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Exhibit 99.2
PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The unaudited pro forma condensed combined financial statements are based
on the historical presentation of the consolidated financial statements of
Provident and Paul Revere. The Unaudited Pro Forma Condensed Combined
Statements of Operations for the years ended December 31, 1996 and 1995, give
effect to the Merger as if it had occurred at the beginning of each of the
periods presented. The Unaudited Pro Forma Condensed Combined Statement of
Financial Condition as of December 31, 1996 gives effect to the Merger as if it
had occurred on December 31, 1996.
The Merger is expected to be accounted for under the purchase method of
accounting. The estimated total purchase price for Paul Revere has been
allocated to tangible and identifiable intangible assets and liabilities based
upon management's estimate of their respective fair market values with the
excess of cost over net assets acquired allocated to goodwill. The allocation of
the purchase price for the Merger is subject to revision when additional
information concerning asset and liability valuation is obtained.
Each of the Unaudited Pro Forma Condensed Combined Statements of Operations
include the historical operating results of Paul Revere from the beginning of
the period covered by such statement until the end of such period. These pro
forma statements may not necessarily be indicative of the results that actually
would have occurred if the Merger had been in effect on the dates indicated or
which may be obtained in the future. These condensed combined pro forma
statements do not reflect any potential savings which may result from the
combined operations of Provident and Paul Revere.
The unaudited pro forma condensed combined financial statements should be
read in conjunction with the historical consolidated financial statements,
including the notes thereto, of Provident, which have been previously filed,
and Paul Revere, which are filed herewith.
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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1996
PRO FORMA
PROVIDENT PAUL REVERE ADJUSTMENTS COMBINED(15)
--------- ----------- ----------- -------------
(IN MILLIONS)
ASSETS
Investments:
Fixed maturity securities
Available-for-sale -- at fair value...... $10,880.1 $5,003.4 $113.7 (1) $15,997.2
Held-to-maturity -- at amortized cost.... 264.5 -- -- 264.5
Equity securities -- at fair value.......... 4.9 89.1 -- 94.0
Mortgage loans.............................. -- 329.0 (46.9) (2) 282.1
Real estate................................. 151.1 2.7 (1.9) (2) 151.9
Policy loans................................ 1,749.0 73.8 -- 1,822.8
Other long-term investments................. 15.5 32.7 (12.0) (2) 36.2
Short-term investments...................... 252.3 239.7 (145.0) (3) 347.0
--------- -------- ------- --------
Total investments................... 13,317.4 5,770.4 (92.1) 18,995.7
Other assets:
Cash and bank deposits...................... 19.3 -- -- 19.3
Accounts receivable......................... 40.1 -- -- 40.1
Premiums receivable......................... 72.3 22.4 -- 94.7
Reinsurance receivable...................... 468.3 466.6 -- 934.9
Accrued investment income................... 268.3 85.1 -- 353.4
Deferred policy acquisition costs........... 421.8 878.9 (878.9) (4) 421.8
Value of business acquired.................. -- 60.2 744.6 (5) 804.8
Goodwill.................................... -- 107.5 341.2 (6) 448.7
Property and equipment -- at cost less
accumulated depreciation................. 59.0 32.0 6.0 (7) 97.0
Miscellaneous............................... 25.5 82.6 -- 108.1
Separate account assets..................... 300.5 23.2 -- 323.7
--------- -------- ------- ---------
Total assets........................ $14,992.5 $7,528.9 $ 120.8 $22,642.2
========= ======== ======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities for benefits to policyholders..... $ 8,521.8 $4,020.6 $ 333.0 (8) $12,875.4
Other policyholders' funds.................... 3,881.1 1,973.1 -- 5,854.2
Federal income tax liability.................. 49.1 164.2 (178.6) (9) 34.7
Long-term debt................................ 200.0 -- 531.2 (10) 731.2
Short-term debt............................... -- 134.7 (108.5) (10) 26.2
Other liabilities............................. 301.4 115.3 51.5 (11) 468.2
Separate account liabilities.................. 300.5 23.2 -- 323.7
--------- -------- ------- ---------
Total liabilities................... 13,253.9 6,431.1 628.6 20,313.6
--------- -------- ------- ---------
Stockholders' equity:
Preferred stock............................. 156.2 -- -- 156.2
Common stock................................ 45.6 45.0 (28.1) (12) 62.5
Additional paid-in capital.................. 11.4 560.1 13.0 (13) 584.5
Net unrealized gain on securities........... 90.9 78.3 (78.3) (14) 90.9
Foreign currency translation adjustment..... (5.2) (14.8) 14.8 (14) (5.2)
Retained earnings........................... 1,439.7 429.2 (429.2) (14) 1,439.7
--------- -------- ------- ---------
Total stockholders' equity.......... 1,738.6 1,097.8 (507.8) 2,328.6
--------- -------- ------- ---------
Total liabilities and stockholders'
equity............................ $14,992.5 $7,528.9 $ 120.8 $22,642.2
========= ======== ======= =========
See Notes to Unaudited Pro Forma Condensed Combined Statement of Financial
Condition.
