<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
- --------------------------------------------------------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------------------------------
Commission File Number 33-94670-01
-------------------------------------
FARMERS GROUP, INC.
(Exact name of registrant as specified in its charter)
NEVADA
(State or other jurisdiction of
incorporation or organization)
95-0725935
(IRS Employer Identification No.)
4680 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90010
(Address of principal executive offices)(Zip Code)
(323) 932-3200
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
Registrant's Common Stock outstanding on September 30, 1998 was 1,000 shares.
<PAGE> 2
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 3
FARMERS GROUP, INC.
AND SUBSIDIARIES
TABLE OF CONTENTS FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 1998
PART I. FINANCIAL INFORMATION PAGE
----
ITEM 1. Financial Statements
Consolidated Balance Sheets - Assets
September 30, 1998 and December 31, 1997 4
Consolidated Balance Sheets - Liabilities and Stockholders'
Equity
September 30, 1998 and December 31, 1997 5
Consolidated Statements of Income
Nine Month Periods ended September 30, 1998 and
September 30, 1997 6
Consolidated Statements of Comprehensive Income
Nine Month Periods ended September 30, 1998 and
September 30, 1997 7
Consolidated Statements of Income
Three Month Periods ended September 30, 1998 and
September 30, 1997 8
Consolidated Statements of Comprehensive Income
Three Month Periods ended September 30, 1998 and
September 30, 1997 9
Consolidated Statement of Stockholders' Equity
Nine Month Period ended September 30, 1998 10
Consolidated Statement of Stockholder's Equity
Nine Month Period ended September 30, 1997 11
Consolidated Statements of Cash Flows
Nine Month Periods ended September 30, 1998 and
September 30, 1997 12
Notes to Interim Financial Statements 13
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
PART II. OTHER INFORMATION 28
SIGNATURES 30
<PAGE> 4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Current assets, excluding insurance subsidiaries:
Cash and cash equivalents $ 155,593 $ 506,273
Marketable securities, at market value 47,777 78,147
Accrued interest 16,911 43,849
Accounts receivable, principally from the P&C Group 59,349 34,804
Notes receivable - affiliate 0 137,000
Deferred taxes 26,599 28,925
Prepaid expenses and other 20,019 13,725
------------- ------------
Total current assets 326,248 842,723
------------- ------------
Investments, excluding insurance subsidiaries:
Fixed maturities available-for-sale, at market value
(cost: $638,826 and $482,355) 649,666 488,245
Mortgage loans on real estate 207 240
Common stocks available-for-sale, at market value
(cost: $329,188 and $322,741) 385,110 388,966
Certificates in surplus of the P&C Group 34,380 684,380
Real estate, at cost (net of accumulated depreciation:
$32,630 and $29,212) 63,295 63,512
Joint ventures, at equity 864 4,825
------------- ------------
1,133,522 1,630,168
------------- ------------
Other assets, excluding insurance subsidiaries:
Notes receivable - affiliate 1,057,000 270,000
Goodwill (net of accumulated amortization:
$585,429 and $540,396) 1,816,326 1,861,359
Attorney-in-fact contracts (net of accumulated amortization:
$416,578 and $384,534) 1,292,465 1,324,509
Securities lending collateral 26,325 49,908
Other assets 249,221 297,602
------------- ------------
4,441,337 3,803,378
------------- ------------
Properties, plant and equipment, at cost: (net of accumulated
depreciation: $283,870 and $242,392) 412,167 450,880
------------- ------------
Investments of insurance subsidiaries:
Fixed maturities available-for-sale, at market value
(cost: $3,932,615 and $3,408,426) 4,115,963 3,555,148
Mortgage loans on real estate 65,105 89,903
Non-redeemable preferred stocks available-for-sale, at market
value (cost: $1,153 and $1,153) 1,286 1,227
Common stocks available-for-sale, at market value
(cost: $41 and $0) 7 120
Certificates in surplus of the P&C Group 119,000 0
Policy loans 180,742 165,894
Real estate, at cost (net of accumulated depreciation:
$21,253 and $19,306) 65,547 69,265
Joint ventures, at equity 8,243 9,515
Other investments, at market value (cost: $9,870 and $3,450) 9,033 3,299
------------- ------------
4,564,926 3,894,371
------------- ------------
Other assets of insurance subsidiaries:
Cash and cash equivalents 183,107 9,980
Marketable securities, at market value 8,133 50,069
Reinsurance premiums receivable - P&C Group 107,067 0
Accrued investment income 58,909 52,017
Deferred policy acquisition costs and value of life business
acquired 795,250 798,725
Securities lending collateral 482,132 544,580
Other assets 30,159 40,542
------------- ------------
1,664,757 1,495,913
------------- ------------
Total assets $ 12,542,957 $ 12,117,433
============= ============
The accompanying notes are an integral part of these interim financial statements.
</TABLE>
<PAGE> 5
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Current liabilities, excluding insurance subsidiaries:
Notes and accounts payable:
P&C Group $ 3,823 $ 2,478
Other 25,896 28,204
Accrued liabilities:
Profit sharing 38,306 51,067
Income taxes 46,323 82,279
Other 24,397 12,245
------------ ------------
Total current liabilities 138,745 176,273
------------ ------------
Other liabilities, excluding insurance subsidiaries:
Real estate mortgages payable 26 92
Non-current deferred taxes 600,952 643,910
Securities lending liability 26,325 49,908
Other 134,803 131,056
------------ ------------
762,106 824,966
------------ ------------
Liabilities of insurance subsidiaries:
Policy liabilities:
Future policy benefits 3,122,215 3,010,162
Claims 28,921 22,156
Other policyholder funds 57,606 60,072
Provision for non-life losses and loss adjustment expenses 105,251 0
Income taxes (including deferred taxes: $164,705 and $153,006) 176,508 148,868
Unearned investment income 1,019 1,016
Reinsurance payable - P&C Group 157,989 0
Securities lending liability 482,132 544,580
Other liabilities 63,245 47,766
------------ ------------
4,194,886 3,834,620
------------ ------------
Total liabilities 5,095,737 4,835,859
------------ ------------
Commitments and contingencies
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior
subordinated debentures 500,000 500,000
------------ ------------
Stockholders' Equity:
Common stock, $1 par value per share; authorized, issued 0 1
and outstanding: as of December 31, 1997 - 1,000 shares
Class A common stock, $1 par value per share; authorized, issued 0.5 0
and outstanding: as of September 30, 1998 - 500 shares
Class B common stock, $1 par value per share; authorized, issued 0.5 0
and outstanding: as of September 30, 1998 - 500 shares
Additional capital 5,212,618 5,212,618
Accumulated other comprehensive income (net of deferred
taxes: $69,749 and $61,193) 129,501 113,549
Retained earnings 1,605,100 1,455,406
------------ ------------
Total stockholders' equity 6,947,220 6,781,573
------------ ------------
Total liabilities and stockholders' equity $ 12,542,957 $ 12,117,432
============ ============
The accompanying notes are an integral part of these interim financial statements.
</TABLE>
<PAGE> 6
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine month period
ended September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Consolidated operating revenues $ 2,286,713 $ 1,504,332
=========== ===========
Management services to property and casualty
insurance companies; and other:
Operating revenues $ 1,015,816 $ 981,107
----------- -----------
Operating expenses 598,528 550,118
Merger related expenses 20,532 0
----------- -----------
Total expenses 619,060 550,118
----------- ----------
Operating income 396,756 430,989
Net investment income 104,039 110,018
Net realized gains 17,977 56,609
Gain on sale of subsidiaries 0 16,536
Dividends on preferred securities of subsidiary trusts (31,553) (31,553)
----------- ----------
Income before provision for taxes 487,219 582,599
Provision for income taxes 198,455 252,835
----------- ----------
Management services income 288,764 329,764
----------- ----------
Insurance subsidiaries:
Life premiums 129,225 122,270
Non-life reinsurance premiums 750,104 0
Life policy charges 154,643 166,026
Investment income, net of expenses 226,918 222,064
Net realized gains 10,007 12,865
----------- -----------
Total revenues 1,270,897 523,225
----------- -----------
Non-life losses and loss adjustment expenses 491,271 0
Life policyholders' benefits and charges 228,298 223,628
Non-life reinsurance commissions 239,974 0
General operating expenses 113,822 132,019
----------- -----------
Total operating expenses 1,073,365 355,647
----------- -----------
Income before provision for taxes 197,532 167,578
Provision for income taxes 70,202 58,086
----------- -----------
Insurance subsidiaries income 127,330 111,492
----------- -----------
Consolidated net income $ 416,094 $ 441,256
=========== ===========
The accompanying notes are an integral part of these interim financial statements.
</TABLE>
<PAGE> 7
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine month period
ended September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Consolidated net income $ 416,094 $ 441,256
=========== ===========
Other comprehensive income, net of tax:
Unrealized holding gains/(losses) on securities:
Unrealized holding gains arising during the period,
net of tax of $15,896 $ 29,582 $
Less: reclassification adjustment for gains
included in net income, net of tax of ($4,728) (8,780)
----------- -----------
Net unrealized holding gains on securities,
net of tax of $11,168 and $12,216 20,802 22,918
Change in effect of unrealized losses on other
insurance accounts, net of tax of ($2,612) and
($4,024) (4,850) (7,473)
----------- -----------
Other comprehensive income 15,952 15,445
----------- -----------
Comprehensive income $ 432,046 $ 456,701
=========== ===========
The accompanying notes are an integral part of these interim financial statements.
</TABLE>
<PAGE> 8
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three month period
ended September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Consolidated operating revenues $ 774,354 $ 494,022
=========== ===========
Management services to property and casualty
insurance companies; and other:
Operating revenues $ 343,904 $ 331,569
---------- ----------
Operating expenses 229,108 186,514
Merger related expenses 20,532 0
---------- ----------
Total expenses 249,640 186,514
---------- ----------
Operating income 94,264 145,055
Net investment income 27,065 39,615
Net realized gains/(losses) (552) 15,906
Dividends on preferred securities of subsidiary trusts (10,518) (10,518)
----------- ----------
Income before provision for taxes 110,259 190,058
Provision for income taxes 47,329 76,861
----------- ----------
Management services income 62,930 113,197
----------- ----------
Insurance subsidiaries:
Life premiums 44,993 38,389
Non-life reinsurance premiums 250,104 0
Life policy charges 51,588 50,505
Investment income, net of expenses 80,369 69,299
Net realized gains 3,396 4,260
----------- -----------
Total revenues 430,450 162,453
----------- -----------
Non-life losses and loss adjustment expenses 160,525 0
Life policyholders' benefits and charges 79,195 66,870
Non-life reinsurance commissions 83,220 0
General operating expenses 38,893 38,199
----------- -----------
Total operating expenses 361,833 105,069
----------- -----------
Income before provision for taxes 68,617 57,384
Provision for income taxes 23,965 19,475
----------- -----------
Insurance subsidiaries income 44,652 37,909
----------- -----------
Consolidated net income $ 107,582 $ 151,106
=========== ===========
The accompanying notes are an integral part of these interim financial statements.
</TABLE>
<PAGE> 9
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three month period
ended September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Consolidated net income $ 107,582 $ 151,106
=========== ===========
Other comprehensive income, net of tax:
Unrealized holding gains/(losses) on securities:
Unrealized holding gains arising during the period,
net of tax of $3,190 $ 5,935 $
Less: reclassification adjustment for gains
included in net income, net of tax of ($2,969) (5,514)
----------- -----------
Net unrealized holding gains on securities,
net of tax of $221 and $26,720 421 45,173
Change in effect of unrealized losses on other
insurance accounts, net of tax of ($2,470) and
($6,072) (4,587) (11,276)
----------- -----------
Other comprehensive income (4,166) 33,897
----------- -----------
Comprehensive income $ 103,416 $ 185,003
=========== ===========
The accompanying notes are an integral part of these interim financial statements.
