-----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, Q853841RiZA1fBkEEkWwM0iRR+Chzfqwhz5g1LVxBER9ZKlAhreFPjqs9UvDDGcT yMXTxZFvxV407d5uXrbuAA== 0000355429-98-000017.txt : 19980518 0000355429-98-000017.hdr.sgml : 19980518 ACCESSION NUMBER: 0000355429-98-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROTECTIVE LIFE CORP CENTRAL INDEX KEY: 0000355429 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 952492236 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12332 FILM NUMBER: 98623213 BUSINESS ADDRESS: STREET 1: 2801 HGWY 280 S CITY: BIRMINGHAM STATE: AL ZIP: 35223 BUSINESS PHONE: 2058799230 MAIL ADDRESS: STREET 1: PO BOX 2606 CITY: BIRMINGHAM STATE: AL ZIP: 35202 10-Q 1 - ----------------------------------------------------------------------------- FORM 10-Q ------------------------------------ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-12332 PROTECTIVE LIFE CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 95-2492236 (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 2801 HIGHWAY 280 SOUTH BIRMINGHAM, ALABAMA 35223 (Address of principal executive offices and zip code) (205) 879-9230 (Registrant's telephone number, including area code) ------------------------------------ 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 [ ] Number of shares of Common Stock, $.50 par value, outstanding as of May 8, 1998: 61,758,264 shares. PROTECTIVE LIFE CORPORATION INDEX PART I. FINANCIAL INFORMATION: Item 1. Financial Statements: Report of Independent Accountants................................. Consolidated Condensed Statements of Income for the Three Months ended March 31, 1998 and 1997 (unaudited)....................... Consolidated Condensed Balance Sheets as of March 31, 1998 (unaudited) and December 31, 1997............................... Consolidated Condensed Statements of Cash Flows for the Three Months ended March 31, 1998 and 1997 (unaudited).......... Notes to Consolidated Condensed Financial Statements (unaudited).. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... PART II. OTHER INFORMATION: Item 2(c). Changes in Securities...................................... Item 4. Submission of Matters to a Vote of Security Holders........... Item 5. Other Information............................................. Item 6. Exhibits and Reports on Form 8-K.............................. Signature................................................................. REPORT OF INDEPENDENT ACCOUNTANTS To the Directors and Stockholders Protective Life Corporation Birmingham, Alabama We have reviewed the accompanying consolidated condensed balance sheet of Protective Life Corporation and subsidiaries as of March 31, 1998, and the related consolidated condensed statements of income and consolidated condensed statements of cash flows for the three-month periods ended March 31, 1998 and 1997. These financial statements are the responsibility of the Company's management. We conducted our review 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, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated condensed 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 balance sheet 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 11, 1998, except for Note N as to which the date is March 2, 1998, we expressed an unqualified opinion which contains an explanatory paragraph regarding the changes in accounting for stock-based employee compensation plans in 1995 on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 31, 1997, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. COOPERS & LYBRAND L.L.P. Birmingham, Alabama April 23, 1998 2
PROTECTIVE LIFE CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Dollars in thousands except per share amounts) (Unaudited) THREE MONTHS ENDED MARCH 31 1998 1997 ---- ---- REVENUES Premiums and policy fees (net of reinsurance ceded: 1998 - $99,628; 1997 - $54,509) $149,358 $129,578 Net investment income 157,626 130,330 Realized investment gains (losses) 11 (418) Other income 13,518 4,762 --------- ---------- 320,513 264,252 BENEFITS AND EXPENSES Benefits and settlement expenses (net of reinsurance ceded: 1998 - $57,363; 1997 - $33,536) 187,897 163,019 Amortization of deferred policy acquisition costs 24,835 20,835 Other operating expenses (net of reinsurance ceded: 1998 - $31,709; 1997 - $14,254) 57,755 41,630 --------- ---------- 270,487 225,484 INCOME BEFORE INCOME TAX AND MINORITY INTEREST 50,026 38,768 Income tax expense 17,009 13,181 --------- --------- INCOME BEFORE MINORITY INTEREST 33,017 25,587 Minority interest in net income of consolidated subsidiaries 3,024 804 --------- --------- NET INCOME $ 29,993 $ 24,783 ======== ======== NET INCOME PER SHARE - BASIC $ .48 $ .40 ========== ========== NET INCOME PER SHARE - DILUTED $ .47 $ .40 ========== ========== DIVIDENDS PAID PER SHARE $ .10 $ .09 ========== ========== Average shares outstanding - basic 62,606,735 62,317,466 Average shares outstanding - diluted 63,261,753 62,669,264
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 3
PROTECTIVE LIFE CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in thousands) MARCH 31 DECEMBER 31 1998 1997 ------------------------------------- ASSETS (Unaudited) Investments: Fixed maturities $ 6,297,854 $ 6,374,328 Equity securities 13,130 15,006 Mortgage loans on real estate 1,367,866 1,312,778 Investment real estate, net 13,319 13,602 Policy loans 192,961 194,109 Other long-term investments 62,796 63,511 Short-term investments 169,267 76,086 ------------- ------------- Total investments 8,117,193 8,049,420 Cash 47,502 Accrued investment income 94,390 95,616 Accounts and premiums receivable, net 48,052 47,784 Reinsurance receivables 584,516 591,613 Deferred policy acquisition costs 652,832 632,737 Property and equipment, net 38,931 36,957 Other assets 97,239 78,541 Assets held in separate accounts 1,123,756 931,465 ------------ ------------- $10,756,909 $10,511,635 LIABILITIES Policy liabilities and accruals $ 3,821,813 $ 3,725,151 Guaranteed investment contract deposits 2,677,543 2,684,676 Annuity deposits 1,502,662 1,511,553 Other policyholders' funds 166,121 183,233 Other liabilities 258,090 306,241 Accrued income taxes 15,937 4,907 Deferred income taxes 40,555 41,212 Debt 120,000 120,000 Liabilities related to separate accounts 1,123,756 931,465 ----------- ------------- 9,726,477 9,508,438 ----------- ------------ COMMITMENTS AND CONTINGENT LIABILITIES - NOTE B GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S SUBORDINATED DEBENTURES 9% Cumulative Monthly Income Preferred Securities, Series A 55,000 55,000 8.25% Trust Originated Preferred Securities 75,000 75,000 6.5% FELINE PRIDES 115,000 115,000 ------------ ------------- 245,000 245,000 ------------ ------------- STOCKHOLDERS' EQUITY Preferred Stock, $1 par value Shares authorized: 3,600,000; Issued: none Junior Participating Cumulative Preferred Stock, $1 par value Shares authorized: 400,000; Issued: none Common Stock, $0.50 par value Shares authorized: 80,000,000 Issued: 1998 and 1997 - 66,672,924 33,336 33,336 Additional paid-in capital 170,671 167,923 Treasury stock (1998 - 4,914,660 shares; 1997 - 5,030,640 shares) (13,198) (13,455) Unallocated stock in Employee Stock Ownership Plan (1998 - 1,291,194 shares; 1997 - 1,386,244 shares) (4,277) (4,592) Retained earnings 537,073 513,258 Accumulated other comprehensive income Net unrealized gains on investments (net of income tax: 1998 - $33,317; 1997 - $33,238) 61,827 61,727 ------------- -------------- 785,432 758,197 ------------- -------------- $10,756,909 $10,511,635 ============= ==============
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 4
PROTECTIVE LIFE CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) THREE MONTHS ENDED MARCH 31 1998 1997 ---- ---- > CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 29,993 $ 24,783 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred policy acquisition costs 24,835 20,835 Capitalization of deferred policy acquisition costs (43,931) (25,480) Depreciation expense 1,964 1,496 Deferred income taxes (1,224) (314) Accrued income taxes 10,207 11,406 Interest credited to universal life and investment products 84,729 41,239 Policy fees assessed on universal life and investment products (34,045) (31,163) Change in accrued investment income and other receivables 8,056 2,381 Change in policy liabilities and other policyholders' funds of traditional life and health products 114,125 93,441 Change in other liabilities (48,076) (17,899) Other (net) (18,652) (4,914) -------------- ------------- Net cash provided by operating activities 127,981 115,811 ------------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Maturities and principal reductions of investments Investments available for sale 1,806,667 723,663 Other 76,911 28,655 Sale of investments Investments available for sale 145,772 537,926 Other 234,634 2,776 Cost of investments acquired Investments available for sale (2,047,391) (1,332,927) Other (281,863) (89,573) Acquisitions and bulk reinsurance assumptions (2,436) Purchase of property and equipment (2,684) (1,890) Sale of property and equipment 22 54 -------------------------------- Net cash used in investing activities (67,932) (133,752) -------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings under line of credit arrangements and debt 304,500 534,400 Principal payments on line of credit arrangements and debt (304,500) (520,400) Dividends to stockholders (6,178) (5,549) Investment product deposits and changes in universal life deposits 330,148 174,968 Investment product withdrawals (431,521) (244,533) -------------- ------------- Net cash used in financing activities (107,551) (61,114) -------------- -------------- INCREASE (DECREASE) IN CASH (47,502) (79,055) CASH AT BEGINNING OF PERIOD 47,502 121,051 --------------- ------------- CASH AT END OF PERIOD $ 0 $ 41,996 ================= ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period: Interest on debt $ 1,558 $ 4,662 Income taxes $ 8,554 $ 1,858 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Reissuance of treasury stock to ESOP $ 84 Unallocated stock in ESOP $ 315 $ 333 Reissuance of treasury stock $ 49 Acquisitions Assets acquired $ 3,398 $ 339 Liabilities assumed (347) (90) Reissuance of treasury stock (3,005) ----------------- ------------ Net $ 46 $ 249 ================= ============
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 5 PROTECTIVE LIFE CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - BASIS OF PRESENTATION; STOCK SPLIT The accompanying unaudited consolidated condensed financial statements of Protective Life Corporation (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 1998, are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. The year-end consolidated condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. For further information, refer to the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1997. On March 2, 1998, the Company's Board of Directors approved a two-for-one split of the Company's Common Stock in the form of a 100% stock dividend distributed on April 1, 1998. Stockholders' equity has been restated to give retroactive recognition to the stock split for all periods presented by reclassifying from retained earnings to common stock the par value of the additional shares arising from the stock split. In addition, unless indicated otherwise, all references to number of shares and per share amounts included herein have been restated to reflect the stock split. NOTE B - COMMITMENTS AND CONTINGENT LIABILITIES The Company is contingently liable to obtain a $20 million letter of credit under indemnity agreements with its directors. Such agreements provide insurance protection in excess of the directors' and officers' liability insurance in force at the time up to $20 million. Should certain events occur constituting a change in control of the Company, the Company must obtain the letter of credit upon which directors may draw for defense or settlement of any claim relating to performance of their duties as directors. The Company has similar agreements with certain of its officers providing up to $10 million in indemnification which are not secured by the obligation to obtain a letter of credit. Under insurance guaranty fund laws in most states, insurance companies doing business therein can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies. The Company does not believe such assessments will be materially different from amounts already provided for in the financial statements. Most of these laws do provide, however, that an assessment may be excused or deferred if it would threaten an insurer's own financial strength. A number of civil jury verdicts have been returned against insurers in the jurisdictions in which the Company does business involving the insurers' sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. Increasingly these lawsuits have resulted in 6 the award of substantial judgments against the insurer that are disproportionate to the actual damages, including material amounts of punitive damages. In addition, in some class action and other lawsuits involving insurers' sales practices, insurers have made material settlement payments. In some states (including Alabama), juries have substantial discretion in awarding punitive damages which creates the potential for unpredictable material adverse judgments in any given punitive damages suit. The Company and its subsidiaries, like other insurers, in the ordinary course of business, are involved in such litigation. Although the outcome of any such litigation cannot be predicted with certainty, the Company believes that at the present time there are no pending or threatened lawsuits that are reasonably likely to have a material adverse effect on the financial position, results of operations, or liquidity of the Company. NOTE C - PREFERRED SECURITIES In 1994 a special purpose finance subsidiary of the Company, PLC Capital L.L.C. ("PLC Capital"), issued $55 million of 9% Cumulative Monthly Income Preferred Securities, Series A ("MIPSSM"). On April 29, 1997, another special purpose finance subsidiary, PLC Capital Trust I ("PLC Capital Trust I") issued $75 million of 8.25% Trust Originated Preferred Securities ("TOPrSSM"). The MIPS and 8.25% TOPrS are guaranteed on a subordinated basis by the Company. This guarantee, considered together with the other obligations of the Company with respect to the MIPS and 8.25% TOPrS, constitutes a full and unconditional guarantee by the Company of PLC Capital and PLC Capital Trust I's obligations with respect to the MIPS and 8.25% TOPrS. PLC Capital and PLC Capital Trust I were formed solely to issue securities and use the proceeds thereof to purchase subordinated debentures of the Company. The sole assets of PLC Capital are $69.6 million of Protective Life Corporation 9% Subordinated Debentures due June 30, 2024, Series A. The sole assets of PLC Capital Trust I are $77.3 million of Protective Life Corporation 8.25% Subordinated Debentures due 2027, Series B. The Company has the right under the subordinated debentures to extend interest payment periods up to five consecutive years, and, as a consequence, dividends on the MIPS and 8.25% TOPrS may be deferred (but will continue to accumulate, together with additional dividends on any accumulated but unpaid dividends at the dividend rate) by PLC Capital and PLC Capital Trust I, respectively, during any such extended interest payment period. The MIPS are redeemable by PLC Capital at any time on or after June 30, 1999. The 8.25%TOPrS are redeemable by PLC Capital Trust I at any time on or after April 29, 2002. On November 20, 1997, another special purpose finance subsidiary, PLC Capital Trust II, issued $115 million of FELINE PRIDESSM which are comprised of a stock purchase contract and a beneficial ownership of 6.5% TOPrS. The sole assets of PLC Capital Trust II are $118.6 million of Protective Life Corporation 6.5% Subordinated Debentures due 2003, Series C. Under the stock purchase contract, on February 16, 2001, the holders will purchase shares of the Company's Common Stock from the Company. The holders may generally settle the contract in cash or by exercising their right to put, in effect, the 6.5% TOPrS back to the Company. The shares of Common Stock issuable range from approximately 3.6 million shares if the price of the Company's Common Stock is greater than or equal to $32.52 to approximately 4.4 million shares if the stock price is less than or equal to $26.66. The 6.5% TOPrS are guaranteed on a subordinated basis by the Company. Dividends on the 6.5% TOPrS may be deferred until maturity. The dividend rate on 7 the 6.5% TOPrS which remain outstanding after February 16, 2001, will be reset by a formula specified in the agreement. The MIPS, 8.25% TOPrS, and FELINE PRIDES are reported in the accompanying balance sheets as "guaranteed preferred beneficial interests in Company's subordinated debentures" and the related dividends are reported in the accompanying statements of income as "minority interest in net income of consolidated subsidiaries". 8 NOTE D - BUSINESS SEGMENTS The Company operates predominantly in the life and accident and health insurance industry. The following table sets forth total operating segment income and assets for the periods shown. Adjustments represent the inclusion of unallocated realized investment gains (losses), the reclassification and tax effecting of pretax minority interest in the Corporate and Other segment, and the recognition of income tax expense. There are no asset adjustments.