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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
The pro forma condensed combined statement of financial condition assumes a
transaction effective date of December 31, 1996 for presentation purposes only.
The amounts included for Provident were taken from its Annual Report on Form
10-K for the year ended December 31, 1996. The amounts included for Paul Revere
were taken from Exhibit 99-1 to the Current Report. The pro forma adjustments
reflect the proposed financing arrangements, including the acquisition of debt
of $531.2 million and the issuance of $590.0 million of common stock equity.
The composition of the common stock equity will be as follows, giving effect to
each of the three forms of Merger Consideration available for election by the
Paul Revere public stockholders:
ASSUMING THE DESIGNATED FORM OF MERGER CONSIDERATION
IS ELECTED BY ALL PAUL REVERE PUBLIC STOCKHOLDERS
(DOLLARS IN MILLIONS)
MIXED CONSIDERATION STOCK CONSIDERATION CASH CONSIDERATION
------------------- ------------------- -------------------
NO. SHARES NO. SHARES NO. SHARES
EQUITY ISSUED EQUITY ISSUED EQUITY ISSUED
------ ---------- ------ ---------- ------ ----------
Zurich.......................... $300.0 9.5 $300.0 9.5 $300.0 9.5
Textron......................... 245.0 6.0 245.0 5.9 245.0 7.7
Paul Revere public
stockholders.................. 45.0 1.4 195.0 5.8 0 0
The Exchange Ratio and related Average Closing Price per share assumed in
the above examples are as follows:
MIXED STOCK CASH
CONSIDERATION CONSIDERATION CONSIDERATION
------------- ------------- -------------
Paul Revere Public Stockholders
Exchange Ratio.............................. .0317 .0295 .0343
Average Closing Price Per Share............. $31.500 $33.875 $29.125
Textron
Exchange Ratio.............................. .0265 .0263 .0343
Average Closing Price Per Share............. $41.400 $41.400 $31.714
The common stock equity portion assumes a $41.40 per share price for
Textron, which, under the Textron Agreement, is the maximum value Textron can
realize for the shares received with any additional value realized becoming
additional capital for Provident. The pro forma condensed combined statement
of financial condition has not anticipated any additional capital that might be
realized. For all other Paul Revere stockholders, the common stock equity
portion assumes a $31.50 per share price, which was the closing price for
Provident Common Stock on April 26, 1996, the last trading day prior to public
announcement of the execution of the Merger
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Agreement in its original form. For purposes of presentation, all holders of
Paul Revere Common Stock are assumed to elect to receive the Mixed
Consideration.
The fair value adjustments to assets and liabilities as of December 31,
1996 are as follows (dollars in millions):
Stockholders' equity as reported by Paul Revere............................ $1,097.8
Fair value adjustments:
Mortgage loans........................................................... (46.9)
Real estate.............................................................. (1.9)
Other long-term investments.............................................. (12.0)
Deferred policy acquisition costs........................................ (878.9)
Value of business acquired............................................... 744.6
Goodwill................................................................. 341.2
Property and equipment................................................... (9.0)
Liability for benefits to policyholders.................................. (333.0)
Other liabilities........................................................ (51.5)
Deferred federal income taxes............................................ 178.6
--------
Total fair value adjustments..................................... (68.8)
Additional assets to be transferred from principal stockholder........... 161.0
--------
Purchase price............................................................. $1,190.0
========
The individual adjustments shown above are commented on more fully in the
notes that follow.
