-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, YjFddWip1MOIgiG4bNfAAlisDJhqYgaDU2yFZOTA7LhQDF9o26bpZW7EMGgRQ9wy 5QLx5G7XROg6tb+n8aK8Zg== 0000909518-94-000046.txt : 19940324 0000909518-94-000046.hdr.sgml : 19940324 ACCESSION NUMBER: 0000909518-94-000046 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEUCADIA NATIONAL CORP CENTRAL INDEX KEY: 0000096223 STANDARD INDUSTRIAL CLASSIFICATION: 6199 IRS NUMBER: 132615557 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-05721 FILM NUMBER: 94517367 BUSINESS ADDRESS: STREET 1: 315 PARK AVE S CITY: NEW YORK STATE: NY ZIP: 10010 BUSINESS PHONE: 2124601900 FORMER COMPANY: FORMER CONFORMED NAME: TALCOTT NATIONAL CORP DATE OF NAME CHANGE: 19800603 10-K 1 12/31/93 FORM 10-K 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, 1993 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from ___________ to ___________ Commission file number: 1-5721 LEUCADIA NATIONAL CORPORATION - --------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) New York 13-2615557 - ------------------------------------- ----------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification Incorporation or Organization) No.) 315 Park Avenue South New York, New York 10010 (212) 460-1900 - --------------------------------------------------------------------------- (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered - ------------------------------------- ----------------------------------- Common Shares, par value $1 per share New York Stock Exchange Pacific Stock Exchange 10-3/8% Senior Subordinated Notes due New York Stock Exchange June 15, 2002 5-1/4% Convertible Subordinated New York Stock Exchange Debentures due February 1, 2003 7-3/4% Senior Notes due August 15, New York Stock Exchange 2013 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 16, 1994 (computed by reference to the last reported closing sale price of the Common Stock on the New York Stock Exchange on such date): $621,552,120. On March 16, 1994, the registrant had outstanding 27,948,823 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 1994 annual meeting of shareholders of the registrant are incorporated by reference into Part III of this Report. PART I Item 1. Business. ------ -------- THE COMPANY GENERAL The Company is a financial services company principally engaged, through its subsidiaries, in personal and commercial lines of property and casualty insurance, life and health insurance primarily marketed directly to older individuals, banking and lending, incentive services and manufacturing. The Company concentrates on profitability and maximizing cash flow in order to build long-term shareholder value, rather than emphasizing volume or market share. Shareholders' equity has grown from a deficit of approximately $7,657,000 at December 31, 1978 (prior to the acquisition of control of and significant ownership interest in the Company by both the Company's Chairman and President), to a positive shareholders' equity of approximately $907,856,000 at December 31, 1993, equal to a book value per common share of negative $.22 at December 31, 1978 and $32.54 at December 31, 1993, respectively. Income before income taxes and the cumulative effects of accounting changes for 1993 was $176,868,000, the highest in the history of the Company. The Company's principal operations are its insurance businesses, where it is a specialty markets provider of property and casualty and life insurance products to niche markets. The Company's principal personal lines insurance products are automobile insurance, homeowners insurance, graded benefit life insurance marketed primarily to the age 50-and-over population and variable annuity products. The Company's principal commercial lines are property and casualty products provided for multi-family residential real estate, retail establishments, and taxicabs in the New York metropolitan area. For the year ended December 31, 1993, the Company's insurance segments contributed approximately 80% of total revenue and, at December 31, 1993, constituted approximately 81% of consolidated assets. The Company's insurance subsidiaries have a diversified investment portfolio of securities, substantially all of which are issued or guaranteed by the U.S. Treasury or by U.S. governmental agencies or are rated "investment grade" by Moody's Investors Service Inc. ("Moody's") and/or Standard & Poor's Corporation ("S&P"). Investments in mortgage loans, real estate and non-investment grade securities represented in the aggregate less than 1% of the insurance subsidiaries' aggregate portfolio at December 31, 1993. The Company's banking and lending operations primarily consist of making instalment loans funded by customer banking deposits ("Deposits") insured by the Federal Deposit Insurance Company (the "FDIC"). The Company has established a niche market for automobile loans to individuals with poor credit histories. Based on its experience with such loans, the Company concluded that excellent opportunities exist for a successful expansion of this business. Accordingly, during 1993 the Company increased, on a controlled basis, its investment in such loans. The Company intends to expand this business in 1994. The Company's incentive services operations consist primarily of trading stamp operations. The Company's manufacturing operations primarily manufacture products for the "do-it-yourself" home improvement market and for industrial and agricultural markets. At December 31, 1993, the Company had aggregate minimum tax loss carryforwards of approximately $197,000,000. The amount and availability of tax loss carryforwards are subject to certain qualifications, limitations and uncertainties, including, with respect to its consolidated subsidiary, Phlcorp, Inc. ("Phlcorp"), tax sharing payments pursuant to a tax settlement agreement with the Internal Revenue Service and the Department of Justice. The Company also has investments, including non-controlling equity interests representing more than 5% of the outstanding capital stock of several public companies. Additionally, the Company continuously evaluates the retention and disposition of its existing operations and investigates possible acquisitions of new businesses in order to maximize its ultimate economic value to shareholders. 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. 3 Financial Information About Industry Segments --------------------------------------------- Certain information concerning the Company's operations is presented in the following table.
Year Ended December 31, ------------------------------- 1993 1992 1991(a) ---- ---- ---- (In millions) Revenues: -------- Property and Casualty Insurance $ 842.1 $ 849.0 $ 476.0 Life Insurance 286.3 395.5 257.6 Banking and Lending 38.2 56.4 43.9 Incentive Services 46.0 96.9 98.3 Manufacturing 173.8 168.8 161.8 Corporate and Other (b) 21.7 6.4 49.1 -------- -------- -------- $1,408.1 $1,573.0 $1,086.7 ======== ======== ======== Income (loss) before income taxes: --------------------------------- Property and Casualty Insurance $ 135.5 $ 108.4 $ 65.3 Life Insurance 54.5 63.7 27.1 Banking and Lending 12.6 17.4 (0.7) Incentive Services 29.2 14.1 7.8 Manufacturing (2.2) (6.6) (0.8) Corporate and Other (b) (52.7) (53.4) (3.7) -------- -------- -------- $ 176.9 $ 143.6 $ 95.0 (a) ======== ======== ======== Identifiable assets employed: ---------------------------- Property and Casualty Insurance $2,169.6 $1,843.3 $1,910.7 Life Insurance 1,610.5 1,857.0 2,030.9 Banking and Lending 262.6 268.9 279.7 Incentive Services 42.9 41.2 72.3 Manufacturing 101.0 105.8 103.0 Corporate and Other (b)(c) 502.7 214.4 193.5 -------- -------- -------- $4,689.3 $4,330.6 $4,590.1 ======== ======== ======== At December 31, 1993, the Company and its consolidated subsidiaries had 4,372 full-time employees. _______________________ (a) Includes Colonial Penn Group, Inc. ("CPG") from date of acquisition (August 16, 1991). On a pro forma (unaudited) basis giving effect to the acquisition of CPG only, income before income taxes for 1991 would have been approximately $141,613,000. (b) Includes Jordan Associated Companies (described below), gains (losses) from certain investments and amounts related to a subsidiary, Cambrian & General ("Cambrian"). See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (c) Principally consists of cash, investments, receivables and, at December 31, 1993, the deferred income tax asset of $114,001,000.
3 INSURANCE OPERATIONS GENERAL The Company engages in the personal property and casualty and the life and health insurance businesses on a nationwide basis and specializes in the commercial property and casualty insurance business in the New York metropolitan area. The Company's principal insurance subsidiaries consist of the CP Group, Charter National Life Insurance Company ("Charter") and the Empire Group. The CP Group consists of Colonial Penn Life Insurance Company ("CPL"), Colonial Penn Franklin Insurance Company ("Franklin"), Colonial Penn Heritage Insurance Company ("Heritage"), Colonial Penn Insurance Company ("CPI") and Intramerica Life Insurance Company ("Intramerica"). The Empire Group consists of Empire Insurance Company ("Empire"), Empire's subsidiary, Allcity Insurance Company ("Allcity") and Colonial Penn Madison Insurance Company ("Madison"). In conducting its insurance operations, the Company focuses primarily on profitability and persistency rather than volume. A.M. Best Company ("Best"), an independent rating agency, has rated CPL, Charter, and Empire "A" (excellent), Intramerica "A-" (excellent) and CPI, Franklin and Heritage "NA-5" (indicating a previously rated company which has experienced a significant change in ownership, management or book of business, as a result of which its operating experience may be interrupted). Demotech, Inc., an independent rating agency, has rated CPI, Franklin and Heritage "A" (exceptional). Ratings may be revised or withdrawn at any time. Restructuring of CP Group The Company's insurance operations were significantly increased as a result of the Company's acquisition of CPG on August 16, 1991. The Company acquired CPG for an aggregate cash purchase price of approximately $128,000,000, including costs. For the year ended December 31, 1992 and for the period from August 16, 1991 to December 31, 1991, CPG contributed approximately $131,757,000 and $59,995,000, respectively, to the Company's consolidated pre-tax income, including gains on sales of securities (approximately $23,543,000 and $16,323,000, respectively) and exclusive of financing costs. Due to changes in the Company's insurance operations it is not practicable to provide meaningful comparable information for CPG for 1993. At the acquisition date, after giving effect to a cash contribution by the seller prior to the closing of approximately $49,827,000, CPG had unaudited shareholder's equity, determined in accordance with generally accepted accounting principles ("GAAP"), of approximately $391,000,000 (or approximately $263,000,000 in excess of the purchase price) and the CP Group had combined unaudited statutory capital and surplus for regulatory purposes determined in accordance with statutory accounting principles ("SAP") of approximately $225,100,000. This acquisition was accounted for as a purchase and the consolidated financial statements included in this Report include the operations of CPG since August 16, 1991. Historically, the CP Group marketed most of its insurance products directly to individuals without the use of commissioned agents through "direct response marketing" methods. Direct response marketing includes any form of marketing in which a company and a customer deal directly with each other rather than through an insurance agent. Direct response marketing methods include print advertising, radio and television advertising, direct mail, telemarketing and customer referral programs. Typical direct response marketing campaigns utilize a variety of these methods in a planned sequence. The costs of certain of these marketing efforts were substantial and the Company believes were not justified by the CP Group's previous operating results. As a result, during the Company's restructuring of the CP Group, the CP Group substantially refined and reduced its marketing efforts. The Company believes that smaller and more focused direct response marketing campaigns have resulted in lower unit costs, resulting in more profitable operations, albeit with an initial substantial 4 reduction in new business. The Company believes that as a result of its restructuring efforts, which are complete, together with the Company's operating experience, the Colonial Penn P&C Group (as defined below) has become a low cost provider of automobile and homeowners insurance to its niche markets, enabling it to charge competitive rates, which should aid the Colonial Penn P&C Group in obtaining new business and retaining existing business. Furthermore, as a result of the Colonial Penn life insurance companies' favorable experience in obtaining new business, the Company has increased its direct response marketing of graded benefit life products, generating significant new premiums at acceptable acquisition costs. The Company believes that its restructuring efforts described above have increased the CP Group's profitability without impairing service to existing policyholders. PROPERTY AND CASUALTY INSURANCE The Company's principal property and casualty insurance operations are conducted through CPI, Franklin and Heritage (collectively, the "Colonial Penn P&C Group") and through the Empire Group. The Colonial Penn P&C Group, which maintains its headquarters in Valley Forge, Pennsylvania, is licensed in all 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands and writes insurance throughout most of the United States. The Colonial Penn P&C Group has regional offices in Devon, Pennsylvania, Tampa, Florida and Phoenix, Arizona. The Empire Group is licensed in twenty- three states and operates primarily in the New York metropolitan area. During the year ended December 31, 1993, approximately 80%, 13% and 7% of net earned premiums of the Company's property and casualty insurance operations were derived from personal and commercial automobile lines of insurance, commercial lines of insurance (other than automobile insurance) and personal lines of insurance (other than automobile insurance), respectively. Total property and casualty insurance net earned premiums for the year ended December 31, 1993 aggregated approximately $712,000,000, of which approximately $452,600,000 was attributable to the Colonial Penn P&C Group. Set forth below is certain statistical information for the Company's property and casualty operations for each of the three years in the period ended December 31, 1993 prepared in accordance with GAAP and SAP. The Combined Ratio is the sum of the Loss Ratio and the Expense Ratio. A Combined Ratio below 100% indicates an underwriting profit and a Combined Ratio above 100% indicates an underwriting loss. The Loss Ratio is the ratio of losses and loss adjustment expenses incurred to net premiums earned. Incurred losses include a provision for claims which have occurred but have not yet been reported. The Expense Ratio is the ratio of underwriting expenses (policy acquisition costs, including 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. Certain accident and health insurance business, which is included in the statutory results of operations of the property and casualty insurance segment and is reflected in the SAP Combined Ratio, is reported in the life insurance segment for financial reporting purposes and therefore is not included in the GAAP Combined Ratios reflected herein. The Combined Ratio does not reflect the effect of investment income on the results of operations. 5
YEAR ENDED DECEMBER 31, ----------------------------- 1993 1992 1991(A) ---- ---- ------- Loss Ratio: GAAP . . . . . . . . . . . . . . . . . . . . . . . 76.9% 82.3% 82.9% SAP . . . . . . . . . . . . . . . . . . . . . . . 76.1% 85.3% 82.0% Industry (SAP) (b) . . . . . . . . . . . . . . . . N/A 88.1% 81.1% Expense Ratio: GAAP . . . . . . . . . . . . . . . . . . . . . . . 20.0% 19.4% 19.2% SAP . . . . . . . . . . . . . . . . . . . . . . . 17.6% 17.5% 21.3% Industry (SAP) (b) . . . . . . . . . . . . . . . . N/A 27.6% 27.7% Combined Ratio (c): GAAP . . . . . . . . . . . . . . . . . . . . . . . 96.9% 101.7% 102.1% SAP . . . . . . . . . . . . . . . . . . . . . . . 93.7% 102.8% 103.3% Industry (SAP) (b) . . . . . . . . . . . . . . . . N/A 115.7% 108.8% _______________ (a) Includes Colonial Penn P&C Group from date of acquisition. (b) Source: Best's Insurance Management Reports, Property/Casualty, March 25, 1993. A comparison to industry combined ratios may not be meaningful as a result of, among other things, differences in geographical concentration and in the mix of property and casualty insurance products. (c) For 1993, the difference in the treatment of certain costs for GAAP and SAP purposes was a principle reason for the difference between the GAAP Combined Ratio and the SAP Combined Ratio. For 1992, the results of the accident and health insurance business, which (as described above) are reflected in the SAP Combined Ratio but are not reflected in the GAAP Combined Ratio, had a non-recurring income item which reduced the SAP Combined Ratio. In addition, in 1992 certain income credits were recognized only for GAAP purposes.
The Company believes, based on published reports, that the Colonial Penn P&C Group's SAP Expense Ratio for 1992, the last year for which annual industry data is available, is among the lowest in the industry. The Colonial Penn P&C Group The Colonial Penn P&C Group's primary business is providing private passenger automobile and homeowners insurance coverage to the age 50-and-over population. The Colonial Penn P&C Group's goal is to be one of the lowest cost providers to this market. Substantially all of the policies are written for a one-year period. However, in many states CPI and Franklin offer a "guaranteed lifetime protection" provision in its automobile policies whereby, subject to certain exceptions, policyholders who are age 50 and older are guaranteed that CPI and Franklin will renew their policies at rates then in effect for the insured's appropriate classification. 6 Net earned premiums for the Colonial Penn P&C Group for the year ended December 31, 1993 were concentrated in the states listed below:
Percentage of Net State Earned Premiums ----- ----------------- Automobile (1): California (2) 19% ---------- Florida 17 New York 13 Connecticut 7 Arizona 7 All others 37 --- Total 100% === Homeowners: Florida 23% ---------- California (2) 17 New York 10 Arizona 6 Pennsylvania 6 All others 38 --- Total 100% === ______________ (1) Does not include net earned premiums with respect to involuntary automobile insurance, i.e., mandatory assumed risks, which generally relate to the amount of writings in the applicable state. (2) For a discussion of legislation relating to California property and casualty operations, see "Insurance Operations-General-Government Regulation."
Prior to 1988, CPI wrote as primary insurer or as a reinsurer certain commercial property and casualty insurance business known as "Special Risks." The Special Risks business consisted of a variety of diverse commercial lines including, among other things, general corporate liability policies issued to public and corporate entities, residual value insurance on leased automobiles, collision insurance to car leasing and rental businesses and professional and directors and officers liability insurance. CPI had realized significant losses in the Special Risks business prior to the acquisition date and had provided for significant additional losses from time to time, both as to policy benefits and non-recoverable reinsurance receivables. The nature of most of this insurance involves exposures which can be expected to develop over a relatively long period of time before a definitive determination of ultimate losses and loss adjustment expenses can be established. As a result, losses with respect to this block are particularly difficult to predict accurately. Based in part upon a recently completed independent actuarial review, the Company believes that the policy reserves for the Special Risks block reflected in the consolidated balance sheet at December 31, 1993 (approximately $74,900,000, before reinsurance) are adequate. In evaluating and administering the Special Risks portfolio, the Company has used its experience gained from the management of certain of the WMAC Companies (as defined below), which also involves managing the run-off of a closed block of commercial property and casualty insurance business. The Company intends to manage the run-off of the Special Risks block and does not intend to offer this aspect of commercial lines insurance either as an insurer or reinsurer. The WMAC Companies are certain legal subsidiaries of Phlcorp which are or have been under the control of the Wisconsin Insurance Commissioner due to the rehabilitation and liquidation proceedings (which were initiated prior to the Company's acquisition of Phlcorp) of certain of Phlcorp's non-consolidated subsidiaries (the "WMAC Companies"). 7 The Empire Group The Empire Group provides personal insurance coverage to automobile owners and homeowners and commercial insurance primarily for residential real estate, restaurants, retail establishments, taxicabs (both medallion and radio-controlled) and several types of service contractors. For the years ended December 31, 1993, 1992 and 1991, net earned premiums and commissions for the Empire Group aggregated approximately $259,400,000, $243,100,000 and $210,700,000, respectively. Substantially all of the Empire Group policies are written in New York for a one-year period; however, some policies are issued for three years with provision for re-rating the policy for premium purposes at each policy anniversary date. The Empire Group is licensed in New York to write all lines of insurance that may be written by a property and casualty insurer except residual value, credit, unemployment, animal and marine protection and indemnity insurance and ocean marine insurance. The Empire Group has acquired blocks of private passenger automobile and commercial automobile assigned risk business from insurance companies required or volunteering to terminate such coverage. These contractual arrangements provide for fees to the Empire Group within parameters established by the New York Insurance Department. In addition, the Empire Group acts for a fee as a "servicing carrier," providing administrative services, including claims processing, underwriting and collection activities, for the New York Public Automobile Pool. This latter arrangement does not involve the assumption of any material underwriting risk by the Empire Group. As is true with the Company's other insurance subsidiaries, the Empire Group's marketing strategy emphasizes profitability rather than volume. The business of the Empire Group is produced through general agents, local agents and insurance brokers, who are compensated for their services by payment of commissions on the premiums they generate. There are five general agents, one of which is owned by Empire, and approximately 426 local agents and insurance brokers presently acting under agreements with the Empire Group. These agents and brokers also represent other competing insurance companies. 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 through December 31 of each year. 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 to represent changes in loss experience (and are reflected in current earnings). In the following table, the liability for losses and LAE of the Company's property and casualty insurance subsidiaries are reconciled for each of the three years ended December 31, 1993. Included therein are current year data and prior year development. 8
RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES 1993 1992 1991 ---- ---- ---- (In thousands) Net liability for losses and LAE at beginning of year $ 904,326 $938,384 $251,401 ---------- -------- -------- Amounts related to the Colonial Penn P&C Group at date of acquisition - - 689,458 ---------- -------- -------- Provision for losses and LAE for claims occurring in the current year 624,048 619,691 320,511 Decrease in estimated losses and LAE for claims occurring in prior years (84,382) (41,912) (1,909) ---------- -------- -------- Total incurred losses and LAE 539,666 577,779 318,602 ---------- -------- -------- Losses and LAE payments for claims occurring during: Current year 236,369 239,055 131,247 Prior years 318,541 372,782 189,830 ---------- -------- -------- 554,910 611,837 321,077 ---------- -------- -------- 889,082 904,326 938,384 Reserve deducted above for insurance not considered collectible 41,065 34,273 41,998 ---------- -------- -------- 930,147 938,599 980,382 Reinsurance recoverable (a) 121,721 - - ---------- -------- -------- Liability for losses and LAE at end of year as reported in financial statements $1,051,868 $938,599 $980,382 ========== ======== ======== _____________ (a) For 1992 and 1991, liability for losses and LAE is shown net of reinsurance recovable.
