================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 10-K ------------- [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended December 31, 1996 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from ___________ to ___________ Commission file number: 1-5721 LEUCADIA NATIONAL CORPORATION - --------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) New York 13-2615557 - ------------------------------------- ----------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification Incorporation or Organization) No.) 315 Park Avenue South New York, New York 10010 (212) 460-1900 - --------------------------------------------------------------------------- (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered - ------------------------------------- ----------------------------------- Common Shares, par value $1 per share New York Stock Exchange Pacific Stock Exchange 10-3/8% Senior Subordinated Notes due New York Stock Exchange June 15, 2002 5-1/4% Convertible Subordinated New York Stock Exchange Debentures due February 1, 2003 7-3/4% Senior Notes due August 15, 2013 New York Stock Exchange 8-1/4% Senior Subordinated Notes due New York Stock Exchange June 15, 2005 7-7/8% Senior Subordinated Notes due New York Stock Exchange October 15, 2006 Securities registered pursuant to Section 12(g) of the Act: None. - --------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [x]. Aggregate market value of the voting stock of the registrant held by non- affiliates of the registrant at March 19, 1997 (computed by reference to the last reported closing sale price of the Common Stock on the New York Stock Exchange on such date): $1,079,513,739. On March 19, 1997, the registrant had outstanding 60,458,618 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE: Certain portions of the registrant's definitive proxy statement pursuant to Regulation 14A of the Securities Exchange Act of 1934 in connection with the 1996 annual meeting of shareholders of the registrant are incorporated by reference into Part III of this Report. ================================================================================
PART I Item 1. Business. ------ -------- THE COMPANY GENERAL The Company is a diversified financial services holding company principally engaged in personal and commercial lines of property and casualty insurance, life and health insurance, banking and lending and manufacturing. The Company concentrates on return on investment and cash flow to build long-term shareholder value, rather than emphasiz- ing volume or market share. Additionally, the Company continuously evaluates the retention and disposition of its existing operations and investigates possible acquisitions of new businesses in order to maximize shareholder value. Shareholders' equity has grown from a deficit of $7,657,000 at December 31, 1978 (prior to the acquisition of a controlling interest in the Company by the Company's Chairman and President), to a positive shareholders' equity of $1,118,107,000 at December 31, 1996, equal to a book value per common share of negative $.11 at December 31, 1978 and $18.51 at December 31, 1996. The Company's principal operations are its insurance businesses, where it is a specialty markets provider of property and casualty and life and health insurance products to niche markets. The Company's principal personal lines insurance products are automobile insurance, homeowners insurance, graded benefit life insurance marketed primarily to the age 50-and-over population and Medicare supplement and variable annuity products. The Company's principal commercial lines are property and casualty products provided for workers' compensation, multi-family residential real estate, retail establishments and livery vehicles in the New York metropolitan area. For the year ended December 31, 1996, the Company's insurance segments contributed 83% of total revenue and, at December 31, 1996, constituted 77% of consolidated assets. The Company's insurance subsidiaries have a diversified investment portfolio of securities, substantially all of which are issued or guaranteed by the U.S. Treasury or by U.S. governmental agencies or are rated "investment grade" by Moody's Investors Service Inc. ("Moody's") and/or Standard & Poor's Corporation ("S&P"). Investments in mortgage loans, real estate and non-investment grade securities represented 5.1% of the insurance subsidiaries' portfolio at December 31, 1996. From time to time several companies have expressed interest in the acquisition of certain of the Company's insurance operations. Recently, the Company has responded to certain of these overtures, conveying a willingness to consider the sale of one or more of these operations in the appropriate context and under acceptable circumstances. Presently the Company is in discussions with certain interested parties. Although there can be no assurance that any transaction will be entered into or that, if entered into, any such transaction will be consummated, the price ranges being discussed for such insurance operations are substantially in excess of the book value of these operations. Unless and until a definitive agreement is executed concerning any such transaction, the Company does not intend to update the status of any discussions concerning any possible transaction. The Company's banking and lending operations principally consist of making instalment loans to niche markets primarily funded by customer banking deposits insured by the Federal Deposit Insurance Corporation (the "FDIC"). One of the Company's principal lending activities is providing automobile loans to individuals with poor credit histories. The Company's manufacturing operations primarily manufacture products for the "do-it-yourself" home improvement market and for industrial markets. Starting in 1994, the Company has made investments outside the United States in Russia and Argentina. For more information concerning these investments see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Report. The Company and certain of its subsidiaries have substantial tax loss carryforwards. The amount and availability of the tax loss carryforwards are subject to certain qualifications, limitations and uncertainties as more fully discussed in the Notes to the Consolidated Financial Statements. As used herein, the term "Company" refers to Leucadia National Corporation, a New York corporation organized in 1968, and its subsidiaries, except as the context otherwise may require.
Financial Information About Industry Segments --------------------------------------------- Certain information concerning the Company's operations is presented in the following table. <TABLE> <CAPTION> Year Ended December 31, ------------------------------- 1996 1995 1994 ---- ---- ---- (In millions) Revenues: -------- <S> <C> <C> <C> Property and Casualty Insurance $1,015.1 $ 984.3 $ 872.1 Life Insurance 240.8 223.6 223.3 Banking and Lending 55.1 58.6 49.0 Manufacturing 148.4 166.3 180.1 Corporate and Other (a) 47.2 125.5 59.9 -------- -------- -------- $1,506.6 $1,558.3 $1,384.4 ======== ======== ======== Income (loss) before income taxes: --------------------------------- Property and Casualty Insurance $ 95.5 $ 78.9 $ 96.4 Life Insurance 53.8 53.7 49.1 Banking and Lending 14.5 16.7 16.3 Manufacturing .4 (18.0) (11.7) Corporate and Other (a)(b) (85.7) .9 (49.8) -------- -------- -------- $ 78.5 $ 132.2 $ 100.3 ======== ======== ======== Identifiable assets employed: ---------------------------- Property and Casualty Insurance $2,398.8 $2,374.2 $2,117.9 Life Insurance 1,631.3 1,538.4 1,515.1 Banking and Lending 291.3 336.8 316.4 Manufacturing 68.7 83.6 93.5 Corporate and Other (c) 803.8 774.9 631.1 -------- -------- -------- $5,193.9 $5,107.9 $4,674.0 ======== ======== ======== </TABLE> At December 31, 1996, the Company and its consolidated subsidiaries had 3,919 full-time employees. ---------------- (a) Includes equity in losses of associated companies ($33,631,000 in 1996, $2,613,000 in 1995 and $5,176,000 in 1994), gains (losses) from certain investments and real estate and other operations. In 1995, includes a $41,030,000 gain related to the return of two of the Company's legal subsidiaries, which were formerly under the control of the Wisconsin Insurance Commissioner (the "WMAC Companies"). (b) Includes corporate interest expense and overhead, including expenses related to certain acquisition and investing activities. (c) Principally consists of cash, investments, real estate, receivables and the deferred income tax asset. 2
INSURANCE OPERATIONS GENERAL The Company engages in the personal property and casualty and life and health insurance businesses on a nationwide basis and specializes in commercial property and casualty insurance business in the New York metropolitan area. The Company's principal property and casualty insurance operations are conducted through the Colonial Penn P&C Group and the Empire Group. The Colonial Penn P&C Group consists of Colonial Penn Insurance Company ("CPI"), Colonial Penn Madison Insurance Company ("Madison"), Colonial Penn Franklin Insurance Company ("Franklin"), Bayside Casualty Insurance Company ("Bayside") and Bay Colony Insurance Company ("Bay Colony") and the Empire Group consists of Empire Insurance Company ("Empire") and Allcity Insurance Company ("Allcity"). The Company's principal life and health insurance subsidiaries are Charter National Life Insurance Company ("Charter"), Colonial Penn Life Insurance Company ("CPL"), Providential Life Insurance Company ("Providential") and Intramerica Life Insurance Company ("Intramerica"). In conducting its insurance operations, the Company focuses primarily on profitability and persistency rather than volume. A.M. Best Company ("Best"), an independent rating agency, has rated CPL and Charter "A" (excellent), CPI, Madison, Franklin, Bay Colony and Intramerica "A-" (excellent) and the Empire Group and Providential "B++" (very good). Bayside has not been assigned a rating. Ratings are subject to change at any time. PROPERTY AND CASUALTY INSURANCE The Colonial Penn P&C Group, which maintains its headquarters in Valley Forge, Pennsylvania, is licensed in all 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands and writes insurance throughout most of the United States. The Colonial Penn P&C Group has regional offices in Valley Forge, Pennsylvania, Tampa, Florida and Phoenix, Arizona. The Empire Group is licensed in six states and operates primarily in the New York metropolitan area. During the year ended December 31, 1996, 82%, 11% and 7% of net earned premiums of the Company's property and casualty insurance operations were derived from personal and commercial automobile lines, other commercial lines and other personal lines, respectively. Total property and casualty net earned premiums for the year ended December 31, 1996 were $823,500,000. Set forth below is certain statistical information for the Company's property and casualty operations prepared in accordance with generally accepted accounting principles ("GAAP") and statutory accounting principles ("SAP"). The Loss Ratio is the ratio of incurred losses and loss adjustment expenses to net premiums earned. The Expense Ratio is the ratio of underwriting expenses (policy acquisition costs, commissions, and a portion of administrative, general and other expenses attributable to underwriting operations) to net premiums written, if determined in accordance with SAP, or to net premiums earned, if determined in accordance with GAAP. A Combined Ratio below 100% indicates an underwriting profit and a Combined Ratio above 100% indicates an underwriting loss. The Combined Ratio does not include the effect of investment income. 3
<TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ----------------------------- 1996 1995 1994 ---- ---- ---- <S> <C> <C> <C> Loss Ratio: GAAP 87.7% 87.7% 81.2% SAP 85.8% 85.9% 81.6% Industry (SAP) (a) N/A 78.9% 81.1% Expense Ratio: GAAP 17.3% 15.8% 17.9% SAP 15.7% 15.3% 17.2% Industry (SAP) (a) N/A 27.5% 27.3% Combined Ratio (b): GAAP 105.0% 103.5% 99.1% SAP 101.5% 101.2% 98.8% Industry (SAP) (a) N/A 106.4% 108.4% <FN> _______________ (a) Source: Best's Aggregates & Averages, Property/Casualty, 1996 Edition. Industry combined ratios may not be fully comparable as a result of, among other things, differences in geographical concentration and in the mix of property and casualty insurance products. (b) For 1996 and 1995, a change in the statutory accounting treatment for retrospectively rated reinsurance agreements was the principal reason for the difference between the GAAP Combined Ratio and the SAP Combined Ratio. Additionally in 1996, the difference relates to the accounting for certain expenses which are treated differently under SAP and GAAP. </FN> </TABLE> The Colonial Penn P&C Group The Colonial Penn P&C Group's primary business is providing private passenger automobile and homeowners insurance coverage to the mature adult population. Substantially all of the Group's policies are written for a one-year period. However, in many states CPI and Franklin offer a "guaranteed lifetime protection" provision to certain qualifying policyholders that ensures their policies will be renewed at rates then in effect for their classification. As of December 31, 1996, the Group had approximately 379,000 voluntary automobile policies in force, representing a 6.6% increase over the prior year end. The Company believes the Colonial Penn P&C Group will continue to grow its voluntary automobile business during 1997, although the Company is unable to estimate the rate of growth or state with certainty that such growth will actually occur. The Colonial Penn P&C Group primarily markets its insurance products to the standard and preferred risk market segments through direct response marketing methods. Direct response marketing includes any form of marketing in which a company and a customer deal directly with each other, rather than through an insurance agent. The Colonial Penn P&C Group has become a low cost provider of its products to its niche markets, enabling it to charge competitive rates. Based on published reports, the Colonial Penn P&C Group's SAP Expense Ratio for 1995, the last year for which annual industry data is available, is among the lowest in the industry. 4
For the years ended December 31, 1996, 1995 and 1994, net earned premiums for the Colonial Penn P&C Group were $497,100,000, $490,500,000 and $447,200,000, respectively. Net earned premiums for the Colonial Penn P&C Group for the year ended December 31, 1996 were concentrated in the states listed below: <TABLE> <CAPTION> Percentage of Net Earned Premiums ----------------- State Automobile(1) Homeowners ----- ------------- ---------- <S> <C> <C> California 20% 14% Florida 18 25 New York 13 13 Arizona 7 7 Connecticut 6 5 New Jersey 6 4 Pennsylvania 4 6 All others 26 26 --- --- Total 100% 100% === === <FN> ______________ (1) Excludes net earned premiums related to acquired blocks of assigned risk business described below and mandatory assumed risk business, which generally relates to the amount of writings in the applicable state. </FN> </TABLE> In recent years, the Colonial Penn P&C Group has acquired blocks of assigned risk business from other insurance companies (the "service business") relating to private passenger automobile insurance. In addition to the premiums paid by policyholders, the Group also receives fee income from the insurance company from which the business was acquired. The Group's low expense ratio enables it to bid competitively. The Colonial Penn P&C Group currently has contracts in force covering approximately $80,000,000 of annualized written premium. Prior to its acquisition by the Company, CPI wrote as primary insurer or as a reinsurer a variety of diverse commercial property and casualty insurance business known as "Special Risks." The nature of most of this insurance, which was not written after 1988, involves exposures which can be expected to develop over a relatively long period of time before a definitive determination of ultimate losses and loss adjustment expenses can be established and the relevant reinsurance collected. Although losses with respect to this block of business are particularly difficult to predict accurately, the Company believes, based in part upon a recently completed independent actuarial review, that it has recorded adequate reserves as of December 31, 1996 ($49,700,000, before reinsurance). The Empire Group The Empire Group provides personal insurance coverage to automobile owners and homeowners and commercial insurance for workers' compensation, residential real estate, restaurants, retail establishments, livery vehicles (both medallion and radio-controlled) and several types of service contractors. For the years ended December 31, 1996, 1995 and 1994, net earned premiums and commissions for the Empire Group were $326,400,000, $326,100,000 and $299,200,000, respectively. Substantially all of the Empire Group's policies are written in New York for a one-year period. The Empire Group is licensed in New York to write all lines of insurance that may be written by a property and casualty insurer, except residual value, credit, unemployment, animal and marine protection and indemnity insurance and ocean marine insurance. 5
The voluntary business of the Empire Group is produced through general agents, local agents and insurance brokers, who are compensated for their services by payment of commissions on the premiums they generate. There are five general agents, one of which is owned by Empire, and approximately 390 local agents and insurance brokers presently acting under agreements with the Empire Group. These agents and brokers also represent other competing insurance companies. Like the Colonial Penn P&C Group, the Empire Group also has service business relating to private passenger and commercial automobile insurance. The Empire Group currently has contracts in force covering approximately $83,000,000 of annualized written premiums. In addition, the Empire Group receives a fee for providing administrative services, including claims processing, underwriting and collection activities, for the New York Public Automobile Pool and the Massachusetts Taxi and Limousine Pool. These latter arrangements do not involve the assumption of any material underwriting risk by the Empire Group. Losses and Loss Adjustment Expenses Liabilities for unpaid losses, which are not discounted (except for certain workers' compensation liabilities), and loss adjustment expenses ("LAE") are determined using case-basis evaluations, statistical analyses and estimates for salvage and subrogation recoverable and represent estimates of the ultimate claim costs of all unpaid losses and LAE. Liabilities include a provision for losses that have occurred but have not yet been reported. These estimates are subject to the effect of trends in future claim severity and frequency experience. Adjustments to such estimates are made from time to time due to changes in such trends as well as changes in actual loss experience. These adjustments are reflected in current earnings. The Company's property and casualty insurance subsidiaries rely upon standard actuarial ultimate loss projection techniques to obtain estimates of liabilities for losses and LAE. These projections include the extrapolation of both losses paid and incurred by business line and accident year and implicitly consider the impact of inflation and claims settlement patterns upon ultimate claim costs based upon historical patterns. In addition, methods based upon average loss costs, reported claim counts and pure premiums are reviewed in order to obtain a range of estimates for setting the reserve levels. For further input, changes in operations in pertinent areas including underwriting standards, product mix, claims management and legal climate are periodically reviewed. In the following table, the liability for losses and LAE of the Company's property and casualty insurance subsidiaries are reconciled for each of the three years ended December 31, 1996. Included therein are current year data and prior year development. 6
<TABLE> <CAPTION> RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES 1996 1995 1994 ---- ---- ---- (In thousands) <S> <C> <C> <C> Net liability for losses and LAE at beginning of year $ 999,641 $ 923,905 $ 889,082 ---------- ---------- ---------- Provision for losses and LAE for claims occurring in the current year 733,263 735,071 679,377 Decrease in estimated losses and LAE for claims occurring in prior years (8,631) (16,378) (71,484) ---------- ---------- ---------- Total incurred losses and LAE 724,632 718,693 607,893 ---------- ---------- ---------- Reclassification of uncollectible reinsurance reserves due to commutations- prior years 2,947 - 15,528 ---------- ---------- ---------- Losses and LAE payments for claims occurring during: Current year 304,533 276,212 259,295 Prior years 439,511 366,745 329,303 ---------- ---------- ---------- 744,044 642,957 588,598 ---------- ---------- ---------- 983,176 999,641 923,905 Reserve deducted above for reinsurance not considered collectible 14,511 22,432 26,547 ---------- ---------- ---------- 997,687 1,022,073 950,452 Reinsurance recoverable 112,780 106,879 117,566 ---------- ---------- ---------- Liability for losses and LAE at end of year as reported in financial statements $1,110,467 $1,128,952 $1,068,018 ========== ========== ========== </TABLE> The Company's property and casualty insurance subsidiaries' liability for losses and LAE as of December 31, 1996 was $999,981,000 determined in accordance with SAP and $1,110,467,000 determined in accordance with GAAP. The difference principally relates to liabilities assumed by reinsurers, which are not deducted from GAAP liabilities. The following tables present the development of balance sheet liabilities from 1986 through 1996 and include periods prior to acquisition for the Empire Group and the Colonial Penn P&C Group. Because of substantial differences in the development of reserves of the Empire Group and the Colonial Penn P&C Group, loss and LAE development data is presented separately for each group. The liability line at the top of each table indicates the estimated liability for unpaid losses and LAE recorded as of the dates indicated. The middle 7
section of the table shows the re-estimated amount of the previously recorded liability based on experience as of the end of each succeeding year. As more information becomes available and claims are settled, the estimated liabilities are adjusted upward or downward with the effect of decreasing or increasing net income at the time of adjustment. The lower section of the table shows the cumulative amount paid with respect to the previously recorded liability as of the end of each succeeding year. The "cumulative redundancy (deficiency)" represents the aggregate change in the estimates over all prior years. For example, the initial 1986 liability estimate indicated on the Empire Group table of $182,133,000 has been re-estimated during the course of the succeeding ten years, resulting in a re-estimated liability at December 31, 1996 of $169,021,000, or a redundancy of $13,112,000. If the re-estimated liability exceeded the liability initially established, a cumulative deficiency would be indicated. The cumulative deficiencies reflected in the Colonial Penn P&C Group table are for periods prior to the Company's acquisition of that Group. The Company believes that the Colonial Penn P&C Group's loss reserving policies and improved claims management procedures since acquisition in 1991 have contributed significantly to the creation of the redundancies included in its table below. In evaluating this information, it should be noted that each amount shown for "cumulative redundancy (deficiency)" includes the effects of all changes in amounts for prior periods. For example, the amount of the redundancy (deficiency) related to losses settled in 1990, but incurred in 1986, will be included in the cumulative redundancy (deficiency) amount for 1986, 1987, 1988 and 1989. This table is not intended to and does not present accident or policy year loss and LAE development data. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it would not be appropriate to extrapolate future redundancies or deficiencies based on these tables. For further discussion of the Company's loss development experience, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Report. 8