The adjustments presented are estimates that are believed to be reasonable
approximations of the ultimate adjustments; however, the amounts of the
adjustments will change based upon, among other things, circumstances and
economic conditions existing as of the date of closing and Paul Revere's
statement of financial condition as of the date of closing.
(1) The adjustment reflects the replacement of the bankers acceptances
owned by Paul Revere's insurance company subsidiaries and the replacement of the
debt owed by Paul Revere with fixed maturity securities. The bankers
acceptances contain rights of offset which allow Paul Revere to offset any
obligations with respect to the bankers acceptances against the acceptance
obligation of the bank to the insurance company subsidiaries. As a result, the
total obligation of Paul Revere was offset against the total asset carrying
value of the bankers acceptances. The bankers acceptance program, which was used
to generate statutory capital for the insurance company subsidiaries, must be
replaced upon the change in control resulting from the Merger. The program will
be replaced with a debt arrangement which will result in an increase in total
assets and total liabilities, rather than the netting of the related asset and
liability amounts.
The adjustment also reflects a $121.0 million capital contribution to be
provided to Paul Revere Life (based on the after tax statutory reserve
strengthening required by the Commonwealth of Massachusetts Division of
Insurance, and by the Textron Voting Agreement) as a part of the $161.0 million
of additional assets (which includes the foregoing $121.0 million, $25.0 million
in cash, and other assets valued at 15.0 million, all as contemplated by the
Textron Voting Agreement) to be transferred from Textron. The capital
contribution is in the form of cash, which would be invested in long-term,
investment-grade securities.
(2) Adjustment to market value. The market value is based upon Provident's
estimate of the exchange price that would result between a willing buyer and a
willing seller and reflects Provident's plan to dispose of the portfolios
through a securitization transaction or sale.
(3) These adjustments reflect the use of $145.0 million of short-term
investments to fund a portion of the purchase price.
(4) The adjustment reflects the elimination of the balance reported by Paul
Revere. This amount will be replaced with the value of business acquired.
(5) The adjustment includes the elimination of the 60.2 million
carried by
Paul Revere and the establishment of the $804.8 million balance determined
by Provident based upon its preliminary assessment of
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the acquired business. The value of business acquired is amortized with interest
based on premium income for products accounted for under Statement of Financial
Accounting Standards (SFAS) No. 60 and on the estimates of future gross profits
for SFAS 97 products. The interest rates used to amortize the value of business
acquired are 7.0% and 5.8% for SFAS 60 and SFAS 97 products, respectively.
Provident will periodically review the carrying amount of the value of business
acquired using the same methods used to evaluate deferred policy acquisition
costs.
The amortization of the value of business acquired before interest
accretion for the first five years following the acquisition is $105.4 million,
$97.2 million, $89.8 million, $84.0 million, and $78.7 million, respectively.
The amount of interest accretion for each of those five years is $47.0 million,
$43.0 million, $39.3 million, $35.9 million, and $32.7 million, respectively,
which results in net amortization for the first five years following the
acquisition of $58.4 million, $54.2 million, $50.5 million, $48.1 million, and
$46.0 million, respectively.
(6) The adjustment includes the elimination of the $107.5 million
reported by Paul Revere and the $448.7 million established by Provident as
the difference between the price paid less the current value of the assets and
liabilities assumed.
(7) Adjustment for $15.0 million of equipment to be transferred to
Paul Revere at the date of sale by Textron and the adjustment of the value of
company-occupied real estate by $9.0 million based upon appraisals recently
completed.
