UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1993
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 1-6701
CAPITAL HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 51-0108922
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Capital Holding Center, 400 West Market Street, Louisville, Kentucky 40202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (502) 560-2000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $1 par value New York Stock Exchange
Pacific Stock Exchange
Adjustable Rate Cumulative
Preferred Stock, Series F New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
$4 Non-Cumulative Convertible Junior Preferred Stock, Series J
(Title of class)
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 and (2) has been subject to the filing
requirements for the past 90 days. Yes X . No ___.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 14, 1994.
Common Stock, $1 par value - $3,291,923,000
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of March 14, 1994.
Common Stock, $1 par value - 100,498,402 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report for the year ended December 31, 1993, are
incorporated by reference into Parts I and II.
Portions of the Proxy Statement for the Annual Meeting of Stockholders to
be held May 11, 1994, are incorporated by reference into Part III.
<PAGE>
PART 1
Item 1. BUSINESS
ORGANIZATION AND SEGMENTS
Capital Holding Corporation (the "Company"), an insurance and diversified
financial services holding company based in Louisville, Kentucky, was
incorporated in Delaware in 1969 by Commonwealth Life Insurance Company
("Commonwealth Life"). The objective was to achieve earnings growth through
acquisitions of other insurance companies and, thus, effect economies of scale
and the sharing of commonly needed resources, while preserving the strengths
of acquired companies' marketing operations.
Through affiliates of its Agency Group, Direct Response Group and Accumulation
and Investment Group, the Company offers accumulation, life and annuity,
accident and health and property and casualty insurance products. The
Company's Banking Group affiliates provide consumer loans, deposits and other
banking services.
Agency Group
By 1976, the Company had acquired Peoples Life Insurance Company ("Peoples
Life") in Washington, D.C.; National Standard Life Insurance Company
("National Standard") in Orlando, Florida; Georgia International Life
Insurance Company ("Georgia International") in Atlanta, Georgia; Home Security
Life Insurance Company ("Home Security") in Durham, North Carolina; and
several other companies that were subsequently merged into these affiliates.
On October 1, 1985, Peoples Life and Home Security were merged to form Peoples
Security Life Insurance Company ("Peoples Security") with headquarters in
Durham. On March 31, 1987, the Company sold Georgia International to
Southmark Corporation. On April 1, 1988, National Standard was merged into
Commonwealth Life. On September 8, 1989, the Company acquired Southlife
Holding Company and its primary operating companies, Public Savings Life
Insurance Company ("Public Savings Insurance") and Security Trust Life
Insurance Company ("Security Trust"). In December 1991 the Company created
Capital Security Life Insurance Company ("Capital Security") with headquarters
in Durham, as the successor to Public Savings Insurance. On November 14,
1991, the Company acquired Durham Corporation ("Durham") and its primary
operating company, Durham Life Insurance Company ("Durham Life"), with
headquarters in Raleigh, North Carolina. Agency Group's business is conducted
primarily through four affiliates: Commonwealth Life, Peoples Security,
Capital Security and Durham Life.
Direct Response Group
National Liberty Corporation ("National Liberty") in Valley Forge,
Pennsylvania, was acquired on January 14, 1981, and added a nationwide direct
marketing operation to what previously had been a regional, agent based
marketing system. In addition, National Home Life Assurance Company
("National Home"), domiciled in Missouri, was also acquired as National
Liberty's primary operating company, together with its principal subsidiaries,
Veterans Life Insurance Company ("Veterans Life") and National Home Life
Insurance Company of New York ("National Home NY").
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Item 1. (continued)
In 1979, Commonwealth Life's property and casualty operation was
recapitalized, made a direct subsidiary of the Company and later renamed
Capital Enterprise Insurance Company ("Capital Enterprise"). On December 31,
1986, the Company acquired Worldwide Underwriters Insurance Company
("Worldwide Insurance"), located in St. Louis, Missouri, and the personal
lines property and casualty insurance business of the Wausau Insurance
Companies. Concurrently, it made Capital Enterprise a direct subsidiary of
Worldwide Insurance. These two affiliates, together with Capital Landmark
Insurance Company, a subsidiary of Capital Enterprise, and Worldwide
Underwriters Insurance Company of North Carolina, a subsidiary of Worldwide
Underwriters Insurance, form the property and casualty line of business of the
Company's Direct Response Group.
On January 15, 1993, Worldwide Insurance acquired Academy Insurance Group
("Academy") and its subsidiaries, Academy Life Insurance Company and Pension
Life Insurance Company. Academy principally markets life insurance to active
duty military service personnel.
Accumulation And Investment Group
In 1987, the institutional accumulation product business, previously managed
in Agency Group, and the retail accumulation product business, previously
managed by National Liberty, were moved to the Accumulation and Investment
Group. Affiliates of Agency Group and Direct Response Group offer these
institutional and retail accumulation products. In addition to the marketing
and management of accumulation (investment-type) products, Accumulation and
Investment Group manages the Company's insurance-related investment
portfolios.
Banking Group
In April 1984, the Company acquired a controlling interest in First Deposit
Corporation ("First Deposit"), located in San Francisco, California, which
owns a consumer bank (First Deposit National Bank) and a credit card bank
(First Deposit National Credit Card Bank). Ownership in First Deposit was
increased each year until 1989 when the remaining shares were purchased.
These affiliates form the Banking Group.
Financial information about business segments is included in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
PRODUCTS
Insurance
Commonwealth Life, Peoples Security, Capital Security, Durham Life, National
Home, Veterans Life, National Home NY and Academy write a variety of
individual, nonparticipating life insurance products. These include universal
life contracts, traditional and interest-sensitive whole life insurance, term
life insurance, endowments, accidental death and dismemberment coverage and
premium waiver disability insurance.
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Item 1. (continued)
The following table progresses total life insurance in force for the year
ended December 31, 1993:
Total Life Insurance
(dollars in thousands)
In force at December 31, 1992 $58,262,410
Sales and additions 18,483,161
76,745,571
Terminations:
Surrender and Conversion 2,380,274
Lapse 6,664,218
Reinsurance -
Other 1,714,575
Subtotal 10,759,067
In force at December 31, 1993 $65,986,504 (1)
Number of policies in force before
reinsurance ceded at December 31, 1993 1,850,455 (1)
(1) Reinsurance assumed has been included. Reinsurance ceded has not been
deducted.
Commonwealth Life, Peoples Security, Capital Security, Durham Life, National
Home, Veterans Life, National Home NY and Academy also issue an assortment of
individual accident and health insurance products. These include coverages
for regular income during periods of hospitalization, scheduled reimbursement
for specific hospital/surgical expenses and cancer treatments, hospice care,
deductible and co-payment amounts not covered by other health insurance, lump
sum payments for accidental death or dismemberment and benefits for death and
injury resulting from an accident. Additionally, National Home and Academy
offer a Medicare supplement product.
Worldwide Insurance, Capital Enterprise and their subsidiaries underwrite
personal lines automobile, homeowners and umbrella liability coverages, mainly
for standard and preferred risks.
Accumulation
The institutional line of accumulation products, offered through Commonwealth
Life, Peoples Security and National Home, consists of fixed rate guaranteed
investment contracts ("GICs") and floating rate GICs which can receive
interest based on rates indexed to either short-, intermediate- or long-term
rates. In addition, the institutional line includes Trust GICs where the plan
sponsor owns and retains assets related to these contracts and Commonwealth
Life and Peoples Security provide benefit responsiveness in the event that
benefit requests and other contractual commitments exceed current cash flows.
Further, Commonwealth Life and Peoples Security offer to institutional
customers Total Return Account Contracts ("TRACs"), which guarantee the total
return of selected indices without the additional transaction costs, including
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Item 1. (continued)
the S & P 500 Index, the Shearson Lehman Aggregate Index and the Government
Corporate Index.
Through National Home, Commonwealth Life and Peoples Security, the Company
offers retail products including immediate life annuities (primarily
structured settlements), variable annuities, single premium and flexible
premium deferred annuities and individual retirement annuities. Single
premium deferred annuities and flexible premium deferred annuities are offered
at a fixed interest rate on either a fixed or indexed basis. In addition,
flexible premium deferred annuities are offered on a variable contract basis.
Banking
Banking Group affiliates offer both secured and unsecured loan accounts, as
well as a broad range of deposit products. The receivables portfolio consists
primarily of unsecured consumer loans which use a VISAR or MasterCardR credit
card as the credit extension vehicle, a revolving cash loan product without a
credit card, a secured line of credit using a VISAR or MasterCardR credit
card, a home equity secured loan product called Select EquityR and insurance
premium finance installment loans. Banking Group affiliates also offer
fee-based products designed to suspend certain customer payment obligations in
situations such as loss of income due to unemployment or disability. Deposit
products include retail and institutional certificates of deposit and money
market deposit accounts.
MARKETING
Agency Group markets individual insurance products primarily through home
service agents, who call on customers in their homes to sell policies and
provide related services. Home office and field associates, including
individuals who provide direct customer sales and those who deliver service
and support, are organized as Customer Service Units ("CSUs"), each of which
operates under a single management structure, as opposed to the prior
organization where marketing and administration were managed separately.
There are 11 CSUs providing full service to customers in particular geographic
and/or market segments. Substantially all of the home service representatives
are employees of Agency Group affiliates and do not represent other insurers.
Such representatives receive compensation from sales commissions and from
renewal and service commissions. The compensation arrangement is designed to
reward representatives who not only sell new policies, but who also
effectively maintain and service in-force business to meet Company sales and
persistency objectives. In addition to its home service sales organization,
marketing partnerships have also been formed whereby products are distributed
through the insurance and marketing organizations of third parties.
Direct Response Group primarily uses television and print media solicitation,
direct mail, telephone and third-party programs to market its insurance
products. Additional mail correspondence and telephone communications are
used to follow up and close sales. Sponsored marketing programs are conducted
through major banks, oil companies, department stores, associations and other
businesses with large customer bases. Products are also marketed to active
duty military personnel on military bases through Agents/Counselors. Property
and casualty products are also marketed through some of the home service
agents of Agency Group.
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Item 1. (continued)
Institutional accumulation products of the Accumulation and Investment Group
are marketed through a small sales staff, bank trustees, municipal GIC
brokers, GIC fund managers, brokers and direct marketing. Retail products are
marketed through financial planners, stock brokerage firms, pension
consultants, savings and loan associations, banks and other financial
institutions.
Banking Group's consumer loan and deposit products are primarily marketed
using direct mail and telemarketing channels and other direct response
methods. Installment loans are primarily marketed through agents. In 1993,
the Banking Group also entered into joint marketing arrangements with
unaffiliated third parties whereby the Banking Group's consumer credit
products would be endorsed by, or offered in connection with the products or
services of, such third parties.
The Company's Agency Group affiliates concentrate their marketing efforts in
the Southeast and Mid-Atlantic states, while the Direct Response, Accumulation
and Investment and Banking Groups market their products nationwide.
RISK
Risk is integral to insurance but, as is customary in the insurance business,
risk exposure is kept within acceptable limits. The Company's subsidiaries
retain no more than $1,000,000 of life insurance and $250,000 of accidental
death benefits for any single life. Excess coverages are reinsured
externally. At December 31, 1993, approximately $4.6 billion, or
approximately 6.9 percent of total life insurance in force, was reinsured with
nonaffiliated insurance companies. The Company would become liable for the
reinsured risks if the reinsurers could not meet their obligations.
The Company's life insurance affiliates in many cases require evidence of
insurability before issuing individual life policies including, in some cases,
a medical examination or a statement by an attending physician. Home office
underwriters review that evidence and approve the issuance of the policy in
accordance with the application if the risk is acceptable. Some applicants
who are substandard risks are rejected, but many are offered policies with
higher premiums or restricted coverages. As of December 31, 1993,
approximately 1.9 percent of life insurance in force was represented by risks
which were substandard at the time the policy was issued. The majority of
individual health insurance is Direct Response Group business and written
without evidence of insurability, relying on safeguards such as product
design, limits on the amount of coverage, and premiums which recognize the
resultant higher level of claims.
Banking Group's unsecured consumer loans are principally generated through
direct mail solicitations sent to a prescreened list of prospective account
holders, followed by credit verification. Four principles guide development
of specific underwriting criteria for each mailing: (i) sufficient credit
history; (ii) no unacceptable derogatory credit remarks; (iii) necessary
income qualification; and (iv) no rapid increase in outstanding debt or credit
availability.
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Item 1. (continued)
As a diversified financial services company, many of the Company's assets and
liabilities are monetary in nature and thus are sensitive to changes in the
interest rate environment.
Detailed discussions about the Company's investments are included in Note C to
the Consolidated Financial Statements on pages 44 through 46 of the Company's
1993 Annual Report and Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations.
REGULATION
Insurance
The business of the Company's insurance subsidiaries is subject to regulation
and supervision by the insurance regulatory authority of each state in which
the subsidiaries are licensed to do business. Such regulators grant licenses
to transact business; regulate trade practices; approve policy forms; license
agents; approve certain premium rates; establish minimum reserve and loss
ratio requirements; review form and content of required financial statements;
prescribe type and amount of investments permitted; and assure that capital,
surplus and solvency requirements are met. Insurance companies can also be
required under the solvency or guaranty laws of most states in which they do
business to pay assessments up to prescribed limits to fund policyholder
losses or liabilities of insolvent insurance companies. They are also
required to file detailed annual reports with supervisory agencies, and
records of their business are subject to examination at any time. Under the
rules of the National Association of Insurance Commissioners (the "NAIC"), a
self-regulatory organization of state insurance commissioners, insurance
companies are examined periodically by one or more of the regulatory
authorities.
The NAIC adopted, in December of 1992, a "Risk Based Capital for Life and/or
Health Insurers Model Act" (the "Model Act") which was designed to identify
inadequately capitalized life and health insurers. The Model Act defines two
key measures: (i) Adjusted Capital, which equals an insurer's statutory
capital and surplus plus its Asset Valuation Reserve, plus half its liability
for policyholder dividends, and (ii) Risk Based Capital. Risk Based Capital
is determined by a complex formula which is intended to take into account the
various risks assumed by an insurer. Should an insurer's Adjusted Capital
fall below certain prescribed levels (defined in terms of its Risk Based
Capital), the Model Act provides for four different levels of regulatory
attention:
"Plan Level": Triggered if an insurer's Adjusted Capital is less than 100%
but greater than or equal to 75% of its Risk Based Capital; requires the
insurer to submit a plan to the appropriate regulatory authority that
discusses proposed corrective action.
"Action Level": Triggered if an insurer's Adjusted Capital is less than 75%
but greater than or equal to 50% of its Risk Based Capital; authorizes the
regulatory authority to perform a special examination of the insurer and to
issue an order specifying corrective actions.
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Item 1. (continued)
"Authorized Control Level": Triggered if an insurer's Adjusted Capital is
less than 50% but greater than or equal to 35% of its Risk Based Capital;
authorizes the regulatory authority to take whatever action it deems
necessary.
"Mandatory Control Level": Triggered if an insurer's Adjusted Capital falls
below 35% of its Risk Based Capital; requires the regulatory authority to
place the insurer under its control.
Since the Adjusted Capital levels of the Company's insurance subsidiaries
currently exceed all of the regulatory action levels as defined by the NAIC's
Model Act, the Model Act currently has no impact on the Company's operations
or financial condition.
The federal government does not directly regulate insurance business, except
with respect to Medicare supplement plans; however, legislation and
administration policies concerning premiums, age and gender discrimination,
financial services and taxation, among other areas, can significantly affect
the insurance business.
Banking
First Deposit's consumer banking subsidiaries are subject to federal and state
regulation with respect to lending and investment practices, capital
requirements, and financial reporting. The primary regulator for these
consumer banking subsidiaries is the Office of the Comptroller of the
Currency.
Holding Company
States have enacted legislation requiring registration and periodic reporting
by insurance companies domiciled within their respective jurisdictions that
control or are controlled by other corporations so as to constitute a holding
company system. The Company and its subsidiaries have registered as a holding
company system pursuant to such legislation in Kentucky, Missouri, North
Carolina, New York, Illinois, Pennsylvania and New Jersey.
Insurance holding company system statutes and rules impose various limitations
on investments in subsidiaries and may require prior regulatory approval for
the payment of dividends and other distributions in excess of statutory net
gain from operations on an annual noncumulative basis by the registered
insurance company to the holding company or its affiliates.
Separate Accounts
Separate accounts of the Company's subsidiaries which offer retail variable
annuities are registered with the Securities and Exchange Commission under the
Investment Company Act of 1940 and are governed by the provisions of the
Internal Revenue Code of 1986, as amended, pertaining to the tax treatment of
annuities.
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<PAGE>
Item 1. (continued)
COMPETITION
The insurance industry is highly competitive with over 2,000 life insurance
companies competing in the United States, some of which have substantially
greater financial resources, broader product lines and larger staffs than the
Company's insurance subsidiaries. Additionally, life insurance companies face
increasing competition from banks, mutual funds and other financial entities
for attracting investment funds.
The Company's insurance subsidiaries differentiate themselves through
progressive marketing techniques, product features, price, customer service,
stability and reputation, as well as competitive credit ratings. The
insurance subsidiaries maintain their competitive position by their focus on
low risk/high return markets and an efficient cost structure. Other
competitive strengths include integrated asset/liability management, risk
management and innovative product engineering.
The credit card and consumer revolving loan industry business in which First
Deposit's subsidiaries are engaged is also highly competitive. The industry
has recently experienced consolidation, lower growth and rising charge-offs.
Competitors are increasing their use of advertising, target marketing, pricing
competition and incentive programs and have also announced changes in the
terms of certain credit cards, including lowering the fixed annual percentage
rate charged on balances or converting the annual percentage rate charged on
balances from a fixed per annum rate to a variable rate. In addition, other
credit card issuers have announced "tiered" or "risk-adjusted" rates under
which the annual percentage rate for the issuer's most creditworthy customers
is lowered.
In response to the competitive environment, First Deposit's subsidiaries have
implemented a variety of new programs to attract and retain customers,
including reducing interest rates on selected accounts. First Deposit's
subsidiaries have generally retained the right to alter various charges, fees
and other terms with respect to consumer credit accounts. In addition, the
Banking Group has experienced steady growth in its secured loan products and
is increasing its efforts to offer its products to underserved markets.
EMPLOYEES
The total number of persons employed by the Company and its subsidiaries was
approximately 9,360 as of December 31, 1993, including an agency sales force
of 3,609. The Company has approximately 350 employees.
FOREIGN OPERATIONS
Substantially all of the Company's operations are conducted in the United
States.
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Item 2. PROPERTIES
Principal properties of the Company and its affiliates include home
offices located in Louisville, Kentucky (Commonwealth Life) and Valley
Forge, Pennsylvania (National Liberty and Worldwide Insurance), which are
owned; and Louisville, Kentucky (Capital Holding Corporation), Durham,
North Carolina (Peoples Security, Capital Security and Durham Life) and
San Francisco and Pleasanton, California (First Deposit), which are
leased.
Item 3. LEGAL PROCEEDINGS
The last subsection, titled "Legal Proceedings", of Note J - Commitments
and Contingencies on page 53 of the Annual Report for the year ended
December 31, 1993, is incorporated by reference.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
EXECUTIVE OFFICERS OF THE REGISTRANT
Name and Age Principal Occupation and Business Experience
Irving W. Bailey II Chairman of the Board of Directors, Capital Holding
Age: 52 Corporation, since November 1988, and President and
Chief Executive Officer, Capital Holding Corporation,
since April 1988. President and Chief Operating
Officer, Capital Holding Corporation, September 1987
to April 1988. Executive Vice President and Chief
Investment Officer, Capital Holding Corporation, from
February 1981 to September 1987. He was with Phoenix
Mutual Life Insurance Company for 9 1/2 years,
serving as Senior Vice President, Investments from
1979 to 1981 and Vice President, Investments from
1976 to 1979.
Robert L. Walker Senior Vice President - Finance and Chief Financial
Age 43 Officer, Capital Holding Corporation, since
August 1993. He served as Vice President and General
Counsel, Capital Holding Corporation, from December
1991 to August 1993, and Vice President, Corporate
Tax, Capital Holding Corporation, from March 1988 to
December 1991. Prior to joining Capital Holding
Corporation, he was with The Mead Corporation from
1975 to 1988, serving most recently as Tax Counsel.
Steven T. Downey Vice President and Controller, Capital Holding
Age: 36 Corporation, since November 1993. He served as
Director, Finance and Accounting - Accumulation and
Investment Group, Capital Holding Corporation, from
January 1993 to November 1993, and Second Vice
President and Assistant Controller from August 1991
to January 1993. Prior to joining Capital Holding
Corporation, he was with Ernst & Young, Certified
Public Accountants, from 1978 to 1991.
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EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
Name and Age Principal Occupation and Business Experience
Shailesh J. Mehta Executive Vice President, Capital Holding
Age: 44 Corporation and President and CEO - Direct Response
Group, Capital Holding Corporation, since
August 1993. Also, President and CEO - Banking
Group, Capital Holding Corporation, and Chairman of
the Board, President and Chief Executive Officer of
First Deposit Corporation (FDC) and subsidiaries
since April 1988. He served as Executive Vice
President and Chief Operating Officer of FDC from
March 1986 until his selection as CEO. Prior to
joining FDC, he served as Vice President, 1977 to
1982; Senior Vice President of Bank Operations, 1982
to 1985; and finally Executive Vice President, 1985
to 1986, of AmeriTrust Bank, Cleveland, Ohio. During
his thirteen year tenure at AmeriTrust, he also
served on the boards of AmeriTrust Venture Capital
Corporation, AmeriTrust Development Bank, NationNet
National ATM Network, and InstaNet National ATM
Network. He is one of the founders of the Cirrus
debit card network.
Lee Adrean President and CEO - Agency Group, Capital Holding
Age: 42 Corporation, since August 1993. He served as Senior
Vice President, Planning and Finance and Chief
Financial Officer, Capital Holding Corporation, from
December 1991 to August 1993, and Senior Vice
President, Strategic Planning and Corporate
Development, Capital Holding Corporation, from
September 1990 to August 1993. Prior to joining
Capital Holding Corporation, he was with Bain &
Company, Inc. from 1979 to 1990, serving as Vice
President, 1985 to 1990; Manager, 1982 to 1985; and
Consultant, 1979 to 1982.
Joseph M. Tumbler President and CEO - Accumulation and Investment
Age: 45 Group, Capital Holding Corporation, since November
1989. He served as Senior Vice President - Strategic
Planning and Corporate Development, Capital Holding
Corporation, from January 1988 to November 1989.
Previously with National Liberty Corporation as
Executive Vice President - Financial Marketing from
September 1986 to January 1988. He was with CIGNA
Corporation from 1978 to 1986, serving as Senior Vice
President, International Life and Group, 1983 to
1986; Vice President, Planning, CIGNA Worldwide,
Inc., 1981 to 1983; Director - Corporate Strategy,
INA Corporation, 1978 to 1981.
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EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
Name and Age Principal Occupation and Business Experience
Lawrence Pitterman Senior Vice President of Administration, Capital
Age: 46 Holding Corporation, since January 1991. Previously
with First Deposit Corporation as Vice President,
Human Resources, from July 1990 to December 1990;
Vice President, Corporate Communications, from 1989
to 1990; and Vice President, First Deposit Savings
Bank, from 1987 to 1989. Prior to joining FDC, he
served as Director, Human Resources, for Data General
Corporation from 1983 to 1987.
Elaine J. Robinson Vice President and Treasurer, Capital Holding
Age 45 Corporation, since December 1991, Second Vice
President and Assistant Treasurer, Capital Holding
Corporation, from November 1987 to December 1991, and
Second Vice President, Corporate Finance, Capital
Holding Corporation, from August 1987 to November
1987. Prior to joining Capital Holding Corporation,
she was with Brown-Forman Corporation from 1971 to
1987, serving most recently as Assistant Vice
President, Corporate Finance and Treasury.
Bruce E. Ogle Vice President and Corporate Auditor, Capital Holding
Age 38 Corporation, since 1989. He served as Director,
Marketing Support-Agency Group, Capital Holding
Corporation, from 1987 to 1988, and as Manager,
Computer Audit Function-Agency Group, Capital Holding
Corporation, from 1984 to 1987.
Frederick C. Kessell Vice President and Chief Investment Officer -
Age 45 Accumulation and Investment Group, Capital
Holding Corporation, since 1988, and Vice President,
Fixed Income Securities - Accumulation and Investment
Group, Capital Holding Corporation from May, 1985 to
1988. Prior to joining Capital Holding Corporation,
he was with Schroder Capital Management from 1979 to
1985, serving as Vice President.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Common Stock Dividend and Market Data, and Quarterly Price Ranges of
Common Stock and Dividends Per Common Share on pages 32 and 34 of the
Annual Report for the year ended December 31, 1993 are incorporated by
reference.
Item 6. SELECTED FINANCIAL DATA
Selected Financial Data on pages 18 and 19 of the Annual Report for the
year ended December 31, 1993, is incorporated by reference.
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PART II (continued)
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Consolidated Results and Analysis on pages 18 and 19, Results by Business
Segment on pages 20 through 31, Business Segment Data on pages 22 and 23,
Supplemental Earnings Data on page 35 and Liquidity and Capital Resources
and Inflation on pages 31 and 32 of the Annual Report for the year
ended December 31, 1993, are incorporated by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of Capital Holding Corporation and
Subsidiaries included on pages 37 through 53 and Quarterly Financial Data
on page 34 of the Annual Report for the year ended December 31, 1993, are
incorporated by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Election of Directors on pages 3 through 5 of the Proxy Statement for the
Annual Meeting of Stockholders to be held May 11, 1994, is incorporated
by reference.
Item 11. EXECUTIVE COMPENSATION
Compensation of Directors and Executive Officers on pages 5 through 14 of
the Proxy Statement for the Annual Meeting of Stockholders to be held May
11, 1994, is incorporated by reference.
Item l2. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners and Management on pages 1
and 2 and Compliance with Section 16(a) of the Securities Exchange Act of
1934 on page 18 of the Proxy Statement for the Annual Meeting of
Stockholders to be held May 11, 1994, are incorporated by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
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PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2)--The response to these portions of Item 14 is submitted
as a separate section of this report.
(a) (3)--The response to this portion of Item 14 is submitted as a
separate section of this report.
(b) No reports on Form 8-K were filed for the three month period ended
December 31, 1993.
(c) Exhibits are submitted as a separate section of this report.
(d) Financial statement schedules are submitted as a separate section of
this report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Louisville, and the Commonwealth of Kentucky, on the 16th day of February
1994:
CAPITAL HOLDING CORPORATION
Irving W. Bailey II
Irving W. Bailey II
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on the 16th day of February 1994:
SIGNATURE TITLE
Irving W. Bailey II Chairman, President, Chief Executive
Irving W. Bailey II Officer and Director
Robert L. Walker Senior Vice President and
Robert L. Walker Chief Financial Officer
Steven T. Downey Vice President and Controller
Steven T. Downey (Principal Accounting Officer)
John L. Clendenin Director
John L. Clendenin
Director
John M. Cranor III
Joseph F. Decosimo Director
Joseph F. Decosimo
- 15 -
<PAGE>
SIGNATURE TITLE
Lyle Everingham Director
Lyle Everingham
Raymond V. Gilmartin Director
Raymond V. Gilmartin
J. David Grissom Director
J. David Grissom
Watts Hill, Jr. Director
Watts Hill, Jr.
F. Warren McFarlan Director
F. Warren McFarlan
Martha R. Seger Director
Martha R. Seger
Director
Florence R. Skelly
Larry D. Thompson Director
Larry D. Thompson
Director
John L. Weinberg
- 16 -
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM l4(a)(1), (2) and (3), (c) and (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENT SCHEDULES
LIST AND INDEX OF EXHIBITS
YEAR ENDED DECEMBER 31, 1993
CAPITAL HOLDING CORPORATION
LOUISVILLE, KENTUCKY
- 17 -
<PAGE>
FORM 10-K--ITEM 14(a)(1) and (2)
CAPITAL HOLDING CORPORATION AND SUBSIDIARIES
INDEX OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following Consolidated Financial Statements of Capital Holding Corporation
and Subsidiaries, included on pages 37 through 53 of the Annual Report for the
year ended December 31, 1993, are incorporated by reference in Item 8:
Page
Consolidated Statements of Income -
Years Ended December 31, 1993, 1992 and 1991 37
Consolidated Statements of Financial Condition -
December 31, 1993 and 1992 38-39
Consolidated Statements of Cash Flows -
Years Ended December 31, 1993, 1992 and 1991 40
Consolidated Statements of Shareholders' Equity -
Years Ended December 31, 1993, 1992 and 1991 41
Notes to Consolidated Financial Statements 42-53
The following financial statement schedules and the related Report of
Independent Auditors are included in Item 14(d):
Schedule I - Summary of Investments - Other Than Investments in
Related Parties
Schedule III - Condensed Financial Information of Registrant
Schedule V - Supplementary Insurance Information
Schedule VI - Reinsurance
Schedule IX - Short-term Borrowings
Information required in Schedule VIII, "Valuation and Qualifying Accounts," is
included in Note C to the consolidated financial statements of Capital Holding
Corporation and subsidiaries, incorporated herein by reference. All other
schedules for which provision is made in the applicable accounting regulation
of the Securities and Exchange Commission are not required under the related
instructions or are inapplicable and, therefore, have been omitted.
- 18 -
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Capital Holding Corporation
We have audited the consolidated financial statements of Capital Holding
Corporation and subsidiaries listed in the accompanying Index to financial
statements (Item 14(a)). Our audits also included the financial statement
schedules listed in the Index at Item 14(a). These financial statements and
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Capital Holding Corporation and subsidiaries at December 31, 1993 and 1992,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1993, in conformity with
generally accepted accounting principles. Also, in our opinion, the financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
ERNST & YOUNG
Louisville, Kentucky
February 9, 1994
- 19 -
<PAGE>
<TABLE>
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS
IN RELATED PARTIES
<CAPTION>
CAPITAL HOLDING CORPORATION AND SUBSIDIARIES
December 31, 1993
Amount shown
in Statement
Amortized Market of Financial
Type of Investment Cost value Condition
(000's Omitted)
<S> <C> <C> <C>
Bonds and redeemable preferred stocks
-held for investment
Bonds:
US government & government agencies $ 962,216 $1,006,165 $ 962,216
State and municipal 382,022 428,051 382,022
Foreign governments 321,841 355,131 321,841
Public utilities 364,596 396,429 364,596
Industrial and miscellaneous 3,265,849 3,554,045 3,265,849
Total bonds 5,296,524 5,739,821 5,296,524
Redeemable preferred stocks 26,897 27,797 26,897
Total bonds and redeemable preferred
stocks-held for investment 5,323,421 5,767,618 5,323,421
Bonds-actively managed
US government & government agencies 1,160,236 1,168,288 1,168,288
State and municipal 439,409 446,631 446,631
Foreign governments 153,810 157,474 157,474
Public utilities 831,384 843,523 843,523
Industrial and miscellaneous 2,513,996 2,596,115 2,596,115
Related hedging instruments - (98,394) (98,394)
Total bonds-actively managed 5,098,835 5,113,637 5,113,637
Common and nonredeemable preferred stocks
Common stocks:
Industrial and miscellaneous 24,287 23,359 23,359
Nonredeemable preferred stocks 396,368 404,131 404,131
Total common and nonredeemable
preferred stocks 420,655 427,490 427,490
Commercial mortgage loans 2,558,466 xxxxxxxxxx 2,558,466
Residential mortgage loans 1,637,452 xxxxxxxxxx 1,637,452
Policy loans 351,507 xxxxxxxxxx 351,507
Consumer loans 1,867,944 xxxxxxxxxx 1,867,944
Real estate <F1> 103,258 xxxxxxxxxx 103,258
Other long-term investments 356,957 xxxxxxxxxx 356,957
Short-term investments 34,995 xxxxxxxxxx 34,995
Total investments $17,753,490 xxxxxxxxxx $17,775,127
<FN>
<F1> Includes real estate taken in foreclosure of $87,071 in our mortgage loan
portfolio.
- 20 -
<PAGE>
SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
<CAPTION>
CAPITAL HOLDING CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF FINANCIAL CONDITION December 31
1993 1992
(000's Omitted)
<S> <C> <C>
Assets
Investments:
Common stock $ 16 $ 16
Investments in and advances
to subsidiaries <F1> 2,921,792 2,636,394
Notes receivable from subsidiaries <F1> 364,061 358,777
Accrued interest and accounts receivable
from subsidiaries <F1> 9,081 15,595
Other assets 49,973 52,590
Total assets $3,344,923 $3,063,372
__________ __________
Liabilities and Shareholders' Equity:
Liabilities
Cash overdraft $ 783 $ 2,887
Notes, accounts payable and other
liabilities to subsidiaries <F1> 75,539 91,676
Short-term borrowings 49,870 49,752
Other liabilities 67,350 68,520
Long-term debt 587,750 587,750
Total liabilities 781,292 800,585
Redeemable cumulative preferred stock
held by subsidiary <F1> 70,740 76,860
Shareholders' equity
Preferred stock 100,000 237,512
Common stock 115,325 57,662
Additional paid-in capital 57,053 59,705
Retained earnings 130,589 24,458
Equity in undistributed earnings
of subsidiaries 2,165,385 2,032,661
Equity in net unrealized investment gain (loss)
of subsidiaries 17,204 (34,998)
Common stock held in treasury - at cost (89,289) (191,073)
Unearned restricted stock (3,376) -
Total shareholders' equity 2,492,891 2,185,927
Total liabilities and shareholders' equity $3,344,923 $3,063,372
__________ __________
<FN>
<F1> Eliminated in consolidation.
See notes to condensed financial statements.
- 21 -
<PAGE>
SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
<CAPTION>
CAPITAL HOLDING CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF INCOME Year Ended December 31
1993 1992 1991
(000's Omitted)
<S> <C> <C> <C>
Revenues
Dividends from subsidiaries <F1> $199,687 $117,187 $ 74,735
Interest on notes receivable from
subsidiaries <F1> 47,944 50,433 51,557
Management and service fees <F1> 25,599 23,683 22,598
Investment and other income, net 1,897 798 5,929
Total revenues 275,127 192,101 154,819
Expenses
Operating expenses 37,996 37,438 37,662
Interest expense 54,175 55,794 55,843
Interest expense on notes payable to
subsidiaries <F1> 5,790 6,908 12,106
Total expenses 97,961 100,140 105,611
Income before federal income tax
benefit and equity in undistributed net
income of subsidiaries 177,166 91,961 49,208
Federal income tax benefit 12,775 6,434 7,624
Income before equity in undistributed
net income of subsidiaries 189,941 98,395 56,832
Equity in undistributed net income
of subsidiaries 132,724 224,101 193,400
Net Income $322,665 $322,496 $250,232
________ ________ ________
<FN>
<F1> Eliminated in consolidation.
See notes to condensed financial statements.
- 22 -
<PAGE>
SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
<CAPTION>
CAPITAL HOLDING CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS Year Ended December 31
1993 1992 1991
(000's Omitted)
<S> <C> <C> <C>
Net Cash Flows from Operating Activities $ 194,627 $111,261 $ 59,814
Cash Flows from Investment Activities:
Investments sold or matured - 4,532 -
Changes in investments in and advances
to subsidiaries <F1> (102,015) (1,287) (11,082)
Changes in operating property (2,155) (5,197) 1,889
Acquisition of subsidiary - - (720)
Change in receivable/payable
with subsidiaries <F1> 4,369 (8,648) (12,615)
All other investment activities, net (28) (79) (2,319)
Net Cash Flows used in Investment Activities (99,829) (10,679) (24,847)
Cash Flows from Financing Activities
Change in short-term borrowings 118 128 (49,591)
Issuance of long-term debt - 65,000 227,750
Repayment of long-term debt - (86,822) (52,752)
Redemption of auction cumulative
preferred stock - - (50,000)
Redemption of redeemable cumulative
preferred stock <F1> (6,120) (2,320) (820)
Purchase of common stock for treasury - - (9,135)
Dividends (80,600) (73,511) (64,422)
Proceeds from exercise of stock options 7,900 7,764 8,217
Change in notes payable
to subsidiaries <F1> (13,992) (12,541) (44,947)
Net Cash Flows used in Financing Activities (92,694) (102,302) (35,700)
Net Increase (Decrease) in Cash and
Cash Equivalents during Year 2,104 (1,720) (733)
Cash and Cash Equivalents (Cash Overdraft)
at Beginning of Year (2,887) (1,167) (434)
Cash and Cash Equivalents (Cash Overdraft)
at End of Year $ (783) $ (2,887) $ (1,167)
_________ ________ ________
<FN>
<F1> Eliminated in consolidation.
See notes to condensed financial statements.
</TABLE>
- 23 -
<PAGE>
SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
CAPITAL HOLDING CORPORATION (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
In the parent company only condensed financial statements, the Company's
investment in subsidiaries is stated at cost plus equity in undistributed
income of subsidiaries since date of acquisition. The condensed financial
statements of the parent company should be read in conjunction with the
Consolidated Financial Statements and Notes of Capital Holding Corporation
and Subsidiaries.
Note A Federal Income Tax
The Company files a consolidated federal income tax return with certain of its
subsidiaries. The federal income tax benefit in the accompanying condensed
financial statements reflects the Company's allocable share of the consolidated
provision. See Note G to the Consolidated Financial Statements of Capital
Holding Corporation and Subsidiaries for a description of the components of the
consolidated federal income tax provision.
Note B Long-Term Debt
Long-term debt of the Company at December 31, 1993 and 1992 consisted of
Debentures and Notes in the amount of $587,750,000. See Note H to the
Consolidated Financial Statements of Capital Holding Corporation and
Subsidiaries for a description of the terms and aggregate maturities of the
Company's long-term debt.
Note C Common Stock
On February 17, 1993, the Board of Directors declared a two-for-one stock split
of the Company's common stock effected in the form of a stock dividend. The
stock dividend was payable on April 30, 1993, to holders of record on
April 15, 1993.
Note D Preferred Stock
The Company has 6,000,000 shares of preferred stock, par value $5, authorized
for issuance in series.
Redeemable Cumulative Preferred Stock Held By Subsidiary
The Company has designated 827,400 shares of preferred stock as redeemable
cumulative preferred stock to be issued in different series with varying annual
dividend rates. The shares outstanding at December 31, 1993 and 1992 were
707,400 and 768,600, respectively. The subsidiary has the right, on an annual
basis, to waive receipt of dividends and has waived any dividends payable
through 1993. The characteristics of the redeemable preferred stock are as
follows:
-24-
<PAGE>
SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
CAPITAL HOLDING CORPORATION (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS - NOTE D - CONTINUED
Shares outstanding
Dividend Shares Year at December 31 Period of
Series rate authorized issued 1993 1992 redemption
B 12.25% 57,400 1980 57,400 65,600 1991-2000
C 14.00% 120,000 1981 120,000 135,000 1992-2001
D 15.00% 90,000 1982 90,000 100,000 1993-2002
E 14.25% 135,000 1982 135,000 150,000 1993-2002
G 12.00% 237,000 1983 117,000 130,000 1993-2002
H 11.50% 100,000 1984 100,000 100,000 1994-2003
I 12.00% 88,000 1984 88,000 88,000 1994-2003
827,400 707,400 768,600
Mandatory pro-rata sinking fund payments are required to redeem 10% of each
series of redeemable preferred stock annually, beginning approximately ten
years after issuance at $100 per share. As the shares are redeemed, they are
retired thereby reducing the total authorized shares. The Company redeemed the
following shares of cumulative preferred stock in 1993: 8,200 of the Series B;
15,000 of the Series C; 10,000 of the Series D; 15,000 of the Series E; and
13,000 of the Series G. The aggregate amount of mandatory pro-rata sinking
fund payments required for redemption of the redeemable preferred stock in each
of the following years are: 1994-$8,000,000; 1995-$8,000,000; 1996-$8,000,000,
1997-$8,000,000 and 1998-$8,000,000. The Company shall have the annual
non-cumulative option to double any sinking fund payment subject to an
aggregate limitation of 25% of the total issue. The redeemable preferred stock
is non-callable for approximately ten years and callable thereafter at $105 per
share plus accrued dividends. However, in the event the Company is required to
obtain approval of a specified percentage of the holders of the issue to effect
a merger, consolidation, or sale of assets and such approval is denied, then
the Company may redeem the preferred stock in its entirety at $100 per share
plus accrued dividends.
Noncumulative Convertible Junior Preferred Stock
On November 14, 1991, the Company issued 1,918,200 shares of Noncumulative
Convertible Junior Preferred Stock, Series J, par value $5, in connection with
the acquisition of Durham Corporation. Effective June 16, 1993, each
outstanding share of Series J preferred stock was exchanged for 5.55 shares of
the Company's common stock and all rights of the holders of Series J preferred
stock, including the rights to receive dividends, were terminated.
Adjustable Rate Cumulative Preferred Stock
In 1982, the Company issued 1,000,000 shares of Adjustable Rate Cumulative
Preferred Stock, Series F, par value $5, at face value of $100 per share. See
Note I to the Consolidated Financial Statements of Capital Holding Corporation
and Subsidiaries for a description of the terms and dividend rate of the Series
F Preferred Stock. On March 2, 1994, the Company redeemed the preferred stock
for cash at face value.
Note E Management and Service Fees
The Company provides its subsidiaries with general management support,
including services in the data processing, human resources, legal and financial
areas. The related charges are billed to the subsidiaries being serviced as
management fees, and are computed using various allocation methods which are,
in the opinion of management, reasonable in relation to services rendered.