<TABLE> <CAPTION> ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT (THE EMPIRE GROUP) Year Ended December 31 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Liability for Unpaid Losses and Loss Adjustment Expenses $182,133 $206,709 $222,814 $235,223 $251,401 $280,679 $322,516 $353,917 $406,695 $476,692 $481,138 Liability Re-estimated as of: One Year Later $180,975 $198,384 $213,671 $227,832 $249,492 $280,020 $321,954 $344,156 $441,165 $504,875 $ - Two Years Later 175,305 194,530 206,088 217,432 245,141 277,866 324,262 374,158 467,659 Three Years Later 170,152 188,843 198,500 212,649 243,849 284,052 345,576 394,418 Four Years Later 168,574 184,564 194,324 211,859 247,314 296,484 361,903 Five Years Later 165,717 181,990 196,070 211,952 255,045 306,094 Six Years Later 164,487 183,015 196,646 216,545 260,031 Seven Years Later 166,266 183,082 199,502 219,786 Eight Years Later 165,953 185,609 201,600 Nine Years Later 167,719 187,252 Ten Years Later 169,021 Cumulative Redundancy (Deficiency) $ 13,112 $ 19,457 $ 21,214 $ 15,437 $ (8,630) $(25,415) $(39,387) $(40,501) $(60,964) $(28,183) $ - ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== Cumulative Amount of Liability Paid Through: One Year Later $ 54,359 $ 60,446 $ 64,140 $ 65,822 $ 78,954 $ 89,559 $113,226 $116,986 $152,904 $202,334 $ - Two Years Later 88,770 97,627 101,206 109,479 126,908 150,043 182,250 199,214 270,020 Three Years Later 114,322 123,092 131,705 140,916 167,330 197,848 239,092 272,513 Four Years Later 130,433 142,910 152,330 166,023 196,099 233,244 285,880 Five Years Later 141,346 155,786 168,117 182,001 216,749 259,946 Six Years Later 149,079 164,213 178,095 193,943 231,892 Seven Years Later 153,681 170,215 185,310 203,169 Eight Years Later 157,332 175,117 191,292 Nine Years Later 160,497 179,368 Ten Years Later 164,019 Gross Liability - End of Year $391,829 $451,442 $517,422 $532,319 Reinsurance 37,912 44,747 40,730 51,181 -------- -------- -------- -------- Net Liability - End of Year as Shown Above $353,917 $406,695 $476,692 $481,138 ======== ======== ======== ======== Gross Re-estimated Liability - Latest $452,063 $522,833 $557,475 Re-estimated Reinsurance - Latest 57,645 55,174 52,600 -------- -------- -------- Net Re-estimated Liability - Latest $394,418 $467,659 $504,875 ======== ======== ======== Gross Cumulative (Deficiency) $(60,234) $(71,391) $(40,053) ======== ======== ======== </TABLE> 9
<TABLE> <CAPTION> ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT (THE COLONIAL PENN P&C GROUP) Year Ended December 31 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Liability for Unpaid Losses and Loss Adjustment Expenses $324,700 $386,200 $ 410,500 $ 448,800 $626,300 $657,700 $581,810 $535,165 $517,210 $522,949 $502,038 Liability Re-estimated as of: One Year Later $352,600 $389,900 $ 445,600 $ 555,900 $659,800 $616,400 $497,994 $473,442 $466,362 $486,135 $ - Two Years Later 340,600 409,000 506,800 588,600 619,600 574,000 463,885 444,554 451,115 Three Years Later 338,700 443,700 535,600 563,800 614,000 555,800 450,542 440,476 Four Years Later 359,400 467,300 522,800 565,800 605,900 547,800 450,742 Five Years Later 384,000 459,400 526,700 562,900 599,700 546,400 Six Years Later 375,700 464,700 526,200 559,200 600,300 Seven Years Later 381,300 465,300 524,400 559,000 Eight Years Later 384,900 464,800 524,500 Nine Years Later 386,000 465,000 Ten Years Later 385,900 Cumulative Redundancy (Deficiency) $(61,200) $(78,800)$(114,000) $(110,200)$ 26,000 $111,300 $131,068 $ 94,689 $ 66,095 $ 36,814 $ - ======== ======== ========= ========= ======== ======== ======== ======== ======== ======== ======== Cumulative Amount of Liability Paid Through: One Year Later $177,100 $207,700 $ 243,300 $ 258,500 $279,300 $283,200 $205,200 $212,317 $213,841 $237,177 $ - Two Years Later 249,800 304,000 353,300 387,500 432,500 390,100 317,492 319,253 326,809 Three Years Later 288,700 356,800 419,900 467,500 492,900 461,000 379,521 386,347 Four Years Later 313,700 393,100 462,200 496,400 536,500 496,400 419,428 Five Years Later 332,700 416,800 476,400 523,400 559,100 525,500 Six Years Later 343,600 425,500 496,900 536,500 583,900 Seven Years Later 349,200 441,800 505,800 553,700 Eight Years Later 366,000 448,900 520,200 Nine Years Later 371,600 461,200 Ten Years Later 382,000 Gross Liability - End of Year $660,039 $616,576 $611,530 $578,148 Reinsurance 124,874 99,366 88,581 76,110 -------- -------- -------- -------- Net Liability - End of Year as Shown Above $535,165 $517,210 $522,949 $502,038 ======== ======== ======== ======== Gross Re-estimated Liability - Latest $543,402 $535,515 $561,191 Re-estimated Reinsurance - Latest 102,926 84,400 75,056 -------- -------- -------- Net Re-estimated Liability - Latest $440,476 $451,115 $486,135 ======== ======== ======== Gross Cumulative Redundancy $116,637 $ 81,061 $ 50,339 ======== ======== ======== </TABLE> 10
LIFE INSURANCE The principal life insurance products offered during the three year period ended December 31, 1996 were "Graded Benefit Life" and a variable annuity product. Through its various subsidiaries, the Company is licensed in all 50 states, the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands and generally sells its products throughout most of the United States. Total direct life insurance in force as of December 31, 1996 was $2.1 billion. The following table reflects premium receipts on variable annuity and other investment oriented products and premiums earned on other life and health insurance products. Variable annuity and other investment oriented product premium receipts are not recorded as revenue under GAAP but are recorded in a manner similar to a deposit, and are included below. <TABLE> <CAPTION> Year Ended December 31, ---------------------------------------- 1996 1995 1994 ---- ---- ---- (In thousands) <S> <C> <C> <C> Graded Benefit Life $120,951 $117,691 $113,678 Variable Annuity 47,228 43,708 98,557 Other Investment Oriented Products 5,044 6,494 9,523 Agent-sold Medicare Supplement Products(1) 39,501 27,982 35,967 Other Health Products 11,941 13,919 16,225 Other 892 566 2,629 -------- -------- -------- Total $225,557 $210,360 $276,579 ======== ======== ======== <FN> __________________ (1) Includes Providential's agent-sold Medicare supplement products from April 1996, the date of acquisition. </FN> </TABLE> Life and Health Insurance Products Graded Benefit Life. "Graded Benefit Life" is a guaranteed-issue product. These modified-benefit, whole life policies are offered on an individual basis primarily to persons age 50 to 80, principally in face amounts of $350 to $10,000, without medical examination or evidence of insurability. Premiums are paid as frequently as monthly. Benefits paid are less than the face amount of the policy during the first two years, except in cases of accidental death. Graded Benefit Life is marketed using direct response marketing techniques. New policyholder leads are generated primarily from television advertisements. The Company intends to continue to concentrate its marketing efforts towards soliciting new policyholders where the cost is justified, upgrading existing policyholders' policy packages and obtaining referrals from existing policyholders. Investment Oriented Products. The principal investment oriented product ("IOP" product) offered is a no-load variable annuity ("VA") product. The VA product is marketed as an investment vehicle to individuals seeking to defer, for federal income tax purposes, the annual increase in their account balance. Premiums from this VA product are invested at the policyholders' election in either unaffiliated mutual funds, where the policyholder bears the entire investment risk, or in a fixed account, where the funds earn interest at rates determined by the Company. The Company's VA product is currently marketed in conjunction with Scudder, Stevens and Clark, a mutual fund manager. 11
Medicare Supplement Products. In 1992, CPL discontinued marketing its Medicare supplement products due to increased competition in this market and expectations that such competition would result in inadequate profitability. However, CPL has continued to offer, on a profitable basis, renewals of its Medicare supplement products. In April 1996, the Company acquired Providential, which markets agent-sold standardized Medicare supplement products in communities where health maintenance organizations are less prevalent. The absence of health maintenance organizations allows Providential to charge premium rates that provide for an adequate return on investments. The Company will continue to explore the acquisition of additional companies or blocks of this business in certain markets. INSURANCE OPERATIONS - GENERAL Investments Investment activities represent a significant part of the Company's insurance related revenues and profitability. Investments are managed by the Company's investment advisors under the direction of, and upon consultation with, the Company's several investment committees. The Company's insurance subsidiaries have a diversified investment portfolio of securities, substantially all of which are rated "investment grade" by Moody's and/or S&P or issued or guaranteed by the U.S. Treasury or by governmental agencies. The Company's insurance subsidiaries do not generally invest in less than "investment grade" or "non-rated" securities, real estate or mortgages, although from time to time they may make such investments in amounts not expected to be material. The composition of the Company's insurance subsidiaries' investment portfolio as of December 31, 1996 and 1995 was as follows: <TABLE> <CAPTION> PROPERTY AND CASUALTY LIFE AND HEALTH --------------------- --------------------- 1996 1995 1996 1995 ---- ---- ---- ---- (Dollars in thousands) <S> <C> <C> <C> <C> Bonds and notes: U.S. Government and agencies 85% 83% 72% 72% Rated investment grade 9 13 16 18 Non rated - other 1 - 1 4 Rated less than investment grade 3 1 6 1 Policyholder loans - - 2 2 Equity securities 1 1 2 1 Other, principally accrued interest 1 2 1 2 --- --- --- --- Total 100% 100% 100% 100% === === === === Estimated average yield to maturity of bonds and notes (a) 6.3% 6.6% 6.5% 6.8% Estimated average remaining life of bonds and notes (a) 3.9 yrs. 3.6 yrs. 7.2 yrs. 6.9 yrs. Carrying value of investment portfolio $1,801,122 $1,861,301 $755,028 $780,633 Market value of investment portfolio $1,801,262 $1,862,094 $754,988 $780,710 <FN> _________________ (a) Excludes trading securities, which are not significant. </FN> </TABLE> Reinsurance Reinsurance is obtained for investment oriented products for face amounts in excess of $500,000 per life. The life insurance subsidiaries generally do not obtain reinsurance for the Graded Benefit Life products because these policies generally have a low face amount. The Colonial Penn P&C Group obtained reinsurance for casualty risks in excess of $2,000,000 in 1996, 1995 and 1994, although most Colonial Penn P&C Group 12
automobile policies do not have policy limits in excess of $100,000 per risk and $300,000 per accident. The Empire Group's maximum retained limit was $500,000 for workers' compensation for 1996, 1995 and 1994; for other property and casualty lines, the Empire Group's maximum retained limit was $300,000 for 1996 and $225,000 for 1995 and 1994. Additionally, the Company's property and casualty insurance subsidiaries have entered into certain excess of loss and catastrophe treaties to protect against certain losses. The Colonial Penn P&C Group's retention of lower level losses in such treaties was $15,000,000 in 1996 and 1995 and $11,000,000 in 1994. In 1997, the Colonial Penn P&C Group entered into "second event" reinsurance that will provide up to $10,000,000 of recovery if multiple catastrophe losses not covered under the Group's basic agreement exceed $20,000,000. The Empire Group's retention of lower level losses in such treaties is $5,000,000 for 1997 and was $3,000,000 for 1996, 1995 and 1994. Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of the policy liability, it does make the assuming reinsurer liable to the insurer to the extent of the reinsurance ceded. The Company's reinsurance generally has been placed with certain of the largest reinsurance companies, including (with their respective Best ratings) General Reinsurance Corporation (A++), Partner Re Co. Ltd. (A+), LaSalle Re Ltd. (A-), AXA Reinsurance Company (A), Zurich Reinsurance Centre, Inc. (A), Munich American Reinsurance Company (A+) and United Teachers Associates Insurance (B++). In addition, the Company has reinsured a block of business with a subsidiary of John Hancock Mutual Life Insurance Company ("Hancock") as part of the sale of such business to Hancock. The Company believes its reinsurers to be financially capable of meeting their respective obligations. However, to the extent that any reinsuring company is unable to meet its obligations, the Company's insurance subsidiaries would be liable for the reinsured risks. The Company has established reserves, which the Company believes are adequate, for any nonrecoverable reinsurance. Competition The insurance industry is a highly competitive industry, in which many of the Company's competitors have substantially greater financial resources, larger sales forces, more widespread agency and broker relationships, and more diversified lines of insurance coverage. Additionally, certain competitors market their products with endorsements from affinity groups, while the Company's products are for the most part unendorsed, which may give such other companies a competitive advantage. Recent federal administrative, legislative and judicial activity may result in changes to federal banking laws that will enable national banks to act as agents in order to offer certain insurance products in direct competition with the Company. The Company is unable to determine what effect, if any, such changes may have on the Company's operations. The Company believes that property and casualty insurers generally compete on the basis of price, customer service, consumer recognition and financial stability. The industry has historically been cyclical in nature, with periods of less intense price competi- tion generating significant profits, followed by periods of increased price competition resulting in reduced profitability or loss. The current cycle of intense price competition has continued for a longer period than in the past, suggesting that the significant infusion of capital into the industry in recent years, coupled with larger investment returns has been, and may continue to be, a depressing influence on policy rates. The profitability of the property and casualty insurance industry is affected by many factors, including rate competition, severity and frequency of claims (including catastrophe losses), interest rates, state regulation, court decisions and judicial climate, all of which are outside the Company's control. 13
Government Regulation Insurance companies are subject to detailed regulation and supervision in the states in which they transact business. Such regulation pertains to matters such as approving policy forms and various premium rates, minimum reserves and loss ratio requirements, the type and amount of investments, minimum capital and surplus requirements, granting and revoking licenses to transact business, levels of operations and regulating trade practices. The majority of the Company's property and casualty insurance operations are in states requiring prior approval by regulators before proposed rates may be implemented. Certain states have indicated that they may change the bases (e.g., age, sex and geographic location) on which rates traditionally have been established. Rates proposed for life insurance generally become effective immediately upon filing. Insurance companies are required to file detailed annual reports with the supervisory agencies in each of the states in which they do business, and are subject to examination by such agencies at any time. Increased regulation of insurance companies at the state level and new regulation at the federal level is possible, although the Company cannot predict the nature or extent of any such regulation or what impact it would have on the Company's operations. The National Association of Insurance Commissioners ("NAIC") has adopted model laws incorporating the concept of a "risk based capital" ("RBC") requirement for insurance companies. Generally, the RBC formula is designed to measure the adequacy of an insurer's statutory capital in relation to the risks inherent in its business. The RBC formula is used by the states as an early warning tool to identify weakly capitalized companies for the purpose of initiating regulatory action. Each of the Company's insurance subsidiaries' RBC ratio as of December 31, 1996 substantially exceeded minimum requirements. The NAIC also has adopted various ratios for insurance companies which, in addition to the RBC ratio, are designed to serve as a tool to assist state regulators in discovering potential weakly capitalized companies or companies with unusual trends. The insurance companies had certain "other than normal" NAIC ratios for the year ended December 31, 1996. The Company believes that there are no material underlying problems or weaknesses in its insurance operations and that it is unlikely that material adverse regulatory action will be taken. The Company's insurance subsidiaries are members of state insurance funds which provide certain protection to policyholders of insolvent insurers doing business in those states. Due to insolvencies of certain insurers in recent years, the Company's insurance subsidiaries have been assessed certain amounts which have not been material and are likely to be assessed additional amounts by state insurance funds. The Company believes that it has provided for all anticipated assessments and that any additional assessments will not have a material adverse effect on the Company's financial condition or results of operations. BANKING AND LENDING During 1996 the Company's banking and lending operations principally were conducted through American Investment Bank, N.A. ("AIB"), its national bank subsidiary and American Investment Financial ("AIF"), an industrial loan corporation. AIB and AIF take money market and other non-demand deposits that are eligible for insurance provided by the FDIC. AIB and AIF had deposits of $209,261,000 and $203,061,000 at December 31, 1996 and 1995, respectively. AIB and AIF currently have several deposit-taking and lending facilities in the Salt Lake City area. The Company's consolidated banking and lending operations had outstanding loans (net of unearned finance charges) of $233,351,000 and $278,391,000 at December 31, 1996 and 1995, respectively. At December 31, 1996, 41% were loans to individuals generally collateralized by automobiles; 14% were 14
unsecured loans to individuals acquired from others in connection with investments in limited partnerships; 42% were unsecured loans to executives and professionals; and 3% were instalment loans to consumers, substantially all of which were collateralized by real or personal property. It is the Company's policy to charge to income an allowance for losses which, based upon management's analysis of numerous factors, including current economic trends, aging of the loan portfolio and historical loss experience, is deemed adequate to cover reasonably expected losses on outstanding loans. At December 31, 1996, the allowance for loan losses for the Company's entire loan portfolio was $12,177,000 or 5.2% of the net outstanding loans, compared to $13,893,000 or 5% of net outstanding loans at December 31, 1995. The funds generated by the deposits are primarily used to make instalment loans, including collateralized personal automobile loans to individuals who have difficulty in obtaining credit. These automobile loans are made at interest rates above those charged to individuals with good credit histories. In determining which individuals qualify for these loans, the Company takes into account a number of highly selective criteria with respect to the individual as well as the collateral to attempt to minimize the number of defaults. Additionally, the Company closely monitors these loans and takes prompt possession of the collateral in the event of a default. For the three year period ended December 31, 1996, the Company generated $219,416,000 of these loans ($38,683,000 during 1996). Beginning in 1995, primarily as a result of increased competition, together with the Company's tightening of its underwriting standards, the portfolio has declined. Loan losses have increased and, at December 31, 1996, the allowance for loan losses for this portfolio was $7,622,000 or 7.9% of net outstanding loans. The Company expects that the increased level of competition will continue and, together with the Company's tightened underwriting standards and the generally lower rates being offered by competitors, is likely to result in a further contraction in the size of this portfolio. The Company's banking and lending operations compete with banks, savings and loan associations, credit unions, credit card issuers and consumer finance companies, many of which are able to offer financial services on very competitive terms. Additionally, substantial national financial services networks have been formed by major brokerage firms, insurance companies, retailers and bank holding companies. Some competitors have substantial local market positions; others are part of large, diversified organizations. The Company's principal banking and lending operations are subject to detailed supervision by state authorities, as well as federal regulation pursuant to the Federal Consumer Credit Protection Act and regulations promulgated by the Federal Trade Commission. The Company's banking operations are subject to federal and state regulation and supervision by, among others, the Office of the Comptroller of the Currency (the "OCC"), the FDIC and the State of Utah. AIB's primary federal regulator is the OCC, while the primary federal regulator for AIF is the FDIC. The Competitive Equality Banking Act of 1987 ("CEBA") places certain restrictions on the operations of AIB and restricts further acquisitions of banks and savings institutions by the Company. CEBA does not restrict AIF as currently operated. MANUFACTURING The Company's manufacturing operations consist primarily of the manufacture of bathroom vanities and related products for the "do-it- yourself" market, proprietary plastic netting for various industrial markets and electrical products. During 1996, the Company sold one division and discontinued certain non-performing product lines. For the year ended December 31, 1996 this segment was profitable for the first time since 1990. 15
Bathroom vanities and related products are sold through manufacturers' representatives, primarily to home improvement centers. The plastics division manufactures and markets plastic netting used for a variety of purposes including, among other things, construction, packaging, carpet backing and filtration. The electrical division primarily produces wire cable and power cords for industrial customers. The manufacturing operations are subject to a high degree of competition, generally on the basis of price, service and quality. Additionally, certain of these manufacturing operations are dependent on cyclical industries, including the construction industry. Through its various manufacturing divisions, the Company holds patents on certain improvements to the basic manufacturing processes and on applications thereof. The Company believes that the expiration of these patents, individually or in the aggregate, is unlikely to have a material effect on manufacturing operations. OTHER OPERATIONS AND INVESTMENTS The Company owns equity interests representing more than 5% of the outstanding capital stock of each of the following domestic public companies at December 31, 1996: Carmike Cinemas, Inc. ("Carmike") (approximately 6% of Class A shares), HomeFed Corporation ("HFC") (approximately 41%), Jordan Industries, Inc. ("JII") (approximately 11%) and MK Gold Company ("MK Gold") (approximately 46%). In April 1996, the Company formed a joint venture, Pepsi International Bottlers ("PIB"), with PepsiCo, Inc to be the exclusive bottler and distributor of PepsiCo beverages in a large portion of central and eastern Russia, Kyrgyzstan and Kazakstan. The Company and PepsiCo have committed to make capital contributions to PIB of $79,500,000 and $26,500,000, respectively. As of December 31, 1996, the Company contributed $51,000,000; the balance was funded in January 1997. The Company has a 75% economic interest in PIB. At December 31, 1996, the carrying amount of the Company's investment in PIB was $33,896,000, reflecting the Company's share of the start-up losses of this venture. The Company anticipates that PIB will continue to experience operating losses during the period that PIB is building production and distribution capacity and market share. The Company owns a 30% interest in Caja de Ahorro y Seguro S.A. ("Caja"), a holding company whose subsidiaries are engaged in property and casualty insurance, life insurance and banking in Argentina. Caja distributes its insurance products primarily on a direct basis, and therefore does not pay commissions to agents. Caja is the largest insurance company in Argentina, with total annual premium revenues of approximately $516,700,000 and total assets (including banking operations) of approximately $646,000,000. At December 31, 1996, the carrying amount of the Company's investment in Caja was $44,333,000. The Company's equity in Caja's results of operations since acquisition has not been material. A subsidiary of the Company is a partner in The Jordan Company and Jordan/Zalaznick Capital Company. These partnerships each specialize in structuring leveraged buyouts in which the partners are given the opportunity to become equity participants. Since 1982, the Company has invested an aggregate of $36,919,000 in these partnerships and related companies and, through December 31, 1996, has received $84,632,000 (including cash, interest bearing notes and other receivables) relating to the disposition of investments and management and other fees. At December 31, 1996, through these partnerships, the Company had interests in JII, Carmike and a total of 19 other companies (the "Jordan Associated Companies"), which in total are carried at cost in the Company's consolidated financial statements at $11,657,000. The Company's real estate investments include a 615,000 square foot office building located near Grand Central Terminal in New York City (carried at $58,608,000 at December 31, 1996), and two luxury residential condominium towers in downtown San Diego, California (carried at $31,572,000 at December 31, 16