(8) Paul Revere performed a reserve study which resulted in a required
addition to reserves of $380.0 million in the third quarter of 1996. The reserve
addition, as required by GAAP, did not include any margins for adverse
deviation. Provident, as a result of the acquisition and the related valuation
process that occurs under GAAP with respect to the liabilities is allowed to
include margins for adverse deviation in the establishment of reserve
liabilities for products accounted for under SFAS 60. Of the $333.0 million
adjustment, $176.5 million relates to the individual disability income business,
which is accounted for under SFAS 60, and is principally the addition of a
margin for adverse deviation related to morbidity. The two primary assumptions
in the establishment of reserves for individual disability income products are
morbidity and investment rates. With respect to morbidity, Paul Revere assumed a
benefit ratio of 84.9% for 1997 while Provident assumed a benefit ratio of 88.3%
for 1997 with no improvement in morbidity levels in future years. Paul Revere
assumed a beginning portfolio yield of 7.8% and a new investment rate of a level
7.8% and Provident assumed a 7.6% investment rate for the beginning portfolio
yield and the new investment rate. The remaining portion of the adjustment,
$156.5 million, results from the change in market value of the fixed maturity
securities portfolio from September 30, 1996, the date of the reserve study,
through December 31, 1996. Because assumptions in the reserves were reset at
September 30, 1996, subsequent changes in unrealized investment gains on the
related investments would result in a comparable change in the reserves.
For products accounted for under both SFAS 60 and SFAS 97, Provident must
set assumptions consistent with its current expectations as reflected in its
accounting and pricing practices currently in use. As part of the acquisition
process, these assumptions will undergo a validation process to ensure that they
are appropriate for and properly applied to the acquired business. Once this
process is completed, the reserve assumptions for SFAS 60 products will be
"locked-in," i.e., there would be no change in the assumptions unless a loss
recognition test indicated a deficiency. Under SFAS 60, any differences in
assumptions and actual experience are reflected in net income over the life of
the policies as experience is realized.
For SFAS 97 products, the present value of estimated gross profits must be
updated periodically to reflect differences in actual experience and assumptions
as well as any adjustment or change in expectations for the assumptions going
forward. Under SFAS 97, any adjustment is recorded in the current period and is
determined as if the current expectations were known at the inception of the
policy and applied retroactively.
For Paul Revere's business, the products accounted for under the SFAS 60
requirements are individual disability insurance, all group products, and a
portion of the individual life business. The remaining portion of the individual
life business and the annuity products are subject to the SFAS 97 requirements.
Provident views the individual disability income business of Paul Revere as
consisting of two distinct blocks of business for loss recognition testing
purposes: excess-risk reinsurance and all other individual disability income
policies. The excess-risk reinsurance contracts represent approximately $25
million of
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annualized premium income which is less than 5% of the total premium income from
the individual disability income segment.
The excess-risk reinsurance policies are significantly different from the
primary policies issued in this segment in that the policies were marketed and
issued and are administered by unrelated third party insurance companies who
have ceded to Paul Revere the amounts of insurance coverage provided under the
policies over a specified monthly or indemnity level. Paul Revere ceased writing
any new business of this type in March 1995. In 1995, Paul Revere increased
reserves $59 million as a result of a loss recognition study performed on this
block of business.
Provident's view of future morbidity experience is consistent with Paul
Revere's view as reflected in its recently completed comprehensive reserve
study.
(9) The total adjustment shown reflects the following temporary
differences, at a tax rate of 35%:
BALANCE
IMMEDIATELY BALANCE
PRIOR TO AFTER
MERGER MERGER ADJUSTMENT
----------- ----------- ----------
Mortgage loans....................................... $ 329.0 $ 282.1 $ (46.9)
Real estate.......................................... 2.7 0.8 (1.9)
Other long-term investments.......................... 32.7 20.7 (12.0)
Deferred policy acquisition costs.................... 878.9 0 (878.9)
Value of business acquired........................... 60.2 804.8 744.6
Property and equipment............................... 32.0 23.0 (9.0)
Liabilities for benefits to policyholders............ (4,020.6) (4,353.6) (333.0)
Other liabilities.................................... (115.3) (166.8) (51.5)
Statutory reserve adjustment not yet deductible...... 0 78.3 78.3
----------
Total adjustments.................................... 510.3
Tax rate............................................. 35%
Adjustment to federal income tax liability........... 178.6
==========
(10) The adjustment includes additional debt required to fund the
acquisition and replace the debt netted against the bankers acceptances on Paul
Revere's statement of financial condition. The amounts shown for short-term debt
are for the repayment of short-term debt by Textron at closing. The short-term
debt was the instrument used to provide funds to Paul Revere in order to
contribute equity, in advance of closing, to Paul Revere Life prior to
December 31, 1996.