</TABLE>
<PAGE> 10
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the nine month period ended September 30, 1998
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated Other Total
Common Additional Comprehensive Retained Stockholders'
Stock Capital Income Earnings Equity
-------- ----------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $ 1 $ 5,212,618 $ 113,549 $ 1,455,406 $ 6,781,574
Net income 416,094 416,094
Unrealized holding gains
arising during the period,
net of tax of $15,896 29,582 29,582
Reclassification adjustment
for gains included in net
income, net of tax of ($4,728) (8,780) (8,780)
Change in effect of unrealized
losses on other insurance
accounts, net of tax of ($2,612) (4,850) (4,850)
Cash dividends paid (266,400) (266,400)
-------- ----------- ---------------- ------------ ------------
Balance, September 30, 1998 $ 1 $ 5,212,618 $ 129,501 $ 1,605,100 $ 6,947,220
======== =========== ================ ============ ============
The accompanying notes are an integral part of these interim financial statements.
</TABLE>
<PAGE> 11
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
For the nine month period ended September 30, 1997
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated Other Total
Common Additional Comprehensive Retained Stockholder's
Stock Capital Income Earnings Equity
-------- ------------ ----------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 1 $ 5,212,618 $ 92,104 $ 1,199,108 $ 6,503,831
Net income 441,256 441,256
Change in other comprehensive
income, net of tax of
$8,192 15,445 15,445
Cash dividends paid (252,900) (252,900)
-------- ------------ ----------------- ------------ ------------
Balance, September 30, 1997 $ 1 $ 5,212,618 $ 107,549 $ 1,387,464 $ 6,707,632
======== ============ ================= ============ ============
The accompanying notes are an integral part of these interim financial statements.
</TABLE>
<PAGE> 12
FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine month period
ended September 30,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Consolidated net income $ 416,094 $ 441,256
Non-cash and operating activities adjustments:
Depreciation and amortization 141,205 130,322
Amortization of deferred policy acquisition costs and
value of life business acquired 67,759 80,759
Policy acquisition costs deferred (71,746) (74,472)
Life insurance policy liabilities 21,311 13,500
Provision for non-life losses and loss adjustment expenses 105,251 0
Universal life type contracts:
Deposits received 223,394 221,181
Withdrawals (180,274) (174,062)
Interest credited 50,285 46,113
Equity in earnings of joint ventures (1,039) (2,824)
Gain on sales of assets (28,197) (70,505)
Gain on sale of subsidiaries 0 (16,536)
Changes in assets and liabilities:
Current assets and liabilities 34,533 25,420
Non-current assets and liabilities 62,598 (112,874)
Other, net (32,095) 77
---------- -----------
Net cash provided by operating activities 809,079 507,355
---------- -----------
Cash Flows from Investing Activities:
Purchases of investments available-for-sale (1,257,063) (1,288,241)
Purchases of properties (34,963) (55,823)
Purchase of notes receivable - affiliate (1,057,000) 0
Purchase of surplus certificates of the P&C Group (119,000) 0
Proceeds from sales and maturities of investments
available-for-sale 656,622 815,164
Proceeds from sales of properties 20,143 12,243
Proceeds from redemption of surplus certificates of the P&C Group 650,000 0
Proceeds from redemption of notes receivable - affiliate 407,000 0
Proceeds from sale of subsidiaries 0 335,408
Mortgage loan collections 24,058 21,465
Increase in policy loans (14,848) (12,785)
Other, net 3,250 (4,290)
---------- -----------
Net cash used in investing activities (721,801) (176,859)
---------- -----------
Cash Flows from Financing Activities:
Dividends paid to stockholders (266,400) (252,900)
Annuity contracts:
Deposits received 107,341 94,463
Withdrawals (164,283) (120,841)
Interest credited 58,577 60,041
Payment of long-term notes payable (66) (60)
---------- -----------
Net cash used in financing activities (264,831) (219,297)
---------- -----------
Increase/(decrease) in cash and cash equivalents (177,553) 111,199
Cash and cash equivalents - at beginning of year 516,253 499,328
---------- -----------
Cash and cash equivalents - at end of period $ 338,700 $ 610,527
========== ===========
The accompanying notes are an integral part of these interim financial statements.
</TABLE>
<PAGE> 13
FARMERS GROUP, INC.
AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
A. Basis of presentation and summary of significant accounting policies
The accompanying consolidated balance sheet of Farmers Group, Inc. ("FGI")
and its subsidiaries (together, the "Company") as of September 30, 1998, the
related consolidated statements of income, comprehensive income, stockholders'
equity and cash flows for the nine month periods ended September 30, 1998 and
September 30, 1997, and the consolidated statements of income and
comprehensive income for the three month periods ended September 30, 1998 and
September 30, 1997, have been prepared in accordance with generally accepted
accounting principles ("GAAP") for interim periods and are unaudited.
However, in management's opinion, the consolidated financial statements include
all adjustments (consisting of only normal recurring adjustments) necessary for
a fair presentation of results for such interim periods. These statements do
not include all of the information and footnotes required by GAAP for complete
financial statements and should be read in conjunction with the consolidated
balance sheets of the Company as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholder's equity, and cash flows
for each of the three years in the period ended December 31, 1997.
Interim results are not necessarily indicative of results for the full
year. All material inter-company transactions have been eliminated. Certain
amounts applicable to prior years have been reclassified to conform with the
1998 presentation.
The preparation of the Company's financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements as well as the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
The Company is attorney-in-fact ("AIF") for three inter-insurance
exchanges: Farmers Insurance Exchange, Fire Insurance Exchange and Truck
Insurance Exchange (collectively, the "Exchanges"), which operate in the
property and casualty insurance industry. As AIF, FGI, or its subsidiaries, as
applicable, provides management services to the Exchanges, their respective
subsidiaries and Farmers Texas County Mutual Insurance Company (collectively,
the "P&C Group") and receives compensation based on a percentage of earned
premiums.
Prior to April 15, 1997, the Company's life insurance operations were
conducted by three wholly owned life insurance subsidiaries: Farmers New World
Life Insurance Company ("Farmers Life"), The Ohio State Life Insurance Company
("OSL") and Investors Guaranty Life Insurance Company ("IGL"). On April 15,
1997, FGI sold OSL and IGL to Great Southern Life Insurance Company, a
subsidiary of Americo Life, Inc.. The contribution to net income of these
subsidiaries in 1997 was $5,507,000, and the combined net assets of these
subsidiaries as of April 15, 1997 was $317,625,000.
In December 1997, Farmers Reinsurance Company ("Farmers Re"), a property
and casualty insurance subsidiary of FGI, was formed and licensed to conduct
business. In January 1998,
<PAGE> 14
Farmers Re entered into a quota share reinsurance treaty with Farmers
Insurance Exchange under which it reinsures a percentage of the auto physical
damage business written by the P&C Group.
As a result of the foregoing, references to the "Insurance Subsidiaries"
within the 1998 consolidated financial statements are to Farmers Life and
Farmers Re, whereas, references to the "Insurance Subsidiaries" within the
1997 consolidated statements of income and comprehensive income and
consolidated statement of cash flows are to Farmers Life, OSL and IGL.
In December 1988, BATUS Inc. ("BATUS"), a subsidiary of B.A.T Industries
p.l.c. ("B.A.T"), acquired 100% ownership of the Company for $5,212,619,000 in
cash, including related expenses, through its wholly owned subsidiary BATUS
Financial Services. Immediately thereafter, BATUS Financial Services was merged
into Farmers Group, Inc.. The acquisition was accounted for as a purchase
and, accordingly, the acquired assets and liabilities were recorded in the
Company's consolidated balance sheets based on their estimated fair values at
December 31, 1988. In January 1990, ownership of the Company was transferred
to South Western Nominees Limited, a subsidiary of B.A.T.
On December 22, 1997, a definitive agreement was reached to merge B.A.T
Industries' Financial Services Businesses, which includes the Company, with
Zurich Insurance Company ("Zurich"). In June 1998, the merger was approved by
the shareholders of B.A.T and Zurich. In September 1998, this merger was
completed and the businesses of Zurich and B.A.T Industries' Financial Services
Businesses were transferred to Zurich Financial Services ("ZFS"), a new Swiss
company with headquarters in Zurich. As a result, each two shares of the
Company's prior outstanding stock were recapitalized into one share of Class A
Common Stock, par value $1.00 per share ("Ordinary Shares") and one share of
Class B Common Stock, par value $1.00 per share ("Income Shares"). Under the
merger agreement, all Ordinary Shares became wholly owned by ZFS and all Income
Shares became wholly owned by Allied Zurich Holdings, an affiliated company
created during the restructuring of B.A.T.
In February 1997, the Financial Accounting Standards Board ("FASB")
released Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share". This Statement, effective for financial statements
issued for periods ending after December 15, 1997, established standards for
computing and presenting earnings per share and applies to entities with
publicly held common stock or potential common stock. The Company does not
have any publicly held common stock and, therefore, is not subject to the
requirements of this Statement.
In 1998, the Company adopted SFAS No. 129, "Disclosure of Information
About Capital Structure". This Statement, effective for financial statements
issued for periods ending after December 15, 1997, established standards for
disclosing information about an entity's capital structure. The adoption of
this Statement did not have a material impact on the Company's consolidated
financial statements.
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income". This Statement, effective for fiscal periods beginning after
December 15, 1997, established standards for reporting and displaying
comprehensive income and its components. This Statement mandated that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement
with the same prominence as other financial statements. As a result of
adopting this Statement, the components of comprehensive income are now stated
in the consolidated statements of comprehensive income. The adoption of this
Statement did not have a material impact on the Company's consolidated
financial statements.
<PAGE> 15
In June 1997, the FASB released SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information". This Statement, effective for
financial statements of public enterprises issued for periods beginning after
December 15, 1997, established standards for reporting information about
operating segments in annual financial statements and required the reporting
of selected information about operating segments in interim financial reports
issued to shareholders. It also established standards for related disclosures
about products and services, geographic areas, and major customers. This
Statement superseded SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise", and amended SFAS No. 94, "Consolidation of All Majority
Owned Subsidiaries". As this Statement need not be applied to the interim
financial statements in the initial year of its application, the Company will
adopt SFAS No. 131 beginning with its December 31, 1998 annual financial
statements. The Company does not expect the adoption of this Statement to have
a material impact on its consolidated financial statements.
In February 1998, the FASB released SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits". This Statement, effective
for financial statements of public and nonpublic enterprises issued for fiscal
years beginning after December 15, 1997, standardized the disclosure
requirements relating to pension and other postretirement benefit plans.
It addressed disclosure only and, as such, did not change the requirements for
measurement or recognition of such plans. This Statement superceded the
disclosure requirements set forth in SFAS No. 87, "Employers' Accounting for
Pensions", SFAS No. 88, "Employers' Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits", and SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions".
The Company does not expect the adoption of this Statement to have a material
impact on its consolidated financial statements.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". This SOP, effective
for financial statements issued for periods beginning after December 15, 1998,
applies to all nongovernmental entities and establishes the rules for
capitalizing or expensing internally used software. The Company does not
expect the adoption of this Statement to have a material impact on its
consolidated financial statements.
In June 1998, the FASB released SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement, effective for financial
statements of public and nonpublic entities issued for fiscal years beginning
after June 15, 1999, established accounting and reporting standards for
derivative instruments (including certain derivative instruments embedded in
other contracts) and for hedging activities. SFAS No. 133 required that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This Statement amended SFAS No. 52, "Foreign Currency Translation", and SFAS
No. 107, "Disclosures about Fair Value of Financial Instruments". It
superseded SFAS No. 80, "Accounting for Futures Contracts", SFAS No. 105,
"Disclosure of Information about Financial Instruments with Off-Balance-Sheet
Risk and Financial Instruments with Concentrations of Credit Risk", and SFAS
No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments". The Company does not expect the adoption of this
Statement to have a material impact on its consolidated financial statements.
<PAGE> 16
B. Material contingencies
The Company is a party to numerous lawsuits arising from its normal
business activities. These actions are in various stages of discovery and
development, and some seek punitive as well as compensatory damages. In the
opinion of management, the Company has not engaged in any conduct which should
warrant the award of any material punitive or compensatory damages. The
Company intends to vigorously defend its position in each case, and management
believes that, while it is not possible to predict the outcome of such matters
with absolute certainty, ultimate disposition of these proceedings should not
have a material adverse effect on the Company's consolidated results of
operations or financial position.