1996). The New York City office building, which has 355,000 square feet of contiguous space available for occupancy, is being marketed for sale. The San Diego towers consist of 201 residential units, 125 of which were available for sale at December 31, 1996, and 42,000 square feet of retail space, of which 7,500 square feet have been leased to a national restaurant chain. For further information about the Company's business, reference is made to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Report and Notes to Consolidated Financial Statements. Item 2. Properties. ------ ---------- Through its various subsidiaries, the Company owns and utilizes in its operations the following significant properties: two office buildings located in Valley Forge, Pennsylvania used by the Colonial Penn P&C Group (totaling approximately 198,700 sq. ft.), one of which is located on land leased from a third party; two offices in Salt Lake City, Utah used for corporate and banking and lending activities (totaling approximately 77,000 sq. ft.); and an office building in Philadelphia, Pennsylvania used by the life insurance companies (approximately 127,000 sq. ft.). In addition, subsidiaries of the Company own six facilities (totaling approximately 970,000 sq. ft.) primarily used for manufacturing and storage located in Georgia, New Jersey, New York, North Carolina, Pennsylvania and Canada. The Company and its subsidiaries lease numerous manufacturing, warehousing, office and headquarters facilities. The facilities vary in size and have leases expiring at various times, subject, in certain instances, to renewal options. See Notes to Consolidated Financial Statements. Item 3. Legal Proceedings. ------ ----------------- PINNACLE LITIGATION On May 11, 1994, a shareholder of the Company filed a purported derivative action entitled Pinnacle Consultants, Ltd. v. Leucadia -------------------------- -------- National Corporation, et al. (C.A. No. 94 Civ. 3496) against the ---------------------------- Company's current Board of Directors and two former directors, John W. Jordan II and Melvin Hirsch. The action, which was filed in the United States District Court for the Southern District of New York, alleged certain Racketeer Influence and Corrupt Organizations Act, securities law, conversion and fraud claims. On December 10, 1996, the Second Circuit Court of Appeals affirmed the judgment of the District Court dismissing these claims. OTHER PROCEEDINGS In addition to the foregoing, the Company and its subsidiaries are parties to legal proceedings that are considered to be either ordinary, routine litigation incidental to their business or not material to the Company's consolidated financial position. The Company does not believe that any of the foregoing actions will have a material adverse effect on its consolidated financial position or consolidated results of operations. Item 4. Submission of Matters to a Vote of Security Holders. ------ --------------------------------------------------- Not applicable. 17
Item 10. Executive Officers of the Registrant. ------- ------------------------------------ All executive officers of the Company are elected at the organizational meeting of the Board of Directors of the Company held annually and serve at the pleasure of the Board of Directors. As of March 19, 1997, the executive officers of the Company, their ages, the positions held by them and the periods during which they have served in such positions were as follows: NAME AGE POSITION WITH LEUCADIA OFFICE HELD SINCE ---- --- ---------------------- ----------------- Ian M. Cumming 56 Chairman of the Board June 1978 Joseph S. Steinberg 53 President January 1979 Thomas E. Mara 51 Executive Vice President May 1980; and Treasurer January 1993 Joseph A. Orlando 41 Vice President and January 1994; Chief Financial Officer April 1996 Barbara L. Lowenthal 42 Vice President and April 1996 Comptroller Paul J. Borden 48 Vice President August 1988 Mark Hornstein 49 Vice President July 1983 Ruth Klindtworth 62 Secretary and Vice President- February 1976; Corporate Administrator January 1990 Mr. Cumming has served as a director and Chairman of the Board of the Company since June 1978. In addition, he has served as a director of Allcity since February 1988 and MK Gold since June 1995. Mr. Cumming has also been a director of Skywest, Inc., a Utah-based regional air carrier, since June 1986. Mr. Steinberg has served as a director of the Company since December 1978 and as President of the Company since January 1979. In addition, he has served as a director of Allcity since February 1988, as a director of MK Gold since June 1995 and as a director of JII since June 1988. Mr. Mara joined the Company in April 1977 and was elected Vice President of the Company in May 1977. He has served as Executive Vice President of the Company since May 1980 and as Treasurer of the Company since January 1993. In addition, he has served as a director of Allcity since October 1994. Mr. Orlando, a certified public accountant, has served as Chief Financial Officer of the Company since April 1996 and as Vice President of the Company since January 1994. Mr. Orlando previously served in a variety of capacities with the Company and its subsidiaries since 1987, including Comptroller of the Company from March 1994 to April 1996. Ms. Lowenthal, a certified public accountant, has served as Vice President and Comptroller of the Company since April 1996. For the prior four years, Ms. Lowenthal served as Director of Policies, Systems and Procedures and Assistant Controller of W.R. Grace & Co., a specialty chemicals company. Mr. Borden joined the Company as Vice President in August 1988 and has served in a variety of other capacities with the Company and its subsidiaries. 18
Mr. Hornstein joined the Company as Vice President in July 1983 and has served in a variety of other capacities with the Company and its subsidiaries. Ms. Klindtworth has been employed by the Company since July 1960 and has served as Secretary of the Company since February 1976 and as Vice President-Corporate Administrator of the Company since January 1990. 19
PART II Item 5. Market for Registrant's Common Equity and Related ------ ------------------------------------------------- Stockholder Matters. ------------------- (a) Market Information. ------------------ The Common Shares of the Company (the "Common Shares") are traded on the New York Stock Exchange and Pacific Stock Exchange under the symbol LUK. The following table sets forth, for the calendar periods indicated, the high and low sales price per Common Share on the consolidated transaction reporting system, as reported by the Dow Jones Historical Stock Quote Reporter Service. On November 15, 1995, the Company effected a two-for-one stock split of the Common Shares in the form of a 100% stock dividend (the "Stock Split"). The dividend was paid to shareholders of record at the close of business on November 1, 1995. Per share amounts set forth in this Report have been adjusted to reflect the Stock Split. <TABLE> <CAPTION> COMMON SHARE ------------ HIGH LOW ---- --- <S> <C> <C> 1995 ---- First Quarter $24.31 $21.44 Second Quarter 26.00 21.81 Third Quarter 29.63 24.56 Fourth Quarter 29.44 24.50 1996 ---- First Quarter $29.00 $23.75 Second Quarter 26.50 23.88 Third Quarter 25.00 21.63 Fourth Quarter 28.50 23.13 1997 ---- First Quarter (through March 19, 1997) $29.00 $25.75 </TABLE> (b) Holders. ------- As of March 19, 1997, there were approximately 4,089 record holders of the Common Shares. (c) Dividends. --------- The Company paid dividends of $.25 per Common Share on December 31, 1996 and $.25 per Common Share on December 29, 1995. The payment of dividends in the future is subject to the discretion of the Board of Directors and will depend upon general business conditions, legal and contractual restrictions on the payment of dividends and other factors that the Board of Directors may deem to be relevant. In connection with the declaration of dividends or the making of distributions on, or the purchase, redemption or other acquisition of Common Shares, the Company is required to comply with certain restrictions contained in certain of its debt instruments. 20
Item 6. Selected Financial Data. ------ ----------------------- The following selected financial data have been summarized from the Company's consolidated financial statements and are qualified in their entirety by reference to, and should be read in conjunction with, such consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations," below. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (In thousands, except per share amounts) <S> <C> <C> <C> <C> <C> SELECTED INCOME STATEMENT DATA: (a) Revenues $1,506,557 $1,558,314 $1,384,385 $1,408,058 $1,573,015 Net securities gains (losses) 39,429 20,027 (12,004) 51,923 51,778 Interest expense (b) 53,996 52,871 44,003 39,465 38,507 Insurance losses, policy benefits and amortization of deferred acquisition costs 962,001 942,803 819,010 789,752 896,673 Income before income taxes, cumulative effects of changes in accounting principles and extraordinary loss 78,512 132,182 100,318 176,868 143,553 Income before cumulative effects of changes in accounting principles and extraordinary loss 55,515 107,503 70,836 116,259 130,607 Cumulative effects of changes in accounting principles - - - 129,195 - Extraordinary loss from early extinguishment of debt, net of income tax benefit (6,838) - - - - Net income 48,677 107,503 70,836 245,454 130,607 Per share: Primary earnings (loss) per common and dilutive common equivalent share: Income before cumulative effects of changes in accounting principles and extraordinary loss $ .91 $1.81 $1.22 $1.98 $2.67 Cumulative effects of changes in accounting principles - - - 2.21 - Extraordinary loss (.11) - - - - ----- ----- ----- ----- ----- Net income $ .80 $1.81 $1.22 $4.19 $2.67 ===== ===== ===== ===== ===== Fully diluted earnings (loss) per common share: Income before cumulative effects of changes in accounting principles and extraordinary loss $ .91 $1.77 $1.21 $1.94 $2.66 Cumulative effects of changes in accounting principles - - - 2.10 - Extraordinary loss (.11) - - - - ----- ----- ----- ----- ----- Net income $ .80 $1.77 $1.21 $4.04 $2.66 ===== ===== ===== ===== ===== <CAPTION> AT DECEMBER 31, --------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (In thousands, except per share amounts) <S> <C> <C> <C> <C> <C> SELECTED BALANCE SHEET DATA: (a) Cash and investments $3,176,927 $3,146,639 $2,764,890 $2,989,384 $3,371,624 Total assets 5,193,936 5,107,874 4,674,046 4,689,272 4,330,580 Debt, including current maturities 525,719 520,862 425,848 401,335 225,588 Customer banking deposits 209,261 203,061 179,888 173,365 186,339 Common shareholders' equity 1,118,107 1,111,491 881,815 907,856 618,161 Book value per common share $18.51 $18.47 $15.72 $16.27 $11.06 <CAPTION> YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> SELECTED INFORMATION ON PROPERTY AND CASUALTY INSURANCE OPERATIONS (Unaudited): (a)(c) GAAP Combined Ratio 105.0% 103.5% 99.1% 96.9% 101.7% SAP Combined Ratio 101.5% 101.2% 98.8% 93.7% 102.8% Industry SAP Combined Ratio (d) N/A 106.4% 108.4% 106.9% 115.7% Premium to Surplus Ratio (e) 1.6x 1.8x 1.9x 1.6x 2.0x <FN> - -------------------------------- Footnotes on following page. 21
(a) Data includes acquired companies from date of acquisition. (b) Includes interest on customer banking deposits. (c) Certain accident and health insurance business, which is included in the statutory results of operations of the property and casualty insurance segment and is reflected in the SAP Combined Ratio, is reported in the life insurance segment for financial reporting purposes and therefore is not included in the GAAP Combined Ratios reflected herein. The Combined Ratio does not reflect the effect of investment income. For 1996 and 1995, a change in the statutory accounting treatment for retrospectively rated reinsurance agreements was the principal reason for the difference between the GAAP Combined Ratios and the SAP Combined Ratios. Additionally in 1996, the difference relates to the accounting for certain expenses which are treated differently under SAP and GAAP. For 1993, the difference reflects the different treatment of certain costs for GAAP and SAP purposes. For 1992, the results of certain accident and health insurance business had a non-recurring income item which reduced the SAP Combined Ratio. In addition, in 1992 certain income credits were recognized only for GAAP purposes. (d) Source: Best's Aggregates & Averages, Property/Casualty, 1996 Edition. Industry Combined Ratios may not be fully comparable as a result of, among other things, differences in geographical concentration and in the mix of property and casualty insurance products. (e) Premium to Surplus Ratio was calculated by dividing statutory property and casualty insurance premiums written by statutory capital at the end of the year. </FN> </TABLE> 22
Item 7. Management's Discussion and Analysis of Financial Condition ------ ----------------------------------------------------------- and Results of Operations. ------------------------- The purpose of this section is to discuss and analyze the Company's consolidated financial condition, liquidity and capital resources and results of operations. This analysis should be read in conjunction with the consolidated financial statements and related notes which appear elsewhere in this Report. LIQUIDITY AND CAPITAL RESOURCES Parent Company Liquidity Leucadia National Corporation (the "Parent") is a holding company whose assets principally consist of the stock of its several direct subsidiaries. The Parent continuously evaluates the retention and disposition of its existing operations and investigates possible acquisitions of new businesses in order to maximize shareholder value. Accordingly, while the Parent does not have any material arrangement, commitment or understanding with respect thereto (except as disclosed in this Report), further acquisitions, divestitures, investments and changes in capital structure are possible. Its principal sources of funds are its available cash resources, bank borrowings, public financings, repayment of subsidiary advances, funds distributed from its subsidiaries as tax sharing payments, management and other fees, and borrowings and dividends from its regulated and non-regulated subsidiaries. It has no substantial recurring cash requirements other than payment of interest and principal on its debt, tax payments and corporate overhead expenses. The Parent maintains the principal borrowings for the Company and its non-banking subsidiaries and has provided working capital to certain of its subsidiaries. These borrowings have primarily been made on an unsecured basis from banks through various credit agreement facilities and term loans, and through public financings. During the year ended December 31, 1996, the Company did not use its $150,000,000 bank credit agreement facilities, except for minor amounts borrowed to meet daily cash requirements. At December 31, 1996, there were no amounts outstanding under such bank credit agreement facilities. The Company's bank borrowings bear interest based on the prime rate or LIBOR. In February 1997, the Company replaced these credit facilities and its $50,000,000 of outstanding bank term loans with a new contractual bank credit facility of $200,000,000. The new facility bears interest based on the prime rate or LIBOR and matures in February 2002. In October 1996, the Company sold $135,000,000 principal amount of its newly authorized 7-7/8% Senior Subordinated Notes due 2006 in an underwritten public offering at 99.487% of the principal amount. As of December 31, 1996, $114,000,000 of the net proceeds were used to purchase $102,656,000 aggregate principal amount of the Company's 10-3/8% Senior Subordinated Notes due 2002 (the "10-3/8% Notes"), plus accrued interest, through a tender offer and in open market purchases. In the fourth quarter of 1996, the Company reported an extraordinary loss on early extinguishment of these 10-3/8% Notes of $6,838,000, net of income tax benefit of $3,682,000. The Company intends to retire the 10-3/8% Notes that remain outstanding either through open market purchases or through early redemption of the 10-3/8% Notes in June 1997. The refinancing of the 10-3/8% Notes will result in annual expense savings of approximately $2,600,000. At December 31, 1996, a maximum of approximately $33,962,000 was available to the Parent as dividends from its regulated subsidiaries without regulatory approval. Additional amounts may be available to the Parent 23
in the form of loans or cash advances from regulated subsidiaries, although no amounts were outstanding at December 31, 1996 or borrowed to date in 1997. There are no restrictions on distributions from the non-regulated subsidiaries; the Parent and its non-regulated subsidiaries had aggregate cash and temporary investments of approximately $194,500,000 at December 31, 1996. The Parent also receives tax sharing payments from subsidiaries included in its consolidated income tax return, including certain regulated subsidiaries. Because of the tax loss carryforwards available to the Parent and certain subsidiaries, together with current interest deductions and corporate expenses, the amount paid by the Parent for income taxes is substantially less than tax sharing payments received from its subsidiaries. In addition, the Parent receives payments from the regulated and non-regulated entities for services provided by the Parent. Payments from regulated subsidiaries for dividends, tax sharing payments and other services totaled approximately $104,400,000 for the year ended December 31, 1996. On March 12, 1997, the Company called for redemption on April 11, 1997 all of its outstanding $100,000,000 5-1/4% Convertible Subordinated Debentures due 2003, at a redemption price of 102.625% of the principal amount of the Debentures, plus accrued interest. The funds to be used for this redemption are expected to be provided from general corporate funds available to the Parent. Based on discussions with commercial and investment bankers, the Company believes that it has the ability to raise additional funds under acceptable conditions for use in its existing businesses or for appropriate investment opportunities. Since 1993, the Company's senior debt obligations have been rated as investment grade by Moody's, S&P and Duff & Phelps Inc. Ratings issued by bond rating agencies are subject to change at any time. Consolidated Liquidity During each of the three years in the period ended December 31, 1996, the Company operated profitably and net cash was provided from operations. The Company has entered into interest rate agreements to manage the impact of changes in interest rates on its variable rate debt and customer banking deposits. Counterparties to these agreements are major financial institutions, which the Company believes are able to fulfill their obligations; however, if they are not, the Company believes that any losses are unlikely to be material. In April 1996, the Company formed PIB with PepsiCo, Inc to be the exclusive bottler and distributor of PepsiCo beverages in a large portion of central and eastern Russia, Kyrgyzstan and Kazakstan. The Company and PepsiCo have committed to make capital contributions to PIB of $79,500,000 and $26,500,000, respectively. As of December 31, 1996, the Company contributed $51,000,000; the balance was funded in January 1997. In February 1997, the Company, PepsiCo and PIB signed a term sheet with third party lenders to provide $90,000,000 of additional financing to PIB. Actual funding will require satisfactory negotiation and execution of definitive loan agreements, as well as, among other things, a license from the Russian Central Bank. Pending satisfaction of such requirements, bridge financing to PIB to cover operating costs and capital expenditures will be necessary. The Company estimates that its share of the bridge financing should not exceed $30,000,000. The Company has a 75% economic interest in PIB and PepsiCo owns the remaining 25%. Under the terms of the joint venture agreement, the Company and PepsiCo have equal voting rights over all significant aspects of PIB's operations. Accordingly, since the Company does not control PIB despite its larger economic interest, the Company accounts for its share of PIB's operating results under the equity method of accounting. The Company's equity in losses of PIB was $17,104,000 for the year ended December 31, 1996, resulting from 24
significant start-up costs of this operation. The Company anticipates that PIB will continue to experience operating losses during the period that PIB is building production and distribution capacity and market share. In July 1996, the Company committed to invest up to $25,000,000 for a 57.5% equity interest in an 809,000 square foot office building and garage and a minority interest in a Marriott hotel. This real estate project in Brooklyn, New York is currently under construction. The Company's equity investment is expected to be contributed toward the end of the anticipated two year construction period. The Empire Group will be a major tenant in the project, and as such will receive certain benefits, primarily from the City of New York, with a present value of approximately $36,000,000. The Company's investments in Russia and Argentina are subject to foreign exchange and other risks. Investing in the emerging markets of Russia is subject to political risk and uncertainty concerning the government's ability to succeed in its program to convert to a market economy, both of which are beyond the Company's control. The Company's investments in Argentina and Russia are subject to foreign currency exchange risks, the volatility of the banking systems and securities markets in these countries, the overall health of their respective economies and the usual competitive factors experienced by companies. The funds for the investments described above were or are expected to be provided from general corporate funds available to the Parent company. In January 1997, the Company sold $150,000,000 aggregate liquidation amount of 8.65% trust issued preferred securities of its subsidiary, Leucadia Capital Trust I, (the "Trust"). These Company-obligated mandatorily redeemable preferred securities have an effective maturity date of January 15, 2027 and represent undivided beneficial interests in the Trust's assets, which consist solely of 8.65% Junior Subordinated Deferrable Interest Debentures due 2027 of the Company. The obligations of the Trust related to its preferred securities are fully and unconditionally guaranteed by the Company. The investment portfolios of the Company's insurance subsidiaries are principally fixed maturity investments rated "investment grade" or U.S. governmental agency issued or guaranteed obligations, although limited investments in "non-rated" or rated less than investment grade securities have been made from time to time. The investment strategy of the insurance subsidiaries has been to maintain a high quality portfolio of publicly traded, fixed income securities with a relatively short duration. Principally as a result of increases in market interest rates during 1996, the unrealized gain on investments at the end of 1995 of approximately $30,086,000 (net of taxes) decreased to approximately $1,759,000 (net of taxes) as of December 31, 1996. While this has resulted in a decrease in shareholders' equity, it had no effect on results of operations or cash flows. The Company provides collateralized automobile loans to individuals with poor credit histories. In 1996, the Company continued to experience increased competition resulting in reduced volume and increased loan losses. During 1996, the Company tightened its underwriting standards in an effort to improve its loan loss experience and increased the reserve maintained on this portfolio. The Company's investment in these loans was $96,338,000, $134,668,000 and $129,512,000 at December 31, 1996, 1995 and 1994, respectively. The Company and certain of its subsidiaries have substantial loss carryforwards and other tax attributes. The amount and availability of tax loss carryforwards are subject to certain qualifications, limitations and uncertainties. In order to reduce the possibility that certain changes in ownership could impose limitations on the use of these carryforwards, the Company's certificate of incorporation contains provisions which generally restrict the ability of a person or entity from accumulating at least five percent of the Common Shares and the ability of persons or entities now owning at least five percent of the Common Shares from acquiring additional Common Shares. The Company has recognized as an asset (net of reserves) certain of the benefits of such loss 25
