SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) December 31, 1993
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The Travelers Inc.
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(Exact name of registrant as specified in its charter)
Delaware 1-9924 52-1568099
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(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
65 East 55th Street, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
(212) 891-8900
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(Registrant's telephone number, including area code)
Primerica Corporation
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(Former Name or Former Address, if Changed Since Last Report)
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THE TRAVELERS INC.
Current Report on Form 8-K
Item 2. Acquisition or Disposition of Assets.
On December 31, 1993, The Travelers Corporation
("TC") was merged with and into Primerica Corporation (the
"Merger"), and Primerica Corporation changed its name to The
Travelers Inc. (the "Company"). The shareholders of TC and
the stockholders of the Company each approved the Merger at
their respective special meetings held on December 30, 1993.
The Merger involved an exchange of 0.80423 of a share of the
Company's common stock for each outstanding share of TC's
common stock, other than dissenting shares and shares held by
the Company or TC. Also, each outstanding share of TC's $4.53
Series A ESOP Convertible Preference Stock and its 9.25%
Series B Preference Stock, other than dissenting shares, was
converted in the Merger into the right to receive one share of
the Company's $4.53 ESOP Convertible Preferred Stock, Series C
and of its 9.25% Preferred Stock, Series D, respectively,
which have substantially the same rights and privileges under
the Company's Certificate of Incorporation as the shares so
converted. Based on the market value on December 30, 1993, of
the securities to be exchanged, the total amount of
consideration given by the Company to the shareholders of TC
was approximately $3.8 billion, and the Company assumed
approximately $485 million of principal amount of TC's debt
obligations.
On December 30, 1993, Messrs. Richard H. Booth,
Robert W. Crispin, C. Michael Armstrong and Robert F. Daniell,
each of whom was a director of TC prior to the Merger, were
elected to the Company's Board of Directors. Mr. Edward H.
Budd, who was the Chief Executive Officer and a director of
TC, has been a director of the Company since September 1992
and is Chairman of The Travelers Insurance Group Inc.
("TIG"), a wholly owned subsidiary of the Company. Messrs.
Booth and Crispin were also executive officers of TC, and
serve as the President and the Vice Chairman and Chief
Investment Officer, respectively, of TIG. In addition, on
December 30, 1993, immediately prior to the Special Meeting of
Shareholders of TC, seven members of the Company's Board of
Directors were elected to the Board of Directors of TC. The
seven directors are Messrs. Kenneth J. Bialkin, Douglas D.
Danforth, Leslie B. Disharoon, Dudley C. Mecum, Joseph R.
Wright, Jr. and Arthur Zankel, and Mrs. Linda J. Wachner.
As a part of the Merger, the Company acquired all of
the plant, equipment and other physical property of TC, some
of which was used by TC in the ordinary course of its business
and some of which was held by TC for resale. The Company
intends to continue such uses.
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits.
(a) Financial Statements of Businesses Acquired.
The financial statements of TC required to be filed
herewith are incorporated by reference to Exhibit 28.08 to the
Company's Annual Report on Form 10-K for the fiscal
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year ended December 31, 1992 and to Exhibit 99.01 to the Company's
Current Report on Form 8-K dated November 29, 1993, and are
included as Exhibits 99.01 and 99.02 hereto, respectively.
(b) Pro Forma Financial Information.
The pro forma financial information with respect to
the Merger required to be filed herewith is incorporated
herein by reference to Exhibit 99.02 to the Company's Current
Report on Form 8-K dated November 29, 1993, and is included as
Exhibit 99.03 hereto.
(c) Exhibits.
Exhibit No. Description
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2.01 Agreement and Plan of Merger dated as of
September 23, 1993, between the Company and TC,
incorporated by reference to Exhibit 9 to
Amendment No. 3 to the Company's Schedule 13D
with respect to TC's common stock, par value
$1.25 per share, CUSIP No. 894180 10 8, filed
with the Securities and Exchange Commission on
October 4, 1993
4.01 Certificate of Merger of TC into the Company,
as filed with the Secretary of State of the
State of Delaware and the Secretary of State
of the State of Connecticut on December 30,
1993
23.01 Consent of Coopers & Lybrand
99.01 Consolidated Balance Sheets of TC and
Subsidiaries as of December 31, 1992 and 1991,
and the related consolidated statements of
operations and retained earnings and cash flows
for each of the three years in the period ended
December 31, 1992, together with the notes
thereto and the related report of Independent
Accountants
99.02 Consolidated Statement of Operations and
Retained Earnings for the Quarter and Nine
Months Ended September 30, 1993 and 1992
(unaudited), Consolidated Balance Sheet as of
September 30, 1993 (unaudited) and September
30, 1992 (unaudited), Consolidated Statement of
Cash Flows for the Nine Months Ended September
30, 1993 and 1992 (unaudited), and Notes to
Financial Statements, of TC
99.03 Unaudited Pro Forma Condensed Consolidated
Statement of Financial Position as of September
30, 1993 and Unaudited Pro Forma Condensed
Consolidated Statements of Income for the nine
months ended September 30, 1993 and for the
year ended December 31, 1992
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SIGNATURE
Pursuant to the requirements of the Securities
Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned hereunto
duly authorized.
Dated: January 13, 1994 THE TRAVELERS INC.
By: /s/ Charles O. Prince, III
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Charles O. Prince, III
Senior Vice President
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EXHIBIT INDEX
Exhibit No. Description
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2.01 Agreement and Plan of Merger dated as of
September 23, 1993, between the Company and TC,
incorporated by reference to Exhibit 9 to
Amendment No. 3 to the Company's Schedule 13D
with respect to TC's common stock, par value
$1.25 per share, CUSIP No. 894180 10 8, filed
with the Securities and Exchange Commission on
October 4, 1993
4.01 Certificate of Merger of TC into the Company,
as filed with the Secretary of State of the
State of Delaware and the Secretary of State
of the State of Connecticut on December 30,
1993
23.01 Consent of Coopers & Lybrand
99.01 Consolidated Balance Sheets of TC and
Subsidiaries as of December 31, 1992 and 1991,
and the related consolidated statements of
operations and retained earnings and cash flows
for each of the three years in the period ended
December 31, 1992, together with the notes
thereto and the related report of Independent
Accountants
99.02 Consolidated Statement of Operations and
Retained Earnings for the Quarter and Nine
Months Ended September 30, 1993 and 1992
(unaudited), Consolidated Balance Sheet as of
September 30, 1993 (unaudited) and September
30, 1992 (unaudited), Consolidated Statement of
Cash Flows for the Nine Months Ended September
30, 1993 and 1992 (unaudited), and Notes to
Financial Statements, of TC
99.03 Unaudited Pro Forma Condensed Consolidated
Statement of Financial Position as of September
30, 1993 and Unaudited Pro Forma Condensed
Consolidated Statements of Income for the nine
months ended September 30, 1993 and for the
year ended December 31, 1992
Exhibit 4.01
CERTIFICATE OF MERGER
OF
THE TRAVELERS CORPORATION
INTO
PRIMERICA CORPORATION
(pursuant to Section 252 of the General Corporation Law of the State of Delaware
and Section 33-367 of the Connecticut Stock Corporation Act)
Primerica Corporation, organized and existing under and by virtue of the
General Corporation Law of the State of Delaware, and The Travelers Corporation,
organized and existing under and by virtue of the Connecticut Stock Corporation
Act,
DO HEREBY CERTIFY:
FIRST: That the name and state of incorporation of each of the
constituent corporations of the merger are as follows:
State of
Name Incorporation
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PRIMERICA CORPORATION . . . . . . . . . . . . . Delaware
THE TRAVELERS CORPORATION . . . . . . . . . . . Connecticut
and that Primerica Corporation is the surviving corporation of the merger
(hereinafter referred to as the "Surviving Corporation").
SECOND: That an Agreement and Plan of Merger (the "Agreement") between
the parties to the merger has been approved, adopted, certified, executed and
acknowledged by each of the constituent corporations in accordance with the
requirements of subsection (c) of Section 252 of the General Corporation Law of
the State of Delaware and in the manner provided for in the applicable
provisions of Chapter 599 of the laws of the State of Connecticut.
THIRD: That the name of the Surviving Corporation is Primerica
Corporation, except that at the effective time of the merger it shall be changed
to The Travelers Inc.
FOURTH: That the Certificate of Incorporation of Primerica Corporation
shall constitute the Certificate of Incorporation of the Surviving Corporation
until thereafter changed or amended as provided therein or by law except that
(i) Article FIRST of the Certificate of Incorporation of Primerica Corporation
shall be amended to read as follows:
FIRST: The name of the Corporation is:
THE TRAVELERS INC.
and (ii) Article FOURTH, Section A of the Certificate of Incorporation of
Primerica Corporation shall be amended to read as follows:
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The total number of shares of Common Stock which the Corporation shall
have authority to issue is Five Hundred Million (500,000,000) shares of Common
Stock having a par value of one cent ($.01) per share. The total number of
shares of Preferred Stock which the Corporation shall have authority to issue is
Thirty Million (30,000,000) shares having a par value of one dollar ($1.00) per
share.
and (iii) Article FOURTH of the Certificate of Incorporation of Primerica
Corporation shall be amended to add new Sections J and K, which shall read as
follows:
J. $4.53 ESOP CONVERTIBLE PREFERRED STOCK, SERIES C
1. Designation, Issuance and Transfer. (a) There shall be a series of
Preferred Stock, the designation of which shall be "$4.53 ESOP Convertible
Preferred Stock, Series C" (hereinafter called the "Series C Preferred Stock")
and the number of authorized shares constituting the Series C Preferred Stock
shall be eight million (8,000,000). Shares of the Series C Preferred Stock shall
have a stated value of $53.25 per share. The number of authorized shares of the
Series C Preferred Stock may be reduced by resolution duly adopted by the Board
of Directors, or by a duly authorized committee thereof, and by the filing,
pursuant to the provisions of the General Corporation Law of the State of
Delaware, of a certificate of amendment to the Certificate of Incorporation of
the Corporation, as theretofore amended, stating that such reduction has been so
authorized, but the number of authorized shares of the Series C Preferred Stock
shall not be increased.
(b) Shares of Series C Preferred Stock shall be issued only to Shawmut
Bank Connecticut, National Association, as trustee (the "Trustee") acting on
behalf of the employee stock ownership feature of The Travelers Savings,
Investment and Stock Ownership Plan, as amended from time to time or any
successor to such plan (the "Plan"), or any successor trustee under the Plan. In
the event of any transfer of shares of Series C Preferred Stock to any person
other than the Trustee, other than a pledge of the shares of Series C Preferred
Stock by the Trust in connection with the financing or refinancing of the
purchase by the Trustee of shares of $4.53 Series A ESOP Convertible Preference
Stock (without par value) of The Travelers Corporation (the "Series A Preference
Stock"; such shares of Series A Preference Stock having been assumed by the
Corporation and become shares of Series C Preferred Stock pursuant to the terms
of such Series A Preference Stock) or of shares of Series C Preferred Stock, the
shares of the Series C Preferred Stock so transferred, upon such transfer and
without any further action by the Corporation or the holder, shall be
automatically converted into shares of Common Stock on the terms otherwise
provided for the conversion of shares of Series C Preferred Stock into shares of
Common Stock pursuant to paragraph 4 of this Section J and no such transferee
shall have any of the voting powers, preferences or rights of shares of Series C
Preferred Stock hereunder, but rather, only the powers and rights pertaining to
the Common Stock into which such shares of Series C Preferred Stock shall be so
converted. Notwithstanding the foregoing provisions of this paragraph 1(b),
shares of Series C Preferred Stock may be converted into shares of Common Stock
as provided by paragraph 4 of this Section J and the shares of Common Stock
issued upon such conversion may be transferred by the holder thereof as
permitted by law.
2. Dividend Rate. (a) Dividends on each share of the Series C Preferred
Stock shall accrue from the date of its original issue (for purposes of this
paragraph 2(a), the date of original issue of the Series C Preferred Stock shall
be the date of commencement of the full quarterly period ending April 1, 1994)
in the amount of $4.53 per annum per share (the "Rate"). Such dividends shall be
cumulative from the
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date of original issue and shall be payable, when and as declared by
the Board of Directors, out of assets legally available for such purpose,
on January 1, April 1, July 1 and October 1 of each year, commencing
April 1, 1994 (each such date being hereinafter individually a "Dividend Payment
Date" and collectively the "Dividend Payment Dates"), except that if such date
is a Sunday or legal holiday then such dividend shall be payable on the first
immediately succeeding calendar day which is not a Sunday or legal holiday. Each
such dividend shall be paid to the holders of record of shares of the Series C
Preferred Stock as they appear on the books of the Corporation on such Dividend
Payment Date, or such other date as shall be fixed by the Board of Directors as
the record date. Dividends in arrears may be declared and paid at any time,
without reference to any regular Dividend Payment Date, to holders of record on
the payment date (which payment date may be fixed by the Board of Directors as
the record date), or such other date as may be fixed by the Board of Directors
as the record date.
(b) Except as hereinafter provided, no dividends shall be declared or paid
or set apart for payment on Preferred Stock of any other series ranking on a
parity with the Series C Preferred Stock as to dividends and upon liquidation
for any period unless full cumulative dividends have been or contemporaneously
are declared and paid on the Series C Preferred Stock through the latest
Dividend Payment Date. When dividends are not paid in full, as aforesaid, upon
the shares of the Series C Preferred Stock and any such other series of
Preferred Stock, all dividends declared upon shares of the Series C Preferred
Stock and such other series of Preferred Stock shall be declared pro rata so
that the amount of dividends declared per share on the Series C Preferred Stock
and such other series of Preferred Stock shall in all cases bear to each other
the same ratio that accrued dividends per share on the shares of the Series C
Preferred Stock and such other series of Preferred Stock bear to each other.
Holders of shares of the Series C Preferred Stock shall not be entitled to any
dividends, whether payable in cash, property or stock, in excess of full
cumulative dividends, as herein provided, on the Series C Preferred Stock. No
interest, or sum of money in lieu of interest, shall be payable in respect of
any dividend payment or payments on the Series C Preferred Stock which may be in
arrears.
(c) So long as any shares of the Series C Preferred Stock are outstanding,
no dividend (other than a dividend in Common Stock or in any other stock of the
Corporation ranking junior to the Series C Preferred Stock as to dividends and
upon liquidation and other than as provided in paragraph 2(b) of this Section J)
shall be declared or paid or set aside for payment, and no other distribution
shall be declared or made upon the Common Stock or upon any other stock of the
Corporation ranking junior to or on a parity with the Series C Preferred Stock
as to dividends or upon liquidation, nor shall any Common Stock nor any other
stock of the Corporation ranking junior to or on a parity with the Series C
Preferred Stock as to dividends or upon liquidation be redeemed, purchased or
otherwise acquired for any consideration (or any moneys be paid to or made
available for a sinking fund for the redemption of any shares of any such stock)
by the Corporation (except by conversion into or exchange for stock of the
Corporation ranking junior to the Series C Preferred Stock as to dividends and
upon liquidation), unless, in each case, the full cumulative dividends on all
outstanding shares of the Series C Preferred Stock shall have been paid or
contemporaneously are declared and paid through the latest Dividend Payment
Date.
(d) Dividends payable on the Series C Preferred Stock for any full
quarterly period shall be computed by dividing the Rate by four (for purposes of
this paragraph 2(d), the Series C Preferred Stock shall be deemed to have been
outstanding for the full quarterly period ending April 1, 1994). Subject to the
preceding sentence, dividends payable on the Series C Preferred Stock for any
period less than a full quarterly period shall be computed on the basis of a
360-day year of 30-day months.
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3. Redemption. (a) The shares of Series C Preferred Stock shall not be
redeemable before January 1, 1998 except as set forth in paragraphs 3(b), 3(c),
3(d) and 3(e) of this Section J. On or after January 1, 1998, the Corporation,
at its sole option, may redeem the Series C Preferred Stock as a whole or in
part at a price of $53.25 per share plus accrued and unpaid dividends thereon to
the date fixed for redemption.
(b) The shares of Series C Preferred Stock shall be redeemable by the
Corporation, at its sole option, at any time and from time to time if there is a
change in the federal tax law of the United States of America which has the
effect of precluding the Corporation from claiming any of the tax deductions for
dividends paid on the Series C Preferred Stock when such dividends are used as
provided under Section 404(k)(2) of the Internal Revenue Code of 1986, as
amended, and as in effect on the date shares of Series C Preferred Stock are
initially issued (for this purpose, such date of initial issuance being the date
of the original issuance of the Series A Preference Stock), at the higher of (i)
$53.25 per share plus accrued and unpaid dividends thereon to the date fixed for
redemption or (ii) the fair market value per share of the Series C Preferred
Stock as determined by an independent appraiser, appointed by the Trustee in
accordance with the provisions of the Plan, as of the most recent Valuation
Date, as defined in the Plan.
(c) The shares of Series C Preferred Stock shall be redeemable in whole at
any time upon the commencement of any action by a governmental authority having
jurisdiction which may result in the divestiture or other material change in the
business of the Corporation or any subsidiary by reason of the issuance of the
Series C Preferred Stock. At such time as the shares of Series C Preferred Stock
shall be redeemable pursuant to this paragraph 3(c), the Corporation, at its
sole option, may redeem the Series C Preferred Stock at the following redemption
prices per share plus, in each case, accrued and unpaid dividends thereon to the
date fixed for redemption.
If redeemed during the twelve-month period beginning January 1,
Year Price
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1994 . . . . . . . . . . . . . . . . . . . . . . $55.52
1995 . . . . . . . . . . . . . . . . . . . . . . $54.95
1996 . . . . . . . . . . . . . . . . . . . . . . $54.38
1997 . . . . . . . . . . . . . . . . . . . . . . $53.82
and $53.25 if redeemed on or after January 1, 1998.
(d) The shares of Series C Preferred Stock shall be redeemed by the
Corporation at a redemption price which shall be the higher of (i) $53.25 per
share plus accrued and unpaid dividends thereon to the date fixed for redemption
or (ii) the fair market value per share of the Series C Preferred Stock as
determined by an independent appraiser appointed by the Trustee in accordance
with the provisions of the Plan, as of the most recent Valuation Date, as
defined in the Plan, at the option of the holder, at any time and from time to
time upon notice to the Corporation given not less than five business days prior
to the date fixed by the holder in such notice for such redemption, upon
certification by such holder to the Corporation, when and to the extent
necessary for such holder to provide for distributions required to be made to
participants under, or to satisfy an investment election provided to
participants in accordance with, the Plan.
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(e) At the option of the holder, the shares of Series C Preferred Stock
shall be redeemed in whole by the Corporation at a redemption price of $53.25
per share plus accrued and unpaid dividends thereon to the date fixed for
redemption, at any time (i) upon a Change in Control of the Corporation or (ii)
in the event that the Plan is not initially determined by the Internal Revenue
Service to be qualified within the meaning of Sections 401(a) and 4975(e)(7) of
the Internal Revenue Code of 1986, as amended, upon notice to the Corporation
given not less than five business days prior to the date fixed by the holder in
such notice for such redemption.
For purposes of this paragraph (e), a "Change in Control" will be deemed to
have occurred upon either of the following:
(i) The date of public disclosure that any person or group of persons
(excluding persons or entities affiliated with the Corporation) directly or
indirectly acquires actual or beneficial ownership of 30% or more of the
combined voting power of the Corporation's outstanding securities entitled
to vote in the election of members of the Board of Directors, or the right
to obtain such ownership; or
(ii) The date Incumbent Directors cease to constitute a majority of the
Board of Directors.
Notwithstanding the foregoing, a Change in Control shall not be deemed to
occur pursuant to (i) above solely because 30% or more of the combined voting
power of the Corporation's outstanding securities entitled to vote in the
election of members of the Board of Directors is acquired by a person, the
majority interest in which is held, directly or indirectly, by the Corporation,
or by one or more employee benefit plans maintained by the Corporation or an
affiliated employer, the majority interest in which is held, directly or
indirectly, by the Corporation.
For the purposes of this definition, the term "person" shall have the same
meaning as set forth in Section 3(a) of the Securities Exchange Act of 1934, as
amended, and in the regulations promulgated thereunder.
For purposes of this definition, the term "Incumbent Directors" shall mean
the Board of Directors on December 31, 1993, to the extent that they continue to
serve as members thereof. Any individual who becomes a member of such Board
after December 31, 1993, if his or her election or nomination for election as a
director was approved by a majority of the then Incumbent Directors, is an
Incumbent Director.
(f) Except with respect to subparagraph 3(e)(i) of this Section J, the
Corporation, at its option, may make payment of the redemption price required
upon redemption of shares of Series C Preferred Stock in cash or in shares of
Common Stock, or in a combination of such shares and cash, any such shares of
Common Stock to be valued for such purpose at the current market price as
determined pursuant to paragraphs 4(d) and 9 of this Section J, provided,
however, that in calculating the current market price, the five consecutive
business days preceding and including the date of redemption shall be used.
Payment of the redemption price required upon redemption of shares of Series C
Preferred Stock pursuant to subparagraph 3(e)(i) of this Section J shall be made
in cash.
(g) In the event the Corporation shall redeem shares of the Series C
Preferred Stock, notice of such redemption shall be given by first class mail,
postage prepaid, mailed not less than 20 nor more than 60 days prior to the
redemption date, to each holder of record of the shares to be redeemed, at such
holder's
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address as the same appears on the books of the Corporation. Each such
notice shall state: (i) the redemption date; (ii) the number of shares of the
Series C Preferred Stock to be redeemed and, if fewer than all the shares held
by such holder are to be redeemed, the number of such shares to be redeemed from
such holder; (iii) the redemption price; (iv) whether such payment shall be in
cash or shares of Common Stock, or in a combination of such shares and cash; (v)
the place or places where certificates for such shares are to be surrendered for
payment of the redemption price; (vi) that dividends on the shares to be
redeemed will cease to accrue on such redemption date; and (vii) the conversion
rights of the shares to be redeemed, the period within which conversion rights
may be exercised, the conversion price and the number of shares of Common Stock
issuable upon conversion of a share of Series C Preferred Stock at the time.
(h) Notice having been mailed as aforesaid, from and after the redemption
date (unless default shall be made by the Corporation in providing money or
shares of Common Stock for the payment of the redemption price of the shares
called for redemption) dividends on the shares of the Series C Preferred Stock
so called for redemption shall cease to accrue, and said shares shall no longer
be deemed to be outstanding, and all rights of the holders thereof as preferred
stockholders of the Corporation (except the right to receive from the
Corporation the redemption price) shall cease. Upon surrender in accordance with
said notice of the certificates for any shares so redeemed (properly endorsed or
assigned for transfer, if the Board of Directors shall so require and the notice
shall so state), such shares shall be redeemed by the Corporation at the
redemption price aforesaid. In case fewer than all the shares represented by any
such certificate are redeemed, a new certificate shall be issued representing
the unredeemed shares without cost to the holder thereof.
(i) Any shares of the Series C Preferred Stock which shall at any time
have been redeemed or repurchased by the Corporation, or surrendered to the
Corporation upon conversion or otherwise acquired by the Corporation shall, upon
such redemption, repurchase, surrender or other acquisition, be retired and
thereafter have the status of authorized but unissued shares of Preferred Stock,
without designation as to series until such shares are once more designated as
part of a particular series by the Board of Directors or a duly authorized
committee thereof.
(j) Notwithstanding the foregoing provisions of this paragraph 3, unless
the full cumulative dividends on all outstanding shares of the Series C
Preferred Stock shall have been paid or contemporaneously are declared and paid
through the latest Dividend Payment Date, no shares of the Series C Preferred
Stock shall be redeemed, except at the option of the holder pursuant to
paragraph 3(d) and paragraph 3(e) of this Section J, unless all outstanding
shares of the Series C Preferred Stock are simultaneously redeemed, and the
Corporation shall not purchase or otherwise acquire any shares of the Series C
Preferred Stock; provided, however, that the foregoing shall not prevent the
purchase or acquisition of shares of the Series C Preferred Stock pursuant to a
purchase or exchange offer made on the same terms to holders of all outstanding
shares of the Series C Preferred Stock.
(k) Any redemption, repurchase or other acquisition by, or any surrender
upon conversion to, the Corporation of shares of Series C Preferred Stock may,
to the extent required to be made out of funds legally available for such
purpose, be made to the extent of any unreserved and unrestricted capital
surplus attributable to such shares in addition to any other surplus, profits,
earnings or other funds or amounts legally available for such purpose.
4. Conversion. (a) The holder of any shares of the Series C Preferred
Stock at his option may at any time (except that if any such shares shall have
been called for redemption, then, as to such shares,
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such right shall terminate at the close of business on the date fixed
for such redemption, unless default shall be made by the Corporation
in providing money or shares of Common Stock for the payment of
the redemption price of the shares called for redemption) convert
the stated value of all such shares into a number of fully paid and
nonassessable shares of Common Stock determined by dividing the stated value of
the shares surrendered for conversion by the Conversion Price fixed or
determined pursuant to paragraph 4(d) and paragraph 9 of this Section J. Such
right shall be exercised by the surrender of the shares so to be converted to
the Corporation at any time during normal business hours at the office of the
Corporation, accompanied by written notice of such holder's election to convert
and (if so required by the Corporation) by instruments of transfer, in form
satisfactory to the Corporation, duly executed by the registered holder or by
his duly authorized attorney, and transfer tax stamps or funds therefor, if
required pursuant to paragraph 4(i) of this Section J.
(b) As promptly as practicable after the surrender for conversion of the
shares of the Series C Preferred Stock in the manner provided in paragraph 4(a)
of this Section J and the payment in cash of any amount required by the
provisions of paragraphs 4(a) and 4(h) of this Section J, the Corporation will
deliver or cause to be delivered to or upon the written order of the holder of
such shares, certificates representing the number of full shares of Common Stock
issuable upon such conversion, issued in such name or names as such holder may
direct. Such conversion shall be deemed to have been made immediately prior to
the close of business on the date of such surrender of the shares, and all
rights of the holder of such shares as a holder of such shares shall cease at
such time and the person or persons in whose name or names the certificates for
such shares of Common Stock are to be issued shall be treated for all purposes
as having become the record holder or holders thereof at such time and such
conversion shall be at the Conversion Price (as hereinafter defined) in effect
at such time; provided, however, that any such surrender and payment on any date
when the stock transfer books of the Corporation shall be closed shall
constitute the person or persons in whose name or names the certificates for
such shares of Common Stock are to be issued as the record holder or holders
thereof for all purposes immediately prior to the close of business on the next
succeeding day on which such stock transfer books are opened and such conversion
shall be at the Conversion Price in effect at such time on such succeeding day.
If the last day for the exercise of the conversion right shall be other than
a business day, then such conversion right may be exercised on the next
succeeding business day.
(c) No adjustments in respect of dividends shall be made upon the
conversion of the shares of the Series C Preferred Stock.
(d) The initial Conversion Price shall be $66.21 per share of the Common
Stock. The Conversion Price shall be subject to adjustment as provided in
paragraph 9.
(e) No fractional shares of stock shall be issued upon the conversion of
shares of the Series C Preferred Stock. If any fractional interest in a share of
Common Stock would, except for the provisions of this paragraph 4(e), be
deliverable upon the conversion of shares, the Corporation shall in lieu of
delivering the fractional share therefor, adjust such fractional interest by
payment to the holder of such surrendered share or shares of an amount in cash
equal (computed to the nearest cent) to the current market value of such
fractional interest, computed on the basis of the last reported sale price
regular way of Common Stock on the New York Stock Exchange, or, if not reported
for such Exchange, on the Composite Tape, on the business day prior to the date
of conversion, or, in case no such reported sale takes place on such day,
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the average of the reported closing bid and asked quotations on the New York
Stock Exchange, or, if the Common Stock is not listed on such Exchange or no
such quotations are available, the last sale price in the over-the-counter
market reported by the National Association of Securities Dealers Automated
Quotations System, or if not reported by such System, the average of the high
bid and low asked quotations in the over-the-counter market as reported
by National Quotation Bureau, Incorporated, or similar organization,
or if no such quotations are available, the fair market price as
determined by the Corporation (whose determination shall be conclusive).
