-----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, Q6kzTLqRD4dfl+UVydsMOPBokOoWxPHNlbQjKdJhc1YY9K/9wYZR6dKEKB8Ag1Rv +30aPmU1ZDBVmH2ScZT63w== 0000931763-98-002912.txt : 19981116 0000931763-98-002912.hdr.sgml : 19981116 ACCESSION NUMBER: 0000931763-98-002912 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROVIDENT COMPANIES INC /DE/ CENTRAL INDEX KEY: 0000005513 STANDARD INDUSTRIAL CLASSIFICATION: ACCIDENT & HEALTH INSURANCE [6321] IRS NUMBER: 621598430 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11834 FILM NUMBER: 98747459 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-Q 1 QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 1998. Commission file number 1-11834 -------- PROVIDENT COMPANIES, INC. ------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 62-1598430 - ------------------------------- -------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1 Fountain Square, Chattanooga, Tennessee 37402 ------------------------------------------------ (Address of principal executive offices) (Zip Code) (423)755-1011 --------------------------------------------------- (Registrant's telephone number, including area code) None - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding for each of the issuer's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING AT SEPTEMBER 30, 1998 - ----------------------------- --------------------------------- Common Stock, $1.00 Par Value 135,242,680 Total number of pages are 152 PROVIDENT COMPANIES, INC. INDEX PAGE PART I. FORWARD LOOKING STATEMENTS 3 FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited): Condensed Consolidated Statements of Financial Condition at September 30, 1998 and December 31, 1997 4 Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 1998 and 1997 6 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997 7 Notes to Condensed Consolidated Financial Statements 8 Independent Auditors' Review Report 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 40 -2- PART 1 FORWARD LOOKING STATEMENTS From time to time, the Company may publish forward-looking statements relating to such matters as financial performance and the business of the Company. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order for the Company to comply with the terms of the safe harbor the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward looking statements, which involve certain risks and uncertainties. These factors include, (i) heightened competition, including specifically the intensification of price competition, the entry of new competitors, and the development of new products by new and existing competitors; (ii) adverse state and federal legislation and regulation, including limitations on premium levels, increases in minimum capital requirements, and other financial viability requirements; (iii) failure to develop multiple distribution channels in order to obtain new customers or failure to retain existing customers; (iv) inability to carry out product design, marketing and sales plans, including, among others, planned changes to existing products (which may result in reduced market acceptance of the revised products) or planned strategies to penetrate new market segments; (v) loss of key executives; (vi) changes in interest rates causing a reduction of investment income; (vii) general economic and business conditions which are less favorable than expected; (viii) unanticipated changes in industry trends; (ix) inaccuracies in assumptions regarding future morbidity, persistency, mortality, and interest rates or portfolio yield used in calculating reserve amounts; (x) failure to continue improvement of the Company's disability insurance claims management process; and (xi) failure to develop and maintain systems and other information technology that are sufficient to support Company initiatives and changes; (xii) failure to substantially complete the Company's Year 2000 project in a manner that avoids a material adverse impact on results of operations arising from Year 2000 issues; and (xiii) litigation involving the Company's business and activities. See "Risk Factors" included in the Company's report on Form 10-K for the year ended December 31, 1997 (pp.17-20), incorporated herein by reference. See also "Year 2000 Issues" below. -3- PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION PROVIDENT COMPANIES, INC. AND SUBSIDIARIES September 30 December 31 1998 1997 (in millions of dollars) ---------------------------------- (Unaudited) ASSETS Investments Fixed Maturity Securities Available-for-Sale $14,946.5 $17,035.1 Held-to-Maturity 298.9 306.8 Equity Securities 12.7 10.0 Mortgage Loans 17.8 17.8 Real Estate 43.7 87.1 Policy Loans 2,101.4 1,983.9 Other Long-term Investments 33.9 22.6 Short-term Investments 44.0 57.5 --------- --------- Total Investments 17,498.9 19,520.8 Cash and Bank Deposits 42.3 37.7 Accounts and Premiums Receivable 109.8 166.4 Reinsurance Receivable 3,171.2 987.2 Accrued Investment Income 363.1 363.2 Deferred Policy Acquisition Costs 413.7 362.9 Value of Business Acquired 498.7 560.8 Goodwill 697.5 732.3 Property and Equipment 118.0 109.2 Miscellaneous 33.6 26.2 Separate Account Assets 320.2 310.9 --------- --------- TOTAL ASSETS $23,267.0 $23,177.6 ========= ========= See notes to condensed consolidated financial statements. -4- CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
September 30 December 31 1998 1997 (in millions of dollars) --------------------------------------------- (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY Policy and Contract Benefits $ 513.0 $ 531.2 Reserves for Future Policy and Contract Benefits and Unearned Premiums 13,674.9 13,193.8 Policyholders' Funds and Experience Rating Refunds 3,482.6 4,328.0 Federal Income Tax Liability 347.0 190.1 Short-term Debt 98.9 150.7 Long-term Debt 600.0 725.0 Other Liabilities 481.9 468.6 Separate Account Liabilities 320.2 310.9 --------- --------- TOTAL LIABILITIES 19,518.5 19,898.3 --------- --------- COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBT SECURITIES OF THE COMPANY 300.0 - --------- --------- COMMITMENTS AND CONTINGENT LIABILITIES - NOTE 6 STOCKHOLDERS' EQUITY Preferred Stock - 156.2 Common Stock, $1 par 135.8 135.2 Additional Paid-in Capital 756.3 750.6 Retained Earnings 1,821.6 1,635.2 Accumulated Other Comprehensive Income--Note 7 745.7 603.6 Treasury Stock (10.9) (1.5) --------- --------- TOTAL STOCKHOLDERS' EQUITY 3,448.5 3,279.3 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $23,267.0 $23,177.6 ========= =========
See notes to condensed consolidated financial statements. -5- CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
Three Months Ended Nine Months Ended September 30 September 30 1998 1997 1998 1997 (in millions of dollars, except share data) --------------------------------------------------------------- REVENUE Premium Income $ 593.2 $ 594.0 $ 1,759.8 $ 1,471.5 Net Investment Income 329.5 362.9 1,039.6 990.1 Net Realized Investment Gains 9.2 6.9 18.2 13.1 Other Income 43.4 33.3 134.3 87.5 ------------ ------------ ------------ ------------ TOTAL REVENUE 975.3 997.1 2,951.9 2,562.2 ------------ ------------ ------------ ------------ BENEFITS AND EXPENSES Policy and Contract Benefits 445.7 451.8 1,377.8 1,212.2 Change in Reserves for Future Policy and Contract Benefits and Policyholders' Funds 163.8 197.3 486.2 507.7 Amortization Deferred Policy Acquisition Costs 19.3 21.4 58.2 57.9 Value of Business Acquired 7.9 9.1 25.2 19.3 Goodwill 5.2 4.2 16.1 8.6 Interest Expense on Debt 20.0 12.0 54.0 27.8 Salaries 57.1 55.1 168.5 132.1 Commissions 58.6 65.0 189.7 161.9 Other Operating Expenses 71.9 71.7 213.4 171.7 ------------ ------------ ------------ ------------ TOTAL BENEFITS AND EXPENSES 849.5 887.6 2,589.1 2,299.2 ------------ ------------ ------------ ------------ INCOME BEFORE FEDERAL INCOME TAXES 125.8 109.5 362.8 263.0 FEDERAL INCOME TAXES 43.9 38.5 135.0 91.5 ------------ ------------ ------------ ------------ NET INCOME $ 81.9 $ 71.0 $ 227.8 $ 171.5 ============ ============ ============ ============ NET INCOME PER COMMON SHARE Basic $ 0.61 $ 0.50 $ 1.67 $ 1.34 Assuming Dilution $ 0.59 $ 0.49 $ 1.63 $ 1.31 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic 135,210,161 134,962,688 135,101,280 120,928,246 Assuming Dilution 138,491,624 137,939,702 138,589,198 123,492,809 DIVIDENDS PER COMMON SHARE $ 0.10 $ 0.10 $ 0.30 $ 0.28
See notes to condensed consolidated financial statements. -6- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
Nine Months Ended September 30 1998 1997 (in millions of dollars) --------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 631.7 $ 763.9 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Sales of Investments 1,039.9 1,256.6 Proceeds from Maturities of Investments 923.1 1,334.7 Purchase of Investments (1,821.7) (2,195.1) Net Sales of Short-term Investments 10.4 362.1 Acquisition of Business--Note 4 - (860.0) Disposition of Business--Note 5 58.0 - Other (19.4) (23.2) --------- --------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 190.3 (124.9) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Deposits to Policyholder Accounts 66.0 415.7 Maturities and Benefit Payments from Policyholder Accounts (802.5) (1,704.8) Net Short-term Debt Repayments (51.8) - Net Long-term Borrowings (Repayments) (125.0) 425.9 Issuance of Company Obligated Mandatorily Redeemable Preferred Securities 300.0 - Redemption of Preferred Stock (156.2) - Issuance of Common Stock 6.3 388.4 Dividends Paid to Stockholders (44.6) (43.3) Other (9.4) 0.5 --------- --------- NET CASH USED BY FINANCING ACTIVITIES (817.2) (517.6) --------- --------- Effect of Foreign Exchange Rate Changes on Cash (0.2) (0.7) --------- --------- NET INCREASE IN CASH AND BANK DEPOSITS 4.6 120.7 CASH AND BANK DEPOSITS AT BEGINNING OF PERIOD 37.7 19.3 --------- --------- CASH AND BANK DEPOSITS AT END OF PERIOD $ 42.3 $ 140.0 ========= =========
See notes to condensed consolidated financial statements. -7- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) PROVIDENT COMPANIES, INC. AND SUBSIDIARIES SEPTEMBER 30, 1998 NOTE 1--BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 1998, are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1997. NOTE 2--DEBT AND EQUITY SECURITIES On February 24, 1998, the Company repaid the $725.0 million outstanding borrowing on its revolving credit facility and redeemed its cumulative preferred stock outstanding of $156.2 million at $150 per share equivalent to $25 per depositary share. The debt repayment and preferred stock redemption were funded through short-term borrowings. In May 1997, the Securities and Exchange Commission declared effective a shelf registration statement pursuant to which the Company could issue up to $900.0 million in debt and/or equity securities. On March 16, 1998, the Company completed a public offering of $200.0 million of 7.25% senior notes due March 15, 2028. On March 16, 1998, Provident Financing Trust I, a wholly-owned subsidiary trust of the Company, issued $300.0 million of 7.405% capital securities in a public offering. These capital securities, which mature on March 15, 2038, are fully and unconditionally guaranteed by the Company, have a liquidation value of $1,000 per capital security, and have a mandatory redemption feature under certain circumstances. The Company issued $300.0 million of 7.405% junior subordinated deferrable interest debentures which mature on March 15, 2038, to the subsidiary trust in connection with the capital securities offering. The sole assets of the subsidiary trust are the junior subordinated debt securities. On July 9, 1998, the Company completed a public offering of $200.0 million of 6.375% senior notes due July 15, 2005, and $200.0 million of 7% senior notes due July 15, 2018. -8- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES SEPTEMBER 30, 1998 NOTE 3--SEGMENT INFORMATION A summary by segment of the Company's revenue and income before federal income taxes, excluding and including net realized investment gains and losses, follows:
Three Months Ended Nine Months Ended September 30 September 30 1998 1997 1998 1997 (in millions of dollars) ---------------------------------------------------------------- Revenue (Excluding Net Realized Investment Gains and Losses) Individual Disability and Life $565.4 $544.1 $1,683.9 $1,341.9 Employee Benefits 277.8 248.9 808.7 643.5 Other Operations 122.9 197.2 441.1 563.7 ------ ------ -------- -------- Total $966.1 $990.2 $2,933.7 $2,549.1 ====== ====== ======== ======== Income Before Net Realized Investment Gains and Losses and Federal Income Taxes Individual Disability and Life $ 82.1 $ 64.9 $ 235.5 $ 150.8 Employee Benefits 32.0 20.3 90.5 44.6 Other Operations 2.5 17.4 18.6 54.5 ------ ------ -------- -------- Total $116.6 $102.6 $ 344.6 $ 249.9 ====== ====== ======== ========
-9- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES SEPTEMBER 30, 1998 NOTE 3--SEGMENT INFORMATION - CONTINUED
Three Months Ended Nine Months Ended September 30 September 30 1998 1997 1998 1997 (in millions of dollars) ---------------------------------------------------------------- Revenue (Including Net Realized Investment Gains and Losses) Individual Disability and Life $568.6 $547.5 $1,698.0 $1,351.7 Employee Benefits 277.7 251.1 810.3 645.3 Other Operations 129.0 198.5 443.6 565.2 ------ ------ -------- -------- Total $975.3 $997.1 $2,951.9 $2,562.2 ====== ====== ======== ======== Income Before Federal Income Taxes Individual Disability and Life $ 85.3 $ 68.3 $ 249.6 $ 160.6 Employee Benefits 31.9 22.5 92.1 46.4 Other Operations 8.6 18.7 21.1 56.0 ------ ------ -------- -------- Total $125.8 $109.5 $ 362.8 $ 263.0 ====== ====== ======== ========
Total revenue (excluding net realized investment gains and losses) includes premium income, net investment income, and other income. Total revenue (including net realized investment gains and losses) includes premium income, net investment income, net realized investment gains and losses, and other income. -10- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES SEPTEMBER 30, 1998 NOTE 4--ACQUISITION OF BUSINESS GENEX SERVICES, INC. On February 28, 1997, the Company acquired GENEX Services, Inc. and GENEX Services of Canada, Inc. (GENEX) at a price of $70.0 million. GENEX is a provider of case management, vocational rehabilitation, and related services to corporations, third party administrators, and insurance companies. These services are utilized in the management of disability and worker's compensation cases. The acquisition was accounted for by the purchase method. The fair values of the assets acquired and liabilities assumed were $17.9 million and $8.9 million, respectively. The purchase price has been allocated to goodwill and is being amortized on a straight-line basis over a 25 year period. The consolidated financial statements include the operating results of GENEX from March 1, 1997. THE PAUL REVERE CORPORATION On March 27, 1997, the Company acquired The Paul Revere Corporation (Paul Revere), a provider of life and disability insurance products, at a price of approximately $1.2 billion. The transaction was financed through common equity issued to Zurich Insurance Company, a Swiss insurer, and its affiliates in the amount of $300.0 million, common equity of $437.5 million and cash of $2.5 million issued to Paul Revere shareholders, internally generated funds of $145.0 million, and borrowings on the Company's revolving credit facility of $305.0 million. The acquisition was accounted for by the purchase method. The fair values of the assets acquired and liabilities assumed were $6,680.0 million and $6,675.4 million, respectively. The purchase price has been allocated principally to the value of business acquired with the remainder being allocated to goodwill. The value of business acquired will be amortized with interest based on premium income for the traditional individual life and disability income products and on the estimates of future gross profits for interest- sensitive individual life products. Goodwill is being amortized on a straight- line basis over a 40 year period. The following pro forma results of operations for the nine months ended September 30, 1997, give effect to the acquisitions and the related financing arrangements, including the acquisition of debt and issuance of common stock equity. The pro forma results of operations, prepared from historical financial results of operations of the Company, Paul Revere, and GENEX with such adjustments as are necessary to present the results of operations as if the acquisitions had occurred as of the beginning of the period presented, are as follows: Nine Months Ended September 30, 1997 (in millions of dollars, except share data) ------------------------ Revenue $3,018.6 Income Before Federal Income Taxes 311.4 Net Income 200.5 Net Income per Common Share Basic 1.42 Assuming Dilution 1.39 -11- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED PROVIDENT COMPANIES, INC. AND SUBSIDIARIES SEPTEMBER 30, 1998 NOTE 4--ACQUISITION OF BUSINESS - CONTINUED Revenue and income before federal income taxes include $36.4 million of pre-tax net realized investment gains for the acquired companies for the 1997 period prior to acquisition. Net income includes $23.7 million ($0.18 per common share) of after-tax net investment gains for the 1997 period prior to acquisition. NOTE 5--SALE OF A PORTION OF A LINE OF BUSINESS In December 1997, the Company entered into an agreement with American General Corporation (American General) under which various affiliates of American General agreed to acquire certain assets and assume certain liabilities of the Company's individual and tax-sheltered annuity business for approximately $58.0 million in cash. In addition, American General acquired a number of miscellaneous group pension lines of business which were no longer actively marketed by the Company. The sale did not include the Company's Canadian annuity business, traditional guaranteed investment contracts, or group single premium annuities. The sale was completed during the second quarter of 1998. Assets transferred to American General in connection with the business sold had a carrying value of approximately $2,413.3 million, and liabilities assumed by American General totaled $2,493.1 million. In connection with the sale, the Company wrote off $18.7 million of goodwill associated with the annuity business acquired from Paul Revere. The gain recognized at the time of the sale of this business increased 1998 operating earnings by $12.2 million ($0.09 per common share) before taxes and $1.4 million ($0.01 per common share) after taxes. Note 6--COMMITMENTS AND CONTINGENT LIABILITIES Two alleged class action lawsuits have been filed in Superior Court in Worcester, Massachusetts (the Court) against the Company - one purporting to represent all career agents of Paul Revere whose employment relationships ended on June 30, 1997 and were offered contracts to sell insurance policies as independent producers, and the other purporting to represent independent brokers who sold certain Paul Revere individual disability income policies with benefit riders. Motions filed by the Company to dismiss most of the counts in the complaints, which allege various breach of contract and statutory claims, have been denied, but the cases remain at a preliminary stage. To date, no class has been certified in either lawsuit. The Company has filed a conditional counterclaim in each action which requests a substantial return of commissions should the Court agree with the plaintiff's interpretation of the contract. The Company has strong defenses to both lawsuits and will vigorously defend its position and resist certification of the classes. In addition, the same plaintiff's attorney who has filed the purported class action lawsuits has filed 41 individual lawsuits on behalf of current and former Paul Revere sales managers alleging various breach of contract claims. The Company has filed a motion in federal court to compel arbitration for 16 of the plaintiffs who are licensed by the National Association of Securities Dealers and have executed the Uniform Application for Registration or Transfer in the Securities Industry (Form U-4). The Company has strong defenses and will vigorously defend its position in these cases as well. Although the alleged class action lawsuits and the 41 individual lawsuits are in the early stages, management does not currently expect these suits to materially affect the financial position or results of operations of the Company. Various lawsuits against the Company have arisen in the normal course of business. Contingent liabilities that might arise from litigation are not deemed likely to materially affect the financial position or results of operations of the Company. -12- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED Provident Companies, Inc. and Subsidiaries SEPTEMBER 30, 1998 NOTE 7--COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted the provisions of Statement of Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive Income, which establishes standards for reporting and presentation of comprehensive income and its components. SFAS 130 requires foreign currency translation adjustments and unrealized holding gains and losses on the Company's available-for-sale fixed maturity and equity securities, which prior to adoption were reported separately in stockholders' equity, to be reported as components of comprehensive income. Prior periods have been reclassified to conform to the requirements of SFAS 130. SFAS 130 had no impact on the Company's net income or stockholders' equity. The components of accumulated other comprehensive income, net of related tax, are as follows:
September 30 December 31 1998 1997 (in millions of dollars) ------------------------------------- Net Unrealized Gain on Securities $775.7 $624.3 Foreign Currency Translation Adjustment (30.0) (20.7) ------ ------ Accumulated Other Comprehensive Income $745.7 $603.6 ====== ======
The components of comprehensive income, net of related tax, are as follows:
Three Months Ended Nine Months Ended September 30 September 30 1998 1997 1998 1997 (in millions of dollars) ------------------------------------------------------- Net Income $ 81.9 $ 71.0 $227.8 $171.5 Change in Net Unrealized Gain on Securities 35.5 217.3 151.4 365.0 Change in Foreign Currency Translation Adjustment (3.8) (2.8) (9.3) (1.5) ------ ------ ------ ------ Comprehensive Income $113.6 $285.5 $369.9 $535.0 ====== ====== ====== ======
-13- INDEPENDENT AUDITORS' REVIEW REPORT Board of Directors and Shareholders Provident Companies, Inc. We have reviewed the accompanying condensed consolidated statement of financial condition of Provident Companies, Inc. and Subsidiaries as of September 30, 1998, and the related condensed consolidated statements of income for the three and nine month periods ended September 30, 1998 and 1997, and the condensed consolidated statements of cash flows for the nine month periods ended September 30, 1998 and 1997. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated statement of financial condition of Provident Companies, Inc. and Subsidiaries as of December 31, 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended, not presented herein, and in our report dated February 3, 1998, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial condition as of December 31, 1997, is fairly stated in all material respects in relation to the consolidated statement of financial condition from which it has been derived. Chattanooga, Tennessee November 10, 1998 -14- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company acquired GENEX Services, Inc. ("GENEX") and The Paul Revere Corporation ("Paul Revere") on February 28, 1997, and March 27, 1997, respectively. The financial information contained herein includes the accounts and operating results of GENEX and Paul Revere from the respective dates of acquisition. Since GENEX and Paul Revere are reflected in the results of the first nine months of 1998 but for only seven and six months of the first nine months of 1997, respectively, the difference in comparability of the periods is frequently attributable to that fact as indicated below. OPERATING RESULTS Revenue excluding net realized investment gains and losses ("revenue") declined $24.1 million, or 2.4 percent, to $966.1 million in the third quarter of 1998 from $990.2 million in the third quarter of 1997. The decline was the result of lower revenue in the other operations segment ($74.3 million), which was partly offset by slightly higher revenue in the individual disability and life segment ($21.3 million) and employee benefits segment ($28.9 million). In the first nine months of 1998, revenue increased $384.6 million, or 15.1 percent, to $2,933.7 million from $2,549.1 million in the first nine months of 1997. The increase was the result of higher revenue in the individual disability and life segment ($342.0 million) and employee benefits segment ($165.2 million), which was partly offset by lower revenue in the other operations segment ($122.6 million). -15- Income before net realized investment gains and losses and federal income taxes ("income") increased $14.0 million, or 13.6 percent, to $116.6 million in the third quarter of 1998, from $102.6 million in the third quarter of 1997. The increase was the result of increased income in the individual disability and life segment ($17.2 million) and employee benefits segment ($11.7 million), which was partly offset by lower income in the other operations segment ($14.9 million). In the first nine months of 1998, income increased $94.7 million, or 37.9 percent, to $344.6 million, from $249.9 million in the first nine months of 1997. The increase was the result of increased income in the individual life and disability segment ($84.7 million) and the employee benefits segment ($45.9 million), which was partly offset by lower income in the other operations segment ($35.9 million). Net income increased $10.9 million, or 15.4 percent, to $81.9 million in the third quarter of 1998, from $71.0 million in the third quarter of 1997. Net realized investment gains after taxes were $6.0 million in the third quarter of 1998, compared to $4.7 million in the third quarter of 1997. For the first nine months of 1998, net income increased $56.3 million, or 32.8 percent, to $227.8 million, from $171.5 million in the first nine months of 1997. Net realized investment gains after taxes were $12.0 million in the first nine months of 1998, compared to $8.8 million in the first nine months of 1997. The gain recognized at the time of the sale of the Company's annuity business (discussed in detail in the other operations segment) increased operating results for the nine month period ending September 30, 1998 by $12.2 million before taxes and $1.4 million after taxes. -16- INDIVIDUAL DISABILITY AND LIFE Revenue in the individual disability and life segment increased $21.3 million, or 3.9 percent, to $565.4 million in the third quarter of 1998, from $544.1 million in the third quarter of 1997. The increase was primarily the result of an increase in investment income of $22.2 million, or 13.5 percent, to $186.2 million in the third quarter of 1998, compared to $164.0 million in the third quarter of 1997. This increase is primarily due to increased capital allocation to this line of business and a shift in investment mix to higher yielding investments in the Paul Revere portfolio. Premium income in this segment declined $5.5 million, or 1.5 percent, to $369.3 million in the third quarter of 1998, from $374.8 million in the third quarter of 1997. The decline was primarily the result of lower premium income in both the individual disability income and individual life lines of business. For the first nine months of 1998, revenue in this segment increased $342.0 million, or 25.5 percent, to $1,683.9 million, from $1,341.9 million in the first nine months of 1997. The increase was primarily the result of the acquisition of Paul Revere. Net investment income increased $123.4 million, or 29.3 percent, to $545.1 million in the first nine months of 1998, from $421.7 million in the first nine months of 1997, primarily due to the acquisition of Paul Revere, the shift in investment mix to higher yielding investments, and increased capital allocation. Premium income in this segment increased $204.3 million, or 22.6 percent, to $1,108.3 million in the first nine months of 1998, from $904.0 million in the first nine months of 1997, reflecting the acquisition of Paul Revere. In November 1994, the Company announced its intention to discontinue the sale of individual disability products which combined lifetime benefits and short elimination periods with own-occupation provisions (other than conversion policies available under existing contractual arrangements). At the same -17- time the Company began introducing products that insured "loss of earnings" as opposed to occupations, and these products generally contained more limited benefit periods and longer elimination periods. Since the acquisition of Paul Revere in March 1997, the Company has discontinued the sale of certain Paul Revere products that are not consistent with the Company's strategic direction for its product portfolio. The Company expects to continue to offer selected Paul Revere products with own-occupation (while not working) features applying stricter underwriting standards. The Company has filed new rates for some of these products and is in the process of repricing other of these selected products and making modifications to their features where appropriate. Going forward, the Company expects to offer a limited portfolio of own-occupation based coverages along with its more complete line of loss of earnings related disability coverages. In the third quarter of 1998, new annualized sales in the individual disability income line totaled $28.2 million, compared to $31.5 million in the third quarter of 1997 and $26.7 million in the second quarter of 1998, reflecting the continued product transition. On a pro forma basis, sales of individual disability income contracts declined in 1998 compared to the previous year, reflecting the disruption associated with the continued product transition and, secondarily, with the consolidation of the Company's and Paul Revere's sales offices and related realignment of the field sales force. Revenue is not expected to be significantly impacted by the transition in products due to continued favorable persistency. The magnitude and duration of the decline in sales from previous years, such as that experienced during 1997 and the first nine months of 1998, are dependent on the response of customers and competitors in the industry. -18- Income in the individual disability and life segment increased $17.2 million, or 26.5 percent, to $82.1 million in the third quarter of 1998, from $64.9 million in the third quarter of 1997. Income from the individual disability income line of business increased $15.7 million, or 27.7 percent, to $72.3 million in the third quarter of 1998, from $56.6 million in the third quarter of 1997. This increase is primarily due to increased investment income in the individual disability income line of business and a lower level of new claims relative to the third quarter of 1997. Management believes substantial investments in the individual disability claims management process since the first quarter of 1995 helped produce the improvement that has occurred in this line over the past three years. The major elements of this investment include an emphasis on early intervention to better respond to the specific nature of the claims, increased specialization to properly adjudicate the increasingly specialized nature of disability claims, and an increased level of staffing with experienced claim adjusters. Also in this segment, income in the individual life line of business increased $1.5 million, or 18.1 percent, to $9.8 million in the third quarter of 1998, from $8.3 million in the third quarter of 1997. This increase is primarily due to improved mortality experience. For the first nine months of 1998, income in this segment increased $84.7 million, or 56.2 percent, to $235.5 million from $150.8 million in the first nine months of 1997. The increase is primarily due to the acquisition of Paul Revere and improved results in the Company's individual disability income line of business. Income in the individual disability income line of business increased $78.3 million, or 60.5 percent, to $207.7 million in the first nine months of 1998, from $129.4 million in the first nine months of 1997. This improvement is primarily due to the acquisition of Paul Revere. Also in this segment, income in the individual life line of business increased $6.4 million, or 29.9 percent, to $27.8 million in the first nine months of 1998, from $21.4 million in the first nine months of 1997. This increase is primarily due to the acquisition of Paul Revere, higher investment income, and improved mortality experience. -19- EMPLOYEE BENEFITS Revenue in the employee benefits segment increased $28.9 million, or 11.6 percent, to $277.8 million in the third quarter of 1998, from $248.9 million in the third quarter of 1997. The increase was primarily the result of an increase in premium income in this segment of $22.1 million, or 11.6 percent, to $212.6 million in the third quarter of 1998, from $190.5 million in the third quarter of 1997. The increase in premium income was primarily the result of increased premium income in the group disability and group life lines of business. For the first nine months of 1998, revenue in this segment increased $165.2 million, or 25.7 percent, to $808.7 million from $643.5 million in the first nine months of 1997. Premium income increased $121.9 million, or 24.7 percent, to $614.7 million in the first nine months of 1998, from $492.8 million in the first nine months of 1997. The increase is the result of the acquisition of Paul Revere and increased premium income in the group disability, group life, and voluntary benefits lines of business. Also in this segment, revenue from GENEX totaled $71.1 million in the first nine months of 1998 compared to $50.3 million of revenue contributed in 1997 subsequent to its acquisition. Income in the employee benefits segment increased $11.7 million, or 57.6 percent, to $32.0 million in the third quarter of 1998, from $20.3 million in the third quarter of 1997. Income in the group disability line of business increased to $12.2 million in the third quarter of 1998 compared to $7.4 million in the third quarter of 1997, primarily due to the impact of updated factors used in calculating Social Security offset amounts and probabilities and claim termination rates, resulting from year-end 1997 group disability reserve studies. Voluntary benefits reported income of $6.3 million in the third quarter of 1998 compared -20- to $4.7 million in the third quarter of 1997. The group life line of business produced income of $9.3 million in the third quarter of 1998 compared to $5.2 million in the third quarter of 1997. For the first nine months of 1998, income increased $45.9 million, or 102.9 percent, to $90.5 million, from $44.6 million in the first nine months of 1997. The increase is primarily the result of the acquisition of Paul Revere and improved results in the group disability, group life, and voluntary benefits lines of business. The group disability line of business produced income of $42.6 million in the first nine months of 1998 compared to $14.9 million in the first nine months of 1997, primarily due to the acquisition of Paul Revere and the impact of updated factors used in calculating Social Security offset amounts and probabilities and claim termination rates, resulting from year-end 1997 group disability reserve studies. Voluntary benefits reported income of $14.3 million in the first nine months of 1998 compared to $11.6 million in the first nine months of 1997. The group life line of business produced income of $25.4 million in the first nine months of 1998 compared to $9.5 million in the first nine months of 1997. OTHER OPERATIONS The other operations segment includes the Company's group pension products, corporate-owned life insurance ("COLI"), medical stop-loss, individual annuities, corporate interest expense, goodwill amortization, and corporate (unallocated) capital and assets. The closed blocks of business have been segregated for reporting and monitoring purposes. Effective January 1, 1998, the Company entered into an agreement with Connecticut General Life Insurance Company ("Connecticut General") for Connecticut General to reinsure, on a 100% coinsurance basis, the Company's in- force medical stop-loss insurance coverages sold to clients of CIGNA Healthcare -21- and its affiliates ("CIGNA"). This reinsured block constitutes substantially all of the Company's medical stop-loss insurance business. The small portion remaining consists of medical stop-loss coverages sold to clients other than those of CIGNA. These coverages will not be renewed. During 1997, the medical stop-loss business produced revenue of $38.1 million and income of $6.6 million. During the first nine months of 1998, this business produced revenue of $10.4 million. Effective April 30, 1998, the Company closed the sale of its in-force individual and tax-sheltered annuity business to various affiliates of American General Corporation ("American General"). The in-force business sold consisted primarily of individual fixed annuities and tax-sheltered annuities in Provident Life and Accident Insurance Company ("Accident"), Provident National Assurance Company ("National"), The Paul Revere Life Insurance Company ("Paul Revere Life"), The Paul Revere Variable Annuity Insurance Company ("Paul Revere Variable"), and The Paul Revere Protective Life Insurance Company ("Paul Revere Protective"). In addition, American General acquired a number of miscellaneous group pension lines of business sold in the 1970's and 1980's which are no longer actively marketed. Pursuant to an administrative services agreement, an affiliate of American General will be providing administrative services to registered separate accounts of Paul Revere Variable and National. The sale did not include the Company's block of traditional guaranteed investment contracts ("GICs") or group single premium annuities, which will continue in a run-off mode. In consideration for the transfer of the approximately $2.4 billion of statutory reserves, American General paid the Company a ceding commission of approximately $58.0 million. On June 30, 1997, the Company announced that it had agreed to transfer its dental business to Ameritas Life Insurance Corporation ("Ameritas"). The dental block, which was acquired in the Paul -22- Revere acquisition, produced $39.2 million in premium income in 1997. The full transition of the dental business to Ameritas was completed in November 1997. Revenue in the other operations segment declined $74.3 million, or 37.7 percent, to $122.9 million in the third quarter of 1998, from $197.2 million in the third quarter of 1997. Revenue from the group pension line of business declined $22.1 million, or 31.6 percent, to $47.9 million in the third quarter of 1998, from $70.0 million in the third quarter of 1997. This decline is primarily the result of a decrease in funds under management resulting from the strategic decision to discontinue the sale of products in the group pension line of business. For the first nine months of 1998, revenue in this segment declined $122.6 million, or 21.7 percent, to $441.1 million, from $563.7 million in the first nine months of 1997. Included in the 1998 year-to-date revenue is a gain of $12.2 million from the sale of the annuity business. The decline is primarily the result of a decrease in funds under management resulting from the discontinuation of the sale of products in the group pension business. Revenue in this line declined $75.4 million, or 32.2 percent, to $158.7 million in the first nine months of 1998, from $234.1 million in the first nine months of 1997. Management expects that revenue in 1998 from this segment will decline from the levels recorded in 1997 due to the decline in funds under management and the sale of the individual annuity line of business. Income in the other operations segment declined $14.9 million, or 85.6 percent, to $2.5 million in the third quarter of 1998, from $17.4 million in the third quarter of 1997. The decline in this segment was due in part to the sale of the annuity line and the medical stop-loss line, as well as lower income in the -23- group pension line of business, which declined to $7.7 million in the third quarter of 1998, from $10.3 million in the third quarter of 1997 primarily due to the result of lower funds under management and lower income from a reduced amount of capital allocated to this line. Income from the COLI line of business increased to $9.6 million in the third quarter of 1998 from $5.2 million in the third quarter of 1997. Interest expense on debt totaled $15.8 million in the third quarter of 1998, compared to $12.0 million in the third quarter of 1997. Goodwill amortization totaled $5.2 million in the third quarter of 1998, compared to $4.2 million in the third quarter of 1997. For the first nine months of 1998, income in this segment declined $35.9 million, or 65.9 percent, to $18.6 million in the first nine months of 1998, from $54.5 million in the first nine months of 1997. The decline in this segment was due in part to lower income in the group pension line of business, which declined to $21.7 million in the first nine months of 1998, from $28.0 million in the first nine months of 1997 primarily as a result of lower funds under management and lower income from a reduced amount of capital allocated to this line. Income from the COLI line of business increased to $20.6 million in the first nine months of 1998 from $14.4 million in the first nine months of 1997. Interest expense on debt totaled $48.8 million in the first nine months of 1998, compared to $27.8 million in the first nine months of 1997. Goodwill amortization totaled $16.1 million in the first nine months of 1998, compared to $8.6 million in the first nine months of 1997. Included in the 1998 year-to- date income is a gain of $12.2 million from the sale of the annuity business. Management expects that income in 1998 from this segment will continue to decline from the levels recorded in 1997 due to the sale of the annuity line and the continued run-off of the group pension business. -24- LIQUIDITY AND CAPITAL RESOURCES On March 27, 1997, the Company consummated the acquisition of Paul Revere ("Paul Revere Merger"), which was financed through common equity issuance to Zurich Insurance Company, a Swiss insurer, and its affiliates, common equity issuance and cash to Paul Revere stockholders, debt, and internally generated funds. The debt financing was provided through an $800.0 million revolving bank credit facility with various domestic and international banks. The revolving bank credit facility was established in 1996 to provide partial financing for the purchase of Paul Revere and GENEX, to refinance the existing bank term notes of $200.0 million, and for general corporate uses. At December 31, 1997, outstanding borrowings under the revolving bank credit facility were $725.0 million. The revolving bank credit facility was repaid on February 24, 1998. The Company also redeemed its outstanding 8.10% cumulative preferred stock, which had an aggregate value of $156.2 million, on February 24, 1998. The debt repayment and preferred stock redemption were funded through short-term borrowing. In May 1997, the Securities and Exchange Commission declared effective a shelf registration statement pursuant to which the Company could issue up to $900.0 million in debt and/or equity securities. On March 16, 1998, the Company completed a public offering of $200.0 million of 7.25% senior notes due March 15, 2028. On March 16, 1998, Provident Financing Trust I, a wholly-owned subsidiary trust of the Company, issued $300.0 million of 7.405% capital securities in a public offering. These capital securities, which mature on March 15, 2038, are fully and unconditionally guaranteed by the Company, have a liquidation value of $1,000 per capital security, and have a mandatory redemption feature under certain circumstances. The Company issued $300.0 million of 7.405% junior subordinated deferrable interest debentures, which mature on March 15, 2038, to the subsidiary trust in connection with the capital securities offering. The sole assets of the subsidiary trust are the junior subordinated debt securities. -25- In April 1998, the Company entered into a $150.0 million five-year revolving credit facility and a $150.0 million 364-day revolving credit facility with various domestic and international banks. The purpose of the facilities is for general corporate purposes. There are no outstanding borrowings under either of the credit facilities. On July 9, 1998, the Company completed a public offering of $200.0 million of 6.375% senior notes due July 15, 2005, and $200.0 million of 7.0% senior notes due July 15, 2018. After completion of this offering, there are no remaining debt or equity securities available under the Company's shelf registration statement. As the Company announced on September 14, 1998, Capital Z Financial Services Fund II, L.P. is a party to an agreement with Zurich Insurance Company pursuant to which it may purchase all of the 12,698,414 shares of the Company's common stock held by Zurich. Capital Z is a global private equity fund focused on investing in insurance, financial and healthcare services and other related businesses. Zurich is the largest investor in Capital Z. The transaction, which is subject to certain conditions, is still pending. The Company believes the cash flow from its operations will be sufficient to meet its operating and financial cash flow requirements. Periodically, the Company may issue debt or equity securities to fund internal expansion, acquisitions, investment opportunities, and the retirement of the Company's debt and equity. As a holding company, the Company is dependent upon payments from its wholly-owned insurance subsidiaries and GENEX to pay dividends to its stockholders and to pay its expenses. These payments by -26- the Company's subsidiaries may take the form of either dividends or interest payments on amounts loaned to such subsidiaries by the Company. State insurance laws generally restrict the ability of insurance companies to pay cash dividends or make other payments to their affiliates in excess of certain prescribed limitations. In the Company's insurance subsidiaries' states of domicile, regulatory approval is required if an insurance company seeks to make loans to affiliates in amounts equal to or in excess of three percent of the insurer's admitted assets or to pay cash dividends in any twelve month period in excess of the greater of such company's net gain from operations of the preceding year or ten percent of its surplus as regards policyholders as of the preceding year end, each as determined in accordance with accounting practices prescribed or permitted by insurance regulatory authorities. An aggregate of $141.5 million was available in 1997 for the payment of dividends and other distributions by the Company's top-tier insurance subsidiaries without regulatory approval, of which $109.9 million was paid. The Company anticipates that $151.9 million will be available in 1998 for such purposes. On October 28, 1998, the respective Boards of Directors of National, Paul Revere Protective, and Paul Revere Variable approved, subject to and contingent on the required regulatory approvals, extraordinary dividends to be paid by the companies to their respective parents of $25.0 million, $100.0 million, and $50.0 million, respectively. The dividends are to be paid on or before December 31, 1998. The Company's liquidity requirements are met primarily by cash flow provided from operations, principally in its insurance subsidiaries. Premium and investment income, as well as maturities and sales of invested assets, provide the primary sources of cash. Cash flow from operations was sufficient in the third quarter and first nine months of 1998. Cash is applied to the payment of policy benefits, costs of acquiring new business (principally commissions) and operating expenses as well as purchases of new -27- investments. The Company has established an investment strategy that management believes will provide for adequate cash flow from operations. During 1997, the Company sold commercial mortgage loans acquired through the Paul Revere Merger with a principal amount of $268.1 million and a book value of $258.4 million. The purpose of this transition was to increase the liquidity and improve the asset quality and asset/liability management of the investment portfolio. As a result of the release of capital generated by the run-off of the GIC portfolio, the sale of the commercial mortgage loans, and other corporate actions, the Company has increased its available capital to support the growth of its businesses, including assisting in the financing of the acquisitions of Paul Revere and GENEX. Management continues to analyze potential opportunities to utilize the capital to further enhance stockholder value, including exploring options that would support the Company's growth initiatives. INVESTMENTS Investment activities are an integral part of the Company's business, and profitability is significantly affected by investment results. Invested assets are segmented into portfolios, which support the various product lines. Generally, the investment strategy for the portfolios is to match the effective asset durations with related expected liability durations and to maximize investment returns, subject to constraints of quality, liquidity, diversification, and regulatory considerations. The following table provides the distribution of invested assets for the periods indicated. -28-
September 30, December 31, ------------- ----------------- 1998 1997 1996 ------------- ------ ----- Investment-Grade Fixed Maturity Securities 79.4% 82.2% 77.0% Below-Investment-Grade Fixed Maturity Securities 7.7 6.6 6.7 Equity Securities 0.1 0.1 0.1 Mortgage Loans 0.1 0.1 -- Real Estate 0.3 0.4 1.1 Policy Loans 12.0 10.2 13.1 Other 0.4 0.4 2.0 ----- ----- ----- Total 100.0% 100.0% 100.0% ===== ===== =====
The following table provides certain investment information and results for the years indicated.