OPERATING SEGMENT INCOME FOR THE THREE MONTHS ENDING MARCH 31, 1998 SPECIALTY INSURANCE LIFE INSURANCE PRODUCTS DENTAL AND INDIVIDUAL CONSUMER FINANCIAL ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS Premiums and policy fees $24,244 $34,025 $ 7,220 $51,603 $28,112 Net investment income 26,732 14,043 15,012 3,974 6,281 Realized investment gains (losses) Other income 7,031 599 5,097 ----------- ------- ---------- --------- -------- Total revenues 50,976 55,099 22,232 56,176 39,490 -------- ------- ------- ------- ------- Benefits and settlement expenses 29,105 27,197 15,395 35,825 15,167 Amortization of deferred policy acquisition costs 4,541 7,172 (12) 2,970 5,649 Other operating expenses 5,856 14,363 2,391 14,079 14,348 --------- ------- ------- ------- ------- Total benefits and expenses 39,502 48,732 17,774 52,874 35,164 -------- ------- ------- ------- ------- Income before tax 11,474 6,367 4,458 3,302 4,326 RETIREMENT SAVINGS AND INVESTMENT PRODUCTS GUARANTEED CORPORATE INVESTMENT INVESTMENT AND TOTAL CONTRACTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED Premiums and policy fees $4,062 $ 92 $149,358 Net investment income $53,435 26,240 11,909 157,626 Realized investment gains (losses) (433) (87) $ 531 11 Other income 1,992 (1,201) 13,518 ----------- ------- ------- ---------- -------- Total revenues 53,002 32,207 10,800 531 320,513 ------- ------- ------- -------- -------- Benefits and settlement expenses 44,656 20,269 283 187,897 Amortization of deferred policy acquisition costs 174 4,330 11 24,835 Other operating expenses 185 4,675 6,511 (4,653) 57,755 -------- ------- ------- ------- -------- Total benefits and expenses 45,015 29,274 6,805 (4,653) 270,487 ------- ------- ------- ------- -------- Income before tax 7,987 2,933 3,995 50,026 Income tax expense 17,009 17,009 Minority interest 3,024 3,024 ---------- Net income $ 29,993 =========
9
OPERATING SEGMENT INCOME FOR THE THREE MONTHS ENDING MARCH 31, 1997 SPECIALTY INSURANCE LIFE INSURANCE PRODUCTS DENTAL AND INDIVIDUAL CONSUMER FINANCIAL ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS Premiums and policy fees $26,579 $32,333 N/A $56,329 $11,861 Net investment income 27,531 12,913 4,100 2,971 Realized investment gains (losses) Other income 3,681 407 196 ---------- -------- -------- -------- Total revenues 54,110 48,927 60,836 15,028 ------- ------- ------- ------- Benefits and settlement expenses 28,451 25,759 40,378 5,060 Amortization of deferred policy acquisition costs 4,573 7,442 1,560 3,707 Other operating expense 6,251 9,962 15,180 3,344 ------- ------- ------- ------- Total benefits and expenses 39,275 43,163 57,118 12,111 ------- ------- ------- ------- Income before income tax 14,835 5,764 3,718 2,917 RETIREMENT SAVINGS AND INVESTMENT PRODUCTS GUARANTEED CORPORATE INVESTMENT INVESTMENT AND TOTAL CONTRACTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED Premiums and policy fees $ 2,424 $ 52 $129,578 Net investment income $51,609 25,856 5,350 130,330 Realized investment gains (losses) (724) 145 $ 161 (418) Other 1,165 (687) 4,762 ----------- ------- ------- ---------- --------- Total revenues 50,885 29,590 4,715 161 264,252 -------- ------- ------ -------- -------- Benefits and settlement expenses 43,497 19,787 87 163,019 Amortization of deferred policy acquisition costs 131 3,409 13 20,835 Other operating expenses 1,068 3,176 3,886 (1,237) 41,630 -------- ------- ------ ------- -------- Total benefits and expenses 44,696 26,372 3,986 (1,237) 225,484 ------- ------- ------ ------- -------- Income before tax 6,189 3,218 729 38,768 Income tax expense 13,181 13,181 Minority interest 804 804 ---------- Net income $ 24,783 ========
10
OPERATING SEGMENT ASSETS MARCH 31, 1998 SPECIALTY INSURANCE LIFE INSURANCE PRODUCTS DENTAL AND INDIVIDUAL CONSUMER FINANCIAL ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS Investments and other assets $1,363,992 $ 988,541 $ 919,246 $266,162 $540,879 Deferred policy acquisition costs 134,169 263,291 116,947 23,971 53,934 ----------- ----------- ----------- --------- --------- Total assets $1,498,161 $1,251,832 $1,036,193 $290,133 $594,813 ========== ========== ========== ======== ======== RETIREMENT SAVINGS AND INVESTMENT PRODUCTS Guaranteed Corporate Investment Investment and Total CONTRACTS PRODUCTS OTHER CONSOLIDATED Investments and other assets $2,867,976 $2,512,375 $644,906 $10,104,077 Deferred policy acquisition costs 1,708 58,683 129 652,832 ------------- ------------ ---------- ------------- Total assets $2,869,684 $2,571,058 $645,035 $10,756,909 ========== ========== ======== =========== OPERATING SEGMENT ASSETS DECEMBER 31, 1997 SPECIALTY INSURANCE LIFE INSURANCE PRODUCTS Dental and Individual Consumer Financial ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS Investments and other assets $1,401,294 $ 963,661 $ 910,030 $264,083 $544,085 Deferred policy acquisition costs 138,052 252,321 108,126 22,459 52,837 ----------- ----------- ----------- --------- --------- Total assets $1,539,346 $1,215,982 $1,018,156 $286,542 $596,922 ========== ========== ========== ======== ======== RETIREMENT SAVINGS AND INVESTMENT PRODUCTS Guaranteed Corporate Investment Investment and Total CONTRACTS PRODUCTS OTHER CONSOLIDATED Investments and other assets $2,887,732 $2,316,495 $591,518 $ 9,878,898 Deferred policy acquisition costs 1,785 56,074 1,083 632,737 ------------- ------------ ---------- ------------- Total assets $2,889,517 $2,372,569 $592,601 $10,511,635 ========== ========== ======== =========== 11
NOTE E - STATUTORY REPORTING PRACTICES Financial statements prepared in conformity with generally accepted accounting principles ("GAAP") differ in some respects from the statutory accounting practices prescribed or permitted by insurance regulatory authorities. At March 31, 1998 and for the three months then ended, the Company's life insurance subsidiaries had consolidated stockholder's equity and net income prepared in conformity with statutory reporting practices of $590.5 million and $24.9 million, respectively. NOTE F - INVESTMENTS As prescribed by Statement of Financial Accounting Standards ("SFAS") No. 115, certain investments are recorded at their market values with the resulting unrealized gains and losses reduced by a related adjustment to deferred policy acquisition costs, net of income tax, reported as a component of stockholders' equity. The market values of fixed maturities increase or decrease as interest rates fall or rise. Therefore, although the adoption of SFAS No. 115 does not affect the Company's operations, its reported stockholders' equity will fluctuate significantly as interest rates change. The Company's balance sheets at March 31, 1998 and December 31, 1997, prepared on the basis of reporting investments at amortized cost rather than at market values, are as follows:
MARCH 31, 1998 DECEMBER 31, 1997 -------------- ----------------- (IN THOUSANDS) Total investments $ 8,001,544 $ 7,933,017 Deferred policy acquisition costs 673,337 654,175 All other assets 1,986,884 1,829,478 ------------ ------------ $10,661,765 $10,416,670 =========== =========== Deferred income taxes $ 7,238 $ 7,974 All other liabilities 9,685,922 9,467,226 ------------ ------------ 9,693,160 9,475,200 Guaranteed preferred beneficial interests in Company's sub- ordinated debentures 245,000 245,000 Stockholders' equity 723,605 696,470 ------------- ------------- $10,661,765 $10,416,670 =========== ===========
NOTE G - ACCOUNTING POLICIES FOR DERIVATIVE FINANCIAL INSTRUMENTS The Company does not use derivative financial instruments for trading purposes. Combinations of futures contracts and options on treasury notes are currently being used as hedges for asset/liability management of certain investments, primarily mortgage loans on real estate, mortgage-backed securities, and liabilities arising from interest-sensitive products such as guaranteed investment contracts and annuities. Realized investment gains and losses on such contracts are deferred and amortized over the life of the hedged asset. At March 31, 1998, options and open 12 futures contracts with a notional amount of $1.2 billion were in a $0.6 million unrealized loss position. The Company uses interest rate swap contracts to convert certain investments from a variable to a fixed rate of interest. The Company also uses interest rate swap contracts and options to enter into interest rate swaps (swaptions) to convert a portion of its Senior Notes, Medium-Term Notes, MIPS, and 8.25% TOPrS from a fixed rate to a variable rate of interest. Amounts paid or received related to the initiation of interest rate swap contracts and swaptions are deferred and amortized over the life of the related debt. At March 31, 1998, related open interest rate swap contracts with a notional amount of $365.3 million were in a $4.4 million net unrealized gain position. In connection with a commercial mortgage loan securitization, the Company entered into interest rate swap contracts converting a fixed rate of interest to a floating rate of interest and converting a floating rate of interest to a fixed rate of interest with a notional amount at March 31, 1998, of $332.4 million. In the aggregate, there were no net unrealized gains or losses associated with these swap contracts at March 31, 1998. NOTE H - NET INCOME PER SHARE Net income per share - basic is net income divided by the average number of shares of Common Stock outstanding including shares that are issuable under various deferred compensation plans. The average shares outstanding used to compute net income per share - basic were 62,606,735 and 62,317,466 for the three months ended March 31, 1998 and 1997, respectively. Net income per share - diluted is net income divided by the average number of shares outstanding including all dilutive potentially issuable shares that are issuable under various stock-based compensation plans and stock purchase contracts. The average shares outstanding used to compute net income per share - diluted were 63,261,753 and 62,669,264 for the three months ended March 31, 1998 and 1997, respectively. A reconciliation of average shares outstanding for the three months ended March 31 is summarized as follows:
RECONCILIATION OF AVERAGE SHARES OUTSTANDING MARCH 31 1998 1997 ---- ---- Issued and outstanding 61,754,156 61,611,732 Issuable under various deferred compensation plans 852,579 705,734 ------------ ------------ Basic 62,606,735 62,317,466 Stock appreciation rights 144,145 Issuable under various other stock-based compensation plans 475,300 351,798 FELINE PRIDES stock purchase contracts 35,573 ------------ ----------- Diluted 63,261,753 62,669,264 ========== ==========
13 NOTE I - COMPREHENSIVE INCOME The following table sets forth the Company's comprehensive income for the three months ended March 31, 1998 and 1997:
THREE MONTHS ENDED 1998 1997 ---- ---- Net income $29,993 $ 24,783 Increase (decrease) in net unrealized gains on investments (net of income tax: 1998 - $83; 1997 - $(21,168)) 107 (39,312) Reclassification adjustment for amounts included in net income (net of income tax: 1998 - $(4); 1997 - $146) (7) 272 ---------- ---------- Comprehensive income (loss) $30,093 $(14,257) ======= =========
NOTE J - ACQUISITION On March 11, 1998, the Company announced a definitive agreement under which the Company will acquire United Dental Care, Inc. ("United Dental Care"). United Dental Care is a leading provider of managed dental care plans with over 1.8 million members. The purchase price per share of United Dental Care common stock is payable in a combination of $9.31 in cash and 0.2893 shares of the Company's common stock. The transaction is subject to approval by United Dental Care stockholders and regulators and other closing conditions. United Dental Care (subject to the Company's right to increase the merger consideration) or the Company may terminate the agreement if the price of the Company's common stock is below $27.50 per share and the Company may terminate the agreement if the price of the Company's common stock is above $39.50 per share. United Dental Care has approximately 8.9 million shares of its common stock outstanding. NOTE K - RECLASSIFICATIONS Certain reclassifications have been made in the previously reported financial statements and accompanying notes to make the prior year amounts comparable to those of the current year. Such reclassifications had no effect on previously reported net income, total assets or stockholders' equity. NOTE L - SUBSEQUENT EVENT On April 27, 1998, the Company's shareholders approved an increase in the number of authorized shares of Common Stock from 80 million to 160 million. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Protective Life Corporation, through its subsidiaries, provides financial services through the production, distribution, and administration of insurance and investment products. Founded in 1907, Protective Life Insurance Company ("Protective Life") is the Company's principal operating subsidiary. Unless the context otherwise requires, the "Company" refers to the consolidated group of Protective Life Corporation and its subsidiaries. The Company has seven operating divisions: Acquisitions, Individual Life, West Coast, Dental and Consumer Benefits ("Dental"), Financial Institutions, Guaranteed Investment Contracts ("GIC"), and Investment Products. The Company also has an additional business segment which is described herein as Corporate and Other. This report includes "forward-looking statements" which express expectations of future events and/or results. All statements based on future expectations rather than on historical facts are forward- looking statements that involve a number of risks and uncertainties, and the Company cannot give assurance that such statements will prove to be correct. Please refer to Exhibit 99 for more information about factors which could affect future results. RESULTS OF OPERATIONS PREMIUMS AND POLICY FEES The following table sets forth for the periods shown the amount of premiums and policy fees and the percentage change from the prior period:
PREMIUMS AND POLICY FEES THREE MONTHS ENDED AMOUNT PERCENTAGE MARCH 31 (IN THOUSANDS) INCREASE 1997 $129,578 12.1% 1998 149,358 15.3
Premiums and policy fees increased $19.8 million or 15.3% in the first three months of 1998 over the first three months of 1997. Premiums and policy fees from the Acquisitions Division decreased $2.3 million. The Individual Life Division's premiums and policy fees increased $1.7 million. The acquisition of West Coast Life Insurance Company ("West Coast") in the second quarter of 1997 increased premiums and policy fees $7.2 million. The Dental Division's exit from the group major medical business resulted in an $11.7 million decrease in premiums and policy fees. Premiums and policy fees related to the Dental Division's other businesses increased $7.0 million in the first three months of 1998 as compared to the same period in 1997. Premiums and policy fees from the Financial Institutions Division increased $16.3 million in the first three months of 1998 as 15 compared to the first three months of 1997. The acquisition of the Western Diversified Group ("Western Diversified") and the coinsurance of an unrelated closed block of credit insurance policies in late 1997 increased premiums and policy fees $19.0 million. Decreases of $2.7 million relate to the normal decrease in premiums on a closed block of credit insurance policies reinsured in 1996. The increase in premiums and policy fees from the Investment Products Division was $1.6 million. NET INVESTMENT INCOME The following table sets forth for the periods shown the amount of net investment income and the percentage change from the prior period:
THREE MONTHS NET INVESTMENT INCOME ENDED AMOUNT PERCENTAGE MARCH 31 (IN THOUSANDS) INCREASE 1997 $130,330 4.9% 1998 157,626 20.9