(f) The Corporation covenants that it will at all times reserve and keep
available, solely for the purpose of issue upon conversion of the outstanding
shares of the Series C Preferred Stock, such number of shares of Common Stock as
shall be issuable upon the conversion of all such outstanding shares, provided
that nothing contained herein shall be construed to preclude the Corporation
from satisfying its obligations in respect of (i) such reservation by reserving
purchased shares of Common Stock which are held in the treasury of the
Corporation and (ii) conversion of any shares of the Series C Preferred Stock by
delivery of purchased shares of Common Stock which are held in the treasury of
the Corporation.
The Corporation covenants that if any shares of Common Stock required to be
reserved for purposes of conversion of the shares hereunder require registration
with or approval of any governmental authority under any Federal or state law
before such shares may be issued upon conversion, the Corporation will cause
such shares to be duly registered or approved, as the case may be.
The Corporation will endeavor to list the shares of Common Stock required to
be delivered upon conversion of shares prior to such delivery upon each national
securities exchange upon which the outstanding Common Stock is listed at the
time of such delivery.
The Corporation covenants that all shares of Common Stock which shall be
issued upon conversion of the shares of Series C Preferred Stock will upon issue
be fully paid and nonassessable.
(g) Before taking any action which would cause an adjustment reducing the
Conversion Price below the then par value of the Common Stock, the Corporation
will take any corporate action which may, in the opinion of its counsel, be
necessary in order that the Corporation may validly and legally issue fully paid
and nonassessable shares of Common Stock at the Conversion Price as so adjusted.
(h) The issuance of certificates for shares of Common Stock upon
conversion or payment of the redemption price shall be made without charge for
any stamp or other similar tax in respect of such issuance. However, if any such
certificate is to be issued in a name other than that of the holder of the share
or shares converted, the person or persons requesting the issuance thereof shall
pay to the Corporation the amount of any tax which may be payable in respect of
any transfer involved in such issuance or shall establish to the satisfaction of
the Corporation that such tax has been paid.
(i) Notwithstanding anything elsewhere contained in this Certificate of
Incorporation, any funds which at any time shall have been deposited or set
aside by the Corporation or on its behalf with any paying agent or otherwise for
the purpose of paying dividends on or the redemption price of any of the shares
of the Series C Preferred Stock and which shall not be required for such
purposes because of the conversion of such shares, as provided in this paragraph
4, shall, upon delivery to the paying agent of evidence satisfactory to it of
such conversion, after such conversion be repaid to the Corporation by the
paying agent.
(j) In case:
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(i) the Corporation shall take any action which would require an
adjustment in the Conversion Price pursuant to paragraph 9 of this Section
J; or
(ii) the Corporation shall authorize the granting to the holders of
its Common Stock of rights or warrants to subscribe for or purchase any
shares of stock of any class or of any other rights and notice thereof shall
be given to holders of Common Stock; or
(iii) there shall be any capital reorganization or reclassification
of the Common Stock (other than a subdivision or combination of the
outstanding Common Stock and other than a change in par value or from par
value to no par value or from no par value to par value of the Common
Stock), or any consolidation or merger to which the Corporation is a party
and for which approval of any stockholders of the Corporation is required,
or any sale or transfer of all or substantially all of the assets of the
Corporation; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then the Corporation shall cause to be given to the holders of the shares of the
Series C Preferred Stock at least ten days prior to the applicable date
hereinafter specified, a notice of (x) the date on which a record is to be taken
for the purpose of any distribution or grant to holders of Common Stock, or, if
a record is not to be taken, the date as of which the holders of Common Stock of
record to be entitled to such distribution or grant are to be determined or (y)
the date on which such reorganization, reclassification, consolidation, merger,
sale, transfer, dissolution, liquidation or winding up is expected to become
effective, and the date as of which it is expected that holders of Common Stock
of record shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding up. Failure to give such notice or any defect therein
shall not affect the legality or validity of any proceedings described in
clauses (i), (ii), (iii) or (iv) of this paragraph 4(j).
5. Voting. The shares of the Series C Preferred Stock shall be entitled
to vote for the election of directors and on all other matters submitted to a
vote of stockholders of the Corporation. Each share of the Series C Preferred
Stock shall be entitled to 1.3 votes per share when voting together as a single
class with shares of Common Stock, such voting rights to be adjusted as the
Conversion Price is adjusted pursuant to paragraphs 4(d)and 9 of this Section J.
Such shares shall vote jointly as a single class with shares of Common Stock and
not as a separate class except as otherwise expressly provided for in the
General Corporation Law of the State of Delaware; provided, however, that
whether or not the General Corporation Law of the State of Delaware so provides,
the affirmative vote of the holders of at least two-thirds of the outstanding
shares of the Series C Preferred Stock and all other series of Preferred Stock
ranking on a parity with the Series C Preferred Stock as to dividends and upon
liquidation, voting together as a class, shall be required for the Corporation
to create a new class or increase an existing class of stock having rights in
respect of the payment of dividends or in liquidation prior to the Series C
Preferred Stock or any other series of Preferred Stock ranking on a parity with
the Series C Preferred Stock as to dividends and upon liquidation, to issue any
preferred stock of the Corporation ranking prior to the Series C Preferred Stock
either as to dividends or upon liquidation, or to change the terms, limitations
or relative rights or preferences of the Series C Preferred Stock or any other
series of Preferred Stock ranking on a parity with the Series C Preferred Stock
as to dividends and upon liquidation, either directly or by increasing the
relative rights of the shares of another class. When the
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shares of Series C Preferred Stock are entitled to vote together with any
other series of Preferred Stock, shares of Series C Preferred Stock shall
be entitled to one vote per share.
6. Liquidation Rights. (a) Upon the dissolution, liquidation or winding
up of the Corporation, whether voluntary or involuntary, the holders of the
shares of the Series C Preferred Stock shall be entitled to receive out of the
assets of the Corporation available for distribution to stockholders, before any
payment or distribution shall be made on the Common Stock or on any other class
of stock ranking junior to the Preferred Stock upon liquidation, the amount of
$53.25 per share, plus accrued and unpaid dividends thereon to the date of final
distribution.
(b) Neither the sale, lease or exchange (for cash, shares of stock,
securities or other consideration) of all or substantially all the property and
assets of the Corporation nor the merger or consolidation of the Corporation
into or with any other corporation or the merger or consolidation of any other
corporation into or with the Corporation, shall be deemed to be a dissolution,
liquidation or winding up, voluntary or involuntary, for the purposes of this
paragraph 6.
(c) After the payment to the holders of the shares of the Series C
Preferred Stock of the full preferential amounts provided for in this paragraph
6, the holders of the Series C Preferred Stock as such shall have no right or
claim to any of the remaining assets of the Corporation.
(d) In the event the assets of the Corporation available for distribution
to the holders of shares of the Series C Preferred Stock upon any dissolution,
liquidation or winding up of the Corporation, whether voluntary or involuntary,
shall be insufficient to pay in full all amounts to which such holders are
entitled pursuant to paragraph 6(a) of this Section J, no such distribution
shall be made on account of any shares of any other series of Preferred Stock or
any other class of stock of the Corporation, in either case ranking on a parity
with the shares of the Series C Preferred Stock upon such dissolution,
liquidation or winding up, unless proportionate distributive amounts shall be
paid on account of the shares of the Series C Preferred Stock, ratably, in
proportion to the full distributable amounts to which holders of all such parity
shares are respectively entitled upon such dissolution, liquidation or winding
up.
7. Ranking. For purposes of the foregoing paragraphs 1 through 6 of this
Section J, any stock of any class or classes of the Corporation shall be deemed
to rank:
(a) prior to the shares of the Series C Preferred Stock, either as to
dividends or upon liquidation, if the holders of such class or classes shall be
entitled to the receipt of dividends or of amounts distributable upon
dissolution, liquidation or winding up of the Corporation, whether voluntary or
involuntary, as the case may be, in preference or priority to the holders of
shares of the Series C Preferred Stock;
(b) on a parity with shares of the Series C Preferred Stock, either as to
dividends or upon liquidation, whether or not the dividend rates, dividend
payment dates or redemption or liquidation prices per share or sinking fund
provisions, if any, be different from those of the Series C Preferred Stock, if
the holders of such stock shall be entitled to the receipt of dividends or of
amounts distributable upon dissolution, liquidation or winding up of the
Corporation, whether voluntary or involuntary, as the case may be, in proportion
to their respective dividend rates or liquidation prices, without preference or
priority, one over the other, as between the holders of such stock and the
holders of shares of the Series C Preferred Stock; and
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(c) junior to shares of the Series C Preferred Stock, either as to
dividends or upon liquidation, if such class or classes shall be Common Stock or
if the holders of shares of the Series C Preferred Stock shall be entitled to
receipt of dividends or of amounts distributable upon dissolution, liquidation
or winding up of the Corporation, whether voluntary or involuntary, as the case
may be, in preference or priority to the holders of shares of such class or
classes.
Notwithstanding any other provision of this Section J or of Section K, the
Series C Preferred Stock shall rank on a parity (within the meaning of paragraph
7(b) of this Section J) with the Corporation's 8.125% Cumulative Preferred
Stock, Series A, 5.50% Convertible Preferred Stock, Series B, $45,000 Cumulative
Redeemable Preferred Stock, Series Z and 9.25% Preferred Stock, Series D as to
dividends and distributions of assets.
8. Consolidation, Merger, etc. (a) In the event that the Corporation
shall consummate any consolidation or merger or similar business combination,
pursuant to which the outstanding shares of Common Stock are by operation of law
exchanged solely for or changed, reclassified or converted solely into stock of
any successor or resulting corporation (including the Corporation) that
constitutes "qualifying employer securities" with respect to a holder of Series
C Preferred Stock within the meaning of Section 409(1) of the Internal Revenue
Code of 1986, as amended, and Section 407(d)(5) of the Employee Retirement
Income Security Act of 1974, as amended, or any successor provisions of law,
and, if applicable, for a cash payment in lieu of fractional shares, if any, the
Series C Preferred Stock of such holder shall, in connection with such
consolidation, merger or similar business combination, be assumed by and shall
become preferred stock of such successor or resulting corporation, having in
respect of such corporation, insofar as possible, the same powers, preferences
and relative, participating, optional or other special rights (including the
redemption rights provided by paragraph 3 of this Section J), and the
qualifications, limitations or restrictions thereon, that the Series C Preferred
Stock had immediately prior to such transaction, except that after such
transaction each share of Series C Preferred Stock shall be convertible,
otherwise on the terms and conditions provided by paragraph 4 of this Section J,
into the number and kind of qualifying employer securities so receivable by a
holder of the number of shares of Common Stock into which such Series C
Preferred Stock could have been converted immediately prior to such transaction;
provided, however, that if by virtue of the structure of such transaction, a
holder of Common Stock is required to make an election with respect to the
nature and kind of consideration to be received in such transaction, which
election cannot practicably be made by the holders of the Series C Preferred
Stock, then the Series C Preferred Stock shall, by virtue of such transaction
and on the same terms as apply to the holders of Common Stock, be converted into
or exchanged for the aggregate amount of stock, securities, cash or other
property (payable in kind) receivable by a holder of the number of shares of
Common Stock into which such Series C Preferred Stock could have been converted
immediately prior to such transaction if such holder of Common Stock failed to
exercise any rights of election to receive any kind or amount of stock,
securities, cash or other property (other than such qualifying employer
securities and a cash payment, if applicable, in lieu of fractional shares)
receivable upon such transaction (provided that, if the kind or amount of
qualifying employer securities receivable upon such transaction is not the same
for each non-electing share, then the kind and amount so receivable upon such
transaction for each non-electing share shall be the kind and amount so
receivable per share by the plurality of the non-electing shares). The rights of
the Series C Preferred Stock as preferred stock of such successor or resulting
corporation shall successively be subject to adjustments pursuant to paragraphs
4 and 9 of this Section J after any such transaction as nearly equivalent as
practicable to the adjustment provided for by such paragraph prior to such
transaction. The Corporation shall not consummate any such merger, consolidation
or similar transaction unless all then outstanding Series C Preferred Stock
shall be assumed and authorized by the successor or resulting corporation as
aforesaid.
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(b) In the event that the Corporation shall consummate any consolidation
or merger or similar business combination, pursuant to which the outstanding
shares of Common Stock are by operation of law exchanged for or changed,
reclassified or converted into other stock or securities or cash or any other
property, or any combination thereof, other than any such consideration which is
constituted solely of qualifying employer securities (as referred to in
paragraph 8(a) of this Section J) and cash payments, if applicable, in lieu of
fractional shares, outstanding shares of Series C Preferred Stock shall, without
any action on the part of the Corporation or any holder thereof (but subject to
paragraph 8(c) of this Section J), be automatically converted by virtue of such
merger, consolidation or similar transaction immediately prior to such
consummation into the number of shares of Common Stock into which such Series C
Preferred Stock could have been converted at such time so that each share of
Series C Preferred Stock shall, by virtue of such transaction and on the same
terms as apply to the holders of Common Stock, be converted into or exchanged
for the aggregate amount of stock, securities, cash or other property (payable
in like kind) receivable by a holder of the number of shares of Common Stock
into which such shares of Series C Preferred Stock could have been converted
immediately prior to such transaction; provided, however, that if by virtue of
the structure of such transaction, a holder of Common Stock is required to make
an election with respect to the nature and kind of consideration to be received
in such transaction, which election cannot practicably be made by the holder of
the Series C Preferred Stock, then the Series C Preferred Stock shall, by virtue
of such transaction and on the same terms as apply to the holders of Common
Stock, be converted into or exchanged for the aggregate amount of stock,
securities, cash or other property (payable in kind) receivable by a holder of
the number of shares of Common Stock into which such Series C Preferred Stock
could have been converted immediately prior to such transaction if such holder
of Common Stock failed to exercise any rights of election as to the kind or
amount of stock, securities, cash or other property receivable upon such
transaction (provided that, if the kind or amount of stock, securities, cash or
other property receivable upon such transaction is not the same for each
non-electing share, then the kind and amount of stock, securities, cash or other
property receivable upon such transaction for each non-electing share shall be
the kind and amount so receivable per share by a plurality of the non-electing
shares).
(c) In the event the Corporation shall enter into any agreement providing
for any consolidation or merger or similar business combination described in
paragraph 8(b) of this Section J, then the Corporation shall as soon as
practicable thereafter (and in any event at least ten business days before
consummation of such transaction) give notice of such agreement and the material
terms thereof to each holder of Series C Preferred Stock and each such holder
shall have the right to elect, by written notice to the Corporation, to receive,
upon consummation of such transaction (if and when such transaction is
consummated), from the Corporation or the successor of the Corporation, in
redemption of such Series C Preferred Stock, a cash payment equal to the
following redemption prices per share, plus, in each case, accrued and unpaid
dividends thereon to the date fixed for redemption.
If redeemed during the twelve-month period beginning January 1,
Year Price
---- -----
1994 . . . . . . . . . . . . . . . . . . . . . . $55.52
1995 . . . . . . . . . . . . . . . . . . . . . . $54.95
1996 . . . . . . . . . . . . . . . . . . . . . . $54.38
1997 . . . . . . . . . . . . . . . . . . . . . . $53.82
and $53.25 if redeemed on or after January 1, 1998.
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No such notice of redemption shall be effective unless given to the
Corporation prior to the close of business on the fifth business day prior to
consummation of such transaction, unless the Corporation or the successor of the
Corporation shall waive such prior notice, but any notice of redemption so given
prior to such time may be withdrawn by notice of withdrawal given to the
Corporation prior to the close of business on the fifth business day prior to
consummation of such transaction.
9. Anti-dilution Adjustments. (a) In the event the Corporation shall, at
any time or from time to time while any of the Series C Preferred Stock is
outstanding, (i) pay a dividend or make a distribution in respect of the Common
Stock in shares of Common Stock, (ii) subdivide the outstanding shares of Common
Stock or (iii) combine the outstanding shares of Common Stock into a smaller
number of shares, in each case whether by reclassification of shares,
recapitalization of the Corporation (including a recapitalization effected by a
merger or consolidation to which paragraph 8 of this Section J does not apply)
or otherwise, the Conversion Price in effect immediately prior to such action
shall be adjusted by multiplying such Conversion Price by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately before such event, and the denominator of which is the number of
shares of Common Stock outstanding immediately after such event. An adjustment
made pursuant to this paragraph 9(a) shall be given effect, upon payment of such
a dividend or distribution, as of the record date for the determination of
stockholders entitled to receive such dividend or distribution (on a retroactive
basis) and in the case of a subdivision or combination shall become effective
immediately as of the effective date thereof.
(b) In the event that the Corporation shall, at any time or from time to
time while any of the Series C Preferred Stock is outstanding, issue to holders
of shares of Common Stock as a dividend or distribution, including by way of a
reclassification of shares or a recapitalization of the Corporation, any right
or warrant to purchase shares of Common Stock (but not including as such a right
or warrant any security convertible into or exchangeable for shares of Common
Stock) at a purchase price per share less than the Fair Market Value (as
hereinafter defined) of a share of Common Stock on the date of issuance of such
right or warrant, then, subject to the provisions of paragraphs 9(e) and 9(f) of
this Section J, the Conversion Price shall be adjusted by multiplying such
Conversion Price by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately before such issuance of rights or
warrants plus the number of shares of Common Stock which could be purchased at
the Fair Market Value of a share of Common Stock at the time of such issuance
for the maximum aggregate consideration payable upon exercise in full of all
such rights or warrants, and the denominator of which shall be the number of
shares of Common Stock outstanding immediately before such issuance of rights or
warrants plus the maximum number of shares of Common Stock that could be
acquired upon exercise in full of all such rights and warrants.
(c) In the event the Corporation shall, at any time or from time to time
while any of the shares of Series C Preferred Stock are outstanding, issue, sell
or exchange shares of Common Stock (other than pursuant to any right or warrant
to purchase or acquire shares of Common Stock (including as such a right or
warrant any security convertible into or exchangeable for shares of Common
Stock) and other than pursuant to any employee or director incentive or benefit
plan or arrangement, including any employment, severance or consulting
agreement, of the Corporation or any subsidiary of the Corporation heretofore or
hereafter adopted) for a consideration having a Fair Market Value, on the date
of such issuance, sale or exchange, less than the Fair Market Value of such
shares on the date of issuance, sale or exchange, then, subject to the
provisions of paragraphs 9(e) and 9(f) of this Section J, the Conversion Price
shall be adjusted by multiplying such Conversion Price by a fraction, the
numerator of which shall be the sum of (i) the Fair Market Value of all the
shares of Common Stock outstanding on the day
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immediately preceding the first public announcement of such issuance,
sale or exchange plus (ii) the Fair Market Value of the consideration
received by the Corporation in respect of such issuance, sale or
exchange of shares of Common Stock, and the denominator of which
shall be the product of (x) the Fair Market Value of a share of Common
Stock on the day immediately preceding the first public announcement of such
issuance, sale or exchange multiplied by (y) the sum of the number of shares of
Common Stock outstanding on such day plus the number of shares of Common Stock
so issued, sold or exchanged by the Corporation. In the event the Corporation
shall, at any time or from time to time while any Series C Preferred Stock is
outstanding, issue, sell or exchange any right or warrant to purchase or acquire
shares of Common Stock (including as such a right or warrant any security
convertible into or exchangeable for shares of Common Stock), other than any
such issuance to holders of shares of Common Stock as a dividend or distribution
(including by way of a reclassification of shares or a recapitalization of the
Corporation) and other than pursuant to any employee or director incentive or
benefit plan or arrangement (including any employment, severance or consulting
agreement) of the Corporation or any subsidiary of the Corporation heretofore or
hereafter adopted, for a consideration having a Fair Market Value, on the date
of such issuance, sale or exchange, less than the Non-Dilutive Amount (as
hereinafter defined), then, subject to the provisions of paragraphs 9(e) and
9(f) of this Section J, the Conversion Price shall be adjusted by multiplying
such Conversion Price by a fraction, the numerator of which shall be the sum of
(i) the Fair Market Value of all the shares of Common Stock outstanding on the
day immediately preceding the first public announcement of such issuance, sale
or exchange plus (ii) the Fair Market Value of the consideration received by the
Corporation in respect of such issuance, sale or exchange of such right or
warrant plus (iii) the Fair Market Value at the time of such issuance of the
consideration which the Corporation would receive upon exercise in full of all
such rights or warrants, and the denominator of which shall be the product of
(i) the Fair Market Value of a share of Common Stock on the day immediately
preceding the first public announcement of such issuance, sale or exchange
multiplied by (ii) the sum of the number of shares of Common Stock outstanding
on such day plus the maximum number of shares of Common Stock which could be
acquired pursuant to such right or warrant at the time of the issuance, sale or
exchange of such right or warrant (assuming shares of Common Stock could be
acquired pursuant to such right or warrant at such time).
(d) In the event the Corporation shall, at any time or from time to time
while any of the Series C Preferred Stock is outstanding, make an Extraordinary
Distribution (as hereinafter defined) in respect of the Common Stock, whether by
dividend, distribution, reclassification of shares or recapitalization of the
Corporation (including a recapitalization or reclassification effected by a
merger or consolidation to which paragraph 8 of this Section J does not apply)
or effect a Pro Rata Repurchase (as hereinafter defined) of Common Stock, the
Conversion Price in effect immediately prior to such Extraordinary Distribution
or Pro Rata Repurchase shall, subject to paragraphs 9(e) and 9(f) of this
Section J, be adjusted by multiplying such Conversion Price by a fraction, the
numerator of which is the difference between (i) the product of (x) the number
of shares of Common Stock outstanding immediately before such Extraordinary
Distribution or Pro Rata Repurchase multiplied by (y) the Fair Market Value of a
share of Common Stock on the day before the ex-dividend date with respect to an
Extraordinary Distribution which is paid in cash and on the distribution date
with respect to an Extraordinary Distribution which is paid other than in cash,
or on the applicable expiration date (including all extensions thereof) of any
tender offer which is a Pro Rata Repurchase, or on the date of purchase with
respect to any Pro Rata Repurchase which is not a tender offer, as the case may
be, and (ii) the Fair Market Value of the Extraordinary Distribution minus the
aggregate amount of regularly scheduled quarterly dividends declared by the
Board of Directors and paid by the Corporation in the twelve months immediately
preceding such Extraordinary Distribution or the aggregate purchase price of the
Pro Rata Repurchase, as the case may be, and the denominator of which shall be
the product of (a) the number of shares of Common Stock outstanding immediately
before
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such Extraordinary Distribution or Pro Rata Repurchase minus, in the case
of a Pro Rata Repurchase, the number of shares of Common Stock repurchased by
the Corporation multiplied by (b) the Fair Market Value of a share of Common
Stock on the day before the ex-dividend date with respect to an Extraordinary
Distribution which is paid in cash and on the distribution date with respect to
an Extraordinary Distribution which is paid other than in cash, or on the
applicable expiration date (including all extensions thereof)of any tender offer
which is a Pro Rata Repurchase or on the date of purchase with respect to any
Pro Rata Repurchase which is not a tender offer, as the case may be. The
Corporation shall send each holder of Series C Preferred Stock (i) notice of its
intent to make any Extraordinary Distribution and (ii) notice of any offer by
the Corporation to make a Pro Rata Repurchase, in each case at the same time as,
or as soon as practicable after, such offer is first communicated (including by
announcement of a record date in accordance with the rules of any stock exchange
on which the Common Stock is listed or admitted to trading) to holders of Common
Stock. Such notice shall indicate the intended record date and the amount and
nature of such dividend or distribution, or the number of shares subject to such
offer for a Pro Rata Repurchase and the purchase price payable by the
Corporation pursuant to such offer, as well as the Conversion Price and the
number of shares of Common Stock into which a share of Series C Preferred Stock
may be converted at such time.
(e) Notwithstanding any other provisions of this paragraph 9, the
Corporation shall not be required to make any adjustment to the Conversion Price
unless such adjustment would require an increase or decrease of at least one
percent (1%) in the Conversion Price. Any lesser adjustment shall be carried
forward and shall be made no later than the time of, and together with, the next
subsequent adjustment which, together with any adjustment or adjustments so
carried forward, shall amount to an increase or decrease of at least one percent
(1%) in the Conversion Price.
(f) If the Corporation shall make any dividend or distribution on the
Common Stock or issue any Common Stock, other capital stock or other security of
the Corporation or any rights or warrants to purchase or acquire any such
security, which transaction does not result in an adjustment to the Conversion
Price pursuant to the foregoing provisions of this paragraph 9, the Board of
Directors shall consider whether such action is of such a nature that an
adjustment to the Conversion Price should equitably be made in respect of such
transaction. If in such case the Board of Directors determines that an
adjustment to the Conversion Price should be made, an adjustment shall be made
effective as of such date, as determined by the Board of Directors. The
determination of the Board of Directors as to whether an adjustment to the
Conversion Price should be made pursuant to the foregoing provisions of this
paragraph 9(f), and, if so, as to what adjustment should be made and when, shall
be final and binding on the Corporation and all stockholders of the Corporation.
The Corporation shall be entitled to make such additional adjustments in the
Conversion Price, in addition to those required by the foregoing provisions of
this paragraph 9, as shall be necessary in order that any dividend or
distribution in shares of capital stock of the Corporation, subdivision,
reclassification or combination of shares of stock of the Corporation or any
recapitalization of the Corporation shall not be taxable to the holders of the
Common Stock.
(g) For purposes of this paragraph 9 the following definitions shall apply:
"Business Day" shall mean each day that is not a Saturday, Sunday or a day
on which state or federally chartered banking institutions in New York, New
York are not required to be open.
"Current Market Price" of publicly traded shares of Common Stock or any
other class of capital stock or other security of the Corporation or any
other issuer for any day shall mean the last
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reported sales price, regular way, or, in the event that no sale
takes place on such day, the average of the reported closing
bid and asked prices, regular way, in either case as reported
on the New York Stock Exchange Composite Tape or, if such security
is not listed or admitted to trading on the New York Stock Exchange, on the
principal national securities exchange on which such security is listed or
admitted to trading or, if not listed or admitted to trading on any national
securities exchange, on the NASDAQ National Market System or, if such
security is not quoted on such National Market System, the average of the
closing bid and asked prices on each such day in the over-the-counter market
as reported by NASDAQ or, if bid and asked prices for such security on each
such day shall not have been reported through NASDAQ, the average of the bid
and asked prices for such day as furnished by any New York Stock Exchange
member firm regularly making a market in such security selected for such
purpose by the Board of Directors or a committee thereof, in each case, on
each trading day during the Adjustment Period.
"Adjustment Period" shall mean the period of five consecutive trading days
preceding, and including, the date as of which the Fair Market Value of a
security is to be determined. The "Fair Market Value" of any security which
is not publicly traded or of any other property shall mean the fair value
thereof as determined by an independent investment banking or appraisal firm
experienced in the valuation of such securities or property selected in good
faith by the Board of Directors or a committee thereof, or, if no such
investment banking or appraisal firm is in the good faith judgment of the
Board of Directors or such committee available to make such determination, as
determined in good faith by the Board of Directors or such committee.
"Extraordinary Distribution" shall mean any dividend or other distribution
to holders of Common Stock (effected while any shares of the Series C
Preferred Stock are outstanding) (i) of cash, where the aggregate amount of
such cash dividend or distribution together with the amount of all cash
dividends and distributions made during the preceding period of 12 months,
when combined with the aggregate amount of all Pro Rata Repurchases (for this
purpose, including only that portion of the aggregate purchase price of such
Pro Rata Repurchases which is in excess of the Fair Market Value of the
Common Stock repurchased as determined on the applicable expiration date
(including all extensions thereof) of any tender offer or exchange offer
which is a Pro Rata Repurchase, or the date of purchase with respect to any
other Pro Rata Repurchase which is not a tender offer or exchange offer made
during such period), exceeds twelve and one-half percent (12 1/2%) of the
aggregate Fair Market Value of all shares of Common Stock outstanding on the
day before the ex-dividend date with respect to such Extraordinary
Distribution which is paid in cash and on the distribution date with respect
to an Extraordinary Distribution which is paid other than in cash, and/or
(ii) of any shares of capital stock of the Corporation (other than shares of
Common Stock), other securities of the Corporation (other than securities of
the type referred to in paragraphs 9(b) or 9(c) of this Section J), evidences
of indebtedness of the Corporation or any other person or any other property
(including shares of any subsidiary of the Corporation) or any combination
thereof. The Fair Market Value of an Extraordinary Distribution for purposes
of paragraph 9(d) of this Section J shall be equal to the sum of the Fair
Market Value of such Extraordinary Distribution plus the amount of any cash
dividends which are not Extraordinary Distributions made during such 12-month
period and not previously included in the calculation of an adjustment
pursuant to paragraph 9(d) of this Section J.