- 25 -
<PAGE>
<TABLE>
SCHEDULE V - SUPPLEMENTARY INSURANCE INFORMATION
<CAPTION>
CAPITAL HOLDING CORPORATION AND SUBSIDIARIES
Year Ended December 31, 1993 - (000's Omitted)
Benefits, Amortization Commis-
Deferred Policy Net claims, and of deferred sions
policy&loan and invest- increase in policy ac- and
acquisition Benefit Unearned contract Premium ment benefit quisition expenses, Premiums
Segment costs <F1> reserves<F2>premiums claims income income<F3> reserves<F4>costs <F5> net <F3> written
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Agency Group:
Life $ 766,988 $ 2,256,769 $ - $ 19,410 $ 344,392 $ 248,667 $ 237,949 $ 74,482 $ 95,682 -
Health 71,791 101,864 - 13,733 65,472 9,459 47,131 6,956 15,323 $ 65,186
Other product lines 3,082 187,230 3,704 37,309 23,349 44,826 350 14,658 10,816
Total 841,861 2,545,863 - 36,847 447,173 281,475 329,906 81,788 125,663 -
Direct Response Group:
Life 417,356 621,998 - 21,452 298,897 61,600 207,434 50,631 47,623
Health 208,462 124,486 - 32,252 197,957 14,108 82,573 38,208 45,469 200,107
Property and casualty 35,047 - 47,340 115,602 143,781 15,913 118,037 7,128 28,965 145,818
Other product lines 11,979 32,265 - 1,371 7,107 3,642 6,574 5,517 14,103
Total 672,844 778,749 47,340 170,677 647,742 95,263 414,618 101,484 136,160
Banking Group 33,092 - - - - 316,831 84,714 81,416 240,576
Accumulation and
Investment Group 109,193 11,142,330 - 1,612 71,127 724,061 607,954 38,802 51,920
Corporate and Other - 4,233 - 2,162 1,642 43,816 (5,783) (171) 24,523
Consolidated $1,656,990 $14,471,175 $47,340 $211,298 $1,167,684 $1,461,446 $1,431,409 $303,319 $578,842
__________ ___________ _______ ________ __________ __________ __________ ________ ________
- 26 -
<PAGE>
SCHEDULE V - SUPPLEMENTARY INSURANCE INFORMATION-CONTINUED
<CAPTION>
CAPITAL HOLDING CORPORATION AND SUBSIDIARIES
Year Ended December 31, 1992 - (000's Omitted)
Benefits, Amortization Commis-
Deferred Policy Net claims, & of deferred sions
policy&loan and invest- increase policy ac- and
acquisition Benefit Unearned contract Premium ment in benefit quisition expenses, Premiums
Segment costs <F1> reserves<F2> premiums claims income income<F3> reserves<F4>costs<F5> net<F3> written
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Agency Group:
Life $ 724,334 $ 2,188,844 $ - $ 15,991 $ 332,028 $ 248,766 $ 231,592 $ 66,241 $100,455
Health 70,386 93,835 - 14,195 64,656 9,192 47,967 7,423 16,126 $ 65,581
Other product lines 2,563 191,357 - 1,943 40,187 23,725 47,646 301 16,386 12,075
Total 797,283 2,474,036 - 32,129 436,871 281,683 327,205 73,965 132,967
Direct Response Group:
Life 317,108 480,077 - 22,269 234,967 39,002 160,390 39,314 33,881
Health 216,291 139,661 - 42,185 183,157 14,633 74,367 40,730 39,510 187,400
Property and casualty 33,146 - 45,300 119,829 140,024 16,982 115,952 6,144 29,849 140,660
Other product lines 15,587 32,698 - 1,808 8,567 3,981 6,495 3,771 11,949
Total 582,132 652,436 45,300 186,091 566,715 74,598 357,204 89,959 115,189
Banking Group 43,253 - - - - 324,200 108,540 35,779 239,323
Accumulation and
Investment Group 118,155 10,411,459 - 390 110,108 716,037 661,095 20,077 51,229
Corporate and Other - 10,514 - 13,077 76,331 57,024 41,278 5,282 56,968 61,579
Consolidated $1,540,823 $13,548,445 $45,300 $231,687 $1,190,025 $1,453,542 $1,495,322 $225,062 $595,676
__________ ___________ _______ ________ __________ __________ __________ ________ ________
- 27 -
<PAGE>
SCHEDULE V - SUPPLEMENTARY INSURANCE INFORMATION-CONTINUED
<CAPTION>
CAPITAL HOLDING CORPORATION AND SUBSIDIARIES
Year Ended December 31, 1991 - (000's Omitted)
Benefits, Amortization Commis-
Deferred Policy Net claims, and of deferred sions
policy&loan and invest- increase in policy and
acquisition Benefit Unearned contract Premium ment benefit acquisition expenses, Premiums
Segment costs <F1> reserves<F2> premiums claims income income<F3> reserves<F4>costs <F5> net <F3> written
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Agency Group:
Life $ 665,377 $ 2,100,297 $ - $ 18,191 $ 281,043 $ 216,354 $ 185,562 $ 55,820 $ 86,361
Health 68,087 84,386 - 13,675 60,734 8,280 45,762 7,849 14,478 $ 65,052
Other product lines 1,882 184,450 25 2,447 31,920 22,064 40,126 356 12,388 13,846
Total 735,346 2,369,133 25 34,313 373,697 246,698 271,450 64,025 113,227
Direct Response Group:
Life 291,701 373,825 - 20,192 222,414 38,050 149,668 37,972 35,872
Health 232,944 147,335 - 44,418 194,540 15,115 88,355 44,127 43,160 194,345
Property and casualty 33,998 - 44,663 136,298 142,561 17,189 122,829 5,373 31,156 140,648
Other product lines 17,352 36,460 - 1,902 8,681 3,350 5,528 1,360 7,754
Total 575,995 557,620 44,663 202,810 568,196 73,704 366,380 88,832 117,942
Banking Group 40,441 - - 318,570 110,586 40,298 188,906
Accumulation and
Investment Group 113,570 9,480,704 - 465 86,118 812,742 754,166 14,887 32,230
Corporate and Other 18,836 30,272 - 16,899 27,994 28,150 16,565 9,737 41,760 19,935
Consolidated $1,484,188 $12,437,729 $44,688 $254,487 $1,056,005 $1,479,864 $1,519,147 $217,779 $494,065
__________ ___________ _______ ________ __________ __________ __________ ________ ________
<FN>
<F1> Includes value of insurance in force purchased.
<F2> Includes policyholder contract deposits.
<F3> See Note M to the Consolidated Financial Statements of Capital Holding Corporation and Subsidiaries for a description
of the basis used in the allocation of net investment income and expenses.
<F4> Includes policyholder interest on investment-type contracts, interest on banking deposits and interest on related
hedging instruments.
<F5> Includes amortization of value of insurance in force purchased.
- 28 -
<PAGE>
SCHEDULE VI - REINSURANCE
<CAPTION>
CAPITAL HOLDING CORPORATION AND SUBSIDIARIES
Percentage
Ceded to Assumed of amount
Gross other from other assumed to
amount companies companies Net amount net amount
(000's Omitted Except Percentages)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1993
Life insurance
in force $57,081,876 $4,617,457 $8,904,628 $61,369,047 14.5%
___________ __________ __________ ___________
Premiums and other
considerations:
Life insurance<F1> $ 735,784 $ 33,357 $ 45,045 $ 747,472 6.0
Accident and health
insurance 357,557 138,291 57,165 276,431 20.7
Property and casualty
insurance 137,610 3,303 9,474 143,781 6.6
Total premiums $ 1,230,951 $ 174,951 $ 111,684 $ 1,167,684 9.6
___________ __________ __________ ___________
Year Ended December 31, 1992
Life insurance
in force $47,992,676 $2,829,588 $10,269,734 $55,432,822 18.5%
___________ __________ ___________ ___________
Premiums and other
considerations:
Life insurance<F1> $ 715,909 $ 37,833 $ 46,662 $ 724,738 6.4
Accident and health
insurance 383,828 110,711 50,169 323,286 15.5
Property and casualty
insurance 138,025 2,899 6,875 142,001 4.8
Total premiums $ 1,237,762 $ 151,443 $ 103,706 $ 1,190,025 8.7
___________ __________ ___________ ___________
Year Ended December 31, 1991
Life insurance
in force $49,377,126 $2,012,241 $4,736,987 $52,101,872 9.1%
___________ __________ __________ ___________
Premiums and other
considerations:
Life insurance<F1> $ 616,627 $ 14,939 $ 22,340 $ 624,028 3.6
Accident and health
insurance 307,245 59,772 40,144 287,617 14.0
Property and casualty
insurance 145,604 6,956 5,712 144,360 4.0
Total premiums $ 1,069,476 $ 81,667 $ 68,196 $ 1,056,005 6.5
___________ __________ __________ ___________
<FN>
<F1> Includes annuities.
- 29 -
<PAGE>
SCHEDULE IX - SHORT-TERM BORROWINGS
<CAPTION>
CAPITAL HOLDING CORPORATION AND SUBSIDIARIES
Weighted
Maximum Average Average
Weighted Amount Amount Interest
Balance Average Outstanding Outstanding Rate
Category of Aggregate at End of Interest During During During
Short-term Borrowings Period Rate the Period the Period<F1> Period<F2>
(000's Omitted Except Interest Rates)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1993
Notes payable to banks - - $ 1,000 $ 8 3.22%
Commercial paper $ 49,870 3.28% 194,739 57,155 3.26
Borrowings under First
Deposit Corporation:
Revolving credit
agreements <F3> 175,000 3.80 327,000 177,348 3.69
Federal funds purchased - - 69,000 6,393 3.05
Repurchase agreements 52,826 3.43 1,012,423 310,245 3.37
Year Ended December 31, 1992
Notes payable to banks - - $ 50,000 $ 2,802 4.46%
Commercial paper $ 49,752 3.92% 194,665 69,615 3.86
Borrowings under First
Deposit Corporation:
Revolving credit
agreements <F3> 172,000 3.93 320,000 159,986 4.37
Federal Funds Purchased 15,000 3.75 37,000 5,669 3.97
Repurchase Agreements 116,933 4.03 939,328 346,228 4.83
Year Ended December 31, 1991
Notes payable to banks $ 23,000 6.00% $133,000 $ 15,710 5.95%
Commercial paper 49,624 5.41 149,374 53,876 6.29
Borrowings under First
Deposit Corporation:
Revolving credit
agreements <F3> 109,000 5.95 140,000 75,010 6.70
Federal funds purchased - - 55,000 13,041 5.99
Repurchase agreements 148,127 5.02 993,683 377,478 6.80
<FN>
(F1) The average amount outstanding during the period was computed by dividing the
total of daily outstanding principal balances by 365 in 1993, 366 in 1992, and
365 in 1991.
(F2) The weighted average interest rate during the period was computed by dividing the
actual interest expense by the average amount outstanding during the period.
(F3) See Note H to the Consolidated Financial Statements of Capital Holding Corporation
and Subsidiaries for description of general terms.
</TABLE>
- 30 -
<PAGE>
FORM 10-K--ITEM 14(a)(3) AND (c)
CAPITAL HOLDING CORPORATION AND SUBSIDIARIES
LIST AND INDEX OF EXHIBITS
Reference
Number Per Exhibit
Exhibit Table Description of Exhibit Number Page
(3) Certificate of Incorporation as amended 3.1 -
on October 17, 1991. (Incorporated by
reference as Exhibit 3.1 of the Company's
Annual Report on Form 10-K for the year
ended December 31, 1991.)
(3) By-Laws of Capital Holding Corporation as 3.2 -
amended on February 17, 1988. (Incorporated
by reference as Exhibit 3.3 of the Company's
Annual Report on Form 10-K for the year
ended December 31, 1989.)
(4) Indenture dated April 1, 1983 between 4.1 -
the Company and Connecticut National Bank
(as successor to National Westminster Bank
USA) for Debt Securities (which now are
8 3/4% Sinking Fund Debentures due
January 15, 2017 and Medium Term Notes
due 1995 to 2022). (Incorporated by
reference as Exhibit 4.2 to Registration
Statement on Form S-3, Registration
No. 2-82957 filed with the Commission on
April 8, 1983.)
(4) Supplemental Indenture, dated 4.2 -
September 1, 1989, between the Company
and Connecticut National Bank (as successor
to National Westminster Bank USA),
Supplements the Indenture dated
April 1, 1983, between the Company and
Connecticut National Bank (as successor
to National Westminster Bank USA).
(Incorporated by reference as Exhibit 4.1
of Form 8-K dated September 18, 1989.)
(4) Capital Holding Corporation 1987 4.3 -
Shareholder Rights Agreement as amended
on November 4, 1992. (Incorporated by
reference as Exhibit 4.5 of the Company's
Annual Report on Form 10-K for the year
ended December 31, 1992.)
(4) Indenture between the Company and 4.4 -
Morgan Guaranty Trust Company of
New York, as Trustee, dated as of
January 1, 1994. (Provided as part
of electronic submission).
- 31 -
<PAGE>
FORM 10-K--ITEM 14(a)(3) AND (c)
CAPITAL HOLDING CORPORATION AND SUBSIDIARIES
LIST AND INDEX OF EXHIBITS (CONTINUED)
Reference
Number Per Exhibit
Exhibit Table Description of Exhibit Number Page
(10) Capital Holding Corporation 1981 10.1 -
Stock Option Incentive Plan, through
August 7,1991 (Incorporated by reference
as Exhibit 10.1 of the Company's Annual
Report on Form 10-K for the year ended
December 31, 1990.)
(10) 1991 amendments to 1981 Stock Option 10.2 -
Incentive Plan and 1989 Stock Option
Plan. (Incorporated by reference as
Exhibit 10.2 of the Company's Annual
Report on Form 10-K for the year
ended December 31, 1991.)
(10) Capital Holding Corporation 1981 Tax- 10.3 -
Qualified Stock Option Plan, as amended.
(Incorporated by reference as Exhibit
10.2 of the Company's annual Report on
Form 10-K for the year ended
December 31, 1990.)
(10) Employment Agreement between Capital 10.4 -
Holding Corporation and Irving W. Bailey II.
(Incorporated by reference as Exhibit 10.6
of the Company's Annual Report on Form 10-K
for the year ended December 31, 1987.)
(10) Descriptions of Company's Management 10.5 -
Incentive Plan, First Deposit Corporation's
Annual Incentive Plan and Company's
Long-Term Incentive Plan. (Incorporated
by reference to the descriptions of the
Incentive Compensation Plans as described
on Pages 6 and 7 of the Proxy Statement
for the Annual Meeting of Stockholders
held May 1, 1992.)
(10) Capital Holding Corporation 1989 Stock 10.6 -
Option Plan, through August 7, 1991.
(Incorporated by reference as Exhibit
10.6 of the Company's Annual Report on
Form 10-K for the year ended
December 31, 1990.)
- 32 -
<PAGE>
FORM 10-K--ITEM 14(a)(3) AND (c)
CAPITAL HOLDING CORPORATION AND SUBSIDIARIES
LIST AND INDEX OF EXHIBITS (CONTINUED)
Reference
Number Per Exhibit
Exhibit Table Description of Exhibit Number Page
(10) Amendment to Employment Agreement 10.7 -
between Capital Holding Corporation and
Irving W. Bailey II. (Incorporated by
reference as Exhibit 10.7 of the
Company's Annual Report on Form 10-K for
the year ended December 31, 1989.)
(10) Employment Agreements between 10.8 -
Capital Holding Corporation and
Joseph M. Tumbler. (Incorporated by
reference as Exhibit 10.8 of the
Company's Annual Report on Form 10-K
for the year ended December 31, 1989.)
(10) Employment Agreements between Capital 10.9 -
Holding Corporation and Lee Adrean,
Shailesh J. Mehta and Lawrence Pitterman.
(Incorporated by reference as Exhibit 10.9
of the Company's Annual Report on Form
10-K for the year ended December 31, 1990.)
(10) Employment Agreements between Capital 10.10 -
Holding Corporation and Frederick C. Kessell
and Robert L. Walker. (Incorporated by
reference as Exhibit 10.11 of the Company's
Annual Report on Form 10-K for the year ended
December 31, 1991.)
(10) First Deposit Corporation Equity Unit 10.11 -
Plan. (Incorporated by reference as
Exhibit 10.12 of the Company's Annual
Report on Form 10-K for the year ended
December 31, 1991.)
(10) Capital Holding Corporation Deferred 10.12 -
Compensation Plan for Deferral of Payments
under the Capital Holding Corporation
Management Incentive Plan. (Incorporated
by reference as Exhibit 10.13 of the
Company's Annual Report on Form 10-K
for the year ended December 31, 1991.)
- 33 -
<PAGE>
FORM 10-K--ITEM 14(a)(3) AND (c)
CAPITAL HOLDING CORPORATION AND SUBSIDIARIES
LIST AND INDEX OF EXHIBITS (CONTINUED)
Reference
Number Per Exhibit
Exhibit Table Description of Exhibit Number Page
(10) Capital Holding Corporation Deferred 10.13 -
Compensation Plan under the Capital
Holding Corporation Long-Term Incentive
Plan. (Incorporated by reference as
Exhibit 10.14 of the Company's Annual
Report on Form 10-K for the year ended
December 31, 1991.)
(10) First Deposit Corporation Deferred 10.14 -
Compensation Plan under the First
Deposit Corporation Annual Incentive
Plan. (Incorporated by reference as
Exhibit 10.15 of the Company's Annual
Report on Form 10-K for the year ended
December 31, 1991.)
(10) Descriptions of Capital Holding 10.15 -
Corporation Supplemental Non-qualified
Thrift Savings Plan and Non-qualified
Pension Agreements. (Incorporated by
reference to the descriptions of the
Retirement Plans and Thrift Savings Plan
as described on pages 7 through 9 of the
Proxy Statement for the Annual meeting
of Stockholders held May 1, 1992.)
(10) Capital Holding Corporation Stock 10.16 -
Ownership Plan (Incorporated by reference
as Exhibit 10.17 of the Company's Annual
Report on Form 10-K for the year ended
December 31, 1992.)
(12) Computation of ratio of earnings to fixed 12.1 35
charges (Provided as part of electronic
transmission.)
(13) Portions of the Annual Report for the year 13.1 -
ended December 31, 1993. (Provided as part
of electronic transmission.)
(21) List of subsidiaries. (Provided as part 21.1 37
of electronic transmission.)
(23) Consent of independent auditors. (Provided 23.1 39
as part of electronic transmission.)
- 34 -
<PAGE>
<TABLE>
EXHIBIT 12.1
<CAPTION>
CAPITAL HOLDING CORPORATION AND SUBSIDIARIES
COMPUTATION OF HISTORICAL RATIO OF EARNINGS TO FIXED CHARGES
Years Ended December 31
1993 1992 1991 1990 1989
(000's Omitted)
<S> <C> <C> <C> <C> <C>
Earnings as Adjusted:
Pretax income from
continuing operations $ 487,058 $ 452,027 $ 345,936 $ 224,712 $ 384,527
Interest expense, excluding
interest on banking
deposits, annuities and
other financial products 72,888 78,784 89,535 63,859 55,469
Portion of rent expense
representing the
interest factor 8,170 9,254 5,335 5,348 5,692
Subtotal 568,116 540,065 440,806 293,919 445,688
Interest expense on
banking deposits 54,025 64,472 86,999 96,440 112,470
Subtotal 622,141 604,537 527,805 390,359 558,158
Interest expense on
annuities and other
financial products 682,960 704,147 756,918 709,668 563,733
Total $1,305,101 $1,308,684 $1,284,723 $1,100,027 $1,121,891
Fixed Charges:
Interest incurred,
excluding interest
incurred on banking
deposits, annuities and
other financial products $ 72,888 $ 81,024 $ 88,875 $ 62,326 $ 53,850
Portion of rent expense
representing the
interest factor 8,170 9,254 5,335 5,348 5,692
Subtotal 81,058 90,278 94,210 67,674 59,542
Interest incurred on
banking deposits 54,025 64,472 86,999 96,440 112,470
Subtotal 135,083 154,750 181,209 164,114 172,012
Interest incurred on
annuities and other
financial products 686,204 704,147 756,918 709,668 563,733
Total $ 821,287 $ 858,897 $ 938,127 $ 873,782 $ 735,745
Ratio of Earnings to Fixed Charges:
Excluding interest on banking
deposits, annuities and other
financial products<F1> 7.0 6.0 4.7 4.3 7.5
Including interest on
banking deposits<F2> 4.6 3.9 2.9 2.4 3.2
Including interest on banking
deposits, annuities and other
financial products<F3> 1.6 1.5 1.4 1.3 1.5
<FN>
- 35 -
<PAGE>
EXHIBIT 12.1 (CONTINUED)
COMPUTATION OF HISTORICAL RATIO OF EARNINGS TO FIXED CHARGES
<F1> For the purpose of computing the ratio of earnings to fixed charges,
earnings have been calculated by adding to pretax income from continuing
operations the amount of fixed charges reduced for capitalized interest
and increased for amortization of previously capitalized interest.
Fixed charges consists of interest on debt and a portion of net rental
expense, approximately one-third, deemed to represent interest.
<F2> Computation of this ratio is the same as described in note (1) above
except that fixed charges also includes interest on banking deposits.
<F3> Computation of this ratio is the same as described in note (1) above
except that fixed charges also includes interest on banking deposits,
annuities and other financial products.
</TABLE>
- 36 -
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
as of December 31, 1993
State or other jurisdiction of
Corporation incorporation or organization
Academy Insurance Group, Inc. Delaware
Academy Life Insurance Company Missouri
Academy Services, Inc. Delaware
Accumulation and Investment Group, Inc. Delaware
Agency Holding I, Inc. Delaware
Agency Holding II, Inc. Delaware
Agency Holding III, Inc. Delaware
Agency Investments I, Inc. Delaware
Agency Investments II, Inc. Delaware
Agency Investments III, Inc. Delaware
Ammest Development Corporation, Inc. Kansas
Ammest Insurance Agency, Inc. California
Ammest Massachusetts Insurance Agency, Inc. Massachusetts
Ammest Realty Corporation Texas
Ammest Realty, Inc. Pennsylvania
Ampac, Inc. Texas
Ampac Insurance Agency, Inc. Pennsylvania
Association Consultants, Inc. Illinois
Capital 200 Block Corporation Delaware
Capital Assignment Corporation Kentucky
Capital Broadway Corporation Kentucky
Capital Enterprise Insurance Company Kentucky
Capital General Development Corporation Delaware
Capital Holding Agency Group, Inc. Kentucky
(d/b/a Commonwealth Peoples Agency Group, Inc.)
Capital Holding Corporation Political Action
Committee - CAP*PAC United States
Capital Holding Corporation Voluntary Employees'
Beneficiary Association Kentucky
Capital Landmark Insurance Company Kentucky
Capital Liberty, L.P. (Limited Partnership) Delaware
Capital Real Estate Development Corporation Delaware
Capital Security Life Insurance Company North Carolina
Capital Values Corporation Delaware
Capital Value Financial Services, Inc. Pennsylvania
Capital Values Securities Corporation Pennsylvania
CHC Durham Corporation Delaware
CHC Real Estate Corporation Delaware
College Resource Group, Inc. Kentucky
Commonwealth Agency, Inc. Kentucky
Commonwealth Life Insurance Company Kentucky
(d/b/a Commonwealth Life Insurance of Kentucky and
d/b/a Kentucky Commonwealth Life Insurance Company)
Commonwealth Premium Finance California
Compass Rose Development Corporation Pennsylvania
Contract Benefits Corporation Arkansas
- 37 -
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES (Continued)
as of December 31, 1993
State or other jurisdiction of
Corporation incorporation or organization
Data/Mark Services, Inc. Delaware
DurCo Agency, Inc. Virginia
Durham Life Insurance Company North Carolina
Financial Planning Services, Inc. Washington, D.C.
First Deposit Corporation Delaware
First Deposit Financial Corporation Utah
First Deposit Life Insurance Company Arkansas
First Deposit National Bank United States
First Deposit National Corporation California
First Deposit National Credit Card Bank United States
First Deposit Service Corporation California
Force Financial Group, Inc. Delaware
Force Financial Services, Inc. Massachusetts
Independence Automobile Association Florida
Independence Automobile Club Georgia
Knight Insurance Agency, Inc. Massachusetts
Knight Insurance Agency (New Hampshire), Inc. New Hampshire
Knight Tuition Payment Plans, Inc. Massachusetts
Military Associates, Inc. Pennsylvania
National Assets Management Corporation Pennsylvania
National Home Life Assurance Company Missouri
National Home Life Assurance Company of New York New York
National Information Systems Corporation Pennsylvania
National Liberty Corporation Pennsylvania
National Liberty Life Insurance Company Pennsylvania
NCOAA Management Company Texas
NCOA Motor Club, Inc. Georgia
Pension Life Insurance Company of America New Jersey
Peoples Security Life Insurance Company North Carolina
Security Trust Life Insurance Company Kentucky
Southlife, Inc. Tennessee
Unicom Administrative Services GmbH Germany
Unicom Administrative Services, Inc. Pennsylvania
Valley Forge Associates, Inc. Pennsylvania
Veterans Benefits Plans, Inc. Pennsylvania
Veterans Insurance Services, Inc. Delaware
Veterans Life Insurance Company Illinois
Winnisquam Community Development Corporation New Hampshire
Worldwide Underwriters Insurance Company Missouri
Worldwide Underwriters Insurance Company
of North Carolina North Carolina
- 38 -
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement No.
33-49719 on Form S-3 dated June 25, 1993, as amended by the Pre-Effective
Amendment No. 1 dated September 2, 1993, Pre-Effective Amendment No. 2 dated
November 12, 1993 and Pre-Effective Amendment No. 3 dated January 12, 1994;
Registration Statement No. 33-35006 on Form S-3 dated May 25, 1990;
Registration Statement No. 33-43363 on Form S-4 dated October 15, 1991;
Registration Statement No. 33-34655 on Form S-8 dated April 24, 1990, as
amended by Post Effective Amendment No. 1; Registration Statement No. 33-47336
on Form S-8 dated April 21, 1992, as amended by Post Effective Amendment No.
1, (which also serves as Post Effective Amendment No. 2 to Registration
Statement No. 33-34655); Registration Statement No. 2-77160 on Form S-8 dated
May 14, 1982, as amended by Post Effective Amendment No. 9; Registration
Statement No. 33-39989 on Form S-8 dated April 16, 1991 and Registration
Statement No. 33-47335 on Form S-8 dated April 21, 1992 (which also serves as
Post Effective Amendment No. 1 to Registration Statement No. 33-39989), of our
report dated February 9, 1994, included herein, with respect to the
consolidated financial statements and schedules of Capital Holding Corporation
included or incorporated by reference in this Annual Report (Form 10-K) for
the year ended December 31, 1993.
ERNST & YOUNG
Louisville, Kentucky
March 22, 1994
- 39 -
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
CAPITAL HOLDING CORPORATION
TO
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, Trustee
----------------
INDENTURE
Dated as of January 1, 1994
----------------
- --------------------------------------------------------------------------------
<PAGE>
................................................................................
Certain Sections of this Indenture relating to
Sections 310 through 318, inclusive, of the
Trust Indenture Act of 1939:
<TABLE>
<CAPTION>
INDENTURE
TRUST INDENTURE ACT SECTION SECTION
--------------------------- --------------
<S> <C>
(S) 310(a)(1).................................................... 609
(a)(2)........................................................ 609
(a)(3)........................................................ Not Applicable
(a)(4)........................................................ Not Applicable
(b)........................................................... 608
610
(S) 311(a)....................................................... 613
(b)........................................................... 613
(S) 312(a)....................................................... 701
702
(b)........................................................... 702
(c)........................................................... 702
(S) 313(a)....................................................... 703
(b)........................................................... 703
(c)........................................................... 703
(d)........................................................... 703
(S) 314(a)....................................................... 704
(a)(4)........................................................ 101
1004
(b)........................................................... Not Applicable
(c)(1)........................................................ 102
(c)(2)........................................................ 102
(c)(3)........................................................ Not Applicable
(d)........................................................... Not Applicable
(e)........................................................... 102
(S) 315(a)....................................................... 601
(b)........................................................... 602
(c)........................................................... 601
(d)........................................................... 601
(e)........................................................... 514
(S) 316(a)....................................................... 101
(a)(1)(A)..................................................... 502
512
(a)(1)(B)..................................................... 513
(a)(2)........................................................ Not Applicable
(b)........................................................... 508
(c)........................................................... 104
(S) 317(a)(1).................................................... 503
(a)(2)........................................................ 504
(b)........................................................... 1003
(S) 318(a)....................................................... 107
</TABLE>
- --------
NOTE: This reconciliation and tie shall not, for any purpose, be deemed to be a
part of the Indenture.
<PAGE>
TABLE OF CONTENTS
----------------
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
PARTIES................................................................... 1
RECITALS OF THE COMPANY................................................... 1
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 101. Definitions:................................................ 1
Act......................................................... 2
Affiliate................................................... 2
Authenticating Agent........................................ 2
Board of Directors.......................................... 2
Board Resolution............................................ 2
Business Day................................................ 2
Commission.................................................. 2
Company..................................................... 3
Company Request; Company Order.............................. 3
Corporate Trust Office...................................... 3
Corporation................................................. 3
Covenant Defeasance......................................... 3
Defaulted Interest.......................................... 3
Defeasance.................................................. 3
Depositary.................................................. 3
Event of Default............................................ 3
First Deposit............................................... 4
Global Security............................................. 4
Holder...................................................... 4
Indenture................................................... 4
Interest.................................................... 4
Interest Payment Date....................................... 4
Maturity.................................................... 4
Notice of Default........................................... 4
Officers' Certificate....................................... 4
Opinion of Counsel.......................................... 5
Original Issue Discount Security............................ 5
Outstanding................................................. 5
Paying Agent................................................ 6
Person...................................................... 6
Place of Payment............................................ 6
Predecessor Security........................................ 6
Redemption Date............................................. 7
Redemption Price............................................ 7
Regular Record Date......................................... 7
</TABLE>
- --------
NOTE: This table of contents shall not, for any purpose, be deemed to be a part
of the Indenture.
i
<PAGE>
<TABLE>
<C> <S> <C>
Responsible Officer.......................................... 7
Restricted Subsidiary........................................ 7
Securities................................................... 7
Security Register and Security Registrar..................... 7
Special Record Date.......................................... 7
Stated Maturity.............................................. 7
Subsidiary................................................... 8
Trustee...................................................... 8
Trust Indenture Act.......................................... 8
U.S. Government Obligations.................................. 8
Vice President............................................... 8
Section 102. Compliance Certificates and Opinions......................... 8
Section 103. Form of Documents Delivered to Trustee....................... 9
Section 104. Acts of Holders; Record Dates................................ 10
Section 105. Notices, Etc., to Trustee and Company........................ 11
Section 106. Notice to Holders; Waiver.................................... 12
Section 107. Conflict with Trust Indenture Act............................ 12
Section 108. Effect of Headings and Table of Contents..................... 13
Section 109. Successors and Assigns....................................... 13
Section 110. Separability Clause.......................................... 13
Section 111. Benefits of Indenture........................................ 13
Section 112. Governing Law................................................ 13
Section 113. Legal Holidays............................................... 13
Section 114. Counterparts................................................. 14
ARTICLE TWO
SECURITY FORMS
Section 201. Forms Generally.............................................. 14
Section 202. Form of Face of Security..................................... 14
Section 203. Form of Reverse of Security.................................. 17
Section 204. Form of Trustee's Certificate of Authentication.............. 22
Section 205. Form of Legend for Global Securities......................... 23
ARTICLE THREE
THE SECURITIES
Section 301. Amount Unlimited; Issuable in Series......................... 23
Section 302. Denominations................................................ 26
</TABLE>
- --------
NOTE: This table of contents shall not, for any purpose, be deemed to be a part
of the Indenture.
ii
<PAGE>
<TABLE>
<C> <S> <C>
Section 303. Execution, Authentication, Delivery and Dating.............. 26
Section 304. Temporary Securities........................................ 28
Section 305. Registration, Registration of Transfer and Exchange......... 29
Section 306. Mutilated, Destroyed, Lost and Stolen Securities............ 31
Section 307. Payment of Interest; Interest Rights Preserved.............. 32
Section 308. Persons Deemed Owners....................................... 33
Section 309. Cancellation................................................ 34
Section 310. Computation of Interest..................................... 34
ARTICLE FOUR
SATISFACTION AND DISCHARGE
Section 401. Satisfaction and Discharge of Indenture..................... 34
Section 402. Application of Trust Money.................................. 36
ARTICLE FIVE
REMEDIES
Section 501. Events of Default........................................... 36
Section 502. Acceleration of Maturity; Rescission and Annulment.......... 39
Section 503. Collection of Indebtedness and Suits for Enforcement by 40
Trustee....................................................
Section 504. Trustee May File Proofs of Claim............................ 41
Section 505. Trustee May Enforce Claims Without Possession of Securities. 41
Section 506. Application of Money Collected.............................. 42
Section 507. Limitation on Suits......................................... 42
Section 508. Unconditional Right of Holders to Receive Principal, Premium 43
and Interest...............................................
Section 509. Restoration of Rights and Remedies.......................... 43
Section 510. Rights and Remedies Cumulative.............................. 43
Section 511. Delay or Omission Not Waiver................................ 44
Section 512. Control by Holders.......................................... 44
Section 513. Waiver of Past Defaults..................................... 44
Section 514. Undertaking for Costs....................................... 45
Section 515. Waiver of Stay or Extension Laws............................ 45
</TABLE>
- --------
NOTE: This table of contents shall not, for any purpose, be deemed to be a part
of the Indenture.
iii
<PAGE>
ARTICLE SIX
THE TRUSTEE
<TABLE>
<C> <S> <C>
Section 601. Certain Duties and Responsibilities....................................... 45
Section 602. Notice of Defaults........................................................ 47
Section 603. Certain Rights of Trustee................................................. 47
Section 604. Not Responsible for Recitals or Issuance of Securities.................... 48
Section 605. May Hold Securities....................................................... 49
Section 606. Money Held in Trust....................................................... 49
Section 607. Compensation and Reimbursement............................................ 49
Section 608. Disqualification; Conflicting Interests................................... 50
Section 609. Corporate Trustee Required; Eligibility................................... 50
Section 610. Resignation and Removal; Appointment of Successor......................... 51
Section 611. Acceptance of Appointment by Successor.................................... 53
Section 612. Merger, Conversion, Consolidation or Succession to Business............... 54
Section 613. Preferential Collection of Claims Against Company......................... 55
Section 614. Appointment of Authenticating Agent....................................... 55
ARTICLE SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
Section 701. Company to Furnish Trustee Names and Addresses of Holders................. 57
Section 702. Preservation of Information; Communications to Holders.................... 57
Section 703. Reports by Trustee........................................................ 58
Section 704. Reports by Company........................................................ 58
</TABLE>
- --------
NOTE: This table of contents shall not, for any purpose, be deemed to be a part
of the Indenture.
iv
<PAGE>
ARTICLE EIGHT
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
<TABLE>
<C> <S> <C>
Section 801. Company May Consolidate, Etc., Only on Certain Terms....... 59
Section 802. Successor Substituted...................................... 60
ARTICLE NINE
SUPPLEMENTAL INDENTURES
Section 901. Supplemental Indentures Without Consent of Holders......... 60
Section 902. Supplemental Indentures with Consent of Holders............ 62
Section 903. Execution of Supplemental Indentures....................... 63
Section 904. Effect of Supplemental Indentures.......................... 63
Section 905. Conformity with Trust Indenture Act........................ 63
Section 906. Reference in Securities to Supplemental Indentures......... 64
ARTICLE TEN
COVENANTS
Section 1001. Payment of Principal, Premium and Interest................. 64
Section 1002. Maintenance of Office or Agency............................ 64
Section 1003. Money for Securities Payments to Be Held in Trust.......... 65
Section 1004. Statement by Officers as to Default........................ 66
Section 1005. Existence.................................................. 66
Section 1006. Payment of Taxes and Other Claims.......................... 67
Section 1007. Limitation Upon Creation of Liens on Capital Stock of 67
Restricted Subsidiaries...................................
Section 1008. Limitation Upon Sales of Capital Stock of Restricted 68
Subsidiaries..............................................
Section 1009. Waiver of Certain Covenants................................ 68
</TABLE>
- --------
NOTE: This table of contents shall not, for any purpose, be deemed to be a part
of the Indenture.
v
<PAGE>
ARTICLE ELEVEN
REDEMPTION OF SECURITIES
<TABLE>
<C> <S> <C>
Section 1101. Applicability of Article................................... 69
Section 1102. Election to Redeem; Notice to Trustee...................... 69
Section 1103. Selection by Trustee of Securities to Be Redeemed.......... 69
Section 1104. Notice of Redemption....................................... 70
Section 1105. Deposit of Redemption Price................................ 71
Section 1106. Securities Payable on Redemption Date...................... 71
Section 1107. Securities Redeemed in Part................................ 71
ARTICLE TWELVE
SINKING FUNDS
Section 1201. Applicability of Article................................... 72
Section 1202. Satisfaction of Sinking Fund Payments with Securities...... 72
Section 1203. Redemption of Securities for Sinking Fund.................. 73
ARTICLE THIRTEEN
DEFEASANCE AND COVENANT DEFEASANCE
Section 1301. Applicability of Article; Company's Option to Effect
Defeasance or Covenant Defeasance.......................... 73
Section 1302. Defeasance and Discharge................................... 74
Section 1303. Covenant Defeasance........................................ 74
Section 1304. Conditions to Defeasance or Covenant Defeasance............ 75
Section 1305. Deposited Money and U.S. Government Obligations to be held
in Trust; Other Miscellaneous Provisions................... 78
TESTIMONIUM............................................................... 78
SIGNATURES AND SEALS...................................................... 79
ACKNOWLEDGMENTS........................................................... 79
</TABLE>
- --------
NOTE: This table of contents shall not, for any purpose, be deemed to be a part
of the Indenture.
vi
<PAGE>
INDENTURE, dated as of January 1, 1994, between CAPITAL HOLDING CORPORATION,
a corporation duly organized and existing under the laws of the State of
Delaware (herein called the "Company"), having its principal office at 680
Fourth Avenue, Louisville, Kentucky 40202, and MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, a banking corporation duly organized and existing under the laws of
New York, as Trustee (herein called the "Trustee").
RECITALS OF THE COMPANY
The Company has duly authorized the execution and delivery of this Indenture
to provide for the issuance from time to time of its unsecured debentures,
notes or other evidences of indebtedness (herein called the "Securities"), to
be issued in one or more series as in this Indenture provided.
All things necessary to make this Indenture a valid agreement of the Company,
in accordance with its terms, have been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Securities
by the Holders thereof, it is mutually agreed, for the equal and proportionate
benefit of all Holders of the Securities or of series thereof, as follows:
ARTICLE ONE
Definitions and Other Provisions
of General Application
Section 101. Definitions.
For all purposes of this Indenture, except as otherwise expressly provided or
unless the context otherwise requires:
(1) the terms defined in this Article have the meanings assigned to them
in this Article and include the plural as well as the singular;
(2) all other terms used herein which are defined in the Trust Indenture
Act, either directly or by reference therein, have the meanings assigned to
them therein;
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(3) all accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted accounting
principles, and, except as otherwise herein expressly provided, the term
"generally accepted accounting principles" with respect to any computation
required or permitted hereunder shall mean such accounting principles as
are generally accepted at the date of such computation; and
(4) the words "herein", "hereof" and "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision.
"Act", when used with respect to any Holder, has the meaning specified in
Section 104.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Authenticating Agent" means any Person authorized by the Trustee pursuant to
Section 614 to act on behalf of the Trustee to authenticate Securities of one
or more series.
"Board of Directors" means either the board of directors of the Company or
any duly authorized committee of that board.
"Board Resolution" means a copy of a resolution certified by the Secretary or
an Assistant Secretary of the Company to have been duly adopted by the Board of
Directors and to be in full force and effect on the date of such certification,
and delivered to the Trustee.
"Business Day", when used with respect to any Place of Payment, means each
Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which
banking institutions in that Place of Payment are authorized or obligated by
law or executive order to close.
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under
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the Securities Exchange Act of 1934, or, if at any time after the execution of
this instrument such Commission is not existing and performing the duties now
assigned to it under the Trust Indenture Act, then the body performing such
duties at such time.
"Company" means the Person named as the "Company" in the first paragraph of
this instrument until a successor Person shall have become such pursuant to the
applicable provisions of this Indenture, and thereafter "Company" shall mean
such successor Person.
"Company Request" or "Company Order" means a written request or order signed
in the name of the Company by its Chairman of the Board, its Vice Chairman of
the Board, its President or a Vice President, and by its Treasurer, an
Assistant Treasurer, its Secretary, an Assistant Secretary or an Assistant
General Counsel, and delivered to the Trustee.
"Corporate Trust Office" means the principal office of the Trustee in the
Borough of Manhattan, The City of New York, at which at any particular time its
corporate trust business shall be administered, which office at the date hereof
is located at 60 Wall Street, New York, New York 10260.
"Covenant Defeasance" has the meaning specified in Section 1303.
"Corporation" means a corporation, association, company, joint-stock company
or business trust.
"Defaulted Interest" has the meaning specified in Section 307.
"Defeasance" has the meaning specified in Section 1302.
"Depositary" means, with respect to the Securities of any series issuable
upon original issuance in whole or in part in the form of one or more Global
Securities, a clearing agency registered under the Securities Exchange Act of
1934, as amended, that is designated to act as Depositary for such Securities
as contemplated by Section 301.
"Event of Default" has the meaning specified in Section 501.
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"First Deposit" shall mean First Deposit Corporation, a Subsidiary organized
and existing under the laws of the State of Delaware.
"Global Security" means a Security bearing the legend specified in Section
205 evidencing all or part of a series of Securities, authenticated and
delivered to, and registered in the name of, the Depositary with respect to
such series or a nominee thereof.
"Holder" means a Person in whose name a Security is registered in the
Security Register.
"Indenture" means this instrument as originally executed or as it may from
time to time be supplemented or amended by one or more indentures supplemental
hereto entered into pursuant to the applicable provisions hereof, including,
for all purposes of this instrument, and any such supplemental indenture, the
provisions of the Trust Indenture Act that are deemed to be a part of and
govern this instrument and any such supplemental indenture, respectively. The
term "Indenture" shall also include the terms of particular series of
Securities established as contemplated by Section 301.
"interest", when used with respect to an Original Issue Discount Security
which by its terms bears interest only after Maturity, means interest payable
after Maturity.
"Interest Payment Date", when used with respect to any Security, means the
Stated Maturity of an instalment of interest on such Security.
"Maturity", when used with respect to any Security, means the date on which
the principal of such Security or an instalment of principal becomes due and
payable as therein or herein provided, whether at the Stated Maturity or by
declaration of acceleration, call for redemption or otherwise.
"Notice of Default" means a written notice of the kind specified in Section
501(4).
"Officers' Certificate" means a certificate signed by the Chairman of the
Board, a Vice Chairman of the Board, the President or a Vice President, and by
the Treasurer, an Assistant Treasurer, the Secretary, an Assistant Secretary or
an Assistant General Counsel, of the Company, and delivered to the Trustee. One
of the officers signing an Officers' Certificate given pursuant to Section 1004
shall
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be the principal executive, financial or accounting officer of the Company.
"Opinion of Counsel" means a written opinion of counsel, who may be counsel
for the Company.
"Original Issue Discount Security" means any Security which provides for an
amount less than the principal amount thereof to be due and payable upon a
declaration of acceleration of the Maturity thereof pursuant to Section 502.
"Outstanding", when used with respect to Securities, means, as of the date of
determination, all Securities theretofore authenticated and delivered under
this Indenture, except:
(i) Securities theretofore cancelled by the Trustee or delivered to the
Trustee for cancellation;
(ii) Securities for whose payment or redemption money in the necessary
amount has been theretofore deposited with the Trustee or any Paying Agent
(other than the Company) in trust or set aside and segregated in trust by
the Company (if the Company shall act as its own Paying Agent) for the
Holders of such Securities; provided that, if such Securities are to be
redeemed, notice of such redemption has been duly given pursuant to this
Indenture or provision therefor satisfactory to the Trustee has been made;
(iii) Securities as to which Defeasance has been effected pursuant to
Section 1302; and
(iv) Securities which have been paid pursuant to Section 306 or in
exchange for or in lieu of which other Securities have been authenticated
and delivered pursuant to this Indenture, other than any such Securities in
respect of which there shall have been presented to the Trustee proof
satisfactory to it that such Securities are held by a bona fide purchaser
in whose hands such Securities are valid obligations of the Company;
provided, however, that in determining whether the Holders of the requisite
principal amount of the Outstanding Securities have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, (i) the
principal
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amount of an Original Issue Discount Security that shall be deemed to be
Outstanding shall be the amount of the principal thereof that would be due and
payable as of the date of such determination upon acceleration of the Maturity
thereof to such date pursuant to Section 502, (ii) the principal amount of a
Security denominated in one or more foreign currencies or currency units shall
be the U.S. dollar equivalent, determined in the manner provided as
contemplated by Section 301 on the date of original issuance of such Security,
of the principal amount (or, in the case of an Original Issue Discount
Security, the U.S. dollar equivalent on the date of original issuance of such
Security of the amount determined as provided in (i) above) of such Security,
and (iii) Securities owned by the Company or any other obligor upon the
Securities or any Affiliate of the Company or of such other obligor shall be
disregarded and deemed not to be Outstanding, except that, in determining
whether the Trustee shall be protected in relying upon any such request,
demand, authorization, direction, notice, consent or waiver, only Securities
which the Trustee knows to be so owned shall be so disregarded. Securities so
owned which have been pledged in good faith may be regarded as Outstanding if
the pledgee establishes to the satisfaction of the Trustee the pledgee's right
so to act with respect to such Securities and that the pledgee is not the
Company or any other obligor upon the Securities or any Affiliate of the
Company or of such other obligor.
"Paying Agent" means any Person authorized by the Company to pay the
principal of or any premium or interest on any Securities on behalf of the
Company.
"Person" means any individual, corporation, partnership, joint venture,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Place of Payment", when used with respect to the Securities of any series,
means the place or places where the principal of and any premium and interest
on the Securities of that series are payable as specified as contemplated by
Section 301.