C. Company Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely Junior Subordinated Debentures
In 1995, Farmers Group Capital and Farmers Group Capital II
(the "Subsidiary Trusts"), consolidated wholly owned subsidiaries of Farmers
Group, Inc., issued $410 million of 8.45% Cumulative Quarterly Income Preferred
Securities ("QUIPS"), Series A and $90 million of 8.25% QUIPS, Series B,
respectively. In connection with the Subsidiary Trusts' issuance of the QUIPS
and the related purchase by Farmers Group, Inc. of all of the Subsidiary
Trusts' Common Securities ("Common Securities"), Farmers Group, Inc. issued to
Farmers Group Capital $422,680,399 principal amount of its 8.45% Junior
Subordinated Debentures, Series A due on December 31, 2025, (the "Junior
Subordinated Debentures, Series A") and issued to Farmers Group Capital II
$92,783,505 principal amount of its 8.25% Junior Subordinated Debentures,
Series B due on December 31, 2025 (the "Junior Subordinated Debentures, Series
B" and, together with the Junior Subordinated Debentures, Series A, the "Junior
Subordinated Debentures"). The sole assets of Farmers Group Capital are the
Junior Subordinated Debentures, Series A. The sole assets of Farmers Group
Capital II are the Junior Subordinated Debentures, Series B. In addition,
these arrangements are governed by various agreements between Farmers Group,
Inc. and the Subsidiary Trusts (the Guarantee Agreements, the Trust Agreements,
the Expense Agreements, the Indentures and the Junior Subordinated Debentures)
which considered together constitute a full and unconditional guarantee by
Farmers Group, Inc. of the Subsidiary Trusts' obligations under the Preferred
Securities.
Under certain circumstances, the Junior Subordinated Debentures may be
distributed to holders of the QUIPS and holders of the Common Securities in
liquidation of the Subsidiary Trusts. The QUIPS are subject to mandatory
redemption upon repayment of the Junior Subordinated Debentures at maturity,
or upon their earlier redemption, at a redemption price of $25 per Preferred
Security, plus accrued and unpaid distributions thereon to the date fixed for
redemption. Farmers Group, Inc. will have the option at any time on or after
September 27, 2000 to redeem, in whole or part, the Junior Subordinated
Debentures.
As of September 30, 1998 and 1997, a total of 20,000,000 shares of QUIPS
were outstanding.
D. Management fees
As AIF, the Company, or its subsidiaries, as applicable, provides
management services to the P&C Group and receives management fees for the
services rendered. As a result, the Company received management fees from the
P&C Group of $950,787,000 and $918,587,000 for the nine month periods ended
September 30, 1998 and September 30, 1997, respectively.
<PAGE> 17
E. Related parties
On September 3, 1998, the Company received $423,734,000 from B.A.T Capital
Corporation, a subsidiary of B.A.T, in settlement of $407,000,000 of notes
receivable and $16,734,000 of accrued interest. These notes were fixed rate
medium-term notes with maturity dates as follows: $137,000,000 in October 1998,
$135,000,000 in October 1999, and $135,000,000 in October 2000. Interest on
these notes was paid semi-annually at coupon rates of 5.35%, 6.68%, and 6.33%,
respectively. On October 7, 1997, a four year $135,000,000 note with an
interest rate of 5.10% matured and the $135,000,000 note that would have
matured in October 2000 was subsequently issued at an interest rate of 6.33%.
Income earned on the notes outstanding for the nine month periods ended
September 30, 1998 and September 30, 1997 was $16,734,000 and $17,424,000,
respectively.
In addition, on September 3, 1998, the Company, using the proceeds from
the $407,000,000 B.A.T note redemption and $650,000,000 from the redemption of
P&C Group Certificates in Surplus (see note G), issued $1,057,000,000 of notes
receivable to British American Financial Services (UK and International) Ltd.
("BAFS"), a subsidiary of the Zurich Financial Services Group. These notes are
fixed rate medium-term notes with maturity dates as follows: $200,000,000 in
September 2000, $207,000,000 in September 2001, $200,000,000 in September 2002,
$200,000,000 in September 2003 and $250,000,000 in September 2004. Interest on
these notes is paid semi-annually at coupon rates of 5.44%, 5.48%, 5.67%, 5.71%
and 5.78%, respectively. Income earned on these notes through September 30,
1998 was $4,761,000.
F. Supplemental cash flow information
For financial statement purposes, the Company considers all investments
with original maturities of 90 days or less as cash equivalents. Following is
a reconciliation of the individual balance sheet cash and cash equivalent
totals to the consolidated cash flow total:
<TABLE>
<CAPTION>
Excluding
Insurance Insurance
Subsidiaries Subsidiaries Consolidated
------------ ------------ ------------
(Amounts in thousands)
<S> <C> <C> <C>
Cash and cash equivalents -- December 31, 1996 $ 412,018 $ 87,310 $ 499,328
Activity through September 1997 111,199
------------
Cash and cash equivalents -- September 30, 1997 585,803 24,724 $ 610,527
============
Cash and cash equivalents -- December 31, 1997 506,273 9,980 $ 516,253
Activity through September 1998 (177,553)
------------
Cash and cash equivalents -- September 30, 1998 155,593 183,107 $ 338,700
============
</TABLE>
Cash payments for interest were $1,601,000 and $2,138,000 for the nine
month periods ended September 30, 1998 and September 30, 1997, respectively,
while the cash payment for dividends to the holders of the Company's QUIPS was
$31,553,000 for each of the nine month periods ended September 30, 1998 and
September 30, 1997. Cash payments for income taxes were $315,977,000 and
$314,475,000 for the nine month periods ended September 30, 1998 and September
30, 1997, respectively.
<PAGE> 18
For the nine month period ended September 30, 1997, net cash proceeds
from the sale of OSL and IGL amounted to $335,408,000 and were primarily in
consideration for the following:
Investments $ 808,208,000
Deferred policy acquisition costs and value of life 182,472,000
business acquired
Life insurance policy liabilities (690,426,000)
G. Certificates of Surplus of the P&C Group
On September 8, 1998, Farmers Life made a $119,000,000 surplus
contribution to the P&C Group and, in return, received a $119,000,000
certificate of contribution, bearing interest at 6.10% annually. In addition,
as of September 30, 1998, the Company held miscellaneous other certificates of
contribution from the P&C Group totaling $34,380,000 which bear interest
at various rates.
Conditions governing repayment of these amounts are outlined in the
certificates. Generally, repayment may be made only when the surplus balance
of the issuer reaches a certain specified level, and then only after approval
is granted by issuer's governing Board and the appropriate Department of
Insurance.
On July 10, 1998, the Company received $675,647,000 from the P&C Group as
follows:
Redemption of a $100,000,000 certificate of contribution, issued on
December 20, 1996, bearing interest at 8.95% annually.
Redemption of a $135,000,000 certificate of contribution, issued on
September 30, 1996, bearing interest at 8.95% annually.
Redemption of a $165,000,000 certificate of contribution, issued on
June 27, 1996, bearing interest at 8.95% annually.
Redemption of a $250,000,000 certificate of contribution, issued in
1995, bearing interest at 8.95% annually.
A $25,647,000 repayment of accrued interest.
H. Merger Related Expenses
As a result of the merger between B.A.T Industries' Financial Service
Businesses and Zurich, the Company has recorded various merger related expenses
totaling $20,532,000, of which $16,545,000 relates to losses the Company will
incur in connection with taking over the management of Zurich's US personal
lines business. In addition, $2,728,000 relates to a write-off of
redundant capitalized software and $1,259,000 relates to miscellaneous audit,
legal and travel expenses incurred by the Company in connection with the
merger.
<PAGE> 19
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company's principal activities are providing management services to
the property and casualty insurance companies, underwriting life insurance and
annuity products, and providing reinsurance coverage to the P&C Group.
Revenues and expenses relating to these principal business activities are
reflected in the Company's Consolidated Financial Statements prepared in
accordance with GAAP, which differs from statutory accounting practices
("SAP"), which Farmers Life and Farmers Re are required to use for regulatory
reporting purposes.
The Company underwrites life insurance and annuity products through
Farmers Life. Revenues attributable to traditional life insurance products,
such as whole life or term life contracts, are classified as premiums as they
become due. Future benefits are associated with such premiums (through
increases in liabilities for future policy benefits), and prior period
capitalized costs are amortized (through amortization of Deferred Policy
Acquisition Costs ("DAC")) so that profits are generally recognized over the
same period as revenue income. Revenues attributable to Universal Life
("UL") products consist of policy charges for the cost of insurance, policy
administration charges, surrender charges, and investment income on assets
allocated to support policyholder account balances on deposit. Revenues for
deferred annuity products consist of surrender charges and investment income
on assets allocated to support policyholder account balances. Expenses on UL
and annuity policies include interest credited to policyholders on policy
balances as well as benefit claims incurred in excess of policy account
balances.
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997
Management Services to Property and Casualty Insurance Companies; and Other
Operating Revenues. Operating revenues increased from $331.6 million
for the three months ended September 30, 1997 to $343.9 million for the three
months ended September 30, 1998, an increase of $12.3 million, or 3.7%.
Operating revenues primarily consist of management fees paid to the Company
as a percentage of gross premiums earned by the P&C Group. Such premiums
increased from $2,537.8 million in the third quarter of 1997 to $2,609.1
million in the third quarter of 1998 due primarily to higher premiums earned
in the Auto and Fire lines of business.
Operating Expenses. Operating expenses as a percentage of operating
revenues increased from 56.3% in the third quarter of 1997 to 72.6% in the
third quarter of 1998, an increase of 16.3% due to $20.5 million of merger
related expenses and a $45.8 million write-off of impaired assets. Excluding
these two items, operating expenses decreased 1.7% between years.
Salaries and Employee Benefits. Salaries and employee benefits
decreased from $83.9 million for the three months ended September 30,
1997 to $79.3 million for the three months ended September 30, 1998, a
decrease of $4.6 million, or 5.5%, due primarily to a reduction in
employee complement.
Buildings and Equipment Expenses. Buildings and equipment expenses
increased from $25.4 million for the three months ended September 30,
1997 to $70.2 million for the three months ended September 30, 1998, an
increase of $44.8 million. In September 1998, a review of capitalized
software was conducted and $43.4 million of capitalized costs that were
no longer expected to be recoverable were written-off.
<PAGE> 20
Amortization of Attorney-In-Fact Contracts and Goodwill. Purchase
accounting entries related to the acquisition of the Company by B.A.T in
December 1988 include goodwill (capitalized at $2.4 billion) and the
value of the AIF contracts of the P&C Group (capitalized at $1.7 billion).
Amortization of these two items, which is being taken on a straight-line
basis over forty years, reduced pretax income by approximately $25.7
million in each of the three month periods ended September 30, 1998
and September 30, 1997.
General and Administrative Expenses. General and administrative
expenses increased from $51.5 million for the three months ended
September 30, 1997 to $53.9 million for the three months ended September
30, 1998, an increase of $2.4 million, or 4.7%, due primarily to higher
business levels.
Merger Related Expenses. Expenses incurred by the Company as a
result of the merger between B.A.T Industries' Financial Services
Businesses and Zurich amounted to $20.5 million in the three month period
ended September 30, 1998 (see Footnote H).
Net Investment Income. Net investment income decreased from $39.6
million for the three months ended September 30, 1997 to $27.1 million for the
three months ended September 30, 1998 due primarily to a decrease in investment
yields.
Net Realized Gains/(Losses). Net realized gains decreased from a $15.9
million gain for the three months ended September 30, 1997 to a ($0.5) million
loss for the three months ended September 30, 1998. This is a result of the
fact that significant gains were realized in 1997 in connection with
restructuring the equities portfolio coupled with the negative movements in
the stock market in 1998.
Dividends on Preferred Securities of Subsidiary Trusts. Dividend expense
related to the $500.0 million of QUIPS issued in 1995 was $10.5 million for
the three months ended September 30, 1998 and September 30, 1997.
Provision for Income Taxes. Provision for income taxes decreased from
$76.9 million for the three months ended September 30, 1997 to $47.3 million
for the three months ended September 30, 1998, a decrease of $29.6 million, or
38.5%. This decrease was due to a decrease in pretax income.
Management Services Income. As a result of the foregoing, management
services income decreased from $113.2 million for the three months ended
September 30, 1997 to $62.9 million for the three months ended September 30,
1998, a decrease of $50.3 million, or 44.4%.