Net investment income in the first three months of 1998 was $27.3 million or 20.9% higher than the corresponding period of the preceding year primarily due to increases in the average amount of invested assets and an increase in participating mortgage loan income. Invested assets have increased primarily due to acquisitions and due to receiving annuity deposits. The acquisition of West Coast, Western Diversified, and a block of credit insurance policies in 1997 resulted in an increase in net investment income of $18.7 million in the first three months of 1998 as compared to the same period in 1997. REALIZED INVESTMENT GAINS The Company generally purchases its investments with the intent to hold to maturity by purchasing investments that match future cash-flow needs. However, the Company may sell any of its investments to maintain approximate matching of assets and liabilities. Accordingly, the Company has classified its fixed maturities and certain other securities as "available for sale." The sales of investments that have occurred have resulted principally from portfolio management decisions to maintain approximate matching of assets and liabilities. The following table sets forth net realized investment gains for the periods shown: THREE MONTHS REALIZED INVESTMENT ENDED GAINS (LOSSES) MARCH 31 (IN THOUSANDS) 1997 $(418) 1998 11 Realized investment gains were less than $0.1 million for the first three months of 1998 compared to realized investment losses of $0.4 million for the corresponding period of 1997. 16 OTHER INCOME The following table sets forth other income for the periods shown: THREE MONTHS ENDED OTHER INCOME MARCH 31 (IN THOUSANDS) 1997 $ 4,762 1998 13,518 Other income consists primarily of revenues of the Company's broker-dealer subsidiary, fees from variable insurance products, revenues of the Company's wholly-owned insurance marketing organizations and small noninsurance subsidiaries, and the results of the Company's 50%-owned joint venture in Hong Kong. Other income in the first three months of 1998 was $8.8 million higher than the corresponding period of 1997. Revenues from the Company's broker-dealer subsidiary increased $3.6 million in the first three months of 1998 as compared to the same period in 1997. Other income from all other sources increased $5.2 million in the first three months of 1998 as compared with the first three months of 1997. 17 INCOME BEFORE INCOME TAX AND MINORITY INTEREST The following table sets forth operating income or loss and income or loss before income tax for the periods shown:
OPERATING INCOME (LOSS) AND INCOME (LOSS) BEFORE INCOME TAX THREE MONTHS ENDED MARCH 31 (IN THOUSANDS) 1997 1998 ---- ---- Operating Income (Loss)1,2 Life Insurance Acquisitions $14,835 $11,474 Individual Life 5,764 6,367 West Coast 4,458 Specialty Insurance Products Dental and Consumer Benefits 3,718 3,302 Financial Institutions 2,917 4,326 Retirement Savings and Investment Products Guaranteed Investment Contracts 6,913 8,420 Investment Products 3,166 2,977 Corporate and Other2 729 3,995 --------- -------- Total operating income 38,042 45,319 ------- ------- Realized Investment Gains (Losses) Guaranteed Investment Contracts (724) (433) Investment Products 145 (87) Unallocated Realized Investment Gains (Losses) 161 531 Related Amortization of Deferred Policy Acquisition Costs Investment Products (93) 43 --------- --------- Total net (511) 54 -------- --------- Income (Loss) Before Income Tax2 Life Insurance Acquisitions 14,835 11,474 Individual Life 5,764 6,367 West Coast 4,458 Specialty Insurance Products Dental and Consumer Benefits 3,718 3,302 Financial Institutions 2,917 4,326 Retirement Savings and Investment Products Guaranteed Investment Contracts 6,189 7,987 Investment Products 3,218 2,933 Corporate and Other2 729 3,995 Unallocated Realized Investment Gains (Losses) 161 531 --------- --------- Total income before income tax $37,531 $45,373 ======= =======
1 Income before income tax excluding realized investment gains and losses and related amortization of deferred acquisition costs. 2 Operating income and income before income tax for the Corporate and Other segment have been reduced by pretax minority interest in income of consolidated subsidiaries of $1,237 in the first three months of 1997 and $4,653 in the first three months of 1998. Such minority interest related to payments made on the Company's MIPSSM, 8.25%TOPrSSM, and FELINE PRIDESSM. 18 Pretax earnings from the Acquisitions Division decreased $3.4 million in the first three months of 1998 as compared to the same period of 1997. Earnings from the Acquisitions Division are normally expected to decline over time (due to the lapsing of policies resulting from deaths of insureds or terminations of coverage) unless new acquisitions are made. In addition, the Division's mortality experience was approximately $2.6 million worse than expected in the first three months of 1998 as compared to being approximately $2.0 million better than expected in the 1997 first quarter. The Individual Life Division's pretax earnings of $6.4 million in the first three months of 1998 were $0.6 million above the same period of 1997. The Division's earnings increased even though the Division's mortality experience was approximately $1.8 million worse than expected. Individual life sales measured by new premiums were $15.8 million, 68% above the first quarter of 1997. Headquartered in San Francisco, West Coast was acquired by the Company on June 3, 1997. West Coast had pretax earnings of $4.5 million for the first three months of 1998. Sales measured by new premiums were $11.6 million, 91% above the first quarter of 1997. Dental Division pretax earnings were $0.4 million lower in the first three months of 1998 as compared to the first three months of 1997 primarily due to higher dental claims in the first quarter of 1998 as compared to the first quarter of 1997. Pretax earnings of the Financial Institutions Division were $1.4 million higher in the first three months of 1998 as compared to the same period in 1997. At the end of the 1997 third quarter, the Division acquired the Western Diversified Group and coinsured an unrelated block of policies. These acquisitions increased earnings $1.3 million. The GIC Division had pretax operating earnings of $8.4 million in the first three months of 1998 and $6.9 million in the corresponding period of 1997. The increase largely reflects an improvement in operating spreads and an increase in the amount of GIC and related annuity deposits. Realized investment losses associated with this Division in the first three months of 1998 were $0.4 million as compared to $0.7 million in the same period last year. As a result, total pretax earnings were $8.0 million in the first three months of 1998 compared to $6.2 million for the same period last year. Investment Products Division pretax operating earnings of $3.0 million were $0.2 million lower in the first three months of 1998 compared to the same period of 1997. Realized investment gains associated with the Division, net of related amortization of deferred policy acquisition costs, were approximately $0.1 million in the first three months of both 1998 and 1997. Total pretax earnings were of $2.9 million in the first three months of 1998 as compared to $3.2 million in the same period of 1997. The Corporate and Other segment consists primarily of net investment income on capital, interest expense on substantially all debt, the Company's 50%-owned joint venture in Hong Kong, several small insurance lines of business, and the operations of several small noninsurance subsidiaries. Pretax earnings for this segment increased $3.3 million in the first three months of 1998 as compared to the first three months of 1997. 19 INCOME TAXES The following table sets forth the effective income tax rates for the periods shown: THREE MONTHS ENDED ESTIMATED EFFECTIVE MARCH 31 INCOME TAX RATES 1997 34% 1998 34 The effective income tax rate for the full year of 1997 was 34%. Management's estimate of the effective income tax rate for 1998 is between 34% and 35%. NET INCOME The following table sets forth net income and the net income per share for the periods shown, and the percentage change from the prior period:
THREE MONTHS NET INCOME ENDED TOTAL PER SHARE- PERCENTAGE PER SHARE- PERCENTAGE MARCH 31 (IN THOUSANDS) BASIC INCREASE DILUTED INCREASE --------------- ------------- --------------- ------------- ------------ ---------- 1997 $24,783 $.40 11.1% $.40 11.1% 1998 29,993 .48 20.0 .47 17.5
Compared to the same period in 1997, net income per share-basic in the first three months of 1998 increased 20.0%, reflecting improved operating earnings in the Individual Life, West Coast, Financial Institutions, and Guaranteed Investment Contracts Divisions and the Corporate and Other segment, and higher realized investment gains (net of related amortization of deferred policy acquisition costs), which were partially offset by lower operating earnings in the Acquisitions, Dental, and Investment Products Divisions. RECENTLY ISSUED ACCOUNTING STANDARDS The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures About Pension and Other Postretirement Benefits." This statement revises the footnote disclosures about pension and other postretirement benefit plans and its adoption will have no effect on the Company's financial condition. LIQUIDITY AND CAPITAL RESOURCES The Company's operations usually produce a positive cash flow. This cash flow is used to fund an investment portfolio to finance future benefit payments. Since future benefit payments largely represent medium- and long-term obligations reserved using certain assumed interest rates, the Company's investments are predominantly in medium- and long-term, fixed-rate investments such as bonds and mortgage loans. 20 Many of the Company's products contain surrender charges and other features that reward persistency and penalize the early withdrawal of funds. Surrender charges for these products generally are sufficient to cover the Company's unamortized deferred policy acquisition costs with respect to the policy being surrendered. GICs and certain annuity contracts have market-value adjustments that protect the Company against investment losses if interest rates are higher at the time of surrender than at the time of issue. The Company's investments in debt and equity securities are reported at market value, and investments in mortgage loans are reported at amortized cost. At March 31, 1998, the fixed maturity investments (bonds, bank loan participations, and redeemable preferred stocks) had a market value of $6,297.9 million, which is 2.0% above amortized cost (less allowances for uncollectible amounts on investments) of $6,171.4 million. The Company had $1,367.9 million in mortgage loans at March 31, 1998. While the Company's mortgage loans do not have quoted market values, at March 31, 1998, the Company estimates the market value of its mortgage loans to be $1,459.5 million (using discounted cash flows from the next call date) which is 6.7% in excess of amortized book value. Most of the Company's mortgage loans have significant prepayment penalties. These assets are invested for terms approximately corresponding to anticipated future benefit payments. Thus, market value fluctuations should not adversely affect liquidity. For several years the Company has offered a type of commercial loan under which the Company will permit a slightly higher loan-to-value ratio in exchange for a participating interest in the cash flows from the underlying real estate. Approximately $393.0 million of the Company's mortgage loans have this participation feature. At March 31, 1998, delinquent mortgage loans and foreclosed real estate were 0.2% of assets. Bonds rated less than investment grade were 2.0% of assets. The Company does not expect these investments to adversely affect its liquidity or ability to maintain proper matching of assets and liabilities. The Company's allowance for uncollectible amounts on investments was $22.0 million at March 31, 1998. Policy loans at March 31, 1998, were $193.0 million, a decrease of $1.1 million from December 31, 1997. Policy loan rates are generally in the 4.5% to 8.0% range and are at least equal the assumed interest rates used for future policy benefits. The Company believes its asset/liability management programs and procedures and certain product features provide significant protection for the Company against the effects of changes in interest rates. However, approximately one-fourth of the Company's liabilities relate to products (primarily whole life insurance) the profitability of which may be affected by changes in interest rates. The effect of such changes in any one year is not expected to be material. Additionally, the Company believes its asset/liability management programs and procedures provide sufficient liquidity to enable it to fulfill its obligation to pay benefits under its various insurance and deposit contracts. The Company's asset/liability management programs and procedures involve the monitoring of asset and liability durations for various product lines; cash flow testing under various interest rate scenarios; and the continuous rebalancing of assets and liabilities with respect to yield, risk, and cash flow characteristics. It is the Company's general policy to generally maintain asset and liability durations within one half year of one another, although from time to time a broader interval may be allowed. 21 The Company does not use derivative financial instruments for trading purposes. Combinations of futures contracts and options on treasury notes are currently being used as hedges for asset/liability management of certain investments, primarily mortgage loans on real estate, mortgage-backed securities, and liabilities arising from interest-sensitive products such as guaranteed investment contracts and annuities. Realized investment gains and losses on such contracts are deferred and amortized over the life of the hedged asset. At March 31, 1998, options and open futures contracts with a notional amount of $1.2 billion were in a $0.6 million unrealized loss position. The Company uses interest rate swap contracts to convert certain investments from a variable to a fixed rate of interest. The Company also uses interest rate swap contracts and options to enter into interest rate swaps (swaptions) to convert a portion of its Senior Notes, Medium-Term Notes, MIPS, and TOPrS from a fixed rate to a variable rate of interest. Amounts paid or received related to the initiation of interest rate swap contracts and swaptions are deferred and amortized over the life of the related debt. At March 31, 1998, related open interest rate swap contracts with a notional amount of $365.3 million were in a $4.4 million net unrealized gain position. In connection with a commercial mortgage loan securitization, the Company entered into interest rate swap contracts converting a fixed rate of interest to a floating rate of interest and converting a floating rate of interest to a fixed rate of interest with a notional amount at March 31, 1998, of $332.4 million. In the aggregate, there were no net unrealized gains or losses associated with these swap contracts at March 31, 1998. Withdrawals related to GICs were approximately $700 million during 1997. Withdrawals related to GICs are estimated to be approximately $900 million in 1998. The Company's asset/liability management programs and procedures take into account GIC withdrawals. Accordingly, the Company does not expect GIC withdrawals to have an unusual effect on the future operations and liquidity of the Company. In anticipation of receiving GIC and annuity deposits, the life insurance subsidiaries were committed at March 31, 1998, to fund mortgage loans and to purchase fixed maturity and other long-term investments in the amount of $601.0 million. The Company's subsidiaries held $168.0 million in cash and short-term investments at March 31, 1998. Protective Life Corporation had an additional $1.3 million in cash and short-term investments available for general corporate purposes. While the Company generally anticipates that the cash flows of its subsidiaries will be sufficient to meet their investment commitments and operating cash needs, the Company recognizes that investment commitments scheduled to be funded may from time to time exceed the funds then available. Therefore, the Company has arranged sources of credit for its insurance subsidiaries to use when needed. The Company expects that the rate received on its investments will equal or exceed its borrowing rate. Additionally, the Company may from time to time sell short-duration GICs to complement its cash management practices. At March 31, 1998, Protective Life Corporation had no borrowings outstanding under its $70 million revolving line of credit. 