"Predecessor Security" of any particular Security means every previous
Security evidencing all or a portion of the same debt as that evidenced by such
particular Security; and, for the purposes of this definition, any Security
authenticated and delivered under Section 306 in exchange for or in lieu of a
mutilated, destroyed, lost or stolen Security shall be deemed to evidence the
same debt as the mutilated, destroyed, lost or stolen Security.
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"Redemption Date", when used with respect to any Security to be redeemed,
means the date fixed for such redemption by or pursuant to this Indenture.
"Redemption Price", when used with respect to any Security to be redeemed,
means the price at which it is to be redeemed pursuant to this Indenture.
"Regular Record Date" for the interest payable on any Interest Payment Date
on the Securities of any series means the date specified for that purpose as
contemplated by Section 301.
"Responsible Officer", when used with respect to the Trustee, means the
chairman or any vice-chairman of the board of directors, the chairman or any
vice-chairman of the executive committee of the board of directors, the
chairman of the trust committee, the president, any vice president, the
secretary, any assistant secretary, the treasurer, any assistant treasurer, the
cashier, any assistant cashier, any trust officer or assistant trust officer,
the controller or any assistant controller or any other officer of the Trustee
customarily performing functions similar to those performed by any of the above
designated officers and also means, with respect to a particular corporate
trust matter, any other officer to whom such matter is referred because of his
knowledge of and familiarity with the particular subject.
"Restricted Subsidiary" shall mean at any time any Subsidiary with assets
greater than or equal to 5% of all assets of the Company and its Subsidiaries
(excluding the assets of First Deposit and its subsidiaries), computed and
consolidated in accordance with generally accepted accounting principles.
Notwithstanding anything to the contrary set forth herein, the term Restricted
Subsidiary shall not include First Deposit or any of its subsidiaries.
"Securities" has the meaning stated in the first recital of this Indenture
and more particularly means any Securities authenticated and delivered under
this Indenture.
"Security Register" and "Security Registrar" have the respective meanings
specified in Section 305.
"Special Record Date" for the payment of any Defaulted Interest means a date
fixed by the Trustee pursuant to Section 307.
"Stated Maturity", when used with respect to any Security or any instalment
of principal thereof or interest thereon, means the date specified in such
Security as the
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fixed date on which the principal of such Security or such instalment of
principal or interest is due and payable.
"subsidiary" shall mean, with respect to any person, any other persons of
which at least a majority of the outstanding voting stock or other ownership
interests having the ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions is at the time directly
or indirectly owned or controlled by such person or one or more of its
subsidiaries or by such person and one or more of its subsidiaries.
"Subsidiary" means a subsidiary of the Company.
"Trustee" means the Person named as the "Trustee" in the first paragraph of
this instrument until a successor Trustee shall have become such pursuant to
the applicable provisions of this Indenture, and thereafter "Trustee" shall
mean or include each Person who is then a Trustee hereunder, and if at any time
there is more than one such Person, "Trustee" as used with respect to the
Securities of any series shall mean each Trustee with respect to Securities of
that series.
"Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at
the date as of which this instrument was executed; provided, however, that in
the event the Trust Indenture Act of 1939 is amended after such date, "Trust
Indenture Act" means, to the extent required by any such amendment, the Trust
Indenture Act of 1939 as so amended.
"U.S. Government Obligations" has the meaning specified in Section 1304.
"Vice President", when used with respect to the Company or the Trustee, means
any vice president, whether or not designated by a number or a word or words
added before or after the title "vice president".
Section 102. Compliance Certificates and Opinions.
Except as otherwise expressly provided by this Indenture, upon any
application or request by the Company to the Trustee to take any action under
any provision of this Indenture, the Company shall furnish to the Trustee such
certificates and opinions as may be required under the Trust Indenture Act.
Each such certificate or opinion shall be given in the form of an Officers'
Certificate, if to be given by an officer of the Company, or an Opinion of
Counsel, if to be given by counsel, and shall comply with
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the requirements of the Trust Indenture Act and any other requirements set
forth in this Indenture.
Every certificate or opinion with respect to compliance with a condition or
covenant provided for in this Indenture (including certificates provided for in
Section 1004) shall include
(1) a statement that each individual signing such certificate or opinion
has read such covenant or condition and the definitions herein relating
thereto;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of each such individual, he has made
such examination or investigation as is necessary to enable him to express
an informed opinion as to whether or not such covenant or condition has
been complied with; and
(4) a statement as to whether, in the opinion of each such individual,
such condition or covenant has been complied with.
Section 103. Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified by, or covered
by an opinion of, any specified Person, it is not necessary that all such
matters be certified by, or covered by the opinion of, only one such Person, or
that they be so certified or covered by only one document, but one such Person
may certify or give an opinion with respect to some matters and one or more
other such Persons as to other matters, and any such Person may certify or give
an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based, insofar
as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or opinion of counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Company stating that the
information with respect to
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such factual matters is in the possession of the Company, unless such counsel
knows, or in the exercise of reasonable care should know, that the certificate
or opinion or representations with respect to such matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
Section 104. Acts of Holders; Record Dates.
Any request, demand, authorization, direction, notice, consent, waiver or
other action provided or permitted by this Indenture to be given or taken by
Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by agent duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee and, where it is hereby expressly required, to the Company. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders signing
such instrument or instruments. Proof of execution of any such instrument or of
a writing appointing any such agent shall be sufficient for any purpose of this
Indenture and (subject to Section 601) conclusive in favor of the Trustee and
the Company, if made in the manner provided in this Section.
The fact and date of the execution by any Person of any such instrument or
writing may be proved by the affidavit of a witness of such execution or by a
certificate of a notary public or other officer authorized by law to take
acknowledgments of deeds, certifying that the individual signing such
instrument or writing acknowledged to him the execution thereof. Where such
execution is by a signer acting in a capacity other than his individual
capacity, such certificate or affidavit shall also constitute sufficient proof
of his authority. The fact and date of the execution of any such instrument or
writing, or the authority of the Person executing the same, may also be proved
in any other manner which the Trustee deems sufficient.
The Company may, in the circumstances permitted by the Trust Indenture Act,
set any day as the record date for the purpose of determining the Holders of
Outstanding Securities of any series entitled to give or take any
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request, demand, authorization, direction, notice, consent, waiver or other
action, provided or permitted by this Indenture to be given or taken by Holders
of Securities of such series. If not set by the Company prior to the first
solicitation of a Holder of Securities of such series made by any Person in
respect of any such action, or, in the case of any such vote, prior to such
vote, the record date for any such action or vote shall be the 30th day (or, if
later, the date of the most recent list of Holders required to be provided
pursuant to Section 701) prior to such first solicitation or vote, as the case
may be. With regard to any record date for action to be taken by the Holders of
one or more series of Securities, only the Holders of Securities of such series
on such date (or their duly designated proxies) shall be entitled to give or
take, or vote on, the relevant action.
The ownership of Securities shall be proved by the Security Register.
Any request, demand, authorization, direction, notice, consent, waiver or
other Act of the Holder of any Security shall bind every future Holder of the
same Security and the Holder of every Security issued upon the registration of
transfer thereof or in exchange therefor or in lieu thereof in respect of
anything done, omitted or suffered to be done by the Trustee or the Company in
reliance thereon, whether or not notation of such action is made upon such
Security.
Without limiting the foregoing, a Holder entitled hereunder to give or take
any action hereunder with regard to any particular Security may do so with
regard to all or any part of the principal amount of such Security or by one or
more duly appointed agents each of which may do so pursuant to such appointment
with regard to all or any different part of such principal amount.
Section 105. Notices, Etc., to Trustee and Company.
Any request, demand, authorization, direction, notice, consent, waiver or Act
of Holders or other document provided or permitted by this Indenture to be made
upon, given or furnished to, or filed with,
(1) the Trustee by any Holder or by the Company shall be sufficient for
every purpose hereunder if made, given, furnished or filed in writing to or
with the Trustee at its Corporate Trust Office, Attention: Corporate Trust
Department, or
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(2) the Company by the Trustee or by any Holder shall be sufficient for
every purpose hereunder (unless otherwise herein expressly provided) if in
writing and mailed, first-class postage prepaid, to the Company addressed
to it at the address of its principal office specified in the first
paragraph of this instrument or at any other address previously furnished
in writing to the Trustee by the Company, marked Attention Treasurer:
Section 106. Notice to Holders; Waiver.
Where this Indenture provides for notice to Holders of any event, such notice
shall be sufficiently given (unless otherwise herein expressly provided) if in
writing and mailed, first-class postage prepaid, to each Holder affected by
such event, at his address as it appears in the Security Register, not later
than the latest date (if any), and not earlier than the earliest date (if any),
prescribed for the giving of such notice. In any case where notice to Holders
is given by mail, neither the failure to mail such notice, nor any defect in
any notice so mailed, to any particular Holder shall affect the sufficiency of
such notice with respect to other Holders. Where this Indenture provides for
notice in any manner, such notice may be waived in writing by the Person
entitled to receive such notice, either before or after the event, and such
waiver shall be the equivalent of such notice. Waivers of notice by Holders
shall be filed with the Trustee, but such filing shall not be a condition
precedent to the validity of any action taken in reliance upon such waiver.
In case by reason of the suspension of regular mail service or by reason of
any other cause it shall be impracticable to give such notice by mail, then
such notification as shall be made with the approval of the Trustee shall
constitute a sufficient notification for every purpose hereunder.
Section 107. Conflict with Trust Indenture Act.
If any provision hereof limits, qualifies or conflicts with a provision of
the Trust Indenture Act that is required under such Act to be a part of and
govern this Indenture, the latter provision shall control. If any provision of
this Indenture modifies or excludes any provision of the Trust Indenture Act
that may be so modified or excluded, the latter provision shall be deemed to
apply to this Indenture as so modified or to be excluded, as the case may be.
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Section 108. Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents are for
convenience only and shall not affect the construction hereof.
Section 109. Successors and Assigns.
All covenants and agreements in this Indenture by the Company shall bind its
successors and assigns, whether so expressed or not.
Section 110. Separability Clause.
In case any provision in this Indenture or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
Section 111. Benefits of Indenture.
Nothing in this Indenture or in the Securities, express or implied, shall
give to any Person, other than the parties hereto and their successors
hereunder and the Holders, any benefit or any legal or equitable right, remedy
or claim under this Indenture.
Section 112. Governing Law.
This Indenture and the Securities shall be governed by and construed in
accordance with the laws of the State of New York, but without regard to
principles of conflicts of laws.
Section 113. Legal Holidays.
In any case where any Interest Payment Date, Redemption Date or Stated
Maturity of any Security shall not be a Business Day at any Place of Payment,
then (notwithstanding any other provision of this Indenture or of the
Securities (other than a provision of the Securities of any series which
specifically states that such provision shall apply in lieu of this Section))
payment of interest or principal (and premium, if any) need not be made at such
Place of Payment on such date, but may be made on the next succeeding Business
Day at such Place of Payment with the same force and effect as if made on the
Interest Payment Date or Redemption Date, or at the Stated Maturity, provided
that no interest shall accrue for the period from and after
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such Interest Payment Date, Redemption Date or Stated Maturity, as the case may
be.
Section 114. Counterparts.
This Indenture may be executed in any number of counterparts, each of which
when so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
ARTICLE TWO
Security Forms
Section 201. Forms Generally.
The Securities of each series shall be in substantially the form set forth in
this Article, or in such other form as shall be established by or pursuant to a
Board Resolution or in one or more indentures supplemental hereto, in each case
with such appropriate insertions, omissions, substitutions and other variations
as are required or permitted by this Indenture, and may have such letters,
numbers or other marks of identification and such legends or endorsements
placed thereon as may be required to comply with the rules of any securities
exchange or as may, consistently herewith, be determined by the officers
executing such Securities, as evidenced by their execution of the Securities.
If the form of Securities of any series is established by action taken pursuant
to a Board Resolution, a copy of an appropriate record of such action shall be
certified by the Secretary or an Assistant Secretary of the Company and
delivered to the Trustee at or prior to the delivery of the Company Order
contemplated by Section 303 for the authentication and delivery of such
Securities.
The definitive Securities shall be printed, lithographed or engraved on steel
engraved borders or may be produced in any other manner, all as determined by
the officers executing such Securities, as evidenced by their execution of such
Securities.
Section 202. Form of Face of Security.
[IF THE SECURITY IS AN ORIGINAL ISSUE DISCOUNT SECURITY, INSERT -- FOR
PURPOSES OF SECTIONS 1272, 1273 AND 1275 OF THE UNITED STATES INTERNAL
REVENUE CODE OF 1986, AS AMENDED, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT ON
THIS SECURITY IS
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% OF ITS PRINCIPAL AMOUNT, THE ISSUE DATE IS , 19 [,]
[AND] THE YIELD TO MATURITY IS %[, THE METHOD USED TO DETERMINE THE
YIELD IS AND THE AMOUNT OF ORIGINAL ISSUE DISCOUNT APPLICABLE TO
THE SHORT ACCRUAL PERIOD OF , 19 TO , 19 IS
% OF THE PRINCIPAL AMOUNT OF THIS SECURITY].]
CAPITAL HOLDING CORPORATION
............................................................................
No. .................................. $ ...................................
CAPITAL HOLDING CORPORATION, a corporation duly organized and existing under
the laws of Delaware (herein called the "Company", which term includes any
successor Person under the Indenture hereinafter referred to), for value
received, hereby promises to pay to .., or registered assigns, the principal sum
of .... Dollars on ..... [if the Security is to bear interest prior to Maturity,
insert -- , and to pay interest thereon from .. or from the most recent Interest
Payment Date to which interest has been paid or duly provided for, semi-
annually on . and .. in each year, commencing .. , at the rate of ..% per annum,
until the principal hereof is paid or made available for payment [if
applicable, insert -- , and (to the extent that the payment of such interest
shall be legally enforceable) at the rate of .........% per annum on any overdue
principal and premium and on any overdue instalment of interest]. The interest
so payable, and punctually paid or duly provided for, on any Interest Payment
Date will, as provided in such Indenture, be paid to the Person in whose name
this Security (or one or more Predecessor Securities) is registered at the
close of business on the Regular Record Date for such interest, which shall be
the .. or .. (whether or not a Business Day), as the case may be, next preceding
such Interest Payment Date. Any such interest not so punctually paid or duly
provided for will forthwith cease to be payable to the Holder on such Regular
Record Date and may either be paid to the Person in whose name this Security
(or one or more Predecessor Securities) is registered at the close of business
on a Special Record Date for the payment of such Defaulted Interest to be fixed
by the Trustee, notice whereof shall be given to Holders of Securities of this
series not less than 10 days prior to such Special Record Date, or be paid at
any time in any other lawful
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manner not inconsistent with the requirements of any securities exchange on
which the Securities of this series may be listed, and upon such notice as may
be required by such exchange, all as more fully provided in said Indenture].
[If the Security is not to bear interest prior to Maturity, insert -- The
principal of this Security shall not bear interest except in the case of a
default in payment of principal upon acceleration, upon redemption or at Stated
Maturity and in such case the overdue principal of this Security shall bear
interest at the rate of .....% per annum (to the extent that the payment of such
interest shall be legally enforceable), which shall accrue from the date of
such default in payment to the date payment of such principal has been made or
duly provided for. Interest on any overdue principal shall be payable on
demand. Any such interest on any overdue principal that is not so paid on
demand shall bear interest at the rate of ...% per annum (to the extent that the
payment of such interest shall be legally enforceable), which shall accrue from
the date of such demand for payment to the date payment of such interest has
been made or duly provided for, and such interest shall also be payable on
demand.]
Payment of the principal of (and premium, if any) and [if applicable, insert
- -- any such] interest on this Security will be made at the office or agency of
the Company maintained for that purpose in ...., in such coin or currency of the
United States of America as at the time of payment is legal tender for payment
of public and private debts [if applicable, insert -- provided, however, that
at the option of the Company payment of interest may be made by check mailed to
the address of the Person entitled thereto as such address shall appear in the
Security Register].
Reference is hereby made to the further provisions of this Security set forth
on the reverse hereof, which further provisions shall for all purposes have the
same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by the
Trustee referred to on the reverse hereof by manual signature, this Security
shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.
Dated:
CAPITAL HOLDING CORPORATION
By: _________________________________
Title: ______________________________
Attest:
By: ___________________________
Title: ________________________
Section 203. Form of Reverse of Security.
This Security is one of a duly authorized issue of securities of the Company
(herein called the "Securities"), issued and to be issued in one or more series
under an Indenture, dated as of ............., 1992 (herein called the
"Indenture"), between the Company and Morgan Guaranty Trust Company of New
York, as Trustee (herein called the "Trustee", which term includes any
successor trustee under the Indenture), to which Indenture and all indentures
supplemental thereto reference is hereby made for a statement of the respective
rights, limitations of rights, duties and immunities thereunder of the Company,
the Trustee and the Holders of the Securities and of the terms upon which the
Securities are, and are to be, authenticated and delivered. This Security is
one of the series designated on the face hereof[, if applicable, insert --
limited in aggregate principal amount to $............].
[If applicable, insert -- The Securities of this series are subject to
redemption upon not less than 30 days' notice by mail, [if applicable, insert
- -- (1) on ............ in any year commencing with the year ............ and
ending with the year ............ through operation of the sinking fund for
this series at a Redemption Price equal to 100% of the principal amount, and
(2)] at any time [on or after ............, ....], as a whole or in part, at
the election of the Company, at the following Redemption Prices (expressed as
percentages of the principal amount): If redeemed [if applicable, insert -- on
or before ............, %, and if redeemed] during the 12-month period
beginning ..... of the years indicated,
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<PAGE>
<TABLE>
<CAPTION>
REDEMPTION REDEMPTION
YEAR PRICE YEAR PRICE
- ---- ---------- ---- ----------
<S> <C> <C> <C>
</TABLE>
and thereafter at a Redemption Price equal to % of the principal amount,
together in the case of any such redemption [if applicable, insert -- (whether
through operation of the sinking fund or otherwise)] with accrued interest to
the Redemption Date, but interest installments whose Stated Maturity is on or
prior to such Redemption Date will be payable to the Holders of such
Securities, or one or more Predecessor Securities, of record at the close of
business on the relevant Record Dates referred to on the face hereof, all as
provided in the Indenture.]
[If applicable, insert -- The Securities of this series are subject to
redemption upon not less than 30 days' notice by mail, (1) on ............ in
any year commencing with the year .... and ending with the year .... through
operation of the sinking fund for this series at the Redemption Prices for
redemption through operation of the sinking fund (expressed as percentages of
the principal amount) set forth in the table below, and (2) at any time [if
applicable, insert -- on or after ............], as a whole or in part, at the
election of the Company, at the Redemption Prices for redemption otherwise than
through operation of the sinking fund (expressed as percentages of the
principal amount) set forth in the table below: If redeemed during the 12-month
period beginning ............ of the years indicated,
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<PAGE>
<TABLE>
<CAPTION>
REDEMPTION PRICE
FOR REDEMPTION REDEMPTION PRICE FOR
THROUGH OPERATION REDEMPTION OTHERWISE
OF THE THAN THROUGH OPERATION
YEAR SINKING FUND OF THE SINKING FUND
- ---- ----------------- ----------------------
<S> <C> <C>
</TABLE>
and thereafter at a Redemption Price equal to ....% of the principal amount,
together in the case of any such redemption (whether through operation of the
sinking fund or otherwise) with accrued interest to the Redemption Date, but
interest installments whose Stated Maturity is on or prior to such Redemption
Date will be payable to the Holders of such Securities, or one or more
Predecessor Securities, of record at the close of business on the relevant
Record Dates referred to on the face hereof, all as provided in the Indenture.]
[If applicable, insert -- Notwithstanding the foregoing, the Company may not,
prior to ............, redeem any Securities of this series as contemplated by
[if applicable, insert -- Clause (2) of] the preceding paragraph as a part of,
or in anticipation of, any refunding operation by the application, directly or
indirectly, of moneys borrowed having an interest cost to the Company
(calculated in accordance with generally accepted financial practice) of less
than ....% per annum.]
[If applicable, insert -- the sinking fund for this series provides for the
redemption on ............ in each year beginning with the year .... and ending
with the year .... of [if applicable, insert -- not less than $.......
("mandatory sinking fund") and not more than] $........ aggregate principal
amount of Securities of this series. Securities of this series acquired or
redeemed by the Company otherwise than through [if applicable, insert --
mandatory] sinking fund payments may be credited against subsequent [if
applicable, insert -- mandatory] sinking fund
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<PAGE>
payments otherwise required to be made [if applicable, insert -- in the inverse
order in which they become due].]
[If the Security is subject to redemption of any kind, insert -- In the event
of redemption of this Security in part only, a new Security or Securities of
this series and of like tenor for the unredeemed portion hereof will be issued
in the name of the Holder hereof upon the cancellation hereof.]
[If applicable, insert -- The Indenture contains provisions for defeasance at
any time of (1) the entire indebtedness of this Security or (2) certain
restrictive covenants and Events of Default with respect to this Security, in
each case upon compliance with certain conditions set forth in the Indenture.]
[If the Security is not an Original Issue Discount Security, insert -- If an
Event of Default with respect to Securities of this series shall occur and be
continuing, the principal of the Securities of this series may be declared due
and payable in the manner and with the effect provided in the Indenture.]
[If the Security is an Original Issue Discount Security, insert -- If an
Event of Default with respect to Securities of this series shall occur and be
continuing, an amount of principal of the Securities of this series may be
declared due and payable in the manner and with the effect provided in the
Indenture. Such amount shall be equal to -- insert formula for determining the
amount. Upon payment (i) of the amount of principal so declared due and payable
and (ii) of interest on any overdue principal and overdue interest (in each
case to the extent that the payment of such interest shall be legally
enforceable), all of the Company's obligations in respect of the payment of the
principal of and interest, if any, on the Securities of this series shall
terminate.]
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Securities of each series to be
affected under the Indenture at any time by the Company and the Trustee with
the consent of the Holders of a majority in principal amount of the Securities
at the time Outstanding of each series to be affected. The Indenture also
contains provisions permitting the Holders of specified percentages in
principal amount of the Securities of each series at the time Outstanding, on
behalf of the Holders of all Securities of such series, to waive compliance by
the Company with cer-
20
<PAGE>
tain provisions of the Indenture and certain past defaults under the Indenture
and their consequences. Any such consent or waiver by the Holder of this
Security shall be conclusive and binding upon such Holder and upon all future
Holders of this Security and of any Security issued upon the registration of
transfer hereof or in exchange hereof or in lieu hereof, whether or not
notation of such consent or waiver is made upon this Security.
As provided in and subject to the provisions of the Indenture, the Holder of
this Security shall not have the right to institute any proceeding with respect
to the Indenture or for the appointment of a receiver or trustee or for any
other remedy thereunder, unless such Holder shall have previously given the
Trustee written notice of a continuing Event of Default with respect to the
Securities of this series, the Holders of not less than 25% in principal amount
of the Securities of this series at the time Outstanding shall have made
written request to the Trustee to institute proceedings in respect of such
Event of Default as Trustee and offered the Trustee reasonable indemnity and
the Trustee shall not have received from the Holders of a majority in principal
amount of Securities of this series at the time Outstanding a direction
inconsistent with such request, and shall have failed to institute any such
proceeding, for 60 days after receipt of such notice, request and offer of
indemnity. The foregoing shall not apply to any suit instituted by the Holder
of this Security for the enforcement of any payment of principal hereof or any
premium or interest hereon on or after the respective due dates expressed
herein.
No reference herein to the Indenture and no provision of this Security or of
the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of and any premium and
interest on this Security at the times, place and rate, and in the coin or
currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein set
forth, the transfer of this Security is registerable in the Security Register,
upon surrender of this Security for registration of transfer at the office or
agency of the Company in any place where the principal of and any premium and
interest on this Security are payable, duly endorsed by, or accompanied by a
written instrument of transfer in form satisfactory to the Company and the
Security Registrar duly executed by, the Holder hereof or his attorney duly
authorized in writing, and thereupon one or more new Securities of this series
and of like tenor, of authorized denominations and for the same
21
<PAGE>
aggregate principal amount, will be issued to the designated transferee or
transferees.
The Securities of this series are issuable only in registered form without
coupons in denominations of $............ and any integral multiple thereof. As
provided in the Indenture and subject to certain limitations therein set forth,
Securities of this series are exchangeable for a like aggregate principal
amount of Securities of this series and of like tenor of a different authorized
denomination, as requested by the Holder surrendering the same.
No service charge shall be made for any such registration of transfer or
exchange, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
Person in whose name this Security is registered as the owner hereof for all
purposes, whether or not this Security be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.
All terms used in this Security which are defined in the Indenture shall have
the meanings assigned to them in the Indenture.
Section 204. Form of Trustee's Certificate of Authentication.
The Trustee's certificates of authentication shall be in substantially the
following form:
This is one of the Securities of the series designated therein referred to in
the within-mentioned Indenture.
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, as Trustee
By...................................
Authorized Officer
22
<PAGE>
Section 205. Form of Legend for Global Securities.
Every Global Security authenticated and delivered hereunder shall bear a
legend in substantially the following form:
"This Security is a Global Security within the meaning of the Indenture
hereinafter referred to and is registered in the name of a Depositary or a
nominee of a Depositary. This Security may not be transferred to, or
registered or exchanged for Securities registered in the name of, any
Person other than the Depositary or a nominee thereof and no such transfer
may be registered, except under the limited circumstances described in the
Indenture. Every Security authenticated and delivered upon registration of
transfer of, or in exchange for or in lieu of, this Security shall be a
Global Security subject to the foregoing, except under such limited
circumstances."
ARTICLE THREE
THE SECURITIES
Section 301. Amount Unlimited; Issuable in Series.
The aggregate principal amount of Securities which may be authenticated and
delivered under this Indenture is unlimited.
The Securities may be issued in one or more series. There shall be
established in or pursuant to a Board Resolution and, subject to Section 303,
set forth, or determined in the manner provided, in an Officers' Certificate,
or established in one or more indentures supplemental hereto, prior to the
issuance of Securities of any series,
(1) the title of the Securities of the series (which shall distinguish
the Securities of the series from Securities of any other series);
(2) any limit upon the aggregate principal amount of the Securities of
the series which may be authenticated and delivered under this Indenture
(except for Securities authenticated and delivered upon registration of
transfer of, or in exchange for, or in lieu of, other Securities of the
series pursuant to Section 304, 305, 306, 906 or 1107 and except for any
Securities which, pursuant to Section 303, are deemed
23
<PAGE>
never to have been authenticated and delivered hereunder);
(3) the Person to whom any interest on a Security of the series shall be
payable, if other than the Person in whose name that Security (or one or
more Predecessor Securities) is registered at the close of business on the
Regular Record Date for such interest;
(4) the date or dates, or the method by which such date or dates will be
determined, on which the principal of the Securities of the series is
payable;
(5) the rate or rates at which the Securities of the series shall bear
interest, if any, the date or dates from which such interest shall accrue
or the method by which such date or dates shall be determined, the Interest
Payment Dates on which any such interest shall be payable and the Regular
Record Date for any interest payable on any Interest Payment Date, or the
method by which such Interest Payment Dates shall be determined;
(6) the place or places where the principal of and any premium and
interest on Securities of the series shall be payable;
(7) the period or periods within which, the price or prices at which and
the terms and conditions upon which Securities of the series may be
redeemed, in whole or in part, at the option of the Company;
(8) the obligation, if any, of the Company to redeem or purchase
Securities of the series pursuant to any sinking fund or analogous
provisions or at the option of a Holder thereof and the period or periods
within which, the price or prices at which and the terms and conditions
upon which Securities of the series shall be redeemed or purchased, in
whole or in part, pursuant to such obligation;
(9) if other than denominations of $1,000 and any integral multiple
thereof, the denominations in which Securities of the series shall be
issuable;
(10) the currency, currencies or currency units in which payment of the
principal of and any premium and interest on any Securities of the series
shall be payable if other than the currency of the United States of America
and the manner of determining the equivalent thereof in the currency of the
United States of America
24
<PAGE>
for purposes of the definition of "Outstanding" in Section 101;
(11) if the amount of payments of principal of or any premium or interest
on any Securities of the series may be determined with reference to an
index, the manner in which such amounts shall be determined;
(12) if the principal of or any premium or interest on any Securities of
the series is to be payable, at the election of the Company or a Holder
thereof, in one or more currencies or currency units other than that or
those in which the Securities are stated to be payable, the currency,
currencies or currency units in which payment of the principal of and any
premium and interest on Securities of such series as to which such election
is made shall be payable, and the periods within which and the terms and
conditions upon which such election is to be made;
(13) if other than the principal amount thereof, the portion of the
principal amount of Securities of the series which shall be payable upon
declaration of acceleration of the Maturity thereof pursuant to Section
502;
(14) if the Securities of such series are to be issued upon the exercise
of warrants, the time, manner and place for such Securities to be
authenticated and delivered;
(15) whether any Securities of the series are to be issuable upon
original issuance in the form of one or more Global Securities and, if so,
(i) the Depositary or Depositaries with respect to such Global Security or
Global Securities and (ii) the circumstances under which any such Global
Security may be exchanged for Securities registered in the name of, and any
transfer of such Global Security may be registered to, a Person other than
such Depositary or its nominee, if other than as set forth in Section 305;
(16) the application, if any, of either or both of Sections 1302,
relating to Defeasance, and 1303, relating to Covenant Defeasance, to the
Securities of the series; and
(17) any other terms of the series (which terms shall not be inconsistent
with the provisions of this Indenture, except as permitted by Section
901(5)).
25
<PAGE>
All Securities of any one series shall be substantially identical except as
to denomination and except as may otherwise be provided in or pursuant to the
Board Resolution referred to above and (subject to Section 303) set forth, or
determined in the manner provided, in the Officers' Certificate referred to
above or in any such indenture supplemental hereto.
If any of the terms of the series are established by action taken pursuant to
a Board Resolution, a copy of an appropriate record of such action shall be
certified by the Secretary or an Assistant Secretary of the Company and
delivered to the Trustee at or prior to the delivery of the Officers'
Certificate setting forth the terms of the series.
Section 302. Denominations.
The Securities of each series shall be issuable in registered form without
coupons in such denominations as shall be specified as contemplated by Section
301. In the absence of any such specified denomination with respect to the
Securities of any series, the Securities of such series shall be issuable in
denominations of $1,000 and any integral multiple thereof.
Section 303. Execution, Authentication, Delivery and Dating.
The Securities shall be executed on behalf of the Company by its Chairman of
the Board, its Vice Chairman of the Board, its President, its Chief Financial
Officer, its Treasurer or any of its Vice Presidents, under its corporate seal
reproduced thereon attested by its Secretary, any of its Assistant Secretaries
or any of its Assistant General Counsels. The signature of any of these
officers on the Securities may be manual or facsimile.
Securities bearing the manual or facsimile signatures of individuals who were
at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Securities or did not
hold such offices at the date of such Securities.
At any time and from time to time after the execution and delivery of this
Indenture, the Company may deliver Securities of any series executed by the
Company to the Trustee for authentication, together with a Company Order for
the authentication and delivery of such Securities, and the Trustee in
accordance with the Company Order
26
<PAGE>
shall authenticate and deliver such Securities. If the form or terms of the
Securities of the series have been established in or pursuant to one or more
Board Resolutions as permitted by Sections 201 and 301, in authenticating such
Securities, and accepting the additional responsibilities under this Indenture
in relation to such Securities, the Trustee shall be entitled to receive, and
(subject to Section 601) shall be fully protected in relying upon, an Opinion
of Counsel stating,
(a) if the form of such Securities has been established by or pursuant to
Board Resolution as permitted by Section 201, that such form has been
established in conformity with the provisions of this Indenture;
(b) if the terms of such Securities have been established by or pursuant
to Board Resolution as permitted by Section 301, that such terms have been
established in conformity with the provisions of this Indenture; and
(c) that such Securities, when authenticated and delivered by the Trustee
and issued by the Company in the manner and subject to any conditions
specified in such Opinion of Counsel, will constitute valid and legally
binding obligations of the Company enforceable in accordance with their
terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles.
If such form or terms have been so established, the Trustee shall not be
required to authenticate such Securities if the issue of such Securities
pursuant to this Indenture will affect the Trustee's own rights, duties or
immunities under the Securities and this Indenture or otherwise in a manner
which is not reasonably acceptable to the Trustee.
Notwithstanding the provisions of Section 301 and of the preceding paragraph,
if all Securities of a series are not to be originally issued at one time, it
shall not be necessary to deliver the Officers' Certificate otherwise required
pursuant to Section 301 or the Company Order and Opinion of Counsel otherwise
required pursuant to such preceding paragraph at or prior to the time of
authentication of each Security of such series if such documents are delivered
at or prior to the authentication upon original
27
<PAGE>
issuance of the first Security of such series to be issued and such documents
reasonably contemplate such issuances.
Each Security shall be dated the date of its authentication.
No Security shall be entitled to any benefit under this Indenture or be valid
or obligatory for any purpose unless there appears on such Security a
certificate of authentication substantially in the form provided for herein
executed by the Trustee by manual signature, and such certificate upon any
Security shall be conclusive evidence, and the only evidence, that such
Security has been duly authenticated and delivered hereunder. Notwithstanding
the foregoing, if any Security shall have been authenticated and delivered
hereunder but never issued and sold by the Company, and the Company shall
deliver such Security to the Trustee for cancellation as provided in Section
309, for all purposes of this Indenture such Security shall be deemed never to
have been authenticated and delivered hereunder and shall never be entitled to
the benefits of this Indenture.
Section 304. Temporary Securities.
Pending the preparation of definitive Securities of any series, the Company
may execute, and upon Company Order the Trustee shall authenticate and deliver,
temporary Securities which are printed, lithographed, typewritten, mimeographed
or otherwise produced, in any authorized denomination, substantially of the
tenor of the definitive Securities in lieu of which they are issued and with
such appropriate insertions, omissions, substitutions and other variations as
the officers executing such Securities may determine, as evidenced by their
execution of such Securities.
If temporary Securities of any series are issued, the Company will cause
definitive Securities of that series to be prepared without unreasonable delay.
After the preparation of definitive Securities of such series, the temporary
Securities of such series shall be exchangeable for definitive Securities of
such series upon surrender of the temporary Securities of such series at the
office or agency of the Company in a Place of Payment for that series, without
charge to the Holder. Upon surrender for cancellation of any one or more
temporary Securities of any series the Company shall execute and the Trustee
shall authenticate and deliver in exchange therefor one or more definitive
Securities of the same series, of any authorized denominations and of a like
aggregate principal amount and tenor. Until so exchanged the temporary
Securities of any series
28
<PAGE>
shall in all respects be entitled to the same benefits under this Indenture as
definitive Securities of such series and tenor.
Section 305. Registration, Registration of Transfer and Exchange.
The Company shall cause to be kept at the Corporate Trust Office of the
Trustee a register (the register maintained in such office and in any other
office or agency of the Company in a Place of Payment being herein sometimes
collectively referred to as the "Security Register") in which, subject to such
reasonable regulations as it may prescribe, the Company shall provide for the
registration of Securities and of transfers of Securities. The Trustee is
hereby appointed "Security Registrar" for the purpose of registering Securities
and transfers of Securities as herein provided.
Upon surrender for registration of transfer of any Security of any series at
the office or agency in a Place of Payment for that series, the Company shall
execute, and the Trustee shall authenticate and deliver, in the name of the
designated transferee or transferees, one or more new Securities of the same
series, of any authorized denominations and of a like aggregate principal
amount and tenor.
At the option of the Holder, Securities of any series may be exchanged for
other Securities of the same series, of any authorized denominations and of a
like aggregate principal amount and tenor, upon surrender of the Securities to
be exchanged at such office or agency. Whenever any Securities are so
surrendered for exchange, the Company shall execute, and the Trustee shall
authenticate and deliver, the Securities which the Holder making the exchange
is entitled to receive.
All Securities issued upon any registration of transfer or exchange of
Securities shall be the valid obligations of the Company, evidencing the same
debt, and entitled to the same benefits under this Indenture, as the Securities
surrendered upon such registration of transfer or exchange.
Every Security presented or surrendered for registration of transfer or for
exchange shall (if so required by the Company or the Trustee) be duly endorsed,
or be accompanied by a written instrument of transfer in form satisfactory to
the Company and the Security Registrar duly executed, by the Holder thereof or
his attorney duly authorized in writing.
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<PAGE>
No service charge shall be made for any registration of transfer or exchange
of Securities, but the Company may require payment of a sum sufficient to cover
any tax or other governmental charge that may be imposed in connection with any
registration of transfer or exchange of Securities, other than exchanges
pursuant to Section 304, 906 or 1107 not involving any transfer.
The Company shall not be required (i) to issue, register the transfer of or
exchange Securities of any series during a period beginning at the opening of
business 15 days before the day of the mailing of a notice of redemption of
Securities of that series selected for redemption under Section 1103 and ending
at the close of business on the day of such mailing, or (ii) to register the
transfer of or exchange any Security so selected for redemption in whole or in
part, except the unredeemed portion of any Security being redeemed in part.
Notwithstanding the foregoing, except as otherwise specified as contemplated
by Section 301, any Global Security of any series shall be exchangeable
pursuant to this Section or Section 304, 306, 906 or 1107 for Securities
registered in the name of, and a transfer of a Global Security of any series
may be registered to, any Person other than the Depositary with respect to such
series or its nominee only if (a) such Depositary notifies the Company that it
is unwilling or unable to continue as Depositary with respect to such Global
Security or if at any time the Depositary with respect to such Global Security
ceases to be a clearing agency registered under the Securities Exchange Act of
1934, as amended, (b) the Company in its sole discretion determines that such
Global Security shall be so exchangeable and the transfer thereof so
registrable and executes and delivers to the Security Registrar a Company Order
providing that such Global Security shall be so exchangeable and the transfer
thereof so registrable, or (c) any event shall have occurred and be continuing
which constitutes or, after notice or lapse of time, or both, would constitute
an Event of Default with respect to the Securities of such series. Upon the
occurrence in respect of any Global Security of any series of any one or more
of the conditions specified in clauses (a), (b) or (c) of the preceding
sentence or such other conditions as may be specified as contemplated by
Section 301 for such series, such Global Security may be exchanged for
Securities registered in the names of, and the transfer of such Global Security
may be registered to, such Persons (including Persons other than the Depositary
with respect to such series and its nominees) as such Depositary shall direct.
Notwithstanding any other provision of this Indenture, any
30
<PAGE>
Security authenticated and delivered upon registration of transfer of, or in
exchange for, or in lieu of, any Global Security shall also be a Global
Security and bear the legend specified in Section 205 except for any Security
authenticated and delivered in exchange for, or upon registration of transfer
of, a Global Security pursuant to the preceding sentence.
Section 306. Mutilated, Destroyed, Lost and Stolen Securities.
If any mutilated Security is surrendered to the Trustee, the Company shall
execute and the Trustee shall authenticate and deliver in exchange therefor a
new Security of the same series and of like tenor and principal amount and
bearing a number not contemporaneously outstanding.
If there shall be delivered to the Company and the Trustee (i) evidence to
their satisfaction of the destruction, loss or theft of any Security and (ii)
such security or indemnity as may be required by them to save each of them and
any agent of either of them harmless, then, in the absence of notice to the
Company or the Trustee that such Security has been acquired by a bona fide
purchaser, the Company shall execute and the Trustee shall authenticate and
deliver, in lieu of any such destroyed, lost or stolen Security, a new Security
of the same series and of like tenor and principal amount and bearing a number
not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Security has become or
is about to become due and payable, the Company in its discretion may, instead
of issuing a new Security, pay such Security.
Upon the issuance of any new Security under this Section, the Company may
require the payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto and any other expenses
(including the fees and expenses of the Trustee) connected therewith.
Every new Security of any series issued pursuant to this Section in exchange
for any mutilated Security or in lieu of any destroyed, lost or stolen Security
shall constitute an original additional contractual obligation of the Company,
whether or not the mutilated, destroyed, lost or stolen Security shall be at
any time enforceable by anyone, and shall be entitled to all the benefits of
this Indenture equally and proportionately with any and all other Securities of
that series duly issued hereunder.
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<PAGE>
The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Securities.
Section 307. Payment of Interest; Interest Rights Preserved.
Except as otherwise provided as contemplated by Section 301 with respect to
any series of Securities, interest on any Security which is payable, and is
punctually paid or duly provided for, on any Interest Payment Date shall be
paid to the Person in whose name that Security (or one or more Predecessor
Securities) is registered at the close of business on the Regular Record Date
for such interest; provided, however, that each installment of interest on any
Security of any series that bears interest may at the Company's option be paid
by (i) mailing a check for such interest, payable to or upon the written order
of the Person entitled thereto pursuant to Section 308, to the address of such
Person as it appears on the Security Register or (ii) wire transfer to an
account maintained by the Person entitled thereto pursuant to Section 308
located in the United States.
Any interest on any Security of any series which is payable, but is not
punctually paid or duly provided for, on any Interest Payment Date (herein
called "Defaulted Interest") shall forthwith cease to be payable to the Holder
on the relevant Regular Record Date by virtue of having been such Holder, and
such Defaulted Interest may be paid by the Company, at its election in each
case, as provided in Clause (1) or (2) below:
(1) The Company may elect to make payment of any Defaulted Interest to
the Persons in whose names the Securities of such series (or their
respective Predecessor Securities) are registered at the close of business
on a Special Record Date for the payment of such Defaulted Interest, which
shall be fixed in the following manner. The Company shall notify the
Trustee in writing of the amount of Defaulted Interest proposed to be paid
on each Security of such series and the date of the proposed payment, and
at the same time the Company shall deposit with the Trustee an amount of
money equal to the aggregate amount proposed to be paid in respect of such
Defaulted Interest or shall make arrangements satisfactory to the Trustee
for such deposit prior to the date of the proposed payment, such money when
deposited to be held in trust for the benefit of the Persons entitled to
such Defaulted
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Interest as in this Clause provided. Thereupon the Trustee shall fix a
Special Record Date for the payment of such Defaulted Interest which shall
be not more than 15 days and not less than 10 days prior to the date of the
proposed payment and not less than 10 days after the receipt by the Trustee
of the notice of the proposed payment. The Trustee shall promptly notify
the Company of such Special Record Date and, in the name and at the expense
of the Company, shall cause notice of the proposed payment of such
Defaulted Interest and the Special Record Date therefor to be mailed,
first-class postage prepaid, to each Holder of Securities of such series at
his address as it appears in the Security Register, not less than 10 days
prior to such Special Record Date. Notice of the proposed payment of such
Defaulted Interest and the Special Record Date therefor having been so
mailed, such Defaulted Interest shall be paid to the Persons in whose names
the Securities of such series (or their respective Predecessor Securities)
are registered at the close of business on such Special Record Date and
shall no longer be payable pursuant to the following Clause (2).
(2) The Company may make payment of any Defaulted Interest on the
Securities of any series in any other lawful manner not inconsistent with
the requirements of any securities exchange on which such Securities may be
listed, and upon such notice as may be required by such exchange, if, after
notice given by the Company to the Trustee of the proposed payment pursuant
to this Clause, such manner of payment shall be deemed practicable by the
Trustee.
Subject to the foregoing provisions of this Section, each Security delivered
under this Indenture upon registration of transfer of or in exchange for or in
lieu of any other Security shall carry the rights to interest accrued and
unpaid, and to accrue, which were carried by such other Security.
Section 308. Persons Deemed Owners.
Prior to due presentment of a Security for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
Person in whose name such Security is registered as the owner of such Security
for the purpose of receiving payment of principal of and any premium and
(subject to Section 307) any interest on such Security and for all other
purposes whatsoever, whether or not such Security be overdue, and neither the
Company,
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the Trustee nor any agent of the Company or the Trustee shall be affected by
notice to the contrary.
