Back to GetFilings.com
================================================================================
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, 1998
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 No.)
Incorporation or Organization)
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
7-3/4% SENIOR NOTES DUE AUGUST 15, 2013 NEW YORK STOCK EXCHANGE
8-1/4% SENIOR SUBORDINATED NOTES DUE
JUNE 15, 2005 NEW YORK STOCK EXCHANGE
7-7/8% SENIOR SUBORDINATED NOTES DUE
OCTOBER 15, 2006 NEW YORK STOCK EXCHANGE
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 [ ].
Aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant at March 12, 1999 (computed by reference to the
last reported closing sale price of the Common Stock on the New York Stock
Exchange on such date): $1,220,637,876.
On March 12, 1999, the registrant had outstanding 60,246,116 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
1999 annual meeting of shareholders of the registrant are incorporated by
reference into Part III of this Report.
================================================================================
NYFS04...:\30\76830\0146\347\FRM1129V.19N
PART I
Item 1. Business.
THE COMPANY
The Company is a diversified financial services holding company
principally engaged in personal and commercial lines of property and casualty
insurance, banking and lending, manufacturing and real estate activities. The
Company concentrates on return on investment and cash flow to build long-term
shareholder value, rather than emphasizing 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
$1,853,159,000 at December 31, 1998, equal to a book value per common share of
the Company (a "Common Share") of negative $.11 at December 31, 1978 and $29.90
at December 31, 1998.
In 1998, the Company announced that it was considering the payment of a
significant cash dividend. The Company has received a ruling from the Internal
Revenue Service providing that any gain realized on such a dividend (up to a
maximum of approximately $812,000,000) would be treated as a capital gain. The
Company anticipates that, prior to the date of its 1999 Annual Meeting scheduled
for May 5, 1999, its Board of Directors will declare a dividend in an aggregate
amount of approximately $812,000,000, minus amounts paid to repurchase Common
Shares from March 17, 1999 through the date of declaration. Payment of such
dividend would require the Company to make an offer to purchase all of its
outstanding 8-1/4% Senior Subordinated Debentures due 2005 and its 7-7/8% Senior
Subordinated Debentures due 2006, outstanding in the aggregate principal amount
of $235,000,000, at a purchase price of 101% of principal, plus accrued and
unpaid interest thereon pursuant to the terms of the indentures governing these
Debentures. These offers would be required to be made within five business days
after the payment of such dividend, unless the terms of the Debentures can be
modified on terms that are acceptable to the Company.
As of December 31, 1998, the Company owned 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, workers' compensation
insurance and banking in Argentina. During 1998, the Company's previously
announced agreement to sell substantially all of its interest in Caja to its
Argentine partner was restructured. In March 1999, the Company sold all of its
interest in Caja to Assicurazioni Generali Group, an Italian insurance company,
for $126,000,000 in cash and a $40,000,000 collateralized note maturing April
2001 from its Argentine partner. The Company will record a pre-tax gain of
approximately $120,000,000 in its first quarter 1999 results of operations in
connection with this transaction.
In February 1999, the Company sold its entire interest in its Russian
joint venture to its joint venture partner, PepsiCo, Inc. for consideration of
approximately $39,190,000. Although the Company will recognize a pre-tax gain of
approximately $29,545,000 in the first quarter 1999 results of operations, when
combined with the Company's share of the joint venture's losses since inception,
the Company's net loss from this investment is approximately $40,310,000. For
more information concerning this transaction, see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of
this Report.
In February 1999, the Company sold its wholly-owned subsidiary, The Sperry
and Hutchinson Company, Inc. (through which the Company had conducted a trading
stamps business) and will reflect a pre-tax gain of approximately $19,000,000 in
its first quarter 1999 results of operations.
In the fourth quarter of 1998, the Company acquired a 95.4% interest in
Fidei S.A., a French company listed on the Paris Stock Exchange that is engaged
directly and through subsidiaries in real estate activities, for approximately
$62,300,000. In connection with this acquisition, the Company entered into
currency swap agreements to hedge approximately $55,000,000 of its foreign
currency exposure.
In September 1998, the Company reinsured substantially all of its life
insurance business to Allstate Life Insurance Company ("Allstate") and a
subsidiary thereof in an indemnity reinsurance transaction (the "Reinsurance
Transaction"). In December 1998, the Company agreed to sell its life insurance
subsidiaries, Charter National Life Insurance Company ("Charter") and
Intramerica Life Insurance Company ("Intramerica"), to Allstate. Consummation of
this transaction, which is expected to occur in the second quarter of 1999, is
subject to regulatory approval and the satisfaction of certain other conditions.
The transaction is expected to result in a pre-tax gain of approximately
$20,000,000, principally resulting from the recognition of deferred gains from
prior reinsurance transactions. The consolidated financial statements of the
Company included in this Report reflect the life insurance operations as
discontinued operations and the consolidated financial statements for prior
periods have been restated to be consistent with such presentation.
In 1998, the Company declared a special pro rata dividend to shareholders
of record on August 25, 1998 relating to the stock of HomeFed Corporation
("HomeFed"), a publicly held real estate development company. For additional
information concerning this dividend, see Item 5, "Market for Registrant's
Common Equity and Related Stockholder Matters" of this Report.
The Company's insurance operations consist of personal and commercial
property and casualty insurance primarily conducted through Empire Insurance
Company ("Empire") and Allcity Insurance Company ("Allcity"). For the year ended
December 31, 1998, these insurance operations accounted for 57% of the Company's
revenues from continuing operations and at December 31, 1998, 25% of the
Company's assets.
The Company's insurance operations have a diversified investment portfolio
of securities, of which approximately 84% 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").
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"). The Company's
principal lending activities consist of providing collateralized personal
automobile loans to individuals with poor credit histories.
The Company's manufacturing operations manufacture and market plastic
netting used for a variety of purposes including, among other things,
construction, agriculture, packaging, carpet padding and filtration.
The Company and certain of its subsidiaries have 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.
2
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), which requires a "management" approach for segment disclosure. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. SFAS 131 also requires disclosures
about products and services, geographic areas and major customers. The Company's
reportable segments consist of its operating units, which offer different
products and services and are managed separately. These reportable segments are:
property and casualty insurance, banking and lending, manufacturing and other
operations. The property and casualty insurance operations provide personal and
commercial lines of insurance primarily to niche markets in the New York
metropolitan area. The banking and lending operations principally make
collateralized personal automobile instalment loans to individuals who have
difficulty obtaining credit, at interest rates above those charged to
individuals with good credit histories. Such loans are primarily funded by
deposits insured by the FDIC. The manufacturing operations manufacture and
market proprietary plastic netting used for a variety of purposes. Other
operations primarily consist of real estate activities. Associated companies
consists of entities which the Company does not control but has the ability to
exercise significant influence over and which are accounted for on the equity
method of accounting. The information in the following tables for corporate
assets primarily consists of investments, notes receivable from the sale of
certain businesses and cash and cash equivalents. Corporate revenues primarily
consist of investment income on the above corporate assets. Corporate assets,
revenues, overhead expenses and interest expense are not allocated to the
operating units. The Company's business is conducted principally in the United
States; foreign operations and investments have not been material.
Certain information concerning the Company's segments for 1998, 1997 and
1996 is presented in the following table.
1998 1997 1996
---- ---- ----
(In millions)
Revenues:
- ---------
Property and Casualty Insurance $ 299.8 $ 363.2 $ 419.4
Banking and Lending 46.0 45.8 55.1
Manufacturing 56.6 133.7 148.4
Other Operations 69.9 102.0 55.8
------- ------- -------
Total revenue for reportable segments 472.3 644.7 678.7
Equity in Associated Companies 23.3 (56.5) (33.6)
Corporate (a) 34.9 42.5 25.3
------- ------- -------
Total consolidated revenues $ 530.5 $ 630.7 $ 670.4
======= ======= =======
3
1998 1997 1996
---- ---- ----
(In millions)
Income (loss) from continuing operations
before income taxes, minority expense of
trust preferred securities and
extraordinary loss:
- ----------------------------------------
Property and Casualty Insurance $ (7.9) $ 4.1 $ 22.4
Banking and Lending 13.9 5.8 14.5
Manufacturing 10.1 .3 .4
Other Operations 22.8 57.3 (1.3)
------- ------- -------
Total income (loss) from continuing
operations before income taxes,
minority expense of trust preferred
securities and extraordinary loss
for reportable segments 38.9 67.5 36.0
Equity in Associated Companies 23.3 (56.5) (33.6)
Corporate (a) (32.8) (35.2) (50.6)
-------- -------- --------
Total consolidated income (loss) from
continuing operations before income
taxes, minority expense of trust
preferred securities and
extraordinary loss $ 29.4 $ (24.2) $ (48.2)
======= ======= =======
Identifiable assets employed:
- -----------------------------
Property and Casualty Insurance $ 990.1 $1,047.8 $1,082.5
Banking and Lending 269.3 265.1 291.3
Manufacturing 41.8 45.4 68.7
Other Operations 673.6 170.0 218.9
-------- -------- --------
Total assets of reportable
segments 1,974.8 1,528.3 1,661.4
Investments in Associated Companies 172.4 207.9 202.5
Net Assets of Discontinued
Operations 45.0 71.9 596.1
Corporate 1,766.8 1,937.2 315.6
-------- -------- --------
Total consolidated assets $3,959.0 $3,745.3 $2,775.6
======== ======== ========
- ------------------
(a) Includes securities losses relating to the writedown of investments in
Russian and Polish securities, as described in Item 7, "Management's
Discussion and Analysis of Financial Condition and Operations" of this
Report.
At December 31, 1998, the Company and its consolidated subsidiaries had
1,391 full-time employees.
4
PROPERTY AND CASUALTY INSURANCE
General
The Company's principal property and casualty insurance operations are
conducted through the Empire Group, which consists of Empire and Allcity. The
Empire Group specializes in personal and commercial property and casualty
insurance business primarily in the New York metropolitan area. The Empire Group
provides personal automobile and homeowners insurance and commercial insurance
coverage for vehicles (including medallion and radio-controlled livery
vehicles), multi-family residential real estate, workers' compensation and
various other business classes. The Empire Group is rated "B+" (very good) by
A.M. Best Company ("Best") and rated "BBB+" (good) by S&P. As with all ratings,
Best and S&P ratings are subject to change at any time.
In 1998, a new president and chief executive officer was named at the
Empire Group and, effective in 1999, the business was reorganized into three
divisions: the Small Business Division, the Personal Lines and Residual Market
Division, and the Mid-Market Division. Each of these divisions has separate
management teams responsible for all marketing, sales and underwriting decisions
within their divisions. The reorganization is designed to provide a greater
degree of accountability for underwriting results and to create a closer
relationship with agents and customers of the Empire Group. The Small Business
Division will primarily focus on commercial package products for small
businesses; the Personal Lines and Residual Market Division will primarily
concentrate on personal automobile and homeowners insurance; and the Mid-Market
Division will focus on commercial auto, commercial package and workers'
compensation insurance for larger accounts.
For the years ended December 31, 1998, 1997 and 1996, net earned premiums
for the Empire Group were $228,600,000, $275,000,000 and $326,400,000,
respectively. The decline in the Empire Group's net earned premiums is primarily
due to the continuing reduction in the assigned risk business and reductions in
certain commercial lines. During the year ended December 31, 1998, approximately
56%, 30% and 14% of net earned premiums of the Empire Group were derived from
personal and commercial automobile lines, other commercial lines and other
personal lines, 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 most lines of insurance that may be written by a property and
casualty insurer. The Empire Group is also licensed to write insurance in
Connecticut, Massachusetts, Missouri, New Hampshire and New Jersey.
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
seven general agents, one of which is owned by Empire, and approximately 379
local agents and insurance brokers presently acting under agreements with the
Empire Group. These agents and brokers also represent other competing insurance
companies. The Empire Group's owned general agent is its largest producer and
generated approximately 12% of its total premium volume for the year ended
December 31, 1998.
The Empire Group has acquired blocks of assigned risk business from other
insurance companies (the "service business") relating to private passenger and
commercial automobile insurance. These contractual arrangements, which are
negotiated for one or two year periods, provide for fees paid to the Empire
Group within parameters established by the New York Insurance Department.
On a quarterly basis, the Empire Group reviews and adjusts its estimated
loss reserves for any changes in trends and actual loss experience. Included in
the Empire Group's results for 1998 was approximately $42,000,000 for reserve
strengthening related to losses from prior accident years. The Empire Group will
5
continue to evaluate the adequacy of its loss reserves and record future
adjustments to its loss reserves as appropriate. Beginning in 1996, the Empire
Group has taken certain steps to improve its operations, including systems
enhancements and actions relating to pricing and improved underwriting and
claims handling; these efforts have continued into 1999. In addition, the Empire
Group may initiate additional changes in the future. The Company believes that
the results of these efforts taken to date will not be known for some time,
given the nature of the property and casualty insurance business and the
inherently long period of time involved in settling claims.
Set forth below is certain statistical information for the Empire Group
prepared in accordance with generally accepted accounting principles ("GAAP")
and statutory accounting principles ("SAP"). The Loss Ratio is the ratio of net
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.
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
---- ---- ----
Loss Ratio:
GAAP 102.6% 100.3% 92.1%
SAP 102.6% 100.3% 89.5%
Industry (SAP) (a) N/A 72.8% 78.4%
Expense Ratio:
GAAP 26.7% 18.2% 22.6%
SAP 31.4% 17.5% 18.4%
Industry (SAP) (a) N/A 28.8% 27.4%
Combined Ratio (b):
GAAP 129.3% 118.5% 114.7%
SAP 134.0% 117.8% 107.9%
Industry (SAP) (a) N/A 101.6% 105.8%
- ---------------
(a) Source: Best's Aggregates & Averages, Property/Casualty, 1998 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 1998, the difference in the accounting treatment for curtailment
gains relating to defined benefit pension plans was the principal reason
for the difference between the GAAP Combined Ratio and the SAP Combined
Ratio. For 1996, 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 for all three years, the difference relates to the
accounting for certain costs which are treated differently under SAP and
GAAP. For further information about the Empire Group's Combined Ratios,
see Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations," of this Report.
6
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 Empire Group relies 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 Empire
Group is reconciled for each of the three years ended December 31, 1998.
Included therein are current year data and prior year development.
7
RECONCILIATION OF LIABILITY FOR LOSSES AND
LOSS ADJUSTMENT EXPENSES
1998 1997 1996
---- ---- ----
(In thousands)
Net SAP liability for losses
and LAE at beginning of year $487,116 $481,138 $476,692
-------- --------- --------
Provision for losses and
LAE for claims occurring
in the current year 191,482 248,408 271,633
Increase in estimated
losses and LAE for
claims occurring in
prior years 42,290 27,027 28,183
-------- --------- --------
Total incurred losses
and LAE 233,772 275,435 299,816
-------- --------- --------
Losses and LAE payments for claims
occurring during:
Current year 64,739 80,149 93,036
Prior years 186,831 189,308 202,334
-------- --------- --------
251,570 269,457 295,370
-------- --------- --------
Net SAP liability for losses and
LAE at end of year 469,318 487,116 481,138
Reinsurance
recoverable 72,956 58,592 51,181
-------- --------- --------
Liability for losses and
LAE at end of year as
reported in financial
statements (GAAP) $542,274 $545,708 $532,319
======== ========= ========
The following table presents the development of balance sheet liabilities
from 1988 through 1998 for the Empire Group. The liability line at the top of
the table indicates the estimated liability for unpaid losses and LAE recorded
as of the dates indicated. The middle 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 1988 liability
estimate indicated on the table of $222,814,000 has been
8
re-estimated during the course of the succeeding ten years, resulting in a
re-estimated liability at December 31, 1998 of $210,837,000, or a redundancy of
$11,977,000. If the re-estimated liability exceeded the liability initially
established, a cumulative deficiency would be indicated.
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 1992, but incurred in 1988, will be
included in the cumulative redundancy (deficiency) amount for 1988, 1989, 1990
and 1991. 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 Empire Group's loss development experience,
see Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of this Report.
9
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
Year Ended December 31,
--------------------------------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(In thousands)
Liability
for Unpaid
Losses and Loss
Adjustment
Expenses $222,814 $235,223 $251,401 $280,679 $322,516 $353,917 $ 406,695 $ 476,692 $481,138 $487,116 $469,318
Liability
Re-estimated
as of:
One Year Later $213,671 $227,832 $249,492 $280,020 $321,954 $344,156 $ 441,165 $ 504,875 $508,165 $529,406 $ -
Two Years Later 206,088 217,432 245,141 277,866 324,262 374,158 467,659 537,372 546,724
Three Years Later 198,500 212,649 243,849 284,052 345,576 394,418 500,286 577,266
Four Years Later 194,324 211,859 247,314 296,484 361,903 415,251 534,014
Five Years Later 196,070 211,952 255,045 306,094 377,097 442,696
Six Years Later 196,646 216,545 260,031 316,887 395,291
Seven Years Later 199,502 219,786 265,525 330,866
Eight Years Later 201,600 222,556 277,626
Nine Years Later 202,989 231,152
Ten Years Later 210,837
Cumulative
Redundancy
(Deficiency) $ 11,977 $ 4,071 $(26,225) $(50,187) $(72,775) $(88,779) $(127,319)$(100,574) $(65,586) $(42,290) $ -
======== ======== ======== ======== ======== ======== ========= ========= ======== ======== ========
Cumulative
Amount of
Liability Paid
Through:
One Year Later $ 64,140 $ 65,822 $ 78,954 $ 89,559 $113,226 $116,986 $ 152,904 $ 202,334 $189,308 $186,831 $ -
Two Years Later 101,206 109,479 126,908 150,043 182,250 199,214 270,020 318,693 314,755
Three Years Later 131,705 140,916 167,330 197,848 239,092 272,513 353,649 407,833
Four Years Later 152,330 166,023 196,099 233,244 285,880 326,637 415,919
Five Years Later 168,117 182,001 216,749 259,946 320,044 363,873
Six Years Later 178,095 193,943 231,892 279,682 341,636
Seven Years Later 185,310 203,169 242,275 293,860
Eight Years Later 191,292 209,115 253,104
Nine Years Later 194,965 214,687
Ten Years Later 198,618
Gross Liability -
End of Year $ 391,829 $ 451,442 $ 517,422 $532,319 $545,708 $542,274
Reinsurance 37,912 44,747 40,730 51,181 58,592 72,956
--------- --------- --------- -------- -------- --------
Net Liability -
End of Year as
Shown Above $ 353,917 $ 406,695 $ 476,692 $481,138 $487,116 $469,318
========= ========= ========= ======== ======== ========
Gross Re-estimated
Liability - Latest $ 514,882 $ 605,549 $ 649,486 $623,588 $592,063
Re-estimated
Reinsurance - Latest 72,186 71,535 72,220 76,864 62,657
--------- --------- --------- -------- --------
Net Re-estimated
Liability - Latest $ 442,696 $ 534,014 $ 577,266 $546,724 $529,406
========= ========= ========= ======== ========
Gross Cumulative
(Deficiency) $(123,053) $(154,107) $(132,064) $(91,269) $(46,355)
========= ========= ========= ======== ========
10
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 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, 1998 and 1997 was as follows:
1998 1997
---- ----
(Dollars in thousands)
Bonds and notes:
U.S. Government and agencies 76% 87%
Rated investment grade 8 11
Non rated - other 4 1
Rated less than investment grade - -
Equity securities, primarily preferred 10 -
Other, principally accrued interest 2 1
--- ---
Total 100% 100%
=== ===
Estimated average yield to maturity
of bonds and notes (a) 5.3% 6.1%
Estimated average remaining
life of bonds and notes (a) 3.3 yrs. 3.5 yrs.