carryforwards and other tax attributes. As described in the Notes to the Consolidated Financial Statements, significant additional amounts may be available under certain circumstances. RESULTS OF OPERATIONS The Company's most significant operations are its insurance businesses, where it is a specialty markets provider of property and casualty and life and health insurance to its niche markets. For the year ended December 31, 1996, the Company's insurance segments contributed 83% of total revenues and, at December 31, 1996, constituted 77% of total assets. Earned premium revenues of the Colonial Penn P&C Group were approximately $497,100,000, $490,500,000 and $447,200,000, for the years ended December 31, 1996, 1995 and 1994, respectively. Earned premiums from voluntary automobile policies were 10.2% higher in 1996 and voluntary automobile policies in force increased 6.6% from December 31, 1995. Since the first quarter of 1995, the Colonial Penn P&C Group has been successful in growing its voluntary automobile business, principally through direct mail and referral marketing techniques. The increase in earned premium revenues was partially offset by reduced service business and the depopulation of state assigned risk automobile pools. The growth in earned premiums in 1995, as compared to 1994, principally resulted from service business and a modest increase in earned premiums related to voluntary automobile polices. Earned premium revenues and commissions of the property and casualty insurance operations of the Empire Group were $326,400,000, $326,100,000 and $299,200,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Beginning in the fourth quarter of 1995, higher premium rates were charged on certain lines of business, including in 1996 amounts related to increased minimum automobile liability coverage required by New York State. Such rate increases were largely offset by a decrease in the number of policies in force. This decrease primarily resulted from the depopulation of the assigned risk pools and reduced volume in other lines of business that have not been profitable, primarily certain specialty programs within voluntary commercial automobile lines. In addition, the Empire Group has experienced increased competition, primarily in workers' compensation and commercial package policies, which has reduced volume. The increase in 1995 as compared to 1994 principally was attributable to growth in policies in force and increased premium rates. The majority of the growth in 1995 resulted from service business. 26
The Company's property and casualty insurance operations combined ratios as determined under GAAP and SAP were as follows: Year Ended December 31, ---------------------- 1996 1995 1994 ---- ---- ---- Colonial Penn P&C Group: GAAP 98.6% 97.0% 96.1% SAP 97.4% 97.3% 97.1% Empire Group: GAAP 114.7% 113.0% 103.5% SAP 107.9% 107.4% 101.3% Property and Casualty Insurance Group: GAAP 105.0% 103.5% 99.1% SAP 101.5% 101.2% 98.8% The provision for insurance losses and policy benefits includes catastrophe losses, net of reinsurance recoveries, estimated at approximately $5,000,000, $4,600,000 and $18,300,000, for the years ended December 31, 1996, 1995 and 1994, respectively. The 1994 losses include approximately $11,700,000 related to the Northridge, California earthquake. In 1996, the combined ratios of the Colonial Penn P&C Group increased due to increased levels of new voluntary automobile business for which higher loss reserves are provided than on renewal business and a retroactive adjustment to its New Jersey automobile pool involuntary assignment, offset in part by a favorable settlement of a special risk claim. The costs incurred to acquire new business combined with the related loss reserving policies depress operating results while the business grows. The Colonial Penn P&C Group believes that its strong underwriting procedures, emphasis on mature adult insureds and claims handling and settlement practices have enabled it to record combined ratios that compare favorably with the industry. The combined ratios for the Colonial Penn P&C Group increased slightly in 1995 as compared to 1994. The 1995 combined ratios reflected higher losses related to service business that were partially offset by increased service fee income. In addition, the combined ratios in 1995 were favorably affected by reduced catastrophe losses as compared to 1994. The combined ratios of the Empire Group increased in 1996 due to unusually high assessments from the New York State workers' compensation fund, severance benefits for certain employees, a reduction in the estimate of fees earned as a servicing carrier for the New York Public Automobile Pool and reduced assigned risk business, offset in part by an improved 1996 accident year loss ratio. The Empire Group believes that the improvement in the 1996 accident year loss ratio results from its efforts to increase the profitability of its product lines, primarily through rate increases and improved underwriting procedures. Included in the Empire Group's results for 1996 and 1995 were approximately $28,000,000 and $34,500,000, respectively, for reserve strengthening related to losses from prior accident years. In 1996, the reserve strengthening primarily related to voluntary commercial automobile and commercial package lines of business, while in 1995 the reserve strengthening primarily related to automobile and workers' compensation lines of business. In 1995, the Empire Group's combined ratios increased as compared to 1994 primarily due to the reserve strengthening. The Empire Group will continue to analyze the adequacy of its loss reserves on a quarterly basis. 27
Premium revenue receipts on IOP products of the life insurance subsidiaries (which are not reflected as revenues) were $52,272,000 in 1996, $50,202,000 in 1995 and $108,080,000 in 1994. The principal IOP product sold during the three years ended December 31, 1996 was a VA product marketed directly to consumers. The Company believes the decline in premium revenue receipts of the VA product in 1995 was due to a combination of factors, including the public's perception of potential tax law changes, increased competition and the performance of the fund manager. Earned premium revenues of the life and health insurance operations were $178,900,000 for 1996, $165,800,000 for 1995 and $172,400,000 for 1994. Included in these amounts were earned premium revenues for the Company's Graded Benefit Life product of $121,000,000, $117,700,000 and $113,700,000 for the years ended December 31, 1996, 1995 and 1994, respectively. The growth related to the Graded Benefit Life product reflects the Company's increased marketing efforts with respect to this product, which have been conducted at acquisition cost levels that result in adequate profitability. In addition to the growth in the Graded Benefit Life product, the increase in this segment's earned premium revenues in 1996 was primarily due to the acquisition of Providential in April 1996 which generated $16,500,000 of earned premium revenues for agent-sold Medicare supplement products. The Company had stopped marketing its own agent-sold Medicare supplement products in 1992 due to inadequate profitability. Providential markets its agent-sold Medicare supplement products primarily in communities where health maintenance organizations are less prevalent, which the Company believes results in adequate profitability. The decline in earned premium revenues in the prior years reflected the run-off of this product line prior to the acquisition of Providential. Insurance losses, policy benefits and amortization of deferred acquisition costs of the life and health insurance operations were $150,500,000, $133,200,000 and $138,300,000 for the years ended December 31, 1996, 1995 and 1994, respectively. The increase in 1996 was primarily due to increased earned premium revenues and a $3,500,000 gain in 1995 from the termination of a reinsurance agreement. The decrease in 1995 reflected the run-off of the agent- sold Medicare supplement business, which had less favorable loss experience in 1995, reduced IOP insurance in force and the $3,500,000 reinsurance gain. The decrease in 1995 was partially offset by the growth of the Graded Benefit Life product. Manufacturing revenues declined during each of the last two years due to the sale of certain divisions and the discontinuance of certain non-performing product lines. The Company recorded charges of $3,700,000 in 1996 and $7,300,000 in 1995 for losses on sales and shutdown expenses, which are primarily reflected in the caption "Selling, general and other expenses." The pre-tax results for this segment improved in 1996, primarily due to manufacturing and operating efficiencies at the bathroom vanities and plastics divisions and the disposal of non-performing businesses. Finance revenues and operating profits reflect the reduced level of consumer instalment loans and the increase in automobile loan losses, as discussed above. In addition, in 1996, the decline in operating profit was also caused by increased interest expense on customer banking deposits. In 1995, the increase in finance revenues from consumer instalment loans as compared to 1994 was offset in part by increased interest expense on customer banking deposits and greater losses on automobile loans. Investment and other income decreased in 1996 and increased in 1995 primarily due to the gain on the return of the WMAC Companies. In 1995, control of the WMAC Companies was returned to the Company and such subsidiaries were consolidated, resulting in a gain of $41,030,000, representing the difference between the carrying amount of the Company's investment prior to consolidation and the net assets of such subsidiaries. Interest and dividend income increased in 1995, reflecting higher investment yields and increased funds available 28
for investment. Investment and other income also reflected increased fee income in 1995 related to service business. Investment and other income in 1994 included $8,458,000 related to the disposition of El Salvador government bonds and $14,490,000 related to the sale of the Company's remaining shares in Bolivian Power Company. Equity in losses of associated companies increased in 1996 primarily due to start-up losses from the Company's equity investment in PIB of $17,104,000, losses from its interest in MK Gold of $6,478,000 and a $7,041,000 write-off of the Company's investment in an unsuccessful well drilled by its Siberian oil exploration joint venture. Higher interest expense in each of 1996 and 1995 compared to the prior year principally reflected the increased level of outstanding debt. Interest expense also reflected the increased level of deposits at AIB and AIF and an increase in rates related to those deposits. Generally, interest rates on deposits are lower than on other available funds. Interest expense on deposits was $12,575,000 in 1996, $12,034,000 in 1995 and $8,304,000 in 1994. The increase in 1995 as compared to 1994 in selling, general and other expenses principally reflected the losses recorded by the manufacturing segment as described above, operating expenses of real estate properties acquired during 1994, expenses relating to certain investing activities, including expenses related to exploring opportunities in Russia, and increased provisions for bad debts at the banking and lending segment. In 1995 and 1994, statistical studies and estimates of service costs indicated that the recorded liability for unredeemed trading stamps was in excess of the amount that ultimately would be required to redeem trading stamps outstanding. As a result, selling, general and other expenses applicable to the trading stamp operations included credits of $9,400,000 and $11,700,000 for the years ended December 31, 1995 and 1994, respectively, reflecting adjustments made to the liability for unredeemed trading stamps. The Company's most recent analysis of the liability for unredeemed trading stamps had not identified any remaining excess as of December 31, 1996. The 1996 provision for income taxes was below the expected normal corporate tax rate primarily due to the favorable resolution of certain contingencies. The provision for income taxes for 1995 was below the expected normal corporate income tax rate principally due to the gain related to the return of the WMAC Companies, which was not taxable, and the favorable resolution of certain contingencies. The provision for income taxes for 1994 was below the expected normal corporate income tax rate principally because of a reduction in the valuation allowance applicable to the deferred tax asset due to the resolution of certain contingencies. The number of shares used to calculate primary earnings per share was 60,560,000, 59,271,000 and 58,202,000 for 1996, 1995 and 1994, respectively. The number of shares used to calculate fully diluted earnings per share was 60,560,000, 62,807,000 and 61,715,000 for 1996, 1995 and 1994, respectively. The increase in the number of shares utilized in calculating per share amounts principally related to the sale of common shares in an underwritten public offering in September 1995. In addition, for fully diluted per share amounts, the 5-1/4% Convertible Subordinated Debentures due 2003 were not assumed to have been converted in 1996 since the effect of such assumed conversion would have been to increase earnings per share. Item 8. Financial Statements and Supplementary Data. ------- -------------------------------------------- Financial Statements and supplementary data required by this Item 8 are set forth at the pages indicated in Item 14(a) below. Item 9. Disagreements on Accounting and Financial Disclosure. ------- ----------------------------------------------------- Not applicable. 29
PART III Item 10. Directors and Executive Officers of the Registrant. -------- -------------------------------------------------- The information to be included under the caption "Nominees for Election as Directors" in the Company's definitive proxy statement to be filed with the Commission pursuant to Regulation 14A of the 1934 Act in connection with the 1997 annual meeting of shareholders of the Company (the "Proxy Statement") is incorporated herein by reference. In addition, reference is made to Item 10 in Part I of this Report. Item 11. Executive Compensation. ------- ---------------------- The information to be included under the caption "Executive Compensation" in the Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and ------- --------------------------------------------------- Management. ---------- The information to be included under the caption "Present Beneficial Ownership of Common Shares" in the Proxy Statement is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. ------- ---------------------------------------------- The information to be included under the caption "Executive Compensation - Certain Relationships and Related Transactions" in the Proxy Statement is incorporated herein by reference. 30
PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ------- ---------------------------------------------------------------- (a)(1)(2) Financial Statements and Schedules. ---------------------------------- Report of Independent Accountants . . . . . F-1 Financial Statements: Consolidated Balance Sheets at December 31, 1996 and 1995 . . . . . . . . F-2 Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994 . . . . . . . . . . . F-3 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 . . . . . F-4 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . F-6 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . F-7 Financial Statement Schedules: Schedule II - Condensed Financial Information of Registrant . . . . . . . . F-34 Schedule III - Supplementary Insurance Information . . . . . . . . . . F-38 Schedule IV - Schedule of Reinsurance . . . . . . . . . . . . . . . F-39 Schedule V - Valuation and Qualifying Accounts . . . . . . . . . . . F-40 Schedule VI - Schedule of Supplemental Information for Property and Casualty Insurance Underwriters . . . . . F-41 31
(3) Executive Compensation Plans and Arrangements. --------------------------------------------- 1982 Stock Option Plan, as amended August 28, 1991 (filed as Annex B to the Company's Proxy Statement dated July 21, 1992). 1992 Stock Option Plan (filed as Annex C to the Company's Proxy Statement dated July 21, 1992). Agreement made as of March 12, 1984 by and between Leucadia, Inc. and Ian M. Cumming (filed as Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1983 (the "1983 10-K")). Agreement made as of March 12, 1984 by and between Leucadia, Inc. and Joseph S. Steinberg (filed as Exhibit 10.15 to the 1983 10-K). Agreement dated as of August 1, 1988 among the Company, Ian M. Cumming and Joseph S. Steinberg (filed as Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991 (the "1991 10-K")). Agreement dated as of January 10, 1992 between Ian M. Cumming, certain other persons listed on Schedule A thereto and the Company (filed as Exhibit 10.7 to the 1991 10-K). Agreement dated as of January 10, 1992 between Joseph S. Steinberg, certain other persons listed on Schedule A thereto and the Company (filed as Exhibit 10.8 to the 1991 10-K). Agreement between Leucadia, Inc. and Ian M. Cumming, dated as of December 28, 1992 (filed as Exhibit 10.12(a) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (the "1992 10-K")). Escrow and Security Agreement by and among Leucadia, Inc., Ian M. Cumming and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1992 (filed as Exhibit 10.12(b) to the 1992 10-K). Agreement between Leucadia, Inc. and Joseph S. Steinberg, dated as of December 28, 1992 (filed as Exhibit 10.13(a) to the 1992 10-K). Escrow and Security Agreement by and among Leucadia, Inc., Joseph S. Steinberg and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1992 (filed as Exhibit 10.13(b) to the 1992 10-K). Agreement made as of December 28, 1993 by and between the Company and Ian M. Cumming (filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (the "1993 10-K")). Agreement made as of December 28, 1993 by and between the Company and Joseph S. Steinberg (filed as Exhibit 10.18 to the 1993 10-K). 32
Agreement between the Company and Ian M. Cumming dated as of December 28, 1993 (filed as Exhibit 10.19(a) to the 1993 10-K). Escrow and Security Agreement by and among the Company, Ian M. Cumming and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1993 (filed as Exhibit 10.19(b) to the 1993 10-K). Agreement between the Company and Joseph S. Steinberg, dated as of December 28, 1993 (filed as Exhibit 10.20(a) to the 1993 10-K). Escrow and Security Agreement by and among the Company, Joseph S. Steinberg and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1993 (filed as Exhibit 10.20(b) to the 1993 10-K). Deferred Compensation Agreement between the Company and Lawrence S. Hershfield, dated March 29, 1995 (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the Quarterly Period ended March 31, 1995). Agreement between the Company and Lawrence S. Hershfield, dated as of May 4, 1995 (filed as Exhibit 10.22(a) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "1995 10-K")). Escrow and Security Agreement by and among the Company, Lawrence S. Hershfield and Weil, Gotshal & Manges, as escrow agent, dated as of May 4, 1995 (filed as Exhibit 10.22(b) to the 1995 10-K). (b) Reports on Form 8-K. ------------------- Not applicable. (c) Exhibits. -------- 3.1 Restated Certificate of Incorporation (filed as Exhibit 5.1 to the Company's Current Report on Form 8-K dated July 14, 1993).* 3.2 Amended and Restated By-laws as amended through December 4, 1996. 4.1 The Company undertakes to furnish the Securities and Exchange Commission, upon request, a copy of all instruments with respect to long-term debt not filed herewith. 10.1 1982 Stock Option Plan, as amended August 28, 1991 (filed as Annex B to the Company's Proxy Statement dated July 21, 1992).* ___________________ * Incorporated by reference. 33
10.2 1992 Stock Option Plan (filed as Annex C to the Company's Proxy Statement dated July 21, 1992).* 10.3(a) Restated Articles and Agreement of General Partnership, effective as of February 1, 1982, of The Jordan Company (filed as Exhibit 10.3(d) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1986).* 10.3(b) Amendments dated as of December 31, 1989 and December 1, 1990 to the Partnership Agreement referred to in 10.3(a) above (filed as Exhibit 10.2(b) to the 1991 10-K).* 10.3(c) Amendment dated as of December 17, 1992 to the Partnership Agreement referred to in 10.3(a) above (filed as Exhibit 10.3(c) to the 1992 10-K).* 10.3(d) Fourth Restatement, dated as of December 31, 1996, of the Articles and Agreement of General Partnership of The Jordan Company. 10.3(e) Articles and Agreement of General Partnership, effective as of April 15, 1985, of Jordan/Zalaznick Capital Company (filed as Exhibit 10.20 to the Company's Registration Statement No. 33-00606).* 10.4 Agreement made as of March 12, 1984 by and between Leucadia, Inc. and Ian M. Cumming (filed as Exhibit 10.14 to the 1983 10-K).* 10.5 Agreement made as of March 12, 1984 by and between Leucadia, Inc. and Joseph S. Steinberg (filed as Exhibit 10.15 to the 1983 10-K).* 10.6 Stock Purchase and Sale Agreement dated as of April 5, 1991, by and between FPL Group Capital Inc and the Company (filed as Exhibit B to the Company's Current Report on Form 8-K dated August 23, 1991).* 10.7 Agreement dated as of August 1, 1988 among the Company, Ian M. Cumming and Joseph S. Steinberg (filed as Exhibit 10.6 to the 1991 10-K).* 10.8 Agreement dated as of January 10, 1992 between Ian M. Cumming, certain other persons listed on Schedule A thereto and the Company (filed as Exhibit 10.7 to the 1991 10-K).* 10.9 Agreement dated as of January 10, 1992 between Joseph S. Steinberg, certain other persons listed on Schedule A thereto and the Company (filed as Exhibit 10.8 to the 1991 10-K).* ___________________ * Incorporated by reference. 34
10.10(a) Agreement dated April 23, 1992 between AIC Financial Services, Inc. (an Alabama corporation), AIC Financial Services (a Mississippi corporation) and AIC Financial Services (a South Carolina corporation) (collectively, "Seller") and Norwest Financial Resources, Inc. (filed as Exhibit 10.10(a) to the 1992 10-K).* 10.10(b) Purchase Agreement between A.I.C. Financial Services, Inc., American Investment Bank, N.A., American Investment Financial and Terracor II d/b/a AIC Financial Fund, Seller, and Associates Financial Services Company, Inc., Buyer, dated November 5, 1992 (filed as Exhibit 10.10(b) to the Company's Registration Statement No. 33-55120).* 10.11(a) Agreement and Plan of Merger, dated as of October 22, 1992, by and among the Company, Phlcorp Acquisition Company and PHLCORP, Inc. (filed as Exhibit 5.2 to the Company's Current Report on Form 8-K dated October 22, 1992).* 10.11(b) Amendment dated December 10, 1992, to the Merger Agreement referred to in 10.11(a) above (filed as Exhibit 5.2 to the Company's Current Report on Form 8-K dated December 14, 1992).* 10.12(a) Agreement between Leucadia, Inc. and Ian M. Cumming, dated as of December 28, 1992 (filed as Exhibit 10.12(a) to the 1992 10-K).* 10.12(b) Escrow and Security Agreement by and among Leucadia, Inc., Ian M. Cumming and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1992 (filed as Exhibit 10.12(b) to the 1992 10-K).* 10.13(a) Agreement between Leucadia, Inc. and Joseph S. Steinberg, dated as of December 28, 1992 (filed as Exhibit 10.13(a) to the 1992 10-K).* 10.13(b) Escrow and Security Agreement by and among Leucadia, Inc., Joseph S. Steinberg and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1992 (filed as Exhibit 10.13(b) to the 1992 10-K).* 10.14 Settlement Agreement between Baldwin-United Corporation and the United States dated August 27, 1985 concerning tax issues (filed as Exhibit 10.14 to the 1992 10-K).* 10.15 Acquisition Agreement, dated as of December 18, 1992, by and between Provident Mutual Life and Annuity Company of America and Colonial Penn Annuity and Life Insurance Company (filed as Exhibit 10.15 to the 1992 10-K).* ___________________ * Incorporated by reference. 35