(11) The adjustment includes preliminary estimates of the costs associated
with the acquisition related to change in control provisions in employment and
benefit plan contracts of $28.0 million, the cost of adjustment and combination
of the business operations and facilities of Provident and Paul Revere of $10.9
million, and the other direct, incremental costs incurred to effect the
acquisition of $12.6 million.
(12) The adjustment reflects the elimination of the Paul Revere balance of
$45.0 million and the issuance of 16.9 million shares of Provident Common Stock.
(13) The adjustment reflects the elimination of the Paul Revere balance of
$560.1 million and the issuance of 6.0 million shares of Provident Common
Stock to Textron at $41.40 per share ($40.40 per share of additional paid-in
capital) and the issuance of 1.4 million and 9.5 million shares of Provident
Common Stock to the public stockholders of Paul Revere and to Zurich,
respectively, at $31.50 per share ($30.50 per share of additional paid-in
capital).
(14) The adjustment reflects the elimination of Paul Revere balances.
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(15) If all public stockholders of Paul Revere Common Stock were to elect
to receive the Stock Consideration or the Cash Consideration, the line items
shown on the Pro Forma Condensed Combined Statement of Financial Condition that
would change are shown below compared to a situation where all such stockholders
elected the Mixed Consideration:
PRO FORMA BALANCES
AS OF DECEMBER 31, 1996
BASED ON
CONSIDERATION ELECTED
------------------------
MIXED STOCK CASH
------ ------ ------
Long-term debt............................................... 731.2 581.2 776.2
Stockholders' equity:
Common stock............................................... 62.5 66.8 62.8
Additional paid-in capital................................. 584.5 730.2 539.2
The acquisition of Paul Revere is expected to be accretive to Provident's
net income per share as reflected in the pro forma condensed combined statement
of operations for the year ended December 31, 1995. For the year ended
December 31, 1996, the acquisition would be accretive to Provident's net income
per share, excluding the pre-tax loss recognition adjustment of $380.0 million
recorded in the third quarter of 1996 by Paul Revere shown in the pro forma
condensed combined statements of operations presented on page 9. Provident
expects certain benefits from the acquisition as the operations of the two
companies are combined. These benefits include the effect on expense levels
that result from a larger business base and the effect of shared expertise in
product development, underwriting, and claims management. While neither of
these factors can be reflected in the pro forma financial statements, they are
expected to have a positive effect on future results from operations.
Provident expects to continue its current investment strategy for the
combined companies. That strategy emphasizes the matching of the effective asset
durations with related expected liability durations subject to constraints with
respect to quality, marketability, and diversification. The investment income
and principal repayments combined with the substantial cash flows from renewal
premiums is expected to provide substantial liquidity for expense and benefit
payments for the combined companies.
As of December 31, 1996, each of the Provident and Paul Revere companies
exceeded the statutory capital requirement imposed by their states of domicile,
which is generally the National Association of Insurance Commissioners' risk
based capital model. The companies have historically generated sufficient
capital to fund the growth of their business lines. Capital raised externally
has been used in part to fund growth through acquisitions. Provident believes
that the combined companies will continue to generate sufficient capital to fund
the growth of its targeted business segments.
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PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
PRO FORMA
PROVIDENT PAUL REVERE ADJUSTMENTS COMBINED(8)
----------- ----------- ------------ -----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Revenue:
Premium income....................... $ 1,175.7 $ 1,130.3 $ -- $ 2,306.0
Net investment income................ 1,090.1 405.7 2.6 (1) 1,498.4
Net realized investment gains
(losses).......................... (8.6) 48.6 -- 40.0
Other income......................... 34.7 5.3 -- 40.0
----------- ----------- ------------ -----------
Total revenue................ 2,291.9 1,589.9 2.6 3,884.4
----------- ----------- ------------ -----------
Benefits and expenses:
Benefits to policyholders............ 1,661.2 1,456.1 (6.6)(2) 3,110.7
Amortization of policy acquisition
costs............................. 64.0 56.5 (46.5)(3) 74.0
Amortization of value of business
acquired.......................... -- 5.5 52.8 (4) 58.3
Amortization of goodwill............. -- 8.3 9.6 (5) 17.9
Commissions and other expenses....... 340.5 311.4 23.1 (6) 675.0
----------- ----------- ------------ -----------
Total benefits and
expenses................... 2,065.7 1,837.8 32.4 3,935.9
----------- ----------- ------------ -----------
Income (loss) before federal income
taxes................................ 226.2 (247.9) (29.8) (51.5)
Federal income taxes (credit).......... 80.6 (85.0) (7.1)(7) (11.5)
----------- ----------- ------------ -----------
Net income (loss)...................... $ 145.6 $ (162.9) (22.7) $ (40.0)
=========== =========== ============ ===========
Net income (loss) per common share..... $ 2.92 $ (3.62) $ (0.84)
=========== =========== ===========
Weighted average common shares
outstanding.......................... 45,522,417 45,000,000 62,392,477
=========== =========== ===========
See Notes to Pro Forma Condensed Combined Statements of Operations.
