UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
______________
FORM 10-Q
|x| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _______
______________
Commission file number 1-9924
______________
Travelers Group Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-1568099
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
388 Greenwich Street, New York, New York 10013
(Address of principal executive offices) (Zip Code)
(212) 816-8000
(Registrant's telephone number, including area code)
______________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No__
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Common stock outstanding as of October 31, 1996: 638,936,705
(adjusted to give effect to the four-for-three stock split
payable on November 22, 1996)
<PAGE>
Travelers Group Inc.
TABLE OF CONTENTS
-----------------
Part I - Financial Information
Item 1. Financial Statements: Page No.
--------
Condensed Consolidated Statement of Income (Unaudited) -
Three and Nine Months Ended September 30, 1996 and 1995 3
Condensed Consolidated Statement of Financial Position -
September 30, 1996 (Unaudited) and December 31, 1995 4
Condensed Consolidated Statement of Changes in
Stockholders' Equity
(Unaudited) - Nine Months Ended September 30, 1996 5
Condensed Consolidated Statement of Cash Flows (Unaudited) -
Nine Months Ended September 30, 1996 and 1995 6
Notes to Condensed Consolidated Financial
Statements - (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Part II - Other Information
Item 1. Legal Proceedings 34
Item 6. Exhibits and Reports on Form 8-K 34
Exhibit Index 35
Signatures 36
2
<PAGE>
Travelers Group Inc. and Subsidiaries
Condensed Consolidated Statement of Income (Unaudited)
(In millions of dollars, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Insurance premiums $ 2,197 $ 1,298 $ 5,513 $ 3,893
Commissions and fees 794 784 2,560 2,074
Interest and dividends 1,484 1,090 4,027 3,254
Finance related interest
and other charges 292 285 863 833
Principal transactions 243 255 786 762
Asset management fees 343 272 991 751
Other income 269 306 823 855
- ------------------------------------------------------------------------------------
Total revenues 5,622 4,290 15,563 12,422
- ------------------------------------------------------------------------------------
Expenses
Policyholder benefits and claims 1,947 1,301 5,537 3,964
Non-insurance compensation and benefits 904 898 2,834 2,548
Insurance underwriting, acquisition
and operating 799 475 2,166 1,427
Interest 580 489 1,640 1,462
Provision for consumer finance
credit losses 60 41 188 122
Other operating 404 379 1,254 1,140
- ------------------------------------------------------------------------------------
Total expenses 4,694 3,583 13,619 10,663
- ------------------------------------------------------------------------------------
Gain (loss) on sale of subsidiaries
and affiliates -- -- 397 --
- ------------------------------------------------------------------------------------
Income before income taxes and
minority interest 928 707 2,341 1,759
Provision for income taxes (323) (251) (684) (621)
Minority interest, net of income taxes (44) -- 0 --
- ------------------------------------------------------------------------------------
Income from continuing operations 561 456 1,657 1,138
- ------------------------------------------------------------------------------------
Discontinued operations, net of
income taxes:
Income from operations -- 25 -- 69
Gain on disposition 31 -- 31 20
- ------------------------------------------------------------------------------------
Net income $ 592 $ 481 $ 1,688 $ 1,227
====================================================================================
Net income per share of common
stock and common stock
equivalents (1):
Continuing operations $0.84 $0.68 $2.49 $1.70
Discontinued operations 0.04 0.04 0.04 0.14
- ------------------------------------------------------------------------------------
Net income $0.88 $0.72 $2.53 $1.84
====================================================================================
Weighted average number of
common shares outstanding
and common stock equivalents
(millions) (1) 639.0 636.4 637.2 633.9
====================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
(1) Current and prior year information has been restated to reflect stock
splits (see Note 1 of Notes to Condensed Consolidated Financial
Statements).
3
<PAGE>
Travelers Group Inc. and Subsidiaries
Condensed Consolidated Statement of Financial Position
(In millions of dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
- ---------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents
(including $1,123 and $1,072 segregated under federal and
other regulations) $ 1,635 $ 1,866
Investments and real estate held for sale:
Fixed maturities, primarily available for sale at market value
(amortized cost - $42,454 and $29,652) 42,578 30,712
Equity securities, at market (cost - $1,109 and $759) 1,201 856
Mortgage loans 3,969 4,048
Real estate held for sale 693 321
Policy loans 1,910 1,888
Short-term and other 5,235 3,140
- ---------------------------------------------------------------------------------------------------------
Total investments and real estate held for sale 55,586 40,965
- ---------------------------------------------------------------------------------------------------------
Securities borrowed or purchased under agreements to resell 23,148 19,601
Brokerage receivables 7,307 6,559
Trading securities owned, at market value 10,806 8,984
Net consumer finance receivables 7,559 7,092
Reinsurance recoverables 10,672 6,461
Value of insurance in force and deferred policy acquisition costs 2,508 2,172
Cost of acquired businesses in excess of net assets 2,922 1,928
Separate and variable accounts 8,191 6,949
Other receivables 5,385 3,564
Other assets 8,735 7,775
- ---------------------------------------------------------------------------------------------------------
Total assets $144,454 $113,916
=========================================================================================================
Liabilities
Investment banking and brokerage borrowings $ 2,781 $ 2,955
Short-term borrowings 2,425 1,468
Long-term debt 10,276 9,190
Securities loaned or sold under agreements to repurchase 24,179 20,619
Brokerage payables 3,779 4,403
Trading securities sold not yet purchased, at market value 6,812 4,563
Contractholder funds 13,984 14,535
Insurance policy and claims reserves 44,531 26,920
Separate and variable accounts 8,148 6,916
Accounts payable and other liabilities 14,211 10,469
- ---------------------------------------------------------------------------------------------------------
Total liabilities 131,126 102,038
- ---------------------------------------------------------------------------------------------------------
ESOP Preferred stock - Series C 167 235
Guaranteed ESOP obligation (35) (67)
- ---------------------------------------------------------------------------------------------------------
132 168
TAP-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts holding solely Junior Subordinated Debt Securities 900 --
- ---------------------------------------------------------------------------------------------------------
Stockholders' equity (1)
Preferred stock at aggregate liquidation value 675 800
Common stock ($.01 par value; authorized shares: 1.5 billion;
issued shares: 1996 - 743,098,811 shares and 1995 - 736,322,514 shares) 7 7
Additional paid-in capital 7,131 6,782
Retained earnings 6,900 5,503
Treasury stock, at cost (1996 - 103,534,657 shares, 1995 -
103,848,820 shares) (2,181) (1,835)
Unrealized gain (loss) on investment securities 136 756
Other, principally unearned compensation (372) (303)
- ---------------------------------------------------------------------------------------------------------
Total stockholders' equity 12,296 11,710
- ---------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $144,454 $113,916
=========================================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
(1) Current and prior year information has been restated to reflect stock splits
(see Note 1 of Notes to Condensed Consolidated Financial Statements).
4
<PAGE>
Travelers Group Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
(In millions of dollars)
Nine months ended September 30, 1996 Amount Shares
- --------------------------------------------------------------------------------
Preferred stock at aggregate liquidation value (in thousands)
Balance, beginning of year $ 800 11,200
Conversion of Series B preferred stock to common stock (125) (2,500)
- --------------------------------------------------------------------------------
Balance, end of period 675 8,700
================================================================================
Common stock and additional paid-in capital
Balance, beginning of year (1) 6,789 736,323
Conversion of Series B preferred stock to common stock 125 6,802
Issuance of shares pursuant to employee benefit plans 251 (26)
Other (27) --
- --------------------------------------------------------------------------------
Balance, end of period 7,138 743,099
- --------------------------------------------------------------------------------
Retained earnings
Balance, beginning of year 5,503
Net income 1,688
Common dividends (215)
Preferred dividends (76)
- ---------------------------------------------------------------
Balance, end of period 6,900
- ---------------------------------------------------------------
Treasury stock (at cost)
Balance, beginning of year (1) (1,835) (103,849)
Issuance of shares pursuant to employee benefit
plans, net of shares tendered for payment of
option exercise price and withholding taxes 86 13,903
Treasury stock acquired (432) (13,589)
- --------------------------------------------------------------------------------
Balance, end of period (2,181) (103,535)
- --------------------------------------------------------------------------------
Unrealized gain (loss) on investment securities
Balance, beginning of year 756
Net change in unrealized gains and losses on
investment securities, net of tax (620)
- ---------------------------------------------------------------
Balance, end of period 136
- ---------------------------------------------------------------
Other, principally unearned compensation
Balance, beginning of year (303)
Restricted stock activity, net of amortization (156)
Other 87
- ---------------------------------------------------------------
Balance, end of period (372)
- ---------------------------------------------------------------
Total common stockholders' equity
and common shares outstanding $11,621
===============================================================
Total stockholders' equity $12,296 639,564
================================================================================
See Notes to Condensed Consolidated Financial Statements.
(1) Current and prior year information has been restated to reflect stock
splits (see Note 1 of Notes to Condensed Consolidated Financial
Statements).
5
<PAGE>
Travelers Group Inc. and Subsidiaries
Condensed Consolidated Statement of Cash Flows (Unaudited)
(In millions of dollars)
<TABLE>
<CAPTION>
Nine months ended September 30, 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Income from continuing operations before
income taxes and minority interest $ 2,341 $ 1,759
Adjustments to reconcile income from
continuing operations before income
taxes, to net cash provided by (used in)
operating activities:
Amortization of deferred policy acquisition
costs and value of insurance in force 864 603
Additions to deferred policy acquisition costs (1,009) (651)
Depreciation and amortization 256 225
Provision for consumer finance credit losses 188 122
Changes in:
Trading securities, net 427 (1,301)
Securities borrowed, loaned and
repurchase agreements, net 13 5,261
Brokerage receivables net of brokerage payables (1,372) (3,149)
Insurance policy and claims reserves 369 542
Other, net 1,115 401
Net cash flows provided by (used in) operating
activities of discontinued operations 48 (550)
- -------------------------------------------------------------------------------------------
Net cash provided by (used in) operations 3,240 3,262
Income taxes paid (532) (389)
- -------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 2,708 2,873
- -------------------------------------------------------------------------------------------
Cash flows from investing activities
Consumer loans originated or purchased (2,453) (2,050)
Consumer loans repaid or sold 1,898 1,657
Purchases of fixed maturities and equity securities (23,764) (12,431)
Proceeds from sales of investments and real estate:
Fixed maturities available for sale and equity securities 19,785 10,177
Mortgage loans 201 446
Real estate and real estate joint ventures 180 199
Proceeds from maturities of investments:
Fixed maturities 2,483 2,064
Mortgage loans 570 386
Other investments, primarily short term, net (117) (1,212)
Business acquisition (4,160) --
Other, net (40) (218)
Net cash flows provided by (used in) investing activities
of discontinued operations -- 927
- -------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (5,417) (55)
- -------------------------------------------------------------------------------------------
Cash flows from financing activities
Dividends paid (291) (256)
Subsidiary issuance of preferred stock 900 --
Subsidiary's sale of Class A common stock 1,453 --
Treasury stock acquired (432) (293)
Issuance of long-term debt 1,590 2,975
Payments and redemptions of long-term debt (468) (1,227)
Net change in short-term borrowings (including
investment banking and brokerage borrowings) 783 (3,040)
Contractholder fund deposits 1,329 2,026
Contractholder fund withdrawals (2,194) (2,746)
Other, net (192) (22)
- -------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 2,478 (2,583)
- -------------------------------------------------------------------------------------------
Change in cash and cash equivalents (231) 235
Cash and cash equivalents at beginning of period 1,866 1,227
- -------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,635 $ 1,462
- -------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,595 $ 1,339
Book value of distribution of Transport
Holdings Inc. shares -- $ 189
===========================================================================================
Supplemental schedule of noncash investing and
financing activities
Assets and liabilities of business acquired:
Invested assets $ 13,894
Reinsurance recoverables and other assets 10,006
Insurance policy and claim reserves (18,195)
Other liabilities (1,545)
- ----------------------------------------------------------------------
Cash payment $ 4,160
======================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
Travelers Group Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
---------------------
The accompanying condensed consolidated financial statements as of September
30, 1996 and for the three-month and nine-month periods ended September 30,
1996 and 1995 are unaudited and include the accounts of Travelers Group Inc.
(TRV) and its subsidiaries (collectively, the Company). In the opinion of
management, all adjustments, consisting of normal recurring adjustments
necessary for a fair presentation, have been reflected. The accompanying
condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and related notes included in the
Company's Annual Report to Stockholders for the year ended December 31, 1995.
Certain financial information that is normally included in annual financial
statements prepared in accordance with generally accepted accounting
principles, but is not required for interim reporting purposes, has been
condensed or omitted.
The Board of Directors on October 23, 1996, declared a four-for-three split
in TRV's common stock, in the form of a 33 1/3% stock dividend, which is
payable on November 22, 1996 to shareholders of record on November 4, 1996.
This is the second stock split declared by TRV this year. In January 1996,
the TRV's Board of Directors declared a three-for-two stock split in the form
of a 50% stock dividend which was paid on May 24, 1996. Both splits combined
are the equivalent of a two-for-one stock split. Current and prior year
information has been restated to reflect the stock splits. At TRV's Annual
Meeting of Stockholders on April 24, 1996, stockholders approved an increase
in the number of shares of common stock of TRV authorized for issuance from
500 million shares to 1.5 billion shares.
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year's presentation.
Discontinued Operations
In January 1995 the sale of the group life and related businesses of The
Travelers Insurance Group Inc. (TIGI) to Metropolitan Life Insurance Company
(MetLife) was completed and also in January 1995, the group medical business
was exchanged for a 50% interest in The MetraHealth Companies, Inc.
(MetraHealth). The Company's interest in MetraHealth was sold on October 2,
1995 and through that date had been accounted for on the equity method. In
1995 the Company's discontinued operations reflect the results of the medical
insurance business not transferred, plus its equity interest in the earnings
of MetraHealth through the date of sale and the gain from the sale in January
1995 of the Company's group life insurance business. Included in net income
from discontinued operations for the third quarter of 1996 is the contingency
payment from the 1995 sale of MetraHealth. Revenues from discontinued
operations for the three months and nine months ended September 30, 1995
amounted to $222 million and $938 million, respectively.
Accounting Change
FAS 121. Effective January 1, 1996 the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (FAS 121). This statement
establishes accounting standards for the impairment of long-lived assets and
certain identifiable intangibles to be disposed of. This statement requires a
write down to fair value when long-lived assets to be held and used are
impaired. The statement also requires that long-lived assets to be disposed
of (e.g. real estate held for sale) be
7
<PAGE>
Notes to Condensed Consolidated Financial Statements (continued)
carried at the lower of cost or fair value less cost to sell, and does not
allow such assets to be depreciated. The adoption of this standard did not
have a material impact on the Company's financial condition, results of
operations or liquidity.
2. Acquisition
-----------
On April 2, 1996, Travelers/Aetna Property Casualty Corp. (TAP), an indirect
majority-owned subsidiary of the Company, purchased from Aetna Life and
Casualty Company (Aetna) all of the outstanding capital stock of The Aetna
Casualty and Surety Company (ACSC) and The Standard Fire Insurance Company
(SFIC) (collectively, Aetna P&C) for approximately $4.16 billion in cash. The
acquisition was accounted for under the purchase method of accounting and,
accordingly, the condensed consolidated financial statements include the
results of Aetna P&C's operations only from the date of acquisition. TAP also
owns The Travelers Indemnity Company (Travelers Indemnity) and is the primary
vehicle through which the Company engages in the property and casualty
insurance business.
To finance the $4.16 billion purchase price and transaction costs, and
capital contributions of $710 million to Aetna P&C, TAP borrowed $2.65
billion from a syndicate of banks under a five-year revolving credit facility
(the Credit Facility) and sold approximately 33 million shares of its Class A
Common Stock representing approximately 9% of its outstanding common stock
(at that time) to four private investors, including Aetna, for an aggregate
of $525 million. TIGI, a wholly owned subsidiary of the Company, acquired
approximately 328 million shares of Class B Common Stock of TAP in exchange
for contributing the outstanding capital stock of Travelers Indemnity and a
capital contribution of approximately $1.14 billion. In addition, TRV
purchased from TAP $540 million of Series Z Preferred Stock of TAP.
Approximately $18 million of the purchase price was funded through the
settlement of receivables from Aetna.
TRV funded its purchase of Series Z Preferred Stock of TAP and the capital
contribution made by TIGI from the issuance of $920 million of debt, and from
$760 million of cash on hand.
On April 23, 1996, TAP sold in a public offering approximately 39 million
shares of its Class A Common Stock, representing approximately 9.75% of its
outstanding common stock, for total proceeds of $928 million. On April 24,
1996, TAP sold in a public offering $500 million of 6 3/4% Notes due April
15, 2001 and $200 million of 7 3/4% Notes due April 15, 2026. On April 26,
1996, Travelers P&C Capital I, a subsidiary trust of TAP, issued $800 million
of 8.08% Trust Preferred Securities in a public offering. On May 10, 1996,
Travelers P&C Capital II, a subsidiary trust of TAP, issued $100 million of
8.00% Trust Preferred Securities in a public offering. These Trust Preferred
Securities, which are fully and unconditionally guaranteed by TAP, have a
liquidation value of $25 per Trust Preferred Security and are mandatorily
redeemable under certain circumstances. Dividends on the Trust Preferred
Securities have been classified as interest expense in the condensed
consolidated statement of income. The aggregate proceeds from the above
offerings of $2.528 billion together with the proceeds from the issuance by
TAP of approximately $700 million of commercial paper were used to repay in
full the borrowings under the credit facility and to redeem in full TAP's
Series Z Preferred Stock.
The assets and liabilities of Aetna P&C are reflected in the Condensed
Consolidated Statement of Financial Position at September 30, 1996 on a fully
consolidated basis at management's best estimate of their fair values, based
on currently available information. Evaluation and appraisal of assets and
liabilities is continuing, including: adjustments to investments; deferred
acquisition costs; financial guarantee obligations which the Company expects
to assume, designate as held for sale and actively
8
<PAGE>
Notes to Condensed Consolidated Financial Statements (continued)
market; claims reserves to conform the accounting policy regarding
discounting to that historically used by the Company; liabilities for lease
and severance costs relating to a restructuring plan for the business
acquired; other assets and liabilities and related deferred income tax
amounts; and allocation of the purchase price may be adjusted. The excess of
the purchase price over the estimated fair value of net assets is
approximately $1.14 billion and will be amortized over 40 years.
During the second quarter of 1996 TAP recorded charges related to the
acquisition and integration of Aetna P&C. These charges resulted primarily
from anticipated costs of the merger and the application of TAP's strategies,
policies and practices to Aetna P&C reserves and include: $301.9 million
after tax and minority interest ($566.5 million before tax and minority
interest) in reserve increases, net of reinsurance, related primarily to
cumulative injury claims other than asbestos (CIOTA); and an $18.7 million
after tax and minority interest ($35 million before tax and minority
interest) provision for lease and severance costs of Travelers Indemnity
related to the restructuring plan for the merger. In addition the Company
recognized a gain of $363 million (before and after tax) from the issuance of
shares of Class A Common Stock by TAP and such gain is not reflected in the
pro forma financial information below.