10.16 Reinsurance Agreement, dated as of December 31, 1991, by and between Colonial Penn Insurance Company and American International Insurance Company (filed as Exhibit 10.16 to the 1992 10-K).* 10.17 Agreement made as of December 28, 1993 by and between the Company and Ian M. Cumming (filed as Exhibit 10.17 to the 1993 10-K).* 10.18 Agreement made as of December 28, 1993 by and between the Company and Joseph S. Steinberg (filed as Exhibit 10.18 to the 1993 10-K).* 10.19(a) Agreement between the Company and Ian M. Cumming, dated as of December 28, 1993 (filed as Exhibit 10.19(a) to the 1993 10-K).* 10.19(b) Escrow and Security Agreement by and among the Company, Ian M. Cumming and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1993 (filed as Exhibit 10.19(b) to the 1993 10-K).* 10.20(a) Agreement between the Company and Joseph S. Steinberg, dated as of December 28, 1993 (filed as Exhibit 10.20(a) to the 1993 10-K).* 10.20(b) Escrow and Security Agreement by and among the Company, Joseph S. Steinberg and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1993 (filed as Exhibit 10.20(b) to the 1993 10-K).* 10.21 Deferred Compensation Agreement between the Company and Lawrence S. Hershfield, dated March 29, 1995 (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the Quarterly Period ended March 31, 1995).* 10.22(a) Agreement between the Company and Lawrence S. Hershfield, dated as of May 4, 1995 (filed as Exhibit 10.22(a) to the 1995 10-K).* 10.22(b) Escrow and Security Agreement by and among the Company, Lawrence S. Hershfield and Weil, Gotshal & Manges, as escrow agent, dated as of May 4, 1995 (filed as Exhibit 10.22(b) to the 1995 10-K).* 10.23 Revolving Credit Agreement dated as of February 28, 1997 between the Company, The First National Bank of Boston, as Administrative Agent, The Chase Manhattan Bank, as Syndication Agent, Bank of America National Trust and Savings Association, as Documentation Agent and the Banks signatory thereto. 21 Subsidiaries of the registrant. ___________________ * Incorporated by reference. 36
23 Consent of independent accountants with respect to the incorporation by reference into the Company's Registration Statements on Form S-8 (File No. 2-84303), Form S-8 and S-3 (File No. 33-6054), Form S-8 and S-3 (File No. 33-26434), Form S-8 and S-3 (File No. 33-30277), Form S-8 (File No. 33-61682) and Form S-8 (File No. 33-61718). 27 Financial Data Schedule. 37
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LEUCADIA NATIONAL CORPORATION March 26, 1997 By: /s/ Barbara L. Lowenthal ------------------------------------- Barbara L. Lowenthal Vice President and Comptroller Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on the date set forth above. Signature Title --------- ----- /s/ Ian M. Cumming Chairman of the Board ------------------------------ (Principal Executive Officer) Ian M. Cumming /s/ Joseph S. Steinberg President and Director ------------------------------ (Principal Executive Officer) Joseph S. Steinberg /s/ Joseph A. Orlando Vice President and Chief Financial ------------------------------ Officer Joseph A. Orlando (Principal Financial Officer) /s/ Barbara L. Lowenthal Vice President and Comptroller ------------------------------ (Principal Accounting Officer) Barbara L. Lowenthal /s/ Paul M. Dougan Director ------------------------------ Paul M. Dougan /s/ Lawrence D. Glaubinger Director ------------------------------ Lawrence D. Glaubinger /s/ James E. Jordan Director ------------------------------ James E. Jordan /s/ Jesse Clyde Nichols, III Director ------------------------------ Jesse Clyde Nichols, III 38
REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Leucadia National Corporation: We have audited the consolidated financial statements and the financial statement schedules of LEUCADIA NATIONAL CORPORATION and SUBSIDIARIES listed in Item 14(a) of this Form 10-K. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of LEUCADIA NATIONAL CORPORATION and SUBSIDIARIES as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. New York, New York March 21, 1997
<TABLE> <CAPTION> LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995 (Dollars in thousands, except par value) 1996 1995 ---- ---- <S> <C> <C> ASSETS - ------ Investments: Available for sale (aggregate cost of $2,561,221 and $2,618,363) $2,562,408 $2,664,471 Trading securities (aggregate cost of $58,732 and $52,153) 58,644 55,702 Held to maturity (aggregate fair value of $72,715 and $65,416) 72,745 64,546 Policyholder loans 18,329 17,768 Other investments, including accrued interest income 77,994 77,994 ---------- ---------- Total investments 2,790,120 2,880,481 Cash and cash equivalents 386,807 266,158 Reinsurance receivables, net 267,540 261,267 Trade, notes and other receivables, net 459,949 497,753 Prepaids and other assets 223,573 238,306 Property, equipment and leasehold improvements, net 99,919 111,374 Deferred policy acquisition costs 105,667 92,144 Deferred income taxes 107,903 103,466 Separate and variable accounts 546,074 472,837 Investments in associated companies 206,384 184,088 ---------- ---------- Total $5,193,936 $5,107,874 ========== ========== LIABILITIES - ----------- Customer banking deposits $ 209,261 $ 203,061 Trade payables and expense accruals 230,663 209,362 Other liabilities 129,909 134,772 Income taxes payable 44,302 39,596 Policy reserves 1,940,645 1,971,080 Unearned premiums 440,943 434,773 Separate and variable accounts 545,019 472,837 Debt, including current maturities 525,719 520,862 ---------- ---------- Total liabilities 4,066,461 3,986,343 ---------- ---------- Minority interest 9,368 10,040 ---------- ---------- SHAREHOLDERS' EQUITY - -------------------- Common shares, par value $1 per share, authorized 150,000,000 shares; 60,417,579 and 60,163,824 shares issued and outstanding, after deducting 54,353,691 and 54,319,654 shares held in treasury 60,418 60,164 Additional paid-in capital 161,026 159,914 Net unrealized gain on investments 1,759 30,086 Retained earnings 894,904 861,327 ---------- ---------- Total shareholders' equity 1,118,107 1,111,491 ---------- ---------- Total $5,193,936 $5,107,874 ========== ========== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-2
<TABLE> <CAPTION> LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- (In thousands, except per share amounts) <S> <C> <C> <C> Revenues: Insurance revenues and commissions $1,002,442 $ 982,388 $ 918,886 Manufacturing 148,284 166,237 180,050 Finance 49,150 53,958 45,835 Investment and other income 300,883 338,317 256,794 Equity in losses of associated companies (33,631) (2,613) (5,176) Net securities gains (losses) 39,429 20,027 (12,004) ---------- ---------- ---------- 1,506,557 1,558,314 1,384,385 ---------- ---------- ---------- Expenses: Provision for insurance losses and policy benefits 862,620 842,126 737,630 Amortization of deferred policy acquisition costs 99,381 100,677 81,380 Manufacturing cost of goods sold 107,667 129,279 137,507 Interest 53,996 52,871 44,003 Salaries 89,430 90,334 87,650 Selling, general and other expenses 214,951 210,845 195,897 ---------- ---------- ---------- 1,428,045 1,426,132 1,284,067 ---------- ---------- ---------- Income before income taxes and extraordinary loss 78,512 132,182 100,318 ---------- ---------- ---------- Income taxes: Current 8,870 2,366 9,085 Deferred 14,127 22,313 20,397 ---------- ---------- ---------- 22,997 24,679 29,482 ---------- ---------- ---------- Income before extraordinary loss 55,515 107,503 70,836 Extraordinary loss from early extinguishment of debt, net of income tax benefit of $3,682 (6,838) - - ---------- ---------- ---------- Net income $ 48,677 $ 107,503 $ 70,836 ========== ========== ========== Earnings (loss) per common and dilutive common equivalent share: Income before extraordinary loss $ .91 $1.81 $1.22 Extraordinary loss (.11) - - ----- ----- ----- Net income $ .80 $1.81 $1.22 ===== ===== ===== Fully diluted earnings (loss) per common share: Income before extraordinary loss $ .91 $1.77 $1.21 Extraordinary loss (.11) - - ----- ----- ----- Net income $ .80 $1.77 $1.21 ===== ===== ===== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-3
<TABLE> <CAPTION> LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- (Thousands of dollars) <S> <C> <C> <C> Net cash flows from operating activities: - ----------------------------------------- Net income $ 48,677 $ 107,503 $ 70,836 Adjustments to reconcile net income to net cash provided by operations: Extraordinary loss, net of income tax benefit 6,838 - - Provision for deferred income taxes 14,127 22,313 20,397 Depreciation and amortization of property, equipment and leasehold improvements 17,978 17,927 17,075 Other amortization 108,502 102,194 88,485 Provision for doubtful accounts 17,424 17,849 10,579 Net securities (gains) losses (39,429) (20,027) 12,004 Equity in losses of associated companies 33,631 2,613 5,176 (Gain) loss on disposal of real estate, property and equipment (7,500) 3,418 (459) (Gains) related to foreign power companies - - (22,948) (Gain) related to the return of the WMAC Companies - (41,030) - Purchases of investments classified as trading (304,939) (177,281) (132,752) Proceeds from sales of investments classified as trading 307,327 182,894 119,042 Deferred policy acquisition costs incurred and deferred (104,891) (118,285) (100,506) Net change in: Reinsurance receivables (5,285) 48,446 154,788 Trade, notes and other receivables (10,690) (26,548) (23,661) Prepaids and other assets (63,873) (18,101) (23,488) Trade payables and expense accruals 26,991 4,682 35,973 Other liabilities (5,057) (18,206) (22,285) Income taxes payable 4,800 105 (1,844) Policy reserves (34,691) 21,152 (123,376) Unearned premiums 3,431 21,227 33,286 Other 1,044 4,452 3,214 --------- ---------- ---------- Net cash provided by operating activities 14,415 137,297 119,536 --------- ---------- ---------- Net cash flows from investing activities: - ----------------------------------------- Acquisition of real estate, property, equipment and leasehold improvements (25,468) (54,696) (122,122) Proceeds from disposals of real estate, property and equipment 46,064 22,533 7,741 Investment in Providential Life in 1996, MK Gold in 1995 and Caja in 1994 (11,196) (22,593) (45,711) Advances on loan receivables (113,787) (154,329) (182,289) Principal collections on loan receivables 128,756 123,266 118,484 Purchases of investments (other than short-term) (2,252,680) (1,893,387) (1,251,643) Proceeds from maturities of investments 610,095 636,076 425,582 Proceeds from sales of investments 1,742,547 1,091,573 888,474 ---------- ---------- ---------- Net cash provided by (used for) investing activities 124,331 (251,557) (161,484) ---------- ---------- ---------- (continued) </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-4
<TABLE> <CAPTION> LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, continued For the years ended December 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- (Thousands of dollars) <S> <C> <C> <C> Net cash flows from financing activities: - ----------------------------------------- Net change in short-term borrowings $ 207 $ (80) $ (582) Net change in customer banking deposits 6,199 22,785 6,346 Net change in policyholder account balances (7,193) (14,802) (17,302) Issuance of long-term debt, net of issuance costs 141,581 101,390 50,000 Reduction of long-term debt (142,954) (9,475) (27,940) Sale of common shares and exercise of warrants, net of expenses - 43,857 - Purchase of common shares for treasury (837) (727) (472) Dividends paid (15,100) (15,025) (7,021) ---------- ---------- ---------- Net cash provided by (used for) financing activities (18,097) 127,923 3,029 ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents 120,649 13,663 (38,919) Cash and cash equivalents at January 1, 266,158 252,495 291,414 ---------- ---------- ---------- Cash and cash equivalents at December 31, $ 386,807 $ 266,158 $ 252,495 ========== ========== ========== Supplemental disclosures of cash flow information: - -------------------------------------------------- Cash paid during the year for: Interest $54,251 $52,919 $43,137 Income tax payments, net of refunds $ 4,077 $ 2,267 $10,731 </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-5
<TABLE> <CAPTION> LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the years ended December 31, 1996, 1995 and 1994 Net Common Unrealized Shares Additional Gain (Loss) $1 Par Paid-in On Retained Value Capital Investments Earnings Total ----- ------- ----------- -------- ----- (Thousands of dollars) <S> <C> <C> <C> <C> <C> Balance, January 1, 1994 $55,794 $ 97,116 $ 49,912 $705,034 $ 907,856 Exercise of options to purchase common shares 330 1,507 1,837 Purchase of stock for treasury (24) (448) (472) Net change in unrealized gain (loss) on investments (91,221) (91,221) Dividend ($.125 per common share) (7,021) (7,021) Net income 70,836 70,836 ------- -------- -------- -------- ---------- Balance, December 31, 1994 56,100 98,175 (41,309) 768,849 881,815 Exercise of options to purchase common shares 415 2,201 2,616 Purchase of stock for treasury (29) (698) (727) Exercise of warrants to purchase common shares (net of expenses) and related income tax benefit 3,200 47,845 51,045 Issuance of common shares, net of underwriting discounts 478 12,391 12,869 Net change in unrealized gain (loss) on investments 71,395 71,395 Dividend ($.25 per common share) (15,025) (15,025) Net income 107,503 107,503 ------- -------- -------- -------- ---------- Balance, December 31, 1995 60,164 159,914 30,086 861,327 1,111,491 Exercise of options to purchase common shares 288 1,915 2,203 Purchase of stock for treasury (34) (803) (837) Net change in unrealized gain (loss) on investments (28,327) (28,327) Dividend ($.25 per common share) (15,100) (15,100) Net income 48,677 48,677 ------- -------- -------- -------- ---------- Balance, December 31, 1996 $60,418 $161,026 $ 1,759 $894,904 $1,118,107 ======= ======== ======== ======== ========== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-6
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Operations: -------------------- The Company is a diversified financial services holding company engaged in personal and commercial lines of property and casualty insurance, life and health insurance, banking and lending and manufacturing, principally in markets throughout the United States. The Company's principal operations are its insurance businesses, where it is a specialty markets provider of property and casualty and life and health insurance products to niche markets. The Company's principal personal lines insurance products are automobile insurance, homeowners insurance, graded benefit life insurance marketed primarily to the age 50-and- over population, variable annuity and Medicare supplement products. The Company's principal commercial lines are property and casualty products provided for workers' compensation, multi-family residential real estate, retail establishments and livery vehicles in the New York metropolitan area. The Company's banking and lending operations principally consist of making instalment loans to niche markets primarily funded by deposits insured by the Federal Deposit Insurance Corporation. The Company's manufacturing operations primarily manufacture products for the "do-it-yourself" home improvement market and for industrial markets. 2. Significant Accounting Policies: ------------------------------- (a) Use of Estimates in Preparing Financial Statements: The preparation of -------------------------------------------------- financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the financial statements and disclosures of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. (b) Consolidation Policy: The consolidated financial statements include the -------------------- accounts of the Company and all majority-owned and controlled entities. All significant intercompany transactions and balances are eliminated in consolidation. Prior to December 31, 1995, two of the Company's legal subsidiaries (the "WMAC Companies") were not consolidated while under the control of the Wisconsin Insurance Commissioner. Effective as of December 31, 1995, control of the WMAC Companies was returned to the Company and such subsidiaries are included in the consolidated financial statements since such date. Investments in entities which the Company does not control but has the ability to exercise significant influence are accounted for on the equity method of accounting. Certain amounts for prior periods have been reclassified to be consistent with the 1996 presentation. (c) Statements of Cash Flows: The Company considers short-term investments, ------------------------ which have maturities of less than three months at the time of acquisition, to be cash equivalents. Cash and cash equivalents include short-term investments F-7
2. Significant Accounting Policies, continued: ------------------------------- of $351,954,000 and $199,725,000 at December 31, 1996 and 1995, respectively. (d) Investments: At acquisition, marketable debt and equity securities are ----------- designated as either i) held to maturity, which are carried at amortized cost, ii) trading, which are carried at estimated fair value with unrealized gains and losses reflected in results of operations, or iii) available for sale, which are carried at estimated fair value with unrealized gains and losses reflected as a separate component of shareholders' equity, net of taxes. Held to maturity investments are made with the intention of holding such securities to maturity, which the Company has the ability to do. Estimated fair values are principally based on quoted market prices. Investments with an impairment in value considered to be other than temporary are written down to estimated net realizable values. The writedowns are included in "Net securities gains (losses)" in the Consolidated Statements of Income. The cost of securities sold is based on average cost. The Company's investments in Russian equity securities ($43,800,000 and $39,700,000 as of December 31, 1996 and 1995, respectively), none of which is held by the insurance or banking subsidiaries, do not have readily determinable fair values. Given the uncertainties inherent in investing in the emerging markets of Russia, the Company is accounting for these investments under the cost recovery method, whereby all receipts are applied to reduce the investment. These investments are included in "Other investments" in the Consolidated Balance Sheets. (e) Property, Equipment and Leasehold Improvements: Property, equipment and ---------------------------------------------- leasehold improvements are stated at cost, net of accumulated depreciation and amortization ($99,214,000 and $101,568,000 at December 31, 1996 and 1995, respectively). Depreciation and amortization are provided principally on the straight-line method over the estimated useful lives of the assets or, if less, the term of the underlying lease. (f) Income Recognition from Insurance Operations: Premiums on property and -------------------------------------------- casualty and health insurance products are recognized as revenues over the term of the policy using the monthly pro rata basis. Premiums for investment oriented insurance products ("IOP products") are reflected in a manner similar to a deposit; revenues reflect only mortality charges and other amounts assessed against the holder of the insurance policies and annuity contracts. The principal IOP product offered during the three year period ended December 31, 1996 was a variable annuity ("VA") product. Other life premiums are recognized as revenues over the premium paying period. Premiums for the VA product are directed by the policyholder to be invested in a unit trust solely for the benefit and risk of the policyholder. Policyholders' accounts are charged for the cost of insurance provided, administrative and certain other charges. The amount included in the balance sheet liability caption "Separate and variable accounts" represents the current value of the policyholders' funds. F-8
2. Significant Accounting Policies, continued: ------------------------------- (g) Policy Acquisition Costs: Policy acquisition costs principally consist of ------------------------ direct response marketing costs, commissions, premium taxes and other underwriting expenses (net of reinsurance allowances). If recoverability of such costs from future premiums and related investment income is not anticipated, the amounts not considered recoverable are charged to operations. Policy acquisition costs applicable to the property and casualty insurance operations are deferred and amortized ratably over the terms of the related policies. Policy acquisition costs applicable to life insurance products are amortized over the expected premium paying period of the policies. (h) Reinsurance: In the normal course of business, the Company seeks to reduce ----------- the loss that may arise from catastrophes and to limit losses from large exposures by reinsuring certain levels of risk with other insurance enterprises. Catastrophe reinsurance treaties serve to reduce property and casualty insurance risk in geographic areas where the Company is exposed to natural disasters, principally Florida, California and the East Coast. The Company has also entered into reinsurance transactions in connection with dispositions of blocks of businesses. Reinsurance contracts do not necessarily legally relieve the Company from its obligations to policyholders. Reinsurance recoverables are reported as assets net of provisions for uncollectible amounts. Premiums earned and other underwriting expenses are stated net of reinsurance. (i) Policy Reserves and Unearned Premiums: Policy reserves and unearned premiums ------------------------------------- for life, health and traditional annuity policies are computed on a net level premium method based upon standard and Company developed tables with provision for adverse deviation and estimated withdrawals. Liabilities for unpaid losses and loss adjustment expenses applicable to the property and casualty insurance operations are determined using case basis evaluations, statistical analyses for losses incurred but not reported and estimates for salvage and subrogation recoverable and represent estimates of ultimate claim costs and loss adjustment expenses. As more information becomes available and claims are settled, the estimated liabilities are adjusted upward or downward with the effect of decreasing or increasing net income at the time of adjustment. (j) Liability for Unredeemed Trading Stamps: The Company's liability for --------------------------------------- unredeemed trading stamps is estimated based upon recent experience, statistical evaluation and estimated costs to service redemptions of unredeemed trading stamps in the future. In prior years, statistical studies and estimates of service costs indicated that the recorded liability for unredeemed trading stamps was in excess of the amount that ultimately will be required to redeem trading stamps outstanding. As a result, selling, general and other expenses applicable to the trading stamp operations include credits of $9,400,000 and $11,700,000 for the years ended December 31, 1995 and 1994, respectively, reflecting the adjustments made to the liability for unredeemed trading stamps. The Company's most recent analysis of the liability for unredeemed trading stamps has not identified any remaining excess as of December 31, 1996. F-9