Nine Months Ended September 30, Year Ended December 31, 1998 1997 1996 ----------------- --------- --------- (in millions of dollars) Average Cash and Invested Assets $18,437.8 $17,808.2 $14,056.3 Net Investment Income $ 1,039.6 $ 1,354.7 $ 1,090.1 Average Yield * 7.5% 7.6% 7.8% Net Realized Investment Gains (Losses) $ 18.2 $ 15.1 $ (8.6)
- ---------------- *Average yield is determined by dividing net investment income by the average cash and invested assets for the period. Excluding net unrealized gains and losses on securities, the yield is 8.3%, 8.0%, and 8.1% for the first nine months of 1998, full year 1997, and full year 1996, respectively. For the past three years, the Company's exposure to non-current investments has improved significantly from prior years. These non-current investments are primarily foreclosed real estate and mortgage loans which became more than thirty days past due in their principal and interest payments. Non-current investments totaled $12.2 million at September 30, 1998, or 0.07 percent of invested assets. -29- The Company's investment in mortgage-backed securities totaled $2.3 billion on an amortized cost basis at September 30, 1998 and $3.1 billion at December 31, 1997. At September 30, 1998, the mortgage-backed securities had an average life of 9.4 years and effective duration of 8.5 years. The mortgage-backed securities are valued on a monthly basis using valuations supplied by the brokerage firms that are dealers in these securities. The primary risk involved in investing in mortgage-backed securities is the uncertainty of the timing of cash flows from the underlying loans due to prepayment of principal. The Company uses models which incorporate economic variables and possible future interest rate scenarios to predict future prepayment rates. The Company has not invested in mortgage-backed derivatives, such as interest-only, principal-only or residuals, where market values can be highly volatile relative to changes in interest rates. Below-investment-grade bonds are inherently more risky than investment- grade bonds since the risk of default by the issuer, by definition and as exhibited by bond rating, is higher. Also, the secondary market for certain below-investment-grade issues can be highly illiquid. Management does not anticipate any liquidity problem caused by the investments in below-investment- grade securities, nor does it expect these investments to adversely affect its ability to hold its other investments to maturity. The Company's exposure to below-investment-grade fixed maturity securities at September 30, 1998, was $1,355.9 million, representing 7.7 percent of invested assets, below the Company's internal limit of 10.0 percent of invested assets for this type of investment. The Company's exposure to below-investment- grade fixed maturities totaled $1,297.1 million at December 31, 1997, representing 6.6 percent of invested assets. -30- Changes in interest rates and individuals' behavior affect the amount and timing of asset and liability cash flows. Management regularly models and tests all asset and liability portfolios to improve interest rate risk management and net yields. Testing the asset and liability portfolios under various interest rate and economic scenarios allows management to choose the most appropriate investment strategy as well as to prepare for the most disadvantageous outcomes. The Company utilizes forward interest rate swaps, forward treasury purchases, and options on forward interest rate swaps to manage and increase yield on cash flows expected from current holdings. All transactions are hedging in nature and not speculative. Almost all transactions are associated with the individual disability product portfolio. During the first quarter of 1998, transactions of this type totaled $415.0 million in notional amount, increasing yield on $63.5 million of purchased securities by approximately 153 basis points. During the second quarter of 1998, transactions of this type totaled $30.0 million in notional amount, increasing yield on $30.5 million of purchased securities by approximately 141 basis points. During the third quarter of 1998, there were no transactions of this type. YEAR 2000 ISSUES As are many other businesses in this country and abroad, the Company is affected in numerous ways, both by its own computer information systems and by third parties with which it has business relationships, in the processing of date data relating to the year 2000 and beyond. Failure to adequately address and substantially resolve year 2000 issues could, and as to mission critical systems in certain circumstances would, have a material adverse effect on the Company's business, results of operations, or financial condition. While there can be no assurance as to its success, the Company has a project underway which is intended and designed to avoid any such material adverse effect from year 2000 issues. -31- In 1996 the Company completed the significant aspects of the planning phase of a project designed to modify its computer information systems to enable proper processing of date data relating to the year 2000. This project has a number of phases, including (i) planning; (ii) inventory (ascertaining the various internal systems and external relationships potentially affected by year 2000 issues); (iii) analysis (determining the extent to which the system or remediation or conversion to a compliant alternative); (iv) construction (remediating the system in order to be compliant); (v) testing (subjecting the integrated testing to validate interconnected and future date processing in the forward year 2000 environment); and (vi) completion. The Company defines Year 2000 "compliant" or "compliance" to mean that software will have the ability to (i) accept input and provide output of data involving dates or portions of dates correctly and without ambiguity as to the twentieth or twenty-first centuries; (ii) manage, store, manipulate, sort, sequence, and perform calculations with respect to data involving dates or portions of dates before, during and after January 1, 2000 (including single-century or multi-century date formulas) without malfunction, abends, aborts; and (iii) manage the leap year occurring in the year 2000 and any Special Dates. The term "Special Dates" means dates used by programmers to create exceptions where no date could be determined as specified to serve as end-of-file indicators or to facilitate sort routines. The Company's approach has primarily been one of modifying or remediating systems to make them compliant since there are not generally compliant replacements available in the market that will meet the Company's operational needs. In some instances non-compliant systems are being replaced with available and usable compliant systems where that approach is both cost and time effective. In addition, there are different areas of remediation requiring different solutions. These include the following: (i) business applications (systems supporting core business processes; this area constitutes more than 75 percent of the overall project effort), (ii) user developed systems (non-mission critical systems developed by business areas in the Company for specific tasks), (iii) hardware and software (computers, central operating systems, software development, and non-information technology systems; this area requires contacting vendors as to year 2000 compliance), (iv) enterprise computing (compliance of the computing infrastructure and year 2000 test facilities), and (v) business partners (other external business relationships that have year 2000 compliance issues; this area requires contacting third parties as to the status of year 2000 compliance). Operational control of the project is the responsibility of the project office. -32- The following table provides information as to the timeline of phases of completion of the year 2000 project for different areas of the Company's business: Year 2000 Project--Time Line(1)
- ----------------------------------------------------------------------------------------------------------- Date 4Q 1995 1Q 1996 2Q 1996 3Q 1996 4Q 1996 - ----------------------------------------------------------------------------------------------------------- Business Impact analysis Initial project Development of Pilot Applications completed plan developed methodology applications chosen to validate methodology - ----------------------------------------------------------------------------------------------------------- Project Office Corporate awareness activities begin - -----------------------------------------------------------------------------------------------------------
-33- Year 2000 Project--Time Line(1)
- ------------------------------------------------------------------------------------------------------- Date 1Q 1997 2Q 1997 3Q 1997 4Q 1997 - ------------------------------------------------------------------------------------------------------- Business Detail project Risk assessments Regression testing begins Applications plan developed performed, inventory complete - ------------------------------------------------------------------------------------------------------- User Inventory Risk assessments completed Developed Begins Systems - ------------------------------------------------------------------------------------------------------- Hardware and Vendor surveys Vendor Inventory of hardware and Software initiated management software begins program formalized - ------------------------------------------------------------------------------------------------------- Enterprise Future date time Upgrade of Definition/analysis/ Computing machine infrastructure work plan development/ environment products begins construction of in-house planning begins system applications - ------------------------------------------------------------------------------------------------------- Business Awareness Partners campaign extends to responses to external inquiries - ------------------------------------------------------------------------------------------------------- Project Office Documentation and Project Office Formalized executive and audit process formed board reporting defined - -------------------------------------------------------------------------------------------------------
-34- Year 2000 Project--Time Line (Continued)(1)
- ------------------------------------------------------------------------------------------------------- Date 1Q 1998 2Q 1998 3Q 1998 4Q 1998 - ------------------------------------------------------------------------------------------------------- Business Construction Full compliance Applications completed, business of business applications begin applications time machine testing - ------------------------------------------------------------------------------------------------------- User Systems in Full compliance Developed construction and of user Systems testing developed systems - ------------------------------------------------------------------------------------------------------- Hardware and Inventory of field Standard software Software office third party configuration service providers established - ------------------------------------------------------------------------------------------------------- Enterprise Time machine Certification Full compliance of Computing environment testing of computing home office constructed at 3 infrastructure infrastructure, sites completed network and telephony systems - ------------------------------------------------------------------------------------------------------- Business Request for Contingency planning Contingency plans Business Partners information sent process defined for finalized for all partner to electronic critical business critical business interface business partners processes interfaces testing - ------------------------------------------------------------------------------------------------------- Project Office Testing metrics Business impact established for time teams formulated machine - -------------------------------------------------------------------------------------------------------
-35- Year 2000 Project--Time Line (Continued)(1)
- ------------------------------------------------------------------------------------------------- Date 1Q 1999 2Q 1999 3Q 1999 4Q 1999 - 2000 - ------------------------------------------------------------------------------------------------- Business Applications - ------------------------------------------------------------------------------------------------- User Developed Systems - ------------------------------------------------------------------------------------------------- Hardware and Contingency plans Software implemented as required - ------------------------------------------------------------------------------------------------- Enterprise Upgrade and Computing replacement of all PC systems completed - ------------------------------------------------------------------------------------------------- Business Business Contingency plans Partners partner implemented as interface required testing completed - ------------------------------------------------------------------------------------------------- Project Office Enterprise - Enterprise - wide wide integration integration testing for testing for re-certification re-certification begins complete - -------------------------------------------------------------------------------------------------
(1) With regard to GENEX, a separate operating subsidiary acquired in February 1997, the primary approach to attaining year 2000 compliance will be replacing non-compliant systems with compliant systems. This process is expected to be complete in the third quarter of 1999. -36- With the exception of GENEX, the Company expects its systems to be compliant by the end of 1998, although it is unlikely that the Company will have received satisfactory assurances from third parties as to year 2000 compliance by the end of 1998. There are numerous instances in which third parties having a relationship with the Company have year 2000 issues to address and resolve. These include primarily vendors of hardware and software, holders of group insurance policies, issuers of investment securities, financial institutions, governmental agencies, and suppliers. An aspect of the project is to identify these third parties and generally to contact them seeking written assurance as to the third party's expectancy to be year 2000 compliant. Written requests have been sent to more than 925 third parties. The nature of the Company's follow up depends upon its assessment of the response and of the materiality of the effect of non- compliance by the third party on the Company. For example, the Company follows up with additional written requests and telephonic inquiries depending upon the circumstances and in some instances determines that it is appropriate to test third party systems about which it has received written assurance. In instances in which the effect of non-compliance may be deemed materially adverse to the Company's business, results of operations, or financial condition, the project personnel are in the process of determining an appropriate contingency arrangement. Project personnel have identified primary business areas which, based on the status of current responses from third parties, have the potential for year 2000 problems. At this time these include cash management, underwriting, client services, and claims. Initial alternatives for contingent arrangements have been selected, and project personnel are considering appropriate documentation of potential procedural changes by the Company or third party providers. With regard to material relationships, contingency plans are expected to be complete by year end 1998. Since inception of the project, the Company has expensed $6.4 million through September 30, 1998, in connection with incremental cost of the year 2000 project and estimates an additional $1.9 million to complete the project. -37- The effort of the information systems personnel and others devoted to the project has been considerable. Temporary personnel in varying numbers have been retained to assist full time personnel in some phases or aspects of the project. The Company has utilized compensation programs to retain project personnel in order to keep the project on schedule. While the project has required systems management to more closely scrutinize the prioritization of information technology projects, it is not believed that any deferral of information technology projects has had a material impact on the Company. At various stages during the project, the Company has used consultants on some particular aspects of the project. The Company has also had occasional contact with certain peer companies comparing approaches to year 2000 issues. The Company has not sought and does not currently expect to obtain independent verification of its processes for dealing with year 2000. Given the range of possibilities that may occur in connection with non- compliance with year 2000 that could affect the Company, particularly as a consequence of third parties, the Company is unable to provide an estimate of the impact of such non-compliance on its business, results of operations, or financial condition. With regard to non-compliance resulting from the Company's systems, which the Company believes to be less likely than that resulting from third parties, the Company would devote its financial and personnel resources, which include approximately 250 systems personnel who would be available, to remediate the problem as soon as possible. With regard to non-compliance resulting from third party failure, the Company is trying to determine through responses and other appropriate action where there is any material likelihood of non-compliance having a potentially material impact. In these instances it is seeking to develop an appropriate contingency arrangement that will minimize such impact; however, given the range of possibilities, no assurance can be given that the Company's efforts will be successful. The foregoing discussion of the year 2000 issue contains forward-looking statements relating to such matters as financial performance and the business of the Company. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order for the Company to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience relating to compliance with year 2000 to differ materially from the anticipated results or other expectations expressed in the Company's forward looking statements concerning year 2000 issues, which involve certain risks and uncertainties. These factors include (i) the unanticipated material impact of a system fault of the Company relating to year 2000, (ii) the failure to successfully remediate, in spite of testing, material systems of the Company, (iii) the time it may take to -38- successfully remediate a failure once it occurs, as well as the resulting costs and loss of revenues, and (iv) the failure of third parties to properly remediate material year 2000 problems. REVIEW BY INDEPENDENT ACCOUNTANTS The condensed consolidated financial statements at September 30, 1998, and for the three month and nine month periods then ended have been reviewed, prior to filing, by Ernst and Young LLP, the Company's independent accountants, and their report is included herein. -39- PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 3.2 Amended and Restated By-Laws Exhibit 10.18 American General Agreements Exhibit 15 Letter re: unaudited interim financial information Exhibit 27 Financial Data Schedule (for SEC use only) (b) Reports on Form 8-K: Form 8-K filed on September 22, 1998, relating to the sale of $200.0 million 6.375% Senior Notes due July 15, 2005, and $200.0 million 7.0% Senior Notes due July 15, 2018, and incorporation of the Underwriting Agreement and the opinions and comments of Alston & Bird LLP issued in connection therewith into the Registration Statement under which the Notes were issued. -40- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Provident Companies, Inc. (Registrant) Date: November 12, 1998 /s/ J. Harold Chandler ------------------------------------ J. Harold Chandler Chairman, President and Chief Executive Officer Date: November 12, 1998 /s/ Thomas R. Watjen ----------------------------------- Thomas R. Watjen Vice Chairman and Chief Financial Officer -41- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 EXHIBITS to FORM 10-Q PROVIDENT COMPANIES, INC. -42- INDEX OF EXHIBITS EXHIBIT PAGE Exhibit 3.2 Amended and Restated By-Laws 44 Exhibit 10.18 American General Agreements 58 Exhibit 15 Letter re: unaudited interim financial information 151 Exhibit 27 Financial Data Schedule (for SEC use only) 152 -43- EX-3.2 2 AMENDED AND RESTATED BY-LAW EXHIBIT 3.2 PROVIDENT COMPANIES, INC. BYLAWS (As Amended by Action of the Board of Directors on October 28, 1998) SECTION I CAPITAL STOCK SECTION 1.1. CERTIFICATES. Every holder of stock in the Corporation shall be entitled to have a certificate signed in the name of the Corporation by the President or a Vice President, and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation certifying the number of shares in the Corporation owned by such holder. If such certificate is countersigned (a) by a transfer agent other than the Corporation or its employee, or, (b) by a registrar other than the Corporation or its employee, any other signature on the certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent, or registrar at the date of issue. SECTION 1.2. RECORD OWNERSHIP. A record of the name and address of the holder of each certificate, the number of shares represented thereby and the date of issue thereof shall be made on the Corporation's books. The Corporation shall be entitled to treat the holder of record of any share of stock as the holder in fact thereof, and accordingly shall not be bound to recognize any equitable or other claim to or interest in any share on the part of any other person, whether or not it shall have express or other notice thereof, except as required by the laws of the State of Delaware. SECTION 1.3. TRANSFER OF RECORD OWNERSHIP. Transfers of stock shall be made on the books of the Corporation only by direction of the person named in the certificate or such person's attorney, lawfully constituted in writing, and only upon the surrender of the certificate therefor and a written assignment of the shares evidenced thereby, which certificate shall be canceled before the new certificate is issued. SECTION 1.4. LOST CERTIFICATES. Any person claiming a stock certificate in lieu of one lost, stolen or destroyed shall give the Corporation an affidavit as to such person's ownership of the certificate and of the facts which go to prove its loss, theft or destruction. Such person shall also, if required by policies adopted by the Board of Directors, give the Corporation a bond, in such form as may be approved by the Corporation, sufficient to indemnify the Corporation against any claim that may be made against it on account of the alleged loss of the certificate or the issuance of a new certificate. SECTION 1.5. TRANSFER AGENTS; REGISTRARS; RULES RESPECTING CERTIFICATES. The Board of Directors may appoint, or authorize any officer or officers to appoint, one or more transfer agents and one or more registrars. The Board of Directors may make such further rules and regulations as it may deem expedient concerning the issue, transfer and registration of stock certificates of the Corporation. SECTION 1.6. RECORD DATE. The Board of Directors may fix in advance a future date, not exceeding 60 days (nor, in the case of a stockholders' meeting, less than ten days) preceding the date of any meeting of stockholders, payment of dividend or other distribution, allotment of rights, or change, conversion or exchange of capital stock or for the purpose of any other lawful action, as the record date for determination of the stockholders entitled to notice of and to vote at any such meeting and any adjournment thereof, or to receive any such dividend or other distribution or allotment of rights, or to exercise the rights in respect of any such change, conversion or exchange of capital stock, or to participate in any such other lawful action, and in such case such stockholders and only such stockholders as shall be stockholders of record on the date so fixed shall be entitled to such notice of and to vote at such meeting and any adjournment thereof, or to receive such dividend or other distribution or allotment of rights, or to exercise such rights, or to participate in any such other lawful action, as the case may be, notwithstanding any transfer of any stock on the books of the Corporation after any such record date fixed as aforesaid. SECTION II MEETINGS OF STOCKHOLDERS SECTION 2.1. ANNUAL. The annual meeting of stockholders for the election of directors and the transaction of such other proper business shall be held on the first Wednesday in May, unless otherwise specified by resolution adopted by the Board of Directors, and at the time and place, within or without the State of Delaware, as determined by the Board of Directors. SECTION 2.2. SPECIAL. Special meetings of stockholders for any purpose or purposes may be called only by the President, the Board of Directors, pursuant to a resolution adopted by a majority of the members of the Board of Directors then in office, or upon written request of the holders of at least ten (10) percent of the votes entitled to be cast on any issue proposed to be considered at the proposed special meeting. Special meetings may be held at any place, within or without the State of Delaware, as determined by the Board of Directors. The only business which may be conducted at such a meeting, other than procedural matters and matters relating to the conduct of the meeting, shall be the matter or matters described in the notice of the meeting. SECTION 2.3. NOTICE. Written notice of each meeting of stockholders, stating the date, time, place and, in the case of a special meeting, the purpose thereof, shall be given as provided by law by the Secretary or an Assistant Secretary not less than ten days nor more than 60 days before -2- such meeting (unless a different time is specified by law) to every stockholder entitled by law to notice of such meeting. SECTION 2.4. LIST OF STOCKHOLDERS. A complete list of the stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder, shall be prepared by the Secretary and shall be open to the examination of any stockholder, for any purpose germane to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified at the place where the meeting is to be held, for at least ten days before the meeting and at the place of the meeting during the whole time of the meeting. SECTION 2.5. QUORUM. The holders of shares of stock entitled to cast a majority of the votes on the matters at issue at a meeting of stockholders, present in person or represented by proxy, shall constitute a quorum, except as otherwise required by the Delaware General Corporation Law. In the event of a lack of a quorum, the chairman of the meeting or a majority in interest of the stockholders present in person or represented by proxy may adjourn the meeting from time to time without notice other than announcement at the meeting, until a quorum shall be obtained. At any such adjourned meeting at which there is a quorum, any business may be transacted that might have been transacted at the meeting originally called. SECTION 2.6. ORGANIZATION AND PROCEDURE. (a) The President, or, in the absence of the President, any other person designated by the Board of Directors, shall preside at meetings of stockholders. The Secretary of the Corporation shall act as secretary, but in the absence of the Secretary, the presiding officer may appoint a secretary. (b) At each meeting of stockholders, the chairman of the meeting shall fix and announce the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at the meeting and shall determine the order of business and all other matters of procedure. Except to the extent inconsistent with any such rules and regulations as adopted by the Board of Directors, the chairman of the meeting may establish rules, which need not be in writing, to maintain order for the conduct of the meeting, including, without limitation, restricting attendance to bona fide stockholders of record and their proxies and other persons in attendance at the invitation of the chairman and making rules governing speeches and debates. The chairman of the meeting acts in his or her absolute discretion and his or her rulings are not subject to appeal. SECTION 2.7. VOTING. Unless otherwise provided in a resolution or resolutions providing for any class or series of Preferred Stock pursuant to Article IV of the Certificate of Incorporation or by the Delaware General Corporation Law, each stockholder shall be entitled to one vote, in person or by written proxy, for each share held of record by such stockholder who is entitled to vote generally in the election of directors. All elections for the Board of Directors shall be decided by a plurality of the votes cast and all other questions shall be decided by a majority of the -3- votes cast, except as otherwise required by the Delaware General Corporation Law or as provided for in the Certificate of Incorporation or these Bylaws. Abstentions shall not be considered to be votes cast. SECTION 2.8. INSPECTORS. The Board of Directors by resolution shall, in advance of any meeting of stockholders, appoint one or more inspectors, which inspector or inspectors may include individuals who serve the Corporation in other capacities, including, without limitation, as officers, employees, agents or representatives of the Corporation, to act at the meeting and make a written report thereof. One or more persons may be designated by the Board of Directors as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the chairman of the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before discharging his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors shall have the duties prescribed by the Delaware General Corporation Law. SECTION 2.9. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS. (a) Annual Meetings of Stockholders. -------------------------------- (1) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (a) pursuant to the Corporation's notice of meeting, (b) by or at the direction of the Board of Directors or (c) by any stockholder of the Corporation who was a stockholder of record at the time of giving of notice provided for in this Bylaw, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Bylaw. (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of this Bylaw, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 60th day nor earlier than the close of business on the 90th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by the Corporation. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re- election as a director all information -4- relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this Bylaw to the contrary, in the event that the number of directors to be elected to the Board of Directors of the corporation at an annual meeting is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least 70 days prior to the first anniversary of the preceding year's annual meeting, stockholder's notice required by this Bylaw shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation. (b) Special Meetings of Stockholders. Only such business shall be -------------------------------- conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (a) by or at the direction of the Board of Directors or (b) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this Bylaw, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Bylaw. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation's notice of meeting, if the stockholder's notice required by paragraph (A)(2) of this Bylaw shall be delivered to the Secretary of the principal executive offices of the Corporation not earlier than the close of business on the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public -5- announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above. (c) General. -------- (1) Only such persons who are nominated in accordance with the procedures set forth in these Bylaws shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Bylaw. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, the Chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Bylaw and, if any proposed nomination or business is not in compliance with this Bylaw, to declare that such defective proposal or nomination shall be disregarded. (2) For purposes of this Bylaw, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Bylaw, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with the respect to the matters set forth in this Bylaw. Nothing in this Bylaw shall be deemed to affect any rights (i) of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders of any series of Preferred Stock to elect directors under specified circumstances. SECTION III BOARD OF DIRECTORS SECTION 3.1. POWERS AND NUMBER. The business and affairs of the Corporation shall be managed by or under the direction of its Board of Directors. In furtherance, and not in limitation, of the powers conferred by the laws of the State of Delaware, the Board of Directors is expressly authorized to: (a) adopt, amend, alter, change or repeal the Bylaws of the Corporation; provided, however, that no Bylaws hereafter adopted shall invalidate any prior act of the directors that would have been valid if such new Bylaws had not been adopted; -6- (b) determine the rights, powers, duties, rules and procedures that affect the power of the Board of Directors to manage and direct the business and affairs of the Corporation, including the power to designate and empower committees of the Board of Directors, to elect, appoint and empower the officers and other agents of the Corporation, and to determine the time and place of, and the notice requirements for, Board meetings, as well as quorum and voting requirements for, and the manner of taking, Board action; and (c) exercise all such powers and do all such acts as may be exercised or done by the Corporation, subject to the provisions of the laws of the State of Delaware and the Certificate of Incorporation and the Bylaws of the Corporation. The number of directors constituting the Board of Directors shall be as authorized from time to time by a vote of a majority of the members of the Board of Directors then in office. SECTION 3.2. RESIGNATION. A director may resign at any time by giving written notice to the President or to the Secretary. Unless otherwise stated in such notice of resignation, the acceptance thereof shall not be necessary to make it effective; and such resignation shall take effect at the time specified therein or, in the absence of such specification, it shall take effect upon the receipt thereof. SECTION 3.3. VACANCIES. Any vacancies in the Board of Directors for any reason and any newly created directorships resulting by reason of any increase in the number of directors may be filled only by the Board of Directors, acting by a majority of the remaining directors then in office, although less than a quorum, or by a sole remaining director, unless there are no remaining directors, in which event the stockholders may fill such vacancies in accordance with Delaware law. Any directors so appointed shall hold office until the next election of directors and until their successors are elected and qualified or their earlier resignation or removal. SECTION 3.4. REMOVAL OF DIRECTORS. Except as may be provided in a designation of the preferences, limitations and relative rights of any class or series of Preferred Stock pursuant to Article IV hereof with respect to any directors elected by the holders of such class or series, any director, or the entire Board of Directors, may be removed from office at any time, with or without cause, by the holders of a majority of the voting power of all of the shares of capital stock of the Corporation then entitled to vote generally in the election of directors, voting together as a single class. SECTION 3.5. REGULAR MEETINGS. Regular meetings of the Board of Directors may be held without further notice at such time as shall from time to time be determined by the Board of Directors. Unless otherwise determined by the Board of Directors, the locations of the regular meetings of the Board of Directors shall be in Chattanooga, Tennessee. A meeting of the Board of Directors for the election of officers and the transaction of such other business as may come before it may be held without notice immediately following the annual meeting of stockholders. -7- SECTION 3.6. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the President or at the request in writing of one third of the members of the Board of Directors then in office. SECTION 3.7. NOTICE OF SPECIAL MEETINGS. Notice of the date, time and place of each special meeting shall be mailed by regular mail to each director at his designated address at least six days before the meeting; or sent by overnight courier to each director at his designated address at least two days before the meeting (with delivery scheduled to occur no later than the day before the meeting); or given orally by telephone or other means, or by telegraph or telecopy, or by any other means comparable to any of the foregoing, to each director at his designated address at least 24 hours before the meeting; provided, however, that if less than five days' notice is provided and one third of the members of the Board of Directors then in office object in writing prior to or at the commencement of the meeting, such meeting shall be postponed until five days after such notice was given pursuant to this sentence (or such shorter period to which a majority of those who objected in writing agree), provided that notice of such postponed meeting shall be given in accordance with this Section 3.7. The notice of the special meeting shall state the general purpose of the meeting, but other routine business may be conducted at the special meeting without such matter being stated in the notice. SECTION 3.8. PLACE OF MEETINGS. The Board of Directors may hold their meetings and have an office or offices inside or outside of the State of Delaware. SECTION 3.9. TELEPHONIC MEETING AND PARTICIPATION. Any or all of the directors may participate in a meeting of the Board of Directors or any committee thereof by conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at the meeting. SECTION 3.10. ACTION BY DIRECTORS WITHOUT A MEETING. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board or of such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. SECTION 3.11. QUORUM AND ADJOURNMENT. A majority of the directors then holding office shall constitute a quorum. The vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Whether or not a quorum is present to conduct a meeting, any meeting of the Board of Directors (including an adjourned meeting) may be adjourned by a majority of the directors present, to reconvene at a specific time and place. It shall not be necessary to give to the directors present at the adjourned meeting notice of the reconvened meeting or of the business to be transacted, other than by announcement at the meeting that was adjourned; provided, however, notice of such reconvened meeting, stating -8- the date, time, and place of the reconvened meeting, shall be given to the directors not present at the adjourned meeting in accordance with the requirements of Section 3.7 hereof. SECTION 3.12. ORGANIZATION. The President, or, in the absence of the President, a member of the Board selected by the members present, shall preside at meetings of the Board. The Secretary of the Corporation shall act as secretary, but in the absence of the Secretary, the presiding officer may appoint a secretary. SECTION 3.13. COMPENSATION OF DIRECTORS. Directors shall receive such compensation for their services as the Board of Directors may determine. Any director may serve the Corporation in any other capacity and receive compensation therefor. SECTION 3.14. PRESUMPTION OF ASSENT. A director of the Corporation who is present at a meeting of the Board of Directors when a vote on any matter is taken is deemed to have assented to the action taken unless he votes against or abstains from the action taken, or unless at the beginning of the meeting or promptly upon arrival the director objects to the holding of the meeting or transacting specified business at the meeting. Any such dissenting votes, abstentions or objections shall be entered in the minutes of the meeting. SECTION IV COMMITTEES SECTION 4.1. COMMITTEES. The Board of Directors may, by resolutions passed by a majority of the members of the Board of Directors, designate members of the Board of Directors to constitute other committees which shall in each case consist of such number of directors, and shall have and may execute such powers as may be determined and specified in the respective resolutions appointing them. Any such committee may fix its rules of procedure, determine its manner of acting and the time and place, whether within or without the State of Delaware, of its meetings and specify what notice thereof, if any, shall be given, unless the Board of Directors shall otherwise by resolution provide. Unless otherwise provided by the Board of Directors or such committee, the quorum, voting and other procedures shall be the same as those applicable to actions taken by the Board of Directors. A majority of the members of the Board of Directors then in office shall have the power to change the membership of any such committee at any time, to fill vacancies therein and to discharge any such committee or to remove any member thereof, either with or without cause, at any time. -9- SECTION V OFFICERS SECTION 5.1. DESIGNATION. The officers of the Corporation shall be a President, one or more Vice Presidents in such gradations as the Board of Directors may determine, a Treasurer, one or more Assistant Treasurers, a Comptroller, one or more Assistant Comptrollers, a Secretary, and one or more Assistant Secretaries, as may be elected by the Board. The Board of Directors may elect or appoint, or provide for the appointment of, such officers or agents as may from time to time appear necessary or advisable in the conduct of the business and affairs of the Corporation. Any number of offices may be held by the same person. SECTION 5.2. ELECTION TERM. At its first meeting after each annual meeting of stockholders, the Board of Directors shall elect the officers or provide for the appointment thereof. Subject to Section 5.3 and Section 5.4 hereof, the term of each officer elected by the Board of Directors shall be until the first meeting of the Board of Directors following the next annual meeting of stockholders and until such officer's successor is chosen and qualified. SECTION 5.3. RESIGNATION. Any officer may resign at any time by giving written notice to the Secretary. Unless otherwise stated in such notice of resignation, the acceptance thereof shall not be necessary to make it effective; and such resignation shall take effect at the time specified therein or, in the absence of such specification, it shall take effect upon the receipt thereof. SECTION 5.4. REMOVAL. Any officer may be removed at any time with or without cause by the affirmative vote of a majority of the members of the Board of Directors then in office. Any officer appointed by another officer may be removed with or without cause by such officer or the Chief Executive Officer. SECTION 5.5. VACANCIES. A vacancy in any office may be filled for the unexpired portion of the term by the Board of Directors or, in the case of offices held by officers who may be appointed by other officers, by any officer authorized to appoint such officer. SECTION 5.6. CHIEF EXECUTIVE OFFICER. The President shall initially be the Chief Executive Officer of the Corporation and thereafter, at such time as the Board of Directors shall determine, the Chief Executive Officer shall be such officer as the Board of Directors shall designate from time to time. The Chief Executive Officer shall be responsible for carrying out the policies adopted by the Board of Directors. SECTION 5.7. PRESIDENT. The President shall have such powers and perform such duties as may be provided for herein and as may be incident to the office and as may be assigned by the Board of Directors. -10- SECTION 5.8. CHAIRMAN OF THE BOARD. The Board, in its discretion may elect a Chairman of the Board, who shall have such powers and perform such duties as may be incident to the office and as may be assigned by the Board of Directors. SECTION 5.9. VICE PRESIDENT. Each Vice President shall have such powers and perform such duties as may be provided for herein and as may be assigned by the President or the Board of Directors. SECTION 5.10. TREASURER. The Treasurer shall have charge of all funds of the Corporation and shall perform all acts incident to the position of Treasurer, subject to the control of the Board of Directors. SECTION 5.11. COMPTROLLER. The Comptroller shall have the custody and operation of the accounting books and records of the Corporation and shall perform all acts incident to the position of Comptroller, subject to the control of the Board of Directors. SECTION 5.12. SECRETARY. The Secretary shall keep the minutes, and give notices, of all meetings of stockholders and directors and of such committees as directed by the Board of Directors. The Secretary shall have charge of such books and papers as the Board of Directors may require. The Secretary or any Assistant Secretary is authorized to certify copies of extracts from minutes and of documents in the Secretary's charge and anyone may rely on such certified copies to the same effect as if such copies were originals and may rely upon any statement of fact concerning the Corporation certified by the Secretary (or any Assistant Secretary). The Secretary shall perform all acts incident to the office of Secretary, subject to the control of the Board of Directors. SECTION 5.13. ASSISTANT SECRETARIES, ASSISTANT TREASURERS AND ASSISTANT COMPTROLLERS. Assistant Secretaries, Assistant Treasurers and Assistant Comptrollers shall have such powers and perform such duties as usually pertain to their respective offices and as may be assigned by the Board of Directors or an officer designated by the Board of Directors. SECTION 5.14. COMPENSATION OF OFFICERS. The officers of the Corporation shall receive such compensation for their services as the Board of Directors or the appropriate committee thereof may determine. The Board of Directors may delegate its authority to determine compensation to designated officers of the Corporation. SECTION 5.15. EXECUTION OF INSTRUMENTS. Checks, notes, drafts, other commercial instruments, assignments, guarantees of signatures and contracts (except as otherwise provided herein or by law) shall be executed by the President or such officers or employees or agents as the Board of Directors or the President may direct. -11- SECTION 5.16. MECHANICAL ENDORSEMENTS. The President or the Secretary may authorize any endorsement on behalf of the Corporation to be made by such mechanical means or stamps as any of such officers may deem appropriate. SECTION VI INDEMNIFICATION SECTION 6.1. INDEMNIFICATION PROVISIONS IN CERTIFICATE OF INCORPORATION. The provisions of this Section VI are intended to supplement Article V of the Certificate of Incorporation pursuant to Sections 5.2 and 5.3 thereof. To the extent that this Section VI contains any provisions inconsistent with said Article V, the provisions of the Certificate of Incorporation shall govern. Terms defined in such Article V shall have the same meaning in this Section VI. SECTION 6.2. INDEMNIFICATION OF EMPLOYEES. The Corporation may indemnify and advance expenses to its employees to the same or any lesser extent as to its directors and officers, as set forth in the Certificate of Incorporation and in this Section VI of the Bylaws of the Corporation. SECTION 6.3. UNDERTAKINGS FOR ADVANCES OF EXPENSES. If and to the extent the Delaware General Corporation Law requires, an advancement by the Corporation of expenses incurred by an indemnitee pursuant to clause (iii) of the last sentence of Section 5.1 of the Certificate of Incorporation (hereinafter an "advancement of expenses") shall be made only upon delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under Article V of the Certificate of Incorporation or otherwise. SECTION 6.4. CLAIMS FOR INDEMNIFICATION. If a claim for indemnification under Section 5.1 of the Certificate of Incorporation is not paid in full by the Corporation within 60 days after it has been received in writing by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 20 days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and in any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses only upon a final -12- adjudication that, the indemnitee has not met the applicable standard of conduct set forth in Section 145 of the Delaware General Corporation Law (or any successor provision or provisions). Neither the failure of the Corporation (including the Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in Section 145 of the Delaware General Corporation Law (or any successor provision or provisions), nor an actual determination by the Corporation (including the Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to have or retain such advancement of expenses, under Article V of the Certificate of Incorporation or this Section VI or otherwise, shall be on the Corporation. SECTION 6.5. INSURANCE. The Corporation may maintain insurance, at its expense, to protect itself and any director, trustee, officer, employee or agent of the Corporation or another enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. SECTION 6.6. SEVERABILITY. In the event that any of the provisions of this Section VI (including any provision within a single section, paragraph or sentence) is held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, the remaining provisions are severable and shall remain enforceable to the full extent permitted by law. SECTION VII MISCELLANEOUS SECTION 7.1. SEAL. The Corporation shall have a suitable seal, containing the name of the Corporation. The Secretary shall be in charge of the seal and may authorize one or more duplicate seals to be kept and used by any other officer or person. SECTION 7.2. WAIVER OF NOTICE. Whenever any notice is required to be given, a waiver thereof in writing, signed by the person or persons entitled to the notice, whether before or after the time stated therein shall be deemed equivalent thereto. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. -13- SECTION 7.3. VOTING OF STOCK OWNED BY THE CORPORATION. Powers of attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Corporation may be executed in the name of and on behalf of the Corporation by the President or such officers or employees or agents as the Board of Directors or the President may direct. Any such officer may, in the name of and on behalf of the Corporation, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may own securities and at any such meeting shall possess and may exercise any and all rights and powers incident to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised and possessed if present. The Board of Directors may from time to time confer like powers upon any other person or persons. SECTION VIII AMENDMENT OF BYLAWS The Board of Directors shall have power to amend, alter, change, adopt or repeal the Bylaws of the Corporation by a two-thirds vote of the members of the Board of Directors then in office, but such power shall not limit the power of the stockholders to amend, alter, change, adopt or repeal the Bylaws. The stockholders also shall have the power to amend, alter, change, adopt or repeal the Bylaws of the Corporation at any annual or special meeting subject to the requirements of the Certificate of Incorporation. -14- EX-10.18 3 AMERICAN GENERAL AGREEMENT EXHIBIT 10.18 Execution Copy --------------- ASSET TRANSFER AND ACQUISITION AGREEMENT BY AND AMONG PROVIDENT COMPANIES, INC., PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY, PROVIDENT NATIONAL ASSURANCE COMPANY, THE PAUL REVERE LIFE INSURANCE COMPANY, THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY, THE PAUL REVERE PROTECTIVE LIFE INSURANCE COMPANY AND AMERICAN GENERAL CORPORATION, WESTERN NATIONAL LIFE INSURANCE COMPANY, THE VARIABLE ANNUITY LIFE INSURANCE COMPANY Dated as of December 8, 1997 TABLE OF CONTENTS
Page ---- ARTICLE 1 - TRANSFER AND ACQUISITION OF ASSETS.............................................................. 1 1.1 Closing................................................................................... 1 1.2 Acquisition of Transferred Assets and Assumption of Assumed Liabilities................... 2 1.3 Determination of Investment Assets and Cash Payments...................................... 3 1.4 Post-Closing Adjustments.................................................................. 5 1.5 Ceding Commission......................................................................... 6 1.6 Closing Deliveries........................................................................ 7 ARTICLE 2 - REPRESENTATIONS AND WARRANTIES OF PROVIDENT AND SELLERS......................................... 9 2.1 Organization, Standing and Authority of Provident and Each Seller......................... 9 2.2 Authorization............................................................................. 9 2.3 Actions and Proceedings................................................................... 10 2.4 No Conflict or Violation.................................................................. 10 2.5 Governmental Consents and Approvals....................................................... 10 2.6 Compliance With Laws...................................................................... 10 2.7 Permits, Licenses and Franchises.......................................................... 11 2.8 Insurance Contracts....................................................................... 11 2.9 Regulatory Filings........................................................................ 13 2.10 Reinsurance............................................................................... 13 2.11 Seller Separate Accounts.................................................................. 13 2.12 Transferred Assets........................................................................ 13 2.13 Assigned and Assumed Contracts............................................................ 13 2.14 Tax Matters............................................................................... 14 2.15 GAAP Financial Statements................................................................. 14 2.16 Statutory Statements...................................................................... 15 2.17 Certain Additional Financial Information.................................................. 15 2.18 Actuarial Appraisal....................................................................... 15 2.19 Conduct of Business....................................................................... 15 2.20 Absence of Certain Changes................................................................ 15 2.21 Other Sale Arrangements................................................................... 16 2.22 Brokerage and Financial Advisers.......................................................... 16 ARTICLE 3 - REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASERS......................................... 16 3.1 Organization and Standing................................................................. 16 3.2 Authorization............................................................................. 16 3.3 Actions and Proceedings................................................................... 16 3.4 No Conflict or Violation.................................................................. 17 3.5 Governmental Consents and Approvals....................................................... 17 3.6 Compliance With Laws...................................................................... 17 3.7 Permits, Licenses and Franchises.......................................................... 17 3.8 Absence of Certain Changes................................................................ 18
-i- 3.9 Brokerage and Financial Advisers.......................................................... 18 3.10 Qualified Institutional Buyer............................................................. 18 3.11 Sufficient Funds.......................................................................... 18 3.12 WNC Acquisition........................................................................... 18 ARTICLE 4 - COVENANTS....................................................................................... 18 4.1 Conduct of Business....................................................................... 18 4.2 Certain Transactions...................................................................... 20 4.3 Investigations; Pre-Closing Access........................................................ 20 4.4 Post-Closing Access....................................................................... 21 4.5 Confidentiality........................................................................... 21 4.6 HSR Act Filings........................................................................... 22 4.7 Consents and Reasonable Efforts........................................................... 22 4.8 Representations and Warranties............................................................ 23 4.9 Expenses.................................................................................. 23 4.10 Marketing Agreements...................................................................... 23 4.11 Bank Accounts and Lockboxes............................................................... 23 4.12 Allocation of Purchase Price and Assumed Liabilities...................................... 24 4.13 Further Assurances........................................................................ 25 4.14 Western National Corporation Acquisition.................................................. 26 4.15 Transition to Purchasers Policy Forms..................................................... 26 4.16 Crediting Rates........................................................................... 26 4.17 Disposition of PNAC and PRV............................................................... 26 4.18 Certain Other Matters..................................................................... 26 ARTICLE 5 - CONDITIONS PRECEDENT TO THE OBLIGATION OF PURCHASERS TO CLOSE................................... 26 5.1 Representations and Warranties; Compliance With Covenants................................. 26 5.2 Other Agreements.......................................................................... 27 5.3 Governmental and Regulatory Consents and Approvals........................................ 27 5.4 Possession of Assets; Instruments of Conveyance........................................... 27 5.5 Injunction................................................................................ 27 5.6 WNC Acquisition........................................................................... 27 ARTICLE 6 - CONDITIONS PRECEDENT TO THE OBLIGATION OF SELLERS TO CLOSE...................................... 27 6.1 Representations and Warranties; Compliance With Covenants................................. 28 6.2 Other Agreements.......................................................................... 28 6.3 Governmental and Regulatory Consents and Approvals........................................ 28 6.4 Injunction................................................................................ 28 ARTICLE 7 - SURVIVAL AND INDEMNIFICATION.................................................................... 28 7.1 Survival of Representations and Warranties................................................ 28 7.2 Obligation to Indemnify................................................................... 29 7.3 Claims Notice............................................................................. 29 7.4 Right to Contest Claims of Third Parties.................................................. 30 7.5 Tax Effect and Insurance.................................................................. 32 7.6 Indemnification Payments.................................................................. 32 7.7 Exclusivity............................................................................... 32
-ii- 7.8 Arbitration............................................................................... 33 ARTICLE 8 - TERMINATION PRIOR TO CLOSING.................................................................... 33 8.1 Termination of Agreement.................................................................. 33 8.2 Survival.................................................................................. 34 ARTICLE 9 - MISCELLANEOUS................................................................................... 34 9.1 Definitions............................................................................... 34 9.2 Expenses.................................................................................. 45 9.3 Substitute Purchaser...................................................................... 46 9.4 Publicity................................................................................. 46 9.5 Confidentiality........................................................................... 46 9.6 Notices................................................................................... 46 9.7 Entire Agreement.......................................................................... 47 9.8 Waivers and Amendments; Non-Contractual Remedies; Preservation of Remedies................ 48 9.9 Governing Law............................................................................. 48 9.10 Binding Effect; Assignment................................................................ 48 9.11 Interpretation............................................................................ 48 9.12 No Third Party Beneficiaries.............................................................. 49 9.13 Counterparts.............................................................................. 49 9.14 Other Agreements, Exhibits and Schedules.................................................. 49 9.15 Headings.................................................................................. 49
EXHIBITS Exhibit 1 Form of Reinsurance Agreement Exhibit 2 Form of Bill of Sale Exhibit 3 Form of General Assignment and Assumption Agreement Exhibit 4 Terms of Marketing Agreements Exhibit 5 State Regulatory Approvals Exhibit 6 Subadvisory Agreement -iii- ASSET TRANSFER AND ACQUISITION AGREEMENT THIS ASSET TRANSFER AND ACQUISITION AGREEMENT (this "Agreement"), dated as of December 8, 1997, is entered into by and among Provident Companies, Inc., a Delaware corporation ("Provident"), Provident Life and Accident Insurance Company, a Tennessee stock life insurance company and a wholly owned subsidiary of Provident ("PLA"), Provident National Assurance Company, a Tennessee stock life insurance company and a wholly owned subsidiary of Provident ("PNAC"), The Paul Revere Life Insurance Company, a Massachusetts stock life insurance company and a wholly owned indirect subsidiary of Provident ("PRL"), The Paul Revere Variable Annuity Insurance Company, a Massachusetts stock life insurance company and a wholly owned indirect subsidiary of Provident ("PRV") and The Paul Revere Protective Life Insurance Company, a Delaware stock life insurance company and a wholly owned indirect subsidiary of Provident ("PRPL"; each of PLA, PNAC, PRL, PRV and PRPL being referred to individually as a "Seller" and together as the "Sellers"), American General Corporation, a Texas corporation ("Parent"), Western National Life Insurance Company ("WNL"), a Texas stock life insurance company (which as of the Closing Date will be a wholly owned indirect subsidiary of Parent), and The Variable Annuity Life Insurance Company ("VALIC"), a Texas stock life insurance company and a wholly owned indirect subsidiary of Parent (each of WNL and VALIC being referred to individually as a "Purchaser" and together as the "Purchasers"). PREAMBLE -------- Upon the terms and subject to the conditions of this Agreement, Sellers wish to sell, and Purchasers wish to acquire, certain of the annuity business of Sellers, and certain other assets of Sellers, and Provident, Sellers, Parent and Purchasers desire to enter into one or more strategic marketing agreements, all as described below. Contemporaneously with the signing of this Agreement, Provident Investment Management, LLC has entered into a Subadvisory Agreement in substantially the form of Exhibit 6 with Parent (the "Subadvisory Agreement"). Certain terms used in this Agreement are defined in Section 9.1. NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, and in reliance upon the representations, warranties, conditions and covenants contained herein, and intending to be legally bound hereby, the parties hereto do hereby agree as follows: ARTICLE 1 TRANSFER AND ACQUISITION OF ASSETS ---------------------------------- 1.1 CLOSING. The Closing shall take place at 10:00 a.m. local time at the ------- offices of Alston & Bird LLP, One Atlantic Center, 1201 West Peachtree Street, Atlanta, Georgia, or such other time and place as Parent and Provident may mutually agree in writing, on the Closing Date following the satisfaction or waiver of all conditions set forth in Articles 5 and 6 concerning the parties' respective obligations to consummate the transactions contemplated herein shall be deemed to have been consummated and become effective for all purposes as of 11:59 p.m. on the Closing Date. 1.2 ACQUISITION OF TRANSFERRED ASSETS AND ASSUMPTION OF ASSUMED ----------------------------------------------------------- LIABILITIES. - ----------- (a) Subject to the terms and conditions set forth herein, at the Closing, the Sellers shall sell, assign, transfer, convey and deliver to Purchasers, and Purchasers shall purchase and accept from the Sellers, all of the Sellers' right, title and interest in and to the Transferred Assets; provided, however, that the amount of cash and Investment Assets to be transferred shall be determined in accordance with the provisions of Section 1.3 and adjusted as required by Section 1.4. (b) On the Closing Date, delivery of the Investment Assets shall be made by transfer to the accounts designated by Purchasers at least two business days prior to the Closing Date. The cash portion of the Transferred Assets shall be transferred to Purchasers by wire transfer of immediately available funds. All other assets included among the Investment Assets shall be transferred by such instruments of transfer or book entry transfer, as appropriate, as are reasonably acceptable to Provident and Purchasers. All sales, assignments and transfers of the Transferred Assets other than cash and Investment Assets shall be effected by the Bills of Sale and the General Assignment and Assumption Agreements. Notwithstanding anything in this Agreement to the contrary, but subject to the provisions of Section 4.4, Sellers shall be entitled to keep and maintain copies of all Books and Records from and after the Closing, and to have access to the originals of the Books and Records in accordance with the terms hereof. (c) Upon the terms and subject to the conditions of this Agreement, on the Closing Date, WNL shall assume: (i) pursuant to the Reinsurance Agreements, as between WNL and each Seller, any and all Adjusted Statutory Reserves and Other Statutory Liabilities of such Seller arising out of or with respect to each WNL Contract, and (ii) pursuant to the General Assignment and Assumption Agreements, all Assumed Liabilities other than the Retained Liabilities. (d) Upon the terms and subject to the conditions of this Agreement, on the Closing Date, VALIC shall assume: (i) pursuant to the Reinsurance Agreements, as between VALIC and each Seller, any and all Adjusted Statutory Reserves and Other Statutory Liabilities of such Seller arising out of or with respect to each VALIC Contract, and (ii) pursuant to the Separate Account Transfer Agreements, any and all Separate Account Liabilities of Sellers arising out of or with respect to each Insurance Contract, other than Retained Liabilities. (e) The liabilities assumed by Purchasers hereunder and under the Ancillary Agreements, less the Ceding Commission, shall be allocated among the Transferred Assets as provided in Section 4.12. -2- 1.3 DETERMINATION OF INVESTMENT ASSETS AND CASH PAYMENTS. ---------------------------------------------------- (a) Attached as Schedule 1.3(A) is a listing of investment assets (the "Preliminary Investment Assets") which the parties have agreed may be included in the Initial Portfolio (as defined herein), together with an estimate of the Initial Cash Position (as defined herein) (such estimate, the "Estimated Initial Cash Position"). Provident and the Sellers have appointed Morgan Stanley, Dean Witter, Discover & Co. and Parent and Purchasers have appointed Bear, Stearns & Co., Inc.. and the parties have jointly appointed Credit Suisse First Boston Corporation (each of Morgan Stanley, Dean Witter, Discover & Co., Bear, Stearns & Co., Inc. and Credit Suisse First Boston Corporation being referred to individually as a "Valuer" and together as the "Valuers"). Provident and Parent shall each be responsible for the cost, if any, of the preparation of the Valuations produced by their respective Valuers and shall be jointly responsible for the cost, if any, of the Valuation prepared by Credit Suisse First Boston Corporation. Each Valuer shall produce a valuation of the Preliminary Investment Assets, based on the midpoint of the bid-ask spread, as of 4:00 p.m., New York City time, on December 8, 1997 (each such valuation referred to as a "Valuation" and together as the "Valuations"). The "Agreed Value" of each Preliminary Investment Asset shall be (i) the middle Valuation thereof plus (ii) the amount of investment income accrued on such Preliminary Investment Asset as of November 30, 1997. (b) As soon as practicable after the date of this Agreement, Provident and the Sellers shall deliver to Parent a statement ("Transferred Reserves Statement") setting forth their determination of the amount of Adjusted Statutory Reserves and Other Statutory Liabilities attributable to the Insurance Contracts in force as of November 30, 1997 (the "Transferred Reserves"), which amounts shall be determined in accordance with Applicable SAP consistently applied. Parent shall have the opportunity to review the Transferred Reserves Statement and Provident and Sellers shall make available their personnel and relevant work papers as reasonably requested by Parent in connection with such review, for a period not to exceed 15 Business Days following delivery of the Transferred Reserves Statement. Any changes in the Transferred Reserves Statement that are agreed to by Parent and Provident within such 15-Business-Day period shall be incorporated into a final Transferred Reserves Statement (the "Final Transferred Reserves Statement"). If Parent and Provident are unable to agree with respect to the amount of the Transferred Reserves included in the Final Transferred Reserves Statement, they shall submit the dispute to an independent actuarial firm jointly selected by them (or selected by their respective actuarial advisors) (the "Independent Actuary"), whose determination of the amount of the Transferred Reserves shall be final and binding and reflected in the Final Transferred Reserves Statement; provided, that such amount shall be within the range of dollar amounts proposed by Parent and Provident, respectively. (c) Within ten Business Days following determination of the Transferred Reserves, the parties shall jointly agree upon a portfolio of assets from among the Preliminary Investment Assets (the "Initial Portfolio") having an aggregate Agreed Value which, together with the Initial Cash Position, shall equal the sum of the Transferred Reserves minus the Ceding Commission minus a ----- ----- receivable from Provident and Sellers equal to the index option component of reserves for those contracts described in Schedule 4.18 minus policy loans to ----- contract holders under Insurance Contracts intended to be reinsured by Purchasers as of November 30, 1997, minus separate ----- -3- account receivables with respect to the Business as of November 30,1997 (such sum, the "Net Asset Value"). In the event the parties are unable to produce an Initial Portfolio having an aggregate Agreed Value equal to the Net Asset Value without subdivision of individual assets, the Initial Portfolio shall consist of whole assets and the difference between the Net Asset Value and the aggregate Agreed Value of the assets composing the Initial Portfolio (whether such difference is a positive or a negative number) shall constitute the "Initial Cash Position." The difference, if any, between the Initial Cash Position and the Estimated Initial Cash Position shall be referred to as the "Initial Cash Position Difference." Provident and the Sellers shall segregate the assets constituting the Initial Portfolio on their books and records (the "Pool") and shall maintain records of all transactions in assets included in the Pool from time to time through the Closing Date. Pursuant to the Subadvisory Agreement, Parent shall serve as subadvisor in respect of the Pool and pursuant to such authority shall have the authority to direct the disposition of investment securities included in the Pool and to direct the purchase of investment securities for inclusion in the Pool (such purchases to be funded from Net Cash From the Business (as defined herein) then available, which shall include on December 8, 1997, an amount equal to the Estimated Initial Cash Position, together with interest thereon from November 30, 1997 to, but not including, December 8, 1997, computed at an Annual Rate equal to the 90- day Treasury Rate in effect on November 30, 1997). On each Business Day Provident will produce and deliver to Parent a good faith estimate of the Net Cash From the Business the close of business on the preceding Business Day, which estimate will be prepared on a basis consistent with Provident's existing internal reporting systems and procedures. The parties agree that (i) the Estimated Initial Cash Position shall be available for investment by the sub- advisor under the Subadvisory Agreement as of 4:00 p.m., New York City time on December 8, 1997, (ii) the Initial Cash Position Difference (if a positive number) shall be available for investment by such subadvisor on the Business Day following its determination, and (iii) Net Cash From the Business reflected in the daily good faith estimates thereof shall be available for investment by such subadvisor on the Business Day following delivery of such estimate. (d) On the Closing Date, Sellers will deliver to Purchasers the assets then included in the Pool (the "Investment Assets"), which shall consist of (i) the Initial Portfolio plus (ii) those investment assets which, after December 8, ---- 1997 and prior to the Closing Date, are purchased for inclusion in the Pool from Net Cash of the Business ("Pool Asset Additions") minus (iii) those investment ----- assets in the Pool (including any Pool Asset Additions) which, after December 8, 1997 and prior to the Closing Date, are (x) redeemed by the issuer thereof, (y) mature in accordance with their terms, or (z) sold ("Pool Asset Reductions"). (e) In addition, prior to the Closing Date, Provident and Sellers shall deliver to Parent and Purchasers an estimated reconciliation of Net Cash From the Business through the Closing Date (the "Preliminary Reconciliation") and a certification of the treasurer of Provident that all items on the Preliminary Reconciliation were estimated in good faith by Sellers and were based upon the books and records of Sellers. If (i) the Net Cash From the Business reflected on the Preliminary Reconciliation is a positive number, Sellers will pay to Purchasers cash in an amount equal to such amount; and (ii) if the Net Cash From the Business reflected on the Preliminary Reconciliation is a negative number, Purchasers will pay to Sellers at Closing cash in such amount. -4- (f) For purposes of this Agreement, "Net Cash From the Business" shall mean an amount equal to the sum of (i) the Estimated Initial Cash Position (including interest thereon from November 30, 1997 to but not including December 8, 1997, computed at an Annual Rate equal to the 90-day Treasury Rate in effect on November 30, 1997) plus the Initial Cash Position Difference (including ---- interest thereon from November 30, 1997 to but not including the date on which the Initial Cash Position Difference is determined, computed at an Annual Rate equal to the 90-day Treasury Rate in effect on November 30, 1997) plus (ii) net ---- cash proceeds received by Sellers in respect of Pool Asset Reductions plus (iii) ---- net cash proceeds attributable to interest received by Sellers after November 30, 1997 and prior to the Closing Date in respect of assets in the Pool minus ----- (iv) cash used to fund Pool Asset Additions plus (v) premiums paid and ---- additional deposits made after November 30, 1997 and prior to the Closing Date in respect of Insurance Contracts intended to be reinsured by Purchasers minus ----- (vi) withdrawals and benefits paid after November 30, 1997 and prior to the Closing Date in respect of Insurance Contracts intended to be reinsured by Purchasers plus (vii) cash proceeds received by Sellers after November 30, 1997 ---- and prior to the Closing Date from payments on policy loans to contract holders under Insurance Contracts which are intended to be reinsured by Purchasers minus ----- (viii) cash used to fund, after November 30, 1997 and prior to the Closing Date, policy loan advances to contract holders under Insurance Contracts which are intended to be reinsured by Purchasers plus (ix) cash payments received by ---- Sellers after November 30, 1997 and prior to the Closing Date, in respect of receivables relating to the Business minus (x) premium taxes, guaranty fund ----- assessments that would not be Retained Liabilities and similar charges incurred by Sellers in respect of the Business after November 30, 1997 and prior to the Closing Date minus (xi) commissions incurred after November 30, 1997 and prior ----- to the Closing Date in respect of Insurance Contracts intended to be reinsured by Purchasers (the amount of such commissions to be determined utilizing the commission schedule attached to the Reinsurance Agreements) minus (xii) other ----- expenses of administering the Business after November 30, 1997 and prior to the Closing Date (such expenses to be determined on a basis consistent with the schedule of fees for services to be rendered by Provident and the Sellers pursuant to the Transition Services Agreement). 1.4 POST-CLOSING ADJUSTMENTS. ------------------------ (a) Provident shall, on or before the date that is 60 days after the Closing Date, prepare a proposed reconciliation of Net Cash From the Business through the Closing Date (the "Reconciliation") and a certification of the treasurer of Provident that all items on the Reconciliation were determined in good faith by Sellers and were based upon the books and records of Sellers. Promptly after its preparation, Provident shall deliver copies of the Reconciliation to Parent. Parent shall have the right to review the Reconciliation and comment thereon for a period of 45 days after receipt thereof. Provident and Sellers agree that Parent and its accountants may have access to the accounting records of Provident and Sellers relating to the preparation of the Reconciliation for the purpose of conducting their review. Any changes in the Reconciliation that are agreed to by Parent and Provident within such 45-day-period shall be incorporated into a final reconciliation of Net Cash From the Business through the Closing Date (the "Final Reconciliation"). In the event that Purchasers and Provident are unable to agree on the manner in which any item or items should be treated in the preparation of the Final -5- Reconciliation within such 45-day period, separate written reports of such item or items shall be made in concise form and shall be referred to such independent accounting firm as Parent and Provident shall mutually designate (the firm making such determination is referred to herein as the "Third Party Accountant"). The Third Party Accountant shall determine as promptly as practicable the manner in which such item or items shall be treated on the Final Reconciliation; provided, however, that the dollar amount of each item in dispute shall be determined within the range of dollar amounts proposed by Provident and Parent, respectively. The determinations by the Third Party Accountant as to the items in dispute shall be in writing and shall be binding and conclusive on the parties and shall be so reflected in the Final Reconciliation. The fees, costs and expenses of retaining the Third Party Accountant shall be shared equally by the parties. Following the resolution of all disputed items (or, if there is no dispute, promptly after the parties reach agreement on the Final Reconciliation), Provident shall prepare the Final Reconciliation and shall deliver copies of such Reconciliation and such calculation to Parent. (b) In the event the amount of Net Cash From the Business reflected on the Final Reconciliation exceeds the amount of Net Cash From the Business reflected on the Preliminary Reconciliation, Sellers shall transfer to Purchasers additional cash equal to the amount of such difference. In the event the amount of Net Cash From the Business reflected on the Preliminary Reconciliation exceeds the amount of Net Cash From the Business reflected on the Final Reconciliation, Sellers shall transfer to Purchasers additional cash equal to the amount of such difference. Any transfer of cash required under this Section 1.4 shall be made within ten Business Days of the date of the delivery of the Final Reconciliation to Purchasers, together with interest thereon from and including the Closing Date to but not including the date of such transfer, computed at an Annual Rate equal to the 90-day Treasury Rate in effect on the Closing Date. 1.5 CEDING COMMISSION. ----------------- (a) The ceding commission is $58,000,000 (the "Ceding Commission"). (b) Not later than March 31, 1999, Parent shall deliver to Provident a written statement (the "Reserves Statement") setting forth the amount of General Account Reserves relating to the individual annuity Business as of November 30, 1998 (the "Final Annuity Reserves"), which Final Annuity Reserves shall be determined in accordance with Applicable SAP applied consistently with, and using the methodologies used in determining, the General Account Reserves of the individual annuity Business included in the Transferred Reserves (the "Transferred Annuity Reserves"). Provident shall have the opportunity to review the Reserves Statement and Parent shall make available its personnel and relevant work papers as reasonably requested by Provident in connection with such review, for a period not to exceed 15 Business Days following delivery of the Reserves Statement. Any changes in the Reserves Statement that are agreed to by Parent and Provident within such 15-Business-Day period shall be incorporated into a final Reserves Statement (the "Final Reserves Statement"). If Parent and Provident are unable to agree with respect to the amount of Final Annuity Reserves included in the Final Reserves Statement, they shall submit the dispute to the Independent Actuary, whose determination of the amount of Final Annuity Reserves shall be final and binding and reflected in the Final Reserves Statement; -6- provided, that such amount shall be within the range of dollar amounts proposed by Parent and Provident, respectively. (c) If (i) the amount of Final Annuity Reserves shown on the Final Reserves Statement exceeds 97.45% of the amount of Transferred Annuity Reserves, Parent shall pay to Provident an amount in cash equal to the percentage increase in such reserves multiplied by the Ceding Commission, and if (ii) the amount of Final Annuity Reserves shown on the Final Reserves Statement is less than 97.45% of the amount of Transferred Annuity Reserves, Provident shall pay to Parent an amount in cash equal to the percentage decrease in such reserves multiplied by the Ceding Commission. In no event shall the payment required by the preceding sentence exceed 20% of the Ceding Commission. Any such payment shall be made within ten Business Days of the date of resolution of all disputed items (or, if there is no dispute, after the parties reach agreement on the amount of Final Annuity Reserves included in the Final Reserves Statement). Any transfer of cash required under this Section 1.5 shall be made within ten Business Days of the date of the delivery of the Final Reconciliation to Purchasers, together with interest thereon from and including November 30, 1997 to but not including the date of such transfer, computed at an Annual Rate equal to the 90-day Treasury Rate in effect on November 30, 1997. (d) Notwithstanding the foregoing, no payment shall be made to the extent that increases or decreases in the Final Annuity Reserves as shown on the Final Reserves Statement are directly attributable to (i) Insurance Contracts not transferred to Purchasers pursuant to this Agreement, (ii) Insurance Contracts where the customer has lapsed but has replaced its policy or contract with another comparable policy or contract issued by a Purchaser or an Affiliate of a Purchaser, (iii) Insurance Contracts issued after November 30, 1997, or (iv) Insurance Contracts that are not individual annuity Insurance Contracts. 1.6 CLOSING DELIVERIES. ------------------ (a) At the Closing, Sellers shall execute (where appropriate) and deliver to Purchasers the following: (i) the Reinsurance Agreements; (ii) the Administrative Services Agreements; (iii) the General Assignment and Assumption Agreements; (iv) the Bills of Sale; (v) evidence of compliance with the requirements of the HSR Act; (vi) evidence of receipt of the Permits described on Exhibit 5 from the Insurance Departments of the States of Tennessee, Delaware, New York and California and the Commonwealth of Massachusetts; and -7- (vii) evidence of compliance with any state pre-acquisition notification acts from which no exemption is available. (b) At the Closing, PNAC and PRV shall execute and deliver to VALIC the Separate Account Transfer Agreements and the Separate Account Administration Agreements. (c) At the Closing, Provident and Sellers shall execute and deliver to Purchasers the following: (i) the Transition Services Agreement; (ii) the License Agreement; (iii) the Marketing Agreements; and (iv) a certificate of an executive officer of Provident, dated the Closing Date, representing and warranting to the effect that (A) the person signing such certificate is familiar with the provisions of this Agreement and (B) the conditions specified in Article 5 have been satisfied. (d) At the Closing, Purchasers shall execute (where appropriate) and deliver to Sellers the following: (i) the Reinsurance Agreements; (ii) the Administrative Services Agreements; (iii) the General Assignment and Assumption Agreements; (iv) evidence of compliance with the requirements of the HSR Act; and (v) evidence of compliance with any state pre-acquisition notification requirements from which no exemption is available. (e) At the Closing, VALIC shall execute and deliver to PNAC and PRV the Separate Account Transfer Agreements and the Separate Account Administration Agreements. (f) At the Closing, Purchasers shall execute and deliver to Provident and Sellers the following: (i) the Transition Services Agreement; (ii) the License Agreement; (iii) the Marketing Agreements; and -8- (iv) a certificate of an executive officer of each Purchaser, dated the Closing Date, representing and warranting to the effect that (A) the person signing such certificate is familiar with the provisions of this Agreement and (B) the conditions specified in Article 6 have been satisfied. ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF PROVIDENT AND SELLERS ------------------------------------------------------- Provident and each Seller hereby represent and warrant to Purchasers as follows (it being understood that each Seller hereby makes only those representations and warranties that specifically relate to it): 2.1 ORGANIZATION, STANDING AND AUTHORITY OF PROVIDENT AND EACH SELLER. ----------------------------------------------------------------- Each of Provident and PRPL is duly organized, validly existing and in good standing under the laws of Delaware and has all requisite power and authority to carry on its operations as they are now being conducted, except where the failure to have such authority would not, individually or in the aggregate, have a Seller Material Adverse Effect. Each of PLA and PNAC is duly organized, validly existing and in good standing under the laws of Tennessee and has all requisite power and authority to carry on the operations of the Business as they are now being conducted, except where the failure to have such authority would not, individually or in the aggregate, have a Seller Material Adverse Effect. Each of PRL and PRV is duly organized, validly existing and in good standing under the laws of Massachusetts and has all requisite power and authority to carry on the operations of the Business as they are now being conducted, except where the failure to have such authority would not, individually or in the aggregate, have a Seller Material Adverse Effect. Each of Provident and each Seller is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where such qualification is necessary, except for those jurisdictions where failure to be so qualified would not, individually or in the aggregate, have a Seller Material Adverse Effect. 2.2 AUTHORIZATION. Each of Provident and the Sellers has all requisite ------------- power and authority to execute and deliver, and to perform its respective obligations under, this Agreement and under each of the Ancillary Agreements to be executed by it. The execution and delivery by Provident and each Seller of this Agreement and the Ancillary Agreements to be executed by them, and the performance by Provident and each Seller of their respective obligations under such agreements, have been duly authorized by all necessary corporate action on the part of Provident and each Seller. This Agreement has been duly executed and delivered by Provident and by each Seller, and on the Closing Date the Ancillary Agreements executed by Provident and/or each Seller will be duly executed and delivered by Provident and/or each Seller, as appropriate; and, subject to the due execution and delivery by the other parties to such agreements, this Agreement and the Ancillary Agreements executed by Provident and/or each Seller will, upon due execution and delivery, be valid and binding obligations of Provident and/or each Seller, as the case may be, enforceable against Provident and/or each Seller in accordance with their respective terms. Notwithstanding the foregoing, the obligation of Provident and each Seller to execute any Ancillary Agreement shall be subject to the terms and conditions of this Agreement. -9- 2.3 ACTIONS AND PROCEEDINGS. There are no outstanding Orders by or with ----------------------- any court, governmental agency, regulatory body or arbitration tribunal before which Provident or any Seller was a party that, individually or in the aggregate, have a Seller Material Adverse Effect. There are no actions, suits, arbitrations or legal, administrative or other proceedings pending or, to the knowledge of Provident or Sellers, threatened against Provident or any Seller, at law or in equity, or before or by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or before any arbitrator of any kind which, if adversely determined, would, individually or in the aggregate, have a Seller Material Adverse Effect. 2.4 NO CONFLICT OR VIOLATION. The execution, delivery and performance by ------------------------ Provident and each Seller of this Agreement and the Ancillary Agreements to which any of them may become a party and the consummation of the transactions contemplated hereby and thereby in accordance with the respective terms and conditions hereof and thereof will not (a) violate any provision of the charter, bylaws or other organizational documents of Provident or any Seller, (b) violate, conflict with or result in the breach of any of the terms of, result in any modification of the effect of, otherwise give any other contracting party the right to terminate, or constitute (or with notice or lapse of time or both, constitute) a default under, any contract relating to or arising in connection with the Business to which Provident or any Seller is a party or by or to which Provident or any Seller or any of their respective assets or properties may be bound or subject, except for such violations, conflicts, breaches or modifications that would not, individually or in the aggregate, have a Seller Material Adverse Effect, (c) violate any Order against, or binding upon, or any agreement with, or condition imposed by, any governmental or regulatory body, foreign or domestic, binding upon Provident or any Seller in connection with the Business, except for such violations that would not, individually or in the aggregate, have a Seller Material Adverse Effect, (d) subject to obtaining the Permits referred to in Section 2.5, violate any statute, law or regulation of any jurisdiction, except for such violations that would not, individually or in the aggregate, have a Seller Material Adverse Effect, or (e) result in a breach or violation of any of the terms or conditions of, constitute a default under, or otherwise cause an impairment or revocation of, any Permit related to the Business, except for such breaches, violations, defaults, impairments or revocations that would not, individually or in the aggregate, have a Seller Material Adverse Effect. 2.5 GOVERNMENTAL CONSENTS AND APPROVALS. Except as required under the HSR ----------------------------------- Act and except for required Permits of and filings with applicable insurance or securities regulatory authorities, the execution, delivery and performance by Provident and each Seller of this Agreement and the Ancillary Agreements to which any of them is a party and the consummation of the transactions contemplated hereby and thereby in accordance with the respective terms hereof and thereof do not require any of Provident or any Seller to obtain any Consent of, make any filing with, or give any notice to, any governmental or regulatory body. 2.6 COMPLIANCE WITH LAWS. Except with respect to those violations, if -------------------- any, which would not, individually or in the aggregate, have a Seller Material Adverse Effect, (i) none of the Sellers nor the Seller Separate Accounts is in violation of any Law or Order applicable to the Business nor, to the knowledge of Sellers, has any Seller received any written notice that any such -10- violation is being alleged and (ii) without limiting the generality of the foregoing, in connection with Sellers' most recently completed or any ongoing quinquennial or triennial examination, no Seller has, to the knowledge of Sellers, received any notice, nor, to the knowledge of Sellers, is any Seller aware of the intention to send any notice, from any state regulatory authority alleging any violation of any such Law or Order or directing any Seller to take any remedial action with respect to such Law or Order, in either case relating to the Business. 2.7 PERMITS, LICENSES AND FRANCHISES. Schedule 2.7 lists (i) all -------------------------------- jurisdictions in which Sellers are licensed to issue the Insurance Contracts and (ii) the lines of business in connection with the Business which Sellers are authorized to transact in each such jurisdiction. Each Seller has been duly authorized by the relevant state insurance regulatory authorities to issue the Insurance Contracts that it is currently writing, and was duly authorized to issue the Insurance Contracts that it is not currently writing at the time such Insurance Contracts were issued, in the respective states in which it conducts the Business, except for authorizations the failure of which to have would not, individually or in the aggregate, have a Seller Material Adverse Effect. Except as set forth on Schedule 2.7, each Seller has all other Permits necessary to conduct the Business in the manner and in the areas in which the Business is presently being conducted and all such Permits are valid and in full force and effect, except where the failure to have such a Permit would not, individually or in the aggregate, have a Seller Material Adverse Effect. 2.8 INSURANCE CONTRACTS. ------------------- (a) The forms of Insurance Contracts available for issuance, and the states in which such forms are authorized for issuance, on the date hereof are listed on Schedule 9.1(C) and are specifically identified on such Schedule. All Insurance Contracts as now in force are in all respects, to the extent required under applicable Law, on forms approved by applicable insurance regulatory authorities or which have been filed and not objected to by such authorities within the period provided for objection, and such forms comply in all material respects with the insurance statutes, regulations and rules applicable thereto, except where the failure to have such approval or non-objection or the failure to so comply would not, individually or in the aggregate, have a Seller Material Adverse Effect. At the time any Seller paid commissions to any broker or agent within the past 36 months in connection with the sale of Insurance Contracts, each such broker or agent was duly licensed as an insurance broker (for the type of business sold by such broker) or agent in the particular jurisdiction in which such broker or agent sold such business for Seller, and no such broker or agent violated (or with or without notice or lapse of time or both would have violated) any federal, state, local or foreign law, ordinance or regulation or any other requirement of any governmental or regulatory body, court or arbitrator applicable to the Business, except where the failure to be so licensed or any such violation would not, individually or in the aggregate, have a Seller Material Adverse Effect. Neither the manner in which any Seller compensates any Person involved in the sale or servicing of Insurance Contracts that is not registered as a broker-dealer or insurance agent, as applicable, nor, to the knowledge of Sellers, the conduct of any such Person, renders such Person a broker-dealer or insurance agent under any applicable federal or state law, and the manner in which any Seller compensates each Person involved in the sale or servicing of Insurance Contracts is in compliance with all applicable federal or state laws except where such manner of compensation or conduct having such effect or the -11- failure to be so in compliance would not, individually or in the aggregate, have a Seller Material Adverse Effect. (b) Each Seller and Provident (with respect to the Business) has implemented procedures and programs which are reasonably designed to provide assurance that its respective agents and employees are in material compliance with all Laws, including without limitation, advertising, licensing and sales practices laws, regulations, directives, bulletins and opinions of governmental authorities, except for non-compliances that, individually or in the aggregate, have not had and would not have a Seller Material Adverse Effect. Each Seller and Provident (with respect to the Business) has previously made available to Purchaser a true, complete and correct copy of its compliance program and procedures referred to in the preceding sentence, and, except as previously disclosed in this Agreement or any Schedule to this Agreement, neither Provident nor any Seller has knowledge of any noncompliance therewith, except for instances of noncompliance which, individually or in the aggregate, have not had and would not have a Seller Material Adverse Effect. (c) Each Seller has at all times since January 1, 1987, maintained records which in all material respects accurately reflect transactions in reasonable detail, and accounting controls, policies and procedures sufficient to ensure in all material respects that such transactions are recorded in a manner which permits the preparation of financial statements in accordance with applicable statutory accounting requirements. (d) Except as set forth on Schedule 2.8(A), to the knowledge of Sellers: (i) to the extent that by operation of law or written agreement or otherwise any Seller is legally responsible therefor, (A) the terms of each Qualified Contract and the administration and operation thereof and of any plan or arrangement funded in whole or in part through any such Qualified Contract comply, and at all relevant times have complied, in all material respects with the applicable provisions of the Code and ERISA and (to the extent such plan is intended by the Contract holder to limit fiduciary responsibility in accordance with section 404(c) of ERISA) comply, and at all relevant times have complied, in all material respects with all applicable requirements for limiting fiduciary responsibility under section 404(c) of ERISA; (B) contributions or payments to each such Qualified Contract which are intended to be nontaxable are not taxable; and (C) plan or contract loans made under such Qualified Contracts were neither prohibited transactions nor taxable when made or at any time thereafter, except with respect to taxable defaults in repayment of such plan or contracts loans; and (ii) neither any Seller nor any of their Affiliates is legally responsible, by operation of law, written agreement or otherwise, for testing, determining or otherwise ensuring compliance under sections 401(a), 403(a), 403(b), 408 and 457 of the Code or otherwise administering or providing administrative services of any nature to any plan or arrangement funded in whole or in part through any such Qualified Contract. -12- 2.9 REGULATORY FILINGS. Except as listed on Schedule 2.9, each Seller has ------------------ filed or will prior to Closing file all reports, statements, documents, registrations, filings or submissions required to be filed by such Seller, and the Seller Separate Accounts with any governmental or regulatory body to the extent they relate to the Business, except where the failure to make such filings would not, individually or in the aggregate, have a Seller Material Adverse Effect. Except as listed on Schedule 2.9, all such registrations, filings and submissions were or will be in compliance in all material respects with applicable law when filed or as amended or supplemented, and, to the knowledge of Sellers, no material deficiencies have been asserted by any such governmental or regulatory body with respect to such registrations, filings or submissions that have not been satisfied. 2.10 REINSURANCE. To the knowledge of Sellers, (a) there are no ----------- agreements, written or oral, pursuant to which any Seller cedes or retrocedes risks assumed under the Insurance Contracts and (b) there are no Insurance Contracts which are agreements of assumed reinsurance. 2.11 SELLER SEPARATE ACCOUNTS. Each of the Seller Separate Accounts is ------------------------ duly and validly established and maintained in all material respects under applicable Laws and the assets of the Seller Separate Accounts are not chargeable with liabilities arising out of any other business that any Seller or Provident may conduct. Each of the Seller Separate Accounts is duly registered as an investment company under the 1940 Act (or exempt from such registration). Except as listed on Schedule 2.11, each of the Seller Separate Accounts is and has been operated in compliance with the 1940 Act in all material respects, and each Seller has filed all reports and amendments of its registration statement required to be filed, and has been granted all exemptive relief necessary for the operations of the Seller Separate Accounts. The Insurance Contracts under which the Seller Separate Account assets are held are duly and validly issued and were sold pursuant to an effective registration statement under the Securities Act and any applicable state securities laws and each such registration statement is currently in effect to the extent necessary to allow Seller to receive contributions under such contracts. Each Seller, as appropriate, has filed each prospectus and statement of additional information, as amended or supplemented, under which the Seller Separate Accounts assets are held that are required to be filed, and each such prospectus and statement of additional information, as of its respective mailing date or date of use, complied in all material respects with applicable securities laws. 2.12 TRANSFERRED ASSETS. Each Seller has good and marketable title to all ------------------ assets included within the Transferred Assets (other than cash and the Transferred Contracts), free of any lien, encumbrance, restriction, claim, charge, or defect of title, except for any liens, encumbrances, restrictions, claims, charges or defects of title whose effect on the value of the relevant Transferred Asset will be collectively reflected in the Agreed Value thereof. 2.13 ASSIGNED AND ASSUMED CONTRACTS. Each of the Assigned and Assumed ------------------------------ Contracts is valid, binding and in full force and effect according to its terms as against each Seller party thereto and, to the knowledge of Sellers, the other party or parties thereto; and is freely assignable to Purchasers pursuant to this Agreement and the General Assignment and Assumption Agreement without notice to or Consent of any Person. No Seller nor, to the knowledge of Sellers, any other party to any such contract is in default with respect to any such contract or such other agreement, -13- except for any such default that would not, individually or in the aggregate, have a Seller Material Adverse Effect. To the knowledge of Sellers, there are no contracts, agreements, commitments or arrangements to which any Seller or Provident is a party, or which is binding upon any Seller or Provident, that restrict the right of any Seller or Provident to change the crediting rates and other non-guaranteed elements under the Insurance Contracts, other than pursuant to the terms of the Insurance Contracts. 2.14 TAX MATTERS. Except for inaccuracies the effect of which would not ----------- have a Seller Material Adverse Effect: (a) The assets of the Seller Separate Accounts are and have been adequately diversified at all times within the meaning of section 817(h) of the Code; (b) Each Insurance Contract complies with the requirements of section 72 of the Code; (c) To the knowledge of Sellers, there are no "hold harmless," tax sharing, indemnification, or similar arrangements regarding the Tax qualification or treatment of any Insurance Contracts; (d) Each Seller is or is treated for all federal income Tax purposes as the owner of the assets underlying each variable Insurance Contract issued, entered into, or sold by Seller; and (e) Each Seller has complied in all material respects with all applicable reporting, withholding and disclosure requirements under the Code, ERISA and other applicable law, including those regarding distributions, with respect to the Insurance Contracts and has reported the distributions under such contracts in accordance with section 72 of the Code in all material respects. 2.15 GAAP FINANCIAL STATEMENTS. On or prior to the date hereof, Provident ------------------------- has delivered to Parent true, correct and complete copies of (a) audited consolidated balance sheet of Provident and its Subsidiaries as of December 31, 1996, prepared in accordance with GAAP, together with the notes thereon and the related report of Ernst & Young LLP, the independent certified public accountant of Provident, and (b) the audited consolidated statements of income, stockholders' equity and cash flows of Provident and its Subsidiaries for the year ended December 31, 1996, together with the notes thereon and the related report of Ernst & Young LLP (collectively, the "Provident Financial Statements"). Provident has delivered to Parent a true, correct and complete copy of the consolidated balance sheet, and the related consolidated statements of income, stockholders' equity and cash flows of Provident and its Subsidiaries for the quarter ended September 30, 1997 (the "Interim Financial Statements"). The Provident Financial Statements and the Interim Financial Statements are based on the books and records of Provident and its Subsidiaries, and the Provident Financial Statements and the Interim Financial Statements have been prepared in accordance with GAAP (subject, in the case of the Interim Financial Statements, to normal recurring year-end adjustments) consistently applied, and fairly present in all material -14- respects the consolidated financial position and results of operations of Provident and its Subsidiaries as of the date and for the period indicated therein. 2.16 STATUTORY STATEMENTS. Provident has previously delivered to Parent -------------------- true, complete and correct copies of the Annual Statements of the Sellers as filed with the Tennessee, Delaware and Massachusetts Insurance Departments for the years ended December 31, 1996 and 1995, together with all audits and schedules thereto and the actuarial opinions applicable to the Business for such years and supporting actuarial memoranda for the year ended December 31, 1996 only. Provident has previously disclosed to Purchaser a true, complete and correct copy of the Quarterly Statement of the Sellers as filed with the Tennessee, Delaware and Massachusetts Insurance Departments, for the quarter ended September 30, 1997, together with all exhibits and schedules thereto. 2.17 CERTAIN ADDITIONAL FINANCIAL INFORMATION Provident has previously ---------------------------------------- delivered to Parent the combined balance sheets and income statements for the Business described in Schedule 2.17 (the "Additional Statutory Information"). The Additional Statutory Information was prepared in good faith by Provident in accordance with Applicable SAP consistently applied for the purpose of the sale of the Business, and fairly represents in all material respects the financial position of the Business for the periods and as of the date stated therein, respectively, and the results of operations of the Business for the periods reflected therein. Provident also has previously delivered to Parent certain pro forma projected financial information for the Business described in Schedule 2.17 (the "Projections"), which Projections were prepared in good faith by Provident in accordance with GAAP consistently applied for the purpose of the sale of the Business. 2.18 ACTUARIAL APPRAISAL. To the knowledge of Sellers, the Actuarial ------------------- Appraisal of Provident's Individual Annuity Business and Guaranteed Interest Contracts ("GICs") Business, dated as of June 30, 1997, (i) reflected only (x) the GICs and insurance contracts written in Canada which are not included in the Insurance Contracts, and (y) insurance policies and annuity contracts issued by Sellers that would have constituted Insurance Contracts if in effect on the date hereof and (ii) was prepared in accordance with Actuarial Standards of Practice numbers 14 and 19, as they apply to actuarial appraisals, and Applicable SAP, consistently applied. 2.19 CONDUCT OF BUSINESS. Except as expressly contemplated or required by ------------------- this Agreement, since December 31, 1996, each Seller has generally conducted the Business only in the ordinary course consistent with its past practices and there has not been any material change in the underwriting, pricing, actuarial, reserving, investment, sales, marketing or agency practices or policies of the Business. 2.20 ABSENCE OF CERTAIN CHANGES. Since December 31, 1996, there has been -------------------------- no adverse change in mortality or lapse experience, or any damage, destruction, loss or other event or condition of any character (whether or not in the ordinary course of business), other than those occurring as a result of general economic or financial conditions or other developments which are not unique to the Business but also affect other Persons who participate or are engaged in lines of -15- business similar to the Business and that, individually or in the aggregate, is likely to have a Seller Material Adverse Effect. 2.21 OTHER SALE ARRANGEMENTS. Neither Provident nor any Seller is ----------------------- obligated or liable, contingently or otherwise, for or with respect to negotiations, letters of intent or commitments for the sale of all or any part of the Business (except in the ordinary course of business) to any Persons other than Purchasers. 2.22 BROKERAGE AND FINANCIAL ADVISERS. No broker, finder or financial -------------------------------- adviser has acted directly or indirectly as such for, or is entitled to any compensation from, Provident, any Seller or their respective Affiliates in connection with this Agreement or the transactions contemplated hereby. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASERS ------------------------------------------------------- Parent and each Purchaser hereby represent and warrant to Provident and each Seller as follows: 3.1 ORGANIZATION AND STANDING. Parent and each Purchaser is a ------------------------- corporation duly organized and validly existing under the laws of the State of Texas and has all requisite power and authority to own, lease and operate its assets, properties and business and to carry on the operations of its business as they are now being conducted, except where such authority is not material to such operations. 3.2 AUTHORIZATION. Parent and each Purchaser has all requisite power and ------------- authority to execute, deliver and perform its obligations under this Agreement and under each of the Ancillary Agreements to be executed by it. The execution and delivery by Parent and Purchasers of this Agreement and the execution and delivery of the Ancillary Agreements to be executed by Purchasers, and the performance by each of them of their obligations under such agreements, have been or, in the case of WNL and VALIC, will be as soon as practicable after execution of this Agreement, duly authorized. This Agreement has been duly executed and delivered by Parent and Purchasers, and on the Closing Date the Ancillary Agreements executed by Purchasers will be duly executed and delivered by such Purchaser; and, subject to the due execution and delivery by the other parties to such agreements, this Agreement is, and the Ancillary Agreements executed by each Purchaser will, upon due execution and delivery, be valid and binding obligations of Parent and Purchasers, respectively, enforceable against Parent or Purchasers, as appropriate, in accordance with their respective terms. Notwithstanding the foregoing, the obligation of each Purchaser to execute any Ancillary Agreement shall be subject to the terms and conditions of this Agreement. 3.3 ACTIONS AND PROCEEDINGS. There are no outstanding Orders by or with ----------------------- any court, governmental agency, regulatory body or arbitration tribunal before which either Purchaser was a party that, individually or in the aggregate, have a Purchaser Material Adverse Effect. There are no actions, suits, arbitrations or legal, administrative or other proceedings pending or, to the -16- knowledge of Purchasers, threatened against either Purchaser, at law or in equity, or before or by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or before any arbitrator of any kind which, if adversely determined, would, individually or in the aggregate, have a Purchaser Material Adverse Effect. 3.4 NO CONFLICT OR VIOLATION. The execution, delivery and performance by ------------------------ Parent and each Purchaser of this Agreement and the execution, delivery and performance by each Purchaser of the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby in accordance with the respective terms and conditions hereof and thereof will not (a) violate any provision of the charter, bylaws or other organizational document of Parent or either Purchaser, (b) violate, conflict with or result in the breach of any of the terms of, result in any modification of the effect of, otherwise give any other contracting party the right to terminate, or constitute (or with notice or lapse of time or both, constitute) a default under, any contract to which Parent or either Purchaser is a party or by or to which either of them or any of their respective assets or properties may be bound or subject, except for such violations, conflicts, breaches or modifications that would not, individually or in the aggregate, have a Purchasers Material Adverse Effect, (c) violate any Order against, or binding upon, or any agreement with, or condition imposed by, any governmental or regulatory body, foreign or domestic, binding upon Parent or either Purchaser, except for such violations that would not, individually or in the aggregate, have a Purchaser Material Adverse Effect, (d) violate any statute, law or regulation of any jurisdiction except for such violations that would not, individually or in the aggregate, have a Purchaser Material Adverse Effect, or (e) result in a breach or violation of any of the terms or conditions of, constitute a default under, or otherwise cause an impairment of, any Permit related to Parent's or either Purchaser's business or necessary to conduct the Business, except for any violation, conflict, breach or default that would individually or in the aggregate, have a Purchaser Material Adverse Effect. 3.5 GOVERNMENTAL CONSENTS AND APPROVALS. Except as required under the HSR ----------------------------------- Act and except for required Permits of applicable insurance regulatory authorities, the execution, delivery and performance by Parent and Purchasers of this Agreement, and the execution, delivery and performance by Purchasers of the Ancillary Agreements, and the consummation of the transactions contemplated hereby and thereby in accordance with the respective terms hereof and thereof, do not require either of Parent or Purchasers to obtain any Consent of, make any governmental filing with or give any notice to, any Person, except for such Consents, filings or notices the failure of which to obtain, make or give, as the case may be, would not individually or in the aggregate have a Purchaser Material Adverse Effect. 3.6 COMPLIANCE WITH LAWS. Except with respect to those violations, if -------------------- any, that will be cured by Parent and Purchasers prior to, or by the act of, Closing or which individually or in the aggregate would not have a Purchaser Material Adverse Effect, neither Purchaser is in violation of any applicable Laws or Orders nor has either Purchaser received any written notice that any such violation is being alleged. 3.7 PERMITS, LICENSES AND FRANCHISES. Schedule 3.7 lists (i) all -------------------------------- jurisdictions in which each Purchaser is licensed to transact an insurance business and (ii) the lines of such business that -17- each Purchaser is authorized to transact in each such jurisdiction. Except as listed on Schedule 3.7, each Purchaser has all Permits necessary to conduct the Business in the manner and in the jurisdictions in which the Business is presently being conducted, and all such Permits are valid and in full force and effect, except where the failure to have such a Permit would not, individually or in the aggregate, have a Purchaser Material Adverse Effect. Except as listed on Schedule 3.7, neither Purchaser has engaged in any activity which would cause revocation or suspension of any such Permit and no action or proceeding looking to or contemplating the revocation or suspension of any such Permit is pending or threatened. 3.8 ABSENCE OF CERTAIN CHANGES. Except as expressly contemplated or -------------------------- required by this Agreement, since December 31, 1996, there has not been (i) any change in the business, operations, condition (financial or otherwise), results of operations, properties, prospects or assets of either Purchaser or (ii) in the ability of either Purchaser to consummate the transactions contemplated hereby or in any Ancillary Agreement, in either case that has had or is likely to have a Purchaser Material Adverse Effect. 3.9 BROKERAGE AND FINANCIAL ADVISERS. No broker, finder or financial -------------------------------- adviser has acted directly or indirectly as such for, or is entitled to any compensation from, Parent or either Purchaser in connection with this Agreement or the transactions contemplated hereby. 3.10 QUALIFIED INSTITUTIONAL BUYER. Each Purchaser is a "qualified ----------------------------- institutional buyer" within the meaning of Rule 144A promulgated under the Securities Act. Each Purchaser hereby acknowledges that Sellers may be relying, with respect to the transfer of Investment Assets, on the exemption from the registration provisions of the Securities Act provided by Rule 144A. 3.11 SUFFICIENT FUNDS. Either Purchasers or Parent has or will have at ---------------- Closing sufficient funds available (through existing credit arrangements or otherwise) to pay the Purchase Price and to pay all fees and expenses related to the transactions contemplated. 3.12 WNC ACQUISITION. Parent has provided to Provident a true and correct --------------- copy of the Agreement and Plan of Merger, dated as of September 11, 1997, (the "WNC Agreement") by and among Parent, Astro Acquisition Corp. and Western National Corporation, the parent company of WNL ("WNC"), pursuant to which WNC will become a wholly owned subsidiary of Parent (the "WNC Acquisition"). Parent knows of no reason which would reasonably be expected to cause the WNC Acquisition not to be consummated prior to the date specified in Section 8.1(e). ARTICLE 4 COVENANTS --------- 4.1 CONDUCT OF BUSINESS. ------------------- (a) Prior to the earlier of the Closing or termination of this Agreement, except as expressly provided in this Agreement, without the prior written consent of Parent, each Seller shall (i) in all material respects operate the Business as presently operated and only in the ordinary -18- course and consistent with past practice (including but not limited to past underwriting standards), (ii) use commercially reasonable best efforts to preserve the value of the Business and (iii) use commercially reasonable best efforts to preserve their relationships with and the goodwill of their agents, brokers, customers, suppliers, employees and other Persons having business dealings with any Seller. (b) Without limiting the generality of Section 4.1(a), and except as otherwise expressly provided in this Agreement, prior to the earlier of the Closing or termination of this Agreement, no Seller will, without the prior written consent of Parent: (i) enter into any contract that would constitute an Assigned and Assumed Contract, other than in the ordinary course of business consistent with past practice; (ii) acquire or dispose of any asset that would constitute a Transferred Asset if owned by any Seller at Closing, other than acquisitions or dispositions in the ordinary course of the Business; (iii) change any of the accounting principles, practices, methods or policies (including but not limited to any reserving methods, practices or policies) employed with respect to the Business, except as may be required as a result of a change in law, SAP or guidelines issued by the Commission or its accounting staff; (iv) change the method of determining the SAP reserves with respect to the Business for any guaranty fund assessment, special insurance assessment or similar assessment or tax; (v) pay, discharge or satisfy any material claims, liabilities or obligations associated with the Business (absolute, asserted or unasserted, contingent or otherwise) other than the payment, discharge or satisfaction in the ordinary course of the Business consistent with past practice; (vi) enter into any reinsurance contract relating to the Business, other than in the ordinary course of business consistent with past practice; (vii) take or cause to be taken any action that would result in such Seller's Seller Separate Accounts to be managed other than in the ordinary course consistent with past practice in all material respects; or (viii) agree in writing or otherwise to take any of the actions described above in this Section 4.1(b). (c) Prior to Closing, each Seller shall notify Parent as promptly as practicable of any event or transaction having a Seller Material Adverse Effect. -19- 4.2 CERTAIN TRANSACTIONS. From the date of this Agreement through the -------------------- Closing, neither Provident nor any Seller nor any of their respective officers, employees, representatives or agents will, directly or indirectly, solicit, encourage or initiate any negotiations or discussions with, or provide any information to, or otherwise cooperate in any other manner with, any Person or group (other than Purchasers and their Affiliates and their respective representatives) concerning any direct or indirect sale or other disposition of the Business. 4.3 INVESTIGATIONS; PRE-CLOSING ACCESS. ---------------------------------- (a) Prior to the Closing Date, Parent and Purchasers shall be entitled, through their employees and representatives, to make such investigation of the assets, liabilities, business and operations of the Business, and such examination of the Books and Records, as Parent and Purchasers may reasonably request. Any investigation, examination or interview by Parent or Purchasers of Sellers' employees and agents or access pursuant to any of the provisions of this Section 4.3(a) shall be conducted or occur at reasonable times upon reasonable prior notice; and each of the parties hereto and its employees and representatives, including counsel, investment bankers, and independent public accountants, shall cooperate with the other's employees and representatives, as the case may be, in connection with such review and examination. (b) In addition, prior to the Closing Date, Provident and each Seller shall provide Parent and Purchasers with full and complete access to every aspect of the Business, subject only to any applicable legal limitations. Without limiting the generality of the foregoing, Provident and each Seller shall (i) provide Parent and Purchasers with access to individuals reasonably specified by Parent or Purchasers to plan the transition of the Business to Purchasers, (ii) designate certain individuals (subject to Parent's reasonable approval) to serve as members of a Provident/Parent transition team and cause such individuals to devote reasonable time to transition matters, (iii) devote reasonable resources to transition matters (such resources to include office accommodations and related facilities for a substantial and continuing presence of Parent's transition team members on Sellers' premises), (iv) cooperate with Parent and Purchasers in connection with their filing of policy and contract forms to enable Purchasers to issue policies and contracts substantially similar to those included in the Business, (v) consult with Parent and Purchasers regarding Seller's development work pertaining to systems, products, distribution and customer and producer services, and (vi) cooperate with Parent and Purchasers in their development work pertaining to systems, products, distribution and customer and producer services. (c) Prior to the Closing Date, Provident and each Seller shall be entitled, through its employees and representatives, to make such investigation of the assets, liabilities, business and operations of Purchasers as Provident or such Seller may reasonably request. Any such investigation or examination shall be conducted at reasonable times upon reasonable prior notice; and each of the parties hereto and its employees and representatives, including counsel, investment bankers, and independent public accountants, shall cooperate with the other's employees and representatives, as the case may be, in connection with such review and examination. -20- (d) Notwithstanding any other provisions of this Section 4.3, Purchasers and Provident shall cooperate in implementing the provisions of this Section 4.3 so as not to prevent or interfere with Sellers' compliance with Section 4.1. 4.4 POST-CLOSING ACCESS. ------------------- (a) Following the Closing Date, Provident and each Seller shall (i) allow Purchasers, upon reasonable prior notice and during regular business hours, through their employees and representatives, the right, at Purchasers expense, to examine and make copies of any books and records retained by Sellers, to the extent they relate to the Business, for any reasonable business purpose, including the preparation or examination of Purchasers Tax returns, regulatory filings and financial statements and the conduct of any litigation or regulatory dispute resolution, whether pending or threatened, concerning the conduct of the Business prior to the Closing Date and (ii) maintain such books and records for Purchasers examination and copying, subject to Provident's or such Seller's general document retention policies, which have been described to Purchasers. Access to such books and records shall be at Purchasers expense and may not unreasonably interfere with Seller's or any successor company's business operations. (b) Following the Closing Date, Purchasers shall (i) allow Provident and each Seller, upon reasonable prior notice and during regular business hours, through its employees and representatives, the right, at Provident's or such Seller's expense, as applicable, to examine and make copies of the Books and Records transferred to Purchasers, respectively, at the Closing for any reasonable business purpose, including the preparation or examination of Tax returns, regulatory filings and financial statements and the conduct of any litigation or the conduct of any regulatory, contract holder, participant or other dispute resolution whether pending or threatened, and (ii) maintain such Books and Records for Seller's examination and copying, subject to Purchasers general document retention policies, which have been described to Provident. Access to such Books and Records shall be at Provident's or such Seller's expense, as applicable, and may not unreasonably interfere with Purchasers' or any successor company's business operations. 