The unaudited pro forma condensed results of operations presented below
assume the above transactions had occurred at the beginning of each of the
periods presented:
Nine Months Ended September 30,
-------------------------------------
Pro Forma 1996 1995
- ----------------------------------------------------------------------------
Revenues $17,163 $16,243
====== ======
Income from continuing operations $ 1,419 $ 781
====== ===
Net income $ 1,450 $ 870
====== ===
Net income per share:
Continuing operations $ 2.11 $ 1.13
==== ====
Net income $ 2.15 $ 1.27
==== ====
Excluding the charges discussed above associated with the acquisition of
Aetna P&C, which total $320.6 million after tax and minority interest, pro
forma income from continuing operations and net income would have been $1.74
billion and $1.77 billion, respectively, or $2.62 per share and $2.66 per
share, respectively, for the nine months ended September 30, 1996. Historical
results of Aetna P&C in the second quarter of 1995 include a charge of $750
million ($488 million after tax) representing an addition to
environmental-related claims reserves.
The unaudited pro forma condensed financial information is not necessarily
indicative either of the results of operations that would have occurred had
this transaction been consummated at the beginning of the periods presented
or of future operations of the combined companies.
9
<PAGE>
Notes to Condensed Consolidated Financial Statements (continued)
3. Debt
----
Investment banking and brokerage borrowings consisted of the following:
(millions) September 30, 1996 December 31, 1995
--------- ------------------ -----------------
Commercial paper $2,604 $2,401
Uncollateralized borrowings 177 399
Collateralized borrowings - 155
-------- ------
$2,781 $2,955
===== =====
Investment banking and brokerage borrowings are short-term and include
commercial paper and collateralized and uncollateralized borrowings used to
finance Smith Barney Holdings Inc.'s (Smith Barney) operations, including the
securities settlement process. The collateralized and uncollateralized
borrowings bear interest at variable rates based primarily on the Federal
Funds interest rate. Smith Barney has a commercial paper program that
consists of both discounted and interest-bearing paper. In addition, Smith
Barney has substantial borrowing arrangements consisting of facilities that
it has been advised are available, but where no contractual lending
obligation exists.
Short-term borrowings consisted of commercial paper outstanding as follows:
(millions) September 30, 1996 December 31, 1995
--------- ------------------ -----------------
Travelers Group Inc. $ 151 $ -
Commercial Credit Company 1,829 1,394
Travelers/Aetna Property
Casualty Corp. 388 -
The Travelers Insurance Company 57 74
------ ------
$2,425 $1,468
===== =====
TRV, Commercial Credit Company (CCC), TAP and The Travelers Insurance Company
(TIC) issue commercial paper directly to investors. Each maintains unused
credit availability under its respective bank lines of credit at least equal
to the amount of its outstanding commercial paper. Each may borrow under its
revolving credit facilities at various interest rate options and compensates
the banks for the facilities through commitment fees.
TRV, CCC and TIC have an agreement with a syndicate of banks to provide $1.0
billion of revolving credit, to be allocated to any of TRV, CCC or TIC. The
participation of TIC in this agreement is limited to $250 million. The
revolving credit facility consists of a five-year revolving credit facility
which expires in 2001. Currently, $250 million is allocated to TRV, $650
million to CCC and $100 million to TIC. Under this facility TRV is required
to maintain a certain level of consolidated stockholders' equity (as defined
in the agreement). At September 30, 1996, this requirement was exceeded by
approximately $4.0 billion. In addition to the five-year revolving credit
facility, TRV, during the second quarter of 1996, entered into a 364-day
revolving credit and bid loan agreement with a bank to provide $75 million of
revolving credit. At September 30, 1996, there were no borrowings outstanding
under either facility.
CCC also has a committed and available revolving credit facility on a
stand-alone basis of $1.5 billion, which expires in 2001.
10
<PAGE>
Notes to Condensed Consolidated Financial Statements (continued)
CCC is limited by covenants in its revolving credit agreements as to the
amount of dividends and advances that may be made to its parent or its
affiliated companies. At September 30, 1996, CCC would have been able to
remit $273 million to its parent under its most restrictive covenants.
As discussed in Note 2, during the first quarter of 1996 TAP entered into a
five-year revolving credit facility in the amount of $2.65 billion with a
syndicate of banks led by Citibank, N.A., Chemical Bank and Morgan Guaranty
Trust Company. This facility expires in March 2001 and was used to finance
the purchase of Aetna P&C. All borrowings under this facility have been
repaid in full and the amount of the facility was subsequently reduced to
$600 million, none of which is currently utilized. Under this facility TAP is
required to maintain a certain level of consolidated stockholders' equity (as
defined in the agreement). At September 30, 1996, this requirement was
exceeded by approximately $2.6 billion.
Long-term debt, including its current portion, consisted of the following:
(millions) September 30, 1996 December 31, 1995
--------- ------------------ -----------------
Travelers Group Inc. $2,004 $2,042
Commercial Credit Company 5,300 5,200
Smith Barney Holdings Inc. 2,016 1,875
Travelers/Aetna Property
Casualty Corp. 900 -
The Travelers Insurance Group Inc. 56 73
------- ------
$10,276 $9,190
====== =====
In December 1995, TRV, through a private placement, issued $100 million
principal amount of 6 1/4% Notes due December 1, 2005, and $100 million
principal amount of 7% Notes due December 1, 2025, substantially all of which
was exchanged for registered debt in June 1996.
During the first nine months of 1996, CCC issued $400 million and Smith
Barney issued $290 million of notes with varying interest rates and
maturities.
In addition to the borrowings discussed in Note 2, TAP during the third
quarter of 1996 sold in a public offering $200 million of 6 3/4% Notes due
September 1, 1999.
Smith Barney has a $1.0 billion revolving credit agreement with a bank
syndicate that extends through May 1999. In addition, Smith Barney has a $500
million 364-day revolving credit agreement that extends through May 1997. At
September 30, 1996, there were no borrowings outstanding under either
facility.
Smith Barney is limited by covenants in its revolving credit facility as to
the amount of dividends that may be paid to TRV. The amount of dividends
varies based upon, among other things, levels of net income of Smith Barney.
At September 30, 1996, Smith Barney would have been able to remit
approximately $590 million to TRV under its most restrictive covenants.
TIC is subject to various regulatory restrictions that limit the maximum
amount of dividends available to its parent without prior approval of the
Connecticut Insurance Department. A maximum of $506 million of statutory
surplus was available in 1996 for such dividends without Department approval,
of which $331 million has been paid to date.
11
<PAGE>
Notes to Condensed Consolidated Financial Statements (continued)
4. TAP - Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
-------------------------------------------------------------------------
Trusts
------
The sole assets of Travelers P&C Capital I and Travelers P&C Capital II are
Junior Subordinated Debt Securities of TAP. These debt securities are
eliminated in consolidation and at September 30, 1996 were as follows:
(in millions) Amount Interest Rate Maturity Date
------ ------------- -------------
Travelers P&C Capital I $800 8.08% April 30, 2036
Travelers P&C Capital II $100 8.00% May 15, 2036
5. Contingencies
-------------
Certain subsidiaries of TAP are in arbitration with underwriters at Lloyd's
of London (Lloyd's) in New York State to enforce reinsurance contracts with
respect to recoveries for certain asbestos claims. The dispute involves the
ability to aggregate asbestos claims under a market agreement between Lloyd's
and those subsidiaries or under the applicable reinsurance treaties.
On insurance contracts written many years ago, the Company continues to
receive claims asserting alleged injuries and damages from asbestos and other
hazardous and toxic substances. In relation to these claims, the Company
carries on a continuing review of its overall position, its reserving
techniques and reinsurance recoverables. In each of these areas of exposure,
the Company 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 or range of exposure represented by these claims to the Company's
financial condition, results of operations or liquidity. The Company believes
that it is reasonably possible that the outcome of the uncertainties
regarding environmental and asbestos claims could result in a liability
exceeding reserves by an amount that would be material to the Company's
operating results in a future period. However, it is not likely that these
claims will have a material adverse effect on the Company's financial
condition or liquidity.
In the ordinary course of business TRV and/or its subsidiaries are also
defendants or co-defendants in various litigation matters, other than
environmental and asbestos claims. Although there can be no assurances, the
Company believes, based on information currently available, that the ultimate
resolution of these legal proceedings would not be likely to have a material
adverse effect on the Company's results of operations, financial condition or
liquidity.
12
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION
and RESULTS of OPERATIONS
Consolidated Results of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------
(In millions, except per share amounts) 1996 1995 1996 1995
- --------------------------------------------------------------------------------
Revenues $5,622 $4,290 $15,563 $12,422
====== ====== ======= =======
Income from continuing operations $561 $456 $1,657 $1,138
Income from discontinued operations 31 25 31 89
----- ----- ------ -------
Net income $592 $481 $1,688 $1,227
==== ==== ====== ======
Earnings per share*:
Continuing operations $0.84 $0.68 $2.49 $1.70
Discontinued operations 0.04 0.04 0.04 0.14
----- ----- ----- -----
Net income $0.88 $0.72 $2.53 $1.84
===== ===== ===== =====
Weighted average number of
common shares outstanding
and common stock equivalents* 639.0 636.4 637.2 633.9
===== ===== ===== =====
(*) On October 23, 1996, the Board of Directors declared a four-for-three split
in the Company's common stock, in the form of a 33 1/3% stock dividend,
payable on November 22, 1996 to shareholders of record on November 4, 1996.
In January 1996, the Company's Board of Directors declared a three-for-two
stock split in the form of a 50% stock dividend which was paid on May 24,
1996. Both splits combined are the equivalent of a two-for-one stock split.
Current and prior year information has been restated to reflect the stock
splits.
Acquisition
As discussed in Note 2 of Notes to the Condensed Consolidated Financial
Statements, on April 2, 1996, Travelers/Aetna Property Casualty Corp. (TAP), an
indirect majority-owned subsidiary of Travelers Group Inc. (TRV), completed the
acquisition of the domestic property and casualty insurance subsidiaries of
Aetna Life and Casualty Company (Aetna P&C) for approximately $4.16 billion in
cash. This acquisition was financed in part by the issuance by TAP of common
stock resulting in a minority interest in TAP of approximately 18%. The
acquisition was accounted for under the purchase method of accounting and,
accordingly, the condensed consolidated financial statements include the results
of Aetna P&C's operations only from the date of acquisition. TAP also owns The
Travelers Indemnity Company (Travelers Indemnity), and is the primary vehicle
through which TRV and its subsidiaries (collectively, the Company) engage in the
property and casualty insurance business.
Results of Operations
Consolidated income from continuing operations for the quarter ended September
30, 1996 was $561 million, and includes reported investment portfolio losses of
$15 million after tax and minority interest. This compares with income from
continuing operations of $456 million in the 1995 period, which included
reported investment portfolio gains of $33 million after tax. Excluding
portfolio gains and losses, income from continuing operations for the third
quarter of 1996 was 36% above the comparable period in 1995, primarily
reflecting improved performance at Smith Barney, Primerica Financial Services
(PFS), Travelers Life and Annuity and the inclusion of the property and casualty
business acquired from Aetna.
13
<PAGE>
Income from continuing operations for the nine months ended September 30, 1996,
was $1.657 billion, compared to $1.138 billion in the 1995 period. Included in
the 1996 nine-month period are portfolio losses of $33 million after tax and
minority interest, charges for reserve adjustments and restructuring costs
related to the acquisition of Aetna's property casualty operations of $321
million after tax and minority interest, a $363 million after tax gain from the
sale of shares of Class A Common Stock by TAP (common stock offering) in the
second quarter of 1996, and a $26 million after tax gain from the disposition of
investment advisory affiliates, compared to portfolio gains of $19 million after
tax in the 1995 nine-month period. Excluding these items, income from continuing
operations for the first nine months of 1996 was 45% above the comparable period
in 1995.
The effective income tax rate for the nine months ended September 30, 1996 is
below the statutory rate of 35% due primarily to the nontaxability of the $363
million gain recognized from the sale of shares of Class A Common Stock by TAP.
Discontinued Operations
In January 1995 the sale of the group life and related businesses of The
Travelers Insurance Group Inc. (TIGI) to Metropolitan Life Insurance Company
(MetLife) was completed and also in January 1995, the group medical business was
exchanged for a 50% interest in The MetraHealth Companies, Inc. (MetraHealth).
The Company's interest in MetraHealth was sold on October 2, 1995 and through
that date had been accounted for on the equity method. In 1995 the Company's
discontinued operations reflect the results of the medical insurance business
not transferred, plus its equity interest in the earnings of MetraHealth through
the date of sale and the gain from the sale in January 1995 of the Company's
group life insurance business. Included in net income from discontinued
operations for the third quarter of 1996 is the contingency payment from the
1995 sale of MetraHealth. Revenues from discontinued operations for the three
months and nine months ended September 30, 1995 amounted to $222 million and
$938 million, respectively.
The following discussion presents in more detail each segment's performance.
Segment Results for the Three Months Ended September 30, 1996 and 1995
----------------------------------------------------------------------
Investment Services
Three Months Ended September 30,
--------------------------------------------------
(millions) 1996 1995
- --------------------------------------------------------------------------------
Revenues Net income Revenues Net income
- --------------------------------------------------------------------------------
Smith Barney $1,889 $209 $1,771 $178
================================================================================
Smith Barney
Smith Barney reported net income of $209 million for the three months ended
September 30, 1996, compared to $178 million reported for the three months ended
September 30, 1995.
14
<PAGE>
Smith Barney Revenues
Three Months Ended September 30,
-------------------------------------
(millions) 1996 1995
- --------------------------------------------------------------------
Commissions $ 498 $ 536
Investment banking 288 243
Principal trading 243 255
Asset management fees 343 272
Interest income, net* 106 93
Other income 29 31
- --------------------------------------------------------------------
Net revenues* $1,507 $1,430
====================================================================
* Net of interest expense of $382 million and $341 million for the three-month
period ended September 30, 1996 and 1995, respectively. Revenues included in
the condensed consolidated statement of income are before deductions for
interest expense.
Revenues, net of interest expense, increased 5% compared to 1995's third
quarter, reflecting increases in several categories. Commission revenues
decreased by 7% to $498 million in the 1996 third quarter from $536 million in
the 1995 period reflecting lower activity in listed and over-the-counter
securities and options. Investment banking revenues increased 19% to $288
million in the 1996 third quarter from $243 million in the 1995 period,
reflecting fee income from a high level of merger and acquisition advisory
activity, as well as strong volume in taxable fixed income underwriting.
Principal trading revenues totaled $243 million for the 1996 third quarter
compared to $255 million in the 1995 period reflecting a decline in equity
trading offset to an extent by an increase in municipal bond trading. Asset
management fees increased 26% to a record $343 million in the 1996 third quarter
from $272 million in the 1995 period. This increase is, to a great extent,
directly related to the increase in assets under management as well as bringing
in-house all of the administrative functions for proprietary mutual funds and
money market funds in the third quarter of 1995. Assets under management, at
September 30, 1996 reached a record $105.4 billion, up from $92.2 billion a year
ago. Assets under management are comprised of money market funds, mutual funds,
managed accounts and accounts managed by financial consultants. Net interest
income was $106 million in the 1996 third quarter, up 14% from $93 million in
the 1995 period primarily due to increased margin lending to clients and
increased taxable fixed income inventory positioning.
Total expenses, excluding interest, increased 3% to $1.165 billion in the 1996
third quarter from $1.128 billion in the 1995 period. This increase was driven
by higher production-related compensation and benefits expense and other
operating expenses. Expenses other than interest and employee compensation and
benefits were $321 million in the 1996 period compared to $298 million in the
1995 period. Smith Barney's ratio of non-compensation expenses to net revenues
was 21.3% for the third quarter of 1996 compared to 20.9% in the comparable 1995
period.
Smith Barney's business is significantly affected by the levels of activity in
the securities markets, which in turn are affected by the level and trend of
interest rates, the general state of the economy and the national and worldwide
political environments, among other factors. An increasing interest rate
environment could have an adverse impact on Smith Barney's businesses, including
commissions (which are linked in part to the economic attractiveness of
securities relative to time deposits) and investment banking (which is affected
by the relative benefit to corporations and public entities of issuing public
debt and/or equity versus other avenues for raising capital). Such effects,
however, could be at least partially offset by a strengthening U.S. economy that
would include growth in the business sector -- accompanied by an increase in the
demand for capital -- and an increase in the capacity of individuals to invest.
A decline in interest rates could favorably impact Smith Barney's business.
Smith Barney's asset management business provides a more predictable and steady
income stream than its other businesses. Smith Barney continues to maintain
tight expense controls which management believes will help the firm weather
periodic downturns in market conditions.
15
<PAGE>
Smith Barney's principal business activities are, by their nature, highly
competitive and subject to various risks, particularly volatile trading markets
and fluctuations in the volume of market activity. While higher volatility can
increase risk, it can also increase order flow, which drives many of Smith
Barney's businesses. Other market and economic conditions, and the size, number
and timing of transactions may also impact net income. As a result, revenues and
profitability can vary significantly from year to year, and from quarter to
quarter.
Note 19 of Notes to the Consolidated Financial Statements included in the
Company's 1995 Annual Report describes Smith Barney's activities in derivative
financial instruments, which are used primarily to facilitate customer
transactions.
Assets Under Management
At September 30,
-----------------------
(billions) 1996 1995
------------------------------------------------------------
Smith Barney $105.4 $ 92.2
Travelers Life and Annuity (1) 21.4 21.9
------------------------------------------------------------
Total Assets Under Management (2) $126.8 $114.1
============================================================
(1) Part of the Life Insurance Services segment.
(2) Excludes assets under management at RCM Capital Management of $26.7 billion
in 1995 (sold in June 1996).
Consumer Finance Services
Three Months Ended September 30,
-----------------------------------------------
(millions) 1996 1995
- ---------------------------------------------------------------------------
Revenues Net income Revenues Net income
- ---------------------------------------------------------------------------
Consumer Finance Services $351 $54 $344 $65
===========================================================================
Earnings in the third quarter of 1996 were lower than the comparable period in
1995, as expected -- driven by a higher provision for loan losses.
Consumer finance receivables, net of unearned finance charges grew $275.1
million during the third quarter of 1996. This growth occurred primarily in real
estate and personal loans, and benefited from a $95 million bulk acquisition of
real estate loans as well as an increase in real estate loan volume of $111
million over last year's levels in the Company's 862 branch office network and
through Primerica Financial Services.
Personal loan volume in the 1996 third quarter was up substantially over the
prior year period and the 1996 second quarter. Travelers Bank credit card
outstandings declined $17.3 million, resulting from the sale of a non-strategic
portfolio, partially offset by strong credit card originations. At September 30,
1996, net receivables totaled a record $7.74 billion, an 8.3% increase over
September 30, 1995. While total interest margin increased from the 1995 period
due to the increase in the portfolio, average net interest margin declined 27
basis points reflecting a decline to 15.17% from 15.77% in the average yield
mainly due to the normal run off of older, higher yielding real estate loans and
growth in lower yielding first mortgage and other higher quality real estate
loans, partially offset by a decrease in cost of funds.
16
<PAGE>
Delinquencies in excess of 60 days were 2.31% as of September 30, 1996 -- higher
than 2.18% at the end of the 1996 second quarter, and 1.97% at the end of the
third quarter of 1995. The charge-off rate remained relatively flat at 2.91%,
compared to the 1996 second quarter, but was higher than in the comparable 1995
period. This reflects a continued high level of personal bankruptcies throughout
the credit industry, a trend that has shown no indication of reversing itself.