22 Protective Life Corporation's cash flow is dependent on cash dividends and payments on surplus notes from its subsidiaries, revenues from investment, data processing, legal, and management services rendered to the subsidiaries, and investment income. At December 31, 1997, approximately $154 million of consolidated stockholders' equity, excluding net unrealized losses on investments, represented net assets of the Company's insurance subsidiaries that cannot be transferred in the form of dividends, loans or advances to the parent company. In addition, the states in which the Company's insurance subsidiaries are domiciled impose certain restrictions on the insurance subsidiaries' ability to pay dividends to Protective Life Corporation. Also, distributions, including cash dividends to Protective Life Corporation from its life insurance subsidiaries, in excess of approximately $727 million, would be subject to federal income tax at rates then effective. Due to the expected growth of the Company's insurance sales, the Company plans to retain substantial portions of the earnings of its life insurance subsidiaries in those companies primarily to support their future growth. Protective Life Corporation's cash disbursements have from time to time exceeded its cash receipts, and these shortfalls have been funded through various external financings. Therefore, Protective Life Corporation may from time to time require additional external financing. To give the Company flexibility in connection with future acquisitions and other growth opportunities, the Company has registered common stock under the Securities Act of 1933 on a delayed (or shelf) basis. A life insurance company's statutory capital is computed according to rules prescribed by the National Association of Insurance Commissioners ("NAIC"), as modified by the insurance company's state of domicile. Statutory accounting rules are different from generally accepted accounting principles and are intended to reflect a more conservative view by, for example, requiring immediate expensing of policy acquisition costs. The NAIC's risk-based capital requirements require insurance companies to calculate and report information under a risk-based capital formula. The achievement of long-term growth will require growth in the statutory capital of the Company's insurance subsidiaries. The subsidiaries may secure additional statutory capital through various sources, such as retained statutory earnings or equity contributions by the Company. Under insurance guaranty fund laws in most states, insurance companies doing business in a participating state can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies. The Company does not believe that any such assessments will be materially different from amounts already reflected in the financial statements. A number of civil jury verdicts have been returned against insurers in the jurisdictions in which the Company does business involving the insurers' sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. Increasingly these lawsuits have resulted in the award of substantial judgments against the insurer that are disproportionate to the actual damages, including material amounts of punitive damages. In addition, in some class action and other lawsuits involving insurers' sales practices, insurers have made material settlement payments. In some states (including Alabama), juries have substantial discretion in awarding punitive damages which creates the potential for unpredictable material adverse judgments in any given punitive damages suit. The Company and its subsidiaries, like other insurers, in the ordinary course of business, are involved in such litigation. Although the outcome of any such litigation cannot be predicted with certainty, the Company believes that at the present time there are no pending or threatened lawsuits that are 23 reasonably likely to have a material adverse effect on the financial position, results of operations, or liquidity of the Company. President Clinton's recent budget proposal contains provisions that would change the way insurance companies and certain of their products are taxed, which, if enacted by Congress would negatively affect the Company. The Company is not aware of any material pending or threatened regulatory action with respect to the Company or any of its subsidiaries. 24 PART II Item 2(c). CHANGES IN SECURITIES References in this item to shares and price per share of the Company's common stock have not been adjusted for the Company's two-for-one stock split on April 1, 1998. Effective January 1, 1998, the Company acquired all of the issued and outstanding capital stock of the following four corporations: Autoquest Insurance Services of Utah, Inc. (a Utah corporation), Income Development Specialists, Inc. (d/b/a/ Autoquest Insurance Services of California) (a California corporation), Autoquest Insurance Services of Nevada, Inc. (a Nevada corporation), and Checker Flag Protection, Inc. (d/b/a Autoquest Administrative Services, Inc.) (a Nevada corporation) (all four companies being hereinafter collectively referred to as the "Autoquest Companies"). Pursuant to the terms of the Stock Purchase Agreements entered into in connection with this acquisition, the Company issued to the stockholders of the Autoquest Companies an aggregate of 54,896 shares of Protective Life Corporation Common Stock, par value $0.50 per share ("Common Stock"), which were issued from treasury shares on January 1, 1998. The offer and sale of 54,896 shares of the Company's Common Stock in this stock-for-stock exchange transaction was not registered under the Securities Act of 1933, as amended, (the "Securities Act") in reliance on exemption under Rule 506 of Regulation D promulgated by the Securities and Exchange Commission under Section 4(2) of the Securities Act. The 54,896 shares of Common Stock were issued to ten (10) investors. Each of these investors was a shareholder of the Autoquest Companies acquired by the Company, was provided with the information required by Rule 502 of Regulation D, and represented to the Company prior to the sale that he or she was capable of evaluating the merits and risks of the proposed investment. No commissions or other forms of remuneration were paid, directly or indirectly, to any person for soliciting any investor in this transaction. A Form D notice was filed with the U. S. Securities and Exchange Commission reporting the issuance of the 54,896 shares of Common Stock in connection with this transaction. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS References in this item to shares of the Company's common stock have not been adjusted for the Company's two-for-one stock split on April 1, 1998. The Annual Meeting of Stockholders was held on April 27, 1998. Shares entitled to vote at the Annual Meeting totaled 30,879,132 of which 26,523,112 shares were represented. The number of shares entitled to vote were determined as of a date prior to the April 1, 1998, stock split At the Annual Meeting the following directors were elected. The number of shares cast for and authorization withheld for each nominee is shown below. 25
AUTHORIZATION FOR WITHHELD William J. Rushton III 25,830,955 692,157 William J. Cabaniss, Jr. 25,820,605 702,507 Drayton Nabers, Jr. 25,831,155 691,957 John J. McMahon, Jr. 25,831,155 691,957 A. W. Dahlberg 25,831,155 691,957 Ronald L. Kuehn, Jr. 25,831,155 691,957 Herbert A. Sklenar 25,831,155 691,957 James S. M. French 25,830,075 693,037 Robert A. Yellowlees 25,831,155 691,957 John D. Johns 25,831,155 691,957 Elaine L. Chao 25,831,279 691,833 Donald M. James 25,831,351 691,761
Additionally, at the Annual Meeting stockholders approved three proposals. The first proposal was to approve an amendment to the Company's 1985 Restated Certificate of Incorporation to increase the authorized Common Stock of the Company from 80 million to 160 million shares, par value $0.50 per share. Shares voting for the first proposal were 24,135,073, shares voting against were 2,348,300, and shares abstaining were 39,739. The second proposal was to approve an amendment to the Company's 1997 Performance Share Plan. Shares voting for the second proposal were 25,829,541, shares voting against were 514,032, and shares abstaining were 179,539. The third proposal was to ratify the appointment of Coopers & Lybrand L.L.P. as the independent public accountants for the Company and its subsidiaries for the current year. Shares voting for the third proposal were 26,460,500, shares voting against were 16,174, and shares abstaining were 46,438. With regard to the transaction of such other business as might properly come before the Annual Meeting or any adjournment thereof 4,277,921 shares were cast as authorization withheld. No other matters came before the Annual Meeting or any adjournment thereof. Item 5. OTHER INFORMATION PREPARATION FOR YEAR 2000. Older computer hardware and software often denote the year using two digits rather than four; for example, the year 1997 often is denoted by such hardware and software as "97." It is probable that such hardware and software will malfunction when calculations involving the year 2000 are attempted because the hardware and/or software will interpret "00" as representing the year 1900 rather that the year 2000. This "Year 2000" issue potentially affects all individuals and companies (including the Company, its customers, business partners, suppliers, banks, custodians and administrators) who rely on computers or devices containing computer chips. The Company has developed and is implementing a Year 2000 transition plan intended to identify and modify or replace primary hardware and/or software systems on which it relies that have a Year 2000 issue. The Company is also developing and implementing a plan to identify and modify or replace secondary hardware and/or software systems on which it relies that have a Year 2000 issue. Substantial resources are being devoted to this effort; however, the costs to develop and implement these plans are not expected to be material. The Company is also confirming that its 26 service providers are implementing plans to identify and modify or replace their systems that have a Year 2000 issue. The Company currently anticipates that its systems will be able to process transactions dated beyond 1999 on or before December 31, 1999. There can be no assurances, however, that the Company's efforts will be successful, that interactions with other service providers with Year 2000 issues will not impair the Company's operations, or that the Year 2000 issue will not otherwise adversely affect the Company. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a). Exhibit 10(a) - The Company's 1997 Long-Term Incentive Plan (formerly the "1997 Performance Share Plan") Exhibit 15 - Letter re: unaudited interim financial statements Exhibit 27 - Financial Data Schedule Exhibit 99 - Safe harbor for Forward Looking Statements (b). A current report on Form 8-K was filed February 11, 1998, reporting under Item 5 and Item 7 the Company's 1997 fourth quarter earnings press release. A current report on Form 8-K was filed March 11, 1998, reporting under Item 5 and Item 7 the Company's press release describing its definitive agreement to acquire United Dental Care, Inc. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PROTECTIVE LIFE CORPORATION Date: May 15, 1998 /S/ JERRY W. DEFOOR ---------------------- Jerry W. DeFoor Vice President and Controller, and Chief Accounting Officer (Duly authorized officer) 27 EX-10 2 Exhibit 10(a) PROTECTIVE LIFE CORPORATION 1997 LONG-TERM INCENTIVE PLAN 1. PURPOSE. The purpose of the Protective Life Corporation 1997 Long-Term Incentive Plan (formerly known as the 1997 Performance Share Plan) is to further the long-term growth in profitability of Protective Life Corporation by offering long-term incentives in addition to current compensation to those key executives who will be largely responsible for such growth. 2. DEFINITIONS. "AWARD" shall mean any grant or award under the Plan. "AWARD PERIOD" means the period of calendar years fixed by the Committee with respect to all Performance Share Awards with the same Date of Grant (but no more than five years) commencing with each Date of Grant, except that the Award Period for a recently hired Employee may be for such lesser period as determined by the Committee. "BOARD" shall mean the Board of Directors of the Company. "CAUSE" shall mean (I) the willful failure by the Participant to perform substantially the Participant's duties as an employee of the Company (other than due to physical or mental illness) after reasonable notice to the Participant of such failure, (II) the Participant's engaging in serious misconduct that is injurious to the Company or any Subsidiary (III) the Participant's having been convicted of, or entered a plea of NOLO CONTENDERE to, a crime that constitutes a felony, or (IV) the breach by the Participant of any written covenant or agreement not to compete with the Company or any Subsidiary. "CHANGE IN CONTROL" shall mean the occurrence of any of the following events: (I) a transaction or acquisition as identified in the Company's Rights Agreement, as in effect from time to time, (ii) the consummation of (A) any consolidation, merger or similar transaction or purchase of securities of the Company pursuant to which (x) the members of the Board of Directors of the Company immediately prior to such transaction, do not, immediately after the transaction, constitute a majority of the Board of Directors of the surviving entity or (y) the stockholders of the Company immediately preceding the transaction, do not, immediately after the transaction, own at least 50% of the combined voting power of the outstanding securities of the surviving entity, (iii) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company, including, without limitation, any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of Protective Life Insurance Company, or (iv) any other event or transaction that is declared by resolution of the Board to constitute a Change in Control for purposes of the Plan. "CHANGE IN CONTROL PRICE" shall mean the greater of (I) the price per share of Common Stock immediately preceding any transaction resulting in a Change in Control or (ii) the highest price per share of Common Stock offered in conjunction with any transaction resulting in a Change in Control (as determined in good faith by the Committee if any part of the offered price is payable other than in cash), EXCEPT THAT, in the case of Incentive Stock Options and Stock Appreciation Rights relating to Incentive Stock Options such price shall be the Fair Market Value on the date on which the cash out described in Section 11 occurs. "CODE" shall mean the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "COMMITTEE" shall mean the Compensation and Management Succession Committee of the Board (or such other committee of the Board that the Board shall designate from time to time) or any subcommittee thereof comprised of two or more directors each of whom is an "outside director" within the meaning of Section 162(m) of the Code and a "non-employee director" within the meaning of Rule 16b-3, as promulgated under Section 16 of the Exchange Act. "COMMON STOCK" shall mean the common stock, par value $0.50 per share, of the Company. "COMPANY" shall mean Protective Life Corporation, a Delaware corporation. "DATE OF GRANT" with respect to a Performance Share Award shall mean as of January 1 of any year in which such an Award is made. "DEFERRED STOCK" shall mean a contractual right to receive a share of Common Stock at the time and subject to the conditions set forth in Section 10 hereof. "DISABILITY" shall mean long-term disability as defined under the terms of the Company's qualified pension plan. "ELIGIBLE EMPLOYEE" shall mean any person (including any officer) employed by the Company or any Subsidiary on a full-time salaried basis. "EMPLOYMENT" shall mean, for purposes of Sections [6(C) through (f), 7(d), 8(c), 9(b) and 10(c)] continuous and regular salaried employment with the Company or a subsidiary, which shall include (unless the Committee shall otherwise determine) any period of vacation, any approved leave of absence or any salary continuation or severance pay period and, at the discretion of the Committee, may include service with any former subsidiary of the Company. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. "EXECUTIVE OFFICER" shall mean those persons who are officers of the Company within the meaning of Rule 16a-1(f) of the Exchange Act. "FAIR MARKET VALUE" of the Common Stock shall mean (I) with respect to Performance Shares, the average of the daily closing prices for a share of the Common Stock for the twenty trading days prior to the date of payment of Performance Shares for an Award Period or an Interim Period, as the case may be, on the Composite Tape for New York Stock Exchange - Listed Stocks, or, if the Common Stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), on which the Common Stock is listed, or, if the Common Stock is not listed on any such Exchange, the average of the daily closing bid quotations with respect to a share of the Common Stock for such twenty trading days on the National Association of Securities Dealers, Inc., Automated Quotations System or any system then in use or (ii) with respect to other Awards, on any date, the closing price of a share of Common Stock, as reported for such day on a national exchange, or the mean between the closing bid and asked prices for a share of Common Stock on such date, as reported on a nationally recognized system of price quotation, PROVIDED THAT, in the event that there are no Common Stock transactions reported on such exchange or system on such date, Fair Market Value shall mean the closing price on the immediately preceding date on which Common Stock transactions were so reported. "INCENTIVE STOCK OPTION" shall mean an Option which is intended to meet the requirements of Section 422 of the Code. "INTERIM PERIOD" shall mean a period of calendar years chosen by the Committee commencing with any Date of Grant, which period is less than the Award Period commencing on the Date of Grant. "NONSTATUTORY STOCK OPTION" shall mean an Option which is not intended to be an Incentive Stock Option. "NORMAL RETIREMENT" shall mean retirement at or after the earliest age at which the Participant may retire and receive a retirement benefit without an actuarial reduction for early commencement of benefits under any defined benefit pension plan maintained by the Company or any of its Subsidiaries in which such Participant participates. "OPTION" shall mean the right to purchase the number of shares of Common Stock specified by the Committee, at a price and for the term fixed by the Committee in accordance with the Plan and subject to any other limitations and restrictions as this Plan and the Committee shall impose. "PARTICIPANT" shall mean an Eligible Employee who is selected by the Committee to receive an Award under the Plan. "PERFORMANCE SHARE" shall mean the equivalent of one share of Common Stock granted under Section 6 which becomes vested and nonforfeitable upon the attainment, in whole or in part, of performance objectives determined by the Committee. "PLAN" shall mean the Protective Life Corporation 1997 Long-Term Incentive Plan as set forth herein and as may be amended from time to time. "RESTRICTED PERIOD" shall mean the period during which a grant of Restricted Stock or Restricted Units is subject to forfeiture. "RESTRICTED STOCK" shall mean any Award of Common Stock granted under Section 9 which becomes vested and nonforfeitable, in whole or in part, upon the completion of such period of service as shall be determined by the Committee. "RESTRICTED UNIT" shall mean any Award of a contractual right granted under Section 9 to receive Common Stock (or, at the discretion of the Committee, cash based on the Fair Market Value of the Common Stock) which becomes vested and nonforfeitable, in whole or in part, upon the completion of such period of service as shall be determined by the Committee. "SECTION 162(M)" shall mean Section 162(m) of the Code and any regulations promulgated thereunder. "STOCK APPRECIATION RIGHT" shall mean a contractual right granted under Section 8 to receive cash, Common Stock or a combination thereof. "SUBSIDIARY" shall mean any corporation of which the Company possesses directly or indirectly fifty percent (50%) or more of the total combined voting power of all classes of stock of such corporation and any other business organization, regardless of form, in which the Company possesses directly or indirectly fifty percent (50%) or more of the total combined equity interests in such organization. 3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Committee which, subject to the provisions of the Plan, shall have the authority to select the Employees who are to participate in the Plan, to determine the Award to be made to each Employee selected to participate in the Plan, and to determine the conditions subject to which Awards will become payable under the Plan. The Committee shall have full power to administer and interpret the Plan and to adopt such rules and regulations consistent with the terms of the Plan as the Committee deems necessary or advisable in order to carry out the provisions of the Plan. Except as otherwise provided in the Plan, the Committee's interpretation and construction of the Plan and its determination of any conditions applicable to Awards or the granting of Awards to specific Participants shall be conclusive and binding on all Participants. In connection with its determination as to the payment of Performance Shares, the Committee has full discretion to adjust performance criteria to recognize special or nonrecurring situations or circumstances for the Company or any other corporation for any year. The Committee may employ such legal counsel, consultants and agents (including counsel or agents who are employees of the Company or a Subsidiary) as it may deem desirable for the administration of the Plan and may rely upon any opinion received from any such counsel or consultant or agent and any computation received from such consultant or agent. All expenses incurred in the administration of the Plan, including, without limitation, for the engagement of any counsel, consultant or agent, shall be paid by the Company. No member or former member of the Board or the Committee shall be liable for any act, omission, interpretation, construction or determination made in connection with the Plan other than as a result of such individual's willful misconduct. The Plan shall be unfunded. Benefits under the Plan shall be paid from the general assets of the Company. 4. MAXIMUM AMOUNT OF SHARES AVAILABLE FOR AWARDS. (a) MAXIMUM NUMBER OF SHARES. The maximum number of shares of Stock in respect of which Awards may be made under the Plan shall be a total of 2,000,000 shares of Common Stock. Without limiting the generality of the foregoing, whenever shares are received by the Company in connection with the exercise of or payment for any Award granted under the Plan, only the net number of shares actually issued shall be counted against the foregoing limit. Notwithstanding the foregoing, but subject to the provisions of Section 4(c), in no event shall (I) the number of shares of Common Stock issued under the Plan with respect to Restricted Stock, Restricted Units or Deferred Stock exceed 400,000 shares of Common Stock and (ii) any Participant receive Awards in any 12-month period for more than 200,000 shares of Common Stock. (b) SHARES AVAILABLE FOR ISSUANCE. Shares of Common Stock may be made available from the authorized but unissued shares of the Company or from shares held in the Company's treasury and not reserved for some other purpose. In the event that any Award is payable solely in cash, no shares shall be deducted from the number of shares available for issuance under Section 4(a) by reason of such Award except in the case of the exercise of a Stock Appreciation Right granted in tandem with an Option. In addition, if any Award in respect of shares is canceled or forfeited for any reason without delivery of shares of Common Stock, the shares subject to such Award shall thereafter again be available for award pursuant to the Plan. (C) ADJUSTMENT FOR CORPORATE TRANSACTIONS. In the event that the Committee shall determine that any stock dividend, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase Common Stock at a price substantially below fair market value, or other similar event affects the Common Stock such that an adjustment is required to preserve, or to prevent enlargement of, the benefits or potential benefits made available under this Plan, then the Committee may, in such manner as the Committee may deem equitable, adjust any or all of (I) the number and kind of shares which thereafter may be awarded or optioned and sold or made the subject of Stock Appreciation Rights under the Plan, (II) the number and kinds of shares subject to outstanding Options and other Awards and (III) the grant, exercise or conversion price with respect to any of the foregoing. Additionally, the Committee may make provisions for a cash payment to a Participant or a person who has an outstanding Option or other Award. However, the number of shares subject to any Option or other Award shall always be a whole number. 5. PARTICIPATION. Participants in the Plan shall be selected by the Committee from those Eligible Employees who, in the estimation of the Committee, have a substantial opportunity to influence the long-term profitability of the Company. 6. PERFORMANCE SHARES. (a) PERFORMANCE SHARE AWARDS. (1) After appropriate approval of the Plan, and thereafter from time to time, the Committee shall select Employees to receive Performance Share Awards in any year as of the Date of Grant. Any Employee may be granted more than one Performance Share Award under the Plan, but no Employee may earn, in the aggregate, more than 50% of the Performance Shares which are the subject of this Plan. Awards of Performance Shares hereunder shall not be made unless any such Award is in compliance with all applicable law. (2) No Participant shall be entitled to receive any dividends or dividend equivalents on Performance Shares; with respect to any Performance Shares, no Participant shall have any voting or any other rights of a Company stockholder; and no Participant shall have any interest in or right to receive any shares of Common Stock prior to the time when the Committee determines the form of payment of Performance Shares pursuant to this Section 6. (3) Payment of the Performance Share Award to any Participant shall be made in accordance with this Section 6 and shall be subject to such conditions for payment as the Committee may prescribe. The Committee may prescribe different conditions for different Participants. Such conditions may be expressed in terms of income per share, return on equity, economic value added, total return, sales or revenues, or on other reasonable bases. Unless the Committee otherwise determines at the time of grant of Performance Shares to an Executive Officer, the performance objectives with respect to such Award shall be related to at least one of the following criteria, which may be determined solely by reference to the performance of the Company or a division or subsidiary or based on comparative performance relative to other companies: (I) income per share, (ii) return on equity, (iii) economic value added, (iv) total return, (v) sales or revenues, or (vi) other reasonable bases; PROVIDED THAT to the extent the Committee determines that it is necessary to qualify compensation under Section 162(m), the performance criteria shall be based on one or more of the criteria listed in (I) through (v) above. The Committee may prescribe conditions such that payment of an Award may be made with respect to a number of shares of Common Stock that is greater than the number of Performance Shares awarded. Except to the extent otherwise expressly provided herein, the Committee may, at any time and from time to time, change the performance objectives applicable with respect to any Performance Shares to reflect such factors, including, without limitation, changes in a Participant's duties or responsibilities or changes in business objectives (e.g., from corporate to subsidiary or division performance or vice versa), as the Committee shall deem necessary or appropriate. In making any such adjustment, the Committee shall adjust the number of Performance Shares or take other appropriate actions to prevent any enlargement or diminution of the Participant's rights related to service rendered and performance attained prior to the effective date of such adjustment. (4) Each Performance Share Award shall be made in writing and shall set forth the terms and conditions set by the Committee for payment of such Award including, without limitation, the length of the Award Period and whether there will be an Interim Period with respect to the Award and if so, the length of the Interim Period. (b) PAYMENT OF PERFORMANCE SHARE AWARDS. Each Participant granted a Performance Share Award shall be entitled to payment of the Award as of the close of the Award Period applicable to such Award, but only if and after the Committee has determined that the conditions for payment of the Award set by the Committee have been satisfied. At the time of grant of each Performance Share Award, the Committee shall decide whether there will be an Interim Period. If the Committee determines that there shall be an Interim Period for the Award to any Participant, each such Participant granted a Performance Share Award with an Interim Period shall be entitled to partial payment on account thereof as of the close of the Interim Period, but only if and after the Committee has determined that the conditions for partial payment of the Award set by the Committee have been satisfied. Performance Shares paid to a Participant for an Interim Period may be retained by the Participant and shall not be repaid to the Company, notwithstanding that based on the conditions set for payment at the end of the Award Period such Participant would not have been entitled to payment of some or any of his Award. Any Performance Shares paid to a Participant for the Interim Period during an Award Period shall be deducted from the Performance Shares to which such Participant is entitled at the end of the Award Period. Unless otherwise directed by the Committee, payment of Performance Share Awards shall be made, as promptly as possible, by the Company after the determination by the Committee that payment has been earned. Unless otherwise directed by the Committee, all payments of Performance Share Awards to Participants shall be made partly in shares of Common Stock and partly in cash, with the cash portion being approximately equal to the amount of federal, state, and local taxes which the Participant's employer is required to withhold on account of said payment. The Committee, in its discretion, may provide for payment of cash and distribution of shares of Common Stock in such other proportions as the Committee deems appropriate, except and provided that the Committee must pay in cash an amount equal to the federal, state, and local taxes which the Participant's employer is required to withhold on account of said payment. There shall be deducted from the cash portion of all Performance Share Awards all taxes to be withheld with respect to such Awards. For payment of each Performance Share Award, the number of shares of Common Stock to be distributed to Participants shall equal the Fair Market Value of the total Performance Shares determined by the Committee to have been earned by the Participant less the portion of the Award that was paid in cash divided by the Fair Market Value of a Performance Share. (C) DEATH OR DISABILITY. If, prior to the close of an Award Period, a Participant's Employment terminates by reason of his or her death or Disability, payment of his or her outstanding Performance Share Award or Awards shall be made as promptly as possible after death or the date of the determination of Disability, and the number of Performance Shares to be paid shall be computed as follows: First, determine (based on the conditions set by the Committee for payment of Performance Share Awards for the subject Award Period) the number of Performance Shares that would have been paid if each subject Award Period had ended on the December 31st immediately preceding the date of death or the date of determination of Disability. Then, multiply each above-determined number by a fraction, the numerator of which is the number of months during the subject Award Period that the Participant was an active Employee, and the denominator of which is the number of months in the Award Period. This product shall be reduced by any Performance Shares for which payment has been made with respect to any Interim Period during each Award Period. In this instance, the Fair Market Value of the Common Stock shall be based on the twenty days immediately preceding the date of death or the date of the determination of Disability. Except as provided in Section 6(g), payments for Awards awarded in the year employment terminates shall be paid at the same percentage as the Award awarded in the year immediately preceding the year of death or Disability. (d) RETIREMENT PRIOR TO CLOSE OF AWARD PERIOD. Unless otherwise determined by the Committee, if, prior to the close of an Award Period, a Participant's Employment terminates by reason of his retirement on or after his or her Normal Retirement