Carrying value of investment portfolio $748,818 $869,073
Market value of investment portfolio $749,147 $869,232
- -------------------------
(a) Excludes trading securities, which are not significant.
Reinsurance
The Empire Group's maximum retained limit was $500,000 for workers'
compensation; for other property and casualty lines, the Empire Group's maximum
retained limit was $300,000 for 1998, 1997 and 1996. Additionally, the Empire
Group has entered into certain excess of loss and catastrophe treaties to
protect against certain losses. The Empire Group's retention of lower level
losses in such treaties is $7,500,000 for 1999, and was $7,500,000 for 1998,
$5,000,000 for 1997 and $3,000,000 for 1996.
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) American
Re-Insurance Company (A++), General Reinsurance Corporation (A++) and Zurich
Reinsurance (North America), Inc. (A). The Company has reinsured substantially
all of its discontinued life insurance operations pursuant to the Reinsurance
Transaction with Allstate and certain other transactions. As mentioned above,
the Company has agreed to sell its remaining life insurance subsidiaries to
Allstate, and expects to close this sale in the second quarter of 1999. 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
11
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 unendorsed, which may give these other companies a
competitive advantage. Federal administrative, legislative and judicial activity
may result in changes to federal banking laws that increase the ability of
national banks to offer 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, product design,
product mix and financial stability. The industry has historically been cyclical
in nature, with periods of less intense price competition 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. In addition, the Company is experiencing increased competition
from low cost insurance providers that write personal lines business on a direct
response basis through direct mail and telemarketing. 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.
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. 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. The Company's continuing insurance operations' RBC
ratio as of December 31, 1998 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. While
the Company's continuing insurance operations had certain "other than normal"
NAIC ratios for the year ended December 31, 1998, 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.
12
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
The Company's banking and lending operations principally are conducted
through American Investment Bank, N.A. ("AIB"), a 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 $189,782,000 and
$198,582,000 at December 31, 1998 and 1997, respectively. AIB and AIF currently
have several deposit-taking and lending facilities in the Salt Lake City area.
The funds generated by the deposits are primarily used to fund consumer
instalment loans.
The Company's consolidated banking and lending operations had outstanding
loans (net of unearned finance charges) of $185,183,000 and $202,938,000 at
December 31, 1998 and 1997, respectively. At December 31, 1998, 76% were loans
to individuals generally collateralized by automobiles; 12% were instalment
loans to consumers, substantially all of which were collateralized by real or
personal property; 5% were unsecured loans to individuals acquired from others
in connection with investments in limited partnerships; 4% were unsecured loans
to executives and professionals, generally with good credit histories; and 3%
were loans to small businesses.
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, 1998, the allowance for loan losses for the Company's entire loan
portfolio was $9,398,000 or 5.1% of the net outstanding loans, compared to
$10,199,000 or 5% of net outstanding loans at December 31, 1997.
Collateralized personal automobile instalment loans are made to
individuals who have difficulty obtaining credit, 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, 1998, the Company generated $146,085,000 of these loans ($72,848,000 during
1998). Due in part to the recent failures of some of the Company's competitors,
the Company has been able to increase its new loan volume at acceptable risk
levels. In addition, during 1998 the Company purchased a $36,900,000 portfolio
of such loans. The Company intends to continue to acquire additional portfolios
of such loans that meet the Company's underwriting standards if they can be
purchased on attractive terms. During 1998, AIB and AIF sold substantially all
of their executive and professional loan portfolios for aggregate proceeds of
$89,500,000.
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.
13
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
Through its plastics division, the Company manufactures and markets
proprietary plastic netting used for a variety of purposes including, among
other things, construction, agriculture, packaging, carpet padding and
filtration. The plastics division markets its products both domestically and
internationally, with approximately 13% of its 1998 sales exported to Europe,
Latin America, Japan and Australia. New product development focuses on niches
where the division's proprietary technology and expertise can lead to
sustainable competitive economic advantages. For the years ended December 31,
1998, 1997 and 1996, the plastics division's revenues were approximately
$56,600,000, $50,900,000 and $47,600,000, respectively.
The plastics division is subject to domestic and international
competition, generally on the basis of price, service and quality. Additionally,
certain products are dependent on cyclical industries, including the
construction industry. 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 the plastics division.
OTHER OPERATIONS
The Company has a 90% interest in two operating wineries, Pine Ridge
Winery in Napa Valley, California and Archery Summit in the Willamette Valley of
Oregon. Pine Ridge, which was acquired in 1991, has been an operating winery
since 1981, while Archery Summit was started by the Company in 1993. These
wineries produce and sell super-ultra-premium wines. During 1998, the wineries
sold approximately 62,000 9-liter equivalent cases of wine generating revenues
of approximately $8,987,000. Since acquisition, the Company's investment in
winery operations has grown, principally to fund the Company's acquisition of
land for vineyard development and to increase production capacity and storage
facilities at both of the wineries. It can take up to five years for a new
vineyard property to reach full production and, depending upon the varietal
produced, up to an additional two years before the wine can be sold. At December
31, 1998, the Company's combined investment in these wineries was approximately
$49,000,000.
At December 31, 1998, the carrying value of the Company's real estate
investments totaled $397,404,000. Of such amount, approximately $245,870,000
consists of real estate assets held by the Company's 95.4% French subsidiary,
Fidei. These assets consisted of 150 buildings (primarily office buildings
located in Paris, France and its environs) totaling more than 3,500,000 square
feet of space. The Company acquired Fidei to maximize its value by marketing all
of its real estate holdings for sale. The remainder of the Company's real estate
investments consist of a variety of domestic projects, some of which are in the
process of development and all of which are available for sale. Included in the
Company's domestic real estate is an office complex located on Capitol Hill in
Washington, D.C. This complex consists of two office buildings with a total of
630,000 square feet of rentable office and retail space and two underground
garages. A comprehensive renovation upgrade to the building is in process. The
D.C. Government has signed a ten year lease for the
14
space and full occupancy is anticipated in the second quarter of 1999. At
December 31, 1998, the Company's investment in this complex had a carrying value
of $60,200,000.
OTHER 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, 1998: Carmike Cinemas, Inc. ("Carmike") (approximately 6% of Class
A shares), GFSI Holdings, Inc. ("GFSI") (approximately 6%), Jordan Industries,
Inc. ("JII") (approximately 10%) , Jordan Telecommunications Products, Inc.
("JTP") (approximately 10%) and MK Gold Company ("MK Gold") (approximately 46%).
During 1998, the Company's previously announced agreement to sell
substantially all of its interest in Caja to its Argentine partner was
restructured, and in March 1999, the Company sold all of its interest in Caja to
Assicurazioni Generali Group for $126,000,000 in cash and a $40,000,000
collateralized note maturing April 2001 from its Argentine partner. The Company
will record a pre-tax gain of approximately $120,000,000 in its first quarter
1999 results of operations in connection with this transaction.
A subsidiary of the Company is an owner in The Jordan Company LLC and
Jordan/Zalaznick Capital Company. These entities each specialize in structuring
leveraged buyouts in which the owners are given the opportunity to become equity
participants. Since 1982, the Company has invested an aggregate of $68,021,000
in these entities and related companies and, through December 31, 1998, has
received $104,456,000 (including cash, interest bearing notes and other
receivables) relating to the disposition of investments and management and other
fees. At December 31, 1998, through these entities, the Company had interests in
JII, JTP, Carmike, GFSI and a total of 21 other companies, which in total are
carried in the Company's consolidated financial statements at $27,564,000.
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 two offices in Salt Lake City, Utah used for corporate and banking
and lending activities (totaling approximately 77,000 sq. ft.). In addition, a
subsidiary of the Company owns a facility (totaling approximately 158,500 sq.
ft.) primarily used for manufacturing located in Georgia.
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.
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.
15
On May 13, 1997, Pinnacle filed a purported derivative complaint in New
York State Supreme Court. The action, entitled Pinnacle Consultants, Ltd. v.
Leucadia National Corp., et al. (no. 602470/97), is substantially similar to the
federal court complaint that was dismissed in 1996. Pinnacle has alleged claims
for fraud, waste, breach of fiduciary duty and conversion against the same
current and former Leucadia directors who were named as defendants in the
federal court action. Defendants' motion to dismiss was granted in part and
denied in part. This decision is being appealed to the Appellate Division, First
Department, by Pinnacle and the defendants. The appeal remains sub judice.
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.
16
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 12, 1999, 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 58 Chairman of the Board June 1978
Joseph S. Steinberg 55 President January 1979
Thomas E. Mara 53 Executive Vice President May 1980;
and Treasurer January 1993
Joseph A. Orlando 43 Vice President and January 1994;
Chief Financial Officer April 1996
Barbara L. Lowenthal 44 Vice President and April 1996
Comptroller
Paul J. Borden 50 Vice President August 1988
Mark Hornstein 51 Vice President July 1983
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, as a director of JII since June 1988, and as a director of HomeFed, a
California real estate developer, since August 1998.
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. In addition, he served as a director of
Allcity since October 1998.
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.
Mr. Borden has served as a director of HomeFed since May 1998.
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.
17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) Market Information.
The Common Shares of the Company 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.
COMMON SHARE
------------
HIGH LOW
---- ---
1997
----
First Quarter $29.00 $25.75
Second Quarter 31.88 27.38
Third Quarter 34.75 31.00
Fourth Quarter 36.63 33.00
1998
----
First Quarter $41.13 $33.56
Second Quarter 40.13 32.81
Third Quarter 34.75 27.63
Fourth Quarter 32.38 26.25
1999
----
First Quarter (through March 12, 1999) $33.06 $29.50
(b) Holders.
As of March 12, 1999, there were approximately 3,685 record holders of the
Common Shares.
(c) Dividends.
The Company paid a cash dividend of $.25 per Common Share on December 31,
1997. 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.
The HomeFed Dividend. The Company acquired a 41.2% interest in HomeFed in
1995. HomeFed is a publicly traded real estate development company (OTC
(Non-NASDAQ): "HFDC") with its principal office at 1903 Wright Place, Suite 220,
Carlsbad, California 92008 (telephone number 706-918-8200).
In 1998, the Company distributed to its shareholders of record on August
25, 1998 (the "HomeFed Dividend Holders") a pro rata dividend of all of the
beneficial interests in a trust that holds 41.2% of the common stock of HomeFed
and contracts to increase that ownership to 89.6% of HomeFed. This dividend
resulted in 1998 dividend income to the HomeFed Dividend Holders of $.1426 for
each Common Share of the Company held on August 25, 1998, even though no
physical distribution was made because the trust interests are uncertificated. A
Form 1099-DIV was sent to HomeFed Dividend Holders reflecting this distribution.
18
The Company anticipates that, following effectiveness of a registration
statement to be filed with respect to the HomeFed shares, the HomeFed Dividend
Holders will receive 1.0 share of HomeFed common stock for each 1.26 Common
Shares of the Company owned of record on August 25, 1998. The Company expects
that the distribution of HomeFed securities will be made in the third quarter of
1999.
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. The Company's regulated subsidiaries are
restricted in the amount of distributions that can be made to the Company
without regulatory approval. For further information see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in this Report.
19
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 Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," of this Report.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except per share amounts)
SELECTED INCOME STATEMENT DATA:
Revenues $530,506 $630,737 $670,443 $753,999 $646,380
Net securities gains (losses) (60,871) 3,249 24,117 15,101 (7,239)
Interest expense (a) 45,139 46,007 53,599 52,538 43,751
Insurance losses, policy benefits and
amortization of deferred acquisition costs 279,110 327,468 355,148 364,957 292,872
Income (loss) from continuing operations
before income taxes, minority expense of
trust preferred securities and extraordinary loss 29,377 (24,238) (48,187) 10,286 (11,477)
Income (loss) from continuing operations
before minority expense of trust preferred
securities and extraordinary loss 54,450 (14,347) (28,861) 24,203 (3,731)
Minority expense of trust preferred securities,
net of taxes (8,248) (7,942) - - -
Income (loss) from continuing operations
before extraordinary loss 46,202 (22,289) (28,861) 24,203 (3,731)
Income from discontinued operations, including
gain on sale, net of taxes 8,141 686,161 84,376 83,300 74,567
Extraordinary loss from early
extinguishment of debt, net of taxes - (2,057) (6,838) - -
Net income 54,343 661,815 48,677 107,503 70,836
Per share:
Basic earnings (loss) per common share:
Income (loss) from continuing operations
before extraordinary loss $.73 $ (.36) $(.48) $ .42 $(.07)
Income from discontinued operations, including
gain on sale .13 11.03 1.40 1.45 1.33
Extraordinary loss - (.03) (.11) - -
---- ------ ----- ----- -----
Net income $.86 $10.64 $ .81 $1.87 $1.26
==== ====== ===== ===== =====
Diluted earnings (loss) per common share:
Income (loss) from continuing operations
before extraordinary loss $.73 $ (.36) $(.48) $ .41 $(.07)
Income from discontinued operations, including .13 11.03 1.40 1.40 1.33
gain on sale
Extraordinary loss - (.03) (.11) - -
---- ------ ----- ----- -----
Net income $.86 $10.64 $ .81 $1.81 $1.26
==== ====== ===== ===== =====
AT DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except per share amounts)
SELECTED BALANCE SHEET DATA:
Cash and investments $2,229,895 $2,453,555 $1,246,220 $1,250,746 $ 940,993
Total assets 3,958,951 3,745,336 2,776,591 2,766,501 2,343,295
Debt, including current maturities 722,601 352,872 520,263 513,810 422,166
Customer banking deposits 189,782 198,582 209,261 203,061 179,888
Common shareholders' equity 1,853,159 1,863,531 1,118,107 1,111,491 881,815
Book value per common share $29.90 $29.17 $18.51 $18.47 $15.72
Cash dividends per common share $ - $ .25 $ .25 $ .25 $ .13
20
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
SELECTED INFORMATION ON PROPERTY AND
CASUALTY INSURANCE OPERATIONS (Unaudited): (b)
GAAP Combined Ratio 129.3% 118.5% 114.7% 113.0% 103.5%
SAP Combined Ratio 134.0% 117.8% 107.9% 107.4% 101.3%
Industry SAP Combined Ratio (c) N/A 101.6% 105.8% 106.4% 108.4%
Premium to Surplus Ratio (d) 1.2x 1.4x 1.8x 2.2x 2.3x
- ---------------------
(a) Includes interest on customer banking deposits.
(b) The Combined Ratio does not reflect the effect of investment income. For
1998, the difference in the accounting treatment for curtailment gains
relating to the defined benefit pension plans was the principal reason for
the difference between the GAAP Combined Ratio and the SAP Combined Ratio.
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 1998, 1997 and 1996, the difference relates to the
accounting for certain costs which are treated differently under SAP and
GAAP.
(c) Source: Best's Aggregates & Averages, Property/Casualty, 1998 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.
(d) Premium to Surplus Ratio was calculated by dividing statutory property and
casualty insurance premiums written by statutory capital at the end of the
year.
21
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 and
cash and liquid investments. 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. As of
December 31, 1998, the Company's cash, cash equivalents and marketable
securities, excluding those amounts held by its regulated subsidiaries and
collateralizing letters of credit, totaled approximately $1,219,000,000. In
addition, the book value of the principal amount of promissory notes received
from Conseco, Inc. upon the 1997 sale of the Colonial Penn Life Group was
$400,000,000 at December 31, 1998.
In 1998, the Company announced that it was considering the payment of a
significant cash dividend. The Company has received a ruling from the Internal
Revenue Service providing that any gain realized on such a dividend (up to a
maximum of approximately $812,000,000) would be treated as a capital gain. The
Company anticipates that, prior to the date of its 1999 Annual Meeting scheduled
for May 5, 1999, its Board of Directors will declare a dividend in an aggregate
amount of approximately $812,000,000, minus amounts paid to repurchase Common
Shares from March 17, 1999 through the date of declaration. Payment of such
dividend would require the Company to make an offer to purchase all of its
outstanding 8-1/4% Senior Subordinated Debentures due 2005 and its 7-7/8% Senior
Subordinated Debentures due 2006, outstanding in the aggregate principal amount
of $235,000,000, at a purchase price of 101% of principal, plus accrued and
unpaid interest thereon pursuant to the terms of the indentures governing these
Debentures. These offers would be required to be made within five business days
after the payment of such dividend, unless the terms of the Debentures can be
modified on terms that are acceptable to the Company.
Except for the Euro denominated debt of Fidei, which is described below,
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 from banks through
various credit agreement facilities and through public financings. The Company
borrowed $62,300,000 under its $100,000,000 bank credit facility to fund the
purchase price of Fidei, including expenses. In addition, the Company entered
into currency swap agreements to hedge approximately $55,000,000 of its foreign
currency exposure. The counterparties to these currency swap agreements are
major financial institutions, which management believes are able to fulfill
their obligations. The swap agreements mature in tranches in March 2000 and
September 2001. At December 31, 1998, $65,500,000 was outstanding under the bank
credit facility.
22
During 1998, the Company's Board of Directors increased to 6,000,000 the
maximum number of its Common Shares that the Company is authorized to purchase.