"Fair Market Value" shall mean, as to shares of Common Stock or any other
class of capital stock or securities of the Corporation or any other issuer
which are publicly traded, the average of the Current Market Prices of such
shares or securities for each day of the Adjustment Period.
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"Non-Dilutive Amount" in respect of an issuance, sale or exchange by the
Corporation of any right or warrant to purchase or acquire shares of Common
Stock (including any security convertible into or exchangeable for shares of
Common Stock) shall mean the difference between (i) the product of the Fair
Market Value of a share of Common Stock on the day preceding the first public
announcement of such issuance, sale or exchange multiplied by the maximum
number of shares of Common Stock which could be acquired on such date upon
the exercise in full of such rights and warrants (including upon the
conversion or exchange of all such convertible or exchangeable securities),
whether or not exercisable (or convertible or exchangeable) at such date, and
(ii) the aggregate amount payable pursuant to such right or warrant to
purchase or acquire such maximum number of shares of Common Stock; provided,
however, that in no event shall the Non-Dilutive Amount be less than zero.
For purposes of the foregoing sentence, in the case of a security convertible
into or exchangeable for shares of Common Stock, the amount payable pursuant
to a right or warrant to purchase or acquire shares of Common Stock shall be
the Fair Market Value of such security on the date of the issuance, sale or
exchange of such security by the Corporation.
"Pro Rata Repurchase" shall mean any purchase of shares of Common Stock by
the Corporation or any subsidiary thereof, whether for cash, shares of
capital stock of the Corporation, other securities of the Corporation,
evidences of indebtedness of the Corporation or any other person or any other
property (including shares of a subsidiary of the Corporation), or any
combination thereof, effected while any of the shares of Series C Preferred
Stock are outstanding, pursuant to any tender offer or exchange offer subject
to Section 13(e) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or any successor provision of law, or pursuant to any other
offer available to substantially all holders of Common Stock; provided,
however, that no purchases of shares by the Corporation or any subsidiary
thereof made in open market transactions shall be deemed a Pro Rata
Repurchase. For purposes of this paragraph 9(g), shares shall be deemed to
have been purchased by the Corporation or any subsidiary thereof "in open
market transactions" if they have been purchased substantially in accordance
with the requirements of Rule 10b-18 as in effect under the Exchange Act, on
the date Series C Preferred Stock is initially issued by the Corporation or
on such other terms and conditions as the Board of Directors or a committee
thereof shall have determined are reasonably designed to prevent such
purchases from having a material effect on the trading market for the Common
Stock.
(h) Whenever an adjustment to the Conversion Price and the related voting
rights of the Series C Preferred Stock is required pursuant to this paragraph 9,
the Corporation shall forthwith place on file with the transfer agent for the
Common Stock and with the Secretary of the Corporation, a statement signed by
two officers of the Corporation stating the adjusted Conversion Price determined
as provided herein and the resulting conversion ratio, and the voting rights (as
appropriately adjusted), of the Series C Preferred Stock. Such statement shall
set forth in reasonable detail such facts as shall be necessary to show the
reason and the manner of computing such adjustment, including any determination
of Fair Market Value involved in such computation. Promptly after each
adjustment to the Conversion Price and the related voting rights of the Series C
Preferred Stock, the Corporation shall mail a notice thereof and of the then
prevailing conversion ratio to each holder of Series C Preferred Stock.
K. 9.25% PREFERRED STOCK, SERIES D
1. Designation; Issuance and Transfer. There shall be a series of
Preferred Stock, the designation of which shall be "9.25% Preferred Stock,
Series D" (hereinafter called the "Series D Preferred Stock") and the number of
authorized shares constituting the Series D Preferred Stock shall be 7,500,000.
Shares
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<PAGE>
of the Series D Preferred Stock shall have a stated value of $50.00 per
share. The number of authorized shares of the Series D Preferred Stock may be
reduced by resolution duly adopted by the Board of Directors, or by a duly
authorized committee thereof, and by the filing, pursuant to the provisions of
the General Corporation Law of the State of Delaware, of a certificate of
amendment to the Certificate of Incorporation, as theretofore amended, stating
that such reduction has been so authorized, but the number of authorized shares
of the Series D Preferred Stock shall not be increased.
2. Dividend Rate. (a) Dividends on each share of the Series D Preferred
Stock shall accrue from the date of its original issue (for purposes of this
paragraph 2(a), the date of original issue of the Series D Preferred Stock shall
be the date of commencement of the full quarterly period ending April 1, 1994)
at a rate of 9.25% per annum per share (the "Rate") applied to the stated value
of each such share. Such dividends shall be cumulative from the date of original
issue and shall be payable, when and as declared by the Board of Directors, out
of assets legally available for such purpose, on January 1, April 1, July 1 and
October 1 of each year, commencing April 1, 1994 (each such date being
hereinafter individually a "Dividend Payment Date" and collectively the
"Dividend Payment Dates"), except that if such date is a Sunday or legal holiday
then such dividend shall be payable on the first immediately succeeding calendar
day which is not a Sunday or legal holiday. Each such dividend shall be paid to
the holders of record of shares of the Series D Preferred Stock as they appear
on the books of the Corporation on such record date, not exceeding 45 days
preceding the payment date thereof, as shall be fixed by the Board of Directors.
Dividends in arrears may be declared and paid at any time, without reference to
any regular Dividend Payment Date, to holders of record on such record date, not
exceeding 45 days preceding the payment date thereof, as may be fixed by the
Board of Directors.
(b) Except as hereinafter provided, no dividends shall be declared or paid
or set apart for payment on Preferred Stock of any other series ranking on a
parity with the Series D Preferred Stock as to dividends and upon liquidation
for any period unless full cumulative dividends have been or contemporaneously
are declared and paid on the Series D Preferred Stock through the latest
Dividend Payment Date. When dividends are not paid in full, as aforesaid, upon
the shares of the Series D Preferred Stock and any such other series of
Preferred Stock, all dividends declared upon shares of the Series D Preferred
Stock and such other series of Preferred Stock shall be declared pro rata so
that the amount of dividends declared per share on the Series D Preferred Stock
and such other series of Preferred Stock shall in all cases bear to each other
the same ratio that accrued dividends per share on the shares of the Series D
Preferred Stock and such other series of Preferred Stock bear to each other.
Holders of shares of the Series D Preferred Stock shall not be entitled to any
dividends, whether payable in cash, property or stock, in excess of full
cumulative dividends, as herein provided, on the Series D Preferred Stock. No
interest, or sum of money in lieu of interest, shall be payable in respect of
any dividend payment or payments on the Series D Preferred Stock which may be in
arrears.
(c) So long as any shares of the Series D Preferred Stock are outstanding,
no dividend (other than a dividend in Common Stock or in any other stock of the
Corporation ranking junior to the Series D Preferred Stock as to dividends and
upon liquidation and other than as provided in paragraph 2(b) of this Section K)
shall be declared or paid or set aside for payment, and no other distribution
shall be declared or made upon the Common Stock or upon any other stock of the
Corporation ranking junior to or on a parity with the Series D Preferred Stock
as to dividends or upon liquidation, nor shall any Common Stock nor any other
stock of the Corporation ranking junior to or on a parity with the Series D
Preferred Stock as to dividends or upon liquidation be redeemed, purchased or
otherwise acquired for any consideration (or any moneys be paid to or made
available for a sinking fund for the redemption of any shares of any such stock)
by the Corporation (except by conversion into or exchange for stock of the
Corporation
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ranking junior to the Series D Preferred Stock as to dividends and
upon liquidation) unless, in each case, the full cumulative dividends on all
outstanding shares of the Series D Preferred Stock shall have been paid or
contemporaneously are declared and paid through the latest Dividend Payment
Date.
(d) Dividends payable on each share of Series D Preferred Stock for any
full quarterly period shall be computed by dividing the Rate by four and
multiplying the quotient by the stated value of such share (for purposes of this
paragraph 2(d), the Series D Preferred Stock shall be deemed to have been
outstanding for the full quarterly period ending April 1, 1994). Subject to the
preceding sentence, dividends payable on the Series D Preferred Stock for any
period less than a full quarterly period shall be computed on the basis of a
360-day year of 30-day months.
3. Redemption. (a) The shares of Series D Preferred Stock shall not be
redeemable before July 1, 1997. On or after July 1, 1997, the Corporation, at
its sole option, may redeem the Series D Preferred Stock as a whole or in part
at a price of $50.00 per share plus accrued and unpaid dividends thereon to the
date fixed for redemption.
(b) In the event that fewer than all the outstanding shares of the Series D
Preferred Stock are to be redeemed, the number of shares to be redeemed shall be
determined by the Board of Directors and the shares to be redeemed shall be
determined by lot or pro rata as may be determined by the Board of Directors or
by any other method as may be determined by the Board of Directors in its sole
discretion to be equitable, except that, notwithstanding such method of
determination, the Corporation may redeem all shares of the Series D Preferred
Stock owned by all stockholders of a number of shares not to exceed 100 as may
be specified by the Corporation.
(c) In the event the Corporation shall redeem shares of the Series D
Preferred Stock, notice of such redemption shall be given by first class mail,
postage prepaid, mailed not less than 30 nor more than 60 days prior to the
redemption date, to each holder of record of the shares to be redeemed, at such
holder's address as the same appears on the books of the Corporation. Each such
notice shall state: (i) the redemption date; (ii) the number of shares of the
Series D Preferred Stock to be redeemed and, if fewer than all the shares held
by such holder are to be redeemed, the number of such shares to be redeemed from
such holder; (iii) the redemption price; (iv) the place or places where
certificates for such shares are to be surrendered for payment of the redemption
price; and (v) that dividends on the shares to be redeemed will cease to accrue
on such redemption date.
(d) Notice having been mailed as aforesaid, from and after the redemption
date (unless default shall be made by the Corporation in providing money for the
payment of the redemption price of the shares called for redemption) dividends
on the shares of the Series D Preferred Stock so called for redemption shall
cease to accrue, and said shares shall no longer be deemed to be outstanding,
and all rights of the holders thereof as stockholders of the Corporation (except
the right to receive from the Corporation the redemption price) shall cease.
Upon surrender in accordance with said notice of the certificates for any shares
so redeemed (properly endorsed or assigned for transfer, if the Board of
Directors shall so require and the notice shall so state), such shares shall be
redeemed by the Corporation at the redemption price aforesaid. In case fewer
than all the shares represented by any such certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares without cost to
the holder thereof.
(e) Any shares of the Series D Preferred Stock which shall at any time have
been redeemed, repurchased or otherwise acquired by the Corporation shall, upon
such redemption, repurchase or other acquisition, be retired and thereafter have
the status of authorized but unissued shares of Preferred Stock,
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<PAGE>
without designation as to series until such shares are once more designated
as part of a particular series by the Board of Directors or a duly
authorized committee thereof.
(f) Notwithstanding the foregoing provisions of this paragraph 3, unless
the full cumulative dividends on all outstanding shares of the Series D
Preferred Stock shall have been paid or contemporaneously are declared and paid
through the last Dividend Payment Date, no shares of the Series D Preferred
Stock shall be redeemed unless all outstanding shares of the Series D Preferred
Stock are simultaneously redeemed, and the Corporation shall not purchase or
otherwise acquire any shares of the Series D Preferred Stock; provided, however,
that the foregoing shall not prevent the purchase or acquisition of shares of
the Series D Preferred Stock pursuant to a purchase or exchange offer made on
the same terms to holders of all outstanding shares of the Series D Preferred
Stock.
(g) Any redemption, repurchase or other acquisition by the Corporation of
shares of Series D Preferred Stock may, to the extent required to be made out of
funds legally available for such purpose, be made to the extent of any
unreserved and unrestricted capital surplus attributable to such shares in
addition to any other surplus, profits, earnings or other funds or amounts
legally available for such purpose.
4. Voting. The shares of the Series D Preferred Stock shall not have any
voting powers, either general or special, except that:
(a) If on the date used to determine stockholders of record for any annual
meeting of stockholders at which directors are to be elected, a Default in
Preferred Dividends (as hereinafter defined) on the Series D Preferred Stock
shall exist, the number of directors constituting the Board of Directors shall
be increased by two, and the holders of the Series D Preferred Stock and all
other series of Preferred Stock ranking on a parity with the Series D Preferred
Stock as to dividends and upon liquidation and upon which like voting rights
have been conferred and are exercisable (whether or not the holders of such
other series of Preferred Stock would be entitled to vote for the election of
directors if such Default in Preferred Dividends did not exist) shall have the
right at such meeting, voting together as a single class without regard to
series, to the exclusion of the holders of Common Stock, to elect two directors
of the Corporation to fill such newly created directorships. Each director
elected by the holders of shares of the Preferred Stock (herein called a
"Preferred Director") as aforesaid shall continue to serve as such director for
the full term for which he shall have been elected, notwithstanding that prior
to the end of such term a Default in Preferred Dividends shall cease to exist.
Any Preferred Director may be removed by, and shall not be removed except by,
the vote of the holders of record of the outstanding shares of the Series D
Preferred Stock and all other series of Preferred Stock ranking on a parity with
the Series D Preferred Stock as to dividends and upon liquidation, voting
together as a single class without regard to series, at a meeting of the
stockholders, or of the holders of shares of such Preferred Stock, called for
the purpose. So long as a Default in Preferred Dividends on the Preferred Stock
shall exist (i) any vacancy in the office of a Preferred Director may be filled
(except as provided in the following clause (ii)) by an instrument in writing
signed by the remaining Preferred Director and filed with the Corporation and
(ii) in the case of the removal of any Preferred Director, the vacancy may be
filled by the vote of the holders of the outstanding shares of Preferred Stock
entitled to vote with respect to the removal of such Preferred Director, voting
together as a single class without regard to series, at the same meeting at
which such removal shall be voted. Each director appointed as aforesaid by the
remaining Preferred Director shall be deemed, for all purposes hereof, to be a
Preferred Director. Whenever the term of office of the Preferred Directors shall
end and no Default in Preferred Dividends shall exist, the number of directors
constituting the Board of Directors shall be reduced by two. For the purposes
hereof, a "Default in
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<PAGE>
Preferred Dividends" on any series of Preferred Stock shall be deemed
to have occurred whenever the amount of accrued and unpaid dividends
upon such series of the Preferred Stock shall be equivalent to six full
quarterly dividends or more, and, having so occurred, such default shall be
deemed to exist thereafter until, but only until, all accrued dividends on all
shares of the Preferred Stock of such series then outstanding shall have been
paid through the last Dividend Payment Date;
(b) Whether or not the General Corporation Law of the State of Delaware so
provides, the affirmative vote of the holders of at least two-thirds of the
outstanding shares of the Series D Preferred Stock and all other series of
Preferred Stock ranking on a parity with the Series D Preferred Stock as to
dividends and upon liquidation, voting together as a single class without regard
to series, shall be required for the Corporation to create a new class or
increase an existing class of stock having rights in respect of the payment of
dividends or in liquidation prior to the Series D Preferred Stock or any other
series of Preferred Stock ranking on a parity with the Series D Preferred Stock
as to dividends and upon liquidation, or to change the terms, limitations or
relative rights or preferences of the Series D Preferred Stock or any other
series of Preferred Stock ranking on a parity with the Series D Preferred Stock
as to dividends and upon liquidation, either directly or by increasing the
relative rights of the shares of another class; and
(c) Whether or not the General Corporation Law of the State of Delaware so
provides, the affirmative vote of the holders of at least two-thirds of the
outstanding shares of the Series D Preferred Stock voting together as a single
class without regard to series with the holders of any one or more other series
of Preferred Stock ranking on a parity with the Series D Preferred Stock as to
dividends and upon liquidation and similarly affected shall be required for
authorizing, effecting, or validating the amendment, alteration or repeal of any
of the provisions of the Certificate of Incorporation or of any Certificate of
Amendment thereof or any similar document (including any Certificate of
Amendment or any similar document relating to any series of the Preferred Stock)
which would adversely affect the preferences, rights or privileges of the Series
D Preferred Stock.
(d) Whether or not the General Corporation Law of the State of Delaware so
provides, the affirmative vote of the holders of at least two-thirds of the
outstanding shares of the Series D Preferred Stock and all other series of
Preferred Stock ranking on a parity with the Series D Preferred Stock as to
dividends and upon liquidation and upon which like voting rights have been
conferred, voting together as a single class without regard to series, shall be
required for the Corporation to issue any authorized shares of preferred stock
of the Corporation ranking prior to the Series D Preferred Stock either as to
dividends or upon liquidation.
5. Liquidation Rights. (a) Upon the dissolution, liquidation or winding up
of the Corporation, whether voluntary or involuntary, the holders of the shares
of the Series D Preferred Stock shall be entitled to receive and to be paid out
of the assets of the Corporation available for distribution to stockholders,
before any payment or distribution shall be made on the Common Stock or on any
other class of stock ranking junior to the Preferred Stock upon liquidation, the
amount of $50.00 per share, plus accrued and unpaid dividends thereon to the
date of final distribution.
(b) Neither the sale, lease or exchange (for cash, shares of stock,
securities or other consideration) of all or substantially all the property and
assets of the Corporation nor the merger or consolidation of the Corporation
into or with any other corporation or the merger or consolidation of any other
corporation into or with the Corporation, shall be deemed to be a dissolution,
liquidation or winding up, voluntary or involuntary, for the purposes of this
paragraph 5.
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(c) After the payment to the holders of the shares of the Series D
Preferred Stock of the full preferential amounts provided for in this paragraph
5, the holders of the Series D Preferred Stock as such shall have no right or
claim to any of the remaining assets of the Corporation.
(d) In the event the assets of the Corporation available for distribution
to the holders of shares of the Series D Preferred Stock upon any dissolution,
liquidation or winding up of the Corporation, whether voluntary or involuntary,
shall be insufficient to pay in full all amounts to which such holders are
entitled pursuant to paragraph 5(a) of this Section K, no such distribution
shall be made on account of any shares of any other series of the Preferred
Stock or any other class of stock of the Corporation ranking on a parity with
the shares of the Series D Preferred Stock upon such dissolution, liquidation or
winding up unless proportionate distributive amounts shall be paid on account of
the shares of the Series D Preferred Stock, ratably, in proportion to the full
distributable amounts to which holders of all such parity shares are
respectively entitled upon such dissolution, liquidation or winding up.
6. Ranking. For purposes of the foregoing paragraphs 1 through 5 of this
Section K, any stock of any class or classes of the Corporation shall be deemed
to rank:
(a) prior to the shares of the Series D Preferred Stock, either as to
dividends or upon liquidation, if the holders of such class or classes shall be
entitled to the receipt of dividends or of amounts distributable upon
dissolution, liquidation or winding up of the Corporation, whether voluntary or
involuntary, as the case may be, in preference or priority to the holders of
shares of the Series D Preferred Stock;
(b) on a parity with shares of the Series D Preferred Stock, either as to
dividends or upon liquidation, whether or not the dividend rates, dividend
payment dates or redemption or liquidation prices per share or sinking fund
provisions, if any, be different from those of the Series D Preferred Stock, if
the holders of such stock shall be entitled to the receipt of dividends or of
amounts distributable upon dissolution, liquidation or winding up of the
Corporation, whether voluntary or involuntary, as the case may be, in proportion
to their respective dividend rates or liquidation prices, without preference or
priority, one over the other, as between the holders of such stock and the
holders of shares of the Series D Preferred Stock; and
(c) junior to shares of the Series D Preferred Stock, either as to
dividends or upon liquidation, if such class or classes shall be Common Stock or
if the holders of shares of the Series D Preferred Stock shall be entitled to
the receipt of dividends or of amounts distributable upon dissolution,
liquidation or winding up of the Corporation, whether voluntary or involuntary,
as the case may be, in preference or priority to the holders of shares of such
class or classes.
Notwithstanding any other provision of this Section K or of Section J, the
Series D Preferred Stock shall rank on a parity (within the meaning of paragraph
6(b) of this Section K) with the Corporation's 8.125% Cumulative Preferred
Stock, Series A, 5.50% Convertible Preferred Stock, Series B, $45,000 Cumulative
Redeemable Preferred Stock, Series Z and Series C Preferred Stock as to
dividends and distributions of assets.
FIFTH: That the executed Agreement as approved is on file at the
principal place of business of the Surviving Corporation, which is 65 East 55th
Street, New York, New York 10022.
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SIXTH: That, in addition to complying with any other Section of Chapter
599 of the laws of the State of Connecticut, a copy of the Agreement will be
furnished by the Surviving Corporation, on request and without cost, to any
stockholder of any constituent corporation.
SEVENTH: That the authorized capital stock of The Travelers Corporation is
five hundred million (500,000,000) shares of Common Capital Stock, par value one
dollar and twenty-five cents ($1.25) per share ("Travelers Common Stock"), ten
million (10,000,000) shares of Preferred Stock, without par value and
twenty-five million (25,000,000) shares of Preference Stock, without par value.
EIGHTH: That the effective time of the merger shall be 3:00 p.m., Eastern
Standard Time, December 31, 1993.
NINTH: That with respect to Primerica Corporation, (a) the Agreement
was required to be adopted by the affirmative vote of the holders of at least a
majority of the issued and outstanding shares of the common stock, par value one
cent ($.01) per share ("Primerica Common Stock"), of Primerica Corporation (or,
in numerical terms, by the holders of at least 120,270,136 of the 240,540,270
shares of Primerica Common Stock issued and outstanding and entitled to vote)
and that (b) the Agreement was adopted by the affirmative vote of the holders of
203,835,497 of the outstanding shares of Primerica Common Stock at a special
meeting of the stockholders of Primerica Corporation held on December 30, 1993.
TENTH: That, with respect to The Travelers Corporation, (a) the Agreement
was required to be approved and adopted by the affirmative vote of (i) the
holders of at least two-thirds of the voting power of the issued and outstanding
shares of Travelers Common Stock and Series A Preference Stock voting together
as a single class, with the shares of Series A Preference Stock being entitled
to 1.3 votes per share for the purpose of such vote (or, in numerical terms, by
at least 100,957,317 of the 151,435,975 votes entitled to be cast for purposes
of such vote by the holders of the 145,707,615 shares of Travelers Common Stock
and the 4,406,431 shares of Series A Preference Stock issued and outstanding and
entitled to vote), (ii) the holders of at least two-thirds of the voting power
of the issued and outstanding shares of Travelers Common Stock, (or, in
numerical terms, by the holders of at least 97,138,410 of the 145,707,615
shares of Travelers Common Stock issued and outstanding and entitled to vote)
and (iii) the holders of at least two-thirds of the voting power of the issued
and outstanding shares of the Series A Preference Stock and Series B Preference
Stock voting together as a single class (or, in numerical terms, by at least
7,937,621 of the 11,906,431 votes entitled to be cast for purposes of such vote
by the holders of the 4,406,431 shares of Series A Preference Stock and the
7,500,000 shares of Series B Preference Stock issued and outstanding and
entitled to vote) and that (b) the Agreement was approved by the affirmative
vote of (i) 127,932,686 of the votes entitled to be cast by the holders of
Travelers Common Stock and Series A Preference Stock, voting together as a
single class, (ii) the holders of 122,922,587 of the outstanding shares of
Travelers Common Stock and (iii) 8,866,943 of the votes entitled to be cast by
the holders of Series A Preference Stock and Series B Preference Stock, voting
together as a single class, in each case at a special meeting of shareholders of
The Travelers Corporation held on December 30, 1993.
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IN WITNESS WHEREOF, we hereunto sign our names and affirm that the
statements made herein pertaining to the corporation of which we are officers
are true under the penalties of false statement, this 30th day of December,
1993.
PRIMERICA CORPORATION
a Delaware corporation
/s/ James Dimon
By: ..................................
James Dimon
President
/s/ Charles O. Prince, III
By: ..................................
Charles O. Prince, III
Secretary
THE TRAVELERS CORPORATION
a Connecticut stock corporation
/s/ Richard H. Booth
By: ..................................
Richard H. Booth
President
/s/ George J. Caspar
By: ..................................
George J. Caspar
Secretary
24
Exhibit 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of
The Travelers Inc. (formerly
Primerica Corporation)
We consent to the incorporation by reference in the
Registration Statements on Form S-3 (Nos. 33-49280, 33-55542,
33-56940, 33-63530, 33-68760 and 33-51101), the Registration
Statements on Form S-8 (Nos. 33-32130, 33-43997, 33-59524, 33-
37399, 33-28437, 33-7665, 33-28110, 33-43883, 33-21099, 33-
29711, 33-47437, 33-39025, 33-40469, 33-38109, 33-50206, 33-
39985, 33-51353, 33-51769 and 33-51783) and the Registration
Statements on Form S-4 (Nos. 33-37089, 33-25532, 33-63236 and
33-51201) of The Travelers Inc. (formerly Primerica
Corporation), of our report dated February 9, 1993, relating
to our audit of the consolidated balance sheets of The
Travelers Corporation and Subsidiaries as of December 31, 1992
and 1991, and the related consolidated statements of
operations and retained earnings and cash flows for each of
the three years in the period ended December 31, 1992, which
report is included in the Current Report on Form 8-K dated
December 31, 1993, of The Travelers Inc., and includes
an explanatory paragraph referring to changes in the
method of accounting for postretirement benefits other than
pensions, accounting for income taxes and accounting for
foreclosed assets in 1992.
/s/ Coopers & Lybrand
Hartford, Connecticut
January 12, 1994
CONSOLIDATED STATEMENT OF The Travelers Corporation and Subsidiaries
OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
(For the year ended December 31, in millions) 1992 1991 1990
- --------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums $ 6,688 $ 7,302 $ 7,435
Net investment income 2,799 3,228 3,494
Realized investment losses (635) (2) (616)
Other, including gains and losses on dispositions 823 849 1,001
------ ------- -------
9,675 11,377 11,314
------ ------- -------
BENEFITS AND EXPENSES
Current and future insurance benefits 6,196 6,314 6,305
Interest credited to contractholders 1,456 1,656 1,798
Loss adjustment expenses 951 975 1,002
Amortization of deferred acquisition costs 558 569 664
General and administrative expenses 1,868 1,540 1,697
------ ------- -------
11,029 11,054 11,466
------ ------- -------
INCOME (LOSS) BEFORE FEDERAL INCOME TAXES, EXTRAORDINARY CREDIT
AND CUMULATIVE EFFECTS OF CHANGES IN ACCOUNTING PRINCIPLES (1,354) 323 (152)
------ ------- -------
FEDERAL INCOME TAXES
Current (23) 48 108
Deferred (503) (32) (82)
------ ------- -------
(526) 16 26
------ ------- -------
INCOME (LOSS) BEFORE EXTRAORDINARY CREDIT AND CUMULATIVE EFFECTS OF CHANGES
IN ACCOUNTING PRINCIPLES (828) 307 (178)
Extraordinary credit -- 11 --
Cumulative effect of change in accounting for postretirement
benefits other than pensions, net of tax (258) -- --
Cumulative effect of change in accounting for income taxes 428 -- --
------ ------- -------
NET INCOME (LOSS) (658) 318 (178)
Retained earnings beginning of year 3,724 3,583 3,996
Dividends to preference shareholders (38) (18) (17)
Dividends to common shareholders (167) (165) (225)
Tax benefit on preference dividends 4 6 7
------ ------- -------
Retained earnings end of year $ 2,865 $ 3,724 $ 3,583
------ ------- -------
PER COMMON SHARE (IN DOLLARS)
Primary
Income (loss) before extraordinary credit and cumulative effects of changes
in accounting principles $ (8.11) $ 2.87 $ (1.85)
Extraordinary credit -- .10 --
Cumulative effect of change in accounting for postretirement
benefits other than pensions, net of tax (2.43) -- --
Cumulative effect of change in accounting for income taxes 4.03 -- --
Net income (loss) (6.51) 2.97 (1.85)
Assuming full dilution
Income (loss) before extraordinary credit and cumulative effects of changes
in accounting principles (8.11) 2.80 (1.85)
Extraordinary credit -- .09 --
Cumulative effect of change in accounting for postretirement
benefits other than pensions, net of tax (2.43) -- --
Cumulative effect of change in accounting for income taxes 4.03 -- --
Net income (loss) (6.51) 2.89 (1.85)
Dividends 1.60 1.60 2.20
====== ======= =======
</TABLE>
See notes to financial statements.