Reserves as a percentage of net receivables remained at 2.92%, unchanged from
the 1996 second quarter.
As of, and for, the
Three Months Ended September 30,
----------------------------------
1996 1995
----------------------------------
Allowance for credit losses as % of
net outstandings 2.92% 2.64%
Charge-off rate for the period 2.91% 2.24%
60 + days past due on a contractual
basis as a % of gross consumer
finance receivables at quarter end 2.31% 1.97%
Life Insurance Services
Three Months Ended September 30,
----------------------------------------------
(millions) 1996 1995
- --------------------------------------------------------------------------------
Revenues Net income Revenues Net income
- --------------------------------------------------------------------------------
Primerica Financial Services (1) $349 $ 68 $334 $ 61
Travelers Life and Annuity (2)(3) 573 78 667 95
- -------------------------------------------------------------------------------
Total Life Insurance Services $922 $146 $1,001 $156
===============================================================================
(1) Net income in 1995 includes $3 million of reported investment portfolio
gains.
(2) Net income includes $13 million of reported investment portfolio losses in
1996 and $27 million of reported investment portfolio gains in 1995.
(3) On September 29, 1995, the Company made a pro rata distribution to its
stockholders of Transport Holdings Inc., which, at the time of distribution,
was the indirect owner of the business of Transport Life Insurance Company
(Transport Life). Revenues and net income of Transport Life in the 1995
quarter amounted to $62 million and $3 million, respectively.
Primerica Financial Services
Earnings before portfolio gains for the third quarter of 1996 increased 17% to
$68 million from $58 million in the 1995 third quarter, reflecting significantly
higher sales of mutual funds and consumer loans as well as continued growth in
life insurance in force. Earnings also benefited from ongoing expense controls.
Face amount of new term life insurance sales was $12.6 billion in the third
quarter of 1996, equal to the prior year period. Life insurance in force reached
$357.2 billion at September 30, 1996, up from $344.7 billion at September 30,
1995, and continued to reflect good policy persistency.
Sales of mutual funds (at net asset value) were $557 million for the third
quarter of 1996, a 42% increase over third quarter 1995 sales of $392 million,
reflecting strong customer demand in the U.S. and Canada.
17
<PAGE>
Nearly 40% of U.S. sales were from the Smith Barney products, predominantly the
Concert Series(sm), which PFS first introduced to its market in March 1996. Net
receivables from $.M.A.R.T.(sm) and $.A.F.E.(sm) consumer loans continued to
advance to $1.40 billion at the end of the third quarter of 1996, up 6% from
$1.33 billion at the end of the 1996 second quarter and up 14% from $1.23
billion in the comparable 1995 period. Earnings and assets relating to these
consumer loans are included in the Consumer Finance segment. The PFS Secure home
and auto insurance products -- issued through TAP -- continue to experience
growth in applications and policies, and as of September 30, 1996, had been
introduced in 26 states and sold through 5,425 agents licensed to sell the
product.
Travelers Life and Annuity
Travelers Life and Annuity consists of annuity, life and health products
marketed by The Travelers Insurance Company (TIC) under the Travelers name and,
during 1995, the individual accident and health operations of Transport Life
(through the date of the spin-off). Among the range of products offered are
individual universal and term life and long-term care insurance, payout
annuities and fixed and variable deferred annuities to individuals and small
businesses and group pension deposit products, including guaranteed investment
contracts and annuities for employer-sponsored retirement and savings plans.
These products are primarily marketed through The Copeland Companies (Copeland),
an indirect wholly owned subsidiary of TIC, Smith Barney Financial Consultants
and a core group of approximately 500 independent agencies. The majority of the
annuity business and a substantial portion of the life business written by
Travelers Life and Annuity is accounted for as investment contracts, with the
result that the premium deposits collected are not included in revenues.
Earnings before portfolio losses increased 33% to $91 million in the third
quarter of 1996, from $68 million in the third quarter of 1995. Improved
earnings were largely driven by strong investment income, reflecting
repositioning of the investment portfolio over the past year. The earnings
increase related to the higher capital base, which benefited from the
reinvestment of the proceeds from the sale of the Company's interest in
MetraHealth in the 1995 fourth quarter, was partially offset by the loss of
earnings from Transport Life, which was spun-off to TRV stockholders in
September 1995. Also offsetting this increase were higher expenses, a portion of
which relates to higher corporate expense allocations subsequent to the TAP
common stock offering. Earnings growth attributable to strong sales of recently
introduced products -- including less capital-intensive variable life insurance
and annuities -- was partially offset by the gradual decline in the amount of
higher margin business written several years ago.
For deferred annuities, net written premiums and deposits were $477.7 million in
the third quarter of 1996, up 20% from $398.2 million in the 1995 third quarter.
Total deferred annuity policyholder account balances and benefit reserves at
September 30, 1996 were $12.6 billion compared to $10.9 billion at September 30,
1995. Sales of the annuity and single premium variable life products distributed
by Smith Barney Financial Consultants were up 32% in the third quarter of 1996.
In addition, annuity sales in the 1996 third quarter at Copeland grew 13% over
the comparable 1995 quarter.
Payout and group annuity policyholder account balances and reserves declined to
$11.2 billion at September 30, 1996, from $12.5 billion at September 30, 1995,
reflecting run-off of low margin guaranteed investment contracts written in
prior years. Net premiums and deposits (excluding those of affiliates) more than
doubled to $299 million in the third quarter of 1996 from $142.1 million in the
third quarter of 1995 reflecting significantly higher sales of variable rate
guaranteed investment contracts.
Face amount of individual life insurance issued during the third quarter of 1996
was $1.7 billion, up from $1.5 billion in the third quarter of 1995, excluding
Transport Life, bringing total life insurance in force to $50.0 billion at
September 30, 1996. Net written premiums and deposits for individual life
insurance were $71.5 million, up 20% in the third quarter of 1996, compared to
$59.8 million in the third quarter
18
<PAGE>
of 1995, excluding Transport Life. This increase primarily reflects sales of
Vintage Life(sm), the single premium universal life product introduced to Smith
Barney Financial Consultants in September 1995.
Net written premiums for the growing long-term care insurance line, excluding
Transport Life, were $34.4 million in the third quarter of 1996, compared to
$22.8 million in the third quarter of 1995.
Property & Casualty Insurance Services
Three Months Ended September 30,
---------------------------------------------
(millions) 1996 1995
- --------------------------------------------------------------------------------
Net Net
Revenues income Revenues income
(loss) (loss)
- --------------------------------------------------------------------------------
Commercial (1) (2) $1,669 $203 $ 820 $ 98
Personal (1) (3) 781 72 376 32
Financing costs and other (1) 2 (28) - -
Minority interest - (44) - -
- --------------------------------------------------------------------------------
Total Property & Casualty
Insurance Services $2,452 $203 $1,196 $130
================================================================================
(1) Before minority interest.
(2) Net income includes $18 million of reported investment portfolio gains in
1995.
(3) Net income includes $1 million and $5 million of reported investment
portfolio gains in 1996 and 1995, respectively.
The following segment earnings include the property and casualty operations of
Aetna P&C for periods subsequent to April 2, 1996. Certain production statistics
related to Aetna P&C operations are provided for comparative purposes for
periods prior to April 2, 1996 and are not reflected in such prior period
revenues or operating results.
Commercial Lines
Earnings before portfolio gains/losses increased 155% to $203 million in the
third quarter of 1996 from $80 million in the third quarter of 1995, primarily
reflecting the acquisition of Aetna P&C, the emerging benefits of expense
reduction initiatives associated with the integration of the two companies and
strong investment income.
Catastrophe losses in the 1996 third quarter, after taxes and reinsurance were
$16 million, primarily associated with Hurricane Fran, compared with an
insignificant amount in the 1995 third quarter.
Commercial Lines net written premiums for the third quarter of 1996 totaled
$1.217 billion, up $621 million from $596 million for the third quarter of 1995,
reflecting the acquisition of Aetna P&C, offset somewhat by the highly
competitive conditions in the marketplace and the Company's continuing focus on
profitability. The Commercial Lines marketplace continues to be highly
competitive, although the broader industry and product line expertise of the
combined company contributed to solid performance in the specialty and small
accounts market segments. Premium equivalents for the third quarter of 1996 were
$470 million compared to $705 million for the third quarter of 1995, reflecting
a highly competitive marketplace combined with a depopulation of involuntary
pools as the loss experience of workers' compensation improves and insureds move
to voluntary markets. Premium equivalents, which are
19
<PAGE>
associated largely with National Accounts, represent estimates of premiums that
customers would have been charged under a fully insured arrangement and do not
represent actual premium revenues.
On a combined total basis including Aetna P&C (for periods prior to April 2,
1996 for comparative purposes only), Commercial Lines net written premiums for
the third quarter of 1996 totaled $1.217 billion, compared to $1.254 billion for
the third quarter of 1995. On the same combined total basis premium equivalents
for the third quarter of 1996 totaled $470 million, compared to $851 million for
the third quarter of 1995. The decrease in premium equivalents reflects a
depopulation of involuntary pools as the loss experience of workers'
compensation improves and insureds move to voluntary markets, combined with a
highly competitive marketplace.
A significant component of Commercial Lines is National Accounts, which works
with national brokers and regional agents providing insurance coverages and
services, primarily workers' compensation, mainly to large corporations.
National Accounts net written premiums of $241 million for the third quarter of
1996 increased $49 million from the third quarter of 1995. This increase
reflects the acquisition of Aetna P&C, partially offset by an ongoing shift from
risk-bearing business into non risk-bearing business and the competitive
marketplace. National Accounts premium equivalents of $452 million for the third
quarter of 1996 were $242 million below the third quarter of 1995. The decrease
in premium equivalents reflects a depopulation of involuntary pools as the loss
experience of workers' compensation improves and insureds move to voluntary
markets, combined with a highly competitive marketplace, slightly offset by the
ongoing shift from risk-bearing business into non risk-bearing business.
For the 1996 third quarter, National Accounts new business, including both
premiums and premium equivalents, was $70 million compared to $89 million for
the third quarter of 1995. This decrease is due to the highly competitive
marketplace. National Accounts renewed business for the third quarter of 1996 of
$373 million decreased $125 million below the 1995 levels, reflecting the
National Accounts policy of maintaining its product pricing and underwriting
standards in a highly competitive pricing environment as insurers compete to
retain business. The National Accounts business retention ratio was 75% for the
third quarter of 1996 and 93% for the third quarter of 1995.
Commercial Accounts serves mid-sized businesses through a network of independent
agencies and brokers. Commercial Accounts net written premiums were $451 million
in the 1996 third quarter compared to $194 million in the 1995 third quarter and
premium equivalents were $18 million in the 1996 third quarter, $7 million above
the 1995 third quarter. These increases reflect the acquisition of Aetna P&C,
marginally offset by the highly competitive market, where Commercial Accounts
has continued to be more selective in renewal activity. Programs designed to
leverage underwriting experience in specific industries have demonstrated
continued growth. For the third quarter of 1996, new premium and premium
equivalent business in Commercial Accounts was $125 million compared to $69
million in the 1995 third quarter, reflecting the acquisition of Aetna P&C. The
Commercial Accounts business retention ratio was 77% for the third quarter of
1996 and 1995. Commercial Accounts continues to focus on the retention of
existing business while maintaining its product pricing standards and its
selective underwriting policy.
Select Accounts serves small businesses through a network of independent
agencies. Select Accounts net written premiums of $345 million for the third
quarter of 1996 were $213 million above the third quarter 1995 premium levels,
reflecting the acquisition of Aetna P&C. New premium business in Select Accounts
was $82 million in the 1996 third quarter compared to $57 million in the 1995
third quarter, which was due to the acquisition of Aetna P&C. The Select
Accounts business retention ratio was 79% in the 1996 third quarter compared to
72% in the comparable 1995 period, reflecting the broader industry and product
line expertise of the combined company.
20
<PAGE>
Specialty Accounts addresses unique risks that typically require specialized
underwriting. Specialty Accounts net written premiums were $180 million in the
1996 third quarter compared to $77 million in the 1995 third quarter. The growth
is primarily attributable to the acquisition of the Aetna P&C Bond business.
The statutory combined ratio for Commercial Lines in the third quarter of 1996
was 109.0% compared to 105.6% in the third quarter of 1995. The GAAP combined
ratio for Commercial Lines in the third quarter of 1996 was 107.4% compared to
103.9% in the third quarter of 1995.
The GAAP combined ratio for Commercial Lines differs from the statutory combined
ratio primarily due to the gross up for GAAP reporting purposes of revenues and
expenses related to service business, including servicing of residual market
pools and deductible policies.
The increases in the 1996 third quarter statutory and GAAP combined ratios for
Commercial Lines were primarily attributable to the inclusion in 1996 of Aetna
P&C's results. Aetna P&C has historically had a higher underwriting expense
ratio, partially offset by a lower loss ratio, which reflects the mix of
business including the favorable effect of the lower loss ratio of the Bond
business. In addition, losses from Hurricane Fran increased the 1996 statutory
and GAAP combined ratios by 2.1 and 1.9 percentage points, respectively.
Personal Lines
Earnings before portfolio gains/losses increased 163% to $71 million in the
third quarter of 1996 from $27 million in the second quarter of 1995. Operating
earnings included the impact of catastrophe losses, after taxes and reinsurance,
of $20 million in the third quarter of 1996, primarily associated with Hurricane
Fran, compared to $5 million in the comparable 1995 period. The improvement in
operating earnings reflects the acquisition of Aetna P&C and the emerging
benefits of expense reductions associated with the merger, strong net investment
income, and continued favorable prior year loss reserve development in personal
auto lines.
Net written premiums in the 1996 third quarter were $668 million, compared to
$305 million in the third quarter of 1995. This improvement reflects the
acquisition of Aetna P&C.
On a combined total basis including Aetna P&C (for periods prior to April 2,
1996 for comparative purposes only), Personal Lines net written premiums for the
third quarter of 1996 totaled $668 million compared to $655 million for the
third quarter of 1995. Excluding the effect of changes in reinsurance coverage,
both automobile and homeowners lines grew modestly. This underlying strength
reflected growth in target markets, partially offset by reductions due to
catastrophe management strategies.
The statutory combined ratio for Personal Lines in the third quarter of 1996 was
102.5% compared to 104.8% in the 1995 third quarter. The GAAP combined ratio for
Personal Lines in the third quarter of 1996 was 98.4% compared to 103.3% in the
1995 third quarter. The decrease in the combined ratios in 1996 was due to the
favorable loss experience in personal auto lines and expense reductions,
partially offset by the higher level of catastrophe losses.
Financing Costs and Other
The primary component for the 1996 third quarter was interest expense of $26
million after tax, reflecting financing costs associated with the acquisition of
Aetna P&C.
21
<PAGE>
Corporate and Other
Three Months Ended September 30,
------------------------------------------------
(millions) 1996 1995
- -------------------------------------------------------------------------------
Net income Net income
Revenues (expense) Revenues (expense)
- -------------------------------------------------------------------------------
Total Corporate and Other(1) $8 $(51) $(22) $(73)
===============================================================================
(1) Net income (expense) includes $3 million and $20 million of reported
investment portfolio losses in 1996 and 1995, respectively.
Lower staff expenses in the third quarter of 1996 compared to the third quarter
of 1995 were partially offset by interest expense on a higher level of corporate
borrowings in the third quarter of 1996.
Segment Results for the Nine Months Ended September 30, 1996 and 1995
---------------------------------------------------------------------
The overall operating trends for the nine months ended September 30, 1996 and
1995 were substantially the same as those of the third quarter periods except as
noted below.
Investment Services
Nine Months Ended September 30,
--------------------------------------------------
(millions) 1996 1995
- --------------------------------------------------------------------------------
Revenues Net income Revenues Net income
- --------------------------------------------------------------------------------
Smith Barney $5,816 $663 $4,987 $413
================================================================================
Smith Barney Revenues
Nine Months Ended September 30,
-------------------------------
(millions) 1996 1995
- ------------------------------------------------------------------
Commissions $1,680 $1,475
Investment banking 864 585
Principal trading 786 762
Asset management fees 991 751
Interest income, net* 301 282
Other income 100 103
- ------------------------------------------------------------------
Net revenues* $4,722 $3,958
==================================================================
* Net of interest expense of $1,094 million and $1,029 million for the
nine-month period ended September 30, 1996 and 1995, respectively. Revenues
included in the condensed consolidated statement of income are before
deductions for interest expense.
Revenues, net of interest expense, increased 19% compared to 1995's first nine
months. Commission revenues increased by 14% to $1.68 billion in the 1996 first
nine months from $1.475 billion in the 1995 period. The increase reflects strong
activity in over-the-counter and listed securities as well as increased mutual
fund sales. Investment banking revenues increased 48% to $864 million in the
1996 first nine months from $585 million in the 1995 period, reflecting strong
volume in equity, high yield,
22
<PAGE>
corporate debt, public finance and taxable fixed income underwritings as well as
fee income from merger and acquisition advisory activity. Principal trading
revenues of $786 million for the 1996 first nine months increased 3% over the
1995 period and showed particular strength in over-the-counter equities and was
partially offset by a decline in municipal and taxable fixed income trading.
Asset management fees were $991 million in the 1996 first nine months compared
to $751 million in the 1995 period. Net interest income was $301 million in the
1996 first nine months, up 7% from $282 million in the 1995 period.
Total expenses, excluding interest, increased 12% to $3.636 billion in the 1996
first nine months from $3.247 billion in the 1995 period. This increase was
driven by higher production-related compensation and benefits expense and other
operating expenses. Expenses other than interest and employee compensation and
benefits were $981 million in the 1996 period compared to $888 million in the
1995 period. Smith Barney's ratio of non-compensation expenses to net revenues
was 20.8% for the first nine months of 1996 compared to 22.4% in the comparable
1995 period.
Consumer Finance Services
Nine Months Ended September 30,
-------------------------------------------------
(millions) 1996 1995
- --------------------------------------------------------------------------------
Revenues Net income Revenues Net income
- --------------------------------------------------------------------------------
Consumer Finance Services(1) $1,047 $171 $1,006 $181
================================================================================
(1) Net income in 1996 includes a portion of the gain ($.7 million) from the
disposition of RCM Capital Management, a California Limited Partnership
(RCM).
The average yield on the portfolio for the first nine months of 1996 was 15.33%
compared to 15.59% in the comparable 1995 period. Net interest margin, at 8.72%,
was about even with the prior year's first nine months. The charge-off rate was
2.90% for the first nine months of 1996, compared to 2.18% for the first nine
months of 1995.
Life Insurance Services
Nine Months Ended September 30,
---------------------------------------------
(millions) 1996 1995
- --------------------------------------------------------------------------------
Revenues Net income Revenues Net income
- --------------------------------------------------------------------------------
Primerica Financial Services (1) $1,058 $209 $1,009 $186
Travelers Life and Annuity (2)(3) 1,699 241 1,872 214
- --------------------------------------------------------------------------------
Total Life Insurance Services $2,757 $450 $2,881 $400
================================================================================
(1) Net income includes $6 million and $15 million of reported investment
portfolio gains in 1996 and 1995, respectively, and in 1996 a portion of the
gain ($4 million) from the disposition of RCM.