Through December 31, 1998, the Company repurchased in the open market 1,996,400
Common Shares for an aggregate cost of approximately $58,071,000. From January
1, 1999 through March 12, 1999, the Company acquired 1,738,570 Common Shares for
an aggregate cost of approximately $52,119,000. As a result, as of March 13,
1999, the Company is authorized to repurchase 3,788,717 Common Shares.
At December 31, 1998, a maximum of approximately $25,200,000 was available
to the Parent as dividends from its regulated subsidiaries without regulatory
approval. Additional amounts may be available to the Parent in the form of loans
or cash advances from regulated subsidiaries, although no amounts were
outstanding at December 31, 1998 or borrowed to date in 1999. There are no
restrictions on distributions from the non-regulated subsidiaries. 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 has been substantially less than
tax sharing payments received from its subsidiaries. Payments from regulated
subsidiaries for dividends, tax sharing payments and other services totaled
approximately $1,295,600,000 (including $1,230,000,000 relating to the sales of
the Colonial Penn companies in 1997) for the year ended December 31, 1998.
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 S&P and Duff & Phelps Inc. Ratings issued by bond rating
agencies are subject to change at any time.
Consolidated Liquidity
In 1998, net cash was used for operations, principally to purchase
investments classified as trading and for the payment of income taxes, partially
offset by the repayment of the Company's bridge financing to PIB, its Russian
joint venture described below. In 1997, net cash was used for operations
principally to fund the Company's capital commitments and bridge financing to
PIB, and for the purchase of investments classified as trading.
In December 1998, a subsidiary of the Company repurchased for $42,200,000
plus accrued interest, $51,800,000 liquidation amount of 8.65% trust issued
preferred securities of Leucadia Capital Trust I, a wholly-owned subsidiary of
the Company. The difference between the book value and the amount paid was
credited directly to shareholders' equity.
During 1998, the Company's previously announced agreement to sell
substantially all of its interest in Caja to its Argentine partner was
restructured and, in March 1999, the Company sold all of its interest in Caja to
Assicurazioni Generali Group, an Italian insurance company, for $126,000,000 in
cash and a $40,000,000 collateralized note maturing April 2001 from its
Argentine partner. The Company will record a pre-tax gain of approximately
$120,000,000 in its first quarter 1999 results of operations in connection with
this transaction.
In September 1998, the Company reinsured, retroactive to January 1, 1998,
substantially all of its remaining life insurance business to Allstate and a
subsidiary thereof in an indemnity reinsurance transaction. While the premium
received on this transaction was approximately $28,675,000, the gain on the
reinsurance transaction was deferred and is being amortized into income based
upon actuarial estimates of the premium revenue of the underlying insurance
contracts. In December 1998, the Company signed an agreement to sell its
23
remaining life insurance subsidiaries, Charter and Intramerica, to Allstate for
statutory surplus at the date of sale (approximately $62,200,000 at December 31,
1998), plus $3,575,000. The transaction is expected to result in a pre-tax gain
of approximately $20,000,000, principally resulting from recognition of deferred
gains from prior reinsurance transactions (including the September 1998 Allstate
transaction described above). The transaction is subject to regulatory approvals
and customary closing conditions and is expected to close in the second quarter
of 1999.
As of December 31, 1998, the Company's consolidated debt was $722,601,000
as compared to $352,872,000 as of December 31, 1997. This increase is primarily
related to the Company's acquisition of 95.4% of Fidei in 1998. At December 31,
1998, the principal amount of Fidei's Euro denominated outstanding debt, all of
which is non-recourse to the Company, was approximately $249,400,000
(approximately 213,656,000 Euros). Inasmuch as Fidei's Euro demoninated assets
will be sold over time and such assets are presently funded with Fidei's Euro
demoninated debt, the Company has determined not to acquire a currency hedge for
Fidei's Euro denominated debt.
In 1996, the Company formed PIB, a joint venture 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 contributed
$79,500,000 to PIB for a 75% equity interest. Effective as of January 30, 1998,
the Company entered into an agreement with PepsiCo, pursuant to which, among
other things, PIB repaid in full the Company's $77,705,000 bridge financing
(which was funded in 1997) and the Company's equity interest in PIB was reduced
to 37.9%. The agreement relieved the Company of any future funding obligation
with respect to PIB and created an option, exercisable by either the Company or
PepsiCo, pursuant to which PepsiCo was obligated to purchase all of the
Company's interest in PIB (the "Option") for $37,000,000, plus interest. In
February 1999, PepsiCo exercised the Option for approximately $39,190,000,
including interest, and the Company recognized a pre-tax gain of approximately
$29,545,000. However, when combined with the Company's share of the joint
venture losses since inception, the Company's net loss from this investment was
approximately $40,310,000.
The investment portfolios of the Company's insurance subsidiaries are
principally fixed maturity investments; the balance of their portfolio consists
largely of preferred securities. Of the fixed maturity securities, the majority
consists of those 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.
Principally as a result of changes in market interest rates during 1998,
the unrealized gain on investments at the end of 1997 of approximately
$5,630,000 (net of taxes) decreased to an unrealized loss of approximately
$982,000 (net of taxes) as of December 31, 1998. 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. Prior to 1998, the Company's loan volume was in decline
primarily as a result of heavy competition in this line of business. However, in
1998, the Company began to see growth in its automobile lending business as it
expanded into new locations and developed new programs. The Company also
benefited from the decline in competition due to the failure of certain
competitors and a reduction in capital available for securitizations. In
addition, in December 1998, the Company purchased a $36,900,000 sub-prime
automobile portfolio. The Company's investment in automobile loans was
$140,400,000, $77,607,000 and $96,338,000 at December 31, 1998, 1997 and 1996,
respectively. During 1998, the Company's banking and lending subsidiaries sold
substantially all of their executive and professional loan portfolios for
aggregate proceeds of $89,500,000 and reported a pre-tax gain on these sales of
approximately $6,500,000.
24
The Company and certain of its subsidiaries have loss carryforwards and
other tax attributes. The amount and availability of tax loss carryforwards are
subject to certain qualifications, limitations and uncertainties. As described
in the Notes to the Consolidated Financial Statements, significant additional
amounts of loss carryforwards may be available under certain circumstances. 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.
RESULTS OF OPERATIONS
Property and Casualty Insurance
The Company's most significant operation is its insurance business, where
it is a provider of property and casualty insurance primarily in the New York
metropolitan area. For the year ended December 31, 1998, the Company's insurance
segment contributed 57% of total revenues from continuing operations and, at
December 31, 1998, constituted 25% of total assets.
Net earned premium revenues of the Empire Group were $228,600,000,
$275,000,000 and $326,400,000 for the years ended December 31, 1998, 1997 and
1996, respectively. In 1998, the decrease in earned premium revenues was
primarily due to a decline in the number of assigned risk automobile pool
contracts acquired due to competition and the depopulation of the assigned risk
automobile pools ($24,600,000) and a reduction in certain lines, principally
voluntary commercial automobile ($8,500,000), private passenger automobile
($6,000,000), commercial package policies ($4,300,000) and workers' compensation
($3,700,000), due to tighter underwriting standards, reunderwriting and
increased competition. In 1997, the decline in earned premium revenues was
primarily due to the depopulation of the assigned risk pools ($31,700,000) and a
reduction in certain commercial lines, principally voluntary commercial
automobile ($10,200,000) and workers' compensation ($8,800,000) due to
competition, reunderwriting and repricing. In addition, earned premium revenues
were reduced in 1997 by $5,500,000 to record premiums due under retrospectively
rated reinsurance contracts written for 1995 and prior accident years. The
Empire Group re-estimated the premium due based upon its then current estimate
of loss ratios for 1995 and prior accident years. Partially offsetting these
reductions was an increase in certain voluntary personal lines, principally
private passenger automobile and homeowners.
The Empire Group's combined ratios as determined under GAAP and SAP were
as follows:
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
GAAP 129.3% 118.5% 114.7%
SAP 134.0% 117.8% 107.9%
The Empire Group's combined ratios increased in 1998 primarily due to the
reduction in premium volume at a rate greater than the reduction in net
underwriting and other costs. In addition, the reduction in servicing fees in
1998 negatively affected the expense ratios. Included in the Empire Group's
results for 1998, 1997 and 1996 were approximately $42,000,000, $27,000,000 and
$28,000,000, respectively, for reserve strengthening related to losses from
prior accident years.
25
During 1998, the Empire Group reviewed the adequacy of the reserves
carried for its open claims' files, focusing on workers' compensation,
commercial auto and other commercial liability lines of business. Such reviews
are part of the Empire Group's normal ongoing practice. Particular emphasis
during this review was placed on reserves carried for the workers' compensation
line of business. As part of the review, substantially all open workers'
compensation claim files were reviewed for every accident year up to and
including 1998. The Empire Group also conducted a comprehensive review of
reserves carried for other commercial liability lines of business in which
approximately 28% of the open claim files were reviewed, with a primary focus on
accident years 1995 to 1997. As a result of these reviews, the Empire Group
revised its assumptions regarding average claims costs and probable ultimate
losses and, accordingly, reserves were strengthened by $13,000,000 for workers'
compensation and $14,000,000 for other commercial liability lines of business.
Additionally, during 1998, the Empire Group reorganized the commercial auto
claims department. As part of this realignment, more complex claims files were
reviewed by the most experienced claims examiners and assumptions regarding
average claims severity and probable ultimate losses were revised and reserves
were strengthened by $14,000,000 for commercial automobile lines of business.
The 1997 reserve strengthening included approximately $11,000,000 for
commercial package lines of business and approximately $7,000,000 for voluntary
commercial automobile lines of business. During 1997, the Empire Group reviewed
the adequacy of the reserves carried for its open claims' files, as part of its
normal ongoing practice, focusing on the commercial package, general liability
and commercial automobile lines of business. As a result of this review and the
continued unfavorable development of prior accident years losses, particularly
the 1992 through 1994 accident years, the Empire Group revised its assumptions
regarding future increases in average claims severity and reserves were
strengthened.
The 1996 reserve strengthening included approximately $20,000,000, for
voluntary commercial automobile lines of business and approximately $8,000,000
for commercial package lines of business. Beginning in 1992, the Empire Group
entered into new market segments of the voluntary commercial business, including
specialty programs for sanitation trucks, gas stations, fuel oil deliveries and
limousines. Initially, the Empire Group based its loss ratio estimate upon its
experience with similar lines of business, industry statistics and standard
actuarial ultimate loss projection techniques, which consider expected loss
ratios. During 1996, claims began to develop unfavorably and the Empire Group
used such claim development to revise the assumptions that formed the basis of
actuarial studies and reserves were increased. With respect to commercial
package lines, general liability claims for business written in 1992 through
1994 also developed unfavorably. These claims showed an increased frequency of
losses as well as an increase in the time between the date the loss occurred and
when the loss was reported compared to prior experience. General liability
claims are susceptible to the emergence of losses over an extended period of
time.
For the lines of business discussed above, as well as all other property
and casualty lines of business, the Company employs a variety of standard
actuarial ultimate loss projection techniques, statistical analyses and
case-basis evaluations to estimate its liability for unpaid losses. The
actuarial projections include an 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. These estimates are performed quarterly and consider any
changes in trends and actual loss experience. Any resulting change in the
estimate of the liability for unpaid losses, including those discussed above, is
reflected in current year earnings during the quarter the change in estimate is
identified.
The reserving process relies on the basic assumption that past experience
is an appropriate basis for predicting future events. The probable effects of
current developments, trends and other relevant matters are also considered.
Since the establishment of loss reserves is affected by many factors, some of
which are outside the Company's control or affected by future conditions,
reserving for property and casualty claims is a complex and uncertain process
requiring the use of informed estimates and judgements. As additional experience
and
26
other data become available and are reviewed, the Company's estimates and
judgements may be revised. While the effect of any such changes in estimates
could be material to future results of operations, the Company does not expect
such changes to have a material effect on its liquidity or financial condition.
In management's judgment, information currently available has been
appropriately considered in estimating the Company's loss reserves. The Company
will continue to evaluate the adequacy of its loss reserves on a quarterly
basis, incorporating any future changes in trends and actual loss experience,
and record adjustments to its loss reserves as appropriate.
Manufacturing
In December 1997, the Company completed the disposition of certain of its
manufacturing operations. As a result, since December 1997, the Company's
manufacturing operations solely have consisted of its plastics division. In
1998, the gross profit for the plastics division increased by 14% to
approximately $21,400,000. This increase was primarily due to greater sales in
most of the division's product lines and lower raw material costs. The decline
in manufacturing revenues during the last three years was due to the sale of
certain divisions and the discontinuance of certain non-performing product lines
in 1997 and prior years. The Company recorded charges of $4,300,000 in 1997 and
$3,700,000 in 1996 for losses on sales and shutdown expenses, which are
primarily reflected in the caption "Selling, general and other expenses."
Banking and Lending
Finance revenues and operating profits reflect the level of consumer
instalment loans, and for 1998, the sale of substantially all of the Company's
executive and professional loan portfolio which resulted in a pre-tax gain of
approximately $6,500,000, as discussed above. In addition, automobile loan
losses declined in 1998 and 1997. In 1997, operating profit was also adversely
affected by $3,500,000 in costs to settle litigation related to a lending
program that is in liquidation. In 1996, operating profit was also affected by
increased interest expense on customer banking deposits.
Other
In 1998, investment and other income increased by approximately
$16,300,000 primarily due to increased interest income ($63,700,000), the sale
of the Company's executive and professional loan portfolio referred to above
($6,500,000) and increased income from real estate activities ($8,800,000),
partially offset by reduced gains from sales of real estate and other assets
($40,700,000) and reduced income relating to the service business ($19,100,000).
In 1997, investment and other income increased by approximately $81,800,000,
primarily due to increased gains from sales of real estate properties
($63,500,000) including the sale of a New York City office building and
increased interest income ($28,100,000) including earnings on the proceeds from
the sales of the Colonial Penn Life Group and Colonial Penn P&C Group. Such
increases were partially offset by reduced trading stamp and miscellaneous other
revenues in 1997 and a litigation settlement gain recorded in 1996.
During 1998, due to declines in values that were deemed other than
temporary, the Company recorded a pre-tax writedown of approximately $75,000,000
related to its investments in Russian and Polish debt and equity securities.
Such writedowns are reflected in the caption "Net securities gains (losses)." At
December 31, 1998, the remaining book value of the Company's investments in
these debt and equity securities was approximately $19,000,000.
Equity in income (losses) of associated companies improved in 1998 as
compared to 1997 primarily due to a reduction of approximately $48,400,000 in
the Company's equity losses related to PIB resulting from
27
discontinuance of the equity method of accounting in early 1998 and income from
an investment partnership of approximately $30,800,000. In December 1997, the
Company invested $20,000,000 to acquire a limited partnership interest in this
partnership. The partnership currently is in the process of liquidating and
making final distributions. The Company does not anticipate that the amount of
income to be realized from this investment will be significant in 1999. Equity
in losses of associated companies increased in 1997 as compared to 1996
primarily due to start-up losses from the Company's equity investment in PIB of
$50,481,000 in 1997 as compared to $17,104,000 in 1996. The equity in losses of
associated companies included losses from the Company's investment in MK Gold of
$4,251,000 in 1997 and $6,478,000 in 1996 and a write-off of $6,540,000 in 1996,
representing the Company's investment in an unsuccessful well drilled by its
Siberian oil exploration joint venture.
Interest expense primarily reflects the level of external borrowings
outstanding throughout the periods. The reduction in interest expense in 1997
was primarily due to the decline in such borrowings.
The decrease in selling, general and other expenses in 1998 as compared to
1997 principally reflects decreased expenses of the manufacturing segment
principally as a result of the sale of certain divisions in 1997, decreased
pension expense due to the recognition of net curtailment gains of $6,500,000, a
1997 charge for estimated costs to settle litigation relating to a lending
program that is in liquidation and lower provisions for bad debts. The decrease
in selling, general and other expenses in 1997 as compared to 1996 principally
reflects the Empire Group's decreased expenses related to reduced premium
volume, decreased operating expenses of real estate properties, decreased
expenses relating to certain investment activities and lower provisions for bad
debts. This decrease was partially offset by the losses recorded by the
manufacturing segment related to sold divisions and the charge for estimated
costs to settle litigation relating to a lending program that is in liquidation.
Income taxes for 1998 reflect a benefit of approximately $39,000,000 for a
change in the Company's estimated 1997 federal tax liability and the favorable
resolution of certain contingencies. The 1997 and 1996 income tax benefits were
greater than the expected normal corporate tax rate primarily due to the
favorable resolution of certain contingencies.
As discussed above, in December 1998, the Company signed an agreement to
sell its remaining life insurance subsidiaries, Charter and Intramerica, to
Allstate. The transaction is subject to regulatory approvals and customary
closing conditions and is expected to close in the second quarter of 1999. In
1998, the Company classified these life insurance operations as discontinued
operations and the consolidated financial statements for prior periods have been
restated to be consistent with such presentation.
The number of shares used to calculate basic earnings (loss) per share was
63,409,000, 62,205,000 and 60,301,000 for 1998, 1997 and 1996, respectively. The
number of shares used to calculate diluted earnings (loss) per share was
63,510,000, 62,205,000 and 60,301,000 for 1998, 1997 and 1996, respectively. For
diluted per share amounts, the Company's 5-1/4% Convertible Subordinated
Debentures due 2003 (which were redeemed in 1997) were not assumed to have been
converted since the effect of such assumed conversion would have been to
increase earnings per share.
Year 2000 and Information Technology Systems
The Company is in the process of evaluating its information technology
systems to determine the potential impact of the Year 2000. The Year 2000 issue
is the result of computer programs being written using two digits (rather than
four) to define the applicable year. Any programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or
28
system failures. As a result, before the end of 1999, computer hardware and
software may need to be upgraded with new hardware and software which can
distinguish 21st century dates from 20th century dates.