2. Significant Accounting Policies, continued: ------------------------------- (k) Income Taxes: The Company provides for income taxes using the liability ------------ method. The future benefit of certain tax loss carryforwards and future deductions is recorded as an asset and the provisions for income taxes are not reduced for the benefit from utilization of tax loss carryforwards. A valuation allowance is provided if deferred tax assets are not considered more likely than not to be realized. (l) Derivative Financial Instruments: The Company enters into interest rate -------------------------------- agreements to manage the impact of changes in interest rates on its variable rate debt and customer banking deposits. The difference between the amounts paid and received is accrued and recognized as an adjustment to interest expense. Gains and losses related to interest rate agreements are amortized as yield adjustments over the remaining life of the underlying hedged security. Cash flows related to the agreements are classified as operating activities in the Consolidated Statements of Cash Flows, consistent with the interest payments on the underlying debt. The Company does not have material derivative financial instruments. (m) Translation of Foreign Currency: Foreign currency denominated investments ------------------------------- which are not subject to hedging agreements and currency rate swap agreements not meeting the accounting requirements for hedges are converted into U.S. dollars at exchange rates in effect at the end of the period. Resulting net exchange gains or losses were not material. 3. Acquisitions: ------------ During 1994, the Company acquired a 30% interest in Caja de Ahorro y Seguro S.A. ("Caja") from the government of Argentina for a purchase price of $46,000,000, including costs. Caja is a holding company whose subsidiaries are engaged in property and casualty insurance, life insurance and banking in Argentina. The difference between the Company's investment in Caja and its share of Caja's underlying net tangible assets is being amortized over 20 years. At December 31, 1996, the carrying amount of the Company's investment in Caja was $44,333,000. In June 1995, the Company purchased a 46.4% common stock interest in MK Gold Company ("MK Gold") for an aggregate cash purchase price of $22,500,000. MK Gold is an international gold mining company whose shares are quoted on the Nasdaq National Market System. At December 31, 1996, the carrying amount of the Company's investment in MK Gold was $15,716,000. In July 1995, pursuant to the chapter 11 reorganization of HomeFed Corporation ("HFC"), the Company acquired 41.2% of HFC's common stock for net cash of approximately $4,200,000. As part of the reorganization plan, the Company provided HFC with a $20,000,000 eight year collateralized loan, which is convertible into additional shares of HFC common stock after three years (subject to certain conditions) and which bears interest at the rate of 12% per annum. HFC is a public company whose subsidiaries develop real property. The Company's investment in HFC was $21,385,000 at December 31, 1996. F-10
3. Acquisitions, continued: ------------ During 1996, the Company formed a joint venture, Pepsi International Bottlers ("PIB"), with PepsiCo, Inc to be the exclusive bottler and distributor of PepsiCo beverages in a large portion of central and eastern Russia, Kyrgyzstan and Kazakstan. The Company and PepsiCo have committed to make capital contributions to PIB of $79,500,000 and $26,500,000, respectively. As of December 31, 1996, the Company contributed $51,000,000; the balance was funded in January 1997. The Company has a 75% economic interest in PIB and PepsiCo owns the remainder. Under the terms of the joint venture agreement, the Company and PepsiCo have equal voting rights over all significant aspects of PIB's operations. Accordingly, since the Company does not control PIB despite its larger economic interest, the Company accounts for its share of PIB's operating results under the equity method of accounting. At December 31, 1996, the carrying amount of the Company's investment in PIB was $33,896,000. The Company's investments described above are included in the caption "Investments in associated companies." 4. Investments in Associated Companies: ----------------------------------- The Company has investments in several Associated Companies that have adopted various fiscal year-ends. The Company records its portion of the earnings of such companies based on fiscal periods ended up to three months prior to the end of the Company's reporting period. The following table provides certain summarized data with respect to the Associated Companies accounted for on the equity method of accounting included in 1996 results of operations. Such results were not material in 1995 and 1994. (Amounts are in thousands.) Assets $1,004,675 ---------- Liabilities 915,703 ---------- Minority interest 2,929 ---------- Net assets $ 86,043 ========== The Company's portion of the reported net assets $ 48,703 ========== Total revenues $ 627,658 (Loss) from continuing operations before extraordinary items $ (90,607) Net (loss) $ (90,607) The Company's equity in net (loss) $ (33,631) At December 31, 1996, investments in associated companies included common stock equity interests of 5% or more in the following domestic publicly owned non-consolidated companies: Carmike Cinemas, Inc. (6% of Class A shares), HFC (41%) and MK Gold (46%). F-11
5. Insurance Operations: -------------------- Premiums received on IOP products were $52,272,000, $50,202,000 and $108,080,000 for the years ended December 31, 1996, 1995 and 1994, respectively. The changes in deferred policy acquisition costs were as follows (in thousands): 1996 1995 1994 ---- ---- ---- Balance, January 1, $ 92,144 $ 74,536 $ 55,410 Acquisition of Providential Life Insurance Company 8,013 - - Policy acquisition costs incurred and deferred 104,891 118,285 100,506 Amortization of deferred acquisition costs (99,381) (100,677) (81,380) -------- --------- -------- Balance, December 31, $105,667 $ 92,144 $ 74,536 ======== ========= ======== The effect of reinsurance on premiums written and earned for the years ended December 31, 1996, 1995 and 1994 is as follows (in thousands): 1996 1995 1994 ---- ---- ---- Premiums Premiums Premiums Premiums Premiums Premiums Written Earned Written Earned Written Earned ------- ------ ------- ------ ------- ------ Direct $1,063,147 $1,058,262 $1,036,120 $1,004,496 $960,463 $923,131 Assumed 3,452 6,047 7,738 22,530 31,804 32,261 Ceded (62,743) (61,867) (49,092) (44,638) (39,722) (36,506) ---------- ---------- ---------- ---------- -------- -------- Net $1,003,856 $1,002,442 $ 994,766 $ 982,388 $952,545 $918,886 ========== ========== ========== ========== ======== ======== Recoveries recognized on reinsurance contracts were $47,190,000 in 1996, $28,900,000 in 1995 and $44,300,000 in 1994. Net income and statutory surplus as determined in accordance with statutory accounting principles as reported to the domiciliary state of the Company's insurance subsidiaries are as follows (in thousands): Year Ended December 31, ----------------------- 1996 1995 1994 ---- ---- ---- Net income: Property and casualty insurance $78,275 $69,145 $59,048 Life insurance $45,801 $13,465 $14,142 At December 31, --------------- 1996 1995 1994 ---- ---- ---- Statutory surplus: Property and casualty insurance $561,060 $520,700 $425,128 Life insurance $406,503 $376,223 $335,903 F-12
5. Insurance Operations, continued: -------------------- The statutory net income of the life insurance subsidiaries is net of certain management and other fees paid to the Company or other subsidiaries of the Company. Under generally accepted accounting principles, the reported income of the life insurance segment is increased by these fees, since all intercompany transactions are eliminated in consolidation. Certain insurance subsidiaries are owned by other insurance subsidiaries. In the data above, investments in such subsidiary-owned insurance companies are reflected in statutory surplus of both the parent and subsidiary-owned insurance company. As a result, at December 31, 1996, 1995 and 1994, statutory surplus of $316,300,000, $292,800,000 and $252,800,000, respectively, related to property and casualty operations is also included in the statutory surplus of the life insurance parent, and statutory surplus of $24,500,000, $29,300,000 and $35,900,000, respectively, related to life operations is also included in the statutory surplus of the property and casualty insurance parent. The insurance subsidiaries are subject to regulatory restrictions which limit the amount of cash and other distributions available to the Company without regulatory approval. At December 31, 1996, $27,082,000 could be distributed to the Company without regulatory approval. In December 1995, the Company entered into an agreement with the California Department of Insurance to settle its Proposition 103 liability for $17,700,000. The settlement did not exceed reserves established in prior years. The Company paid the settlement amount during the first quarter of 1996. The Company's insurance subsidiaries are contingently liable for possible assessments under state regulatory requirements pertaining to potential insolvencies of unaffiliated insurance companies. Liabilities, which are established based upon regulatory guidance, have not been material. For information with respect to the activity in property and casualty loss reserves, see "Reconciliation of Liability for Losses and Loss Adjustment Expenses" in Item 1 included elsewhere herein, which is incorporated by reference into these consolidated financial statements. F-13
6. Investments: ----------- The amortized cost, gross unrealized gains and losses and estimated fair value of investments classified as held to maturity and as available for sale at December 31, 1996 and 1995 are as follows (in thousands): <TABLE> <CAPTION> Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- <S> <C> <C> <C> <C> Held to maturity: 1996 - ---- Bonds and notes: United States Government agencies and authorities $55,714 $ 422 $439 $55,697 States, municipalities and political subdivisions 1,825 - - 1,825 Public utilities 309 - 3 306 All other corporates 639 - 10 629 Other fixed maturities 14,258 - - 14,258 ------- ------ ---- ------- $72,745 $ 422 $452 $72,715 ======= ====== ==== ======= 1995 - ---- Bonds and notes: United States Government agencies and authorities $49,823 $1,011 $139 $50,695 States, municipalities and political subdivisions 920 8 - 928 All other corporates 310 - 10 300 Other fixed maturities 13,493 - - 13,493 ------- ------ ---- ------- $64,546 $1,019 $149 $65,416 ======= ====== ==== ======= Available for sale: 1996 - ---- Bonds and notes: United States Government agencies and authorities $2,164,824 $ 9,626 $21,822 $2,152,628 States, municipalities and political subdivisions 14,713 72 37 14,748 Foreign governments 12,571 6,060 17 18,614 Public utilities 49,919 534 515 49,938 All other corporates 313,448 10,840 3,713 320,575 ---------- ------- ------- ---------- Total fixed maturities 2,555,475 27,132 26,104 2,556,503 ---------- ------- ------- ---------- Equity securities: Preferred stocks 2,293 331 1 2,623 Common stocks - industrial, miscellaneous and all other 3,453 145 316 3,282 ---------- ------- ------- ---------- Total equity securities 5,746 476 317 5,905 ---------- ------- ------- ---------- $2,561,221 $27,608 $26,421 $2,562,408 ========== ======= ======= ========== </TABLE> F-14
6. Investments, continued: ----------- <TABLE> <CAPTION> Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- <S> <C> <C> <C> <C> 1995 - ---- Bonds and notes: United States Government agencies and authorities $2,161,873 $24,503 $3,097 $2,183,279 States, municipalities and political subdivisions 3,367 50 32 3,385 Foreign governments 21,435 3,242 1,372 23,305 Public utilities 50,158 1,123 501 50,780 All other corporates 354,804 14,144 2,192 366,756 ---------- ------- ------ ---------- Total fixed maturities 2,591,637 43,062 7,194 2,627,505 ---------- ------- ------ ---------- Equity securities: Common stocks: Banks, trusts and insurance companies 10,001 3,217 1 13,217 Industrial, miscellaneous and all other 16,725 7,919 895 23,749 ---------- ------- ------ ---------- Total equity securities 26,726 11,136 896 36,966 ---------- ------- ------ ---------- $2,618,363 $54,198 $8,090 $2,664,471 ========== ======= ====== ========== </TABLE> The amortized cost and estimated fair value of investments classified as held to maturity and as available for sale at December 31, 1996, by contractual maturity are shown below. Expected maturities are likely to differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. <TABLE> <CAPTION> Held to Maturity Available for Sale ---------------- ------------------ Estimated Estimated Amortized Fair Amortized Fair Cost Value Cost Value ---- ----- ---- ----- (In thousands) <S> <C> <C> <C> <C> Due in one year or less $29,805 $29,923 $ 307,309 $ 312,306 Due after one year through five years 35,191 35,016 1,339,715 1,332,251 Due after five years through ten years 2,146 2,153 258,598 259,499 Due after ten years 1,643 1,751 135,731 135,943 ------- ------- ---------- ---------- 68,785 68,843 2,041,353 2,039,999 Mortgage-backed securities 3,960 3,872 514,122 516,504 ------- ------- ---------- ---------- $72,745 $72,715 $2,555,475 $2,556,503 ======= ======= ========== ========== </TABLE> F-15
6. Investments, continued: ----------- At December 31, 1996 and 1995 securities with book values aggregating $42,397,000 and $45,069,000, respectively, were on deposit with various regulatory authorities. Certain information with respect to trading securities at December 31, 1996 and 1995 is as follows (in thousands): <TABLE> <CAPTION> Amortized Estimated Carrying Cost Fair Value Value ---- ---------- ----- <S> <C> <C> <C> 1996 - ---- Fixed maturities - Corporate bonds and notes $33,430 $33,897 $33,897 Equity securities: Preferred stocks 16,260 16,823 16,823 Common stocks - industrial, miscellaneous and all other 4,842 5,803 5,803 Options 4,200 2,121 2,121 ------- ------- ------- Total trading securities $58,732 $58,644 $58,644 ======= ======= ======= 1995 - ---- Fixed maturities: Corporate bonds and notes $26,356 $27,194 $27,194 Foreign governments 2,080 3,880 3,880 Equity securities: Preferred stocks 17,785 19,079 19,079 Common stocks - industrial, miscellaneous and all other 142 148 148 Options 5,790 5,401 5,401 ------- ------- ------- Total trading securities $52,153 $55,702 $55,702 ======= ======= ======= </TABLE> F-16
7. Trade, Notes and Other Receivables, Net: --------------------------------------- A summary of trade, notes and other receivables, net at December 31, 1996 and 1995 is as follows (in thousands): 1996 1995 ---- ---- Instalment loan receivables net of unearned finance charges of $1,910 and $3,680 (a) $233,351 $268,470 Loans to small business concerns, including accrued interest - 9,921 Premiums receivable 193,179 187,425 Trade receivables 20,856 22,669 Service fee receivable 7,806 5,176 Amount due on sale of securities 3,919 6,808 Other 20,226 17,786 -------- -------- 479,337 518,255 Allowance for doubtful accounts (including $12,177 and $13,893 applicable to loan receivables of banking and lending subsidiaries) (19,388) (20,502) -------- -------- $459,949 $497,753 ======== ======== (a) Contractual maturities of instalment loan receivables at December 31, 1996 were as follows (in thousands): 1997 - $111,891; 1998 - $62,489; 1999 - $34,557; 2000 - $17,233 and 2001 and thereafter - $7,181. Experience shows that a substantial portion of such notes will be repaid or renewed prior to contractual maturity. Accordingly, the foregoing is not to be regarded as a forecast of future cash collections. 8. Prepaids and Other Assets: ------------------------- At December 31, 1996 and 1995, a summary of prepaids and other assets is as follows (in thousands): 1996 1995 ---- ---- Real estate assets, net $142,089 $147,508 Inventories, net 21,281 30,573 Excess of acquisition cost over net tangible assets acquired - 173 Balances in risk sharing pools and associations 6,961 9,896 Prepaid reinsurance premium 9,081 6,528 Unamortized debt expense 7,415 7,588 Other 36,746 36,040 -------- -------- $223,573 $238,306 ======== ======== F-17
9. Trade Payables, Expense Accruals and Other Liabilities: ------------------------------------------------------ A summary of trade payables, expense accruals and other liabilities at December 31, 1996 and 1995 is as follows (in thousands): 1996 1995 ---- ---- Trade Payables and Expense Accruals: Payables related to securities $ 43,048 $ 43,635 Amount due on reinsurance 16,447 11,798 Trade and drafts payable 45,677 40,003 Accrued compensation, severance and other employee benefits 27,758 28,084 Pension liability 5,712 5,735 Accrued interest payable 8,375 8,965 Taxes, other than income 21,608 23,505 Amounts withheld on account of others 17,238 2,914 Provision for servicing carrier claims 26,986 23,513 Other 17,814 21,210 -------- -------- $230,663 $209,362 ======== ======== Other Liabilities: Unearned service fees $ 41,576 $ 32,333 Lease obligations 1,588 3,815 Liability for unredeemed trading stamps 23,735 30,574 Postretirement and postemployment benefits 26,532 25,560 Premiums received in advance 3,588 4,871 Holdbacks on loans 3,806 6,035 Unclaimed funds and dividends 3,659 3,622 Other 25,425 27,962 -------- -------- $129,909 $134,772 ======== ======== 10. Long-term and Other Indebtedness: -------------------------------- The principal amount, stated interest rate and maturity of long-term debt outstanding at December 31, 1996 and 1995 are as follows (dollars in thousands): 1996 1995 ---- ---- Senior Notes: Term loans with banks $ 50,000 $ 50,000 7 3/4% Senior Notes due 2013, less debt discount of $831 and $881 99,169 99,119 Industrial Revenue Bonds (with variable interest) 4,900 5,600 Other 15,076 14,493 -------- -------- 169,145 169,212 -------- -------- Subordinated Notes: 10 3/8% Senior Subordinated Notes due 2002, less debt discount of $92 and $605 22,252 124,395 8 1/4% Senior Subordinated Notes due 2005 100,000 100,000 7 7/8% Senior Subordinated Notes due 2006, less debt discount of $678 134,322 - 6% Swiss Franc Bonds due March 10, 1996 - 27,255 5 1/4% Convertible Subordinated Debentures due 2003 100,000 100,000 -------- -------- 356,574 351,650 -------- -------- $525,719 $520,862 ======== ======== F-18
10. Long-term and Other Indebtedness, continued: -------------------------------- At December 31, 1996, credit agreements provided for aggregate contractual credit facilities of $150,000,000, bore interest based on the prime rate or LIBOR, plus commitment and other fees, and were due to expire in June 1997. No amounts were borrowed under these facilities as of December 31, 1996 and 1995. The term loans with banks also bore interest based on the prime rate or LIBOR. In February 1997, the Company replaced these credit facilities and the $50,000,000 of outstanding bank term loans with a new contractual bank credit facility of $200,000,000. The new facility bears interest based on the prime rate or LIBOR and expires in February 2002. The most restrictive of the Company's debt instruments require maintenance of minimum Tangible Net Worth and limit Indebtedness, as defined in the agreements. In addition, the debt instruments contain limitations on dividends, investments, liens, contingent obligations and certain other matters. Had the new credit facility been in effect as of December 31, 1996, cash dividends of $300,300,000 would be eligible to be paid under the most restrictive covenants. In October 1996, the Company sold $135,000,000 principal amount of its newly authorized 7 7/8% Senior Subordinated Notes due 2006 in an underwritten public offering at 99.487% of the principal amount. As of December 31, 1996, $114,000,000 of the net proceeds were used to purchase $102,656,000 aggregate principal amount of the 10 3/8% Senior Subordinated Notes due 2002 (the "10 3/8% Notes") plus accrued interest through a tender offer and in open market purchases. The Company intends to retire the 10 3/8% Notes that remain outstanding either through open market purchases or through early redemption in June 1997. In the fourth quarter of 1996, the Company reported an extraordinary loss on early extinguishment of these 10 3/8% Notes of $10,520,000 ($6,838,000 after taxes or $.11 per share). The 5 1/4% Convertible Subordinated Debentures due 2003 (the "5 1/4% Debentures") are convertible into Common Shares at $28.75 per Common Share, an aggregate of 3,478,261 Common Shares, subject to anti-dilution provisions. On March 12, 1997, the Company called for redemption on April 11, 1997 all of its outstanding $100,000,000 5 1/4% Debentures, at a redemption price of 102.625% of the principal amount of the Debentures, plus accrued interest. Approximately $9,425,000 of the manufacturing division's net property, equipment and leasehold improvements are pledged as collateral for the Industrial Revenue Bonds; and approximately $26,259,000 of other assets (primarily property) are pledged for other indebtedness aggregating approximately $14,691,000. Interest rate agreements are used to manage the potential impact of changes in interest rates on term loans with banks, customer banking deposits and credit agreement borrowings. Under interest rate swap agreements, the Company has agreed with other parties to pay fixed rate interest amounts and receive variable rate interest amounts calculated by reference to an agreed notional amount. The variable interest rate portion of the swaps is a specified LIBOR interest rate. At December 31, 1995, the notional amount of the Company's interest rate swaps were $75,000,000. Swaps that expired in 1996 required fixed rate payments of 7.23% on a $50,000,000 notional amount. The remaining $25,000,000, which comprises the notional amount of the Company's interest rate swaps at December 31, 1996, expire in 1999 and require fixed rate payments of 7.33%. The Company would have been required to pay $782,000 at December 31, 1996 and $2,351,000 at December 31, 1995 to retire these agreements. The LIBOR rate at December 31, 1996 was 5.6%. Changes in LIBOR interest rates in the future will change the amounts to be received under the agreements as well as interest to be paid under the related variable debt obligations. F-19
10. Long-term and Other Indebtedness, continued: -------------------------------- Counterparties to interest rate swap agreements are major financial institutions, which management believes are able to fulfill their obligations. However, any losses due to default by the counterparties are likely to be immaterial. The aggregate annual mandatory redemptions of debt during the five year period ending December 31, 2001 are as follows (in thousands): 1997 - $2,817; 1998 - $2,438; 1999 - $51,854; 2000 - $1,140; and, 2001 - $1,164. The weighted average interest rate on short-term borrowings (primarily customer banking deposits) was 5.8% and 6.1% at December 31, 1996 and 1995, respectively. 11. Common Shares, Stock Options, Warrants and Preferred Shares: ----------------------------------------------------------- The Board of Directors from time to time has authorized acquisitions of the Company's Common Shares. Pursuant to such authorization, during the three year period ended December 31, 1996, the Company acquired 87,285 Common Shares (34,037 shares in 1996, 29,276 shares in 1995 and 23,972 shares in 1994) at an average price of $23.77 per Common Share. The Company has a fixed stock option plan which provides for grants of options or rights to non-employee directors and certain employees up to a maximum grant of three hundred thousand shares to any individual in a given taxable year. The plan provides for the issuance of stock options and stock appreciation rights at not less than the fair market value of the underlying stock at the date of grant. Options generally become exercisable in five equal annual instalments starting one year from date of grant. No stock appreciation rights have been granted. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", ("SFAS 123"), establishes a fair value method for accounting for stock-based compensation plans, either through recognition in the statements of income or disclosure. The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized in the statements of income for its stock-based compensation plans. Had compensation cost for the Company's stock option plans been recorded in the statements of income consistent with the provisions of SFAS 123, the Company's net income and earnings per share for 1996 and 1995 would not have been materially different from those reported. F-20
11. Common Shares, Stock Options, Warrants and Preferred Shares, continued: ----------------------------------------------------------- A summary of activity with respect to the Company's stock options for the three years ended December 31, 1996 is as follows: <TABLE> <CAPTION> Available Common Weighted for Shares Average Options Future Subject Exercise Exercisable Option to Option Prices at Year-End Grants --------- ------ ----------- ------ <S> <C> <C> <C> <C> Balance at January 1, 1994 1,552,944 $ 9.31 443,992 1,587,000 ======= ========= Granted 26,000 $18.28 Exercised (330,000) $ 5.57 Cancelled (33,000) $11.16 --------- Balance at December 31, 1994 1,215,944 $10.47 553,868 1,574,800 ======= ========= Granted 10,000 $23.25 Exercised (414,826) $ 6.31 Cancelled (38,500) $12.16 --------- Balance at December 31, 1995 772,618 $12.79 443,018 1,583,100 ======= ========= Granted 630,200 $26.54 Exercised (287,792) $ 7.66 Cancelled (41,100) $16.54 --------- Balance at December 31, 1996 1,073,926 $22.09 317,826 974,400 ========= ======= ========= </TABLE> The weighted-average fair value of the options granted was $7.04 per share for 1996 and $6.47 per share for 1995 as estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (1) expected volatility of 25.3% for 1996 and 27.4% for 1995; (2) risk-free interest rates of 6.0% for 1996 and 5.9% for 1995; (3) expected lives of 3.7 years for 1996 and 4.0 years for 1995; and (4) dividend yields of .9% for 1996 and 1.1% for 1995. The following table summarizes information about fixed stock options outstanding at December 31, 1996: <TABLE> <CAPTION> Options Outstanding Options Exercisable --------------------------------------- ------------------------- Weighted Common Average Weighted Common Weighted Shares Remaining Average Shares Average Range of Subject to Contractual Exercise Subject to Exercise Exercise Prices Option Life Price Option Price - --------------- ------ ---- ----- ------ ----- <S> <C> <C> <C> <C> <C> $ 6.13 127,326 0.7 years $ 6.13 127,326 $ 6.13 $11.25 - $14.25 14,800 1.0 years $12.87 12,400 $13.19 $17.88 - $21.50 314,100 2.9 years $20.33 176,100 $20.39 $23.25 - $26.63 617,700 5.1 years $26.49 2,000 $23.25 --------- ------- $ 6.13 - $26.63 1,073,926 3.9 years $22.09 317,826 $14.41 ========= ======= </TABLE> F-21