Section 309. Cancellation.
All Securities surrendered for payment, redemption, registration of transfer
or exchange or for credit against any sinking fund payment shall, if
surrendered to any Person other than the Trustee, be delivered to the Trustee
and shall be promptly cancelled by it. The Company may at any time deliver to
the Trustee for cancellation any Securities previously authenticated and
delivered hereunder which the Company may have acquired in any manner
whatsoever, and may deliver to the Trustee (or to any other Person for delivery
to the Trustee) for cancellation any Securities previously authenticated
hereunder which the Company has not issued and sold, and all Securities so
delivered shall be promptly cancelled by the Trustee. No Securities shall be
authenticated in lieu of or in exchange for any Securities cancelled as
provided in this Section, except as expressly permitted by this Indenture. All
cancelled Securities held by the Trustee shall be disposed of in accordance
with the customary practices of the Trustee.
Section 310. Computation of Interest.
Except as otherwise specified as contemplated by Section 301 for Securities
of any series, interest on the Securities of each series shall be computed on
the basis of a 360-day year of twelve 30-day months.
ARTICLE FOUR
Satisfaction and Discharge
Section 401. Satisfaction and Discharge of Indenture.
This Indenture shall upon Company Request cease to be of further effect
(except as to any surviving rights of registration of transfer or exchange of
Securities herein expressly provided for), and the Trustee, at the expense of
the Company, shall execute proper instruments acknowledging satisfaction and
discharge of this Indenture, when
(1) either
(A) all Securities theretofore authenticated and delivered (other than
(i) Securities which have been destroyed, lost or stolen and which have
been
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replaced or paid as provided in Section 306 and (ii) Securities for whose
payment money has theretofore been deposited in trust or segregated and
held in trust by the Company and thereafter repaid to the Company or
discharged from such trust, as provided in Section 1003) have been
delivered to the Trustee for cancellation; or
(B) all such Securities not theretofore delivered to the Trustee for
cancellation
(i) have become due and payable, or
(ii) will become due and payable at their Stated Maturity within one
year, or
(iii) are to be called for redemption within one year under
arrangements satisfactory to the Trustee for the giving of notice of
redemption by the Trustee in the name, and at the expense, of the
Company,
and the Company, in the case of (i), (ii) or (iii) above, has deposited or
caused to be deposited with the Trustee as trust funds in trust for the
purpose an amount sufficient to pay and discharge the entire indebtedness
on such Securities not theretofore delivered to the Trustee for
cancellation, for principal and any premium and interest to the date of
such deposit (in the case of Securities which have become due and payable)
or to the Stated Maturity or Redemption Date, as the case may be;
(2) the Company has paid or caused to be paid all other sums payable
hereunder by the Company; and
(3) the Company has delivered to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that all conditions precedent herein
provided for relating to the satisfaction and discharge of this Indenture
have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 607, the obligations of
the Trustee to any Authenticating Agent under Section 614 and, if money shall
have been deposited with the Trustee pursuant to subclause (B) of Clause (1) of
this Section, the obligations of the Trustee under Section 402 and the last
paragraph of Section 1003 shall survive.
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Section 402. Application of Trust Money.
Subject to provisions of the last paragraph of Section 1003, all money
deposited with the Trustee pursuant to Section 401 shall be held in trust and
applied by it, in accordance with the provisions of the Securities and this
Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the Persons entitled thereto, of the principal and any premium
and interest for whose payment such money has been deposited with the Trustee.
ARTICLE FIVE
Remedies
Section 501. Events of Default.
"Event of Default", wherever used herein with respect to Securities of any
series, means any one of the following events (whatever the reason for such
Event of Default and whether it shall be voluntary or involuntary or be
effected by operation of law or pursuant to any judgment, decree or order of
any court or any order, rule or regulation of any administrative or
governmental body):
(1) default in the payment of any interest upon any Security of that
series when it becomes due and payable, and continuance of such default for
a period of 30 days; or
(2) default in the payment of the principal of (or premium, if any, on)
any Security of that series at its Maturity; or
(3) default in the deposit of any sinking fund payment, when and as due
by the terms of a Security of that series; or
(4) default in the performance, or breach, of any covenant or warranty of
the Company in this Indenture (other than a covenant or warranty a default
in whose performance or whose breach is elsewhere in this Section
specifically dealt with or which has expressly been included in this
Indenture solely for the benefit of series of Securities other than that
series), and continuance of such default or breach for a period of 60 days
after there has been given, by
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registered or certified mail, to the Company by the Trustee or to the
Company and the Trustee by the Holders of at least 25% in principal amount
of the Outstanding Securities of that series a written notice specifying
such default or breach and requiring it to be remedied and stating that
such notice is a "Notice of Default" hereunder; or
(5) a default, whether it shall be voluntary or involuntary or be
effected by operation of law pursuant to any judgment, decree or order of
any court or any order, rule or regulation of any administrative or
governmental body, under any indenture or instrument evidencing or under
which the Company or any Restricted Subsidiary has at the date of this
Indenture or shall hereafter have outstanding indebtedness for money
borrowed in excess of an aggregate principal amount of $10,000,000 shall
happen and be continuing and such indebtedness for money borrowed shall
have been accelerated so that the same shall be or become due and payable,
and such acceleration shall not be rescinded or annulled within 10 days
after notice thereof shall have been given to the Company by the Trustee by
registered mail or to the Company and the Trustee by the Holders of not
less than 10% in principal amount of the Securities of any series at that
time Outstanding; provided, however, that if such default under such
indenture or instrument shall be remedied or cured by the Company, or
waived by the holders of such indebtedness, then the Event of Default
hereunder by reason thereof shall be deemed likewise to have been thereupon
remedied, cured or waived without further action upon the part of either
the Trustee or any of the Holders of Securities of any series at the time
Outstanding; and provided, further, that, subject to the provisions of
subparagraphs (a), (b) and (c) of Section 601 hereof, the Trustee shall not
be charged with knowledge of any such default or any remedy, cure or waiver
thereof, or any such acceleration, unless written notice thereof shall have
been given to the Trustee by the Company, by the holder or an agent of a
holder of any such indebtedness, by the trustee then acting under any such
indenture or other instrument under which such failure to pay shall have
occurred, or by the Holders of not less than 25% in principal amount of the
Securities of any series at the time Outstanding; or
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(6) the entry by a court having jurisdiction in the premises of (A) a
decree or order for relief in respect of the Company in an involuntary case
or proceeding under any applicable Federal or State bankruptcy, insolvency,
reorganization or other similar law or (B) a decree or order adjudging the
Company a bankrupt or insolvent, or approving as properly filed a petition
seeking reorganization, arrangement, adjustment or composition of or in
respect of the Company under any applicable Federal or State law, or
appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or of any substantial
part of its property, or ordering the winding up or liquidation of its
affairs, and the continuance of any such decree or order for relief or any
such other decree or order unstayed and in effect for a period of 90
consecutive days; or
(7) the commencement by the Company of a voluntary case or proceeding
under any applicable Federal or State bankruptcy, insolvency,
reorganization or other similar law or of any other case or proceeding to
be adjudicated a bankrupt or insolvent, or the consent by it to the entry
of a decree or order for relief in respect of the Company in an involuntary
case or proceeding under any applicable Federal or State bankruptcy,
insolvency, reorganization or other similar law or to the commencement of
any bankruptcy or insolvency case or proceeding against it, or the filing
by it of a petition or answer or consent seeking reorganization or relief
under any applicable Federal or State law, or the consent by it to the
filing of such petition or to the appointment of or taking possession by a
custodian, receiver, liquidator, assignee, trustee, sequestrator or other
similar official of the Company or of any substantial part of its property,
or the making by it of an assignment for the benefit of creditors, or the
admission by it in writing of its inability to pay its debts generally as
they become due, or the taking of corporate action by the Company in
furtherance of any such action; or
(8) any other Event of Default provided with respect to Securities of
that series.
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Section 502. Acceleration of Maturity; Rescission and Annulment.
If an Event of Default with respect to Securities of any series at the time
Outstanding occurs and is continuing, then in every such case the Trustee or
the Holders of not less than 25% in principal amount of the Outstanding
Securities of that series may declare the principal amount (or, if any of the
Securities of that series are Original Issue Discount Securities, such portion
of the principal amount of such Securities as may be specified in the terms
thereof) of all of the Securities of that series to be due and payable
immediately, by a notice in writing to the Company (and to the Trustee if given
by Holders), and upon any such declaration such principal amount (or specified
amount) shall become immediately due and payable.
At any time after such a declaration of acceleration with respect to
Securities of any series has been made and before a judgment or decree for
payment of the money due has been obtained by the Trustee as hereinafter in
this Article provided, the Holders of a majority in principal amount of the
Outstanding Securities of that series, by written notice to the Company and the
Trustee, may rescind and annul such declaration and its consequences if
(1) the Company has paid or deposited with the Trustee a sum sufficient to
pay
(A) all overdue interest on all Securities of that series,
(B) the principal of (and premium, if any, on) any Securities of that
series which have become due otherwise than by such declaration of
acceleration and any interest thereon at the rate or rates prescribed
therefor in such Securities,
(C) to the extent that payment of such interest is lawful, interest upon
overdue interest at the rate or rates prescribed therefor in such
Securities, and
(D) all sums paid or advanced by the Trustee hereunder and the reasonable
compensation, expenses, disbursements and advances of the Trustee, its
agents and counsel;
and
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(2) all Events of Default with respect to Securities of that series, other
than the non-payment of the principal of Securities of that series which
have become due solely by such declaration of acceleration, have been cured
or waived as provided in Section 513.
No such rescission shall affect any subsequent default or impair any right
consequent thereon.
Section 503. Collection of Indebtedness and Suits for Enforcement by Trustee.
The Company covenants that if
(1) default is made in the payment of any interest on any Security when
such interest becomes due and payable and such default continues for a
period of 30 days, or
(2) default is made in the payment of the principal of (or premium, if
any, on) any Security at the Maturity thereof,
the Company will, upon demand of the Trustee, pay to it, for the benefit of the
Holders of such Securities, the whole amount then due and payable on such
Securities for principal and any premium and interest and, to the extent that
payment of such interest shall be legally enforceable, interest on any overdue
principal and premium and on any overdue interest, at the rate or rates
prescribed therefor in such Securities, and, in addition thereto, such further
amount as shall be sufficient to cover the costs and expenses of collection,
including the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel.
If the Company fails to pay such amounts forthwith upon such demand, the
Trustee, in its own name and as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid, may
prosecute such proceeding to judgment or final decree and may enforce the same
against the Company or any other obligor upon such Securities and collect the
moneys adjudged or decreed to be payable in the manner provided by law out of
the property of the Company or any other obligor upon such Securities, wherever
situated.
If an Event of Default with respect to Securities of any series occurs and is
continuing, the Trustee may in its discretion proceed to protect and enforce
its rights and the rights of the Holders of Securities of such series by
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such appropriate judicial proceedings as the Trustee shall deem most effectual
to protect and enforce any such rights, whether for the specific enforcement of
any covenant or agreement in this Indenture or in aid of the exercise of any
power granted herein, or to enforce any other proper remedy.
Section 504. Trustee May File Proofs of Claim.
In case of any judicial proceeding relative to the Company (or any other
obligor upon the Securities), its property or its creditors, the Trustee shall
be entitled and empowered, by intervention in such proceeding or otherwise, to
take any and all actions authorized under the Trust Indenture Act in order to
have claims of the Holders and the Trustee allowed in any such proceeding. In
particular, the Trustee shall be authorized to collect and receive any moneys
or other property payable or deliverable on any such claims and to distribute
the same; and any custodian, receiver, assignee, trustee, liquidator,
sequestrator or other similar official in any such judicial proceeding is
hereby authorized by each Holder to make such payments to the Trustee and, in
the event that the Trustee shall consent to the making of such payments
directly to the Holders, to pay to the Trustee any amount due it for the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel, and any other amounts due the Trustee under Section
607.
No provision of this Indenture shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Securities
or the rights of any Holder thereof or to authorize the Trustee to vote in
respect of the claim of any Holder in any such proceeding; provided, however,
that the Trustee may, on behalf of the Holders, vote for the election of a
trustee in bankruptcy or similar official and be a member of a creditors' or
other similar committee.
Section 505. Trustee May Enforce Claims Without Possession of Securities.
All rights of action and claims under this Indenture or the Securities may be
prosecuted and enforced by the Trustee without the possession of any of the
Securities or the production thereof in any proceeding relating thereto, and
any such proceeding instituted by the Trustee shall be brought in its own name
as trustee of an express trust, and any recovery of judgment shall, after
provision for the payment of the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel,
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be for the ratable benefit of the Holders of the Securities in respect of which
such judgment has been recovered.
Section 506. Application of Money Collected.
Any money collected by the Trustee pursuant to this Article shall be applied
in the following order, at the date or dates fixed by the Trustee and, in case
of the distribution of such money on account of principal or any premium or
interest, upon presentation of the Securities and the notation thereon of the
payment if only partially paid and upon surrender thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee under Section 607;
and
SECOND: To the payment of the amounts then due and unpaid for principal
of and any premium and interest on the Securities in respect of which or
for the benefit of which such money has been collected, ratably, without
preference or priority of any kind, according to the amounts due and
payable on such Securities for principal and any premium and interest,
respectively.
Section 507. Limitation on Suits.
No Holder of any Security of any series shall have any right to institute any
proceeding, judicial or otherwise, with respect to this Indenture, or for the
appointment of a receiver or trustee, or for any other remedy hereunder, unless
(1) such Holder has previously given written notice to the Trustee of a
continuing Event of Default with respect to the Securities of that series;
(2) the Holders of not less than 25% in principal amount of the
Outstanding Securities of that series shall have made written request to
the Trustee to institute proceedings in respect of such Event of Default in
its own name as Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
compliance with such request;
(4) the Trustee for 60 days after its receipt of such notice, request and
offer of indemnity has failed to institute any such proceeding; and
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(5) no direction inconsistent with such written request has been given to
the Trustee during such 60-day period by the Holders of a majority in
principal amount of the Outstanding Securities of that series;
it being understood and intended that no one or more of such Holders shall have
any right in any manner whatever by virtue of, or by availing of, any provision
of this Indenture to affect, disturb or prejudice the rights of any other of
such Holders, or to obtain or to seek to obtain priority or preference over any
other of such Holders or to enforce any right under this Indenture, except in
the manner herein provided and for the equal and ratable benefit of all of such
Holders.
Section 508. Unconditional Right of Holders to Receive Principal, Premium and
Interest.
Notwithstanding any other provision in this Indenture, the Holder of any
Security shall have the right, which is absolute and unconditional, to receive
payment of the principal of and any premium and (subject to Section 307)
interest on such Security on the Stated Maturity or Maturities expressed in
such Security (or, in the case of redemption, on the Redemption Date) and to
institute suit for the enforcement of any such payment, and such rights shall
not be impaired without the consent of such Holder.
Section 509. Restoration of Rights and Remedies.
If the Trustee or any Holder has instituted any proceeding to enforce any
right or remedy under this Indenture and such proceeding has been discontinued
or abandoned for any reason, or has been determined adversely to the Trustee or
to such Holder, then and in every such case, subject to any determination in
such proceeding, the Company, the Trustee and the Holders shall be restored
severally and respectively to their former positions hereunder and thereafter
all rights and remedies of the Trustee and the Holders shall continue as though
no such proceeding had been instituted.
Section 510. Rights and Remedies Cumulative.
Except as otherwise provided with respect to the replacement or payment of
mutilated, destroyed, lost or stolen Securities in the last paragraph of
Section 306, no right or remedy herein conferred upon or reserved to the
Trustee or to the Holders is intended to be exclusive of any other right or
remedy, and every right and remedy shall, to
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the extent permitted by law, be cumulative and in addition to every other right
and remedy given hereunder or now or hereafter existing at law or in equity or
otherwise. The assertion or employment of any right or remedy hereunder, or
otherwise, shall not prevent the concurrent assertion or employment of any
other appropriate right or remedy.
Section 511. Delay or Omission Not Waiver.
No delay or omission of the Trustee or of any Holder of any Securities to
exercise any right or remedy accruing upon any Event of Default shall impair
any such right or remedy or constitute a waiver of any such Event of Default or
an acquiescence therein. Every right and remedy given by this Article or by law
to the Trustee or to the Holders may be exercised from time to time, and as
often as may be deemed expedient, by the Trustee or by the Holders, as the case
may be.
Section 512. Control by Holders.
The Holders of a majority in principal amount of the Outstanding Securities
of any series shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred on the Trustee, with respect to the
Securities of such series, provided that
(1) such direction shall not be in conflict with any rule of law or with
this Indenture, and
(2) the Trustee may take any other action deemed proper by the Trustee
which is not inconsistent with such direction.
Section 513. Waiver of Past Defaults.
The Holders of not less than a majority in principal amount of the
Outstanding Securities of any series may on behalf of the Holders of all the
Securities of such series waive any past default hereunder with respect to such
series and its consequences, except a default
(1) in the payment of the principal of or any premium or interest on any
Security of such series, or
(2) in respect of a covenant or provision hereof which under Article Nine
cannot be modified or amended without the consent of the Holder of each
Outstanding Security of such series affected.
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Upon any such waiver, such default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been cured, for every purpose
of this Indenture; but no such waiver shall extend to any subsequent or other
default or impair any right consequent thereon.
Section 514. Undertaking for Costs.
In any suit for the enforcement of any right or remedy under this Indenture,
or in any suit against the Trustee for any action taken, suffered or omitted by
it as Trustee, a court may require any party litigant in such suit to file an
undertaking to pay the costs of such suit, and may assess costs against any
such party litigant, in the manner and to the extent provided in the Trust
Indenture Act; provided that neither this Section nor the Trust Indenture Act
shall be deemed to authorize any court to require such an undertaking or to
make such an assessment in any suit instituted by the Company.
Section 515. Waiver of Stay or Extension Laws.
The Company covenants (to the extent that it may lawfully do so) that it will
not at any time insist upon, or plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay or extension law wherever enacted,
now or at any time hereafter in force, which may affect the covenants or the
performance of this Indenture; and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such
law and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Trustee, but will suffer and permit the execution
of every such power as though no such law had been enacted.
ARTICLE SIX
The Trustee
Section 601. Certain Duties and Responsibilities.
(a) Except during the continuance of an Event of Default,
(1) the Trustee undertakes to perform such duties and only such duties as
are specifically set forth in this Indenture, and no implied covenants or
obligations shall be read into this Indenture against the Trustee; and
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(2) in the absence of bad faith on its part, the Trustee may conclusively
rely, as to the truth of the statements and the correctness of the opinions
expressed therein, upon certificates or opinions furnished to the Trustee
and conforming to the requirements of this Indenture; but in the case of
any such certificates or opinions which by any provision hereof are
specifically required to be furnished to the Trustee, the Trustee shall
examine the same to determine whether or not they conform to the
requirements of this Indenture.
(b) In case an Event of Default has occurred and is continuing, the Trustee
shall exercise such of the rights and powers vested in it by this Indenture,
and use the same degree of care and skill in their exercise, as a prudent man
would exercise or use under the circumstances in the conduct of his own
affairs.
(c) No provision of this Indenture shall be construed to relieve the Trustee
from liability for its own negligent action, its own negligent failure to act,
or its own willful misconduct, except that
(1) this Subsection shall not be construed to limit the effect of
Subsection (a) of this Section;
(2) the Trustee shall not be liable for any error of judgment made in
good faith by a Responsible Officer, unless it shall be proved that the
Trustee was negligent in ascertaining the pertinent facts;
(3) the Trustee shall not be liable with respect to any action taken or
omitted to be taken by it in good faith in accordance with the direction of
the Holders of a majority in principal amount of the Outstanding Securities
of any series, determined as provided in Section 512, relating to the time,
method and place of conducting any proceeding for any remedy available to
the Trustee, or exercising any trust or power conferred upon the Trustee,
under this Indenture with respect to the Securities of such series; and
(4) no provision of this Indenture shall require the Trustee to expend or
risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder, or in the exercise of any of
its rights or powers, if it shall have reasonable grounds for believing
that repayment of such funds or adequate indemnity against such risk or
liability is not reasonably assured to it.
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(d) Whether or not therein expressly so provided, every provision of this
Indenture relating to the conduct or affecting the liability of or affording
protection to the Trustee shall be subject to the provisions of this Section.
Section 602. Notice of Defaults.
If a default occurs hereunder with respect to Securities of any series, the
Trustee shall give the Holders of Securities of such series within 90 days
after the occurrence of such default notice of such default as and to the
extent provided by the Trust Indenture Act; provided, however, that in the case
of any default of the character specified in Section 501(4) with respect to
Securities of such series, no such notice to Holders shall be given until at
least 30 days after the occurrence thereof. For the purpose of this Section,
the term "default" means any event which is, or after notice or lapse of time
or both would become, an Event of Default with respect to Securities of such
series.
Section 603. Certain Rights of Trustee.
Subject to the provisions of Section 601:
(a) the Trustee may rely and shall be protected in acting or refraining
from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond,
debenture, note, other evidence of indebtedness or other paper or document
believed by it to be genuine and to have been signed or presented by the
proper party or parties;
(b) any request or direction of the Company mentioned herein shall be
sufficiently evidenced by a Company Request or Company Order or as
otherwise expressly provided herein and any resolution of the Board of
Directors shall be sufficiently evidenced by a Board Resolution;
(c) whenever in the administration of this Indenture the Trustee shall
deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Trustee (unless other
evidence be herein specifically prescribed) may, in the absence of bad
faith on its part, rely upon an Officers' Certificate;
(d) the Trustee may consult with counsel and the written advice of such
counsel or any Opinion of
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Counsel shall be full and complete authorization and protection in respect
of any action taken, suffered or omitted by it hereunder in good faith and
in reliance thereon;
(e) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or direction
of any of the Holders pursuant to this Indenture, unless such Holders shall
have offered to the Trustee reasonable security or indemnity against the
costs, expenses and liabilities which might be incurred by it in compliance
with such request or direction;
(f) the Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, other evidence of indebtedness or other paper or
document, but the Trustee, in its discretion, may make such further inquiry
or investigation into such facts or matters as it may see fit, and, if the
Trustee shall determine to make such further inquiry or investigation, it
shall be entitled to examine the books, records and premises of the
Company, personally or by agent or attorney; and
(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by
it hereunder.
Section 604. Not Responsible for Recitals or Issuance of Securities.
The recitals contained herein and in the Securities, except the Trustee's
certificates of authentication, shall be taken as the statements of the
Company, and the Trustee or any Authenticating Agent assumes no responsibility
for their correctness. The Trustee makes no representations as to the validity
or sufficiency of this Indenture or of the Securities except that the Trustee
represents that it is duly authorized to execute and deliver this Indenture,
authenticate the Securities and perform its obligations hereunder and that the
statements made by it in a Statement of Eligibility under the Trust Indenture
Act of 1939 of a Corporation Designated to Act as Trustee on Form T-1 supplied
to the Company are true and accurate, subject to the qualifications set forth
therein. The Trustee or
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any Authenticating Agent shall not be accountable for the use or application by
the Company of Securities or the proceeds thereof.
Section 605. May Hold Securities.
The Trustee, any Authenticating Agent, any Paying Agent, any Security
Registrar or any other agent of the Company, in its individual or any other
capacity, may become the owner or pledgee of Securities and, subject to
Sections 608 and 613, may otherwise deal with the Company with the same rights
it would have if it were not Trustee, Authenticating Agent, Paying Agent,
Security Registrar or such other agent.
Section 606. Money Held in Trust.
Money held by the Trustee in trust hereunder need not be segregated from
other funds except to the extent required by law. The Trustee shall be under no
liability for interest on any money received by it hereunder except as
otherwise agreed with the Company.
Section 607. Compensation and Reimbursement.
The Company agrees
(1) to pay to the Trustee from time to time reasonable compensation for
all services rendered by it hereunder (which compensation shall not be
limited by any provision of law in regard to the compensation of a trustee
of an express trust);
(2) except as otherwise expressly provided herein, to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and
advances incurred or made by the Trustee in accordance with any provisions
of this Indenture (including the reasonable compensation and the expenses
and disbursements of its agents and counsel), except any such expense,
disbursement or advance as may be attributable to its negligence or bad
faith; and
(3) to indemnify the Trustee for, and to hold it harmless against, any
loss, liability or expense incurred without negligence or bad faith on its
part, arising out of or in connection with the acceptance or administration
of the trust or trusts hereunder, including the costs and expenses of
defending itself against any claim or liability in connection with the
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exercise or performance of any of its powers or duties hereunder.
As security for the performance of the obligations of the Company under this
Section the Trustee shall have a lien prior to the Securities upon all property
and funds held or collected by the Trustee as such, except funds held in trust
for the payment of principal of, premium, if any, or interest on particular
Securities.
The "Trustee" as used in this Section 607 shall include any predecessor
Trustee, but the negligence or bad faith of any Trustee shall not affect the
rights of any other Trustee hereunder.
Section 608. Disqualification; Conflicting Interests.
If the Trustee has or shall acquire a conflicting interest within the meaning
of the Trust Indenture Act, the Trustee shall either eliminate such interest or
resign, to the extent and in the manner provided by, and subject to the
provisions of, the Trust Indenture Act and this Indenture.
Section 609. Corporate Trustee Required; Eligibility.
There shall at all times be one or more Trustees hereunder with respect to
Securities of each series, each of which shall be a Person that is eligible
pursuant to the Trust Indenture Act to act as such and (i) has a combined
capital and surplus of at least $50,000,000 and (ii) (a) has a long-term debt
rating from at least one of Moody's Investors Service ("Moody's") or Standard &
Poor's Corporation ("S&P"), or any of their respective successors or assigns,
or if neither Moody's nor S&P, nor their respective successors and assigns, has
provided such a long-term debt rating, then the bank holding company of which
such Person is a subsidiary shall have a long-term debt rating from at least
one of Moody's or S&P, or their respective successors and assigns, and (b) if
such Person (or, if applicable, the bank holding company of which such Person
is a subsidiary) has a long-term debt rating from Moody's, then such rating
shall not be less than A3 under the system of ratings used by Moody's on the
date of this Indenture (or the equivalent of A3 if the system of ratings is
changed) and Moody's shall at no time lower such rating below A3 or its
equivalent, and if such Person (or, if applicable, the bank holding company of
which such Person is a subsidiary) has a long-term debt rating from S&P, then
such rating shall not be less than A- under the system of
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ratings used by S&P on the date of this Indenture (or the equivalent of A- if
the system of ratings is changed) and S&P shall at no time lower such rating
below A- or its equivalent. If such Person publishes reports of condition at
least annually, pursuant to law or to the requirements of said supervising or
examining authority, then for the purposes of this Section, the combined
capital and surplus of such Person shall be deemed to be its combined capital
and surplus as set forth in its most recent report of condition so published.
If at any time any one of the Trustees shall cease to be eligible, or the
Person proposing to be or become the successor to any one of the Trustees
pursuant to Section 612 shall fail to be eligible, in accordance with the
provisions of this Section, such Trustee shall resign immediately in the manner
and with the effect hereinafter specified in this Article.
Section 610. Resignation and Removal; Appointment of Successor.
No resignation or removal of the Trustee and no appointment of a successor
Trustee pursuant to this Article shall become effective until the acceptance of
appointment by the successor Trustee in accordance with the applicable
requirements of Section 611.
The Trustee may resign at any time with respect to the Securities of one or
more series by giving written notice thereof to the Company. If the instrument
of acceptance by a successor Trustee required by Section 611 shall not have
been delivered to the Trustee within 30 days after the giving of such notice of
resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor Trustee with respect to the
Securities of such series.
The Trustee may be removed at any time with respect to the Securities of any
series by Act of the Holders of a majority in principal amount of the
Outstanding Securities of such series, delivered to the Trustee and to the
Company.
If at any time:
(1) the Trustee shall fail to comply with Section 608 after written
request therefor by the Company or by any Holder who has been a bona fide
Holder of a Security for at least six months, or
(2) the Trustee shall cease to be eligible under Section 609 and shall
fail to resign after written request therefor by the Company or by any such
Holder, or
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(3) the Trustee shall become incapable of acting or shall be adjudged a
bankrupt or insolvent or a receiver of the Trustee or of its property shall
be appointed or any public officer shall take charge or control of the
Trustee or of its property or affairs for the purpose of rehabilitation,
conservation or liquidation,
then, in any such case, (i) the Company by a Board Resolution shall remove the
Trustee with respect to all securities, or (ii) subject to Section 514, any
Holder who has been a bona fide Holder of a Security for at least six months
may, on behalf of himself and all others similarly situated, petition any court
of competent jurisdiction for the removal of the Trustee with respect to all
Securities and the appointment of a successor Trustee or Trustees.
If the Trustee shall resign, be removed or become incapable of acting, or if
a vacancy shall occur in the office of Trustee for any cause, with respect to
the Securities of one or more series, the Company, by a Board Resolution, shall
promptly appoint a successor Trustee or Trustees with respect to the Securities
of that or those series (it being understood that any such successor Trustee
may be appointed with respect to the Securities of one or more or all of such
series and that at any time there shall be only one Trustee with respect to the
Securities of any particular series) and shall comply with the applicable
requirements of Section 611. If, within one year after such resignation,
removal or incapability, or the occurrence of such vacancy, a successor Trustee
with respect to the Securities of any series shall be appointed by Act of the
Holders of a majority in principal amount of the Outstanding Securities of such
series delivered to the Company and the retiring Trustee, the successor Trustee
so appointed shall, forthwith upon its acceptance of such appointment in
accordance with the applicable requirements of Section 611, become the
successor Trustee with respect to the Securities of such series and to that
extent supersede the successor Trustee appointed by the Company. If no
successor Trustee with respect to the Securities of any series shall have been
so appointed by the Company or the Holders and accepted appointment in the
manner required by Section 611, any Holder who has been a bona fide Holder of a
Security of such series for at least six months may, on behalf of himself and
all others similarly situated, petition any court of competent jurisdiction for
the appointment of a successor Trustee with respect to the Securities of such
series.
The Company shall give notice of each resignation and each removal of the
Trustee with respect to the
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Securities of any series and each appointment of a successor Trustee with
respect to the Securities of any series to all Holders of Securities of such
series in the manner provided in Section 106. Each notice shall include the
name of the successor Trustee with respect to the Securities of such series and
the address of its Corporate Trust Office.
Section 611. Acceptance of Appointment by Successor.
In case of the appointment hereunder of a successor Trustee with respect to
all Securities, every such successor Trustee so appointed shall execute,
acknowledge and deliver to the Company and to the retiring Trustee an
instrument accepting such appointment, and thereupon the resignation or removal
of the retiring Trustee shall become effective and such successor Trustee,
without any further act, deed or conveyance, shall become vested with all the
rights, powers, trusts and duties of the retiring Trustee; but, on the request
of the Company or the successor Trustee, such retiring Trustee shall, upon
payment of its charges, execute and deliver an instrument transferring to such
successor Trustee all the rights, powers and trusts of the retiring Trustee and
shall duly assign, transfer and deliver to such successor Trustee all property
and money held by such retiring Trustee hereunder.
In case of the appointment hereunder of a successor Trustee with respect to
the Securities of one or more (but not all) series, the Company, the retiring
Trustee and each successor Trustee with respect to the Securities of one or
more series shall execute and deliver an indenture supplemental hereto wherein
each successor Trustee shall accept such appointment and which (1) shall
contain such provisions as shall be necessary or desirable to transfer and
confirm to, and to vest in, each successor Trustee all the rights, powers,
trusts and duties of the retiring Trustee with respect to the Securities of
that or those series to which the appointment of such successor Trustee
relates, (2) if the retiring Trustee is not retiring with respect to all
Securities, shall contain such provisions as shall be deemed necessary or
desirable to confirm that all the rights, powers, trusts and duties of the
retiring Trustee with respect to the Securities of that or those series as to
which the retiring Trustee is not retiring shall continue to be vested in the
retiring Trustee, and (3) shall add to or change any of the provisions of this
Indenture as shall be necessary to provide for or facilitate the administration
of the trusts hereunder by more than one Trustee, it being understood that
nothing herein or in such supplemental indenture shall constitute such Trustees
co-
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trustees of the same trust and that each such Trustee shall be trustee of a
trust or trusts hereunder separate and apart from any trust or trusts hereunder
administered by any other such Trustee; and upon the execution and delivery of
such supplemental indenture the resignation or removal of the retiring Trustee
shall become effective to the extent provided therein and each such successor
Trustee, without any further act, deed or conveyance, shall become vested with
all the rights, powers, trusts and duties of the retiring Trustee with respect
to the Securities of that or those series to which the appointment of such
successor Trustee relates; but, on request of the Company or any successor
Trustee, such retiring Trustee shall duly assign, transfer and deliver to such
successor Trustee all property and money held by such retiring Trustee
hereunder with respect to the Securities of that or those series to which the
appointment of such successor Trustee relates.
Upon request of any such successor Trustee, the Company shall execute any and
all instruments for more fully and certainly vesting in and confirming to such
successor Trustee all such rights, powers and trusts referred to in the first
and second paragraphs of this Section, as the case may be.
No successor Trustee shall accept its appointment unless at the time of such
acceptance such successor Trustee shall be qualified and eligible under this
Article.
Section 612. Merger, Conversion, Consolidation or Succession to Business.
Any corporation into which the Trustee may be merged or converted or with
which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all the corporate trust business
of the Trustee, shall be the successor of the Trustee hereunder, provided such
corporation shall be otherwise qualified and eligible under this Article,
without the execution or filing of any paper or any further act on the part of
any of the parties hereto. In case any Securities shall have been
authenticated, but not delivered, by the Trustee then in office, any successor
by merger, conversion or consolidation to such authenticating Trustee may adopt
such authentication and deliver the Securities so authenticated with the same
effect as if such successor Trustee had itself authenticated such Securities.
In case any Securities shall not have been authenticated by such predecessor
Trustee, any such successor Trustee may authenticate and deliver such
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Securities, in either its own name or that of its predecessor Trustee, with the
full force and effect which this Indenture provides for the certificate of
authentication of the Trustee.
Section 613. Preferential Collection of Claims Against Company.
If and when the Trustee shall be or become a creditor of the Company (or any
other obligor upon the Securities), the Trustee shall be subject to the
provisions of the Trust Indenture Act regarding the collection of claims
against the Company (or any such other obligor).
Section 614. Appointment of Authenticating Agent.
The Trustee may appoint an Authenticating Agent or Agents with respect to one
or more series of Securities which shall be authorized to act on behalf of the
Trustee to authenticate Securities of such series issued upon original issue
and upon exchange, registration of transfer or partial redemption thereof or
pursuant to Section 306, and Securities so authenticated shall be entitled to
the benefits of this Indenture and shall be valid and obligatory for all
purposes as if authenticated by the Trustee hereunder. Wherever reference is
made in this Indenture to the authentication and delivery of Securities by the
Trustee or the Trustee's certificate of authentication, such reference shall be
deemed to include authentication and delivery on behalf of the Trustee by an
Authenticating Agent and a certificate of authentication executed on behalf of
the Trustee by an Authenticating Agent. Each Authenticating Agent shall be
acceptable to the Company and shall at all times be a corporation organized and
doing business under the laws of the United States of America, any State
thereof or the District of Columbia, authorized under such laws to act as
Authenticating Agent, having a combined capital and surplus of not less than
$50,000,000 and subject to supervision or examination by Federal or State
authority. If such Authenticating Agent publishes reports of condition at least
annually, pursuant to law or to the requirements of said supervising or
examining authority, then for the purposes of this Section, the combined
capital and surplus of such Authenticating Agent shall be deemed to be its
combined capital and surplus as set forth in its most recent report of
condition so published. If at any time an Authenticating Agent shall cease to
be eligible in accordance with the provisions of this Section, such
Authenticating Agent shall resign immediately in the manner and with the effect
specified in this Section.
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Any corporation into which an Authenticating Agent may be merged or converted
or with which it may be consolidated, or any corporation resulting from any
merger, conversion or consolidation to which such Authenticating Agent shall be
a party, or any corporation succeeding to the corporate agency or corporate
trust business of an Authenticating Agent, shall continue to be an
Authenticating Agent, provided such corporation shall be otherwise eligible
under this Section, without the execution or filing of any paper or any further
act on the part of the Trustee or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving written notice
thereof to the Trustee and to the Company. The Trustee may at any time
terminate the agency of an Authenticating Agent by giving written notice
thereof to such Authenticating Agent and to the Company. Upon receiving such a
notice of resignation or upon such a termination, or in case at any time such
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, the Trustee may appoint a successor Authenticating
Agent which shall be acceptable to the Company and shall mail written notice of
such appointment by first-class mail, postage prepaid, to all Holders of
Securities of the series with respect to which such Authenticating Agent will
serve, as their names and addresses appear in the Security Register. Any
successor Authenticating Agent upon acceptance of its appointment hereunder
shall become vested with all the rights, powers and duties of its predecessor
hereunder, with like effect as if originally named as an Authenticating Agent.
No successor Authenticating Agent shall be appointed unless eligible under the
provisions of this Section.
The Trustee agrees to pay to each Authenticating Agent from time to time
reasonable compensation for its services under this Section, and the Trustee
shall be entitled to be reimbursed for such payments, subject to the provisions
of Section 607.
If an appointment with respect to one or more series is made pursuant to this
Section, the Securities of such series may have endorsed thereon, in addition
to the Trustee's certificate of authentication, an alternative certificate of
authentication in the following form:
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This is one of the Securities of the series designated therein referred to in
the within-mentioned Indenture.
MORGAN GUARANTY TRUST COMPANY OF NEW
YORK, as Trustee
By..................................,
As Authenticating Agent
By...................................
Authorized Officer
ARTICLE SEVEN
Holders' Lists and Reports by Trustee and Company
Section 701. Company to Furnish Trustee Names and Addresses of Holders.
The Company will furnish or cause to be furnished to the Trustee
(a) semi-annually, not later than March 15 and September 15 in each year,
a list for each series of Securities, in such form as the Trustee may
reasonably require, of the names and addresses of the Holders of Securities
of such series as of the preceding March 1 or September 1, as the case may
be, and
(b) at such other times as the Trustee may request in writing, within 30
days after the receipt by the Company of any such request, a list of
similar form and content as of a date not more than 15 days prior to the
time such list is furnished;
excluding from any such list names and addresses received by the Trustee in its
capacity as Security Registrar.
Section 702. Preservation of Information; Communications to Holders.
The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders contained in the most recent
list furnished to the
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Trustee as provided in Section 701 and the names and addresses of Holders
received by the Trustee in its capacity as Security Registrar. The Trustee may
destroy any list furnished to it as provided in Section 701 upon receipt of a
new list so furnished.
The rights of the Holders to communicate with other Holders with respect to
their rights under this Indenture or under the Securities, and the
corresponding rights and privileges of the Trustee, shall be as provided by the
Trust Indenture Act.
Every Holder of Securities, by receiving and holding the same, agrees with
the Company and the Trustee that neither the Company nor the Trustee nor any
agent of either of them shall be held accountable by reason of any disclosure
of information as to names and addresses of Holders made pursuant to the Trust
Indenture Act.
Section 703. Reports by Trustee.
The Trustee shall transmit to Holders such reports concerning the Trustee and
its actions under this Indenture on or before each May 15 as may be required
pursuant to the Trust Indenture Act at the times and in the manner provided
pursuant thereto.
A copy of each such report shall, at the time of such transmission to
Holders, be filed by the Trustee with each stock exchange upon which any
Securities are listed, with the Commission and with the Company. The Company
will notify the Trustee when any Securities are listed on any stock exchange.
Section 704. Reports by Company.
The Company shall file or cause to be filed with the Trustee and the
Commission, and transmit to Holders, such information, documents and other
reports, and such summaries thereof, as may be required pursuant to the Trust
Indenture Act, or any rules or regulations then in effect thereunder, at the
times and in the manner provided pursuant to such Act; provided that any such
information, documents or reports required to be filed with the Commission
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, shall be filed with the Trustee within 15 days after the same is so
required to be filed with the Commission.
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ARTICLE EIGHT
Consolidation, Merger, Conveyance, Transfer or Lease
Section 801. Company May Consolidate, Etc., Only on Certain Terms.
The Company shall not consolidate with or merge into any other Person or
convey, transfer or lease its properties and assets substantially as an
entirety to any Person, and the Company shall not permit any Person to
consolidate with or merge into the Company, or convey, transfer or lease its
properties and assets substantially as an entirety to the Company, unless:
(1) in case the Company shall consolidate with or merge into another
Person or convey, transfer or lease its properties and assets substantially
as an entirety to any Person, the Person formed by such consolidation or
into which the Company is merged or the Person which acquires by conveyance
or transfer, or which leases, the properties and assets of the Company
substantially as an entirety shall be a corporation, partnership or trust,
shall be organized and validly existing under the laws of the United States
of America, any State thereof or the District of Columbia and shall
expressly assume, by an indenture supplemental hereto, executed and
delivered to the Trustee, in form satisfactory to the Trustee, the due and
punctual payment of the principal of and any premium and interest on all
the Securities and the performance or observance of every covenant of this
Indenture on the part of the Company to be performed or observed;
(2) immediately after giving effect to such transaction, no Event of
Default, and no event which, after notice or lapse of time or both, would
become an Event of Default, shall have happened and be continuing;
(3) if, as a result of any such consolidation or merger or such
conveyance, transfer or lease, properties or assets of the Company would
become subject to a mortgage, pledge, lien, security interest or other
encumbrance which would not be permitted by this Indenture, the Company or
such successor Person, as the case may be, shall take such steps as shall
be necessary effectively to secure the Securities equally and ratably with
(or prior to) all indebtedness secured thereby; and
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(4) the Company has delivered to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that such consolidation or merger, or
conveyance, transfer or lease by the Company of its properties and assets
substantially as an entirety to any Person and, if a supplemental indenture
is required in connection with such transaction, such supplemental
indenture complies with this Article and that all conditions precedent
herein provided for relating to such transaction have been complied with;
provided, however, that the Company shall not be required to deliver such
an Officer's Certificate or Opinion of Counsel as the result of any
conveyance, transfer or lease of properties and assets substantially as an
entirety to the Company by any Person.
Section 802. Successor Substituted.
Upon any consolidation of the Company with, or merger of the Company into,
any other Person or any conveyance, transfer or lease of the properties and
assets of the Company substantially as an entirety in accordance with Section
801, the successor Person formed by such consolidation or into which the
Company is merged or to which such conveyance, transfer or lease is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under this Indenture with the same effect as if such successor
Person had been named as the Company herein, and thereafter, except in the case
of a lease, the predecessor Person shall be relieved of all obligations and
covenants under this Indenture and the Securities.
ARTICLE NINE
Supplemental Indentures
Section 901. Supplemental Indentures Without Consent of Holders.
Without the consent of any Holders, the Company, when authorized by a Board
Resolution, and the Trustee, at any time and from time to time, may enter into
one or more indentures supplemental hereto, in form satisfactory to the
Trustee, for any of the following purposes:
(1) to evidence the succession of another Person to the Company and the
assumption by any such successor of the covenants of the Company herein and
in the Securities; or
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(2) to add to the covenants of the Company for the benefit of the Holders
of all or any series of Securities (and if such covenants are to be for the
benefit of less than all series of Securities, stating that such covenants
are expressly being included solely for the benefit of such series) or to
surrender any right or power herein conferred upon the Company; or
(3) to add any additional Events of Default; or
(4) to add to or change any of the provisions of this Indenture to such
extent as shall be necessary to permit or facilitate the issuance of
Securities in bearer form, registrable or not registrable as to principal,
and with or without interest coupons, or to permit or facilitate the
issuance of Securities in uncertificated form; or
(5) to add to, change or eliminate any of the provisions of this
Indenture in respect of one or more series of Securities, provided that any
such addition, change or elimination (i) shall neither (A) apply to any
Security of any series created prior to the execution of such supplemental
indenture and entitled to the benefit of such provision nor (B) modify the
rights of the Holder of any such Security with respect to such provision or
(ii) shall become effective only when there is no such Security
Outstanding; or
(6) to secure the Securities pursuant to the requirements of Section
801(3) or otherwise; or
(7) to establish the form or terms of Securities of any series as
permitted by Sections 201 and 301; or
(8) to evidence and provide for the acceptance of appointment hereunder
by a successor Trustee with respect to the Securities of one or more series
and to add to or change any of the provisions of this Indenture as shall be
necessary to provide for or facilitate the administration of the trusts
hereunder by more than one Trustee, pursuant to the requirements of Section
611; or
(9) to cure any ambiguity, to correct or supplement any provision herein
which may be inconsistent with any other provision herein, or to make any
other provisions with respect to matters or questions arising under this
Indenture, provided that such action pursuant to this clause (9) shall not
adversely affect
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the interests of the Holders of Securities of any series in any material
respect.