Since 1996, the Company has been evaluating its Year 2000 readiness. Its
program to address its Year 2000 readiness consists of (i) the preparation of an
inventory of all computer related hardware and software, all non-computer
related hardware that may have embedded technology and all third parties that
are material to the Company's business operations, (ii) the identification of a
senior officer at each of the Company's operating subsidiaries and significant
investments to be responsible for overseeing the implementation of the Year 2000
program and reporting on compliance therewith to the Company's senior
management, (iii) the identification of mission critical aspects of the
Company's business, and assessment of the Year 2000 readiness of such mission
critical systems and components, (iv) the development of a plan to upgrade,
repair or replace systems as required for Year 2000 compliance, (v) the
development of a plan to test the readiness of all critical systems, (vi) making
inquiry of material third parties as to the state of their Year 2000 compliance,
and (vii) as appropriate, the development of a contingency plan for either
non-compliant internal systems or non-compliant material third parties. Where
appropriate, outside consultants have been engaged to advise the Company on its
Year 2000 readiness. Substantially all of the Company's operations have
completed the inventory and identification process and are in the process of
upgrading and testing critical systems. The Company's primary focus during the
balance of 1999 will be on continued testing of mission critical systems and
software provider upgrades, as well as monitoring the readiness of material
third parties.
In 1996, the Empire Group began to evaluate its information technology
systems and their ability to support future business needs. This led to a
decision to acquire new policy management and accounting systems. These systems
provide enhanced functionality and improved processing for underwriting, claims,
billing, collection, reinsurance, reporting and accounting and are designed to
be Year 2000 compliant. The Empire Group anticipates that these new systems will
be fully implemented in 1999 and that any non-compliant programs will become
compliant during 1999. All but one of the manufacturing operation's material
systems (involving the storage of historical information) have tested as being
Year 2000 compliant. The Company is exploring alternative systems to maintain
this information. Until an acceptable replacement for this system can be found,
the Company can maintain these records in hard copy. The banking and lending
operations have successfully completed testing of mission critical systems and
testing of non-mission critical systems is currently underway. In addition,
deposit customers have been sent letters to inform them about the Year 2000
issue and to educate them about the progress made in addressing this issue.
The Year 2000 issue may affect other entities with which the Company
transacts business. The Company has made inquiry of third parties with whom it
has material relationships as to the Year 2000 compliance of such third parties.
Many of such parties have reported plans to be fully compliant by the end of
1999 and most have reported substantial progress at the end of 1998. However, at
this time the Company cannot predict the effect of the Year 2000 on its material
third parties or the impact any deficiency in the Year 2000 readiness of such
parties could have on the Company.
Through December 31, 1998, expenses incurred by the Company in connection
with the Year 2000 issue (excluding expenses related to the Empire Group's
acquisition of new systems, which was not motivated by Year 2000 concerns) did
not exceed $500,000. Based upon current information, the Company does not expect
that the Year 2000 issue will have a material effect on its consolidated
financial position or consolidated results of operations.
Cautionary Statement for Forward-Looking Information
Statements included in this Report may contain forward-looking statements.
Such forward-looking statements are made pursuant to the safe-harbor provisions
of the Private Securities Litigation Reform Act of
29
1995. Such statements may relate, but are not limited, to projections of
revenues, income or loss, capital expenditures, fluctuations in insurance
reserves, plans for growth and future operations (including Year 2000
compatibility), competition and regulation as well as assumptions relating to
the foregoing. Forward-looking statements are inherently subject to risks and
uncertainties, many of which cannot be predicted or quantified. When used in
this Report, the words "estimates", "expects", "anticipates", "believes",
"plans", "intends" and variations of such words and similar expressions are
intended to identify forward-looking statements that involve risks and
uncertainties. Future events and actual results could differ materially from
those set forth in, contemplated by or underlying the forward-looking
statements. The factors that could cause actual results to differ materially
from those suggested by any such statements include, but are not limited to,
those discussed or identified from time to time in the Company's public filings,
including general economic and market conditions, changes in foreign and
domestic laws, regulations and taxes, changes in competition and pricing
environments, regional or general changes in asset valuation, the occurrence of
significant natural disasters, the inability to reinsure certain risks
economically, the adequacy of loss reserves, prevailing interest rate levels,
weather related conditions that may affect the Company's operations, the
difficulty in identifying hardware and software that may not be Year 2000
compliant, the lack of success of third parties to adequately address the Year
2000 issue, vendor delays and technical difficulties affecting the Company's
ability to upgrade or replace its hardware and/or software for Year 2000
compliance, and changes in the composition of the Company's assets and
liabilities through acquisitions or divestitures. Undue reliance should not be
placed on these forward-looking statements, which are applicable only as of the
date hereof. The Company undertakes no obligation to revise or update these
forward-looking statements to reflect events or circumstances that arise after
the date of this Report or to reflect the occurrence of unanticipated events.
30
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The following includes "forward-looking statements" that involve risk and
uncertainties. Actual results could differ materially from those projected in
the forward-looking statements.
The Company's market risk arises principally from interest rate risk
related to its investment portfolio, its borrowing activities and the banking
and lending activities of certain subsidiaries. The Company does not enter into
material derivative financial instrument transactions.
The Company's investment portfolio is primarily classified as available
for sale, and consequently, is recorded on the balance sheet at fair value with
unrealized gains and losses reflected in shareholders' equity. Included in the
Company's investment portfolio are fixed income securities, which comprised
approximately 90% of the Company's total investment portfolio at December 31,
1998. These fixed income securities are primarily rated "investment grade" or
are 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 estimated weighted average remaining life of
these fixed income securities was approximately 2.5 years at December 31, 1998.
The Company's fixed income securities, like all fixed income instruments, are
subject to interest rate risk and will fall in value if market interest rates
increase. At December 31, 1998, the Company's portfolio of trading securities
was not material. The Company manages the investment portfolio of its insurance
subsidiaries to preserve principal, maintain a high level of quality, comply
with applicable insurance industry regulations and achieve an acceptable rate of
return. In addition, the Company considers the duration of its insurance
reserves in comparison with that of its investments.
The Company is subject to interest rate risk on its long-term fixed
interest rate debt and the Company-obligated mandatorily redeemable preferred
securities of its subsidiary trust holding solely subordinated debt securities
of the Company. Generally, the fair market value of debt and preferred
securities with a fixed interest rate will increase as interest rates fall, and
the fair market value will decrease as interest rates rise.
The Company's banking and lending operations are subject to risk resulting
from interest rate fluctuations to the extent that there is a difference between
the amount of the interest-earning assets and the amount of interest-bearing
liabilities that are prepaid/withdrawn, mature or reprice in specified periods.
The principal objectives of the Company's banking and lending asset/liability
management activities are to provide maximum levels of net interest income while
maintaining acceptable levels of interest rate and liquidity risk and to
facilitate funding needs. The Company utilizes an interest rate sensitivity
model as the primary quantitative tool in measuring the amount of interest rate
risk that is present. The model quantifies the effects of various interest rate
scenarios on the projected net interest margin over the ensuing twelve-month
period. Derivative financial instruments, including interest rate swaps, may be
used to modify the Company's indicated net interest sensitivity to levels deemed
to be appropriate based on risk management policies and the Company's current
economic outlook. Counterparties to such 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.
The following table provides information about the Company's financial
instruments used for purposes other than trading that are sensitive to changes
in interest rates. For investment securities and debt obligations, the table
presents principal cash flows by expected maturity dates. For the variable rate
notes receivable and variable rate borrowings, the weighted average interest
rates are based on implied forward rates in the yield curve at the reporting
date. For loans, securities and liabilities with contractual maturities, the
table presents contractual principal cash flows adjusted for the Company's
historical experience of loan prepayments and prepayments of mortgage-backed
securities. For banking and lending's variable rate products, the weighted
average variable rates are based upon the respective pricing index at the
reporting date. For money market
31
deposits that have no contractual maturity, the table presents principal cash
flows based on the Company's historical experience and management's judgment
concerning their most likely withdrawal behaviors. For interest rate swaps, the
table presents notional amounts by contractual maturity date.
32
Expected Maturity Date
----------------------
1999 2000 2001 2002 2003 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
(Dollars in thousands)
THE COMPANY, EXCLUDING
BANKING AND LENDING:
RATE SENSITIVE ASSETS:
Available for Sale Fixed
Income Securities:
U.S. Government $783,303 $146,339 $9,306 $198,045 $12,784 $160,629 $1,310,406 $1,310,406
Weighted Average
Interest Rate 5.08% 5.91% 7.17% 6.38% 5.86% 6.22%
Other Fixed Maturities:
Rated Investment Grade $7,555 $3,808 $15,020 $2,832 $18,112 $46,063 $93,390 $93,390
Weighted Average
Interest Rate 6.84% 8.03% 9.35% 12.15% 7.29% 7.99%
Rated Less Than
Investment Grade/Not
Rated $20,440 $25,727 $18,040 $33,598 $10,248 $11,575 $119,628 $119,628
Weighted Average
Interest Rate 9.26% 1.84% 2.04% 5.12% 6.80% 8.05%
Held to Maturity Fixed
Income Securities:
U.S. Government $774 $- $- $5,230 $- $2,148 $8,152 $8,481
Weighted Average
Interest Rate 6.75% - - 6.47% - 6.88%
Variable Rate Notes
Receivable $- $- $- $- $400,000 $- $400,000 $400,000
Weighted Average
Interest Rate 5.66% 5.64% 5.71% 5.75% 5.79% -
RATE SENSITIVE LIABILITIES:
Fixed Interest Rate
Borrowings $865 $870 $71,170 $8,006 $97,803 $435,795 $614,509 $621,435
Weighted Average
Interest Rate 6.83% 6.83% 6.83% 7.10% 7.11% 7.44%
Variable Rate Borrowings $78,479 $- $- $- $- $9,815 $88,294 $88,294
Weighted Average
Interest Rate 7.25% 5.14% 5.21% 5.25% 5.29% 5.44%
OTHER RATE SENSITIVE
FINANCIAL INSTRUMENTS:
Company-obligated
Mandatorily Redeemable
Preferred Securities of
Subsidiary Trust Holding
Solely Subordinated
Debt Securities of the
Company $- $- $- $- $- $98,200 $98,200 $99,182
Weighted Average
Interest Rate 8.65% 8.65% 8.65% 8.65% 8.65% 8.65%
33
Expected Maturity Date
----------------------
1999 2000 2001 2002 2003 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
(Dollars in thousands)
BANKING AND LENDING:
RATE SENSITIVE ASSETS:
Certificates of Deposit $15,030 $1,090 $- $- $- $- $16,120 $16,121
Weighted Average Interest
Rate 5.622% 5.821% - - - - 5.635%
Fixed Interest Rate Securities $9,971 $1,582 $1,354 $931 $5,824 $12,839 $32,501 $32,499
Weighted Average Interest
Rate 6.136% 5.988% 6.028% 6.084% 6.074% 6.382% 6.206%
Variable Interest Rate
Securities $5 $5 $5 $5 $2 $- $22 $21
Weighted Average Interest
Rate 8.125% 8.125% 8.125% 8.125% 8.125% - 8.125%
Fixed Interest Rate Loans $65,464 $45,222 $29,560 $11,898 $7,540 $17,623 $177,307 $178,148
Weighted Average Interest
Rate 21.067% 20.709% 20.640% 22.187% 19.590% 16.900% 20.489%
Variable Interest Rate Loans $1,022 $564 $427 $335 $269 $5,259 $7,876 $7,951
Weighted Average Interest
Rate 13.097% 14.514% 14.583% 14.492% 14.644% 10.651% 11.759%
RATE SENSITIVE LIABILITIES:
Money Market Deposits $5,803 $3,669 $3,261 $2,854 $2,446 $4,076 $22,109 $21,986
Weighted Average Interest
Rate 3.792% 4.000% 4.000% 4.000% 4.000% 4.000% 3.945%
Time Deposits $121,437 $23,264 $10,771 $7,534 $4,667 $- $167,673 $170,836
Weighted Average Interest
Rate 5.455% 6.174% 5.787% 5.777% 5.731% - 5.610%
Fixed Interest Rate
Borrowings $19,798 $- $- $- $- $- $19,798 $19,798
Weighted Average Interest
Rate 4.875% - - - - - 4.875%
RATE SENSITIVE DERIVATIVE
FINANCIAL INSTRUMENTS:
Pay Fixed/Receive Variable
Interest Rate Swap $- $- $- $- $60,000 $- $60,000 $292
Average Pay Rate 5.067% 5.067% 5.067% 5.067% 5.067% - 5.067%
Average Receive Rate 5.313% 5.313% 5.313% 5.313% 5.313% - 5.313%
OFF-BALANCE SHEET ITEMS:
Commitments to Extend
Credit $31 $31 $31
Weighted Average Interest
Rate 14.650% 14.650%
Unused Lines of Credit $3,000 $- $- $- $- $5,202 $8,202 $8,202
Weighted Average Interest
Rate 7.75% - - - - 4.875% 5.927%
34
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.
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
1999 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.
35
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, 1998 and 1997... F-2
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996.......................... F-3
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................... F-4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1998, 1997 and 1996...... F-6
Notes to Consolidated Financial Statements.................. F-7
Financial Statement Schedules:
Schedule III - Supplementary Insurance Information.......... F-33
Schedule V - Valuation and Qualifying Accounts.............. F-34
Schedule VI - Schedule of Supplemental Information for
Property and Casualty Insurance Underwriters.............. F-35
36
(3) Executive Compensation Plans and Arrangements.
1992 Stock Option Plan (filed as Annex C to the Company's Proxy
Statement dated July 21, 1992).
Amended and Restated Shareholders Agreement dated as of December 16,
1997 among the Company, Ian M. Cumming and Joseph S. Steinberg.
Leucadia National Corporation Senior Executive Annual Incentive Bonus
Plan (filed as Annex D to the Company's Proxy Statement dated October
3, 1997 (the "1997 Proxy Statement")).
Deferred Compensation Agreement between the Company and Joseph S.
Steinberg dated December 8, 1998.
(b) Reports on Form 8-K.
None.
(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 February 23,
1999.
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 1992 Stock Option Plan (filed as Annex C to the Company's Proxy
Statement dated July 21, 1992).*
10.2 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).*
10.3 Operating Agreement of The Jordan Company LLC, dated as of July
23, 1998.
10.4 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).*
10.5 Amended and Restated Shareholders Agreement dated as of December
16, 1997 among the Company, Ian M. Cumming and Joseph S.
Steinberg (filed as Exhibit 10.4 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997 (the
"1997 10-K")).*
- -------------------------
*Incorporated by reference.
37
10.6 Deferred Compensation Agreement between the Company and Joseph S.
Steinberg dated December 8, 1998.
10.7 Settlement Agreement between Baldwin-United Corporation and the
United States dated August 27, 1985 concerning tax issues (filed
as Exhibit 10.14 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992 (the "1992 10-K")).*
10.8 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).*
10.9 Amended and Restated Revolving Credit Agreement dated as of
November 3, 1997 between the Company, BankBoston, N.A. 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 (filed as
Exhibit 10.13 to the 1997 10-K).*
10.10 Purchase Agreement among Conseco, the Company, Charter, Colonial
Penn Group, Inc., Colonial Penn Holdings, Inc., Leucadia
Financial Corporation, Intramerica, Colonial Penn Franklin
Insurance Company and Colonial Penn Insurance Company dated as of
April 30, 1997 (filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1997).*
10.11 Purchase Agreement among GECC, the Company, Charter, Colonial
Penn Group Inc. and Colonial Penn Holdings, Inc. dated as of June
30, 1997 (filed as Annex A to the 1997 Proxy Statement).*
10.12 Purchase Agreement by and among Allstate Life Insurance Company,
Allstate Life Insurance Company of New York, Charter, Intramerica
and the Company, dated February 11, 1998 (filed as Exhibit 10.16
to the 1997 10-K).*
10.13 Leucadia National Corporation Senior Executive Annual Incentive
Bonus Plan (filed as Annex D to the 1997 Proxy Statement.)*
10.14 Stock Purchase Agreement by and between the Company and Allstate
Life Insurance Company dated as of December 18, 1998.
10.15 Trust Agreement dated August 14, 1998 between the Company for the
benefit of its shareholders as of August 25, 1998 and Joseph A.
Orlando, as Trustee.
21 Subsidiaries of the registrant.
- -------------------------
*Incorporated by reference.
38
23 Consents 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.
(d) Financial Statements of 50%-or-Less-Owned Entity
Gotham Partners Acquisition I, L.P. financial statements as of
December 31, 1998 and for the year ended December 31, 1998.