38
<PAGE>
CONSOLIDATED BALANCE SHEET The Travelers Corporation and Subsidiaries
<TABLE>
<CAPTION>
(At December 31, in millions) 1992 1991
- ----------------------------- ---- ----
<S> <C> <C>
ASSETS
Fixed maturities
Bonds (market, $14,774; $19,023) $ 13,950 $ 17,867
Trading portfolio securities (cost, $8,622; $2,921) 8,944 3,052
Redeemable preferred stocks (market, $53; $69) 52 68
Equity securities, at market
Common stocks (cost, $114; $351) 151 395
Nonredeemable preferred stocks (cost, $137; $159) 138 151
Mortgage loans 10,072 12,618
Investment real estate, net of accumulated depreciation of $54; $132 826 2,133
Real estate held for sale, net of accumulated depreciation of $133 1,332 --
Policy loans 1,210 1,026
Short-term securities 1,341 1,583
Other investments 1,313 1,357
-------- --------
Total investments 39,329 40,250
-------- --------
Cash and cash equivalents 1,688 1,511
Investment income accrued 510 540
Premium balances receivable 1,855 1,864
Deferred acquisition costs 791 720
Deferred federal income taxes 1,371 353
Separate and variable accounts 5,330 5,252
Other assets 2,728 2,668
-------- --------
TOTAL ASSETS $ 53,602 $ 53,158
======== ========
LIABILITIES
Contractholder funds $ 19,268 $ 21,336
Benefit and loss reserves 16,268 15,820
Unearned premium reserves 1,318 1,282
Policy and contract claims 1,087 1,059
Short-term debt 64 --
Long-term debt 1,124 945
Current federal income taxes 73 136
Securities transactions in course of settlement 722 51
Separate and variable accounts 5,251 5,192
Other liabilities 3,373 2,691
-------- --------
TOTAL LIABILITIES 48,548 48,512
-------- --------
COMMITMENTS AND CONTINGENCIES--note 9
PREFERENCE STOCK SERIES A 225 225
GUARANTEED ESOP OBLIGATION (149) (169)
-------- --------
76 56
-------- --------
SHAREHOLDERS' EQUITY
Preference stock series B 375 --
Common stock (145 and 106 shares issued) 182 132
Additional paid-in capital 1,400 700
Unrealized investment gains, net of taxes 197 73
Retained earnings 2,865 3,724
Cost of common stock in treasury (41) (39)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 4,978 4,590
-------- --------
TOTAL $ 53,602 $ 53,158
======== ========
SHAREHOLDERS' EQUITY PER COMMON SHARE (in dollars) $ 31.96 $ 44.06
======== ========
</TABLE>
See notes to financial statements.
39
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS The Travelers Corporation and Subsidiaries
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
(For the year ended December 31, in millions) 1992 1991 1990
- --------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums collected $ 6,645 $ 7,464 $ 7,745
Net investment income received 2,837 3,243 3,656
Other revenues received 615 682 655
Benefits and claims paid (6,677) (6,916) (7,116)
Interest credited to contractholders (1,404) (1,618) (1,782)
Operating expenses paid (2,003) (2,289) (2,284)
Income taxes paid (41) (81) (90)
Trading account investments, (purchases) sales, net (938) (1,973) 140
Other 239 174 (419)
------- ------ --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (727) (1,314) 505
------- ------ --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment repayments
Fixed maturities 3,161 2,843 2,767
Mortgage loans 1,360 994 1,035
Proceeds from investments sold
Fixed maturities 1,103 3,440 1,272
Equity securities 839 661 1,216
Mortgage loans 303 198 78
Real estate 270 122 120
Investments in
Fixed maturities (5,143) (4,670) (5,857)
Equity securities (582) (670) (724)
Mortgage loans (159) (237) (853)
Real estate (61) (37) (77)
Policy loans, net (184) (184) (237)
Short-term securities, (purchases) sales, net 242 (16) (496)
Other investments, net 51 (47) (268)
Securities transactions in course of settlement 671 (884) 227
Proceeds from disposition of subsidiaries and other operations 9 122 215
Other 65 (101) 99
------- ------ --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,945 1,534 (1,483)
------- ------ --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance (redemption) of short-term debt, net 64 (185) (17)
Issuance (redemption) of certificates of deposit, net (136) (415) (32)
Issuance of long-term debt 367 95 8
Payments of long-term debt (169) (68) (128)
Contractholder fund deposits 3,048 4,101 5,319
Contractholder fund withdrawals (5,003) (5,325) (4,840)
Issuance of preference stock series B 375 -- --
Issuance of common stock 550 -- --
Repurchase of common stock -- -- (48)
Dividends to shareholders (196) (182) (247)
Other 59 83 68
------- ------ --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,041) (1,896) 83
------- ------ --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 177 $(1,676) $ (895)
======= ====== ========
CASH AND CASH EQUIVALENTS AT DECEMBER 31 $ 1,688 $ 1,511 $ 3,187
======= ====== ========
INTEREST PAID $ 140 $ 306 $ 426
======= ====== ========
</TABLE>
See notes to financial statements.
40
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CHANGES IN ACCOUNTING PRINCIPLES. In the third quarter of 1992, Travelers
implemented Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" (FAS 106), and
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (FAS 109). These accounting changes were implemented with retroactive
application to January 1, 1992. Further disclosures relating to FAS 106 and
FAS 109, as well as restated financial information for the quarters ended
March 31, 1992 and June 30, 1992 and for the six months ended June 30, 1992,
are reflected in notes 2, 13 and 14.
As of December 31, 1992, Travelers implemented the American Institute of
Certified Public Accountants' Statement of Position 92-3, "Accounting for
Foreclosed Assets" (SOP 92-3). This accounting change was implemented with
prospective application. Further disclosures relating to SOP 92-3 are included
in note 2.
PRINCIPLES OF CONSOLIDATION. The financial statements have been prepared in
conformity with generally accepted accounting principles and include The
Travelers Corporation and its insurance and significant noninsurance
subsidiaries on a fully consolidated basis. Certain prior year amounts have
been reclassified to conform with the 1992 presentation.
INVESTMENTS. The aggregate carrying values of fixed maturities, equity
securities, mortgage loans and real estate are determined after deducting
appropriate investment valuation reserves. Investment valuation reserves are
discussed below and are presented in note 16.
Fixed maturities comprise bonds and redeemable preferred stocks and the
majority are carried at amortized cost, since the company has the ability and
intent to hold those securities on a long-term basis. Trading portfolio
securities, consisting of fixed maturities that are likely to be sold prior to
maturity, are carried at current market value. Transfers of securities from the
amortized cost portfolio to the trading portfolio result in adjustments to
unrealized investment gains or losses, which are included in shareholders'
equity.
Equity securities, which consist of common and nonredeemable preferred
stocks, are generally carried at market value as of the balance sheet date.
Mortgage loans are carried at the aggregate of the unpaid balances and
include in-substance foreclosures.
Real estate is carried at cost less accumulated depreciation. Real estate
held for sale is carried at the lower of cost or fair value less estimated
costs to sell. At foreclosure, real estate is recorded at the lower of the
unpaid principal balance or fair value. Fair value is established at time of
foreclosure by appraisers, both internal and external, using discounted cash
flow analyses and other acceptable techniques.
Accrual of income is suspended on fixed maturities or mortgage loans
that are in default, or on which it is likely that future interest payments
will not be made as scheduled, and interest income is recognized only as
payment is received.
Gains or losses arising from futures contracts used to hedge
investments are treated as basis adjustments and are recognized in income over
the life of the hedged investments.
Gains and losses arising from forward contracts used to hedge foreign
investments in Travelers U.S. portfolios are a component of realized investment
gains and losses. Gains and losses arising from forward contracts used to hedge
investments in foreign operations (primarily Canadian) are generally reflected
directly in shareholders' equity.
Rate differentials on interest rate swap agreements are accrued over
the life of the contract and are recognized as an adjustment to interest income
from the related item.
INVESTMENT GAINS AND LOSSES. Realized investment gains and losses are included
as a component of pretax revenues based upon specific identification of the
investments sold on the trade date and include adjustments to investment
valuation reserves. These adjustments reflect changes considered to be other
than temporary in the net realizable value of investments. Also included are
gains and losses arising from the translation of the local currency value of
foreign investments to U.S. dollars, the functional currency of Travelers.
Unrealized investment gains and losses on equity securities, trading
portfolio fixed maturities and investments in foreign operations (primarily
Canadian), net of related taxes, are generally reflected directly in
shareholders' equity.
POLICY LOANS. Policy loans are carried at the amount of the unpaid balances
that are not in excess of the net cash surrender values of the related
insurance policies. The carrying value of policy loans, which have no defined
maturities, is considered to be fair value.
CASH AND CASH EQUIVALENTS. Cash equivalents include liquid investments with
maturities of 90 days or less when purchased. The carrying value of these
instruments approximates their fair value.
DEFERRED ACQUISITION COSTS. Commissions and premium taxes incurred in
connection with property-casualty insurance are deferred and amortized pro rata
over the contract periods in which the related premiums are earned. Future
investment income attributable to related premiums is taken into account in
measuring the carrying value of this asset. All other acquisition expenses are
charged to operations as incurred.
Costs of acquiring individual life insurance, annuities, and accident
and health business, principally commissions and certain expenses related to
policy issuance, underwriting and marketing, all of which vary with and are
primarily related to the production of new business, are deferred. For
traditional insurance products, these costs are amortized, with interest, in
proportion to the ratio of estimated annual revenues to the estimated total
revenues over the contract period. For most life insurance, a 20- to 30-year
amortization period is used, and a 10- to 15-year period is used for variable
annuities. A 10-year period is used for guaranteed renewable health policies.
Deferred acquisition costs for universal life contracts and certain annuity
contracts are amortized at a constant rate based upon the present value of
estimated gross profit expected to be realized over the life of the contracts,
which is reevaluated annually.
41
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
SEPARATE AND VARIABLE ACCOUNTS. Separate and variable accounts primarily
represent funds for which investment income and investment gains and losses
accrue directly to, and investment risk is borne by, the contractholders. Each
account has specific investment objectives. The assets of each account are
legally segregated and are not subject to claims that arise out of any other
business of Travelers. The assets of these accounts are carried at market
value. Certain other separate accounts provide guaranteed levels of return or
benefits. The assets of these accounts are carried at amortized cost. Amounts
assessed to the contractholders for management services are included in
revenues. Deposits, net investment income and realized investment gains and
losses for these accounts are excluded from revenues, and related liability
increases are excluded from benefits and expenses.
OTHER ASSETS. Goodwill is being amortized over periods generally not exceeding
25 years and other intangibles over their estimated useful lives. These assets
are included in other assets in the consolidated balance sheet and amounted to
$97 million and $73 million at December 31, 1992 and 1991, respectively.
Receivables related to retrospectively rated policies on property-casualty
business, net of allowance for estimated uncollectible amounts, are included in
other assets.
CONTRACTHOLDER FUNDS. Contractholder funds represent receipts from the issuance
of universal life, pension investment and certain individual annuity contracts.
Such receipts are considered deposits on investment contracts that do not have
substantial mortality or morbidity risk.
Account balances are also increased by interest credited and reduced by
withdrawals, mortality charges and administrative expenses charged to the
contractholders. Calculations of contractholder account balances for investment
contracts reflect lapse, withdrawal and interest rate assumptions based on
contract provisions, Travelers experience and industry standards. Interest
rates range from 3.34% to 17.42%. Contractholder funds also include other funds
that policyholders leave on deposit with the company.
BENEFIT AND LOSS RESERVES. Benefit reserves for traditional individual life
insurance, annuities, and accident and health policies have been computed based
upon mortality, morbidity, lapse and interest assumptions applicable to these
coverages, including provision for adverse deviations. Interest rates range
from 2% to 16.45%, and mortality, morbidity and withdrawal assumptions reflect
Travelers experience and industry standards. The assumptions vary by plan, age
at issue, year of issue and duration.
Traditional group life insurance, certain pension contracts, and accident
and health benefit reserves have been computed generally using interest rates
ranging from 2% to 16.45%, and mortality, morbidity and withdrawal assumptions
based on Travelers experience and industry standards. Appropriate recognition
has been given to experience rating and reinsurance.
Property-casualty reserves include (1) unearned premiums representing
the unexpired portion of policy premiums, including adjustments for
reinsurance, and (2) estimated provisions for both reported and unreported
claims incurred and related expenses. The reserves are regularly adjusted based
upon experience. Included in the benefit and loss reserves in the consolidated
balance sheet at December 31, 1992 and 1991 are $736 million and $739 million,
respectively, of property-casualty loss reserves that have been discounted
using an interest rate of 5%.
In determining benefit and loss reserves, Travelers carries on a continuing
review of its overall position, its reserving techniques and reinsurance. In
light of present facts and current legal interpretations, management believes
that adequate provision has been made for benefit and loss reserves, including
the potential liabilities posed by environmental and asbestos claims.
PREMIUMS. Premiums are recognized as revenues when due. Reserves are
established for the portion of premiums that will be earned in future periods
and for deferred profits on limited-payment policies that are being recognized
in income over the policy term.
OTHER REVENUES. Other revenues include surrender, mortality and administrative
charges and fees as earned on investment, universal life and other insurance
contracts. Other revenues also include gains and losses on dispositions of
assets other than realized investment gains and losses, and revenues of
noninsurance subsidiaries.
INTEREST CREDITED TO CONTRACTHOLDERS. Interest credited to contractholders
represents amounts earned by universal life, pension investment and certain
individual annuity contracts in accordance with contract provisions.
FEDERAL INCOME TAXES. The provision for federal income taxes is comprised of
two components, current income taxes and deferred income taxes. Deferred
federal income taxes arise from changes in Travelers deferred federal income
tax asset during the year. The deferred federal income tax asset is recognized
to the extent that future realization of the tax benefit is more likely than
not, with a valuation allowance for the portion that is not likely to be
recognized. Prior to 1992, deferred federal income taxes arose from differences
in the timing of recognition of certain items of income and expense for
financial statement and tax purposes. Note 2 includes a discussion of Travelers
change in its method of accounting for income taxes. The impact of the Tax
Reform Act of 1986 and the Omnibus Budget Reconciliation Act of 1990 on net
income is discussed in note 14.
ACCOUNTING STANDARDS NOT YET ADOPTED. In November 1992, the Financial
Accounting Standards Board (the Board) issued Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits" (FAS
112). Travelers must adopt FAS 112 for its financial statements no later than
1994.
FAS 112 establishes accounting standards for employers who provide benefits
to former or inactive employees after employment, but before retirement. The
statement requires employers to recognize the cost of the obligation to provide
these benefits on an accrual basis. Employers must implement this guidance by
42
<PAGE>
recognizing a cumulative catch-up adjustment. Travelers has not yet determined
the impact FAS 112 will have on its financial statements.
In December 1992, the Board issued Statement of Financial Accounting
Standards No. 113, "Accounting and Reporting for Reinsurance of Short-Duration
and Long-Duration Contracts" (FAS 113). Travelers must adopt FAS 113 for its
first quarter 1993 financial statements.
FAS 113 amends current accounting and reporting requirements for the
reinsurance of insurance contracts. FAS 113 requires the reporting of
reinsurance receivables and prepaid insurance premiums as assets. The statement
also precludes the immediate recognition of gains for all reinsurance contracts
unless the liability to the policyholder has been extinguished. Implementation
of FAS 113 is not expected to have a material impact on Travelers financial
results, however, assets and liabilities will be increased by like amounts.
2. CHANGES IN ACCOUNTING PRINCIPLES
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. In the third quarter of 1992,
Travelers changed its method of accounting for the costs of its retiree benefit
plans, in compliance with FAS 106. This change was made effective as of January
1, 1992. FAS 106 requires Travelers to accrue the cost of postretirement
benefits over the years of service rendered by an employee. Previously these
costs were accounted for on a "pay-as-you-go" (cash) basis.
The implementation of FAS 106 resulted in a one time non-cash after-tax
charge to net income of $258 million, or $2.48 per primary share and $2.37 per
fully diluted share, in the first quarter of 1992.
See note 13 for further discussion of FAS 106.
ACCOUNTING FOR INCOME TAXES. During the third quarter of 1992, Travelers
adopted FAS 109 with retroactive application to January 1, 1992. FAS 109
establishes new principles for calculating and reporting the effects of federal
income taxes in financial statements. FAS 109 replaces the income statement
orientation inherent in the prior income tax accounting standard with a balance
sheet approach. Under the new approach, deferred tax assets and liabilities are
generally determined based on the difference between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. FAS 109 allows
recognition of deferred tax assets if future realization of the tax benefit is
more likely than not, with a valuation allowance for the portion that is not
likely to be recognized.
The implementation of FAS 109 resulted in a one time increase to earnings of
$428 million, or $4.11 per primary share and $3.93 per fully diluted share, in
the first quarter of 1992. This increase in earnings was principally due to the
accelerated recognition of "fresh start" tax benefits, tax rate differences and
the recognition of a portion of previously unrecognized deferred tax assets.
See note 14 for further discussion of FAS 109.
ACCOUNTING FOR FORECLOSED ASSETS. In February 1993, Travelers announced its
intent to accelerate the sale of foreclosed real estate, and effective December
31, 1992, changed its method of accounting for foreclosed assets, in compliance
with SOP 92-3. This guidance requires that in-substance foreclosures and
foreclosed assets held for sale be carried at the lower of cost or fair value
less estimated costs to sell. Previously, all foreclosed assets were carried at
cost less accumulated depreciation. This accounting change resulted in a pretax
charge of $437 million to realized investment losses.
RESTATEMENT OF 1992 FIRST AND SECOND QUARTERS (UNAUDITED). FAS 106 and FAS 109
were implemented in the third quarter of 1992 with retroactive application to
January 1, 1992. The impact of implementation of FAS 106 and FAS 109 on
consolidated net income and shareholders' equity for the quarters ended March
31,1992 and June 30, 1992 and for the six months ended June 30, 1992 is as
follows:
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended Six Months Ended
March 31, 1992 June 30, 1992 June 30, 1992
----------------------- ------------------------ -------------------------
As As As As As As
(in millions, except per share amounts) Reported Restated Reported Restated Reported Restated
- --------------------------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 63 $ 224 $ 78 $ 66 $ 141 $ 290
Per common share:
Primary .58 2.12 .70 .59 1.27 2.71
Fully diluted .57 2.05 .69 .58 1.26 2.58
Shareholders equity 4,530 4,690 4,970 5,118 4,970 5,118
======= ======= ======= ======= ======= =======
</TABLE>
43
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
3. ACQUISITIONS AND DISPOSITIONS
In December 1992, Travelers acquired a 50% interest in Commercial Insurance
Resources, Inc.; and acquired Transport Life Insurance Company's preferred
provider and third party administrator organizations from Primerica Corporation
(Primerica) (see note 19).
In the fourth quarter of 1991, Travelers sold Dillon, Read Inc. (Dillon
Read), its investment banking subsidiary. Travelers received cash proceeds of
$122 million. Consolidated assets and liabilities were reduced as a result of
this disposition. Dillon Read assets, consisting primarily of cash and cash
equivalents of $2.7 billion and investments, were $4.3 billion at the date of
sale. Liabilities, consisting primarily of securities sold under repurchase
agreements, were $4.2 billion at the date of sale. The pretax loss on the sale
of $41 million is included in other revenues.
In December 1990, Travelers purchased the common stock of U.S. Behavioral
Health, a provider of managed psychiatric and substance abuse services, for
$19 million.
In the fourth quarter of 1990, Travelers completed the sale of its wholly
owned subsidiary, Travelers Mortgage Services, Inc. (TMSI), which originates
and services home mortgage loans and operates a relocation services business.
Sales proceeds of $210 million are subject to final settlement adjustments
which, in the opinion of management, are not expected to be material. On an
after-tax basis, the gain on this transaction was insignificant. Under the
terms of the sales agreement, Travelers has indemnified the purchaser for
losses from certain preclosing activities and for excess losses that may be
experienced on a portfolio of mortgage loans generated prior to the sale, which
losses will be calculated following the third anniversary of the sale. A
reserve has been established for these items based upon management's current
estimate of the range of potential losses. These estimates are subject to
revision as indemnifiable losses are identified and actual excess losses on the
indemnified portfolio are realized.
Revenues, income before federal income taxes and net income of Dillon
Read and TMSI are as follows:
<TABLE>
<CAPTION>
Dillon Read TMSI
----------------- ----
(in millions) 1991* 1990 1990*
- ------------- ----- ---- -----
<S> <C> <C> <C>
Revenues $135 $149 $115
Income before federal income taxes 9 7 1
Net income 5 5 --
=== === ===
</TABLE>
* Through the date of sale.
In addition, Travelers sold and/or purchased several other interests,
subsidiaries and operations in 1992, 1991 and 1990. The impact of these
transactions was not material to the consolidated financial results of
Travelers.
Net gains on dispositions after related income taxes amounted to $3
million for the year ended December 31, 1992 and $4 million for the year ended
December 31, 1990. Net losses on dispositions after related income taxes
amounted to $33 million for the year ended December 31, 1991.
4. QUARTERLY DATA
Selected unaudited consolidated quarterly data for 1992 and 1991 is presented
on page 37.
5. DEBT
<TABLE>
<CAPTION>
(in millions) 1992 1991
- ------------- ---- ----
<S> <C> <C>
Short-term debt
Federal Home Loan Bank advances $ 64 --
----- ---
Long-term debt
9 1/2% senior notes $ 300 --
8.32% debentures 194 $194
8.70% debentures -- 50
12% GNMA/FNMA
collateralized obligations 188 257
7 5/8% notes 185 185
ESOP note guarantee 149 169
Federal Home Loan Bank advances 90 60
Other 18 30
----- ---
$1,124 $945
===== ===
</TABLE>
At December 31, 1992, the estimated fair value of Travelers long-term debt was
$1.2 billion, primarily determined by quoted market prices.
SENIOR NOTES. On March 10, 1992, Travelers issued $300 million of 9 1/2% senior
notes which mature on March 1, 2002. No principal or sinking fund payments are
required prior to maturity date. The senior notes rank equally with all other
unsecured, unsubordinated obligations of Travelers.
DEBENTURES. The 8.32% convertible subordinated debentures, which are due March
10, 2015, were issued on June 10, 1988, in exchange for convertible
exchangeable preferred stock. They are convertible into Travelers common stock
at the rate of .975 shares of common stock for each $50 debenture. The
debentures are generally subordinated to all indebtedness of The Travelers
Corporation for money borrowed and insurance and annuity related reserves. The
debentures have a mandatory annual minimum sinking fund requirement of
approximately $8 million beginning March 10, 1995.
On December 10, 1992, Travelers redeemed all of the 8.70% debentures. The
redemption price of $51 million represented 100% of the outstanding principal
plus accrued interest from August 1, 1992.
GNMA/FNMA-COLLATERALIZED OBLIGATIONS. The 12% obligations of Travelers Mortgage
Securities Corporation have a stated maturity (assuming no prepayments) of
March 1, 2014. Distributions on the GNMA and FNMA certificates, together with
reinvestment earnings, are used to make principal and interest payments on the
obligations. Since the rate of payment of principal depends on the rate of
payment (including prepayments) of the underlying GNMA and FNMA certificates,
the actual annual amounts of future principal payments cannot be reasonably
estimated.
44
<PAGE>
The approximate minimum principal payments to be made in each of the next
five years, assuming no further prepayments on the GNMA and FNMA certificates,
are as follows:
<TABLE>
<CAPTION>
(in millions)
- -------------
<S> <C>
1993 $21
1994 2
1995 3
1996 3
1997 3
==
</TABLE>
NOTES. The 7 5/8% notes were issued in January 1987 and mature on January 15,
1997. No principal payments are required prior to the maturity date. During
1991, Travelers acquired $4 million of these notes at a cost of $3 million.
ESOP NOTE GUARANTEE. Travelers has guaranteed the loan obligation of its
Employee Stock Ownership Plan (ESOP) (see note 13). The minimum principal
payments to be made in 1993, 1994, 1995, 1996 and 1997 are $24 million, $28
million, $30 million, $32 million and $35 million, respectively.
FEDERAL HOME LOAN BANK ADVANCES. Travelers' banking subsidiary is a member of
the Federal Home Loan Bank and participates in its Advance Program. Outstanding
advances mature at various dates from February 1993 to April 2002 and have
interest rates ranging from 3.68% to 7.91%, some of which are reset annually on
the anniversary of the advance. At December 31, 1992 and December 31, 1991,
$205 million and $86 million, respectively, of mortgage loans were pledged to
collateralize these advances. The subsidiary can, with additional collateral,
borrow up to $246 million under this program.
LINES OF CREDIT. At December 31, 1992, Travelers and subsidiaries had
approximately $590 million of unused lines of credit, of which $275 million
expires beyond December 31, 1993.
6. CAPITAL AND PREFERENCE STOCK
Number of shares at December 31, 1992:
<TABLE>
<CAPTION>
Treasury
Issued Stock Outstanding
------ -------- -----------
<S> <C> <C> <C>
Common stock,
par value $1.25,
500,000,000 authorized 145,387,066 1,366,548 144,020,518
Preferred stock,
no par value,
10,000,000 authorized -- -- --
Preference stock,
no par value,
25,000,000 authorized
Series A,
$53.25 stated value 4,222,034 -- 4,222,034
Series B,
$50 stated value 7,500,000 -- 7,500,000
=========== ========= ===========
</TABLE>
COMMON STOCK. Summary of activity in common stock outstanding:
<TABLE>
<CAPTION>
1992 1991 1990
---- ---- ----
<S> <C> <C> <C>
Balance beginning
of year 104,156,082 102,170,021 102,789,746
Shares issued 38,026,314 -- --
Dividend reinvestment
plan 1,662,282 719,694 328,235
Accrued vacation
buy-back plan -- 874,877 --
Exercise of options 134,074 31,397 7,915
Savings and investment
plan -- -- 3,642
Restricted stock awards 134,072 335,179 432,958
Other (10,089) 24,914 148,423
Acquired for treasury (82,217) -- (1,540,898)
----------- ----------- -----------
Balance end of year 144,020,518 104,156,082 102,170,021
=========== =========== ===========
</TABLE>
At December 31, 1992, common shares were reserved for the following:
<TABLE>
<S> <C>
Purchase rights 157,344,838
Travelers stock plans 9,420,118
Conversion of series A preference shares 4,566,521
Conversion of debentures 3,776,848
Dividend reinvestment plan 1,123,202
Other 154,946
===========
</TABLE>
COMMON STOCK PURCHASE RIGHTS. In 1986, Travelers adopted a Share Purchase
Rights Plan, and a dividend distribution of one common share purchase right on
each outstanding share of common stock was declared and paid. The rights trade
automatically with the common shares. The rights will only become exercisable
10 days after a person or group either acquires 10% or more of Travelers common
shares or announces an offer that would result in such person or group owning
10% or more of the shares. Following such an acquisition, each right (other
than rights held by the 10% holder, whose rights become void) will become
exercisable for a number of common shares of Travelers stock having a market
value of twice the $150 exercise price of each right. However, the acquisition
of permitted shares by Primerica, its affiliates and associates in accordance
with the strategic alliance described in note 19 shall not cause the rights to
be exercisable. Alternatively, if Travelers is involved in a merger or other
business combination at any time after the rights become exercisable, each
right will entitle its holder to buy a number of shares of common stock of the
acquiring company having a market value of twice the exercise price of each
right. At no time will the rights have any voting power.