(2) Net income includes $22 million of reported investment portfolio losses in
1996 and $7 million of reported investment portfolio gains in 1995.
(3) On September 29, 1995, the Company made a pro rata distribution to its
stockholders of Transport Holdings Inc., which, at the time of distribution,
was the indirect owner of the business of Transport Life. Revenues and net
income of Transport Life in the 1995 period amounted to $196 million and $17
million, respectively.
23
<PAGE>
Primerica Financial Services
Face amount of new term life insurance sales was $38.9 billion in the first nine
months of 1996, compared to $39.5 billion in the prior year period. Sales of
mutual funds (at net asset value) were $1.761 billion for the first nine months
of 1996, up from sales of $1.123 billion in the first nine months of 1995.
Travelers Life and Annuity
For deferred annuities, net written premiums and deposits were $1.475 billion in
the first nine months of 1996, up 30% from $1.134 billion in the 1995 period.
In the payout and group annuity business, net written premiums and deposits were
$962.7 million in the 1996 first nine months, compared to $759.5 million in the
1995 first nine months (which excludes deposits of $60 million in the third
quarter of 1996 and $200 million in the first quarter of 1995 related to the
transfer in-house of pension fund assets of an affiliate, previously managed
externally).
Face amount of individual life insurance issued during the first nine months of
1996 was $4.9 billion, up from $4.5 billion in the first nine months of 1995,
excluding Transport Life. Net written premiums and deposits for individual life
insurance were $215.8 million, up 19% in the first nine months of 1996, compared
to $181.0 million in the first nine months of 1995, excluding Transport Life.
Net written premiums for the growing long-term care insurance line, excluding
Transport Life, were $92.9 million in the first nine months of 1996, compared to
$63.1 million in the first nine months of 1995.
Property & Casualty Insurance Services
Nine Months Ended September 30,
-------------------------------------------
(millions) 1996 1995
- --------------------------------------------------------------------------------
Net Net
Revenues income Revenues income
(loss) (loss)
- --------------------------------------------------------------------------------
Commercial (1) (2) $3,919 $ 60 $2,446 $240
Personal (1) (3) 1,904 145 1,097 80
Financing costs and other (1) 9 (58) - -
Minority interest - - - -
- --------------------------------------------------------------------------------
Total Property & Casualty
Insurance Services $5,832 $147 $3,543 $320
================================================================================
(1) Before minority interest.
(2) Net income includes $11 million of reported investment portfolio losses in
1996 and $15 million of reported investment portfolio gains in 1995, and
$383 million of charges in 1996 related to the acquisition of Aetna P&C.
(3) Net income includes $4 million of reported investment portfolio losses in
1996 and $2 million of reported investment portfolio gains in 1995, and $8
million of charges in 1996 related to the acquisition of Aetna P&C.
24
<PAGE>
As previously indicated, TAP incurred charges during the second quarter of 1996
related to the acquisition and integration of Aetna P&C. These charges resulted
primarily from anticipated costs of the merger and the application of TAP's
strategies, policies and practices to Aetna P&C reserves. The charges include:
o $301.9 million after tax and minority interest ($566.5 million before tax
and minority interest) in reserve increases, net of reinsurance, related
primarily to cumulative injury claims other than asbestos (CIOTA)
o $18.7 million after tax and minority interest ($35 million before tax and
minority interest) provision for lease and severance costs of Travelers
Indemnity related to the restructuring plan for the merger
Commercial Lines
Commercial Lines net written premiums for the first nine months of 1996 totaled
$2.957 billion (excluding a one-time adjustment associated with a reinsurance
transaction), up $1.215 billion compared to $1.742 billion for the first nine
months of 1995, reflecting the acquisition on April 2, 1996 of Aetna P&C, offset
in part by the highly competitive conditions in the Commercial Lines marketplace
and the Company's continuing focus on profitability. Premium equivalents for the
first nine months of 1996 totaled $1.986 billion, down $277 million from $2.263
billion for the first nine months of 1995, reflecting the competitive
environment.
On a combined total basis including Aetna P&C (for periods prior to April 2,
1996 for comparative purposes only), Commercial Lines net written premiums for
the first nine months of 1996 totaled $3.541 billion, compared to $3.937 billion
for the first nine months of 1995, reflecting the highly competitive conditions
in the Commercial Lines marketplace and the Company's continuing focus on
profitability. In addition, Commercial Lines continues to re-evaluate its
exposure to certain segments of the middle market. On the same combined total
basis premium equivalents for the first nine months of 1996 totaled $2.102
billion, compared to $2.757 billion for the first nine months of 1995. The
decrease in premium equivalents reflects a depopulation of involuntary pools as
the loss experience of workers' compensation improves and insureds move to
voluntary markets, combined with a highly competitive marketplace.
National Accounts net written premiums for the 1996 first nine months were $616
million (excluding a one-time adjustment associated with a reinsurance
transaction) compared to $514 million in the 1995 first nine months. National
Accounts premium equivalents of $1.940 billion for the 1996 first nine months
compared to $2.231 billion in the first nine months of 1995. In the 1996 first
nine months, National Accounts new business, including both premiums and premium
equivalents, was $298 million compared to $345 million in the 1995 period.
National Accounts renewed business including both premiums and premium
equivalents for the first nine months of 1996 was $1.707 billion compared to
$1.639 billion in the 1995 period. National Accounts business retention ratio
was 81% for the first nine months of 1996 compared to 84% for the first nine
months of 1995.
Commercial Accounts net written premiums were $1.033 billion in the 1996 first
nine months compared to $564 million in the 1995 first nine months and premium
equivalents were $46 million, compared to $32 million in the 1995 period. For
the first nine months of 1996, new premium and equivalent business in Commercial
Accounts was $252 million compared to $205 million in the 1995 period. The
Commercial Accounts business retention ratio was 71% in the 1996 first nine
months, compared to 76% in the comparable 1995 period.
Select Accounts net written premiums of $855 million for the first nine months
of 1996 were $446 million above the first nine months of 1995 premium levels.
New premium business in Select Accounts was $198 million in the 1996 first nine
months compared to $117 million in the 1995 period. The Select
25
<PAGE>
Accounts business retention ratio was 78% in the 1996 first nine months compared
to 75% in the comparable 1995 period.
Specialty Accounts net written premiums of $454 million in the 1996 first nine
months compared to $256 million in the 1995 period.
The statutory combined ratio for Commercial Lines for the first nine months of
1996 was 131.9% compared to 108.3% in the first nine months of 1995. The GAAP
combined ratio for Commercial Lines for the first nine months of 1996 was 126.4%
compared to 106.1% in the comparable 1995 period.
The increase in the first nine months of 1996 statutory and GAAP combined ratios
for Commercial Lines compared to the first nine months of 1995 is primarily
attributable to the charges taken in the second quarter of 1996 related to the
acquisition and integration of Aetna P&C. Excluding these amounts, the statutory
and GAAP combined ratios for the nine months ended September 30, 1996 would have
been 109.9% and 107.6%, respectively. The increase in the first nine months of
1996 statutory and GAAP combined ratios excluding acquisition-related charges
compared to the first nine months of 1995 statutory and GAAP combined ratios is
generally due to the inclusion in 1996 of Aetna P&C results. Aetna P&C has
historically had a higher underwriting expense ratio, partially offset by a
lower loss ratio, which reflects the mix of business including the favorable
effect of the lower loss ratio of the Bond business. In addition, losses from
Hurricane Fran increased the 1996 statutory and GAAP combined ratios by 0.9 and
0.8 percentage points, respectively.
Personal Lines
Net written premiums in the first nine months of 1996 were $1.685 billion,
compared to $978 million in the first nine months of 1995. This improvement
primarily reflects the acquisition of Aetna P&C and, to a lesser extent, growth
in target markets, marginally offset by reductions due to catastrophe management
strategies.
On a combined total basis including Aetna P&C (for periods prior to April 2,
1996 for comparative purposes only), Personal Lines net written premiums for the
first nine months of 1996 totaled $2.001 billion, compared to $1.886 billion for
the first nine months of 1995. Excluding the effect of changes in reinsurance
coverage, both automobile and homeowners lines grew modestly. This underlying
strength reflected growth in target markets, partially offset by reductions due
to catastrophe management strategies.
The statutory combined ratio for Personal Lines for the first nine months of
1996 was 102.1% compared to 103.7% in the 1995 first nine months. The GAAP
combined ratio for Personal Lines in the first nine months of 1996 was 99.6%
compared to 101.0% in the comparable 1995 period.
The decrease in the combined ratios in 1996 was due to the favorable loss
experience in personal auto lines and expense reductions, partially offset by
the higher level of catastrophe losses, which after tax and reinsurance were
$52 million for the first nine months of 1996 compared to $8 million in the
1995 period.
Financing Costs and Other
The primary component for the 1996 nine months was interest expense of $51
million after tax, reflecting financing costs associated with the acquisition of
Aetna P&C.
Environmental Claims
The Company's reserves for environmental claims are not established on a
claim-by-claim basis. An aggregate bulk reserve is carried for all of the
Company's environmental claims that are in the dispute
26
<PAGE>
process. This bulk reserve is established and adjusted based upon the aggregate
volume of in-process environmental claims and the Company's experience in
resolving such claims. Until the dispute is resolved, the estimated amounts for
disputed coverage claims are carried in bulk reserve. At September 30, 1996,
approximately 20% of the net environmental loss reserve (i.e., approximately
$250 million) is case reserves. The balance, approximately 80% of the net
aggregate reserve (i.e. approximately $1.026 billion), is carried in a bulk
reserve together with incurred but not yet reported environmental claims for
which the Company has not received any specific claims.
The following table displays activity for environmental losses and loss expenses
and reserves for the nine months ended September 30, 1996 and 1995.
Environmental Losses Nine Months Ended Nine Months Ended
(millions) September 30, 1996 September 30, 1995
------------------ ------------------
Beginning reserves:
Direct $ 454 $ 482
Ceded (50) (11)
------ -----
Net 404 471
Acquisition of Aetna P&C:
Direct 938 -
Ceded (24) -
Incurred losses and loss expenses:
Direct 82 110
Ceded (31) (61)
Losses paid:
Direct 113 136
Ceded (20) (22)
Ending reserves:
Direct 1,361 456
Ceded (85) (50)
------ -----
Net $1,276 $ 406
====== =====
Asbestos Claims
At September 30, 1996, approximately 25% of the net aggregate reserve (i.e.,
approximately $265 million) is case reserves. The balance, approximately 75%
(i.e., approximately $795 million) of the net asbestos reserves, represents
incurred but not yet reported losses.
27
<PAGE>
The following table displays activity for asbestos losses and loss expenses and
reserves for the nine months ended September 30, 1996 and 1995.
Asbestos Losses Nine Months Ended Nine Months Ended
(millions) September 30, 1996 September 30, 1995
------------------ ------------------
Beginning reserves:
Direct $ 695 $702
Ceded (293) (319)
------ ----
Net 402 383
Acquisition of Aetna P&C:
Direct 776 -
Ceded (116) -
Incurred losses and loss expenses:
Direct 83 98
Ceded (8) (68)
Losses paid:
Direct 135 77
Ceded (58) (71)
Ending reserves:
Direct 1,419 723
Ceded (359) (316)
------ ----
Net $1,060 $407
====== ====
In relation to these asbestos and environmental-related claims, the Company
carries on a continuing review of its overall position, its reserving techniques
and reinsurance recoverables. In each of these areas of exposure, the Company
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 or
range of exposure represented by these claims to the Company's financial
condition, results of operations or liquidity. The Company believes that it is
reasonably possible that the outcome of the uncertainties regarding
environmental and asbestos claims could result in a liability exceeding the
reserves by an amount that would be material to operating results in a future
period. However, it is not likely these claims will have a material adverse
effect on the Company's financial condition or liquidity.
Cumulative Injury Other Than Asbestos (CIOTA)
Cumulative injury other than asbestos (CIOTA) claims are generally submitted to
the Company under general liability policies and often involve an allegation by
a claimant against an insured that the claimant has suffered injuries as a
result of long-term or continuous exposure to harmful products or substances.
Such harmful products or substances include, but are not limited to, lead paint,
pesticides, pharmaceutical products, silicone-based personal products, solvents
and other deleterious substances.
Due to claimants' allegations of long-term bodily injury in CIOTA claims,
numerous complex issues regarding such claims are presented. The claimant's
theories of liability must be evaluated, evidence pertaining to a causal link
between injury and exposure to a substance must be reviewed, the potential role
of other causes of injury must be analyzed, the liability of other defendants
must be explored, and assessment of a claimant's damages must be made and the
law of the jurisdiction must be applied. In addition, the Company must review
the number of policies issued by the Company to the insured and whether such
policies are triggered by the allegations, the terms and limits of liability of
such policies, the obligations of other insurers to respond to the claim, and
the applicable law in each jurisdiction.
28
<PAGE>
For these reasons, the Company has long considered CIOTA to be a separate and
distinct type of claim which requires special handling. Approximately 10 years
ago the Company established a separate department to focus on CIOTA claims that
has enabled it to better estimate CIOTA liabilities based on historical data.
To the extent disputes exist between the Company and a policyholder regarding
the coverage available for CIOTA claims, the Company resolves the disputes,
where feasible, through settlements with the policyholder or through coverage
litigation. Generally, the terms of a settlement agreement set forth the nature
of the Company's participation in resolving CIOTA claims and the scope of
coverage to be provided by the Company and contain the appropriate indemnities
and hold harmless provisions to protect the Company. These settlements generally
eliminate uncertainties for the Company regarding the risks extinguished,
including the risk that losses would be greater than anticipated due to evolving
theories of tort liability or unfavorable coverage determinations. This approach
also has the effect of determining losses at a date earlier than would have
occurred in the absence of such settlement agreements. On the other hand, in
cases where future developments are favorable to insurers, this approach could
have the effect of resolving claims for amounts in excess of those that would
ultimately have been paid had the claims not been settled in this manner. No
inference should be drawn that because of the Company's method of dealing with
CIOTA claims, its reserves for such claims are more conservatively stated than
those of other insurers.
Aetna P&C did not distinguish CIOTA from other general liability claims or treat
CIOTA claims as a special class of claims. In addition, there were substantial
differences in claims approach and resolution between the Company and Aetna P&C
regarding CIOTA claims.
During the second quarter, the Company completed its review of Aetna P&C's
exposure to CIOTA claims in order to determine an appropriate level of reserves
using the Company's approach as described above. Based on the results of that
review, the Company's general liability insurance reserves were increased $360
million, net of reinsurance ($191.9 million after tax and minority interest).
Corporate and Other
Nine Months Ended September 30,
----------------------------------------------
(millions) 1996 1995
- --------------------------------------------------------------------------------
Net income Net income
Revenues (expense) Revenues (expense)
- --------------------------------------------------------------------------------
Net expenses (1) $(158) $(176)
Net gain (loss) on sale of 384 -
subsidiaries and affiliates
- --------------------------------------------------------------------------------
Total Corporate and Other $111 $226 $5 $(176)
================================================================================
(1) Net income (expense) includes $8 million and $20 million of reported
investment portfolio losses in 1996 and 1995, respectively.
Lower staff expenses in the first nine months of 1996 compared to the first nine
months of 1995 were partially offset by interest expense on a higher level of
corporate borrowings.
29
<PAGE>
Liquidity and Capital Resources
TRV services its obligations primarily with dividends and other advances that it
receives from subsidiaries. The subsidiaries' dividend-paying abilities are
limited by certain covenant restrictions in bank and/or credit agreements and/or
by regulatory requirements. TRV believes it will have sufficient funds to meet
current and future commitments. Each of TRV's major operating subsidiaries
finances its operations on a stand-alone basis consistent with its
capitalization and ratings.
Travelers Group Inc. (TRV)
TRV issues commercial paper directly to investors and maintains unused credit
availability under committed revolving credit agreements at least equal to the
amount of commercial paper outstanding.
TRV, Commercial Credit Company (CCC) and The Travelers Insurance Company (TIC)
have an agreement with a syndicate of banks to provide $1.0 billion of revolving
credit, to be allocated to any of TRV, CCC or TIC. The participation of TIC in
this agreement is limited to $250 million. The revolving credit facility
consists of a five-year revolving credit facility which expires in 2001.
Currently $250 million is allocated to TRV, $650 million to CCC and $100 million
to TIC. Under this facility TRV is required to maintain a certain level of
consolidated stockholders' equity (as defined in the agreement). At September
30, 1996 this requirement was exceeded by approximately $4.0 billion. In
addition to the five-year revolving credit facility, during the second quarter
of 1996, TRV entered into a 364-day revolving credit and bid loan agreement with
a bank to provide $75 million of revolving credit. At September 30, 1996, there
were no borrowings outstanding under either facility.
Currently, TRV has unused credit availability of $325 million. TRV may borrow
under its revolving credit facilities at various interest rate options and
compensates the banks for the facilities through commitment fees.
During October 1996, Travelers Capital I, a subsidiary trust of TRV, issued $400
million of 8.00% Trust Preferred Securities in a public offering. These Trust
Preferred Securities, which are fully and unconditionally guaranteed by TRV,
have a liquidation value of $25 per Trust Preferred Security and are mandatorily
redeemable under certain circumstances.
TRV as of November 5, 1996, had $1.0 billion available for debt offerings and
$600 million available for trust preferred securities offerings under its shelf
registration statements.
In December 1995, TRV, through a private placement, issued $100 million
principal amount of 6 1/4% Notes due December 1, 2005, and $100 million
principal amount of 7% Notes due December 1, 2025, substantially all of which
was exchanged for registered debt in June 1996.
During the second and third quarters of 1996, $125 million of liquidation value
of the 5.50% Convertible Preferred Stock Series B (Series B Preferred)
representing 2,499,945 shares of Series B Preferred was converted into 6,802,432
shares of common stock. Each share of the Series B Preferred Stock was converted
into 2.72109 shares of TRV common stock at a conversion price of $18.375 per
share. The remaining 55 shares were redeemed for cash at $51.925 per share plus
accrued and unpaid dividends.
Travelers/Aetna Property Casualty Corp. (TAP)
On April 2, 1996, Travelers/Aetna Property Casualty Corp. (TAP), an indirect
majority-owned subsidiary of the Company, purchased from Aetna Life and Casualty
Company (Aetna) all of the outstanding capital stock of The Aetna Casualty and
Surety Company (ACSC) and The Standard Fire Insurance Company (SFIC)
(collectively, Aetna P&C) for approximately $4.16 billion in cash. TAP also owns
The Travelers
30
<PAGE>
Indemnity Company (Travelers Indemnity), and is the primary vehicle through
which the Company engages in the property and casualty insurance business. See
Note 2 of Notes to Condensed Consolidated Financial Statements regarding the
financing of the Aetna P&C purchase.
TAP has a five year revolving credit agreement with a syndicate of banks that
expires on March 15, 2001. All borrowings under the credit facility have been
repaid in full and the amount of the facility was subsequently reduced to $600
million, none of which is currently utilized. Under this facility TAP is
required to maintain a certain level of consolidated stockholders' equity (as
defined in the agreement). At September 30, 1996, this requirement was exceeded
by approximately $2.6 billion.
