agreement, the Company has agreed to pay to Textron Inc. $20 per share in cash and a number of shares of newly issued common stock equal to the product of 6 and the Textron Inc. Exchange Ratio. The transaction will be financed through common equity issued to Zurich Insurance Company, a Swiss insurer, or one or more of its affiliates, common equity issued to Paul Revere shareholders, debt, and internally generated funds. The transaction is subject to regulatory approval and is expected to close during the first quarter of 1997. The acquisition will be accounted for by the purchase method. CONTINGENT LIABILITIES Various lawsuits against the Company have arisen in the normal course of business. Contingent liabilities that might arise from litigation are not deemed likely to materially affect the financial position or results of operations of the Company. -40- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 15--STATUTORY FINANCIAL INFORMATION STATUTORY NET INCOME, STOCKHOLDER'S EQUITY, AND DIVIDENDS The Company's insurance subsidiaries' statutory net income, as reported in conformity with statutory accounting practices prescribed by state regulatory authorities, for the years ended December 31, 1996, 1995, and 1994, was $104.9 million, $67.1 million, and $33.8 million, respectively. Statutory stockholder's equity at December 31, 1996 and 1995, was $674.2 million and $570.4 million, respectively. Regulatory restrictions limit the amount of dividends available for distribution to the Company from its insurance subsidiaries, without prior approval by regulatory authorities, to the greater of ten percent of an insurer's statutory surplus as regards policyholders as of the preceding year end or the statutory net gain from operations, excluding realized investment gains and losses, of the preceding year. The payment of dividends is further limited to the amount of statutory unassigned surplus. Based on these restrictions, $107.0 million will be available for the payment of dividends to the Company from its insurance subsidiaries during 1997. PERMITTED STATUTORY ACCOUNTING PRACTICES The Company's insurance subsidiaries prepare their statutory-basis financial statements in accordance with accounting practices prescribed or permitted by the National Association of Insurance Commissioners (NAIC) and the Tennessee Department of Commerce and Insurance. Prescribed statutory accounting practices include state laws, regulations, and general administrative rules, as well as a variety of publications of the NAIC. Permitted statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state, may differ from company to company within a state, and may change in the future. At December 31, 1996, the Company has not applied any permitted accounting practices that differ from prescribed statutory accounting practices. The NAIC currently is in the process of recodifying statutory accounting practices, the result of which is expected to standardize prescribed statutory accounting practices. Accordingly, that project, which is expected to be completed in 1997, will likely change, to some extent, prescribed statutory accounting practices and may result in changes to the accounting practices that the Company's insurance subsidiaries use to prepare their statutory financial statements. DEPOSITS At December 31, 1996, the Company's insurance subsidiaries had on deposit with regulatory authorities securities with a book value of $173.9 million held for the protection of policyholders. NOTE 16--SUBSEQUENT EVENTS On February 28, 1997, the Company acquired GENEX Services, Inc. and GENEX Services of Canada, Inc. (GENEX), subsidiaries of First Data Corporation, at a price of approximately $70.0 million. GENEX is a provider of case management, vocational rehabilitation, and related services to corporations, third party administrators, and insurance companies. These services are utilized in the management of disability and worker's compensation cases. The acquisition, financed through borrowings on the Company's revolving credit facility, was accounted for by the purchase method. -41- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES NOTE 17--SUPPLEMENTAL DATA ON QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of unaudited quarterly results of operations for 1996 and 1995:
1996 ----------------------------------------------- 4th 3rd 2nd 1st (in millions of dollars, except per share data) ----------------------------------------------- Premium Income $292.4 $287.4 $291.3 $304.6 Net Investment Income 268.0 269.5 274.1 278.5 Net Realized Investment Gains (Losses) 1.4 (4.1) (5.3) (0.6) Total Revenue 568.5 562.7 569.0 591.7 Income Before Federal Income Taxes 67.8 51.8 53.2 53.4 Net Income 43.9 33.2 34.1 34.4 Net Income Per Common Share .89 .66 .68 .69
1995 ----------------------------------------------- 4th 3rd 2nd 1st (in millions of dollars, except per share data) ----------------------------------------------- Premium Income $285.8 $292.0 $313.1 $361.0 Net Investment Income 296.9 301.6 309.8 313.0 Net Realized Investment Losses (2.3) (0.9) (24.6) (3.9) Total Revenue 594.7 602.7 644.1 713.8 Income Before Federal Income Taxes 53.4 51.1 51.9 19.6 Net Income 35.4 32.9 35.0 12.3 Net Income Per Common Share .71 .66 .70 .20