39
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 18, 1999 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
- ------------------------------- (Principal Financial Officer)
Joseph A. Orlando
/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
40
REPORT OF INDEPENDENT ACCOUNTANTS
March 8, 1999
To the Board of Directors and
Shareholders of Leucadia National Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under item 14(a) (1) (2) of this Form 10-K, present fairly, in all
material respects, the financial position of Leucadia National Corporation and
Subsidiaries at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedules listed in the index
appearing under item 14(a) (1) (2) of this Form 10-K, present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. 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 of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
F-1
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(Dollars in thousands, except par value)
1998 1997
---- ----
ASSETS
Investments:
Available for sale (aggregate cost of $1,555,789
and $1,643,679) $1,553,126 $1,651,389
Trading securities (aggregate cost of $132,907
and $108,479) 132,576 115,416
Held to maturity (aggregate fair value of $47,583
and $36,316) 47,256 36,198
Other investments, including accrued interest income 37,247 69,366
---------- ----------
Total investments 1,770,205 1,872,369
Cash and cash equivalents 459,690 581,186
Reinsurance receivables, net 48,070 31,972
Trade, notes and other receivables, net 833,301 751,337
Prepaids and other assets 490,242 144,314
Property, equipment and leasehold improvements, net 121,790 60,433
Deferred policy acquisition costs 18,255 23,906
Investments in associated companies 172,390 207,902
Net assets of discontinued operations 45,008 71,917
---------- ----------
Total $3,958,951 $3,745,336
========== ==========
LIABILITIES
Customer banking deposits $ 189,782 $ 198,582
Trade payables and expense accruals 233,485 208,762
Other liabilities 109,397 93,141
Income taxes payable 96,500 172,593
Deferred tax liability 7,709 22,739
Policy reserves 542,274 545,708
Unearned premiums 94,572 127,666
Debt, including current maturities 722,601 352,872
---------- ----------
Total liabilities 1,996,320 1,722,063
---------- ----------
Minority interest 11,272 9,742
---------- ----------
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
subordinated debt securities of the Company 98,200 150,000
---------- ----------
SHAREHOLDERS' EQUITY
Common shares, par value $1 per share, authorized
150,000,000 shares; 61,984,686 and 63,879,155
shares issued and outstanding, after deducting
56,430,847 and 54,398,456 shares held in treasury 61,985 63,879
Additional paid-in capital 205,227 253,267
Accumulated other comprehensive income (771) 5,630
Retained earnings 1,586,718 1,540,755
---------- ----------
Total shareholders' equity 1,853,159 1,863,531
---------- ----------
Total $3,958,951 $3,745,336
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1998, 1997 and 1996
(In thousands, except per share amounts)
1998 1997 1996
---- ---- ----
Revenues:
Insurance revenues and commissions $228,576 $275,015 $326,433
Manufacturing 56,572 133,406 148,284
Finance 31,560 40,529 49,150
Investment and other income 251,379 235,053 156,090
Equity in income (losses) of associated
companies 23,290 (56,515) (33,631)
Net securities gains (losses) (60,871) 3,249 24,117
-------- -------- --------
530,506 630,737 670,443
-------- -------- --------
Expenses:
Provision for insurance losses and policy
benefits 233,772 275,435 299,816
Amortization of deferred policy acquisition
costs 45,338 52,033 55,332
Manufacturing cost of goods sold 35,201 94,077 107,667
Interest 45,139 46,007 53,599
Salaries 41,413 52,987 43,183
Selling, general and other expenses 100,266 134,436 159,033
-------- -------- --------
501,129 654,975 718,630
-------- -------- --------
Income (loss) from continuing operations
before income taxes, minority expense of trust
preferred securities and extraordinary loss 29,377 (24,238) (48,187)
-------- -------- --------
Income taxes:
Current (32,649) (6,138) 1,303
Deferred 7,576 (3,753) (20,629)
-------- -------- --------
(25,073) (9,891) (19,326)
-------- -------- --------
Income (loss) from continuing operations
before minority expense of trust preferred
securities and extraordinary loss 54,450 (14,347) (28,861)
Minority expense of trust preferred securities,
net of taxes 8,248 7,942 -
-------- -------- --------
Income (loss) from continuing operations before
extraordinary loss 46,202 (22,289) (28,861)
Income from discontinued operations,
net of taxes 8,141 58,516 84,376
Gain on disposal of discontinued operations,
net of taxes of $234,059 - 627,645 -
-------- -------- --------
Income before extraordinary loss 54,343 663,872 55,515
Extraordinary loss from early extinguishment
of debt, net of income tax benefit of $1,108
and $3,682 - (2,057) (6,838)
-------- -------- --------
Net income $ 54,343 $661,815 $ 48,677
======== ======== ========
Basic earnings (loss) per common share:
Income (loss) from continuing operations
before extraordinary loss $.73 $ (.36) $(.48)
Income from discontinued operations .13 .94 1.40
Gain on disposal of discontinued operations - 10.09 -
Extraordinary loss - (.03) (.11)
---- ------ -----
Net income $.86 $10.64 $ .81
==== ====== =====
Diluted earnings (loss) per common share:
Income (loss) from continuing operations
before extraordinary loss $.73 $ (.36) $(.48)
Income from discontinued operations .13 .94 1.40
Gain on disposal of discontinued operations - 10.09 -
Extraordinary loss - (.03) (.11)
---- ------ -----
Net income $.86 $10.64 $ .81
==== ====== =====
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
(In thousands)
Net cash flows from operating activities:
- -----------------------------------------
Net income $ 54,343 $ 661,815 $ 48,677
Adjustments to reconcile net income to net
cash (used for) operations:
Extraordinary loss, net of income tax benefit - 2,057 6,838
Provision (benefit) for deferred income taxes 7,576 (3,753) (20,629)
Depreciation and amortization of property,
equipment and leasehold improvements 10,250 10,913 12,889
Other amortization 38,098 59,253 65,418
Provision for doubtful accounts 9,473 11,135 18,412
Net securities (gains) losses 60,871 (3,249) (24,117)
Equity in (income) losses of associated companies (23,290) 56,515 33,631
(Gain) on disposal of real estate, property
and equipment (33,802) (66,940) (7,485)
(Gain) on sale of loan portfolio (6,535) - -
(Gain) on disposal of discontinued operations - (627,645) -
Investments classified as trading, net (139,715) (108,254) 6,724
Deferred policy acquisition costs incurred and deferred (39,687) (49,354) (52,763)
Net change in:
Reinsurance receivables (16,098) 24,459 (14,186)
Trade, notes and other receivables 79,960 (65,374) 1,999
Prepaids and other assets (11,054) (80,002) (64,246)
Net assets of discontinued operations 26,909 (37,746) (55,036)
Trade payables and expense accruals 24,816 60,306 14,889
Other liabilities (43,980) (6,024) (7,427)
Income taxes payable (79,191) (9,638) 17,753
Policy reserves (3,434) 13,389 14,897
Unearned premiums (33,094) (22,753) (14,372)
Other 1,321 3,470 734
---------- --------- --------
Net cash (used for) operating activities (116,263) (177,420) (17,400)
---------- --------- --------
Net cash flows from investing activities:
- -----------------------------------------
Acquisition of real estate, property, equipment
and leasehold improvements (79,296) (57,130) (19,932)
Proceeds from disposals of real estate, property
and equipment 59,814 198,287 46,043
Proceeds from disposal of discontinued operations,
net of expenses - 1,042,067 -
Investment in Providential Life in 1996 and Fidei
in 1998 (62,264) - (11,196)
Advances on loan receivables (153,920) (97,898) (113,787)
Principal collections on loan receivables 79,258 114,411 128,756
Proceeds from sales of loan receivables 89,516 - -
Purchases of investments (other than short-term) (2,897,174) (1,716,242) (877,542)
Proceeds from maturities of investments 844,384 324,415 329,440
Proceeds from sales of investments 2,134,113 732,361 604,259
---------- ---------- ---------
Net cash provided by investing activities 14,431 540,271 86,041
---------- ---------- ---------
(continued)
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
For the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
(In thousands)
Net cash flows from financing activities:
- -----------------------------------------
Net change in short-term borrowings $ 84,911 $ (50,000) $ 207
Net change in customer banking deposits (8,670) (10,646) 6,199
Issuance of Company-obligated mandatorily redeemable
preferred securities of subsidiary trust - 147,465 -
Reduction of Company-obligated mandatorily redeemable
preferred securities of subsidiary trust (42,217) - -
Issuance of long-term debt, net of issuance
costs 14,428 9,566 141,581
Reduction of long-term debt (388) (30,944) (139,861)
Purchase of common shares for treasury (59,348) (1,484) (837)
Dividends paid (8,380) (15,964) (15,100)
--------- --------- ---------
Net cash provided by (used for)
financing activities (19,664) 47,993 (7,811)
--------- --------- ---------
Net (decrease) increase in cash and
cash equivalents (121,496) 410,844 60,830
Cash and cash equivalents at January 1, 581,186 170,342 109,512
--------- --------- ---------
Cash and cash equivalents at December 31, $ 459,690 $ 581,186 $ 170,342
========= ========= =========
Supplemental disclosures of cash flow information:
- --------------------------------------------------
Cash paid during the year for:
Interest $46,469 $48,456 $53,854
Income tax payments, net of refunds $60,266 $28,100 $ 6,682
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 1998, 1997 and 1996
(In thousands, except per share amounts)
Common Accumulated
Shares Additional Other
$1 Par Paid-in Comprehensive Retained
Value Capital Income Earnings Total
----- ------- ------------- -------- -----
Balance, January 1, 1996 $60,164 $159,914 $ 30,086 $ 861,327 $1,111,491
----------
Comprehensive income:
Net changes in unrealized gain
(loss) on investments, net of
tax benefit of $15,670 (28,327) (28,327)
Net income 48,677 48,677
----------
Comprehensive income 20,350
----------
Exercise of options to purchase
common shares 288 1,915 2,203
Purchase of stock for treasury (34) (803) (837)
Dividends ($.25 per common share) (15,100) (15,100)
------- -------- -------- --------- ----------
Balance, December 31, 1996 60,418 161,026 1,759 894,904 1,118,107
----------
Comprehensive income:
Net changes in unrealized gain
(loss) on investments, net of
taxes of $2,291 3,871 3,871
Net income 661,815 661,815
----------
Comprehensive income 665,686
----------
Exercise of options to purchase
common shares 248 3,263 3,511
Conversion of 5 1/4% Convertible
Subordinated Debentures 3,258 90,417 93,675
Purchase of stock for treasury (45) (1,439) (1,484)
Dividends ($.25 per common share) (15,964) (15,964)
------- -------- ------- ---------- ----------
Balance, December 31, 1997 63,879 253,267 5,630 1,540,755 1,863,531
----------
Comprehensive income:
Net changes in unrealized gain
(loss) on investments, net of
tax benefit of $3,596 (6,612) (6,612)
Net change in unrealized foreign
exchange gain (loss), net of tax
benefit of $61 211 211
Net income 54,343 54,343
----------
Comprehensive income 47,942
----------
Buyback of trust preferred securities,
net of taxes of $3,354 6,229 6,229
Exercise of options to purchase
common shares 137 3,048 3,185
Purchase of stock for treasury (2,031) (57,317) (59,348)
Dividends (8,380) (8,380)
------- -------- ------- ---------- ----------
Balance, December 31, 1998 $61,985 $205,227 $ (771) $1,586,718 $1,853,159
======= ======== ======= ========== ==========
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, principally in
the New York metropolitan area, banking and lending and manufacturing,
principally in markets in the United States, and real estate activities. The
Company's principal operations are its insurance businesses, of which its
principal personal lines insurance products are automobile insurance and
homeowners insurance. The Company's principal commercial lines are property and
casualty products provided for vehicles (including medallion and
radio-controlled livery vehicles), multi-family residential real estate,
workers' compensation and various other business classes.
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
manufacture and market proprietary plastic netting used for a variety of
purposes.
In 1998, the Company classified as discontinued operations its life insurance
subsidiaries, Charter National Life Insurance Company ("Charter") and
Intramerica Life Insurance Company ("Intramerica"). Prior period financial
statements have been restated to conform with this presentation.
2. Significant Accounting Policies:
(a) Use of Estimates in Preparing Financial Statements: The preparation of
financial statements in conformity with generally accepted accounting principles
("GAAP") 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.
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 1998 presentation and for discontinued operations.
(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 of
$323,305,000 and $414,833,000 at December 31, 1998 and 1997, 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.
F-7
2. Significant Accounting Policies, continued:
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 and Polish equity securities ($18,992,000
and $51,025,000 as of December 31, 1998 and 1997, 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 and Poland, the Company is accounting for these
investments under the cost recovery method, whereby all receipts are applied to
reduce the investment. Quarterly, the Company reviews its investment in Russian
and Polish equity securities to determine that the carrying amount is
realizable. In performing such reviews, the Company considers current market
prices, prior sale transactions, the current political and economic environment
and other factors. These investments are included in "Other investments" in the
Consolidated Balance Sheets. During 1998, due to declines in values that were
deemed other than temporary, the Company recorded a pre-tax writedown of
approximately $75,000,000 related to its investments in Russian and Polish debt
and equity securities. Such writedowns are reflected in the caption "Net
securities gains (losses)."
(e) Property, Equipment and Leasehold Improvements: Property, equipment and
leasehold improvements are stated at cost, net of accumulated depreciation and
amortization ($76,397,000 and $67,116,000 at December 31, 1998 and 1997,
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 insurance products are recognized as revenues over the term of the
policy using the monthly pro rata basis.
(g) Policy Acquisition Costs: Policy acquisition costs principally consist of
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 are deferred and amortized ratably over the terms of
the related 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,
primarily the New York metropolitan area. 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: Liabilities for unpaid losses and
loss adjustment expenses ("LAE") 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
F-8
2. Significant Accounting Policies, continued:
estimated liabilities are adjusted upward or downward with the effect of
decreasing or increasing net income at the time of adjustment.
(j) 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.
(k) Derivative Financial Instruments: The Company enters into interest rate
agreements to manage the impact of changes in interest rates on its customer
banking deposits. The difference between the amounts paid and received is
accrued and recognized as an adjustment to interest expense (the accrual
accounting method). 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 also enters into
currency rate swap agreements to hedge net investments in foreign subsidiaries.
Gains and losses on such hedges are reported as a component of shareholders'
equity. The Company does not have material derivative financial instruments.
(l) Translation of Foreign Currency: Foreign currency denominated investments
and financial statements are translated into U.S. dollars at current exchange
rates, except that revenues and expenses are translated at average exchange
rates during each reporting period; resulting translation adjustments are
reported as a component of shareholders' equity. Net foreign exchange gains
(losses) were not material.
(m) Recently Issued Accounting Standard: In June 1998, the Financial Accounting
Standards Board issued Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), which will be
effective for fiscal years beginning after June 15, 1999. The Company is
reviewing the impact of the implementation of SFAS 133 on the Company's
financial position and results of operations.
3. Acquisitions:
In 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 contributed $79,500,000 to PIB for a 75% equity
interest. Effective as of January 30, 1998, the Company entered into an
agreement with PepsiCo, pursuant to which, among other things, PIB repaid in
full the Company's $77,705,000 bridge financing and the Company's equity
interest in PIB was reduced to 37.9%. Pursuant to this agreement, the Company no
longer had any ability to influence PIB; effective February 1, 1998, the Company
discontinued accounting for this investment under the equity method of
accounting. The agreement relieved the Company of any future funding obligation
with respect to PIB and created an option exercisable by either the Company or
PepsiCo, pursuant to which PepsiCo was obligated to purchase all of the
Company's interest in PIB (the "Option") for $37,000,000, plus interest. In
February 1999, PepsiCo exercised the Option for approximately $39,190,000,
including interest. The Company will recognize a pre-tax gain of approximately
$29,545,000 in the first quarter of 1999. However, when combined with the
Company's share of the joint venture losses since inception, the Company's net
loss from this investment was approximately $40,310,000.
The Company's investment in PIB is included in the caption "Investments in
associated companies."
F-9
3. Acquisitions, continued:
In the fourth quarter of 1998, the Company acquired a 95.4% interest in Fidei
S.A., a French company listed on the Paris Stock Exchange that is engaged
directly and through subsidiaries in real estate activities, for approximately
$62,300,000, including expenses. In connection with this acquisition, the
Company entered into currency swap agreements to hedge approximately $55,000,000
of its foreign currency exposure. The counterparties to these currency swap
agreements are major financial institutions, which management believes are able
to fulfill their obligations. The swap agreements mature in tranches in March
2000 and September 2001.
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 1998, 1997 and 1996 results of operations. (Amounts are in thousands.)
1998 1997
---- ----
Assets $2,058,222 $1,162,394
---------- ----------
Liabilities 1,903,463 1,104,100
--------- ----------
Minority interest - 6,446
---------- ----------
Net assets $ 154,759 $ 51,848
========== ==========
The Company's portion of the
reported net assets $ 47,788 $ 13,160
========== ==========
1998 1997 1996
---- ---- ----
Total revenues $790,778 $716,320 $627,568
Income (loss) from continuing
operations before extraordinary items $ 79,641 $(66,525) $(90,607)
Net income (loss) $ 79,641 $(66,525) $(90,607)
The Company's equity in net
income (loss) $ 23,290 $(56,515) $(33,631)
In December 1997, the Company invested $20,000,000 to acquire a limited
partnership interest in an investment partnership. During 1998, the Company
recognized income from this partnership of approximately $30,800,000. The
partnership currently is in the process of liquidating and making final
distributions. The Company does not anticipate that the amount of income to be
realized from this investment will be significant in 1999.
As of December 31, 1998, the Company owned 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, workers' compensation insurance
and banking in Argentina. During 1998, the Company's previously announced
agreement to sell substantially all of its interest in Caja to its Argentine
partner was restructured, and in March 1999, the Company sold all of its
interest in Caja to Assicurazioni Generali Group, an Italian insurance company,
for $126,000,000 in cash and a $40,000,000 collateralized note
F-10
4. Investments in Associated Companies, continued:
maturing April 2001 from its Argentine partner. The Company will record a
pre-tax gain of approximately $120,000,000 in its first quarter 1999 results of
operations.
At December 31, 1998, investments in associated companies included publicly
traded common stock equity interests of 5% or more in the following
non-consolidated companies: Carmike Cinemas, Inc. (6% of Class A shares) and MK
Gold Company (46%).
5. Insurance Operations:
The changes in deferred policy acquisition costs were as follows (in thousands):
1998 1997 1996
---- ---- ----
Balance, January 1, $ 23,906 $ 26,585 $ 29,154
Policy acquisition costs incurred
and deferred 39,687 49,354 52,763
Amortization of deferred
acquisition costs (45,338) (52,033) (55,332)
-------- -------- --------
Balance, December 31, $ 18,255 $ 23,906 $ 26,585
======== ======== ========
The effect of reinsurance on premiums written and earned for the years ended
December 31, 1998, 1997 and 1996 is as follows (in thousands):
1998 1997 1996
---- ---- ----
Premiums Premiums Premiums Premiums Premiums Premiums
Written Earned Written Earned Written Earned
------- ------ ------- ------ ------- ------
Direct $214,878 $247,913 $282,217 $304,891 $338,648 $353,902
Assumed 93 148 200 280 1,030 1,115
Ceded (17,528) (19,485) (29,184) (30,156) (29,898) (28,584)
-------- -------- -------- -------- -------- --------
Net $197,443 $228,576 $253,233 $275,015 $309,780 $326,433
======== ======== ======== ======== ======== ========
Percentage
of amount
assumed
to net .05% .06% .08% .10% .33% .34%
=== === === === === ===
Recoveries recognized on reinsurance contracts were $38,958,000 in 1998,
$29,786,000 in 1997 and $25,473,000 in 1996.
Net income (loss) as determined in accordance with statutory accounting
principles ("SAP") as reported to the domiciliary state of the Company's
property and casualty insurance subsidiaries were $(9,410,000), $3,405,000 and
$26,905,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
The related statutory surplus was $199,772,000, $217,925,000 and $220,317,000 at
December 31, 1998, 1997 and 1996, respectively. As of December 31, 1998, the
statutory surplus of the Empire Insurance Group was $160,603,000.
The insurance subsidiaries are subject to regulatory restrictions which limit
the amount of cash and other distributions available to the Company without
F-11
5. Insurance Operations, continued:
regulatory approval. As of December 31, 1998, $15,079,000 could be distributed
to the Company without regulatory approval.
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.
In the following table, the liabilities for unpaid losses and LAE, of the Empire
Insurance Group is reconciled for each of the three years in the period ended
December 31, 1998. The changes in the liabilities include adjustments for the
current year's business and changes in estimates of prior years' liabilities.