TAP also issues commercial paper directly to investors and maintains unused
credit availability under the committed revolving credit agreement at least
equal to the amount of commercial paper outstanding.
In addition in September 1996 TAP sold in a public offering $200 million of
6 3/4% Notes due September 1, 1999 and in October an additional $200 million of
6 1/4% Notes due October 1, 1999.
TAP as of November 5, 1996, had $900 million available for debt offerings under
its shelf registration statement.
Commercial Credit Company (CCC)
CCC also issues commercial paper directly to investors and maintains unused
credit availability under committed revolving credit agreements at least equal
to the amount of commercial paper outstanding. Currently CCC has unused credit
availability of $2.150 billion. CCC may borrow under its revolving credit
facilities at various interest rate options and compensates the banks for the
facilities through commitment fees.
CCC is limited by covenants in its revolving credit agreements as to the amount
of dividends and advances that may be made to its parent or its affiliated
companies. At September 30, 1996, CCC would have been able to remit $273 million
to its parent under its most restrictive covenants.
CCC completed the following long-term debt offerings in 1996 and, as of November
5, 1996, had $950 million available for debt offerings and $400 million
available for trust preferred security offerings under its shelf registration
statements:
o 5 7/8% Notes due January 15, 2003....... $200 million
o 5.55% Notes due February 15, 2001....... $200 million
In addition to the long-term debt offerings above, in October 1996 CCC, through
a private placement, issued $200 million of 6.45% Notes due October 18, 2006
which by their terms can be put to CCC at par on October 18, 1999.
Smith Barney Holdings Inc. (Smith Barney)
Smith Barney funds its day-to-day operations through the use of commercial
paper, collateralized and uncollateralized bank borrowings (both committed and
uncommitted), internally generated funds, repurchase transactions, and
securities lending arrangements. The volume of Smith Barney's borrowings
generally fluctuates in response to changes in the amount of reverse repurchase
transactions outstanding, the level of securities inventories, customer balances
and securities borrowing transactions. Smith Barney has a $1.0 billion revolving
credit agreement with a bank syndicate that extends through May 1999. In
addition, Smith Barney has a $500 million 364-day revolving credit agreement
with a bank syndicate that extends through May 1997. At September 30, 1996,
there were no borrowings outstanding under either
31
<PAGE>
facility. In addition, Smith Barney has substantial borrowing arrangements
consisting of facilities that it has been advised are available, but where no
contractual lending obligation exists.
Smith Barney, through its subsidiary Smith Barney Inc., issues commercial paper
directly to investors. As a policy, Smith Barney attempts to maintain sufficient
capital and funding sources in order to have the capacity to finance itself on a
fully collateralized basis at all times, including periods of financial stress.
In addition, Smith Barney monitors its leverage and capital ratios on a daily
basis.
Smith Barney is limited by covenants in its revolving credit facility as to the
amount of dividends that may be paid to TRV. The amount of dividends varies
based upon, among other things, levels of net income of Smith Barney. At
September 30, 1996, Smith Barney would have been able to remit approximately
$590 million to TRV under its most restrictive covenants.
Smith Barney completed the following long-term debt offering in 1996 and, as of
November 5, 1996, had $485 million available for debt offerings under its shelf
registration statement:
o 5 7/8% Notes due February 1, 2001.................... $250 million
o S&P 500 Equity Linked Notes due August 13, 2001 ..... $40 million
o 7 1/8% Notes due October 1, 2006..................... $200 million
Securities Borrowed, Loaned and Subject to Repurchase Agreements
Smith Barney engages in "matched book" transactions in government and
mortgage-backed securities as well as "conduit" transactions in corporate equity
and debt securities. These transactions are similar in nature. A "matched book"
transaction involves a security purchased under an agreement to resell (i.e.,
reverse repurchase transaction) and simultaneously sold under an agreement to
repurchase (i.e., repurchase transaction). A "conduit" transaction involves the
borrowing of a security from a counterparty and the simultaneous lending of the
security to another counterparty. These transactions are reported gross in the
Condensed Consolidated Statement of Financial Position and typically yield
interest spreads generally ranging from 10 to 30 basis points. The interest
spread results from the net of interest received on the reverse repurchase or
security borrowed transaction and the interest paid on the corresponding
repurchase or security loaned transaction. Interest rates charged or credited in
these activities are usually based on current Federal Funds rates but can
fluctuate based on security availability and other market conditions. The size
of balance sheet positions resulting from these activities can vary
significantly depending primarily on levels of activity in the bond markets, but
would have a relatively smaller impact on net income.
The Travelers Insurance Company (TIC)
At September 30, 1996, TIC had $22.3 billion of life and annuity product deposit
funds and reserves. Of that total, $11.9 billion is not subject to discretionary
withdrawal based on contract terms. The remaining $10.4 billion is for life and
annuity products that are subject to discretionary withdrawal by the
contractholder. Included in the amount that is subject to discretionary
withdrawal is $1.7 billion of liabilities that are surrenderable with market
value adjustments. Also included are an additional $5.4 billion of the life
insurance and individual annuity liabilities, which are subject to discretionary
withdrawal and have an average surrender charge of 5.1%. In the payout phase,
these funds are credited at significantly reduced interest rates. The remaining
$3.3 billion of liabilities is surrenderable without charge. More than 15% of
these relate to individual life products. These risks would have to be
underwritten again if transferred to another carrier, which is considered a
significant deterrent against withdrawal by long-term policyholders. Insurance
liabilities that are surrendered or withdrawn are reduced by outstanding policy
loans and related accrued interest prior to payout.
32
<PAGE>
TIC, a direct subsidiary of TIGI, issues commercial paper to investors and
maintains unused committed revolving credit facilities at least equal to the
amount of commercial paper outstanding. Currently, TIC has unused credit
availability of $100 million.
TIC is subject to various regulatory restrictions that limit the maximum amount
of dividends available to its parent without prior approval of the Connecticut
Insurance Department. A maximum of $506 million of statutory surplus was
available in 1996 for such dividends without Department approval, of which $331
million has been paid to date.
Future Application of Accounting Standards
Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
(FAS 123), is effective for 1996 reporting. This statement addresses the
accounting for the cost of stock-based compensation, such as stock options and
restricted stock. FAS 123 permits either expensing the value of stock-based
compensation over the period earned or disclosing in the financial statement
footnotes the pro forma impact to net income as if the value of stock-based
compensation awards had been expensed. The value of awards would be measured at
the grant date based upon estimated fair value, using option pricing models. The
Company has selected the disclosure alternative that requires such pro forma
disclosures to be included in annual financial statements.
In June 1996, the Financial Accounting Standards Board (FASB) issued statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" (FAS 125). FAS
125 provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. These standards are based
on consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrended, and
derecognizes liabilities when extinguished. FAS 125 provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The requirements of FAS 125 would be
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively; however, the FASB has announced its intention to delay until
January 1, 1998 the effective date for certain provisions. Earlier or
retroactive application is not permitted. The Company is currently evaluating
the impact of this statement.
33
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
For information concerning the several class action lawsuits filed
against Smith Barney Inc. in connection with three funds managed by Hyperion
Capital Management Inc., see the descriptions that appear in the fourth
paragraph on page 26 of the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1993, and the first paragraph under the heading
"Smith Barney" on page 65 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1995, which descriptions are incorporated by reference
herein. A copy of the pertinent paragraphs of such filings is included as an
exhibit to this Form 10-Q. In October 1996, the U.S. Court of Appeals for the
Second Circuit affirmed the district court's dismissal of the claims. Plaintiffs
have applied for a rehearing en banc.
For information concerning actions filed against several insurance
companies and industry organizations relating to service fee charges and premium
calculations on certain workers' compensation insurance, see the descriptions
that appear in the paragraph that begins on page 90 and ends on page 91 of the
Prospectus dated April 22, 1996 of Travelers/Aetna Property Casualty Corp., a
majority-owned subsidiary of the Company, and in the second paragraph on page 35
of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996, which descriptions are incorporated by reference herein. A copy of the
pertinent paragraphs of such filings is included as an exhibit to this Form
10-Q. In October 1996, certain subsidiaries of the Company were named as
defendants in a purported class action filed in the District Court of Wyandotte
County, Kansas, Civil Court Department under the name Amundson & Associates Art
Studio Ltd. v. NCCI, et al. The plaintiffs make allegations and seek damages
that are similar to those in the cases referred to above.
For information concerning a purported class action filed against
Primerica Financial Services Inc. ("PFSI"), a subsidiary of the Company, in
connection with the purchase by individuals of interests in oil and gas rights
owned by Basic Energy and Affiliated Resources Inc. ("BEAR"), see the
description that appears in the second paragraph on page 30 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 and the
fourth paragraph on page 25 of the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996, which descriptions are incorporated by
reference herein. A copy of the pertinent paragraphs of such filings is included
as an exhibit to this Form 10-Q. In October 1996, the court dismissed several
claims against PFSI. Also in October 1996, the National Association of
Securities Dealers, Inc. ("NASD") filed a complaint against PFSI alleging a
failure to supervise certain registered representatives and associated persons
and to establish and maintain proper written procedures for compliance with NASD
rules regarding private securities transactions relating to BEAR.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended
September 30, 1996.
34
<PAGE>
EXHIBIT INDEX
Exhibit Filing
Number Description of Exhibit Method
- ------ ---------------------- ------
3.01 Restated Certificate of Incorporation of Travelers Group
Inc. (formerly The Travelers Inc.) (the "Company"),
Certificate of Designation of Cumulative Adjustable Rate
Preferred Stock, Series Y, and Certificate of Amendment to
the Restated Certificate of Incorporation, incorporated by
reference to Exhibit 3.01 to Amendment No. 1 to the
Company's Registration Statement on Form S-4 (No.
333-00737).
3.02 By-Laws of the Company as amended through January 24,
1996, incorporated by reference to Exhibit 3.02 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 (File No. 1-9924) (the "Company's
1995 10-K").
10.01 Amendment No. 14 to the Stock Option Plan of the Company. Electronic
10.02 Amended and Restated Compensation Plan for Non-Employee Electronic
Directors of the Company.
10.03 Capital Accumulation Plan of the Company (as amended Electronic
through September 25, 1996).
10.04 Amendment No. 1 to the Travelers Group 1996 Stock Electronic
Incentive Plan.
10.05 Amendment No. 2 to the Travelers Group 1996 Stock Electronic
Incentive Plan.
11.01 Computation of Earnings Per Share. Electronic
12.01 Computation of Ratio of Earnings to Fixed Charges. Electronic
27.01 Financial Data Schedule. Electronic
99.01 The fourth paragraph on page 26 of the Company's Quarterly Electronic
Report on Form 10-Q for the fiscal quarter ended September
30, 1993 and the first paragraph under the heading "Smith
Barney" on page 65 of the Company's 1995 10-K.
99.02 The paragraph that begins on page 90 and ends on page 91 Electronic
of the Prospectus dated April 22, 1996 of Travelers/Aetna
Property Casualty Corp. and the second paragraph on page
35 of the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1996.
99.03 The second paragraph on page 30 of the Company's Quarterly Electronic
Report on Form 10-Q for the fiscal quarter ended September
30, 1995 and the fourth paragraph on page 25 of the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1996.
The total amount of securities authorized pursuant to any instrument
defining rights of holders of long-term debt of the Company does not
exceed 10% of the total assets of the Company and its consolidated
subsidiaries. The Company will furnish copies of such instrument to the
Commission upon request.
35
<PAGE>
SIGNATURES
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 thereunto duly authorized.
Travelers Group Inc.
Date: November 12, 1996 By /s/ Heidi Miller
-----------------------
Heidi Miller
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 12, 1996 By /s/ Irwin Ettinger
-------------------------
Irwin Ettinger
Executive Vice President
(Chief Accounting Officer)
36
<PAGE>
EXHIBIT INDEX
Exhibit Filing
Number Description of Exhibit Method
- ------ ---------------------- ------
3.01 Restated Certificate of Incorporation of Travelers Group
Inc. (formerly The Travelers Inc.) (the "Company"),
Certificate of Designation of Cumulative Adjustable Rate
Preferred Stock, Series Y, and Certificate of Amendment to
the Restated Certificate of Incorporation, incorporated by
reference to Exhibit 3.01 to Amendment No. 1 to the
Company's Registration Statement on Form S-4 (No.
333-00737).
3.02 By-Laws of the Company as amended through January 24,
1996, incorporated by reference to Exhibit 3.02 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 (File No. 1-9924) (the "Company's
1995 10-K").
10.01 Amendment No. 14 to the Stock Option Plan of the Company. Electronic
10.02 Amended and Restated Compensation Plan for Non-Employee Electronic
Directors of the Company.
10.03 Capital Accumulation Plan of the Company (as amended Electronic
through September 25, 1996).
10.04 Amendment No. 1 to the Travelers Group 1996 Stock Electronic
Incentive Plan.
10.05 Amendment No. 2 to the Travelers Group 1996 Stock Electronic
Incentive Plan.
11.01 Computation of Earnings Per Share. Electronic
12.01 Computation of Ratio of Earnings to Fixed Charges. Electronic
27.01 Financial Data Schedule. Electronic
99.01 The fourth paragraph on page 26 of the Company's Quarterly Electronic
Report on Form 10-Q for the fiscal quarter ended September
30, 1993 and the first paragraph under the heading "Smith
Barney" on page 65 of the Company's 1995 10-K.
99.02 The paragraph that begins on page 90 and ends on page 91 Electronic
of the Prospectus dated April 22, 1996 of Travelers/Aetna
Property Casualty Corp. and the second paragraph on page
35 of the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1996.
99.03 The second paragraph on page 30 of the Company's Quarterly Electronic
Report on Form 10-Q for the fiscal quarter ended September
30, 1995 and the fourth paragraph on page 25 of the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1996.
The total amount of securities authorized pursuant to any instrument
defining rights of holders of long-term debt of the Company does not
exceed 10% of the total assets of the Company and its consolidated
subsidiaries. The Company will furnish copies of such instrument to the
Commission upon request.
Amendment No. 14 to the Travelers Group
Stock Option Plan (the "SOP Plan")
================================================================================
As of July 24, 1996, the Board of Directors of Travelers Group Inc. hereby
approves the following amendments to the SOP Plan:
1. The first paragraph of Section 2 is amended to read in its entirety as
follows:
The Plan shall be administered by the Committee. For purposes of this Plan,
"Committee" shall mean, with respect to employees who are subject to the
reporting requirements of Section 16(a) of the 1934 Act (as defined below)
("Section 16(a) Persons"), the Incentive Compensation Subcommittee, and
with respect to all other Optionees (as defined in Section 3(b) hereof),
either the Nominations and Compensation Committee or the Incentive
Compensation Subcommittee, as the case may be. "Incentive Compensation
Subcommittee" shall mean a subcommittee of the Nominations and Compensation
Committee, appointed by the Nominations and Compensation Committee, the
composition of which subcommittee shall satisfy the requirements of Rule
16b-3 under the Securities Exchange Act of 1934, as amended (the "1934
Act"), with respect to grants made to Section 16(a) Persons, and who
qualify, and remain qualified as "outside directors" as defined in Section
162(m) of the Code; and "Nominations and Compensation Committee" shall mean
the Nominations and Compensation Committee appointed by the Board of
Directors of the Company (the "Board").
2. The words "(or, if necessary for tax purposes, a subcommittee thereof)" in
the first sentence of Section 3(b) are deleted.
3. Section 5(c) is amended to read in its entirety as follows:
Options, reload Options and, during any period of restrictions on
transferability, incremental shares, may not be sold, assigned, pledged,
hypothecated or otherwise transferred by the Optionee other than by will or
the laws of descent and distribution, except as provided in this Section
5(c). The Committee may permit (on such terms, conditions and limitations
as it shall establish) Options and reload Options to be transferred one
time to, or to a trust or similar vehicle for the benefit of an Optionee's
immediate family members (the "Permitted
<PAGE>
Transferees"). All rights with respect to Options granted to an Optionee
shall be exercisable during his or her lifetime only by the Optionee, or if
applicable, the Permitted Transferees. An Optionee may designate one or
more beneficiaries to succeed to the rights of the Optionee with respect to
Options granted under the Plan in the event of the death of the Optionee,
by providing written notice of such designation to the Committee on such
form as may be prescribed by the Committee. If no such notice is received,
the Optionee's estate shall succeed to the rights of the Optionee with
respect to Options granted under the Plan.
4. In Section 9(m), the second sentence is deleted in its entirety.
5. Subsection 9(p) is deleted in its entirety.
6. The amendments set forth in paragraphs 1 through 3 shall become effective
on July 24, 1996. The amendments set forth in paragraphs 4 and 5 shall
become effective on the date designated by the General Counsel of the
Company as the effective date for the Company's employee benefit plans to
be subject to Rule 16b-3 as promulgated by the Securities and Exchange
Commission on May 30, 1996.
TRAVELERS GROUP INC.
AMENDED AND RESTATED COMPENSATION PLAN
FOR NON-EMPLOYEE DIRECTORS (the "Plan")
Section 1. Eligibility. Each member of the Board of Directors of Travelers
Group Inc. (the "Company") who is not an employee of the Company or any of its
subsidiaries (an "Eligible Director") is eligible to participate in the Plan.
Section 2. Administration. The Plan shall be administered, construed and
interpreted by the Board of Directors of the Company. Pursuant to such
authorization, the Board of Directors shall have the responsibility for carrying
out the terms of the Plan, including but not limited to the determination of the
annual retainer to be paid to all Eligible Directors (the "Annual Fixed Director
Compensation"). To the extent permitted under the securities laws applicable to
compensation plans including, without limitation, the requirements of Section
16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") or
under the Internal Revenue Code of 1986, as amended (the "Code"), the
Nominations and Compensation Committee of the Board of Directors, or a
subcommittee of the Nominations and Compensation Committee, may exercise the
discretion granted to the Board under the Plan, provided that the composition of
such Committee or subcommittee shall satisfy the requirements of Rule 16b-3
under the Exchange Act, or any successor rule or regulation. The Board of
Directors may also designate a plan administrator to manage the record keeping
and other routine administrative duties under the Plan.
Section 3. Compensation. Annual Fixed Director Compensation payable to
Eligible Directors for services rendered as a director during a calendar year,
if not deferred pursuant to paragraph 4 of the Plan, shall be paid partly in
shares of common stock, par value $.01 per share (the "Common Stock"), of the
Company and partly in cash. Payment shall be made quarterly, on the first
business day following the end of the quarter for which the compensation is
payable, to each Eligible Director who served as a director during at least
one-half of such quarter and who was a director on the last day of such quarter.
The percentage of such payment to be made in cash shall approximate the maximum
Federal income tax liability that could be incurred by the Eligible Director in
respect of receipt of the shares of Common Stock as compensation, which amount
shall be determined from time to time by the Board of Directors, with the advice
of tax counsel. The number of shares of the Company's Common Stock to be
transferred to the Eligible Director in payment of the balance of such quarterly
installment of Annual Fixed Director Compensation shall be determined in the
manner set forth in paragraph 5(a), and such
<PAGE>
shares shall not be transferred or sold by such Eligible Director for a period
of six months following the date of grant.
Section 4. Election to Defer.