Insurance Subsidiaries
In December 1997, Farmers Re, a property and casualty insurance
subsidiary of FGI, was formed and licensed to conduct business. In January
1998, Farmers Re entered into a quota share reinsurance treaty with Farmers
Insurance Exchange under which it reinsures a percentage of the auto physical
damage business written by the P&C Group. As a result, for the three month
period ended September 30, 1998, Farmers Re assumed $250.1 million of
premiums, incurred $160.5 million of non-life losses and loss adjustment
expenses and incurred $83.3 million of non-life reinsurance commissions.
For the three months ended September 30, 1998, Farmers Re contributed $9.5
million to income before taxes and $6.2 million to net income.
<PAGE> 21
On April 15, 1997, OSL and IGL were sold to Great Southern Life Insurance
Company, a subsidiary of Americo Life, Inc.. As a result, there was no
contribution to net income from OSL or IGL for the three months ended September
30, 1998 and 1997.
The following commentary addresses the results of the Company's remaining
life insurance subsidiary, Farmers Life.
Total Revenues. Total revenues increased from $162.5 million for the
three months ended September 30, 1997 to $177.2 million for the three months
ended September 30, 1998, an increase of $14.7 million, or 9.0%.
Life Premiums. Premiums increased $6.6 million for the three months
ended September 30, 1998, or 17.2%, over the three months ended September
30, 1997. This increase was due to growth in the average volume of
insurance in-force which was driven by sales of the Premier Whole Life
("PWL"), Farmers Premier 20 Year Term ("FP20"), and Single Premium
Immediate Annuities ("SPIA") products.
Life Policy Charges. Policy charges increased $1.1 million for the
three months ended September 30, 1998, or 2.1%, over the three months
ended September 30, 1997, reflecting growth in the average volume of
universal life-type insurance in-force.
Investment Income. Net investment income increased $7.9 million in
the three months ended September 30, 1998, or 11.4%, over the three
months ended September 30, 1997 due to higher bond interest income
earned on a higher invested asset base.
Net Realized Gains. Net realized gains decreased $0.9 million, from
$4.3 million in the three months ended September 30, 1997 to $3.4 million
in the three months ended September 30, 1998 due to lower gains realized
on bond sales in 1998.
Total Operating Expenses. Total operating expenses increased from $105.1
million for the three months ended September 30, 1997 to $118.1 million for
the three months ended September 30, 1998, an increase of $13.0 million, or
12.4%.
Life Policyholders' Benefits and Charges. Life policyholders'
benefits expense and charges increased from $66.9 million for the three
months ended September 30, 1997 to $79.2 million for the three months
ended September 30, 1998, an increase of $12.3 million, or 18.4%.
Policy benefits. Policy benefits, which consist primarily of
death and surrender benefits on life products, increased $9.4
million over September 30, 1997 to $35.0 million, due to growth in
the volume of life insurance in-force and an increase in mortality
experience between periods.
Increase in liability for future benefits. Increase in
liability for future benefits expense increased from $4.2 million
for the three months ended September 30, 1997 to $6.4 million for
the three months ended September 30, 1998. This increase was
primarily attributable to additional sales of the PWL, SPIA and the
Farmers Premier product series, especially the FP20 product
introduced in October 1997.
<PAGE> 22
Interest credited to policyholders. Interest credited to
policyholders, which represents the amount credited to policyholder
funds on deposit under universal life-type contracts and deferred
annuities, increased from $37.1 million for the three months ended
September 30, 1997 to $37.8 million for the three months ended
September 30, 1998, or 1.9%, reflecting growth in the universal life
fund balance.
General Operating Expenses. General operating expenses increased
from $38.2 million for the three months ended September 30, 1997 to $38.9
million for the three months ended September 30, 1998, an increase of
$0.7 million, or 1.8%.
Amortization of DAC and Value of Life Business Acquired.
Amortization expense decreased from $25.3 million for the three
months ended September 30, 1997 to $23.9 million for the three
months ended September 30, 1998 due to higher universal life death
claims experience in 1998.
Commissions. Commissions increased from $3.5 million for the
three months ended September 30, 1997 to $4.7 million for the three
months ended September 30, 1998, or $1.2 million.
General and Administrative Expenses. General and administrative
expenses increased from $9.4 million for the three months ended
September 30, 1997 to $10.3 million for the three months ended
September 30, 1998, or 9.6%. This increase resulted mainly from
increased premium taxes.
Provision for Income Taxes. Provision for income taxes increased from
$19.5 million for the three months ended September 30, 1997 to $20.6 million
for the three months ended September 30, 1998, an increase of $1.1 million,
due to an increase in pretax operating income.
Farmers Life Income. As a result of the foregoing, Farmers Life income
increased from $37.9 million for the three months ended September 30, 1997 to
$38.5 million for the three months ended September 30, 1998, an increase of
$0.6 million, or 1.6%.
Consolidated Net Income
Consolidated net income of the Company decreased from $151.1 million for
the three months ended September 30, 1997 to $107.6 million for the three
months ended September 30, 1998, a decrease of $43.5 million, or 28.8%, due
primarily to the merger related expenses and the write-off of impaired assets.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997
Management Services to Property and Casualty Insurance Companies; and Other
Operating Revenues. Operating revenues increased from $981.1 million
for the nine months ended September 30, 1997 to $1,015.8 million for the
nine months ended September 30, 1998, an increase of $34.7 million, or 3.5%.
This growth reflects higher gross premiums earned by the P&C Group, which
increased from $7,520.9 million in the first nine months of 1997 to $7,718.5
million in the first nine month of 1998 primarily as a result of policy growth
experienced within the Auto and Fire lines of business which was achieved
despite increasingly competitive market conditions.
<PAGE> 23
Operating Expenses. Operating expenses as a percentage of operating
revenues increased from 56.1% for the nine months ended September 30, 1997 to
60.9% for the nine months ended September 30, 1998 due to $20.5 million of
merger related expenses and a $45.8 million write-off of impaired assets.
Excluding these two items, operating expenses increased less than 1.0% between
years.
Salaries and Employee Benefits. Salaries and employee benefits
decreased from $250.9 million for the nine months ended September 30,
1997 to $247.3 million for the nine months ended September 30, 1998, a
decrease of $3.6 million, or 1.4%, primarily due to a reduction in
employee complement.
Buildings and Equipment Expenses. Buildings and equipment expenses
increased from $70.8 million for the nine months ended September 30, 1997
to $122.9 million for the nine months ended September 30, 1998, an
increase of $52.1 million, or 73.6%. This increase was primarily due to
the $43.4 million write-off of capitalized software coupled with higher
amortization expense associated with information technology systems.
Amortization of Attorney-In-Fact Contracts and Goodwill.
Amortization expense was $77.1 million in each of the nine month periods
ended September 30, 1998 and September 30, 1997.
General and Administrative Expenses. General and administrative
expenses were $151.3 million in each of the nine months ended September
30, 1998 and September 30, 1997.
Merger Related Expenses. Expenses incurred by the Company as a
result of the merger between B.A.T Industries' Financial Services
Businesses and Zurich amounted to $20.5 million in the nine month
period ended September 30, 1998 (see Footnote H).
Net Investment Income. Net investment income decreased from $110.0
million for the nine months ended September 30, 1997 to $104.0 million for
the nine months ended September 30, 1998 due substantially to lower yield
rates.
Net Realized Gains. Net realized gains decreased from $56.6 million
for the nine months ended September 30, 1997 to $18.0 million for the nine
months ended September 30, 1998 due to the fact that significant gains were
realized in 1997 in connection with restructuring the equities portfolio.
Gain on Sale of Subsidiaries. A $16.5 million gain related to the sale
of OSL and IGL was recognized through September 30, 1997.
Dividends on Preferred Securities of Subsidiary Trusts. Dividend expense
was $31.5 million in each of the nine month periods ended September 30, 1998
and September 30, 1997.
Provision for Income Taxes. Provision for income taxes decreased from
$252.8 million for the nine months ended September 30, 1997 to $198.4 million
for the nine months ended September 30, 1998, a decrease of $54.4 million, or
21.5%. This decrease was due to the decrease in pretax income and the fact
that $27.3 million of taxes were recorded in 1997 related to the sale of OSL
and IGL.
<PAGE> 24
Management Services Income. As a result of the foregoing, management
services income decreased from $329.8 million for the nine months ended
September 30, 1997 to $288.8 million for the nine months ended September 30,
1998. Exclusive of the merger related expenses and the write-off of impaired
assets, management services income increased slightly between years.
Insurance Subsidiaries
Through September 30, 1998, Farmers Re assumed $750.1 million of premiums,
incurred $491.3 million of non-life losses and loss adjustment expenses and
incurred $240.1 million of non-life reinsurance commissions. For the first
nine months of 1998, Farmers Re contributed $25.7 million to income before
taxes and $16.7 million to net income.
As OSL and IGL were sold to Great Southern Life Insurance Company on
April 15, 1997, there was no contribution to net income from OSL or IGL for
the nine months ended September 30, 1998, compared to a $5.5 million
contribution to net income for the nine months ended September 30, 1997.
The following commentary addresses the results of the Company's remaining
life insurance subsidiary, Farmers Life.
Total Revenues. Total revenues increased from $477.7 million for the
nine months ended September 30, 1997 to $513.8 million for the nine months
ended September 30, 1998, an increase of $36.1 million, or 7.6%.
Life Premiums. Premiums increased $16.2 million for the nine months
ended September 30, 1998, or 14.2%, over the nine months ended September
30, 1997. This increase was due to a 15.1% growth in the average volume
of insurance in-force driven by sales of the PWL and FP20 products. Also
contributing to the increase in premiums was an increase in the number of
annuities entering the payment phase.
Life Policy Charges. Policy charges increased $4.4 million for the
nine months ended September 30, 1998, or 2.9%, over the nine months ended
September 30, 1997, reflecting a 3.5% growth in the average volume of
universal life-type insurance in-force.
Investment Income. Net investment income increased $15.3 million
in the nine months ended September 30, 1998, or 7.5%, over the nine
months ended September 30, 1997. The increase was due to higher bond
interest income earned on a higher invested asset base.
Net Realized Gains. Net realized gains increased $0.2 million,
from $9.7 million in the nine months ended September 30, 1997 to $9.9
million in the nine months ended September 30, 1998. This increase was
due to higher gains realized on bond sales.
Total Operating Expenses. Total operating expenses increased from $318.2
million for the nine months ended September 30, 1997 to $342.0 million for
the nine months ended September 30, 1998, an increase of $23.8 million,
or 7.5%.
<PAGE> 25
Life Policyholders' Benefits and Charges. Life policyholders'
benefits expense and charges increased from $203.6 million for the nine
months ended September 30, 1997 to $228.3 million for the nine months
ended September 30, 1998, an increase of $24.7 million, or 12.1%.
Policy benefits. Policy benefits increased $15.8 million over
September 30, 1997 to $99.2 million, due to a 7.7% growth in the
volume of life insurance in-force and an increase in mortality
experience between periods.
Increase in liability for future benefits. Increase in
liability for future benefits expense increased from $11.2 million
for the nine months ended September 30, 1997 to $16.7 million for
the nine months ended September 30, 1998. This increase was
primarily attributable to additional sales of the PWL, AIP and the
Farmers Premier product series, especially the FP20 product
introduced in October 1997.
Interest credited to policyholders. Interest credited to
policyholders increased from $109.0 million for the nine months
ended September 30, 1997 to $112.4 million for the nine months ended
September 30, 1998, or 3.1%, reflecting growth in the universal
life fund balance.
General Operating Expenses. General operating expenses decreased
from $114.6 million for the nine months ended September 30, 1997 to
$113.7 million for the nine months ended September 30, 1998, a decrease
of $0.9 million, or 0.8%.
Amortization of DAC and Value of Life Business Acquired.
Amortization expense decreased from $71.4 million for the nine
months ended September 30, 1997 to $67.8 million for the nine
months ended September 30, 1998 due to higher universal life death
claims experience in 1998.
Commissions. Commissions increased from $12.9 million for the
nine months ended September 30, 1997 to $14.1 million for the nine
months ended September 30, 1998, as a result of growth in business
in force.
General and Administrative Expenses. General and administrative
expenses increased from $30.3 million for the nine months ended
September 30, 1997 to $31.8 million for the nine months ended
September 30, 1998, or 5.0%. This increase resulted mainly from
increased premium taxes.
Provision for Income Taxes. Provision for income taxes increased from
$53.5 million for the nine months ended September 30, 1997 to $61.2 million
for the nine months ended September 30, 1998, an increase of $7.7 million,
due to an increase in pretax operating income.