The Company's property and casualty insurance subsidiaries rely upon standard actuarial ultimate loss projection techniques to obtain estimates of liabilities for losses and LAE. These projections include the extrapolation of both losses paid and incurred by business line and accident year and implicitly consider the impact of inflation and claims settlement patterns upon ultimate claim costs based upon historical patterns. In addition, methods based upon average loss costs, reported claim counts and pure premiums are reviewed in order to obtain a consistent range of estimates for setting the reserve levels. For further input, loss reserve committees periodically 9 mix, claims management and legal climate. Such input sometimes leads to modifications of the statistical projections. The Company's property and casualty insurance subsidiaries' liability for losses and LAE as of December 31, 1993 was $910,657,000 determined in accordance with SAP and $1,051,868,000 determined in accordance with GAAP. The reconciling differences principally relate to liabilities assumed by reinsurers, which are not deducted from GAAP liabilities (approximately $163,000,000) reduced by approximately $15,000,000, net, included in accounts other than property and casualty loss reserves for GAAP and approximately $6,000,000 for salvage and subrogation. The tables below present the development of balance sheet liabilities for 1983 through 1993 and include periods prior to acquisition for each of the Empire Group and the Colonial Penn P&C Group. The adjusted liability line of the table indicates the estimated liability for unpaid losses and LAE recorded at the balance sheet date for each of the indicated years. This liability represents the estimated amount of losses and LAE for claims that were unpaid at each annual balance sheet date, including provisions for losses estimated to have been incurred but not reported to the Company's property and casualty companies. 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. The estimate is increased or decreased as more information becomes known about the frequency and severity of claims. 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. Thus, for the year 1985, the Empire Group table indicates that an estimated $8,887,000 of losses remain unpaid as of December 31, 1993 (the difference between the currently estimated $155,727,000 of re- estimated liability for that year and the $146,840,000 paid through December 31, 1993). The effect on income during the past three years of changes in estimates of the liabilities for losses and LAE is shown in the reconciliation table above. The "cumulative redundancy (deficiency)" represents the aggregate change in the estimates over all prior years. For example, the initial 1983 liability estimate indicated on the Empire Group table ($153,342,000) has been re-estimated during the course of the succeeding ten years, resulting in a re-estimated liability at December 31, 1993 of $131,556,000, or a redundancy of $21,786,000. If the re-estimation of liability exceeded the liability initially established, a cumulative deficiency would be indicated. As noted in the Colonial Penn P&C Group table below, the loss and LAE development of the Colonial Penn P&C Group from 1985 through 1989 resulted in cumulative deficiencies, indicating that the established reserves for policy claims and LAE were less than subsequently determined to be necessary. The Colonial Penn P&C Group provided additional reserves related to prior years' claims of approximately $107,100,000 in 1990 and $35,100,000 in 1989. Prior to its acquisition by the Company, and in part as a result of the unfavorable loss development, the Colonial Penn P&C Group reviewed its loss ratio and experience on a state-by-state basis, and initiated procedures to improve underwriting standards, increase rates (subject to necessary regulatory approvals) and withdraw from certain states with unfavorable experience, where permissible, on financially acceptable terms. The Company used the knowledge and experience gained from managing Empire and certain of the WMAC Companies to review the adequacy of the Colonial Penn P&C Group reserves and concluded that the existing reserves were adequate. The Company believes that the Empire Group's conservatism in establishing reserves and CP Group's conservatism and improved claims management procedures since acquisition have contributed significantly to the creation of the redundancies included in the tables below. 10 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 1987, but incurred in 1983, will be included in the cumulative redundancy (deficiency) amount for 1983, 1984, 1985 and 1986. 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 may not be appropriate to extrapolate future redundancies or deficiencies based on these tables. Because of substantial differences in the development of reserves of the Colonial Penn P&C Group and the Empire Group, loss and LAE development data of the Colonial Penn P&C Group and the Empire Group are each presented separately. 11
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT (THE EMPIRE GROUP) Year Ended December 31, 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (In thousands) Adjusted Liability for Unpaid Losses and Loss Adjustment Expenses $153,342 $156,434 $165,713 $182,133 $206,709 $222,814 $235,223 $251,401 $280,679 $322,615 $353,937 Liability Re-estimated as of: One Year Later $137,663 $142,474 $160,728 $180,975 $198,384 $213,671 $227,832 $249,492 $280,020 $322,037 $ - Two Years Later 132,899 144,504 162,962 175,305 194,530 206,088 217,432 245,141 277,866 Three Years Later 134,144 143,635 156,870 170,152 188,843 198,500 212,649 243,849 Four Years Later 132,019 139,113 157,001 168,574 184,564 194,324 211,859 Five Years Later 128,440 139,441 155,413 165,717 181,990 196,070 Six Years Later 129,010 139,584 154,045 164,487 183,015 Seven Years Later 130,173 139,435 154,151 166,266 Eight Years Later 130,236 139,741 155,727 Nine Years Later 130,295 141,054 Ten Years Later 131,556 Cumulative Redundancy $ 21,786 $ 15,380 $ 9,986 $ 15,867 $ 23,694 $ 26,744 $ 23,364 $ 7,552 $ 2,813 $ 578 $ - ======== ======== ======= ======== ======== ======== ======== ======== ======== ======= ======== Cumulative Amount of Liability Paid Through: One Year Later $ 43,859 $ 44,056 $ 51,795 $ 54,359 $ 60,446 $ 64,140 $ 65,822 $ 78,954 $ 89,559 $113,309 $ - Two Years Later 68,999 74,265 83,249 88,770 97,627 101,206 109,479 126,908 150,043 Three Years Later 89,415 95,527 106,348 114,322 123,092 131,705 140,916 167,330 Four Years Later 103,773 110,368 123,275 130,433 142,910 152,330 166,023 Five Years Later 112,319 120,479 132,618 141,346 155,786 168,117 Six Years Later 117,591 126,094 139,276 149,079 164,213 Seven Years Later 120,781 130,015 143,926 153,681 Eight Years Later 123,286 132,600 146,840 Nine Years Later 125,126 134,881 Ten Years Later 126,980 Gross liability - end of year $394,709 Reinsurance 40,772 -------- Net liability - $353,937 end of year as ======== shown above 12
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT (THE COLONIAL PENN P&C GROUP) Year Ended December 31, 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (In thousands) Adjusted Liability for Unpaid Losses and Loss Adjustment Expenses $229,700 $215,200 $217,000 $324,700 $386,200 $ 410,500 $ 448,800 $626,300 $657,700 $581,711 $535,145 Liability Re-estimated as of: One Year Later $197,900 $193,200 $236,500 $352,600 $389,900 $ 445,600 $ 555,900 $659,800 $616,400 $497,911 $ - Two Years Later 190,700 198,800 245,900 340,600 409,000 506,800 588,600 619,600 574,000 Three Years Later 193,700 203,500 241,600 338,700 443,700 535,600 563,800 614,000 Four Years Later 197,000 200,000 248,100 359,400 467,300 522,800 565,800 Five Years Later 194,500 197,100 231,200 384,000 459,400 526,700 Six Years Later 193,900 193,500 257,600 375,700 464,700 Seven Years Later 195,000 199,200 250,800 381,300 Eight Years Later 195,700 201,100 255,900 Nine Years Later 197,300 202,900 Ten Years Later 198,000 Cumulative Redundancy (Deficiency) $ 31,700 $ 12,300 $(38,900) $(56,600) $(78,500) $(116,200) $(117,000) $ 12,300 $ 83,700 $ 83,800 $ - ======== ======== ======== ======== ======== ========= ========= ======== ======== ======== ======== Cumulative Amount of Liability Paid Through: One Year Later $103,500 $105,500 $126,200 $177,100 $207,700 $ 243,300 $ 258,500 $279,300 $283,200 $205,200 $ - Two Years Later 150,600 156,600 178,500 249,800 304,000 353,300 387,500 432,500 390,100 Three Years Later 175,300 177,500 208,600 288,700 356,800 419,900 467,500 492,900 Four Years Later 184,900 187,600 227,600 313,700 393,100 462,200 496,400 Five Years Later 188,700 195,600 213,100 332,700 416,800 476,400 Six Years Later 191,800 187,000 223,000 343,600 425,500 Seven Years Later 192,500 190,800 227,800 349,200 Eight Years Later 193,100 192,700 231,100 Nine Years Later 193,800 194,400 Ten Years Later 194,900 Gross liability- end of year $657,159 Reinsurance 122,014 -------- Net liability - $535,145 end of year as ======== shown above
13 LIFE INSURANCE The Company's principal life insurance subsidiaries are Charter, CPL and Intramerica. For the year ended December 31, 1993, the Company's principal life insurance products were "Graded Benefit Life" and variable annuity insurance products. Through its various subsidiaries, the Company is licensed in all 50 states, the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands and generally writes its life and health products in most of the United States. Total direct life insurance in force as of December 31, 1993 was approximately $2.7 billion. The following table reflects premiums earned on the Company's life and health insurance products (except investment oriented products) and premium receipts on variable annuity and other investment oriented products for each of the three years in the period ended December 31, 1993. Variable annuity and other investment oriented product premium receipts are not recorded as revenue under GAAP but are recorded in a manner similar to a deposit, and are included below.
Year Ended December 31, ---------------------------------------- 1993 1992 1991 (1) ---- ---- ---- (In thousands) Graded Benefit Life $109,838 $109,552 $ 36,230 Variable Annuity Products 81,484 58,207 25,804 Other Investment Oriented Products 6,828 9,828 17,360 Agent-sold Medicare Supplement Products (2) 47,364 62,724 23,159 Other Health Products 18,992 22,367 8,538 Other 495 1,847 626 -------- -------- -------- Total (3) $265,001 $264,525 $111,717 ======== ======== ======== __________________ (1) Excludes premium receipts on life insurance products of the CP Group prior to the acquisition date (August 16, 1991). (2) Effective December 31, 1992, the Company ceased marketing Medicare Supplement products through agents. (3) Excludes premium receipts (refunds) in 1993, 1992 and 1991 (since the acquisition date) of $(1,655,000), $28,745,000 and $57,142,000, respectively, on reinsurance of certain ordinary life policies and group life and health insurance contracts underwritten by other insurance companies and assumed by the life insurance subsidiaries.
Life and Health Insurance Products Graded Benefit Life. "Graded Benefit Life" is a guaranteed-issue product. These modified-benefit, whole life policies are offered on an individual basis primarily to persons age 50 to 80, principally in face amounts of $350 to $10,000, without medical examination or evidence of insurability. Premiums are paid as frequently as monthly. Graded Benefit Life is marketed using direct response marketing techniques. New policyholder leads are generated primarily from television advertisements. Consistent with its present marketing program, the Company intends to concentrate its marketing efforts towards soliciting new policyholders where the cost is justified, upgrading existing policyholders' policy packages and obtaining referrals from existing policyholders. The Company believes that premiums on new business written in 1994 will exceed reductions due to death and lapses. 14 During late l993, the Company began offering certain policyholders a rider to their existing Graded Benefit Life policy. This "Accelerated Benefit Rider" pays a policy benefit if the policyholder is suffering from a terminal illness. Initial results are promising and the Company expects to offer this rider to additional policyholders on a limited basis. The Company is exploring the development of other new products. Investment Oriented Products. During 1993, the principal investment oriented product offered by the Company's life insurance subsidiaries was a no-load variable annuity ("VA") product. The VA product is marketed as an investment vehicle to individuals seeking to defer, for federal income tax purposes, the annual increase in their account balance. Premiums from this VA product either are invested at the policyholders' election in unaffiliated mutual funds where the policyholder bears the entire investment risk or in a fixed account where the funds earn interest at rates determined by the Company. The Company's VA product is currently marketed in conjunction with a mutual fund manager. The Company is pursuing cooperative arrangements with other money managers to distribute its VA product. Prior to 1991, the investment oriented products sold by the Company included, among others, single premium deferred annuity ("SPDA") and single premium whole life ("SPWL") products. During 1992, the Company concluded that the profitability of its existing blocks of SPDA and SPWL businesses were unlikely to achieve acceptable operating results in the future. For a discussion of the reinsurance of certain of these products, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." Medicare Supplement. Medicare Supplement products are health insurance products primarily designed to supplement medicare benefits for the older population on an underwritten guaranteed renewable basis. Prior to l993, the Company's Medicare Supplement products were marketed primarily through insurance agents. As a result of recent federal and state legislation mandating standardization of Medicare Supplement products (thereby enhancing an individual's ability to compare various Medicare Supplement products), this market has become more competitive. The Company is no longer actively marketing Medicare Supplement products, but is offering renewals of its non- standardized products to its policyholders. National health care reforms are currently under consideration. It is not possible to predict whether any reforms will be enacted, and, if enacted, what effect such reforms might have on the Company's Medicare Supplement products. INSURANCE OPERATIONS - GENERAL Investments Investment activities represent a significant part of the Company's insurance related revenues and profitability. Investments are managed by the Company's investment advisors under the direction of, and upon consultation with, the Company's several investment committees. The Company's insurance subsidiaries have a diversified investment portfolio of securities substantially all of which are rated "investment grade" by Moody's and/or S&P or issued or guaranteed by the U.S. Treasury or by governmental agencies. The Company's insurance subsidiaries do not generally invest in less than "investment grade" or "non-rated" securities, real estate or mortgages, although the Company's insurance subsidiaries may from time to time make such investments in amounts not expected to be material. For additional information concerning the Company's investments, see "Notes to Consolidated Financial Statements." 15 The composition of the Company's insurance subsidiaries' investment portfolio as of December 31, 1993 and 1992 was as follows:
PROPERTY AND CASUALTY LIFE AND HEALTH --------------------- --------------------- 1993 1992 1993 1992 ---- ---- ---- ---- (Dollars in thousands) Bonds and notes (a): U.S. Government and agencies . . . . . . . . . 75% 79% 75% 63% Rated investment grade (b) . . . . . . . . . . 22 20 19 24 Non rated - other . . . . . . . . . . . . . . - - 1 1 Rated less than investment grade . . . . . . . - - - 1 Policyholder loans . . . . . . . . . . . . . . . - - 2 10 Equity securities . . . . . . . . . . . . . . . . 1 - 1 - Other, principally accrued interest . . . . . . . 2 1 2 1 --- --- --- --- Total . . . . . . . . . . . . . . . . . 100 % 100 % 100% 100% === === === === Estimated average yield to maturity of bonds and notes (c) . . . . . . . . . . . . 6.2 % 7.0 % 6.2% 7.6% Estimated average remaining life of bonds and notes (c) . . . . . . . . . . . . . . . . . 4.5 yrs. 5.9 yrs. 5.1 yrs. 5.8 yrs. Carrying value of investment portfolio . . . . . $1,650,085 $1,387,644 $779,739 $1,240,275 Market value of investment portfolio . . . . . . $1,651,411 $1,411,478 $780,867 $1,271,185 _________________ (a) Exclusive of investments held for sale at December 31, 1992, "U.S. Government and agencies" would have represented 69% of the property and casualty segment's investment portfolio and 59% of the life and health segment's investment portfolio and "Rated investment grade" would have represented 19% of the property and casualty segment's investment portfolio and 22% of the life and health segment's investment portfolio. Investments held for sale represented 10% of the property and casualty investment portfolio and 6% of the life and health investment portfolio at December 31, 1992. (b) As rated by Moody's and/or S&P. (c) Exclusive of trading securities in 1993, which are not significant, and investments held for sale in 1992.
Reinsurance The Company currently obtains reinsurance for certain of its life insurance policies and property and casualty insurance policies. Among the Company's major reinsurers (and their respective Best ratings) are General Reinsurance Corporation (A++), Lincoln National Life Insurance Co. (A+), Munich American Reinsurance Company (A++) and Hartford Fire Insurance Company (A+). Reinsurance is obtained for investment oriented products for face amounts in excess of $500,000 per life. The life insurance subsidiaries generally do not obtain reinsurance for the Graded Benefit Life products because these policies generally do not exceed $10,000 face amount. The Colonial Penn P&C Group obtained reinsurance for casualty risks in excess of $2,000,000 in 1993 ($1,000,000 in 1992). Most Colonial Penn P&C Group automobile policies do not have policy limits in excess of $100,000 per risk and $300,000 per accident. The Empire Group's maximum limit retained for workers' compensation was $500,000 from July 1, 1992 through December 31, 1993 and $200,000 from January 1, 1991 through June 30, 1992 and for other property and casualty lines, the maximum limit retained was $225,000 for 1993 and $175,000 for each of 1992 and 1991. Additionally, the Company's property and casualty insurance subsidiaries have entered into certain excess of loss and catastrophe treaties to protect against certain losses. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 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, which the Company believes to be financially capable of meeting their respective obligations. However, to the extent that any reinsuring company is unable to meet its obligations, the Company's insurance subsidiaries would be liable for the reinsured risks. Additionally, certain of CPI's Special Risks reinsurers have experienced financial difficulty and some are in rehabilitation proceedings. CPI has 16 established reserves, which the Company believes are adequate, for nonrecoverable reinsurance on its Special Risks block of insurance. In 1992, 1993 and 1994, unusually severe natural disasters occurred, including Hurricane Andrew (1992), the Midwest floods and California fires (1993) and the Los Angeles Earthquake (1994). These events have resulted in unprecedented industry-wide losses. The Company's insurance subsidiaries also suffered losses as a result of certain of these occurrences, although reinsurance reduced the economic loss to the Company of Hurricane Andrew. However, as a result of the industry's losses, the Company has seen a notable decrease in the availability of catastrophe reinsurance at reasonable rates, particularly at low levels of deductibility. Although the Company has completed its 1994 reinsurance program at acceptable upper loss limits, the insurance subsidiaries in 1993 and 1994 were unable to obtain 1992 levels of deductibility at reasonable cost. Accordingly, the Company increased its retention of lower level losses. The Company did not incur catastrophic losses in excess of its retained limits in 1993 and to date in 1994. Further, in 1992 the Company did not incur losses in excess of its maximum reinsurance. Competition The insurance industry is a highly competitive industry, in which many of the Company's competitors have substantially greater financial resources, larger sales forces, more widespread agency and broker relationships, and more diversified lines of insurance coverage. Additionally, certain competitors market their products with endorsements from affinity groups, while the Company's products are for the most part unendorsed, which may give such other companies a competitive advantage. VA products are subject to regulation both as insurance policies and as securities. As a result, the introduction of a VA product involves significant regulatory and administrative efforts over a substantial period of time. The Company expects sales of its no-load VA product to be cyclical, generally following the securities markets. The attractiveness of VA products as an investment vehicle is closely linked to the tax status of such products. Typically, increases in account values of VA products are not taxed until distributed in the form of either surrenders or annuity payments. The taxable portion of any such distribution is taxed as ordinary income. The property and casualty insurance industry has historically been cyclical in nature, with periods of less intense price competi- tion and high underwriting standards generating significant profits, followed by periods of increased price competition and lower under- writing standards resulting in reduced profitability or loss. Price competition has been significant in recent years. The cyclicality and competitive nature of the property and casualty insurance business historically have contributed to significant industry-wide quarter-to- quarter and year-to-year fluctuations in underwriting results and net income. Its profitability is affected by many factors, including rate competition, severity and frequency of claims, 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. There can be no assurance that such regulatory requirements will not become more stringent in the future and have an adverse effect on the Company's operations. The majority of the Company's property 17 and casualty insurance operations are in states requiring prior approval by regulators before proposed rates may be implemented. Certain states have indicated that they may change the bases (e.g., age, sex and geographic location) on which rates traditionally have been established. Rates proposed for life insurance generally become effective immediately upon filing. Insurance companies are required to file detailed annual reports with the supervisory agencies in each of the states in which they do business, and are subject to examination by such agencies at any time. Due to the savings and loan crisis and the seizure by state insurance regulators of certain large financially unstable insurance companies, there has been some erosion of confidence in all financial institutions, including insurance companies. 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. The National Association of Insurance Commissioners ("NAIC") has adopted model laws incorporating the concept of a "risk based capital" requirement for insurance companies, although the model law is not intended to apply to property and casualty insurance companies until year end 1994 financial statements are available. Generally, Risk Based Capital ("RBC") 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 RBC formula develops a risk adjusted target level of statutory surplus for insurers by applying certain factors to various asset, premium and reserve items. Higher factors are applied to more risky items and lower factors are applied to less risky items. Thus, the target level of statutory surplus varies not only as a result of the insurer's size, but also on the risk profile of the insurer's operation. The RBC model laws provide for four incremental levels of regulatory attention for insurers whose surplus is below the calculated RBC target. These levels of attention range in severity from requiring the insurer to submit a plan for corrective action to actually placing the insurer under regulatory control. Each of the Company's insurance subsidiaries' RBC ratio as of December 31, 1993 substantially exceeded the 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. Generally, life insurance companies having three or more of such ratios outside their "normal" range may be indicative of a weakly capitalized company. Two of the Company's life insurance subsidiaries, Charter and CPL, had three or more "other than normal" NAIC ratios for the year ended December 31, 1993. Charter had five "other than normal" ratios in l993, four of which resulted from reinsurance of the SPWL block of business described under "Management's Discussion and Analysis of Financial Condition and Results of Operations," while CPL had four "other than normal" ratios in l993, three of which resulted from reinsurance transactions, including a transaction with an affiliate. The Company believes that there are no underlying problems or weaknesses at Charter or CPL and that, in view of the strong capital and RBC ratios of Charter and CPL and their strong and conservative investment portfolios, it is unlikely that material adverse regulatory action will be taken. On November 8, 1988, California voters passed Proposition 103, an insurance initiative which requires a 20% rollback in insurance rates for policies written or renewed during the twelve month period beginning November 8, 1988 (the "rollback period") and provided that changes in insurance premiums after November 8, 1989 must be submitted for approval by the California Insurance Commissioner prior to implementation. While the Proposition has the most significant impact on automobile insurance, some of its provisions also apply to 18 other types of property and casualty insurance. In May 1989, the California Supreme Court held that insurance companies may not be deprived of a "fair return." In June 1991, the current California Insurance Commissioner issued revised regulations regarding the rollback period which established an allowable after-tax return of 10% for the rollback period. These regulations were held unconstitutional by the Los Angeles Superior Court in February 1993, because each insurer was entitled to an individual hearing to determine its fair level of profit. The California Insurance Commissioner has appealed this decision, which remains sub judice. The Company has not yet ---------- received any order or determination requiring it to refund any premiums collected. Based upon its operating results in the relevant years, the Company believes the Colonial Penn P&C Group should not be assessed for any rollback rebate and, if assessed a significant amount, intends to vigorously oppose such determination. Voluntary automobile net earned premiums in California represent approximately 8.9% of the Company's total property and casualty net earned premiums. Proposition 103 does not apply to premiums earned on involuntary coverage. It is possible that other states may attempt similar initiatives, although the Company is unable to predict whether and to what extent such regulation may be proposed or adopted. In early 1990, New Jersey adopted new laws to depopulate the deficit-ridden Automobile Joint Underwriting Association (the "JUA"), the New Jersey insurance pool for high-risk drivers. The New Jersey statute, among other things, abolished the JUA, established the Market Transition Facility (the "MTF") as a temporary successor to the JUA, established quotas for depopulation of the MTF and required all automobile insurers to share in the losses of the MTF based on their depopulation share of the JUA, as set by the New Jersey Department of Insurance. The MTF deficit is currently estimated to be $917 million. Based on that amount, the Colonial Penn P&C Group would be assessed approximately $11,100,000. In February 1994, the Colonial Penn P&C Group paid approximately $5,300,000 of this possible assessment into a court mandated escrow account. The balance of this possible assessment has been provided for in the Company's December 31, 1993 balance sheet. The New Jersey Insurance Department has adopted regulations which would permit an insurer, with the approval of the Insurance Department, to recover amounts paid to the MTF through surcharges to policyholders; however, there can be no assurance that the Colonial Penn P&C Group would be permitted to surcharge its policyholders for all or even part of any assessment. 