date or prior to his or her Normal Retirement date if such retirement was at the request of his employer, payment of the Participant's outstanding Performance Share Award or Awards will be made as promptly as possible after such retirement and such payment shall be computed in the same manner as in Section 6(c), using the effective date of retirement in place of the date of death or determination of Disability. (e) TERMINATION UNDER CERTAIN CIRCUMSTANCES. If, prior to the close of an Award Period, a Participant's Employment terminates by reason of (I) his or her retirement prior to his or her Normal Retirement date and such retirement was at the request of the Participant and approved by his of her employer, (ii) the divestiture by the Company of one or more of its business segments or a significant portion of the assets of a business segment, or (iii) a significant reduction by the Company in its salaried work force, the determination of whether such Participant shall receive payment of his or her outstanding Performance Share Award or Awards shall be within the exclusive discretion of the Committee. Payment, if any, of his or her Performance Share Award or Awards to such Participant shall be made as promptly as possible after one of the events described in subsections (I), (ii), and (iii) of this Section 9 occurs and the amount of such payment shall be computed in the same manner as in Section 6(c), using the effective date that such event occurs in place of the date or determination of Disability. (f) VOLUNTARY TERMINATION OR DISCHARGE. If, prior to the close of an Award Period, a Participant's Employment terminates and there is no payment due under the terms of Sections 6(c), (d) or (h) or 11, all of such Participant's outstanding Performance Shares shall forthwith and automatically be cancelled and all rights of the former holder of such cancelled Performance Shares in respect to such cancelled Performance Shares shall forthwith terminate. (g) INTERPRETATION. Notwithstanding anything else contained in this Plan to the contrary, if any Award of Performance Shares is intended, at the time of grant, to be other performance-based compensation within the meaning of Section 162(m)(4)(C) of the Code, to the extent required to so qualify any Award hereunder, (I) the Committee shall not be entitled to exercise any discretion otherwise authorized under this Plan with respect to such award if the ability to exercise such discretion (as opposed to the exercise of such discretion) would cause such award to fail to qualify as other performance-based compensation and (ii) in the event that an Executive Officer's Employment terminates by reason of his or her retirement on or after his or her Normal Retirement date or prior to his or her Normal Retirement date if such retirement was at the request of his employer, the payment, if any, with respect to any Performance Shares awarded since the December 31st immediately preceding the date of termination shall be made as promptly as possible after the end of the year in which such termination occurs and the number of Performance Shares to be paid shall be equal to that percentage, if any, of such Award that would have been earned if, based on the conditions set by the Committee for payment of Awards for the subject Award Period, the subject Award Period had ended as of December 31 of the year in which the termination occurred, times a fraction, the numerator of which is the number of months during the subject Award Period that the Participant was an active Employee, and the denominator of which is the number of months in the Award Period. (h) PAYMENT UPON PLAN TERMINATION. Payment of all Performance Share Awards outstanding at the date of Plan Termination shall be made as promptly as possible after such date and payment of each such Award shall be computed in the same manner as in Section 6(C) using the effective date of Plan Termination in place of the date of death or the date of the determination of Disability, except that the Common Stock will be priced at Fair Market Value based on the twenty trading days immediately preceding the date of Plan Termination. 7. STOCK OPTIONS. (a) GRANT. Subject to the provisions of the Plan, the Committee shall have the authority to grant Options to an Eligible Employee and to determine (I) the number of shares to be covered by each Option, (II) the exercise price therefor and (III) the conditions and limitations applicable to the exercise of the Option. The Committee shall have the authority to grant Incentive Stock Options or Nonstatutory Stock Options; PROVIDED THAT Incentive Stock Options may not be granted to any Participant who is not an employee of the Company or one of its Subsidiaries at the time of grant. In the case of Incentive Stock Options, the terms and conditions of such grants shall be subject to and comply with Section 422 of the Code and the regulations thereunder. (b) OPTION PRICE. The Committee shall establish the exercise price at the time each Option is granted, which price shall not be less than 100% of the Fair Market Value of the Common Stock at the date of grant, except that, for purposes of satisfying the foregoing requirement with respect to a Nonstatutory Stock Option, the Committee may elect to credit against the exercise price payable by a Participant the value of any compensation otherwise payable to the Participant under the terms of the Company's compensation practices and programs which is surrendered, foregone or exchanged pursuant to such rules or procedures as the Committee shall establish from time to time. (C) EXERCISE. Each Option shall be exercised at such times and subject to such terms and conditions as the Committee may specify in the applicable Award or thereafter; provided, however, that if the Committee does not establish a different exercise schedule at or after the date of grant of an Option, such Option shall become exercisable in three (3) equal installments on each of the first three anniversaries of the date the Option is granted. The Committee may impose such conditions with respect to the exercise of Options as it shall deem appropriate, including without limitation, any conditions relating to the application of federal or state securities laws. No shares shall be delivered pursuant to any exercise of an Option unless arrangements satisfactory to the Committee have been made to assure full payment of the option price therefor. Without limiting the generality of the foregoing, payment of the option price may be made in cash or its equivalent or, if and to the extent permitted by the Committee, by exchanging shares of Common Stock owned by the optionee (which are not the subject of any pledge or other security interest), or by a combination of the foregoing, provided that the combined value of all cash and cash equivalents and the Fair Market Value of any such Common Stock so tendered to the Company, valued as of the date of such tender, is at least equal to such option price. The Committee may permit a Participant to elect to pay the exercise price upon the exercise of an Option by authorizing a third party to sell shares of Common Stock (or a sufficient portion of the shares) acquired upon the exercise of the Option and remit to the Company a sufficient portion of the sale proceeds to pay the entire exercise price and any tax withholding resulting from such exercise. (d) TERMINATION OF EMPLOYMENT. Unless the Committee shall otherwise determine at or after grant, an Option shall be exercisable following the termination of a Participant's Employment only to the extent provided in this Section 7(d). If a Participant's Employment terminates due to the Participant's (I) death, (II) Disability, (III) early retirement with the consent of the Committee or (IV) Normal Retirement, the Participant (or, in the event of the Participant's death or Disability during Employment or during the period during which an Option is exercisable under this sentence, the Participant's beneficiary or legal representative) may exercise any Option held by the Participant at the time of such termination, regardless of whether then exercisable, for a period of three years in the case of Normal Retirement or early retirement with consent and one year in the case of death or Disability (or such greater or lesser period as the Committee shall determine at or after grant), but in no event after the date the Option otherwise expires. If a Participant's Employment is terminated for Cause (or, if after the Participant's termination of Employment, the Committee determines that the Participant's Employment could have been terminated for Cause had the Participant still been employed or has otherwise engaged in conduct that is detrimental to the interests of the Company, as determined by the Committee in its sole discretion), all Options held by the Participant shall immediately terminate, regardless of whether then exercisable. In the event of a Participant's termination of Employment for any reason not described in the preceding two sentences, the Participant (or, in the event of the Participant's death or Disability during the period during which an Option is exercisable under this sentence, the Participant's beneficiary or legal representative) may exercise any Option which was exercisable at the time of such termination for 90 days (or such greater or lesser period as the Committee shall specify at or after the grant of such Option) following the date of such termination, but in no event after the date the Option otherwise expires. 8. STOCK APPRECIATION RIGHTS. (a) GRANT OF STOCK APPRECIATION RIGHTS. The Committee shall have the authority to grant Stock Appreciation Rights in tandem with an Option, in addition to an Option, or freestanding and unrelated to an Option. Stock Appreciation Rights granted in tandem or in addition to an Option may be granted either at the same time as the Option or at a later time. Stock Appreciation Rights shall not be exercisable after the expiration of ten years from the date of grant and shall have a base price determined in the same manner as, and subject to the same conditions as apply with respect to, a Nonstatutory Stock Option under Section 7(b). (b) EXERCISE OF STOCK APPRECIATION RIGHTS. A Stock Appreciation Right shall entitle the Participant to receive from the Company an amount equal to the excess of the Fair Market Value of a share of Common Stock on the date of exercise of the Stock Appreciation Right over the base price thereof. The Committee shall determine the time or times at which or the event or events (including, without limitation, a Change of Control) upon which a Stock Appreciation Right may be exercised in whole or in part, the method of exercise and whether such Stock Appreciation Right shall be settled in cash, shares of Common Stock or a combination of cash and shares of Common Stock; provided, however, that unless otherwise specified by the Committee at or after grant, a Stock Appreciation Right granted in tandem with an Option shall be exercisable only at the same time or times as the related Option is exercisable. Unless the Committee shall establish a different exercise schedule at or after the date of grant, each Stock Appreciation Right shall become exercisable in three (3) equal installments on each of the first three anniversaries of the date of grant. (C) TERMINATION OF EMPLOYMENT. Unless the Committee shall otherwise determine at or after grant, a Stock Appreciation Right shall be exercisable following the termination of a Participant's Employment only to the extent provided in this Section 8(c). If a Participant's Employment terminates due to the Participant's (I) death, (II) Disability, (III) early retirement with the consent of the Committee or (IV) Normal Retirement, the Participant (or, in the event of the Participant's death or Disability during Employment or during the period during which a Stock Appreciation Right is exercisable under this sentence, the Participant's beneficiary or legal representative) may exercise any Stock Appreciation Right held by the Participant at the time of such termination, regardless of whether then exercisable, for a period of three years in the case of Normal Retirement or early retirement with consent and one year in the case of death or Disability (or such greater or lesser period as the Committee shall determine at or after grant), but in no event after the date the Stock Appreciation Right otherwise expires. If a Participant's Employment is terminated for Cause (or, if after the Participant's termination of Employment, the Committee determines that the Participant's Employment could have been terminated for Cause had the Participant still been employed or has otherwise engaged in conduct that is detrimental to the interests of the Company, as determined by the Committee in its sole discretion), all Stock Appreciation Rights held by the Participant shall immediately terminate, regardless of whether then exercisable. In the event of a Participant's termination of Employment for any reason not described in the preceding two sentences, the Participant (or, in the event of the Participant's death or Disability during the period during which a Stock Appreciation Right is exercisable under this sentence, the Participant's beneficiary or legal representative) may exercise any Stock Appreciation Right which was exercisable at the time of such termination for 90 days (or such greater or lesser period as the Committee shall specify at or after the grant of such Stock Appreciation Right) following the date of such termination, but in no event after the date the Stock Appreciation Right otherwise expires. 9. RESTRICTED STOCK AND RESTRICTED UNITS. (a) GRANT OF RESTRICTED STOCK OR RESTRICTED UNITS. The Committee may grant Awards of Restricted Stock or Restricted Units to Participants at such times and in such amounts, and subject to such other terms and conditions not inconsistent with the Plan, as it shall determine. Each grant of Restricted Stock or Restricted Units shall be evidenced by an Award Agreement. Unless the Committee provides otherwise at or after the date of grant, stock certificates evidencing any shares of Restricted Stock so granted shall be held in the custody of the Secretary of the Company until the Restricted Period lapses, and, as a condition to the grant of any Award of shares of Restricted Stock, the Participant shall have delivered to the Secretary of the Company a certificate, endorsed in blank, relating to the shares of Common Stock covered by such Award. (b) TERMINATION OF EMPLOYMENT. Unless the Committee otherwise determines at or after grant, the rights of a Participant with respect to an award of Restricted Stock or Restricted Units outstanding at the time of the Participant's termination of Employment shall be determined under this Section 9(b). In the event that a Participant's Employment terminates due to the Participant's (I) death, (II) Disability, (III) early retirement with the consent of the Committee or (IV) Normal Retirement, any restrictions on an award of Restricted Stock or Restricted Units shall lapse. Unless the Committee otherwise determines, any portion of any Restricted Stock or Restricted Unit Award as to which the Restricted Period has not lapsed at the date of a Participant's termination of Employment shall be forfeited as of such date. (C) DELIVERY OF SHARES. Upon the expiration or termination of the Restricted Period and the satisfaction (as determined by the Committee) of any other conditions determined by the Committee, the restrictions applicable to the Restricted Stock or Restricted Units shall lapse and a stock certificate for the number of shares of Common Stock with respect to which the restrictions have lapsed shall be delivered, free of all such restrictions, except any that may be imposed by law, to the Participant or the Participant's beneficiary or estate, as the case may be. No payment will be required to be made by the Participant upon the delivery of such shares of Common Stock and/or cash, except as otherwise provided in Section 12(a) of the Plan. At or after the date of grant, the Committee may accelerate the vesting of any award of Restricted Stock or Restricted Units or waive any conditions to the vesting of any such award. (d) RESTRICTED PERIOD; RESTRICTIONS ON TRANSFERABILITY DURING RESTRICTED PERIOD. Unless otherwise determined by the Committee at or after the date of grant, the Restricted Period applicable to any award of Restricted Stock or Restricted Units shall lapse, and the shares related to such award shall become freely