Farmers Life Income. As a result of the foregoing, Farmers Life income
increased from $106.0 million for the nine months ended September 30, 1997 to
$110.6 million for the nine months ended September 30, 1998.
<PAGE> 26
Consolidated Net Income
Consolidated net income of the Company decreased from $441.3 million for
the nine months ended September 30, 1997 to $416.1 million for the nine months
ended September 30, 1998 due to the merger related expenses and the write-off
of impaired assets. Exclusive of these two items, consolidated net income
increased 3.7% between periods.
Year 2000 Issue
Many computer systems in use today were designed and developed using two
digits, rather than four, to specify the year. As a result, such systems will
recognize "00" as the year 1900 rather than the year 2000. This could cause
many computer applications to fail completely or to create erroneous results
unless corrective measures are taken. As early as 1995, the Company's
management recognized that its information systems were at risk to produce
erroneous results due to the effect of the century rollover. Significant
efforts have been expended to gain a complete understanding of Year 2000
implications and to develop a strategy to make the Company's and P&C Group's
systems Year 2000 compliant. The costs associated with the Year 2000 Project
are being expensed as incurred and, through the period ended September 30,
1998, such costs totaled $13.9 million, of which $3.2 million was allocated
to the P&C Group. Total costs of the project are expected to be approximately
$20.5 million, of which approximately $5.1 million is expected to be allocated
to the P&C Group.
To remedy the Year 2000 problem, management has devised a three-phase
plan:
Phase I -"Awareness and Initial Impact Assessment" - This phase was
completed in May 1996. During this phase, Year 2000 "Impact Assessment" was
performed using a mainframe analysis tool to determine which areas were at
risk.
Phase II -"Year 2000 Workpackage and Development Blueprint Project" -
This phase was completed in November 1996 and consisted of creating a
comprehensive master plan which included establishing and prioritizing
clusters (groups of similar computer programs) and agreeing upon a definition
of what would be acceptable Year 2000 compliance. In addition, a timeframe
was established for the conversion, compliance testing and the implementation
of Year 2000 compliant programs into production.
Phase III -"Year 2000 Conversion and Implementation" - The Company is
currently in the process of converting, implementing and testing these Year
2000 conversion programs. Management expects this phase to be completed by
July 1999.
In addition, the Company has evaluated its relationships with third
parties with which the Company has a direct and material relationship to
determine whether they are Year 2000 compliant. The Company has sent out
questionnaires and warranty requests to all third party vendors and is
currently in the process of performing compliance testing with all vendors to
validate the vendors' claims regarding Year 2000 compliance. Management
anticipates that by July 1999, compliance testing related to third party
relationships will be completed. However, it is not possible to state with
certainty that the operations of third parties will not be materially impacted
in turn by other parties with whom they themselves have a relationship.
<PAGE> 27
The Year 2000 issue may not only affect the Company's information
technology systems (IT) but also its non-IT systems. The Company has assessed
the readiness of its non-IT systems and believes that in the event of an
interruption of these systems, contingency plans have been established such
that no major disruptions will occur.
The Company has completed its first drafts of Year 2000 contingency
plans. These plans will be reviewed and updated as more information becomes
available. In the event that the Company's vendors do not expect to be Year
2000 compliant, the Company's contingency plans may include replacing such
vendors. The operations of the Company and the P&C Group are such that in
the event all electronic communications are down, the Company and the P&C
Group could continue to operate until an alternative communication source
was acquired.
Liquidity and Capital Resources
As of September 30, 1998 and September 30, 1997 the Company held cash
and cash equivalents of $338.7 million and $610.5 million, respectively.
In addition, as of September 30, 1998, the Company had available revolving
credit facilities enabling it to borrow up to $500.0 million in the event
such a need should arise.
Net cash provided by operating activities increased from $507.4 million
for the nine months ended September 30, 1997 to $809.1 million for the nine
months ended September 30, 1998, an increase of $301.7 million, or 59.5%.
This increase in cash was primarily due to a $105.3 million increase in the
provision for non-life losses and loss adjustment expenses by Farmers Re, as
well as a $97.9 million decrease in non-current liabilities in 1997.
Net cash used in investing activities increased from $176.9 million for
the nine months ended September 30, 1997 to $721.8 million for the nine months
ended September 30, 1998, a decrease in cash of $544.9 million. This decrease
in cash was due to the $1,057.0 million of notes receivable issued to BAFS in
1998, the $119.0 million surplus contribution made to the P&C Group by Farmers
Life in 1998 and $335.0 million of proceeds received from the sale of OSL and
IGL in 1997. Partially offsetting these decreases in cash were $650.0 million
of proceeds received from the redemption of certificates of contribution by the
P&C Group in 1998 and $407.0 million of proceeds received from the settlement
of the B.A.T Capital Corporation notes receivable in 1998.
Net cash used in financing activities increased from $219.3 million for
the nine months ended September 30, 1997 to $264.8 million for the nine months
ended September 30, 1998, an increase of $45.5 million, or 20.7%. This
decrease in cash was due to a $13.5 million increase in dividends paid to
the Company's stockholders in 1998 and a $43.4 million increase in annuity
contract withdrawals by policyholders between years.
<PAGE> 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is a party to numerous lawsuits arising from its normal
business activities. These actions are in various stages of discovery
and development, and some seek punitive as well as compensatory damages.
In the opinion of management, the Company has not engaged in any conduct
which should warrant the award of any material punitive or compensatory
damages. The Company intends to vigorously defend its position in each
case, and management believes that, while it is not possible to predict
the outcome of such matters with absolute certainty, ultimate
disposition of these proceedings should not have a material adverse
effect on the Company's consolidated results of operations or financial
position. In addition, the Company is, from time to time, involved as a
party to various governmental and administrative proceedings.
Item 2. Changes in Securities.
After approval by the Company's shareholder, each two shares of the
Company's outstanding stock were recapitalized into the following:
-One share Class A Common Stock (Ordinary Share), par value $1.00 per
share.
Holders of Ordinary Shares are entitled to one vote per share
upon election of directors and all other matters upon which
stockholders generally are entitled to vote. In addition, holders
of Ordinary Shares are entitled to receive dividends and in the
event of a liquidation are entitled to any and all distributions of
money or other property of the Company.
-One share Class B Common Stock (Income Share), par value $1.00 per
share.
Holders of Income Shares are entitled to one-ninth vote per share
upon election of directors and all other matters upon which
stockholders generally are entitled to vote. In addition, holders
of Income Shares are entitled to receive dividends, but have no
right to capital in the event of a liquidation.
Dividends may be paid to holders of Ordinary Shares and Income Shares in
equal amounts, at the exclusion of one class of stock or in any ratio
determined solely at the discretion of the Board of Directors of the
Company.
Item 3. Defaults upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders.
On September 4, 1998, at a special meeting of the Stockholder, the
Company's sole Stockholder approved an amendment to Article Fourth of the
Restated Articles of Incorporation which restructured the capital
structure of the Company. For additional information, refer to the Form
8-K filed by the Company dated September 6, 1998.
<PAGE> 29
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3.1 Restated Articles of Incorporation of FGI, as amended May 23,
1977, as further amended September 24, 1984, as further amended
May 19, 1986, as further amended February 3, 1989, as further
amended September 4, 1998.
(b) Reports on Form 8-K.
On July 17, 1998, FGI filed a report on Form 8-K announcing
the private placement of $650,000,000 of Exchange Trust Surplus
Note Securities.
FGI filed a report on Form 8-K dated September 6, 1998,
announcing the completion of the merger between the financial
services businesses of B.A.T Industries p.l.c. (which includes the
Company) and Zurich Insurance Company to form a new company known
as Zurich Financial Services, a company organized under the laws of
Switzerland.
<PAGE> 30
FARMERS GROUP, INC.
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on it behalf by the
undersigned thereunto duly authorized.
Farmers Group, Inc.
(Registrant)
November 9, 1998 /s/ Martin D. Feinstein
--------------------------------------------
Date Martin D. Feinstein
Chairman of the Board,
President and Chief Executive Officer
November 9, 1998 /s/ Gerald E. Faulwell
--------------------------------------------
Date Gerald E. Faulwell
Senior Vice President
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of Farmers Group, Inc. and subsidiaries as of
September 30, 1998 and the related consolidated statements of income,
comprehensive income, stockholders' equity and cash flows for the nine
month period ended September 30, 1998 (unaudited) and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 338,700
<SECURITIES> 55,910
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 683,464
<PP&E> 696,037
<DEPRECIATION> 283,870
<TOTAL-ASSETS> 12,542,957
<CURRENT-LIABILITIES> 403,004
<BONDS> 0
500,000
0
<COMMON> 1
<OTHER-SE> 6,947,219
<TOTAL-LIABILITY-AND-EQUITY> 12,542,957
<SALES> 0
<TOTAL-REVENUES> 2,286,713
<CGS> 0
<TOTAL-COSTS> 1,570,409
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,553
<INCOME-PRETAX> 684,751
<INCOME-TAX> 268,657
<INCOME-CONTINUING> 416,094
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 416,094
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 3.1
RESTATED ARTICLES OF INCORPORATION OF
FARMERS GROUP, INC.
The undersigned hereby certify that they are, respectively, the President
and Secretary of Farmers Group, Inc. and that they were authorized to execute
this certificate by a resolution of the board of directors of said corporation
duly adopted at a meeting held on the 17th day of May, 1974.
The undersigned further certify that the following is the entire text of
the Articles of Incorporation of Farmers Group, Inc. as amended to the date of
this certificate:
KNOW ALL MEN BY THESE PRESENTS:
That we, the undersigned, have this day voluntarily associated ourselves
together for the purpose of forming a Corporation under and pursuant to the
laws of the State of Nevada, and we hereby certify:
FIRST: That the name of this corporation is Farmers Group, Inc.
SECOND: The principal office and place of business of this
Corporation in the State of Nevada shall be located at Scheeline Banking and
Trust Company, in the City of Reno, County of Washoe, State of Nevada, but the
Corporation may maintain an office, or offices, in such Towns, Cities, places
and foreign Countries outside of the State of Nevada, as the Board of Directors
may from time to time determine, or as may be designated by the By-Laws of the
Corporation, and all Corporate business of every kind and nature may be
conducted outside the State of Nevada the same as in the State of Nevada.
(Not amended since incorporation)
THIRD: The nature of the business and the objects and purposes
proposed to be transacted, promoted and carried on by this Corporation are:
1. To purchase and otherwise acquire, become interested in, hold, sell,
mortgage, pledge or otherwise dispose of, or turn to account or realize upon,
all forms of securities including stocks, bonds, debentures, notes, evidences
of indebtedness, certificates of indebtedness, certificates of interest,
commercial papers, mortgages, deeds of trust and other similar instruments and
rights, issued or created by corporations, domestic or foreign, associations,
firms, trustees, syndicates, individuals, governments, states, municipalities,
or other political divisions, or issued or created by others, and to deal in
and with the same, and to issue in exchange therefor or in payment thereof
its own stocks, bonds or other obligations or securities, or otherwise pay
therefor; to exercise in respect thereof any and all rights, powers and
privileges of individual ownership or interest therein, including the right
to vote thereon and to consent or otherwise act with respect thereto; to do any
and
<PAGE> 2
all acts and things for the preservation, protection, improvement, and
enhancement in value thereof or designed to accomplish any such purpose, and to
aid by loan, subsidy, guaranty, or in any other manner those issuing, creating
or responsible for any of such securities, all to such extent as a corporation
organized under said General Corporation Law may then lawfully do.
2. To take, hold, manage or control escrow of any kind or nature and to
act as escrow or escrow holder in escrows of any and every kind.
3. To investigate and report with respect to, and to undertake, carry
on, aid, assist or participate in the litigation or reorganization of,
financial, commercial, mercantile, agricultural, industrial or other business
concerns, firms, associations and corporations, and for that purpose to take
over the properties, manage the affairs and conduct the business of such
concerns, firms associations and corporations, and in the course of such
business to acquire and dispose of, or otherwise turn to account all or any
negotiable or transferable instruments or securities, including debentures,
bonds, notes, certificates of indebtedness, certificates of interest, and all
kinds of commercial paper.