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 GENERAL The Company's banking and lending operations primarily are conducted through its national bank subsidiary, American Investment Bank, N.A. ("AIB"); two wholly owned industrial loan corporations (the "ILCs"), American Investment Financial ("AIF") and Governor Financial ("GF"); and Transportation Capital Corp. ("TCC"), a small business investment company, which is a 99% owned subsidiary of the Company. AIB and the ILCs take money market and other non-demand deposits that are eligible for insurance provided by the FDIC within its applicable limitations. At December 31, 1993, AIB and the ILCs had Deposits of $173,365,000 compared to $186,339,000 at December 31, 1992. In January 1994, the deposits and certain 19 assets of GF were combined into AIF. AIB and AIF currently have several deposit-taking and lending facilities and an administrative office in the Salt Lake City area. TCC, which is not a significant subsidiary of the Company, makes collaterialized loans to operators of medallion taxicabs and limousines. At December 31, 1993, the Company's consolidated banking and lending operations had outstanding loans (net of unearned finance charges) of $205,744,000 compared to $169,552,000 at December 31, 1992. The increase was financed primarily from proceeds of the sale of the Company's consumer loan offices sold in 1992. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations." At December 31, 1993, approximately 36% were loans to individuals generally collateralized by automobiles; approximately 26% were unsecured loans to individuals acquired from others in connection with investments in limited partnerships; approximately 23% were unsecured loans to executives and professionals; approximately 9% were loans to small business concerns collateralized principally by taxicab medallions and other personal property; approximately 5% of the loans were instalment loans to consumers, substantially all of which were collateralized by real or personal property; and approximately 1% were loans generally collateralized by non-residential real estate. 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, 1993, the allowance for loan losses for the Company's entire loan portfolio was approximately $8,341,000 or 4.1% of the net outstanding loans, compared to approximately $6,973,000 or 4.1% of net outstanding loans at December 31, 1992. The funds generated by the Deposits are primarily used to make instalment loans, including collateralized personal automobile loans to individuals who have difficulty in obtaining credit. These automobile loans are made at interest rates above those charged to individuals with good credit histories. In determining which individuals qualify for these loans, the Company takes into account a number of highly selective criteria with respect to the individual as well as the collateral to attempt to minimize the number of defaults. Additionally, the Company monitors these loans and takes prompt possession of the collateral securing such loans in the event of a default. For the three year period ended December 31, 1993, the Company generated an aggregate of approximately $100,754,000 of these loans (approximately $51,000,000 during 1993). At December 31, 1993, the allowance for loan losses for this portfolio was approximately $4,399,000 or 6% of net outstanding loans; actual loss experience has been approximately 1.4% per year of average outstanding loans. The Company is satisfied with the results of this loan portfolio and believes that there is an opportunity for successful growth in this niche market. The Company intends to expand its business in this area. COMPETITION The Company's lending operations compete with banks, savings and loan associations and credit unions, many of which are able to offer financial services on very competitive terms, credit card issuers and consumer finance companies. 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. GOVERNMENT REGULATION The Company's principal 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 20 by the Federal Trade Commission. The Company's banking operations are subject to extensive 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 the ILCs is the FDIC. AIB and AIF have substantially similar assets. With FDIC approval on January 31, 1994, AIF purchased a substantial portion of the assets and assumed all of the deposit liabilities as well as a significant amount of the remaining liabilities of GF. Following this transaction, GF retained its ILC charter but terminated its FDIC insurance and thus its right under Utah law to accept deposits. The Competitive Equality Banking Act of 1987 ("CEBA") places certain restrictions on the operations and growth of AIB and restricts further acquisitions of banks and savings institutions by the Company. CEBA does not restrict the growth of the ILCs as currently operated. INCENTIVE SERVICES GENERAL For the year ended December 31, 1993, the Company's incentive services business was conducted by The Sperry and Hutchinson Company, Inc. ("S&H"). In early 1993, the Company contributed the net assets of S&H Motivation, Inc. ("SHM") to a new joint venture formed with an unrelated motivation services company and provided a $3,000,000 line of credit to the joint venture in exchange for a 45% equity interest in the joint venture. Operations of the motivation services business historically have not been significant and are not expected to be significant in the future. S&H distributes Green Stamps to retailers under license agreements that give the retailer an exclusive franchise for a particular category of retail establishment in a particular geographic area. Customers of participating retailers receive Green Stamps when they purchase goods and services. Since 1969, when annual sales for the trading stamp industry as a whole peaked, S&H's trading stamp business has been steadily declining. The Company believes that there is a substantial likelihood that the declining trend in trading stamp sales will continue. The Company has attempted, but has not succeeded in, developing new uses for its trading stamp business. REDEMPTION RESERVE-LIQUIDITY When trading stamps are sold, S&H receives cash and accrues as a liability the estimated obligation to deliver merchandise and/or cash associated with those stamps. Demands for redemption generally occur over a considerable period of time. The loss of customers usually results in an acceleration of redemptions and requires the expenditure of available funds to provide the merchandise and/or cash required for such redemptions. At December 31, 1993 and 1992, the liability for unredeemed trading stamps reflected in the Company's consolidated balance sheets was approximately $58,541,000 and $74,964,000, respectively. The most recent statistical studies of trading stamp redemptions have indicated that the historical pattern of redemptions has changed and that the recorded liability for unredeemed trading stamps is in excess of the amount that ultimately will be required to redeem trading stamps outstanding. The amount of this excess may be different than indicated by these studies. Accordingly, the Company is amortizing the apparent excess over 21 a five year period. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPETITION The Company's incentive services businesses compete primarily with other incentive companies and other forms of promotional and merchandising techniques other than trading stamps. Retail establish- ments, for example, frequently utilize store coupons, special advertising programs, games, extra services and related programs. MANUFACTURING The Company's manufacturing operations consist primarily of the manufacture of bathroom vanities and related products for the "do-it- yourself" market, through its General Marble division, and padding, absorbent, erosion control and proprietary plastic netting products for various industrial and agricultural uses, through its Fibers and Plastics divisions. In 1990, the Company acquired a factory in North Carolina and in 1991 equipped it with state-of-the-art manufacturing machinery for its General Marble division. This facility was designed to enable the Company to improve the quality of its products, to manufacture certain of its products on a "ready-to-assemble" basis and to expand capacity. General Marble's products are sold through manufacturers' representatives primarily to home improvement centers. The inefficiencies and start up costs associated with bringing this facility to full production, together with pricing pressures, have adversely affected results of operations for this segment. The Fibers and Plastics divisions manufacture and market padding, absorbent and erosion control products, which may be reinforced with plastic netting, for the furniture, automotive, erosion control and maintenance industries and thermoplastic netting used for a variety of purposes including, among other things, construction, packaging, agriculture, carpet backing and filtration. The manufacturing operations are subject to a high degree of competition, generally on the basis of price, service and quality. Additionally, these manufacturing operations are dependent on cyclical industries, including the construction industry, which have been adversely effected by recent economic conditions. Through its various manufacturing divisions, the Company holds patents on certain improvements to the basic manufacturing processes and on applications thereof. The Company believes that the expiration of these patents, individually or in the aggregate, is unlikely to have a material effect on the business of its manufacturing operations. OTHER OPERATIONS AND INVESTMENTS The Company also owns non-controlling equity interests representing, at December 31, 1993, more than 5% of the outstanding capital stock of each of the following domestic public companies: Carmike Cinemas, Inc. ("Carmike") (approximately 9% of Class A shares), Jones Plumbing Systems, Inc. ("Jones") (approximately 21%), Jordan Industries, Inc. ("JII") (approximately 11%) and Olympus Capital Corporation (approximately 18%). 22 The Company owns interests in two foreign power companies: Compania Boliviana de Energia Electrica, S.A. - Bolivian Power Company Limited ("Bolivian Power") and through Canadian International Power Company Limited Liquidating Trust, The Barbados Light and Power Company Limited. The Company's investments in the power companies were recorded at an aggregate of approximately $5,208,000 at December 31, 1993. The shares of Bolivian Power are traded on the New York Stock Exchange. In November 1993, the Company sold 750,000 common shares of Bolivian Power in an underwritten public offering. The Company currently owns approximately 719,206 common shares of Bolivian Power, representing approximately 17% of Bolivian Power's outstanding common shares. In 1990, the Company received the stock of certain of the WMAC Companies that had been under the control of the Wisconsin Insurance Commissioner. The Company is unable to predict when Commercial Loan Insurance Company ("CLIC") and WMAC Credit Insurance Corporation ("Credit"), two WMAC Companies which constitute substantially all of the WMAC Companies' remaining value expected from the assets under the control of the Wisconsin Insurance Commissioner, will be returned to its control. The Company estimates that the fair value to the Company of the net tangible assets yet to be received is approximately $32,800,000 in excess of their recorded carrying value at December 31, 1993. A subsidiary of the Company is a partner in The Jordan Company and Jordan/Zalaznick Capital Company. These partnerships each specialize in structuring leveraged buyouts in which the partners are given the opportunity to become equity participants. John W. Jordan II, a director of the Company, is the managing partner of the two partnerships. Since 1982, the Company has invested an aggregate of $25,870,000 in these partnerships and related companies and, through December 31, 1993, has received approximately $62,398,000 (consisting of cash, interest bearing notes and other receivables) relating to the disposition of investments and management and other fees. At December 31, 1993, through these partnerships, the Company had interests in an aggregate of 15 companies (the "Jordan Associated Companies"), which are carried in the Company's consolidated financial statements at $13,620,000. The Jordan Associated Companies include JII, Carmike and Jones. Item 2. Properties. ------ ---------- Through its various subsidiaries, the Company owns the following significant properties: an office building in Clayton, Missouri (approximately 66,000 sq. ft.), which is leased to unaffiliated parties; an office building in Valley Forge, Pennsylvania (approxi- mately 94,800 sq. ft.) located on land leased from a third party to a subsidiary of the Company; two offices in Salt Lake City, Utah (totaling approximately 74,000 sq. ft.); three multi-tenant office buildings in Indianapolis, Indiana (totaling approximately 444,000 sq. ft.) which are leased (or are available for lease) to unaffiliated parties; and a warehouse in Fort Worth, Texas (approximately 256,000 sq. ft.) that is leased to a third party. In addition, subsidiaries of the Company own nine facilities (totaling approximately 1,208,000 sq. ft.) primarily used for manufacturing and storage located in Georgia, New Jersey, New York, North Carolina, Pennsylvania, Wisconsin and Canada. The Company's 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 Note 15 of Notes to Consolidated Financial Statements. 23 Item 3. Legal Proceedings. ------ ----------------- PHLCORP TENDER OFFER Seven class action complaints were filed against the Company and others in connection with the Company's tender offer to purchase up to 5,200,000 common shares of Phlcorp, which expired in February 1988, and have been consolidated into one action in the United States District Court for the Southern District of New York (the "Southern District"), entitled In re PHLCORP Securities Tender Offer Litigation ------------------------------------------------ (Civil Action No. 88 Civ. 0306 (SS)) ("In Re Phlcorp"). ------------- The consolidated and amended class action complaint (the "Complaint") seeks damages (in an unspecified amount), imposition of a constructive trust and costs and disbursements of the action. Several of the claims were dismissed in 1988 as a result of defendants' motion to dismiss. The remaining claims allege that defendants violated the Securities Exchange Act of 1934, as amended, by causing Phlcorp's directors to issue a recommendation to accept the Company's tender offer, which incorrectly represented that the directors' recommendation was based on a determination that the Company's offer was fair and that defendants breached their fiduciary duties in connection with the tender offer. A class of plaintiff minority shareholders, who owned shares of Phlcorp on January 21, 1988, has been certified. Upon completion of discovery, with the exception of discovery of experts, defendants filed a motion for Summary Judgment. Prior to the time defendants' reply brief was due, the parties reached an agreement in principle for the settlement of the action. A stipulation of settlement was submitted to the Court for its approval on January 24, 1994. At a conference on February 2, 1994, the Court entered an order requiring (a) plaintiffs to mail notice of the proposed settlement to class members by February 22, 1994, (b) class members to submit any objections to the settlement by April 15, 1994 and (c) a hearing to determine whether the settlement should be approved to be held on April 29, 1994. Because of the settlement agreement, defendants withdrew their summary judgment motion, without prejudice to renew the motion in the event that the court does not approve the settlement. Defendants believe that the material allegations of these complaints are without merit and, if not settled, intend to defend these actions vigorously. EMPIRE TRANSACTIONS Beginning in 1988, four separate actions were commenced in the Supreme Court, New York County relating to Empire's conversion from a mutual to a stock company, a 1988 reverse stock split, a subsequent odd lot cash tender offer and adoption of Empire's Section 7118 Plan in l991. Empire, Phlcorp and ten of Empire's directors are named as defendants in some or all of these actions. While the Company believes the material allegations of these actions are without merit, these actions have been settled pursuant to Court approval. The settlement, which will become final during the second quarter of l994, unless appealed, will have no material effect on the Company. PHLCORP MERGER Three actions were filed by minority shareholders of Phlcorp in connection with the August 17, 1992 proposal by the Company to Phlcorp that the Company acquire all outstanding Phlcorp shares not already owned 24 by it and its subsidiaries and the October 12, 1992 public announcement that the Company and Phlcorp had reached an agreement in principle with respect to the merger of Phlcorp (then a 63.1% owned public subsidiary of the Company) with and into a wholly owned subsidiary of the Company (the "Phlcorp Merger"). The actions name the Company and/or Phlcorp and their directors as defendants. Two of the actions were brought in the Supreme Court of the State of New York, County of New York, and one was filed in the Pennsylvania Court of Common Pleas, Philadelphia County. The Pennsylvania action has been voluntarily discontinued. The amended class action complaints in the New York action contain similar allegations, inter alia, that the Company, aided and abetted by its directors, breached its fiduciary duties purportedly owed to Phlcorp's minority shareholders by using its position as controlling shareholder of Phlcorp to effect the Merger on terms which do not reflect the true value of Phlcorp Shares, by failing to disclose material facts concerning Phlcorp's assets, businesses, and future prospects, and by timing the October 12 Proposal to coincide with an abnormally high stock price of Leucadia and an artificially depressed Phlcorp stock price. In addition, one of the New York actions asserts a derivative claim brought on behalf of Phlcorp for corporate waste under state law. In November and December 1992, defendants moved to dismiss the New York actions. In early December 1992, plaintiffs' request for a preliminary injunction barring consummation of the Phlcorp Merger, was denied. The parties have entered into settlement negotiations. On February 19, 1993, the court denied defendants' motions to dismiss the New York actions as moot in light of settlement negotiations. The court indicated that plaintiffs would be able to re-open the cases by way of an order to show cause if the cases are not in fact settled. On September 5, 1993, the parties entered into a memorandum of understanding to settle the matter subject to plaintiffs conducting confirmatory discovery and the court's approval of the settlement. Defendants believe that the material allegations of these complaints are without merit and, if not settled, intend to defend these actions vigorously. OTHER PROCEEDINGS In addition to the foregoing, the Company and its subsidiaries are parties to legal proceedings that are considered to be either ordinary, routine litigation incidental to their business or not material to the Company's consolidated financial position. The Company does not believe that any of the foregoing actions will have a material adverse effect on its consolidated financial position or consolidated results of operations. Item 4. Submission of Matters to a Vote of Security Holders. ------ --------------------------------------------------- Not applicable. 25 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 16, 1994, 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 . . . . . . . . . . 53 Chairman of the Board June 1978 Joseph S. Steinberg . . . . . . . . 50 President January 1979 Thomas E. Mara . . . . . . . . . . 48 Executive Vice President May 1980; and Treasurer January 1993 Lawrence S. Hershfield . . . . . . 37 Executive Vice July 1993 President Norman P. Kiken . . . . . . . . . . 51 Vice President and October 1977 Comptroller Paul J. Borden . . . . . . . . . . 45 Vice President August 1988 Mark Hornstein . . . . . . . . . . 46 Vice President July 1983 Ruth Klindtworth . . . . . . . . . 59 Secretary and Vice President- February 1976; Corporate Administrator January 1990 C. Bruce Miller . . . . . . . . . . 62 Vice President January 1989 Joseph A. Orlando . . . . . . . . . 38 Vice President January 1994 David K. Sherman . . . . . . . . . 28 Vice President August 1992
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 Bolivian Power since March 1987, as Chairman of the Board of Bolivian Power since September 1988 and as a director of Allcity since February 1988. 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 Bolivian Power since March 1987, as a director of Allcity since February 1988 and as a director of JII since June 1988. Mr. Mara joined the Company in April 1977 and was elected Vice President of the Company in May 1977. He has served as Executive Vice President of the Company since May 1980 and as Treasurer of the Company since January 1993. Mr. Mara also served as Treasurer of the Company from April 1981 to April 1985. Mr. Hershfield has served as Executive Vice President of the Company since July 1993 and prior thereto served as Vice President of the Company since April 1990. Mr. Hershfield has also served as a director of Bolivian Power since January 1992. From 1981 to April 1990, he served in a variety of executive positions with the Company's subsidiary, BRAE Corporation (formerly a public company), including President, Executive Vice President and Vice President. Mr. Kiken, a certified public accountant, was employed by Coopers & Lybrand, certified public accountants, from 1969 until he joined the Company in October 1977 as Vice President and Comptroller. 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. 26 Mr. Hornstein joined the Company as Vice President in July 1983 and has also served as Secretary of Bolivian Power since July 1988. Ms. Klindtworth has been employed by the Company since July 1960 and was appointed Assistant Secretary in May 1973. She has served as Secretary of the Company since February 1976, as Vice President- Corporate Administrator of the Company since January 1990 and prior thereto had served as Assistant Vice President-Corporate Administrator of the Company since February 1979. Mr. Miller has served as Vice President of the Company since January 1989. He has also served as Executive Vice President of a subsidiary of the Company for more than the past five years. Mr. Orlando, a certified public accountant, has served as Vice President of the Company since January 1994. Mr. Orlando served in a variety of capacities with the Company and its subsidiaries since 1987, including serving as Chairman of S & H. Mr. Sherman has served as Vice President of the Company since August 1992. For the five years prior, he served in a variety of capacities with the Company and its subsidiaries. 27 PART II Item 5. Market for Registrant's Common Equity and Related ------------------------------------------------- Stockholder Matters. ------------------- (a) Market Information. ------------------ The common shares of the Company (the "Common Shares") are traded on the New York Stock Exchange and Pacific Stock Exchange under the symbol LUK. The following table sets forth, for the calendar periods indicated, the high and low sales price per Common Share on the consolidated transaction reporting system, as reported by the Dow Jones Historical Stock Quote Reporter Service. On January 8, 1993, the Company effected a two-for-one stock split of the Common Shares in the form of a 100% stock dividend (the "Stock Split"). The dividend was paid to shareholders of record immediately following the close of business on December 31, 1992. Per share amounts set forth in this Report have been adjusted to reflect the Stock Split.
COMMON SHARE ------------ HIGH LOW ---- --- 1992 ---- First Quarter . . . . . . . . . . . . . $26.69 $18.32 Second Quarter . . . . . . . . . . . . 25.94 22.00 Third Quarter . . . . . . . . . . . . . 35.25 23.75 Fourth Quarter . . . . . . . . . . . . 41.00 30.75 1993 ---- First Quarter . . . . . . . . . . . . . $51.25 $38.63 Second Quarter . . . . . . . . . . . . 43.75 36.00 Third Quarter . . . . . . . . . . . . . 47.75 39.25 Fourth Quarter . . . . . . . . . . . . 44.50 38.75 1994 ---- First Quarter (through March 16, 1994) $43.63 $39.25
(b) Holders. ------- As of March 16, 1993, there were approximately 6,918 record holders of the Common Shares. (c) Dividends. --------- The Company declared and paid on December 15, 1993, a dividend of $.25 per Common Share and on December 31, 1992, a dividend of $.20 per Common Share. Prior thereto, the Company had not paid any cash dividends on the Common Shares since January 1, 1973. In connection with the Phlcorp Merger, the Company agreed to consider, but has not made any commitment to, paying annual dividends in the future. The payment of dividends in the future is subject to the discretion of the Board of Directors and will depend upon general business conditions, legal and contractual restrictions on the payment of dividends and other factors that the Board of Directors may deem to be relevant. In connection with the declaration of dividends or the making of distributions on, or the purchase, redemption or other acquisition of Common Shares, the Company is required to comply with certain restrictions contained in certain of its debt instruments. 28 Item 6. Selected Financial Data. ------ ----------------------- The following selected financial data have been summarized from the Company's consolidated financial statements and are qualified in their entirety by reference to, and should be read in conjunction with, such consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations," below.