4.5 CONFIDENTIALITY. Each party hereto (with Provident and Sellers, on --------------- the one hand, and Parent and Purchasers, on the other hand, considered to be one party for purposes of this Section 4.5) will hold, and will use its best efforts to cause its Affiliates, and their respective representatives to hold, in strict confidence from any Person (other than any such Affiliate or representative), unless (i) compelled to disclose by judicial or administrative process (including in connection with obtaining the necessary Consents of governmental or regulatory authorities required for consummation of the transactions contemplated hereby) or by other requirements of Law or (ii) disclosed in an action or proceeding brought by a party hereto in pursuit of its rights or in the exercise of its remedies hereunder, all documents and information concerning the other party or any of its Affiliates furnished to it by the other party or such other party's representatives in connection with this Agreement or the transactions contemplated hereby, except to the extent that such documents or information can be shown to have been (a) previously known by the party receiving such documents or information, (b) in the public domain (either prior to or after the furnishing of such documents or information hereunder) through no fault of such receiving party or (c) later acquired by the receiving party from another source if the receiving party is not aware -21- that such source is under an obligation to another party hereto to keep such documents and information confidential; provided that following the Closing the foregoing restrictions will not apply to Parent's or Purchasers use of documents and information concerning the Business furnished by Provident or a Seller hereunder. In the event the transactions contemplated hereby are not consummated, upon the request of the other party, each party hereto will, and will cause its Affiliates and their respective representatives to, promptly redeliver or cause to be redelivered all copies of confidential documents and information furnished by the other party in connection with this Agreement or the transactions contemplated hereby and destroy or cause to be destroyed all notes, memoranda, summaries, analyses, compilations and other writings related thereto or based thereon prepared by the party furnished such documents and information or its representatives. 4.6 HSR ACT FILINGS. Provident and Parent shall, as promptly as --------------- practicable, file, or cause to be filed, Notification and Report Forms to be filed under the HSR Act with the Federal Trade Commission (the "FTC") and the Antitrust Division of the United States Department of Justice (the "Antitrust Division") in connection with the transactions contemplated by this Agreement, the Ancillary Agreements and the other agreements contemplated hereby and thereby, and will use their respective reasonable efforts to respond as promptly as practicable to all inquiries received from the FTC or the Antitrust Division for additional information or documentation and to cause the waiting periods under the HSR Act to terminate or expire at the earliest possible date. Provident and Parent will each furnish to the other such necessary information and reasonable assistance as the other may request in connection with its preparation of necessary filings or submissions to any governmental or regulatory agency, including any filings necessary under the provisions of the HSR Act. 4.7 CONSENTS AND REASONABLE EFFORTS. Each Purchaser and each Seller shall ------------------------------- cooperate and use commercially reasonable best efforts to obtain all Consents and agreements of, and to give and make all notices and filings with, any governmental authorities and regulatory agencies, necessary to Consent to the consummation of the transactions contemplated by this Agreement, the Ancillary Agreements and the other agreements contemplated hereby and thereby, including the Permits described in Sections 5.3 and 6.3. Each Seller shall use commercially reasonable best efforts to obtain, and each Purchaser will cooperate with Seller in obtaining, all other Consents to the transactions contemplated by this Agreement and the Ancillary Agreements, and the Consents of third parties under contracts to be assigned. In the event third party Consents under contracts to be assigned cannot be obtained, Sellers shall have no obligation to provide or obtain comparable benefits for Purchasers, but shall, at the request of Purchasers, continue after the Closing to use commercially reasonable best efforts to obtain, and each Purchaser will cooperate with Seller in obtaining, all such Consents which have not been obtained. Each Purchaser will use commercially reasonable best efforts to obtain all Consents to the transactions contemplated by this Agreement and the Ancillary Agreements as set forth on Schedule 3.4. The parties hereto agree to negotiate in good faith, and execute prior to, or in connection with the Closing, the Separate Account Transfer Agreements, the Separate Account Administration Agreements, the Transition Services Agreements, the Administration Services Agreements and the License Agreement. -22- 4.8 REPRESENTATIONS AND WARRANTIES. From the date hereof through the ------------------------------ Closing Date, (a) Provident and each Seller shall use their respective commercially reasonable best efforts to conduct its affairs in such a manner so that, except as otherwise contemplated or permitted by this Agreement, the representations and warranties contained in Article 2 shall continue to be true, complete and correct in all material respects on and as of the Closing Date as if made on and as of the Closing Date, except for representations and warranties that are expressly stated to be made as of an earlier date, (b) Parent and each Purchaser shall use their respective commercially reasonable best efforts to conduct their affairs in such a manner so that, except as otherwise contemplated or permitted by this Agreement, the representations and warranties contained in Article 3 shall continue to be true and correct in all material respects on and as of the Closing Date as if made on and as of the Closing Date, (c) Sellers shall notify Purchasers promptly of any event, condition or circumstance known to Sellers occurring from the date hereof through the Closing Date that would constitute a violation or breach of this Agreement by any Seller, and (d) Purchasers shall notify Provident promptly of any event, condition or circumstance known to Purchasers occurring from the date hereof through the Closing Date that would constitute a violation or breach of this Agreement by either Purchaser. 4.9 EXPENSES. Except as otherwise specifically provided in this -------- Agreement, the parties to this Agreement shall bear their respective expenses incurred in connection with the preparation, execution and performance of this Agreement and the transactions contemplated hereby, including all fees and expenses of agents, representatives, counsel, investment bankers, actuaries and accountants; provided, however, that (a) Parent shall pay the cost of the filing fees in connection with all filings by any of the parties hereto with the FTC and the Antitrust Division under the HSR Act with respect to the transactions contemplated hereby and (b) Purchasers shall bear the cost of obtaining required insurance regulatory Consents and Orders for the implementation of the Reinsurance Agreements from the State of Texas, (c) Sellers shall bear the cost of obtaining required Consents and Orders for the implementation of the Reinsurance Agreements from the States of Tennessee, Delaware and the Commonwealth of Massachusetts, and (d) Parent and Sellers shall each bear one- half of the cost of obtaining required Consents and Orders for the implementation of the Reinsurance Agreements from any States other than Texas, Tennessee, Delaware and the Commonwealth of Massachusetts. 4.10 MARKETING AGREEMENTS. The parties hereto agree to negotiate in good -------------------- faith, and execute prior to or in connection with the Closing, one or more marketing agreements, which marketing agreements shall (i) be effective as of the Closing, (ii) have terms consistent with the summary of terms attached hereto as Exhibit 4, and (iii) have such other terms as the parties may agree (the "Marketing Agreements"). 4.11 BANK ACCOUNTS AND LOCKBOXES. Pursuant to the General Assignment and --------------------------- Assumption Agreements, each Seller shall transfer to Purchasers the bank accounts and lockboxes of such Seller used solely in the operation of the Business. Each Seller shall execute such additional agreements and instruments as may be required by a particular bank to effectuate the transfer to Purchasers of such bank accounts and lockboxes. -23- 4.12 ALLOCATION OF PURCHASE PRICE AND ASSUMED LIABILITIES. ---------------------------------------------------- (a) Provident, each Seller and each Purchaser agree to allocate the Ceding Commission, the liabilities assumed by Purchasers hereunder and under the Ancillary Agreements, and all other capitalizable costs incurred in connection with the transactions described herein (collectively, the "Allocable Amount") among the Transferred Assets in accordance with this Section 4.12 for all purposes, including Tax and financial accounting purposes (giving effect to appropriate differences between tax and SAP reserves and appropriate allocation of the Ceding Commission). (b) For purposes of section 1060 of the Code, each Seller and Purchasers shall (i) make the allocation described in Section 4.12(a) in the manner described in Income Tax Regulations section 1.1060-1T, and (ii) file asset acquisition statements on Form 8594 (or any replacement or successor form) reflecting such allocation at the time, in the manner, and under the procedures described in such provision of the Income Tax Regulations. (c) As soon as practicable after the Closing Date, each Purchaser shall prepare a schedule reflecting the allocation of the Allocable Amount under Section 4.12(b) in the manner described in Income Tax Regulations section 1.1060-1T and shall submit it to Provident. If, within 30 days of Provident's receipt of such schedule, Provident shall not have objected in writing to the determination of the Allocable Amount or to such allocation, the allocation shall be used by each Seller and Purchasers for purposes of Form 8594 (and any replacement or successor form) and all other federal income Tax purposes. If, within 15 days of any objection in writing to the determination of the Allocable Amount or to such allocation, Provident and Purchasers shall not have agreed in writing to the allocation under Section 4.12(b), any disputed aspects of the determination of the Allocable Amount or to such allocation shall be resolved by the Third Party Accountant within 30 days of the submission of the dispute to the Third Party Accountant by Provident or Purchasers. The decision of the Third Party Accountant shall be final, and the costs, expenses, and fees of the Third Party Accountant shall be borne equally by Provident and Purchasers. (d) Neither Provident, any Seller, Parent nor any Purchaser shall take any position before any Taxing Authority or otherwise (including in any Tax return) inconsistent with this Section 4.12 unless and to the extent required to do so pursuant to a determination (as defined in section 1313(a) of the Code or any similar provision of state, local or foreign law). (e) Sellers and Parent will comply with the following concerning the capitalization of certain policy expenses, pursuant to section 848 of the Code and Income Tax Regulations sections 1.848-1 and 1.848-2: (i) As used in this Section 4.12(e), the following terms shall have the following meanings: (A) The term "party" will refer either to each Seller or to Purchasers, as appropriate. The term "parties" will refer to Sellers and Purchasers. -24- (B) The term "Agreement" will refer to the Reinsurance Agreement between each Seller and each Purchaser. (C) Other terms used in this Section 4.12 are defined by reference to section 848 of the Code and Income Tax Regulation sections 1.848-1 and 1.848-2 as in effect on the Closing Date. (ii) Pursuant to the joint election set forth in section 1.848- 2(g)(8) of the Income Tax Regulations, the party with net positive consideration for each taxable year will capitalize specified policy acquisition expenses with respect to the Agreement without regard to the general deductions limitation of section 848(c)(1) of the Code. The first taxable year for which the joint election will be effective is the tax year ending December 31, 1998. Both parties shall attach a joint schedule to their 1998 Federal income Tax Returns which identifies the Agreement for which the joint election has been made. (iii) Both parties shall exchange information pertaining to the amount of net consideration under the Agreement each year to ensure consistency or as otherwise required by the Internal Revenue Service. Such exchange of information will be made according to the following procedure: By May 15 of each year, each Seller will submit to Parent a schedule of its calculation of the net consideration under the Agreement for the preceding calendar year. That schedule will be accompanied by a statement signed by an officer of such Seller disclosing the amount of net consideration such Seller will report with respect to the Agreement in its Federal income Tax Return for the preceding calendar year. To ensure consistency, Parent will utilize that information in determining its net consideration with respect to the Agreement for its preceding taxable year. Parent will advise Sellers if they disagree with the calculations provided and the parties agree to act in good faith to resolve such differences amicably. 4.13 FURTHER ASSURANCES. ------------------ (a) Upon the terms and subject to the conditions herein provided, on and prior to the Closing Date each Purchaser and each Seller shall use all commercially reasonable best efforts to take, or cause to be taken, all action or do, or cause to be done, all things or execute any documents necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, the Ancillary Agreements and the other agreements contemplated hereby and thereby. (b) On and after the Closing Date, each Seller (as reasonably requested from time to time by any Purchaser) and Purchasers (as reasonably requested from time to time by any Seller) shall take all reasonably appropriate action and execute any additional documents, instruments or conveyances of any kind (not containing additional representations and warranties) which may be reasonably necessary to carry out any of the provisions hereof, including putting each of Purchasers in full possession and operating control of the Transferred Assets and the Business, -25- and giving effect to the assumption of liabilities by Purchasers as contemplated hereby and thereby. 4.14 WESTERN NATIONAL CORPORATION ACQUISITION. Parent shall use its ---------------------------------------- commercially reasonable best efforts, subject to the terms and conditions of the WNC Agreement, to consummate the WNC Acquisition. 4.15 TRANSITION TO PURCHASERS POLICY FORMS. Commencing on the Closing ------------------------------------- Date, as requested in writing by Purchasers, each Seller shall issue contracts ("Post-Closing Contracts") of the type specified in Schedule 9.1(C) as products currently being issued and that are in effect on the Closing Date; provided, that such Seller shall not be required to issue contracts pursuant to this Section 4.15 in any state if either Purchaser has obtained insurance department approval of its own forms in substitution for the Insurance Contracts in such state. Purchasers shall use their commercially reasonable best efforts to obtain the policy forms approvals referred to in the previous sentence as soon as is reasonably practicable after the date hereof. 4.16 CREDITING RATES. Each Seller shall adopt the crediting rates that shall --------------- be prescribed by Purchasers and approved by Sellers, such approval not to be unreasonably withheld, for its respective business for the first quarter of 1998 and shall cooperate with Purchasers prior to Closing in determining the crediting rates to be applied thereafter. 4.17 DISPOSITION OF PNAC AND PRV. For so long as any Reinsurance Contracts --------------------------- remain outstanding under any Reinsurance Agreements to which PNAC or PRV are party, Provident shall not, and shall not permit its Subsidiaries to, sell, transfer or otherwise dispose of a majority of the equity interest in PNAC or PRV, as applicable, to any Person (other than to Provident or any of its Affiliates) who at the time of such sale, transfer or disposition does not have a published A. M. Best rating of at least "A", without first obtaining the prior written consent of Parent, which consent shall not be unreasonably withheld or delayed. 4.18 CERTAIN OTHER MATTERS. The parties agree to take the actions specified --------------------- in Schedule 4.18 with respect to the contracts described in Schedule 4.18. ARTICLE 5 CONDITIONS PRECEDENT TO THE OBLIGATION OF PURCHASERS TO CLOSE ------------------------------------------------------------- The obligations of Parent and Purchasers under this Agreement are subject to the satisfaction on or prior to the Closing of the following conditions, any one or more of which may be waived by Purchasers to the extent permitted by Law: 5.1 REPRESENTATIONS AND WARRANTIES; COMPLIANCE WITH COVENANTS. Except for --------------------------------------------------------- changes as may be permitted or required pursuant to the terms hereof, the representations and warranties of Provident and the Sellers contained in this Agreement shall be true and correct in all material respects and such representations and warranties as are qualified as to materiality shall be true and correct in all respects on and as of the Closing with the same effect as though such -26- representations and warranties had been made on and as of the Closing, except that any such representations and warranties that are given as of a specified date and relate solely to a specified date or period shall be true and correct in all material respects or all respects, as the case may be, only as of such date or period. Provident and each Seller shall have performed and complied with all covenants and agreements required to be performed or complied with by Provident or such Seller under this Agreement prior to or concurrently with the Closing in all material respects. 5.2 OTHER AGREEMENTS. The Ancillary Agreements and each of the other ---------------- agreements and instruments contemplated hereby and thereby to which each Seller or Provident is a party shall have been duly executed and delivered by each Seller or Provident, as applicable, on the Closing Date and each of such agreements, documents and instruments shall be in full force and effect with respect to each such Seller or Provident on the Closing Date, as applicable. 5.3 GOVERNMENTAL AND REGULATORY CONSENTS AND APPROVALS. -------------------------------------------------- (a) All Permits and authorizations required by each Seller and Purchasers from governmental and regulatory bodies listed on Exhibit 5 shall have been obtained and shall be in full force and effect and without conditions or limitations which would have a material adverse effect on the Business as operated by Purchasers after the Closing Date and are unacceptable to Purchasers in the exercise of its reasonable business judgment, and Purchasers shall have been furnished with appropriate evidence, reasonably satisfactory to it and its counsel, of the granting of such Permits. (b) The applicable waiting period under the HSR Act, including all extensions thereof, shall have expired or been terminated and Purchasers shall have been furnished with appropriate evidence, reasonably satisfactory to it, of such expiration or termination. 5.4 POSSESSION OF ASSETS; INSTRUMENTS OF CONVEYANCE. On the Closing Date, ----------------------------------------------- each Seller shall have delivered to Purchasers possession of the Transferred Assets to be transferred on the Closing Date and shall have transferred to Purchasers all of the right, title and interest of each such Seller in and to such assets as provided in this Agreement and the Ancillary Agreements. 5.5 INJUNCTION. There shall be no effective injunction, writ, preliminary ---------- restraining order or any other Order of any nature issued by a court of competent jurisdiction, directing that the transactions provided for herein not be consummated as herein provided. 5.6 WNC ACQUISITION. The WNC Acquisition shall have been consummated. --------------- ARTICLE 6 CONDITIONS PRECEDENT TO THE OBLIGATION OF SELLERS TO CLOSE ----------------------------------------------------------- The obligations of Provident and Sellers under this Agreement are subject to the satisfaction on or prior to the Closing of the following conditions, any one or more of which may be waived by Provident to the extent permitted by Law: -27- 6.1 REPRESENTATIONS AND WARRANTIES; COMPLIANCE WITH COVENANTS. Except for --------------------------------------------------------- changes as may be permitted or required pursuant to the terms hereof, the representations and warranties of Purchasers contained in this Agreement shall be true and correct in all material respects and such representations and warranties as are qualified as to materiality shall be true and correct in all respects on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing, except that any such representations and warranties that are given as of a specified date and relate solely to a specified date or period shall be true and correct in all material respects or all respects, as the case may be, only as of such date or period. Purchasers and Parent shall have performed and complied with all covenants and agreements required to be performed or complied with by Purchasers or Parent under this Agreement prior to or concurrently with the Closing in all material respects. 6.2 OTHER AGREEMENTS. The Ancillary Agreements and each of the other ---------------- agreements and instruments contemplated hereby and thereby to which Purchasers is a party shall have been duly executed and delivered by Purchasers on the Closing Date and each of such agreements and instruments shall be in full force and effect with respect to Purchasers on the Closing Date. 6.3 GOVERNMENTAL AND REGULATORY CONSENTS AND APPROVALS. -------------------------------------------------- (a) All Permits required by each Seller and Purchasers from governmental and regulatory bodies listed on Exhibit 5 shall have been obtained and shall be in full force and effect and without conditions or limitations which would have a material adverse effect on the business of such Seller and are unacceptable to Provident in the exercise of its reasonable business judgment, and Provident shall have been furnished with appropriate evidence, reasonably satisfactory to it and its counsel, of the granting of such Permits. (b) The applicable waiting period under the HSR Act, including all extensions thereof, shall have expired or been terminated and Provident shall have been furnished with appropriate evidence, reasonably satisfactory to it, of such expiration or termination. 6.4 INJUNCTION. There shall be no effective injunction, writ, preliminary ---------- restraining order or any other Order of any nature issued by a court of competent jurisdiction, directing that the transactions provided for herein not be consummated as herein provided. ARTICLE 7 SURVIVAL AND INDEMNIFICATION ---------------------------- 7.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and ------------------------------------------ warranties of the parties hereto contained in this Agreement and the Ancillary Agreements shall survive the execution and delivery hereof; provided that, except as set forth in the following sentence, the representations and warranties of the parties hereto herein shall terminate and expire on the second anniversary of the Closing Date, except for matters as to which a Claims Notice shall have been given pursuant to Section 7.3 or 7.4 by a party hereto prior to the applicable expiration date, -28- which representations shall continue with respect to such matters until such matters have been finally decided, settled or adjudicated. The representations contained in Sections 2.1 and 2.2 shall survive until the expiration of all applicable statutes of limitations. 7.2 OBLIGATION TO INDEMNIFY. ----------------------- (a) Subject to the limitations set forth in this Article 7, from and after the Closing Date, each Seller (other than PNAC, PRV and PRPL) agrees to indemnify, defend and hold harmless Parent and Purchasers (and their respective directors, officers, employees, Affiliates, successors and permitted assigns) (collectively, the "Purchaser Indemnitees") from and against all Losses based upon: (i) any breach of or inaccuracy in the representations and warranties contained in Article 2 or in any certificate delivered by any Seller to Purchasers pursuant to this Agreement on or after the date of execution of this Agreement; (ii) any breach, nonfulfillment or default in the performance of any of the covenants and agreements of Provident or any Seller contained in this Agreement or in any Ancillary Agreement; or (iii) all Retained Liabilities. (b) Subject to the limitations set forth in this Article 7, from and after the Closing Date, Purchasers agree to indemnify, defend and hold harmless Provident and each Seller (and their respective directors, officers, employees, Affiliates, successors and permitted assigns) (collectively, the "Seller Indemnitees") from and against all Losses, based upon: (i) any breach of or inaccuracy in the representations and warranties of Parent and Purchasers contained in Article 3 or in any certificate delivered by any Purchaser to Provident or Sellers pursuant to this Agreement on or after the date of execution of this Agreement; (ii) any breach, nonfulfillment or default in the performance of any of the covenants and agreements of Parent or Purchasers contained in this Agreement or in any Ancillary Agreement; or (iii) all Assumed Liabilities. (c) For the avoidance of doubt, the Purchaser Indemnitees shall not be entitled to the benefit of the indemnity in Section 7.2(a) in respect of any amounts which are taken into account in calculating the amounts to be paid pursuant to Section 1.5(c). (d) The aggregate amount for which the Sellers shall be liable under Section 7.2(a)(i) and (ii) shall be $20,000,000. The aggregate amount for which Purchasers shall be liable under Section 7.2(b)(i) and (ii) shall be $20,000,000. Except as set forth in the following sentence, the Sellers shall be required to indemnify the Purchaser Indemnitees pursuant to Section 7.2(a)(i) and (ii) only to the extent that the sum of Losses incurred by the Purchaser Indemnitees in connection with such clauses exceeds $300,000 in the aggregate (the "Deductible"), and then only for the amount of such excess. Notwithstanding the foregoing, no Loss resulting from a breach by any Seller of the covenant set forth in Section 4.16 shall be subject to the Deductible. Purchasers shall be required to indemnify the Seller Indemnitees pursuant to Section 7.2(b)(i) and (ii) only to the extent that the sum of Losses incurred by the Seller Indemnitees in connection with such clauses exceeds the Deductible, and then only for the amount of such excess. 7.3 CLAIMS NOTICE. In the event that either a Purchaser Indemnitee or a ------------- Seller Indemnitee wishes to assert a claim for indemnification hereunder, such party seeking indemnification (the "Indemnified Party") shall deliver written notice (a "Claims Notice") to the party from which -29- indemnification is sought (the "Indemnifying Party") no later than ten (10) Business Days after such claim becomes known to the Indemnified Party, specifying the facts constituting the basis for, and the amount (if known) of the claim asserted. Failure to deliver a Claims Notice with respect to a claim (other than a claim based on a Third Party Claim) in a timely manner as specified in the preceding sentence shall not be deemed a waiver of the Indemnified Party's right to indemnification hereunder for Losses in connection with such claim, but the amount of reimbursement to which the Indemnified Party is entitled shall be reduced by the amount, if any, by which the Indemnified Party's Losses would have been less had such Claims Notice been timely delivered. 7.4 RIGHT TO CONTEST CLAIMS OF THIRD PARTIES. ---------------------------------------- (a) If an Indemnified Party asserts, or may in the future seek to assert, a claim for indemnification hereunder because of a claim or demand made, or an action, proceeding or investigation instituted, by any Person not a party to this Agreement (a "Third Party Claimant") that may result in a Loss with respect to which the Indemnified Party would be entitled to indemnification pursuant to this Article 7 (a "Third Party Claim"), the Indemnified Party shall deliver to the Indemnifying Party a Claims Notice with respect thereto, which Claims Notice shall, in accordance with the provisions of Section 7.3, be delivered as promptly as practicable and in any event no later than ten (10) Business Days after such Third Party Claim is actually known to the Indemnified Party. Failure to deliver a Claims Notice with respect to a claim in a timely manner as specified in the preceding sentence shall not be deemed a waiver of the Indemnified Party's right to indemnification hereunder for Losses in connection with such claim, but the amount of reimbursement to which the Indemnified Party is entitled shall be reduced by the amount, if any, by which the Indemnified Party's Losses would have been less had such Claims Notice been timely delivered; provided, that the failure to deliver a Claims Notice with respect to a Third Party Claim within twenty (20) Business Days of the Indemnified Party's receipt of written notice of such Third Party Claim shall be deemed to be a waiver of the Indemnified Party's right to indemnification hereunder for Losses in connection with such Third Party Claim. (b) (i) The Indemnifying Party shall have the right, upon written notice to the Indemnified Party, to investigate, contest, defend or settle any Third Party Claim that may result in a Loss with respect to which the Indemnified Party is entitled to indemnification pursuant to this Article 7; provided, that the Indemnified Party may, at its option and at its own expense, participate in the investigation, contesting, defense or settlement of any such Third Party Claim through representatives and counsel of its own choosing; and, provided further, that the Indemnifying Party shall not settle any Third Party Claim unless (i) such settlement is on exclusively monetary terms or (ii) the Indemnified Party shall have consented to the terms of such settlement, which consent shall not unreasonably be withheld. If requested by the Indemnifying Party, the Indemnified Party will, at the sole cost and expense of the Indemnifying Party, cooperate with the Indemnifying Party and its counsel in contesting any Third Party Claim or, if appropriate and related to the Third Party Claim in question, in making any counterclaim against the Third Party Claimant, or any cross-complaint against any Person (other than the Indemnified Party or its Affiliates). The failure of the Indemnifying Party to provide the above-mentioned written notice to the Indemnified Party within ten (10) Business Days after receipt of a Claims -30- Notice with respect to a Third Party Claim shall be deemed an election not to defend the same. Unless and until the Indemnifying Party elects to defend the Third Party Claim, the Indemnified Party shall have the right, at its option and at the Indemnifying Party's expense to the extent that the applicable Deductible has been exhausted, to do so in such manner as it deems appropriate; provided, however, that the Indemnified Party shall not settle or compromise any Third Party Claim for which it seeks indemnification hereunder without the prior written consent of the Indemnifying Party (which shall not be unreasonably withheld) during the ten (10) Business Day period referred to above after the receipt of a Claims Notice, or thereafter in a manner that would cause any applicable Deductible to be exhausted. (ii) Notwithstanding Section 7.4(b)(i), the Indemnified Party shall have the right to investigate, contest, defend or settle any Third Party Claim falling under Section 7.2(a)(i) or (b)(i), as the case may be, so long as the Losses that could reasonably be expected to result from such Third Party Claim, together with all Losses under any other Third Party Claim falling under such Sections over which the Indemnified Party has retained control pursuant to this Section 7.4(b)(ii), would not exceed the Deductible. In the event that an Indemnified Party retains control over any Third Party Claim pursuant to this Section 7.4(b)(ii): (A) the Indemnifying Party shall have the right to participate in (but not control) the defense of such Third Party Claim; (B) the Indemnified Party shall not settle or compromise such Third Party Claim without the prior written consent of the Indemnifying Party (which shall not be unreasonably withheld); and (C) the Indemnified Party shall not be entitled to any indemnification for any amounts by which the actual Losses resulting from such Asserted Claims exceeds, in the aggregate, the Deductible. (c) The Indemnifying Party shall be entitled to participate in (but not to control) the defense of any Third Party Claim which it has elected, or is deemed to have elected, not to defend, or as to which it does not have the right to defend under Section 7.4(b), with its own counsel and at its own expense. (d) Except as provided in the first sentence of Section 7.4(b), the Indemnifying Party shall bear all costs of defending any Third Party Claim and shall indemnify and hold the Indemnified Party harmless against and from all costs, fees and expenses incurred in connection with defending such Third Party Claim. (e) Purchasers and the Sellers shall make mutually available to each other (or to Provident or Parent, as applicable) all relevant information in their possession relating to any Third Party Claim (except to the extent that such action would result in a loss of attorney-client privilege) and shall cooperate with each other in the defense thereof. (f) In the event that any party, or any Affiliate thereof, becomes aware of, or any Person brings, or threatens to bring, an action, proceeding or investigation with respect to, any defect affecting a plan in which a Qualified Contract is held (a "Plan Defect"), the parties shall cooperate in identifying actions that may be necessary or desirable in order to cure or otherwise address such Plan Defect, including, without limitation, the modification, amendment or replacement of such plan, and Sellers shall have the right to take such necessary corrective actions -31- relating thereto as such Sellers shall identify; provided that Sellers shall not take any action to which Purchasers reasonably object on the grounds that the proposed action would adversely affect the ability of such plan to continue investing in such Qualified Contract, would require changes to such Qualified Contract adverse to Purchasers, or otherwise adversely affect Purchasers' relationship with the sponsor of such plan, without the prior written consent of Purchasers, which consent shall not be unreasonably withheld or delayed. Provident and Sellers shall use commercially reasonable efforts to determine, as soon as practicable after the date of this Agreement, and in any event prior to Closing, whether any Plan Defects exist and shall keep Parent reasonably apprised of the results of their investigation; provided that Provident and Sellers shall not be required to disclose any information subject to the attorney-client privilege. Parent and Purchasers shall not seek to replace any plan under which any Qualified Contracts are presently held until such time as Provident or any Seller shall notify Parent or any Purchaser that it has determined that such plan does not contain a Plan Defect, or that any such Plan Defect has been cured or otherwise addressed. 7.5 TAX EFFECT AND INSURANCE. The liability of the Indemnitors with ------------------------ respect to any Indemnification Claim shall be reduced by the tax benefit actually realized and any insurance proceeds received by the Indemnitees as a result of any Losses upon which such Indemnification Claim is based, and shall include any tax detriment actually suffered by the Indemnitees as a result of such Losses. The amount of any such tax benefit or detriment shall be determined by taking into account the effect, if any and to the extent determinable, of timing differences resulting from the acceleration or deferral of items of gain or loss resulting from such Losses and shall otherwise be determined so that payment by the Indemnitors of the Indemnification Claim, as adjusted to give effect to any such tax benefit or detriment, will make the Indemnitee as economically whole as is reasonably practical with respect to the Losses upon which the Indemnification Claim is based. Any dispute as to the amount of such tax benefit or detriment shall be resolved by arbitration as provided in Section 7.8 of this Agreement. 7.6 INDEMNIFICATION PAYMENTS. Any payment hereunder shall be made by wire ------------------------ transfer of immediately available funds to such account or accounts as the Indemnified Party shall designate to the Indemnifying Party in writing. 7.7 EXCLUSIVITY. After the Closing, to the extent permitted by applicable ----------- Laws, the indemnities provided for in Section 7.2 shall be the exclusive remedies of Purchasers and Sellers and their respective officers, directors, employees, agents and Affiliates for any breach of or inaccuracy in any representation or warranty (including in any certificate delivered by a party pursuant to this Agreement) or any breach, nonfulfillment or default in the performance of any of the covenants or agreements contained in this Agreement (but not any such covenants or agreements to the extent they are by their terms to be performed after the Closing Date), and the parties shall not be entitled to a rescission of this Agreement or to any further indemnification rights or claims of any nature whatsoever in respect thereof, all of which the parties hereto hereby waive. -32- 7.8 ARBITRATION. ----------- (a) Any dispute arising out of or relating to the interpretation, performance or breach of this Agreement, including the formation or validity thereof, shall be submitted for decision to a panel of three arbitrators. Notice requesting arbitration must be in writing and sent certified or registered mail, return receipt requested. (b) One arbitrator shall be chosen by each party and the two arbitrators shall, before instituting the hearing, choose an impartial third arbitrator (the "Umpire") who shall preside at the hearing. If either party fails to appoint its arbitrator within 30 days after being requested to do so by the other party, the latter, after ten days notice by certified or registered mail of its intention to do so, may appoint the second arbitrator. If the two arbitrators are unable to agree upon the selection of the Umpire within 30 days of their appointment, then each arbitrator shall submit to the other a list of three Umpire candidates. Each arbitrator shall strike the names of two candidates from the other arbitrator's list, and the Umpire shall be selected from the two remaining candidates by a lot drawing procedure determined by the two arbitrators. (c) Unless the parties otherwise agree all arbitrators shall be disinterested active or former officers of insurance or reinsurance companies. (d) Within 30 days after notice of appointment of all arbitrators, the panel shall meet and determine a schedule for the conduct of the arbitration, including hearings. The panel shall be relieved of all judicial formality and shall not be bound by the strict rules of procedure and evidence. The panel shall determine where the arbitration shall take place. To the extent and only to the extent that the provisions of this Agreement are ambiguous or unclear, the panel shall make its decision considering the custom and practice of the applicable insurance and reinsurance business. Insofar as the arbitration panel looks to substantive Law, the Law of Tennessee shall govern. The decision of any two arbitrators when rendered in writing shall be final and binding. The panel is empowered to grant interim relief as it may deem appropriate. (e) The panel shall render its decision, which shall be in writing and state the reasons therefor, within 60 days following the termination of hearings. Judgment upon the award may be entered in any court having jurisdiction thereof. Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the cost of the Umpire. The remaining costs of the arbitration shall be allocated by the panel. The panel may, at its discretion, award such further costs and expenses as it considers appropriate, including but not limited to interest (determined at the panel's discretion) and attorneys' fees, to the extent permitted by Law. The panel shall not award punitive damages under any circumstances. ARTICLE 8 TERMINATION PRIOR TO CLOSING ---------------------------- 8.1 TERMINATION OF AGREEMENT. This Agreement may be terminated at any ------------------------ time prior to the Closing: -33- (a) by mutual written consent of Provident and Parent. (b) by Provident or Parent in writing, if there shall be any Order of any court or governmental or regulatory agency binding on Parent or any Purchasers and/or Provident or any Seller, which prohibits or restrains Parent or any Purchasers and/or Provident or any Seller from consummating the transactions contemplated hereby; provided, that Parent or such Purchasers and/or Provident or such Sellers, as the case may be, shall have used its commercially reasonable best efforts to have any such Order lifted and the same shall not have been lifted by April 1, 1998; (c) by Parent in writing if there has been a material breach by Provident or any Seller of any of the representations, warranties, agreements or covenants of Provident and the Sellers set forth herein which is not subject to cure prior to the Closing, or a failure of any other condition not subject to cure prior to the Closing to which the obligations of Purchasers are subject; (d) by Provident in writing if there has been a material breach by Parent or Purchasers of any of the representations, warranties, agreements or covenants of Parent and Purchasers set forth herein which is not subject to cure prior to the Closing, or a failure of any other condition not subject to cure prior to the Closing to which the obligations of Provident and the Sellers are subject; and (e) by either of Provident or Parent in writing, if the Closing has not occurred on or prior to April 1, 1998, unless the failure of the Closing to occur shall be due to the failure of the party seeking to terminate this Agreement to materially perform each of its obligations under this Agreement required to be performed by it on or prior to the Closing Date. 8.2 SURVIVAL. If this Agreement is terminated and the transactions -------- contemplated hereby are not consummated as described above, this Agreement shall become null and void and of no further force and effect, except for (a) the provisions of this Agreement relating to the obligations of the parties hereto to keep confidential and not to use certain information and data obtained from the other parties hereto and (b) the provisions of Sections 4.9, 9.2, 9.9(b) and this Section 8.2. ARTICLE 9 MISCELLANEOUS ------------- 9.1 DEFINITIONS. The following terms shall have the respective meanings set ----------- forth below throughout this Agreement: "1940 ACT" means the Investment Company Act of 1940, as amended, and all rules and regulations thereunder. -34- "90-DAY TREASURY RATE" means the annual yield rate, on the date to which such 90-Day Treasury Rate relates, of actively traded U.S. Treasury securities having a remaining duration to maturity of three months, as such rate is published under "Treasury Constant Maturities" in Federal Reserve Statistical Release H.15(519). "ADJUSTED STATUTORY RESERVES AND OTHER STATUTORY LIABILITIES" at any time means statutory reserves and other statutory liabilities of the Business appropriately includable in line items 1 through 25, except lines 11.4 and 24.1, of the Liabilities, Surplus and Other Funds page of the NAIC Annual Statement Blank (1996 format), but excluding from such statutory reserves and other statutory liabilities the statutory liabilities included within Retained Liabilities. "ADMINISTRATIVE SERVICES AGREEMENTS" means the Administrative Services Agreements between each Seller and Purchaser, in form and substance reasonably acceptable to the parties, which shall set forth (i) the terms and conditions upon which such Purchaser shall provide certain administrative services to such Seller with respect to the Reinsured Contracts, and (ii) the consideration to be paid therefor. "ADVERTISEMENT" means any material designed to create public interest in insurance policies, annuity contracts and variable annuity contracts or in an insurer, or in an insurance producer, or to induce the public to purchase, increase, modify, reinstate, borrow on, surrender, replace or retain such a policy or contract. "AFFILIATE" means, with respect to any Person, at the time in question, any other Person controlling, controlled by or under common control with such Person. "AGREED VALUE" shall have the meaning set forth in Section 1.3(a). "ALLOCABLE AMOUNT" shall have the meaning set forth in Section 4.12(a). "ANCILLARY AGREEMENTS" means the Reinsurance Agreements, the Separate Account Transfer Agreements, the Administrative Services Agreements, the Separate Account Administration Agreements, the General Assignment and Assumption Agreements, the Bills of Sale, the Transition Services Agreement, the Marketing Agreements, and the License Agreement. "ANNUAL RATE" means the value of "r" in the expression (1 + r)n/365 - 1, where "n" is equal to the number of days for which interest is to be computed and the result of the expression is the interest factor for computing the applicable interest amounts. "ANTITRUST DIVISION" shall have the meaning set forth in Section 4.6. "APPLICABLE SAP" means Tennessee SAP, in the case of PLA and PNAC, Massachusetts SAP, in the case of PRL and PRV and Delaware SAP, in the case of PRPL. "ASSIGNED AND ASSUMED CONTRACTS" means those contracts and other agreements material to the operation of the Business identified on Schedule 9.1(A). -35- "ASSUMED LIABILITIES" shall mean all (i) liabilities and obligations first to be paid or performed after the Closing Date under or pursuant to the Assigned and Assumed Contracts, if any, (ii) liabilities for amounts payable after November 30, 1997 for returns or refunds of Premiums in respect of Insurance Contracts intended to be reinsured by Purchasers, and (iii) liabilities for guaranty fund assessments and similar charges imposed with respect to the Insurance Contracts based on dates of insolvency after November 30, 1997. "BILL OF SALE" means the Bill of Sale which is substantially in the form of Exhibit 2. "BOOKS AND RECORDS" means the originals or copies of all customer lists, policy information, Insurance Contract forms and rating plans, disclosure and other documents and filings required under applicable securities laws, claim records, sales records, underwriting records, financial records, tax records and compliance records in the possession or control of Sellers and relating principally to the operation of the Business, including any database, magnetic or optical media (to the extent not subject to licensing restrictions) and any other form of recorded, computer generated or stored information or process, but excluding any such records that are subject to the attorney-client privilege. "BUSINESS DAY" means any day other than a Saturday, Sunday, a day on which banking institutions in the State of New York are permitted or obligated by law to be closed or a day on which the New York Stock Exchange is closed for trading. "BUSINESS" means the business of administering the Insurance Contracts, as currently conducted by Sellers. "CEDING COMMISSION" shall have the meaning provided in Section 1.5. "CLAIMS NOTICE" shall have the meaning set forth in Section 7.3. "CLOSING DATE" means (i) if the last of the conditions to Closing set forth in this Agreement is satisfied or waived in writing prior to the 15th day of a given month, then the Closing Date shall be the first day of the month following the month in which the last of the conditions was so satisfied or waived in writing, or (ii) if such satisfaction or waiver in writing occurs or is granted after the 15th day of any given month, then the Closing Date shall be the first day of the second month following the month in which the last of the closing conditions is so satisfied or waived; provided, however, that if such date is not a Business Day, the Closing Date shall be the immediately succeeding Business Day; and provided further, that the Closing may occur on such other date as the parties may agree to in writing, provided however, that the Closing Date shall not be later than the date specified in Section 8.1(e). "CLOSING" means the closing of the transactions contemplated by this Agreement. "CODE" means the Internal Revenue Code of 1986, as amended. Any citation to a provision of the Code includes a citation to any successor provision. -36- "COMMISSION" means the United States Securities and Exchange Commission. "CONSENT" shall mean any consent, approval, authorization, clearance, exemption, waiver, or similar affirmation by any Person pursuant to any contract or any applicable Law, Order, or Permit. "DELAWARE SAP" means the statutory accounting principles and practices prescribed or permitted by the Insurance Department of the State of Delaware as applied on a basis consistent with those utilized in the preparation of 1996 Annual Statement of PRPL. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and all final and temporary regulations and interpretive Bulletins and other rulings of general applicability thereunder. "ESTIMATED INITIAL CASH POSITION" shall have the meaning set forth in Section 1.3(a). "FINAL ANNUITY RESERVES" shall have the meaning set forth in Section 1.5(b). "FINAL RECONCILIATION" shall have the meaning set forth in Section 1.4(a). "FINAL RESERVES STATEMENT" shall have the meaning set forth in Section 1.5(b). "FINAL TRANSFERRED RESERVES STATEMENT" shall have the meaning set forth in Section 1.3(b). "FTC" shall have the meaning set forth in Section 4.6. "GAAP" means United States generally accepted accounting principles as in effect from time to time. "GENERAL ACCOUNT RESERVES" means the general account statutory reserves of Seller (without regard to the transactions contemplated by the Reinsurance Agreements) with respect to the Insurance Contracts determined pursuant to Applicable SAP, as such reserves would have been included in lines 1, 2, 3, 4.1, 4.2, 5, 6, 7.1, 7.2, 7.3, 8, 9, 10.1, 10.2, 10.3, 11.1, 11.2 and 11.3 of the Liabilities, Surplus and Other Funds page of the NAIC Annual Statement Blank (1996 format), excluding, however, any general account statutory reserve adjustments in relation to Separate Account Liabilities. "GENERAL ASSIGNMENT AND ASSUMPTION AGREEMENT" means the General Assignment and Assumption Agreement between each Seller and Purchasers which is substantially in the form of Exhibit 3. "HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder. -37- "INCOME TAX REGULATIONS" means the temporary or final regulations issued under the Code. Any citation to a provision of the Income Tax Regulations includes a reference to any successor regulatory provision. "INDEMNIFIED PARTY" shall have the meaning set forth in Section 7.3. "INDEMNIFYING PARTY" shall have the meaning set forth in Section 7.3. "INDEPENDENT ACTUARY" shall have the meaning set forth in Section 1.3(b). "INITIAL CASH POSITION" shall have the meaning set forth in Section 1.3(c). "INITIAL CASH POSITION DIFFERENCE" shall have the meaning set forth in Section 1.3(c). "INITIAL PORTFOLIO" shall have the meaning set forth in Section 1.3(c). "INSURANCE CONTRACTS" means those contracts of insurance and annuities, and riders thereto and renewals, exchanges and extensions thereof, of Sellers described on Schedule 9.1(C) and new policies of like type issued after the date of this Agreement but before the Closing Date. "INVESTMENT ASSETS" shall have the meaning set forth in Section 1.3(d). "IRS" means the United States Internal Revenue Service. "KNOWLEDGE" shall be interpreted for the purposes of this Agreement as follows: (i) a matter will be deemed to be within the "knowledge of Sellers" if (A) such matter is as of the date of the execution of this Agreement actually known to any of the Seller Key People, or (B) in light of the positions held by the Seller Key People, but taking into account that the due diligence undertaken by the Seller Key People prior to the execution of this Agreement was limited to reviewing materials accessible to the Seller Key People without informing other individuals of the transactions contemplated by this Agreement, the matter would reasonably be expected to be known by the Seller Key People; and (ii) a matter will be deemed to be within the "knowledge of Purchasers" if it is actually known to any of the Purchaser Key People as of the date of the execution of this Agreement after reasonable inquiry. "LAW" means any domestic or foreign federal, state or local code, law, statute, ordinance, regulation, rule, reporting or licensing requirement, policy, guideline, administrative interpretation or other requirement (including those of the Commission, NASD, NAIC and any state) applicable to the parties hereto, or any of their respective Affiliates, properties, assets, officers, directors, employees or agents, as the case may be. "LICENSE AGREEMENT" means the software license agreement to be entered into on or prior to the Closing Date among Sellers and Purchasers, in form and substance reasonably acceptable to the parties, which shall set forth (i) the terms and conditions upon which -38- Sellers will grant a license to use the software described in Schedule 9.1(B), and (ii) the consideration to be paid therefor. "LOSS" and "LOSSES" shall mean actions, claims, losses, liabilities, damages, deficiencies, costs, expenses (including reasonable attorneys' fees and expenses), interest, taxes and penalties. "MARKETING AGREEMENTS" means the marketing agreements to be entered into by Parent, each Purchaser, Provident and each Seller pursuant to Section 4.10. "MASSACHUSETTS SAP" means the statutory accounting principles and practices prescribed or permitted by the Insurance Department of the Commonwealth of Massachusetts as applied on a basis consistent with those utilized in the preparation of 1996 Annual Statements of PRL and PRV. "MATERIAL" shall have the following meaning: A matter will be deemed to be "material" in connection with any provision of this Agreement if such matter would be considered significant by a reasonable acquiror of the Business in the context of the particular provision in which the word "material" appears. "NAIC" means the National Association of Insurance Commissioners. "NASD" shall mean the National Association of Securities Dealers, Inc., including its Subsidiary, NASD Regulation, Inc. "NET ASSET VALUE" shall have the meaning set forth in Section 1.3(c). "NET CASH FROM THE BUSINESS" shall have the meaning set forth in Section 1.3(f). "ORDER" shall mean any administrative decision or award, decree, injunction, judgment, order, quasi-judicial decision or award, ruling, or writ of any federal, state, local or foreign or other court, arbitrator, mediator, tribunal, or other governmental or regulatory agency or authority. "PARENT" shall have the meaning set forth in the first paragraph of this Agreement. "PERMITS" means all licenses, permits, orders, approvals, registrations, authorizations, qualifications and filings with and under all federal, state, local or foreign laws or governmental or regulatory bodies. "PERSON" means any individual, corporation, partnership, firm, joint venture, association, joint-stock company, trust, unincorporated organization, governmental, judicial or regulatory body, business unit (including, but not limited to, the Business), division or other entity. "PLA" shall have the meaning set forth in the first paragraph of this Agreement. -39- "PNAC" shall have the meaning set forth in the first paragraph of this Agreement. "POOL ASSET ADDITIONS" shall have the meaning set forth in Section 1.3(d). "POOL ASSET REDUCTIONS" shall have the meaning set forth in Section 1.3(d). "POOL" shall have the meaning set forth in Section 1.3(c). "POST-CLOSING CONTRACTS" shall have the meaning set forth in Section 4.15. "PRELIMINARY INVESTMENT ASSETS" shall have the meaning set forth in Section 1.3(a). "PRELIMINARY RECONCILIATION" shall have the meaning set forth in Section 1.3(e). "PREMIUMS" means premiums and annuity considerations, deposits and similar receipts with respect to the Insurance Contracts. "PRL" shall have the meaning set forth in the first paragraph of this Agreement. "PROVIDENT" shall have the meaning set forth in the first paragraph of this Agreement. "PRPL" shall have the meaning set forth in the first paragraph of this Agreement. "PRV" shall have the meaning set forth in the first paragraph of this Agreement. "PURCHASER INDEMNITEES" shall have the meaning set forth in Section 7.2(a). "PURCHASER KEY PEOPLE" means the individuals set forth in Schedule 9.1(D). "PURCHASER MATERIAL ADVERSE EFFECT" shall mean an event, change or occurrence which, individually or together with any other event, change or occurrence, has a material adverse impact on the ability of Parent or either Purchaser to perform its obligations under this Agreement or any Ancillary Agreement or to consummate the transactions contemplated hereby and thereby. "PURCHASER" shall have the meaning set forth in the first paragraph of this Agreement. "QUALIFIED CONTRACT" means an Insurance Contract issued in connection with a plan intended to qualify for tax treatment under section 401(a), 403(a), 403(b), 408 or 457 of the Code. "RECONCILIATION" shall have the meaning set forth in Section 1.4(a). "REINSURANCE AGREEMENTS" means the Reinsurance Agreements between each Seller and each Purchaser, substantially in the form of Exhibit 1, which set forth (i) the terms and conditions upon which certain Adjusted Statutory Reserves and Other Statutory Liabilities of such Seller will be reinsured by Purchasers, and (ii) the consideration to be paid therefor. -40- "REPLACEMENT TRANSACTION" means a transaction in which a new annuity contract or variable annuity contract is to be purchased by a prospective insured and the proposing producer should know that one or more existing annuity contracts or variable annuity contracts is to be lapsed, forfeited, surrendered, reduced in value or pledged as collateral for greater than 25% of the loan value set forth in the policy. "RESERVES STATEMENT" shall have the meaning set forth in Section 1.5(b). "RETAINED LIABILITIES" means the following: (i) all liabilities of the Business (other than the Adjusted Statutory Reserves and Other Statutory Liabilities and obligations under contracts and agreements) that have, as of November 30, 1997, either (without duplication) (x) been accrued by a Seller on such Seller's books prepared in accordance with Applicable SAP (to the extent of the amount of such accrual) or (y) been asserted by a third party claimant in a writing received by a Seller or any of its Affiliates prior to November 30, 1997; (ii) notwithstanding anything to the contrary contained in this Agreement, any liability for compensatory, consequential, exemplary, punitive or similar damages or other loss, or any fines or other statutory penalties, which results from (i) any claim, or (ii) any action relating to (x) any alleged or actual act, error or omission by any Seller or any of their Affiliates, agents or representatives, prior to the Closing Date, whether intentional or otherwise, or (y) any reckless conduct or bad faith by any Seller or any of their Affiliates, agents or representatives, in connection with the handling of any claim under any of the Insurance Contracts (including, but not limited to, liability arising from failure by the Seller or any of its Affiliates, agents or representatives, to settle within the limit of any policy, or by reason of alleged or actual negligence or bad faith of the Seller or any of its Affiliates, agents or representatives, in rejecting an offer of settlement or in the preparation of defense or in the trial of any action against an owner, insured or beneficiary of the Seller or any of its Affiliates, agents or representatives, or in the preparation or prosecution of an appeal consequent upon such action) or in connection with the marketing, sale, issuance, delivery, cancellation or administration of any of the Insurance Contracts (including, but not limited to, (s) failure to comply with applicable laws regulating Advertisements, requiring mandatory disclosure of policy information, requiring employment of standards to determine if the purchase of a policy or contract is suitable for an applicant, prohibiting the use of unfair methods of competition and deceptive acts or practices and regulating replacement transactions, and (t) liability arising from claims relating to Advertisements, errors or omissions relating to policy information disclosure, failure to employ standards to determine if the purchase of a policy or contract is suitable for an applicant, engaging in unfair methods of competition or deceptive acts or practices and Replacement Transactions (other than obligations to pay benefits or other amounts or to take any other actions specifically provided for under such Insurance Contracts as originally issued and subsequently amended or supplemented prior to November 30, 1997)). For the avoidance of doubt, the foregoing would include any -41- claims related to "market conduct" or other sales practices of any Seller, Provident, or any of their Affiliates, employees, advisers or agents; (iii) any liability or loss incurred or suffered as a result of any claim by any present or former employee, agent or broker of a Seller or any of its Affiliates who performed or performs services in the Business, that (x) relates to the employment, agency or brokerage relationship of such present or former employee, agent or broker with such Seller or any of its Affiliates, and (y) arose out of actions, events or omissions that occurred (or, in the case of omissions, failed to occur) prior to the Closing Date; (iv) Adjusted Statutory Reserves and Other Statutory Liabilities and Separate Account Liabilities (subject to the obligations of Purchasers under the Reinsurance Agreements and the Separate Account Transfer Agreements); (v) pension and other post-employment liabilities for retired employees; (vi) liabilities for Taxes of Seller; (vii) obligations under contracts of a Seller not assigned to a Purchaser; (viii) any liability secured by a security interest in any asset not transferred to a Purchaser; (ix) liabilities for amounts payable prior to November 30, 1997 for returns or refunds of Premiums; (x) liabilities for commission payments or other fees or compensation (including, without limitation, persistency bonuses), payable with respect to the Insurance Contracts to or for the benefit of brokers and service providers; (xi) liabilities for guaranty fund assessments and similar charges imposed with respect to the Insurance Contracts based on dates of insolvency prior to November 30, 1997; (xii) liability for reinsurance in unauthorized companies; and (xiii) liabilities specifically excluded in this Agreement from those being assumed by Purchasers. "SECURITIES ACT" means the Securities Act of 1933, as amended, and all rules and regulations thereunder. "SELLER INDEMNITEES" shall have the meaning set forth in Section 7.2(b). "SELLER KEY PEOPLE" means the individuals set forth in Schedule 9.1(E). -42- "SELLER MATERIAL ADVERSE EFFECT" shall mean an event, change or occurrence which, individually or together with any other event, change or occurrence, has a material adverse impact on (i) the Business or the Transferred Assets (taken as a whole) or (ii) the ability of Provident or any Seller to perform their respective obligations under this Agreement or any Ancillary Agreement or to consummate the transactions contemplated hereby and thereby. "SELLER PARTIES" means Provident and Sellers. "SELLER SEPARATE ACCOUNTS" means the separate accounts of PNAC and the separate accounts of PRV, in each case identified on Schedule 9.1(F). "SELLER" and "SELLERS" shall have the meaning set forth in the first paragraph of this Agreement. "SEPARATE ACCOUNT ADMINISTRATION AGREEMENTS" means the Separate Account Administration Agreements to be entered into between Purchasers and each of PNAC and PRV, in form and substance reasonably acceptable to the parties, which shall set forth (i) the administrative and other services, including investment management services, to be provided pending transfer of the Seller Separate Accounts to Purchasers, and (ii) the consideration to be paid therefor. "SEPARATE ACCOUNT LIABILITIES" means those liabilities that are reflected in the Seller Separate Accounts. "SEPARATE ACCOUNT TRANSFER AGREEMENTS" means the Transfer and Assumption Reinsurance Agreements to be entered into between Purchasers and each of PNAC and PRV, in form and substance reasonably acceptable to the parties, which shall set forth (i) the terms and conditions upon which certain Separate Account Liabilities of such Seller will be assumed by a Purchaser, include the receipt of all necessary governmental and Seller Separate Account contract holder approvals for the transfer of the Seller Separate Accounts to such Purchaser, the election of new members of the Seller Separate Accounts' Boards of Managers, and the approval of new Seller Separate Account investment advisory agreements, and (ii) the consideration to be paid therefor. "SUBSIDIARY" means, with respect to any Person on a given date (i) any other Person of which a majority of the voting power of the equity securities or equity interests is owned directly or indirectly by such Person and (ii) any other Person the accounts of which, by virtue of an ownership interest in it by such Person would be consolidated, in accordance with GAAP, with those of such Person in its financial statements as of the applicable date. "TAXES" (or "TAX" as the context may require) means (i) any tax, however denominated, imposed by any federal, state, local, municipal, territorial, provincial or foreign government or any agency or political subdivision of any such government (a "TAXING AUTHORITY"), including any tax imposed under Subtitle A of the Code and any net income, alternative or add-on minimum tax, gross income, gross receipts, sales, use, gains, goods and services, production, documentary, recording, social security, unemployment, -43- disability, workers' compensation, estimated, ad valorem, value added, transfer, franchise, profits, license, withholding on amounts paid to or by any Seller or its Affiliates, payroll, employment, excise, severance, stamp, capital stock, occupation, personal or real property, environmental or windfall profit tax, premium, custom, duty or other tax, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest, penalty, addition to tax or additional amount imposed by any Taxing Authority relating thereto, (ii) liability of Provident or any of its Affiliates for the payment of any amounts of the type described in (i) as a result of being a member of an affiliated, consolidated, combined or unitary group with any other corporation at any time on or prior to the Closing Date, and (iii) liability of Provident or any of its Affiliates for the payment of any amounts as a result of being a party to any Tax Sharing Agreement or with respect to the payment of any amounts of the type described in (i) or (ii) as a result of any express or implied obligation to indemnify any other Person. "TAXING AUTHORITY" has the meaning set forth in the definition of "Taxes." "TENNESSEE SAP" means the statutory accounting principles and practices prescribed or permitted by the Insurance Department of the State of Tennessee as applied on a basis consistent with those utilized in the preparation of 1996 Annual Statements of PLA and PNAC. "THIRD PARTY ACCOUNTANT" shall have the meaning set forth in Section 1.4(a). "THIRD PARTY CLAIM" shall have the meaning set forth in Section 7.4(a). "THIRD PARTY CLAIMANT" shall have the meaning set forth in Section 7.4(a). "TRANSFERRED ANNUITY RESERVES" shall have the meaning set forth in Section 1.5(b). "TRANSFERRED ASSETS" means: (i) Net Cash From the Business (if any); (ii) Investment Assets; (iii) all of Sellers' rights and interests under the Insurance Contracts to receive principal and interest paid on policy or contract loans on or after the Closing Date; (iv) a receivable equal to the index option component of reserves for the contracts described in Schedule 4.18; (v) the Books and Records; and (vi) the Transferred Contracts, but excluding those assets (A) specifically identified on Schedule 9.1(G), (B) described on Schedule 2.1 to the Transition Services Agreement as being made available by Sellers, -44- (C) the Insurance Contracts, the Seller Separate Accounts, and the policies and contracts funded by the Seller Separate Accounts, (D) reinsurance treaties and agreements, (E) cash and Investment Assets other than the Net Cash From the Business and Investment Assets specified in clauses (i) and (ii) above, and (F) that cannot be transferred to Purchasers because of any Seller's inability to obtain the Consent of a third party required for such transfer to be effective. "TRANSFERRED CONTRACTS" means the Assigned and Assumed Contracts, and all other contracts, assigned pursuant to the General Assignment and Assumption Agreement. "TRANSFERRED RESERVES" shall have the meaning set forth in Section 1.3(b). "TRANSFERRED RESERVES STATEMENT" shall have the meaning set forth in Section 1.3(b). "TRANSITION SERVICES AGREEMENT" means the Transition Services Agreement among Provident, each Seller and Purchasers in form and substance reasonably acceptable to the parties, which shall set forth (i) the terms and conditions upon which Provident and Sellers shall provide certain services and assets for a transitional period to Purchasers, and (ii) the consideration to be paid therefor. "UMPIRE" shall have the meaning set forth in Section 7.8. "VALIC CONTRACTS" means the Insurance Contracts written in the States of New York, New Hampshire and Vermont. "VALUATION" shall have the meaning set forth in Section 1.3(a). "VALUER" shall have the meaning set forth in Section 1.3(a). "WNL CONTRACTS" means all of the Insurance Contracts other than the VALIC Contracts. 9.2 EXPENSES. -------- (a) Except as otherwise provided in this Agreement and this Section 9.2, each of Parent and Provident shall bear and pay all direct costs and expenses incurred by them, or on their behalf, in connection with the transactions contemplated hereunder. (b) Notwithstanding the foregoing, if this Agreement is terminated (i) by Provident pursuant to Section 8.1(d) or (ii) by either party pursuant to Section 8.1(e) and the failure of the Closing to occur by the date specified in Section 8.1(e) resulted principally from the failure to satisfy any one or more of the conditions set forth in Sections 6.1, 6.2 or 5.6, then Parent shall promptly pay Provident the sum of all the reasonable out-of-pocket costs and expenses of Provident and the Sellers, including costs of counsel, investment bankers, actuaries and accountants associated with this Agreement and the transactions contemplated hereby, provided however, that such sum shall not exceed $1,200,000. -45- (c) Notwithstanding the foregoing, if this Agreement is terminated (i) by Parent pursuant to Section 8.1(c) or (ii) by either party pursuant to Section 8.1(e) and the failure of the Closing to occur by the date specified in Section 8.1(e) resulted principally from the failure to satisfy any one or more of the conditions set forth in Sections 5.1, 5.2 or 5.4, then Provident shall promptly pay Parent the sum of all the reasonable out-of-pocket costs and expenses of Parent and the Purchasers, including costs of counsel, investment bankers, actuaries and accountants associated with this Agreement and the transactions contemplated hereby, provided however, that such sum shall not exceed $1,200,000. (d) Any dispute between the parties arising out of this Section 9.2 shall be referred for arbitration pursuant to Section 7.8. (e) The parties acknowledge that the loss to any party resulting from breach of this Agreement by any other party or other failure of the transactions contemplated hereby to be consummated is not susceptible of ready measurement and, therefore, that the payments provided in this Section 9.2 are intended by the parties to constitute liquidated damages for any breach by a party of the terms of this Agreement, and not a penalty. 9.3 SUBSTITUTE PURCHASER. Provident and Sellers acknowledge that Parent -------------------- shall be entitled, upon giving prior written notice to Provident and Sellers, to assign the rights and obligations of VALIC under this Agreement, prior to or after the Closing Date, to WNL or another Subsidiary of Parent, and hereby consent to such assignment whereupon references herein to "VALIC" shall be deemed to be references to such Subsidiary. Parent and Purchasers shall use all best efforts to take, or cause to be taken, all action or do, or cause to be done, all things or execute any documents necessary, proper or advisable under applicable laws and regulations to provide Sellers with full credit for reinsurance in the States of New York, New Hampshire and Vermont. 9.4 PUBLICITY. Except as may otherwise be required by law or regulation, --------- no release or announcement concerning this Agreement or the transactions contemplated hereby shall be made without advance consultation by Seller and Purchasers with respect thereto. The parties hereto shall cooperate with each other in making any release or announcement. 9.5 CONFIDENTIALITY. The parties agree that, other than as agreed or as --------------- required to implement the transactions contemplated hereby, the parties will keep confidential the terms and conditions of this Agreement and the Ancillary Agreements, including the Schedules and Exhibits hereto and thereto, except as otherwise required by law (including pursuant to any federal or state securities laws or the rules of any stock exchange or self-regulatory organization or pursuant to any legal, regulatory or legislative proceedings). 9.6 NOTICES. Any notice or other communication required or permitted ------- hereunder shall be in writing and shall be delivered personally (by courier or otherwise), telegraphed, telexed, sent by facsimile transmission or sent by certified or registered mail, postage prepaid and return receipt -46- requested, or by express mail. Any such notice shall be deemed given when so delivered personally, telegraphed, telexed or sent by facsimile transmission, as follows: (i) if to Parent or Purchasers: American General Corporation 2929 Allen Parkway Houston, Texas 77019 Attention: Mark S. Berg, Esq Telecopier No.: (713) 831-1266 With a concurrent copy to: Skadden, Arps, Slate, Meagher & Flom LLP 919 Third Avenue New York, New York 10022 Attention: Morris Kramer, Esq Telecopier No.: (212) 735-2000 (ii) If to Provident or any Seller: Provident Companies, Inc. 1 Fountain Square Chattanooga, Tennessee 37402 Attention: F. Dean Copeland Telecopier No.: (423) 755-2590 With a concurrent copy to: Alston & Bird LLP One Atlantic Center 1201 West Peachtree Street Atlanta, Georgia 30309-3424 Attention: David E. Brown, Jr. Telecopier No.: (404) 881-4777 Any party may, by notice given in accordance with this Section 9.4 to the other parties, designate another address or person for receipt of notices hereunder provided that notice of such a change shall be effective upon receipt. 9.7 ENTIRE AGREEMENT. This Agreement (including the Ancillary Agreements, ---------------- the other agreements contemplated hereby and thereby, the Exhibits and the Schedules hereto) contains the entire agreement among the parties with respect to the subject matter hereof and supersedes all prior agreements, written or oral, with respect thereto. -47- 9.8 WAIVERS AND AMENDMENTS; NON-CONTRACTUAL REMEDIES; PRESERVATION OF ----------------------------------------------------------------- REMEDIES. This Agreement may be amended, superseded, canceled, renewed or - -------- extended, and the terms hereof may be waived, only by a written instrument signed by each of the parties or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party on exercising any right, power or privilege hereunder shall operate as a waiver thereof, or shall any waiver on the part of any party of any right, power or privilege, or any single or partial exercise of any such right, power or privilege, preclude any further exercise thereof or the exercise of any other such right, power or privilege. The rights and remedies herein provided are cumulative and are not exclusive of any rights or remedies that any party may otherwise have at law or in equity. 9.9 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ------------- ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF. 9.10 BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and -------------------------- inure to the benefit of the parties and their respective successors, permitted assigns and legal representatives. Neither this Agreement, nor any right hereunder, may be assigned by any party (in whole or in part) without the prior written consent of the other party hereto. 9.11 INTERPRETATION. -------------- (a) Notwithstanding anything in this Agreement to the contrary, no term or condition of this Agreement shall be construed to supersede, restrict or otherwise limit any term or condition set forth in the Reinsurance Agreements. (b) The parties acknowledge and agree that, except as specifically provided herein, they may pursue judicial remedies at law or equity in the event of a dispute with respect to the interpretation or construction of this Agreement. In the event that an alternative dispute resolution procedure is provided for in any of the Ancillary Agreements or any other agreement contemplated hereby or thereby, and there is a dispute with respect to the construction or interpretation of such Ancillary Agreement, the dispute resolution procedure provided for in such Ancillary Agreement shall be the procedure that shall apply with respect to the resolution of such dispute. (c) For purposes of this Agreement, the words "hereof," "herein," "hereby" and other words of similar import refer to this Agreement as a whole unless otherwise indicated. Whenever the singular is used herein, the same shall include the plural, and whenever the plural is used herein, the same shall include the singular, where appropriate. All dollar references in this Agreement are to the currency of the United States. -48- 9.12 NO THIRD PARTY BENEFICIARIES. Except as set forth in Article 7, ---------------------------- nothing in this Agreement is intended or shall be construed to give any Person (including, but not limited to, the employees of Seller), other than the parties hereto, their successors and permitted assigns, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. 9.13 COUNTERPARTS. This Agreement may be executed by the parties hereto in ------------ separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all, of the parties hereto. 9.14 OTHER AGREEMENTS, EXHIBITS AND SCHEDULES. The Exhibits and the ---------------------------------------- Schedules are a part of this Agreement as if fully set forth herein. All references herein to Articles, Sections, subsections, paragraphs, subparagraphs, clauses, Exhibits and Schedules shall be deemed references to such parts of this Agreement, unless the context shall otherwise require. 9.15 HEADINGS. The headings in this Agreement are for reference only, and -------- shall not affect the interpretation of this Agreement. IN WITNESS WHEREOF, the parties have executed this Asset Transfer and Acquisition Agreement as of the date first above written. PROVIDENT COMPANIES, INC. BY: /s/ Thomas R. Watjen --------------------------------- PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY BY: /s/ Thomas R. Watjen --------------------------------- PROVIDENT NATIONAL ASSURANCE COMPANY BY: /s/ Thomas R. Watjen --------------------------------- -49- THE PAUL REVERE LIFE INSURANCE COMPANY BY: /s/ Thomas R. Watjen ----------------------------------- THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY BY: /s/ Thomas R. Watjen ----------------------------------- THE PAUL REVERE PROTECTIVE LIFE INSURANCE COMPANY BY: /s/ Thomas R. Watjen ----------------------------------- AMERICAN GENERAL CORPORATION BY: /s/ Jon P. Newton ----------------------------------- WESTERN NATIONAL LIFE INSURANCE COMPANY BY: /s/ Michael J. Akers ---------------------------------- THE VARIABLE ANNUITY LIFE INSURANCE COMPANY BY: /s/ Jon P. Newton ----------------------------------- -50- March 24, 1998 This letter agreement confirms and documents the agreement among the undersigned as to certain modifications to the Asset Transfer and Acquisition Agreement, dated as of December 8, 1997 (the "Agreement"), entered into by and among Provident Companies, Inc., Provident Life and Accident Insurance Company, Provident National Assurance Company, The Paul Revere Life Insurance Company, The Paul Revere Variable Annuity Insurance Company, The Paul Revere Protective Life Insurance Company, and American General Corporation, American General Annuity Insurance Company (formerly Western National Life Insurance Company), and The Variable Annuity Life Insurance Company. Capitalized terms used but not otherwise defined herein are intended to have the meanings assigned to them in the Agreement. 1. Termination of Agreement. The parties hereby agree to modify Section ------------------------ 8.1(e) of the Agreement to provide that such Agreement may be terminated, by either Provident or Parent in writing, if the Closing has not occurred on or prior to April 30, 1998, unless the failure of the Closing to occur shall be due to the failure of the party seeking to terminate the Agreement to perform each of its obligations under the Agreement required to be performed by it on or prior to the Closing Date; provided that the foregoing April 30, 1998 date shall be automatically extended to May 31, 1998, in the event that all necessary regulatory approvals have not been obtained on or prior to April 30, 1998. 2. License Agreement. The parties shall enter into one License Agreement, ----------------- which shall set forth the terms and conditions upon which Sellers will grant a royalty-free license to install and use the VARKS software to American General Annuity Insurance Company. 3. Separate Accounts. The parties further agree that the Separate Account ----------------- Transfer Agreements and the Separate Account Administration Agreements contemplated by the Agreement are hereby waived as closing conditions pursuant to Sections 1.6, 5.1, 6.1 and 9.8 of the Agreement. In lieu of the Separate Account Transfer Agreements and Separate Account Administration Agreements contemplated by the Agreement, the parties shall negotiate in good faith an Administrative Services Agreement with respect to the Separate Accounts, the form of which shall be agreed upon prior to the Closing. The Administrative Services Agreement would be effective on or before June 30, 1998. In addition, at the option of Parent, Parent may propose to the Separate Account holders for approval a change of the investment advisor for the Separate Accounts. 