4. To purchase or otherwise acquire, sell or otherwise dispose of,
realize upon or otherwise turn to account, manage, liquidate or reorganize
the properties, assets, business, undertakings, enterprises or ventures, or any
part thereof, of corporations, associations, firms, individuals, syndicates and
others, to further and promote the general business interests of any thereof,
and to improve, extend and place upon a safe and more permanent foundation any
such business, undertaking, enterprises or venture.
5. To act as financial, commercial or general agent or representative of
any corporation, association, firm, syndicate, individual or others, and as
such to develop, improve and extend the property, trade and business interests
thereof, and to aid any lawful enterprise in connection therewith, and in
connection with acting as such, or as agent or broker for any principal to
give any other aid or assistance.
6. To promote and assist, financially or otherwise, corporations, firms,
syndicates, associations, individuals and others and to give any guaranty in
connection therewith or otherwise for the payment of money or for the
performance of any other undertaking or obligation.
7. To borrow money, and for moneys borrowed or in payment for property
acquired, or for any other objects and purposes of the corporation or otherwise
in connection with the transaction of any part of its business, to issue bonds,
debentures, notes and other obligations, secured or unsecured, and to mortgage,
pledge or hypothecate any or all of its properties or assets as security
therefor. To make, accept, endorse, guarantee, execute and issue notes and
other obligations, to mortgage, pledge or hypothecate any stocks, bonds or
other evidences of indebtedness or securities and any other property held by
it, or in which it may be interested, and to loan money with or without
collateral or other security.
<PAGE> 3
8. To guarantee the payment of the principal of and/or interest upon
bonds, notes, or other evidences of secured indebtedness or obligations, or the
performance of the contracts or other undertakings of any corporation,
copartnership, syndicates, individual or others, and, to such extent, to enter
into, make, perform and carry out contracts of every kind and any lawful
purpose, with any person, firm, association, corporation, syndicate or others.
9. To purchase, hold, sell and transfer the shares of its own capital
stock; provided it shall not use its funds or property for the purchase of its
own shares of capital stock when such use would cause any impairment of its
capital; and provided further that shares of its own capital stock belonging to
it shall not be voted upon directly or indirectly.
10. To purchase or otherwise acquire, hold, own, mortgage, sell, convey,
exchange, option, subdivide, or otherwise dispose of real and personal property
of every class and description and any estate or interest therein, including
leaseholds for any term, in any of the States, Districts, Territories or
Colonies of the United States, and in any and all foreign countries, subject to
the laws of such State, District, Territory, Colony or Country.
11. In general, to manage, operate and carry on any other business in
connection with the foregoing, and to have and exercise all the powers
conferred by the laws of Nevada upon corporations formed under the act
hereinafter referred to, and to do any or all of the things hereinbefore set
forth to the same extent as natural persons might or could do.
12. The foregoing clauses shall be construed both as objects and powers;
and it is hereby expressly provided that the foregoing enumeration of specific
powers shall not be held to limit or restrict in any manner the powers of this
corporation.
And in addition to the foregoing to exercise, transact and carry on
in all of the States, Territories and Colonial possessions of the United
States, exclusive of the State of Nevada, the following additional objects and
purposes, to-wit:
13. To act as the agent, under Power of Attorney, or otherwise, of any
number of individuals, partnerships and/or Corporations in the exchange of
reciprocal or inter-insurance contracts, covering any and all forms of hazards
which may be lawfully insured against except that of Life Insurance; to execute
contracts for and on behalf of such Subscribers, whether individually or
collectively, and to collect premiums and other fees for the same; to act as
agent for any such Subscribers in obtaining such Insurance from other
individuals, partnerships and/or Corporations.
14. To establish and maintain, upon behalf of such Subscribers, out of
the capital assets of this Company, or otherwise, a reserve in accordance with
law, to meet losses which may accrue and to pay out the funds of Subscribers in
meeting any such losses and any other expenses accruing in regard thereto.
<PAGE> 4
15. To charge and receive from the Subscribers any such premiums and/or
fees and may be fixed in such reciprocal and/or inter-insurance contracts and
to disburse the same without restrictions, except those which may be required
by law in the maintaining of legal reserves to meet losses.
16. To execute any and all bonds, documents, contracts or other
instruments of writing which may be deemed necessary or desirable to carry out
of the purpose aforesaid, and to do all things necessary and requisite thereto,
the same as an individual might or could do to carry those purposes into
effect.
(Amended: Date of Certificate last
amending, November 15, 1927)
FOURTH: The amount of the total authorized capital stock of the
corporation is Thirty-Two Million Dollars ($32,000,000.00) and the total number
of shares which the corporation shall be authorized to issue is thirty-two
million (32,000,000), of which two million (2,000,000) shares are to be
Preferred Stock, having a par value of One Dollar ($1.00) per share, and thirty
million (30,000,000) shares are to be Common Stock, having a par value of One
Dollar ($1.00) per share.
(First Paragraph amended: Date of Certificate last
amending, May 19, 1972)
The Common Stock may be issued from time to time for such consideration as
shall be determined by the Board of Directors and the holders of such Common
Stock shall be entitled to one (1) vote per share upon the election of
directors and upon any question affecting the management or affairs of the
corporation.
The Preferred Stock may be issued from time to time in one or more series.
Preferred Stock which may be redeemed, purchased or acquired by the corporation
may be reissued, except as otherwise provided in any resolution of the Board of
Directors fixing the terms of any series of Preferred Stock, or as otherwise
provide by law.
With the exception of the initial series of Preferred Stock, the
designation and express terms and provisions of which are hereinafter set forth
in this Article FOURTH, the Board of Directors is hereby expressly authorized
to fix the designations, preferences and relative, participating, optional or
other special rights, or qualifications, limitations or restrictions on the
shares of any series of Preferred Stock, all as provided in the Nevada Revised
Statutes, including without limitation the dividend rights, dividend rate,
conversion rights, voting rights, rights and terms of redemption (including
sinking fund provisions), the redemption price or prices, the liquidation
rights, and the number of shares constituting any such series, or any or all of
them; and to increase or decrease (but not below the number of shares of such
series then outstanding) the number of shares of any series subsequent to the
issue of shares of such series. In case the number of shares of any series
shall be so decreased, the shares constituting such decrease shall resume the
status which they had prior to the adoption of the resolution originally fixing
the number of shares of such series.
<PAGE> 5
The initial series of Preferred Stock of the corporation shall be
designated: "$3.00 Cumulative Convertible Preferred Stock" (hereinafter the
"$3.00 Preferred Stock"), consisting of 312,500 shares, which shall have the
following rights, preferences, restrictions and other terms and provisions
relating thereto:
1. Dividends. The holders of the $3.00 Preferred Stock shall be
entitled to receive out of any funds of the corporation at the time legally
available for the declaration of dividends, an initial dividend of 75 cents per
share for the period from date of issuance through the close of business on
March 12, 1971, and thereafter dividends at the rate of $3.00 per annum per
share, and no more, payable in cash quarterly on the second Friday of March,
June, September and December of each year, when and as declared by the Board of
Directors. Such dividends shall accrue from day to day, whether or not earned
or declared, and shall be cumulative; and any dividends accrued thereon and
unpaid shall not bear interest. Unless dividends on the $3.00 Preferred Stock
at the rate prescribed shall be declared and paid or set apart for payment in
full on all outstanding shares of $3.00 Preferred Stock for all previous
dividend periods, no dividends shall be declared or paid upon, and no assets
shall be distributed or set apart for shares of Common Stock, or any other
stock junior to the $3.00 Preferred Stocks in right of payment of dividends.
2. Liquidation. The $3.00 Preferred Stock shall have no liquidation
preference over the Common Stock or over any other stock which is on a parity
with the Common Stock; and in the event of a liquidation, dissolution or
winding up of the corporation, the holders of $3.00 Preferred Stock shall be
entitled to receive out of the assets of the corporation, whether such assets
are capital or surplus of any nature, all dividends accrued thereon and unpaid
(whether or not earned or declared) and an amount per share, and no more, which
is equal to the amount if any, payable on such liquidation, dissolution or
winding up upon the number of shares (and/or fraction thereof) of the Common
Stock of the corporation into which each share of $3.00 Preferred Stock is
convertible immediately prior to the time of such event, thereby treating the
$3.00 Preferred Stock as though it were Common Stock for such purpose. A
consolidation or merger of the corporation shall not be deemed to be a
liquidation, dissolution or winding up within the meaning thereof.
3. Redemption. Shares of $3.00 Preferred Stock are not subject to
redemption.
4. Voting Rights. The holders of the issued and outstanding shares
of $3.00 Preferred Stock shall possess full voting rights and powers at the
rate of one (1) vote per share and shall be entitled to notice of any
shareholders' meeting in accordance with the By-Laws of the corporation, and
shall be entitled to vote together with holders of Common Stock upon the
election of directors or upon any question affecting the management or affairs
of the corporation.
5. Conversion. The holders of the shares of $3.00 Preferred Stock
shall have conversion rights as follows:
(1) The shares of $3.00 Preferred Stock shall be convertible, at
the option of the respective holders thereof, at any time on or prior to March
12, 1976, at the office of the corporation or any transfer agent for such
shares, and at the close of business on March 12, 1976, all shares of
<PAGE> 6
$3.00 Preferred Stock not theretofore converted shall be converted
automatically, into fully paid and non-assessable shares (calculated to the
nearest 1/100th of a share, fraction of less that 1/100th of a share being
disregarded) of Common Stock of the corporation, at the conversion rate,
determined as hereinafter provided, in effect at the time of conversion.
The corporation shall make no payment or adjustment on account of any
dividends accrued on shares of $3.00 Preferred Stock surrendered for
conversion prior to the close of business on March 12, 1976. The holders of
shares of $3.00 Preferred Stock outstanding immediately prior to the close of
business on March 12, 1976 shall be entitled to receive in respect of each such
share an amount equal to all dividends accrued thereon and unpaid (whether or
not earned or declared).
(2) Before any holder of $3.00 Preferred Stock shall be entitled to
convert the same into shares of Common Stock, he shall surrender the
certificate of certificates therefor, duly endorsed or accompanied by proper
instruments of transfer, at the office of the corporation or of any transfer
agent for the $3.00 Preferred Stock, and shall give written notice to the
corporation at such office that he elects to convert the same and shall state
in writing therein the name or names in which he wishes the certificate or
certificates for shares of Common Stock to be issued. The corporation shall
as soon as practicable thereafter, issue and deliver at such office to such
holder of $3.00 Preferred Stock, or to his nominee or nominees, certificates
for the number of full shares of Common Stock to which he shall be entitled as
aforesaid, together with cash in lieu of any fraction of a share as hereinafter
provided. Such conversion shall be deemed to have been made as of the date of
such surrender of the shares of $3.00 Preferred Stock to be converted and the
person or persons entitled to receive the shares of Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on said date.
(3) The conversion rate shall be one (1) share of Common Stock for each
one (1) share of $3.00 Preferred Stock converted, such rate being subject to
adjustment from time to time in case the corporation shall at any time issue
additional shares of Common Stock as a dividend upon any outstanding stock of
the corporation other than the $3.00 Preferred Stock, or subdivide the
outstanding shares of Common Stock, or combine the outstanding shares of Common
Stock. The conversion rate theretofore in effect shall be proportionately
increased or decreased, as the case may be, effective at the opening of
business on the day next succeeding the record date for the determination of
stockholders entitled to such dividend, or at the close of business on the date
of such subdivision or combination, as the case may be.
(4) No fractional shares of Common Stock shall be issued upon the
conversion of shares of $3.00 Preferred Stock. If any fractional interest in a
share of Common Stock would, except for the provisions of this paragraph (4),
be deliverable upon the conversion of any shares of $3.00 Preferred Stock, the
corporation shall, in lieu of delivering a fractional share therefore, adjust
such fractional interest by payment to the holder of such surrendered shares of
$3.00 Preferred Stock of an amount in cash equal (computed to the nearest
cent) to such fraction multiplied by the last sales price (or bid price if
there be no sales) of the Common Stock on the national securities exchange, if
any, on which the Common Stock is at the time listed (or upon the senior such
exchange if the Common Stock is then listed on more than one such exchange) on
the day of conversion, or, if at the time the Common Stock is not listed on
any national securities exchange, by the mean of
<PAGE> 7
the last reported bid and asked prices of the Common Stock in the Los Angeles
over-the-counter securities market on the day of conversion.