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PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
PRO FORMA
PROVIDENT PAUL REVERE ADJUSTMENTS COMBINED(8)
---------- ----------- ----------- -----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Revenue:
Premium income............................ $ 1,251.9 $ 1,051.3 $ -- $ 2,303.2
Net investment income..................... 1,221.3 389.7 1.9(1) 1,612.9
Net realized investment gains (losses).... (31.7) 89.0 -- 57.3
Other income.............................. 113.8 4.0 -- 117.8
---------- ----------- ----------- -----------
Total revenue..................... 2,555.3 1,534.0 1.9 4,091.2
---------- ----------- ----------- -----------
Benefits and expenses:
Benefits to policyholders................. 1,904.6 1,039.2 (6.6)(2) 2,937.2
Amortization of policy acquisition
costs.................................. 71.0 51.9 (40.0)(3) 82.9
Amortization of value of business
acquired............................... -- 5.9 45.4(4) 51.3
Amortization of goodwill.................. -- 8.3 9.6(5) 17.9
Commissions and other expenses............ 403.7 291.4 26.7(6) 721.8
---------- ----------- ----------- -----------
Total benefits and expenses....... 2,379.3 1,396.7 35.1 3,811.1
---------- ----------- ----------- -----------
Income before federal income taxes.......... 176.0 137.3 (33.2) 280.1
Federal income taxes........................ 60.4 52.0 (8.3)(7) 104.1
---------- ----------- ----------- -----------
Net income.................................. $ 115.6 $ 85.3 $ (24.9) $ 176.0
========= ========= ========== ==========
Net income per common share................. $ 2.27 $ 1.90 $ 2.62
========= ========= ==========
Weighted average common shares
outstanding............................... 45,381,373 45,000,000 62,251,433
========= ========= ==========
See Notes to Pro Forma Condensed Combined Statements of Operations.
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NOTES TO PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
The Pro Forma Condensed Combined Statements of Operations for the years
ended December 31, 1996 and 1995 assume a Merger effective date of January 1,
1996 and 1995, respectively, and are for presentation purposes only. The
amounts included for Provident were taken from its Annual Report on Form 10-K
for the year ended December 31, 1996. The amounts included for Paul Revere were
taken from Exhibit 99.1 to this Current Report. The pro forma adjustments
reflect the proposed financing arrangements, including the acquisition of debt
of $531.2 million and the issuance of $590.0 million of common stock equity.
The common stock equity portion assumes a $41.40 per share price for Textron,
which, under the Textron Agreement, is the maximum value Textron can realize
for the shares received with any additional value realized becoming additional
capital for Provident. The pro forma condensed combined statements of
operations have not anticipated any additional capital or investment that might
be realized. For all other stockholders of Paul Revere, the common stock equity
portion assumes a $31.50 per share price, which was the closing price for
Provident Common Stock on April 26, 1996, the last trading day prior to public
announcement of the execution of the Merger Agreement in its original form. For
purposes of presentation, all holders of Paul Revere Common Stock (other than
Textron) are assumed to elect to receive the Mixed Consideration and that
Textron receives the Textron Consideration. The adjustments presented are
preliminary estimates that are believed to be reasonable approximations of the
ultimate adjustments; however, the amounts of the adjustments will change based
upon, among other things, circumstances and economic conditions existing as of
the date of closing.