1998 1997 1996
---- ---- ----
(In thousands)
Net SAP liability for losses
and LAE at beginning of year $487,116 $481,138 $476,692
-------- -------- --------
Provision for losses and
LAE for claims occurring
in the current year 191,482 248,408 271,633
Increase in estimated losses
and LAE for claims
occurring in prior years 42,290 27,027 28,183
-------- -------- --------
Total incurred losses
and LAE 233,772 275,435 299,816
-------- -------- --------
Losses and LAE payments for
claims occurring during:
Current year 64,739 80,149 93,036
Prior years 186,831 189,308 202,334
-------- -------- --------
251,570 269,457 295,370
-------- -------- --------
Net SAP liability for losses
and LAE at end of year 469,318 487,116 481,138
Reinsurance recoverable 72,956 58,592 51,181
-------- -------- --------
Liability for losses and LAE
at end of year as reported
in financial statements (GAAP) $542,274 $545,708 $532,319
======== ======== ========
6. Discontinued Operations:
In September 1998, the Company reinsured, retroactive to January 1, 1998,
substantially all of its life insurance business to Allstate Life Insurance
Company ("Allstate") and a subsidiary thereof in an indemnity reinsurance
transaction. While the premium received on this transaction was approximately
$28,675,000, the gain on the reinsurance transaction was deferred and is being
amortized into income based upon actuarial estimates of the premium revenue of
the underlying insurance contracts. In December 1998, the Company signed an
agreement to sell its life insurance subsidiaries, Charter and Intramerica, to
Allstate for statutory surplus at the date of sale (approximately $62,200,000 at
December 31, 1998), plus $3,575,000. This transaction is expected to result
F-12
6. Discontinued Operations, continued:
in a pre-tax gain of approximately $20,000,000, principally resulting from
recognition of deferred gains from prior reinsurance transactions, including the
reinsurance transaction described above. The transaction is subject to
regulatory approvals and customary closing conditions and is expected to close
in the second quarter of 1999.
In September 1997, the Company completed the sale of the Colonial Penn Life
Group to Conseco, Inc. for $460,000,000, including $400,000,000 in notes
maturing on January 2, 2003 collateralized by non-cancelable letters of credit
and $60,000,000 in cash. These companies were principally engaged in the sale of
graded benefit life insurance policies through direct marketing and agent-sold
Medicare supplement insurance. The Company reported a pre-tax gain of
approximately $271,750,000 on the sale. In connection with the sale of the
Colonial Penn Life Group, the Company reinsured certain life insurance policies
for a premium of $25,000,000. The gain on this reinsurance transaction was
deferred and is being amortized into income based on actuarial estimates of the
premium revenue of the underlying insurance contracts. Upon the closing of the
sale to Allstate described above, the remaining deferred gain will be recognized
in income.
In November 1997, the Company completed the sale of the property and casualty
insurance business of the Colonial Penn P&C Group to General Electric Capital
Corporation for total cash consideration of $1,018,100,000, plus $14,300,000 for
retention of certain employee benefit liabilities. The Group's primary business
was providing private passenger automobile insurance to the mature adult
population through direct response marketing. The Company reported a pre-tax
gain of approximately $589,950,000 on the sale.
At December 31, 1998 and 1997 the components of net assets of discontinued
operations are as follows (in thousands):
1998 1997
---- ----
Investments $ 65,788 $ 83,431
Cash and cash equivalents 3,032 25,995
Separate account assets 619,578 541,546
Notes and other receivables 179,580 175,777
Other 15,425 201
-------- --------
Total assets 883,403 826,950
-------- --------
Policy reserves 179,083 191,374
Separate account liabilities 619,578 541,546
Other 39,734 22,113
-------- --------
Total liabilities 838,395 755,033
-------- --------
Net assets of discontinued operations $ 45,008 $ 71,917
======== ========
F-13
6. Discontinued Operations, continued:
A summary of the results of discontinued operations (through the dates of sale)
is as follows for each of the three years in the period ended December 31, 1998
(in thousands):
1998 1997 1996
---- ---- ----
Charter and Intramerica:
Revenues $10,799 $12,739 $13,881
------- ------- -------
Expenses:
Provision for insurance losses
and policy benefits (646) 1,898 1,846
Other operating expenses (1,079) 11,537 3,187
------- ------- -------
(1,725) 13,435 5,033
------- ------- -------
Income (loss) before income taxes 12,524 (696) 8,848
Income taxes 4,383 (360) 3,047
------- ------- -------
Income (loss) from discontinued
operations, net of taxes $ 8,141 $ (336) $ 5,801
======= ======= =======
Colonial Penn P&C Group:
Revenues $512,811 $592,005
-------- --------
Expenses:
Provision for insurance losses
and policy benefits 373,602 421,823
Other operating expenses 86,519 100,660
-------- --------
460,121 522,483
-------- --------
Income before income taxes 52,690 69,522
Income taxes 18,329 22,288
-------- --------
Income from discontinued
operations, net of taxes $ 34,361 $ 47,234
======== ========
Colonial Penn Life Group:
Revenues $166,078 $230,228
-------- --------
Expenses:
Provision for insurance losses
and policy benefits 100,964 139,135
Other operating expenses 28,341 42,764
-------- --------
129,305 181,899
-------- --------
Income before income taxes 36,773 48,329
Income taxes 12,282 16,988
-------- --------
Income from discontinued
operations, net of taxes $ 24,491 $ 31,341
======== ========
F-14
7. 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, 1998 and 1997 are as follows (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
Held to maturity:
1998
- ----
Bonds and notes:
United States Government
agencies and authorities $23,743 $348 $22 $24,069
States, municipalities
and political subdivisions 6,818 3 - 6,821
All other corporates 349 - 2 347
Other fixed maturities 16,346 - - 16,346
------- ---- --- -------
$47,256 $351 $24 $47,583
======= ==== === =======
1997
- ----
Bonds and notes:
United States Government
agencies and authorities $22,161 $166 $46 $22,281
States, municipalities
and political subdivisions 3,002 3 - 3,005
All other corporates 141 - 5 136
Other fixed maturities 10,894 - - 10,894
------- ---- --- -------
$36,198 $169 $51 $36,316
======= ==== === =======
Available for sale:
1998
- ----
Bonds and notes:
United States Government
agencies and authorities $1,313,764 $ 5,736 $ 1,290 $1,318,210
States, municipalities
and political subdivisions 126 - - 126
Foreign governments 2,955 3,131 - 6,086
Public utilities 2,166 - 1 2,165
All other corporates 204,288 8,241 7,762 204,767
---------- ------- ------- ----------
Total fixed maturities 1,523,299 17,108 9,053 1,531,354
---------- ------- ------- ----------
Equity securities:
Preferred stocks 5,571 281 16 5,836
Common stocks:
Banks, trusts and insurance
companies 20,036 - 6,312 13,724
Industrial, miscellaneous and
all other 6,833 276 4,914 2,195
---------- ------- ------- ----------
Total equity securities 32,440 557 11,242 21,755
---------- ------- ------- ----------
Other 50 - 33 17
---------- ------- ------- ----------
$1,555,789 $17,665 $20,328 $1,553,126
========== ======= ======= ==========
F-15
7. Investments, continued:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
1997
- ----
Bonds and notes:
United States Government
agencies and authorities $1,361,597 $ 5,778 $2,241 $1,365,134
Foreign governments 34,364 3,511 175 37,700
All other corporates 239,254 3,054 2,207 240,101
---------- ------- ------ ----------
Total fixed maturities 1,635,215 12,343 4,623 1,642,935
Equity securities:
Common stocks - industrial,
miscellaneous and all other 3,464 998 945 3,517
Other 5,000 - 63 4,937
---------- ------- ------ ----------
$1,643,679 $13,341 $5,631 $1,651,389
========== ======= ====== ==========
Reclassification amounts included in comprehensive income for the year ended
December 31, 1998 are as follows (in thousands):
Unrealized holding (losses) arising during
the period, net of taxes of $1,366 $(2,467)
Less: reclassification adjustment for gains
included in net income, net of taxes of $2,230 (4,145)
-------
Net change in unrealized gain (loss) on investments,
net of taxes of $3,596 $(6,612)
=======
The amortized cost and estimated fair value of investments classified as held to
maturity and as available for sale at December 31, 1998, 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.
Held to Maturity Available for Sale
---------------- ------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
(In thousands)
Due in one year or less $18,320 $18,327 $ 803,748 $ 811,298
Due after one year
through five years 15,631 15,712 495,065 492,083
Due after five years
through ten years 6,431 6,680 141,124 142,781
Due after ten years 4,554 4,544 4,943 4,951
------- ------- ---------- ----------
44,936 45,263 1,444,880 1,451,113
Mortgage-backed securities 2,320 2,320 78,419 80,241
------- ------- ---------- ----------
$47,256 $47,583 $1,523,299 $1,531,354
======= ======= ========== ==========
At December 31, 1998 and 1997 securities with book values aggregating $8,119,000
and $8,003,000, respectively, were on deposit with various regulatory
authorities. Additionally, at December 31, 1998 and 1997, securities with book
values of approximately $105,000,000 collateralized a letter of credit issued in
connection with the sale of the Colonial Penn P&C Group.
F-16
7. Investments, continued:
Certain information with respect to trading securities at December 31, 1998 and
1997 is as follows (in thousands):
Amortized Estimated Carrying
Cost Fair Value Value
---- ---------- -----
1998
- ----
Fixed maturities - corporate bonds
and notes $ 16,782 $ 17,477 $ 17,477
Equity securities:
Preferred stocks 105,775 101,964 101,964
Common stocks - industrial,
miscellaneous and all other 72 105 105
Options and warrants 1,119 431 431
Other investments 9,159 12,599 12,599
-------- -------- --------
Total trading securities $132,907 $132,576 $132,576
======== ======== ========
1997
- ----
Fixed maturities - corporate bonds
and notes $ 5,360 $ 5,419 $ 5,419
Equity securities:
Preferred stocks 100,483 107,567 107,567
Common stocks - industrial,
miscellaneous and all other 1,600 1,600 1,600
Options and warrants 1,036 830 830
-------- -------- -------
Total trading securities $108,479 $115,416 $115,416
======== ======== ========
8. Trade, Notes and Other Receivables, Net:
A summary of trade, notes and other receivables, net at December 31, 1998 and
1997 is as follows (in thousands):
1998 1997
---- ----
Note receivable from Conseco, Inc. from sale
of the Colonial Penn Life Group (including
accrued interest) (see Note 6) $405,854 $406,223
Instalment loan receivables, net of unearned
finance charges of $3,026 and $919(a) 185,183 202,938
Receivables related to securities 112,684 343
Receivables relating to real estate activities 68,863 8,552
Tenant receivables of Fidei 53,775 -
Premiums receivable 40,374 49,451
Bridge financing to PIB - 77,705
Other 23,590 22,455
-------- --------
890,323 767,667
Allowance for doubtful accounts (including $9,398
and $10,199 applicable to loan receivables of
banking and lending subsidiaries and, in 1998,
$40,955 relating to Fidei) (57,022) (16,330)
-------- --------
$833,301 $751,337
======== ========
(a) Contractual maturities of instalment loan receivables at December 31, 1998
were as follows (in thousands): 1999 - $44,017; 2000 - $37,474; 2001 - $33,236;
2002 - $30,362 and 2003 and thereafter - $40,094. 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.
F-17
9. Prepaids and Other Assets:
At December 31, 1998 and 1997, prepaids and other assets included real estate
assets, net, of $397,404,000 and $93,264,000, respectively. Approximately
$245,870,000 of the 1998 real estate investment consists of real estate assets
held by Fidei. These assets are primarily office buildings located in Paris,
France and its environs which Fidei is currently marketing for sale.
10. Trade Payables, Expense Accruals and Other Liabilities:
A summary of trade payables and expense accruals and other liabilities at
December 31, 1998 and 1997 is as follows (in thousands):
1998 1997
---- ----
Trade Payables and Expense Accruals:
Payables related to securities $144,088 $ 97,844
Trade and drafts payable 27,629 20,512
Accrued compensation, severance and other
employee benefits 18,695 33,269
Accrued interest payable 14,420 5,709
Taxes, other than income 8,441 2,817
Provision for servicing carrier claims 5,768 12,337
Amount due on reinsurance 3,017 16,160
Other 11,427 20,114
-------- --------
$233,485 $208,762
======== ========
Other Liabilities:
Liability for unredeemed trading stamps $ 19,517 $ 22,227
Postretirement and postemployment benefits 18,855 21,584
Liabilities related to real estate activities 13,446 19
Unearned service fees 7,465 15,129
Other 50,114 34,182
-------- --------
$109,397 $ 93,141
======== ========
F-18
11. Indebtedness:
The principal amount, stated interest rate and maturity of debt outstanding at
December 31, 1998 and 1997 are as follows (dollars in thousands):
1998 1997
---- ----
Payable in U.S. dollars:
Senior Notes:
Bank credit facility $ 65,500 $ -
7 3/4% Senior Notes due 2013, less debt
discount of $731 and $781 99,269 99,219
Industrial Revenue Bonds (with variable interest) 9,815 9,815
Other due 1999 through 2016 with a weighted average
interest rate of 8.3% 64,182 9,447
-------- --------
238,766 118,481
-------- --------
Subordinated Notes:
8 1/4% Senior Subordinated Notes due 2005 100,000 100,000
7 7/8% Senior Subordinated Notes due 2006,
less debt discount of $540 and $609 134,460 134,391
-------- --------
234,460 234,391
-------- --------
Payable in other currencies:
Euro denominated debt due 2001
through 2009 with a weighted average effective
interest rate of 5.1% 249,375 -
-------- --------
$722,601 $352,872
======== ========
At December 31, 1998 the Company had an unsecured bank credit facility of
$100,000,000 which bears interest based on the prime rate or LIBOR and matures
in November 2002. $65,500,000 was borrowed under this bank credit facility as of
December 31, 1998.
The Euro denominated debt, which is non-recourse to the Company, is entirely
related to the acquisition of Fidei.
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. As of December 31,
1998, cash dividends of approximately $579,000,000 would be eligible to be paid
under the most restrictive covenants.
The Company reported extraordinary losses on early extinguishment of its 5 1/4%
Convertible Subordinated Debentures due 2003 (the "5 1/4% Debentures") and its
10 3/8% Senior Subordinated Notes due 2002 of $3,165,000 ($2,057,000 after taxes
or $.03 per share) in 1997 and $10,520,000 ($6,838,000 after taxes or $.11 per
share) in 1996.
Approximately $10,470,000 of the manufacturing division's net property,
equipment and leasehold improvements are pledged as collateral for the
Industrial Revenue Bonds; and approximately $94,030,000 of other assets
(primarily investments and property) are pledged for other indebtedness
aggregating approximately $49,182,000.
Interest rate agreements are used to manage the potential impact of changes in
interest rates on customer banking deposits. 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, 1998 and 1997, the notional
amounts of the Company's interest rate swaps were $60,000,000 and $25,000,000,
respectively. These interest rate swaps expire in 2003 and require fixed rate
payments of 5.07%. The Company would have been required to pay $292,000 at
December 31, 1998 and $636,000 at December 31, 1997 to retire these agreements.
The LIBOR rate at December 31, 1998 was 5.07%. 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. In
connection with
F-19
11. Indebtedness, continued:
the acquisition of Fidei, the Company borrowed $62,300,000 under its bank credit
facility and entered into currency swap agreements to hedge approximately
$55,000,000 of its foreign currency exposure. The swap agreements mature in
tranches in March 2000 and September 2001.
Counterparties to interest rate and currency swap agreements are major financial
institutions, which management believes are able to fulfill their obligations.
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, 2003 are as follows (in thousands): 1999 - $99,142; 2000 -
$870; 2001 - $71,170; 2002 - $8,006; and, 2003 - $97,803.
The weighted average interest rate on short-term borrowings (primarily customer
banking deposits) was 5.8% and 5.9% at December 31, 1998 and 1997, respectively.
12. Preferred Securities of Subsidiary Trust:
In January 1997, the Company sold $150,000,000 aggregate liquidation amount of
8.65% trust issued preferred securities of its wholly-owned 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 $154,640,000 principal amount of 8.65% Junior Subordinated Deferrable
Interest Debentures due 2027 of the Company. Considered together, the "back-up
undertakings" of the Company related to the Trust's preferred securities
constitute a full and unconditional guarantee by the Company of the Trust's
obligations under the preferred securities. During 1998, a subsidiary of the
Company repurchased $51,800,000 aggregate liquidation amount of the 8.65% trust
issued preferred securities for $42,200,000, plus accrued interest. The
difference between the purchase price and the book value was credited directly
to shareholders' equity, net of taxes.
13. Common Shares, Stock Options and Preferred Shares:
The Board of Directors from time to time has authorized acquisitions of the
Company's Common Shares. In October 1998, the Company's Board of Directors
increased to 6,000,000 the maximum number of shares that the Company is
authorized to purchase. During the three year period ended December 31, 1998,
the Company acquired 2,111,193 Common Shares at an average price of $29.23 per
Common Share. From January 1, 1999 through March 12, 1999, the Company acquired
1,738,570 Common Shares at an average price of $29.98 per Common Share. As a
result, as of March 13, 1999, the Company is authorized to repurchase 3,788,717
Common Shares.
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. As permitted, 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
1998, 1997 and 1996 would not have been materially different from those
reported.
F-20
13. Common Shares, Stock Options and Preferred Shares, continued:
A summary of activity with respect to the Company's stock options for the three
years ended December 31, 1998 is as follows:
Available
Common Weighted for
Shares Average Options Future
Subject Exercise Exercisable Option
to Option Prices at Year-End Grants
--------- ------ ----------- ------
Balance at January 1, 1996 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
======= =========
Granted 77,500 $26.67
Exercised (248,196) $14.15
Cancelled (393,470) $24.69
---------
Balance at December 31, 1997 509,760 $24.64 171,980 1,278,770
======= =========
Granted 4,000 $35.38
Exercised (137,922) $23.10
Cancelled (53,800) $25.02
---------
Balance at December 31, 1998 322,038 $25.37 147,378 1,328,570
========= ======= =========
The weighted-average fair value of the options granted was $8.50 per share for
1998, $6.39 per share for 1997 and $7.04 per share for 1996 as estimated on the
date of grant using the Black-Scholes option-pricing model with the following
assumptions: (1) expected volatility of 20.0% for 1998, 20.3% for 1997 and 25.3%
for 1996 (2) risk-free interest rates of 5.6% for 1998, 6.1% for 1997 and 6.0%
for 1996; (3) expected lives of 4.0 years for 1998 and 3.7 years for 1997 and
1996; and (4) dividend yields of .7% for 1998 and .9% for 1997 and 1996.