YEAR ENDED DECEMBER --------------------------------------------------------------------- 1993 1992 1991 1990 1989 ---- ---- ---- ---- ---- (In thousands, except per share amounts) SELECTED INCOME STATEMENT DATA: (a) Revenues $1,408,058 $1,573,015 $1,086,748 $674,914 $659,061 Interest expense (b) 39,465 38,507 36,925 34,604 43,961 Provision for insurance losses and policy benefits 789,752 896,673 558,127 232,986 225,999 Income from continuing operations before income taxes and cumulative effects of changes in accounting principles 176,868 143,553 95,030 78,938 34,805 Income from continuing operations before cumulative effects of changes in accounting principles 116,259 130,607 94,830 65,010 22,567 Income (loss) from discontinued operations less applicable income taxes - - - (17,670) 41,744 Income before cumulative effects of changes in accounting principles 116,259 130,607 94,830 47,340 64,311 Cumulative effects of changes in accounting principles 129,195 - - - - Net income 245,454 130,607 94,830 47,340 64,311 Per share: Primary earnings (loss) per common and dilutive common equivalent share: Continuing operations before cumulative effects of changes in accounting principles $3.97 $5.35 $4.00 $2.68 $ .85 Discontinued operations - - - (.73) 1.56 Cumulative effects of changes in accounting principles 4.41 - - - - ----- ----- ----- ----- ----- Net income $8.38 $5.35 $4.00 $1.95 $2.41 ===== ===== ===== ===== ===== Fully diluted earnings (loss) per common share: Continuing operations before cumulative effects of changes in accounting principles $3.89 $5.33 $3.97 $2.68 $ .84 Discontinued operations - - - (.73) 1.52 Cumulative effects of changes in accounting principles 4.20 - - - - ----- ----- ----- ----- ----- Net income $8.09 $5.33 $3.97 $1.95 $2.36 ===== ===== ===== ===== ===== 29 AT DECEMBER 31, ------------------------------------------------------------------- 1993 1992 1991 1990 1989 ---- ---- ---- ---- ---- SELECTED BALANCE SHEET DATA: (a) Cash and investments $2,989,384 $3,371,624 $3,627,542 $1,741,273 $1,632,340 Total assets 4,689,272 4,330,580 4,590,096 2,406,438 2,244,678 Debt, including current maturities 401,335 225,588 220,728 208,458 120,428 Customer banking deposits 173,365 186,339 194,862 176,366 126,114 Common shareholders' equity 907,856 618,161 365,495 268,567 257,735 Book value per common share $32.54 $22.12 $15.89 $11.82 $9.84 YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- 1993 1992 1991 1990 1989 ---- ---- ---- ---- ---- SELECTED INFORMATION ON PROPERTY AND CASUALTY INSURANCE OPERATIONS (Unaudited): (a)(c)(d) GAAP Combined Ratio 96.9% 101.7% 102.1% 105.2% 105.3% SAP Combined Ratio 93.7% 102.8% 103.3% 100.8% 102.3% Industry SAP Combined Ratio (e) N/A 115.7% 108.8% 109.5% 109.2% Premium to Surplus Ratio (f) 1.6x 2.0x 2.2x 1.4x 1.9x _________________________ (a) Data includes acquired companies from date of acquisition and has been reclassified for discontinued operations. (b) Includes interest on customer banking deposits. (c) Combined Ratios and the Premium to Surplus Ratios include CPG for the relevant periods since August 16, 1991. (d) Certain accident and health insurance business, which is included in the statutory results of operations of the property and casualty insurance segment and is reflected in the SAP Combined Ratio, is reported in the life insurance segment for financial reporting purposes and therefore is not included in the GAAP Combined Ratios reflected herein. The Combined Ratio does not reflect the effect of investment income on results of operations. For 1993, the difference in the treatment of costs for GAAP and SAP purposes was a principle reason for the difference between the GAAP Combined Ratio and the SAP Combined Ratio. For 1992, the results of the accident and health insurance business, which (as described above) are reflected in the SAP Combined Ratio but are not reflected in the GAAP Combined Ratio, had a non-recurring income item which reduced the SAP Combined Ratio. In addition, in 1992 certain income credits were recognized only for GAAP purposes. (e) Source: Best's Insurance Management Reports, Property/Casualty Supplement, March 25, 1993. A comparison to industry average may not be meaningful as a result of, among other things, differences in geographical concentration and in the mix of property and casualty insurance products. (f) Premium to Surplus Ratio was calculated by dividing statutory property and casualty insurance premiums written by statutory capital at the end of the year.
30 Item 7. Management's Discussion and Analysis of Financial Condition ----------------------------------------------------------- and Results of Operations. ------------------------- LIQUIDITY AND CAPITAL RESOURCES The Company. During each of the three years in the period ended ----------- December 31, 1993, the Company operated profitably and in the year ended December 31, 1991 net cash was provided from operations. For the years ended December 31, 1993 and 1992, in spite of increased earnings, net cash was used for operations. The 1992 net cash used principally resulted from a 1991 reinsurance transaction, which had the effect of reducing CPI's premium to surplus ratio for 1991, and the 1993 net cash used principally related to the transfer of blocks of insurance described below. Principally as a result of the acquisition of the minority interest in Phlcorp (the "Phlcorp Minority Interest") on December 31, 1992 and the Company's continuing profitable operations, ratings of the Company's debt obligations were upgraded in 1993 by Moody's, S&P and Duff & Phelps Inc., three of the leading bond rating agencies, all of which rated the Company's senior debt as "investment grade." The Company believes the higher ratings have made it substantially easier to raise additional funds, including the offerings described below, on favorable terms. Ratings issued by bond rating agencies are subject to change at any time. In February 1993, the Company sold $100,000,000 principal amount of its newly authorized 5 1/4% Convertible Subordinated Debentures due 2003 (the "Convertible Debentures") in an underwritten public offering. The Convertible Debentures are convertible into Common Shares at $57.50 per Common Share (an aggregate of 1,739,130 Common Shares), subject to anti-dilution provisions. In August 1993, the Company sold $100,000,000 principal amount of its newly authorized 7 3/4% Senior Notes due 2013 (at 99% of principal amount) in an underwritten public offering. The net proceeds of these offerings were added to working capital. Principally as a result of the public offerings and increased cash flow from affiliates, including tax sharing payments, the Company and its non-regulated affiliates had aggregate cash and temporary investments of approximately $204,000,000 at February 28, 1994. Such funds are available for general corporate purposes, including acquisitions. However, the interest rate currently earned on such funds is less than the interest paid on the 1993 debt offerings. In addition, at February 28, 1994 the Company had available aggregate credit agreement facilities of $150,000,000. During 1994, the credit agreements were renewed and now expire in 1997. No amounts were outstanding at February 28, 1994 under these credit agreement facilities. Effective as of January 1, 1993, as described more fully in Note 1(a) of Notes to Consolidated Financial Statements, the Company adopted SFAS 106 (postretirement benefits), SFAS 109 (income taxes), SFAS 112 (postemployment benfits), SFAS 113 (reinsurance) and EITF 93-6 (retrospectively rated reinsurance agreements). Although adoption of these statements resulted in an aggregate credit of $129,195,000 being reported as an element of net income for 1993 and an increase in shareholders' equity of $138,605,000, adoption of such statements will not affect cash flows, actual income taxes paid or the actual utilization of the Company's substantial tax loss carryforwards. However, adoption of SFAS 109 is likely to increase reported provisions for income taxes in most periods. In addition, as of December 31, 1993, the Company adopted SFAS 115. SFAS 115 requires that most securities, other than those meeting the requirements for classification as "held-to-maturity," be carried on the consolidated balance sheet at market value, either through an adjustment to earnings (if classified as "trading securities") or through shareholders' equity (if classified as "available for sale"). The Company has classified substantially all of its investment portfolio as "available for sale," which resulted in an increase of shareholders' equity at December 31, 1993 of approximately $49,500,000. The Company believes SFAS 115 will result in 31 substantial fluctuations in reported shareholders' equity, but is unlikely to have a material effect on results of operations. For additional information with respect to the changes in accounting principles, see "Results of Operations," below and Notes to Consolidated Financial Statements. During 1992, the Company concluded that the profitability of its existing SPDA and SPWL business was unlikely to achieve acceptable operating results in the future. Accordingly, principally starting in the fourth quarter of 1992, the Company offered certain of its existing SPDA policyholders the opportunity to exchange their policies for SPDA policies of an unrelated insurer and entered into a reinsurance agreement (which closed in stages in 1992 and 1993) to reinsure certain blocks of SPDA business with a second unrelated insurer. In connection with the 1993 SPDA closing (which involved reinsurance of policies with account balances of approximately $47,187,000 on the date of closing in 1993), there was no significant net gain or loss. The Company is maximizing the return on any remaining SPDA policies by reducing crediting rates to the minimum permitted. As a result, the Company believes that a substantial portion of the remaining SPDA policyholders will terminate their policies over a period of time. On June 23, 1993, the Company reinsured substantially all of its existing blocks of SPWL business with a subsidiary of John Hancock Mutual Life Insurance Company ("John Hancock"). In connection with the transaction, the Company realized a net pre-tax gain of approximately $16,700,000. Such net pre-tax gain consists of net gains on sales of investments sold in connection with the transaction (approximately $24,100,000), which are included in the caption "Net securities gains," reduced by a net loss of approximately $7,400,000 (principally the write-off of deferred policy acquisition costs of approximately $26,900,000 less the premium received on the transaction), which is included in the caption "Provision for insurance losses and policy benefits." Further, the Company may receive additional consideration based on the subsequent performance of this block of business. For financial reporting purposes, the Company will reflect the policy liabilities assumed by John Hancock (in policy reserves), with an offsetting receivable from John Hancock of the same amount (in reinsurance receivable, net), until the Company is relieved of its legal obligation to the SPWL policyholders. During the first quarter of 1994, the Company and an equal partner agreed to acquire a 60% interest in Caja de Ahorro y Seguro S.A. ("Caja") for a purchase price of approximately $85,000,000, subject to final adjustment. Caja is a holding company whose subsidiaries are engaged in property and casualty insurance, life insurance and banking in Argentina. Caja has (unaudited) assets in excess of approximately $500,000,000. Reliable historical operating data for Caja is not available. The Company believes that Caja will not constitute a "significant subsidiary." On August 16, 1991, the Company acquired CPG. As described in "Results of Operations," CPG has operated profitably and has been a substantial contributor to the Company's performance. Prior to the acquisition of CPG, particularly in 1989 and 1990, the property and casualty insurance operations of CPG had provided significant additional amounts for losses. At December 31, 1991, the Company stated it believed that the reserves established for the Colonial Penn P&C Group were adequate, including amounts applicable to the Special Risks business. Since acquisition, the claims and settlement experience of the acquired business has been satisfactory and the Company continues to believe (in part based on the recent report of an independent consulting actuary) that the reserves established for the Colonial Penn P&C Group, including the Special Risks business and amounts that may be assessed by California and New Jersey, are adequate. The Company records trading stamp revenues and provides for the cost of redemptions at the time trading stamps are furnished to licensees. A liability for unredeemed trading stamps is estimated based on the cost of merchandise, cash and related redemption service expenses required to redeem the trading stamps which 32 are expected to be presented for redemption in the future. The Company periodically reviews the appropriateness of the estimated redemption rates based upon recent experience, statistical evaluations and other relevant factors. At December 31, 1993 and 1992, the liability for unredeemed trading stamps reflected in the Company's consolidated balance sheet was $58,541,000 and $74,964,000, respectively. The most recent statistical studies of trading stamp redemptions have indicated that the historical pattern of redemptions has changed and that the recorded liability for unredeemed trading stamps is in excess of the amount that ultimately will be required to redeem trading stamps outstanding. The amount of this excess may be different than indicated by these studies. Accordingly, the Company is amortizing the aggregate apparent excess over a five year period (starting in 1990 with respect to approximately $34,000,000 of such apparent excess and in 1991 with respect to approximately $28,000,000 of such apparent excess). Based upon the latest studies, the unamortized apparent excess was approximately $17,067,000 at December 31, 1993. The Company will continue to monitor current redemptions and estimates of ultimate redemptions. The government of El Salvador and representatives of the Company had previously reached agreement as to the amount to be paid for the assets of an electric utility in El Salvador in which the Company had an interest. Pursuant to such agreement, on March 30, 1993, the Company received cash of approximately $5,300,000 and approximately $12,000,000 principal amount of 6% U.S. dollar denominated El Salvador Government bonds due in instalments through 1996. The gain recognized during 1993 was not material. As a result of receiving required prepayments and the sale of the bonds, the Company will report a pre- tax gain of approximately $8,458,000 in the first quarter of 1994. In connection with the formation of JII on June 1, 1988, John W. Jordan II, a director and significant shareholder of the Company, acquired from the Company most of the Company's direct interest in JII in exchange for a zero coupon note which matured in 1993. On June 1, 1993 Mr. Jordan delivered to the Company 224,175 of the Company's Common Shares valued at $8,294,000 (the maturity value of the zero coupon note) as payment in full of the zero coupon note. The Common Shares were valued at $37.00 per share, the closing price of a Common Share on the New York Stock Exchange Composite Tape on May 24, 1993, the last full trading day prior to the authorization by the Company's Board of Directors of the agreement. The Company is to receive the residual interest in CLIC and Credit from the Wisconsin Insurance Commissioner without additional consideration. The Company estimates that the value of the net tangible assets of such companies to the Company was approximately $32,800,000 in excess of their carrying amount at December 31, 1993. The underlying assets of such companies are principally invested in high quality interest earning securities. The timing for receipt of such assets is uncertain. During 1993 and 1992, the property and casualty insurance industry suffered unprecedented losses from natural disasters, principally Hurricane Andrew in 1992 and snow storm and fire related losses in 1993. The Company's insurance subsidiaries also suffered certain of such losses, although as described below in "Results of Operations," reinsurance reduced the economic loss to the Company related to Hurricane Andrew. However, as a result of the industry's losses, the Company has seen a notable decrease in the availability of catastrophe reinsurance at reasonable rates, particularly at low levels of deductibility. Although the reinsurance programs were completed at acceptable upper loss limits (albeit at a somewhat increased cost), the insurance subsidiaries have been unable to obtain previous levels of deductibility at reasonable cost. Accordingly, for 1994 and 1993 the Company has increased its retention of lower level losses to $11,000,000. In 1992, the Company did not incur losses in excess of its maximum reinsurance. Further, the Company did not incur catastrophic losses in excess of its retained limits in 1993 and to date in 1994. In January 1994, Los Angeles experienced severe earthquakes. As a result, the Company suffered losses estimated at approximately $7,000,000 to $10,000,000. In addition, severe winter storms in 1994 resulted in unusually high losses. 33 New Jersey's insurance laws require all automobile insurers to share in the losses of the MTF based on their depopulation share of the JUA, as set by the New Jersey Department of Insurance. Although the amount of the MTF deficit has not yet been finalized, based on certain current estimates of the MTF deficit (which are subject to change), the Colonial Penn P&C Group would be assessed approximately $11,100,000. While the New Jersey Insurance Department has adopted regulations which would permit an insurer, with the approval of the Insurance Department, to recover amounts paid to the MTF through surcharges to policyholders, there can be no assurance that the Colonial Penn P&C Group would be permitted to surcharge its policyholders for all or even part of any future deficit assessment. The Colonial Penn P&C Group has provided for its portion of the estimated MTF losses. The NAIC has adopted a model law incorporating the concept of a "risk based capital" ("RBC") requirement for insurance companies, although the model law is not intended to apply to property and casualty insurance companies until year end 1994 financial statements are available. Generally, RBC is designed to measure the adequacy of an insurer's statutory capital in relation to the risks inherent in the business. The RBC formula will be used by the states as an early warning tool to identify weakly capitalized companies for the purpose of initiating regulatory action. The RBC ratios of the Company's insurance subsidiaries as of December 31, 1993 were substantially in excess of the minimum requirements. The Company and certain of its subsidiaries including Phlcorp and its subsidiaries, have substantial loss carryforwards and other tax attributes (see Note 13 of Notes to Consolidated Financial Statements). The amount and availability of tax loss carryforwards are subject to certain qualifications, limitations and uncertainties, including, with respect to Phlcorp and its subsidiaries, tax sharing payments pursuant to a tax settlement agreement with the Internal Revenue Service and the Department of Justice. In order to reduce the possibility that certain changes in ownership could impose limitations on the use of these carryforwards which could reduce their value to the Company, the Company's shareholders, at a special meeting held on December 30, 1992, imposed certain charter restrictions which generally restrict the ability of a person or entity from accumulating five percent or more 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. Upon implementation of SFAS 109, the Company recognized as an asset (net of reserves) certain of the benefits of such loss carryforwards and other tax attributes. However, the amount of the asset recognized only reflects the minimum Phlcorp tax loss carryforwards and assumes that certain proposed regulations affecting the use of Phlcorp's tax loss carryforwards are finalized without significant change. As described in the accompanying financial statements, significant additional amounts may be available under certain circumstances. The Company's fixed maturity investments are generally "investment grade" or U.S. governmental agency issued or guaranteed obligations, although limited investments in "non-rated" or rated less than "investment grade" securities have been made from time to time. The Company believes that it provides for potential losses on its investments upon early indications that a decline in the market value of a particular security may be other than temporary. The cost and market/carrying value of the Company's investments in "non-rated" or less than "investment grade" rated securities was approximately $40,218,000 and $48,351,000 at December 31, 1993, respectively. At December 31, 1993, less than 1% of the insurance subsidiaries fixed maturity investment portfolio was rated by Moody's and/or S&P as less than "investment grade" or was not rated. The Company continuously evaluates its existing operations and investigates possible acquisitions of new businesses and dispositions of businesses in order to maximize its ultimate economic value to shareholders. Accordingly, while the Company does not have any material arrangement, commitment or understanding with respect thereto, except as described in this Report, further acquisitions, divestitures, investments and changes in 34 capital structure are possible. The Company also believes based on discussions with commercial and investment bankers that it has the ability to raise significant additional funds under acceptable conditions for use in its existing businesses or for appropriate investment opportunities. Parent. Leucadia National Corporation (the "Parent") is a ------ holding company whose assets principally consist of the stock of its several direct subsidiaries. As described below, its principal sources of funds are derived from its available cash resources, bank borrowings, public financings, repayment of 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 expenses of its corporate offices. The Parent maintains the principal borrowings for the Company and its non-banking subsidiaries and has provided working capital to certain of its wholly owned subsidiaries. These borrowings have primarily been made on an unsecured basis from banks through various credit agreement facilities and term loans, and through public financings. As noted above, during 1993, the Company issued an aggregate of $200,000,000 principal amount of senior debt securities and subordinated convertible debt securities in underwritten public offerings. Although the Company had no specific use for such funds (the proceeds of the offerings were principally invested on a temporary basis), the Company believes that it was prudent to borrow long term funds at rates that were historically attractive. As a result of these offerings and other sources of funds, at February 28, 1994, the Company and its wholly owned non-regulated subsidiaries had cash and temporary investments of approximately $204,000,000. There are no restrictions on distributions from the wholly owned non-regulated subsidiaries and therefore all cash available to these subsidiaries (including proceeds from sales of their investments in marketable securities) is available to the Parent. At December 31, 1993, a maximum of approximately $50,590,000 was available to the Parent as dividends from the regulated subsidiaries without regulatory approval. Additional amounts may be available to the Parent in the form of loans or cash advances from such regulated subsidiaries. The Parent (and Phlcorp) also receive tax sharing payments from their subsidiaries included in consolidated tax returns, including certain regulated subsidiaries. Because of the tax loss carryforwards available to the Parent (and Phlcorp) and current interest deductions, the amount paid by the Parent (and Phlcorp) for income taxes is substantially less than tax sharing payments received from the subsidiaries. In addition, the Company believes significant amounts are available from the regulated and non-regulated entities for services provided by the Parent. The Parent also has borrowed short-term funds from time to time from its regulated subsidiaries (as permitted by applicable regulations), although no amounts were outstanding at December 31, 1993 and no amounts were borrowed to date in 1994. Furthermore, as previously noted, the Parent has recently renewed its credit agreements which provide for aggregate credit agreement facilities of $150,000,000. No significant amounts were borrowed in 1993 or to date in 1994 under such agreements. RESULTS OF OPERATIONS CPG is included in results of operations from its date of acquisition, August 16, 1991. For the year ended December 31, 1992, CPG contributed revenues of approximately $836,552,000 (including net gains on sales of securities of approximately $23,543,000) and contributed approximately $131,757,000 to consolidated pre-tax income (exclusive of financing costs). For the period from August 16, 1991 to December 31, 1991, CPG contributed revenues of approximately $359,088,000 (including net gains on sales of securities of approximately $16,323,000) and contributed approximately $59,995,000 to consolidated pre-tax income (exclusive of financing costs). Due to changes in the Company's insurance operations it is not practicable to 35 provide meanful comparable information for CPG for 1993. Except as disclosed herein, the material changes in results of operations for the year ended December 31, 1992 compared to the preceding year result from the acquisition of CPG. Premium receipts on investment oriented products of the life insurance subsidiaries (which are not reflected as revenues) were approximately $88,312,000 in 1993, $68,035,000 in 1992 and $43,164,000 in 1991. The principal investment oriented product sold during the three year period ended December 31, 1993 was a tax-advantaged VA product marketed directly to consumers. Increases in premium receipts in 1993 and 1992 may in part result from Federal tax law changes anticipated in 1992 and enacted in 1993. Substantially all other life insurance earned premiums relate to the CPG operations. Earned premium revenues of the life and health insurance operations were approximately $181,800,000 for 1993 compared to $233,700,000 for 1992. The decrease reflected the termination of certain assumed life and health reinsurance contracts which had revenues of approximately $28,750,000 for 1992 and minimal profitability (except for termination gains of approximately $6,200,000 recognized in 1992). In addition, earned premium revenues decreased as a result of the run-off of the agent sold medicare supplement business, which the Company ceased marketing at December 31, 1992 due to inadequate profitability. During 1993, based on its experience since acquisition, the Company concluded that it would be able to generate significant new premiums for its Graded Benefit Life business at acquisition cost levels that result in adequate profitability. Accordingly, starting in 1993, the Company increased its marketing efforts with respect to this product. Earned premium revenues and commissions of the property and casualty insurance operations of the Empire Group were approximately $259,400,000 in 1993, $243,100,000 in 1992 and $210,700,000 in 1991. The increases (as compared to the preceding year) are principally due to increases in certain premium rates (4.3% in 1993 and 6.2% in 1992) and increased premium volume (2.4% in 1993 and 9.2% in 1992). Earned premium revenues of the Colonial Penn property and casualty insurance operations were approximately $452,600,000 in 1993 and $456,000,000 in 1992. Earned premiums in 1993 reflect an increase in involuntary auto insurance resulting from assigned risk business. The 1993 decline in other business was anticipated and is principally the result of the substantial reduction in marketing costs incurred prior to acquisition, which the Company believes were not justified by prior operating results. As described more fully elsewhere herein, the Colonial Penn property and casualty insurance operations are using other means to market their products. The Company believes its present marketing efforts have resulted in new business which to some degree offsets the normal attrition of existing business. The Company believes that it is likely that new business generated in 1994 will be greater than business lost through normal attrition, although there can be no assurance that this will be achieved. Manufacturing revenues and cost of goods sold in 1993 and 1992 increased slightly from amounts from the preceding year. Manufacturing gross profit was substantially unchanged in 1993 and lower in 1992 than 1991. The decline in 1992 was due to certain manufacturing inefficiencies and start up costs associated with the Company's new bathroom vanity manufacturing facility, under-utilization of facilities in part due to general unfavorable economic conditions and pricing pressures. These inefficiencies contributed to the manufacturing operations having a small loss in 1991 and a substantially larger loss in 1993 and 1992. Although the new manufacturing plant decreased its inefficiencies in 1993, the plant continues to operate at unacceptable efficiency levels. During 1993, the Company instituted actions that it believes should improve efficiency to acceptable levels in 1994 and 1995, although there can be no assurance as to that effect. 