(5) Whenever the conversion rate is adjusted, as herein provided the
corporation shall forthwith maintain at its office and file with the transfer
agents for shares of $3.00 Preferred Stock and any securities exchange or
exchanges on which such shares are listed, a statement signed by the President
or a Vice President of the corporation and by its Treasurer or an Assistant
Treasurer, showing in detail the facts requiring such adjustment and the
conversion rate after such adjustment. Such transfer agent or agents and
securities exchange or exchanges shall be under no duty or responsibility with
respect to any such statement except to exhibit the same from time to time to
any holder of shares of $3.00 Preferred Stock desiring an inspection thereof.
(6) In case of any capital reorganization or any reclassification of the
Common Stock of the corporation or in case of a consolidation or merger of the
corporation with or into another corporation or the conveyance of all or
substantially all of the assets of the corporation to another corporation, each
share of $3.00 Preferred Stock shall thereafter be convertible into the number
of shares of stock or other securities or property to which a holder of the
number of shares of Common Stock of the corporation deliverable upon conversion
of such shares of $3.00 Preferred Stock would have been entitled upon such
reorganization, reclassification, consolidation, merger or conveyance; and, in
any such case appropriate adjustment (as determined by the Board of Directors)
shall be made in the application of the provisions herein set forth with
respect to the rights and interests thereafter of the holders of the shares of
$3.00 Preferred Stock to the end that the provisions set forth herein (including
provisions with respect to changes in and other adjustments of the conversion
rate) shall thereafter be applicable, as nearly as reasonably may be, in
relation to any shares of stock or other property thereafter deliverable upon
the conversion of the shares of $3.00 Preferred Stock.
(7) In the event:
(i) the corporation shall take a record of the holders of
shares of its Common Stock for the purpose of entitling them to
receive a dividend, or any other distribution, payable otherwise
than in cash; or
(ii) the corporation shall take a record of the holders of
shares of its Common Stock for the purpose of entitling them to
subscribe for or purchase any shares of stock of any class or to
receive any other rights; or
(iii) there shall be any capital reorganization of the
corporation, reclassification of the Common Stock of the
corporation (other than a subdivision or combination thereof),
consolidation or merger of the corporation with or into another
corporation, or conveyance of all or substantially all of the
assets of the corporation to another corporation; or
<PAGE> 8
(iv) of the voluntary or involuntary dissolution, liquidation
or winding up of the corporation;
then and in any such case, the corporation shall cause to be mailed to the
transfer agent or agents for $3.00 Preferred Stock, and to the holders of
record of the outstanding shares of $3.00 Preferred Stock, at least 15 days
prior to the date hereinafter specified, a notice stating the date on which (x)
a record is to be taken for the purpose of such dividend distribution or
rights, or (y) such reclassification, reorganization, consolidation, merger,
conveyance, dissolution, liquidation or winding up is to take place and the
date, if any is to be fixed, as of which holders of shares of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such reclassification,
reorganization, consolidation, merger, conveyance, dissolution, liquidation
or winding up.
(8) The corporation shall obtain and keep in force such permits or other
authorizations as may be required by law in order to enable the corporation
validly to issue and deliver such number of shares of its Common Stock as shall
from time to time be sufficient to effect the conversion of all shares of $3.00
Preferred Stock from time to time outstanding. The corporation shall at all
times reserve and keep available, out of its authorized but unissued Common
Stock, solely for the purpose of effecting the conversion of the shares of
$3.00 Preferred Stock the full number of shares of Common Stock deliverable
upon the conversion of all shares of $3.00 Preferred Stock from time to time
outstanding.
(9) The corporation shall pay any and all issue and other taxes that may
be payable in respect of any issue or delivery of shares of Common Stock on
conversion of shares of $3.00 Preferred Stock pursuant hereto. The corporation
shall not, however, be required to pay any tax which may be payable in respect
of any transfer involved in the issue and delivery of shares of Common Stock in
a name other than that in which the shares of $3.00 Preferred Stock so converted
were registered, and no such issue or delivery shall be made unless and until
the person requesting such issue has paid to the corporation the amount of any
such tax, or has established, to the satisfaction of the corporation, that such
tax has been paid.
(Amended: Date of Certificate last
amending, December 31, 1970)
FIFTH: That the amount of capital with which the Corporation will begin
business is Nine Hundred ($900.00) Dollars.
(Not amended since incorporation)
SIXTH: The members of the Governing Board shall be styled Directors and
the number of such Directors, which shall be not less than three, shall be the
number thereof provided in the By-Laws of this Corporation. The names and post
office addresses of the first Board of Directors are as follows:
<PAGE> 9
<TABLE>
<CAPTION>
Name Residence
<C> <C>
LOUIS H. DIDIER PUENTE, CALIFORNIA
EDWARD R. MOORE ROUTE #3, SANTA ANA, CALIFORNIA
FRANK A. BORCHARD OXNARD, CALIFORNIA
THOMAS E. LEAVEY 616 BROADWAY ARCADE BLDG.
LOS ANGELES, CALIFORNIA
JOHN C. TYLER 616 BROADWAY ARCADE BLDG.
LOS ANGELES, CALIFORNIA
HARRY L. PERSON 616 BROADWAY ARCADE BLDG.
LOS ANGELES, CALIFORNIA
A. B. PERSON 616 BROADWAY ARCADE BLDG.
LOS ANGELES, CALIFORNIA
GEO. D. RODGERS 616 BROADWAY ARCADE BLDG.
LOS ANGELES, CALIFORNIA
J. K. MAHONEY 616 BROADWAY ARCADE BLDG.
LOS ANGELES, CALIFORNIA
(Amended: Date of Certificate last
amending, May 22, 1974)
</TABLE>
SEVENTH: The names and post office addresses of the original Subscribers
of these Articles of Incorporation, and the number of shares and amount
subscribed for by each respectively, are as follows:
<TABLE>
<CAPTION>
NO. OF
SHARES
NAME RESIDENCE PREFERRED AMOUNT
<C> <C> <C> <C>
LOUIS H. DIDIER PUENTE, CALIFORNIA ONE (1) $1.00
EDWARD R. MOORE ROUTE #3, SANTA ANA ONE (1) $1.00
CALIFORNIA
FRANK R. BORCHARD OXNARD, CALIFORNIA ONE (1) $1.00
THOMAS E. LEAVEY 616 BROADWAY ARCADE BLDG. ONE (1) $1.00
LOS ANGELES, CALIFORNIA
JOHN C. TYLER 616 BROADWAY ARCADE BLDG. ONE (1) $1.00
LOS ANGELES, CALIFORNIA
HARRY L. PERSON 616 BROADWAY ARCADE BLDG. ONE (1) $1.00
LOS ANGELES, CALIFORNIA
A. B. PERSON 616 BROADWAY ARCADE BLDG. ONE (1) $1.00
LOS ANGELES, CALIFORNIA
GEO. D. RODGERS 616 BROADWAY ARCADE BLDG. ONE (1) $1.00
LOS ANGELES, CALIFORNIA
J. K. MAHONEY 616 BROADWAY ARCADE BLDG ONE (1) $1.00
LOS ANGELES, CALIFORNIA
(Not amended since incorporation)
</TABLE>
EIGHTH: The Capital Stock of this Corporation, after the amount of the
subscription price or par value has been paid in, shall not be subject to
assessment to pay debts of this
<PAGE> 10
Corporation, and not stock issued as fully paid up shall ever be assessable or
assessed, and the Articles of Incorporation shall not be amended in this
particular.
(Not amended since incorporation)
NINTH: This Corporation is to have perpetual existence.
(Not amended since incorporation)
TENTH: In furtherance and not in limitation of the powers conferred by
Statute the Board of Directors is expressly authorized:
To make, alter and amend the By-Laws of this Corporation, to fix the
amount to be reserved as working capital over and above its capital stock paid
in, to authorize and cause to be executed mortgages and liens upon the real and
personal property of this Corporation;
From time to time to determine whether and to what extent, and at what
times and places, and under what conditions and regulations, the accounts and
books of this Corporation, (other than the stock ledger), or any of them, shall
be open to inspection of stockholders, and no stockholders shall have any right
of inspecting any account, book or document of this Corporation except as
conferred by the Statute, unless authorized by resolution of the stockholders
or Directors;
If the By-Laws so provide, to designate two (2) or more of its number to
constitute an executive committee, which committee shall for the time being as
provided in said resolution or in the By-Laws of this Corporation have and
exercise any or all of the powers of the Board of Directors in the management
of the business affairs of the Corporation, and to have power to authorize the
seal of this Corporation to be affixed to all papers which may require it.
Pursuant to the affirmative vote of the holders of at least a majority of
the stock issued and outstanding, having voting power, given at a stockholders'
meeting duly called for that purpose, or when authorized by the written consent
of at least a majority of the holders of the voting stock issued and
outstanding, the Board of Directors shall have power and authority at any
meeting to sell, lease or exchange all of the property and assets of this
Corporation, including its Good Will and its Corporate franchises, upon such
terms and conditions as its Board of Directors deem expedient for the best
interests of the Corporation.
This Corporation may in its By-Laws confer power upon its Directors in
addition to the foregoing, and in addition to the powers and authorities
expressly conferred upon them by the Statute.
Both stockholders and Directors shall have power if the By-Laws so
provide, to hold their meetings, and to have one or more offices within or
without the State of Nevada, and to keep the books of this Corporation (subject
to the provisions of the Statutes), outside of the State of Nevada, at such
place or places as may be from time to time designated by the Board of
Directors.
<PAGE> 11
(Amended: Date of Certificate last
amending, March 28, 1958)
ELEVENTH: This Corporation reserves the right to amend, alter, change or
repeal any provisions contained in these Articles of Incorporation (except such
as are expressly stated herein as not to be amended), in the manner now or
hereafter prescribed by Statute, and all rights conferred upon stockholders
herein, and granted subject to this reservation.
(Not amended since incorporation)
WE, THE UNDERSIGNED, being each of the original subscribers to the capital
stock hereinbefore named, for the purpose of forming a Corporation to do
business both within and without the State of Nevada, and in pursuance of the
General Corporation Laws of the State of Nevada, effective March 31st, 1925,
and the acts amendatory thereof and supplemental thereto, do make and file
these Articles of Incorporation, hereby declaring and certifying that the facts
herein stated are true, and do respectfully agree to take the number of shares
of stock herein set forth and accordingly have hereunto set our hands and seals
this 14th day of October, 1927.
LOUIS H. DIDIER
EDWARD R. MOORE
FRANK A. BORCHARD
THOMAS E. LEAVEY
JOHN C. TYLER
HARRY L. PERSON
A. B. PERSON
GEO. D. RODGERS
J. K. MAHONEY
FARMERS GROUP, INC.
/s/ Robert E. Early
Robert E. Early, President
/s/ Thomas C. Underwood
Thomas C. Underwood, Secretary
<PAGE> 12
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
FARMERS GROUP, INC.
FARMERS GROUP, INC., a corporation organized under the laws of the State
of Nevada, by its President, GEORGE MASLACH, and Secretary, HARRY BOYD, does
hereby certify:
1. That the Board of Directors of said corporation, at a meeting duly
convened and held on the 4th day of February, 1977, adopted a resolution
declaring that the change and amendment in the Restated Articles of
Incorporation hereinafter set forth is advisable, and called a meeting of the
stockholders to take action thereon.
2. That thereafter, and on the 20th day of May, 1977, pursuant to such
call of the Board of Directors, and upon notice given to each stockholder of
record entitled to vote on the amendment to the Restated Articles of
Incorporation as provided by law and the By-Laws, the Annual Meeting of
Stockholders of said corporation was held, at which meeting more than a
majority in interest of the stockholders having voting powers, to wit, holding
22,027,330 shares of the 26,489,474 shares of Common Stock issued and
outstanding on the record date for the meeting were present in person or
represented by proxy, and that more than a majority in interest of the
stockholders having voting powers voted in favor of such change and amendment
to the Restated Articles of Incorporation, such change and amendment being as
follows:
Restated Articles of Incorporation of Farmers Group, Inc. be amended to
read as follows:
"FOURTH: The amount of the total authorized capital stock of the
Corporation is Fifty-Two Million Dollars ($52,000,000) and the total
<PAGE> 13
number of shares which the Corporation shall be authorized to issue
is Fifty-Two Million (52,000,000) of which Two Million (2,000,000)
shares are to be preferred stock having a par value of One Dollar
($1.00) per share; and Fifty Million (50,000,000) shares are to be
Common Stock, having a par value of One Dollar ($1.00) per share."