(a) Time of Election. As soon as practicable prior to the beginning of
a calendar year, an Eligible Director may elect to defer compensation to be
received pursuant to the Plan by directing that all of the Annual Fixed Director
Compensation which otherwise would have been payable in accordance with
paragraph 3 above during such calendar year and succeeding calendar years shall
be credited to a deferred compensation account (the "Director's Account"). Under
a valid election, such deferred Compensation shall be payable entirely in shares
of Common Stock, determined in accordance with paragraph 5(a) below. Any person
who shall become an Eligible Director during any calendar year, and who was not
an Eligible Director of the Company prior to the beginning of such calendar
year, may elect, within 30 days after his or her term begins, to defer payment
of all his or her Annual Fixed Director Compensation earned during the remainder
of such calendar year and for succeeding calendar years.
(b) Form and Duration of Election. An election to defer Annual Fixed
Director Compensation shall be made by written notice executed by the Eligible
Director and filed with the Secretary of the Company. Such election shall
continue until the Eligible Director terminates such election by subsequent
written notice filed with the Secretary of the Company. Any such election to
terminate deferral shall become effective for the calendar quarter following
receipt of the election form by the Company and shall only be effective with
respect to Annual Fixed Director Compensation payable for services rendered as
an Eligible Director thereafter. Amounts credited to the Director's Account
prior to the effective date of termination shall not be affected by such
termination and shall be distributed only in accordance with the terms of the
Plan.
(c) Change of Election. An Eligible Director who has terminated his or
her election to defer compensation hereunder may thereafter make another
election in accordance with paragraph 4(a) to defer such compensation for the
calendar year subsequent to the filing of such election and succeeding calendar
years.
Section 5. The Director's Account. All Annual Fixed Director Compensation
that an Eligible Director has elected to defer under the Plan shall be credited
to the Director's Account as follows:
(a) As of the date a quarterly installment of the Annual Fixed
Director Compensation would otherwise be payable, there shall be credited to the
Director's Account the number of full shares of the Company's Common Stock
obtained by dividing the amount of the Annual Fixed Director Compensation for
the calendar quarter by the average of the closing price of the Company's Common
Stock on the Composite Tape of the New York Stock Exchange Inc. on the last ten
trading days of the calendar quarter for which such Compensation is otherwise
payable. If the amount of the Annual Fixed Director Compensation for the
calendar quarter is
2
<PAGE>
not evenly divisible by such average closing price of the Company's Common
Stock, the balance shall be credited to the Director's Account in cash.
(b) At the end of each calendar quarter, there shall be credited to
the Director's Account an amount equal to the cash dividends that would have
been paid on the number of shares of Common Stock credited to the Director's
Account as of the dividend record date, if any, occurring during such calendar
quarter as if such shares had been shares of issued and outstanding Common Stock
on such record date, and such amount shall be treated as reinvested in
additional shares of Common Stock on the dividend payment date.
(c) Cash amounts credited to the Director's Account pursuant to
subparagraphs (a) and (b) above shall accrue interest commencing from the date
the cash amounts are credited to the Director's Account at a rate per annum to
be determined from time to time by the Company. Amounts credited to the
Director's Account shall continue to accrue interest until distributed in
accordance with the Plan. An Eligible Director may be given the opportunity make
a written election to treat the existing cash balance and interest accrued
thereon as invested in additional shares of Common Stock. The timing of the
effectiveness of such election shall be subject to the Company's discretion.
(d) An Eligible Director shall not have any interest in the cash or
Common Stock in his or her Director's Account until such cash or Common Stock is
distributed in accordance with the Plan.
Section 6. Distribution from Accounts.
(a) Form of Election. At the time an Eligible Director makes an
election to defer receipt of Annual Fixed Director Compensation pursuant to
paragraphs 5(a) or 5(c), such Director shall also file with the Secretary of the
Company a written election with respect to the distribution of the aggregate
amount of cash and shares credited to the Director's Account pursuant to such
election. An Eligible Director may elect to receive such amount in one lump-sum
payment or in a number of approximately equal annual installments (provided the
payout period does not exceed 15 years). The lump-sum payment or the first
installment shall be paid as of (i) the first business day of any calendar year
subsequent to the date the Annual Fixed Director Compensation would otherwise be
payable, as specified by the Director, (ii) the first business day of the
calendar quarter immediately following the cessation of the Eligible Director's
service as a director of the Company or (iii) the earlier of (i) or (ii), as the
Eligible Director may elect. Subsequent installments shall be paid as of the
first business day of each succeeding annual installment period until the entire
amount credited to the Director's Account shall have been paid. A cash payment
will be made with the final installment for any fraction of a share of Common
Stock credited to the Director's Account.
(b) Adjustment of Method of Distribution. An Eligible Director
participating in the Plan may, prior to the beginning of any calendar year, file
another written election with the Secretary of the Company electing to change
the date and/or method of distribution of the
3
<PAGE>
aggregate amount of cash and shares of Common Stock credited to the Director's
Account for services rendered as a director commencing with such calendar year.
Amounts credited to the Director's Account prior to the effective date of such
change (the "Prior Amounts") shall not be affected by such change and shall be
distributed only in accordance with the election in effect at the time the Prior
Amounts were credited to the Director's Account; provided, however, that an
Eligible Director may elect to change the time at which Prior Amounts are to be
paid, if (i) a written election to effect such change is filed with the
Secretary of the Company at least one year before the earliest scheduled payment
of the Prior Amounts and (ii) such change would not accelerate the Eligible
Director's receipt of the Prior Amounts. Notwithstanding the foregoing, in the
event an Eligible Director suffers a severe financial hardship outside the
control of such Director, as determined by the Company, the Eligible Director
may elect to advance or defer the date of distribution of his or her Director's
Account or change the method of distribution thereof.
(c) Change of Control. Notwithstanding anything to the contrary
contained herein, upon a "Change of Control" (as defined below), the full number
of shares of Common Stock and cash in each Director's Account shall be
immediately funded and be distributable on the later of the date six months and
one day following the "Change of Control" or the distribution date(s) previously
elected by an Eligible Director. For purposes of this Plan, a "Change of
Control" shall mean the occurrence of any of the following, unless such
occurrence shall have been approved or ratified by at least a two-thirds (2/3)
vote of the Continuing Directors (defined below): (i) any person within the
meaning of Sections 13(d) and 14(d) of the Exchange Act, shall have become the
beneficial owner, within the meaning of Rule 13d-3 under the Exchange Act, of
shares of stock of the Company having twenty-five percent (25%) or more of the
total number of votes that may be cast for election of the directors of the
Company; or (ii) there shall have been a change in the composition of the Board
of Directors such that at any time a majority of the Board of Directors shall
have been members of the Board for less than twenty-four (24) months, unless the
election of each new director who was not a director at the beginning of the
period was approved by a vote of at least two-thirds (2/3) of the directors then
still in office who were directors at the beginning of such period, or who were
approved as directors pursuant to the provisions of this paragraph (the
"Continuing Directors").
Section 7. Distribution on Death. If an Eligible Director should die before
all amounts credited to the Director's Account shall have been paid in
accordance with the election referred to in paragraph 6, the balance in such
Director's Account as of the date of such Director's death shall be paid
promptly following such Director's death, in accordance with the method of
payment elected by the Eligible Director, to the beneficiary designated in
writing by such Director. Such balance shall be paid to the estate of the
Eligible Director if (a) no such designation has been made or (b) the designated
beneficiary shall have predeceased the Director and no further beneficiary
designation has been made.
Section 8. Miscellaneous.
(a) The right of an Eligible Director to receive any amount in the
Director's Account shall not be transferable or assignable by such Director,
except by will or by the laws of
4
<PAGE>
descent and distribution, and no part of such amount shall be subject to
attachment or other legal process.
(b) Except as otherwise set forth herein, the Company shall not be
required to reserve or otherwise set aside funds or shares of Common Stock for
the payment of its obligations hereunder. The Company shall make available as
and when required a sufficient number of shares of Common Stock to meet the
requirements arising under the Plan.
(c) The establishment and maintenance of, or allocation and credits
to, the Director's Account shall not vest in the Eligible Director or his
beneficiary any right, title or interest in and to any specific assets of the
Company. An Eligible Director shall not have any dividend or voting rights or
any other rights of a stockholder (except as expressly set forth in paragraph
5(b) with respect to dividends and as provided in subparagraph (f) below) until
the shares of Common Stock credited to a Director's Account are distributed. The
rights of an Eligible Director to receive payments under this Plan shall be no
greater than the right of an unsecured general creditor of the Company.
(d) The Plan shall continue in effect until terminated by the Board of
Directors. The Board of Directors may at any time amend or terminate the Plan;
provided, however, that (i) no amendment or termination shall impair the rights
of an Eligible Director with respect to amounts then credited to the Director's
Account; (ii) the provisions of the Plan relating to eligibility, the amount and
price of securities to be awarded, the timing of and the amount of Annual Fixed
Director Compensation awards shall not be amended more than once every six
months, other than to comport with changes in the Internal Revenue Code of 1986,
as amended, the Employee Retirement Income Security Act of 1974, as amended, or
the rules thereunder; and (iii) no amendment shall become effective without
approval of the stockholders of the Company if such stockholder approval is
required to enable the Plan to satisfy applicable state or Federal statutory or
regulatory requirements.
(e) Each Eligible Director participating in the Plan will receive an
annual statement indicating the amount of cash and number of shares of Common
Stock credited to the Director's Account as of the end of the preceding calendar
year.
(f) If adjustments are made to outstanding shares of Common Stock as a
result of stock dividends, stock splits, recapitalizations, mergers,
consolidations and similar transactions, an appropriate adjustment shall be made
in the number of shares of Common Stock credited to the Director's Account.
(g) Shares of Common Stock that may be granted under the Plan shall be
subject to adjustment upon the occurrence of adjustments to the outstanding
Common Stock described in paragraph 8(f) hereof.
5
<PAGE>
(h) The validity, construction, interpretation, administration and
effect of the Plan and of its rules and regulations, and rights relating to the
Plan, shall be determined solely in accordance with the laws of the State of
Delaware.
(i) All claims and disputes between an Eligible Director and the
Company arising out of the Plan shall be submitted to arbitration in accordance
with the then current arbitration policy of the Company. Notice of demand for
arbitration shall be given in writing to the other party and shall be made
within a reasonable time after the claim or dispute has arisen. The award
rendered by the arbitrator shall be final, and judgment may be entered upon it
in accordance with applicable law in any court having jurisdiction thereof. The
provisions of this Section 8(i) shall be specifically enforceable under
applicable law in any court having jurisdiction thereof.
(j) If any term or provision of this Plan or the application thereof
to any person or circumstances shall, to any extent, be invalid or
unenforceable, then the remainder of the Plan, or the application of such term
or provision to persons or circumstances other than those as to which it is held
invalid or unenforceable, shall not be affected thereby, and each term and
provision hereof shall be valid and be enforced to the fullest extent permitted
by applicable law.
TRAVELERS GROUP
CAPITAL ACCUMULATION PLAN
as amended through September 25, 1996
Section 1. Purpose of the Plan.
The name of this plan is TRAVELERS GROUP CAPITAL ACCUMULATION PLAN (the
"Plan"). The purpose of the Plan is to enable TRAVELERS GROUP INC. (the
"Company") and its Subsidiaries to attract, retain and motivate officers and
certain other employees, to compensate them for their contributions to the
growth and profits of the Company and to encourage ownership of stock in the
Company on the part of such personnel. The Plan provides incentives to
participating officers and certain other employees which are linked directly to
increases in stockholder value and will therefore inure to the benefit of all
stockholders of the Company.
Section 2. Definitions.
For purposes of the Plan, the following terms shall be defined as set forth
below:
(a) "Board" means the Board of Directors of the Company.
(b) "Cause" shall mean (1) failure by a Participant to perform
substantially his or her duties with the Company or a Subsidiary, after
reasonable notice to the Participant of such failure; (2) conduct by a
Participant that is in material competition with the Company or a
Subsidiary or (3) conduct by a Participant that breaches his or her duty of
loyalty to the Company or a Subsidiary, or that is materially injurious to
the Company or a Subsidiary, monetarily or otherwise, which conduct shall
include, but not be limited to (i) disclosing or misusing any confidential
information pertaining to the Company or a Subsidiary; (ii) any attempt,
directly or indirectly to induce any employee, agent, insurance agent,
insurance broker or broker-dealer of the Company or any Subsidiary to be
employed or perform services elsewhere or (iii) any attempt by a
Participant directly or indirectly to solicit the trade of any customer or
supplier or prospective customer or supplier of the Company or any
Subsidiary or (iv) disparaging the Company, any Subsidiary or any of their
respective officers or directors. The determination of whether any conduct,
action or failure to act constitutes "Cause" shall be made by the
Committee.
(c) "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
(d) "Committee" shall mean, with respect to Section 16(a) Persons, the
Incentive Compensation Subcommittee, and with respect to all other
Participants, either the Nominations and Compensation Committee or the
Incentive Compensation Subcommittee, as the case may be.
(e) "Disability" shall mean a disability that renders an individual unable
to be occupied within his or her business or profession for a specified
period of time, as determined by the Committee, or its designee.
(f) "Eligible Employee" means an employee of the Company or any Subsidiary
as described in Section 3.
(g) "Incentive Compensation Subcommittee" shall mean a subcommittee of the
Nominations and Compensation Committee, appointed by the Nominations and
Compensation Committee, the composition of which subcommittee shall satisfy
the requirements of Rule 16b-3 under the Securities and Exchange Act of
1
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1934, as amended (the "1934 Act"), with respect to grants to Section 16(a)
Persons, and who also qualify, and remain qualified as "outside directors"
as defined in Section 162(m) of the Code.
(h) "Incremental Shares" shall have the meaning set forth in Section 6(i).
(i) "Nominations and Compensation Committee" shall mean the Nominations and
Compensation Committee appointed by the Board.
(j) "Options" mean non-qualified stock options to purchase shares of Stock
which are not incentive stock options under Section 422 of the Code and
which are granted under Section 6 herein.
(k) "Participant" means an Eligible Employee selected by the Committee,
pursuant to the Committee's authority in Section 7, to receive an award of
Restricted Stock.
(l) "Related Employment" means the employment of an individual by an
employer which is neither the Company nor a Subsidiary provided (i) such
employment is undertaken by the individual at the request of the Company or
a Subsidiary, (ii) immediately prior to undertaking such employment, the
individual was an officer or employee of the Company or a Subsidiary, or
was engaged in Related Employment as herein defined and (iii) such
employment is recognized by the Committee, in its sole discretion, as
Related Employment for purposes of this Plan. The death or Disability of an
individual during a period of Related Employment as herein defined shall be
treated, for purposes of this Plan, as if the death or onset of Disability
had occurred while the individual was an officer or employee of the Company
or a Subsidiary.
(m) "Restricted Stock" means an award of shares of Stock that is subject to
the restrictions set forth in Section 5.
(n) "Retirement" means no longer being occupied in one's business or
profession and terminating active employment with the Company or a
Subsidiary after either (i) reaching age 65, or (ii) reaching age 60 and
having 30 years of employment with the Company or a Subsidiary.
(o) "Section 16(a) Person" means any officer or director of the Company or
any Subsidiary who is subject to the reporting requirements of Section
16(a) of the 1934 Act.
(p) "Stock" means the common stock of the Company.
(q) "Subsidiary" means any entity at least one-half of whose outstanding
voting stock, or beneficial ownership for entities other than corporations,
is owned, directly or indirectly, by the Company, or which is otherwise
controlled directly or indirectly by the Company.
Section 3. Eligibility and Participation.
Officers and certain other employees of the Company and its Subsidiaries
who are responsible for or contribute to the management, growth and/or
profitability of the Company or its Subsidiaries shall be eligible to
participate in the Plan. The Participants under the Plan shall be selected from
time to time by the Committee, in its sole discretion, from among Eligible
Employees.
Section 4. Amount and Form of Awards.
(a) Awards under the Plan shall be determined by the Committee and will be
granted at such time as the Committee may in its sole discretion determine. The
Committee may also, in its sole discretion, provide for alternative methods for
grants of awards. A Participant will receive such award in Restricted Stock or,
alternatively, and, if so
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elected by the Participant and determined by the Committee pursuant to Section
6, a portion of such award may be received in Options.
(b) The maximum number of shares of Stock which may be issued under the
Plan, either as Restricted Stock or pursuant to the exercise of Options, shall
be not more than 61,500,000 shares of Stock, plus, to the extent of repurchases
of Stock after April 24, 1996, up to an additional 15 million shares of Stock,
subject to adjustment as provided in Section 8, and such shares may be
authorized but unissued shares, or previously issued shares reacquired by the
Company, or both. In the event Restricted Stock is forfeited, or an outstanding
Option is terminated, expires or is canceled, prior to the end of the period
during which the restrictions on Restricted Stock expire, or the Options can be
exercised, the shares of Stock called for by such award of Restricted Stock or
the unexercised portion of the Option award will become available for future
awards.
Section 5. Restricted Stock.
(a) The number of shares of Restricted Stock awarded to a Participant under
the Plan will be determined by a formula or formulas approved by the Committee.
In order to reflect the impact of the restrictions on the value of the
Restricted Stock, as well as the possibility of forfeiture of Restricted Stock,
the fair market value of Stock shall be discounted at a rate of 25% in
determining the number of shares of Restricted Stock to be awarded. The
Committee may, where it deems appropriate, and in its sole discretion, provide
for an alternative discount rate. For purposes of this Plan, the fair market
value of Stock for an award will be the average of the Stock's closing prices on
the Composite Tape of the New York Stock Exchange Inc. ("NYSE") for the five
trading days prior to the date of the award. The dollar value of an award will
be divided by the discounted market value to determine the number of shares of
Restricted Stock in an award. The value of fractional shares will be paid in
cash. In the event the Committee provides for alternative methods for grants of
awards, the Committee, in its sole discretion, may provide for alternative
methods of determining the fair market value of Stock for such awards, and may
also provide for alternative forfeiture provisions.
(b) Unless the Committee determines otherwise, a Participant shall not have
any rights with respect to an award, unless or until such Participant has
executed an agreement evidencing the award (a "Restricted Stock Award
Agreement") and has delivered a fully executed copy thereof to the Company. Each
Participant who is awarded Restricted Stock may, but need not, be issued a stock
certificate in respect of such shares of Restricted Stock. A "book entry" (i.e.,
a computerized or manual entry) shall be made in the records of the Company to
evidence an award of shares of Restricted Stock to a Participant where no
certificate is issued in the name of the Participant. Such Company records
shall, absent manifest error, be binding on the Participants. Each certificate,
if any, registered in the name of a Participant shall bear an appropriate legend
referring to the terms, conditions, and restrictions applicable to such award,
substantially in the following form:
"The transferability of the certificate and the shares of stock represented
hereby are subject to the terms and conditions (including forfeiture) of
the Travelers Group Capital Accumulation Plan and a Restricted Stock Award
Agreement entered into between the registered owner and Travelers Group
Inc. Copies of such Plan and Agreement are on file in the offices of
Travelers Group Inc."
The Committee shall require that any stock certificate issued in the name
of a Participant evidencing shares of Restricted Stock be held in the custody of
the Company until the restrictions thereon shall have lapsed, and that, as a
condition of such issuance of a certificate for Restricted Stock, the
Participant shall have delivered a stock power, endorsed in blank, relating to
the shares covered by such certificate.