transferable, as to an equal amount of shares of Restricted Stock or Restricted Units on each of the first five (5) anniversaries of the date of grant. Restricted Stock or Restricted Units may not be sold, assigned, pledged or otherwise encumbered, except as herein provided, during the Restricted Period. Any certificates issued in respect of Restricted Stock shall be registered in the name of the Participant and deposited by such Participant, together with a stock power endorsed in blank, with the Company. At the expiration of the Restricted Period with respect to any award of Restricted Stock, unless otherwise forfeited, the Company shall deliver such certificates to the Participant or to the Participant's legal representative. Payment for Restricted Stock Units shall be made by the Company in shares of Common Stock, cash or in any combination thereof, as determined by the Committee. (e) RIGHTS AS A STOCKHOLDER; DIVIDEND EQUIVALENTS. Unless otherwise determined by the Committee at or after the date of grant, Participants granted shares of Restricted Stock shall be entitled to receive, either currently or at a future date, as specified by the Committee, all dividends and other distributions paid with respect to those shares, provided that if any such dividends or distributions are paid in shares of Common Stock or other property (other than cash), such shares and other property shall be subject to the same forfeiture restrictions and restrictions on transferability as apply to the shares of Restricted Stock with respect to which they were paid. The Committee will determine whether and to what extent to credit to the account of, or to pay currently to, each recipient of Restricted Units, an amount equal to any dividends paid by the Company during the Restricted Period with respect to the corresponding number of shares of Common Stock ("Dividend Equivalents"). To the extent provided by the Committee at or after the date of grant, any Dividend Equivalents with respect to cash dividends on the Common Stock credited to a Participant's account shall be deemed to have been invested in shares of Common Stock on the record date established for the related dividend and, accordingly, a number of additional Restricted Units shall be credited to such Participant's account equal to the greatest whole number which may be obtained by dividing (X) the value of such Dividend Equivalent on the record date by (Y) the Fair Market Value of a share of Common Stock on such date. 10. DEFERRED STOCK. (a) DEFERRED STOCK AWARDS. Subject to such terms and conditions as the Committee shall determine, a Participant may be granted a Deferred Stock Award, entitling the Participant to receive shares of Common Stock without any payment in cash or property in one or more installments at a future date or dates. Such Award shall be non-transferrable and may be conditioned on such matters as the Committee shall determine, including continued employment or attainment of performance goals. No shares of Common Stock will be issued at the time an award of Deferred Stock is made and the Company shall not be required to set aside a fund for the payment of any such award. The Company will establish a separate account for the Participant and will record in such account the number of Deferred Stock Units awarded to the Participant. Any deferral restrictions under a Deferred Stock Award may be accelerated or waived by the Committee at any time prior to termination of employment. The Committee may permit Participants to further deter receipt of a Deferred Stock Award. (b) RIGHTS AS A STOCKHOLDER; DIVIDEND EQUIVALENTS. A Participant shall not have any right in respect of Deferred Stock awarded pursuant to the Plan to vote on any matter submitted to the Company's stockholders until such time as the shares of Common Stock attributable to such Deferred Stock have been issued to such Participant or his beneficiary. The Committee will determine whether and to what extent to credit to the account of, or to pay currently to, each recipient of a Deferred Stock Award, any Dividend Equivalents. To the extent provided by the Committee at or after the date of grant, any Dividend Equivalents with respect to cash dividends on the Common Stock credited to a Participant's account shall be deemed to have been invested in shares of Common Stock on the record date established for the related dividend and, accordingly, a number of Deferred Stock shall be credited to such Participant's account equal to the greatest whole number which may be obtained by dividing (X) the value of such Dividend Equivalent on the record date by (Y) the Fair Market Value of a share of Common Stock on such date. (C) SETTLEMENT OF DEFERRED STOCK. Unless the Committee determines otherwise at or after the date of grant, a Participant shall receive one share of Common Stock for each Deferred Stock Unit (and related Dividend Equivalents) that shall have become vested on or prior to the date of such Participant's termination of Employment with the Company and the Subsidiaries, other than any such termination for Cause, on the date of such termination of Employment (or on such earlier date as the Committee shall permit or such later date as may be elected by the Participant in accordance with the rules and procedures of the Committee). In the event of the termination of a Participant's Employment with the Company and the Subsidiaries for Cause, the Participant shall immediately forfeit all rights with respect to any Deferred Stock Units (and related Dividend Equivalents) credited to his or her account. The Committee may provide in the Award Agreement applicable to any Award of Deferred Stock that, in lieu of issuing shares of Common Stock in settlement of the vested portion of such Deferred Stock, the Committee may direct the Company to pay to the Participant the cash balance of such Deferred Stock. 11. CHANGE IN CONTROL. (a) ACCELERATED VESTING AND PAYMENT. Subject to the provisions of Section 11(b) below, in the event of a Change in Control, each Option and Stock Appreciation Right shall promptly be canceled in exchange for a payment in cash of an amount equal to the excess of the Change of Control Price over the exercise price for such Option or the base price for such Stock Appreciation Right, whichever is applicable, the Restricted Period applicable to all shares of Restricted Stock or Restricted Units shall expire and all such shares shall become nonforfeitable and immediately transferable and all Deferred Stock shall become fully vested and the shares of Common Stock with respect thereto shall be immediately payable. (b) ALTERNATIVE AWARDS. Notwithstanding Section 11(a), no cancellation, acceleration of exercisability, vesting, cash settlement or other payment shall occur with respect to any Award or any class of Awards if the Committee reasonably determines in good faith prior to the occurrence of a Change in Control that such Award or class of Awards shall be honored or assumed, or new rights substituted therefor (such honored, assumed or substituted award hereinafter called an "Alternative Award") by a Participant's employer (or the parent or a subsidiary of such employer) immediately following the Change in Control, provided that any such Alternative Award must: (I) be based on stock which is traded on an established securities market, or which will be so traded within 60 days following the Change in Control; (ii) provide such Participant (or each Participant in a class of Participants) with rights and entitlements substantially equivalent to or better than the rights and entitlements applicable under such Incentive Award, including, but not limited to, an identical or better exercise or vesting schedule and identical or better timing and methods of payment; (iii) have substantially equivalent economic value to such Incentive Award (determined by the Committee as constituted immediately prior to the Change in Control, in its sole discretion, promptly after the Change in Control); and (iv) have terms and conditions which provide that in the event that the Participant's employment is involuntarily terminated or constructively terminated (other than for Cause) upon or following such Change in Control, any conditions on a Participant's rights under, or any restrictions on transfer or exercisability applicable to, each such Alternative Award shall be waived or shall lapse, as the case may be. For this purpose, a constructive termination shall mean a termination by a Participant following a material reduction in the Participant's compensation, a material reduction in the Participant's responsibilities or the relocation of the Participant's principal place of employment to another location a material distance farther away from the Participant's home, in each case, without the Participant's prior written consent. (C) In the event of a Change in Control, each Participant shall be deemed to have earned Performance Shares with respect to each of his or her Performance Share Awards outstanding at the date of such Change in Control. The number of Performance Shares so earned shall be computed by determining (based on the conditions set by the Committee for payment of Performance Share Awards for the subject Award Period) the number of Performance Shares that would have been paid if each subject Award Period had ended on the December 31st immediately preceding the Change of Control provided that in no event shall the number of Performance Shares earned be less than the aggregate number of Performance Shares at the target performance level (as identified in the applicable award letter) with respect to all such Awards. Performance Share Awards granted in the year of the Change in Control shall be earned at the same percentage as Awards granted in the year preceding the year of the Change in Control. Each Performance Share so earned shall be canceled in exchange for an immediate payment in cash of an amount equal to the Change in Control Price. 12. GENERAL PROVISIONS. (a) WITHHOLDING. The Company shall have the right to deduct from all amounts paid to a Participant in cash (whether under this Plan or otherwise) any taxes required by law to be withheld in respect of Awards under this Plan. In the case of any Award satisfied in the form of Common Stock, no shares shall be issued unless and until arrangements satisfactory to the Committee shall have been made to satisfy any withholding tax obligations applicable with respect to such Award. Without limiting the generality of the foregoing and subject to such terms and conditions as the Committee may impose, the Company shall have the right to retain, or the Committee may, subject to such terms and conditions as it may establish from time to time, permit Participants to elect to tender, Common Stock (including Common Stock issuable in respect of an Award) to satisfy, in whole or in part, the amount required to be withheld. (b) AWARDS. Each Award hereunder shall be evidenced in writing. The written agreement shall be delivered to the Participant and shall incorporate the terms of the Plan by reference and specify the terms and conditions thereof and any rules applicable thereto. (C) CANCELLATION OF PERFORMANCE SHARES. With the written consent of a Participant holding Performance Shares granted to him under the Plan, the Committee may cancel such Performance Shares. In the event of any such cancellation, all rights of the former holder of such cancelled Performance Shares in respect to such cancelled Performance Shares shall forthwith terminate. (d) NO ASSIGNMENT OF INTEREST. Unless the Committee shall permit (on such terms and conditions as it shall establish) an Award to be transferred to a member of the Participant's immediate family or to a trust or similar vehicle for the benefit of such immediate family members (collectively, the "Permitted Transferees"), an Award or interest of any Participant in the Plan shall not be assignable, either by voluntary assignment or by operation of law, and any assignment of such interest, whether voluntary or by operation of law, shall render the Award void, except that cash or shares of Common Stock payable under the Plan shall be transferable by testamentary will or by the laws of descent and distribution. All shares of Common Stock paid pursuant to this Plan are to be taken subject to an investment representation by the Participant or other recipient that any such shares are acquired for investment and not with a view to distribution and that such shares shall not be transferred or sold until registered in compliance with the Securities Act of 1933 or unless an exemption therefrom is available in the opinion of the General Counsel for the Company. All rights with respect to Awards granted to a Participant under the Plan shall be exercisable during his or her lifetime only by such Participant, or, if applicable, the Permitted Transferees. (e) DESIGNATION OF BENEFICIARY. Each Participant may designate a beneficiary or beneficiaries (which beneficiary may be an entity other than a natural person) to receive any payments which may be made following the Participant's death. Such designation may be changed or canceled at any time without the consent of any such beneficiary. Any such designation, change or cancellation must be made in a form approved by the Committee and shall not be effective until received by the Committee. If no beneficiary has been named, or the designated beneficiary or beneficiaries shall have predeceased the Participant, the beneficiary shall be the Participant's spouse or, if no spouse survives the Participant, the Participant's estate. If a Participant designates more than one beneficiary, the rights of such beneficiaries shall be payable in equal shares, unless the Participant has designated otherwise. (f) EMPLOYMENT RIGHTS. An Award made under the Plan shall not confer any right on the Participant to continue in the employ of the Company or any subsidiary or limit in any way the right of his employer to terminate his employment at any time. (g) EXPENSES. The expenses of administrating the Plan shall be borne by the Company. (h) NO RIGHTS TO AWARDS, NO SHAREHOLDER RIGHTS. No Participant or Eligible Employee shall have any claim to be granted any Award under the Plan, and there is no obligation of uniformity of treatment of Participants and Eligible Employees. Subject to the provisions of the Plan and the applicable Award, no person shall have any rights as a shareholder with respect to any shares of Common Stock to be issued under the Plan prior to the issuance thereof. (I) CONSTRUCTION OF THE PLAN. The validity, construction, interpretation, administration and effect of the Plan and of its rules and regulations, and rights relating to the Plan, shall be determined solely in accordance with the laws of the State of Delaware. (j) LEGEND. To the extent any stock certificate is issued to a Participant in respect of shares of Restricted Stock awarded under the Plan prior to the expiration of the applicable Restricted Period, such certificate shall be registered in the name of the Participant and shall bear the following (or similar) legend: "The shares of stock represented by this certificate are subject to the terms and conditions contained in the Protective Life Corporation 1997 Long-Term Incentive Plan and the Award Agreement, dated as of ____________, between the Company and the Participant, and may not be sold, pledged, transferred, assigned, hypothecated or otherwise encumbered in any manner (except as provided in the Plan or in such Award Agreement) until _______________." Upon the lapse of the Restricted Period with respect to any such shares of Restricted Stock, the Company shall issue or have issued new share certificates without the legend described herein in exchange for those previously issued. (k) EFFECTIVE DATE. The Plan, as amended, shall be effective on the date the Plan is approved by shareholders. No Awards may be granted under the Plan after December 31, 2006. (l) AMENDMENT OF PLAN. The Board or the Committee may amend, suspend or terminate the Plan or any portion thereof at any time, provided that no amendment shall be made without shareholder approval if such amendment would (l) increase the number of shares of Common Stock subject to the Plan, except pursuant to Section 4(c); (2) change the price at which Options may be granted; (3) change the definition of Performance Share; or (4) remove the administration of the Plan from the Committee. Without the written consent of an affected Participant, no termination, suspension or modification of the Plan shall adversely affect any right