The following table summarizes information about fixed stock options outstanding
at December 31, 1998:
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
- --------------- ------ ---- ----- ------ -----
$17.88 - $20.44 68,238 .9 years $20.25 67,038 $20.29
$23.25 - $26.63 241,800 3.2 years $26.37 78,540 $26.33
$31.50 - $35.63 12,000 4.2 years $34.17 1,800 $33.79
------- -------
$17.88 - $35.63 322,038 2.8 years $25.37 147,378 $23.68
======= =======
At December 31, 1998 and 1997, 1,650,608 and 1,788,530, respectively, of the
Company's Common Shares were reserved for stock options.
At December 31, 1998 and 1997, 6,000,000 preferred shares (redeemable and
non-redeemable), par value $1 per share, were authorized.
F-21
14. Net Securities Gains (Losses):
The following summarizes net securities gains (losses) for each of the three
years in the period ended December 31, 1998 (in thousands):
1998 1997 1996
---- ---- ----
Net realized gains on fixed maturities $ 13,021 $ 1,340 $ 6,990
Writedown related to investments in Russian
and Polish debt and equity securities (75,371) - -
Net unrealized gains (losses) on trading
securities (1,456) 2,932 (3,834)
Net realized gains (losses) on equity and other
securities 2,935 (1,023) 20,961
-------- ------- -------
$(60,871) $ 3,249 $24,117
======== ======= =======
Proceeds from sales of investments classified as available for sale were
$1,687,385,000, $734,443,000 and $594,286,000 during 1998, 1997 and 1996,
respectively. Gross gains of $24,964,000, $6,054,000 and $24,351,000 and gross
losses of $33,784,000, $2,403,000 and $5,123,000 were realized on these sales
during 1998, 1997 and 1996, respectively.
15. Other Results of Operations Information:
Investment and other income for each of the three years in the period ended
December 31, 1998 consist of the following (in thousands):
1998 1997 1996
---- ---- ----
Interest on short-term investments $ 24,246 $ 14,301 $ 8,532
Interest on fixed maturities 94,547 72,084 58,609
Interest on notes receivable 26,717 6,789 615
Other investment income 15,592 4,191 4,337
Service fee income 13,169 32,257 25,084
Trading stamp revenues 4,032 8,194 12,017
Rental income 16,864 8,082 10,560
Gains on sale of real estate and other assets,
net of costs 34,629 75,298 11,078
Gain on sale of loan portfolio 6,535 - -
Litigation settlements - 579 5,434
Other 15,048 13,278 19,824
-------- -------- --------
$251,379 $235,053 $156,090
======== ======== ========
During 1998, the Company's subsidiaries, American Investment Bank, N.A. and
American Investment Financial, sold substantially all of their executive and
professional loan portfolios for aggregate proceeds of $89,500,000. The Company
reported a pre-tax gain on the sales of approximately $6,535,000 for the year
ended December 31, 1998.
In June 1997 the Company sold its investment in a New York City office building
for $100,000,000 in cash. The Company reported a pre-tax gain of approximately
$35,600,000 on the sale.
Taxes, other than income or payroll, included in operations amounted to
$10,563,000 (including $3,131,000 of premium taxes) for the year ended December
31, 1998, $10,707,000 (including $4,137,000 of premium taxes) for the year ended
December 31, 1997 and $16,150,000 (including $5,099,000 of premium taxes) for
the year ended December 31, 1996.
Advertising costs amounted to $2,150,000, $4,026,000 and $5,138,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
F-22
16. Income Taxes:
The principal components of the deferred tax liability at December 31, 1998 and
1997 are as follows (in thousands):
1998 1997
---- ----
Deferred Tax Asset:
Insurance reserves and unearned premiums $ 30,868 $ 33,831
Securities valuation reserves 47,112 20,129
Other accrued liabilities 1,556 7,890
Unrealized losses on investments 1,106 -
Tax loss carryforwards, net of tax sharing payments 63,228 39,047
-------- --------
143,870 100,897
Valuation allowance (102,403) (71,776)
-------- --------
41,467 29,121
-------- --------
Deferred Tax Liability:
Instalment sale (12,000) (12,000)
Unrealized (gains) on investments - (2,613)
Depreciation (6,098) (5,864)
Policy acquisition costs (6,389) (8,367)
Other, net (24,689) (23,016)
-------- --------
(49,176) (51,860)
-------- --------
Net deferred tax liability $ (7,709) $(22,739)
======== ========
The valuation allowance principally relates to capital loss carryforwards,
certain acquired tax loss carryforwards, the usage of which is subject to
certain limitations and certain other matters which may restrict their
utilization, and unrealized capital losses. Upon the closing of the sale of the
Company's interest in Caja (see Note 4), the valuation allowance will be reduced
by approximately $30,000,000 due to the availability of capital loss
carryforwards to offset a portion of the capital gain.
The (benefit) for income taxes for each of the three years in the period ended
December 31, 1998 was as follows (in thousands):
1998 1997 1996
---- ---- ----
State income taxes (principally
currently payable) $ (1,500) $ 3,729 $ 1,200
Federal income taxes:
Current (31,249) (10,375) (397)
Deferred 7,576 (3,753) (20,629)
Foreign income taxes (principally
currently payable) 100 508 500
-------- -------- --------
$(25,073) $ (9,891) $(19,326)
======== ======== ========
The table below reconciles expected statutory federal income tax to actual
income tax (benefit) (in thousands):
1998 1997 1996
---- ---- ----
Expected federal income tax $ 10,282 $(8,483) $(16,865)
State income taxes, net of federal
income tax benefit (975) 2,424 780
Reduction in valuation allowance (8,065) (1,890) (1,693)
Recognition of additional tax benefits (30,870) (2,719) (2,500)
Tax on policyholder surplus account 5,406 - -
Other (851) 777 952
-------- ------- --------
Actual income tax (benefit) $(25,073) $(9,891) $(19,326)
======== ======= ========
F-23
16. Income Taxes, continued:
Reflected above as recognition of additional tax benefits, are reductions to the
Company's income tax provision for the favorable resolution of certain
contingencies and, in 1998, for a change in the Company's 1997 estimated federal
income tax liability. The valuation allowance applicable to the deferred income
tax asset gives effect to the possible unavailability of certain income tax
deductions. During 1998, 1997 and 1996 certain matters were favorably resolved
and the Company reduced the valuation allowance as reflected in the above
reconciliation. However, during 1998, the valuation allowance was also increased
by approximately $38,000,000 for capital losses.
At December 31, 1998, the Company had tax loss carryforwards of $15,000,000,
which are available to reduce federal income tax payments for the entire
consolidated group, and certain of the Company's subsidiaries had tax loss
carryforwards of $47,000,000, which can only be used to reduce federal income
tax payments for the group that generated the carryforward. The tax loss
carryforwards of the Company and its subsidiaries have been reflected in the
deferred tax liability after applying the statutory federal income tax rate less
any applicable tax sharing payments to the Internal Revenue Service. The tax
loss carryforwards of the Company expire primarily in 2010. The tax loss
carryforwards of the Company's subsidiaries expire in 2002 and 2003. In
addition, at December 31, 1998 the Company had capital loss carryforwards of
$110,000,000 which expire in 2002 and 2003.
Limitations exist under the tax law which may restrict the utilization of the
tax loss carryforwards. In addition, the capital loss carryforwards can only be
used to offset capital gains. 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 includes
restrictions which prohibit transfers of the Company's Common Stock under
certain circumstances.
In connection with the sale of certain of the Company's operations in recent
years, the Company had indemnified the purchasers for certain tax matters. The
Company does not believe that such indemnification obligation will result in any
additional material liability to the Company.
F-24
17. 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. Effective December 31, 1998, the Company froze its defined benefit
pension plans which resulted in the recognition of approximately $6,500,000 of
net curtailment gains.
A summary of activity with respect to the Company's pension plans for 1998 and
1997 is as follows (in thousands):
1998 1997
---- ----
Projected Benefit Obligation:
Projected benefit obligation
at January 1, $100,314 $ 98,733
Service cost (a) 2,590 4,234
Interest cost (a) 5,536 7,411
Actuarial loss 561 10,016
Benefits paid (5,055) (10,111)
Settlements (31,060) (2,021)
Curtailment (9,491) (7,948)
-------- --------
Projected benefit obligation
at December 31, $ 63,395 $100,314
======== ========
Change in Plan Assets:
Fair value of plan assets
at January 1, $ 93,088 $ 90,902
Actual return of plan assets 5,186 8,967
Employer contributions 1,076 6,059
Benefits paid (5,012) (10,111)
Administrative expenses (626) (74)
Settlements (31,230) (2,655)
-------- --------
Fair value of plan assets
at December 31, $ 62,482 $ 93,088
======== ========
Funded Status $ (913) $ (7,226)
Unrecognized prior service cost 66 84
Unrecognized net loss at January 1, 1987 - 378
Unrecognized net loss from experience
differences and assumption changes 2,356 4,341
-------- --------
Accrued pension asset (liability) $ 1,509 $ (2,423)
======== ========
(a) Includes $369 and $5,760 for 1998 and 1997, respectively, relating to
discontinued operations' obligations which were retained.
Pension expense charged to operations included the following components (in
thousands):
1998 1997 1996
---- ---- ----
Service cost $ 2,542 $ 2,240 $ 2,496
Interest cost 5,215 3,645 3,606
Expected return on plan assets (5,108) (3,330) (2,989)
Amortization of prior service cost (89) (72) 1,001
Amortization of transition obligation 121 95 90
Recognized net actuarial loss 171 152 502
------- ------- -------
Net pension expense $ 2,852 $ 2,730 $ 4,706
======= ======= =======
F-25
17. Pension Plans and Postretirement Benefits, continued:
The projected benefit obligation at December 31, 1998 and 1997 was determined
using an assumed discount rate of 6.75% and 7.0%, respectively, and, for 1997,
an assumed compensation increase rate of 4.3%. The assumed long-term rate of
return on plan assets was 7.5% and 7.4% at December 31, 1998 and 1997,
respectively.
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 $1,057,000,
$1,202,000 and $1,340,000 for the years ended December 31, 1998, 1997 and 1996,
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 (credited)
to expense (principally amortization of a curtailment gain in 1998 and 1997 and
interest in 1996) related to such benefits were $(1,990,000) in 1998,
$(2,851,000) in 1997 and $1,355,000 in 1996.
A summary of activity with respect to the Company's postretirement plans for
1998 and 1997 is as follows:
1998 1997
---- ----
Accumulated postretirement
benefit obligation at January 1, $11,090 $15,892
Service cost 30 23
Interest cost 805 776
Contributions by plan participants 401 68
Actuarial loss (gain) 906 (4,770)
Benefits paid (1,341) (899)
------- -------
Accumulated postretirement benefit
obligation at December 31, 11,891 11,090
Unrecognized prior service cost 2,259 4,847
Unrecognized net actuarial gain 2,482 3,622
------- -------
Accrued postretirement benefit obligation $16,632 $19,559
======= =======
The discount rate used in determining the accumulated postretirement benefit
obligation was 6.75% and 7.0% at December 31, 1998 and 1997, respectively. The
assumed health care cost trend rates used in measuring the accumulated
postretirement benefit obligation were between 6.0% and 9.5% for 1998 and 6.9%
and 10.5% for 1997, declining to an ultimate rate of between 5.0% and 6.0% by
2006.
If the health care cost trend rates were increased or decreased by 1%, the
accumulated postretirement obligation as of December 31, 1998 would have
increased or decreased by $823,000 and $729,000, respectively. The effect of
these changes on the aggregate of service and interest cost for 1998 would be
immaterial.
18. 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
$7,680,000 in 1998, $7,307,000 in 1997 and $8,583,000 in 1996. Aggregate minimum
annual rentals (exclusive of real estate taxes, maintenance and certain other
F-26
18. Commitments, continued:
charges) relating to facilities under lease in effect at December 31, 1998 are
as follows (in thousands): 1999 - $7,144; 2000 - $6,982; 2001 - $6,912; 2002 -
$6,772; 2003 - $6,495; and thereafter - $103,802. Future minimum sublease rental
income relating to facilities under lease in effect at December 31, 1998 are as
follows (in thousands): 1999 - $848; 2000 - $863; 2001 - $868; 2002 - $876; 2003
- - $883; and thereafter - $4,049.
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 are 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, of
which $5,000,000 is currently invested.
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.
In connection with the sale of the Colonial Penn P&C Group, the Company provided
the purchaser with a $100,000,000 non-cancelable letter of credit to
collateralize certain indemnification obligations. This letter of credit is
collateralized by certain deposits of the Company aggregating approximately
$105,000,000.
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 $293,888,000 at December 31,
1998.
19. 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.
F-27
20. Earnings (Loss) Per Common Share:
A reconciliation of the numerators and denominators of the basic and diluted
earnings (loss) per share calculations for income (loss) from continuing
operations before extraordinary loss for each of the three years in the period
ended December 31, 1998 is as follows (in thousands, except per share amounts):
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
1998:
- -----
Basic Earnings Per Share:
Income from continuing operations
before extraordinary loss $ 46,202 63,409 $ .73
=====
Effect of Dilutive Securities:
Options - 101
-------- ------
Diluted earnings per share $ 46,202 63,510 $ .73
======== ====== =====
1997:
- -----
Basic (Loss) Per Share:
(Loss) from continuing operations
before extraordinary loss $(22,289) 62,205 $(.36)
=====
Effect of Dilutive Securities:
Options - -
5 1/4% Debentures - -
-------- ------
Diluted (loss) per share $(22,289) 62,205 $(.36)
======== ====== =====
1996:
- -----
Basic (Loss) Per Share:
(Loss) from continuing operations
before extraordinary loss $(28,861) 60,301 $(.48)
=====
Effect of Dilutive Securities:
Options - -
5 1/4% Debentures - -
-------- ------
Diluted (loss) per share $(28,861) 60,301 $(.48)
======== ====== =====
Options to purchase 886,730 and 1,144,431 weighted average shares of common
stock were outstanding during the years ended December 31, 1997 and 1996,
respectively, but were not included in the computation of diluted (loss) per
share, as those options were antidilutive.
Additionally, during the year ended December 31, 1996, and for the period
January 1, 1997 through April 11, 1997, the 5 1/4% Debentures, which were
convertible into 3,478,260 Common Shares, were outstanding. Such debentures were
not included in the computation of diluted (loss) per share, as those debentures
were antidilutive.
21. 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
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:
F-28
21. Fair Value of Financial Instruments, continued:
(a) Investments: The fair values of marketable equity securities, fixed maturity
securities and investments held for trading purposes (which include securities
sold not owned) are substantially based on quoted market prices, as disclosed in
Note 7.
(b) Cash and cash equivalents: For cash equivalents, the carrying amount
approximates fair value.
(c) Notes receivable on the sale of the Colonial Penn Life Group: The fair value
of variable rate note receivable is estimated to be the carrying amount.
(d) Loan receivables of banking and lending subsidiaries: The fair value of
loan receivables 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.
(e) Investments in associated companies: For 1998, the fair value of Caja is
based upon the sales price as discussed in Note 4. For 1997, the fair value of
Caja was estimated to be the carrying amount. 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) Customer banking deposits: The fair value of customer banking deposits is
estimated using rates currently offered for deposits of similar remaining
maturities.
(g) 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.
F-29
21. Fair Value of Financial Instruments, continued:
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1998 and 1997 are as follows (in thousands):
1998 1997
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial Assets:
Investments $1,770,205 $1,770,532 $1,872,369 $1,872,487
Cash and cash equivalents 459,690 459,690 581,186 581,186
Note receivable on sale of the
Colonial Penn Life Group (including
accrued interest) 405,854 405,854 406,223 406,223
Loan receivables of banking and
lending subsidiaries, net of
allowance 175,785 186,099 192,739 203,963
Investments in associated
companies 172,390 306,071 207,902 217,499
Financial Liabilities:
Customer banking deposits 189,782 192,822 198,582 199,414
Debt 722,601 729,527 352,872 371,757
Securities sold not owned 144,088 144,088 97,708 97,708
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely subordinated debt
securities of the Company 98,200 99,182 150,000 159,000
22. Segment Information:
In 1998, the Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), which requires a "management" approach for segment disclosure. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. SFAS 131 also requires disclosures
about products and services, geographic areas and major customers.
For information with respect to the Company's segments, see "Financial
Information about Industry Segments" in Item 1 of the Report, which is
incorporated by reference into these consolidated financial statements.
23. Events Subsequent to the Balance Sheet Date:
In February 1999, the Company sold its wholly-owned subsidiary, The Sperry and
Hutchinson Company, Inc. and will recognize a pre-tax gain of approximately
$19,000,000 in the first quarter of 1999.