4. Marketing Agreements. The parties agree that the execution of certain -------------------- Marketing Agreements contemplated by Section 4.10 of the Agreement are hereby waived as closing conditions pursuant to Sections 1.6, 5.1, 6.1 and 9.8 of the Agreement. The terms of any marketing agreements to be entered into by Provident, Sellers and Purchasers may be finalized and executed by the parties post-closing. The parties agree to negotiate in good faith, and execute prior to June 30, 1998, such marketing agreements. IN WITNESS WHEREOF, the undersigned have executed this letter agreement as of the date above. PROVIDENT COMPANIES, INC. /s/ F. Dean Copeland ----------------------- Name: F. Dean Copeland Title: Executive Vice President PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY /s/ F. Dean Copeland ----------------------- Name: F. Dean Copeland Title: Executive Vice President PROVIDENT NATIONAL ASSURANCE COMPANY /s/ F. Dean Copeland ----------------------- Name: F. Dean Copeland Title: Executive Vice President THE PAUL REVERE LIFE INSURANCE COMPANY /s/ F. Dean Copeland ----------------------- Name: F. Dean Copeland Title: Executive Vice President THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY /s/ F. Dean Copeland ----------------------- Name: F. Dean Copeland Title: Executive Vice President -2- THE PAUL REVERE PROTECTIVE LIFE INSURANCE COMPANY /s/ F. Dean Copeland ------------------------------- Name: F. Dean Copeland Title: Executive Vice President AMERICAN GENERAL CORPORATION /s/ Nicholas R. Rasmussen ------------------------------- Name: Nicholas R.Rasmussen Title: Senior Vice President- Corporate Development AMERICAN GENERAL ANNUITY INSURANCE COMPANY (formerly Western National Life Insurance Company) /s/ Michael J. Akers -------------------------------- Name: Michael J. Akers Title: Executive Vice President and Chief Financial Officer THE VARIABLE ANNUITY LIFE INSURANCE COMPANY /s/ Craig R. Rodby --------------------------------- Name: Craig R. Rodby Title: Vice Chairman -3- May 15, 1998 This letter agreement confirms and documents the agreement among the undersigned as to certain modifications to the Asset Transfer and Acquisition Agreement, dated as of December 8, 1997 (as amended hereby and by the letter agreement dated March 24, 1998 (the "March Amendment"), the "Agreement"), entered into by and among Provident Companies, Inc., Provident Life and Accident Insurance Company, Provident National Assurance Company, The Paul Revere Life Insurance Company, The Paul Revere Variable Annuity Insurance Company, The Paul Revere Protective Life Insurance Company, and American General Corporation, American General Annuity Insurance Company (formerly Western National Life Insurance Company), and The Variable Annuity Life Insurance Company. Capitalized terms used but not otherwise defined herein are intended to have the meanings assigned to them in the Agreement. WHEREAS, in the course of its pre-closing investigation of the business and operations of Sellers pursuant to Section 4.3 of the Agreement, Parent and Purchasers have become aware of certain material inaccuracies in the representations of Provident and Sellers contained in Section 2.08(d) and Section 2.14 of the Agreement; and WHEREAS, Parent and Purchasers have requested that Provident and Sellers take, and Provident and Sellers have agreed to take, remedial actions including, without limitation, the actions described in Paragraph 1 hereof; and WHEREAS, the parties desire to bifurcate the Closing contemplated by the Agreement, as described in Paragraph 2 hereof, and clarify certain closing matters; and WHEREAS, certain modifications to the Agreement are necessary or desirable in order to obtain the approval of the state insurance departments, as described in Paragraphs 3 and 4 hereof; NOW, THEREFORE, in consideration of the foregoing, the parties hereto do hereby agree as follows: 1. Qualified Contracts ------------------- (a) 403(b) Endorsement. With respect to the Qualified Contracts issued ------------------ connection with a plan intended to qualify for tax treatment under Section 403(b) of the Code, Provident and Sellers shall file with the appropriate state insurance departments, and have distributed to all holders of such Qualified Contracts, amended endorsements (in the forms attached hereto as Exhibit A, the "Endorsements"). --------- All fees and expenses associated with the necessary regulatory approvals of the Endorsements contemplated by this Paragraph 1(a), and the distribution of the Endorsements to the Qualified Contract holders, shall be borne by Provident and Sellers. Provident and Sellers further acknowledge that any Losses resulting from the failure to effect an earlier distribution of comparable endorsements shall constitute Retained Liabilities. (b) Hold Harmless Agreements. As soon as practicable after the date ------------------------ hereof, and in any event prior to June 30, 1998, Provident and Sellers shall deliver to Purchasers a schedule (the "Indemnitor Obligation Schedule") that lists all of the "hold harmless," tax sharing, indemnification, or similar arrangements regarding Tax qualification or treatment of any Insurance Contracts, which Schedule identifies the indemnitees and the indemnitor obligations thereunder (the "Indemnitor Obligations"). Provident and Sellers agree to cooperate with Purchasers in developing, within 18 months of the date hereof, administrative procedures that will facilitate compliance with such Indemnitor Obligations during the terms of the respective Administrative Services Agreements and Separate Account Administrative Services Agreements executed and delivered by the parties hereto. Purchasers agree to provide to Provident and Sellers, as soon as practicable after receipt of the Indemnitor Obligation Schedule, an addendum to such Schedule indicating the date (which, with respect to each Indemnitor Obligation, shall be the earliest practicable date, as determined in good faith by Purchasers, by which Purchasers can reasonably comply with such Indemnitor Obligation without unreasonable expense or disruption of Purchasers' business, but in no event shall such date exceed 18 months from the date hereof) by which Purchasers will comply with each Indemnitor Obligation (each such date being referred to as a "Compliance Date"). Provident and Sellers acknowledge that any Losses (other than Losses based upon Purchasers' gross negligence or wilful misconduct) based upon (i) a Purchaser's nonperformance of any Indemnitor Obligations that are not listed on the Indemnitor Obligation Schedule during the term of an Administrative Services Agreement or Separate Account Administrative Services Agreement (as the case may be), or (ii) a Purchaser's nonperformance of any Indemnitor Obligations prior to the Compliance Date with respect to each such obligation, shall constitute Retained Liabilities. Any Losses based upon Purchaser's nonperformance of any Indemnitor Obligations on or following the Compliance Date with respect to each such obligation shall constitute Assumed Liabilities. (c) Loan Defaults. In order to ensure compliance of the Qualified ------------- with all applicable Tax regulations, Provident and Sellers hereby agree to promptly review and make any necessary changes to the procedures that are currently used by Sellers for loan defaults under the Qualified Contracts ("Modified Loan Procedures"), and to promptly prepare and distribute a notice ("Loan Notice") to the affected plan participants. Such Modified Loan Procedures shall include, without limitation, the following: (i) with respect to new loans, foreclosure only when the participant is otherwise eligible for distribution and default of the entire loan upon nonpayment; and (ii) with respect to existing loans, foreclosure only when the participant is otherwise eligible for distribution. All fees and expenses associated with development and implementation of the foregoing modifications, including the cost of preparing and mailing a notice to the affected plan participants, shall be borne by Provident and Sellers. Modified Loan Procedures and the Loan Notice shall be subject to the prior approval of Purchasers, which approval shall not be unreasonably withheld. Provident and Sellers acknowledge that any Losses based upon a Seller's noncompliance with the Tax regulations governing the administration of loan defaults under a Qualified Contract, and any Losses resulting from the failure to effect an earlier implementation of -2- any Modified Loan Procedures or distribution of a related Loan Notice, shall constitute Retained Liabilities. (d) Miscellaneous. (i) The parties acknowledge that the term "Losses" ------------- include actions, claims, losses, liabilities, damages, deficiencies, expenses (including reasonable attorneys' fees and expenses), interest, taxes and penalties arising from an Internal Revenue Service audit or from a claim asserted by an employer or plan participant, or their respective representatives, including without limitation any claim resulting from a correction or self- correction program permitted by the Internal Revenue Service (other than a claim initiated by Purchasers). (ii) In the event that the remedial actions set forth herein and agreed to by the parties is not sufficient to cure any inaccuracies in the representations of Provident and Sellers with respect to Section 2.8(d) and Section 2.14 of the Agreement, Provident and Sellers hereby agree to execute and deliver all other documents and instruments and take all other remedial action as may be necessary to effect the cure of such inaccuracies. (iii) Nothing herein is intended to limit the indemnification or other rights of Parent or Purchasers under the terms of the Agreement, which shall remain in full force and effect, as supplemented by this letter agreement. 2. Bifurcated Closing. (a) The parties agree that the Closing ------------------ by the Agreement shall be effected pursuant to two separate closings, relating to the WNL Contracts (the "AGAIC Closing") and the VALIC Contracts (the "VALIC Closing"), respectively. Each of the AGAIC Closing and the VALIC Closing shall occur at a time and place as Parent and Provident may mutually agree, following the satisfaction or waiver of all conditions set forth in Articles 5 and 6 of the Agreement concerning the parties' respective obligations to consummate the transactions contemplated in the Agreement, as such conditions relate to the AGAIC Closing and the VALIC Closing, respectively. Each of the AGAIC Closing and the VALIC Closing shall be effective as of 11:59 p.m. on April 30, 1998. (b) The reference to May 31, 1998 in Paragraph 1 of the letter agreement dated March 24, 1998, executed by the parties hereto, is hereby replaced with a reference to "June 30, 1998." (c) With respect to the AGAIC Closing, the term "Closing Date" shall mean the date on which the Investment Assets applicable to the WNL Contracts are authorized for transfer to AGAIC. With respect to the VALIC Closing, the term "Closing Date" shall mean the date on which the Investment Assets applicable to the VALIC Contracts are authorized for transfer to VALIC. (d) The parties acknowledge that the Transferred Assets for the AGAIC Closing and the VALIC Closing will not include any (i) Books and Records, (ii) Transferred Contracts, or (iii) lockboxes and bank accounts. Therefore, the parties agree that the Bills of Sale and -3- the General Assignment and Assumption Agreements are hereby waived as closing conditions pursuant to Sections 1.6, 5.1, 6.1 and 9.8 of the Agreement. (e) With respect to the AGAIC Closing and the VALIC Closing, the term "Insurance Contracts" shall include the contracts issued by Sellers on or before November 15, 1998, on applications dated on or before May 15, 1998. (f) At the AGAIC Closing, Sellers will deliver to WNL the assets then included in the Pool other than those listed on Exhibit B --------- hereto (such excluded assets, the "Excluded Investment Assets"). The Excluded Investment Assets consist of (i) assets withheld pending the VALIC Closing, and (ii) assets estimated for settlement of the cash amounts owed by Purchasers to Sellers under Section 1.3(e) of the Agreement. The Excluded Investment Assets shall be retained in the Pool and subject to continued investment and reinvestment pursuant to Section 1.3 of the Agreement. At the VALIC Closing, Sellers will deliver to VALIC all assets then included in the Pool, net of amounts owed to Sellers or Purchasers under Section 1.4(b) of the Agreement (as modified by Paragraph 4 hereof). The deliveries provided in this Paragraph 2(f) shall be in satisfaction of Sellers' delivery obligations under Section 1.3(d) of the Agreement. (g) At the AGAIC Closing, Provident and Sellers shall deliver to Parent and Purchasers the Preliminary Reconciliation contemplated by Section 1.3(e) of the Agreement with respect to the portion of the Business represented by the WNL Contracts (provided that such Preliminary Reconciliation shall cover the period through March 31, 1998), and the parties shall make the payments contemplated by the second sentence of Section 1.3(e) of the Agreement based upon the amounts reflected therein. If the VALIC Closing occurs prior to the delivery of the Reconciliation contemplated by Paragraph 2(h) hereof, Provident and Sellers shall deliver to Parent and Purchasers, at the VALIC Closing, the Preliminary Reconciliation contemplated by Section 1.3(e) of the Agreement with respect to the portion of the Business represented by the VALIC Contracts (provided that such Preliminary Reconciliation shall cover the period through March 31, 1998), and the parties shall make the payments contemplated by the second sentence of Section 1.3(e) of the Agreement based upon the amounts reflected therein. If the VALIC Closing occurs at or after the delivery of the Reconciliation contemplated by Paragraph 2(h) hereof, and on or before June 30, 1998, the Reconciliation so delivered will include, in lieu of a separate Preliminary Reconciliation with respect to the VALIC Contracts, a separate computation of such cash payment as may be required to be made at the VALIC Closing, and the parties shall make the payments contemplated by the second sentence of Section 1.3(e) of the Agreement based upon the amounts reflected therein. (h) Provident shall, on or before June 30, 1998, prepare the Reconciliation contemplated by Section 1.4(a) of the Agreement with respect to the portion of the Business represented by the WNL Contracts and the portion of the Business represented by the VALIC Contracts, reflecting a proposed reconciliation of Net Cash From the Business through April 30, 1998. Such Reconciliation shall separately reflect a reconciliation of the Net Cash From the Business attributable to the WNL Contracts. The parties shall utilize the -4- procedures set forth in Section 1.4 of the Agreement to determine the amount of cash or securities, if any, to be transferred from one party to the other by reason of any difference between the Preliminary Reconciliation payments made pursuant to Paragraph 2(g) hereof and the Final Reconciliation determined pursuant to Section 1.4 of the Agreement. 3. State Insurance Regulatory Approvals. The parties agree to amend ------------------------------------ the Agreement, and revise the form of the Ancillary Agreements, to the extent agreed upon to obtain state insurance regulatory approvals. 4. Post-Closing Adjustments. In order to correct a typographical ------------------------ error, Section 1.4(b) of the Agreement shall be deleted and replaced its entirety with the following: (b) In the event the amount of Net Cash From the Business reflected on the Final Reconciliation exceeds the amount of Net Cash From the Business reflected on the Preliminary Reconciliation, Sellers shall transfer to Purchasers additional cash equal to the amount of such difference. In the event the amount of Net Cash From the Business reflected on the Preliminary Reconciliation exceeds the amount of Net Cash From the Business reflected on the Final Reconciliation, Purchasers shall transfer to Sellers additional cash or securities held in the Pool equal to the amount of such difference. Any transfer of cash required under this Section 1.4 shall be made within ten Business Days of the date of the delivery of the Final Reconciliation to Purchasers, together with interest thereon from and including the Closing Date to but not including the date of such transfer, computed at an Annual Rate equal to the 90-day Treasury Rate in effect on the Closing Date. 5. Treatment of Separate Accounts. On or before May 21, 1998, the ------------------------------ parties shall file with the New York Department of Insurance forms of Separate Account Administrative Services Agreements for the purposes of obtaining approval of the New York Department of Insurance for PNAC, PRV and VALIC to enter into such Agreements. 6. Amendment of Provisions Relating to License Agreement. Paragraph ----------------------------------------------------- 2 of the March Amendment and Sections 1.6(c)(ii) and 1.6(f)(ii) of the Agreement shall be deleted in their entirety. 7. No Other Amendments. No other amendments to the Agreement, except ------------------- those expressly set forth herein and in the March Amendment, are intended by the parties hereto, and the Agreement, as amended hereby and by the March Amendment, shall continue and remain in full force and effect. The agreements set forth herein and in the March Amendment do not, except as expressly provided in the March Amendment or herein, constitute a waiver of any right or claim that the parties may have under the Agreement. -5- IN WITNESS WHEREOF, the undersigned have executed this letter agreement as of the date above. PROVIDENT COMPANIES, INC. /s/ Henry T. Hardin III ------------------------------------------ Name: Henry T. Hardin III Title: Vice President and Senior Counsel PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY /s/ Henry T. Hardin III ------------------------------------------ Name: Henry T. Hardin III Title: Vice President and Senior Counsel PROVIDENT NATIONAL ASSURANCE COMPANY /s/ Henry T. Hardin III ------------------------------------------ Name: Henry T. Hardin III Title: Vice President and Senior Counsel THE PAUL REVERE LIFE INSURANCE COMPANY /s/ Henry T. Hardin III ------------------------------------------ Name: Henry T. Hardin III Title: Vice President and Senior Counsel THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY /s/ Henry T. Hardin III ------------------------------------------ Name: Henry T. Hardin III Title: Vice President and Senior Counsel -6- THE PAUL REVERE PROTECTIVE LIFE INSURANCE COMPANY /s/ Henry T. Hardin III ------------------------------------------ Name: Henry T. Hardin III Title: Vice President and Senior Counsel AMERICAN GENERAL CORPORATION /s/ Nicholas R. Rasmussen ------------------------------------------ Name: Nicholas R. Rasmussen Title: Senior Vice President-- Corporate Development AMERICAN GENERAL ANNUITY INSURANCE COMPANY (formerly Western National Life Insurance Company) /s/ Michael J. Akers ------------------------------------------ Name: Michael J. Akers Title: Executive Vice President THE VARIABLE ANNUITY LIFE INSURANCE COMPANY /s/ Craig R. Rodby ------------------------------------------ Name: Craig R. Rodby Title: Vice Chairman -7- EXHIBIT A ENDORSEMENTS Group Annuity Contract/Certificate Amendment The tax qualification of the Tax-Sheltered Annuity (TSA) Contract and Certificates thereto require that: 1. The Tax-Sheltered Annuity (TSA) Contract is established for the exclusive benefit of the Participants and their Beneficiaries. Each Participant's interest is nonforfeitable. A Participant's interest in the Contract is not transferable. 2. Purchase Payments are flexible. Purchase Payments in any taxable year may not exceed the limits described in Sections 403(b), 415(c), or 402(g) of the Internal Revenue Code of 1986, as amended ("Code"), as applicable to the type of contribution being made, and taking into account such other contributions as are required to be aggregated with the Purchase payments in applying these limits. The preceding limits shall not apply to a rollover contribution or a direct transfer permitted under the Code. Purchase Payments must be in cash only. 3. "Includible Compensation" means, in the case of any employee, the amount of compensation which is received from the employer described in Code Section 403(b)(1)(A), and which is includible in gross income (computed without regard to Code Section 911) for the most recent period (ending not later than the close of the taxable year) which under Code Section 403(b)(4) may be counted as one year of service. Such term does not include any amount contributed by the employer for any annuity contact to which Code Section 403(b) applies or any other employee pre-tax salary reductions, except to the extent permitted under Code Section 403(b). 4. Except to the extent of any amounts which have been held in 403(b) annuity contract or custodial account since December 31, 1986, the entire interest of the Participant Account must commence to be distributed to him not later than April 1 immediately following the calendar year in which he attains age 70 1/2, or retires, whichever is later. The distribution may be made to the individual either in a lump sum or in amounts to be paid over (a) the life of the Participant, or the lives of the Participant and his beneficiary, or (b) a period certain not extending beyond the life expectancy of the Participant, or the life expectancies of the Participant and his beneficiary. The entire interest of the Participant Account shall also be subject to the appropriate incidental benefit requirements of Code Sections 403(b)(10) and 401(a)(9). The life expectancy of the Participant and of a beneficiary that is the Participant's spouse shall be recalculated each year unless the Participant otherwise elects. Life expectancies shall be determined as provided in Code Section 401(a)(9). Required distributions from a TSA are not eligible for tax-free rollovers. 5. To qualify as a contract which can defer compensation under an Internal Revenue Code Section 403(b) annuity contract, the withdrawal restrictions under Internal Revenue Code Section 403(b)(11) must be met. To the extent required under Code Section 403(b)(11), withdrawals of contributions to an annuity contract which were made pursuant to a salary reduction agreement, and of earnings attributable to such contributions, may be paid only upon or after attainment of age 59 1/2, separation from service, death, total or permanent disability (as defined in Internal Revenue Code Section 72(m)(7)) or in the case of hardship (as defined in the Treasury Regulations). The hardship exception applies only to the salary reduction contributions and not to any income attributed to such contributions. The same or similar restrictions shall apply to all amounts transferred from a Code Section 403(b)(7) custodial account. There is an additional tax on early distributions from your TSA before you reach age 59 1/2. Except as otherwise provided in the Code, the tax is 10% of the taxable portion of the distribution. Exceptions to the additional tax, which are subject to legislative revisions, generally include distributions: (1) to an employee who has separated from service, if those distributions are part of a scheduled series of substantially equal periodic payments for the life of the Participant (or the joint lives of the Participant and the Participant's beneficiary) or the life expectancy of the Participant (or the joint life expectancies of the Participant and the Participant's beneficiary); (2) to an employee who has separated from service after attaining age 55; (3) a distribution which is used to pay medical expenses to the extent the expenses are deductible under Sec. 213 (determined without regard to whether the taxpayer itemizes deductions); (4) distributions after the death of the employee; (5) distributions after the disability of the employee. 6. Upon the death of the Participant, the following distribution provisions shall take effect: (a) If the Participant dies after distribution of his interest has commenced, the remaining portion of such interest will continue to be distributed at least as rapidly as under the method of distribution being used prior to the Participant's death. (b) If the Participant dies before distribution of his interest commences, the Participant's entire interest will be distributed no later than 5 years after the Participant's death. If any portion of the Participant's interest is payable to a designated Beneficiary, distributions may be made in equal installments over the life expectancy of the designated Beneficiary, commencing no later than 1 year after the Participant's death. If the designated Beneficiary is the Participant's Surviving Spouse, the Surviving Spouse may elect to treat the contract as his or her own to the extent permitted under the Code. (c) Where the survivor payee is a person other than the Participant's Spouse, an election under Option III - Joint and Survivor Life Annuity, can be made only if the present value of the Annuity payments to be paid to the Participant exceeds 50 percent of the present value of the Annuity payments to be paid to the Participant and his or her survivor. 7. The Participant will, at all times, be 100% vested in the value of the Participant Account. 8. If any benefit payable to the Participant under this Contract or Certificate constitutes an "eligible rollover distribution" within the meaning of Section 402 of the Code, the Participant may elect to have such distribution paid directly to an "eligible retirement plan" in a transaction designated under the Code as a "direct rollover." Before any eligible rollover distribution is made, the Participant will be provided a written explanation of his or her rights to make a direct rollover and the consequences of not making a direct rollover. No surrender, withdrawal, or other benefit distribution that constitutes an eligible rollover distribution will be made to the Participant under the Contract or Certificate unless the Code's requirements applicable to eligible rollover distribution have been satisfied. 9. Separate records will be maintained for the interest of each Participant. 10. The Company, as issuer of a Tax-Sheltered Annuity (TSA), shall furnish annual calendar year reports concerning the status of such Annuity. All provisions of the Contract and Certificate stay the same except where changed by this Endorsement. The Date of Issue of this Endorsement is the same as that of the Contract or the Certificate, as applicable. Signed for the Company at Worcester, Massachusetts. [Insert Company Name] Secretary Individual Annuity Amendment The tax qualification of the Tax-Sheltered Annuity (TSA) Contract and Certificates thereto require that: 1. The Tax-Sheltered Annuity (TSA) Contract is established for the exclusive benefit of the Participants and their Beneficiaries. Each Participant's interest is nonforfeitable. A Participant's interest in the Contract is not transferable. 2. Purchase Payments are flexible. Purchase Payments in any taxable year may not exceed the limits described in Sections 403(b), 415(c), or 402(g) of the Internal Revenue Code of 1986, as amended ("Code"), as applicable to the type of contribution being made, and taking into account such other contributions as are required to be aggregated with the Purchase payments in applying these limits. The preceding limits shall not apply to a rollover contribution or a direct transfer permitted under the Code. Purchase Payments must be in cash only. 3. "Includible Compensation" means, in the case of any employee, the amount of compensation which is received from the employer described in Code Section 403(b)(1)(A), and which is includible in gross income (computed without regard to Code Section 911) for the most recent period (ending not later than the close of the taxable year) which under Code Section 403(b)(4) may be counted as one year of service. Such term does not include any amount contributed by the employer for any annuity contact to which Code Section 403(b) applies or any other employee pre-tax salary reductions, except to the extent permitted under Code Section 403(b). 4. Except to the extent of any amounts which have been held in a 403(b) annuity contract or custodial account since December 31, 1986, the entire interest of the Participant Account must commence to be distributed to him not later than April 1 immediately following the calendar year in which he attains age 70 1/2, or retires, whichever is later. The distribution may be made to the individual either in a lump sum or in amounts to be paid over (a) the life of the Participant, or the lives of the Participant and his beneficiary, or (b) a period certain not extending beyond the life expectancy of the Participant, or the life expectancies of the Participant and his beneficiary. The entire interest of the Participant Account shall also be subject to the appropriate incidental benefit requirements of Code Sections 403(b)(10) and 401(a)(9). The life expectancy of the Participant and of a beneficiary that is the Participant's spouse shall be recalculated each year unless the Participant otherwise elects. Life expectancies shall be determined as provided in Code Section 401(a)(9). Required distributions from a TSA are not eligible for tax-free rollovers. 5. To qualify as a contract which can defer compensation under an Internal Revenue Code Section 403(b) annuity contract, the withdrawal restrictions under Internal Revenue Code Section 403(b)(11) must be met. To the extent required under Code Section 403(b)(11), withdrawals of contributions to an annuity contract which were made pursuant to a salary reduction agreement, and of earnings attributable to such contributions, may be paid only upon or after attainment of age 59 1/2, separation from service, death, total or permanent disability (as defined in Internal Revenue Code Section 72(m)(7)) or in the case of hardship (as defined in the Treasury Regulations). The hardship exception applies only to the salary reduction contributions and not to any income attributed to such contributions. The same or similar restrictions shall apply to all amounts transferred from a Code Section 403(b)(7) custodial account. There is an additional tax on early distributions from your TSA before you reach age 59 1/2. Except as otherwise provided in the Code, the tax is 10% of the taxable portion of the distribution. Exceptions to the additional tax, which are subject to legislative revisions, generally include distributions: (1) to an employee who has separated from service, if those distributions are part of a scheduled series of substantially equal periodic payments for the life of the Participant (or the joint lives of the Participant and the Participant's beneficiary) or the life expectancy of the Participant (or the joint life expectancies of the Participant and the Participant's beneficiary); (2) to an employee who has separated from service after attaining age 55; (3) a distribution which is used to pay medical expenses to the extent the expenses are deductible under Sec. 213 (determined without regard to whether the taxpayer itemizes deductions); (4) distributions after the death of the employee; (5) distributions after the disability of the employee. 6. Upon the death of the Participant, the following distribution provisions shall take effect: (a) If the Participant dies after distribution of his interest has commenced, the remaining portion of such interest will continue to be distributed at least as rapidly as under the method of distribution being used prior to the Participant's death. (b) If the Participant dies before distribution of his interest commences, the Participant's entire interest will be distributed no later than 5 years after the Participant's death. If any portion of the Participant's interest is payable to a designated Beneficiary, distributions may be made in equal installments over the life expectancy of the designated Beneficiary, commencing no later than 1 year after the Participant's death. If the designated Beneficiary is the Participant's Surviving Spouse, the Surviving Spouse may elect to treat the contract as his or her own to the extent permitted under the Code. (c) Where the survivor payee is a person other than the Participant's Spouse, an election under Option III - Joint and Survivor Life Annuity, can be made only if the present value of the Annuity payments to be paid to the Participant exceeds 50 percent of the present value of the Annuity payments to be paid to the Participant and his or her survivor. 7. The Participant will, at all times, be 100% vested in the value of the Participant Account. 8. If any benefit payable to the Participant under this Contract or Certificate constitutes an "eligible rollover distribution" within the meaning of Section 402 of the Code, the Participant may elect to have such distribution paid directly to an "eligible retirement plan" in a transaction designated under the Code as a "direct rollover." Before any eligible rollover distribution is made, the Participant will be provided a written explanation of his or her rights to make a direct rollover and the consequences of not making a direct rollover. No surrender, withdrawal, or other benefit distribution that constitutes an eligible rollover distribution will be made to the Participant under the Contract or Certificate unless the Code's requirements applicable to eligible rollover distributions have been satisfied. 9. Separate records will be maintained for the interest of each Participant. 10. The Company, as issuer of a Tax-Sheltered Annuity (TSA), shall furnish annual calendar year reports concerning the status of such Annuity. All provisions of the Contract and Certificate stay the same except where changed by this Endorsement. The Date of Issue of this Endorsement is the same as that of the Contract or the Certificate, as applicable. Signed for the Company at Worcester, Massachusetts. [Insert Company Name] Secretary EXHIBIT B EXCLUDED INVESTMENT ASSETS June 29, 1998 This letter agreement confirms and documents the agreement among the undersigned as to certain modifications to the Asset Transfer and Acquisition Agreement, dated as of December 8, 1997 (as supplemented hereby and by the letter agreements dated March 24, 1998, and May 15, 1998, the "Agreement"), entered into by and among Provident Companies, Inc., Provident Life and Accident Insurance Company, Provident National Assurance Company, The Paul Revere Life Insurance Company, The Paul Revere Variable Annuity Insurance Company, The Paul Revere Protective Life Insurance Company, and American General Corporation, American General Annuity Insurance Company (formerly Western National Life Insurance Company) ("AGAIC"), and The Variable Annuity Life Insurance Company ("VALIC"). Capitalized terms used but not otherwise defined herein are intended to have the meanings assigned to them in the Agreement. Notwithstanding anything herein to the contrary, the parties acknowledge and agree that no transaction among the insurance companies shall predate January 1, 1998. 1. Determination of Investment Assets and Cash Payments. The parties ---------------------------------------------------- agree that Section 1.3 of the Agreement shall be deleted in its entirety, and the following substituted in its place: "1.3 DETERMINATION OF INVESTMENT ASSETS AND CASH PAYMENTS. ---------------------------------------------------- (a) Schedule 1.3(A) shall be prepared as a listing of investment assets (the "Initial Seller Portfolio") included in the pool (the "Pool"), together with their market values as of January 1, 1998, as agreed to by the parties. Sellers shall segregate the assets constituting the Pool on their books and records and shall maintain records of all transactions in assets included in the Pool from time to time through the Closing Date. Pursuant to the Subadvisory Agreement, Parent shall serve as subadvisor in respect of the Pool and pursuant to such authority shall have the authority to direct the disposition of investment securities included in the Pool and to direct the purchase of investment securities for inclusion in the Pool (such purchases to be funded from Net Cash From the Business (as defined herein) then available). On each Business Day Provident will produce and deliver to Parent a good faith estimate of the Net Cash From the Business through the close of business on the preceding Business Day, which estimate will be prepared on a basis consistent with Provident's existing internal reporting systems and procedures. Provident and Parent agree that Net Cash From the Business reflected in the daily good faith estimates thereof shall be available for investment by such subadvisor on the Business Day following delivery of such estimate. (b) On the Closing Date, Sellers will deliver to Purchasers the assets then included in the Pool (the "Investment Assets"), which shall consist of (i) the Initial Seller Portfolio plus (ii) those investment ---- assets which, on and after January 1, 1998 and prior to the Closing Date, are purchased for inclusion in the Pool from Net Cash From the Business ("Pool Asset Additions") minus (iii) those investment assets in the Pool ----- (including any Pool Asset Additions) which, on and after January 1, 1998, and prior to the Closing Date, are (x) redeemed by the issuer thereof, (y) mature in accordance with their terms, or (z) sold ("Pool Asset Reductions"). (c) In addition, prior to the Closing Date, Provident and Sellers shall deliver to Parent and Purchasers an estimated reconciliation of Net Cash From the Business through the Closing Date (the "Preliminary Reconciliation") and a certification of the treasurer of Provident that all items on the Preliminary Reconciliation were estimated in good faith by Sellers and were based upon the books and records of Sellers. If (i) the Net Cash From the Business reflected on the Preliminary Reconciliation is a positive number, Sellers will pay to Purchasers cash in an amount equal to such amount; and (ii) if the Net Cash From the Business reflected on the Preliminary Reconciliation is a negative number, Purchasers will pay to Sellers at Closing cash in such amount. (d) For purposes of this Agreement, "Initial Cash Balance" shall mean an amount equal to (i) the amount of Adjusted Statutory Reserves and Other Statutory Liabilities attributable to the Insurance Contracts in force as of January 1, 1998, as determined in accordance with Applicable SAP, consistently applied, minus (ii) the aggregate market value as of ----- January 1, 1998, of the assets included in the Pool as of such date, minus ----- (iii) policy loans to contract holders under Insurance Contracts intended to be reinsured by Purchasers as of January 1, 1998, minus (iv) a receivable from Provident and Sellers equal to the index option component of reserves for those contracts described in Schedule 4.18, minus (v) the ----- Ceding Commission. (e) For purposes of this Agreement, "Net Cash From the Business" shall mean an amount equal to the sum of (i) the Initial Cash Balance plus ---- (ii) net cash proceeds received by Sellers in respect of Pool Asset Reductions plus (iii) net cash proceeds attributable to interest received ---- by Sellers after January 1, 1998 and prior to the Closing Date in respect of assets in the Pool minus (iv) cash used to fund Pool Asset Additions ----- plus (v) premiums paid and additional deposits made after January 1, 1998 ---- and prior to the Closing Date in respect of Insurance Contracts intended to be reinsured by Purchasers minus (vi) withdrawals and benefits paid after ----- January 1, 1998 and prior to the Closing Date in respect of Insurance Contracts intended to be reinsured by Purchasers plus (vii) cash proceeds ---- received by Sellers after January 1, 1998 and prior to the Closing Date from payments on policy loans to contract holders under Insurance Contracts which are intended to be reinsured by Purchasers minus (viii) cash used to ----- fund, after January 1, 1998 and prior to the Closing Date, policy loan advances to contract holders under Insurance Contracts which are intended to be reinsured by Purchasers plus (ix) cash payments received by Sellers ---- after January 1, 1998 and prior to the Closing Date, in respect of receivables relating to the Business minus (x) premium taxes, guaranty fund ----- assessments that would not be Retained Liabilities and similar charges incurred by Sellers in respect of the Business after January 1, 1998 and prior to the Closing Date minus (xi) commissions incurred after January 1, ----- 1998 and prior to the Closing Date in respect of Insurance Contracts intended to be reinsured by Purchasers (the amount of such commissions to be determined utilizing the commission schedule attached to the Reinsurance Agreements) minus (xii) other expenses of administering the Business after ----- January 1, 1998 and prior to the Closing Date (such expenses to be determined on a basis consistent with the schedule of fees for services to be rendered pursuant to the Transition Services Agreement). -2- Cross-references to the subparagraphs of Section 1.3 of the Agreement shall be changed, as appropriate, to reflect the foregoing restatement. 2. Ceding Commission. The parties agree that Section 1.5(a) of the Agreement ----------------- shall be deleted in its entirety, and the following substituted in its place: "(a) The ceding commission is $38.6 million (the "Ceding Commission")." The parties agree that Section 1.5(c) of the Agreement shall be deleted in its entirety, and the following substituted in its place: "(c) If (i) the amount of Final Annuity Reserves shown on the Final Reserves Statement exceeds 97.45% of the amount of Transferred Annuity Reserves, Parent shall pay to Provident an amount in cash equal to the percentage increase in such reserves multiplied by $58 million, and if (ii) the amount of Final Annuity Reserves shown on the Final Reserves Statement is less than 97.45% of the amount of Transferred Annuity Reserves, Provident shall pay to Parent an amount in cash equal to the percentage decrease in such reserves multiplied by $58 million. In no event shall the payment required by the preceding sentence exceed $11.6 million. Any such payment shall be made within ten Business Days of the date of resolution of all disputed items (or, if there is no dispute, after the parties reach agreement on the amount of Final Annuity Reserves included in the Final Reserves Statement). Any transfer of cash required under this Section 1.5 shall be made within ten Business Days of the date of the delivery of the Final Reconciliation to Purchasers, together with interest thereon from and including November 30, 1997 to but not including the date of such transfer, computed at an Annual Rate equal to the 90-day Treasury Rate in effect on November 30, 1997." 