(c) The shares of Restricted Stock awarded pursuant to this Section 5 shall
be subject to the following restrictions and conditions:
(i) Subject to the provisions of the Plan and the Restricted Stock
Award Agreements, during the two-year period (together with any extensions
thereof approved as provided herein) commencing on the date of the award
(the "Restricted Period"), the Participant shall not be permitted to sell,
transfer, pledge or assign shares
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of Restricted Stock awarded under the Plan. The Committee may, in its sole
discretion, (x) initially provide for an alternative Restricted Period or
alter the two-year Restricted Period for a previously granted award
(provided that the Committee may not extend the Restricted Period for a
previously granted award without the Participant's written consent), (y)
during any extension of such Restricted Period, provide for alternative
restrictions, and (z) provide for the lapse of any such restrictions in
installments and accelerate or waive any such restrictions in whole or in
part based on such factors and such circumstances as the Committee may
determine, in its sole discretion, including, but not limited to, the
Participant's Retirement, termination, death or Disability.
(ii) Unless the Committee in its sole discretion shall determine
otherwise at or prior to the time of the grant of any award, the
Participant shall have the right to direct the vote of his shares of
Restricted Stock during the Restricted Period, in accordance with paragraph
(e) of this Section 5. The Participant shall have the right to receive any
regular dividends on such shares of Restricted Stock. The Committee shall
in its sole discretion determine the Participant's rights with respect to
extraordinary dividends or distributions on the shares of Restricted Stock.
(iii) Shares of Common Stock shall be delivered to the Participant
either in certificate form or by crediting the Participant's brokerage
account at Smith Barney Inc. promptly after, and only after, the Restricted
Period shall expire (or such earlier time as the restrictions may lapse in
accordance with paragraph (c)(i) of this Section 5) without forfeiture in
respect of such shares of Restricted Stock.
(d) Subject to the provisions of paragraph (c)(i) of this Section 5, the
following provisions shall apply to a Participant's shares of Restricted Stock
prior to the end of the Restricted Period (including extensions and Related
Employment):
(i) Upon the death of a Participant, the restrictions on his or her
Restricted Stock shall immediately lapse. In the event of a Participant's
Disability prior to the termination of employment, awards of Restricted
Stock shall continue to vest as originally scheduled, provided (a) the
Participant continues to meet the conditions prescribed by the Committee
for determination of Disability and has not voluntarily terminated his or
her employment or (b) the Disability is discontinued and the Participant
resumes employment upon the discontinuance of the Disability or, if
applicable, the completion of any related leave of absence as permitted
under the Company's policies governing family and medical leave.
(ii) If a Participant voluntarily terminates employment or if a
Participant is involuntarily terminated for Cause, such Participant shall
forfeit his or her Restricted Stock.
(iii) If a Participant is involuntarily terminated without Cause or
retires from employment (as defined below), but does not fall within the
definition of Retirement, such Participant shall forfeit his or her
Restricted Stock and receive in return, without interest, a cash payment
equal to seventy-five percent (75%) of the fair market value of the number
of shares of Restricted Stock forfeited, calculated as of the date of the
award.
(iv) Upon Retirement, a Participant shall receive his or her
Restricted Stock upon completion of the Restricted Period, unless the
Committee determines that such Participant shall forfeit the Restricted
Stock and receive instead, a cash payment, without interest, equal to
seventy-five percent (75%) of the fair market value of the number of shares
of Restricted Stock forfeited, calculated as of the date of the award.
(e) Unless the Committee in its sole discretion shall determine otherwise
at or prior to the time of the grant of any award, during the Restricted Period
the shares of Restricted Stock shall be voted by the Company's senior
administrative officer in charge of administering the Plan, or such other person
as the Committee may designate (the "Plan Administrator"), and the Plan
Administrator shall vote such shares in accordance with instructions received
from Participants (unless to do so would constitute a violation of the Plan
Administrator's fiduciary duties). Shares as to which no instructions are
received shall be voted by the Plan Administrator proportionately in accordance
with
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instructions received from Participants in the Plan (unless to do so would
constitute a violation of the Plan Administrator's fiduciary duties).
(f) In any instance where the vesting of an award of Restricted Stock or
the vesting and/or exercisability of an Option or reload option extends past the
date of termination of a Participant's employment, either pursuant to the terms
of the Plan or by action of the Committee, the Restricted Stock as well as any
rights of continued vesting and exercisability with respect to Options and
reload options shall be forfeited, if, in the determination of the Committee,
the Participant, at any time within any such remaining period of continued
vesting or exercisability engages in any of the conduct described in
subparagraphs (2) or (3) of the definition of "Cause" under this Plan. In
addition, if, in the determination of the Committee, the Participant engages in
any of the conduct described in subparagraph (3) of the definition of "Cause"
under this Plan, while holding any Incremental Shares which remain subject to
restrictions on transferability, at the option of the Committee, the Participant
shall forfeit such Incremental Shares and receive instead a cash payment,
without interest, equal to the original exercise price for the Option or reload
option under which the Incremental Shares were issued, multiplied by the number
of Incremental Shares forfeited.
(g) With respect to international Participants residing in Switzerland, the
Company shall have the right, exercisable in the discretion of the Committee, at
any time subsequent to the grant of an award of Restricted Stock and prior to
the end of the Restricted Period (including any extensions thereof approved as
provided herein), to repurchase all or a portion of a Participant's Restricted
Stock at a repurchase price of $1.00 per share.
Section 6. Election of Options.
(a) At the time a Participant is notified of his or her award of Restricted
Stock under the Plan, the Committee in its sole discretion may permit such
Participant to elect to receive up to a maximum of one-third (1/3) of his or her
award in the form of Options. The Committee in its sole discretion shall
determine the number of Options to be awarded in lieu of each share of
Restricted Stock given up and may alter the maximum percentage of Restricted
Stock which may be exchanged for Options. Such election shall be made within a
period of 60 days after the grant of the award (or such shorter period after the
date of the award as the Committee may specify). In the absence of such an
election, the award will be paid entirely in shares of Restricted Stock.
(b) Options will be granted with an exercise price equal to the fair market
value of Stock, which will be the average of the Stock's closing prices on the
Composite Tape of the NYSE on the five trading days prior to the grant date. The
Committee in its discretion shall determine the expiration date of the Options,
provided that in no event shall the expiration date be later than ten years from
the date of the award. Options granted under the Plan shall vest pursuant to a
schedule determined by the Committee, in its sole discretion, prior to the
Participant's election to receive Options.
(c) In order to evidence acceptance of an Option, the Committee may require
recipients of Options to enter into a stock option agreement with the Company,
in such form as the Committee shall determine, which agreement shall set forth,
among other things, the exercise price of the Option, the term of the Option and
provisions regarding exercisability of the Option granted thereunder.
(d) Options, reload options and, during any period of restrictions on
transferability, Incremental Shares may not be sold, assigned, pledged,
hypothecated or otherwise transferred by the Participant other than by will or
the laws of descent and distribution, except as provided in this Section 6(d).
The Committee may permit (on such terms, conditions and limitations as it shall
establish) Options and reload options to be transferred one time to a trust or
similar vehicle for the benefit of the Participant's immediate family members
(the "Permitted Transferee"). Except to the extent required by law, no right or
interest of any Participant in the Plan or any award granted hereunder shall be
subject to any lien, levy, attachment, pledge, obligation, liability or
bankruptcy of the Participant. All rights with respect to awards granted to a
Participant shall be exercisable during his or her lifetime only by the
Participant, or if applicable, the Permitted Transferee.
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(e) An Option shall not be exercisable unless payment in full is made for
the shares being acquired thereunder at the time of exercise; such payment shall
be made (A) in United States dollars by cash or check, (B) in lieu thereof,
unless the Committee shall in its sole discretion determine otherwise, by
tendering to the Company Stock owned by the person exercising the Option (or
owned by the person exercising the Option and his or her spouse, jointly) and
acquired at least six months prior to such tender, including shares of
Restricted Stock awarded hereunder at least six months prior to such tender, and
having a fair market value equal to the cash exercise price applicable to such
Option, such fair market value to be determined in such reasonable manner as may
be provided for from time to time by the Committee or as may be required in
order to comply with or to conform to the requirements of any applicable or
relevant laws or regulations, (C) by a combination of United States dollars and
Stock as aforesaid, or (D) if permitted by the Committee, by authorizing the
Company to sell, on behalf of the Participant, the appropriate number of shares
otherwise issuable to the Participant upon the exercise of the Option with the
proceeds of sale applied to pay the exercise price.
(f) An Option shall not be exercisable unless the person exercising the
Option has been, at all times during the period beginning with the date of grant
of the Option and ending on the date of such exercise, an officer or employee of
the Company or a Subsidiary, except that:
(i) if such person shall cease to be an officer or employee of the Company
or a Subsidiary solely by reason of a period of Related Employment, he or
she may, during such period of Related Employment, exercise the Option as
if he or she continued to be such an officer or employee; or
(ii) if such person shall cease to be such an officer or employee on
account of an involuntary termination of employment for Cause, or on
account of a voluntary termination of employment (which voluntary
termination of employment is not considered to be "retirement" as provided
in subsection (v) below or "Retirement" as defined above), all unvested and
unexercised Options shall be forfeited on the last day of employment. If
such person shall cease to be such an officer or employee on account of an
involuntary termination (other than for Cause, and which is not considered
to be "retirement" or "Retirement"), while holding a vested Option which
has not expired and has not been exercised, such person may, for a period
of thirty (30) days following termination of employment, but in no event
after the Option has expired under the provisions of 6(b) hereof) exercise
such Option with respect to any shares as to which he or she could have
exercised the Option on the date he or she terminated employment; or
(iii)(A) In the event of a Participant's death prior to the termination of
employment, the Committee may permit unvested Options to continue to vest
as scheduled. Vested Options (or vested portions thereof) that have not
been exercised and have not expired at the time of death may be exercised
by the Participant's executors, administrators, heirs or distributees at
any time prior to the expiration date of the Option. If a Participant dies
at any time after a termination of employment, the provisions relating to
the particular conditions of such termination of employment shall govern
the vesting and exercisability of Options granted to such Participant,
except that if a Participant dies within thirty (30) days of an involuntary
termination (other than for Cause) the provisions of subsection (vi) below
shall apply; or
(iii)(B) In the event of a Participant's Disability prior to the
termination of employment, vested Options (or vested portions thereof) that
have not been exercised and have not expired may be exercised at any time
prior to the expiration date of the Option, provided the Participant
continues to meet the conditions prescribed by the Committee for
determination of Disability. The Committee shall determine a Participant's
rights with respect to unvested Options at the time of determination of
Disability. However, unless the Committee determines otherwise, if a
Participant holds any unvested Options at the time of determination of
Disability no further vesting shall occur unless and until the Participant
resumes employment with the Company or a Subsidiary upon the earlier to
occur of (a) the end of the period of Disability (or any related leave of
absence as permitted under the Company's policies governing family and
medical leave) or (b) twelve (12) months (or such other time period as
determined by the Committee) after the determination of the Disability. If
the Participant resumes employment with the Company or a Subsidiary within
the applicable time limits, then
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vesting shall resume, effective on the return-to-work date, without any
credit given for the time during which the Participant was unable to work
as a result of the Disability, or the related leave. If the Participant
does not resume employment with the Company or a Subsidiary within the
applicable time limits or, if at any time prior to the end of any remaining
period of vesting and/or exercisability of Options, the Participant no
longer meets the conditions prescribed by the Committee for the
determination of Disability, all unvested and unexercised Options shall be
forfeited; or
(iv) if such person shall cease to be such an officer or employee by reason
of Retirement while holding an Option that has not expired and has not been
fully exercised, such person may exercise the Option with respect to any
shares as to which he or she could have exercised the Option on the date he
or she ceased to be such an officer or employee at any time within three
years of the date he or she ceased to be such an officer or employee (but
in no event after the Option has expired under the provisions of Section
6(b) hereof); or
(v) if such person shall cease to be an officer or employee because he or
she has "retired" from employment (i.e., such person is no longer occupied
within his or her business or profession and has terminated active
employment with the Company or a Subsidiary after reaching age 55 and
having completed at least five years of employment with the Company or a
Subsidiary, or, after reaching a certain age and completing a certain
number of years of service, as determined by the Committee) but has not met
the definition of "Retirement", while holding an Option that has not
expired and has not been fully exercised, such person may exercise the
Option with respect to any shares as to which he or she could have
exercised the Option on the date he or she ceased to be such an officer or
employee at any time within three years of the date he or she ceased to be
such an officer or employee (but in no event after the Option has expired
under the provisions of Section 6(b) hereof); or
(vi) If a Participant shall die or become Disabled within thirty (30) days
of his or her involuntary termination of employment other than for Cause,
vested Options (or vested portions thereof) which have not been exercised
and have not expired or been forfeited may be exercised by the Participant
or his or her executors, administrators, heirs or distributees, as the case
may be, at any time within one (1) year after the date of such event, but
in no event after the Option has expired; or
(vii) notwithstanding the foregoing provisions of this Section 6(f), the
Committee shall have the authority, on a case by case basis, in its sole
and absolute discretion, to alter and/or waive the period of vesting and/or
exercisability, however such periods may not be changed to the detriment of
the Participant after the date of grant without the Participant's written
consent.
(g) If an Option is exercised by a Participant, then, at the discretion of
the committee administering the Company's Stock Option Plan, the Participant may
receive a replacement or reload option under such Stock Option Plan or any
successor plan, in accordance with the provisions of such plan.
(h) If the exercise price of an Option is paid by delivery of a number of
shares of Restricted Stock, then the Participant shall receive, in connection
with the exercise, an equal number of identically restricted shares of Stock;
the Incremental Shares of Stock issued upon such exercise shall contain any
applicable restrictions that are set forth in the Participant's stock option
agreement and/or in the Plan. In such event, the fair market value of shares of
Restricted Stock delivered or withheld, for purposes of this Plan, shall not
take into account the restrictions on such shares.
(i) The Incremental Shares issued as a result of the exercise of an Option
may not be sold, assigned, pledged, hypothecated or otherwise transferred by the
Participant, except as specifically permitted pursuant to Section 6(d) above,
for a period of one (1) year following the date of exercise if no reload option
is granted in connection with such exercise, or for a period of two (2) years if
a reload option is granted in connection with such exercise, or such other
shorter or longer periods of restriction on transferability as may be determined
by the Committee. For purposes of the Plan, the term "Incremental Shares" shall
mean those shares of Stock actually issued to a Participant upon the exercise of
an Option. The number of Incremental Shares will equal the number of Option
shares exercised minus the
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sum of (a) the number of shares of Stock surrendered by the Participant or sold
by the Company on behalf of the Participant to pay the exercise price and (b)
the number of shares of Stock withheld by the Company, at the Participant's
election to pay the applicable withholding taxes arising as a result of the
Option exercise.
Section 7. Administration.
The Plan shall be administered by the Committee.
The Committee shall have the power and authority to grant Restricted Stock
or Options to Participants, pursuant to the terms of the Plan.
In particular, the Committee shall have the authority:
(a) to select those employees of the Company and its Subsidiaries who are
Eligible Employees;
(b) to determine whether and to what extent Restricted Stock or Options are
to be granted to Participants hereunder;
(c) to determine the number of shares of Stock to be covered by each such
award granted hereunder;
(d) to determine the terms and conditions, not inconsistent with the terms
of the Plan, of any award granted hereunder; and
(e) to determine the terms and conditions, not inconsistent with the terms
of the Plan, which shall govern all written instructions evidencing the
Options and Restricted Stock.
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time, deem advisable; to interpret the terms and provisions of the
Plan and any award issued under the Plan; and to otherwise supervise the
administration of the Plan. All decisions made by the Committee pursuant to the
provisions of the Plan shall be final and binding on all persons, including the
Company and the Participants. The Committee may delegate some or all of its
authority over the administration of the Plan to any other committee, with
approval by the Board, but only with respect to persons who are not Section
16(a) Persons.
Section 8. Adjustments upon a Change in Common Stock.
In the event of any change in the outstanding Stock of the Company by
reason of any stock split, stock dividend, distribution, recapitalization,
merger, consolidation, reorganization, combination or exchange of shares or
other similar event if such change equitably requires an adjustment in the
number or kind of shares that may be issued under the Plan pursuant to Section
4(b), or in the number or kind of shares subject to, or the option price per
share under, any outstanding Option which has been granted to any Participant,
such adjustment shall be made by the Committee and shall be conclusive and
binding for all purposes of the Plan. In no event shall the excess of the
aggregate fair market value of the Stock subject to the Options immediately
after any substitution, exchange or adjustment over the aggregate option price
for such Stock be more than the excess of the aggregate fair market value of all
of the Stock subject to the Option immediately before any such substitution,
exchange or adjustment over the aggregate option price of such Stock nor shall
the adjusted Option give the holder thereof any additional benefits he or she
did not have under the old Option.
Section 9. Amendment and Termination.
The Plan may be amended or terminated at any time and from time to time by
the Board, but no amendment which increases the aggregate number of shares of
Stock which may be issued pursuant to the Plan (except as provided
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in Section 8) shall be effective unless and until the same is approved by the
stockholders of the Company. Neither an amendment to the Plan nor the
termination of the Plan shall adversely affect any right of any Participant with
respect to any Restricted Stock or Option theretofore granted without such
Participant's written consent. Subject to the foregoing limitations, the
Committee shall have the authority to amend certain Plan provisions to the
extent necessary to permit participation in the Plan by employees who are
employed outside of the United States on terms and conditions which are
comparable to those afforded to employees located within the United States.
Section 10. General Provisions.
(a) The Committee may require each person purchasing shares pursuant to an
Option to represent and agree with the Company in writing that such person is
acquiring the shares without a view to distribution thereof. The certificates
for such shares may include any legend which the Committee deems appropriate to
reflect any restriction on transfer. All certificates for shares of Stock
delivered under the Plan shall be subject to such stop transfer orders and other
restrictions as the Committee may deem advisable under the rules, regulations,
and other requirements of the Securities and Exchange Commission, any stock
exchange upon which the Stock is then listed, and any applicable federal or
state securities law.
(b) Nothing contained in the Plan shall prevent the Board from adopting
other or additional compensation arrangements, subject to stockholder approval
if such approval is required; and such arrangements may be either generally
applicable or applicable only in specific cases. The adoption of the Plan shall
not confer upon any employee of the Company or any Subsidiary any right to
continued employment with the Company or a Subsidiary, as the case may be, nor
shall it interfere in any way with the right of the Company or a Subsidiary to
terminate the employment of any of its employees at any time.
(c) No member of the Board or the Committee, nor any officer or employee of
the Company acting on behalf of the Board or the Committee, shall be personally
liable for any action, determination, or interpretation taken or made in good
faith with respect to the Plan, and all members of the Board and the Committee
and each and any officer or employee of the Company acting on their behalf
shall, to the extent permitted by law, be fully indemnified and protected by the
Company in respect of any such action, determination or interpretation.