-42- EX-21 9 SUBSIDIARIES OF THE COMPANY Exhibit (21) Subsidiaries of the Company (attached) Subsidiaries of the Company Name State of Domicile ---- ----------------- Provident Life and Accident Insurance Company Tennessee Provident National Assurance Company Tennessee Provident Life and Casualty Insurance Company Tennessee GENEX Services, Inc. Pennsylvania GENEX Services of Canada Province of Ontario EX-23 10 CONSENT OF INDEPENDENT AUDITORS Exhibit (23) Consent of Independent Auditors (attached) Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-K) of Provident Companies, Inc. and Subsidiaries of our report dated February 10, 1997, included in the 1996 Annual Report to Stockholders of Provident Companies, Inc. and Subsidiaries. Our audit also included the financial statement schedules of Provident Companies, Inc. and Subsidiaries listed in Item 14(a). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-47551, Form S-8 No. 33-88108 and Form S-8 No. 33-62231) pertaining to the Provident Life and Accident Insurance Company MoneyMaker, A Long-Term 401(k) Retirement Savings Plan, the Provident Life and Accident Insurance Company Stock Option Plan of 1994 and the Provident Life and Accident Insurance Company Employee Stock Purchase Plan of 1995 and in the Registration Statements (Form S-3 No. 333-17849 and Form S-4 No. 333-17085) of our report dated February 10, 1997, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedules included in this Annual Report (Form 10-K) of Provident Companies, Inc. and Subsidiaries. ERNST & YOUNG LLP Chattanooga, Tennessee March 21, 1997 EX-24 11 POWERS OF ATTORNEY Exhibit (24) Powers of Attorney (attached) POWER OF ATTORNEY OF DIRECTOR OF PROVIDENT COMPANIES, INC. KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Provident Companies, Inc., a Delaware corporation, which proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, an Annual Report on Form 10-K for the year ended December 31, 1996, hereby constitutes and appoints J. Harold Chandler or Susan N. Roth, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution to do any and all acts and things and execute, for him and in his name, place and stead, said form and any and all amendments thereto and to file the same, with all exhibits thereto, and any and all 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 agent, or their substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of March 21, 1997. /s/William L. Armstrong ----------------------- William L. Armstrong POWER OF ATTORNEY OF DIRECTOR OF PROVIDENT COMPANIES, INC. KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Provident Companies, Inc., a Delaware corporation, which proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, an Annual Report on Form 10-K for the year ended December 31, 1996, hereby constitutes and appoints J. Harold Chandler or Susan N. Roth, as her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution to do any and all acts and things and execute, for her and in her name, place and stead, said form and any and all amendments thereto and to file the same, with all exhibits thereto, and any and all 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 she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agent, or their substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of March 21, 1997. /s/Charlotte M. Heffner ----------------------- Charlotte M. Heffner POWER OF ATTORNEY OF DIRECTOR OF PROVIDENT COMPANIES, INC. KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Provident Companies, Inc., a Delaware corporation, which proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, an Annual Report on Form 10-K for the year ended December 31, 1996, hereby constitutes and appoints J. Harold Chandler or Susan N. Roth, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution to do any and all acts and things and execute, for him and in his name, place and stead, said form and any and all amendments thereto and to file the same, with all exhibits thereto, and any and all 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 agent, or their substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of March 21, 1997. /s/Hugh B. Jacks ----------------- Hugh B. Jacks POWER OF ATTORNEY OF DIRECTOR OF PROVIDENT COMPANIES, INC. KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Provident Companies, Inc., a Delaware corporation, which proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, an Annual Report on Form 10-K for the year ended December 31, 1996, hereby constitutes and appoints J. Harold Chandler or Susan N. Roth, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution to do any and all acts and things and execute, for him and in his name, place and stead, said form and any and all amendments thereto and to file the same, with all exhibits thereto, and any and all 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 agent, or their substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of March 21, 1997. /s/William B. Johnson ----------------------- William B. Johnson POWER OF ATTORNEY OF DIRECTOR OF PROVIDENT COMPANIES, INC. KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Provident Companies, Inc., a Delaware corporation, which proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, an Annual Report on Form 10-K for