11. Common Shares, Stock Options, Warrants and Preferred Shares, continued: ----------------------------------------------------------- On September 13, 1995, Ian M. Cumming and Joseph S. Steinberg, Chairman of the Board and President of the Company, respectively, and certain members of Mr. Cumming's family exercised previously granted warrants to purchase an aggregate of 3,188,000 Common Shares and sold such shares in an underwritten public offering. In connection with such public offering, the Company granted the underwriters an over allotment option, which was exercised, for 478,200 Common Shares. Under the terms of the warrant agreement, the Company was required to pay expenses of the sale, other than underwriting discounts. As a result of the exercise of the warrants and the exercise of the over allotment option, the Company realized aggregate cash proceeds, net of expenses, of $43,736,000. For income tax purposes, the exercise of the warrants resulted in a current income tax deduction of $57,305,000. For financial reporting purposes, the benefit of such deduction ($20,057,000) was credited directly to shareholders' equity. At December 31, 1996 and 1995, the Company's Common Shares were reserved as follows: 1996 1995 ---- ---- Stock Options 2,048,326 2,355,718 Convertible Debentures 3,478,261 3,478,261 --------- --------- 5,526,587 5,833,979 ========= ========= At December 31, 1996 and 1995, 6,000,000 preferred shares (redeemable and non-redeemable), par value $1 per share, were authorized. 12. Net Securities Gains (Losses): ----------------------------- The following summarizes net securities gains (losses) for each of the three years in the period ended December 31, 1996 (in thousands): 1996 1995 1994 ---- ---- ---- Net realized gains (losses) on fixed maturities $20,491 $14,430 $(11,246) Provision for write-down of fixed maturity investments - - (3,126) Net unrealized gain (loss) on trading securities (2,230) 3,639 (1,500) Net realized gains on equity and other securities 21,168 1,958 3,868 ------- ------- -------- $39,429 $20,027 $(12,004) ======= ======= ======== Proceeds from sales of investments classified as available for sale were $1,732,272,000, $1,085,764,000 and $854,824,000 during 1996, 1995 and 1994, respectively. Gross gains of $36,625,000, $22,766,000 and $8,461,000 and gross losses of $5,600,000, $8,119,000 and $18,446,000 were realized on these sales during 1996, 1995 and 1994, respectively. F-22
13. Other Results of Operations Information: --------------------------------------- Investment and other income for each of the three years in the period ended December 31, 1996 consist of the following (in thousands): 1996 1995 1994 ---- ---- ---- Interest on short-term investments $ 23,861 $ 22,499 $ 13,555 Interest on fixed maturities 158,975 153,034 141,279 Service fee income 50,445 54,481 31,608 Trading stamp revenues 12,017 17,957 19,489 Rental income 11,281 10,730 7,691 Gains on sale of property, net of costs 11,078 4,833 1,741 Gain on sale of Transportation Capital Corp. 1,516 - - Gains related to foreign power companies - - 22,948 Gain on return of the WMAC Companies - 41,030 - Litigation settlements 5,434 4,666 - Other 26,276 29,087 18,483 -------- -------- -------- $300,883 $338,317 $256,794 ======== ======== ======== Effective as of December 31, 1995, control of the WMAC Companies was returned to the Company and such subsidiaries were consolidated. The gain related to the return of the WMAC Companies reflects the difference between the carrying amount of the Company's investment prior to consolidation and the net assets of such subsidiaries. Taxes, other than income or payroll, included in operations amounted to $33,907,000 (including $18,791,000 of premium taxes) for the year ended December 31, 1996, $36,978,000 (including $21,687,000 of premium taxes) for the year ended December 31, 1995 and $37,310,000 (including $21,330,000 of premium taxes) for the year ended December 31, 1994. Advertising costs amounted to $13,351,000, $13,079,000 and $12,541,000 for the years ended December 31, 1996, 1995 and 1994, respectively. F-23
14. Income Taxes: ------------ The principal components of the deferred tax asset at December 31, 1996 and 1995 are as follows (in thousands): 1996 1995 ---- ---- Insurance reserves and unearned premiums $ 97,259 $ 95,453 Securities valuation reserves 13,544 8,392 Other accrued liabilities 7,212 15,030 Employee benefits and compensation 7,685 7,554 Unrealized (gains) on investments (504) (16,174) Depreciation (3,870) (6,557) Policy acquisition costs (10,421) (10,254) Tax loss carryforwards, net of tax sharing payments 37,388 49,026 Other, net 194 5,056 -------- -------- 148,487 147,526 Valuation allowance (40,584) (44,060) -------- -------- $107,903 $103,466 ======== ======== The valuation allowance principally relates to certain acquired tax loss carryforwards, the usage of which is subject to certain limitations and certain other matters which may restrict their availability, and unrealized capital losses. In addition, the amounts reflected above are based on the minimum tax loss carryforwards of Phlcorp, Inc. ("Phlcorp"), a subsidiary of the Company. As described more fully herein, substantial additional amounts may be available under certain circumstances and as uncertainties are resolved. If these uncertainties are resolved in the Company's favor, the deferred tax asset related to tax loss carryforwards would increase by approximately $81,000,000, exclusive of any additional valuation allowance. The Company believes it is more likely than not that the recorded deferred tax asset will be realized principally from taxable income generated by profitable operations. The provision for income taxes for each of the three years in the period ended December 31, 1996 was as follows (in thousands): 1996 1995 1994 ---- ---- ---- State income taxes (principally currently payable) $ 1,200 $ 2,500 $ 6,000 Federal income taxes: Current 7,170 (630) 2,906 Deferred 14,127 22,313 20,397 Foreign income taxes (principally currently payable) 500 496 179 ------- ------- ------- $22,997 $24,679 $29,482 ======= ======= ======= F-24
14. Income Taxes, continued: ------------ The table below reconciles expected statutory federal income tax to actual income tax expense (in thousands): 1996 1995 1994 ---- ---- ---- Expected federal income tax $27,479 $ 46,264 $35,111 State income taxes, net of federal income tax benefit 780 1,625 3,900 Amortization of excess of acquisition cost over net tangible assets acquired - 910 1,028 Tax exempt interest (30) (469) (1,144) Return of the WMAC Companies - (14,360) - Reduction in valuation allowance (3,476) - (5,340) Recognition of additional tax benefits (2,500) (9,547) (4,450) Other 744 256 377 ------- -------- ------- Actual income tax expense $22,997 $ 24,679 $29,482 ======= ======== ======= The valuation allowance applicable to the deferred income tax asset recorded upon adoption of SFAS 109 gave effect to the possible unavailability of certain income tax deductions. During 1996 and 1994 certain matters were favorably resolved and the Company reduced the valuation allowance as reflected in the above reconciliation. Since the WMAC Companies have previously been included in the Company's consolidated federal income tax return, the gain recorded upon return of the WMAC Companies is not taxable. Phlcorp, in connection with its 1986 reorganization, entered into a tax settlement agreement (the "Tax Settlement Agreement") with the United States whereby, among other things, Phlcorp agreed that upon utilization of certain pre-reorganization tax loss carryforwards, it would pay 25% of any resultant tax savings to the government, subject to certain limitations. The Tax Settlement Agreement provides that post-reorganization tax attributes and net operating losses will be utilized prior to pre-reorganization operating losses in calculating tax sharing payments. Due to unresolved issues concerning certain post-reorganization deductions, Phlcorp is unable to state with certainty the amount of its available carryforwards. However, Phlcorp believes that it has minimum tax operating loss carryforwards of between $70,000,000 and $302,000,000 at December 31, 1996. The expiration dates for Phlcorp's carryforwards will depend on the outcome of the matters referred to above, although it is unlikely such carryforwards will begin to expire before 1998. F-25
14. Income Taxes, continued: ------------ At December 31, 1996 the Company had tax loss carryforwards, which have been reflected in the deferred tax asset after applying the statutory federal income tax rate, as follows (in thousands): Year of Loss Expiration Carryforwards ---------- ------------- 1997 $ 463 1998 1,311 1999 433 2000 21 2002 272 2003 11,045 2005 13,150 2010 12,657 -------- 39,352 Phlcorp minimum amount, as described above 70,000 -------- Total minimum tax loss carryforwards $109,352 ======== Limitations exist under the tax law which may restrict the utilization of the Phlcorp carryforwards and the utilization of an aggregate of approximately $2,797,000 of non-Phlcorp tax loss carryforwards. Further, certain of the future deductions may only be utilized in the tax returns of certain life insurance subsidiaries. These limitations are considered in the determination of the valuation allowance. Under certain circumstances, the value of the carryforwards available could be substantially reduced if certain changes in ownership were to occur. In order to reduce this possibility, the Company's certificate of incorporation was amended to include certain charter restrictions which prohibit transfers of the Company's Common Stock under certain circumstances. Under prior law, Charter National had accumulated $15,447,000 of special federal income tax deductions allowed life insurance companies and the Colonial Penn life insurance subsidiaries had accumulated $161,000,000 of such special deductions. Under certain conditions, such amounts could become taxable in future periods. Except with respect to amounts applicable to Colonial Penn's life insurance subsidiaries, the Company does not anticipate any transaction occurring which would cause these amounts to become taxable. With respect to Colonial Penn's life insurance subsidiaries, the IRS has asserted that certain of such special federal income tax deductions should have been reflected in taxable income in prior years, and has assessed additional taxes (excluding interest) of $2,899,000 and $19,132,000, for 1989 and 1988, respectively. Under the terms of the purchase agreement whereby Colonial Penn was acquired from FPL Group Capital Inc (the "Seller"), the Seller assumed the obligation to reimburse the Company for any such taxes. Pursuant to the purchase agreement, the Company complied with the Seller's instructions and agreed to the 1989 assessment. To date, Seller has failed to F-26
14. Income Taxes, continued: ------------ comply with its contractual obligation to reimburse the Company for payment of the 1989 assessment, the related interest and the loss of certain minimum tax credit carryforwards, an aggregate of $3,766,000, to which the Company is entitled under Seller's indemnification. In a response to a legal proceeding initiated by the Company to collect such amount due under the Seller's indemnification obligation, the Seller has alleged that the Company has breached the purchase agreement and, on that basis, Seller has denied liability for the 1989 assessment. The Company believes it has not breached the purchase agreement and the Seller remains liable for all such taxes and interest. The Seller is currently exercising its right under the purchase agreement to control the contest of the 1988 IRS assessment. If the Seller is unsuccessful in contesting the 1988 IRS assessment, no assurance can be given that the Seller will comply with its indemnification obligations under the purchase agreement. The Company intends to enforce its indemnification rights against the Seller and to seek other relief, including relief for Seller's bad faith. During 1995, the Company entered into an agreement with the Seller to settle a lawsuit initiated by the Company to collect certain amounts due from the Seller under a tax indemnification included in the purchase agreement for other taxable periods. The settlement required the Seller to pay certain amounts to the Company, which are reflected in investment and other income for the year ended December 31, 1995. 15. Pension Plans and Postretirement Benefits: ----------------------------------------- The Company maintains defined benefit pension plans covering employees of certain units who meet age and service requirements. Benefits are generally based on final average salary and years of service. The Company funds its pension plans in amounts sufficient to satisfy minimum ERISA funding requirements. Pension expense charged to operations included the following components (in thousands): 1996 1995 1994 ---- ---- ---- Service cost $ 5,306 $ 4,603 $ 5,529 Interest cost 7,317 7,020 6,596 Actual return on plan assets (6,329) (11,501) 2,610 Net amortization and deferral 2,160 4,400 (8,507) ------- -------- ------- Net pension expense $ 8,454 $ 4,522 $ 6,228 ======= ======== ======= F-27
15. Pension Plans and Postretirement Benefits, continued: ----------------------------------------- The funded status of the pension plans at December 31, 1996 and 1995 was as follows (in thousands): 1996 1995 ---- ---- Actuarial present value of accumulated benefit obligation: Vested $74,562 $ 81,245 Non-vested 2,021 1,880 ------- -------- $76,583 $ 83,125 ======= ======== Projected benefit obligation $98,733 $103,683 Plan assets at fair value 90,902 85,033 ------- -------- Funded status (7,831) (18,650) Unrecognized prior service cost 2,773 2,953 Unrecognized net loss at January 1, 1987 431 1,706 Unrecognized net (gain) loss from experience differences and assumption changes (1,085) 8,256 ------- -------- Accrued pension liability $(5,712) $ (5,735) ======= ======== The plans' assets consist primarily of U.S. government and agencies' bonds and corporate bonds and notes. The projected benefit obligation at December 31, 1996 and 1995 was determined using an assumed discount rate of 7.5% and 7.0%, respectively, and an assumed compensation increase rate of 5.0% and 5.6%, respectively. The assumed long-term rate of return on plan assets was 7.4% at December 31, 1996 and 1995. The Company also has defined contribution pension plans covering certain employees. Contributions and costs are a percent of each covered employee's salary. Amounts charged to expense related to such plans were $2,315,000, $2,262,000 and $3,292,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Several subsidiaries provide certain health care and other benefits to certain retired employees under plans which are currently unfunded. The Company pays the cost of postretirement benefits as they are incurred. Amounts charged to expense (principally interest) related to such benefits were $1,795,000 in 1996, $1,679,000 in 1995 and $1,762,000 in 1994. F-28
15. Pension Plans and Postretirement Benefits, continued: ----------------------------------------- Included in other liabilities at December 31, 1996 and 1995 are the following (in thousands): 1996 1995 ---- ---- Accumulated postretirement benefit obligation: Retirees $12,624 $16,091 Fully eligible active plan participants 2,818 2,827 Other active plan participants 450 2,218 ------- ------- Accumulated postretirement benefit obligation 15,892 21,136 Unrecognized prior service cost 5,623 455 Unrecognized net gain from experience differences and assumption changes 1,580 436 ------- ------- Accrued postretirement benefit obligation $23,095 $22,027 ======= ======= The discount rate used in determining the accumulated postretirement benefit obligation was 7.5% and 7.0% at December 31, 1996 and 1995, respectively. The assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation were between 7.3% and 13.0% for 1996 and 7.6% and 14.0% for 1995, declining to an ultimate rate of between 5.0% and 8.0% by 2006. If the health care cost trend rates were increased by 1%, the accumulated postretirement obligation as of December 31, 1996 and 1995 would have increased by $1,046,000 and $1,317,000, respectively. The effect of this change on the aggregate of service and interest cost for 1996 and 1995 would be immaterial. 16. Commitments: ----------- The Company and its subsidiaries rent office space and office equipment under non-cancelable operating leases with terms generally varying from one to twenty years. Rental expense (net of sublease rental income) charged to operations was $15,235,000 in 1996, $14,461,000 in 1995 and $16,566,000 in 1994. Aggregate minimum annual rentals (exclusive of real estate taxes, maintenance and certain other charges) relating to facilities under lease in effect at December 31, 1996 are as follows (in thousands): 1997 - $8,589; 1998 - $7,703; 1999 - $9,845; 2000 - - $7,213; 2001 - $6,329; and thereafter - $109,896. Future minimum sublease rental income is not material. Included in the amounts shown above are the gross future minimum annual rental payments relating to a twenty year lease which the Empire Group entered into beginning November 1998 for its executive and administrative offices. These offices will be in an office building in which the Company has an equity interest. The above amounts have not been reduced for the Company's share of rental income due to its equity participation in this office building. In connection with this equity investment, the Company has committed to invest up to $25,000,000, which is expected to be contributed in 1998. In connection with the sale of certain subsidiaries, the Company has made or guaranteed the accuracy of certain representations given to the acquiror. No material loss is expected in connection with such matters. F-29
16. Commitments, continued: ----------- In connection with the return of the WMAC Companies, the WMAC Companies have guaranteed the collectibility of reinsurance agreements applicable to a block of mortgage reinsurance business. The maximum amount of such contingency is $26,237,000 at December 31, 1996. The reinsurance agreements are with highly rated institutions and/or are secured in part by letters of credit or trust funds; as a result the Company does not expect a material loss in connection with this guarantee. The insurance and the banking and lending subsidiaries are limited by regulatory requirements and agreements in the amount of dividends and other transfers of funds that are available to the Company. Principally as a result of such restrictions, the net assets of subsidiaries which are subject to limitations on transfer of funds to the Company were approximately $907,295,000 at December 31, 1996. 17. Litigation: ---------- The Company is subject to various litigation which arises in the course of its business. Based on discussions with counsel, management is of the opinion that such litigation will have no material adverse effect on the consolidated financial position of the Company or its consolidated results of operations. 18. Earnings (Loss) Per Common Share: -------------------------------- Earnings (loss) per common and dilutive common equivalent share was calculated by dividing net income by the sum of the weighted average number of Common Shares outstanding and the incremental weighted average number of Common Shares issuable upon exercise of options and warrants for the periods they were outstanding. The number of common and dilutive common equivalent shares used for this calculation was 60,560,000 in 1996, 59,271,000 in 1995 and 58,202,000 in 1994. Fully diluted earnings (loss) per share was calculated as described above except that in 1994 the incremental number of shares utilized the year end market price for the Company's Common Shares, since the year end market price was above the average for that year. In addition, for 1995 and 1994 the calculations assume the 5 1/4% Debentures had been converted into Common Shares for the period they were outstanding and earnings increased for the interest on such debentures, net of the income tax effect. Conversion was not assumed for 1996 since the effect of such assumed conversion would have been to increase earnings per share. The number of shares used for this calculation was 60,560,000 in 1996, 62,807,000 in 1995 and 61,715,000 in 1994. 19. Fair Value of Financial Instruments: ----------------------------------- The following table presents fair value information about certain financial instruments, whether or not recognized on the balance sheet. Where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by F-30
19. Fair Value of Financial Instruments, continued: ----------------------------------- the assumptions used, including the discount rate and estimates of future cash flows. The fair value amounts presented do not purport to represent and should not be considered representative of the underlying "market" or franchise value of the Company. The methods and assumptions used to estimate the fair values of each class of the financial instruments described below are as follows: (a) Investments: The fair values of marketable equity securities and fixed maturity securities are substantially based on quoted market prices, as disclosed in Note 6. It is not practicable to determine the fair value of policyholder loans since such loans generally have no stated maturity, are not separately transferable and are often repaid by reductions to benefits and surrenders. (b) Cash and cash equivalents: For cash equivalents, the carrying amount approximates fair value. (c) Loans receivable of banking and lending subsidiaries: The fair value of loans receivable of the banking and lending subsidiaries is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities. (d) Separate and variable accounts: Separate and variable accounts assets and liabilities are carried at market value, which is a reasonable estimate of fair value. (e) Investments in associated companies: The fair values of a foreign power company are principally estimated based upon quoted market prices. The carrying value of the remaining investments in associated companies approximates fair value. (f) Derivatives: The fair values of derivatives generally reflect the amounts that the Company would receive or pay to terminate the interest rate and currency swap contracts. (g) Customer banking deposits: The fair value of customer banking deposits is estimated using rates currently offered for deposits of similar remaining maturities. (h) Long-term and other indebtedness: The fair values of non-variable rate debt are estimated using quoted market prices and estimated rates which would be available to the Company for debt with similar terms. The fair value of variable rate debt is estimated to be the carrying amount. (i) Investment contract reserves: Single premium deferred annuity reserves are carried at account value, which is a reasonable estimate of fair value. The fair value of other investment contracts is estimated by discounting the future payments at rates which would currently be offered for contracts with similar terms. F-31
19. Fair Value of Financial Instruments, continued: ----------------------------------- The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1996 and 1995 are as follows (in thousands): <TABLE> <CAPTION> 1996 1995 ---- ---- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- <S> <C> <C> <C> <C> Financial Assets: Investments: Practicable to estimate fair value $2,771,791 $2,771,761 $2,862,713 $2,863,583 Policyholder loans 18,329 - 17,768 - Cash and cash equivalents 386,807 386,807 266,158 266,158 Loans receivable of banking and lending subsidiaries, net of allowance 221,174 234,771 264,498 277,676 Separate and variable accounts 546,074 546,074 472,837 472,837 Investments in associated companies 206,384 214,462 184,088 192,166 Other assets (derivatives) - - 1,838 9,180 Financial Liabilities: Customer banking deposits 209,261 210,160 203,061 204,192 Long-term and other indebtedness 525,719 535,150 520,862 546,140 Investment contract reserves 37,658 41,404 67,254 72,803 Separate and variable accounts 545,019 545,019 472,837 472,837 Other liabilities (derivatives) 886 2,335 259 2,610 </TABLE> 20. Segment Information: ------------------- For information with respect to the Company's business segments, see "Financial Information about Industry Segments" in Item 1 included elsewhere herein, which is incorporated by reference into these consolidated financial statements. F-32