36 Trading stamps revenues were lower in 1993 and 1992 than the preceding year principally due to the loss of business of certain customers. The Company believes the historical decline in usage of trading stamps will continue. The Company provided the liability for unredeemed trading stamps based on the estimate that approximately 75% of stamps issued in each of 1993, 1992 and 1991 ultimately will be redeemed. The gross profit rate was higher in 1992 than in 1991 principally due to lower merchandise costs. In early 1993, the Company contributed the net assets of its motivation services business to a new joint venture formed with an unrelated motivation services company in exchange for a 45% equity interest in the joint venture. The joint venture is recorded on the equity basis of accounting. Results of operations of the motivation services business have historically not been significant and are not expected to be significant in the future. Finance revenues reflect the level of consumer instalment loans. In 1992 the Company sold at a profit substantially all of its consumer loan development offices, which had aggregate consumer instalment loans at the time of sale of approximately $68,500,000. As expected, the operating profit applicable to this segment increased in 1993 as the offices sold in 1992 operated at a loss. Based on its experience since 1988 in providing automobile collateralized loans to individuals with poor credit histories, during 1993 the Company concluded that there were excellent opportunities for successful expansion of this business. Accordingly, on a controlled basis, the Company increased its investment in such loans. Such loans approximated $73,321,000 at December 31, 1993 and $47,890,000 at December 31, 1992. The Company expects to further increase such loans in 1994. Investment and other income decreased in 1993 compared to 1992. The decrease was the result of a lower level of investments due to disposition of the SPWL and SPDA business and lower interest rates. Exclusive of CPG, investment and other income decreased in 1992 compared to 1991. The investment earnings of the non-CPG insurance subsidiaries were lower in 1992 compared to the prior year in part due to a reduction in Charter's investment portfolio to fund a substantial portion of the CPG purchase price. The estimated average yield to maturity of bonds and notes in the Company's investment portfolio was lower at December 31, 1993 and 1992 than at the preceding year end. The decreased yield resulted in part from the reinvestment of sales proceeds at the generally prevailing lower interest rates. Further, other income in 1991 includes approximately $9,359,000 related to the resolution of certain pre-acquisition contingencies related to Cambrian, a consolidated subsidiary. The $12,981,000 gain in 1993 from the sale of a portion of the investment in Bolivian Power and the $12,128,000 gain in 1992 from sale of the consumer loan development offices is reflected in other income. 37 Net securities gains (losses) in each of the three years ended December 31, 1993 were as follows (in thousands):
1993 1992 1991 ---- ---- ---- Net gains on fixed maturities: Resulting in additional provision for policyholder benefits $ 6,800 $ 2,700 $ 8,800 Resulting in increase in amortization of deferred policy acquisition costs 24,100 11,230 - Other 19,352 51,797 26,103 ------- -------- -------- 50,252 65,727 34,903 Provision for write-down of investments in certain fixed maturity investments (2,000) (19,677) (7,783) Provision for write-down of investments in certain equity and other securities - (364) (757) Net unrealized holding loss on trading securities (685) - - Gain on sale of investment in Molins PLC - - 18,437 Net gains on equity and other securities 4,356 6,092 5,591 ------- -------- ------ $51,923 $ 51,778 $ 50,391 ======= ======== ========
The proceeds from sales of investments were primarily reinvested at the generally lower prevailing interest rates. Since these reinvestment rates were, in certain instances, lower than had previously been expected on certain fixed rate annuity policies issued by the life insurance subsidiaries, in 1993 and 1991 the Company provided approximately $6,800,000 and $8,800,000, respectively, which is included in results of operations under the caption, "Provision for insurance losses and policy benefits." In 1992, as a result of realizing securities gains and reinvestment of sales proceeds at the lower prevailing interest rates, and securities gains realized in connection with the termination or transfer of the SPDA business, the Company recalculated and eliminated deferred policy acquisition costs applicable to certain of its investment oriented products (including the SPDA policies), reviewed the expected and required return on certain fixed income products and, as a result, provided additional reserves of approximately $13,900,000, which is included in the caption "Provision for insurance losses and policy benefits" in 1992 results of operations. These reinvestment risks do not apply to the Company's currently offered variable investment oriented products. The provision for insurance losses and policy benefits of the life and health operations decreased in the 1993 period compared to the 1992 period, principally due to lower earned premiums and insurance in force, (including the SPDA and SPWL business that was sold in late 1992 and 1993). However, the provision for insurance losses and policy benefits of the life and health operations for 1993 includes a net loss of approximately $7,400,000 (principally the write-off of deferred policy acquisition costs less the premium received) applicable to the SPWL business sold to John Hancock and additional provisions of approximately $6,800,000 applicable to certain fixed rate policies due to realization of securities gains and reinvestment of proceeds at the lower prevailing interest rates, as described more fully above. The provision for insurance losses and policy benefits of the life and health operations exclusive of CPG increased in 1992 compared to 1991 principally due to the growth in earned premiums and the additional amounts provided by the life insurance subsidiaries as a result of the realized securities gains described above. Further, the spread between amounts credited to policyholders by the life insurance subsidiaries and amounts earned on investments was reduced in 1992 as compared to 1991. As a result of the termination of certain reinsurance arrangements by the life insurance subsidiaries, approximately $6,200,000, representing amounts 38 provided for policyholder benefits that were no longer required, is reflected as a reduction in the provision for insurance losses and policy benefits for 1992. The Company's property and casualty insurance operations combined ratios as determined under GAAP and SAP were as follows: Year ended December 31, GAAP SAP ------ ------ 1993 96.9% 93.7% 1992 101.7%102.8% 1991 102.1%103.3% For the Colonial Penn P&C Group, the severity of personal automobile claims was substantially more favorable in 1993 than in 1992 and the frequency of such claims was substantially more favorable in 1992 than in the prior year. The Company believes this experience reflects its improved underwriting procedures, emphasis on over 50 year old insureds and prior rate increases. In addition, the combined ratio and the provision for losses applicable to the property and casualty operations for 1993 were favorably affected due to settlement of prior years' claims at amounts less than had been provided. The overall loss experience of the Empire Group's property and casualty insurance subsidiaries was less favorable in 1992 than in 1991 primarily as a result of unfavorable loss experience in automobile lines and an approximately $3,000,000 retroactive assessment for a workers' compensation fund. The Company believes that as a result of the reduction in claims outstanding for the Colonial Penn P&C Group, there will be a reduced positive effect on future results of operations from settlement of claims at less than amounts previously provided in spite of providing loss reserves on current operations at very conservative levels. The provision for insurance losses and policy benefits in 1993 and 1992 (including CPG) also includes catastrophe losses (net of reinsurance recoveries in 1992) estimated at an aggregate of approximately $10,900,000 in 1993 and $12,300,000 in 1992 (including amounts related to Hurricane Andrew in 1992). In addition, in 1992, the Company provided approximately $1,000,000 to reinstate certain reinsurance coverage which was exhausted in connection with Hurricane Andrew. Interest expense principally reflects the level of external borrowings outstanding during the period and, in each year compared to the preceding year, the effect of lower interest rates. Interest expense in 1992 also reflects a lower level of intercompany borrowings from Phlcorp during 1992, which resulted in increased interest charges of approximately $4,880,000 in 1992 compared to 1991. Additionally, interest expense reflects the level of Deposits at AIB and the ILCs. Generally, interest rates on Deposits are lower than on other available funds. Interest on Deposits was approximately $9,001,000 in 1993, $11,954,000 in 1992 and $15,138,000 in 1991. The Company estimates that in 1993, the interest expense on its borrowings which were invested in temporary investments exceeded interest earned by approximately $2,500,000. Selling, general and other expenses in 1991 includes costs applicable to development by the trading stamps subsidiary of a database marketing program of approximately $8,237,000 (including close down costs). In 1991 the Company discontinued development of the program due to a lack of acceptance by food manufacturers. Minority interest in 1992 and 1991 was principally applicable to the Phlcorp Minority Interest. On December 31, 1992, the Company acquired the Phlcorp Minority Interest in exchange for approximately 4,408,000 Common Shares. 39 Income before income taxes and the effects of accounting changes was $176,868,000 in 1993, $143,553,000 in 1992 and $95,030,000 in 1991. The amount for 1993 was the highest in the history of the Company. The provision for income taxes for 1993 was calculated under SFAS 109 which does not reflect the benefit from utilization of tax loss carryforwards. The provisions for income taxes for 1992 and 1991 have been reduced for the benefit from utilization of tax loss carryforwards. The provision for income taxes for 1993 was reduced by approximately $8,315,000 as a result of tax law changes and a reduction in the valuation allowance applicable to certain deferred tax assets. The Company estimates that if the 1993 tax provision had been calculated as it was in 1992 and 1991, such provision would have been lower by, and net income (exclusive of amounts applicable to changes in accounting principles) would have been higher by approximately $42,614,000 (or $1.46 per primary earnings per share and $1.38 per fully diluted earnings per share). The provisions for income taxes for 1992 and 1991 principally consist of state income taxes, the federal alternative minimum income tax, federal income taxes applicable to the life insurance subsidiaries which cannot utilize the Company's tax loss carryforwards and United Kingdom income taxes applicable to Cambrian. The 1991 provision reflects credits of approximately $5,400,000, resulting from the favorable outcome of certain prior years' United Kingdom income tax matters. As noted above, the tax provisions for 1992 and 1991 reflect the benefit from utilization of accounting and tax loss carryforwards, including capital loss carryforwards. The number of shares used to calculate primary earnings per share was 29,270,000, 24,435,000 and 23,704,000 for 1993, 1992 and 1991, respectively. The number of shares used to calculate fully diluted earnings per share was 30,743,000, 24,516,000 and 23,916,000 for 1993, 1992 and 1991, respectively. The increase in 1993 was principally caused by the acquisition of the Phlcorp Minority Interest and, with respect to fully diluted per share amounts, the effect of the assumed conversion of the 5 1/4% Convertible Debentures. The increase in the number of shares utilized in calculating per share amounts in 1992 compared to 1991 was principally caused by the exercise of options to purchase common shares and the increase in the market price per common share. Item 8. Financial Statements and Supplementary Data. ------ ------------------------------------------- Financial Statements and supplementary data required by this Item 8 are set forth at the pages indicated in Item 14(a) below. Item 9. Disagreements on Accounting and Financial Disclosure. ------ ---------------------------------------------------- Not applicable. 40 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 1994 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. 41 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. ---------------------------------------- (a)(1)(2) Financial Statements and Schedules. ---------------------------------- Report of Independent Certified Public Accountants . . . . . . . . . . . . . . . F-1 Financial Statements: Consolidated Balance Sheets at December 31, 1993 and 1992 . . . . . . . . F-2 Consolidated Statements of Income for the years ended December 31, 1993, 1992 and 1991 . . . . . . . . . . . F-3 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1992 and 1991 . . . . . F-4 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1993, 1992 and 1991 . . . . . . . . . . . . . . . . . F-6 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . F-7 Financial Statement Schedules: Schedule I - Summary of Investments Other Than Investments in Affiliates . . . F-35 Schedule III - Condensed Financial Information of Registrant . . . . . . . . F-37 Schedule V - Supplementary Insurance Information . . . . . . . . . . F-41 Schedule VI - Schedule of Reinsurance . . . . . . . . . . . . . . . F-42 Schedule VIII - Valuation and Qualifying Accounts . . . . . . . . . . . F-43 Schedule IX - Short-Term Borrowings . . . . F-44 Schedule X - Schedule of Supplemental Information for Property and Casualty Insurance Underwriters . . . . . F-45 42 (3) Executive Compensation Plans and Arrangements. --------------------------------------------- 1982 Stock Option Plan, as amended August 28, 1991 (filed as Annex B to the Company's Proxy Statement dated July 21, 1992). 1992 Stock Option Plan (filed as Annex C to the Company's Proxy Statement dated July 21, 1992). Agreement made as of March 12, 1984 by and between Leucadia, Inc. and Ian M. Cumming (filed as Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1983 (the "1983 10-K")). Agreement made as of March 12, 1984 by and between Leucadia, Inc. and Joseph S. Steinberg (filed as Exhibit 10.15 to the Company's 1983 10-K). Agreement dated as of August 1, 1988 among the Company, Ian M. Cumming and Joseph S. Steinberg (filed as Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991 (the "1991 10-K")). Agreement dated as of January 10, 1992 between Ian M. Cumming, certain other persons listed on Schedule A thereto and the Company (filed as Exhibit 10.7 to the Company's 1991 10-K). Agreement dated as of January 10, 1992 between Joseph S. Steinberg, certain other persons listed on Schedule A thereto and the Company (filed as Exhibit 10.8 to the Company's 1991 10-K). Agreement between Leucadia, Inc. and Ian M. Cumming, dated as of December 28, 1992 (filed as Exhibit 10.12(a) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (the "1992 10-K")). Escrow and Security Agreement by and among Leucadia, Inc., Ian M. Cumming and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1992 (filed as Exhibit 10.12(b) to the 1992 10-K). Agreement between Leucadia, Inc. and Joseph S. Steinberg, dated as of December 28, 1992 (filed as Exhibit 10.13(a) to the 1992 10-K). Escrow and Security Agreement by and among Leucadia, Inc., Joseph S. Steinberg and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1992 (filed as Exhibit 10.13(b) to the 1992 10-K). Agreement made as of December 28, 1993 by and between the Company and Ian M. Cumming (filed as Exhibit 10.17 to this Report). Agreement made as of December 28, 1993 by and between the Company and Joseph S. Steinberg (filed as Exhibit 10.18 to this Report). Agreement between the Company and Ian M. Cumming dated as of December 28, 1993 (filed as Exhibit 10.19(a) to this Report). Escrow and Security Agreement by and among the Company, Ian M. Cumming and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1993 (filed as Exhibit 10.19(b) to this Report). Agreement between the Company and Joseph S. Steinberg, dated as of December 28, 1993 (filed as Exhibit 10.20(a) to this Report). Escrow and Security Agreement by and among the Company, Joseph S. Steinberg and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1993 (filed as Exhibit 10.20(b) to this Report). 43 (b) Reports on Form 8-K. ------------------- Not applicable. (c) Exhibits. -------- 3.1 Restated Certificate of Incorporation (filed as Exhibit 5.1 to the Company's Current Report on Form 8-K dated July 14, 1993).* 3.2 By-laws (as amended) filed as Exhibit 4.5 to the Company's Registration Statement No. 33-57054).* 4.1 The Company undertakes to furnish the Securities and Exchange Commission, upon request, a copy of all instruments with respect to long-term debt not filed herewith. 10.1 1982 Stock Option Plan, as amended August 28, 1991 (filed as Annex B to the Company's Proxy Statement dated July 21, 1992).* 10.2 1992 Stock Option Plan (filed as Annex C to the Company's Proxy Statement dated July 21, 1992).* 10.3(a) Restated Articles and Agreement of General Partnership, effective as of February 1, 1982, of The Jordan Company (filed as Exhibit 10.3(d) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1986).* 10.3(b) Amendments dated as of December 31, 1989 and December 1, 1990 to the Partnership Agreement referred to in 10.3(a) above (filed as Exhibit 10.2(b) to the Company's 1991 10-K).* 10.3(c) Amendment dated as of December 17, 1992 to the Partnership Agreement referred to in 10.3(a) above (filed as Exhibit 10.3(c) to the 1992 10-K).* 10.3(d) Articles and Agreement of General Partnership, effective as of April 15, 1985, of Jordan/Zalaznick Capital Company (filed as Exhibit 10.20 to the Company's Registration Statement No. 33-00606).* 10.4 Agreement made as of March 12, 1984 by and between Leucadia, Inc. and Ian M. Cumming (filed as Exhibit 10.14 to the 1983 10-K).* 10.5 Agreement made as of March 12, 1984 by and between Leucadia, Inc. and Joseph S. Steinberg (filed as Exhibit 10.15 to the 1983 10-K).* ___________________ * Incorporated by reference. 44 10.6 Stock Purchase and Sale Agreement dated as of April 5, 1991, by and between FPL Group Capital Inc. and the Company (filed as Exhibit B to the Company's Current Report on Form 8-K dated August 23, 1991).* 10.7 Agreement dated as of August 1, 1988 among the Company, Ian M. Cumming and Joseph S. Steinberg (filed as Exhibit 10.6 to the Company's 1991 10- K).* 10.8 Agreement dated as of January 10, 1992 between Ian M. Cumming, certain other persons listed on Schedule A thereto and the Company (filed as Exhibit 10.7 to the Company's 1991 10-K).* 10.9 Agreement dated as of January 10, 1992 between Joseph S. Steinberg, certain other persons listed on Schedule A thereto and the Company (filed as Exhibit 10.8 to the Company's 1991 10-K).* 10.10(a) Agreement dated April 23, 1992 between AIC Financial Services, Inc. (an Alabama corporation), AIC Financial Services (a Mississippi corporation) and AIC Financial Services (a South Carolina corporation) (collectively, "Seller") and Norwest Financial Resources, Inc. (filed as Exhibit 10.10(a) to the 1992 10-K).* 10.10(b) Purchase Agreement between A.I.C. Financial Services, Inc., American Investment Bank, N.A., American Investment Financial and Terracor II d/b/a AIC Financial Fund, Seller, and Associates Financial Services Company, Inc., Buyer, dated November 5, 1992 (filed as Exhibit 10.10(b) to the Company's Registration Statement No. 33-55120).* 10.11(a) Agreement and Plan of Merger, dated as of October 22, 1992, by and among the Company, Phlcorp Acquisition Company and PHLCORP, Inc. (filed as Exhibit 5.2 to the Company's Current Report on Form 8-K dated October 22, 1992).* 10.11(b) Amendment dated December 10, 1992, to the Merger Agreement referred to in 10.11(a) above (filed as Exhibit 5.2 to the Company's Current Report on Form 8-K dated December 14, 1992).* 10.12(a) Agreement between Leucadia, Inc. and Ian M. Cumming, dated as of December 28, 1992 (filed as Exhibit 10.12(a) to the 1992 10-K).* 10.12(b) Escrow and Security Agreement by and among Leucadia, Inc., Ian M. Cumming and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1992 (filed as Exhibit 10.12(b) to the 1992 10-K).* 10.13(a) Agreement between Leucadia, Inc. and Joseph S. Steinberg, dated as of December 28, 1992 (filed as Exhibit 10.13(a) to the 1992 10-K).* ___________________ * Incorporated by reference. 45 10.13(b) Escrow and Security Agreement by and among Leucadia, Inc., Joseph S. Steinberg and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1992 (filed as Exhibit 10.13(b) to the 1992 10-K).* 10.14 Settlement Agreement between Baldwin-United Corporation and the United States dated August 27, 1985 concerning tax issues (filed as Exhibit 10.14 to the 1992 10-K).* 10.15 Acquisition Agreement, dated as of December 18, 1992, by and between Provident Mutual Life and Annuity Company of America and Colonial Penn Annuity and Life Insurance Company (filed as Exhibit 10.15 to the 1992 10-K).* 10.16 Reinsurance Agreement, dated as of December 31, 1991, by and between Colonial Penn Insurance Company and American International Insurance Company (filed as Exhibit 10.16 to the 1992 10-K).* 10.17 Agreement made as of December 28, 1993 by and between the Company and Ian M. Cumming. 10.18 Agreement made as of December 28, 1993 by and between the Company and Joseph S. Steinberg. 10.19(a) Agreement between the Company and Ian M. Cumming, dated as of December 28, 1993. 10.19(b) Escrow and Security Agreement by and among the Company, Ian M. Cumming and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1993. 10.20(a) Agreement between the Company and Joseph S. Steinberg, dated as of December 28, 1993. 10.20(b) Escrow and Security Agreement by and among the Company, Joseph S. Steinberg and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1993. 21 Subsidiaries of the registrant. 23 Consent of independent certified public 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). ___________________ * Incorporated by reference. 46 28 Schedule P of the 1993 Annual Statement to Insurance Departments of the Colonial Penn Insurance Company and Affiliated Fire & Casualty Insurers, the Empire Insurance Company, Principal Insurer, and Colonial Penn Madison Insurance Company. 47 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 23, 1994 By: /s/ Norman P. Kiken ------------------------- Norman P. Kiken 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 ------------------------------ Ian M. Cumming (Principal Executive Officer) /s/ Joseph S. Steinberg President and Director ------------------------------ Joseph S. Steinberg (Principal Executive Officer) /s/ Norman P. Kiken Vice President and Comptroller ------------------------------ Norman P. Kiken (Principal Financial and Accounting Officer) /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/ John W. Jordan II Director ------------------------------ John W. Jordan II /s/ Jesse Clyde Nichols, III Director ------------------------------ Jesse Clyde Nichols, III 48 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors of Leucadia National Corporation: We have audited the consolidated financial statements and the financial statement schedules of LEUCADIA NATIONAL CORPORATION and SUBSIDIARIES listed in Item 14(a) of this Form 10-K. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of LEUCADIA NATIONAL CORPORATION and SUBSIDIARIES as of December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. As more fully discussed in Note 1 to the consolidated financial statements, in 1993, the Company changed its method of accounting for Income Taxes, Postretirement Benefits Other than Pensions, Postemployment Benefits, Re-insurance of Short-Duration and Long- Duration Contracts, Multiple-Year Retrospectively Rated Contracts, and Certain Investments in Debt and Capital Securities, all as set forth in various pronouncements of the Financial Accounting Standards Board and the Emerging Issues Task Force. COOPERS & LYBRAND New York, New York March 17, 1994 F-1 LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1993 and 1992 (Dollars in thousands, except par value)