(1) The adjustment reflects the reduction in net investment income that
results from using $145.0 million of short-term investments held by Provident
to fund a portion of the acquisition price. The adjustment also reflects
a $121.0 million capital contribution provided to Paul Revere as a part
of the $161.0 million of additional assets (which includes the foregoing
$121.0 million, $25.0 million in cash, and other assets valued at $15.0
million, all as contemplated by the Textron Voting Agreement) to be transferred
from Textron. The capital contribution is in the form of cash, which
would be invested in long-term, investment-grade securities.
(2) The adjustment reflects the change in liabilities that results from
establishing higher beginning reserve liabilities and results in lower
accretions to policyholder benefits in the future. The adjustments are discussed
in Note 8 to the Unaudited Pro Forma Condensed Combined Statement of Financial
Condition.
(3) The adjustment to amortization of policy acquisition costs
reflects the elimination of the Paul Revere amounts as shown on its
historical financial statements and the inclusion of amortization on first year
amounts only of $10.0 million and $11.9 million for the years ended
December 31, 1996 and 1995, respectively. The first year amounts are based on
Paul Revere's reported amounts.
(4) The amortization of value of business acquired has been adjusted to
eliminate the amounts reported by Paul Revere and to include the amounts
determined by Provident as a part of its valuation of the business acquired as
discussed in Note 5 to the Unaudited Pro Forma Condensed Combined Statement of
Financial Condition. The assumptions and methods used to amortize the value of
the business acquired were determined and applied in a materially consistent
manner with Provident's current practices applied to its deferred policy
acquisition costs.
(5) The adjustment reflects the elimination of the amortization of
goodwill reported by Paul Revere and the inclusion of the amortization of
goodwill Provident estimates will result from the Merger. Provident is
amortizing the goodwill over 25 years in equal installments.
(6) This adjustment includes two items: interest expense on the new
debt facility and the elimination of the existing debt. The interest expense on
the new debt facility includes the $531.2 million of debt to finance the
acquisition plus the refinancing of the existing $200.0 million of Provident
debt outstanding. This expense would have been $47.1 million for 1995 and
$42.2 million for 1996. The elimination of the interest expense on the
existing debt is $20.4 million for 1995 and $19.1 million for 1996. The
interest rate on the long-term debt is reset quarterly based on LIBOR plus
0.40%. A change of 0.125% in the interest rate would create a change in net
income of $0.01 per share or $0.60 million, $0.48
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million, and $0.63 million if all Paul Revere public stockholders elected the
Mixed Consideration, the Stock Consideration and the Cash Consideration,
respectively.
(7) Federal income taxes were provided on the income statement
adjustments, except the amortization of goodwill, at a rate of 35%.
(8) If all public stockholders of Paul Revere Common Stock were to elect to
receive the Stock Consideration or the Cash Consideration, the line items, other
than totals, shown on the Pro Forma Condensed Combined Statements of Operations
that would change are shown below compared to a situation where all such
stockholders elected the Mixed Consideration:
PRO FORMA AMOUNTS FOR THE
YEAR ENDED DECEMBER 31, 1996
BASED ON CONSIDERATION ELECTED
------------------------------------
MIXED STOCK CASH
---------- ---------- ----------
Benefits and expenses:
Commissions and other expenses................... $ 675.0 $ 666.4 $ 671.6
Federal income taxes (credit)...................... (11.5) (8.5) (10.3)
Net income (loss).................................. (40.0) (34.4) (37.8)
Net income (loss) per common share................. $ (0.84) $ (0.71) $ (0.80)
Weighted average common shares outstanding......... 62,392,477 67,719,977 62,771,549
PRO FORMA AMOUNTS FOR THE
YEAR ENDED DECEMBER 31, 1995
BASED ON CONSIDERATION ELECTED
------------------------------------
MIXED STOCK CASH
---------- ---------- ----------
Benefits and expenses:
Commissions and other expenses................... $ 721.8 $ 712.2 $ 724.8
Federal income taxes............................... 104.1 107.5 103.1
Net income......................................... 176.0 182.2 174.0
Net income per common share........................ $ 2.62 $ 2.55 $ 2.58
Weighted average common shares outstanding......... 62,251,433 66,578,933 62,630,505
12