3. Determination of Holding Company Investment Assets and Cash Payments. The -------------------------------------------------------------------- parties agree that a new Section 1.7 of the Agreement shall be added, as follows: "1.7 DETERMINATION OF HOLDING COMPANY INVESTMENT ASSETS AND CASH ----------------------------------------------------------- PAYMENTS. -------- (a) Schedule 1.7(A) shall be prepared as a listing of investment assets (the "Preliminary Investment Assets") which Provident and Parent have agreed may be included in the Initial Holding Company Portfolio (as defined herein), together with an estimate of the Initial Cash Position (as defined herein) (such estimate, the "Estimated Initial Cash Position"). Provident has appointed Morgan Stanley, Dean Witter, Discover & Co. and Parent has appointed Bear, Stearns & Co., Inc.. and the parties have jointly appointed Credit Suisse First Boston Corporation (each of Morgan Stanley, Dean Witter, Discover & Co., Bear, Stearns & Co., Inc. and Credit Suisse First Boston Corporation being referred to individually as a "Valuer" and together as the "Valuers"). Provident and Parent shall each be responsible for the cost, if any, of the preparation of the Valuations produced by their respective Valuers and shall be jointly responsible for the cost, if any, of the Valuation prepared by Credit Suisse First Boston Corporation. Each Valuer shall produce a valuation of the Preliminary Investment Assets, based on the midpoint of the bid-ask spread, as of 4:00 p.m., New York City time, on December 8, 1997 (each such -3- valuation referred to as a "Valuation" and together as the "Valuations"). The "Agreed Value" of each Preliminary Investment Asset shall be (i) the middle Valuation thereof plus (ii) the amount of investment income accrued on such Preliminary Investment Asset as of November 30, 1997. (b) As soon as practicable after the date of this Agreement, Provident shall deliver to Parent a statement ("Transferred Reserves Statement") setting forth the determination of the amount of Adjusted Statutory Reserves and Other Statutory Liabilities attributable to the Insurance Contracts in force as of November 30, 1997 (the "Transferred Reserves"), which amounts shall be determined in accordance with Applicable SAP consistently applied. Parent shall have the opportunity to review the Transferred Reserves Statement and Provident shall make available its personnel and relevant work papers as reasonably requested by Parent in connection with such review, for a period not to exceed 15 Business Days following delivery of the Transferred Reserves Statement. Any changes in the Transferred Reserves Statement that are agreed to by Parent and Provident within such 15-Business-Day period shall be incorporated into a final Transferred Reserves Statement (the "Final Transferred Reserves Statement"). If Parent and Provident are unable to agree with respect to the amount of the Transferred Reserves included in the Final Transferred Reserves Statement, they shall submit the dispute to an independent actuarial firm jointly selected by them (or selected by their respective actuarial advisors) (the "Independent Actuary"), whose determination of the amount of the Transferred Reserves shall be final and binding and reflected in the Final Transferred Reserves Statement; provided, that such amount shall be within the range of dollar amounts proposed by Parent and Provident, respectively. (c) Within ten Business Days following determination of the Transferred Reserves, Provident and Parent shall jointly agree upon a portfolio of assets from among the Preliminary Investment Assets (the "Initial Holding Company Portfolio") having an aggregate Agreed Value which, together with the Initial Cash Position, shall equal the sum of the Transferred Reserves minus $58 million minus a receivable from Provident ----- ----- equal to the index option component of reserves for those contracts described in Schedule 4.18 minus policy loans to contract holders under ----- Insurance Contracts intended to be reinsured as of November 30, 1997 (such sum, the "Net Asset Value"). In the event Provident and Parent are unable to produce an Initial Holding Company Portfolio having an aggregate Agreed Value equal to the Net Asset Value without subdivision of individual assets, the Initial Holding Company Portfolio shall consist of whole assets and the difference between the Net Asset Value and the aggregate Agreed Value of the assets composing the Initial Holding Company Portfolio (whether such difference is a positive or a negative number) shall constitute the "Initial Cash Position." The difference, if any, between the Initial Cash Position and the Estimated Initial Cash Position shall be referred to as the "Initial Cash Position Difference." Provident shall segregate the assets constituting the Initial Holding Company Portfolio on its books and records (the "Holding Company Pool") and shall maintain records of all transactions in assets included in the Holding Company Pool from time to time through December 31, 1997. Pursuant to the Subadvisory Agreement, Parent shall serve as subadvisor in respect of the Holding Company Pool through December 31, 1997, and pursuant to such authority shall have the authority to direct the disposition of investment securities included in the Holding -4- Company Pool and to direct the purchase of investment securities for inclusion in the Holding Company Pool (such purchases to be funded from Net Cash Balance (as defined herein) then available, which shall include on December 8, 1997, an amount equal to the Estimated Initial Cash Position, together with interest thereon from November 30, 1997 to, but not including, December 8, 1997, computed at an Annual Rate equal to the 90-day Treasury Rate in effect on November 30, 1997). On each Business Day Provident will produce and deliver to Parent a good faith estimate of the Net Cash Balance through the close of business on the preceding Business Day, which estimate will be prepared on a basis consistent with Provident's existing internal reporting systems and procedures. Provident and Parent agree that (i) the Estimated Initial Cash Position shall be available for investment by the sub-advisor under the Subadvisory Agreement as of 4:00 p.m., New York City time, on December 8, 1997, (ii) the Initial Cash Position Difference (if a positive number) shall be available for investment by such subadvisor on the Business Day following its determination, and (iii) Net Cash Balance reflected in the daily good faith estimates thereof shall be available for investment by such subadvisor on the Business Day following delivery of such estimate. (d) For purposes of this Agreement, "Net Cash Balance" shall mean an amount equal to the sum of (i) the Estimated Initial Cash Position (including interest thereon from November 30, 1997 to but not including December 8, 1997, computed at an Annual Rate equal to the 90-day Treasury Rate in effect on November 30, 1997) plus the Initial Cash Position ---- Difference (including interest thereon from November 30, 1997 to but not including the date on which the Initial Cash Position Difference is determined, computed at an Annual Rate equal to the 90-day Treasury Rate in effect on November 30, 1997) minus (ii) cash used to fund those investment ----- assets which, on and after November 30, 1997 and on or prior to December 31, 1997, are purchased for inclusion in the Holding Company Pool from Net Cash Balance ("Holding Company Pool Asset Additions") plus (iii) net cash ---- proceeds received by Provident in respect of those investment assets in the Holding Company Pool (including any Holding Company Pool Asset Additions) which, after November 30, 1997, and on or prior to December 31, 1997, are (x) redeemed by the issuer thereof, (y) mature in accordance with their terms, or (z) sold ("Holding Company Pool Asset Reductions") plus (iv) net ---- cash proceeds attributable to interest received by Provident after November 30, 1997 and on or prior to December 31, 1997 in respect of assets in the Holding Company Pool plus (v) premiums paid and additional deposits made ---- after November 30, 1997 and on or prior to December 31, 1997 in respect of Insurance Contracts intended to be reinsured minus (vi) withdrawals and ----- benefits paid after November 30, 1997 and on or prior to December 31, 1997, in respect of Insurance Contracts intended to be reinsured plus (vii) cash ---- proceeds received by Provident after November 30, 1997 and on or prior to December 31, 1997, from payments on policy loans to contract holders under Insurance Contracts which are intended to be reinsured minus (viii) cash ----- used to fund, after November 30, 1997 and on or prior to December 31, 1997, policy loan advances to contract holders under Insurance Contracts which are intended to be reinsured plus (ix) cash payments received by Provident ---- after November 30, 1997 and on or prior to December 31, 1997, in respect of receivables relating to the Business minus (x) premium taxes, guaranty fund ----- assessments that would not be Retained Liabilities and similar charges incurred by Provident in respect of the Business after November 30, 1997 and on or prior to -5- December 31, 1997 minus (xi) commissions incurred after November 30, 1997 ----- and on or prior to December 31, 1997 in respect of Insurance Contracts intended to be reinsured (the amount of such commissions to be determined utilizing the commission schedule attached to the Reinsurance Agreements) minus (xii) other expenses of administering the Business after November 30, ----- 1997 and on or prior to December 31, 1997 (such expenses to be determined on a basis consistent with the schedule of fees for services to be rendered pursuant to the Transition Services Agreement). (e) Provident shall, on or before the date that is 60 days after the Closing Date, prepare a proposed reconciliation (the "Holding Company Reconciliation") of the Net Cash Balance and the unrealized gains in the Holding Company Portfolio as of December 31, 1997 (the "Unrealized Gains") and a certification of the treasurer of Provident that all items on the Holding Company Reconciliation were determined in good faith by Provident and were based upon the books and records of Provident. Promptly after its preparation, Provident shall deliver copies of the Holding Company Reconciliation to Parent. Parent shall have the right to review the Holding Company Reconciliation and comment thereon for a period of 45 days after receipt thereof. Provident agrees that Parent and its accountants may have access to the accounting records of Provident relating to the preparation of the Holding Company Reconciliation for the purpose of conducting their review. Any changes in the Holding Company Reconciliation that are agreed to by Parent and Provident within such 45-day-period shall be incorporated into a final reconciliation of Net Cash Balance (the "Final Holding Company Reconciliation"). In the event that Purchasers and Provident are unable to agree on the manner in which any item or items should be treated in the preparation of the Final Holding Company Reconciliation within such 45-day period, separate written reports of such item or items shall be made in concise form and shall be referred to such independent accounting firm as Parent and Provident shall mutually designate (the firm making such determination is referred to herein as the "Third Party Accountant"). The Third Party Accountant shall determine as promptly as practicable the manner in which such item or items shall be treated on the Final Holding Company Reconciliation; provided, however, that the dollar amount of each item in dispute shall be determined within the range of dollar amounts proposed by Provident and Parent, respectively. The determinations by the Third Party Accountant as to the items in dispute shall be in writing and shall be binding and conclusive on the parties and shall be so reflected in the Final Holding Company Reconciliation. The fees, costs and expenses of retaining the Third Party Accountant shall be shared equally by the parties. Following the resolution of all disputed items (or, if there is no dispute, promptly after the parties reach agreement on the Final Holding Company Reconciliation), Provident shall prepare the Final Holding Company Reconciliation and shall deliver copies of such Final Holding Company Reconciliation and such calculation to Parent. (f) In the event that the Initial Cash Balance exceeds the sum of Net Cash Balance plus $19.4 million minus Unrealized Gains reflected on the ---- ----- Final Holding Company Reconciliation, Parent shall transfer to Provident additional cash equal to the amount of such difference. In the event that the sum of Net Cash Balance plus $19.4 million minus Unrealized Gains ---- ----- reflected on the Final Holding Company Reconciliation exceeds the Initial Cash Balance, Provident shall transfer to Parent additional cash equal to the amount of such difference. Any transfer of cash required under this Section 1.7 shall -6- be made within ten Business Days of the date of the delivery of the Final Holding Company Reconciliation to Parent, together with interest thereon from and including the Closing Date to but not including the date of such transfer, computed at an Annual Rate equal to the 90-day Treasury Rate in effect on the Closing Date." 4. Reinsurance Agreements (PNAC and PRL). In connection with the AGAIC ------------------------------------- Closing, each of PNAC and PRL entered into a Reinsurance Agreement, dated as of April 30, 1998, with AGAIC. The parties have agreed that such Reinsurance Agreements shall be cancelled and superceded by the Reinsurance Agreements executed and delivered by PNAC, PRL and VALIC at the VALIC Closing, effective as of April 30, 1998. All of the Insurance Contracts covered by such Reinsurance Agreements shall constitute VALIC Contracts. 5. Reinsurance Agreements (PLA, PRV, and PRPL). In connection with the AGAIC ---------------------- Closing, each of PLA, PRV, and PRPL entered into a Reinsurance Agreement, dated as of April 30, 1998, with AGAIC. The parties have agreed that such Reinsurance Agreements shall be cancelled and superceded by the Reinsurance Agreements executed and delivered by PLA, PRV, PRPL, and AGAIC at the VALIC Closing. 6. New York Business of Sellers. With respect to the VALIC Contracts issued by ---------------------------- PNAC and PRL, the parties have agreed as follows: (a) Certain Additional Financial Information. The following language ---------------------------------------- shall be added as the last sentence of SECTION 2.17 of the Agreement: "Purchasers acknowledge that Sellers do not guaranty the profitability of the Reinsured Contracts." (b) Crediting Rates. The following language shall be added as the last --------------- two sentences of SECTION 4.16 of the Agreement: "Notwithstanding the foregoing, with respect to the VALIC Contracts to which PNAC and PRL are parties, Sellers shall set all non-guaranteed elements of the Reinsured Contracts from and after the Effective Time (as defined in the respective Reinsurance Agreements), taking into account the recommendations of the Purchasers with respect thereto." (c) Ancillary Documents. For purposes of the VALIC Closing, the forms ------------------- of Administrative Services Agreements and Reinsurance Agreements to which PNAC and PRL are parties, and the form of Transition Services Agreement, shall be modified to reflect the changes agreed to by the New York Insurance Department. 7. Marketing Agreements. The parties agree that the execution of certain -------------------- Marketing Agreements contemplated by Section 4.10 of the Agreement are hereby waived as closing conditions pursuant to Sections 1.6, 5.1, 6.1, and 9.8 of the Agreement. The terms of any marketing agreements to be entered into by Provident, Sellers, and Purchasers may be finalized and executed by the parties post-closing. The parties acknowledge that they have no obligation to execute such marketing agreements on or before June 30, 1998. -7- 8. 403(b) Endorsement. The parties acknowledge that (i) PNAC and PLA may have ------------------ issued Qualified Contracts in connection with plans intended to qualify for tax treatment under section 403(b) of the Code; and (ii) upon review of such contracts, the forms of Endorsement attached as Exhibit A to the letter agreement dated May 15, 1998, shall be modified and used to the extent necessary to bring such Qualified Contracts into compliance with section 403(b) of the Code. The forms of any such endorsements shall be prepared by Purchasers and shall be subject to prior approval by Sellers, which approval shall not be unreasonably withheld. 9. Miscellaneous. Any references to the Agreement in the Reinsurance ------------- Agreements, the Administrative Services Agreements, or the Transition Services Agreement delivered at the AGAIC Closing shall be deemed to be modified, as necessary, to incorporate the changes made by this letter agreement. Section 9.1 of the Agreement is deleted in its entirety and shall be replaced by the language set forth in Schedule 9.1 hereto. In addition, (i) references to ------------ "Closing" shall refer to the AGAIC Closing or the VALIC Closing, as appropriate, and (ii) references to "Closing Date" shall refer to the AGAIC Closing Date or the VALIC Closing Date, as appropriate. [Signatures on Following Pages] -8- IN WITNESS WHEREOF, the undersigned have executed this letter agreement as of the date above. PROVIDENT COMPANIES, INC. /s/ Henry T. Hardin III -------------------------- Henry T. Hardin III Vice President and Assistant General Counsel PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY /s/ Henry T. Hardin III -------------------------- Henry T. Hardin III Vice President and Assistant General Counsel PROVIDENT NATIONAL ASSURANCE COMPANY /s/ Henry T. Hardin III -------------------------- Henry T. Hardin III Vice President and Assistant General Counsel THE PAUL REVERE LIFE INSURANCE COMPANY /s/ Henry T. Hardin III -------------------------- Henry T. Hardin III Vice President and Assistant General Counsel THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY /s/ Henry T. Hardin III -------------------------- Henry T. Hardin III Vice President and Assistant General Counsel -9- THE PAUL REVERE PROTECTIVE LIFE INSURANCE COMPANY /s/ Henry T. Hardin III -------------------------- Henry T. Hardin III Vice President and Assistant General Counsel AMERICAN GENERAL CORPORATION /s/ Nicholas R. Rasmussen ---------------------------- Name: Nicholas R. Rasmussen Title: Senior Vice President-Corporate Development AMERICAN GENERAL ANNUITY INSURANCE COMPANY (formerly Western National Life Insurance Company) /s/ Michael J. Akers ----------------------- Name: Michael J. Akers Title: Executive Vice President THE VARIABLE ANNUITY LIFE INSURANCE COMPANY /s/ Craig R. Rodby --------------------- Name: Craig R. Rodby Title: Vice Chairman -10- SCHEDULE 9.1 ------------ 9.1 DEFINITIONS. The following terms shall have the respective meanings set ----------- forth below throughout this Agreement: "1940 ACT" means the Investment Company Act of 1940, as amended, and all rules and regulations thereunder. "90-DAY TREASURY RATE" means the annual yield rate, on the date to which such 90-Day Treasury Rate relates, of actively traded U.S. Treasury securities having a remaining duration to maturity of three months, as such rate is published under "Treasury Constant Maturities" in Federal Reserve Statistical Release H.15(519). "ADJUSTED STATUTORY RESERVES AND OTHER STATUTORY LIABILITIES" at any time means statutory reserves and other statutory liabilities of the Business appropriately includable in line items 1 through 25, except lines 11.4 and 24.1, of the Liabilities, Surplus and Other Funds page of the NAIC Annual Statement Blank (1996 format), but excluding from such statutory reserves and other statutory liabilities the statutory liabilities included within Retained Liabilities. "ADMINISTRATIVE SERVICES AGREEMENTS" means the Administrative Services Agreements between each Seller and Purchaser, in form and substance reasonably acceptable to the parties, which shall set forth (i) the terms and conditions upon which such Purchaser shall provide certain administrative services to such Seller with respect to the Reinsured Contracts, and (ii) the consideration to be paid therefor. "ADVERTISEMENT" means any material designed to create public interest in insurance policies, annuity contracts and variable annuity contracts or in an insurer, or in an insurance producer, or to induce the public to purchase, increase, modify, reinstate, borrow on, surrender, replace or retain such a policy or contract. "AFFILIATE" means, with respect to any Person, at the time in question, any other Person controlling, controlled by or under common control with such Person. "AGREED VALUE" shall have the meaning set forth in Section 1.7(a). "ALLOCABLE AMOUNT" shall have the meaning set forth in Section 4.12(a). "ANCILLARY AGREEMENTS" means the Reinsurance Agreements, the Separate Account Transfer Agreements, the Administrative Services Agreements, the Separate Account Administration Agreements, the General Assignment and Assumption Agreements, the Bills of Sale, the Transition Services Agreement, the Marketing Agreements, and the License Agreement. "ANNUAL RATE" means the value of "r" in the expression (1 + r)n/365 - 1, where "n" is equal to the number of days for which interest is to be computed and the result of the expression is the interest factor for computing the applicable interest amounts. "ANTITRUST DIVISION" shall have the meaning set forth in Section 4.6. "APPLICABLE SAP" means Tennessee SAP, in the case of PLA and PNAC, Massachusetts SAP, in the case of PRL and PRV and Delaware SAP, in the case of PRPL. "ASSIGNED AND ASSUMED CONTRACTS" means those contracts and other agreements material to the operation of the Business identified on Schedule 9.1(A). "ASSUMED LIABILITIES" shall mean all (i) liabilities and obligations first to be paid or performed after the Closing Date under or pursuant to the Assigned and Assumed Contracts, if any, (ii) liabilities for amounts payable after November 30, 1997 for returns or refunds of Premiums in respect of Insurance Contracts intended to be reinsured by Purchasers, and (iii) liabilities for guaranty fund assessments and similar charges imposed with respect to the Insurance Contracts based on dates of insolvency after November 30, 1997. "BILL OF SALE" means the Bill of Sale which is substantially in the form of Exhibit 2. "BOOKS AND RECORDS" means the originals or copies of all customer lists, policy information, Insurance Contract forms and rating plans, disclosure and other documents and filings required under applicable securities laws, claim records, sales records, underwriting records, financial records, tax records and compliance records in the possession or control of Sellers and relating principally to the operation of the Business, including any database, magnetic or optical media (to the extent not subject to licensing restrictions) and any other form of recorded, computer generated or stored information or process, but excluding any such records that are subject to the attorney-client privilege. "BUSINESS DAY" means any day other than a Saturday, Sunday, a day on which banking institutions in the State of New York are permitted or obligated by law to be closed or a day on which the New York Stock Exchange is closed for trading. "BUSINESS" means the business of administering the Insurance Contracts, as currently conducted by Sellers. "CEDING COMMISSION" shall have the meaning provided in Section 1.5(a). "CLAIMS NOTICE" shall have the meaning set forth in Section 7.3. "CLOSING DATE" means (i) if the last of the conditions to Closing set forth in this Agreement is satisfied or waived in writing prior to the 15th day of a given month, then the Closing Date shall be the first day of the month following the month in which the last of the conditions was so satisfied or waived in writing, or (ii) if such satisfaction or waiver in writing occurs or is granted after the 15th day of any given month, then the Closing Date shall be the first day of the second month following the month in which the last of the closing conditions is so satisfied or waived; provided, however, that if such date is not a Business Day, the Closing Date shall be the immediately succeeding Business Day; and provided further, that the Closing may occur on such other date as the parties may agree to in writing, provided however, that the Closing Date shall not be later than the date specified in Section 8.1(e). -2- "CLOSING" means the closing of the transactions contemplated by this Agreement. "CODE" means the Internal Revenue Code of 1986, as amended. Any citation to a provision of the Code includes a citation to any successor provision. "COMMISSION" means the United States Securities and Exchange Commission. "CONSENT" shall mean any consent, approval, authorization, clearance, exemption, waiver, or similar affirmation by any Person pursuant to any contract or any applicable Law, Order, or Permit. "DELAWARE SAP" means the statutory accounting principles and practices prescribed or permitted by the Insurance Department of the State of Delaware as applied on a basis consistent with those utilized in the preparation of 1996 Annual Statement of PRPL. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and all final and temporary regulations and interpretive Bulletins and other rulings of general applicability thereunder. "ESTIMATED INITIAL CASH POSITION" shall have the meaning set forth in Section 1.7(a). "FINAL ANNUITY RESERVES" shall have the meaning set forth in Section 1.5(b). "FINAL HOLDING COMPANY RECONCILIATION" shall have the meaning set forth in Section 1.7(e). "FINAL RECONCILIATION" shall have the meaning set forth in Section 1.4(a). "FINAL RESERVES STATEMENT" shall have the meaning set forth in Section 1.5(b). "FINAL TRANSFERRED RESERVES STATEMENT" shall have the meaning set forth in Section 1.7(b). "FTC" shall have the meaning set forth in Section 4.6. "GAAP" means United States generally accepted accounting principles as in effect from time to time. "GENERAL ACCOUNT RESERVES" means the general account statutory reserves of Seller (without regard to the transactions contemplated by the Reinsurance Agreements) with respect to the Insurance Contracts determined pursuant to Applicable SAP, as such reserves would have been included in lines 1, 2, 3, 4.1, 4.2, 5, 6, 7.1, 7.2, 7.3, 8, 9, 10.1, 10.2, 10.3, 11.1, 11.2 and 11.3 of the Liabilities, Surplus and Other Funds page of the NAIC Annual Statement Blank (1996 format), excluding, however, any general account statutory reserve adjustments in relation to Separate Account Liabilities. "GENERAL ASSIGNMENT AND ASSUMPTION AGREEMENT" means the General Assignment and Assumption Agreement between each Seller and Purchasers which is substantially in the form of Exhibit 3. -3- "HOLDING COMPANY POOL" shall have the meaning set forth in Section 1.7(c). "HOLDING COMPANY POOL ASSET ADDITIONS" shall have the meaning set forth in Section 1.7(d). "HOLDING COMPANY POOL ASSET REDUCTIONS" shall have the meaning set forth in Section 1.7(d). "HOLDING COMPANY RECONCILIATION" shall have the meaning set forth in Section 1.7(e). "HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder. "INCOME TAX REGULATIONS" means the temporary or final regulations issued under the Code. Any citation to a provision of the Income Tax Regulations includes a reference to any successor regulatory provision. "INDEMNIFIED PARTY" shall have the meaning set forth in Section 7.3. "INDEMNIFYING PARTY" shall have the meaning set forth in Section 7.3. "INDEPENDENT ACTUARY" shall have the meaning set forth in Section 1.7(b). "INITIAL CASH BALANCE" shall have the meaning set forth in Section 1.3(d). "INITIAL CASH POSITION" shall have the meaning set forth in Section 1.7(c). "INITIAL CASH POSITION DIFFERENCE" shall have the meaning set forth in Section 1.7(c). "INITIAL HOLDING COMPANY PORTFOLIO" shall have the meaning set forth in Section 1.7(c). "INITIAL SELLER PORTFOLIO" shall have the meaning set forth in Section 1.3(a). "INSURANCE CONTRACTS" means those contracts of insurance and annuities, and riders thereto and renewals, exchanges and extensions thereof, of Sellers described on Schedule 9.1(C) and new policies of like type issued after the date of this Agreement but before the Closing Date. "INVESTMENT ASSETS" shall have the meaning set forth in Section 1.3(b). "IRS" means the United States Internal Revenue Service. "KNOWLEDGE" shall be interpreted for the purposes of this Agreement as follows: (i) a matter will be deemed to be within the "knowledge of Sellers" if (A) such matter is as of the date of the execution of this Agreement actually known to any of the Seller Key People, or (B) in light of the positions held by the Seller Key People, but taking into account that the due diligence undertaken by the Seller Key People prior to the execution of this Agreement was limited to reviewing materials accessible to the Seller Key People without informing other individuals of the transactions contemplated by this Agreement, the matter would reasonably be expected to be known by the Seller Key People; and (ii) a matter will be -4- deemed to be within the "knowledge of Purchasers" if it is actually known to any of the Purchaser Key People as of the date of the execution of this Agreement after reasonable inquiry. "LAW" means any domestic or foreign federal, state or local code, law, statute, ordinance, regulation, rule, reporting or licensing requirement, policy, guideline, administrative interpretation or other requirement (including those of the Commission, NASD, NAIC and any state) applicable to the parties hereto, or any of their respective Affiliates, properties, assets, officers, directors, employees or agents, as the case may be. "LICENSE AGREEMENT" means the software license agreement to be entered into on or prior to the Closing Date among Sellers and Purchasers, in form and substance reasonably acceptable to the parties, which shall set forth (i) the terms and conditions upon which Sellers will grant a license to use the software described in Schedule 9.1(B), and (ii) the consideration to be paid therefor. "LOSS" and "LOSSES" shall mean actions, claims, losses, liabilities, damages, deficiencies, costs, expenses (including reasonable attorneys' fees and expenses), interest, taxes and penalties. "MARKETING AGREEMENTS" means the marketing agreements to be entered into by Parent, each Purchaser, Provident and each Seller pursuant to Section 4.10. "MASSACHUSETTS SAP" means the statutory accounting principles and practices prescribed or permitted by the Insurance Department of the Commonwealth of Massachusetts as applied on a basis consistent with those utilized in the preparation of 1996 Annual Statements of PRL and PRV. "MATERIAL" shall have the following meaning: A matter will be deemed to be "material" in connection with any provision of this Agreement if such matter would be considered significant by a reasonable acquiror of the Business in the context of the particular provision in which the word "material" appears. "NAIC" means the National Association of Insurance Commissioners. "NASD" shall mean the National Association of Securities Dealers, Inc., including its Subsidiary, NASD Regulation, Inc. "NET ASSET VALUE" shall have the meaning set forth in Section 1.7(c). "NET CASH BALANCE" shall have the meaning set forth in Section 1.7(d). "NET CASH FROM THE BUSINESS" shall have the meaning set forth in Section 1.3(e). "ORDER" shall mean any administrative decision or award, decree, injunction, judgment, order, quasi-judicial decision or award, ruling, or writ of any federal, state, local or foreign or other court, arbitrator, mediator, tribunal, or other governmental or regulatory agency or authority. -5- "PARENT" shall have the meaning set forth in the first paragraph of this Agreement. "PERMITS" means all licenses, permits, orders, approvals, registrations, authorizations, qualifications and filings with and under all federal, state, local or foreign laws or governmental or regulatory bodies. "PERSON" means any individual, corporation, partnership, firm, joint venture, association, joint-stock company, trust, unincorporated organization, governmental, judicial or regulatory body, business unit (including, but not limited to, the Business), division or other entity. "PLA" shall have the meaning set forth in the first paragraph of this Agreement. "PNAC" shall have the meaning set forth in the first paragraph of this Agreement. "POOL ASSET ADDITIONS" shall have the meaning set forth in Section 1.3(b). "POOL ASSET REDUCTIONS" shall have the meaning set forth in Section 1.3(b). "POOL" shall have the meaning set forth in Section 1.3(a). "POST-CLOSING CONTRACTS" shall have the meaning set forth in Section 4.15. "PRELIMINARY INVESTMENT ASSETS" shall have the meaning set forth in Section 1.7(a). "PRELIMINARY RECONCILIATION" shall have the meaning set forth in Section 1.3(c). "PREMIUMS" means premiums and annuity considerations, deposits and similar receipts with respect to the Insurance Contracts. "PRL" shall have the meaning set forth in the first paragraph of this Agreement. "PROVIDENT" shall have the meaning set forth in the first paragraph of this Agreement. "PRPL" shall have the meaning set forth in the first paragraph of this Agreement. "PRV" shall have the meaning set forth in the first paragraph of this Agreement. "PURCHASER INDEMNITEES" shall have the meaning set forth in Section 7.2(a). "PURCHASER KEY PEOPLE" means the individuals set forth in Schedule 9.1(D). "PURCHASER MATERIAL ADVERSE EFFECT" shall mean an event, change or occurrence which, individually or together with any other event, change or occurrence, has a material adverse impact on the ability of Parent or either Purchaser to perform its obligations under this Agreement or any Ancillary Agreement or to consummate the transactions contemplated hereby and thereby. "PURCHASER" shall have the meaning set forth in the first paragraph of this Agreement. -6- "QUALIFIED CONTRACT" means an Insurance Contract issued in connection with a plan intended to qualify for tax treatment under section 401(a), 403(a), 403(b), 408 or 457 of the Code. "RECONCILIATION" shall have the meaning set forth in Section 1.4(a). "REINSURANCE AGREEMENTS" means the Reinsurance Agreements between each Seller and each Purchaser, substantially in the form of Exhibit 1, which set forth (i) the terms and conditions upon which certain Adjusted Statutory Reserves and Other Statutory Liabilities of such Seller will be reinsured by Purchasers, and (ii) the consideration to be paid therefor. "REPLACEMENT TRANSACTION" means a transaction in which a new annuity contract or variable annuity contract is to be purchased by a prospective insured and the proposing producer should know that one or more existing annuity contracts or variable annuity contracts is to be lapsed, forfeited, surrendered, reduced in value or pledged as collateral for greater than 25% of the loan value set forth in the policy. "RESERVES STATEMENT" shall have the meaning set forth in Section 1.5(b). "RETAINED LIABILITIES" means the following: (i) all liabilities of the Business (other than the Adjusted Statutory Reserves and Other Statutory Liabilities and obligations under contracts and agreements) that have, as of November 30, 1997, either (without duplication) (x) been accrued by a Seller on such Seller's books prepared in accordance with Applicable SAP (to the extent of the amount of such accrual) or (y) been asserted by a third party claimant in a writing received by a Seller or any of its Affiliates prior to November 30, 1997; (ii) notwithstanding anything to the contrary contained in this Agreement, any liability for compensatory, consequential, exemplary, punitive or similar damages or other loss, or any fines or other statutory penalties, which results from (i) any claim, or (ii) any action relating to (x) any alleged or actual act, error or omission by any Seller or any of their Affiliates, agents or representatives, prior to the Closing Date, whether intentional or otherwise, or (y) any reckless conduct or bad faith by any Seller or any of their Affiliates, agents or representatives, in connection with the handling of any claim under any of the Insurance Contracts (including, but not limited to, liability arising from failure by the Seller or any of its Affiliates, agents or representatives, to settle within the limit of any policy, or by reason of alleged or actual negligence or bad faith of the Seller or any of its Affiliates, agents or representatives, in rejecting an offer of settlement or in the preparation of defense or in the trial of any action against an owner, insured or beneficiary of the Seller or any of its Affiliates, agents or representatives, or in the preparation or prosecution of an appeal consequent upon such action) or in connection with the marketing, sale, issuance, delivery, cancellation or administration of any of the Insurance Contracts (including, but not limited to, (s) failure to comply with applicable laws regulating Advertisements, requiring mandatory disclosure of policy information, requiring employment of standards to determine if the purchase of a policy or contract is suitable for an applicant, prohibiting the use of unfair methods of competition and deceptive acts or practices and regulating -7- replacement transactions, and (t) liability arising from claims relating to Advertisements, errors or omissions relating to policy information disclosure, failure to employ standards to determine if the purchase of a policy or contract is suitable for an applicant, engaging in unfair methods of competition or deceptive acts or practices and Replacement Transactions (other than obligations to pay benefits or other amounts or to take any other actions specifically provided for under such Insurance Contracts as originally issued and subsequently amended or supplemented prior to November 30, 1997)). For the avoidance of doubt, the foregoing would include any claims related to "market conduct" or other sales practices of any Seller, Provident, or any of their Affiliates, employees, advisers or agents; (iii) any liability or loss incurred or suffered as a result of any claim by any present or former employee, agent or broker of a Seller or any of its Affiliates who performed or performs services in the Business, that (x) relates to the employment, agency or brokerage relationship of such present or former employee, agent or broker with such Seller or any of its Affiliates, and (y) arose out of actions, events or omissions that occurred (or, in the case of omissions, failed to occur) prior to the Closing Date; (iv) Adjusted Statutory Reserves and Other Statutory Liabilities and Separate Account Liabilities (subject to the obligations of Purchasers under the Reinsurance Agreements and the Separate Account Transfer Agreements); (v) pension and other post-employment liabilities for retired employees; (vi) liabilities for Taxes of Seller; (vii) obligations under contracts of a Seller not assigned to a Purchaser; (viii) any liability secured by a security interest in any asset not transferred to a Purchaser; (ix) liabilities for amounts payable prior to November 30, 1997 for returns or refunds of Premiums; (x) liabilities for commission payments or other fees or compensation (including, without limitation, persistency bonuses), payable with respect to the Insurance Contracts to or for the benefit of brokers and service providers; (xi) liabilities for guaranty fund assessments and similar charges imposed with respect to the Insurance Contracts based on dates of insolvency prior to November 30, 1997; (xii) liability for reinsurance in unauthorized companies; and (xiii) liabilities specifically excluded in this Agreement from those being assumed by Purchasers. -8- "SECURITIES ACT" means the Securities Act of 1933, as amended, and all rules and regulations thereunder. "SELLER INDEMNITEES" shall have the meaning set forth in Section 7.2(b). "SELLER KEY PEOPLE" means the individuals set forth in Schedule 9.1(E). "SELLER MATERIAL ADVERSE EFFECT" shall mean an event, change or occurrence which, individually or together with any other event, change or occurrence, has a material adverse impact on (i) the Business or the Transferred Assets (taken as a whole) or (ii) the ability of Provident or any Seller to perform their respective obligations under this Agreement or any Ancillary Agreement or to consummate the transactions contemplated hereby and thereby. "SELLER PARTIES" means Provident and Sellers. "SELLER SEPARATE ACCOUNTS" means the separate accounts of PNAC and the separate accounts of PRV, in each case identified on Schedule 9.1(F). "SELLER" and "SELLERS" shall have the meaning set forth in the first paragraph of this Agreement. "SEPARATE ACCOUNT ADMINISTRATION AGREEMENTS" means the Separate Account Administration Agreements to be entered into between Purchasers and each of PNAC and PRV, in form and substance reasonably acceptable to the parties, which shall set forth (i) the administrative and other services, including investment management services, to be provided pending transfer of the Seller Separate Accounts to Purchasers, and (ii) the consideration to be paid therefor. "SEPARATE ACCOUNT LIABILITIES" means those liabilities that are reflected in the Seller Separate Accounts. "SEPARATE ACCOUNT TRANSFER AGREEMENTS" means the Transfer and Assumption Reinsurance Agreements to be entered into between Purchasers and each of PNAC and PRV, in form and substance reasonably acceptable to the parties, which shall set forth (i) the terms and conditions upon which certain Separate Account Liabilities of such Seller will be assumed by a Purchaser, include the receipt of all necessary governmental and Seller Separate Account contract holder approvals for the transfer of the Seller Separate Accounts to such Purchaser, the election of new members of the Seller Separate Accounts' Boards of Managers, and the approval of new Seller Separate Account investment advisory agreements, and (ii) the consideration to be paid therefor. "SUBSIDIARY" means, with respect to any Person on a given date (i) any other Person of which a majority of the voting power of the equity securities or equity interests is owned directly or indirectly by such Person and (ii) any other Person the accounts of which, by virtue of an ownership interest in it by such Person would be consolidated, in accordance with GAAP, with those of such Person in its financial statements as of the applicable date. "TAXES" (or "TAX" as the context may require) means (i) any tax, however denominated, imposed by any federal, state, local, municipal, territorial, provincial or foreign government -9- or any agency or political subdivision of any such government (a "TAXING AUTHORITY"), including any tax imposed under Subtitle A of the Code and any net income, alternative or add-on minimum tax, gross income, gross receipts, sales, use, gains, goods and services, production, documentary, recording, social security, unemployment, disability, workers' compensation, estimated, ad valorem, value added, transfer, franchise, profits, license, withholding on amounts paid to or by any Seller or its Affiliates, payroll, employment, excise, severance, stamp, capital stock, occupation, personal or real property, environmental or windfall profit tax, premium, custom, duty or other tax, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest, penalty, addition to tax or additional amount imposed by any Taxing Authority relating thereto, (ii) liability of Provident or any of its Affiliates for the payment of any amounts of the type described in (i) as a result of being a member of an affiliated, consolidated, combined or unitary group with any other corporation at any time on or prior to the Closing Date, and (iii) liability of Provident or any of its Affiliates for the payment of any amounts as a result of being a party to any Tax Sharing Agreement or with respect to the payment of any amounts of the type described in (i) or (ii) as a result of any express or implied obligation to indemnify any other Person. "TAXING AUTHORITY" has the meaning set forth in the definition of "Taxes." "TENNESSEE SAP" means the statutory accounting principles and practices prescribed or permitted by the Insurance Department of the State of Tennessee as applied on a basis consistent with those utilized in the preparation of 1996 Annual Statements of PLA and PNAC. "THIRD PARTY ACCOUNTANT" shall have the meaning set forth in Section 1.7(e). "THIRD PARTY CLAIM" shall have the meaning set forth in Section 7.4(a). "THIRD PARTY CLAIMANT" shall have the meaning set forth in Section 7.4(a). "TRANSFERRED ANNUITY RESERVES" shall have the meaning set forth in Section 1.5(b). "TRANSFERRED ASSETS" means: (i) Net Cash From the Business (if any); (ii) Investment Assets; (iii) all of Sellers' rights and interests under the Insurance Contracts to receive principal and interest paid on policy or contract loans on or after the Closing Date; (iv) a receivable equal to the index option component of reserves for the contracts described in Schedule 4.18; (v) the Books and Records; and (vi) the Transferred Contracts, -10- but excluding those assets (A) specifically identified on Schedule 9.1(G), (B) described on Schedule 2.1 to the Transition Services Agreement as being made available by Sellers, (C) the Insurance Contracts, the Seller Separate Accounts, and the policies and contracts funded by the Seller Separate Accounts, (D) reinsurance treaties and agreements, (E) cash and Investment Assets other than the Net Cash From the Business and Investment Assets specified in clauses (i) and (ii) above, and (F) that cannot be transferred to Purchasers because of any Seller's inability to obtain the Consent of a third party required for such transfer to be effective. "TRANSFERRED CONTRACTS" means the Assigned and Assumed Contracts, and all other contracts, assigned pursuant to the General Assignment and Assumption Agreement. "TRANSFERRED RESERVES" shall have the meaning set forth in Section 1.7(b). "TRANSFERRED RESERVES STATEMENT" shall have the meaning set forth in Section 1.7(b). "TRANSITION SERVICES AGREEMENT" means the Transition Services Agreement among Provident, each Seller and Purchasers in form and substance reasonably acceptable to the parties, which shall set forth (i) the terms and conditions upon which Provident and Sellers shall provide certain services and assets for a transitional period to Purchasers, and (ii) the consideration to be paid therefor. "UNREALIZED GAINS" shall have the meaning set forth in Section 1.7(e). "UMPIRE" shall have the meaning set forth in Section 7.8. "VALIC CONTRACTS" means the Insurance Contracts written in the States of New Hampshire and Vermont and the Insurance Contracts written by PNAC and PRL. "VALUATION" shall have the meaning set forth in Section 1.7(a). "VALUER" shall have the meaning set forth in Section 1.7(a). "WNL CONTRACTS" means all of the Insurance Contracts other than the VALIC Contracts. -11- EX-15 4 LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFO. Exhibit 15 Board of Directors and Shareholders Provident Companies, Inc. We are aware of the incorporation by reference in the Registration Statements (Form S-8 No. 33-47551, Form S-8 No. 33-88108, Form S-8 No. 33-62231 and Form S- 8 No. 333-40219) of Provident Companies, Inc. pertaining to the Provident Life and Accident Insurance Company MoneyMaker, A Long-Term 401(k) Retirement Savings Plan, the Provident Life and Accident Insurance Company Stock Option Plan of 1994, the Provident Life and Accident Insurance Company Employee Stock Purchase Plan of 1995, the Provident Life and Accident Insurance Company Management Incentive Compensation Plan of 1994 and The Paul Revere Savings Plan, and in the Registration Statement (Form S-3 No. 333-17849) of Provident Companies, Inc. for the registration of 9,523,810 shares of its common stock of our report dated November 10, 1998 relating to the unaudited condensed consolidated interim financial statements of Provident Companies, Inc. which is included in its Form 10-Q for the quarter ended September 30, 1998. Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a part of the registration statements prepared or certified by accountants within the meaning of Section 7 or 11 of the Securities Act of 1933. ERNST & YOUNG LLP Chattanooga, Tennessee November 10, 1998 EX-27 5 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF PROVIDENT COMPANIES, INC. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 14,946,500 298,900 355,200 12,700 17,800 43,700 17,498,900 42,300 0 413,700 23,267,000 13,674,900 0 513,000 3,482,600 698,900 0 0 135,800 3,312,700 23,267,000 1,759,800 1,039,600 18,200 134,300 1,864,000 58,200 666,900 362,800 135,000 227,800 0 0 0 227,800 1.67 1.63 0 0 0 0 0 0 0 "POLICY-LOSSES" INCLUDE RESERVES FOR FUTURE POLICY AND CONTRACT BENEFITS OF $13,487,800 AND UNEARNED PREMIUMS OF $187,100.
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