The rights expire on July 31, 1996, and may be redeemed by Travelers
for $.05 per right at any time prior to the acquisition of 10% or more of
Travelers common stock by a person or group or within 10 days after the
announcement of a tender offer for 10% or more of Travelers common stock. In
addition, Travelers may exchange the rights, in whole or part, for common
shares at an exchange ratio of one common share per right. This provision
45
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
would be available only after a person or group acquired beneficial ownership
of 10% or more of Travelers common shares, and before they acquired 50% or more
of the shares.
SERIES A CONVERTIBLE PREFERENCE STOCK. Travelers $4.53 Series A ESOP
Convertible Preference Stock has been issued to prefund Travelers matching
obligation under one of its benefit plans (see note 13).
SERIES B PREFERENCE STOCK. In June 1992, the company issued 7,500,000 shares of
Travelers 9 1/4% Series B Preference Stock at a stated value of $50 per share.
The series B preference shares are held in the form of depositary shares, with
two depositary shares representing each preference share. Annual dividends of
$4.625 per share ($2.3125 per depositary share) are payable quarterly.
Dividends are cumulative from the date of issue. The series B preference stock
is not redeemable prior to July 1, 1997. On and after July 1, 1997, the stock
is redeemable at Travelers' option, in whole or in part, at any time, at a
price of $50 per share (equivalent to $25 per depositary share), plus accrued
and unpaid dividends, if any, to the redemption date.
In the event that dividends on the series B preference stock are in arrears
in an amount equal to at least six full quarterly dividends, holders of the
stock would have the right to elect two additional directors to Travelers Board
of Directors.
ACCRUED VACATION BUY-BACK PLAN. Under The Travelers Accrued Vacation Buy-Back
Plan, employees elected in 1991 either to exchange accumulated unused vacation
balances as of January 1, 1991 for shares of Travelers common stock, or use
such days before December 31, 1993. Under this plan, 874,877 shares of
Travelers common stock were issued in June 1991. These elections resulted in
after-tax income of $4 million.
ADDITIONAL PAID-IN CAPITAL. The changes in additional paid-in capital for the
three years ended December 31, 1992 are primarily attributable to the issuance
of common stock in connection with the Primerica strategic alliance in 1992
(see note 19), The Travelers Accrued Vacation Buy-Back Plan in 1991, and the
issuance of common stock in connection with the dividend reinvestment plan and
restricted stock awards in all three years.
UNREALIZED INVESTMENT GAINS (LOSSES). An analysis of the change in unrealized
gains and losses on investments is shown in note 16.
7. SHAREHOLDERS' EQUITY AND DIVIDEND AVAILABILITY
State insurance regulatory authorities prescribe statutory accounting practices
for calculating net income and capital and surplus that differ in certain
respects from generally accepted accounting principles (GAAP). The significant
differences relate to deferred acquisition costs, which are charged to expenses
as incurred; federal income taxes, which reflect amounts that are currently
taxable; postretirement benefits, which are charged to expenses as paid; and
benefit reserves, which are determined using mortality, morbidity and interest
assumptions, and which, when considered in light of the assets supporting these
reserves, adequately provide for obligations under policies and contracts. In
addition, the recording of impairments in the value of investments generally
lags recognition for GAAP. Statutory net income and capital and surplus also
include the benefit of certain actions taken by the company, with the approval
of state insurance regulatory authorities, to strengthen its statutory capital
position.
The tables below reconcile consolidated statutory net income and statutory
capital and surplus computed in accordance with state insurance regulatory
practices with consolidated net income and shareholders' equity as reported
herein in conformity with GAAP.
<TABLE>
<CAPTION>
NET INCOME (LOSS) FOR THE YEAR ENDED DECEMBER 31
- ------------------------------------------------
(in millions) 1992 1991 1990
- ------------- ---- ---- ----
<S> <C> <C> <C>
Statutory net income (loss)
Life companies $ (319) $ (55) $ 468
Property-casualty companies (237) 258 117
----- ----- -----
Total (556) 203 585
Adjustments to life and health
reserves and contractholder funds (2) (120) (350)
Deferred acquisition costs 71 35 4
Equity in undistributed net income
(loss) of noninsurance subsidiaries (19) (37) 11
Timing of recognition of realized
investment gains and losses (539) 194 (615)
Deferred federal income taxes 503 32 82
Other, including certain
restructuring expenses (286) 11 105
Cumulative effect of change in
accounting for postretirement
benefits other than pensions,
net of tax (258) -- --
Cumulative effect of change in
accounting for income taxes 428 -- --
----- ----- -----
Net income (loss) $ (658) $ 318 $ (178)
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY AT END OF YEAR
- -----------------------------------
(in millions) 1992 1991 1990
- ------------- ---- ---- ----
<S> <C> <C> <C>
Statutory capital and surplus
Life companies $1,571 $1,932 $1,815
Property-casualty companies 1,665 1,843 1,905
----- ----- -----
Total 3,236 3,775 3,720
Adjustments to life and health
reserves and contractholder funds 316 279 271
Deferred acquisition costs 791 720 706
Valuation reserves, nonadmitted
and other asset adjustments (85) (245) (424)
Deferred federal income taxes 1,371 353 364
Liability for postretirement benefits
other than pensions (408) -- --
Other liability adjustments, includ-
ing certain restructuring reserves (243) (292) (400)
----- ----- -----
Shareholders' equity $4,978 $4,590 $4,237
===== ===== =====
</TABLE>
46
<PAGE>
DIVIDEND AVAILABILITY. The Travelers Corporation is currently subject to
various regulatory restrictions that limit the maximum amount of dividends
available to shareholders without prior approval of insurance regulatory
authorities. Under statutory accounting practices, $324 million of statutory
surplus is available in 1993 for dividends to shareholders without prior
approval.
Dividend payments to The Travelers Corporation from its insurance
subsidiaries are subject to similar restrictions and are limited to $642
million in 1993.
8. LEASES
Travelers and its subsidiaries have entered into various operating and capital
lease agreements for office space and data processing and certain other
equipment. Rental expense under operating leases was $216 million, $208 million
and $209 million in 1992, 1991 and 1990, respectively. Future net minimum
rental and lease payments are estimated as follows:
<TABLE>
<CAPTION>
Minimum operating Minimum capital
(in millions) rental payments lease payments
- ------------- ----------------- ---------------
<S> <C> <C>
Year ending December 31,
1993 $148 $ 7
1994 125 7
1995 97 7
1996 66 7
1997 36 4
Thereafter 22 73
--- ---
$494 $105
=== ===
</TABLE>
Included in these expenses are the rentals related to the sale of certain
buildings leased back under operating and capital leases with initial terms
ranging from 5 to 25 years. Deferred gains arising from these sales are being
amortized over the primary lease terms. At December 31, 1992, the amount
remaining to be amortized is $59 million.
The following is a summary of assets under capital leases:
<TABLE>
<CAPTION>
(in millions) 1992 1991 1990
- ------------- ---- ---- ----
<S> <C> <C> <C>
Buildings $31 $31 $31
Equipment 18 10 9
-- -- --
49 41 40
Less accumulated depreciation 12 13 9
-- -- --
Net $37 $28 $31
== == ==
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK. Travelers trades and issues
financial instruments with off-balance-sheet risk in the normal course of its
business. These instruments, which are used to reduce the company's overall
exposure to market risk and to enhance the company's investment opportunities,
include financial guarantees, financial futures, forward contracts, fixed rate
loan commitments and variable rate loan commitments, including revolving lines
of credit.
Financial instruments with off-balance-sheet risk involve, to varying
degrees, elements of credit and market risk in excess of the amount recognized
in the consolidated balance sheet. The contract or notional amounts of these
instruments reflect the extent of involvement Travelers has in a particular
class of financial instrument. However, the maximum credit loss or cash flow
associated with these instruments can be less than these amounts.
Travelers also may use other kinds of financial instruments from time to
time that expose the company to similar kinds of off-balance-sheet risk. These
instruments include unfunded commitments to partnerships, transfers of
receivables with recourse and interest rate swaps. The off-balance-sheet risks
of these financial instruments were not considered significant at December 31,
1992 and 1991.
Travelers exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for financial guarantees and fixed and
variable rate loan commitments is represented by the contractual amount of
these instruments. For financial futures contracts and forward contracts, the
company's exposure to credit loss in the event of nonperformance by the
counterparty is less than the contractual or notional amount.
The company monitors creditworthiness of counterparties to these financial
instruments by using criteria of acceptable risk that are consistent with
on-balance-sheet financial instruments. The controls include credit approvals,
limits and other monitoring procedures. Many transactions include the use of
collateral to minimize credit risk and lower the effective cost to the
borrower.
A summary of contract or notional amounts is presented below:
<TABLE>
<CAPTION>
(in millions) 1992 1991
- ------------- ---- ----
<S> <C> <C>
Financial instruments whose contract
amount represents credit exposure:
Financial guarantees $4,039 $5,076
Variable rate loan commitments 278 264
Fixed rate loan commitments 160 197
Financial instruments whose contract
amount exceeds credit exposure:
Forward contracts used as hedges 722 656
Financial futures contracts 418 155
===== =====
</TABLE>
Financial guarantees are written conditional commitments issued by the
company to guarantee the performance of a customer to a third party. At
December 31, 1992, the fair value of financial guarantee contracts is $7
million, which is an estimate of current replacement cost. These obligations
are described more fully in note 10.
Fixed rate loan commitments are obligations to make investments at fixed
interest rates, including obligations to invest in fixed maturities and fixed
rate mortgage loans. Variable rate loan commitments are obligations to make
investments at variable interest rates, including obligations to invest in
variable rate mortgage loans. At December 31, 1992, fixed and variable rate
loan commitments have no meaningful fair value because the terms of the
commitments approximate market rates.
47
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
Travelers uses a variety of financial futures contracts to manage its
sensitivity to changes in market interest rates. These contracts generally
hedge the interest rate risk of other investments. Financial futures contracts
are traded on recognized exchanges.
Cash payments are not required to enter into financial futures contracts.
Outstanding positions are marked to market and settled daily. The notional
amount of futures contracts represents the extent of Travelers involvement, but
not future cash requirements, as open positions are typically closed out prior
to the delivery date of the contract. At December 31, 1992, Travelers futures
contracts have no fair value because these contracts are marked to market and
settled in cash.
The company uses a variety of forward contracts to manage its sensitivity to
changes in foreign currency exchange rates. These contracts generally act as
hedges for foreign investments held by U.S. portfolios or for investments in
foreign operations (primarily Canadian). Forward contracts are traded
over-the-counter, generally with a financial institution.
Cash payments are not required to enter into foreign currency forward
contracts. Outstanding positions are marked to market; however, they are not
settled in cash until maturity. The market risk attributed to either a futures
contract or a forward contract is balanced by the market risk attributed to the
associated hedged asset to minimize Travelers' overall sensitivity to risk. At
December 31, 1992, the fair value of forward contracts used as hedges is $9
million, which is based on quoted market prices.
LITIGATION. Certain of Travelers subsidiaries are involved in litigation with
respect to claims arising with regard to insurance, which is taken into account
in establishing benefit reserves. On insurance contracts written many years
ago, Travelers continues to receive claims asserting alleged injuries and
damages from asbestos and other hazardous and toxic substances.
In relation to these claims, Travelers carries on a continuing review of its
overall position and its reserving techniques and reinsurance. The latest
review confirms that adequate provision has been made for any obligations now
foreseen.
After Travelers announced an addition to its mortgage loan and real estate
investment valuation reserves and a dividend reduction on October 5, 1990,
several lawsuits were filed in the U.S. District Court in Connecticut against
Travelers and certain of its senior officers. These lawsuits were consolidated
into a single proceeding, entitled In re Travelers Corporation Securities
Litigation, Civ. No. H-90-842 (AHN). The U.S. District Court granted Travelers
motion to dismiss on August 14, 1992. The plaintiffs appealed the dismissal to
the U.S. Court of Appeals for the Second Circuit. On December 8, 1992, the
plaintiffs withdrew their appeal and dismissed their claims against Travelers.
Travelers and its subsidiaries are defendants or codefendants in other
litigation.
The Securities and Exchange Commission is conducting a non-public inquiry
pursuant to an order of investigation with respect to Travelers accounting,
reporting and disclosure treatment of certain matters in connection with its
lending and loss recognition practices pertaining to real estate investments
and related matters going back to January 1, 1988. Travelers is cooperating
fully with the Commission's staff.
It is management's opinion, after consultation with counsel and review of
the facts, that it is improbable that the ultimate liability, if any, arising
from such contingencies will have any material adverse effect on the
consolidated financial position.
10. GUARANTEES OF THE SECURITIES OF OTHER ISSUERS
As part of its regular insurance business in which a wide range of risks are
assumed to cover possible future economic loss by third parties, Travelers
underwrites insurance guaranteeing the securities of certain issuers. The
aggregate net amount of guarantees of principal and interest for such
securities was approximately $3 billion and $4 billion in 1992 and 1991,
respectively. Estimated net earned premiums amounted to $7 million in both 1992
and 1991. Premiums are earned pro rata over the policy term. The related
unearned premium reserve amounted to $14 million and $17 million at December
31, 1992 and 1991, respectively.
Travelers participation in the Municipal Bond Insurance Association (MBIA)
business written prior to 1986 approximates 95% of the $3 billion coverage at
the end of 1992 referred to above. At December 31, 1992 and 1991, $12 million
and $10 million, respectively, of reserves for possible losses incurred but not
reported have been provided relating to MBIA business.
11. PER SHARE DATA
Primary income per common share is computed after provision for the dividend
requirements on preference stocks and on convertible exchangeable preferred
stock through June 10, 1988, the date of exchange of such stock for convertible
subordinated debentures. It is based upon the weighted average number of common
shares outstanding including, if applicable, common stock equivalents. Fully
diluted income per share is based on the number of shares used in the
calculation of primary income per share plus shares issuable if series A
preference shares, convertible debentures and preferred shares were converted
for the periods they were outstanding. In 1992, 1990 and 1988, such conversions
were not assumed as the effect was antidilutive.
The number of shares used in the calculation was:
<TABLE>
<CAPTION>
PRIMARY FULLY DILUTED
------- -------------
<S> <C> <C>
1992 106,149,028 106,149,028
1991 103,022,370 111,595,983
1990 101,814,180 101,814,180
1989 102,587,596 108,336,328
1988 101,384,558 101,384,558
=========== ===========
</TABLE>
48
<PAGE>
12. ADDITIONAL OPERATING INFORMATION*
Results included in the table below reflect 1992 fourth quarter after-tax
charges of $288 million for implementation of SOP 92-3 and $197 million for an
addition to mortgage loan valuation reserves.
<TABLE>
<CAPTION>
Property- Property- Managed Asset
Casualty Casualty Care and Management Corporate
Commercial Personal Financial Employee & Pension and Other
(in millions) Lines Lines Services Benefits Services Operations Consolidated
- ------------- ---------- --------- --------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1992
Revenues
Premiums $ 2,295 $1,428 $ 231 $2,620 $ 114 -- $ 6,688
Net investment income 546 156 631 328 1,180 $ (42) 2,799
Realized investment gains (losses) 78 22 (98) (18) (626) 7 (635)
Other, including gains and losses
on dispositions 10 27 120 657 23 (14) 823
------ ----- ------ ----- ------ ------ ------
Total 2,929 1,633 884 3,587 691 (49) 9,675
------ ----- ------ ----- ------ ------ ------
Income (loss) before federal
income taxes and cumulative effects
of changes in accounting principles (61) (289) (72) (70) (761) (101) (1,354)
Cumulative effect of change in
accounting for postretirement benefits
other than pensions, net of tax (88) (37) (15) (106) (10) (2) (258)
Cumulative effect of change in
accounting for income taxes 57 11 36 123 191 10 428
Net income (loss) (45) (201) (20) (23) (311) (58) (658)
Assets 11,574 2,488 12,974 5,293 19,514 1,759 53,602
====== ===== ====== ===== ====== ====== ======
1991
Revenues
Premiums $ 2,726 $1,457 $ 249 $2,687 $ 183 -- $ 7,302
Net investment income 595 162 641 356 1,510 $ (36) 3,228
Realized investment gains (losses) 4 9 6 14 (42) 7 (2)
Other, including gains and losses
on dispositions (3) 31 117 616 23 65 849
------ ----- ------ ----- ------ ------ ------
Total 3,322 1,659 1,013 3,673 1,674 36 11,377
------ ----- ------ ----- ------ ------ ------
Income (loss) before federal
income taxes 242 27 56 143 (35) (110) 323
Net income (loss) 219 35 40 107 (5) (78) 318
Assets 10,569 2,341 11,876 5,041 22,209 1,122 53,158
====== ===== ====== ===== ====== ====== ======
1990
Revenues
Premiums $ 2,673 $1,583 $ 275 $2,634 $ 270 -- $ 7,435
Net investment income 617 150 647 342 1,709 $ 29 3,494
Realized investment losses (18) (9) (144) (35) (404) (6) (616)
Other, including gains and losses
on dispositions 25 33 91 557 28 267 1,001
------ ----- ------ ----- ------ ------ ------
Total 3,297 1,757 869 3,498 1,603 290 11,314
------ ----- ------ ----- ------ ------ ------
Income (loss) before federal
income taxes 178 (77) (68) 100 (299) 14 (152)
Net income (loss) 182 (33) (80) 69 (288) (28) (178)
Assets 10,477 2,243 10,753 4,714 24,017 4,595 56,799
====== ===== ====== ===== ====== ====== ======
</TABLE>
* Included above in Corporate and Other Operations are Travelers Mortgage
Services, Inc., which was sold in 1990; and Dillon, Read Inc., which was sold
in 1991 (see note 3).
49
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
13. BENEFIT PLANS
PENSION PLANS. Travelers and its subsidiaries maintain defined benefit pension
plans for salaried employees. The plans are noncontributory and benefits are
based upon an employee's years of service and final average pay. Vesting occurs
after 5 years of service in compliance with the provisions of the Tax Reform
Act of 1986. The company's funding policy for qualified U.S. pension plans is
to contribute, at a minimum, the equivalent of the amount required under the
Employee Retirement Income Security Act of 1974 and the Internal Revenue Code.
Actuarially determined costs are provided for all other plans.
Components of pension expense are:
<TABLE>
<CAPTION>
(in millions) 1992 1991 1990
- ------------- ---- ---- ----
<S> <C> <C> <C>
U.S. plans:
Service costs $ 40 $ 46 $ 46
Interest costs 128 125 113
Actual return on assets (67) (167) (8)
Net amortization and deferral (53) 7 (155)
---- ---- ----
Net pension expense (income) $ 48 $ 11 $ (4)
==== ==== ====
</TABLE>
As a result of certain organizational restructuring initiatives (see note
20), special termination benefits of $25 million are included in the net
amortization and deferral component of the 1992 net pension expense.
Reconciliation of the funded status of the qualified plans follows:
<TABLE>
<CAPTION>
(in millions) 1992 1991 1990
- ------------- ---- ---- ----
<S> <C> <C> <C>
Actuarial present value of vested
benefit obligations $1,399 $1,127 $1,030
Actuarial present value of
accumulated benefit obligations 1,418 1,153 1,048
===== ===== =====
Plan assets at fair value $1,624 $1,644 $1,568
Actuarial present value of
projected benefit obligation 1,656 1,525 1,359
----- ----- -----
Assets in excess of (less than)
projected benefit obligation (32) 119 209
Unamortized transition asset (36) (45) (55)
Unrecognized net actuarial loss 268 198 157
Unrecognized prior service benefit (40) (78) (118)
----- ----- -----
Prepaid pension expense $ 160 $ 194 $ 193
===== ===== =====
</TABLE>
At December 31, 1992, non-qualified plans had projected benefit obligations
of $46 million, which were $6 million less than the recorded liability. At
December 31, 1991 and 1990, the projected benefit obligation exceeded the
recorded liability by $35 million and $68 million, respectively.
The expected long-term rate of return on plan assets was 9.7% for 1992 and
10.2% for 1991 and 1990. In 1992, the discount rate used in determining the
projected benefit obligation was 8.25% and the assumed rate of future annual
salary increases varied between 3% and 10%, based upon employees' ages. The
discount rate and rate of increase in future compensation levels used in
determining the projected benefit obligation were 8.5% and 6.5%, respectively,
in both 1991 and 1990. Changes in assumptions from period to period can result
in adjustments to the accumulated and projected benefit obligations. Such
changes may also effect the expense recognized and/or the unrecognized net
actuarial gain or loss. Plan assets are held primarily in various separate
accounts and the general account of The Travelers Insurance Company. These
accounts invest in stocks, bonds, mortgage loans and real estate of entities
unrelated to Travelers.
Travelers also sponsors defined contribution pension plans for certain
agents. Company contributions are primarily a function of production. The
expense for these plans was $2 million in both 1992 and 1991 and $1 million in
1990.
OTHER BENEFIT PLANS. In addition to pension benefits, Travelers provides
certain health care and life insurance benefits for retired employees.
Substantially all salaried employees may become eligible for these benefits
when they become eligible to receive benefits from Travelers pension plan.
Retirees may elect certain prepaid health care benefit plans. Life insurance
benefits generally are set at a fixed amount.
In the third quarter of 1992, Travelers adopted FAS 106. Travelers elected
to recognize the accumulated postretirement benefit obligation (i.e., the
transition obligation) as a change in accounting principle retroactive to
January 1, 1992.
FAS 106 also involves continuing expenses that reduced net income $11
million, or $.11 per primary and fully diluted share, for the year ended
December 31, 1992. Prior to the adoption of FAS 106, Travelers accounted for
these postretirement costs on a cash basis. The cost recognized by Travelers
for these and similar benefits provided to active employees was based upon paid
claims, net of employee contributions. Total costs of the plans for retirees
were $20 million in 1991 and $17 million in 1990.
Travelers made contributions to the plans in 1992 as claims were incurred;
the company's contributions totaled $23 million for the year ended December 31,
1992. Retirees' contributions to these plans vary, based upon the retiree's age
and election of coverage. Generally, for employees retiring after January 1,
1993, increases in the company's contributions for health care will be limited
to two times the current average cost per retiree. In addition, retirees'
contributions will vary based upon their years of service with Travelers.
Components of net periodic postretirement benefit cost for the year ended
December 31, 1992 are (in millions):
<TABLE>
<S> <C>
Service costs $ 7
Interest costs 33
Net amortization and deferral 14
--
Net periodic postretirement benefit cost $54
==
</TABLE>
50
<PAGE>
As a result of certain organizational restructuring initiatives (see note
20), curtailment losses of $14 million are included as the net amortization and
deferral component of net periodic postretirement benefit cost.
The following table sets forth the plans' funded status reconciled with
amounts recognized in Travelers' consolidated balance sheet at December 31,
1992 (in millions):
<TABLE>
<S> <C>
Accumulated postretirement benefit obligation for:
Retirees $286
Other fully eligible plan participants 60
Other active plan participants 84
---
Total accumulated postretirement benefit obligation 430
Plan assets at fair value --
---
Accumulated postretirement benefit obligation
in excess of plan assets 430
Unrecognized net loss from experience
different from that assumed (7)
---
Accrued postretirement benefit cost $423
===
</TABLE>
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 8.0% and the assumed rate of future
annual salary increases varied between 3% and 10%, based upon employees' ages.
For measurement purposes, an annual rate of increase in the per capita cost
of health care benefits (the health care cost trend rate) of up to 15.5% was
assumed through 1993; the rate is assumed to decrease gradually to a maximum of
6.5% in 2001, and remain at that level thereafter. The health care cost trend
rate assumption has a significant effect on the amounts reported. To
illustrate, increasing the assumed health care cost trend rates by 1% in each
year would increase the accumulated postretirement benefit obligation as of
December 31, 1992 by $26 million and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for the year ended
December 31, 1992 by $2 million.
In the event of a change in control, as defined in the applicable plans, of
Travelers, provisions of some employee benefit plans secure existing
compensation and benefit entitlements earned prior to any change in control and
provide a salary and benefit continuation floor for employees whose employment
might be affected.
STOCK PLANS. Stock options, stock appreciation rights (SARs) and shares of
restricted stock have been granted pursuant to plans adopted by the Board of
Directors and approved by shareholders at the 1982 and 1988 annual meetings.
The 1988 plan provides for the award of up to 10,000,000 shares of Travelers
common stock in the form of options to purchase common stock or SARs, and
restricted stock. Commencing in 1988, all grants are made pursuant to the 1988
plan, although the prior plan continues to govern awards of options and SARs
made pursuant to it.
All outstanding options and SARs are either exercisable or become
exercisable over various periods beginning one year after the date of grant and
may be exercised until 10 years from the date of grant.
A holder of an option with an SAR attached has the right to surrender the
SAR for the appreciation in the common stock between the time of the grant and
the surrender. However, the maximum value of an SAR is limited to twice the
option purchase price. The exercise of an SAR cancels the option grant with
which the SAR is associated, and vice versa.
Shares of restricted stock are granted subject to restrictions on their
transferability. These restrictions will lapse upon the expiration of a period
of employment or the achievement of stated criteria, or both. The restrictions
may lapse over a period of between one and ten years from the date of grant.
Information with respect to grants follows:
<TABLE>
<CAPTION>
Options outstanding
-------------------------
Shares Average
available option
for grant Shares price
--------- ------ -------
<S> <C> <C> <C>
Balance,
January 1, 1990 3,713,328 2,055,724 $40.46
Options:
Granted (858,086) 858,086 $21.61
Exercised -- (9,342) $22.80
Forfeited 25,198 (80,607)
Restricted stock:
Granted (429,108) --
Forfeited 14,380 --
--------- --------- -----
Balance,
December 31, 1990 2,465,712 2,823,861 $34.79
Options:
Granted (1,109,209) 1,109,209 $17.09
Exercised -- (36,219) $13.91
Forfeited 64,473 (208,755)
Restricted stock:
Granted (330,568) --
Forfeited 9,579 --
--------- --------- -----
Balance,
December 31, 1991 1,099,987 3,688,096 $29.46
Options:
Authorized 5,000,000 --
Granted (2,056,100) 2,056,100 $22.38
Exercised -- (190,001) $14.52
Forfeited 142,348 (231,007)
Restricted stock:
Granted (131,072) --
Forfeited 41,767 --
--------- --------- -----
Balance,
December 31, 1992 4,096,930 5,323,188 $27.28
========= ========= =====
</TABLE>
Options exercisable at December 31, 1992, 1991 and 1990 were 2,782,576,
1,859,359 and 1,385,155, respectively.
51
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
SAVINGS, INVESTMENT AND STOCK OWNERSHIP PLAN. Under the savings, investment and
stock ownership plan available to substantially all employees, Travelers
matches a portion of employee contributions and, prior to 1990, invested it in
Travelers common stock. Travelers matching obligations were $36 million in
1992 and 1991 and $33 million in 1990. In the second quarter of 1989, Travelers
established an Employee Stock Ownership Plan (ESOP) to serve as the funding
vehicle for its matching obligation under the savings, investment and stock
ownership plan beginning in 1990. In June 1989, the ESOP purchased 3,755,869
shares of Travelers $4.53 Series A ESOP Convertible Preference Stock at $53.25
per share. The series A preference stock is convertible into Travelers common
stock at a one-to-one conversion rate. The shares may be redeemed at the option
of Travelers or the holder under certain circumstances. Annual dividends of
$4.53 are cumulative. The series A preference stock has a minimum liquidation
value of $53.25 plus unpaid and accrued dividends. The ESOP financed the
purchase of the series A preference shares with a $200 million variable
interest rate loan from a third party. Travelers has guaranteed the ESOP's debt
obligation, and the unpaid principal balance is included in Travelers long-term
debt with a corresponding offset to the ESOP series A preference stock.
Increasing semi-annual payments that began January 1, 1990 will fully amortize
the debt by July 1, 1997.