1993 1992 ---- ---- ASSETS ------ Investments $2,697,970 $2,701,025 Cash and short-term investments 291,414 670,599 Reinsurance receivable, net 462,671 10,553 Trade, notes and other receivables, net 390,394 326,454 Prepaids and other assets 161,441 174,844 Property, equipment and leasehold improvements, net 99,741 103,545 Deferred policy acquisition costs and value of insurance in force 55,410 78,895 Deferred income taxes 114,001 - Separate and variable accounts 335,357 215,988 Investments in associated companies 80,873 48,677 ---------- ---------- Total $4,689,272 $4,330,580 ========== ========== LIABILITIES ----------- Customer banking deposits $ 173,365 $ 186,339 Trade payables and expense accruals 164,533 131,122 Other liabilities 110,396 113,244 Income taxes payable 40,378 27,790 Policy reserves 2,105,408 2,390,219 Unearned premiums 380,260 339,634 Separate and variable accounts 334,636 213,492 Liability for unredeemed trading stamps 58,541 74,964 Debt, including current maturities 401,335 225,588 ---------- --------- Total liabilities 3,768,852 3,702,392 ---------- ---------- Minority interest 12,564 10,027 ---------- ---------- SHAREHOLDERS' EQUITY -------------------- Common shares, par value $1 per share, authorized 150,000,000 and 60,000,000 shares; 27,897,023 and 27,944,535 shares issued and outstanding, after deducting 30,260,664 and 29,978,256 shares held in treasury 27,897 27,945 Additional paid-in capital 125,013 123,656 Net unrealized gain on investments 49,912 9 Retained earnings 705,034 466,551 ---------- ---------- Total shareholders' equity 907,856 618,161 ---------- ---------- Total $4,689,272 $4,330,580 ========== ==========
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, 1993, 1992 and 1991
1993 1992 1991 ---- ---- ---- (In thousands, except per share amounts) Revenues: Insurance revenues and commissions $ 893,850 $ 932,943 $ 517,284 Manufacturing 173,638 168,687 161,420 Trading stamps 23,827 29,339 34,607 Motivation services - 63,336 58,935 Finance 33,587 39,580 37,690 Investment and other income 231,233 287,352 226,421 Net securities gains 51,923 51,778 50,391 ---------- --------- --------- 1,408,058 1,573,015 1,086,748 Expenses: Provision for insurance losses and policy benefits 789,752 896,673 558,127 Insurance commissions 6,609 13,327 4,883 Cost of goods sold: Manufacturing 122,815 119,742 110,228 Trading stamps 1,252 1,421 5,971 Motivation services - 46,653 42,658 Interest 39,465 38,507 36,925 Salaries 83,179 97,758 66,954 Selling, general and other expenses 185,713 191,886 150,517 Minority interest 2,405 23,495 15,455 ---------- ---------- --------- 1,231,190 1,429,462 991,718 ---------- ---------- --------- Income before income taxes and cumulative effects of changes in accounting principles 176,868 143,553 95,030 Provision for income taxes: ---------- --------- --------- Currently payable 25,355 12,946 200 Applied to deferred taxes 35,254 - - ---------- --------- --------- 60,609 12,946 200 ---------- --------- --------- Income before cumulative effects of changes in accounting principles 116,259 130,607 94,830 Cumulative effects of changes in accounting principles 129,195 - - ---------- --------- --------- Net income $ 245,454 $ 130,607 $ 94,830 ========== ========= ========= Earnings per common and dilutive common equivalent share: Income before cumulative effects of changes in accounting principles $3.97 $5.35 $4.00 Cumulative effects of changes in accounting principles 4.41 - - ----- ----- ----- Net income $8.38 $5.35 $4.00 ===== ===== ===== Fully diluted earnings per common share: Income before cumulative effects of changes in accounting principles $3.89 $5.33 $3.97 Cumulative effects of changes in accounting principles 4.20 - - ----- ----- ----- Net income $8.09 $5.33 $3.97 ===== ===== =====
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, 1993, 1992 and 1991
1993 1992 1991 ---- ---- ---- (Thousands of dollars) Net cash flows from operating activities: ---------------------------------------- Net income $ 245,454 $ 130,607 $ 94,830 Adjustments to reconcile net income to net cash provided by (used for) operations: Cumulative effects of changes in accounting principles (129,195) - - Benefit from utilization of tax loss carryforwards applied to reduce SFAS 109 deferred tax asset 35,254 - - Depreciation and amortization of property, equipment and leasehold improvements 16,378 16,825 13,876 Other amortization 113,450 78,395 39,742 Provision for doubtful accounts 6,754 9,437 13,115 Net securities (gains) (51,923) (51,778) (50,391) (Gain) on reinsurance transaction with John Hancock (exclusive of security gains and write-off of deferred policy acquisition costs) (19,456) - - (Gain) on sale of loan development offices - (12,128) - Equity in loss of associated companies 2,064 1,891 722 (Gain) related to Bolivian Power (12,981) - - Purchases of investments classified as trading (77,333) - - Proceeds from sales of investments classified as trading 38,118 - - Net change in reinsurance receivable 52,356 - - Net change in trade, notes and other receivables (55,877) 2,071 (8,780) Net change in prepaids and other assets (49,258) (27,902) (10,168) Deferred policy acquisition costs incurred and deferred (81,746) (77,448) (56,058) Net change in trade payables and expense accruals (the decrease in 1992 principally relates to a prior reinsurance transaction) 18,295 (101,508) 61,823 Net change in other liabilities (3,954) (12,584) 5,100 Net change in income taxes 8,195 3,888 1,386 Net change in policy reserves (56,327) (8,850) 18,177 Net change in unearned premiums 35,020 31,007 (49,748) Decrease in liability for unredeemed trading stamps (16,423) (19,095) (16,514) Cash related to reinsurance transaction with John Hancock (510,698) - - Minority interest 2,405 23,495 15,455 Other 1,701 730 1,214 ----------- ----------- ----------- Net cash provided by (used for) operating activities (489,727) (12,947) 73,781 ----------- ----------- ----------- Net cash flows from investing activities: ---------------------------------------- Acquisition of property, equipment and leasehold improvements (19,368) (27,351) (27,869) Proceeds from disposals of property, equipment and leasehold improvements 5,760 7,034 9,128 Cash related to acquisition of certain companies, net - (1,711) 116,456 Collections on notes receivable and policy loans 438 341 1,157 Advances on loan receivables (132,324) (114,168) (125,658) Principal collections on loan receivables 95,535 108,912 109,120 Proceeds from sales of instalment loan receivables - 78,096 - Purchases of investments (other than short- term) (1,582,856) (2,650,517) (1,558,791) Proceeds from maturities of investments 471,440 642,723 276,846 Proceeds from sales of investments 1,219,509 2,447,450 1,258,744 ----------- ----------- ----------- Net cash provided by investing activities 58,134 490,809 59,133 ----------- ------------ ----------- (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, 1993, 1992 and 1991
1993 1992 1991 ---- ---- ---- (Thousands of dollars) Net cash flows from financing activities: ---------------------------------------- Net change in credit agreement and other short-term borrowings $ (5,678) $ (79,893) $ (20,574) Net change in customer banking deposits (12,817) (8,117) 18,860 Net change in policyholder account balances (95,554) (220,888) 47,331 Issuance of long-term debt, net of issuance costs 194,157 130,640 35,080 Reduction of long-term debt (18,237) (63,433) (10,251) Purchase of warrants to acquire common shares - (14,700) - Exercise of PHLCORP, Inc. warrants - - 14,782 Purchase of common shares for treasury (2,492) (2,850) (1,373) Dividends paid (6,971) (5,589) - ---------- ---------- ---------- Net cash provided by (used for) financing activities 52,408 (264,830) 83,855 ---------- ---------- ---------- Net increase (decrease) in cash and short-term investments (379,185) 213,032 216,769 Cash and short-term investments at January 1, 670,599 457,567 240,798 ---------- ---------- ---------- Cash and short-term investments at December 31, $ 291,414 $ 670,599 $ 457,567 ========== ========== ========== Supplemental disclosures of cash flow ------------------------------------- information: ----------- Cash paid during the year for: $34,574 $39,745 $36,287 Interest $17,025 $10,316 $ (270) Net income tax payments (refunds)
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, 1993, 1992 and 1991
Net Common Unrealized Shares Additional Gain (Loss) $1 Par Paid-in On Retained Value Capital Investments Earnings Total ------ ---------- ----------- -------- ----- (Thousands of dollars) Balance, January 1, 1991 $22,724 $ - $ (860) $246,703 $268,567 Exercise of options to purchase common shares 384 1,953 2,337 Net change in unrealized gain (loss) on investments 1,134 1,134 Purchase of stock for treasury (102) (1,271) (1,373) Net income 94,830 94,830 ------- -------- ------- -------- -------- Balance, December 31, 1991 23,006 682 274 341,533 365,495 Exercise of options to purchase common shares 641 4,879 5,520 Acquisition of PHLCORP, Inc. minority interest 4,408 135,535 139,943 Net change in unrealized gain (loss) on investments (265) (265) Purchase of stock for treasury (110) (2,740) (2,850) Purchase of warrants to acquire common shares (14,700) (14,700) Dividend ($.20 per Common Share) (5,589) (5,589) Net income 130,607 130,607 ------- -------- ------- -------- -------- Balance, December 31, 1992 27,945 123,656 9 466,551 618,161 Exercise of options to purchase common shares 235 2,100 2,335 Net change in unrealized gain (loss) on investments 49,903 49,903 Purchase of stock for treasury (283) (10,503) (10,786) Income tax benefit related to warrant and option transactions (primarily recognized upon adoption of SFAS 109) 9,760 9,760 Dividend ($.25 per Common Share) (6,971) (6,971) Net income 245,454 245,454 ------- -------- ------- -------- -------- Balance, December 31, 1993 $27,897 $125,013 $49,912 $705,034 $907,856 ======= ======== ======= ======== ========
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. Significant Accounting Policies: ------------------------------- (a) Changes in Accounting Policies: Effective as of January 1, 1993, ------------------------------ the Company adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS 109"), Statement of Financial Accounting Standards No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"), Statement of Financial Accounting Standards No. 112 "Employers' Accounting for Postemployment Benefits" ("SFAS 112"), Statement of Financial Accounting Standards No. 113 "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" ("SFAS 113") and Financial Accounting Standards Board's Emerging Issues Task Force Consensus No. 93-6 "Accounting for Multiple-Year Retrospectively Rated Contracts by Ceding and Assuming Enterprises" ("EITF 93-6"). As a result of adoption of SFAS 106, SFAS 109, SFAS 112 and EITF 93-6, the cumulative effects of such changes through January 1, 1993 were recorded as of the date of adoption and were principally reflected in results of operations as "Cumulative effects of changes in accounting principles." In addition, as a result of adoption of SFAS 109, certain acquired intangibles were reduced (for benefits of acquired tax loss carryforwards) and shareholders' equity was directly increased (as a result of prior stock transactions). SFAS 106, SFAS 112 and EITF 93-6 had no material effect on income before cumulative effects of changes in accounting principles for 1993 and are unlikely to have a material effect on future results of operations. Effective as of December 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). Adoption of SFAS 115 had no material effect on results of operations but did increase shareholders' equity by approximately $49,500,000 at December 31, 1993 as described more fully in Note 1(e). (b) Consolidation Policy: The consolidated financial statements -------------------- include the accounts of the Company and all significant majority-owned subsidiaries. The Company's subsidiary, Phlcorp, Inc. ("Phlcorp") has several legal subsidiaries (the "WMAC Companies") which are, or were, under the control of the Wisconsin Insurance Commissioner (the "Commissioner"). These companies are not consolidated while under the control of the Commissioner. Investments in certain other entities in which the Company owns less than 50% of the voting interest and has the ability to exercise significant influence are accounted for on the equity method of accounting. Amounts related to such companies have not been material. Certain amounts for prior periods have been reclassified to be consistent with the 1993 presentation. (c) Stock Split: On January 8, 1993, a two-for-one stock split was ----------- effected in the form of a 100% stock dividend. The financial statements (and notes thereto) give retroactive effect to the stock split for all periods presented. (d) Statement of Cash Flows: The Company considers short-term ----------------------- investments (generally investments with maturities of less than three months at the time of acquisition) as cash equivalents. As described in Note 2, on August 16, 1991, the Company acquired Colonial Penn Group, Inc. ("Colonial Penn") for cash of approximately $128,000,000. The acquired assets were recorded at an aggregate of The accompanying notes are an integral part of these consolidated financial statements. F-7 1. Significant Accounting Policies, continued: ------------------------------- approximately $1,950,000,000 (principally investments in securities) and the acquired liabilities were recorded at an aggregate of approximately $1,822,000,000 (principally policy reserves and unearned premiums). Also, as described in Note 2, on December 31, 1992, the Company acquired the minority interest in Phlcorp (the "Phlcorp Minority Interest") for approximately 4,408,000 of the Company's Common Shares which were recorded at an aggregate of approximately $142,927,000, including costs. Because Phlcorp was a consolidated subsidiary, the Phlcorp Minority Interest (approximately $92,819,000) was eliminated and the difference between the consideration issued and the minority interest eliminated was principally allocated to investments in associated companies (approximately $11,022,000), amounts related to the WMAC Companies (approximately $16,847,000) and excess of purchase price over net assets acquired (approximately $22,277,000). The amount allocated to excess of purchase price over net assets acquired was eliminated as a result of the adoption of SFAS 109. On June 1, 1993, the Company received 224,175 of the Company's Common Shares (valued at $8,294,000) in settlement of a zero coupon note due from John W. Jordan II, a Director of the Company and a significant shareholder. Based on the market price of the shares on the date the transaction was approved by the Board of Directors, the value of the shares received was equal to the maturity value of the note. (e) Investments: Prior to December 31, 1993, investments were carried ----------- at amortized cost with respect to fixed maturities (other than those classified as held for sale) and policyholder loans. Investments were carried at market with respect to marketable equity securities of the insurance subsidiaries and options that did not meet the accounting definition of a hedge and at the lower of cost or market (in the aggregate) for other marketable equity securities. Prior to adoption of SFAS 115, the Company classified a portion of the insurance subsidiaries' investment portfolios as "held for sale." Such investments were carried at the lower of cost or market. A substantial portion of the proceeds from disposition of the portfolio classified as held for sale were invested in other securities. The Company adopted SFAS 115 on December 31, 1993. Under SFAS 115 marketable debt and equity securities are designated as i) "held to maturity" (carried at cost), ii) "trading" (carried at market with differences between cost and market being reflected in results of operations) or iii) if not otherwise classified, as "available for sale" (carried at market with differences between cost and market being reflected as a separate component of shareholders' equity, net of income tax effect). The adoption of SFAS 115 resulted in an increase in reported shareholders' equity of approximately $49,500,000. The Company does not expect that SFAS 115 will have a material effect on future results of operations, although the Company believes SFAS 115 is likely to result in substantial fluctuations in reported shareholders' equity. The fixed maturity investments of the insurance subsidiaries (other than those classified as "trading") are made with the intention of holding such securities to maturity and the Company has the ability to do so. Both prior and subsequent to adoption of SFAS 115, declines in market value below cost which are considered other than temporary are charged to results of operations. For determining realized gain or loss on securities sold, cost is based on average cost. Net unrealized gain on investments at December 31, 1993 is net of deferred income taxes of $27,091,000. (f) Property, Equipment and Leasehold Improvements: Property, ---------------------------------------------- equipment and leasehold improvements are stated at cost, net of accumulated depreciation and amortization (approximately $73,640,000 and $65,150,000 at F-8 1. Significant Accounting Policies, continued: ------------------------------- December 31, 1993 and 1992, 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 lease. (g) Income Recognition from Insurance Operations: Premiums on the -------------------------------------------- property and casualty insurance business are recognized as revenues over the term of the policy using the monthly pro rata basis. The life insurance subsidiaries have had several investment oriented insurance products (collectively the "IOP products"), principally consisting of single premium whole life ("SPWL") products, a variable life ("VL") product, variable annuity ("VA") products and a single premium deferred annuity ("SPDA") product. IOP product premiums are reflected in a manner similar to a deposit; revenues reflect only mortality charges and other amounts assessed against the holder of the insurance policies and annuity contracts. Other life premiums are recognized as revenues when due. Health premiums are recognized as revenues over the premium paying period. Premiums for the VA and VL products are directed by the policyholder to be invested generally in a unit trust solely for the benefit and risk of the policyholder. Such investments are considered a "separate account." Policyholder's accounts are charged for the cost of insurance provided, administrative and certain other charges. The amounts included in the balance sheet as policy reserves for the VA and VL products represent the current value of the policyholders' funds. (h) Policy Acquisition Costs: Policy acquisition costs principally ------------------------ consist of direct response marketing costs, commissions, premium taxes and other underwriting expenses (net of reinsurance allowances). If recoverability of such costs is not anticipated, the amounts not considered recoverable are charged to operations. During the three years ended December 31, 1993, the Company has also written-off or reduced deferred policy acquisition costs in connection with dispositions of blocks of business or reinvestment of proceeds from security sales at the lower prevailing interest rates. Policy acquisition costs applicable to the property and casualty insurance operations are deferred and amortized ratably over the terms of the related policies. Policy acquisition costs applicable to IOP products are deferred and amortized as a level percentage of the present value of expected gross profits over the estimated life of each policy. The Company regularly compares its actual experience to the previously expected gross profit and reviews revised estimates of expected future gross profits. When significant changes occur, deferred policy acquisition costs are recalculated and the resultant adjustment is reflected in results of operations. Policy acquisition costs applicable to other life insurance products are amortized over the expected premium paying period of the policies. (i) Reinsurance: In the normal course of business, the Company seeks ----------- to reduce the loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. The Company has also entered into reinsurance transactions in connection with dispositions of blocks of businesses. Reinsurance contracts do not necessarily relieve the Company from its obligations to policyholders. Prior to January 1, 1993, losses, loss adjustment expenses and unearned premiums were stated net of reinsurance ceded, as were premiums earned and other underwriting expenses. Under SFAS 113, which was adopted as of January 1, 1993, the effects of certain reinsurance transactions are no longer deducted from the related asset or liability. As a result of adoption of SFAS 113, at December 31, 1993 certain assets (principally F-9 1. Significant Accounting Policies, continued: ------------------------------- reinsurance receivables) and policy reserves were each greater by approximately $457,621,000, representing reinsured amounts that prior to the adoption of SFAS 113 would have been deducted from the related asset or liability. Under SFAS 113 and the prior accounting, appropriate provisions are made for uncollectible reinsurance receivables. Although SFAS 113 did not have a material effect on results of operations, it is likely to affect the way certain new reinsurance transactions or extensions or amendments of existing reinsurance contracts are reported. (j) Policy Reserves and Unearned Premiums: Policy reserves and ------------------------------------- unearned premiums for life, health and traditional annuity policies are computed on a net level premium method based upon standard and Company developed tables with provision for adverse deviation and estimated withdrawals. Liabilities for unpaid losses and loss adjustment expenses applicable to the property and casualty insurance operations are determined using case basis evaluations, statistical analyses for losses incurred but not reported and estimates for salvage and subrogation recoverable and represent estimates of ultimate claim costs and loss adjustment expenses. Effective as of January 1, 1993, the Company adopted EITF 93-6 which specifies the accounting for certain retrospectively rated reinsurance agreements. EITF 93-6 is applicable to a small number of per risk, excess of loss reinsurance policies entered into in the normal course of the Empire Insurance Company and subsidiaries' (the "Empire Group") property and casualty insurance business. As a result of the adoption of EITF 93-6, the Company (retroactive to January 1, 1993) reduced its policy reserves at January 1, 1993 by approximately $14,654,000 and recorded a credit of approximately $9,672,000 (net of income taxes of $4,982,000) which is included in the caption "Cumulative effects of changes in accounting principles." If the accounting specified by EITF 93-6 had been in effect in 1992 and 1991, the resulting increase in income before cumulative effects of changes in accounting principles for each of those years would not have been material. (k) Trading Stamp Revenue and Liability for Unredeemed Trading Stamps: ----------------------------------------------------------------- The Company records trading stamp revenues and provides for the cost of redemptions at the time trading stamps are furnished to licensees. A liability for unredeemed trading stamps is estimated based upon the cost of merchandise, cash and related redemption service expenses required to redeem the trading stamps which are expected to be presented for redemption in the future. The Company periodically reviews the appropriateness of the estimated redemption rates based upon recent experience, statistical evaluations and other relevant factors. The most recent statistical studies of trading stamp redemptions have indicated that the historical pattern of redemptions has changed and that the recorded liability for unredeemed trading stamps is in excess of the amount that ultimately will be required to redeem trading stamps outstanding. Although the Company believes a significant change in redemption patterns has occurred, the amount of the excess may be different than indicated by these studies. Accordingly, the Company is amortizing the aggregate apparent excess over a five year period (starting in 1990 with respect to approximately $34,000,000 of such apparent excess and in 1991 with respect to approximately $28,000,000 of such apparent excess). As a result, after giving effect to related adjustments, cost of goods sold applicable to the trading stamp operations reflects a credit of approximately $11,900,000, $14,100,000 and $13,700,000 for the years ended December 31, 1993, 1992 and 1991, respectively. Based on the latest studies the unamortized apparent excess at December 31, 1993 was approximately $17,067,000. The Company provided the liability for unredeemed trading stamps based on the estimate that approximately 75% of stamps issued in each of the three years ended December 31, 1993 ultimately will be redeemed. (l) Motivation Services Revenues: Motivation services revenues are ---------------------------- generally recorded when awards are redeemed or travel programs are completed. Customer deposits for travel programs and the Company's related costs are deferred until such programs are completed. In early 1993, the Company contributed the net assets of the motivation service business to a new joint venture formed with an unrelated motivation services company in exchange for a 45% equity interest in the joint venture. Results of operations of the motivation services business have historically not been significant and are not expected to be significant in the future. F-10 1. Significant Accounting Policies, continued: ------------------------------- (m) Pension, Postemployment and Postretirement Costs: There are ------------------------------------------------ non-contributory trusteed pension plans, which cover certain employees, which generally provide for retirement benefits based on salary and length of service. The plans are funded in amounts sufficient to satisfy minimum ERISA funding requirements. Certain subsidiaries provide health care and other benefits to certain eligible retired employees. The plans (most of which require employee contributions) are unfunded. Prior to January 1, 1993, the costs of such benefits were expensed generally as incurred, although liabilities for benefits were recorded in connection with certain acquisitions, including that of Colonial Penn and the Phlcorp Minority Interest. Effective as of January 1, 1993, the Company adopted SFAS 106 and SFAS 112 which require companies to accrue the cost of providing certain postretirement and postemployment benefits during the employees' period of service. The Company does not expect SFAS 106 and SFAS 112 to have a material effect on results of continuing operations exclusive of cumulative effects of changes in accounting principles. (n) Income Taxes: The Company and its domestic subsidiaries, other ------------ than (i) Phlcorp and its subsidiaries prior to January 1, 1993 and (ii) the life insurance subsidiaries of Colonial Penn (acquired in 1991, as described below), file a consolidated federal income tax return. Prior to January 1, 1993, Phlcorp filed a consolidated federal income tax return with its subsidiaries that are not life insurance companies. The life insurance subsidiaries of Colonial Penn file separate or consolidated federal income tax returns. In addition, certain subsidiaries are subject to foreign income taxes. The Company provides for income taxes using the liability method. Effective as of January 1, 1993, the Company adopted SFAS 109. Prior to adoption of SFAS 109, the benefit from utilization of tax loss carryforwards and future deductions was only recognized when utilized and under certain other limited circumstances. Under SFAS 109, the future benefit of certain tax loss carryforwards and future deductions is recorded as an asset (net of valuation allowance) and the provision for income taxes for periods ending after December 31, 1992 is not reduced for the benefit from utilization of tax loss carryforwards. Accordingly, the provision for income taxes for periods ended in 1993 is not comparable to provisions for income taxes for periods ended in 1992 and 1991. Under the liability method, deferred income taxes are provided at the statutorily enacted rates for differences between the tax and accounting bases of substantially all assets and liabilities and for carryforwards. A valuation allowance is provided (and periodically reevaluated) if deferred tax assets are not considered more likely than not to be realized. (o) Translation of Foreign Currency: Foreign currency denominated ------------------------------- investments which are not subject to hedging agreements and currency rate swap agreements not meeting the accounting requirements for "hedges," are converted into U.S. dollars at exchange rates in effect at the end of the period. Resulting net exchange gains or losses were not material. 