Section 902. Supplemental Indentures with Consent of Holders.
With the consent of the Holders of not less than a majority in principal
amount of the Outstanding Securities of each series affected by such
supplemental indenture, by Act of said Holders delivered to the Company and the
Trustee, the Company, when authorized by a Board Resolution, and the Trustee
may enter into an indenture or indentures supplemental hereto for the purpose
of adding any provisions to or changing in any manner or eliminating any of the
provisions of this Indenture or of modifying in any manner the rights of the
Holders of Securities of such series under this Indenture; provided, however,
that no such supplemental indenture shall, without the consent of the Holder of
each Outstanding Security affected thereby,
(1) change the Stated Maturity of the principal of, or any instalment of
principal of or interest on, any Security, or reduce the principal amount
thereof or the rate of interest thereon or any premium payable upon the
redemption thereof, or reduce the amount of the principal of an Original
Issue Discount Security that would be due and payable upon a declaration of
acceleration of the Maturity thereof pursuant to Section 502, or change any
Place of Payment where, or the coin or currency in which, any Security or
any premium or interest thereon is payable, or impair the right to
institute suit for the enforcement of any such payment on or after the
Stated Maturity thereof (or, in the case of redemption, on or after the
Redemption Date), or
(2) reduce the percentage in principal amount of the Outstanding
Securities of any series, the consent of whose Holders is required for any
such supplemental indenture, or the consent of whose Holders is required
for any waiver (of compliance with certain provisions of this Indenture or
certain defaults hereunder and their consequences) provided for in this
Indenture, or
(3) modify any of the provisions of this Section, Section 513 or Section
1009, except to increase any such percentage or to provide that certain
other provisions of this Indenture cannot be modified or waived without the
consent of the Holder of each Outstanding Security affected thereby,
provided, however, that this clause shall not be deemed to require the
consent of
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any Holder with respect to changes in the references to "the Trustee" and
concomitant changes in this Section and Section 1009, or the deletion of
this proviso, in accordance with the requirements of Sections 611 and
901(8).
A supplemental indenture which changes or eliminates any covenant or other
provision of this Indenture which has expressly been included solely for the
benefit of one or more particular series of Securities, or which modifies the
rights of the Holders of Securities of such series with respect to such
covenant or other provision, shall be deemed not to affect the rights under
this Indenture of the Holders of Securities of any other series.
It shall not be necessary for any Act of Holders under this Section to
approve the particular form of any proposed supplemental indenture, but it
shall be sufficient if such Act shall approve the substance thereof.
Section 903. Execution of Supplemental Indentures.
In executing, or accepting the additional trusts created by, any supplemental
indenture permitted by this Article or the modifications thereby of the trusts
created by this Indenture, the Trustee shall be entitled to receive, and
(subject to Section 601) shall be fully protected in relying upon, an Opinion
of Counsel stating that the execution of such supplemental indenture is
authorized or permitted by this Indenture. The Trustee may, but shall not be
obligated to, enter into any such supplemental indenture which affects the
Trustee's own rights, duties or immunities under this Indenture or otherwise.
Section 904. Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this Article, this
Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every
Holder of Securities theretofore or thereafter authenticated and delivered
hereunder shall be bound thereby.
Section 905. Conformity with Trust Indenture Act.
Every supplemental indenture executed pursuant to this Article shall conform
to the requirements of the Trust Indenture Act.
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Section 906. Reference in Securities to Supplemental Indentures.
Securities of any series authenticated and delivered after the execution of
any supplemental indenture pursuant to this Article may, and shall if required
by the Trustee, bear a notation in form approved by the Trustee as to any
matter provided for in such supplemental indenture. If the Company shall so
determine, new Securities of any series so modified as to conform, in the
opinion of the Trustee and the Company, to any such supplemental indenture may
be prepared and executed by the Company and authenticated and delivered by the
Trustee in exchange for Outstanding Securities of such series.
ARTICLE TEN
Covenants
Section 1001. Payment of Principal, Premium and Interest.
The Company covenants and agrees for the benefit of each series of Securities
that it will duly and punctually pay the principal of and any premium and
interest on the Securities of that series in accordance with the terms of the
Securities and this Indenture.
Section 1002. Maintenance of Office or Agency.
The Company will maintain in each Place of Payment for any series of
Securities an office or agency where Securities of that series may be presented
or surrendered for payment, where Securities of that series may be surrendered
for registration of transfer or exchange and where notices and demands to or
upon the Company in respect of the Securities of that series and this Indenture
may be served. The Company will give prompt written notice to the Trustee of
the location, and any change in the location, of such office or agency. If at
any time the Company shall fail to maintain any such required office or agency
or shall fail to furnish the Trustee with the address thereof, such
presentations, surrenders, notices and demands may be made or served at the
Corporate Trust Office of the Trustee, and the Company hereby appoints the
Trustee as its agent to receive all such presentations, surrenders, notices and
demands.
The Company may also from time to time designate one or more other offices or
agencies where the Securities of one or more series may be presented or
surrendered for any or all such purposes and may from time to time rescind
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such designations; provided, however, that no such designation or rescission
shall in any manner relieve the Company of its obligation to maintain an office
or agency in each Place of Payment for Securities of any series for such
purposes. The Company will give prompt written notice to the Trustee of any
such designation or rescission and of any change in the location of any such
other office or agency.
Section 1003. Money for Securities Payments to Be Held in Trust.
If the Company shall at any time act as its own Paying Agent with respect to
any series of Securities, it will, on or before each due date of the principal
of or any premium or interest on any of the Securities of that series,
segregate and hold in trust for the benefit of the Persons entitled thereto a
sum sufficient to pay the principal and any premium and interest so becoming
due until such sums shall be paid to such Persons or otherwise disposed of as
herein provided and will promptly notify the Trustee of its action or failure
so to act.
Whenever the Company shall have one or more Paying Agents for any series of
Securities, it will, prior to each due date of the principal of or any premium
or interest on any Securities of that series, deposit with a Paying Agent a sum
sufficient to pay such amount, such sum to be held as provided by the Trust
Indenture Act, and (unless such Paying Agent is the Trustee) the Company will
promptly notify the Trustee of its action or failure so to act.
The Company will cause each Paying Agent for any series of Securities other
than the Trustee to execute and deliver to the Trustee an instrument in which
such Paying Agent shall agree with the Trustee, subject to the provisions of
this Section, that such Paying Agent will (i) comply with the provisions of the
Trust Indenture Act applicable to it as a Paying Agent and (ii) during the
continuance of any default by the Company (or any other obligor upon the
Securities of that series) in the making of any payment in respect of the
Securities of that series, and upon the written request of the Trustee,
forthwith pay to the Trustee all sums held in trust by such Paying Agent for
payment in respect of the Securities of that series.
The Company may at any time, for the purpose of obtaining the satisfaction
and discharge of this Indenture or for any other purpose, pay, or by Company
Order direct any Paying Agent to pay, to the Trustee all sums held in trust by
the Company or such Paying Agent, such sums to be held by the Trustee upon the
same trusts as those upon which
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such sums were held by the Company or such Paying Agent; and, upon such payment
by any Paying Agent to the Trustee, such Paying Agent shall be released from
all further liability with respect to such money.
Any money deposited with the Trustee or any Paying Agent, or then held by the
Company, in trust for the payment of the principal of or any premium or
interest on any Security of any series and remaining unclaimed for two years
after such principal, premium or interest has become due and payable shall be
paid to the Company on Company Request, or (if then held by the Company) shall
be discharged from such trust; and the Holder of such Security shall
thereafter, as an unsecured general creditor, look only to the Company for
payment thereof, and all liability of the Trustee or such Paying Agent with
respect to such trust money, and all liability of the Company as trustee
thereof, shall thereupon cease; provided, however, that the Trustee or such
Paying Agent, before being required to make any such repayment, may at the
expense of the Company cause to be published once, in a newspaper published in
the English language, customarily published on each Business Day and of general
circulation in the Borough of Manhattan, The City of New York, notice that such
money remains unclaimed and that, after a date specified therein, which shall
not be less than 30 days from the date of such publication, any unclaimed
balance of such money then remaining will be repaid to the Company.
Section 1004. Statement by Officers as to Default.
The Company will deliver to the Trustee, within 120 days after the end of
each fiscal year of the Company ending after the date hereof, an Officers'
Certificate, stating whether or not to the best knowledge of the signers
thereof the Company is in default in the performance and observance of any of
the terms, provisions and conditions of this Indenture or any Board Resolution
adopted pursuant to Section 301 hereof (without regard to any period of grace
or requirement of notice provided hereunder) and, if the Company shall be in
default, specifying all such defaults and the nature and status thereof of
which they may have knowledge.
Section 1005. Existence.
Subject to Article Eight, the Company will do or cause to be done all things
necessary to preserve and keep in full force and effect the corporate
existence, rights (charter and statutory) and franchise of the Company and any
Restricted Subsidiary; provided, however, that neither the Company nor any
Restricted Subsidiary shall be required to
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preserve any such right or franchise if the Board of Directors of the Company
or such Restricted Subsidiary shall determine that the preservation thereof is
no longer desirable in the conduct of the business of the Company or such
Restricted Subsidiary and that the loss thereof is not disadvantageous in any
material respect to the Holders.
Section 1006. Payment of Taxes and Other Claims.
The Company will pay or discharge or cause to be paid or discharged, before
the same shall become delinquent, (1) all taxes, assessments and governmental
charges levied or imposed upon the Company or any Restricted Subsidiary or upon
the income, profits or property of the Company or any Restricted Subsidiary,
and (2) all lawful claims for labor, materials and supplies which, if unpaid,
might by law become a lien upon the property of the Company or any Restricted
Subsidiary; provided, however, that the Company shall not be required to pay or
discharge or cause to be paid or discharged any such tax, assessment, charge or
claim whose amount, applicability or validity is being contested in good faith
by appropriate proceedings.
Section 1007. Limitation Upon Creation of Liens on Capital Stock of Restricted
Subsidiaries.
The Company will not, and it will not permit any Restricted Subsidiary at any
time directly or indirectly to create, assume, incur or permit to exist any
indebtedness secured by a pledge, lien or other encumbrance (any pledge, lien
or other encumbrance being hereinafter in this Section referred to as a "lien")
on the capital stock of any Restricted Subsidiary without making effective
provision whereby the Outstanding Securities (and, if the Company so elects,
any other indebtedness ranking on a parity with the Securities) shall be
equally and ratably secured with such secured indebtedness so long as such
other indebtedness shall be secured; provided, however, that the foregoing
covenant shall not be applicable to liens of taxes or assessments or
governmental charges or levies not then due and delinquent or the validity of
which is being contested in good faith or which is less than $5,000,000 in
amount, liens created by or resulting from any litigation or legal proceeding
which is currently being contested in good faith by appropriate proceedings or
which involve claims of less than $5,000,000, or deposits to secure (or in lieu
of) surety, stay, appeals or custom bonds.
If the Company shall hereafter be required to secure the Securities equally
and ratably with any other indebtedness pursuant to this Section, (i) the
Company will
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promptly deliver to the Trustee an Officers' Certificate stating that the
foregoing covenant has been complied with, and an Opinion of Counsel stating
that in the opinion of such counsel the foregoing covenant has been complied
with and that any instruments executed by the Company or any Restricted
Subsidiary in the performance of the foregoing covenant comply with the
requirements of the foregoing covenant and (ii) the Trustee is hereby
authorized to enter into an indenture or agreement supplemental hereto and to
take such action, if any, as it may deem advisable to enable it to enforce the
rights of the holders of the Securities so secured.
Section 1008. Limitation Upon Sales of Capital Stock of Restricted
Subsidiaries.
The Company will not sell, transfer or otherwise dispose of (except to a
Subsidiary or for directors' qualifying shares), and it will not permit any
Restricted Subsidiary to sell, transfer or otherwise dispose of (except to the
Company or to a Subsidiary or for directors' qualifying shares), any shares of
capital stock of a Restricted Subsidiary, except the entire capital stock of
such Restricted Subsidiary at the time owned by the Company for a consideration
consisting of cash or other property, which, in the opinion of the Board of
Directors, is at least equal to the fair value thereof.
Section 1009. Waiver of Certain Covenants.
The Company may omit in any particular instance to comply with any term,
provision, covenant or condition set forth in Sections 1004 to 1008,
inclusive,with respect to the Securities of any series if before the time for
such compliance the Holders of at least a majority in principal amount of the
Outstanding Securities of such series shall, by Act of such Holders, either
waive such compliance in such instance or generally waive compliance with such
term, provision, covenant or condition, but no such waiver shall extend to or
affect such term, provision, covenant or condition except to the extent so
expressly waived, and, until such waiver shall become effective, the
obligations of the Company and the duties of the Trustee in respect of any such
term, provision, covenant or condition shall remain in full force and effect.
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ARTICLE ELEVEN
Redemption of Securities
Section 1101. Applicability of Article.
Securities of any series which are redeemable before their Stated Maturity
shall be redeemable in accordance with their terms and (except as otherwise
specified as contemplated by Section 301 for Securities of any series) in
accordance with this Article.
Section 1102. Election to Redeem; Notice to Trustee.
The election of the Company to redeem any Securities shall be evidenced by a
Board Resolution. In case of any redemption at the election of the Company of
less than all the Securities of any series, the Company shall, at least 60 days
prior to the Redemption Date fixed by the Company (unless a shorter notice
shall be satisfactory to the Trustee), notify the Trustee of such Redemption
Date, of the principal amount of Securities of such series to be redeemed and,
if applicable, of the tenor of the Securities to be redeemed. In the case of
any redemption of Securities prior to the expiration of any restriction on such
redemption provided in the terms of such Securities or elsewhere in this
Indenture, the Company shall furnish the Trustee with an Officers' Certificate
evidencing compliance with such restriction.
Section 1103. Selection by Trustee of Securities to Be Redeemed.
If less than all the Securities of any series are to be redeemed (unless all
of the Securities of such series and of a specified tenor are to be redeemed),
the particular Securities to be redeemed shall be selected not more than 60
days prior to the Redemption Date by the Trustee, from the Outstanding
Securities of such series subject to such redemption and not previously called
for redemption, by such method as the Trustee shall deem fair and appropriate
and which may provide for the selection for redemption of portions (equal to
the minimum authorized denomination for Securities of that series or any
integral multiple thereof) of the principal amount of Securities of such series
of a denomination larger than the minimum authorized denomination for
Securities of that series. If less than all of the Securities of such series
and of a specified tenor are to be redeemed, the particular Securities to be
redeemed shall be selected not more than 60 days prior to the Redemption Date
by the Trustee, from the Outstanding Securities of such
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series and specified tenor not previously called for redemption in accordance
with the preceding sentence.
The Trustee shall promptly notify the Company in writing of the Securities
selected for redemption and, in the case of any Securities selected for partial
redemption, the principal amount thereof to be redeemed.
For all purposes of this Indenture, unless the context otherwise requires,
all provisions relating to the redemption of Securities shall relate, in the
case of any Securities redeemed or to be redeemed only in part, to the portion
of the principal amount of such Securities which has been or is to be redeemed.
Section 1104. Notice of Redemption.
Notice of redemption shall be given by first-class mail, postage prepaid,
mailed not less than 30 nor more than 60 days prior to the Redemption Date,
unless a shorter period is specified by the terms of such series established
pursuant to Section 301, to each Holder of Securities to be redeemed, at his
address appearing in the Security Register, but failure to give such notice in
the manner herein provided to the Holder of any Security designated for
redemption as a whole or in part, or any defect in the notice to any such
Holder, shall not affect the validity of the proceedings for the redemption of
any other such Security or portion thereof.
All notices of redemption shall state:
(1) the Redemption Date,
(2) the Redemption Price,
(3) if less than all the Outstanding Securities of any series are to be
redeemed, the identification (and, in the case of partial redemption of any
Securities, the principal amounts) of the particular Securities to be
redeemed,
(4) that on the Redemption Date the Redemption Price will become due and
payable upon each such Security to be redeemed and, if applicable, that
interest thereon will cease to accrue on and after said date,
(5) the place or places where such Securities are to be surrendered for
payment of the Redemption Price, and
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(6) that the redemption is for a sinking fund, if such is the case.
Notice of redemption of Securities to be redeemed at the election of the
Company shall be given by the Company or, at the Company's request, by the
Trustee in the name and at the expense of the Company and shall be irrevocable.
Section 1105. Deposit of Redemption Price.
Prior to any Redemption Date, the Company shall deposit with the Trustee or
with a Paying Agent (or, if the Company is acting as its own Paying Agent,
segregate and hold in trust as provided in Section 1003) an amount of money
sufficient to pay the Redemption Price of, and (except if the Redemption Date
shall be an Interest Payment Date) accrued interest on, all the Securities
which are to be redeemed on that date.
Section 1106. Securities Payable on Redemption Date.
Notice of redemption having been given as aforesaid, the Securities so to be
redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price therein specified, and from and after such date (unless the
Company shall default in the payment of the Redemption Price and accrued
interest) such Securities shall cease to bear interest. Upon surrender of any
such Security for redemption in accordance with said notice, such Security
shall be paid by the Company at the Redemption Price, together with accrued
interest to the Redemption Date; provided, however, that, unless otherwise
specified as contemplated by Section 301, installments of interest whose Stated
Maturity is on or prior to the Redemption Date shall be payable to the Holders
of such Securities, or one or more Predecessor Securities, registered as such
at the close of business on the relevant Record Dates according to their terms
and the provisions of Section 307.
If any Security called for redemption shall not be so paid upon surrender
thereof for redemption, the principal and any premium shall, until paid, bear
interest from the Redemption Date at the rate prescribed therefor in the
Security.
Section 1107. Securities Redeemed in Part.
Any Security which is to be redeemed only in part shall be surrendered at a
Place of Payment therefor (with, if the Company or the Trustee so requires, due
endorsement by, or a written instrument of transfer in form satisfactory
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to the Company and the Trustee duly executed by, the Holder thereof or his
attorney duly authorized in writing), and the Company shall execute, and the
Trustee shall authenticate and deliver to the Holder of such Security without
service charge, a new Security or Securities of the same series and of like
tenor, of any authorized denomination as requested by such Holder, in aggregate
principal amount equal to and in exchange for the unredeemed portion of the
principal of the Security so surrendered.
ARTICLE TWELVE
Sinking Funds
Section 1201. Applicability of Article.
The provisions of this Article shall be applicable to any sinking fund for
the retirement of Securities of a series except as otherwise specified as
contemplated by Section 301 for Securities of such series.
The minimum amount of any sinking fund payment provided for by the terms of
Securities of any series is herein referred to as a "mandatory sinking fund
payment", and any payment in excess of such minimum amount provided for by the
terms of Securities of any series is herein referred to as an "optional sinking
fund payment". If provided for by the terms of Securities of any series, the
cash amount of any sinking fund payment may be subject to reduction as provided
in Section 1202. Each sinking fund payment shall be applied to the redemption
of Securities of any series as provided for by the terms of Securities of such
series.
Section 1202. Satisfaction of Sinking Fund Payments with Securities.
The Company (1) may deliver Outstanding Securities of a series (other than
any previously called for redemption) and (2) may apply as a credit Securities
of a series which have been redeemed either at the election of the Company
pursuant to the terms of such Securities or through the application of
permitted optional sinking fund payments pursuant to the terms of such
Securities, in each case in satisfaction of all or any part of any sinking fund
payment with respect to the Securities of such series required to be made
pursuant to the terms of such Securities as provided for by the terms of such
series; provided that such Securities have not been previously so credited.
Such Securities shall be received and credited for such purpose
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by the Trustee at the Redemption Price specified in such Securities for
redemption through operation of the sinking fund and the amount of such sinking
fund payment shall be reduced accordingly.
Section 1203. Redemption of Securities for Sinking Fund.
Not less than 60 days prior to each sinking fund payment date for any series
of Securities, the Company will deliver to the Trustee an Officers' Certificate
specifying the amount of the next ensuing sinking fund payment for that series
pursuant to the terms of that series, the portion thereof, if any, which is to
be satisfied by payment of cash and the portion thereof, if any, which is to be
satisfied by delivering and crediting Securities of that series pursuant to
Section 1202 and will also deliver to the Trustee any Securities to be so
delivered. Not less than 30 days before each such sinking fund payment date the
Trustee shall select the Securities to be redeemed upon such sinking fund
payment date in the manner specified in Section 1103 and cause notice of the
redemption thereof to be given in the name of and at the expense of the Company
in the manner provided in Section 1104. Such notice having been duly given, the
redemption of such Securities shall be made upon the terms and in the manner
stated in Sections 1106 and 1107.
ARTICLE THIRTEEN
DEFEASANCE AND COVENANT DEFEASANCE
SECTION 1301. Applicability of Article; Company's Option to Effect Defeasance
or Covenant Defeasance.
If, pursuant to Section 301, provision is made for either or both of (a)
defeasance of the Securities of a series under Section 1302 or (b) covenant
defeasance of the Securities of a series under Section 1303, then the
provisions of such Section or Sections, as the case may be, together with the
other provisions of this Article Thirteen, shall be applicable to the
Securities of such series, and the Company may at its option by Board
Resolution, at any time, with respect to the Securities of such series, elect
to have either Section 1302 (if applicable) or Section 1303 (if applicable) be
applied to the Outstanding Securities of such series upon compliance with the
conditions set forth below in this Article Thirteen.
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Section 1302. Defeasance and Discharge.
Upon the Company's exercise of the option provided in Section 1301 and
applicable to this Section 1302, the Company shall be deemed to have been
discharged from its obligations with respect to the Outstanding Securities of
such series on the date the conditions set forth below are satisfied
(hereinafter, "defeasance"). For this purposes, such defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness
represented by the Outstanding Securities of such series and to have satisfied
all its other obligations under such Securities and this Indenture insofar as
such Securities are concerned (and the Trustee, at the expense of the Company,
shall execute proper instruments acknowledging the same), except for the
following which shall survive until otherwise terminated or discharged
hereunder: (A) the rights of Holders of Outstanding Securities of such series
to receive, solely from the trust fund described in Section 1304 and as more
fully set forth in such Section, payments in respect of the principal of (and
premium, if any) and interest on such Securities when such payments are due,
(B) the Company's obligations with respect to such Securities under Sections
304, 305, 306, 1002 and 1003, (C) the rights, powers, trusts, duties, and
immunities of the Trustee hereunder and (D) this Article Thirteen. Subject to
compliance with this Article Thirteen, the Company may exercise its option
provided in Section 1301 and applicable to this Section 1302 notwithstanding
the prior exercise of its option under this Section 1302 with respect to the
Securities of such series.
Section 1303. Covenant Defeasance.
Upon the Company's exercise of the option provided in Section 1301 and
applicable to this Section 1303, the Company shall be released from its
obligations under Sections 801(3), 1006, 1007 and 1008 and the occurrence of an
event specified in Section 501(4) (with respect to Sections 801(3), 1007 or
1008) or Section 501(5) shall not be deemed to be an Event of Default, in each
case with respect to the Outstanding Securities of such series as provided in
this Section on and after the date the conditions set forth below are satisfied
(hereinafter, "Covenant Defeasance"). For this purpose, such Covenant
Defeasance means that, with respect to the Outstanding Securities of such
series, the Company may omit to comply with and shall have no liability in
respect of any term, covenant, condition or limitation set forth in any such
Section (to the extent so specified in the case of Section 501(4)), whether
directly or indirectly by reason of any reference elsewhere herein to any such
Section or by reason
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of any reference in any such Section to any other provision herein or in any
other document, but the remainder of this Indenture and such Securities shall
be unaffected thereby.
Section 1304. Conditions to Defeasance or Covenant Defeasance.
The following shall be the conditions to the application of either Section
1302 or Section 1303 to the Outstanding Securities of such series:
(1) The Company shall irrevocably have deposited or caused to be
deposited with the Trustee (or another trustee satisfying the requirements
of Section 609 who shall agree to comply with the provisions of this
Article Thirteen applicable to it) as trust funds in trust for the purpose
of making the following payments, specifically pledged as security for, and
dedicated solely to, the benefit of the Holders of Outstanding Securities
of such series, (A) money in an amount, or (B) U.S. Government Obligations
which through the scheduled payment of principal and interest in respect
thereof in accordance with their terms will provide, not later than one day
before the due date of any payment, money in an amount, or (C) a
combination thereof, sufficient, in the opinion of a nationally recognized
firm of independent public accountants expressed in a written certification
thereof delivered to the Trustee, to pay and discharge, and which shall be
applied by the Trustee (or any such other qualifying trustee) to pay and
discharge, (i) the principal of (and premium, if any, on) and each
installment of principal of (and premium, if any) and interest on the
Outstanding Securities of such series on the Stated Maturity of such
principal or installment of principal or interest and (ii) any mandatory
sinking fund payments or analogous payments applicable to the Outstanding
Securities of such series on the day on which such payments are due and
payable in accordance with the terms of this Indenture and of such
Securities. For this purpose, "U.S. Government Obligations" means any
securities that are (x) direct obligations of the United States of America
for the payment of which the full faith and credit of the United States of
America is pledged or (y) obligations of a Person controlled or supervised
by and acting as an agency or instrumentality of the United States of
America the payment of which is unconditionally guaranteed as a full faith
and credit obligation by the United States of America, which, in either
case (x) or (y), are not callable or redeemable at the option of
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the issuer thereof and shall also include a depository receipt issued by a
bank (as defined in Section 3(a)(2) of the Securities Act of 1933, as
amended) as custodian with respect to any such U.S. Government Obligation
or a specific payment of principal of or interest on any such U.S.
Government Obligation specified in clause (x) held by such custodian for
the account of the holder of such depository receipt, provided that (except
as required by law) such custodian is not authorized to make any deduction
from the amount payable to the holder of such depository receipt from any
amount received by the custodian in respect of the U.S. Government
Obligation or the specific payment of principal of or interest on the U.S.
Government Obligation evidenced by such depository receipt.
(2) No Event of Default or event which with notice or lapse of time or
both would become an Event of Default with respect to the Securities of
such series shall have occurred and be continuing on the date of such
deposit or, insofar as subsections 501(6) and (7) are concerned, at any
time during the period ending on the 91st day after the date of such
deposit or, if longer, ending on the day following the expiration of the
longest preference period applicable to the Company in respect of such
deposit (it being understood that this condition shall not be deemed
satisfied until the expiration of such period).
(3) Such Defeasance or Covenant Defeasance shall not cause the Trustee
for the Securities of such series to have a conflicting interest within the
meaning of the Trust Indenture Act with respect to any securities of the
Company.
(4) Such Defeasance or Covenant Defeasance shall not result in a breach
or violation of, or constitute a default under, this Indenture or any other
agreement or instrument to which the Company is a party or by which it is
bound.
(5) Such Defeasance or Covenant Defeasance shall not cause any Securities
of such series then listed on any registered national securities exchange
under the Securities Exchange Act of 1934, as amended, to be delisted.
(6) In the case of an election under Section 1302, the Company shall have
delivered to the Trustee an opinion of nationally recognized tax counsel
stating that (x) the Company has received from, or
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there has been published by, the Internal Revenue Service a ruling, or (y)
since the date of this Indenture there has been a change in the applicable
Federal income tax law, in either case (x) or (y) to the effect that, and
based thereon such opinion shall confirm that, the Holders of the
Outstanding Securities of such series will not recognize income, gain or
loss for Federal income tax purposes as a result of the deposit, Defeasance
and discharge to be effected with respect to the Securities of such series
and will be subject to Federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such deposit,
Defeasance and discharge had not occurred.
(7) In the case of an election under Section 1303, the Company shall have
delivered to the Trustee an Opinion of Counsel to the effect that the
Holders of the Outstanding Securities of such series will not recognize
income, gain or loss for Federal income tax purposes as a result of the
deposit and Covenant Defeasance to be effected with respect to the
Securities of such series and will be subject to Federal income tax on the
same amounts, in the same manner and at the same times as would have been
the case if such deposit and Covenant Defeasance had not occurred.
(8) Such Defeasance or Covenant Defeasance shall be effected in
compliance with any additional terms, conditions or limitations which may
be imposed on the Company in connection therewith pursuant to Section 301.
(9) The Company shall have either (x) delivered to the Trustee an Opinion
of Counsel stating that the exercise of the election under Section 1302 or
Section 1303 (as the case may be) will not require the trust fund described
in Section 1304(1) to register as an "investment company" under the
Investment Company Act of 1940, as amended (the "1940 Act"), or (y)
registered such trust fund under the 1940 Act.
(10) The Company shall have delivered to the Trustee an Officers
Certificate and an Opinion of Counsel, each stating that all conditions
precedent provided for relating to either the Defeasance under Section 1302
or the Covenant Defeasance under Section 1303 (as the case may be) have
been complied with.
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Section 1305. Deposited Money and U.S. Government Obligations to be Held in
Trust; Other Miscellaneous Provisions.
Subject to the provisions of the last paragraph of Section 1003, all money
and U.S. Government Obligations (including the proceeds thereof) deposited with
the Trustee (or other qualifying trustee -- collectively, for purposes of this
Section 1305, the "Trustee") pursuant to Section 1304 in respect of the
Securities of such series shall be held in trust and applied by the Trustee, in
accordance with the provisions of the Securities of such series and this
Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the Holders of such Securities of such series, of all sums due
and to become due thereon in respect of principal (and premium, if any) and
interest, but such money need not be segregated from other funds except to the
extent required by law.
The Company shall pay and indemnify the Trustee against any tax, fee or other
charge imposed on or assessed against the U.S. Government Obligations deposited
pursuant to Section 1304 or the principal and interest received in respect
thereof other than any such tax, fee or other charge which by law is for the
account of the Holders of the Outstanding Securities.
Anything in this Article Thirteen to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon Company
Request any money or U.S. Government Obligations held by it as provided in
Section 1304 which, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee, are in excess of the amount thereof which would then
be required to be deposited to effect an equivalent Defeasance or Covenant
Defeasance.
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly
executed, and their respective corporate seals to be hereunto affixed and
attested, all as of the day and year first above written.
CAPITAL HOLDING CORPORATION
/s/ Robert L. Walker
By...................................
Robert L. Walker
Senior Vice President--Finance and
Chief Financial Officer
78
<PAGE>
Attest:
/s/ Sherry F. Hardy
.....................................
MORGAN GUARANTY TRUST COMPANY OF NEW
YORK, as Trustee
/s/ Marlene Fahey
By...................................
Name: Marlene Fahey
Title: Vice President
Attest:
/s/
.....................................
COMMONWEALTH OF KENTUCKY
SS
COUNTY OF JEFFERSON
On the 11th day of January, 1994, before me personally came Robert L. Walker,
to me known, who, being by me duly sworn, did depose and say that he is Senior
Vice President of Finance and CFO of Capital Holding Corporation, a Delaware
corporation, one of the corporations described in and which executed the
foregoing instrument; that he knows the seal of said corporation; that the seal
affixed to said instrument is such corporate seal; that it was so affixed by
authority of the Board of Directors of said corporation, and that he signed his
name thereto by like authority.
/s/ Susan Rae Lerding
.....................................
Notary Public
My commission expires: 11-16-96
STATE OF NEW YORK
SS
COUNTY OF NEW YORK
On the 13th day of January, 1994, before me personally came Marlene Fahey, to
me known, who, being by me duly sworn, did depose and say that she is Vice
President of Morgan Guaranty Trust Company of New York, a New York banking
corporation, one of the corporations described in and which executed the
foregoing
79
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instrument; that he knows the seal of said corporation; that the seal affixed
to said instrument is such corporate seal; that it was so affixed by authority
of the Board of Directors of said corporation, and that he signed his name
thereto by like authority.
/s/ Joanne E. Ilse
.....................................
Notary Public
My commission expires: 10-4-96
80
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FINANCIAL CONTENTS
================================================================================
Management's Discussion and Analysis 18
Management's Responsibilities for Financial Reporting 36
Report of Ernst & Young, Independent Auditors 36
Consolidated Statements of Income 37
Consolidated Statements of Financial Condition 38
Consolidated Statements of Cash Flows 40
Consolidated Statements of Shareholders' Equity 41
Notes to Consolidated Financial Statements 42
17
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS
================================================================================
CONSOLIDATED RESULTS AND ANALYSIS
Capital Holding's 1993 net income was $3.12 per common and common equivalent
share ("per common share"), down .6 percent from the $3.14 per common share
reported in 1992. All per share amounts have been adjusted to reflect a two-for-
one stock split in the form of a dividend, effective April 30, 1993. Net income
reflects the impact of the retroactive tax rate change resulting from federal
tax legislation enacted on August 10, 1993. This change reduced reported
earnings in 1993 by $5.1 million, or $.05 per common share, due to the impact of
the change on the effective annual tax rate, and $11.7 million, or $.12 per
common share, due to the one-time charge to deferred taxes. Net income per
common share for 1992 was up 18.0 percent from $2.66 in 1991.
Net income in 1993 included net realized investment losses (net of related
deferred acquisition cost amortization and taxes) of $.20 per common share
resulting from $13.5 million of net realized investment and securities gains,
offset by provisions for mortgage loan loss reserve additions and writedowns of
$33.6 million. Net income in 1992 included $.04 per common share of net realized
investment losses compared to net realized investment losses of $.23 per common
share in 1991.
Operating return on equity was 15.0 percent in 1993, down from 16.4 percent
in 1992 and 17.1 percent in 1991. The reduction in 1993 was primarily
attributable to the tax rate change. The reduction in 1992 was due largely to
the acquisition of Durham Corporation ("Durham").
The graph below is a stacked bar chart that reflected the operating earnings by
each business segment (excluding Corporate and Other) for the years ended
December 31, 1991 through 1993.
Operating Earnings by Business Segment
(Excluding Corporate and Other)
(Dollars in millions)
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Business Segment 1991 1992 1993
- ----------------------------------------------
<S> <C> <C> <C>
Agency Group $173 $190 $194
Direct Response Group 71 85 98
Banking Group 73 94 118
Accumulation and
Investment Group 112 120 134
</TABLE>
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
(Amounts in thousands except per common share information)
================================================================================
<TABLE>
<CAPTION>
December 31 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
Realized investment gain (loss) $ (20,155) $ 6,477 $ (18,780) $ (122,799) $ 124,269 $ 25,310
Total revenues 2,884,164 2,853,292 2,670,656 2,577,309 2,500,116 2,045,866
Cumulative effect of change in
accounting principle -- -- -- -- (56,021) --
Net income 322,665 322,496 250,232 166,193 219,687 189,864
Assets $22,929,005 $20,588,264 $18,873,028 $16,668,545 $14,970,015 $12,963,268
Long-term debt 589,268 589,320 611,245 386,247 330,299 262,574
Shareholders' equity 2,492,891 2,185,927 1,930,924 1,552,515 1,516,269 1,257,549
- ------------------------------------------------------------------------------------------------------------------------
Per common share: (a)
Income before cumulative effect of
change in accounting principle $ 3.12 $ 3.14 $ 2.66 $ 1.70 $ 2.93 $ 2.00
Cumulative effect of change in
accounting principle -- -- -- -- (.62) --
Net income 3.12 3.14 2.66 1.70 2.31 2.00
Shareholders' equity 23.59 20.55 17.86 15.66 14.81 12.89
Cash dividends paid .73 .66 .60 .54 .50 .47
Closing market price 37.13 36.13 31.81 19.56 26.00 16.38
Operating earnings (b) 3.32 3.18 2.89 2.57 2.23 1.91
Operating return on equity (c) 15.0% 16.4% 17.1% 17.0% 16.5% 15.7%
Common shares outstanding at year end 101,426 94,804 92,708 89,568 92,284 89,791
Weighted average common and common
equivalent shares outstanding 101,132 100,531 90,699 91,821 90,594 91,271
December 31 1987 1986 1985 1984 1983
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Realized investment gain (loss) $ 14,302 $ 169,341 $ 5,346 $ (6,612) $ (1,128)
Total revenues 1,784,692 1,640,353 1,361,804 1,201,853 1,070,208
Cumulative effect of change in
accounting principle -- (104,069) -- -- --
Net income 178,591 168,945 134,238 116,369 104,472
Assets $10,356,492 $8,295,014 $6,722,165 $5,580,581 $4,812,948
Long-term debt 287,574 192,575 273,705 276,952 301,091
Shareholders' equity 1,186,468 1,173,485 1,073,963 959,091 921,142
- ----------------------------------------------------------------------------------------------------------
Per common share: (a)
Income before cumulative effect of
change in accounting principle $ 1.74 $ 2.62 $ 1.23 $ 1.04 $ .91
Cumulative effect of change in
accounting principle -- (1.03) -- -- --
Net income 1.74 1.59 1.23 1.04 .91
Shareholders' equity 11.51 10.61 9.60 8.50 7.94
Cash dividends paid .44 .41 .39 .37 .35
Closing market price 13.50 15.31 14.69 10.75 9.28
Operating earnings (b) 1.66 1.63 1.26 1.10 .95
Operating return on equity (c) 14.4% 16.7% 13.9% 13.6% 12.2%
Common shares outstanding at year end 94,385 101,186 101,402 101,092 103,424
Weighted average common and common
equivalent shares outstanding 98,410 101,498 101,258 101,678 104,190
</TABLE>
- -----------------------------
(a) Per common share amounts have been retroactively adjusted for a two-for-one
stock split in the form of a dividend, effective April 30, 1993.
(b) Operating earnings exclude from net income, realized investment gains and
losses and related deferred acquisition cost amortization, net of taxes.
(c) Operating return on equity is computed as operating earnings less provision
for nonconvertible preferred dividends, divided by a rolling four quarter
average of total shareholders' equity less the nonconvertible preferred
stock.
18
<PAGE>
Operating earnings applicable to common shareholders (operating earnings
less the provision for nonconvertible preferred stock dividends) were $3.32 per
common share in 1993, up 4.4 percent from $3.18 per common share reported in
1992 (up 10.0 percent from 1991). Operating earnings for 1993 also reflect the
$.17 per common share reduction resulting from the new tax legislation. Without
the $.17 per common share tax legislation impact, operating earnings would have
been up 9.7 percent. Strong results in the Banking and Accumulation and
Investment Groups and Direct Response Group's January 1993 acquisition of
Academy Insurance Group ("Academy") contributed to earnings growth in 1993.
Growth in 1992 came principally from Banking and Direct Response Group and
Agency Group's November 1991 acquisition of Durham.
Consolidated revenues were $2.9 billion, up 1.1 percent (1992 -- $2.9
billion, up 6.8 percent). Consolidated revenues included pretax net realized
investment losses of $20.2 million in 1993 and pretax net realized investment
gains of $6.5 million in 1992 (1991 -- losses of $18.8 million). Revenues,
excluding realized investment gains and losses, were $2.9 billion, up 2.0
percent (1992 -- $2.8 billion, up 5.9 percent). Revenue growth of $57.5 million
in 1993 was primarily due to business growth in the Banking Group and the
Academy acquisition in the Direct Response Group; these increases were partially
offset by a decrease in Corporate and Other revenues, as we disposed of some
non-strategic business lines acquired as part of the Durham acquisition.
The graph represented below is a stacked bar chart that reflected the revenues
by business segment for the years ended December 31, 1991 through 1993. Total
revenues appear on the top of each bar.
Revenues by Business Segment
(Dollars in millions)
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Business Segment 1991 1992 1993
- ----------------------------------------------
<S> <C> <C> <C>
Agency Group $ 623 $ 727 $ 733
Direct Response Group 651 651 759
Banking Group 451 507 545
Accumulation and
Investment Group 914 853 833
Corporate and Other 32 115 14
- ----------------------------------------------
Total Revenues $2,671 $2,853 $2,884
</TABLE>
19
<PAGE>
RESULTS BY BUSINESS SEGMENT
AGENCY GROUP
Agency Group markets traditional and interest-sensitive individual life and
health insurance products through home service representatives who are full-time
employees of Agency Group's principal operating subsidiaries, including Common-
wealth Life Insurance Company ("Commonwealth Insurance"), Peoples Security Life
Insurance Company ("Peoples Security Insurance"), Capital Security Life
Insurance Company and Durham Life Insurance Company. Agency Group's markets are
principally in the Southeast and Mid-Atlantic states. In addition, Agency Group
leverages its insurance capabilities by marketing insurance products in
partnership with several third-party insurance and marketing organizations.
Revenues were $733.5 million, up .9 percent from 1992 ($727.0 million, up
16.6 percent) reflecting growth in life premium income, partially offset by
lower investment and other income. The growth in 1992 was primarily due to the
1991 acquisition of Durham. Life premium income, including premium equivalents,
was $403.3 million, up 4.6 percent over 1992 ($385.6 million, up 18.2 percent).
Life premium growth was positively influenced by favorable 1992 sales and
improved termination rates, but 1993 sales were below expectations. Life sales
were down 13.5 percent from 1992, a result of account consolidation associated
with the integration of Durham's field operations, and accentuated by 1992's
strong partnership sales. Life termination rates, which reflect Agency Group's
emphasis on improved persistency, were 16.2 percent in 1993 compared to 17.2
percent in 1992 and 16.1 percent in 1991 (1991 excludes Durham). Net investment
and other income was $286.3 million, down 1.3 percent from 1992 ($290.1 million,
up 16.2 percent). Miscellaneous other income fluctuations accounted for all of
this decrease; investment income was essentially flat with 1992, as growth in
Agency Group's invested assets was offset by declining investment yields.
Agency Group pretax earnings were $193.7 million, up 1.8 percent from
$190.2 million in 1992, primarily due to improved life earnings. Pretax earnings
in 1992 were up 10.0 percent from 1991, primarily due to the Durham acquisition.
Life earnings account for more than 95 percent of Agency Group income. Life
pretax earnings were $185.6 million, up 1.4 percent from $183.1 million in 1992,
as increased premium income and declining unit operating costs were partially
offset by tighter interest spreads, unfavorable mortality results and increased
amortization of acquisition costs. Life earnings were up 8.8 percent in 1992
from $168.4 million in 1991, primarily due to the Durham acquisition in late
1991. Life profit margins, defined as pretax earnings as a percent of mean
policyholder reserves, were 8.4 percent compared with the 1992 margin of 8.6
percent, reflecting tighter interest spreads and unfavorable claims experience.
The decrease in 1992 from 9.2 percent in 1991 was the result of Durham's higher
mix of lower margin interest-sensitive business.
The individual life insurance business is a mature market in which first
year premiums are expected to grow slowly, and the primary insurance buying
population is expected to decrease slightly over the next several years. Agency
Group's results historically have been in the upper third of performance
relative to its peers and generally consistent with these trends, ignoring the
effect of acquisitions. Going forward, Agency Group has established clear "best
in class" objectives relative to its peer group of companies. To achieve these
goals, it will focus on increased levels and profitability of new business
through execution of superb field management. In addition, Agency Group has
targeted improved expense ratios and claims experience as critical elements to
increasing overall profit margins and growth rates in earnings. To focus on
these strategies, Agency Group organized its home office and field operations
into Customer Service Units (CSUs), which align field sales organizations in
regional geographies with full service administrative teams in the home office
to provide policy issuance, underwriting, claims administration and other
customer service. This organizational structure will enable Agency Group to more
effectively address the profit drivers of the business--sales, lapses, expenses,
subsidies and claims--at the agency office and CSU level. Thus, Agency Group
will be able to focus attention on underperforming offices and CSUs, while
stressing continuous improvement for those performing well. At the same time,
Agency Group will continue to focus on enhancing home office cost structure by
streamlining processes and service automation, among other things. Results from
these initiatives will be necessary in 1994 to offset the impact of declining
investment yields and increasing acquisition cost amortization, and to position
Agency Group for better growth.