The series A preference shares are held by the ESOP Trustee and are
allocated to participants by a method that considers the debt service
requirements of the ESOP. To the extent that the shares allocated by this
method are not sufficient to meet Travelers matching obligation under the
savings plan, Travelers will contribute additional series A preference shares,
common stock or cash. In January 1993, 184,397 additional preference shares
were contributed to the ESOP to meet the 1992 matching obligation. In December
1991, 320,000 additional preference shares were contributed to the ESOP to meet
the estimated 1991 matching obligation. Likewise, in January 1991, 146,165
additional preference shares were contributed to the ESOP to meet the 1990
matching obligation.
ESOP expense is recognized based upon the value of preference shares
allocated to plan participants, giving consideration to interest incurred on
the debt and credit for dividends received. The value of additional series A
preference shares, common stock or cash necessary to satisfy the matching
requirement is included as a component of ESOP expense. The amount of ESOP
expense recognized by Travelers was $26 million in 1992, $29 million in 1991
and $32 million in 1990. Dividends of $19 million in 1992, $17 million in 1991
and $22 million in 1990, as well as contributions of $8 million in 1992, $10
million in 1991 and $16 million in 1990, were used by the ESOP to service its
debt. The ESOP incurred $5 million, $9 million and $14 million of interest
expense in 1992, 1991 and 1990, respectively.
In February 1993, Travelers announced changes to a number of its benefit
plans. These changes, which become effective in April 1993, include a revision
of the pension plan formula, increases to employee contribution levels for
medical and dental coverages, and adjustments to the matching feature of the
savings, investment and stock ownership plan.
14. FEDERAL INCOME TAXES
<TABLE>
<CAPTION>
(in millions) 1992 1991 1990
- ------------- ---- ---- ----
<S> <C> <C> <C>
EFFECTIVE TAX RATE
Income (loss) before federal
income taxes $(1,354) $323 $(152)
------ --- ----
Statutory tax rate 34% 34% 34%
------ --- ----
Expected federal income taxes $ (460) $110 $ (52)
Tax effect of:
Nontaxable investment income (38) (44) (59)
Unrecognized tax benefits on
realized investment losses -- -- 158
"Fresh start" adjustments (20) (50) (45)
Disposition of subsidiaries -- 6 35
Other (8) (6) (11)
------ --- ----
Federal income taxes $ (526) $ 16 $ 26
------ --- ----
Effective tax rate 39% 5% (17)%
------ --- ----
COMPOSITION OF FEDERAL INCOME TAXES
Current:
United States $ (31) $ 46 $ 92
Foreign 8 2 16
------ --- ----
Total (23) 48 108
------ --- ----
Deferred:
United States (503) (32) (83)
Foreign -- -- 1
------ --- ----
Total (503) (32) (82)
------ --- ----
Federal income taxes $ (526) $ 16 $ 26
====== === ====
</TABLE>
52
<PAGE>
The net deferred tax asset at December 31, 1992 and the net deferred tax
asset at January 1, 1992, after implementation of FAS 109 and FAS 106, were
comprised of the tax effects of the temporary differences related to the
following assets and liabilities:
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 1,
(in millions) 1992 1992
- ------------- ------------ ----------
<S> <C> <C>
Deferred tax assets:
Property-casualty loss reserves $ 570 $ 532
Benefit, reinsurance and other reserves 239 219
Contractholder funds 173 149
Investments 379 229
Reserve for postretirement benefits 144 133
Restructuring reserves 98 16
Other 196 83
----- -----
Total 1,799 1,361
----- -----
Deferred tax liabilities:
Deferred acquisition costs 230 222
Accumulated depreciation 44 57
Prepaid pension expense 54 66
----- -----
Total 328 345
----- -----
Net deferred tax asset before
valuation allowance 1,471 1,016
Valuation allowance for deferred tax assets (100) (100)
----- -----
Net deferred tax asset after
valuation allowance $ 1,371 $ 916
===== =====
</TABLE>
The change in the net deferred tax asset after valuation allowance includes
a $48 million change in the deferred taxes relating to unrealized investment
gains.
The net tax effects of significant timing differences in the deferred tax
provision prior to 1992 were as follows:
<TABLE>
<CAPTION>
(in millions) 1991 1990
- ------------- ---- ----
<S> <C> <C>
Components of deferred taxes:
Deferred acquisition costs $ (6) $ (3)
Benefit, reinsurance and other reserves (32) (48)
Dividends to contractholders 7 20
Property-casualty loss reserves (39) (89)
Prepaid pension expense 2 9
Compensated absences 9 (1)
Realized investment losses -- (3)
Investment valuation and other reserves 17 27
Other 10 6
--- ---
Deferred federal income taxes $(32) $(82)
=== ===
</TABLE>
CONSOLIDATED FEDERAL INCOME TAXES. Travelers files its federal income tax
return on a consolidated basis. The return includes one subgroup of companies
that are considered life insurers for federal income tax purposes and one
subgroup of companies that are not life insurers. Certain limitations and
restrictions apply to the utilization of losses generated by one subgroup
against income of the other subgroup.
Upon adoption of FAS 109, a valuation allowance of $100 million was
established to reduce the net deferred tax asset on investment losses to the
amount that, based upon all available evidence, is more likely than not to be
realized. Reversal of the valuation allowance is contingent upon the
recognition of future capital gains in Travelers federal income tax return or a
change in circumstances which causes the recognition of the benefits to become
more likely than not. There was no net change in the total valuation allowance
during 1992.
As of December 31, 1992, Travelers has no ordinary or capital loss
carryforwards. Travelers has an alternative minimum tax (AMT) credit
carryforward of $63 million as of December 31, 1992. This credit will be
utilized to offset the excess of regular tax over AMT in future years and has
no expiration period.
Extraordinary tax credits of $11 million relating to the realization of book
capital loss carryforwards were recognized in 1991. In addition, $316 million
of deferred tax assets, which were in excess of the amount of tax recoverable
through carrybacks, were not recognized at December 31, 1991. In 1992, this
amount was included in the FAS 109 cumulative effect adjustment net of the
valuation allowance of $100 million.
See note 2 for a discussion of the implementation of new principles for
accounting for income taxes.
LIFE INSURANCE COMPANIES. The "policyholders surplus account", which arose
under prior tax law, is generally that portion of the gain from operations that
has not been subjected to tax, plus certain deductions. The balance of this
account, which, under provisions of the Tax Reform Act (TRA) of 1984, will not
increase after 1983, is estimated to be $893 million. This amount has not been
subjected to current income taxes but, under certain conditions that management
considers to be remote, may become subject to income taxes in future years. At
current rates, the maximum amount of such tax (for which no provision has been
made in the financial statements) is approximately $304 million.
NONLIFE COMPANIES. Commencing in 1987, the TRA of 1986 requires insurance
companies to discount property-casualty loss reserves for tax purposes.
Companies are, however, allowed a "fresh start" adjustment by recomputation of
the opening 1987 loss reserves. This adjustment reduced 1991 taxes by $35
million and 1990 taxes by $30 million. There was no 1992 effect since the
unamortized "fresh start" balance at December 31, 1991 was included in the FAS
109 cumulative effect adjustment.
Starting in 1990, the Omnibus Budget Reconciliation Act of 1990 requires
property-casualty insurance companies to accrue estimated salvage and
subrogation recoverable. Companies are, however, allowed a "fresh start"
adjustment equal to 87% of the discounted opening 1990 reserve. For Travelers,
this amount is to be spread over a four-year period beginning in 1990. "Fresh
start" adjustments relating to salvage and subrogation reduced 1992, 1991 and
1990 taxes by $20 million, $15 million and $15 million, respectively.
53
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
15. REINSURANCE
Travelers, through its insurance subsidiaries, participates in reinsurance to
reduce overall risks, including exposure to large losses and catastrophic
events, and to effect business-sharing arrangements. Its property-casualty
insurance subsidiaries also participate as a servicing carrier for and member
of several pools and associations. Travelers remains primarily liable as the
direct insurer on all risks reinsured. Reinsurance recoverables are reported
after allowances for uncollectible amounts. A summary of reinsurance financial
data is presented below:
<TABLE>
<CAPTION>
(in millions) 1992 1991 1990
- ------------- ---- ---- ----
<S> <C> <C> <C>
REINSURANCE PREMIUMS ASSUMED:
Life business $ 115 $ 137 $ 98
Property-casualty business 408 389 375
----- ----- -----
Total $ 523 $ 526 $ 473
===== ===== =====
REINSURANCE PREMIUMS CEDED:
Life business $ 46 $ 8 $ 51
Property-casualty business 1,509 1,377 1,436
----- ----- -----
Total $1,555 $1,385 $1,487
===== ===== =====
BALANCE SHEET IMPACT:
Life business:
Deducted from benefit and
loss reserves, and policy
and contract claims $ 41 $ 39 $ 37
----- ----- -----
Property-casualty business:
Deducted from loss reserves
Pools and associations $2,983 $2,869 $2,565
Reinsurers 908 949 926
----- ----- -----
Total $3,891 $3,818 $3,491
----- ----- -----
Deducted from unearned
premium reserves
Pools and associations $ 378 $ 330 $ 391
Reinsurers 94 71 62
----- ----- -----
Total $ 472 $ 401 $ 453
===== ===== =====
</TABLE>
16. INVESTMENTS AND INVESTMENT GAINS (LOSSES)
<TABLE>
<CAPTION>
(For the year ended
December 31, in millions) 1992 1991 1990
- ------------------------- ---- ---- ----
<S> <C> <C> <C>
REALIZED
Fixed maturities $ 99 $ 103 $ (44)
Equity securities 34 43 17
Mortgage loans (400) (103) (597)
Real estate (425) -- (70)
Foreign currency translation (37) (32) 8
Other 94 (13) 70
---- ------ ---
Realized investment losses $(635) $ (2) $(616)
==== ===== ====
UNREALIZED
Fixed maturities $ 167 $ 170 $ (66)
Equity securities 3 59 (141)
Other 16 27 8
---- ---- ----
186 256 (199)
Related taxes 62 65 (37)
---- ---- ----
Net unrealized investment
gains (losses) 124 191 (162)
Balance beginning of year 73 (118) 44
---- ---- ----
Balance end of year $ 197 $ 73 $(118)
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
EQUITY SECURITIES Unrealized
----------------------
(At December 31, in millions) Cost Gains Losses
- ----------------------------- ---- ----- ------
<S> <C> <C> <C>
1992 $251 $58 $20
1991 510 80 44
1990 452 52 73
=== == ==
</TABLE>
<TABLE>
<CAPTION>
FIXED MATURITIES
Estimated Estimated market
(At December 31, Carrying market value greater than
in millions) value value carrying value
- ---------------- -------- --------- ------------------------
Amount Percent
------ -------
<S> <C> <C> <C> <C>
1992 $22,946 $23,771 $ 825 4
1991 20,987 22,144 1,157 6
1990 22,780 22,911 131 1
====== ====== ===== ==
</TABLE>
54
<PAGE>
FIXED MATURITIES. Estimated market values of investments in fixed maturities in
good standing are principally a function of current interest rates, which are
not considered in computing related future liabilities to contractholders. The
practice of reporting investments in fixed maturities at amortized cost is a
generally accepted accounting principle of long standing for insurance
companies for those investments that are intended to be held to maturity. The
presentation of estimated market values based on current interest yields
without a corresponding revaluation of contractholder liabilities can be
misinterpreted. Fixed maturities are valued based upon quoted market prices or,
if quoted prices are not available, discounted expected cash flows using market
rates commensurate with the credit quality and maturity of the investment.
Sales from the amortized cost portfolios have been made periodically.
Such sales were $1.1 billion in 1992 and $2.6 billion in 1991. Gross gains of
$49 million in 1992 and $92 million in 1991, and gross losses of $10 million in
both 1992 and 1991 were realized on those sales.
The carrying values of the trading portfolio fixed maturities are
adjusted to market value as it is likely they will be sold prior to maturity.
At December 31, 1992 and 1991, these fixed maturities had market values of $8.9
billion and $3.1 billion, respectively. Net unrealized gains were $322 million
at December 31, 1992 and $131 million at December 31, 1991. Sales of trading
portfolio fixed maturities were $4.4 billion in 1992 and $3.8 billion in 1991.
Gross gains of $124 million in 1992 and $90 million in 1991, and gross losses
of $16 million in 1992 and $13 million in 1991, were realized on those sales.
FIXED MATURITIES CARRIED AT AMORTIZED COST BY INVESTMENT TYPE
<TABLE>
<CAPTION>
Gross Gross
Carrying unrealized unrealized Market
(in millions) value gains losses value
- ------------- -------- ---------- --------- ------
<S> <C> <C> <C> <C>
DECEMBER 31, 1992
U.S. Government and
government agencies
and authorities $ 1,115 $ 88 $ 2 $ 1,201
States, municipalities
and political
subdivisions 1,560 43 21 1,582
Foreign governments 453 28 1 480
Public utilities 2,847 165 6 3,006
Convertible bonds 1 -- -- 1
All other corporate
bonds 8,071* 458 25 8,504
Redeemable preferred
stock 52 3 2 53
------ ---- --- ------
Total $14,099 $ 785 $ 57 $14,827
====== ==== === ======
DECEMBER 31, 1991
U.S. Government and
government agencies
and authorities $ 2,498 $ 201 $ 3 $ 2,696
States, municipalities
and political
subdivisions 1,680 38 41 1,677
Foreign governments 569 41 -- 610
Public utilities 1,304 96 3 1,397
Convertible bonds 12 1 1 12
All other corporate
bonds 11,885* 808 62 12,631
Redeemable preferred
stock 68 4 3 69
------ ----- --- ------
Total $18,016 $1,189 $113 $19,092
====== ===== === ======
</TABLE>
* Before valuation reserves of $97 million and $81 million at December 31,
1992 and 1991, respectively.
55
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
TRADING PORTFOLIO SECURITIES BY INVESTMENT TYPE
<TABLE>
<CAPTION>
Carrying value at December 31,
(in millions) 1992 1991
- ------------- ---- ----
<S> <C> <C>
U.S. Government and government
agencies and authorities $5,382 $2,248
States, municipalities and political subdivisions 18 2
Foreign governments 13 216
Public utilities 89 6
Convertible bonds 458 449
All other corporate bonds 2,984 131
----- -----
Total trading portfolio securities $8,944 $3,052
===== =====
</TABLE>
The carrying value and market value of fixed maturities at December 31,
1992, by contractual maturity, are shown below. Fixed maturities subject to
early or unscheduled prepayments have been included based upon their
contractual maturity dates. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
MATURITY Carrying Market
(in millions) value* value
-------- -------
<S> <C> <C>
One year or less $ 1,056 $ 1,091
Over 1 year through 5 years 6,189 6,343
Over 5 years through 10 years 7,733 8,099
Over 10 years 8,065 8,238
------ ------
$23,043 $23,771
====== ======
</TABLE>
* Before valuation reserves of $97 million at December 31, 1992.
CONCENTRATIONS. At December 31, 1992, Travelers had no concentration of
investments in a single investee exceeding 10% of consolidated shareholders'
equity.
Included in fixed maturities is a concentration in below investment grade
assets totaling $1.3 billion at both December 31, 1992 and 1991. Travelers
defines its below investment grade assets as those securities rated "Ba1" or
below by external rating agencies, or the equivalent by Travelers internal
analysts when a public rating does not exist. Such assets include
publicly traded below investment grade bonds, highly leveraged transactions and
certain other privately issued bonds that are classified as below investment
grade loans. Travelers also has concentrations of investments in the following
industries prior to consideration of investment valuation reserves:
<TABLE>
<CAPTION>
(in millions) 1992 1991
- ------------ ---- ----
<S> <C> <C>
Finance $1,683 $1,347
Banking* 1,681 1,862
Electric utilities 1,366 1,101
===== =====
</TABLE>
* Includes $900 million and $1.1 billion at December 31, 1992 and 1991,
respectively, of primarily short-term investments and cash equivalents issued
by foreign banks located principally in Europe and Japan.
Below investment grade assets included in the totals above were as follows:
<TABLE>
<CAPTION>
(in millions) 1992 1991
- ------------ ---- ----
<S> <C> <C>
Finance $121 $65
Banking 37 86
Electric utilities 33 4
=== ===
</TABLE>
At December 31, 1992 and 1991, significant concentrations of mortgage loans
were for properties located in highly populated areas in the states listed
below. The amounts shown are prior to consideration of investment valuation
reserves:
<TABLE>
<CAPTION>
(in millions) 1992 1991
- ------------- ---- ----
<S> <C> <C>
California $1,460 $1,855
New York 1,326 1,459
Texas 1,010 1,369
Florida 962 1,037
===== =====
</TABLE>
Other mortgage loan investments are fairly evenly dispersed throughout the
United States, with no holdings in any other state exceeding $700 million and
$825 million at December 31, 1992 and 1991, respectively.
Travelers monitors creditworthiness of counterparties to all financial
instruments by using controls that include credit approvals, limits and other
monitoring procedures. Collateral for fixed maturities often includes pledges
of assets, including stock and other assets, guarantees and letters of credit.
Travelers underwriting standards with respect to new mortgage loans generally
require loan to value ratios of 75% or less at the time of mortgage
origination.
56
<PAGE>
INVESTMENT VALUATION RESERVES. At December 31, 1992, 1991 and 1990, total
investment valuation reserves, which are deducted from the applicable
investment carrying values in the consolidated balance sheet, were as follows:
<TABLE>
<CAPTION>
(in millions) 1992 1991 1990
- ------------- ---- ---- ----
<S> <C> <C> <C>
Beginning of year $ 925 $1,046 $ 512
Increase 883 172 747
Impairments, net of
gains/recoveries (311) (293) (213)
----- ----- -----
End of year $1,497 $ 925 $1,046
===== ===== =====
</TABLE>
At December 31, 1992, investment valuation reserves were comprised of
$882 million for mortgage loans, $510 million for real estate and $105 million
for securities. Increases in the investment valuation reserves are reflected as
realized investment losses.
Travelers continually monitors its investment portfolios, assessing
status and creditworthiness of borrowers as well as other variables. The
valuation reserves reflect management's judgment of the probable losses
inherent in the portfolios. This judgment is based on a review of factors that
include individual loan and historical loss experience and the specific
industry and economic conditions. Management believes the reserves are adequate
based on the current environment.
NONINCOME PRODUCING. Investments included in the consolidated balance sheets
that were nonincome producing for the preceding 12 months were as follows:
<TABLE>
<CAPTION>
(in millions) 1992 1991
- ------------- ----- -----
<S> <C> <C>
Fixed maturities $ 16 $ 69
Mortgage loans 514 519
Real estate 699 579
----- -----
Total $1,229 $1,167
===== =====
</TABLE>
RESTRUCTURED. The company has restructured investments totaling approximately
$1.4 billion and $1.6 billion at December 31, 1992 and 1991, respectively. The
new terms typically defer a portion of contract interest payments to varying
future periods. The accrual of interest is suspended on all restructured loans,
and interest income is reported only as payment is received. Gross interest
income on restructured mortgage loans that would have been recorded in
accordance with the original terms of such loans amounted to $166 million in
1992 and $197 million in 1991. Interest on these loans, included in net
investment income, aggregated $72 million and $74 million in 1992 and 1991,
respectively.
17. FAIR VALUE OF CERTAIN FINANCIAL INSTRUMENTS
Travelers uses various financial instruments in the normal course of its
business. Fair value information for financial instruments not presented
elsewhere in these financial statements is discussed below. Fair values of
financial instruments which are considered insurance contracts are not required
to be disclosed and are not included in the amounts discussed.
The estimated fair value of Travelers mortgage loan portfolio at
December 31, 1992 is $9.7 billion. Mortgage loans are grouped into homogeneous
categories based on Travelers internal rating system. Performing loans
generally are valued using either discounted cash flow analyses, reflecting
market-based interest rates commensurate with the underlying risk, or, if
foreclosure is deemed possible,the lower of carrying value or underlying
collateral value. In arriving at estimated fair value, Travelers used interest
rates reflecting the higher returns required in the current real estate
financing market. As the marketplace changes, these rates will be adjusted
accordingly. Underperforming loans are valued at the lower of carrying value or
underlying collateral value.
The carrying value of $537 million of financial instruments classified
as other assets approximates their fair value at December 31, 1992. The
carrying value of $2.7 billion of financial instruments classified as other
liabilities also approximates their fair value at December 31, 1992. Fair value
is determined using various methods including discounted cash flows and
carrying value, as appropriate for the various financial instruments.
At December 31, 1992, contractholder funds with defined maturities
have a carrying value of $6.0 billion and a fair value of $6.2 billion. The
fair value of these contracts is determined by discounting expected cash flows
at an interest rate commensurate with Travelers credit risk and the expected
timing of cash flows. Contractholder funds without defined maturities have a
carrying value of $10.7 billion and a fair value of $10.4 billion at December
31, 1992. These contracts generally are valued at surrender value.
The assets of separate accounts providing a guaranteed return have a
carrying value and fair value of $711 million and $767 million, respectively,
at December 31, 1992. The liabilities of separate accounts providing a
guaranteed return have a carrying value and fair value of $632 million and $735
million, respectively, at December 31, 1992.
The carrying values of short-term securities, investment income
accrued and securities transactions in the course of settlement approximate
their fair value.
57
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
18. NET INVESTMENT INCOME
<TABLE>
<CAPTION>
(For the year ended December 31,
in millions) 1992 1991 1990
- ------------ ----- ----- -----
<S> <C> <C> <C>
GROSS INVESTMENT INCOME
Fixed maturities
Bonds $1,984 $2,344 $2,382
Redeemable preferred stocks 4 6 7
Equity securities
Common stocks 8 -- 30
Nonredeemable preferred stocks 8 7 9
Mortgage loans 983 1,238 1,588
Real estate 399 266 162
Policy loans 109 96 67
Other 6 72 85
----- ----- -----
3,501 4,029 4,330
----- ----- -----
INVESTMENT EXPENSES
General investment 553 443 314
Interest, discount and expense
on long-term debt 90 72 80
Other interest 59 286 442
----- ----- -----
702 801 836
----- ----- -----
Net investment income $2,799 $3,228 $3,494
===== ===== =====
</TABLE>
The amounts shown in the above table are net of increases in the investment
income valuation reserves, which reflect estimates of amounts considered
doubtful of realization. For 1990, the increase was $20 million. There were no
such increases in 1992 and 1991. At December 31, 1992 and 1991, the reserve,
which is deducted from investment income accrued in the consolidated balance
sheet, amounted to $58 million and $73 million, respectively.
At both December 31, 1992 and 1991, the investment income valuation
reserves of a noninsurance subsidiary amounted to $27 million.
19. PRIMERICA STRATEGIC ALLIANCE
On September 20, 1992, Travelers announced a strategic alliance with Primerica.
The transactions involved in this alliance resulted in Travelers issuing
approximately 38 million shares of common stock at $19 per share for $550
million in cash; a 50% interest in Commercial Insurance Resources, Inc., a
wholly owned subsidiary of Primerica and the parent of the Gulf Insurance
Group; and the purchase of Primerica's Transport Life Insurance Company's
preferred provider and third party administrator organizations. These
transactions resulted in an increase in Travelers shareholders' equity of $723
million and the ownership by Primerica of approximately 26.6% of Travelers
common stock.
20. RESTRUCTURING COSTS
During 1992, Travelers announced a series of organizational restructuring
initiatives associated with its plan to streamline the company's business and
corporate operations. These initiatives resulted in a pretax charge of $308
million, related to severance and associated costs, and includes $25 million of
special termination benefits charged to pension expense and $14 million of
curtailment losses charged to other postretirement benefit plans (see note 13).
21. RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
In the first quarter of 1992, Travelers changed its presentation of cash flows
from operating activities from the indirect method to the direct method. The
following table reconciles net income (loss) to net cash provided by (used in)
operating activities:
<TABLE>
<CAPTION>
(For the year ended December 31,
in millions) 1992 1991 1990
- ------------ ----- ------ -----
<S> <C> <C> <C>
Net income (loss) $ (658) $ 318 $ (178)
Reconciling adjustments
Trading account investments,
(purchases) sales, net (938) (1,973) 140
Realized gains (159) (93) (118)
Investment income accrued 30 67 98
Premium balances receivable 9 (9) 235
Deferred acquisition costs (71) (14) (4)
Deferred federal income taxes (503) (32) (82)
Cumulative effects of changes
in accounting principles (170) -- --
Insurance reserves and
accrued expenses 512 309 409
Restructuring reserves 229 (28) (4)
Other, including investment
valuation reserves 992 141 9
----- ------ -----
Net cash provided by (used in)
operating activities $ (727) $(1,314) $ 505
===== ====== =====
</TABLE>
Cash overdrafts have been reclassified to other liabilities on the consolidated
balance sheet for all years presented.
22. Noncash Investing and Financing Activities
Significant noncash investing and financing activities include: a) the 1992
acquisition of a 50% interest in Commercial Insurance Resources, Inc. and the
acquisition of Transport Life Insurance Company's preferred provider and third
party administrator organizations through the issuance of common stock (see
note 19); b) the issuance of stock under The Travelers Accrued Vacation
Buy-Back Plan (see note 6); c) the 1991 transfer of $560 million of assets and
liabilities supporting certain annuity business into a separate account; d) the
issuance of additional series A preference stock in 1991 (see note 13); e)
increases in investment valuation reserves in 1992, 1991 and 1990 for
securities, mortgage loans and real estate (see note 16); f) acquisition of
real estate through foreclosures of mortgage loans amounting to $809 million,
$861 million and $415 million in 1992, 1991 and 1990, respectively; and g)
acceptance of purchase money mortgages for sales of real estate aggregating $72
million, $33 million and $86 million in 1992, 1991 and 1990, respectively.
58
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors,
The Travelers Corporation:
We have audited the accompanying consolidated balance sheets of The Travelers
Corporation and Subsidiaries as of December 31, 1992 and 1991, and the related
consolidated statements of operations and retained earnings and cash flows for
each of the three years in the period ended December 31, 1992. These
consolidated financial statements are the responsibility of Travelers
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Travelers Corporation and Subsidiaries as of December 31, 1992 and 1991, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1992 in conformity with
generally accepted accounting principles.
As discussed in Notes 2, 13 and 14 to the consolidated financial statements,
Travelers changed its method of accounting for postretirement benefits other
than pensions, accounting for income taxes and accounting for foreclosed assets
in 1992.