2. Acquisitions: ------------ Through November 1991, the Company owned approximately 66% of the outstanding common shares of Phlcorp. During 1991 outstanding warrants to acquire approximately 8% of Phlcorp's shares were exercised by other parties at an aggregate purchase price of approximately $14,782,000. After giving effect to certain purchases by the Company, the Company owned approximately 63% of Phlcorp's outstanding common shares at December 31, 1991 and throughout most of 1992. On December 31, 1992, pursuant to a merger agreement, Phlcorp merged with a subsidiary of the Company and became a wholly owned subsidiary of the Company (the "Merger"). Pursuant to the terms of the Merger, the Company issued .812 of a Common Share for each Phlcorp share not held by the Company or its subsidiaries (an aggregate of approximately 4,408,000 of the Company's Common Shares). The aggregate cost of acquiring the Phlcorp Minority Interest (principally based F-11 2. Acquisitions, continued: ------------ on the market price of the Company's Common Shares on the day immediately prior to entering into an agreement in principle as to the terms of the transaction) was approximately $142,927,000. The Company is a partner in The Jordan Company and Jordan/Zalaznick Capital Company, private investment firms whose principal activity is structuring leveraged buy-outs in which the partners are given the opportunity to become equity participants. John W. Jordan II, a director of the Company and a significant shareholder, is a Managing Partner of both firms. Since 1982, through such partnerships, the Company acquired interests in several companies (the "Jordan Associated Companies"), principally engaged in various aspects of manufacturing and distribution. The Company currently accounts for its interests in fourteen of the Jordan Associated Companies on the cost method of accounting and one company (which is not material to the Company) on the equity method of accounting. The investments acquired as a result of the partnership interests are considered Associated Companies. On August 16, 1991, the Company, through its wholly owned subsidiary, Charter National Life Insurance Company ("Charter National"), completed the acquisition of Colonial Penn for an aggregate cash purchase price of approximately $128,000,000, including costs. The Company also made a subsequent $40,000,000 investment in Colonial Penn's principal property and casualty insurance subsidiary. Colonial Penn is a holding company, principally for life and property and casualty insurance companies specializing in direct marketing of personal lines of insurance primarily to individuals over the age of 50. Colonial Penn's principal property and casualty insurance subsidiary also previously wrote certain commercial property and casualty insurance. At the acquisition date, after giving effect to a cash contribution by the seller prior to the closing of approximately $49,827,000, Colonial Penn had (unaudited) shareholder's equity, determined in accordance with generally accepted accounting principles, of approximately $391,000,000 (approximately $263,000,000 in excess of the purchase price). The allocation of the purchase price reflected the elimination of deferred policy acquisition costs, value of insurance in force and property and equipment, and additional amounts for employee severance, postretirement benefits, relocation, lease commitments, restructuring costs and additional reserves for policyholders' benefits. Colonial Penn is included in results of operations from its date of acquisition, August 16, 1991. For the period from date of acquisition to December 31, 1991, Colonial Penn had revenues of approximately $359,088,000 (including net security gains of approximately $16,323,000) and contributed approximately $59,995,000 to consolidated pre-tax income (exclusive of financing costs). For the year ended December 31, 1992, Colonial Penn had revenues of approximately $836,552,000 (including net security gains of approximately $23,543,000) and contributed approximately $131,757,000 to consolidated pre-tax income (exclusive of financing costs). Due to changes in the Company's insurance operations, it is not practicable to provide meaningful comparable information for the acquired Colonial Penn operations for 1993. The following table provides certain unaudited consolidated pro forma results of operations data assuming the acquisition of Colonial Penn and the Phlcorp Minority Interest had occurred on January 1, 1991. (Amounts are in thousands, except per share amounts.)
For the Year Ended December 31, ------------------------------- 1992 1991 ---- ---- Revenues $1,573,015 $1,826,875 Income before income taxes $ 163,417 $ 153,329 Income taxes $ 12,946 $ 1,200 Net income $ 150,471 $ 152,129 Per share: Primary $5.22 $5.41 Fully diluted $5.20 $5.37
F-12 2. Acquisitions, continued: ------------ The principal pro forma adjustments related to Colonial Penn reflected in the data above consist of elimination and/or reduction of (i) amortization and depreciation of deferred policy acquisition costs, value of insurance in force, goodwill and fixed assets, (ii) rent expense applicable to excess facilities and, (iii) with respect to 1991, income taxes. Such pro forma data also provides for the cost of financing the acquisition. The effects of certain cost savings programs implemented by the Company since the acquisition of Colonial Penn are reflected only to the extent included in the consolidated historical results of operations. The reduction in new business solicitation effort which has been accomplished by the Company since the acquisition was expected to, and has, resulted in a substantial reduction in new business and premium revenues. Colonial Penn's annualized written premiums related to new business generated were approximately $24,563,000 for 1992 compared to $111,277,000 for 1991. However, the effect on operating earnings of such reduction in new business solicitation efforts cannot be reasonably estimated and is not reflected in the pro forma data above. Accordingly, such pro forma data should not necessarily be considered indicative of future results of operations or the results of operations that would have resulted if the acquisitions had actually occurred as reflected in the pro forma data. 3. Investments in Associated Companies: ----------------------------------- The Company owns or held part interests in the following foreign power companies: Compania de Alumbrado Electrico de San Salvador, S.A. ("CAESS"), Compania Boliviana de Energia Electrica, S.A. - Bolivian Power Company Limited ("Bolivian Power") and, through Canadian International Power Company Limited Liquidating Trust, The Barbados Light and Power Company Limited. In March 1993, in settlement of claims related to El Salvador's 1986 seizure of CAESS's assets, the Company received cash of approximately $5,300,000 and approximately $12,000,000 principal amount of 6% U.S. dollar denominated El Salvador Government bonds due in instalments through 1996. The Company, which had an investment in CAESS of $8,188,000 at December 31, 1992, will recognize the gain on the cash basis. Payments of principal and interest are being made in accordance with their terms. Recognized gains in 1993 were not significant. During 1994, the Company disposed of the bonds and will report a pre-tax gain of $8,458,000 in first quarter 1994 results of operations. During 1993 the Company sold 750,000 shares of Bolivian Power common stock in an underwritten public offering and realized a pre-tax gain of approximately $12,981,000, which is reflected in 1993 results of operations in the caption, "Investment and other income." At December 31, 1993, the Company owned 719,206 shares of Bolivian Power common stock. The Company believes that it ultimately will receive the stock of two WMAC Companies, which are the only additional companies expected to be returned to the Company with significant value. However, the timing of such receipt is uncertain. The Company estimates that the fair value to the Company of the net tangible assets yet to be received is approximately $32,800,000 in excess of their recorded cost at December 31, 1993. 4. Insurance Operations: -------------------- SPWL and SPDA policies generally provide the policyholder with a declared rate of cash value increase for a specified initial period and subsequent annual rates as determined by the Company, generally subject to minimum rates; the policyholder is generally subject to early termination penalties designed to recover unamortized policy acquisition costs. F-13 4. Insurance Operations, continued: -------------------- Premiums received on IOP products amounted to approximately $88,312,000, $68,035,000 and $43,164,000 for the years ended December 31, 1993, 1992 and 1991, respectively. The changes in deferred policy acquisition costs and value of insurance in force were as follows (in thousands):
1993 1992 1991 ---- ---- ---- Balance, January 1, $ 78,895 $ 82,982 $ 76,037 --------- -------- -------- Additions 81,746 77,448 56,058 --------- -------- -------- Included in provision for insurance losses and policy benefits: Provided in connection with disposition and/or transfers of business (29,748) (9,130) - Provided in connection with sales of securities - (2,100) - Other amortization (71,702) (70,305) (49,113) --------- -------- -------- (101,450) (81,535) (49,113) --------- -------- -------- Adoption of SFAS 109 (3,781) - - --------- -------- -------- Balance, December 31, $ 55,410 $ 78,895 $ 82,982 ========= ======== ========
During 1992, the Company concluded that the profitability of its existing block of SPDA business was unlikely to achieve acceptable results in the future. Accordingly, principally starting in the fourth quarter of 1992, the Company offered certain of its existing SPDA policyholders' the opportunity to exchange their policies for SPDA policies of an unrelated insurer and entered into a reinsurance agreement (which closed in stages in 1992 and 1993) to reinsure certain blocks of SPDA business with a second unrelated insurer. As a result, during the fourth quarter of 1992, policies with an aggregate policyholders' account balance of approximately $196,648,000 were either terminated by the policyholder, transferred at the policyholder's request or transferred in a reinsurance transaction. In the 1993 transactions, which involved reinsurance of policies with account balances of approximately $47,187,000 on the date of closing, there was no significant gain or loss. The Company is maximizing the return on any remaining SPDA policies by reducing crediting rates to the minimum permitted. As a result, the Company believes a substantial portion of the remaining SPDA policyholders will terminate their policies over a period of time. On June 23, 1993, the Company reinsured substantially all of its existing SPWL business with a subsidiary of John Hancock Mutual Life Insurance Company ("John Hancock"). In connection with the transaction, the Company realized a net pre-tax gain of approximately $16,700,000 during 1993. Such net pre-tax gain consists of net gains on sales of investments sold in connection with the transaction (approximately $24,100,000), which are included in the caption "Net securities gains," reduced by a net loss of approximately $7,400,000 (principally the write-off of deferred policy acquisition costs of approximately $26,900,000 less the premium received on the transaction) which is included in the caption "Provision for insurance losses and policy benefits." Further, the Company may receive additional consideration based on the subsequent performance of this block of business. Under SFAS 113, for financial reporting purposes, the Company will reflect the policy liabilities assumed by John Hancock (in policy reserves), with an offsetting receivable from John Hancock of the same amount (in reinsurance receivable, net), until the Company is relieved of its legal obligation to the SPWL policyholders. During 1993, the Company was legally relieved of SPWL policy liabilities of approximately $200,096,000. During the three years ended December 31, 1993, the Company sold, at gains, substantial amounts of investments (including dispositions in connection with the actual or contemplated transfer of blocks of business) and, in certain cases, reinvested proceeds at the lower prevailing interest rates. Since certain of these rates F-14 4. Insurance Operations, continued: -------------------- were lower than had previously been expected on certain fixed rate annuity policies, the Company provided additional reserves of approximately $6,800,000 in 1993, $2,700,000 in 1992 and $8,800,000 in 1991. In addition, because of the lower anticipated investment earnings, the Company also recalculated deferred policy acquisition costs and provided additional amounts for amortization of deferred policy acquisition costs of $2,100,000 in 1992. The amount deducted from insurance loss and policy reserves for reinsured risks was approximately $179,391,000 at December 31, 1992. The effect of reinsurance on premiums written and earned for the year ended December 31, 1993 is as follows (in thousands):
Premiums Premiums Written Earned -------- -------- Direct $930,424 $893,797 Assumed 34,102 33,628 Ceded (33,191) (33,575) -------- -------- Net $931,335 $893,850 ======== ========
Recoveries recognized on reinsurance contracts were approximately $22,800,000 in 1993. Net income and statutory surplus as determined in accordance with statutory accounting principles as reported to the domiciliary state of the Company's insurance subsidiaries are as follows (in thousands):
Year Ended December 31, ----------------------- 1993 1992 1991 ---- ---- ---- Net income (loss): Property and casualty insurance $ 96,279 $ 51,108 $ 11,099 Life insurance $ (2,951) $ 16,187 $(24,561) At December 31, --------------- 1993 1992 1991 ---- ---- ---- Statutory surplus: Property and casualty insurance $475,408 $378,816 $328,725 Life insurance $303,986 $234,058 $207,358
Certain insurance subsidiaries are owned by other insurance subsidiaries. In the data above, investments in such subsidiary-owned insurance companies are reflected in statutory surplus of both the parent and subsidiary-owned insurance company. As a result, at December 31, 1993 and 1992, statutory surplus of approximately $288,800,000 and $122,000,000, respectively, related to property and casualty operations is included in the statutory surplus of the life insurance parent and the property and casualty insurance subsidiary, and statutory surplus of approximately $42,200,000 and $38,000,000, respectively, related to life operations is included in the statutory surplus of the property and casualty insurance parent and the life insurance subsidiary. The insurance subsidiaries are subject to regulatory restrictions which limit the amount of cash and other distributions available to the Company without regulatory approval. At December 31, 1993, approximately $33,200,000 could be distributed to the Company without regulatory approval. F-15 4. Insurance Operations, continued: -------------------- 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 and are likely to be assessed additional amounts by the state insurance funds. The Company has provided for all anticipated assessments and does not expect any additional assessments to have a material effect on results of operations. The Colonial Penn property and casualty insurance subsidiaries are subject to a possible rate "roll-back" refund on California insurance premiums for certain pre-acquisition years. The amount of such roll-back refunds are to be determined by the California Insurance Commissioner. The Company has not been notified of the amount, if any, of such roll-back refund. Based on its operating results in the relevant years, the Company believes Colonial Penn should not be assessed for any roll-back refund and, if assessed a significant amount, intends to vigorously oppose such determination. In addition, New Jersey's insurance laws require all automobile insurers to share in the losses of the successor (the "MTF") to its insurance pool for high risk drivers (the "JUA"), based on their depopulation share of the JUA, as set by New Jersey. Although the amount of the MTF deficit has not yet been established, based on certain current estimates (which are subject to change) of the MTF deficit, Colonial Penn could be assessed approximately $11,100,000, which has been accrued. For 1993, voluntary automobile net earned premiums in California and New Jersey together represented approximately 10% of the Company's total property and casualty net earned premiums. 5. Investments: ----------- Certain information with respect to investments (other than short- term) at December 31, 1993 is as follows (in thousands):
Amortized Carrying Cost Market Amount ---------- ---------- --------- Investments held to maturity $ 74,796 $ 77,243 $ 74,796 Investments available for sale 2,447,180 2,524,493 2,524,493 Trading securities 40,578 41,984 41,984 Policyholder loans 18,138 18,138 18,138 Other 3,162 3,164 3,156 Accrued interest income 35,403 35,403 35,403 ---------- ---------- ---------- $2,619,257 $2,700,425 $2,697,970 ========== ========== ==========
F-16 5. Investments, continued: ----------- The amortized cost and estimated market value of investments classified as held to maturity and investments classified as available for sale at December 31, 1993 are as follows (in thousands):
Gross Gross Unrealized Unrealized Estimated Amortized Holding Holding Market Cost Gains Losses Value --------- ---------- ---------- --------- Held to maturity: Bonds and notes: United States Government agencies and authorities $55,556 $2,470 $61 $57,965 States, municipalities and political subdivisions 2,175 45 - 2,220 All other corporates 477 - 7 470 Other fixed maturities 16,588 - - 16,588 ------- ------ --- ------- $74,796 $2,515 $68 $77,243 ======= ====== === ======= Available for sale: Bonds and notes: United States Government agencies and authorities $1,924,697 $43,756 $2,806 $1,965,647 States, municipalities and political subdivisions 68,469 896 70 69,295 Foreign governments 9,726 3,914 15 13,625 Public utilities 117,927 4,769 694 122,002 All other corporates 307,420 21,057 751 327,726 Preferred stock (non-equity) 392 2 26 368 ---------- ------- ------ ---------- Total fixed maturities 2,428,631 74,394 4,362 2,498,663 Equity securities 18,549 7,774 493 25,830 ---------- ------- ------ ---------- $2,447,180 $82,168 $4,855 $2,524,493 ========== ======= ====== ==========
The amortized cost and estimated market value of investments classified as held to maturity and investments classified as available for sale at December 31, 1993, 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 Market Amortized Market Cost Value Cost Value --------- -------- --------- --------- (In thousands) Due in one year or less $30,840 $30,880 $ 209,558 $ 215,065 Due after one year through five years 32,742 34,726 1,098,084 1,128,778 Due after five years through ten years 4,190 4,418 364,952 379,454 Due after ten years 2,422 2,638 97,773 102,783 ------- ------- ---------- ---------- 70,194 72,662 1,770,367 1,826,080 Mortgage-backed securities 4,602 4,581 658,264 672,583 ------- ------- ---------- ---------- $74,796 $77,243 $2,428,631 $2,498,663 ======= ======= ========== ==========
F-17 5. Investments, continued: ----------- Certain information with respect to investments (other than short- term) at December 31, 1992 is as follows (in thousands):
Amortized Carrying Cost Market Amount ---------- ---------- ---------- Equity securities: Common stock $ 7,630 $ 10,827 $ 8,038 Preferred stock 2,152 2,217 2,217 ---------- ---------- ---------- Total equity securities 9,782 13,044 10,255 Fixed maturities 2,327,765 2,380,952 2,327,765 Policyholder loans 119,612 119,612 119,612 Other 2,205 1,770 1,770 Accrued interest income 36,259 36,259 36,259 Investments held for sale 205,364 211,667 205,364 ---------- ---------- ---------- $2,700,987 $2,763,304 $2,701,025 ========== ========== ==========
The amortized cost and estimated market value of fixed maturity investments (other than investments held for sale) at December 31, 1992 are as follows (in thousands):
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ---------- --------- Bonds and notes: United States Government agencies and authorities $1,720,936 $38,408 $3,948 $1,755,396 States, municipalities and political subdivisions 23,709 1,468 388 24,789 Foreign governments 53,137 3,438 25 56,550 Public utilities 115,681 4,711 349 120,043 All other corporates 379,762 11,524 1,652 389,634 Preferred stock (non-equity) 3,194 - - 3,194 Other 31,346 - - 31,346 ---------- ------- ------ ---------- $2,327,765 $59,549 $6,362 $2,380,952 ========== ======= ====== ==========
The amortized cost and estimated market value of investments held for sale at December 31, 1992 are as follows (in thousands):
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ----------- ---------- --------- Bonds and notes: United States Government agencies and authorities $181,435 $4,937 $642 $185,730 Public utilities 11,484 550 - 12,034 All other corporates 12,445 1,461 3 13,903 -------- ------ ---- -------- $205,364 $6,948 $645 $211,667 ======== ====== ==== ========
Gross unrealized gains and losses on the Company's marketable equity securities were $3,366,000 and $104,000, respectively, at December 31, 1992. At December 31, 1993 and 1992 securities with book values aggregating approximately $55,145,000 and $39,469,000, respectively, were on deposit with various regulatory authorities. F-18 5. Investments, continued: ----------- At December 31, 1993, the Company had common stock equity interests of 5% or more in the following domestic publicly owned non-consolidated companies, some of which are Associated Companies: Carmike Cinemas, Inc. (approximately 9% of Class A shares), Jones Plumbing Systems, Inc. (approximately 21%) and Olympus Capital Corporation (approximately 18%). 6. Receivables, Net: ---------------- A summary of trade, notes and other receivables, net at December 31, 1993 and 1992 is as follows (in thousands):
1993 1992 ---- ---- Instalment loan receivables net of unearned finance charges of $5,858 and $3,281 (a) $187,694 $149,128 Loans to small business concerns, including accrued interest 18,050 20,424 Agents' balances and premiums receivable 154,201 107,270 Amount due on sale of securities 2,513 523 Trade receivables 26,258 35,830 Zero Coupon Note receivable from John W. Jordan II, net of discount (b) - 7,874 El Salvador Government bonds receivable, net of deferred gain 1 - Premium tax receivable 399 3,910 Other 14,804 13,562 -------- -------- 403,920 338,521 Allowance for doubtful accounts (including $8,341 and $6,973 applicable to loan receivables of banking and lending subsidiaries) (13,526) (12,067) -------- -------- $390,394 $326,454 ======== ========
[FN] (a) Contractual maturities of instalment loan receivables at December 31, 1993 were as follows (in thousands): 1994 - $102,524; 1995 - $39,598; 1996 - $21,674; 1997 - $13,942 and 1998 and thereafter - $9,956. 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. (b) On June 1, 1993, Mr. Jordan delivered to the Company 224,175 of the Company's Common Shares valued at $8,294,000 (the maturity value of the zero coupon note, after reflecting certain prepayments) as payment in full of the zero coupon note. The Common Shares were valued at $37.00 per share, the closing price of a Common Share on the New York Stock Exchange Composite Tape on the last full trading day prior to the authorization by the Company's Board of Directors of the agreement. Interest and other income recognized in connection with the note was $420,000 for 1993, $929,000 for 1992 and $819,000 for 1991. During 1992, the Company sold substantially all of its consumer loan development offices (which offices had aggregate instalment loan receivables at the time of sale of approximately $68,500,000) and realized pre-tax gains of approximately $12,128,000 in connection with the sales. Such gains are included in 1992 results of operations in the caption, "Investment and other income." Reinsurance receivables are net of allowance for doubtful accounts of approximately $83,825,000 and $43,799,000 at December 31, 1993 and 1992, respectively. Amounts due from reinsurers for 1993 were reclassified in accordance with SFAS 113 resulting in the apparent increase in the allowance for doubtful reinsurance receivables. Had the prior accounting been in effect, reinsurance receivables would have been reduced by approximately $457,621,000 at December 31, 1993. At December 31, 1993, reinsurance receivables, net includes approximately $322,351,000 due from a subsidiary of John Hancock. F-19 7. Prepaids and Other Assets: ------------------------- At December 31, 1993 and 1992, a summary of prepaids and other assets is as follows (in thousands): [CAPTION] 1993 1992 ---- ---- Inventories $ 34,817 $ 36,432 Real estate assets, net 30,443 28,419 Excess of acquisition cost over net tangible assets acquired(*) 3,508 35,518 Amounts related to the WMAC Companies, at cost 24,051 23,348 Balances in risk sharing pools and associations 27,231 19,697 Prepaid reinsurance premium 2,639 38 Net pension asset 2,712 4,068 Unamortized debt expense 8,024 3,967 Other 28,016 23,357 -------- -------- $161,441 $174,844 ======== ======== (*) Approximately $29,700,000 of the December 31, 1992 amount was eliminated upon adoption of SFAS 109.