DIRECT RESPONSE GROUP
Direct Response Group markets insurance to individuals directly and through
third-party organizations primarily using television, direct mail and telephone.
Life and health insurance products are underwritten by the National Liberty
group of companies, and property and casualty products (personal lines
automobile and homeowners coverages) are underwritten through Worldwide
Insurance Group. In addition to the direct response channel, products of the
Worldwide companies are also made available through some Agency Group home
service representatives.
In January 1993, Direct Response Group acquired Academy for a purchase
price of $117.6 million. Academy markets life insurance through an agency field
force to active-duty military service personnel. It has the endorsement of the
Non Commissioned Officers Association, which allows its agents/ counselors
access to military personnel. The Academy business
20
<PAGE>
represents a growth opportunity for Direct Response Group and also provides a
strategic complement to its current veterans segment by furnishing early access
to members of the military market.
Revenues in 1993 were $758.5 million, up $107.7 million (16.5 percent) from
1992, reflecting primarily the $104.6 million increase in revenue from the
acquisition of Academy. Excluding Academy, life premium income grew $16.2
million due to previous years' sales volume, and health premium income declined
$16.7 million (9.1 percent) reflecting lower new customer sales. Revenues in
1992 were $650.9 million, even with 1991; growth in life premium income of $12.6
million was offset by an $11.4 million decline in health premium income.
Pretax earnings in 1993 reflect a full year's benefit from the Academy
acquisition and were up $13.4 million (15.8 percent) to $97.9 million; increases
in life earnings (up $16.1 million) and property and casualty earnings (up $1.6
million) were partially offset by non-core business results, including a $5.9
million loss resulting from the sale of a small third-party administrator.
Excluding Academy, pretax earnings were down $8.5 million or 10.0 percent,
primarily due to the disappointing marketing results of the past two years and
the aforementioned non-core business results. Pretax earnings in 1992 were $84.5
million, up $13.8 million (19.5 percent) due primarily to a $7.9 million
increase in health pretax earnings and a $5.4 million increase in property and
casualty pretax earnings.
Life pretax earnings in 1993 were up $16.1 million (39.9 percent) to $56.5
million. These results reflect a $17.5 million positive impact from the
acquisition of Academy. Life earnings, excluding Academy, were down $1.4 million
(3.5 percent) to $39.0 million, principally due to unfavorable mortality. Life
profit margins (defined as pretax earnings as a percent of premium income), were
18.9 percent, up from the 1992 margin of 17.2 percent reflecting the higher
margins in the Academy business. Health pretax earnings were up $2.6 million
(6.0 percent) to $45.8 million, reflecting $4.0 million in earnings from
Academy, and better claims experience offset by lower premium income on other
health business. In 1992, health earnings were $43.2 million, up 22.2 percent
due to favorable claims experience and spending. Health profit margins (pretax
earnings as a percent of premium income), were 23.1 percent, down modestly from
23.6 percent in 1992 due to the impact of Academy. Property and casualty pretax
earnings were $8.2 million, up 24.1 percent from $6.6 million in 1992, primarily
due to lower catastrophic losses and expense levels. The combined ratio (the
primary profit measure for the property and casualty business), representing the
ratio of total dollars of claims and expenses incurred for each $100 of
premiums, continues to show a positive trend at 106.9 percent in 1993, compared
to 108.4 percent in 1992 and 112.2 percent in 1991. Property and casualty
results continue to be favorably impacted by initiatives begun in 1990 to re-
underwrite existing contracts, reprice new business, and by ongoing risk
management.
The Direct Response Group was successful in 1993 in continuing to penetrate
the military market with the Academy acquisition. However, over the last few
months it has refocused its strategy and initiatives, under the new leadership
of Shailesh Mehta, to return to stronger growth in earnings and sales than the
disappointing results of 1993. Improving on marketing results will clearly be a
focus for profitability management in 1994. The Direct Response Group will
continue its market-focused, customer-driven vision, and will emphasize improved
marketing results through greater penetration of the military market, improved
targeted customer acquisition, management and retention, and reduced operating
costs. Results from these initiatives will be necessary to offset the impact of
declining yields in its investment portfolio due to the prevailing low interest
rate environment.
BANKING GROUP
The Banking Group markets consumer loans, deposit products and other
banking services, via mail, telephone and other direct response channels,
through the First Deposit Corporation group of companies ("First Deposit").
Consumer loans include unsecured credit cards, unsecured revolving lines of
credit, revolving home equity loans, installment loans for insurance premium
financing and a credit card secured by an interest-bearing savings account. In
addition to the above lending products, Banking Group markets money market
deposit accounts to retail customers and certificates of deposit to both retail
and institutional customers. Banking Group has expanded profitability through
cross-selling to existing customers products such as Credit Protection. Credit
Protection allows consumers to protect their credit in case of disruption of
income due to unemployment, disability, or hospitalization. First Deposit is one
of the largest credit card issuers in the country with $4.2 billion of assets
under management.
Banking Group had an outstanding year with pretax earnings of $117.7
million, up 25.9 percent from 1992 ($93.5 million, up 27.7 percent from 1991)
due to increased fee and other income, improved credit loss ratios, favorable
funding costs and growth in consumer receivable accounts and balances. These
favorable impacts were partially offset by an approximate $19 million impact of
increased acquisition cost amortization due to the adoption of a new accounting
rule. The new rule requires amortization of acquisition costs for certain loan
types over a much shorter time period (one year) than the Banking Group was
utilizing based on the expected life of the cardholder relationship. Revenues
grew $38.4 million (7.6 percent) over the $506.7 million reported in 1992 (1991
- --$451.0 million, up 17.3 percent) due to increased fee and other income.
21
<PAGE>
BUSINESS SEGMENT DATA
<TABLE>
<CAPTION>
(Dollars in thousands)
==================================================================================================================
Year Ended December 31 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PREMIUMS, PREMIUM EQUIVALENTS
AND OTHER CONSIDERATIONS:
Agency Group
Life (includes premium equivalents) $ 403,256 $ 385,621 $ 326,204 $ 310,942 $ 284,710 $ 271,112
Health 65,472 64,656 60,734 57,722 47,888 38,069
Other product lines 37,309 40,187 31,920 28,891 27,940 30,018
- ------------------------------------------------------------------------------------------------------------------
Subtotal 506,037 490,464 418,858 397,555 360,538 339,199
Life premium equivalents (58,864) (53,593) (45,161) (43,671) (44,272) (42,798)
- ------------------------------------------------------------------------------------------------------------------
TOTAL AGENCY GROUP 447,173 436,871 373,697 353,884 316,266 296,401
Direct Response Group
Life 298,897 234,967 222,414 205,894 197,409 196,057
Health 197,957 183,157 194,540 198,658 182,089 206,616
Property and casualty 143,781 140,024 142,561 135,327 174,149 158,054
Other product lines 7,107 8,567 8,681 9,952 10,893 12,666
- ------------------------------------------------------------------------------------------------------------------
TOTAL DIRECT RESPONSE GROUP 647,742 566,715 568,196 549,831 564,540 573,393
Accumulation and Investment Group 71,127 110,108 86,118 258,705 135,656 97,502
Corporate and Other 1,642 76,331 27,994 9,049 10,482 15,145
- ------------------------------------------------------------------------------------------------------------------
CONSOLIDATED PREMIUMS
AND OTHER CONSIDERATIONS $1,167,684 $1,190,025 $1,056,005 $1,171,469 $1,026,944 $ 982,441
- ------------------------------------------------------------------------------------------------------------------
REVENUES:
Agency Group
Life (includes premium equivalents) $ 653,646 $ 637,521 $ 542,962 $ 508,364 $ 469,964 $ 446,025
Health 74,646 74,095 69,337 66,584 54,259 43,634
Other product lines 64,049 68,986 56,199 50,400 48,180 47,205
- ------------------------------------------------------------------------------------------------------------------
Subtotal 792,341 780,602 668,498 625,348 572,403 536,864
Life premium equivalents (58,864) (53,593) (45,161) (43,671) (44,272) (42,798)
- ------------------------------------------------------------------------------------------------------------------
TOTAL AGENCY GROUP 733,477 727,009 623,337 581,677 528,131 494,066
Direct Response Group
Life 362,571 273,969 260,464 245,291 235,558 231,364
Health 212,074 197,790 209,655 214,504 196,862 221,511
Property and casualty 162,382 158,603 160,652 153,719 191,708 169,884
Other product lines 21,489 20,489 20,023 24,124 24,363 24,974
- ------------------------------------------------------------------------------------------------------------------
TOTAL DIRECT RESPONSE GROUP 758,516 650,851 650,794 637,638 648,491 647,733
Banking Group 545,070 506,691 450,956 384,498 341,965 243,386
Accumulation and Investment Group 832,768 852,550 913,532 1,077,827 836,243 616,406
Corporate and Other
Other 34,488 109,714 50,817 18,468 21,017 18,965
Realized investment gain (loss) (20,155) 6,477 (18,780) (122,799) 124,269 25,310
- ------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE AND OTHER 14,333 116,191 32,037 (104,331) 145,286 44,275
- ------------------------------------------------------------------------------------------------------------------
CONSOLIDATED REVENUES $2,884,164 $2,853,292 $2,670,656 $2,577,309 $2,500,116 $2,045,866
- ------------------------------------------------------------------------------------------------------------------
INCREASE IN BANKING GROUP
UNSECURED LOAN BALANCES,
BEFORE SECURITIZATION $ 306,975 $ 175,015 $ 544,927 $ 532,858 $ 533,937 $ 611,599
- ------------------------------------------------------------------------------------------------------------------
INCREASE IN ACCUMULATION AND
INVESTMENT GROUP
POLICYHOLDER DEPOSITS $1,610,716 $1,191,015 $ 589,349 $1,575,098 $1,323,880 $1,814,091
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
BUSINESS SEGMENT DATA
(Dollars in thousands)
<TABLE>
<CAPTION>
==========================================================================================================================
Year Ended December 31 1993 1992 1991 1990 1989 1988
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCOME BEFORE FEDERAL INCOME
TAX AND CUMULATIVE EFFECT ADJUSTMENT:
Agency Group
Life $ 185,644 $ 183,112 $ 168,350 $ 157,805 $ 139,728 $ 126,974
Health 3,936 2,579 1,232 3,124 3,837 3,608
Other product lines 4,083 4,521 3,370 4,618 2,291 2,449
- --------------------------------------------------------------------------------------------------------------------------
TOTAL AGENCY GROUP 193,663 190,212 172,952 165,547 145,856 133,031
Direct Response Group
Life 56,494 40,384 38,409 29,725 24,816 23,961
Health 45,783 43,183 35,329 38,567 35,468 35,541
Property and casualty 8,202 6,608 1,244 (6,949) 3,275 1,890
Other product lines (12,621) (5,673) (4,262) (1,127) (2,151) (661)
- --------------------------------------------------------------------------------------------------------------------------
TOTAL DIRECT RESPONSE GROUP 97,858 84,502 70,720 60,216 61,408 60,731
Banking Group 117,720 93,502 73,231 57,315 34,101 17,319
Accumulation and Investment Group 134,085 120,142 112,242 95,974 81,438 63,763
Corporate and Other
Other (34,375) (32,493) (56,334) (46,802) (44,241) (40,244)
Realized investment gain (loss),
net of related amortization (21,893) (3,838) (26,875) (107,538) 105,965 24,579
- --------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE AND OTHER (56,268) (36,331) (83,209) (154,340) 61,724 (15,665)
- --------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED INCOME BEFORE
FEDERAL INCOME TAX AND
CUMULATIVE EFFECT ADJUSTMENT $ 487,058 $ 452,027 $ 345,936 $ 224,712 $ 384,527 $ 259,179
==========================================================================================================================
ASSETS:
Agency Group
Life $ 3,460,984 $ 3,383,932 $ 3,263,513 $ 2,672,958 $ 2,587,888 $ 2,210,605
Health 168,194 167,487 161,092 135,479 103,861 83,939
Other product lines 642,664 617,734 573,781 454,119 436,205 389,173
- --------------------------------------------------------------------------------------------------------------------------
TOTAL AGENCY GROUP 4,271,842 4,169,153 3,998,386 3,262,556 3,127,954 2,683,717
Direct Response Group
Life 1,134,137 758,198 678,147 669,644 629,831 615,617
Health 370,739 386,014 386,456 400,619 384,372 397,232
Property and casualty 301,554 298,963 303,675 330,611 342,616 256,222
Other product lines 156,816 172,193 166,592 177,078 178,842 175,737
- --------------------------------------------------------------------------------------------------------------------------
TOTAL DIRECT RESPONSE GROUP 1,963,246 1,615,368 1,534,870 1,577,952 1,535,661 1,444,808
Banking Group 2,211,537 2,136,624 2,033,834 1,582,040 1,550,900 1,648,898
Accumulation and Investment Group 13,068,453 11,405,996 10,164,266 9,480,402 7,958,866 6,562,750
Corporate and Other 1,413,927 1,261,123 1,141,672 765,595 796,634 623,095
- --------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED ASSETS $22,929,005 $20,588,264 $18,873,028 $16,668,545 $14,970,015 $12,963,268
==========================================================================================================================
</TABLE>
23
<PAGE>
Total assets under management (including $2.0 billion of securitized
receivables--see discussion which follows on Banking Group's securitization
program) were $4.2 billion in 1993 compared to $3.9 billion in 1992 (including
$1.8 billion of securitized receivables). First Gold/SM/ credit card balances
grew to $281.9 million and Secured Card product balances grew to $52.6 million.
Balances for Select Equity/(R)/, the home equity loan product, grew $95.1
million to $312.4 million at the end of 1993.
Banking Group's pretax return on mean assets was 5.4 percent compared to
4.5 percent for 1992 (1991-4.1 percent) due to improved funding costs and
additional fee and other income. Banking Group hedges a significant portion of
interest rate risk associated with its floating rate deposit liabilities, to
better match its predominantly fixed rate consumer receivables portfolio in both
rising and falling interest rate environments. Earnings results are thus largely
insulated from rapid changes in interest rates, and therefore are expected to
continue to benefit from the favorable interest rate environment.
Fee income from servicing securitized consumer loans continued to
experience strong growth, reflecting growth in average securitized balances.
Fees from this source were $172.8 million in 1993, $140.3 million in 1992 and
$110.0 million in 1991. Other income includes fees from the Credit Protection
product, transaction processing, and other services; income from these sources
were $55.4 million in 1993, $42.4 million in 1992 and $22.2 million in 1991.
Loan loss reserves were 4.6 percent of on-balance-sheet credit card
receivables and consumer line of credit loans, compared to 5.4 percent at the
end of 1992. Net credit card losses were 4.1 percent of average on-balance-sheet
outstanding loan balances in 1993 compared to 4.5 percent in 1992. Balances past
due 30 days or more related to on-balance-sheet loans were 2.2 percent, improved
from 2.3 percent at December 31, 1992 (1991-2.0 percent).
The graph represented below is a stacked bar chart that
reflected unsecuritized (on-balance-sheet) consumer loans in
the Banking Group by category at December 31, 1992 and 1993.
Total unsecuritized consumer loans appear on the top of each
bar.
Unsecuritized Consumer Loans
December 31
(Dollars in millions)
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Category 1992 1993
- -------- --------------
<S> <C> <C>
Credit Card Receivables $1,018 $1,099
Consumer Lines of Credit 468 460
Equity Lines of Credit and Other
Consumer Loans 279 384
--------------
Total Unsecuritized Consumer
Loans $1,765 $1,943
</TABLE>
The following table summarizes unsecuritized problem consumer loans,
including non-accrual loans and loans past due greater than 30 days:
<TABLE>
<CAPTION>
December 31 1993 1992
- ----------- ------------
<S> <C> <C>
(Dollars in millions)
Non-accrual loans $ 8.0 $ 5.4
Loans past due greater than 30 days 45.2 38.6
------------
Total problem consumer loans $53.2 $44.0
============
</TABLE>
There are no additional specifically identified loans that represent potential
problems.
Banking Group has securitized consumer loans without recourse since 1989.
Securitization, the process of selling blocks of loans to investors, is used to
manage growth within banking regulatory guidelines, efficiently use capital
resources and provide an alternative funding source for continued business
growth. When blocks of loans are securitized, for financial statement and
regulatory purposes, the loan balances are removed from the balance sheet.
Banking Group continues to service the securitized loans for the investors and
earns fee income over the amounts paid to the investors. During 1993, Banking
Group created a Master Trust that enabled it to more efficiently securitize its
consumer receivables and to access the public market rather than the private
market. A shelf registration for $2 billion was filed with the Securities and
Exchange Commission in 1993. During 1993, $1.5 billion of consumer loans were
securitized, including $558.0 million of current year securitizations. Total
securitized balances at year end amounted to $2.0 billion. Investor demand for
both fixed and floating rate public asset-backed securities remained strong
through 1993, leading to relatively tight interest rate spreads over comparable
Treasury securities. The issuance of these securities by Banking Group into the
public market led to an improvement in the spread compared with prior issuances.
Banking Group, as part of its asset/liability management process, monitors
and projects changes in the level of assets due to customer activity on
outstanding and newly issued lines of credit or other loan products. Projected
changes in asset levels are monitored on a daily and weekly basis and are used
to determine the level of funding required during a particular period. Banking
Group has a policy of monitoring and managing the amount of funding that matures
during a particular period (weekly or monthly), as well as managing the level of
individual customer concentrations in the portfolio. Banking Group accesses
funds from a variety of sources with varying rate structures and terms. Sources
include Federal Deposit Insurance Corporation insured retail money market and
certificates of deposit, and the aforementioned asset securitization program.
This diversification of funding sources allows flexibility, continuity and
availability of funds at optimal prices. Banking Group structures deposit
maturities to fund current assets and, in the event of securitization of assets,
to comply with asset growth restrictions imposed by banking laws. A significant
portion of Banking Group's deposits are short-term,
24
<PAGE>
which increases the importance of monitoring and maintaining liquidity. Banking
Group uses a variety of hedging instruments to reduce interest rate risk,
including interest rate swaps, caps and floors.
The graph represented below is a stacked bar chart that reflected banking
deposits by category as of December 31, 1992 and 1993. Total banking deposits
appear on the top of each bar. The legend contains a further breakdown of
Certificates of Deposit (CDs) of $100,000 or greater by duration.
Banking Deposits
December 31
(Dollars in millions)
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Category 1992 1993
- -------- --------------
<S> <C> <C>
Savings Deposits $ 349 $ 364
Time and CDs less than $100,000
and Transaction Accounts 341 334
CDs of $100,000 or greater:
Duration
--------
0-3 Months 487 517
3-12 Months 196 266
1-5 Years 23 11
--------------
Total 706 794
--------------
Total Savings Deposits $1,396 $1,492
</TABLE>
Banking Group was successful in 1993 in implementing its business
diversification strategy, and has become a multi-market, multi-product provider
of financial services. Earnings include spread income derived from Banking
Group's unsecured lending business. In addition, it diversified its sources of
earnings with fee income from both Credit Protection products and products
geared for high volume credit card purchasers, fee and spread-based income on
the Secured Card product and spread-based income from Select Equity/(R)/.
Banking Group has also been able to protect and grow its unsecured spread
product business despite intense predatory marketing by competitors. Banking
Group has accomplished this by enhancing customer relationships with improved
service through programs such as the Personal Banker, which focuses on
establishing a personal relationship with each customer in order to better serve
their need for financial flexibility. Going forward, Banking Group will continue
its diversification strategy. Therefore, earnings contributions from non-
traditional sources should increase as a percentage of total Banking Group
earnings. Banking Group is expected to continue to experience strong growth in
earnings, although growth rates may slow somewhat as the business matures and
its earnings base increases.
ACCUMULATION AND INVESTMENT GROUP
The Accumulation and Investment Group ("Accumulation") is responsible for
the marketing and management of accumulation (investment-type) products written
in the Company's life insurance subsidiaries, as well as the management of all
insurance-related investment portfolios. This has principally been an
asset/liability spread management business. Accumulation receives customer
deposits and, in most contracts, guarantees to return the full principal plus
interest at a specified or formula-driven rate. These funds are invested to earn
interest, dividends and capital appreciation sufficient to cover guarantees, pay
expenses and produce a profit. Accumulation continues to emphasize and grow fee-
based businesses that provide certain liquidity and withdrawal guarantees, but
which also limit the guarantee to the actual performance of underlying assets
over the life of the contract.
Accumulation offers a broad array of financial products both to
institutions and individuals, including floating and fixed rate guaranteed
investment contracts (GICs), Trust GICs and separate account products to
institutional customers, including pension funds, banks, mutual funds and other
organizations. These contracts have stated as well as indeterminate maturities.
Accumulation markets retail annuities, which include fixed and variable
contracts, and immediate life annuities (primarily structured settlements) to
individuals through banks, securities brokerage firms, financial planners and
specialized consultants.
Accumulation pretax earnings were strong at $134.1 million, an increase of
11.6 percent from $120.1 million in 1992 (up 7.0 percent from 1991). Mean
policyholder deposits, a key driver of this segment's profits, grew $1.6 billion
or 15.6 percent (1992 -- up 7.2 percent). Profit margins (the ratio of pretax
earnings to mean policyholder deposits) were strong at 111 basis points in 1993,
compared to 115 basis points in 1992 and 1991. Accumulation margins continue to
benefit from low short-term rates and a steep, positively sloped yield curve.
Earnings improved over 1992 due to the impact of the decline in interest rates
over the 1992-1993 period on rates paid to policyholders, growth in spread-based
and fee-based deposits, and a decline in provisions for estimated state
insurance guaranty fund assessments. These positive factors were partially
offset by lower investment yields, higher expense levels and accelerated
amortization of retail acquisition costs. Going forward, spread-based margins
will continue to tighten as proceeds from maturities and asset prepayments are
reinvested, in line with lower current interest rates. Margins will tighten more
significantly if short to intermediate term interest rates trend higher. The 7.0
percent growth in earnings in 1992 was also largely attributable to the
favorable interest rate environment and growth in spread-based deposits,
partially offset by the $13.9 million provision for anticipated state insurance
guaranty fund assessments. Revenues were $832.8 million in 1993, a decrease of
2.3 percent (1992-$852.6 million, down 6.7 percent) reflecting lower life
annuity sales.
25
<PAGE>
Policyholder deposits grew $1.6 billion to $12.7 billion (1992 growth was
$1.2 billion). Growth in 1993 was primarily due to strong institutional sales
results, with increases of $842.4 million in 1993 compared to $438.2 million in
1992. Index-guaranteed Total Return Account Contract products and short-indexed
GIC products represented $720.6 million, or 85.5 percent, of the growth in
institutional deposits. In 1993, Accumulation undertook a program to
significantly reduce the disintermediation potential of its short-indexed GIC
products by extending from 30 days to 90 days the notice period customers must
provide the Company before they may withdraw deposits. Completion of this
significant program was achieved in December 1993. Retail spread-based deposits
increased $362.1 million, slower than in the recent past, as credited rates were
reduced faster than competitors' rates over the course of 1993. This result
reflects Accumulation's emphasis on profitability management over volume growth.
Going forward, the focus in retail will be on sales of fee-based variable
annuities and profitability management in the fixed annuity business. In 1993,
fee-based variable annuities experienced strong growth of $406.3 million to
$816.7 million. In 1992, retail spread deposits grew $518.3 million and fee-
based variable annuities grew $234.6 million. In addition, the institutional
fee-based Trust GIC, which is not reflected as a deposit on the balance sheet,
continued to be a popular alternative to traditional products; balances grew
$3.0 billion to $4.4 billion (1992 growth was $1.4 billion) at year end 1993.
The table below shows how policyholder deposits are reflected in the
Consolidated Statements of Financial Condition:
<TABLE>
<CAPTION>
December 31 1993 1992
- ----------- ------------------
<S> <C> <C>
(Dollars in millions)
Benefit reserves-
Deferred and immediate annuities and
single premium life business $ 5,038 $ 4,683
Policyholder contract deposits-
Fixed rate and long- and short-indexed GICs 6,066 5,701
Separate account liabilities-
Index-guaranteed contracts, Market Value
Annuities, and variable annuities 1,551 660
-----------------
TOTAL $12,655 $11,044
=================
</TABLE>
Accumulation was successful in 1993 in beginning to implement its strategy
of diversifying its sources of earnings and risk away from interest rate
(duration) risk. This was accomplished through certain non-duration risk
investment programs, and by growing its fee-based sources of earnings such as
Trust GIC and variable annuities. Going forward, Accumulation will continue this
diversification strategy while continuing to appropriately manage the interest
rate risk in its spread-based businesses.
CORPORATE AND OTHER
Corporate and Other includes activities of a general corporate nature, the
group and credit life and health (through 1992) and real estate results of
Durham, real estate development activities, debt service, realized investment
gains and losses, an allocation of net investment income for the capital
allocated to business segments, and intersegment eliminations.
Corporate and Other revenues decreased $75.2 million in 1993 reflecting the
disposition through reinsurance of Durham's group business, effective January 1,
1993 (a decrease of $51.1 million in revenues), and the sale of the credit
insurance business in 1992 (a decrease of $25.0 million in revenues). The 1991
acquisition of Durham was focused on the home service insurance operations of
Durham Life Insurance Company. The acquired group and credit insurance business
did not fit our corporate strategy and, consequently, the Company divested those
lines of business.
Corporate and Other pretax loss, excluding realized investment gains and
losses, was $34.4 million in 1993, up from $32.5 million in 1992, reflecting
lower income on a partnership investment. The decline in the loss in 1992
compared to the 1991 loss of $56.3 million, was due to income from Durham's
group and credit business. Corporate and Other earnings, exclusive of the impact
from the Durham group and credit business, are primarily influenced by net
investment income on capital invested in the business segments, corporate
expenses and fluctuations in interest expense on corporate debt.
ASSET/LIABILITY MANAGEMENT
In both the Company's insurance and banking operations, a key element of
profitability and risk management is the asset/liability management process. The
integrated management of assets and liabilities related to insurance operations
is addressed in the following discussion. The process for banking operations is
discussed under the Banking Group section.
The asset/liability management process is designed to monitor product and
asset characteristics on both the individual product and Company aggregate
levels. Each major product category is supported by a separate asset portfolio,
which is managed in accordance with a pre-established baseline asset strategy.
This baseline asset strategy represents an appropriate matching of a product's
assets and liabilities, taking into account asset and liability risks, maturity
and liquidity risks, as well as asset diversification and quality
considerations. Baselines are developed and updated through extensive financial
modeling. Stochastic analyses and worst case scenarios are integrated to design
the asset baseline which is best suited to the individual product.
26
<PAGE>
Extensive financial modeling also is performed on aggregate asset and
liability positions. These analyses, which reflect durations of assets and
liabilities, liquidity management, asset quality and other risk characteristics,
are used to keep the aggregate portfolio of assets and liabilities within
desired tolerances while optimizing returns. Aggregate portfolio management
takes advantage of offsetting characteristics of individual products and makes
aggregate portfolio adjustments, to obtain a better overall balance of asset and
liability characteristics than that which could be obtained at the individual
product level.
The Company actively manages a significant portion of its investment
portfolio. In this process, securities are evaluated among sectors for relative
value based on the Company's long term outlook, and positions are moved from
fully valued sectors or companies to undervalued ones, capturing the incremental
returns that result when those sectors or companies regain market equilibrium.
As a result, these securities have shorter holding periods than those
investments held to maturity. These actively managed securities are carried at
market value, with unrealized gains or losses reflected directly in
shareholders' equity, net of tax. Those securities that the Company intends to
hold to maturity are classified as "held for investment" and are carried at
amortized cost.
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115 classifies these
securities into three categories: 1) debt securities that a company has the
positive intent and ability to hold to maturity are classified as "held to
maturity" and reported at amortized cost; 2) debt and equity securities that are
bought and held principally to be sold in the near term are classified as
"trading securities" and reported at fair value, with unrealized gains and
losses included in earnings; and 3) debt and equity securities not classified as
trading or held to maturity are classified as "available for sale" and reported
at fair value, with unrealized gains and losses shown as a separate component of
shareholders' equity.
SFAS No. 115 significantly restricts a company's ability to sell securities
in the held to maturity category without raising questions about the
appropriateness of its accounting policy for such securities. Thus, a company's
ability to maintain the appropriate flexibility to make the optimal investment
decision is significantly restricted if it classifies securities in the held to
maturity category. In order to maximize its investment flexibility, the Company
will classify all of its debt and equity securities as available for sale. SFAS
No. 115 was adopted effective January 1, 1994. If it had been adopted effective
December 31, 1993, reported shareholders' equity would have increased by $261.4
million, net of taxes and related adjustment of deferred acquisition cost
balances.
While adoption of SFAS No. 115 with 100 percent of debt and equity
securities carried at fair value will introduce additional volatility to
reported shareholders' equity, it will not change the underlying economics. The
current accounting model required by the FASB, with some assets valued at fair
value and others at historical cost and all liabilities valued at historical
cost, does not accurately portray overall economic results. With the closely
integrated manner in which the Company manages its assets and liabilities, the
concept of adjusting certain assets to fair value, principally reflecting
changes in the interest rate environment, without making a similar adjustment to
liabilities, will distort reported financial results. Due to the potential for
distortion, a fair value pro forma balance sheet is provided in Note E of the
accompanying Consolidated Financial Statements. SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments," requires disclosure of fair values for
selected financial instruments but does not require disclosure of fair value for
traditional insurance liabilities. Fair value disclosure is provided for all
financial instruments, including traditional insurance liabilities, in an effort
to properly reflect changes in shareholders' equity from fluctuations in
interest rates. The fair values as presented differ from carrying amounts
principally as a result of changes in credit spreads and the interest rate
environment.
The active management process adds value for shareholders but also has the
potential to introduce incremental volatility to net income, as bonds are bought
and sold during both rising and falling interest rate environments. However, the
actively managed portfolios are subject to several risk management constraints,
including those designed to insure preservation of a strong capital position,
optimization of future earnings, and management of the level of realized gains
and losses and resultant tax effects.
The asset/liability management process focuses on the management of a
variety of risks, including interest rate risk. Management of interest rate risk
is an important determinant of profitability. Among other measures, the
sensitivity of asset and liability portfolio values to changes in interest rates
can be measured by the portfolio's duration mismatch, which represents the
difference between the estimated durations of invested assets and those of the
associated liabilities. Duration is a measure of the sensitivity of values to
changes in interest rates. Duration mismatch management is a primary
asset/liability management tool. Generally, the Company's asset durations are
longer than its liability durations and are adjusted throughout the year to
reflect changing business and economic conditions. In practice, the Company
employs a variety of financial instruments and modeling techniques in the
overall asset/liability management process with which to specifically manage the
net duration position. Those financial instruments include interest rate swaps,
cap and collar agreements, options, futures, forwards and other derivative
securities.
27
<PAGE>
ASSET/LIABILITY REVIEW
Cash and invested assets were $18.2 billion at December 31, 1993, up 8.1
percent (1992-$16.8 billion, up 7.2 percent). Excluding Banking Group assets,
invested assets related to insurance operations were $16.1 billion in 1993
compared to $14.8 billion in 1992. The discussion which follows relates solely
to the invested assets and liabilities related to insurance operations.
As investment manager for the Company's invested assets related to
insurance operations, Accumulation manages the distribution of assets to
optimize risk adjusted returns in accordance with its baseline strategies.
Overall, the distribution of invested assets related to insurance operations
remains essentially unchanged from year end 1992.
The graph represented below is a pie chart that reflected the percentage of
total insurance invested assets by investment type at December 31, 1993. The
legend contains the dollar amount of each investment in millions as well as
total insurance invested assets.
Distribution of Insurance Invested Assets
December 31, 1993
(Dollars in millions)
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
% of
Investment Type Amount Total
- --------------- ---------------
<S> <C> <C>
Public Bonds $ 9,099 56.6%
Commercial Mortgages 2,558 15.9
Residential Mortgages 1,637 10.2
Private Placements 1,255 7.8
Other 613 3.8
Common and Preferred Stocks 452 2.8
Cash and Cash Equivalents 372 2.3
Real Estate 103 .6
--------------
Total Insurance Invested Assets $16,089 100.0%
</TABLE>
The Company's ability to prudently seek out and actively manage among
sectors within various asset classes has been key to the historically low
default rate in public, fixed income securities. Additionally, selectivity and
thorough credit underwriting employed have proven effective for private
placement securities and residential and commercial mortgages. Careful
evaluation of net swap counterparty exposure in combination with any credit
exposure from investments in debt securities of that institution, and management
to pre-established guidelines after considering potential interest rate
movements which would modify our risk profile, have significantly mitigated risk
generally associated with derivative programs.
Public and private bonds and preferred stocks account for the majority of
invested assets. The Company maintains a high credit quality investment
portfolio with only 4.6 percent of invested assets at December 31, 1993,
representing below investment grade bonds. Default and loss experience in the
portfolio remains excellent with no defaults and no significant losses as a
result of impairments in value during 1993 or 1992. During 1993, sales out of
the held for investment portfolio totaled $69.2 million, and resulted in a $2.2
million realized gain. These sales were all due to significant declines in the
issuer's credit-worthiness. At December 31, 1993 and 1992, there were no
securities in the public or private bond and preferred stock portfolio that were
delinquent as to interest or dividends.
The Company's bond and preferred stock portfolio at December 31, 1993 is
highly diversified among sectors, including $2.3 billion of mortgage-backed
securities ("MBS"). There has been concern expressed recently by rating
agencies, various regulators and other constituencies regarding investments in
MBS by insurers and other financial institutions. These highly rated securities
provide excellent credit quality and liquidity. The majority of issues are
guaranteed by the Government National Mortgage Association (GNMA), Federal
National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation
(FHLMC), and are structured as publicly-traded collateralized mortgage
obligations (CMOs). Unlike most corporate or real estate debt, the primary
concern with MBS is uncertainty of timing of cash flows due to prepayment
assumptions rather than the possibility of loss of principal (i.e., credit
risk). While MBS are subject to varying prepayment patterns, as are callable
corporate bonds, the investment in MBS should be taken in context with the
integrated manner in which the Company manages its assets and liabilities. The
Company's MBS portfolio comprised only 14.6 percent of total invested assets at
December 31, 1993.
The Company's CMO holdings include a variety of different classes. The
return of principal is reasonably assured for each major class. When these
securities are purchased at a discount or premium, the income yield will vary
with changes in prepayment speeds due to the change in accretion of discount or
amortization of premium. The overall impact of variability in yields on the
portfolio is not significant in relation to the yield on the total invested
assets of the Company. In addition, the Company has only nominal exposure to
more volatile, high-risk CMOs (CMOs structured to share in residual cash flows
or which receive only interest payments). The largest individual class of CMOs
held by the Company is planned amortization class (PAC) bonds, representing
approximately 17 percent of the total MBS portfolio. PACs are structured to
provide a more certain cash flow to the investor and therefore have reduced
prepayment risk. The second largest class of CMOs is sequential payment bonds,
representing approximately 16 percent of the total MBS portfolio. The prepayment
risk associated with sequential payment bonds depends on their place in the
overall CMO structure, their priority in terms of principal payments, and other
types of tranches in the structure. Due to the short overall original weighted
average life
28
<PAGE>
and insignificant discount associated with the Company's sequential payment
bonds, the effect of changing prepayment speeds on yields is not significant.
Pass-throughs are the largest type of MBS owned by the Company, representing
approximately 47 percent of the total MBS portfolio. Pass-throughs are GNMA,
FNMA or FHLMC guaranteed MBS which, simply stated, pass through interest and
principal payments to the investors in accordance with their respective
ownership percentage.
The table below provides detail of mortgage-backed securities as of
December 31, 1993:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Mortgage-Backed Securities by Type
----------------------------------
December 31 Amortized Cost Market Value
- ----------- ----------------------------------
<S> <C> <C>
(Dollars in millions)
CMOs $1,236 $1,277
Pass-throughs 1,091 1,119
- -----------------------------------------------------------
Total $2,327 $2,396
===========================================================
</TABLE>
In the course of its management of the insurance-related investment
portfolios, the Company engages in commercial and residential mortgage lending.
The commercial mortgage lending practice is that substantially all originations
are first mortgage loans with maximum loan-to-value ratios of 75 percent. The
Company requires minimum debt service coverage from existing cash flows of 1.2
times. At the time of the origination of a mortgage loan, a personal inspection
of the collateral and research concerning the borrower and the market are
undertaken. In addition, new mortgage loans require engineering and
environmental studies. Currently, multi-family apartments, credit-anchored
shopping centers and industrial facilities are preferred projects for mortgage
loans. Mortgage loans are not presently offered on projects secured by hotels,
farms, raw land, unanchored shopping centers and special purpose type
properties.
The graph represented below is a pie chart that reflected the
percentage of total commercial mortgage loans by property
type at December 31, 1993. The legend contains the dollar
amount by property type in millions as well as total
commercial mortgage loans.
Commercial Mortgage Loan Principal Balance by Property Type
December 31, 1993
(Dollars in millions)
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
% of
Property Type Amount Total
- ------------- ---------------
<S> <C> <C>
Retail $ 941 34.7%
Apartment 671 24.8
Office 502 18.5
Industrial 289 10.7
Health Care 174 6.4
Hotel 82 3.0
Other 52 1.9
-------------
Total Commercial Mortgage Loans $2,711 100.0%
</TABLE>
In addition to its stringent underwriting standards, the Company minimizes
credit risk through various means, including maintaining small average loan
balances, diversification by property type, and significantly, through a
geographic dispersion of similar property types.
The graph represented below is a pie chart that reflected the
percentage of total commercial mortgage loans by ACLI defined
geographic location at December 31, 1993. The legend
contains the dollar amount by region in millions as well as
total commercial mortgage loans.
Commercial Mortgage Loan Principal Balance by Geographic*
Location
December 31, 1993
Dollars in millions
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
% of
ACLI Defined Region Amount Total
- ------------------- ---------------
<S> <C> <C>
East North Central $ 588 21.7%
South Atlantic 511 18.8
West South Central 401 14.8
East South Central 372 13.7
Pacific 349 12.9
Middle Atlantic 221 8.2
New England 139 5.1
Mountain 113 4.2
West North Central 17 .6
-------------
Total Commercial Mortgage Loans $2,711 100.0%
</TABLE>
*Based on ACLI defined regions
The Company's mortgage loan philosophy is conservative in loan origination
and proactive in identifying and resolving problem loan situations. It includes
an "early warning" system designed to assist in detecting potential problems
before actual delinquency occurs, so that these loans can be reviewed monthly to
monitor results and take further action, as appropriate. Problem commercial
mortgage loans (based on American Council of Life Insurance (ACLI) standards,
which include loans past due 60 days or more, loans in the process of
foreclosure, restructured loans and real estate acquired through foreclosure) as
of December 31, 1993 amounted to 5.12 percent of outstanding commercial loans,
significantly lower than the 6.20 percent reported at the end of 1992, and the
best year end result since 1990. These results compare very favorably to the
industry results at December 31, 1993 of 18.87 percent.
The Company also maintains a residential loan portfolio with conservative
underwriting standards. Loans are acquired only from approved originators, are
individually re-underwritten by the Company, and 100 percent of all legal
documentation is reviewed to ensure a first lien position. Quality control
reviews are additionally performed on fifteen to twenty percent of all purchased
loans, which includes "re-creating" the credit files to protect against fraud or
significant inaccuracy.
29
<PAGE>
The graph represented below is a pie chart that reflected the percentage of
total residential mortgage loans by ACLI defined geographic location at December
31, 1993. The legend contains the dollar amount by region in millions as well as
total residential mortgage loans.
Residential Mortgage Loan Principal Balance by Geographic*
Location
December 31, 1993
(Dollars in millions)
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
% of
ACLI Defined Region Amount Total
- -------------------------------------------------------
<S> <C> <C>
Pacific $ 751 46.2%
South Atlantic 248 15.3
Middle Atlantic 232 14.3
Mountain 113 6.9
New England 94 5.8
East North Central 86 5.3
West South Central 46 2.8
West North Central 36 2.2
East South Central 19 1.2
- -------------------------------------------------------
Total Residential Mortgage Loans $1,625 100.0%
</TABLE>
*Based on ACLI defined regions
Included in the Company's residential mortgage loans in the Pacific region
are $683.4 million of California loans, which the Company has additionally
insured using pool insurance on much of the portfolio to reduce exposure to any
potential loss that might result from weakening real estate values in that
state.
Problem residential mortgage loans (based on Mortgage Bankers Association
(MBA) standards, which include loans past due 30 days or more and loans in the
process of foreclosure, and are based on number of loans) were 3.59 percent and
4.00 percent at December 31, 1993 and 1992, respectively. By comparison, the MBA
average for problem residential mortgage loans stood at 5.37 percent at
September 30, 1993, the latest period for which data is available, and 5.63
percent at December 31, 1992.
Mortgage loans on which the Company has discontinued the accrual of
interest and restructured loans accruing interest are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Mortgage Loans
Commercial Residential
- ------------------------------------------------------------------
December 31 1993 1992 1993 1992
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in millions)
Non-accrual loans $64.3 $96.4 $12.6 $25.4
Restructured loans, accruing interest 5.2 1.1 -- --
- ------------------------------------------------------------------
Total $69.5 $97.5 $12.6 $25.4
==================================================================
</TABLE>
As of December 31, 1993, the Company had approximately $62.4 million of
commercial mortgage loans with identified potential problems which could cause
these loans to be included in one of the above categories in the future;
however, the Company does not anticipate any material losses from these loans.
In regard to the liability side of the asset/liability management process,
the management of product liabilities and their related assets begins as a
product is developed. Understanding the customer's need is the first step.
Marketing, product development, legal, investment and finance personnel then
work together as a team to develop a product and its associated asset strategy.
This integrated approach is an important element of the Company's success, as
each team member in the product management process develops an appreciation of
the perspective of the others. This helps assure that the product is attractive
to customers and provides a profit commensurate with the risks being assumed.
The tables below contain information on the Company's major insurance
products with related interest components. In addition to these products, the
Company also offers products that provide a guaranteed indexed rate of return to
the customer and others whose return is based on the market performance of
underlying assets.
<TABLE>
<CAPTION>
Mean
Deposits
and Effective
Year Ended December 31, 1993 Reserves Interest Rate
- --------------------------------------------------------------------
<S> <C> <C> <C>
(Dollars in thousands)
Guaranteed investment contracts $6,133,525 $236,052 3.85%
Retail annuities 3,218,696 182,303 5.66
Life annuities 1,109,389 98,765 8.90
Single premium life 733,065 32,058 4.37
Life, health and other 3,282,191 187,900 5.72
Mean
Deposits
and Effective
Year Ended December 31, 1992 Reserves Interest Rate
- --------------------------------------------------------------------
<S> <C> <C> <C>
(Dollars in thousands)
Guaranteed investment contracts $5,577,859 $237,825 4.26%
Retail annuities 2,866,714 191,712 6.69
Life annuities 1,001,609 92,170 9.20
Single premium life 739,029 38,803 5.25
Life, health and other 2,971,580 175,921 5.92
</TABLE>
GICs are either floating rate, indeterminate maturity contracts (67 percent
of GIC deposits), or fixed rate, fixed maturity contracts (33 percent of GIC
deposits). Floating rate contracts credit interest based on various indices
which reset monthly and allow the contractholder to withdraw funds with advance
notice periods ranging from three months to twelve months (one month to twelve
months prior to December 31, 1993). There is no withdrawal penalty. The fixed
maturity contracts, which are synthetically converted to floating rate contracts
using interest rate swaps, have both a market value and surrender penalty for
early withdrawal, and mature as follows (dollars in millions): 1994 -- $799.7;
1995 -- $827.5; 1996 -- $398.9; 1997 -- $292.9 and 1998 -- $276.4.