(d) A Participant's rights and interest under the Plan may not be assigned
or transferred in whole or in part either directly or by operation of law or
otherwise (except in the event of a Participant's death or as provided in
Section 6(d) above) including, but not by way of limitation, execution, levy,
garnishment, attachment, pledge, bankruptcy or in any other manner and no such
right or interest of any Participant in the Plan shall be subject to any
obligation or liability of such Participant. A Participant may designate one or
more beneficiaries to succeed to the rights of the Participant with respect to
awards granted under the Plan in the event of the death of the Participant, by
providing written notice of such designation to the Committee, on such form as
may be prescribed by the Committee. If no such notice is received, the
Participant's estate shall succeed to the rights of the Participant with respect
to awards granted under the Plan.
(e) The Company and its Subsidiaries shall have the right to deduct from
any payment made under the Plan any federal, state or local income or other
taxes required by law to be withheld with respect to such payment. It shall be a
condition to the obligation of the Company to issue Stock upon the lapse of
restrictions on Restricted Stock or upon exercise of an Option that the
Participant (or any beneficiary or person entitled to exercise the Option) pay
to the Company, upon its demand, such amount as may be requested by the Company
for the purpose of satisfying any liability to withhold federal, state or local
income or other taxes. If the amount requested is not paid, the Company may
refuse to issue shares. Unless the Committee shall in its sole discretion
determine otherwise, payment for taxes required to be withheld may be made in
whole or in part by an election by a Participant, in accordance with rules
adopted by the Committee from time to time (A) to have the Company withhold
Stock otherwise issuable pursuant to the Plan having a fair market value equal
to such tax liability and/or (B) to tender to the Company shares of Stock owned
by the Participant or the person exercising the option and acquired more than
six months prior to such tender (excluding shares of Restricted Stock awarded
hereunder) and having a fair market value equal to such tax liability, such fair
market value
9
<PAGE>
(in the case of clause (A) or (B)), to be determined in such reasonable manner
as may be provided for from time to time by the Committee or as may be required
in order to comply with or to conform to the requirements of any applicable or
relevant laws or regulations.
(f) Notwithstanding anything to the contrary contained herein, upon a
"Change of Control" (defined below), the restrictions on each award of
Restricted Stock shall immediately lapse, and all outstanding Options and reload
options shall become immediately exercisable with respect to one hundred percent
(100%) of the Stock subject thereto. "Change of Control" shall mean the
occurrence of any of the following, unless such occurrence shall have been
approved or ratified by at least a two-thirds (2/3) vote of the Continuing
Directors (defined below): (A) any person within the meaning of Sections 13(d)
and 14(d) of the 1934 Act, shall have become the beneficial owner, within the
meaning of Rule 13d-3 under the 1934 Act, of shares of stock of the Company
having twenty five percent (25%) or more of the total number of votes that may
be cast for election of the directors of the Company, or (B) there shall have
been a change in the composition of the Board such that at any time a majority
of the Board shall have been members of the Board for less than twenty-four (24)
months, unless the election of each new director who was not a director at the
beginning of the period was approved by a vote of at least two-thirds (2/3) of
the directors then still in office who were directors at the beginning of such
period, or who were approved as directors pursuant to the provisions of this
paragraph (the "Continuing Directors").
(g) All claims and disputes between a Participant and the Company or any
Subsidiary arising out of the Plan or any award granted hereunder shall be
submitted to arbitration in accordance with the then current arbitration policy
of the Company or the Subsidiary with whom the Participant is employed. Notice
of demand for arbitration shall be given in writing to the other party and shall
be made within a reasonable time after the claim or dispute has arisen. The
award rendered by the arbitrator shall be made in accordance with the Plan,
shall be final, and judgment may be entered upon it in accordance with
applicable law in any court having jurisdiction thereof. The provisions of this
Section 10(g) shall be specifically enforceable under applicable law in any
court having jurisdiction thereof.
(h) The validity, construction, interpretation, administration and effect
of the Plan and of its rules and regulations, and rights relating to the Plan,
shall be determined solely in accordance with the laws of the State of Delaware.
(i) No Stock or other securities shall be issued hereunder unless counsel
for the Company shall be satisfied that such issuance will be in compliance with
all applicable Federal, state and international securities statutes, rules and
regulations. The appropriate officers of the Company or its Subsidiaries shall
cause to be filed any reports, returns or other information regarding awards or
Stock issued under the Plan as may be required by Section 13 or 15(d) of the
1934 Act or any other applicable statute, rule or regulation.
(j) If any term or provision of this Plan or the application thereof to any
person or circumstances shall, to any extent, be invalid or unenforceable, then
the remainder of the Plan, or the application of such term or provision to
persons or circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby, and each term and provision hereof
shall be valid and be enforced to the fullest extent permitted by applicable
law.
Section 11. Effective Date of Plan.
The Plan shall be effective on the date it is adopted by the Board, subject
to the approval of stockholders.
Amendment No. 1 to the
Travelers Group 1996 Stock Incentive Plan (the "SIP Plan")
================================================================================
As of July 24, 1996, the Board of Directors of Travelers Group Inc. (the
"Company") hereby approves the following amendments to the SIP Plan:
1. In Section 2, "Definitions":
o the definition of "Incentive Compensation Subcommittee" is amended to
delete the words "consisting of at least three (3) members thereof who
are and shall remain "disinterested directors", as defined in Rule
16b-3 under the 1934 Act" and insert in lieu thereof the words "the
composition of which subcommittee shall satisfy the requirements of
Rule 16b-3 under the 1934 Act (with respect to grants to Section 16(a)
Persons)"; and
o the definition of "Nominations and Compensation Committee" is amended
to delete the words "consisting of at least three (3) members thereof
who are and shall remain "disinterested persons" as defined in Rule
16b-3 under the 1934 Act".
2. The last sentence of Section 10(c) is deleted in its entirety.
3. Section 18(d) is deleted in its entirety, and subsections 18(e) through 18(g)
are re-numbered 18(d) through 18(f) and all cross-references to such
subsections are changed accordingly.
The above amendments to the SIP Plan shall become effective on the date
designated by the General Counsel of the Company as the effective date for the
Company's employee benefit plans to be subject to Rule 16b-3 as promulgated by
the Securities and Exchange Commission on May 30, 1996.
Amendment No. 2 to Travelers Group 1996 Stock Incentive Plan
effective as of September 25, 1996
- --------------------------------------------------------------------------------
The Travelers Group 1996 Stock Incentive Plan (the "Plan") is hereby amended in
the following respects:
1. The following definition is hereby added as the first definition to appear
in Section 2:
"Additional Shares" shall have the meaning set forth in Section 5(a).
2. Section 5(a) is hereby amended by deleting the words "fifty million
(50,000,000)" appearing in the first sentence thereof and replacing them
with the words "seventy-five million (75,000,000) (as adjusted to reflect
the 3 for 2 stock dividend paid by the Company on May 24, 1996)", by
deleting the remaining portion of that sentence, and replacing the deleted
language with the following:
"plus the number of shares approved by the Company's stockholders
under the 1986 Travelers Group Stock Option Plan remaining ungranted
at the expiration of such plan, to wit, fourteen million six hundred
sixty five thousand twenty (14,665,020) shares (the "Additional
Shares"), with all such shares being subject to adjustment as provided
in Section 15. The Additional Shares may not be issued to (i) any
Participant pursuant to an Incentive Stock Option or (ii) Section
16(a) Persons pursuant to any Option.
3. Capitalized terms used, but not defined herein, shall have the meaning
ascribed to such terms in the Plan.
Exhibit 11.01
Travelers Group Inc. and Subsidiaries
Computation of Earnings Per Share
(In millions, except for per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
Earnings:
Income from continuing operations $ 561 $ 456 $ 1,657 $ 1,138
Discontinued operations 31 25 31 89
----- ----- ------- -------
Net income 592 481 1,688 1,227
Preferred dividends:
8.125% Cumulative Preferred
Stock - Series A (6) (6) (18) (18)
5.5% Convertible Preferred
Stock - Series B -- (2) (4) (5)
$4.53 Convertible Preferred
Stock - Series C (12) (4) (26) (13)
9 1/4% Preferred Stock - Series D (9) (9) (26) (27)
----- ----- ------- -------
(27) (21) (74) (63)
----- ----- ------- -------
Income applicable to common stock $ 565 $ 460 $ 1,614 $ 1,164
===== ===== ======= =======
Average shares:
Common 613.0 612.7 611.4 614.6
Warrants 3.1 1.4 3.0 .6
Assumed exercise of dilutive
stock options 10.0 9.8 10.4 8.1
Incremental shares - Stock
based incentive plans 12.9 12.5 12.4 10.6
----- ----- ------- -------
639.0 636.4 637.2 633.9
===== ===== ======= =======
Earnings per share:
Continuing operating $0.84 $0.68 $ 2.49 $ 1.70
Discontinued operations 0.04 0.04 0.04 0.14
----- ----- ------- -------
Net Income $0.88 $0.72 $ 2.53 $ 1.84
===== ===== ======= =======
Earnings per common share is computed after recognition of preferred stock
dividend requirements and is based on the weighted average number of common
shares outstanding during the period after consideration of the dilutive effect
of common stock warrants and stock options and the incremental shares assumed
issued under the Capital Accumulation Plan and other restricted stock plans.
Fully diluted earnings per common share, assuming conversion of all outstanding
dilutive convertible preferred stock and the maximum dilutive effect of common
stock equivalents, have not been presented because the effects are not material.
The fully diluted earnings per common share calculation for the three and nine
months ended September 30, 1996 would entail adding the number of shares
issuable on conversion of the dilutive convertible preferred stock (5.1 and 5.1
million, respectively) and the incremental dilutive effect of common stock
equivalents (3.4 and 5.2 million, respectively) to the number of shares included
in the earnings per common share calculation (resulting in 647.5 and 647.5
million shares, respectively) and eliminating the dividend requirements of the
dilutive convertible preferred stock ($2 and $12 million, respectively). The
fully diluted earnings per common share calculation for the three and nine
months ended September 30, 1995 would entail adding the number of shares
issuable on conversion of the dilutive convertible preferred stock (13.9 and
13.9 million, respectively) and the incremental dilutive effect of common stock
equivalents (3.8 and 8.9 million, respectively) to the number of shares included
in the earnings per common share calculation (resulting in 654.1 and 656.7
million shares, respectively) and eliminating the dividend requirements of the
dilutive convertible preferred stock ($5 and $16 million, respectively).
All current and prior year information has been restated to reflect the
three-for-two stock split paid on May 24 and the four-for-three stock split
payable on November 22, 1996 to stockholders of record on November 4, 1996.
EXHIBIT 12.01
Travelers Group Inc. and Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
(In millions of dollars, except for ratio)
Nine months ended
September 30,
----------------------
1996 1995
---- ----
Income from continuing operations
before income taxes and minority interest $2,341 $1,759
Interest 1,640 1,462
Portion of rentals deemed to be interest 80 81
------ ------
Earnings available for fixed charges $4,061 $3,302
====== ======
Fixed charges
Interest $1,640 $1,462
Portion of rentals deemed to be interest 80 81
------ ------
Fixed charges $1,720 $1,543
====== ======
Ratio of earnings to fixed charges 2.36x 2.14x
==== ====
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27.01
Travelers Group Inc.
Financial Data Schedule
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
September 30, 1996 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF TRAVELERS
GROUP INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,635
<SECURITIES> 89,540 <F1>
<RECEIVABLES> 20,251 <F2>
<ALLOWANCES> 0 <F3>
<INVENTORY> 0 <F3>
<CURRENT-ASSETS> 0 <F3>
<PP&E> 0 <F3>
<DEPRECIATION> 0 <F3>
<TOTAL-ASSETS> 144,454
<CURRENT-LIABILITIES> 0 <F3>
<BONDS> 15,482 <F4>
1,067
675
<COMMON> 7
<OTHER-SE> 11,614 <F5>
<TOTAL-LIABILITY-AND-EQUITY> 144,454
<SALES> 0 <F3>
<TOTAL-REVENUES> 15,563
<CGS> 0 <F3>
<TOTAL-COSTS> 13,619
<OTHER-EXPENSES> 0 <F3>
<LOSS-PROVISION> 188 <F6>
<INTEREST-EXPENSE> 1,640 <F6>
<INCOME-PRETAX> 2,341
<INCOME-TAX> 684
<INCOME-CONTINUING> 1,657
<DISCONTINUED> 31 <F3>
<EXTRAORDINARY> 0 <F3>
<CHANGES> 0 <F3>
<NET-INCOME> 1,688
<EPS-PRIMARY> $2.53
<EPS-DILUTED> 0 <F3>
<FN>
<F1> Includes the following items from the financial statements: total
investments $55,586; securities borrowed or purchased under
agreements to resell $23,148; and trading securities owned, at
market value $10,806.
<F2> Includes the following items from the financial statements:
brokerage receivables $7,307; net consumer finance receivables
$7,559 and other receivables $5,385.
<F3> Items which are inapplicable relative to the underlying financial
statements are indicated with a zero as required.
<F4> Includes the following items from the financial statements:
investment banking and brokerage borrowings $2,781; short-term
borrowings $2,425 and long-term debt $10,276.
<F5> Includes the following items from the financial statements:
additional paid-in capital $7,131; retained earnings $6,900;
treasury stock $(2,181); unrealized gain (loss) on investment
securities $136; and other $(372).
<F6> Included in total costs and expenses applicable to sales and
revenues.
</FN>
</TABLE>
EXHIBIT 99.01
COMPANY'S FORM 10-Q
September 30, 1993
Page 26
In October 1993, several purported class action lawsuits were filed in the
Federal District Court for the Southern District of New York naming Smith
Barney, Harris Upham & Co. Incorporated ("SBS") as defendant. The cases arise
from SBS's participation as lead and co-underwriter in the initial public
offerings of three separate funds managed by Hyperion Capital Management Inc.
The plaintiffs have also named as defendants the funds' directors and the
co-underwriters and their representatives. Plaintiffs allege that the
registration statements and prospectuses by which the offerings were made
between June 1992 and October 1992 were materially false and misleading, and are
seeking unspecified damages in claims brought under the Federal securities laws.
The Company believes it has meritorious defenses to these actions and intends to
defend against them vigorously.
<PAGE>
COMPANY'S FORM 10-K
December 31, 1995
Page 65
For information concerning several purported class action lawsuits filed
against SBI in connection with three funds managed by Hyperion Capital
Management Inc., see the description that appears in the fourth paragraph of
page 26 of the Company's filing on Form 10-Q for the quarter ended September 30,
1993, which description is incorporated by reference herein. A copy of the
pertinent paragraph of such filing is included as an exhibit to this Form 10-K.
The actions were consolidated under the title In re: Hyperion Securities
Litigation. SBI's motion to dismiss the claims was granted in July 1995. In
August 1995, an appeal was filed in the U.S. Court of Appeals for the Second
Circuit. The Company is awaiting a decision on the appeal.
EXHIBIT 99.02
PROSPECTUS OF TRAVELERS/AETNA
PROPERTY CASUALTY CORP.
April 22, 1996
Pages 90-91
A number of cases have been filed against several insurance companies and
industry organizations relating to service fee charges and premium calculations
on certain workers' compensation insurance. Certain subsidiaries of the Company
are defendants in South Carolina ex rel. Medlock v. National Council on
Compensation Insurance ("NCCI"), an action filed by the Attorney General of
South Carolina in August 1994 in the Court of Common Pleas, County of
Greenville, South Carolina; Four Way Plant Farm v. NCCI, a purported class
action filed in September 1994 in the Circuit Court for Bullock County, Alabama,
and NC Steel, Inc. v. NCCI, a purported class action filed in November 1993 in
the Superior Court Division of the General Court of Justice, Wake County, North
Carolina. In these cases, the plaintiffs generally allege that the
administration of each state's workers' compensation assigned risk pool
conspired with servicing carriers for the pool to collect excessive fees in
violation of state antitrust and/or unfair trade practice laws. The plaintiffs
seek unspecified compensatory, treble and/or punitive damages and injunctive
relief. The Company believes it has meritorious defenses and intends to contest
the allegations. In NC Steel, Inc. v. NCCI, the defendants' motion to dismiss
was granted in February 1995, and the plaintiffs have appealed to the North
Carolina Court of Appeals. In April 1994, certain subsidiaries of [the Company]
were named as additional defendants in a purported class action pending in the
116th District of Dallas County, Texas, entitled Weatherford Roofing Company v.
Employers National Insurance Company. The plaintiffs in this case allege that
the workers' compensation carriers in Texas have conspired to collect excessive
or improper premiums in violation of state insurance laws, antitrust laws and/or
state unfair trade practices laws. The plaintiffs seek compensatory, treble
and/or punitive damages as well as declaratory and injunctive relief. In a
statutory demand letter, plaintiffs' counsel allege classwide compensatory
damages, including interest through October 1994, of approximately $572 million.
Since that time, court-approved settlements with certain other insurers have
been based on single damage, or alleged overcharge, calculations which, if
applied to Company-issued policies of class members, would yield single damages
of $50 million or less. The Company believes it has meritorious defenses and
intends to contest the allegations unless an attractive settlement opportunity
arises.
<PAGE>
COMPANY'S FORM 10-Q
June 30, 1995
Page 35
For information concerning actions filed against several insurance
companies and industry organizations relating to service fee charges and premium
calculations on certain workers' compensation insurance, see the description
that appears in the paragraph beginning on page 90 and continuing on page 91 of
the Prospectus dated April 22, 1996 of Travelers/Aetna Property Casualty Corp.,
a majority-owned subsidiary of the Company, which description is incorporated by
reference herein. A copy of the pertinent paragraph of such filing is included
as an exhibit to this Form 10-Q. Two of such actions, Four Way Plant Farm v.
NCCI and Weatherford Roofing Company v. Employees National Insurance Company,
have been settled, subject to approval of the court. In NC Steel, Inc. v. NCCI,
the North Carolina Court of Appeals affirmed the trial court's dismissal in
part, reversed in part and remanded for further proceedings.
EXHIBIT 99.03
COMPANY'S FORM 10-Q
September 30, 1995
Page 30
In July 1995, a purported class action was filed under the name Elvidio
-------
Vennettilli et. al. v. Primerica Inc. et. al. in the United States District
- ---------------------------------------------
Court for the Eastern District of Michigan on behalf of individuals who
purchased interests in oil and gas rights owned by Basic Energy and Affiliated
Resources Inc. ("BEAR"). Notwithstanding that the alleged violations were in
contravention of agreements between the agents and Primerica Financial Services
("PFS") and did not involve securities of the Company or any subsidiary thereof,
the complaint, which seeks unspecified monetary damages, alleges that
defendants, including PFS, committed violations of the federal securities laws
and common law fraud. The Company believes it has meritorious defenses and
intends to contest the allegations.
<PAGE>
COMPANY'S FORM 10-Q
March 31, 1996
Page 25
For information concerning a purported class action against Primerica Inc.
and others in connection with the purchase of oil and gas rights owned by Basic
Energy and Affiliated Resources Inc. ("BEAR"), see the description that appears
in the second paragraph of page 30 of the Company's filing on Form 10-Q for the
quarter ended September 30, 1995, which description is incorporated by reference
herein. A copy of the pertinent paragraph of such filing is included as an
exhibit to this Form 10-Q. Two additional alleged class actions making similar
allegations and seeking similar relief, Fournier v. PFS Inc. and McNeely v.
BEAR, have purported to name certain subsidiaries of the Company as defendants.
These cases are pending in the U.S. District Court for the Eastern District of
Michigan. The Company has filed a motion to dismiss each of these actions.