F-30
24. Selected Quarterly Financial Data (Unaudited):
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands, except per share amounts)
1998:
- -----
Revenues $144,987 $146,717 $ 77,705 $161,097
======== ======== ======== ========
Income (loss) from continuing operations $ 11,124 $ 13,339 $ (5,448) $ 27,187
======== ======== ======== ========
Income from discontinued operations,
net of taxes $ 1,459 $ 1,503 $ 3,411 $ 1,768
======== ======== ======== ========
Net income (loss) $ 12,583 $ 14,842 $ (2,037) $ 28,955
======== ======== ======== ========
Basic earnings (loss) per common share:
Income (loss) from continuing operations $.18 $.21 $(.08) $.43
Income from discontinued operations .02 .02 .05 .03
---- ---- ----- ----
Net income (loss) $.20 $.23 $(.03) $.46
==== ==== ===== ====
Number of shares used in calculation 63,904 63,941 63,600 62,310
====== ====== ====== ======
Diluted earnings (loss) per common share:
Income (loss) from continuing operations $.18 $.21 $(.08) $.43
Income from discontinued operations .02 .02 .05 .03
---- ---- ----- ----
Net income (loss) $.20 $.23 $(.03) $.46
==== ==== ===== ====
Number of shares used in calculation 64,053 64,063 63,600 62,367
====== ====== ====== ======
F-31
24. Selected Quarterly Financial Data (Unaudited), continued:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands, except per share amounts)
1997:
- -----
Revenues $159,607 $188,397 $138,675 $144,058
======== ======== ======== ========
Income (loss) from continuing operations
before extraordinary loss $ (6,796) $ 18,859 $(13,983) $(20,369)
======== ======== ======== ========
Income from discontinued operations,
net of taxes $ 19,516 $ 16,734 $ 17,866 $ 4,400
======== ======== ======== ========
Gain on disposal of discontinued
operations, net of taxes $ - $ - $200,337 $427,308
======== ======== ======== ========
Extraordinary loss from early extinguishment
of debt, net of income tax benefit $ - $ (2,044) $ (13) $ -
======== ======== ======== ========
Net income $ 12,720 $ 33,549 $204,207 $411,339
======== ======== ======== ========
Basic earnings (loss) per common share:
Income (loss) from continuing operations $(.11) $ .31 $(.22) $(.32)
Income from discontinued operations .32 .27 .28 .07
Gain on disposal of discontinued operations - - 3.17 6.69
Extraordinary loss - (.03) - -
----- ----- ----- -----
Net income $ .21 $ .55 $3.23 $6.44
===== ===== ===== =====
Number of shares used in calculation 60,441 61,072 63,259 63,856
====== ====== ====== ======
Diluted earnings (loss) per common share:
Income (loss) from continuing operations $(.11) $ .30 $(.22) $(.32)
Income from discontinued operations .32 .26 .28 .07
Gain on disposal of discontinued operations - - 3.17 6.69
Extraordinary loss - (.03) - -
----- ----- ----- -----
Net income $ .21 $ .53 $3.23 $6.44
===== ===== ===== =====
Number of shares used in calculation 60,441 64,113 63,259 63,856
====== ====== ====== ======
In 1998 and 1997, the totals of quarterly per share amounts do not necessarily
equal annual per share amounts.
F-32
SCHEDULE III - Supplementary Insurance Information
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
For the years ended December 31, 1998, 1997 and 1996
Insurance
Losses,
Policy
Benefits
and
Amortization
Deferred Policy of
Policy and Net Deferred Other Non-Life
Acquisition Unearned Contract Premium Investment Acquisition Operating Premiums
Costs Premiums Claims Revenue Income Costs Expenses Written
----- -------- ------ ------- ------ ----- -------- -------
(In thousands)
1998
- ----
Property and casualty insurance:
Automobile $ 7,407 $47,734 $252,348 $128,855 $24,686 $141,011 $ 4,644 $105,341
Commercial 7,245 31,533 266,423 68,655 19,738 111,626 5,460 61,681
Miscellaneous and personal 3,603 15,305 23,503 31,066 2,668 26,473 2,334 30,421
------- ------- -------- -------- ------- -------- ------- --------
$18,255 $94,572 $542,274 $228,576 $47,092 $279,110 $12,438 $197,443
======= ======= ======== ======== ======= ======== ======= ========
1997
- ----
Property and casualty insurance:
Automobile $11,130 $ 72,614 $297,810 $169,586 $28,415 $208,521 $(15,649) $148,944
Commercial 8,594 39,119 232,057 77,657 19,427 95,024 9,693 73,716
Miscellaneous and personal 4,182 15,933 15,841 27,772 2,372 23,923 2,079 30,573
------- -------- -------- -------- ------- -------- -------- --------
$23,906 $127,666 $545,708 $275,015 $50,214 $327,468 $ (3,877) $253,233
======= ======== ======== ======== ======= ======== ======== ========
1996
- ----
Property and casualty insurance:
Automobile $14,392 $ 93,957 $295,634 $212,821 $30,890 $248,506 $ (5,160) $200,541
Commercial 8,847 43,336 225,705 92,414 20,564 86,593 16,627 84,187
Miscellaneous and personal 3,346 13,126 10,980 21,198 1,767 20,049 1,997 25,052
------- -------- -------- -------- ------- -------- -------- --------
$26,585 $150,419 $532,319 $326,433 $53,221 $355,148 $ 13,464 $309,780
======= ======== ======== ======== ======= ======== ======== ========
F-33
SCHEDULE V - Valuation and Qualifying Accounts
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
For the years ended December 31, 1998, 1997 and 1996
Additions Deductions
-------------------------------- ------------------
Charged
Balance at to Costs Balance
Beginning and Write- Sale of at End of
Description of Period Expenses Recoveries Acquisitions Offs Receivables Period
----------- --------- -------- ---------- ------------ ---- ----------- ---------
(In thousands)
1998
- ----
Loan receivables of
banking and lending
subsidiaries $10,199 $ 4,900 $4,915 $ - $ 8,996 $1,620 $ 9,398
Trade, notes and other
receivables 6,131 4,573 876 48,307 12,138 125 47,624
------- ------- ------ ------- ------- ------ -------
Total allowance for
doubtful accounts $16,330 $ 9,473 $5,791 $48,307 $21,134 $1,745 $57,022
======= ======= ====== ======= ======= ====== =======
1997
- ----
Loan receivables of
banking and lending
subsidiaries $12,177 $ 6,140 $5,021 $ - $13,139 $ - $10,199
Trade, notes and other
receivables 7,206 4,995 1,412 - 7,054 428 6,131
------- ------- ------ ------- ------- ------ -------
Total allowance for
doubtful accounts $19,383 $11,135 $6,433 $ - $20,193 $ 428 $16,330
======= ======= ====== ======= ======= ====== =======
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 - 9,040 78 7,206
------- ------- ------ ------- ------- ------ -------
Total allowance for
doubtful accounts $20,502 $18,412 $6,373 $ - $25,214 $ 690 $19,383
======= ======= ====== ======= ======= ====== =======
F-34
SCHEDULE VI - Schedule of Supplemental Information for Property and
Casualty Insurance Underwriters
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
For the years ended December 31, 1998, 1997 and 1996
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
--------------------- ------------ ---------- ----------
(In thousands)
1998
- ----
Automobile $ - $125,675 $(6,782) $169,224
Commercial 1,122 47,343 48,814 71,396
Miscellaneous and personal - 18,464 258 10,950
------ -------- ------- --------
Total property and casualty $1,122 $191,482 $42,290 $251,570
====== ======== ======= ========
1997
- ----
Automobile $ - $179,984 $ 635 $181,161
Commercial 409 53,022 24,939 76,259
Miscellaneous and personal - 15,402 1,453 12,037
------ -------- ------- --------
Total property and casualty $ 409 $248,408 $27,027 $269,457
====== ======== ======= ========
1996
- ----
Automobile $ - $194,183 $21,478 $209,179
Commercial 347 64,171 4,779 73,916
Miscellaneous and personal - 13,279 1,926 12,275
------ -------- ------- --------
Total property and casualty $ 347 $271,633 $28,183 $295,370
====== ======== ======= ========
F-35
Financial Statements
Gotham Partners Acquisition I, L.P.
Year ended December 31, 1998
with Report of Independent Auditors
Gotham Partners Acquisition I, L.P.
Financial Statements
Year ended December 31, 1998
CONTENTS
Report of Independent Auditors................................ 1
Statement of Financial Condition.............................. 2
Condensed Schedule of Investments............................. 3
Statement of Income........................................... 4
Statement of Changes in Partners' Capital..................... 5
Statement of Cash Flows....................................... 6
Notes to Financial Statements................................. 7
Report of Independent Auditors
To the Partners of
Gotham Partners Acquisition I, L.P.
We have audited the accompanying statement of financial condition of Gotham
Partners Acquisition I, L.P. (the "Partnership"), including the condensed
schedule of investments, as of December 31, 1998, and the related statements of
income, changes in partners' capital and cash flows for the year then ended.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gotham Partners Acquisition I,
L.P. at December 31, 1998, and the results of its operations and its cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
New York, New York
January 27, 1999
1
Gotham Partners Acquisition I, L.P.
Statement of Financial Condition
December 31, 1998
ASSETS
Cash $ 1,800
Due from broker 49,338,354
Investments in securities--at value (cost $7,230,744) 10,056,002
Other assets 8,179
----------------
Total assets $ 59,404,335
================
LIABILITIES AND PARTNERS' CAPITAL
Accrued expenses $ 10,000
Partners' capital 59,394,335
----------------
Total liabilities and partners' capital $ 59,404,335
================
See notes to financial statements.
2
Gotham Partners Acquisition I, L.P.
Condensed Schedule of Investments
December 31, 1998
PERCENTAGE
OF PARTNERS'
CAPITAL VALUE
----------------- ---------------------
INVESTMENTS IN SECURITIES
Options-Food and Beverages:
McDonald's Corp. (cost $7,223,816) 16.91% $ 10,044,480
Equity securities-Food and Beverages:
McDonald's Corp.-150 shares (cost $6,928) 0.02 11,522
----------------- ---------------------
Total investments in securities (cost $7,230,744) 16.93% $ 10,056,002
================= =====================
See notes to financial statements.
3
Gotham Partners Acquisition I, L.P.
Statement of Income
Year ended December 31, 1998
GAIN FROM SECURITIES TRANSACTIONS
Net realized gain from securities transactions $ 87,483,920
Net change in unrealized appreciation on securities positions 2,953,731
--------------------
Net gain from securities transactions $ 90,437,651
INVESTMENT INCOME AND EXPENSE
Income:
Interest 1,197,861
Dividends 5,417
--------------------
1,203,278
Dividend expense 12,600
--------------------
Net investment income 1,190,678
OPERATING EXPENSES
Professional fees 19,343
Other expenses 9,349
--------------------
Total operating expenses 28,692
--------------------
Net income $ 91,599,637
====================
See notes to financial statements.
4
Gotham Partners Acquisition I, L.P.
Statement of Changes in Partners' Capital
Year ended December 31, 1998
GENERAL LIMITED
TOTAL PARTNER PARTNERS
----------------------------------------------------------
Partners' capital at beginning of year $ 49,489,013 $ - $ 49,489,013
Capital contributions 15,800,000 - 15,800,000
Capital distributions (97,494,315) (6,448,938) (91,045,377)
Allocation of net income:
Pro-rata allocation 86,909,122 1,758,423 85,150,699
Special allocation 4,690,515 4,690,515 -
----------------------------------------------------------
Net income 91,599,637 6,448,938 85,150,699
----------------------------------------------------------
Partners' capital at end of year $ 59,394,335 $ - $ 59,394,335
==========================================================
See notes to financial statements.
5
Gotham Partners Acquisition I, L.P.
Statement of Cash Flows
Year ended December 31, 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 91,599,637
Adjustments to reconcile net income to net cash provided by
operating activities:
Net change in unrealized appreciation on securities positions (2,953,731)
Changes in assets and liabilities:
Increase in due from broker (30,736,434)
Decrease in investments in securities--cost 23,776,146
Decrease in other assets 4,677
Decrease in accrued expenses (11,064)
----------------------
Total adjustments (9,920,406)
----------------------
Net cash provided by operating activities 81,679,231
----------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions 15,800,000
Capital distributions (97,494,315)
----------------------
Net cash used in financing activities (81,694,315)
----------------------
Net decrease in cash (15,084)
Cash at beginning of year 16,884
----------------------
Cash at end of year $ 1,800
======================
See notes to financial statements.
6
Gotham Partners Acquisition I, L.P.
Notes to Financial Statements
December 31, 1998
1. ORGANIZATION
Gotham Partners Acquisition I, L.P. (the "Partnership") was organized as a
limited partnership under the laws of the state of Delaware and commenced
operations on October 22, 1997. The Partnership's investment objective is to
achieve maximum capital appreciation through investments in securities of
McDonald's Corp. (the "Company"). In order to achieve its objective, the
Partnership may invest in the shares of the capital stock of the Company and any
options, warrants, convertible securities or derivative instruments related to
the Company and in the securities resulting from any spin-off, reorganization,
merger or recapitalization of the Company.
GPA I, L.L.C. (the "General Partner") makes all investment decisions on behalf
of the Partnership and is solely responsible for the development and
implementation of the Partnership's investment policy and strategy.
The Partnership is in the process of liquidating its investments and
distributing the capital to the partners. Once all of the capital has been
distributed, the Partnership will be terminated.
2. SIGNIFICANT ACCOUNTING POLICIES
The Partnership records its securities transactions on a trade date basis.
Securities listed on a national securities exchange are valued at their last
reported sales price. Securities for which no such market prices are available
are valued at fair value by the General Partner on a reasonable basis and in
good faith. At December 31, 1998, over-the-counter options totaling $10,044,480
were valued at their estimated fair values using prices furnished by the
counterparty to the respective contracts.
Net income was allocated in accordance with the terms of the Partnership
Agreement.
No Federal, state or local income taxes have been provided since the partners
are individually liable for the taxes on their share of the Partnership's
income.
7
Gotham Partners Acquisition I, L.P.
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The fair value of the Partnership's assets and liabilities which qualify as
financial instruments under Statement of Financial Accounting Standards No. 107,
"Disclosure About Fair Value of Financial Instruments," approximates the
carrying amounts presented in the statement of financial condition.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
3. DUE FROM BROKER
Due from broker represents cash balances with the clearing broker.
4. CONCENTRATIONS OF CREDIT RISK
The Partnership is engaged in trading over-the-counter stock options with
certain counterparties. These financial instruments expose the Partnership to
credit risk arising from the potential inability of counterparties to perform
under the terms of the contracts.
All securities transactions of the Partnership listed on a national securities
exchange are cleared by a major U.S. securities firm pursuant to a customer
agreement. At December 31, 1998, all of the investments in equity securities and
due from broker are positions with and amounts due from this broker.
5. DERIVATIVE FINANCIAL INSTRUMENTS
All options are reported at fair value and changes in fair values are reflected
in the statement of income. The average monthly fair value of options held
during the year was $67,672,760. The fair value of options held at December 31,
1998 was $10,044,480. Net realized and unrealized gains on options held during
the year was $91,714,634.
8
Gotham Partners Acquisition I, L.P.
Notes to Financial Statements (continued)
6. INCENTIVE ALLOCATION AND DISTRIBUTIONS
The General Partner is entitled to an incentive allocation of 20% of the net
capital appreciation attributable to a limited partner's capital account at the
end of each measuring period, defined in the Partnership Agreement, in part, to
be the period beginning on the date of admission and ending on the date
designated as the record date as of which a distribution is to be made to such
limited partner. Each limited partner is entitled to a 15% compounded annual
preferred return, as defined in the Partnership Agreement, on its capital
investment during the measuring period before the General Partner is allocated
an incentive allocation. Upon satisfaction of the preferred return, the General
Partner receives priority allocations to "catch up" to a 20% share of net
capital appreciation during the measuring period. After the preferred return and
the "catch up" allocations, any remaining net capital appreciation is allocated,
at the end of each measuring period, 80% to the limited partner and 20% to the
General Partner. In the event of a partial distribution being made to all
limited partners on a pro rata basis, the General Partner is not entitled to its
full incentive allocation, but rather a partial incentive allocation based on
the amount being distributed. The General Partner, in its sole discretion, may
elect to waive all or any portion of the incentive allocation with respect to
any one or more limited partners.
August 31, 1998 was designated as the end of the first measuring period.
Accordingly, the Partnership distributed $91,045,377 to the limited partners on
September 14, 1998. In connection with the pro rata distribution, the General
Partner received an incentive allocation of $4,690,515, of which $2,954,623 was
paid to the General Partner on September 14, 1998. The remaining $1,735,892 of
the General Partner's incentive allocation was distributed to the General
Partner on October 22, 1998, along with $1,758,423, the General Partner's pro
rata share of the Partnership's earnings from September 1, 1998 to October 21,
1998.
Because the Partnership Agreement provides that incentive allocations can only
be made at the end of a measuring period, no incentive allocation of the net
capital appreciation from September 1, 1998 through December 31, 1998 is
reflected in the financial statements.
January 21, 1999 was designated as the end of the second measuring period.
Accordingly, the Partnership distributed $37,263,233 to the limited partners on
January 22, 1999. In connection with the pro rata distribution, the General
Partner received an incentive allocation of $5,247,250, which was paid to the
General Partner on January 22, 1999.
9
Gotham Partners Acquisition I, L.P.
Notes to Financial Statements (continued)
The Partnership intends to make final distributions to all partners once all
investments have been liquidated and the Partnership's final audit has been
completed.
10
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
February 23, 1999.
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 1992 Stock Option Plan (filed as Annex C to the
Company's Proxy Statement dated July 21, 1992).*
10.2 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).*
10.3 Operating Agreement of The Jordan Company LLC, dated as
of July 23, 1998.
10.4 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).*
10.5 Amended and Restated Shareholders Agreement dated as of
December 16, 1997 among the Company, Ian M. Cumming and
Joseph S. Steinberg (filed as Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 (the "1997 10-K")).*
10.6 Deferred Compensation Agreement between the Company and
Joseph S. Steinberg dated December 8, 1998.
10.7 Settlement Agreement between Baldwin-United Corporation
and the United States dated August 27, 1985 concerning
tax issues (filed as Exhibit 10.14 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1992 (the "1992 10-K")).*
10.8 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.
Exhibit Exemption
Number Description Indication
- ------ ----------- ----------
10.9 Amended and Restated Revolving Credit Agreement dated
as of November 3, 1997 between the Company, BankBoston,
N.A. 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 (filed as Exhibit 10.13 to the
1997 10-K).*
10.10 Purchase Agreement among Conseco, the Company, Charter,
Colonial Penn Group, Inc., Colonial Penn Holdings,
Inc., Leucadia Financial Corporation, Intramerica,
Colonial Penn Franklin Insurance Company and Colonial
Penn Insurance Company dated as of April 30, 1997
(filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June
30, 1997).*
10.11 Purchase Agreement among GECC, the Company, Charter,
Colonial Penn Group Inc. and Colonial Penn Holdings,
Inc. dated as of June 30, 1997 (filed as Annex A to the
1997 Proxy Statement).*
10.12 Purchase Agreement by and among Allstate Life Insurance
Company, Allstate Life Insurance Company of New York,
Charter, Intramerica and the Company, dated February
11, 1998 (filed as Exhibit 10.16 to the 1997 10-K).*
10.13 Leucadia National Corporation Senior Executive Annual
Incentive Bonus Plan (filed as Annex D to the 1997
Proxy Statement.)*
10.14 Stock Purchase Agreement by and between the Company and
Allstate Life Insurance Company dated as of December
18, 1998.
10.15 Trust Agreement dated August 14, 1998 between the
Company for the benefit of its shareholders as of
August 25, 1998 and Joseph A. Orlando, as Trustee.
21 Subsidiaries of the registrant.
23 Consents 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.