21. Selected Quarterly Financial Data (Unaudited): --------------------------------------------- <TABLE> <CAPTION> First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (In thousands, except per share amounts) <S> <C> <C> <C> <C> 1996: - ----- Revenues $384,506 $378,633 $377,796 $365,622 ======== ======== ======== ======== Income before extraordinary loss $ 15,601 $ 13,173 $ 19,185 $ 7,556 ======== ======== ======== ======== Extraordinary loss from early extinguishment of debt, net of income tax benefit $ - $ - $ - $ (6,838) ======== ======== ======== ======== Net income $ 15,601 $ 13,173 $ 19,185 $ 718 ======== ======== ======== ======== Earnings (loss) per common and dilutive common equivalent share: Income before extraordinary loss $.26 $.22 $.32 $ .12 Extraordinary loss - - - (.11) ---- ---- ---- ----- Net income $.26 $.22 $.32 $ .01 ==== ==== ==== ===== Number of shares used in calculation 60,586 60,552 60,534 60,571 ====== ====== ====== ====== Earnings (loss) per fully diluted common share: Income before extraordinary loss $.26 $.22 $.31 $ .12 Extraordinary loss - - - (.11) ---- ---- ---- ----- Net income $.26 $.22 $.31 $ .01 ==== ==== ==== ===== Number of shares used in calculation 60,586 60,552 64,022 60,571 ====== ====== ====== ====== 1995: - ----- Revenues $360,688 $376,757 $390,987 $429,882 ======== ======== ======== ======== Net income $ 16,323 $ 17,409 $ 21,726 $ 52,045 ======== ======== ======== ======== Earnings per common and dilutive common equivalent share $.28 $.30 $.37 $.86 ==== ==== ==== ==== Number of shares used in calculation 58,590 58,591 59,427 60,565 ====== ====== ====== ====== Earnings per fully diluted common share $.28 $.29 $.36 $.83 ==== ==== ==== ==== Number of shares used in calculation 62,069 62,218 62,984 64,043 ====== ====== ====== ====== </TABLE> In 1996 and 1995, the totals of quarterly per share amounts do not necessarily equal annual per share amounts. F-33
<TABLE> <CAPTION> SCHEDULE II - Condensed Financial Information of Registrant LEUCADIA NATIONAL CORPORATION BALANCE SHEETS December 31, 1996 and 1995 1996 1995 ---- ---- (Thousands of dollars) <S> <C> <C> ASSETS - ------ Cash and cash equivalents $ 61,330 $ 14,877 Investments 115,443 107,087 Deferred income taxes 107,903 103,466 Miscellaneous receivables and other assets 42,221 52,119 Investments in and advances to/from subsidiaries, net 1,321,381 1,364,275 ---------- ---------- $1,648,278 $1,641,824 ========== ========== LIABILITIES - ----------- Accounts payable, expense accruals and income taxes $ 24,043 $ 29,386 Debt, including current maturities 506,128 500,947 ---------- ---------- 530,171 530,333 ---------- ---------- SHAREHOLDERS' EQUITY - -------------------- Common shares, par value $1 per share, authorized 150,000,000 shares; 60,417,579 and 60,163,824 shares issued and outstanding, after deducting 54,353,691 and 54,319,654 shares held in treasury 60,418 60,164 Additional paid-in capital 161,026 159,914 Net unrealized gain on investments 1,759 30,086 Retained earnings 894,904 861,327 ---------- ---------- Total shareholders' equity 1,118,107 1,111,491 ---------- ---------- $1,648,278 $1,641,824 ========== ========== </TABLE> See notes to this schedule. F-34
<TABLE> <CAPTION> SCHEDULE II - Condensed Financial Information of Registrant, continued: LEUCADIA NATIONAL CORPORATION STATEMENTS OF INCOME For the years ended December 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- (In thousands, except per share amounts) <S> <C> <C> <C> Investment income, net $ 32,469 $ 38,931 $ 22,700 Equity in losses of associated companies (14,720) (24) - Net securities gains (losses) 96 (1) (2,160) Equity in income of subsidiaries 124,162 153,213 130,266 -------- -------- -------- 142,007 192,119 150,806 -------- -------- -------- Interest expense 62,242 58,723 50,060 Other expenses, net 24,250 25,893 29,910 -------- -------- -------- 86,492 84,616 79,970 -------- -------- -------- Income before extraordinary loss 55,515 107,503 70,836 Extraordinary loss from early extinguishment of debt, net of income tax benefit of $3,682 (6,838) - - -------- -------- -------- Net income $ 48,677 $107,503 $ 70,836 ======== ======== ======== Earnings (loss) per common and dilutive common equivalent share: Income before extraordinary loss $ .91 $1.81 $1.22 Extraordinary loss (.11) - - ----- ----- ----- Net income $ .80 $1.81 $1.22 ===== ===== ===== Fully diluted earnings (loss) per common share: Income before extraordinary loss $ .91 $1.77 $1.21 Extraordinary loss (.11) - - ----- ----- ----- Net income $ .80 $1.77 $1.21 ===== ===== ===== </TABLE> See notes to this schedule. F-35
<TABLE> <CAPTION> SCHEDULE II - Condensed Financial Information of Registrant, continued: LEUCADIA NATIONAL CORPORATION STATEMENTS OF CASH FLOWS For the years ended December 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- (Thousands of dollars) <S> <C> <C> <C> Net cash flows from operating activities: - ----------------------------------------- Net income $ 48,677 $ 107,503 $ 70,836 Adjustments to reconcile net income to net cash provided by (used for) operations: Amortization (487) 681 1,486 Net securities (gains) losses (96) 1 2,160 Equity in earnings of subsidiaries (124,162) (153,213) (130,266) Equity in losses of associated companies 14,720 24 - Extraordinary loss, net of income tax benefit 6,838 - - Net change in: Miscellaneous receivables 1,121 (582) 221 Other assets (7,327) (1,714) (5,347) Investments in and advances to/from subsidiaries, net 125,508 26,641 (19,051) Accounts payable, expense accruals and income taxes (1,661) 9,047 3,881 Other 2,204 2,616 1,840 --------- --------- --------- Net cash provided by (used for) operating activities 65,335 (8,996) (74,240) --------- --------- --------- Net cash flows from investing activities: - ----------------------------------------- Dividends received from subsidiaries 32,581 10,076 8,422 Capital contribution to subsidiaries (12,068) (13,319) (6,008) Investment in Providential Life in 1996 and MK Gold Company in 1995 (11,504) (22,593) - Purchases of investments (other than short-term) (149,228) (124,855) (8,022) Proceeds from maturities of investments 116,930 43,300 1,000 Proceeds from sales of investments 25,117 76 68,268 --------- --------- --------- Net cash provided by (used for) investing activities 1,828 (107,315) 63,660 --------- --------- --------- Net cash flows from financing activities: - ----------------------------------------- Net change in short-term borrowings 207 (80) (402) Issuance of long-term debt, net of issuance costs 132,793 98,590 50,000 Reduction of long-term debt (137,773) (5,702) (21,250) Sale of common shares and exercise of warrants, net of expenses - 43,857 - Purchase of common shares for treasury (837) (727) (472) Dividends paid (15,100) (15,025) (7,021) --------- --------- --------- Net cash provided by (used for) financing activities (20,710) 120,913 20,855 --------- --------- --------- Net increase in cash and cash equivalents 46,453 4,602 10,275 Cash and cash equivalents at January 1, 14,877 10,275 - --------- --------- --------- Cash and cash equivalents at December 31, $ 61,330 $ 14,877 $ 10,275 ========= ========= ========= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $40,238 $39,768 $33,512 Income tax payments, net of refunds $ 2,490 $(3,723) $ 5,799 </TABLE> See notes to this schedule. F-36
SCHEDULE II - Condensed Financial Information of Registrant, continued: LEUCADIA NATIONAL CORPORATION NOTES TO SCHEDULE A. The notes to consolidated financial statements of Leucadia National Corporation and Subsidiaries are incorporated by reference to this schedule. B. The statements of shareholders' equity are the same as those presented for Leucadia National Corporation and Subsidiaries. C. Equity in the income of the subsidiaries is after reflecting income taxes recorded by the subsidiaries. In 1996, 1995 and 1994, there was no provision or benefit for income taxes provided by the parent company, other than the benefit related to the extraordinary loss. Tax sharing payments received from subsidiaries were $48,017,000 in 1996, $42,078,000 in 1995 and $35,385,000 in 1994. D. The deferred income tax asset of $107,903,000 and $103,466,000 at December 31, 1996 and 1995, respectively, had not been allocated to the individual subsidiaries. F-37
<TABLE> <CAPTION> SCHEDULE III - Supplementary Insurance Information LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES For the years ended December 31, 1996, 1995 and 1994 Insurance Losses, Policy Benefits and Separate Amortization Deferred and Policy of Policy Future Variable and Net Deferred Other Non-Life Acquisition Policy Unearned Accounts Contract Premium Investment Acquisition Operating Premiums Costs Benefits Premiums Liabilities Claims Revenue Income Costs Expenses Written ----- -------- -------- ----------- ------ ------- ------ ----- -------- ------- (Thousands of dollars) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> 1996 - ---- Life insurance $ 64,013 $801,635 $ 9,620 $545,019 $ 28,543 $ 178,925 $ 57,200 $150,523 $ 61,699 $ 50,392 -------- -------- -------- -------- ---------- ---------- -------- -------- -------- -------- Property and casualty insurance: Automobile 29,092 - 349,419 - 807,207 676,726 88,012 682,545 24,020 685,743 Commercial 8,847 - 43,336 - 267,034 92,414 21,948 81,349 16,638 84,187 Miscellaneous and personal 3,715 - 38,568 - 36,226 54,377 5,812 47,584 5,987 56,262 -------- -------- -------- -------- ---------- ---------- -------- -------- -------- -------- 41,654 - 431,323 - 1,110,467 823,517 115,772 811,478 46,645 826,192 -------- -------- -------- -------- ---------- ---------- -------- -------- -------- -------- $105,667 $801,635 $440,943 $545,019 $1,139,010 $1,002,442 $172,972 $962,001 $108,344 $876,584 ======== ======== ======== ======== ========== ========== ======== ======== ======== ======== 1995 - ---- Life insurance $ 45,423 $815,310 $ 7,950 $472,837 $ 26,818 $ 165,820 $ 56,651 $133,214 $ 65,068 $ 39,885 -------- -------- -------- -------- ---------- ---------- -------- -------- -------- -------- Property and casualty insurance: Automobile 34,054 - 338,439 - 805,926 667,365 80,228 688,708 12,594 684,683 Commercial 10,141 - 51,808 - 285,637 102,722 19,936 85,493 9,679 100,351 Miscellaneous and personal 2,526 - 36,576 - 37,389 46,481 5,601 35,388 5,672 49,134 -------- -------- -------- -------- ---------- ---------- -------- -------- -------- -------- 46,721 - 426,823 - 1,128,952 816,568 105,765 809,589 27,945 834,168 -------- -------- -------- -------- ---------- ---------- -------- -------- -------- -------- $ 92,144 $815,310 $434,773 $472,837 $1,155,770 $ 982,388 $162,416 $942,803 $ 93,013 $874,053 ======== ======== ======== ======== ========== ========== ======== ======== ======== ======== 1994 - ---- Life insurance $ 32,286 $870,910 $ 10,039 $419,355 $ 25,802 $ 172,445 $ 55,218 $138,324 $ 68,872 $ 49,319 -------- -------- -------- -------- ---------- ---------- -------- -------- -------- -------- Property and casualty insurance: Automobile 29,741 - 314,145 - 766,276 599,180 70,275 553,916 33,093 629,555 Commercial 10,567 - 54,208 - 263,400 101,394 18,107 77,471 12,302 101,221 Miscellaneous and personal 1,942 - 35,154 - 38,342 45,867 4,964 49,299 6,220 46,968 -------- -------- -------- -------- ---------- ---------- -------- -------- -------- -------- 42,250 - 403,507 - 1,068,018 746,441 93,346 680,686 51,615 777,744 -------- -------- -------- -------- ---------- ---------- -------- -------- -------- -------- $ 74,536 $870,910 $413,546 $419,355 $1,093,820 $ 918,886 $148,564 $819,010 $120,487 $827,063 ======== ======== ======== ======== ========== ========== ======== ======== ======== ======== </TABLE> F-38
<TABLE> <CAPTION> SCHEDULE IV - Schedule of Reinsurance LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES For the years ended December 31, 1996, 1995 and 1994 Percentage of Ceded Assumed Amount Direct to Other from Other Net Assumed Business Companies Companies Amount to Net -------- --------- --------- ------ ------ (Thousands of dollars) <S> <C> <C> <C> <C> <C> 1996 - ---- Life insurance in force $2,119,000 $152,000 $ 32,000 $1,999,000 1.60% ========== ======== ======== ========== Premiums: Life insurance $ 128,469 $ 969 $ 132 $ 127,632 .10% Accident and health insurance 52,020 577 3 51,446 .01% Property and liability insurance 877,773 60,321 5,912 823,364 .72% ---------- -------- -------- ---------- Total premiums $1,058,262 $ 61,867 $ 6,047 $1,002,442 .60% ========== ======== ======== ========== 1995 - ---- Life insurance in force $2,168,000 $187,000 $ 36,000 $2,017,000 1.78% ========== ======== ======== ========== Premiums: Life insurance $ 124,576 $ 904 $ 392 $ 124,064 .32% Accident and health insurance 43,538 617 4 42,925 .01% Property and liability insurance 836,382 43,117 22,134 815,399 2.71% ---------- -------- -------- ---------- Total premiums $1,004,496 $ 44,638 $ 22,530 $ 982,388 2.29% ========== ======== ======== ========== 1994 - ---- Life insurance in force $2,285,000 $271,000 $161,000 $2,175,000 7.40% ========== ======== ======== ========== Premiums: Life insurance $ 120,761 $ 1,484 $ 1,121 $ 120,398 .93% Accident and health insurance 53,775 683 6 53,098 .01% Property and liability insurance 748,595 34,339 31,134 745,390 4.18% ---------- -------- -------- ---------- Total premiums $ 923,131 $ 36,506 $ 32,261 $ 918,886 3.51% ========== ======== ======== ========== </TABLE> F-39
<TABLE> <CAPTION> SCHEDULE V - Valuation and Qualifying Accounts LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES For the years ended December 31, 1996, 1995 and 1994 Additions Deductions --------------------------------- ----------------------- Charged Balance at (Credited) Balance Beginning to Costs and Sale of at End of Description of Period Expenses Recoveries Other Write-Offs Receivables Period ----------- ---------- ------------ ---------- ----- ---------- ----------- -------- (Thousands of dollars) <S> <C> <C> <C> <C> <C> <C> <C> 1996 - ---- Loan receivables of banking and lending subsidiaries $13,893 $ 9,966 $5,104 $ - $16,174 $612 $12,177 Trade, notes and other receivables 6,609 8,446 1,269 5 9,040 78 7,211 ------- ------- ------ ------- ------- ---- ------- Total allowance for doubtful accounts $20,502 $18,412 $6,373 $ 5 $25,214 $690 $19,388 ======= ======= ====== ======= ======= ==== ======= Reinsurance receivable $ 4,804 $ (988) $ - $ - $ 358 $ - $ 3,458 ======= ======= ====== ======= ======= ==== ======= 1995 - ---- Loan receivables of banking and lending subsidiaries $12,308 $ 9,467 $4,163 $ - $12,045 $ - $13,893 Trade, notes and other receivables 5,773 6,832 1,283 - 7,124 155 6,609 ------- ------- ------ ------- ------- ---- ------- Total allowance for doubtful accounts $18,081 $16,299 $5,446 $ - $19,169 $155 $20,502 ======= ======= ====== ======= ======= ==== ======= Reinsurance receivable $ 4,046 $ 969 $ - $ - $ 211 $ - $ 4,804 ======= ======= ====== ======= ======= ==== ======= 1994 - ---- Loan receivables of banking and lending subsidiaries $ 8,341 $ 7,634 $2,702 $ - $ 6,369 $ - $12,308 Trade, notes and other receivables 5,185 5,744 1,449 - 6,605 - 5,773 ------- ------- ------ ------- ------- ---- ------- Total allowance for doubtful accounts $13,526 $13,378 $4,151 $ - $12,974 $ - $18,081 ======= ======= ====== ======= ======= ==== ======= Reinsurance receivable $83,825 $(2,799) $ - $ - $76,980 (a) $ - $ 4,046 ======= ======= ====== ======= ======= ==== ======= <FN> (a) Principally relates to the write-off of fully reserved receivables for unpaid losses. </FN> </TABLE> F-40
<TABLE> <CAPTION> SCHEDULE VI - Schedule of Supplemental Information for Property and Casualty Insurance Underwriters LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES For the years ended December 31, 1996, 1995 and 1994 Discount, if any, Claims and Claim Deducted in Reserves Adjustment Expenses Paid Claims for Unpaid Claims and Incurred Related to: and Claim Claim Adjustment ----------------------- Adjustment Expenses Current Year Prior Year Expenses ---------------------- ----------------------- ----------- (Thousands of dollars) <S> <C> <C> <C> <C> 1996 - ---- Automobile $ - $622,948 $ (6,995) $629,163 Commercial 347 64,171 (465) 75,069 Miscellaneous and personal - 45,687 (3,707) 41,793 ---- -------- -------- -------- Total property and casualty $347 $732,806 $(11,167) $746,025 ==== ======== ======== ======== 1995 - ---- Automobile $ - $626,781 $ (6,614) $573,055 Commercial 252 71,329 (7,604) 38,497 Miscellaneous and personal - 36,961 (6,040) 31,640 ---- -------- -------- -------- Total property and casualty $252 $735,071 $(20,258) $643,192 ==== ======== ======== ======== 1994 - ---- Automobile $ - $556,736 $(55,771) $483,120 Commercial 276 70,658 (12,822) 59,436 Miscellaneous and personal - 51,983 (6,221) 46,042 ---- -------- -------- -------- Total property and casualty $276 $679,377 $(74,814) $588,598 ==== ======== ======== ======== </TABLE> F-41
EXHIBIT INDEX Exhibit Exemption Number Description Indication ------ ----------- ---------- 3.1 Restated Certificate of Incorporation (filed as Exhibit 5.1 to the Company's Current Report on Form 8-K dated July 14, 1993).* 3.2 Amended and Restated By-laws, as amended through December 4, 1996. 4.1 The Company undertakes to furnish the Securities and Exchange Commission, upon request, a copy of all instruments with respect to long-term debt not filed herewith. 10.1 1982 Stock Option Plan, as amended August 28, 1991 (filed as Annex B to the Company's Proxy Statement dated July 21, 1992).* 10.2 1992 Stock Option Plan (filed as Annex C to the Company's Proxy Statement dated July 21, 1992).* 10.3(a) Restated Articles and Agreement of General Partnership, effective as of February 1, 1982, of The Jordan Company (filed as Exhibit 10.3(d) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1986).* 10.3(b) Amendments dated as of December 31, 1989 and December 1, 1990 to the Partnership Agreement referred to in 10.3(a) above (filed as Exhibit 10.2(b) to the 1991 10-K).* 10.3(c) Amendment dated as of December 17, 1992 to the Partnership Agreement referred to in 10.3(a) above (filed as Exhibit 10.3(c) to the 1992 10-K).* 10.3(d) Fourth Restatement, dated as of December 31, 1996, of the Articles and Agreement of General Partnership of The Jordan Company. 10.3(e) Articles and Agreement of General Partnership, effective as of April 15, 1985, of Jordan/Zalaznick Capital Company (filed as Exhibit 10.20 to the Company's Registration Statement No. 33-00606).* 10.4 Agreement made as of March 12, 1984 by and between Leucadia, Inc. and Ian M. Cumming (filed as Exhibit 10.14 to the 1983 10-K).* 10.5 Agreement made as of March 12, 1984 by and between Leucadia, Inc. and Joseph S. Steinberg (filed as Exhibit 10.15 to the 1983 10-K).* _________________________ * Incorporated by reference.
Exhibit Exemption Number Description Indication ------ ----------- ---------- 10.6 Stock Purchase and Sale Agreement dated as of April 5, 1991, by and between FPL Group Capital Inc and the Company (filed as Exhibit B to the Company's Current Report on Form 8-K dated August 23, 1991).* 10.7 Agreement dated as of August 1, 1988 among the Company, Ian M. Cumming and Joseph S. Steinberg (filed as Exhibit 10.6 to the 1991 10-K).* 10.8 Agreement dated as of January 10, 1992 between Ian M. Cumming, certain other persons listed on Schedule A thereto and the Company (filed as Exhibit 10.7 to the 1991 10-K).* 10.9 Agreement dated as of January 10, 1992 between Joseph S. Steinberg, certain other persons listed on Schedule A thereto and the Company (filed as Exhibit 10.8 to the Company's 1991 10-K).* 10.10(a) Agreement dated April 23, 1992 between AIC Financial Services, Inc. (an Alabama corporation), AIC Financial Services (a Mississippi corporation) and AIC Financial Services (a South Carolina corporation) (collectively, "Seller") and Norwest Financial Resources, Inc. (filed as Exhibit 10.10(a) to the 1992 10-K).* 10.10(b) Purchase Agreement between A.I.C. Financial Services, Inc., American Investment Bank, N.A., American Investment Financial and Terracor II d/b/a AIC Financial Fund, Seller, and Associates Financial Services Company, Inc., Buyer, dated November 5, 1992 (filed as Exhibit 10.10(b) to the Company's Registration Statement No. 33-55120).* 10.11(a) Agreement and Plan of Merger, dated as of October 22, 1992, by and among the Company, Phlcorp Acquisition Company and PHLCORP, Inc. (filed as Exhibit 5.2 to the Company's Current Report on Form 8-K dated October 22, 1992).* 10.11(b) Amendment dated December 10, 1992, to the Merger Agreement referred to in 10.11(a) above (filed as Exhibit 5.2 to the Company's Current Report on Form 8-K dated December 14, 1992).* 10.12(a) Agreement between Leucadia, Inc. and Ian M. Cumming, dated as of December 28, 1992 (filed as Exhibit 10.12(a) to the 1992 10-K).* 10.12(b) Escrow and Security Agreement by and among Leucadia, Inc., Ian M. Cumming and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1992 (filed as Exhibit 10.12(b) to the 1992 10-K).* 10.13(a) Agreement between Leucadia, Inc. and Joseph S. Steinberg, dated as of December 28, 1992 (filed as Exhibit 10.13(a) to the 1992 10-K).* _________________________ * Incorporated by reference. 40
Exhibit Exemption Number Description Indication ------ ----------- ---------- 10.13(b) Escrow and Security Agreement by and among Leucadia, Inc., Joseph S. Steinberg and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1992 (filed as Exhibit 10.13(b) to the 1992 10-K).* 10.14 Settlement Agreement between Baldwin-United Corporation and the United States dated August 27, 1985 concerning tax issues (filed as Exhibit 10.14 to the 1992 10-K).* 10.15 Acquisition Agreement, dated as of December 18, 1992, by and between Provident Mutual Life and Annuity Company of America and Colonial Penn Annuity and Life Insurance Company (filed as Exhibit 10.15 to the 1992 10-K).* 10.16 Reinsurance Agreement, dated as of December 31, 1991, by and between Colonial Penn Insurance Company and American International Insurance Company (filed as Exhibit 10.16 to the 1992 10-K).* 10.17 Agreement made as of December 28, 1993 by and between the Company and Ian M. Cumming (filed as Exhibit 10.17 to the 1993 10-K).* 10.18 Agreement made as of December 28, 1993 by and between the Company and Joseph S. Steinberg (filed as Exhibit 10.18 to the 1993 10-K).* 10.19(a) Agreement between the Company and Ian M. Cumming, dated as of December 28, 1993 (filed as Exhibit 10.19(a) to the 1993 10-K).* 10.19(b) Escrow and Security Agreement by and among the Company, Ian M. Cumming and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1993 (filed as Exhibit 10.19(b) to the 1993 10-K).* 10.20(a) Agreement between the Company and Joseph S. Steinberg, dated as of December 28, 1993 (filed as Exhibit 10.20(a) to the 1993 10-K).* 10.20(b) Escrow and Security Agreement by and among the Company, Joseph S. Steinberg and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1993 (filed as Exhibit 10.20(b) to the 1993 10-K).* 10.21 Deferred Compensation Agreement between the Company and Lawrence S. Hershfield, dated March 29, 1995 (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the Quarterly Period ended March 31, 1995).* 10.22(a) Agreement between the Company and Lawrence S. Hershfield, dated as of May 4, 1995 (filed as Exhibit 10.22(a) to the 1995 10-K).* _________________________ * Incorporated by reference. 41
Exhibit Exemption Number Description Indication ------ ----------- ---------- 10.22(b) Escrow and Security Agreement by and among the Company, Lawrence S. Hershfield and Weil, Gotshal & Manges, as escrow agent, dated as of May 4, 1995 (filed as Exhibit 10.22(b) to the 1995 10-K).* 10.23 Revolving Credit Agreement dated as of February 28, 1997, between the Company, The First National Bank of Boston as Administrative Agent, The Chase Manhattan Bank as Syndication Agent, Bank of America National Trust and Savings Association as Documentation Agent and the Banks signatory thereto. 21 Subsidiaries of the registrant. 23 Consent of independent accountants with respect to the incorporation by reference into the Company's Registration Statements on Form S-8 (File No. 2-84303), Form S-8 and S-3 (File No. 33-6054), Form S-8 and S-3 (File No. 33-26434), Form S-8 and S-3 (File No. 33-30277), Form S-8 (File No. 33-61682) and Form S-8 (File No. 33-61718). 27 Financial Data Schedule. _______________ * Incorporated by reference