30
<PAGE>
Retail annuities include single premium and flexible premium deferred
annuities. The contracts typically have a first-year surrender charge of 5.0 to
7.0 percent, which generally declines to zero over five to six years. The
average remaining surrender charge is 2.4 percent. Retail annuities as of
December 31, 1993 also include $159.1 million of separate account, market value
adjustment annuities, which have a market value adjustment on withdrawal prior
to the end of a six year interest guarantee period. As of December 31, 1993,
approximately 60 percent of retail annuities are subject to a surrender charge.
Life annuities include structured settlements and pension buyout annuities
which pay fixed periodic benefits to contractholders. Early withdrawals are
prohibited. Annual benefit payments on this line are currently about $91.2
million. This cash outflow is scheduled to taper off over the next 20 years, but
some payments will continue well into the next century.
Single premium life contracts have minimal surrender provisions; however,
1987 changes in the federal tax laws "grandfathered" favorable tax treatment for
existing contracts, thus creating a significant withdrawal disincentive.
The life, health and other category contains a full range of traditional
and interest-sensitive life and health insurance products which contain standard
insurance surrender provisions.
LIQUIDITY AND CAPITAL RESOURCES
The Company is a legal entity, separate and distinct from its subsidiaries.
As a holding company with no other business operations, the primary sources of
cash to meet obligations, including principal and interest payments with respect
to indebtedness, are dividends and other statutorily permitted payments from its
subsidiaries.
A strong liquidity position is critical to the Company's continuing
financial strength. The availability of cash is essential to the timely payment
of policyholder, debt and other obligations, and instrumental to realizing
opportunities in today's fast-paced financial markets. As a result, the
Company's liquidity position is actively monitored and managed.
Product design and investment strategies play a major role in liquidity
management. The Company's products provide significant customer value, which
protects against sudden cash demands. In addition, many insurance contracts
contain withdrawal notice provisions or early withdrawal penalties and pay
interest rates that are reset regularly to market levels, providing additional
disintermediation protection. Liquidity risks are minimized further by
investment strategies which provide for high quality asset portfolios, by
systematic controls and by active, integrated asset/liability management
processes.
Cash flows from operations in 1993 were $1.1 billion, down from $1.2
billion in 1992 and even with $1.1 billion in 1991. These substantial levels
come from a stable base of income from insurance premiums (particularly from the
home service Agency Group operations, which are very predictable and relatively
immune to disintermediation), from investments and from other product sales.
Investment commitments are planned to coincide with expected cash flows.
Normal day to day cash variations are met by a commercial paper program,
supplemented by committed lines of credit. Commercial paper borrowings averaged
$57.2 million in 1993 at a weighted average interest rate of 3.26 percent.
Commercial paper outstanding at December 31, 1993 was $49.9 million compared to
$49.8 million at the end of 1992. In addition to the corporate commercial paper
program, Commonwealth Insurance, Peoples Security Insurance and National Home
Life Assurance Company ("National Home Assurance") each have $50 million in
available commercial paper programs. There were no borrowings under these
programs in 1993.
The Company has committed lines of credit of $850 million which serve as a
contingency reserve should adverse conditions materialize, and as back-up to the
commercial paper program. There were no borrowings under these lines of credit
during the year. In addition, the Company's bond and stock portfolio of $10.9
billion at December 31, 1993 provides a significant source of short-term
liquidity.
Banking Group analyzes its current and future liquidity needs to support
its deposit portfolio and asset growth. First Deposit also maintains $400
million of committed lines of credit to provide liquidity for its existing
deposit base as well as to satisfy short-term funding requirements. The December
31, 1993 outstanding borrowings under this line were $175.0 million, compared to
$172.0 million at the end of 1992.
The Company's Series C medium-term note program originally permitted the
issuance of up to $225 million in medium-term notes. At the end of 1993,
outstanding borrowings under the Company's medium-term note program totaled
$117.75 million, leaving capacity under this program of $107.25 million. On
January 12, 1994, the Company's shelf registration of $292.75 million of debt
securities went effective, and on January 14, 1994, the Company commenced its
$400 million Series D medium-term note program. This program encompasses the
newly-effective $292.75 million shelf registration, in addition to the $107.25
million of unissued Series C medium-term notes. The ratio of long-term debt to
total capital was 19.1 percent at December 31, 1993, compared with 21.2 percent
at the end of 1992, both within the lower end of ranges of leverage considered
acceptable by the Company.
Effective June 16, 1993, each outstanding share of Capital Holding's Series
J, non-cumulative, convertible, junior preferred stock was exchanged for 5.55
shares of Capital Holding common stock.
31
<PAGE>
Effective March 2, 1994, the Company redeemed, at face value, all $100
million of its Adjustable Rate Cumulative Preferred Stock, Series F, at $100 per
share plus accrued and unpaid dividends through the date of redemption. The
Company is considering issuance of another preferred stock instrument to replace
the redeemed Series F stock.
The Company announced on January 31, 1994 its plans to repurchase
approximately three million shares of its common stock by the end of 1994 with
the intent to minimize the dilutive effect of employee benefit plans that
feature stock awards.
From a financial ratings perspective, 1993 was an excellent year, as
Capital Holding and its subsidiaries received several upgrades. Moody's
Investors Service upgraded the financial strength ratings of Commonwealth
Insurance and Peoples Security Insurance. Moody's also upgraded Capital
Holding's senior debt, commercial paper and preferred stock ratings. Duff &
Phelps Credit Rating Company upgraded the claims paying ability rating for
National Home Assurance. First Deposit Corporation received an issuer rating
upgrade to A/B from Thomson BankWatch, Inc. ("Thomson"). First Deposit
Corporation, First Deposit National Bank and First Deposit National Credit Card
Bank carry a TBW-1 short-term rating from Thomson.
The table below reflects ratings for Capital Holding and its major
insurance subsidiaries at December 31, 1993:
<TABLE>
<CAPTION>
STANDARD DUFF & A.M.
& POOR'S MOODY'S PHELPS BEST
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
Capital Holding Ratings:
Senior Debt AA A2 AA-
Adjustable Rate
Preferred Stock AA- a2 A+
Commercial Paper A-1+ P-1 D-1+
Claims Paying/Financial
Strength Ratings:
Commonwealth Insurance AAA Aa3 AA+ A+
Peoples Security Insurance AAA Aa3 AA+ A+
National Home Assurance AA A2 AA A+
Commercial Paper Ratings:
Commonwealth Insurance A-1+ P-1 D-1+
Peoples Security Insurance A-1+ P-1 D-1+
National Home Assurance A-1+
</TABLE>
The National Association of Insurance Commissioners (NAIC) adopted the
"Risk Based Capital for Life and/or Health Insurers Model Act" in December 1992.
Under this "Model Act," the Adjusted Capital levels of the Company's insurance
subsidiaries currently exceed all of the regulatory action levels as defined by
the NAIC's Model Act.
INFLATION
As a financial institution, many of the Company's assets and liabilities are
monetary in nature, sensitive to the interest rate environment. Some assets
benefit if interest rates increase while others lose value. Likewise, some
liabilities perform better in a rising environment, while others are adversely
affected. The converse is true when interest rates decline. The Company has
instituted what it believes to be a very effective asset/liability management
process, the objective of which is to optimize net interest margins within
prescribed risk tolerances while at the same time protecting net asset values.
Nevertheless, changes in the interest rate environment could cause net interest
margins to fluctuate from historical levels.
COMMON STOCK DIVIDEND AND MARKET DATA
In 1993, a two-for-one stock split in the form of a dividend was declared.
The market price of the Company's stock was $37.13 per common share at December
31, 1993, compared with $36.13 at December 31, 1992 and $31.81 at December 31,
1991. The price-earnings multiple (calculated on the last twelve months net
income per common share) was 11.9 compared to 11.5 at the end of 1992 and 11.9
at the end of 1991. The price-to-book ratio was 1.57 compared with 1.76 at the
end of 1992 and 1.78 at the end of 1991. Total shares held in treasury at
December 31, 1993 were 13.9 million, at an average cost of $6.42 per common
share.
Capital Holding has increased its dividend in each year of its history. In
1993, the increase was 10.6 percent compared with 10.0 percent in 1992. The ten-
year compound growth rate has been 7.6 percent, measurably higher than the 6.8
percent for the companies that make up the Dow Jones Industrial Average. The
compound annual dividend growth rate is twice the compound annual growth of the
Consumer Price Index over the same period, providing shareholders with an income
stream that has outpaced inflation by a wide margin.
The quarterly dividend of $.20 per common share declared by the Board of
Directors for the first quarter of 1994 represents an increase of 9.6 percent
over the previous quarterly rate.
Approximately 17,100 individuals and institutions owned Capital Holding
stock at December 31, 1993, including 5,700 employees who owned stock through
Capital Holding's Thrift Savings Plan.
The table on page 34 shows the historical price range of the Company's
common stock as quoted on the New York Stock Exchange -- Composite Transactions.
The New York Stock Exchange is the principal market in which our stock is traded
(ticker symbols: CPH -- common; CPHF -- preferred). The Company's common shares
are also listed on the Pacific Stock Exchange.
32
<PAGE>
BUSINESS REPORT
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31 1993 1992 1991 1990 1989 1988
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
AGENCY GROUP:
Life
Pretax earnings $ 185,644 $ 183,112 $ 168,350 $ 157,805 $ 139,728 $ 126,974
Mean policyholder reserves 2,219,099 2,140,303 1,820,377 1,683,739 1,566,388 1,489,201
Margin on mean reserves 8.4% 8.6% 9.2% 9.4% 8.9% 8.5%
Health
Pretax earnings $ 3,936 $ 2,579 $ 1,232 $ 3,124 $ 3,837 $ 3,608
Premium income 65,472 64,656 60,734 57,722 47,888 38,069
Margin on premium 6.0% 4.0% 2.0% 5.4% 8.0% 9.5%
- ----------------------------------------------------------------------------------------------------------
DIRECT RESPONSE GROUP:
Life
Pretax earnings $ 56,494 $ 40,384 $ 38,409 $ 29,725 $ 24,816 $ 23,961
Premium income 298,897 234,967 222,414 205,894 197,409 196,057
Margin on premium 18.9% 17.2% 17.3% 14.4% 12.6% 12.2%
Health
Pretax earnings $ 45,783 $ 43,183 $ 35,329 $ 38,567 $ 35,468 $ 35,541
Premium income 197,957 183,157 194,540 198,658 182,089 206,616
Margin on premium 23.1% 23.6% 18.2% 19.4% 19.5% 17.2%
Property and casualty
Pretax earnings (loss) $ 8,202 $ 6,608 $ 1,244 $ (6,949) $ 3,275 $ 1,890
Earned premium 143,781 140,024 142,561 135,327 174,149 158,054
Loss/LAE ratio 82.1% 82.8% 86.2% 98.4% 92.3% 87.3%
Expense ratio 24.8 25.6 26.0 19.3 18.2 19.3
Combined ratio 106.9 108.4 112.2 117.7 110.5 106.6
- ----------------------------------------------------------------------------------------------------------
BANKING GROUP:
Pretax earnings $ 117,720 $ 93,502 $ 73,231 $ 57,315 $ 34,101 $ 17,319
Ending assets 2,211,537 2,136,624 2,033,834 1,582,040 1,563,537 1,650,942
Mean assets 2,174,082 2,085,229 1,807,937 1,572,789 1,607,240 1,276,458
Margin on mean assets 5.4% 4.5% 4.1% 3.6% 2.1% 1.4%
- ----------------------------------------------------------------------------------------------------------
ACCUMULATION AND INVESTMENT GROUP:
Pretax earnings $ 134,085 $ 120,142 $ 112,242 $ 95,974 $ 81,438 $ 63,763
Ending policyholder
deposits 12,654,759 11,044,043 9,853,028 9,263,679 7,688,581 6,364,701
Mean policyholder deposits 12,113,883 10,477,775 9,776,749 8,399,222 6,969,224 5,385,559
Margin on mean deposits 1.11% 1.15% 1.15% 1.14% 1.17% 1.18%
- ----------------------------------------------------------------------------------------------------------
(Dollars in millions)
REGULATORY SHAREHOLDERS' EQUITY:
Life insurance $ 1,135.9 $ 1,069.7 $ 967.3 $ 832.1 $ 758.0 $ 564.8
Property and casualty
insurance 111.5 69.5 58.8 60.8 49.4 59.0
- ----------------------------------------------------------------------------------------------------------
TOTAL INSURANCE $ 1,247.4 $ 1,139.2 $ 1,026.1 $ 892.9 $ 807.4 $ 623.8
==========================================================================================================
BANKING $ 234.9 $ 186.2 $ 129.5 $ 98.8 $ 106.4 $ 90.2
==========================================================================================================
</TABLE>
33
<PAGE>
Quarterly Financial Data
(Dollars in thousands except per common share)
<TABLE>
==========================================================================================================
<CAPTION>
Per Common Share(a)
Premiums Investment Realized Benefits ---------------------
and Other and Other Investment and Net Operating Net
Considerations Income, Net Gain (Loss) Expenses Income Earnings(b) Income
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993
4th Quarter $290,866 $432,363 $ 4,421 $593,628 $91,536 $.90 $.89
3rd Quarter 279,229 434,494 (7,050) 580,294 73,763 .75 .71
2nd Quarter 290,000 441,242 1,635 601,463 91,530 .86 .89
1st Quarter 307,589 428,536 (19,161) 621,721 65,836 .81 .64
- ----------------------------------------------------------------------------------------------------------
1992
4th Quarter $286,440 $432,579 $ (155) $591,231 $90,347 $.88 $.88
3rd Quarter 282,920 410,372 14,373 581,992 88,852 .82 .87
2nd Quarter 305,385 406,854 3,517 607,290 77,626 .76 .75
1st Quarter 315,280 406,985 (11,258) 620,752 65,671 .72 .64
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Quarterly Price Ranges of Common Stock and
Dividends Per Common Share (a)
==========================================================================================================
High Low Dividend High Low Dividend
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993 1992
4th Quarter $44.88 $36.25 $.1825 4th Quarter $36.75 $29.94 $.165
3rd Quarter 44.50 38.38 .1825 3rd Quarter 32.50 28.75 .165
2nd Quarter 42.25 34.50 .1825 2nd Quarter 30.13 26.00 .165
1st Quarter 40.63 35.63 .1825 1st Quarter 31.63 26.82 .165
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(a) Per common share amounts have been retroactively adjusted for a two-for-one
stock split in the form of a dividend, effective April 30, 1993.
(b) Operating earnings exclude from net income, realized investment gains and
losses and related deferred acquisition cost amortization, net of taxes.
34
<PAGE>
SUPPLEMENTAL EARNINGS DATA
(Dollars in thousands except per common share)
<TABLE>
====================================================================================================================================
<CAPTION>
Year Ended December 31 1993 1992 1991 1990 1989 1988
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating earnings before federal income tax(a) $508,951 $455,865 $372,811 $332,250 $278,562 $234,600
Federal income tax on operating earnings before impact of tax
law change 150,141 129,907 102,500 85,510 66,330 52,800
- --------------------------------------------------------------------------------------------------------------------------------
Operating earnings before impact of tax law change 358,810 325,958 270,311 246,740 212,232 181,800
Federal income tax impact of the change in annual
effective tax rate due to the tax law change(b) 5,089 -- -- -- -- --
Federal income tax impact on deferred taxes due to
the tax law change(b) 11,682 -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Operating earnings 342,039 325,958 270,311 246,740 212,232 181,800
Realized investment gain (loss), net of tax (18,244) 3,346 (14,738) (90,619) 75,557 8,546
Related amortization, net of tax (1,130) (6,808) (5,341) 10,072 (12,081) (482)
Cumulative effect of change in
accounting principle, net of tax -- -- -- -- (56,021) --
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME 322,665 322,496 250,232 166,193 219,687 189,864
Provision for dividends on nonconvertible preferred stock 6,750 6,750 8,604 10,432 10,515 7,323
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO COMMON STOCK $315,915 $315,746 $241,628 $155,761 $209,172 $182,541
================================================================================================================================
Per common share:(c)
Operating earnings before impact
of tax law change(a) $ 3.49 $ 3.18 $ 2.89 $ 2.57 $ 2.23 $ 1.91
Federal income tax impact of the change in annual
effective tax rate due to tax law change(b) (.05) -- -- -- -- --
Federal income tax impact on deferred taxes
due to the tax law change(b) (.12) -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Operating earnings 3.32 3.18 2.89 2.57 2.23 1.91
Realized investment gain (loss), net of tax (.18) .03 (.17) (.98) .83 .10
Related amortization, net of tax (.02) (.07) (.06) .11 (.13) (.01)
Cumulative effect of change in
accounting principle, net of tax -- -- -- -- (.62) --
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 3.12 $ 3.14 $ 2.66 $ 1.70 $ 2.31 $ 2.00
================================================================================================================================
</TABLE>
(a) Operating earnings exclude realized investment gains and losses and related
deferred acquisition cost amortization.
(b) The Omnibus Budget Reconciliation Act of 1993 was enacted into law on August
10, 1993. Companies were required to recognize the impact of the tax law
change on both the deferred tax balance and current taxes payable during the
period the change was enacted.
(c) Per common share amounts have been retroactively adjusted for a two-for-one
stock split in the form of a dividend, effective April 30, 1993.
35
<PAGE>
MANAGEMENT'S RESPONSBILITIES
FOR FINANCIAL REPORTING
===============================================================================
The consolidated financial statements appearing in this Annual Report have
been prepared by management, which is responsible for their preparation,
integrity and fair presentation. The statements have been prepared in accordance
with generally accepted accounting principles and necessarily include some
amounts that are based on management's best estimates and judgments.
Management is responsible for the system of internal controls over
financial reporting at Capital Holding and its affiliates, a system designed to
provide reasonable assurance regarding the preparation of reliable published
financial statements. This system is augmented by written policies and
procedures including a code of conduct to foster a strong ethical climate, a
program of internal audit, and the selection and training of qualified
personnel. Management believes that the Company's system of internal controls
over financial reporting provides reasonable assurance that the financial
records are reliable for preparing financial statements.
The Audit Committee of the Board of Directors, composed solely of outside
Directors, meets with the independent auditors, management and internal auditors
periodically to discuss internal controls over financial reporting, auditing and
financial reporting matters. The Committee reviews with the independent auditors
the scope and results of the audit effort. The Committee also meets with the
independent auditors and with internal auditors without management present to
ensure that these groups have free access to the Committee.
The independent auditors are recommended by the Audit Committee of the
Board of Directors, selected by the Board of Directors and ratified by the
shareholders. Based upon their audit of the consolidated financial statements,
the independent auditors, Ernst & Young, have issued their Auditors' Report,
which appears on this page.
/s/ Irving W. Bailey II /s/ Robert L. Walker
- ------------------------------- ---------------------------------
Irving W. Bailey II Robert L. Walker
Chairman, President and Senior Vice President -- Finance
Executive Officer Chief and Chief Financial Officer
/s/ Steven T. Downey
- -------------------------------
Steven T. Downey
Vice President and Controller
REPORT OF ERNST & YOUNG,
INDEPENDENT AUDITORS
===============================================================================
Board of Directors and Shareholders
Capital Holding Corporation
We have audited the accompanying consolidated statements of financial
condition of Capital Holding Corporation and subsidiaries as of December 31,
1993 and 1992, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1993. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Capital Holding
Corporation and subsidiaries at December 31, 1993 and 1992, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1993, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young
---------------------------
Ernst & Young
Louisville, Kentucky
February 9, 1994
36
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per common and common equivalent share)
Capital Holding Corporation and Subsidiaries
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31 1993 1992 1991
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Premiums and other considerations $1,167,684 $1,190,025 $1,056,005
Investment income, net of expenses 1,461,446 1,453,542 1,479,864
Consumer loan servicing fees 172,814 140,273 110,044
Realized investment gain (loss) (20,155) 6,477 (18,780)
Other income, net 102,375 62,975 43,523
- ------------------------------------------------------------------------------------------
TOTAL REVENUES 2,884,164 2,853,292 2,670,656
BENEFITS AND EXPENSES:
Benefits and claims 846,616 865,945 788,054
Increase in benefit and contract reserves 584,793 629,377 731,093
Commissions, net 74,762 89,532 75,486
General, administrative and other expenses, net 504,080 506,144 418,579
Amortization:
Deferred policy and loan acquisition costs 284,104 212,038 204,358
Value of insurance in force purchased 19,215 13,024 13,421
Goodwill 12,162 7,781 6,905
Interest expense 71,374 77,424 86,824
- ------------------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 2,397,106 2,401,265 2,324,720
INCOME BEFORE FEDERAL INCOME TAX 487,058 452,027 345,936
Federal Income Tax 164,393 129,531 95,704
NET INCOME 322,665 322,496 250,232
Provision for Dividends on Nonconvertible Preferred
Stock 6,750 6,750 8,604
- ------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO COMMON STOCK $ 315,915 $ 315,746 $ 241,628
==========================================================================================
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE $3.12 $3.14 $2.66
==========================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
37
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
=============================================================================
<TABLE>
<CAPTION>
December 31 1993 1992
- -----------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Bonds and redeemable preferred stocks -- held for
investment -- at amortized cost (market value of
$5,767,618 and $4,808,924 in 1993 and 1992,
respectively) $ 5,323,421 $ 4,619,400
Bonds -- actively managed -- at market (amortized
cost of $5,098,835 and $4,403,157 in 1993 and
1992, respectively) 5,113,637 4,376,902
Common and nonredeemable preferred stocks --
at market (amortized cost of $420,655 and
$488,569 in 1993 and 1992, respectively) 427,490 450,385
Commercial mortgage loans 2,558,466 2,693,547
Residential mortgage loans 1,637,452 1,647,045
Consumer loans 1,867,944 1,682,387
Policy loans 351,507 315,383
Real estate 103,258 109,031
Other long-term investments 356,957 168,423
Short-term investments 34,995 11,803
- -----------------------------------------------------------------------------
TOTAL INVESTMENTS 17,775,127 16,074,306
Cash and cash equivalents 377,318 717,039
Investment income due and accrued 324,242 351,421
Operating property -- at cost, less accumulated
depreciation and amortization 167,345 161,644
Deferred policy and loan acquisition costs 1,373,481 1,311,899
Value of insurance in force purchased 283,509 228,924
Goodwill 230,183 220,479
Separate account assets 2,036,856 1,034,346
Other assets 360,944 488,206
- -----------------------------------------------------------------------------
TOTAL ASSETS $22,929,005 $20,588,264
=============================================================================
</TABLE>
38
<PAGE>
Capital Holding Corporation and Subsidiaries
===============================================================================
<TABLE>
<CAPTION>
December 31 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Policy liabilities:
Benefit reserves $ 8,404,785 $ 7,847,568
Policyholder contract deposits 6,066,390 5,700,877
Policy and contract claims 211,298 231,687
Other policyholders' funds 242,666 148,637
- -------------------------------------------------------------------------------
TOTAL POLICY LIABILITIES 14,925,139 13,928,769
Banking deposits 1,491,767 1,396,115
Accrued expenses and other liabilities 1,032,659 1,079,191
Separate account liabilities 2,036,856 1,034,346
Long-term debt 589,268 589,320
Deferred federal income tax 360,425 374,596
- -------------------------------------------------------------------------------
TOTAL LIABILITIES 20,436,114 18,402,337
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock:
6,000,000 shares authorized for issuance
in series:
Series F, Adjustable Rate Cumulative, $100
face value; Issued and outstanding --
1,000,000 shares 100,000 100,000
Series J, Junior Noncumulative Convertible;
Issued and outstanding -- 1,068,000 shares
in 1992 -- 137,512
Common stock, $1 par:
300,000,000 shares authorized;
Issued -- 115,325,000 shares 115,325 57,662
Additional paid-in capital 57,053 59,705
Net unrealized investment gain (loss) 17,204 (34,998)
Retained earnings 2,295,974 2,057,119
Common stock held in treasury -- at cost:
1993 -- 13,899,000 shares; 1992 --
20,521,000 shares (89,289) (191,073)
Unearned restricted stock (3,376) --
- -------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 2,492,891 2,185,927
===============================================================================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $22,929,005 $20,588,264
===============================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
39
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) Capital Holding Corporation and Subsidiaries
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net income $ 322,665 $ 322,496 $ 250,232
Adjustments to reconcile net income to net cash flows from operations:
Increase in benefit and contract reserves 691,827 737,549 784,570
Amortization of deferred policy and loan acquisition costs 284,104 212,038 204,358
Amortization of value of insurance in force purchased and goodwill 31,377 20,805 20,326
Provision for consumer loan losses 64,056 104,949 84,263
Change in investment income due and accrued 29,987 (12,469) (20,107)
Depreciation and other amortization 27,235 28,506 20,657
Realized investment (gain) loss 20,155 (6,477) 18,780
Change in current federal income tax 32,003 (27,315) 45,363
Provision (benefit) for deferred federal income tax (28,498) 11,263 (1,265)
Policy and loan acquisition costs deferred:
General, administrative and other expenses (242,043) (209,724) (199,552)
Commissions (103,643) (100,477) (75,515)
Other (44,058) 78,763 (7,538)
- --------------------------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM OPERATIONS 1,085,167 1,159,907 1,124,572
CASH FLOWS FROM INVESTMENT ACTIVITIES:
Investments sold or matured 14,480,572 8,327,356 8,782,192
Cost of investments acquired (15,425,077) (9,056,499) (9,384,034)
Additions to operating property (40,426) (60,195) (36,655)
Net increase in credit card receivables and other consumer loans (782,309) (798,471) (797,323)
Securitization of credit card receivables 557,989 603,000 470,000
Acquisition of subsidiaries (59,363) -- 6,590
All other investment activities (209,680) (119,099) (48,238)
- --------------------------------------------------------------------------------------------------------------------
NET CASH FLOWS USED IN INVESTMENT ACTIVITIES (1,478,294) (1,103,908) (1,007,468)
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in other short-term borrowings (78,989) (39,066) (3,178)
Policyholder contract deposits 1,404,119 1,742,933 1,748,460
Withdrawals of policyholder contract deposits (1,262,524) (1,464,926) (2,148,177)
Proceeds from sales of certificates of deposit 2,268,921 1,885,063 1,479,762
Payments for maturing certificates of deposit (2,188,305) (1,952,006) (1,212,681)
Increase in other banking deposits 15,036 12,070 1,772
Redemption of preferred stock -- -- (50,000)
Issuance of long-term debt -- 65,000 227,750
Repayment of long-term debt (35,152) (86,925) (52,752)
Proceeds from revolving line of credit 708,000 1,504,000 1,001,000
Principal payments on revolving line of credit (705,000) (1,441,000) (939,917)
Purchase of common stock for treasury -- -- (9,135)
Dividends (80,600) (73,511) (64,422)
Proceeds from exercise of stock options 7,900 7,764 8,217
- --------------------------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES 53,406 159,396 (13,301)
- --------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS DURING YEAR (339,721) 215,395 103,803
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 717,039 501,644 397,841
- --------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 377,318 $ 717,039 $ 501,644
====================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
40
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands) Capital Holding Corporation and Subsidiaries
===============================================================================
<TABLE>
<CAPTION>
Net Common
Additional Unrealized Stock Unearned Total
Preferred Common Paid-in Investment Retained Held in Restricted Shareholders'
Stock Stock Capital Gain (Loss) Earnings Treasury Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1991 $ 150,000 $ 57,662 $ 20,987 $(31,545) $1,626,888 $(271,477) $ -- $1,552,515
Net income 250,232 250,232
Dividends:
Preferred (10,383) (10,383)
Common (55,722) (55,722)
Change in net unrealized
investment gain (loss) (1,755) (1,755)
Purchase of 497,600
common shares for treasury (9,135) (9,135)
Redemption of 50 shares
Series A Preferred Stock (50,000) (50,000)
Issuance of 1,918,200
shares Series J
Preferred Stock 246,955 246,955
Issuance of 3,076,100
common shares from
treasury on conversion of
554,300 shares Series J
Preferred Stock (71,362) 22,543 48,819 --
Issuance of 561,400 common
shares under employee
benefit plans (1,912) 10,129 8,217
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1991 275,593 57,662 43,530 (33,300) 1,809,103 (221,664) -- 1,930,924
Net income 322,496 322,496
Dividends:
Preferred (11,456) (11,456)
Common (64,012) (64,012)
Change in net unrealized
investment gain (loss) (1,698) (1,698)
Issuance of 1,637,700
common shares from
treasury on conversion
of 295,200 shares
Series J Preferred Stock,
and cash paid in lieu of
fractional shares (38,081) 14,160 23,815 (106)
Issuance of 458,400 common
shares under employee
benefit plans, including
tax benefit 2,015 988 6,776 9,779
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1992 237,512 57,662 59,705 (34,998) 2,057,119 (191,073) -- 2,185,927
Net income 322,665 322,665
Dividends:
Preferred (7,493) (7,493)
Common (75,912) (75,912)
Common stock split 57,663 (57,890) (227)
Change in net unrealized
investment gain (loss) 52,202 52,202
Issuance of 5,927,900
common shares from
treasury on conversion of
1,068,100 shares Series J
Preferred Stock, and cash
paid in lieu of fractional
shares (137,512) 47,077 90,407 (28)
Issuance of 583,800 common
shares under employee
benefit plans, including
tax benefit 5,705 (405) 9,650 14,950
Award of 110,500 unearned
restricted common shares
to employees, net of
forfeitures and amortization 2,456 1,727 (3,376) 807
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 $ 100,000 $115,325 $ 57,053 $ 17,204 $2,295,974 $ (89,289) $(3,376) $2,492,891
==============================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP) designed for
shareholder reporting to measure income on a going-concern basis. Insurance and
banking subsidiaries of Capital Holding Corporation ("the Company") also submit
financial reports to regulatory authorities based on regulatory accounting
practices designed to measure solvency, which differ significantly from GAAP.
Certain 1992 and 1991 amounts have been reclassified to conform with the 1993
presentation. These reclassifications had no significant effect on the Company's
financial position or results of operations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Capital Holding
Corporation and all of its subsidiaries. All significant intercompany accounts
and transactions are eliminated in consolidation.
INVESTMENTS
Those bonds and redeemable preferred stocks that the Company intends to
hold to maturity are classified as held for investment. They are carried at
cost, adjusted for amortization of premium or accretion of discount. Adjustments
to cost are amortized into investment income on a constant yield basis over the
expected life of the investment. Gains and losses are recognized in income when
the investment is sold.
The Company segregates those investments it does not intend to hold to
maturity and which can be managed actively for total return. These actively
managed investments are carried at market value, adjusted for the changes in
market value of financial instruments which qualify as hedges. Gains or losses
realized on closed or terminated instruments which hedged actively managed
investments are amortized to investment income on a constant yield basis over
the expected life of the investment. Unrealized gains and losses on actively
managed investments generally are credited or charged, net of applicable taxes,
directly to shareholders' equity as a component of net unrealized investment
gain (loss) and are recognized in income upon disposition of the investment.
Interest rate exchange agreements, or portions thereof, which do not qualify as
hedges are marked to market with unrealized gains or losses credited or charged,
net of applicable taxes, directly to shareholders' equity as a component of net
unrealized investment gain (loss).
Net income includes realized gains and losses on investments sold, net of
unamortized gains and losses of related hedging instruments, and provisions for
other than temporary impairment in the value of investments retained. The cost
of investments sold is determined on a first-in, first-out basis.
Dividends on redeemable preferred stocks and interest on bonds and loans
are credited to income as they accrue. Dividends on common and nonredeemable
preferred stocks are credited to income on ex-dividend dates.
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which is effective for calendar year
1994 financial statements. SFAS No. 115 provides for classification of
securities into three categories with different accounting treatment for each
category. The categories are "held to maturity," "trading securities" and
"available for sale." The Company will adopt SFAS No. 115 effective January 1,
1994 and will classify all of its securities as "available for sale." These
securities will be carried at market value, with unrealized gains and losses,
net of applicable taxes and adjustments to related deferred policy acquisition
costs, reported in shareholders' equity as a component of net unrealized
investment gain (loss). Adoption will result in an estimated increase of
$261,400,000 in shareholders' equity as of January 1, 1994.
Mortgage and consumer loans are carried at unpaid balances, net of
allowances for uncollectible amounts. It is the Company's policy to discontinue
the accrual of interest on mortgage loans when the loans are more than ninety
days delinquent. Real estate taken in foreclosure is recorded at the lower of
cost or net realizable value. Real estate is carried at cost less depreciation,
generally calculated using the straight-line method. Policy loans are carried at
unpaid balances. Other long-term investments are carried at cost or on the
equity method, as appropriate. Short-term investments and cash equivalents are
carried at cost, which approximates market value.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," which establishes accounting standards for creditors when
a loan is deemed impaired. SFAS No. 114 is primarily applicable to the
commercial loan portfolio, as large groups of smaller balance homogeneous loans
such as credit card, consumer installment loans, or residential mortgages are
excluded. The Company is currently determining the impact of this Statement,
which is required for calendar year 1995 financial statements. However, adoption
is not expected to have a material effect on the Company's financial position or
results of operations.
OPERATING PROPERTY
Operating property, including real estate, furniture and fixtures, and data
processing hardware and related systems, is recorded at cost, which, for
significant additions, includes interest capitalized. These assets are
depreciated or amortized over their estimated useful lives, principally using
the straight-line method.
POLICY AND LOAN ACQUISITION COSTS
The costs of acquiring new individual life, annuity, accident and health and
property and casualty insurance policies are deferred to the extent recoverable
from future premiums or expected gross profits. These costs consist principally
of
42
<PAGE>
commissions; product-related printing, mailing, and solicitation
costs; and other issue-related administrative expenses. The amortization policy
is explained under Premiums, Benefits and Expenses. Mortgage loan commitment
fees, net of direct costs incurred for successful efforts in acquiring loans,
are deferred and amortized as income over the expected life of the loan,
generally seven years. The direct costs of acquiring consumer loans, such as
referral fee payments to third parties and credit report fees, are netted
against related credit card and line of credit fees, if any, and are deferred
and amortized on a straight-line basis, generally over one year for credit card
products and five years for consumer line of credit products.
OTHER INTANGIBLES
The value of insurance in force purchased is an asset that is recorded in
connection with the acquisition of an insurance company. The initial value is
determined by an actuarial study using expected future gross profits as a
measurement of the net present value of the insurance purchased, which is
amortized on a constant yield basis, with the accrual of interest added to the
unamortized balance using rates ranging from 7 to 15 percent. The balance is
amortized over the estimated life of the insurance in force over a period not to
exceed 30 years for individual life insurance, 25 years for individual accident
and health insurance and 15 years for property and casualty insurance. Goodwill
is amortized over a period not to exceed 40 years using the straight-line
method.
SEPARATE ACCOUNTS
Separate account assets and liabilities represent funds segregated by the
Company for the benefit of certain policyholders and employee groups who
generally bear the investment risk, or for policyholders who are guaranteed a
return consistent with the performance of an index such as the S&P 500. The
separate account assets and liabilities are carried at market value. Revenues
and expenses on the separate account assets and related liabilities equal to the
benefits paid to the separate account policyholders are excluded from the
amounts reported in the Consolidated Statements of Income. Fees charged or
spread earned on policyholders' deposits are included in Other income, net.
BENEFIT RESERVES AND POLICYHOLDER
CONTRACT DEPOSITS
TRADITIONAL LIFE INSURANCE AND ACCIDENT AND HEALTH INSURANCE PRODUCTS
Traditional life insurance products include those contracts with fixed and
guaranteed premiums and benefits, and consist principally of whole life and term
insurance policies, limited-payment life insurance policies and certain
annuities with life contingencies. Accident and health insurance products
include coverages for regular income during periods of hospitalization,
scheduled reimbursement for specific hospital/surgical expenses and cancer
treatments, and lump sum payments for accidental death or dismemberment.
Reserves on traditional life and accident and health insurance products are
calculated by using a net level premium method and assumptions, determined at
the time of policy issue, as to investment yields, mortality, morbidity and
withdrawals. The assumptions are based on projections of past experience and
include provisions for possible unfavorable deviation. Reserves on most such
individual policies are based on assumed investment yields which range from a
level 3.0 percent for policies issued before 1951 to a rate grading from 7.5 to
5.5 percent for policies issued after 1980. Reserves on individual policies
acquired by purchase are based on assumptions considered appropriate as of the
date of purchase, with an assumed investment yield grading from 9.0 to 5.5
percent.
UNIVERSAL LIFE AND INVESTMENT-TYPE PRODUCTS
Universal life products include universal life and other interest-sensitive
life insurance policies. Investment-type products consist primarily of
guaranteed investment contracts (GICs) and single premium annuity and life
contracts.
Benefit reserves and policyholder contract deposits on these products are
determined following the retrospective deposit method and consist of policy
values that accrue to the benefit of the policyholder, before deduction of
surrender charges.
INTEREST RATE ASSUMPTIONS
The weighted average assumed investment yield for policy reserves and
deposits was 6.0 percent in 1993, 6.1 percent in 1992 and 7.4 percent in 1991.
POLICY AND CONTRACT CLAIMS
Policy and contract claims, principally related to accident and health and
property and casualty insurance policies, are based on estimates of future
trends in claim severity and frequency.
PREMIUMS, BENEFITS AND EXPENSES
TRADITIONAL LIFE INSURANCE AND ACCIDENT AND HEALTH INSURANCE PRODUCTS
Premiums for individual life policies are recognized when due; premiums for
accident and health and all other policies are reported as earned
proportionately over their policy terms.
Benefit claims (including an estimated provision for claims incurred but
not reported), benefit reserve changes, and expenses (except those deferred) are
charged to income as incurred. Deferred policy acquisition costs are charged to
income over periods of 25 years or less for traditional life insurance policies
and 20 years or less for accident and health policies. Amortization is
determined principally by using the sum-of-the-years' premium method and
assumptions generally consistent with those used for computing benefit reserves.
These practices are designed to match benefits and expenses with related
premiums and thereby spread income recognition over expected policy lives.
43
<PAGE>
UNIVERSAL LIFE AND INVESTMENT-TYPE PRODUCTS
Premiums for these products consist of policy charges for the cost of
insurance, policy initiation, administration and surrenders during the period.
Expenses include interest credited to policy account balances, net payments or
receipts related to interest rate exchange agreements and benefit payments made
in excess of policy account balances. Credited interest rates ranged from 3.3 to
7.3 percent in 1993.
Deferred policy acquisition costs are amortized in relation to the
incidence of expected gross profits, including realized investment gains and
losses, over the expected life of the policies, not to exceed 25 years for
universal life-type contracts and 15 years for investment-type contracts.
FEDERAL INCOME TAX
Effective January 1, 1993, the Company adopted the provisions of SFAS No.
109, "Accounting for Income Taxes." Adoption of SFAS No. 109 was not material to
the Company's consolidated financial statements. Deferred income tax assets and
liabilities reflect the future tax consequences of differences between the
reported amounts of assets and liabilities in the accompanying financial
statements and those in the Company's income tax returns.
BENEFIT PLANS
The cost of the Company's defined benefit retirement plan is determined
using the projected unit credit method, plus amortization of prior service cost
and gains and losses over the expected future service period of plan
participants. The Company's funding policy is to contribute amounts to the plan
sufficient to meet regulatory minimum funding requirements, plus such additional
amounts as it may determine appropriate from time to time. Contributions to the
defined contribution retirement, profit sharing and thrift savings plans are
expensed as incurred. The cost of plans providing life insurance benefits for
active employees, and life and health insurance benefits for eligible retirees,
is accrued generally over participants' active periods of service.
BANKING DEPOSITS
Banking deposits consist primarily of savings deposits, time deposits and
certificates of deposit of $100,000 or more. Interest on banking deposits and
related hedging instruments is reflected in the Consolidated Statements of
Income in Benefits and claims.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Per common and common equivalent share amounts in the Consolidated Statements of
Income have been calculated using net income after provision for dividends on
nonconvertible preferred stock, divided by the weighted average number of common
and common equivalent shares outstanding during the year (1993--101,132,000
shares; 1992--100,531,000 shares; 1991--90,699,000 shares). Fully diluted
net income per common share is not presented as it approximates net income per
common and common equivalent share. All common and common equivalent share and
per share data for prior periods presented have been restated to reflect the
two-for-one stock split (see Note I).
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash and cash equivalents consist of highly liquid investments with maturities
of three months or less at their time of purchase. Cash paid for interest on
debt was $71,470,000, $80,970,000 and $82,338,000 in 1993, 1992 and 1991,
respectively. Cash paid for federal income taxes was $154,999,000, $147,450,000
and $57,812,000 in 1993, 1992 and 1991, respectively.
NOTE B--ACQUISITIONS
During 1993, the Company acquired a life, accident and health insurance
company and a company that provides college financing alternatives. The two
companies were acquired in separate transactions for a total purchase price of
$122,400,000, including liabilities assumed.
In November 1991, the Company acquired Durham Corporation, a North
Carolina-based life, accident and health insurance company. The total purchase
price, including liabilities assumed, was $249,079,000. The consideration paid
consisted of 1,918,200 shares of Capital Holding Junior Noncumulative
Convertible Preferred Stock, which were subsequently converted for the Company's
common stock (see Note I).
The above acquisitions were accounted for utilizing the purchase method of
accounting and, in the aggregate, were not significant to the Company's
consolidated financial position. The operating results of these acquisitions,
subsequent to their respective acquisition dates, are included in the Company's
consolidated results of operations. Pro forma combined results of operations
prior to acquisition would not differ significantly from reported results and,
consequently, are not presented.