2. That the foregoing amendment, stated in paragraph 2 hereinabove,
was approved and adopted by the affirmative vote of the holders of 21,339,109
shares, being the holders of more than a majority of the issued and
outstanding shares of said corporation entitled to vote; that the total number
of issued and outstanding shares of said corporation, the holders of which are
entitled to vote is 26,489,474 shares.
IN WITNESS WHEREOF, FARMERS GROUP, INC. has caused this Certificate to be
signed by its President and its Secretary and its corporate seal to be hereto
affixed this 23rd day of May, 1977.
FARMERS GROUP, INC.
By /s/ George Maslach
----------------------------------
George Maslach, President
By /s/ Harry Boyd
----------------------------------
Harry Boyd, Secretary
<PAGE> 14
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
FARMERS GROUP, INC.
FARMERS GROUP, INC., a corporation organized under the laws of the State
of Nevada, by its President, JOSEPH E. METSCHAN, and Secretary, MARYANN
SELTZER, does hereby certify:
1. That the Board of Directors of said corporation at a meeting duly
convened and held on the 3rd day of February 1984, adopted a resolution
declaring that the change and amendment in the Restated Articles of
Incorporation hereinafter set forth is advisable, and called a meeting of the
stockholders to take action thereon.
2. That thereafter, and on the 18th day of May, 1984, pursuant to such
call of the Board of Directors, and upon notice given to each stock holder of
record entitled to vote on the amendment to the Restated Articles of
Incorporation as provided by law and the By-Laws, the Annual Meeting of
Stockholders of said corporation was held, at which meeting more than a
majority in interest of the stockholders have voting powers, to wit, holding
at least 22,565,791 shares of the 33,952,349 shares of Common Stock issued and
outstanding on the record date for the meeting were present in person or
represented by proxy, and that more than a majority in interest of the
stockholders having voting powers in favor of such change and amendment to the
Restated Articles of Incorporation, such change and amendment being as follows:
<PAGE> 15
That the first paragraph of Article Fourth of the Restated Articles
of Incorporation of Farmers Group, Inc. be amended to read as follows:
"FOURTH: The total number of shares which the corporation shall
be authorized to issue is seventy-nine million (79,000,000), of
which four million (4,000,000) shares are to be Preferred Stock and
seventy-five million (75,000,000) shares are to be Common Stock.
All of the shares of capital stock of the corporation shall have a
par value of One Dollar ($1.00) per share."
3. That the foregoing amendment, stated in paragraph 2 hereinabove, was
approved and adopted by the affirmative vote of the holders of 20,757,079
shares, being the holders of more than a majority of the issued and outstanding
shares of said corporation entitled to vote; that the total number of issued
and outstanding shares of said corporation, the holders of which are entitled
to vote is 33,952,349 shares.
IN WITNESS WHEREOF, FARMERS GROUP, INC. has caused this Certificate
to be signed by its President and its Secretary and its corporate seal to be
hereto affixed this 24th day of September, 1984.
FARMERS GROUP, INC.
By /s/ Joseph E. Metschan
----------------------------------
JOSEPH E. METSCHAN
By /s/ Maryann Seltzer
----------------------------------
MARYANN SELTZER
<PAGE> 16
CERTIFICATE OF AMENDMENT
OF
RESTATED ARTICLES OF INCORPORATION
OF
FARMERS GROUP, INC.
FARMERS GROUP, INC., a corporation organized under the laws of the State
of Nevada, by its President, LEO E. DENLEA, JR. and Secretary, MARYANN
SELTZER, does hereby certify:
1. That the Board of Directors of said corporation at a meeting duly
convened and held on the 7th day of February, 1986, adopted a resolution
declaring that the change and amendment in the Restated Articles of
Incorporation hereinafter set forth is advisable, and called a meeting of the
stockholders to take action thereon.
2. That thereafter, and on the 16th day of May, 1986, pursuant to such
call of the Board of Directors, and upon notice given to each stockholder of
record entitled to vote on the amendment to the Restated Articles of
Incorporation as provided by law and the By-Laws, the Annual Meeting of
Stockholders of said corporation was held, at which meeting more than a
majority in interest of the stockholders having voting powers, to wit, holding
at least 22,946,625 shares of the 34,446,910 shares of Common Stock issued and
outstanding on the record date for the meeting were present in person or
represented by proxy, and that more than a majority in interest of the
stockholders having voting power voted in favor of such change and amendment
to the Restated Articles of Incorporation, such change and amendment being as
follows:
<PAGE> 17
That the first paragraph of Article Fourth of the Restated Articles of
Incorporation of Farmers Group, Inc. be amended to read as follows:
"FOURTH: The total number of shares which the corporation shall
be authorized to issue is two hundred and thirty-seven million
(237,000,000), of which twelve million (12,000,000) shares are to
be Preferred Stock, having a par value of One Dollar ($1.00) per
share, and two hundred and twenty-five million (225,000,000) shares
are to be Common Stock having a par value of One Dollar ($1.00) per
share."
3. That the foregoing amendment, stated in paragraph 2 hereinabove,
was approved and adopted by the affirmative vote of the holders of 19,954,586
shares, being the holders of more than a majority of the issued and
outstanding shares of said corporation entitled to vote; that the total number
of issued and outstanding shares of said corporation, the holders of which
were entitled to vote on the record date was 34,446,910 shares.
IN WITNESS WHEREOF, FARMERS GROUP, INC. has caused this Certificate to be
signed by its President and its Secretary and its corporate seal to be hereto
affixed this 19th day of May, 1986.
FARMERS GROUP, INC.
By /s/ Leo E. Denlea, Jr.
----------------------------------
Leo E. Denlea, JR.,
President
By /s/ Maryann Seltzer
----------------------------------
Maryann Seltzer,
Secretary
<PAGE> 18
CERTIFICATE OF AMENDMENT
OF
RESTATED ARTICLES OF INCORPORATION
OF
FARMERS GROUP, INC.
FARMERS GROUP, INC., a corporation organized under the laws of the State
of Nevada (the "Company"), by its President, LEO E. DENLEA, JR. and Secretary,
MARYANN SELTZER, does hereby certify:
1. That the Board of Directors of said Company at a meeting duly
convened and held on the 24th day of August 1988, adopted a resolution
approving that certain Agreement and Plan of Merger dated as of August 24,
1988 among BATUS Inc., BATUS Financial Services Inc. and the Company and the
transactions contemplated thereby, including an amendment (the "Amendment")
to Article Fourth of the Restated Articles of Incorporation of the Company
such that said Article should read in its entirety:
<PAGE> 19
The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 1,000. All 1,000 such
shares shall consist of Common Stock, par value $1.00 per share,
2. That thereafter, and on the 14th day of December, 1988, pursuant
to the call of the Board of Directors, and upon due notice given to each
stockholder of record entitled to vote, a Special Meeting of Stockholders of
said Company was held;
3. That at such Special Meeting, of the 68,539,942 shares of common
stock of the Company ("Shares") that were issued, outstanding and entitled to
vote as of the close of business on November 7, 1988, the record date for such
Special Meeting, 5,215,991 shares abstained from voting on, 45,257,788 Shares
voted in favor of, and 2,603,694 Shares voted against the adoption and
approval of the Merger Agreement and transactions contemplated thereby,
including the Amendment;
4. That said affirmative vote represented a majority of the Shares
and that thereby, the Amendment was duly adopted by the stockholders of the
Company.
WITNESS our hands and the seal of the Company on this 3rd day of
February, 1989.
/s/ Leo E. Denlea, Jr.
----------------------------------
LEO E. DENLEA, JR.
Chairman of the Board,
President and Chief
Executive Officer
/s/ Maryann Seltzer
----------------------------------
MARYANN SELTZER
Secretary
<PAGE> 20
CERTIFICATE OF AMENDMENT
OF
RESTATED ARTICLES OF INCORPORATION
OF
FARMERS GROUP, INC.
FARMERS GROUP, INC., a corporation organized under the laws of the State
of Nevada (the "Corporation"), by its Vice President, Howard E. Falk, Jr., and
Secretary, Doren E. Hohl, does hereby certify:
1. That the Board of Directors of said Corporation at a meeting duly
convened and held on the fifth day of August, 1998, adopted a resolution
approving an amendment (the "Amendment") to Article Fourth of the Restated
Articles of Incorporation of the Corporation such that said Article should read
in its entirety:
"FOURTH: The amount of the total authorized capital stock of the
corporation is One Thousand Dollars ($1,000.00) and the total number of
shares which the corporation shall be authorized to issue is one thousand
(1,000), of which five hundred (500) shares are to be Class A Common
Stock, having a par value of One Dollar ($1.00) per share, and five
hundred (500) shares are to be Class B Common Stock, having a par value
of One Dollar ($1.00) per share.
The holders of the shares of Class A Common Stock shall be entitled
to one (1) vote per share upon the election of directors and on all other
matters upon which stockholders generally are entitled to vote. The
holders of the shares of Class B Common Stock shall be entitled to
one-ninth (1/9) vote per share upon the election of directors and on all
other matters upon which stockholders generally are entitled to vote.
The holders of the shares of Class A Common Stock and the holders of the
shares of Class B Common Stock shall be entitled to notice of any
stockholders' meeting in accordance with the By-Laws of the corporation,
and the holders of the shares of Class A Common Stock and the holders of
the shares of Class B Common
<PAGE> 21
Stock shall vote together as a single class with respect to any matter
brought to a stockholder vote, except as otherwise provided by law.
The holders of the shares of Class A Common Stock and the holders
of the shares of Class B Common Stock shall be entitled to receive,
when and if declared by the board of directors, out of funds of the
corporation at the time legally available therefor, dividends or
distributions payable either in cash, in stock, or otherwise; provided,
however, that the board of directors may, in its sole discretion, declare
dividends or distributions payable exclusively to the holders of the
shares of Class A Common Stock, or payable exclusively to the holders of
the shares of Class B Common Stock, or payable to the holders of the
shares of Class A Common Stock and the holders of the shares of Class B
Common Stock in equal or unequal amounts, notwithstanding the amount of
prior dividends or distributions declared on either such class or any
other factor.
In the event of a liquidation, dissolution or winding up of the
corporation, the holders of the shares of Class A Common Stock shall
be entitled to receive any and all distributions of money or other
property of the corporation to the exclusion of the holders of the
shares of Class B Common Stock."
2. That thereafter, on the 4th day of September, 1998, pursuant to
the call of the Board of Directors, a Special Meeting of Stockholder of said
Corporation was held;
3. That at such Special Meeting, all 1,000 shares of common stock of
the Corporation ("Shares") that were issued and outstanding voted in favor
of the adoption and approval of the Amendment and that the Amendment was
thereby duly adopted by the sole stockholder of the Corporation; and
4. As authorized by the Board of Directors and the sole stockholder
of the Corporation, at the time this Certificate of Amendment is filed in the
office of the Secretary of State of Nevada (the "Effective Time"), each share
of common stock of the Corporation outstanding immediately prior to the
Effective Time shall, automatically and without further action by any holder
of any such shares, be converted into and shall become (a) one-half of a
fully-paid and non-assessable share of
<PAGE> 22
Class A Common Stock and (b) one-half of a fully-paid and non-assessable
share of Class B Common Stock (the "Recapitalization"). Promptly after the
Effective Time, each record holder of a certificate that, immediately prior
to the Effective Time, represented a share of common stock of the Corporation
shall be entitled to receive in exchange for such certificate, upon surrender
of such certificate to the Corporation at its principal office, certificates
for the number of shares of Class A Common Stock and Class B Common Stock to
which such holder is entitled as a result of the Recapitalization. Until
surrendered and exchanged in accordance herewith, each certificate that,
immediately prior to the Effective Time, represented shares of common stock
of the Corporation shall represent the number of shares of Class A Common
Stock and Class B Common Stock to which the holder is entitled as a result of
the Recapitalization.
WITNESS our hands and the seal of the Corporation on this 4th day of
September, 1998.
/s/ Howard E. Falk, Jr.
----------------------------------
Vice President
/s/ Doren E. Hohl
----------------------------------
Secretary