the year ended December 31, 1996, hereby constitutes and appoints J. Harold Chandler or Susan N. Roth, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution to do any and all acts and things and execute, for him and in his name, place and stead, said form and any and all amendments thereto and to file the same, with all exhibits thereto, and any and all 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 agent, or their substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of March 21, 1997. /s/Hugh O. Maclellan, Jr. ------------------------- Hugh O. Maclellan, Jr. POWER OF ATTORNEY OF DIRECTOR OF PROVIDENT COMPANIES, INC. KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Provident Companies, Inc., a Delaware corporation, which proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, an Annual Report on Form 10-K for the year ended December 31, 1996, hereby constitutes and appoints J. Harold Chandler or Susan N. Roth, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution to do any and all acts and things and execute, for him and in his name, place and stead, said form and any and all amendments thereto and to file the same, with all exhibits thereto, and any and all 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 agent, or their substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of March 21, 1997. /s/A. S. (Pat) MacMillan ------------------------ A. S. (Pat) MacMillan POWER OF ATTORNEY OF DIRECTOR OF PROVIDENT COMPANIES, INC. KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Provident Companies, Inc., a Delaware corporation, which proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, an Annual Report on Form 10-K for the year ended December 31, 1996, hereby constitutes and appoints J. Harold Chandler or Susan N. Roth, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution to do any and all acts and things and execute, for him and in his name, place and stead, said form and any and all amendments thereto and to file the same, with all exhibits thereto, and any and all 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 agent, or their substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of March 21, 1997. /s/C. William Pollard ----------------------- C. William Pollard POWER OF ATTORNEY OF DIRECTOR OF PROVIDENT COMPANIES, INC. KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Provident Companies, Inc., a Delaware corporation, which proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, an Annual Report on Form 10-K for the year ended December 31, 1996, hereby constitutes and appoints J. Harold Chandler or Susan N. Roth, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution to do any and all acts and things and execute, for him and in his name, place and stead, said form and any and all amendments thereto and to file the same, with all exhibits thereto, and any and all 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 agent, or their substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of March 21, 1997. /s/Scott L. Probasco, Jr. ------------------------- Scott L. Probasco, Jr. POWER OF ATTORNEY OF DIRECTOR OF PROVIDENT COMPANIES, INC. KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Provident Companies, Inc., a Delaware corporation, which proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, an Annual Report on Form 10-K for the year ended December 31, 1996, hereby constitutes and appoints J. Harold Chandler or Susan N. Roth, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution to do any and all acts and things and execute, for him and in his name, place and stead, said form and any and all amendments thereto and to file the same, with all exhibits thereto, and any and all 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 agent, or their substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of March 21, 1997. /s/Steve S Reinemund ----------------------- Steven S Reinemund POWER OF ATTORNEY OF DIRECTOR OF PROVIDENT COMPANIES, INC. KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Provident Companies, Inc., a Delaware corporation, which proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, an Annual Report on Form 10-K for the year ended December 31, 1996, hereby constitutes and appoints J. Harold Chandler or Susan N. Roth, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution to do any and all acts and things and execute, for him and in his name, place and stead, said form and any and all amendments thereto and to file the same, with all exhibits thereto, and any and all 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 agent, or their substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of March 21, 1997. Burton E. Sorensen ----------------------- Burton E. Sorensen EX-27 12 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF PROVIDENT COMPANIES, INC. FOR THE YEAR ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 10,880,100 264,500 263,100 4,900 0 151,100 13,317,400 19,300 0 421,800 14,992,500 8,051,300 58,800 411,700 3,881,100 200,000 0 156,200 45,600 1,536,800 14,992,500 1,175,700 1,090,100 (8,600) 34,700 1,661,200 64,000 340,500 226,200 80,600 145,600 0 0 0 145,600 2.92 0 2,481,500 910,600 107,800 322,400 502,100 2,675,400 (2,000)
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