NOTE C--INVESTMENTS
The tables below contain amortized cost and market value information on
equity securities (common and nonredeemable preferred stocks), debt securities
(bonds and redeemable
44
<PAGE>
preferred stocks) and related hedging instruments at December 31, 1993 and 1992:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
December 31, 1993 COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
ACTIVELY MANAGED
Debt securities:
U.S. government obligations $ 403,092 $ 3,137 $ 3,460 $ 402,769
States and political subdivisions 439,409 8,866 1,644 446,631
Corporate 3,078,089 111,034 23,249 3,165,874
Mortgage-backed 1,024,435 18,860 4,012 1,039,283
Other 153,810 4,676 1,012 157,474
Related hedging instruments -- -- 98,394 (98,394)
- -------------------------------------------------------------------------------------------------
Total debt securities 5,098,835 146,573 131,771 5,113,637
Equity securities 420,655 13,372 6,537 427,490
- -------------------------------------------------------------------------------------------------
TOTAL ACTIVELY MANAGED $5,519,490 $159,945 $138,308 $5,541,127
=================================================================================================
HELD FOR INVESTMENT
Debt securities:
U.S. government obligations $ 127,229 $ 6,688 $ 395 $ 133,522
States and political subdivisions 382,022 46,079 50 428,051
Corporate 3,189,822 316,111 11,332 3,494,601
Mortgage-backed 1,302,507 58,644 4,838 1,356,313
Other 321,841 33,290 -- 355,131
- -------------------------------------------------------------------------------------------------
TOTAL DEBT SECURITIES HELD FOR INVESTMENT $5,323,421 $460,812 $ 16,615 $5,767,618
=================================================================================================
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
December 31, 1992 COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
ACTIVELY MANAGED
Debt securities:
U.S. government obligations $ 411,678 $ 7,947 $ 2,830 $ 416,795
States and political subdivisions 294,686 11,100 113 305,673
Corporate 2,572,223 113,726 16,882 2,669,067
Mortgage-backed 1,068,687 53,401 9,199 1,112,889
Other 51,587 627 -- 52,214
Related hedging instruments 4,296 -- 184,032 (179,736)
- -------------------------------------------------------------------------------------------------
Total debt securities 4,403,157 186,801 213,056 4,376,902
Equity securities 488,569 12,422 50,606 450,385
- -------------------------------------------------------------------------------------------------
TOTAL ACTIVELY MANAGED $4,891,726 $199,223 $263,662 $4,827,287
=================================================================================================
HELD FOR INVESTMENT
Debt securities:
U.S. government obligations $ 45,743 $ 3,503 $ 34 $ 49,212
States and political subdivisions 296,467 23,895 659 319,703
Corporate 2,679,233 147,088 16,956 2,809,365
Mortgage-backed 1,374,231 51,014 27,881 1,397,364
Other 223,726 9,736 182 233,280
- -------------------------------------------------------------------------------------------------
TOTAL DEBT SECURITIES HELD FOR INVESTMENT $4,619,400 $235,236 $ 45,712 $4,808,924
=================================================================================================
</TABLE>
The amortized cost and market value of debt securities at December 31,
1993, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations, sometimes without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED MARKET
December 31, 1993 COST VALUE
- ---------------------------------------------------------------------
<S> <C> <C>
(Dollars in thousands)
ACTIVELY MANAGED
Due in one year or less $ 14,224 $ 14,289
Due after one year through five years 543,865 543,735
Due after five years through ten years 1,383,188 1,414,673
Due after ten years 2,133,123 2,200,051
- ---------------------------------------------------------------------
Subtotal 4,074,400 4,172,748
Mortgage-backed securities 1,024,435 1,039,283
- ---------------------------------------------------------------------
Subtotal 5,098,835 5,212,031
Related hedging instruments -- (98,394)
- ---------------------------------------------------------------------
TOTAL DEBT SECURITIES ACTIVELY MANAGED $5,098,835 $5,113,637
=====================================================================
HELD FOR INVESTMENT
Due in one year or less $ 20,663 $ 21,223
Due after one year through five years 340,953 357,646
Due after five years through ten years 585,117 651,517
Due after ten years 3,074,181 3,380,919
- ---------------------------------------------------------------------
Subtotal 4,020,914 4,411,305
Mortgage-backed securities 1,302,507 1,356,313
- ---------------------------------------------------------------------
TOTAL DEBT SECURITIES HELD FOR INVESTMENT $5,323,421 $5,767,618
=====================================================================
</TABLE>
Additionally, the table below shows the annual change in net unrealized
investment gain (loss) and the amount of realized investment gain on debt and
equity securities for the years ended December 31, 1993, 1992 and 1991:
<TABLE>
<CAPTION>
Year Ended December 31 1993 1992 1991
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Dollars in thousands)
Debt securities:
Change in unrealized investment gain (loss) $295,730 $(36,699) $201,256
Realized investment gain 16,119 27,672 7,538
Equity securities:
Change in unrealized investment gain (loss) $ 45,019 $(12,291) $ 21,903
Realized investment gain 12,112 11,886 3,540
====================================================================================
</TABLE>
Proceeds during 1993, 1992 and 1991 from sales of investments in debt
securities were $11,114,981,000, $6,113,954,000 and $7,051,912,000,
respectively. Gross gains of $384,268,000, $272,059,000 and $175,861,000 and
gross losses of $45,887,000, $149,103,000 and $139,078,000 were realized on
sales of debt securities during 1993, 1992 and 1991, respectively. Gross gains
of $13,666,000 in 1993, and gross losses of $335,928,000, $81,598,000 and
$596,000 in 1993, 1992 and 1991, respectively, on related hedging instruments
were realized on those sales.
45
<PAGE>
Federal income tax in 1993, 1992 and 1991 includes a provision (benefit) of
$(1,911,000), $3,131,000 and $(4,042,000), respectively, for the tax effect of
total realized gains or losses. Deferred federal income tax liabilities of
$39,619,000 and $53,644,000 have been provided against net unrealized gains on
actively managed debt securities, deferred income tax assets of $34,438,000 and
$62,571,000 have been provided against net unrealized losses on hedging
instruments related to those securities and deferred income tax liabilities
(assets) of $2,392,000 and $(12,983,000) have been provided against net
unrealized investment gains and losses on equity securities as of December 31,
1993 and 1992, respectively.
Consumer loans have been reduced by the sales, without recourse, of
receivables under asset securitization plans during 1993 and 1992 of
$557,989,000 and $603,000,000, respectively. Total receivables securitized as of
December 31, 1993 were $2,004,408,000.
An analysis of the allowance for loan losses on consumer and mortgage loans
for the years ended December 31, 1993, 1992 and 1991 is as follows:
<TABLE>
<CAPTION>
Consumer Mortgage
Year Ended ---------------------------------------------------------------
December 31 1993 1992 1991 1993 1992 1991
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Balance at beginning of period $ 82,974 $ 74,710 $ 48,917 $ 47,510 $ 46,478 $ 36,901
Current period provision 64,056 104,949 84,263 33,561 28,143 19,765
Current period chargeoffs, net
of recoveries (66,840) (70,738) (48,310) (29,709) (27,111) (10,188)
Other deductions(a) (5,129) (25,947) (10,160) - - -
- ----------------------------------------------------------------------------------------------
BALANCE AT END OF PERIOD $ 75,061 $ 82,974 $ 74,710 $ 51,362 $ 47,510 $ 46,478
==============================================================================================
</TABLE>
(a) Other deductions represent the elimination of the allowance on consumer
loans securitized without recourse.
Mortgage loans which have been non-income producing for the preceding twelve
months were $44,109,000 at December 31, 1993 and $26,096,000 at December 31,
1992.
NET INVESTMENT INCOME
Gross investment income, net of payments or receipts on related interest rate
exchange agreements, by type of investment, and investment expenses for the
years ended December 31, 1993, 1992 and 1991, were as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1993 1992 1991
- ------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Gross investment income:
Debt securities $ 683,756 $ 623,660 $ 688,751
Equity securities 29,648 34,483 38,356
Mortgage loans 421,939 430,875 384,122
Consumer loans 332,213 337,621 330,520
Policy loans 18,293 17,088 13,621
Real estate and other long-term
investments 19,668 28,525 15,566
Short-term investments and
cash equivalents 21,699 28,819 43,118
- ------------------------------------------------------------------------------
TOTAL 1,527,216 1,501,071 1,514,054
Less investment expenses 65,770 47,529 34,190
- ------------------------------------------------------------------------------
INVESTMENT INCOME, NET OF EXPENSES $1,461,446 $1,453,542 $1,479,864
==============================================================================
</TABLE>
NOTE D-FINANCIAL INVESTMENTS
The Company utilizes a variety of off-balance-sheet financial instruments as
part of its efforts to hedge and manage fluctuations in the market value of its
portfolio of actively managed securities arising from changes in general
interest rate levels, to achieve certain other asset/liability management
objectives (including management of investment returns and diversification of
risk) and to meet its customers' financing needs. These instruments include
interest rate exchange agreements, options, futures, forwards and commitments to
extend credit, and involve (to varying degrees) elements of credit and market
risks in excess of the amounts recognized in the accompanying financial
statements at a given point in time. The contract or notional amounts of these
instruments reflect the extent of involvement in the various types of financial
instruments.
The Company's exposure to credit risk is the risk of loss from a
counterparty failing to perform according to the terms of the contract. This
exposure includes settlement risk (risk that the counterparty defaults
after the Company has delivered funds or securities under the terms of the
contract) which results in an accounting loss and replacement cost risk (cost to
replace the contract at current market rates should the counterparty default
prior to the settlement date).
There is no off-balance-sheet exposure to credit risk that would result in
an immediate accounting loss (settlement risk) associated with counterparty non-
performance on interest rate exchange agreements, futures, forwards or options.
Interest rates exchange agreements are subject to replacement cost risk, which
equals the cost to replace those contracts in a net gain position should a
counterparty default. Default by a counterparty would not result in an immediate
accounting loss. These instruments, as well as futures, forwards and options are
subject to market risk, which is the possibility that future changes in market
prices may make the instruments less
46
<PAGE>
================================================================================
valuable. Credit loss exposure resulting from non-performance by a counterparty
for commitments to extend credit is represented by the contractual amounts of
the instruments.
The credit risk on all financial instruments, whether on-or off-balance-
sheet, is controlled through an on-going credit review, approval and monitoring
process. The Company determines, on an individual counterparty basis, the need
for collateral or other security to support financial instruments with credit
risk, and establishes individual and aggregate counterparty exposure limits. In
order to limit exposure associated with counterparty non-performance on
interest rate exchange agreements, the Company enters into master netting
agreements with its counterparties. These master netting agreements provide
that, upon default of either party, contracts in gain positions will be offset
with contracts in loss positions and the net gain or loss will be received or
paid, respectively. Assuming every counterparty defaulted, the cost of replacing
those interest rate contracts in a net gain position, after consideration of the
aforementioned master netting agreements, was $222,015,000 and $208,446,000 at
December 31, 1993 and 1992, respectively.
The following table summarizes the contract or notional amounts of the
Company's interest rate exchange agreements, futures, forwards, options and
amounts subject to commitments as of December 31, 1993 and 1992. The table
should be read in conjunction with the preceding narrative as well as the
descriptions of these instruments and their risks immediately following.
Year Ended December 31 1993 1992
- -----------------------------------------------------------------------
(Dollars in thousands)
NOTIONAL AMOUNT OF
INTEREST RATE EXCHANGE
AGREEMENTS
Interest rate swap agreements:
Company receives floating rate and
makes fixed rate payments $2,187,166 $4,798,529
Company receives fixed rate
and makes floating rate payments 4,635,382 4,831,253
Company receives and
makes floating rate payments
(utilizing a different index) 405,836 463,437
Interest rate cap agreements 679,909 1,019,513
Interest rate floor agreements 50,000 485,000
CONTRACT AMOUNT OF OTHER
AGREEMENTS
Futures and forwards:
Commitments to sell 295,800 31,122
Commitments to purchase -- 65,490
Foreign currency investments:
Commitments to sell -- 144,981
Commitments to purchase -- 157,011
Purchased options 417,013 869,182
Written options 40,000 215,653
COMMITMENTS
Consumer line of credit loan commitments 4,664,378 3,793,570
Trust GIC contracts 4,439,494 1,457,614
Other commitments 639,522 596,667
=======================================================================
INTEREST RATE EXCHANGE AGREEMENTS
The Company enters into interest rate exchange agreements to reduce and manage
interest rate risk associated with individual assets and liabilities and its
aggregate portfolios. These interest rate exchange agreements include interest
rate swap, cap and floor agreements with maturities ranging from January, 1994
through September, 2003. Interest rate swap agreements generally involve the
exchange of fixed and floating rate interest payments, without an exchange of
the underlying principal. Interest rate cap agreements involve the payment of a
maximum fixed interest rate when an indexed rate exceeds that fixed rate.
Interest rate floor agreements involve the payment of a minimum fixed interest
rate when that rate exceeds an indexed rate. The amounts to be received or paid
pursuant to these agreements are accrued and recognized in the Consolidated
Statements of Income through an adjustment to Investment income or Benefits and
claims, as appropriate, over the life of the agreements. Gains or losses
realized on closed or terminated agreements accounted for as hedges are deferred
and amortized to investment income on a constant yield basis over the expected
remaining life of the underlying investment, generally over 7 to 10 years. Net
deferred gains on these agreements were $91,327,000 as of December 31, 1993;
the Company had no such deferred gains or losses as of December 31, 1992.
FUTURES AND FORWARDS
Futures and forwards are contracts which call for the delayed delivery of
securities in which the seller agrees to deliver on a specified future date, a
specified instrument at a specified price. These contracts are carried at market
value, with realized and unrealized gains and losses recognized in income.
Futures contracts' margin requirements, equal to the change in market value,
usually are settled on a daily basis. Risks arise from movements in securities'
values.
The Company's foreign currency investments include forward agreements,
settlement of which is linked to exchange rates in effect at maturity dates.
There are no cash requirements associated with these agreements in advance of
their maturity dates. Risks arise from movements in exchange rates. The Company
manages its exposure to foreign currency exchange movements on forward
agreements by hedging such forward positions with foreign currency option
contracts.
OPTIONS
Options are contracts that give the option purchaser the right, but not the
obligation, to buy or sell, within a specified period of time, a financial
instrument at a specified price. The Company's options have maturities ranging
from August, 1996 through December, 2001. As a purchaser of options, the Company
pays, at the beginning of the contract, a premium for transferring the risk of
an unfavorable change in the price of the underlying financial instrument. As a
writer of options, the Company receives a premium, at the beginning of the
contract, for assuming the risk of an unfavorable change in the price of the
underlying financial instrument. The Company generally hedges written option
positions with counterbalancing
47
<PAGE>
futures or option positions. Options are carried at market value, with realized
and unrealized gains and losses recognized in income or, if the option contract
qualifies as a hedge, as an adjustment to the carrying amount of the asset or
liability being hedged.
COMMITMENTS
Consumer line of credit loan commitments are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. In addition, these commitments can be withdrawn by the Company at any
time after 30 days notice, or without notice as permitted by law. It is
anticipated that commitment amounts will only be partially drawn upon based on
overall customer usage patterns and, therefore, do not necessarily represent
future cash requirements.
The Company has issued Trust GIC contracts to plan sponsors pursuant to the
terms of which the plan sponsor owns and retains the assets related to these
contracts. The Company guarantees to provide benefit responsiveness, which may
take the form of annuities, in the event that qualified plan benefit requests
and other contractual commitments exceed plan cash flows. The plan sponsor
agrees to reimburse the Company for such benefit payments with interest, either
at a fixed or floating rate, from future plan contributions and asset cash
flows. In return for this guarantee, the Company receives a premium which varies
based on such elements as benefit responsive exposure and contract size. The
Company thoroughly underwrites the plan(s) for the possibility of having to make
benefit payments and also must agree to the investment guidelines to ensure
appropriate credit quality and cash flow matching. Funding requirements to date
have been minimal and management does not anticipate any future material funding
requirements.
Other commitments primarily consist of agreements to lend to a customer at
some future time, subject to conditions established in the contract. Since it is
likely some commitments may expire or be withdrawn without being fully drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates individually each customer's
creditworthiness. Collateral may be obtained, if deemed necessary, based on a
credit evaluation of the counterparty. The collateral may include commercial
and/or residential real estate.
CONCENTRATIONS OF CREDIT RISK
The Company limits credit risk by diversifying its investment portfolio
among common and preferred stocks, public bonds, private placement securities
and commercial and residential mortgage loans. It further diversifies these
portfolios between and within industry sectors, by geography and by property
type. Credit risk is also limited by maintaining stringent underwriting
standards and purchasing insurance protection. In addition, the Company
establishes credit approval processes, limits and monitoring procedures on an
individual counterparty basis. It underwrites and originates commercial and
residential loans through its insurance and banking subsidiaries. As a result,
management believes that significant concentrations of credit risk do not exist.
NOTE E--FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using discounted cash flow or other valuation
techniques. Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of the amount and timing of future
cash flows. SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. The fair value
amounts presented herewith do not include an amount for the value associated
with customer or agent relationships, the expected interest margin (interest
earnings over interest credited) to be earned in the future on investment-type
products, or other intangible items. Accordingly, the aggregate fair value
amounts presented do not necessarily represent the underlying value of the
Company.
The following statement reflects fair values for those instruments
specifically covered by SFAS No. 107 along with a fair value amount for those
traditional insurance liabilities for which disclosure is permitted but not
required; all other assets and liabilities have been reflected at their carrying
amount.
<TABLE>
<CAPTION>
1993 1992
- -----------------------------------------------------------------------------------
CARRYING CARRYING
December 31 FAIR VALUE AMOUNT FAIR VALUE AMOUNT
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
ASSETS
Investments:
Bonds and redeemable
preferred stocks--
held for investment $ 5,767,618 $ 5,323,421 $ 4,808,924 $ 4,619,400
Bonds--actively
managed (a) 5,113,637 5,113,637 4,376,902 4,376,902
Common and
nonredeemable
preferred stocks (a) 427,490 427,490 450,385 450,385
Commercial
mortgage loans 2,893,223 2,558,466 2,883,596 2,693,547
Residential
mortgage loans 1,749,698 1,637,452 1,775,139 1,647,045
Consumer loans 2,392,981 1,867,944 2,182,025 1,682,387
Policy loans 351,507 351,507 315,383 315,383
Real estate and other
investments (a) 495,210 495,210 289,257 289,257
- -----------------------------------------------------------------------------------
TOTAL INVESTMENTS 19,191,364 17,775,127 17,081,611 16,074,306
Cash and cash
equivalents (a) 377,318 377,318 717,039 717,039
Deferred policy and
loan acquisition
costs -- 1,373,481 -- 1,311,899
Value of insurance in
force purchased -- 283,509 -- 228,924
Goodwill (a) 230,183 230,183 220,479 220,479
Separate account assets (a) 2,036,856 2,036,856 1,034,346 1,034,346
Other assets (a) 852,531 852,531 1,001,271 1,001,271
- -----------------------------------------------------------------------------------
TOTAL ASSETS $22,688,252 $22,929,005 $20,054,746 $20,588,264
- -----------------------------------------------------------------------------------
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================
<S> <C> <C> <C> <C>
LIABILITIES
Policy liabilities:
Benefit reserves $ 7,011,636 $ 8,404,785 $ 6,267,269 $ 7,847,568
Policyholder contract deposits 6,066,390 6,066,390 5,700,877 5,700,877
Policy and contract claims and other
policyholders' funds 436,242 453,964 356,855 380,324
- -------------------------------------------------------------------------------------------------
TOTAL POLICY
LIABILITIES 13,514,268 14,925,139 12,325,001 13,928,769
Banking deposits 1,502,576 1,491,767 1,426,101 1,396,115
Accrued expenses and other liabilities (a) 1,032,659 1,032,659 1,079,191 1,079,191
Separate account liabilities (a) 2,036,856 2,036,856 1,034,346 1,034,346
Long-term debt 667,165 589,268 625,498 589,320
Deferred federal income tax 738,919 360,425 715,985 374,596
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 19,492,443 20,436,114 17,206,122 18,402,337
- -------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY $ 3,195,809 $ 2,492,891 $ 2,848,624 $ 2,185,927
=================================================================================================
</TABLE>
- ------------
(a) These assets and liabilities are carried at fair value or are not covered by
SFAS No. 107 and are reported at carrying amounts.
VALUATION METHODS AND ASSUMPTIONS
BONDS, PREFERRED STOCKS AND COMMON STOCKS
Fair values for debt and equity securities are based on quoted market prices,
where available. For debt securities for which a quoted market price is not
available, fair values are estimated using a pricing matrix or quoted prices of
comparable instruments. The fair values of actively managed securities include
the offsetting fair value losses of related hedging instruments in the amount of
$98,394,000 and $179,736,000 at December 31, 1993 and 1992, respectively. See
additional detail in Note C.
COMMERCIAL AND RESIDENTIAL MORTGAGE LOANS
Fair values of commercial and residential mortgage loans are estimated
utilizing discounted cash flow calculations, using current market interest rates
for loans with similar terms to borrowers of similar credit quality. The fair
values of commercial and residential mortgage loans include the fair value gains
of related hedging instruments in the amounts of $83,416,000 and $99,196,000,
respectively, at December 31, 1993 and $75,440,000 and $101,934,000,
respectively, at December 31, 1992.
CONSUMER LOANS
Fair values of consumer line of credit loans are determined by discounting
the estimated future cash flows, adjusted for differences in loan
characteristics at rates for securities backed by similar loans. Variable rate
equity lines secured by second deeds of trust with interest rate floors
approximate carrying amounts plus a floor premium calculated using external
market valuations. For variable rate loans that reprice monthly with no
applicable floor and no significant change in credit risk, carrying amounts
approximate fair values. The fair values of consumer loans include a value for
loan servicing rights related to securitized loans.
POLICY LOANS
The carrying amounts of policy loans approximate their fair values.
POLICY LIABILITIES
Fair values for liabilities under floating rate GICs approximate carrying
amounts. Fair values for liabilities under other investment-type insurance
contracts are estimated using discounted cash flow calculations, based on
current interest rates for similar contracts. Fair values for liabilities under
traditional insurance contracts are estimated using discounted cash flow
calculations based on current interest rate and pricing assumptions. Other
policy liabilities represent obligations which are anticipated to be settled in
the near-term where fair values approximate their carrying amounts. The fair
values of policy liabilities represent the fair values of the insurance
contracts as a whole which implicitly eliminates deferred policy acquisition
costs and value of insurance in force purchased. The fair values of certain
investment-type insurance contracts include the offsetting fair value gains of
related hedging instruments in the amount of $94,855,000 and $124,943,000 at
December 31, 1993 and 1992, respectively.
BANKING DEPOSITS
The fair values for demand deposits (money market accounts and certain
savings accounts) are equal to the amount payable on demand at the reporting
date, that is, their carrying amount. The carrying amounts for variable rate
certificates of deposit approximate their fair values. Fair values for fixed
rate certificates and other fixed rate deposits are estimated using discounted
cash flow calculations based on interest rates currently offered on deposits of
similar remaining maturities. Fair values of banking deposits include the fair
value losses of related hedging instruments in the amount of $8,463,000 and
$25,555,000 at December 31, 1993 and 1992, respectively.
LONG-TERM DEBT
Fair values of publicly traded debt are based on quoted market prices,
where available. In instances where a quoted market price is not available, fair
values are based on discounted cash flow analyses by an external source, using a
current borrowing rate for similar debt arrangements.
DEFERRED FEDERAL INCOME TAX
Included in this caption is a projected liability for federal income tax
which may be incurred as a result of the excess of estimated fair value over
reported values of the assets and liabilities. This projected tax liability of
$378,494,000 and $341,389,000 at December 31, 1993 and 1992, respectively, has
been computed on a non-discounted basis assuming a statutory federal income
tax rate of 35 percent and 34 percent for 1993 and 1992, respectively.
HEDGING INSTRUMENTS
Fair values for interest rate exchange agreements are based on pricing
models or formulas using current assumptions.
49
<PAGE>
Hedging instruments are classified with the asset or liability being hedged.
NOTE F--ACCUMULATED DEPRECIATION AND AMORTIZATION
Accumulated depreciation and amortization were as follows:
<TABLE>
<CAPTION>
December 31 1993 1992
- -------------------------------------------------------------
<S> <C> <C>
(Dollars in thousands)
Investment real estate $ 2,431 $ 1,945
Operating property 154,550 133,256
Value of insurance in force purchased 229,312 210,097
Goodwill 79,804 67,642
=============================================================
</TABLE>
The value of insurance in force purchased is an asset that represents the
present value of future profits on business acquired. An analysis of the value
of insurance in force purchased for the years ended December 31, 1993, 1992 and
1991 is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1993 1992 1991
- -------------------------------------------------------------------
<S> <C> <C> <C>
(Dollars in thousands)
Balance at beginning of
period $228,924 $259,660 $183,856
Additions resulting from
acquisitions 73,800 -- 89,225
Accretion of interest
during the year 30,584 28,510 20,654
Amortization of asset (49,799) (41,534) (34,075)
Write-offs -- (17,712) --
- -------------------------------------------------------------------
BALANCE AT END OF PERIOD $283,509 $228,924 $259,660
===================================================================
</TABLE>
The value of insurance in force purchased which was written off in 1992
relates to the Durham Corporation credit life business, which was sold during
the year. Amortization in each of the following years, of the value of insurance
in force purchased, is expected to be: 1994--$49,165,000; 1995--$45,909,000;
1996--$41,917,000; 1997--$39,658,000 and 1998--$37,150,000.
NOTE G--FEDERAL INCOME TAX
As a result of the Omnibus Budget Reconciliation Act of 1993, enacted on
August 10, 1993 and made retroactive to January 1, 1993, the federal statutory
income tax rate increased to 35 percent from 34 percent. The effect of the
change in tax legislation increased income tax expense by $16,771,000 for the
year ended December 31, 1993, including a one-time charge of $11,682,000 as a
result of applying the newly enacted tax rate to deferred tax balances as of
August 10, 1993, and a $5,089,000 impact on current taxes due to the change in
the statutory tax rate.
Federal income tax expense (benefit) for the years ended December 31, 1993,
1992 and 1991, respectively, consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31 1993 1992 1991
- ------------------------------------------------------------------
<S> <C> <C> <C>
(Dollars in thousands)
Current $192,891 $118,268 $96,969
Deferred (28,498) 11,263 (1,265)
- ------------------------------------------------------------------
TOTAL FEDERAL INCOME TAX $164,393 $129,531 $95,704
==================================================================
</TABLE>
The following is a reconciliation of the federal statutory income tax rate
to the Company's actual effective income tax rate :
<TABLE>
<CAPTION>
PERCENT OF GAAP PRETAX INCOME
---------------------------------
Year Ended December 31 1993 1992 1991
- -------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income
tax rate 35.0% 34.0% 34.0%
Tax-preferenced investment
income (3.3) (3.6) (4.5)
Impact on deferred of
enacted tax rate change 2.4 -- --
Other items, net (0.3) (1.7) (1.8)
- -------------------------------------------------------------------
EFFECTIVE INCOME TAX RATE 33.8% 28.7% 27.7%
===================================================================
</TABLE>
Deferred tax liabilities and assets consisted of the following:
<TABLE>
<CAPTION>
December 31 1993 1992
- --------------------------------------------------------------------------
<S> <C> <C>
(Dollars in thousands)
DEFERRED TAX LIABILITIES:
Deferred policy and loan acquisition costs $421,302 $402,662
Market discount on investments 23,614 19,786
Value of insurance in force purchased 85,882 63,206
Prepaid pension asset 29,128 24,111
Net unrealized gain on actively
managed securities 9,264 --
Other 33,391 42,659
- --------------------------------------------------------------------------
TOTAL DEFERRED TAX LIABILITIES 602,581 552,424
DEFERRED TAX ASSETS:
Policy liabilities 51,040 35,927
Employee benefit accruals 32,135 28,380
Loan loss reserve 68,255 60,123
Net unrealized loss on actively
managed securities -- 18,030
Net deferred investment gains 32,257 --
Other 58,469 35,368
- --------------------------------------------------------------------------
TOTAL DEFERRED TAX ASSETS 242,156 177,828
- --------------------------------------------------------------------------
NET DEFERRED TAX LIABILITIES $360,425 $374,596
==========================================================================
</TABLE>
Prior to 1984, a portion of the life insurance subsidiaries' current income
was not subject to current income tax and was accumulated in tax accounts known
as policyholders' surplus. The total of the life insurance subsidiaries'
balances accumulated in the policyholders' surplus accounts as of December 31,
1983 amounted to $256,996,000 and was frozen at that time as a result of the Tax
Reform Act of 1984. Accordingly, no additions to the policyholders' surplus
accounts have been made since that date. Distributions from these accounts would
be subject to current income tax. At December 31, 1993, the life insurance
subsidiaries could have paid (or deemed to have paid) to the Company additional
dividends, subject to statutory limitations on subsidiary dividends as discussed
in Note I, of approximately $1,147,249,000 before being subject to tax on any
portion of the policyholders' surplus accounts. Since the Company believes that
the policyholders' surplus accounts will not be subject to current income tax in
the foreseeable future, no provision has been made for the related deferred
income taxes of $89,949,000.
50
<PAGE>
NOTE H -- DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31 1993 1992
- -------------------------------------------------------------------
<S> <C> <C>
(Dollars in thousands)
Debentures:
Sinking Fund 8.75% due 2017 $ 95,000 $ 95,000
Notes:
8.95% to 9.50% medium-term notes due
1995, noncallable 84,000 84,000
8.17% to 8.97% medium-term notes due
1996, noncallable 65,750 65,750
7.043% to 9.79% medium-term notes due
1997, noncallable 57,500 57,500
8.11% to 9.35% medium-term notes due
1998, noncallable 13,000 13,000
8.83% to 8.90% medium-term notes due
1999, noncallable 70,000 70,000
8.32% to 9.99% medium-term notes due
2000 to 2022, noncallable 177,500 177,500
10.00% medium-term notes due 2021,
callable at par in 2001 25,000 25,000
Other 1,518 1,570
- -------------------------------------------------------------------
TOTAL $589,268 $589,320
===================================================================
</TABLE>
Aggregate maturities of long-term debt in each of the following years are:
1994--none; 1995--$84,000,000; 1996--$65,750,000; 1997--$57,500,000 and
1998--$13,000,000.
DEBENTURES
The 8.75 percent Sinking Fund Debentures are subject to an annual sinking fund
beginning in 1998 and to a 10-year refunding provision, which may be reduced to
the extent that the debentures are acquired through early redemption provisions
or on the open market.
REVOLVING CREDIT FACILITY AGREEMENTS
The Company entered into a Revolving Credit Facility Agreement, with various
domestic and international banks, effective June 19, 1992, having an initial
three-year term. As provided for in the agreement, the term was extended by one
year with a remaining one-year extension at the end of the second year of the
agreement. The agreement provides for an aggregate principal amount of
$300,000,000 in unsecured borrowings with a facility fee of .225 percent per
annum based on the commitment at the time, regardless of usage, and on the
Company's ratings on senior debt. The facility enables the Company to borrow on
a standby basis and under competitive bid procedures. The loans bear interest
based on one of the following options: fixed rates determined by the
participating banks; the London Interbank Offered Rate ("LIBOR") adjusted for a
margin; LIBOR plus a margin of .25 percent; an adjusted certificate of deposit
rate plus a margin of .375 percent; or the higher of the base commercial lending
rate or federal funds plus .50 percent. The above margins are based on the
Company's ratings on senior debt. There have been no borrowings under this
agreement.
The Company entered into a short-term committed revolving credit facility
effective October 12, 1993 having an initial 364 day term that may be renewed
annually. The unsecured agreement provides for an aggregate principal amount of
$100,000,000 with a facility fee of .10 percent per annum on the daily average
balance. The borrowings bear interest based upon one of the following options:
higher of federal funds plus .25 percent or the base commercial lending rate;
LIBOR plus .225 percent; or an adjusted certificate of deposit rate plus .35
percent. There have been no borrowings under this facility.
SYNDICATED CREDIT FACILITY AGREEMENT
The Company entered into a five-year Syndicated Credit Facility Agreement,
with various international banks, effective August 21, 1990. The agreement
provides for an aggregate principal amount of $450,000,000 in unsecured
borrowings with an annual commitment fee of .10 percent on the average daily
unused commitment, and a facility fee of .025 percent per annum based on the
commitment at the time regardless of usage. The facility enables the Company to
borrow on a standby basis and under competitive bid procedures. The loans bear
interest based on one of the following options: fixed rates determined by the
domestic offices of the participating banks; LIBOR adjusted for a margin; LIBOR
plus .20 percent; or the greater of federal funds plus .125 percent or the base
commercial lending rate. There have been no borrowings under this agreement.
REVOLVING CREDIT AGREEMENTS
First Deposit Corporation and subsidiaries maintain revolving credit
agreements with various banks, borrowings under which are secured by a portion
of its consumer loan portfolio. At December 31, 1993, the agreements provide for
an aggregate principal amount of $400,000,000, with an annual commitment fee of
.375 percent on the average daily unused amount. Revolving credit loans under
the agreement bear interest based on one of the following options: greater of
the federal funds rate plus .50 percent or the prime interest rate; the
Eurodollar interest rate plus .375 percent; or the adjusted certificate of
deposit interest rate of the participating banks plus .50 percent. The
agreements expire January 17, 1995, and are renewable annually until January 17,
1997. At December 31, 1993, outstanding borrowings of $175,000,000 were
collateralized by consumer loans having unpaid balances of $865,458,000.
NOTE I -- SHAREHOLDERS' EQUITY AND RESTRICTIONS
COMMON STOCK SPLIT
On February 17, 1993, the Board of Directors declared a two-for-one split of
the Company's common stock effected in the form of a stock dividend. The stock
dividend was payable on April 30, 1993, to holders of record on April 15, 1993.
51
<PAGE>
PREFERRED STOCK
On November 14, 1991, the Company issued 1,918,200 shares of Series J, Junior
Noncumulative Convertible Preferred Stock, par value $5, in connection with the
acquisition of Durham Corporation (see Note B). The dividend rate was $4
annually, payable quarterly. Effective June 16, 1993, each outstanding share of
Series J preferred stock was exchanged for 5.55 shares of the Company's common
stock and all rights of the holders of Series J preferred stock, including the
right to receive dividends, were terminated.
Preferred Stock also includes 1,000,000 shares of Series F, Adjustable Rate
Cumulative Preferred Stock, par value $5, issued at $100 per share. The dividend
rate is set quarterly at an annualized rate of 1.85 percent less than the
highest of the U.S. Treasury three-month, 10-year or 20-year maturity rates,
which rate may not be less than 6.75 percent nor greater than 14.0 percent. The
preferred stock is redeemable, in whole or in part, at the option of the Company
at a price of $100 per share. On January 28, 1994, the Company announced plans
to redeem the preferred stock for cash at face value, effective March 2, 1994.
SHAREHOLDER RIGHTS PLAN
The Company adopted in 1987 a Shareholder Rights Plan designed to deter those
takeover initiatives not in the best interest of its shareholders. Under the
Plan, as amended on November 4, 1992, a Common Share Purchase Right (Right) with
an exercise price of $75 is attached to each outstanding share of the Company's
common stock. The Rights detach and become exercisable when any person or group
acquires 20 percent or more (or announces a tender offer for 20 percent or more)
of the Company's common stock, at which time each Right (other than those held
by the acquiring company) will entitle the holder to purchase that number of
shares of common stock of the Company with a market value of two times the
exercise price. If the Company is acquired in a merger or other business
combination or 50 percent or more of its consolidated assets or earning power
are sold, each Right will entitle the holder to purchase that number of shares
of stock of the acquiring company at the exercise price having a market value of
two times that price.
The Rights, which expire December 15, 1999, are redeemable by action of the
Board of Directors at a price of $.01 per Right at any time prior to their
becoming exercisable.
STATUTORY LIMITATIONS ON SUBSIDIARY DIVIDENDS
The Company's insurance subsidiaries are subject to limitations on the payment
of dividends to it. Generally, dividends during any year may not be paid,
without prior regulatory approval, in excess of the lesser of (and with respect
to life and health subsidiaries in the state of Missouri, in excess of the
greater of): (a) 10 percent of the insurance subsidiaries' statutory
shareholders' equity as of the preceding December 31; or (b) the insurance
subsidiaries' statutory gain from operations for the preceding year. The banking
subsidiaries' payment of dividends are restricted by certain net worth
requirements, and these subsidiaries were in compliance with those requirements
at December 31, 1993.
A comparison of subsidiaries' statutory net income and consolidated GAAP net
income is shown below. Statutory shareholders' equity for the insurance
subsidiaries consisted of capital and surplus of $43,567,000 and $1,203,819,000,
respectively, in 1993 and $43,567,000 and $1,095,597,000, respectively, in 1992.
In converting to GAAP, typical adjustments to insurance statutory amounts
include: (a) costs of acquiring new policies are deferred and amortized over the
premium-paying period or in relation to the incidence of expected gross profits;
(b) benefit reserves are calculated using more realistic investment, mortality
and withdrawal assumptions; (c) deferred income taxes are provided; (d)
acquisitions accounted for as purchases recognize the fair value of assets and
liabilities acquired; (e) statutory non-admitted assets are restored for GAAP;
and (f) for banking, the direct costs of acquiring consumer loans are deferred
and amortized over one year or five years, depending on the product.
<TABLE>
<CAPTION>
Year Ended December 31 1993 1992 1991
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
(Dollars in thousands)
Statutory gain from insurance operations:
Life insurance companies $156,202 $112,506 $147,543
Property and casualty insurance companies 8,662 8,095 4,117
- ---------------------------------------------------------------------------
Total statutory gain from
insurance operations 164,864 120,601 151,660
Realized investment gain (loss),
net of tax (5,553) (16,901) 26,951
- ---------------------------------------------------------------------------
Total insurance statutory net income 159,311 103,700 178,611
Banking net income 127,707 68,037 44,355
- ---------------------------------------------------------------------------
TOTAL STATUTORY NET INCOME $287,018 $171,737 $222,966
===========================================================================
CONSOLIDATED GAAP NET INCOME $322,665 $322,496 $250,232
===========================================================================
</TABLE>
The Company believes that contractual and statutory limitations impose no
practical restrictions on the Company's dividend and common stock repurchase
plans.
NOTE J--COMMITMENTS AND CONTINGENCIES
LEASES
At December 31, 1993, future minimum rental commitments under noncancellable
leases aggregated $114,494,000 through 2012 for office space and aggregated
$13,279,000 through 1998 for data processing and other equipment. Total payments
under these commitments in each of the following years are: 1994--$20,198,000;
1995--$17,742,000; 1996--$15,022,000; 1997--$9,567,000 and 1998--$7,441,000.
The leases contain no significant restrictions or obligations, and capital
leases included are not material.
52
<PAGE>
REINSURANCE AND UNDERWRITING RISK
To limit risk, the Company retains no more than $1,000,000 of life
insurance and $250,000 of accidental death benefits for any single life. Excess
coverages are reinsured externally, and at December 31, 1993, amounted to
approximately 6.9 percent of total life insurance in force. The Company would
become liable for the reinsured benefits if the reinsurers could not meet their
obligations.
Underwriting standards for individual life policies generally require
evidence of insurability. If applications involving substandard risks are
accepted, higher premiums are charged or coverage is limited. Other coverages
may be written without evidence of insurability, with product design, pricing or
other requirements compensating for the higher level of anticipated claims.
LEGAL PROCEEDINGS
In the normal course of business, the Company and its subsidiaries are
parties to a number of lawsuits. Management believes that these suits will be
resolved with no material financial impact on the Company.
NOTE K -- BENEFIT PLANS
The Company has a defined benefit pension plan covering most of its full-
time employees. The plan is non-contributory and provides benefits that are
based on employees' years of service and compensation during the last ten years
of employment. Employee groups not participating in the defined benefit pension
plan are covered by defined contribution retirement or profit sharing plans. In
addition, the Company has a thrift savings plan which provides for partial
employer matching of participant contributions. The Company and its subsidiaries
also provide certain life insurance and health care benefits, including benefits
to eligible retirees. Retiree medical insurance was discontinued for those
employees retiring after June 1, 1989.
NOTE L -- STOCK OWNERSHIP AND STOCK OPTION PLANS
In May 1992, the Company adopted the Capital Holding Corporation Stock
Ownership Plan ("the Plan") which provides for the award of up to 3,600,000
shares of the Company's common stock (subject to certain adjustments) on a
nonrestricted or restricted basis. Under the Plan, a portion of key employees'
incentive awards (and non-employee directors' compensation) may be paid in
nonrestricted shares of the Company's common stock and matched with an award of
restricted shares. Recipients of all stock awards have the right to vote their
respective shares and to receive cash dividends. Nonrestricted stock can be
withdrawn after the grant date, subject to forfeiture of the matching restricted
shares. Restricted stock cannot be sold or transferred by the recipient prior to
the vesting period, which is three years for 50 percent of the shares and six
years for the remaining shares. During 1993, there were 77,500 shares issued
under the Plan which were nonrestricted and 77,500 shares which were restricted.
Unearned compensation under the Plan is recorded as Unearned restricted stock in
the Consolidated Statements of Financial Condition and is being amortized over
the vesting period.
The Company has a stock option plan for key employees which authorizes the
Board of Directors to grant, before January 1, 1999, options to purchase a total
of 4,400,000 shares of common stock and related stock appreciation rights,
subject to various terms, at not less than market value. The options granted
become exercisable at the rate of one-third per year beginning one year after
the date granted, and must be exercised not later than ten years after the grant
date. At December 31, 1993, there were 1,548,100 shares available for grant
(1992 -- 2,099,400 shares) and options for 1,681,600 shares were exercisable
(1992 -- 1,610,500 shares). Plan activity for the most recent three years
follows:
<TABLE>
<CAPTION>
Number of Option Price
Options Per Share
- -------------------------------------------------------------
<S> <C> <C>
Outstanding at January 1, 1991 2,811,462 $ 8.46-$25.50
Granted 772,000 $21.75-$26.38
Exercised (616,094) $ 9.08-$21.50
Canceled or forfeited (158,082) $ 9.82-$23.41
- -------------------------------------------------------------
Outstanding at December 31, 1991 2,809,286 $ 8.46-$26.38
Granted 786,440 $28.69-$31.91
Exercised (493,398) $ 8.46-$21.75
Canceled or forfeited (58,748) $ 9.82-$31.78
- -------------------------------------------------------------
Outstanding at December 31, 1992 3,043,580 $ 9.08-$31.91
Granted 698,700 $38.31-$43.06
Exercised (575,577) $ 9.08-$31.78
Canceled or forfeited (162,090) $10.63-$43.06
- -------------------------------------------------------------
OUTSTANDING AT DECEMBER 31, 1993 3,004,613 $12.53-$43.06
=============================================================
</TABLE>
NOTE M -- SEGMENT INFORMATION
The operations of the Company and its subsidiaries have been classified
into five business segments as follows: Agency Group, Direct Response Group,
Banking Group, Accumulation and Investment Group and Corporate and Other. These
segments reflect the management structure of the organization, and are
distinguished by products and/or marketing methods.
See Business Segment Data, pages 22 and 23, for revenues, income before
federal income tax and assets for each of the three years in the period ended
December 31, 1993.
Segment revenues include: premiums and other considerations, including
amounts assessed for mortality coverage, contract administration, initiation, or
surrender; net investment income; and other income, net.
Net investment income, on a fully taxable equivalent basis, is allocated to
product lines based on policy liabilities and surplus required to support the
business. Expenses are charged to pretax segment income (and within business
segments to product lines) as incurred, or are allocated on bases considered
reasonable; however, other acceptable methods of allocation might produce
different results. Net investment income reflects a charge to the product
segments and income to corporate for capital employed to support segment
business.
Capital expenditures and depreciation expense are not material and,
consequently, are not reported.
53
<PAGE>
GRAPHICS APPENDIX
1. Page 18 of Management's Discussion and Analysis in the
1993 Annual Report contains a stacked bar chart that
reflected the operating earnings by each business segment
(excluding Corporate and Other) for the years 1991 through
1993.
2. Page 19 of Management's Discussion and Analysis in the
1993 Annual Report contains a stacked bar chart that
reflected the revenues by business segment for the years 1991
through 1993. Total revenues appear on the top of each bar.
3. Page 24 of Management's Discussion and Analysis in the
1993 Annual Report contains a stacked bar chart that
reflected unsecuritized (on-balance-sheet) consumer loans in
the Banking Group by category at December 31, 1992 and 1993.
Total unsecuritized consumer loans appear on the top of each
bar.
4. Page 25 of Management's Discussion and Analysis in the
1993 Annual Report contains a stacked bar chart that
reflected banking deposits by category as of December 31,
1992 and 1993. Total banking deposits appear on the top of
each bar. The legend contains a further breakdown of CDs of
$100,000 or greater by duration.
5. Page 28 of Management's Discussion and Analysis in the
1993 Annual Report contains a pie chart that reflected the
percentage of total insurance invested assets by investment
type at December 31, 1993. The legend contains the dollar
amount of each investment in millions as well as total
insurance invested assets.
6. Page 29 of Management's Discussion and Analysis in the
1993 Annual Report contains a pie chart that reflected the
percentage of total commercial mortgage loans by property
type at December 31, 1993. The legend contains the dollar
amount by property type in millions as well as total
commercial mortgage loans.
7. Page 29 of Management's Discussion and Analysis in the
1993 Annual Report contains a pie chart that reflected the
percentage of total commercial mortgage loans by ACLI defined
geographic location at December 31, 1993. The legend
contains the dollar amount by region in millions as well as
total commercial mortgage loans.
8. Page 30 of Management's Discussion and Analysis in the
1993 Annual Report contains a pie chart that reflected the
percentage of total residential mortgage loans by ACLI
<PAGE>
defined geographic location at December 31, 1993. The legend
contains the dollar amount by region in millions as well as
total residential mortgage loans.