/s/ Coopers & Lybrand
Hartford, Connecticut
February 9, 1993
59
<TABLE>
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C>
CONSOLIDATED STATEMENT OF The Travelers Corporation and Subsidiaries
OPERATIONS AND RETAINED EARNINGS
(In millions) (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Quarter Nine Months
Ended Sept. 30 Ended Sept. 30
1993 1992 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Premiums $ 1,547.3 $ 1,667.9 $ 4,981.8 $ 5,143.4
Net investment income 644.0 696.3 1,956.5 2,128.3
Realized investment gains 63.3 57.1 246.5 66.5
Other, including gains and losses on dispositions 223.5 210.2 669.5 656.7
- --------------------------------------------------------------------------------------------------------------------------------
2,478.1 2,631.5 7,854.3 7,994.9
- --------------------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future insurance benefits 1,603.3 1,794.7 4,593.5 4,815.2
Interest credited to contractholders 289.8 338.3 913.9 1,106.8
Loss adjustment expenses 285.5 223.6 701.8 650.4
Amortization of deferred acquisition costs 122.0 143.5 393.2 405.0
General and administrative expenses 337.2 695.1 1,043.9 1,447.1
- --------------------------------------------------------------------------------------------------------------------------------
2,637.8 3,195.2 7,646.3 8,424.5
- --------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE FEDERAL INCOME TAXES
AND CUMULATIVE EFFECTS OF CHANGES IN
ACCOUNTING PRINCIPLES (159.7) (563.7) 208.0 (429.6)
- --------------------------------------------------------------------------------------------------------------------------------
FEDERAL INCOME TAXES
Current (58.8) (50.8) 9.4 10.7
Deferred (65.4) (154.6) (53.1) (202.5)
- --------------------------------------------------------------------------------------------------------------------------------
(124.2) (205.4) (43.7) (191.8)
- --------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECTS OF CHANGES
IN ACCOUNTING PRINCIPLES (35.5) (358.3) 251.7 (237.8)
Cumulative effect of change in accounting for postretirement
benefits other than pensions, net of tax - - - (258.4)
Cumulative effect of change in accounting for income taxes - - - 427.9
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) (35.5) (358.3) 251.7 (68.3)
Retained earnings beginning of period 3,011.4 3,921.8 2,865.4 3,724.2
Dividends to preference shareholders (13.6) (13.5) (40.9) (24.5)
Dividends to common shareholders (64.3) (41.8) (180.1) (125.3)
Tax benefit on preference stock dividends 0.9 0.8 2.8 2.9
- --------------------------------------------------------------------------------------------------------------------------------
Retained earnings end of period $ 2,898.9 $ 3,509.0 $ 2,898.9 $ 3,509.0
- --------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE (in dollars)
Primary
Income (loss) before cumulative effects of changes
in accounting principles $ (.33) $ (3.54) $ 1.47 $ (2.47)
Cumulative effect of change in accounting for postretirement
benefits other than pensions, net of tax - - - (2.48)
Cumulative effect of change in accounting for income taxes - - - 4.10
Net income (loss) (.33) (3.54) 1.47 (.85)
Assuming full dilution
Income (loss) before cumulative effects of changes
in accounting principles (.33) (3.54) 1.45 (2.47)
Cumulative effect of change in accounting for postretirement
benefits other than pensions, net of tax - - - (2.48)
Cumulative effect of change in accounting for income taxes - - - 4.10
Net income (loss) (.33) (3.54) 1.45 (.85)
Dividends .40 .40 1.20 1.20
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
- 3 -
<PAGE>
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET The Travelers Corporation and Subsidiaries
(In millions)
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Sept. 30 Dec. 31 Sept. 30
1993 1992 1992
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS (UNAUDITED) (UNAUDITED)
Fixed maturities
Bonds (market, $16,776.2; $14,773.5; $19,570.9) $ 15,401.0 $ 13,950.4 $ 18,227.9
Trading portfolio securities
(cost, $8,407.8; $8,621.9; $4,104.5) 8,877.6 8,943.8 4,264.5
Redeemable preferred stocks
(market, $39.6; $53.3; $61.9) 38.5 51.7 60.1
Equity securities, at market
Common stocks (cost, $91.8; $113.8; $403.4) 174.3 150.6 400.7
Nonredeemable preferred stocks
(cost, $128.6; $136.6; $165.3) 137.2 138.3 170.4
Mortgage loans 7,853.3 10,072.1 10,935.5
Investment real estate, net of accumulated
depreciation of $49.3; $54.4; $172.9 601.7 826.4 2,527.3
Real estate held for sale, net of accumulated
depreciation of $122.5; $132.8 1,481.8 1,332.1 -
Policy loans 1,214.8 1,209.8 1,211.6
Short-term securities 999.6 1,340.4 1,049.0
Other investments 1,323.6 1,313.0 1,331.4
- --------------------------------------------------------------------------------------------------------------------------
Total investments 38,103.4 39,328.6 40,178.4
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 1,184.3 1,687.5 857.0
Investment income accrued 486.9 510.6 533.0
Premium balances receivable 1,804.5 1,855.6 1,987.6
Reinsurance recoverable 4,173.7 4,167.7 5,038.7
Deferred acquisition costs 824.9 790.7 769.9
Deferred federal income taxes 1,326.3 1,370.7 1,130.9
Separate and variable accounts 6,235.8 5,330.4 5,429.4
Other assets 2,932.7 2,986.8 3,194.9
- --------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 57,072.5 $ 58,028.6 $ 59,119.8
- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Contractholder funds $ 18,295.7 $ 19,275.4 $ 19,670.1
Benefit and loss reserves 20,302.2 20,173.2 21,049.0
Unearned premium reserves 1,744.3 1,790.1 1,840.9
Policy and contract claims 973.9 1,129.1 971.1
Short-term debt - 64.0 39.0
Long-term debt 947.8 1,123.8 1,174.9
Current federal income taxes 106.6 73.0 93.7
Separate and variable accounts 6,134.3 5,250.6 5,347.3
Other liabilities 3,225.1 4,095.4 4,091.5
- --------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 51,729.9 52,974.6 54,277.5
- --------------------------------------------------------------------------------------------------------------------------
ESOP PREFERENCE STOCK SERIES A 234.9 224.8 224.8
GUARANTEED ESOP OBLIGATION (124.9) (148.7) (148.7)
- --------------------------------------------------------------------------------------------------------------------------
110.0 76.1 76.1
- --------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preference stock series B 375.0 375.0 375.0
Common stock (146.6, 145.4 and 106.7 shares issued) 183.3 181.7 133.4
Additional paid-in capital 1,424.0 1,400.0 711.8
Unrealized investment gains, net of taxes 380.9 197.1 76.8
Retained earnings 2,898.9 2,865.4 3,509.0
Cost of common stock in treasury (29.5) (41.3) (39.8)
- --------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 5,232.6 4,977.9 4,766.2
- --------------------------------------------------------------------------------------------------------------------------
TOTAL $ 57,072.5 $ 58,028.6 $ 59,119.8
- --------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY PER COMMON SHARE (in dollars) $ 33.35 $ 31.96 $ 41.67
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
- 4 -
<PAGE>
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS THE TRAVELERS CORPORATION AND SUBSIDIARIES
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(In millions) (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPT. 30
1993 1992
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums collected $ 4,697.0 $ 4,979.3
Net investment income received 1,937.1 2,153.3
Other revenues received 475.5 478.9
Benefits and claims paid (4,928.9) (4,815.6)
Interest credited to contractholders (876.1) (1,068.2)
Operating expenses paid (1,548.2) (1,610.6)
Income taxes refunded (paid) 34.4 (61.2)
Trading account investments, (purchases) sales, net (433.0) (805.7)
Other 89.0 198.5
- ---------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (553.2) (551.3)
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment repayments
Fixed maturities 2,711.1 2,239.1
Mortgage loans 982.8 816.1
Proceeds from investments sold
Fixed maturities 411.2 938.7
Equity securities 164.5 496.4
Mortgage loans 225.8 295.2
Real estate 589.5 152.3
Investments in
Fixed maturities (4,150.6) (4,092.4)
Equity securities (141.5) (529.7)
Mortgage loans (177.5) (92.9)
Real estate (59.0) (51.2)
Policy loans, net (5.0) (185.2)
Short-term securities, (purchases) sales, net 340.8 534.3
Other investments, (purchases) sales, net 94.6 (58.0)
Securities transactions in course of settlement 66.0 697.8
Cash from disposition of subsidiaries and other operations 47.2 4.0
Other (31.4) (26.3)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 1,068.5 1,138.2
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance (redemption) of short-term debt, net (9.0) 39.0
Issuance (redemption) of certificates of deposit, net 18.9 (132.4)
Issuance of long-term debt - 367.0
Payments of long-term debt (123.3) (118.0)
Contractholder fund deposits 2,460.4 2,197.1
Contractholder fund withdrawals (3,267.5) (3,921.9)
Issuance of preference stock series B - 375.0
Issuance of common stock 7.1 -
Release of treasury stock 9.4 -
Dividends to shareholders (214.7) (139.4)
Other 100.2 92.6
- ---------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (1,018.5) (1,241.0)
- ---------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS $ (503.2) $ (654.1)
- ---------------------------------------------------------------------------------------------------------------
Interest paid $ 81.9 $ 80.3
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Sept. 30
1993 1992
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 1,184.3 $ 857.0
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
- 5 -
<PAGE>
THE TRAVELERS CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
September 30, 1993
1. General
The interim financial statements in this report have been prepared in
conformity with generally accepted accounting principles (GAAP) and are
unaudited. They reflect all adjustments (none of which were other than
normal recurring adjustments, except as discussed in Notes 3 and 13 below)
necessary, in the opinion of management, for a fair statement of results
for the periods reported. Certain prior year amounts have been
reclassified to conform with the 1993 presentation (see Note 2 below).
2. Changes in Accounting Principles
In the first quarter of 1993, Travelers implemented Statement of Financial
Accounting Standards No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts" (FAS 113). FAS 113 requires
the reporting of reinsurance receivables and prepaid reinsurance premiums
as assets and precludes the immediate recognition of gains for all
reinsurance contracts unless the liability to the policyholder has been
extinguished. Implementation of FAS 113 did not have an impact on
Travelers earnings, however, assets and liabilities increased by like
amounts. Assets and liabilities within the Consolidated Balance Sheet were
increased by $4,342 million as of September 30, 1993, $4,427 million as of
December 31, 1992 and $5,298 million as of September 30, 1992. See Note 7
for additional reinsurance disclosures.
In July 1993, the Financial Accounting Standards Board Emerging Issues Task
Force (EITF) reached a conclusion on Issue No. 93-6 "Accounting for
Multiple-Year Retrospectively Rated Contracts by Ceding and Assuming
Enterprises" (EITF No. 93-6). EITF No. 93-6 clarifies the accounting for
certain reinsurance agreements with retrospectively rated features.
Travelers changed its method of accounting for such contracts to conform
with the conclusion. The effects of the change in method of accounting did
not materially impact Travelers financial results.
3. Federal Income Taxes
In August 1993, the President signed into law the Omnibus Budget
Reconciliation Act of 1993 (the Act). Included in the Act was a provision
that raised the tax rate on corporations from 34% to 35%. Under current
GAAP accounting rules, Travelers was required to restate its deferred tax
asset using the new 35% rate. This restatement produced a $40 million
increase to the deferred tax asset (and increase to earnings) that is
included in the third quarter results for 1993.
The provision for federal income taxes for the quarters ended September 30,
1993 and September 30, 1992 includes $4 million and $5 million,
respectively, of "fresh start" tax benefits relating to salvage and
subrogation. The provision for federal income taxes for the nine months
ended September 30, 1993 and September 30, 1992 includes $12 million and
$15 million, respectively, of "fresh start" tax benefits relating to
salvage and subrogation.
- 6 -
<PAGE>
TRAVELERS CORPORATION AND SUBSIDIARIES
Notes to Financial Statements (continued)
September 30, 1993
4. Capital and Preference Stock
Number of shares at September 30, 1993:
<TABLE>
<CAPTION>
Issued Treasury Stock Outstanding
------------ -------------- -----------
<S> <C> <C> <C>
Common stock, par value $1.25,
500,000,000 authorized 146,620,712 977,245 145,643,467
Preferred stock, no par value,
10,000,000 authorized - - -
Preference stock, no par value,
25,000,000 authorized
Series A, $53.25 stated value 4,406,431 - 4,406,431
Series B, $50 stated value 7,500,000 - 7,500,000
</TABLE>
5. Per Share Data
Primary income per common share is computed after provision for the
dividend requirements on preference stocks. It is based upon the weighted
average number of common shares outstanding including, if applicable,
common share equivalents. Fully diluted income per share is based on the
number of shares used in the calculation of primary income per share plus
additional common share equivalents and shares issuable if series A
preference shares and convertible debentures were converted for the periods
they were outstanding. The number of shares used in the calculations was:
<TABLE>
<CAPTION>
Primary Fully diluted
----------------------------------------- -----------------------------------------------
Quarter Year-to-date Quarter Year-to-date
-------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
1993 146,478,832 145,644,984 147,662,669 146,537,978
1992 104,472,879 104,260,494 104,472,879 104,260,494
</TABLE>
- 7 -
<PAGE>
THE TRAVELERS CORPORATION AND SUBSIDIARIES
Notes to Financial Statements (continued)
September 30, 1993
6. Investments in Fixed Maturities
The following table displays the carrying values and estimated market
values of investments in fixed maturities (bonds and redeemable preferred
stocks) exclusive of trading portfolios:
<TABLE>
<CAPTION>
Estimated
market value
greater
Estimated than
Carrying market carrying
(in millions) value value value
------------- ---------- ----------- -----------------------------
Amount %
------ ---
<S> <C> <C> <C> <C>
September 30, 1993 $15,440 $16,816 $1,376 8.9
December 31, 1992 14,002 14,827 825 5.9
September 30, 1992 18,288 19,633 1,345 7.4
</TABLE>
Estimated market values of investments in fixed maturities in good standing
are principally a function of current interest rates, which are not
considered in computing related future liabilities to contractholders.
Fixed maturities are valued based upon quoted market prices or, if quoted
prices are not available, discounted expected cash flows using market rates
commensurate with the credit quality and maturity of the investment.
The carrying values of the trading portfolio fixed maturities are adjusted
to market value as it is likely they will be sold prior to maturity. Such
carrying values were $8,878 million, $8,944 million and $4,265 million at
September 30, 1993, December 31, 1992 and September 30, 1992, respectively.
- 8 -
<PAGE>
THE TRAVELERS CORPORATION AND SUBSIDIARIES
Notes to Financial Statements (continued)
September 30, 1993
7. Reinsurance
Travelers, through its insurance subsidiaries, participates in reinsurance
to reduce overall risks, including exposure to large losses and
catastrophic events, and to effect business-sharing arrangements. Its
property-casualty insurance subsidiaries also participate as a servicing
carrier for and member of several pools and associations. Amounts
recoverable from reinsurers of short-duration contracts are estimated in a
manner consistent with the claim liability associated with the reinsured
policy. Travelers remains primarily liable as the direct insurer on all
risks reinsured. Reinsurance recoverables are reported after allowances
for uncollectible amounts. Generally, the cost of reinsurance is
recognized over the period of the reinsurance contract. Prepaid
reinsurance premiums are included in other assets within the Consolidated
Balance Sheet.
A summary of reinsurance financial data reflected within the Consolidated
Statement of Operations and Retained Earnings is presented below and on
page 10 (in millions):
<TABLE>
<CAPTION>
Quarter Nine Months
Ended September 30 Ended September 30
-------------------------------- --------------------------------
1993 1992 1993 1992
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Written Premiums:
----------------
Direct $ 1,839 $ 1,907 $ 5,783 $ 5,798
Assumed 100 179 343 512
Ceded (392) (418) (1,144) (1,167)
------- ------- ------- --------
Total $ 1,547 $ 1,668 $ 4,982 $ 5,143
======== ======== ======== =========
Earned Premiums:
---------------
Direct
Life business $ 732 $ 726 $ 2,191 $ 2,160
Property-casualty business 983 1,227 3,383 3,577
Assumed
Life business 18 54 92 157
Property-casualty business 73 99 297 309
Ceded
Life business (29) (38) (94) (106)
Property-casualty business (364) (350) (1,085) (1,003)
------- ------- ------- --------
Total $ 1,413 $ 1,718 $ 4,784 $ 5,094
======== ======== ======== =========
</TABLE>
- 9 -
<PAGE>
THE TRAVELERS CORPORATION AND SUBSIDIARIES
Notes to Financial Statements (continued)
September 30, 1993
7. Reinsurance (cont.)
<TABLE>
<CAPTION>
Quarter Nine Months
(in millions) Ended September 30 Ended September 30
------------- -------------------------------- ---------------------------------
1993 1992 1993 1992
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
Reinsurance Recoveries:
----------------------
Life business $ 28 $ 16 $ 60 $ 58
Property-casualty business 243 319 827 949
-------- -------- -------- ---------
Total $ 271 $ 335 $ 887 $ 1,007
======== ======== ======== =========
</TABLE>
A summary of financial data reflected within the Consolidated Balance Sheet
follows:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
(in millions) 1993 1992 1992
------------- --------------- ------------ -------------
<S> <C> <C> <C>
Reinsurance Recoverables:
------------------------
Life business $ 78 $ 86 $ 95
Property-casualty business 4,096 4,082 4,944
------- ------- --------
Total $ 4,174 $ 4,168 $ 5,039
======= ======= ========
</TABLE>
Included within the September 30, 1993 reinsurance recoverable balance is a
current estimate of reinsurance recoverable from Lloyd's of London
(Lloyd's) of $336 million.
- 10 -
<PAGE>
THE TRAVELERS CORPORATION AND SUBSIDIARIES
Notes to Financial Statements (continued)
September 30, 1993
8. Components of Net Income (Loss)
(in millions)
<TABLE>
<CAPTION>
Quarter Nine Months
Ended September 30 Ended September 30
-------------------- --------------------
1993 1992 1993 1992
---- ---- ---- ----
<S> <C> <C> <C> <C>
Product Lines:
-------------
Property-Casualty Commercial Lines $ (153) $ (76) $ (50) $ (9)
Property-Casualty Personal Lines 30 (163) 80 (156)
Financial Services 42 8 112 40
Managed Care and Employee Benefits 46 (63) 110 (12)
Asset Management & Pension Services 9 (47) 18 101
Corporate and Other (10) (17) (18) (32)
------ ------ ------ ------
Consolidated Net Income (Loss) $ (36) $ (358) $ 252 $ (68)
====== ====== ====== ======
</TABLE>
- 11 -
<PAGE>
THE TRAVELERS CORPORATION AND SUBSIDIARIES
Notes to Financial Statements (continued)
September 30, 1993
9. Reconciliation of Statutory Basis to GAAP
The tables below and on page 13 reconcile consolidated statutory net income
(loss) and statutory capital and surplus computed in accordance with state
insurance regulatory practices with consolidated net income (loss) and
shareholders' equity as reported herein in conformity with GAAP.
<TABLE>
<CAPTION>
Nine Months
Ended September 30
-------------------------------
(in millions) 1993 1992
------------- --------- ---------
<S> <C> <C>
Net income (loss)
Statutory net income (loss)
Life companies $ (288) $ (138)
Property-casualty companies 13 (109)
--------- -------
Total (275) (247)
Adjustments to life and health reserves
and contractholder funds (83) (67)
Deferred acquisition costs 34 50
Equity in undistributed net income of
noninsurance subsidiaries 12 1
Timing of recognition of realized investment
gains and losses 524 137
Deferred federal income taxes 53 202
Cumulative effect of change in accounting
for postretirement benefits other than pensions,
net of tax - (258)
Cumulative effect of change in accounting
for income taxes - 428
Other (13) (314)
--------- -------
Net income (loss) $ 252 $ (68)
========= =======
</TABLE>
- 12 -
<PAGE>
THE TRAVELERS CORPORATION AND SUBSIDIARIES
Notes to Financial Statements (continued)
September 30, 1993
9. Reconciliation of Statutory Basis to
GAAP (cont.)
<TABLE>
<CAPTION>
September 30
------------------------------
(in millions) 1993 1992
---- ----
<S> <C> <C>
Shareholders' equity
Statutory capital and surplus
Life companies $ 1,462 $ 2,116
Property-casualty companies 1,665 1,676
-------- -------
Total 3,127 3,792
Adjustments to life and health reserves
and contractholder funds 253 247
Deferred acquisition costs 825 770
Valuation reserves, nonadmitted and other
asset adjustments 302 (171)
Deferred federal income taxes 1,326 1,131
Liability for postretirement benefits other
than pensions (389) (404)
Other liability adjustments, including
certain restructuring reserves (211) (599)
-------- -------
Shareholders' equity $ 5,233 $ 4,766
======== =======
10. Reconciliation of Net Income (Loss) to Net Cash
Used in Operating Activities
</TABLE>
The following table reconciles net income (loss) to net cash used in
operating activities:
<TABLE>
<CAPTION>
Nine Months
Ended September 30
------------------------------
(in millions) 1993 1992
------------- ---- ----
<S> <C> <C>
Net income (loss) $ 252 $ (68)
Reconciling adjustments:
Trading account investments,
(purchases) sales, net (433) (806)
Realized capital gains (120) (95)
Investment income accrued 18 7
Premium balances receivable 51 (123)
Deferred acquisition costs (34) (50)
Deferred federal income taxes (53) (202)
Cumulative effect of changes in
accounting principles - (170)
Insurance reserves and accrued expenses 190 518
Other (424) 438
-------- -------
Net cash used in operating activities $ (553) $ (551)
======== =======
</TABLE>
- 13 -
<PAGE>
THE TRAVELERS CORPORATION AND SUBSIDIARIES
Notes to Financial Statements (continued)
September 30, 1993
11. Primerica Merger
On September 23, 1993, Travelers and Primerica Corporation (Primerica)
announced a definitive agreement for Primerica to acquire through a merger
the remaining 73% of Travelers common stock it does not already own. The
proposed merger involves an exchange of .80423 shares of Primerica common
stock for each Travelers share. The new company will be named The
Travelers. The merger is subject to a vote of shareholders of both
companies and customary regulatory approvals, including approvals from a
number of state insurance commissions. The transaction will be accounted
for on a purchase accounting basis and is expected to be completed around
year-end 1993.
This transaction will cause Travelers to incur certain financial costs over
and above normal operating costs. These costs relate to transaction fees,
severance, stock options and restricted stock.
Travelers estimates that approximately $17 million of transaction fees will
be incurred, of which $4 million were incurred in the third quarter of
1993. These fees represent charges for investment bankers, legal counsel,
accountants, regulatory filings and costs associated with communications to
shareholders.
Employees who are involuntarily terminated between September 23, 1993
and the end of 1994 will receive four weeks severance for each completed
year of service, twice the normal level of severance. At this time,
Travelers has not been able to estimate the cost relating to the additional
two weeks severance. However, the cost for employees who are terminated
based on the current restructuring plan could range from $15 million to
$54 million after-tax. The estimated cost of this benefit will be
incurred at closing.
Stock options will vest in accordance with their terms. Option holders
will have the right during the 60 days immediately following shareholder
approval of the merger to exchange any unexercised stock options for cash
equal to the amount by which the "Change in Control Price" exceeds the
stock option purchase price per share, all as provided in the 1988 Stock
Incentive Plan. The cost relating to the options will depend on the
difference in the share price, the number of options in the money and the
number of option holders who elect to exercise their options. Primerica
will be offering an alternative stock option election which option holders
may choose in lieu of exercising or exchanging their options. For
illustrative purposes, if the "Change in Control Price" was $30.00 a share,
the after-tax cost of exchanging all stock options would be $18 million.
Similarly, if the "Change in Control Price" was $38.00 a share, the
after-tax cost of exchanging all stock options would be $46 million. The
cost of exchanging these options will be incurred when the merger is
approved.
Travelers has 862,361 shares of restricted stock outstanding. The
restrictions on certain of these shares will lapse with the approval of the
merger by Travelers shareholders. For illustrative purposes, if the
"Change in Control Price" was $30.00 a share, Travelers would incur an
after-tax cost of $8 million for these restricted shares. Alternatively,
if the "Change in Control Price" was $38.00 a share, Travelers would incur
an after-tax cost of $9 million for these restricted shares. The
additional cost of these restricted shares will be incurred when the merger
is approved.
- 14 -
<PAGE>
THE TRAVELERS CORPORATION AND SUBSIDIARIES
Notes to Financial Statements (continued)
September 30, 1993
12. Guarantees of the Securities of Other Issuers
As part of its regular insurance business in which a wide range of risks
are assumed to cover possible future economic loss by third parties,
Travelers underwrites insurance guaranteeing the securities of certain
issuers. The aggregate net amount of guarantees of principal and interest
for such securities was approximately $148 million at September 30, 1993
and $3 billion at December 31, 1992, respectively. Estimated net earned
premiums for the same periods amounted to $5 million and $7 million in 1993
and 1992, respectively. Premiums are earned pro rata over the policy term.
The related unearned premium reserve amounted to $1 million and $14 million
at September 30, 1993 and December 31, 1992, respectively.
Travelers participation in the Municipal Bond Insurance Association (MBIA)
has been reinsured to Municipal Bond Investors Assurance Corporation,
effective August 31, 1993. This accounts for the decline in the aggregate
net amount of guarantees of principal and interest and the reduction in the
unearned premium reserves at September 30, 1993.
13. Asbestos, Environmental Liability and Litigation Reserves
In the third quarter of 1993, Travelers added $325 million to its
reserves for asbestos and environmental liabilities, as well as for
blood-related claims for policies issued in the early 1980s. This addition
to reserves resulted in an after-tax charge of $211 million. Several
recent developments contributed to the decision to add to reserves. The
insurance industry is witnessing a growth in claims brought by outside
workers who allege exposure to asbestos while working on site at various
companies. There has been an increase in the incidence of this type of
claim during 1993. Travelers also has experienced a growth in
environmental claims primarily from smaller companies with lower coverage
limits and has been named as a defendant in coverage cases brought by other
insurers against their policyholders and the policyholders' other carriers.
14. Commitments and Contingencies
In response to the announcement of the anticipated merger with Primerica, a
number of proposed class action lawsuits were filed in state court in
Connecticut against Travelers, its directors and certain Primerica
directors. The complaints generally seek damages on behalf of shareholders
of Travelers based on the alleged inadequacy of the purchase price of
Travelers shares under the terms of the merger. Travelers and Primerica
will aggressively defend against these lawsuits.
The Travelers Corporation and certain of its subsidiaries were plaintiffs
in a recently settled lawsuit in Federal Court in Connecticut relating to
Separate Account "R", a real estate separate account that is administered
and managed by The Travelers Insurance Company. The defendant Account
participants filed counterclaims alleging that Travelers breached its
fiduciary obligations in the management of Separate Account "R". In
April 1993, Travelers entered into a class action settlement agreement
with all defendants, which resolved all counterclaims and, as a result,
all outstanding issues with the class of Account participants. Pursuant
to the final settlement, Travelers paid approximately $80 million to all
Account participants in August 1993, reimbursed a portion of the legal
fees incurred by defendant Account participants, and will ultimately
- 15 -
<PAGE>
THE TRAVELERS CORPORATION AND SUBSIDIARIES
Notes to Financial Statements (continued)
September 30, 1993
14. Commitments and Contingencies (cont.)
return to all Account participants the December 31, 1992 value of their
interests in the equity component of the Account. In 1992, Travelers
established a $53 million reserve for the estimated net cost of resolving
this lawsuit. In January 1993, Travelers filed a declaratory action in
Federal Court in New York against one of its errors and omissions insurers
in response to a denial of coverage for the Separate Account "R"
settlement. This litigation continues, after the court, in October 1993,
denied a Travelers motion to enforce a settlement agreement with this
insurer. Travelers is also pursuing resolution of its claim against its
remaining insurer. Travelers has established a receivable of $33 million
for its insurance claims which was reduced by $5 million in the third
quarter of 1993.
In February 1990, the New Jersey Department of Insurance filed an
administrative action, Fortunato v. Aetna Casualty & Surety Co. et al.,
seeking restitution from fifteen insurance companies, including Travelers,
arising from their acting as service carriers for the New Jersey Automobile
Full Insurance Underwriting Association. In June 1993, Travelers resolved
this action and received a Consent Order from the New Jersey Insurance
Department dismissing the action with prejudice. Compliance with the terms
of the settlement agreement was not material to the financial statements.
In April 1989, a lawsuit was filed against Travelers by the federal
government alleging Travelers improperly handled health benefit claims for
individuals who are actively employed and eligible for Medicare coverage.
In November 1992, the court ruled on cross motions for summary judgment.
The court found that Travelers had no liability when acting in the capacity
of an administrator of claims. However, the court also recognized that,
while the government's right of recovery with respect to insured claims is
governed by the substantive terms of our customer's health benefit plan,
the right of recovery is independent of procedural limitations in Travelers
contracts.
The Securities and Exchange Commission is conducting a nonpublic inquiry
pursuant to an order of investigation with respect to Travelers accounting,
reporting and disclosure treatment of certain matters in connection with
its lending and loss recognition practices pertaining to real estate
investments and related matters going back to January 1, 1988. Travelers
is cooperating fully with the Commission's staff.
Travelers is in litigation with certain underwriters at Lloyd's in New York
state court to enforce reinsurance contracts with respect to recoveries for
certain asbestos claims. The parties are awaiting a decision by the court
on a motion by Lloyd's to stay or dismiss the litigation in favor of
arbitration.
Certain of Travelers subsidiaries are involved in litigation with
respect to claims arising with regard to insurance, which is taken into
account in establishing benefit reserves. On insurance contracts written
many years ago, Travelers continues to receive claims asserting alleged
injuries and damages from asbestos and other hazardous and toxic
substances. In each of these areas of exposure (asbestos and
environmental losses) Travelers has endeavored to litigate individual
cases and settle claims on favorable terms. Given the vagaries of court
coverage decisions, plaintiffs' expanded theories of liability, the risks
inherent in major litigation and other uncertainties, it is not presently
possible to quantify the ultimate exposure represented by these claims to
Travelers financial condition, results of operations or liquidity. As a
result, Travelers expects that future earnings may be adversely affected,
although the amounts cannot be reasonably estimated. See "Management's
Discussion and Analysis - Commercial Lines" for further discussion.