of such Participant under the terms of an Award granted before the date of such termination, suspension or modification. (m) APPLICATION OF PROCEEDS. The proceeds received by the Company from the sale of its shares under the Plan will be used for general corporate purposes. (n) COMPLIANCE WITH LEGAL AND EXCHANGE REQUIREMENTS. The Plan, the granting and exercising of Awards thereunder, and the other obligations of the Company under the Plan, shall be subject to all applicable federal and state laws, rules, and regulations, and to such approvals by any regulatory or governmental agency as may be required. The Company, in its discretion, may postpone the granting and exercising of Awards, the issuance or delivery of Common Stock under any Award or any other action permitted under the Plan to permit the Company, with reasonable diligence, to complete such stock exchange listing or registration or qualification of such Common Stock or other required action under any federal or state law, rule, or regulation and may require any Participant to make such representations and furnish such information as it may consider appropriate in connection with the issuance or delivery of Common Stock in compliance with applicable laws, rules, and regulations. The Company shall not be obligated by virtue of any provision of the Plan to recognize the exercise of any Award or to otherwise sell or issue Common Stock in violation of any such laws, rules, or regulations; and any postponement of the exercise or settlement of any Award under this provision shall not extend the term of such Awards, and neither the Company nor its directors or officers shall have any obligation or liability to the Participant with respect to any Award (or Common Stock issuable thereunder) that shall lapse because of such postponement. (o) DEFERRALS. The Committee may postpone the exercising of Awards, the issuance or delivery of Common Stock under any Award or any action permitted under the Plan to prevent the Company or any of its Subsidiaries from being denied a Federal income tax deduction with respect to any Award other than an Incentive Stock Option. (p) GENDER AND NUMBER. Except when otherwise indicated by the context, words in the masculine gender used in the Plan shall include the feminine gender, the singular shall include the plural, and the plural shall include the singular. EX-15 3 Exhibit 15 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Protective Life Corporation We are aware that our report dated April 23, 1998, on our review of interim consolidated financial information of Protective Life Corporation and subsidiaries for the period ended March 31, 1998, and included in the Company's quarterly report on Form 10-Q for the quarter then ended, is incorporated by reference in the Company's registration statements on Form S-8 and Form S-3. Pursuant to Rule 436(C) under the Securities Act of 1933, this report should not be considered a part of the registration statements prepared or certified by us within the meaning of Sections 7 and 11 of that Act. COOPERS & LYBRAND L.L.P. Birmingham, Alabama May 15, 1998 EX-27 4
7 This schedule contains the summary financial information extracted from the consolidated financial statements of Protective Life Corporation and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS 3-MOS DEC-31-1998 DEC-31-1997 JAN-01-1998 JAN-01-1997 MAR-31-1998 MAR-31-1997 6,297,854 4,697,855 0 0 0 0 13,130 37,255 1,367,866 1,579,900 13,319 11,775 8,117,193 6,614,772 0 41,996 584,516 335,838 652,832 502,568 10,756,909 8,317,012 3,433,490 2,472,301 388,323 253,439 0 0 166,121 146,076 120,000 195,000 245,000 55,000 0 0 33,336 33,336 752,096 562,640 10,756,909 8,317,012 149,358 129,578 157,626 130,330 11 (418) 13,518 4,762 187,897 163,019 24,835 20,835 57,755 41,630 50,026 38,768 17,009 13,181 29,993 24,783 0 0 0 0 0 0 29,993 24,783 .48 .40 .47 .40 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Reflects two for one stock split effective April 1, 1998. Net of minority interest in income of consolidated subsidiaries of $3,024. Net of minority interest in income of consolidated subsidiaries of $804.
EX-99 5 Exhibit 99 to Form 10-Q of Protective Life Corporation for the three months ended March 31, 1998 Safe Harbor for Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 (the "Act") encourages companies to make "forward-looking statements" by creating a safe harbor to protect the companies from securities law liability in connection with forward-looking statements. Forward-looking statements can be identified by use of words such as "expect," "estimate," "project, " budget," "forecast," "anticipate," "plan," and similar expressions. Protective Life Corporation (the "Company") intends to qualify both its written and oral forward-looking statements for protection under the Act. To qualify oral forward-looking statements for protection under the Act, a readily available written document must identify important factors that could cause actual results to differ materially from those in the forward-looking statements. The Company provides the following information to qualify forward-looking statements for the safe harbor protection of the Act. The operating results of companies in the insurance industry have historically been subject to significant fluctuations due to competition, economic conditions, interest rates, investment performance, maintenance of insurance ratings, and other factors. Certain known trends and uncertainties which may affect future results of the Company are discussed more fully below. MATURE INDUSTRY; COMPETITION. Life and health insurance is a mature industry. In recent years, the industry has experienced virtually no growth in life insurance sales, though the aging population has increased the demand for retirement savings products. Insurance is a highly competitive industry and the Company encounters significant competition in all lines of business from other insurance companies, many of which have greater financial resources than the Company, as well as competition from other providers of financial services. The life and health insurance industry is consolidating, with larger, more efficient organizations emerging from consolidation. Also, mutual insurance companies are converting to stock ownership which will give them greater access to capital markets. Management believes that the Company's ability to compete is dependent upon, among other things, its ability to attract and retain distribution channels to market its insurance and investment products, its ability to develop competitive and profitable products, its ability to maintain low unit costs, and its maintenance of strong claims-paying and financial strength ratings from rating agencies. The Company competes against other insurance companies and financial institutions in the origination of commercial mortgage loans. RATINGS. Ratings are an important factor in the competitive position of life insurance companies. Rating organizations periodically review the financial performance and condition of insurers, including the Company's insurance subsidiaries. A downgrade in the ratings of the Company's life insurance subsidiaries could adversely affect its ability to sell its products and its ability to compete for attractive acquisition opportunities. Rating organizations assign ratings based upon several factors. While most of the considered factors relate to the rated company, some of the factors relate to general economic conditions and circumstances outside the rated company's control. For the past several years rating downgrades in the industry have exceeded upgrades. POLICY CLAIMS FLUCTUATIONS. The Company's results may fluctuate from year to year on account of fluctuations in policy claims received by the Company. LIQUIDITY AND INVESTMENT PORTFOLIO. Many of the products offered by the Company's life insurance subsidiaries allow policyholders and contractholders to withdraw their funds under defined circumstances. The Company's insurance subsidiaries design products and configure investment portfolios so as to provide and maintain sufficient liquidity to support anticipated withdrawal demands and contract benefits and maturities. Formal asset/liability management programs and procedures are used to monitor the relative duration of the Company's assets and liabilities. While the Company's life insurance subsidiaries own a significant amount of liquid assets, many of their assets are relatively illiquid. Significant unanticipated withdrawal or surrender activity could, under some circumstances, compel the Company's insurance subsidiaries to dispose of illiquid assets on unfavorable terms, which could have a material adverse effect on the Company. INTEREST RATE FLUCTUATIONS. Sudden and/or significant changes in interest rates expose insurance companies to the risk of not earning anticipated spreads between the interest rate earned on investments and the credited rates paid on outstanding policies. Both rising and declining interest rates can negatively affect the Company's spread income. For example, certain of the Company's insurance and investment products guarantee a minimum credited interest rate. While the Company develops and maintains asset/liability management programs and procedures designed to preserve spread income in rising or falling interest rate environments, no assurance can be given that significant changes in interest rates will not materially affect such spreads. Lower interest rates may result in lower sales of the Company's insurance and investment products. REGULATION AND TAXATION. The Company's insurance subsidiaries are subject to government regulation in each of the states in which they conduct business. Such regulation is vested in state agencies having broad administrative power dealing with all aspects of the insurance business including premium rates, marketing practices, advertising, policy forms, and capital adequacy, and is concerned primarily with the protection of policyholders rather than stockholders. The Company cannot predict the form of any future regulatory initiatives. Under the Internal Revenue Code of 1986, as amended (the Code), income tax payable by policyholders on investment earnings is deferred during the accumulation period of certain life insurance and annuity products. This favorable tax treatment may give certain of the Company's products a competitive advantage over other non-insurance products. Congress is currently reviewing certain proposals contained in President Clinton's Fiscal Year 1999 Budget which, if enacted, would adversely impact the tax treatment of variable annuity and certain other life insurance products. To the extent that the Code is revised to reduce the tax-deferred status of life insurance and annuity products, or to increase the tax-deferred status of competing products, all life insurance companies, including the Company's subsidiaries, would be adversely affected with respect to their ability to sell such products, and, depending on grandfathering provisions, the surrenders of existing annuity contracts and life insurance policies. The Company cannot predict what future initiatives the President or Congress may propose which may affect the Company. LITIGATION. A number of civil jury verdicts have been returned against insurers in the jurisdictions in which the Company does business involving the insurers' sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. Increasingly these lawsuits have resulted in the award of substantial judgments against the insurer that are disproportionate to the actual damages, including material amounts of punitive damages. In some states (including Alabama), juries have substantial discretion in awarding punitive damages which creates the potential for unpredictable material adverse judgments in any given punitive damages suit. The Company and its subsidiaries, like other insurers, in the ordinary course of business, are involved in such litigation. The outcome of any such litigation cannot be predicted with certainty. In addition, in some class action and other lawsuits involving insurers' sales practices, insurers have made material settlement payments. INVESTMENT RISKS. The Company's invested assets are subject to customary risks of defaults and changes in market values. The value of the Company's commercial mortgage portfolio depends in part on the financial condition of the tenants occupying the properties which the Company has financed. Factors that may affect the overall default rate on, and market value of, the Company's invested assets include interest rate levels, financial market performance, and general economic conditions, as well as particular circumstances affecting the businesses of individual borrowers and tenants. CONTINUING SUCCESS OF ACQUISITION STRATEGY. The Company has actively pursued a strategy of acquiring blocks of insurance policies. This acquisition strategy has increased the Company's earnings in part by allowing the Company to position itself to realize certain operating efficiencies associated with economies of scale. There can be no assurance, however, that suitable acquisitions, presenting opportunities for continued growth and operating efficiencies, will continue to be available to the Company, or that the Company will realize the anticipated financial results from its acquisitions. RELIANCE UPON THE PERFORMANCE OF OTHERS. The Company has entered into various ventures involving other parties. Examples include, but are not limited to: many of the Company's products are sold through independent distribution channels; the Investment Products Division's variable annuity deposits are invested in funds managed by unaffiliated investment managers; a portion of the sales in the Individual Life, Dental, and Financial Institutions Divisions comes from arrangements with unrelated marketing organizations; and the Company has entered the Hong Kong insurance market in a joint venture. Therefore the Company's results may be affected by the performance of others. YEAR 2000. Older computer hardware and software often denote the year using two digits rather than four; for example, the year 1997 often is denoted by such hardware and software as "97." It is probable that such hardware and software will malfunction when calculations involving the year 2000 are attempted because the hardware and/or software will interpret "00" as representing the year 1900 rather that the year 2000. This "Year 2000" issue potentially affects all individuals and companies (including the Company and its suppliers, customers, and business partners) who rely on computers or devices containing computer chips. The Company has developed and is implementing a Year 2000 transition plan intended to identify and modify or replace primary hardware and/or software systems on which it relies that have a Year 2000 issue. The Company is also developing and implementing a plan to identify and modify or replace secondary hardware and/or software systems on which it relies that have a Year 2000 issue. Substantial resources are being devoted to this effort; however, the costs to develop and implement these plans are not expected to be material. The Company is also confirming that its service providers are implementing plans to identify and modify or replace their systems that have a Year 2000 issue. The Company currently anticipates that its systems will be able to process transactions dated beyond 1999 on or before December 31, 1999. There can be no assurances, however, that the Company's efforts will be successful, that interactions with other service providers with Year 2000 issues will not impair the Company's operations, or that the Year 2000 issue will not otherwise adversely affect the Company. REINSURANCE. As is customary in the insurance industry, the Company's insurance subsidiaries cede insurance to other insurance companies. However, the ceding insurance company remains liable with respect to ceded insurance should any reinsurer fail to meet the obligations assumed by it. Additionally, the Company assumes policies of other insurers. Any regulatory or other adverse development affecting the ceding insurer could also have an adverse effect on the Company. Forward-looking statements express expectations of future events and/or results. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected. Due to these inherent uncertainties, investors are urged not to place undue reliance on forward-looking statements. In addition, the Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes to projections over time. -----END PRIVACY-ENHANCED MESSAGE-----