The amount of related litigation costs was $33 million and $30 million for
the nine months ended September 30, 1993 and 1992, respectively. Third
quarter litigation costs were $9 million for both 1993 and 1992.
Travelers and/or its subsidiaries are defendants or co-defendants in
various litigation matters. Although there can be no assurances, as of the
end of the third quarter Travelers believes, based on information currently
available, that the ultimate resolution of these legal proceedings (other
than environmental and asbestos claims) would not be likely to have, but
may have, a material adverse effect on the results of operations.
- 16 -
<PAGE>
THE TRAVELERS CORPORATION AND SUBSIDIARIES
Notes to Financial Statements (continued)
September 30, 1993
15. Dispositions
In the third quarter of 1993, Travelers sold The Massachusetts Company
(TMC), its banking subsidiary. Travelers received cash proceeds of
$53 million. Consolidated assets and liabilities were reduced as a result
of this disposition. TMC assets, consisting primarily of mortgage loans and
fixed maturities, were $949 million at the date of sale. Liabilities,
consisting primarily of customer deposits, were $896 million at the date of
sale. The impact of this sale was insignificant to the consolidated
financial results of Travelers. Revenues, income before federal income
taxes and net income of TMC are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30
----------------
(in millions) 1993* 1992
---- ----
<S> <C> <C>
Revenues $ 20 $ 19
Income before federal income taxes 10 7
Net income 7 5
</TABLE>
* Through the date of sale.
16. Accounting Standards Not Yet Adopted
In November 1992, the Financial Accounting Standards Board (the Board)
issued Statement of Financial Accounting Standards No. 112, "Employers'
Accounting for Postemployment Benefits" (FAS 112). Travelers must adopt
FAS 112 for its financial statements for the year ended December 31, 1994.
FAS 112 establishes accounting standards for employers who provide
benefits to former or inactive employees after employment, but before
retirement. The statement requires employers to recognize the cost of the
obligation to provide these benefits on an accrual basis. Employers must
implement FAS 112 by recognizing a cumulative catch-up adjustment. Based
on preliminary estimates, Travelers obligation for benefits provided to
former or inactive employees after employment but before retirement is
projected to have a pretax impact of between $49 million and $59 million.
In May 1993, the Board issued Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairment of a Loan" (FAS 114).
Travelers must adopt FAS 114 for its financial statements no later than
January 1, 1995.
FAS 114 clarifies how a creditor should assess the need for a loan loss
accrual and describes how impaired loans should be measured when
determining the amount of a loan loss accrual. The statement also amends
existing guidance on the measurement of restructured loans in a troubled
debt restructuring involving a modification of terms. Travelers has not
yet determined the impact FAS 114 will have on its financial statements.
- 17 -
<PAGE>
THE TRAVELERS CORPORATION AND SUBSIDIARIES
Notes to Financial Statements (continued)
September 30, 1993
16. Accounting Standards Not Yet Adopted (cont.)
In May 1993, the Board issued Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Debt and Equity Securities" (FAS 115).
Travelers must adopt FAS 115 for its financial statements no later than
January 1, 1994.
FAS 115 addresses accounting and reporting for investments in equity
securities that have a readily determinable fair value and for all debt
securities. Those investments are to be classified in one of three
categories. Debt securities that will be held to maturity are to be
reported at amortized cost. Securities that are bought and held
principally for the purpose of selling them in the near term are to be
reported at fair value, with unrealized gains and losses included in
earnings. Securities that are neither to be held to maturity nor to be
sold in the near term are to be reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a component of
shareholders' equity. Travelers has not yet determined the impact FAS 115
will have on its financial statements. However, if Travelers was to report
all debt securities at fair value at September 30, 1993, shareholders'
equity would increase by approximately $895 million.
In March 1992, the Board issued Interpretation No. 39, "Offsetting of
Amounts Related to Certain Contracts" (Interpretation 39). Travelers must
adopt the provisions of Interpretation 39 for its first quarter 1994
financial statements.
Interpretation 39's general principle states that amounts due from and due
to another party may not be offset in the balance sheet unless a right of
setoff exists. Travelers currently maintains contracts where amounts due
from customers are offset against amounts due to related claimants.
Implementation of Interpretation 39 is not expected to have a material
impact on Travelers financial position, however, assets and liabilities
will be increased by like amounts.
- 18 -
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
On September 23, 1993 the Boards of Directors of both Primerica and The
Travelers announced a definitive agreement for Primerica to purchase the
remaining approximately 73% of Travelers' Common Stock, $1.25 par value per
share ("Travelers Common Stock"), it does not already own. Pursuant to that
agreement, The Travelers will merge with and into Primerica, subject to
certain conditions (the "Merger"). The Merger involves an exchange of .80423
shares of Primerica's Common Stock, $.01 par value per share, for each share
of Travelers Common Stock. In addition, each share of outstanding $4.53
Series A ESOP Convertible Preference Stock, without par value, of The
Travelers and 9.25% Series B Preference Stock, without par value, of The
Travelers, other than, in each case, shares held by shareholders who properly
exercise dissenters' rights under Connecticut law and other than shares held
by Primerica or The Travelers, will be converted into one share of
$4.53 ESOP Convertible Preferred Stock, Series C, of Primerica and 9.25%
Preferred Stock, Series D, of Primerica, respectively, which will have
substantially the same rights and privileges as the shares so converted. The
purchase price used in the accompanying pro forma condensed consolidated
financial statements of approximately $4.1 billion is based upon the exchange
ratio applied to the quoted market price of Primerica's Common Stock on
September 22, 1993 and multiplied by the number of outstanding shares of
Travelers Common Stock at September 30, 1993, not already owned by Primerica
and its subsidiaries, plus the premium over book value at September 22, 1993
related to the two issues of Preference Stock being exchanged in the Merger.
The following unaudited pro forma condensed consolidated statements of
income of Primerica for the nine months ended September 30, 1993 and year ended
December 31, 1992, present consolidated operating results for Primerica as if
Primerica's planned acquisition of approximately 73% of the Common Stock of The
Travelers not previously owned by Primerica had occurred as of January 1, 1992.
The accompanying unaudited pro forma condensed consolidated statement of
financial position as of September 30, 1993 gives effect to the 73% acquisition
as if it had occurred as of September 30, 1993. The unaudited pro forma
consolidated financial data do not purport to represent what Primerica's
financial position or results of operations actually would have been had the
acquisition in fact occurred on the dates indicated, or to project Primerica's
financial position or results of operations for any future date or period. The
pro forma adjustments are based upon available information and certain
assumptions that Primerica currently believes are reasonable in the
circumstances. The unaudited pro forma consolidated financial information should
be read in conjunction with the accompanying notes thereto; the separate
historical financial statements of Primerica as of and for the nine months ended
September 30, 1993, and for the year ended December 31, 1992 which are contained
in Primerica's Form 10-Q for the quarterly period ended September 30, 1993 and
in its Annual Report on Form 10-K for the fiscal year ended December 31, 1992,
respectively; and the unaudited pro forma financial information as of and for
the nine months ended September 30, 1993, and for the year ended December 31,
1992, which reflect Primerica's acquisition of the domestic retail brokerage and
asset management businesses of Shearson Lehman Brothers Holdings Inc. and
acquisition of approximately 27% of the Common Stock of The Travelers, and which
are contained in Exhibit 99.01 to Primerica's Form 10-Q for the quarterly period
ended September 30, 1993 and in Annex B to Item 5 of Primerica's Report on Form
8-K dated April 28, 1993, respectively.
The pro forma adjustments and combined amounts are provided for
informational purposes only, and if the acquisition is consummated, Primerica's
financial statements will reflect the effects of the acquisition only from the
date such acquisition occurs. The pro forma adjustments are applied to the
historical consolidated financial statements of Primerica and The Travelers to
account for the acquisition as a purchase. Under purchase accounting, the total
purchase cost will be allocated to The Travelers' assets and liabilities based
on their relative fair values. Allocations are subject to valuations as of the
date of the acquisition based on appraisals and other studies, which are not yet
completed. Accordingly, the final allocations will be different from the amounts
reflected herein. Although the final allocation will differ, the pro forma
condensed financial information reflects management's best estimate based on
currently available information.
<PAGE>
PRIMERICA CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT
OF FINANCIAL POSITION
AS OF SEPTEMBER 30, 1993
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
RECLASSIFICATION
AND PRO FORMA
TRAVELERS ELIMINATION ADJUSTMENTS
PRIMERICA HISTORICAL OF HISTORICAL RELATING TO PRO FORMA
HISTORICAL (100%) AMOUNTS(A) THE MERGER PRIMERICA
--------- --------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents...................... $ 1,919.4 $ 1,184.3 $ 3,103.7
Investments:
Fixed maturities:
Available for sale....................... 2,534.4 2,534.4
Held for investment...................... 59.4 15,439.5 $ 114.5 $ 929.0(C) 16,542.4
Trading portfolio securities............. 8,877.6 8,877.6
Equity securities, at market................. 216.0 311.5 527.5
Mortgage loans............................... 310.7 7,853.3 (118.3) (128.3)(C) 7,917.4
Investment real estate, net of accumulated
depreciation............................. 1,123.1 (774.8)(B)
(348.3)(C)
Real estate held for sale, net of accumulated
depreciation............................. 1,362.4 (73.9) 774.8(B) 2,063.3
Policy loans................................. 159.8 1,214.8 1,374.6
Short-term and other......................... 877.1 1,921.2 9.3 45.9(C) 2,853.5
--------- --------- ------------- ----------- ----------
Total investments...................... 4,157.4 38,103.4 (68.4) 498.3 42,690.7
--------- --------- ------------- ----------- ----------
Net consumer finance receivables............... 5,926.3 5,926.3
Trading securities owned, at market value...... 6,607.1 6,607.1
Securities borrowed or purchased under
agreements to resell......................... 12,703.9 12,703.9
Brokerage receivables.......................... 8,299.7 8,299.7
Value of insurance in force and deferred policy
acquisition costs............................ 1,390.6 824.9 (140.1) (40.3)(C) 2,035.1
Cost of acquired businesses in excess of net
assets....................................... 1,294.0 92.1 (13.4) 1,064.9(C) 2,437.6
Investment in The Travelers Corporation........ 891.6 (891.6)
Separate and variable accounts................. 6,235.8 6,235.8
Other assets................................... 4,070.6 10,632.0 (106.7) (6.7)(C) 14,456.0
(133.2)(D)
--------- --------- ------------- ----------- ----------
Total assets........................... $47,260.6 $57,072.5 $(1,220.2) $ 1,383.0 $104,495.9
--------- --------- ------------- ----------- ----------
--------- --------- ------------- ----------- ----------
LIABILITIES
Investment banking and brokerage borrowings.... $ 2,633.1 $ 2,633.1
Short-term borrowings.......................... 1,840.8 1,840.8
Long-term debt................................. 6,246.4 $ 947.8 $ 12.2 $ 60.4(C) 7,266.8
Trading securities sold not yet purchased, at
market value................................. 3,868.7 3,868.7
Securities loaned or sold under agreements to
repurchase................................... 12,540.7 12,540.7
Contractholder funds........................... 18,295.7 37.9 305.8(C) 18,639.4
Insurance policy and claims reserves........... 3,109.2 23,020.4 (1.9) 451.5(C) 26,579.2
Brokerage payables............................. 5,896.8 5,896.8
Separate and variable accounts................. 6,134.3 11.8 50.7(C) 6,196.8
Accounts payable and other liabilities......... 5,678.0 3,331.7 33.0 42.8(C) 8,952.3
(133.2)(D)
--------- --------- ------------- ----------- ----------
Total liabilities...................... 41,813.7 51,729.9 93.0 778.0 94,414.6
--------- --------- ------------- ----------- ----------
Travelers ESOP preference stock--series A...... 234.9 234.9
Guaranteed ESOP obligation..................... (124.9) (124.9)
--------- ----------
110.0 110.0
--------- ----------
STOCKHOLDERS' EQUITY
Primerica preferred stock--series A............ 300.0 300.0
Primerica 5.5 % convertible preferred
stock--series B.............................. 125.0 125.0
Travelers preference stock--series B........... 375.0 375.0
Common stock................................... 2.6 183.3 (182.3)(E) 3.6
Additional paid-in capital..................... 2,613.3 1,441.6 (421.6) 605.0(C) 7,052.0
(891.6) 3,705.3(E)
Retained earnings.............................. 2,897.4 2,898.9 (2,898.9)(E) 2,897.4
Treasury stock, at cost........................ (457.4) (29.5) 29.5(E) (730.1)
(272.7)(E)
Unearned compensation--restricted stock........ (90.5) (17.6) (108.1)
Other.......................................... 56.5 380.9 (380.9)(E) 56.5
--------- --------- ------------- ----------- ----------
Total stockholders' equity............. 5,446.9 5,232.6 (1,313.2) 605.0 9,971.3
--------- --------- ------------- ----------- ----------
Total liabilities and stockholders'
equity............................... $47,260.6 $57,072.5 $(1,220.2) $ 1,383.0 $104,495.9
--------- --------- ------------- ----------- ----------
--------- --------- ------------- ----------- ----------
</TABLE>
See Accompanying Notes
<PAGE>
PRIMERICA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL
POSITION
(IN MILLIONS OF DOLLARS)
<TABLE>
<S> <C>
(A) Adjustments to eliminate Primerica's existing 27% interest in The Travelers, reported on the equity basis of
accounting, and to reclassify the statement of financial position to reflect consolidation accounting, including an
adjustment to reflect the reduction in stockholders' equity resulting from the excess of historical book value over the
purchase price of the 27% investment, amounting to $421.6.
(B) Pro forma adjustment to reclassify The Travelers' investment real estate to real estate held for sale.
The accompanying historical financial statements of The Travelers reflect its present strategy with respect to its
portfolio of real estate assets. Primerica has tentatively planned that, upon gaining control through the Merger,
substantially all investment real estate will be disposed of by sale or otherwise over a two to three year period. The
values allocated in Note C below reflect Primerica's estimate of amounts to be realized on that basis.
No valuation adjustment has been reflected in the accompanying pro forma financial statements for real estate presently
carried by The Travelers in the held for sale category. The experience developed with 1993 sales activity indicates
that losses on real estate presently characterized as held for sale have increased for certain individual properties.
Therefore, The Travelers will be recording an incremental loss provision in the fourth quarter of 1993 of $165 before
federal income tax benefit. The effect of reflecting this additional loss in the allocation of the purchase price would
be to increase goodwill amortization to expense by approximately $2.0 on an annual basis.
In the accompanying pro forma financial statements, mortgage loans are generally assumed to be held for investment and
are valued based upon current market yields taking into account the estimated current risk status of the loans (see
Note C below). An alternative strategy being considered by Primerica may involve the disposition of a substantial
portion of such loans and reinvestment of the proceeds in other types of investments. In that case, the values realized
from sale of the mortgage loans could be less than the values assigned in the accompanying purchase accounting
allocation. While assessment of this strategy is still in progress, preliminary analysis indicates that the additional
reduction in value which would result, if this strategy were adopted, could approximate $300. This would result in
incremental goodwill amortization to expense of approximately $4.5 on an annual basis.
(C) Pro forma adjustments resulting from allocation of purchase price based on relative fair values of underlying net
assets acquired. The amounts and assumptions relating to the principal adjustments are as follows:
Assets
</TABLE>
<TABLE>
<S> <C>
DEBIT
(CREDIT)
-------------
Premium allocated to investments in fixed maturities held for investment based on fair value of
the securities..................................................................................... $ 929.0
Discount allocated to investments in mortgage loans based on fair value using estimated current
market yields reflecting the credit risk and term of each loan, with a weighted average yield
of 9.87%........................................................................................... $ (128.3)
Adjustment of carrying amount of investment real estate to estimated selling prices based upon
application of capitalization rates (primarily 10% to 12%), comparisons to specific market
sales and discounted cash flow analyses............................................................ $ (348.3)
Premium allocated to investment partnerships based on fair value of underlying investments........... $ 45.9
Actuarially determined present value of projected future profits, discounted at interest rates
ranging from 14% to 18%, from life and accident and health insurance business acquired, net of
elimination of deferred acquisition costs related to such business, at book value.................. $ (40.3)
Excess purchase price over fair value of net assets acquired of $1,132.4, net of 73% of carrying
amount of Travelers recorded goodwill.............................................................. $ 1,064.9
</TABLE>
<PAGE>
PRIMERICA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL
POSITION (CONTINUED)
(IN MILLIONS OF DOLLARS)
<TABLE>
<S> <C>
Liabilities
Premium allocated to long-term debt based on current interest rates.............................. $ (60.4)
Premium allocated to investment contracts with fixed maturities, participating group pension
contracts and annuities in the payout phase with minimal or no mortality risk included in
contractholder funds, determined by discounting expected cash flows at interest rates
reflecting current pricing. Interest rates used in the valuations range from 2.5% to 6.5%..... $ (305.8)
Premium allocated to annuities in the payout phase and life and accident and health business
included in insurance policy and claims reserves, reflecting current pricing as well as
mortality and morbidity assumptions consistent with current actuarial tables. Interest rates
used in the valuations range from 2.5% to 6.5%................................................ $ (451.5)
Premium allocated to separate and variable accounts representing guaranteed payments............. $ (50.7)
Other Liabilities
</TABLE>
<TABLE>
<S> <C> <C>
Excess of existing operating lease obligations over fair value of such
obligations, based on current market rental rates..................................... $ (153.3)
Amount allocated to liabilities for estimated cost of restructuring businesses
acquired.............................................................................. (110.0)
Actuarially determined amount allocated to pension, postretirement and
postemployment benefit obligations.................................................... (181.1)
Net deferred tax benefit resulting from allocation of purchase price.................... 247.7
Elimination of deferred revenue items................................................... 148.7
Other................................................................................... 5.2
Total Other Liabilities............................................................... $ (42.8)
</TABLE>
<TABLE>
<S> <C>
(D) Pro forma adjustment to eliminate The Travelers' investment in Gulf Insurance Company and subsidiaries (subsidiaries of
Primerica) and the related minority interest.
(E) Represents the following pro forma adjustments:
Adjustments to account for the issuance of approximately 86 million shares of Primerica Common Stock in connection with
Primerica's planned acquisition of the approximately 73% of Travelers Common Stock not previously owned and
approximately 10 million shares issued to subsidiaries of Primerica in exchange for The Travelers' shares held by the
subsidiaries. The Primerica Common Stock to be issued to subsidiaries is reported in the accompanying pro forma
statement of financial position as treasury stock at the carrying amount at September 30, 1993 of the subsidiaries'
investment in The Travelers of $272.7.
Adjustments to eliminate The Travelers' historical common equity.
</TABLE>
<PAGE>
PRIMERICA CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993
(IN MILLIONS OF DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
RECLASSIFICATION
PRO FORMA AND PRO FORMA
PRIMERICA TRAVELERS ELIMINATION ADJUSTMENTS PRO FORMA
BEFORE HISTORICAL OF HISTORICAL RELATING TO PRIMERICA
TRANSACTION (100%) AMOUNTS(1) THE MERGER COMBINED
----------- ---------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
REVENUES
Insurance premiums........................ $ 1,101.4 $ 4,981.8 $ 6,083.2
Net investment income..................... 630.7 1,956.5 $ (46.9) $ (137.0)(2) 2,403.3
Realized investment gains................. 246.5 (20.4) (5.0)(3) 221.1
Finance related interest and
other charges........................... 706.7 706.7
Commissions and fees...................... 2,228.5 2,228.5
Principal transactions.................... 669.5 669.5
Equity in income of
The Travelers Corporation............... 128.0 (128.0)
Other income.............................. 969.0 669.5 (0.9) (2.7)(2) 1,624.8
(10.1)(3)
----------- ---------- -------------- ------------ -----------
Total revenues..................... 6,433.8 7,854.3 (196.2) (154.8) 13,937.1
----------- ---------- -------------- ------------ -----------
EXPENSES
Policyholder benefits and claims.......... 617.6 5,295.3 (109.5) (16.6)(2) 5,786.8
Interest credited to contractholders...... 913.9 (20.7) (56.2)(2) 837.0
Insurance underwriting, acquisition and
operating................................. 380.8 393.2 (12.4) (19.0)(2) 742.6
Non-insurance compensation and benefits... 2,401.6 2,401.6
Interest.................................. 554.5 93.1 (0.9) (6.5)(2) 640.2
Provision for credit losses............... 94.9 94.9
Other operating........................... 1,069.6 950.8 (24.9) (5.9)(2) 2,010.1
21.2(2)
(0.7)(3)
----------- ---------- -------------- ------------ -----------
Total expenses..................... 5,119.0 7,646.3 (168.4) (83.7) 12,513.2
----------- ---------- -------------- ------------ -----------
Gain on sale of subsidiaries and
affiliates.............................. 12.8 12.8
----------- ---------- -------------- ------------ -----------
Income (loss) before income taxes,
minority interest and cumulative effect
of changes in accounting principles..... 1,327.6 208.0 (27.8) (71.1) 1,436.7
Provision for income taxes................ 507.7 (43.7) (3.1) (14.3)(4) 446.6
----------- ---------- -------------- ------------ -----------
Income (loss) before minority interest and
cumulative effect of changes in
accounting principles................... 819.9 251.7 (24.7) (56.8) 990.1
Minority interest, net of income taxes.... (18.9) 18.9(3)
----------- ---------- -------------- ------------ -----------
Income (loss) before cumulative effect of
changes in accounting principles........ $ 801.0 $ 251.7 $ (24.7) $ (37.9) $ 990.1
----------- ---------- -------------- ------------ -----------
----------- ---------- -------------- ------------ -----------
INCOME PER SHARE OF COMMON STOCK AND
COMMON STOCK EQUIVALENTS
Before cumulative effect of changes in
accounting principles................... $ 3.25 $ 2.85(5)
----------- -----------
----------- -----------
Weighted average common shares outstanding
and common stock equivalents (in
millions)............................... 239.4 325.3(5)
----------- -----------
----------- -----------
</TABLE>
See Accompanying Notes
<PAGE>
PRIMERICA CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1992
(IN MILLIONS OF DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
PRIMERICA TRAVELERS RECLASSIFICATION ADJUSTMENTS PRO FORMA
BEFORE HISTORICAL AND RELATING TO PRIMERICA
TRANSACTION (100%) ELIMINATION(1) THE MERGER COMBINED
----------- ----------- --------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
REVENUES
Insurance premiums......................... $ 1,693.5 $ 6,688.0 $ 8,381.5
Net investment income...................... 826.2 2,799.0 $ (67.8) $ (215.6)(2) 3,341.8
Realized investment losses................. (635.0) (635.0)
Finance related interest and other
charges.................................. 952.7 952.7
Commissions and fees....................... 2,407.1 2,407.1
Principal transactions..................... 860.9 860.9
Equity in income of The Travelers
Corporation.............................. (202.6) 202.6
Other income............................... 1,155.9 823.0 (1.3) (4.5)(2) 1,973.1
----------- ----------- --------------- ------------ -----------
Total revenues...................... 7,693.7 9,675.0 133.5 (220.1) 17,282.1
----------- ----------- --------------- ------------ -----------
EXPENSES
Policyholder benefits and claims........... 906.8 7,147.0 0.1 (22.7)(2) 8,031.2
Interest credited to
contractholders.......................... 1,456.0 (26.9) (114.6)(2) 1,314.5
Insurance underwriting, acquisition and
operating................................ 673.7 558.0 (16.6) 0.5(2) 1,215.6
Non-insurance compensation and benefits.... 2,782.2 2,782.2
Interest................................... 824.7 149.8 (1.2) (8.6)(2) 964.7
Provision for credit losses................ 165.3 165.3
Other operating............................ 1,386.1 1,718.2 (39.0) (7.8)(2) 3,085.8
28.3(2)
----------- ----------- --------------- ------------ -----------
Total expenses...................... 6,738.8 11,029.0 (83.6) (124.9) 17,559.3
----------- ----------- --------------- ------------ -----------
Gain on sale of subsidiaries and
affiliates............................... 187.6 187.6
----------- ----------- --------------- ------------ -----------
Income (loss) before income taxes, minority
interest and cumulative effect of changes
in accounting principles................. 1,142.5 (1,354.0) 217.1 (95.2) (89.6)
Provision for income taxes................. 415.3 (526.0) 83.7 (24.0)(4) (51.0)
----------- ----------- --------------- ------------ -----------
Income (loss) before minority interest and
cumulative effect of changes in
accounting principles.................... 727.2 (828.0) 133.4 (71.2) (38.6)
Minority interest, net of income
taxes.................................... (19.8) 19.8(3)
----------- ----------- --------------- ------------ -----------
Income (loss) before cumulative effect of
changes in accounting
principles............................... $ 707.4 $ (828.0) $ 133.4 $ (51.4) $ (38.6)
----------- ----------- --------------- ------------ -----------
----------- ----------- --------------- ------------ -----------
INCOME PER SHARE OF COMMON STOCK AND COMMON
STOCK EQUIVALENTS
Before cumulative effect of changes in
accounting principles.................... $ 2.83 $ (0.38)(5)
----------- -----------
----------- -----------
Weighted average common shares outstanding
and common stock equivalents (in
millions)................................ 238.3 315.9(5)
----------- -----------
----------- -----------
</TABLE>
See Accompanying Notes
<PAGE>
PRIMERICA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS OF DOLLARS)
PRO FORMA ADJUSTMENTS RELATING TO THE PLANNED ACQUISITION OF THE APPROXIMATELY
73% OF TRAVELERS COMMON STOCK NOT PREVIOUSLY OWNED BY PRIMERICA.
(1) Adjustments to eliminate Primerica's existing 27% interest in the historical
earnings of The Travelers, reported on the equity basis of accounting, and
to reclassify the statement of income to reflect consolidation accounting.
(2) Principal adjustments resulting from the allocation of purchase price based
on relative fair value of underlying net assets, as follows: amortization of
premium or discount allocated to investments on a level yield basis over the
life of the investments ($137.0 in 1993; $215.6 in 1992); amortization of
the present value of projected future profits of life and accident and
health business over the estimated contract periods, using current interest
crediting rates ranging from 5% to 6.5% to accrete interest, net of
elimination of amortization of deferred acquisition costs related to such
business ($(19.0) in 1993; $0.5 in 1992); amortization of the premium
associated with contractholder funds on a level yield basis or in relation
to amortization of the premium or discount allocated to the assets
supporting the liabilities ($56.2 in 1993; $114.6 in 1992); amortization of
the actuarially determined liabilities using current interest and actuarial
assumptions for certain life and accident and health business ($16.6 in
1993; $22.7 in 1992); amortization of premium allocated to long term debt
using the interest method at current interest rates ($6.5 in 1993; $8.6 in
1992); and amortization of excess of purchase price over fair value of net
assets acquired over 40 years ($21.2 in 1993; $28.3 in 1992). All other pro
forma adjustments to pre-tax income resulting from purchase accounting
amount to a net benefit of $3.2 in 1993 and $3.3 in 1992.
(See Notes B and C of Notes to the Unaudited Pro Forma Condensed
Consolidated Statement of Financial Position for additional information.)
(3) Adjustment to eliminate The Travelers' equity in the income of Gulf
Insurance Company and subsidiaries (subsidiaries of Primerica) and the
related minority interest.
(4) Adjustment to reflect the income tax effects of (2) and (3) above.
(5) Income per share of Common Stock includes the effect of the issuance of
approximately 86 million shares of Primerica Common Stock in connection with
the acquisition as though they were outstanding since January 1, 1992. In
addition, income per share of Common Stock includes the pro forma effect of
the payment of preferred dividends as if Travelers Series A Preference Stock
and Travelers Series B Preference Stock, which will be exchanged for
Primerica Preferred Stock having substantially identical terms, had been
outstanding since January 1, 1992.