8. Trade Payables, Expense Accruals and Other Liabilities: ------------------------------------------------------ A summary of trade payables, expense accruals and other liabilities at December 31, 1993 and 1992 is as follows (in thousands):
1993 1992 ---- ---- Trade Payables and Expense Accruals: Payables related to securities $ 32,393 $ 378 Amount due on reinsurance 11,671 22,988 Trade and drafts payable 35,134 43,891 Accrued compensation, severance and other employee benefits 17,566 16,266 Accrued interest payable 8,950 4,012 Taxes, other than income 23,152 13,134 Provision for servicing carrier claims 13,159 9,761 Other 22,508 20,692 -------- -------- $164,533 $131,122 ======== ======== Other Liabilities: Lease obligations $ 12,783 $ 13,195 Customer deposits, rebates and contract adjustments 1,158 13,969 Due for purchase of Empire common shares 11,732 11,882 Recorded liability for postretirement and postemployment benefits 26,947 15,426 Unearned service fees 12,905 9,482 Premiums received in advance 6,032 8,107 Holdbacks on loans 7,083 6,967 Unclaimed funds and dividends 4,474 5,053 Liability for stock not tendered 8,245 4,382 Other 19,037 24,781 -------- -------- $110,396 $113,244 ======== ========
F-20 9. Long-term and Other Indebtedness: -------------------------------- The principal amount, stated interest rate and maturity of long-term debt outstanding at December 31, 1993 and 1992 are as follows (dollars in thousands):
1993 1992 ---- ---- Senior Notes: Credit agreements $ - $ - Term loans with banks, due in 1994 21,250 35,000 7 3/4% Senior Notes due in 2013, less debt discount of $981 99,019 - Industrial Revenue Bonds (principally with variable interest) 8,058 8,604 Other 15,844 24,913 -------- -------- 144,171 68,517 -------- -------- Subordinated Notes: 10 3/8% Senior Subordinated Notes due 2002, less debt discount of $793 and $886 124,207 124,114 6% Swiss Franc Bonds due March 10, 1996 ("Swiss Franc Bonds") 32,957 32,957 5 1/4% Convertible Subordinated Debentures due 2003 100,000 - -------- -------- 257,164 157,071 -------- -------- $401,335 $225,588 ======== ========
Credit agreements provide for aggregate contractual credit facilities of $150,000,000 at December 31, 1993 and bear interest based on the prime rate or LIBOR, plus commitment and other fees. Such credit facilities were renewed in 1994 to expire in 1997. Approximately $16,717,000 of the manufacturing division's net property, equipment and leasehold improvements are pledged as collateral for the Industrial Revenue Bonds; and approximately $2,727,000 of other property is pledged for other indebtedness aggregating approximately $1,171,000. The Company has interest rate swap agreements with a bank which expire in 1996, the practical effect of which is to convert the variable interest rate on $50,000,000 of indebtedness into fixed interest rate obligations at an interest rate of approximately 8%. During 1989, the Company entered into long-term hedging transactions whereby substantially all currency rate risk related to the Swiss Franc Bonds for their remaining term was eliminated and the cost of which increased the cost of the issue to approximately 10.4%. In February 1993, the Company sold $100,000,000 principal amount of its newly authorized 5 1/4% Convertible Subordinated Debentures due 2003 (the "Convertible Debentures") in an underwritten public offering. The Convertible Debentures are convertible into Common Shares at $57.50 per Common Share (an aggregate of 1,739,130 Common Shares), subject to anti-dilution provisions. In August 1993, the Company sold $100,000,000 principal amount of its newly authorized 7 3/4% Senior Notes due 2013 (at 99% of principal amount) in an underwritten public offering. The most restrictive of the Company's debt instruments requires maintenance of minimum Tangible Net Worth, as defined, and limit Indebtedness, as defined, to a percentage of Tangible Net Worth and Subordinated F-21 9. Long-term and Other Indebtedness, continued: -------------------------------- Indebtedness, as defined. In addition, the debt instruments contain limitations on dividends, investments, liens, contingent obligations and certain other matters. As of January 1, 1994, cash dividends of approximately $180,600,000 could be paid under the most restrictive covenants. The aggregate annual mandatory redemptions of debt during the five year period ending December 31, 1998 (exclusive of Credit Agreements) are as follows (in thousands): 1994 - $28,821; 1995 - $3,013; 1996 - $35,246; 1997 - $1,017; and, 1998 - $872. 10. Common Shares, Stock Options, Warrants and Preferred Shares: ----------------------------------------------------------- On July 14, 1993, the shareholders approved an increase in authorized Common Shares from 60,000,000 to 150,000,000. The Board of Directors from time to time has authorized acquisitions of the Company's Common Shares. Pursuant to such authorization, during the three year period ended December 31, 1993, the Company acquired 496,031 Common Shares (282,409 in 1993, 110,800 shares in 1992 and 102,822 shares in 1991) at an average price of $30.26 per Common Share. The Common Shares acquired in 1993, include 224,175 Common Shares acquired from John W. Jordan II. A summary of activity with respect to the Company's stock options for the three years ended December 31, 1993 is as follows:
Available Common For Shares Total Future Subject Option Option Option To Option Prices Price Grants --------- ------ ------ -------- Balance at January 1, 1991 1,600,878 $ 4.97-$11.00 $13,134,392 211,900 ======= Granted 446,500 $12.25 5,469,625 Exercised (385,296) $ 4.97-$11.00 (2,337,265) Cancelled (127,584) $ 5.03-$12.25 (1,217,449) --------- ----------- Balance at December 31, 1991 1,534,498 $ 4.97-$12.25 15,049,303 292,984 ======= Granted 46,000 $22.50-$33.50 1,315,000 Exercised (641,130) $ 4.97-$12.25 (5,520,662) Cancelled (79,700) $ 7.88-$12.25 (916,869) --------- ----------- Balance at December 31, 1992 859,668 $ 7.88-$33.50 9,926,772 970,000 ======= Granted 176,500 $40.88-$43.00 7,231,938 Exercised (234,896) $ 7.69-$28.50 (2,333,357) Cancelled (24,800) $ 7.69-$22.50 (363,350) --------- ----------- Balance at December 31, 1993 776,472 $ 7.69-$43.00 $14,462,003 793,500 ========= =========== =======
The options were granted under plans that provide 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 the options or rights are granted. Options granted under these plans generally become exercisable in five equal annual instalments starting one year from date of grant; no stock appreciation rights have been granted. At December 31, 1993 and 1992, options to purchase 221,996 and 243,904 Common Shares, respectively, were exercisable. In January 1992, the Company redeemed certain Warrants (which previously had been granted to the Company's Chairman and President pursuant to shareholder approval) for an aggregate cash payment of F-22 10. Common Shares, Stock Options, Warrants and Preferred Shares, ----------------------------------------------------------- continued: approximately $14,700,000, which amount was charged to additional paid-in capital. In January 1992, pursuant to subsequent approval of the shareholders, warrants to purchase 800,000 Common Shares at $20.188 (the then market value of the Company's shares) per Common Share through January 10, 1997 were granted to each of the Company's Chairman and President. The warrants granted in 1992 became exercisable on April 1, 1993. At December 31, 1993 and 1992, the Company's Common Shares were reserved as follows:
1993 1992 ---- ---- Stock Options 1,569,972 1,829,668 Warrants 1,600,000 1,600,000 Convertible Debentures 1,739,130 - --------- --------- 4,909,102 3,429,668 ========= =========
At December 31, 1993 and 1992, 6,000,000 preferred shares (redeemable and non-redeemable), par value $1 per share, were authorized. Phlcorp, through November 1991, had warrants outstanding which were exercisable for Phlcorp common shares at $13.425 per Phlcorp common share. 1,203,318 of such warrants were exercised (1,176,093 in 1991, including 74,983 exercised by the Company) prior to their expiration in November 1991. 11. Cumulative Effects of Changes in Accounting Principles: ------------------------------------------------------ A summary of the amounts included in cumulative effects of changes in accounting principles and related per share amounts for the year ended December 31, 1993 is as follows (in thousands, except per share amounts):
Per Share --------- Fully Amount Primary Diluted ------ ------- ------- SFAS 109 $127,152 $4.34 $4.14 SFAS 106, less income taxes of $2,298 (4,461) (.15) (.15) SFAS 112, less income taxes of $1,632 (3,168) (.11) (.10) EITF 93-6, less income taxes of $4,982 9,672 .33 .31 -------- ----- ----- $129,195 $4.41 $4.20 ======== ===== =====
F-23 12. Net Securities Gains: -------------------- The following summarizes net securities gains (losses) for each of the three years in the period ended December 31, 1993 (in thousands):
1993 1992 1991 ---- ---- ---- Net gains on fixed maturities: Resulting in additional provision for policyholder benefits $ 6,800 $ 2,700 $ 8,800 Resulting in increase in amortization of deferred policy acquisition costs 24,100 11,230 - Other 19,352 51,797 26,103 ------- -------- ------- 50,252 65,727 34,903 Provision for write-down of investments in certain fixed maturity investments (2,000) (19,677) (7,783) Provision for write-down of investments in certain equity and other securities - (364) (757) Net unrealized holding loss on trading securities (685) - - Gain on sale of investment in Molins PLC - - 18,437 Net gains on equity and other securities 4,356 6,092 5,591 ------- -------- ------- $51,923 $ 51,778 $50,391 ======= ======== =======
As a result of the realization of significant gains on sales of securities (including dispositions in connection with the termination or transfer of SPDA and SPWL business) and reinvestment of the proceeds of certain dispositions at the lower prevailing interest rates, the Company recalculated or eliminated deferred policy acquisition costs applicable to the IOP products and provided additional amounts for policyholder benefits applicable to certain fixed rate products as indicated above. Proceeds from sales of fixed maturity investments (including securities held for sale) were approximately $1,171,574,000, $2,421,057,000 and $1,016,645,000 during 1993, 1992 and 1991, respectively. Gross gains of approximately $51,839,000, $70,551,000 and $50,797,000 and gross losses (including provisions for write-downs) of approximately $3,587,000, $24,501,000 and $23,677,000 were realized on those sales during 1993, 1992 and 1991, respectively. 13. Income Taxes: ------------ As a result of adoption of SFAS 109 in 1993 the future benefit of certain tax loss carryforwards and future deductions was recorded as an asset (net of valuation allowance) and the provision for income taxes for the year ended December 31, 1993 was not reduced for the benefit from utilization of tax loss carryforwards. Adoption of SFAS 109 at January 1, 1993 was principally reflected as follows (in thousands):
Tax benefits related to acquired companies (utilized to eliminate acquired intangibles) $ 35,938 Tax benefits resulting from capital transactions (credited to paid-in capital) 9,410 Other tax benefits (reflected as the cumulative effect of a change in accounting principle) 127,152 -------- Benefit of certain tax loss carryforwards and future deductions (net of valuation allowance) recognized as an increase in deferred tax assets $172,500 ========
F-24 13. Income Taxes, continued: ------------ The principle components of the deferred tax asset at December 31, 1993 are as follows (in thousands):
Insurance reserves and unearned premiums $ 83,051 Securities valuation reserves 7,187 Other accrued liabilities 26,260 Liability for unredeemed trading stamps 9,690 State taxes 6,421 Employee benefits and compensation 11,496 Deferred taxes on unrealized gains on investments (27,091) Depreciation (9,480) Policy acquisition costs 3,097 Tax loss carryforwards, net of tax sharing payments 60,310 Other, net (4,115) -------- 166,826 Valuation allowance (52,825) -------- $114,001 ========
The valuation allowance principally relates to certain acquired tax loss carryforwards, the usage of which is subject to certain limitations and certain other matters which may restrict the availability of reported tax loss carryforwards. In addition, the amounts reflected above are based on the minimum tax loss carryforwards of Phlcorp and assume that certain proposed regulations affecting the use of Phlcorp's tax loss carryforwards are finalized without significant change. As described more fully herein, substantial additional amounts may be available under certain circumstances. The Company believes it is more likely than not that the recorded deferred tax asset will be realized; such realization will principally result from taxable income generated by profitable operations. The provision for income taxes for each of the three years in the period ended December 31, 1993 was as follows (in thousands):
1993 1992 1991 ---- ---- ---- State income taxes (principally currently payable) $ 8,562 $ 5,847 $ 6,678 Federal income taxes: Currently payable 16,793 19,703 4,639 Applied to reduce deferred tax asset recorded under SFAS 109 35,254 - - Deferred - (12,892) (8,058) United Kingdom income taxes (principally currently payable (refundable)) - 288 (3,059) ------- -------- ------- $60,609 $ 12,946 $ 200 ======= ======== =======
F-25 13. Income Taxes, continued: ------------ The table below reconciles the "expected" statutory federal income tax applicable to the actual income tax expense (in thousands).
1993 1992 1991 ---- ---- ---- "Expected" federal income tax $61,904 $ 48,808 $ 32,310 State income taxes, net of federal income tax benefit 5,565 3,900 4,454 Amortization of excess of acquisition cost over net tangible assets acquired 1,154 622 616 Benefit of foreign tax credit - - (1,300) Benefit from use of loss carryforwards - (46,796) (35,724) Minority interest 842 7,988 5,255 Alternative minimum tax - 2,723 1,222 Amounts applicable to prior years taxes (principally United Kingdom in 1991 and 1993) (552) (4,183) (6,514) Effects of OBRA (defined below) (4,215) - - Reduction in valuation reserve (4,100) - - Other 11 (116) (119) ------- -------- -------- Actual income tax expense $60,609 $ 12,946 $ 200 ======= ======== ========
The provision for income taxes for 1993 only was calculated under SFAS 109. Accordingly, the provisions for periods ended in 1993 are not comparable to provisions for periods ended prior to 1993. In August 1993, the Omnibus Budget Reconciliation Act (the "OBRA") was enacted which, among other things, increased certain corporate income tax rates retroactive to the beginning of 1993. Under SFAS 109, deferred income taxes are calculated at the statutory rates scheduled to be in effect when the tax benefit is estimated to be realized. When changes in statutory income tax rates are enacted, current and deferred income taxes are recalculated and any resulting adjustment is reflected in the provision for income taxes in the period in which such legislation is enacted. The valuation allowance applicable to the deferred income tax asset recorded upon adoption of SFAS 109 gave effect to the possible unavailability of certain income tax deductions. During the third quarter of 1993 certain matters were resolved and the Company reduced the valuation allowance, resulting in a reduction in the provision for income taxes for the year ended December 31, 1993. The Company estimates that if SFAS 109 had not been adopted, the provision for income taxes for the year ended December 31, 1993 would have been lower by, and net income (exclusive of amounts applicable to changes in accounting principles) would have been higher by, approximately $42,614,000 (or $1.46 per primary earnings per share and $1.38 per fully diluted earnings per share). As previously noted, the Company, certain of the Colonial Penn life insurance subsidiaries and Phlcorp prior to 1993 filed consolidated federal income tax returns with certain subsidiaries (including, with respect to Phlcorp, the WMAC Companies). Phlcorp is included in the Company's consolidated income tax return in 1993. Phlcorp, in connection with its 1986 reorganization, entered into a tax settlement agreement (the "Tax Settlement Agreement") with the United States whereby, among other things, Phlcorp agreed that upon utilization of certain pre-reorganization tax loss carryforwards, it would pay 25% of any resultant tax savings to the government, subject to certain limitations. The Tax Settlement Agreement provides that the amount of pre-reorganization operating loss carryforwards will be calculated by a method which, among other things, gives F-26 13. Income Taxes, continued: ------------ consideration to the outcome of certain ruling requests made by Phlcorp and provides that post-reorganization net operating losses will be utilized prior to pre-reorganization operating losses in calculating tax sharing payments. In 1991, the Internal Revenue Service ("IRS") issued a favorable ruling on certain rulings requested by Phlcorp. This ruling did not address all matters and, therefore, certain matters remain unresolved. In addition, in the past, the IRS has indicated that it disagrees with Phlcorp's reporting positions on certain post-reorganization deductions and has suggested that such positions violate the Tax Settlement Agreement. Because of these uncertainties, Phlcorp is unable to state with certainty the amount of its available carryforwards. However, Phlcorp believes that it has minimum tax operating loss carryforwards of between $143,000,000 and $302,000,000 at December 31, 1993. The expiration dates for Phlcorp's carryforwards will depend on the outcome of the matters referred to above, although it is unlikely such carryforwards will begin to expire before 1998. At December 31, 1993 the Company had loss carryforwards for income tax purposes as follows (in thousands): [CAPTION] Year of Loss Expiration Carryforwards ---------- ----------------- 1994 $ 1,073 1995 113 1996 18,931 1997 714 1998 652 1999 1,321 2000 654 2001 621 2002 588 2003 17,509 2004 - 2005 11,651 -------- 53,827 Phlcorp minimum amount, as described above 143,000 -------- Total minimum tax loss carryforwards $196,827 ========
Limitations exist under the tax law which may restrict the utilization of the Phlcorp carryforwards subsequent to December 31, 1993 and an aggregate of approximately $25,000,000 of non-Phlcorp tax loss carryforwards. Further, certain of the future deductions may only be utilized in the tax returns of certain life insurance subsidiaries. These limitations were considered when providing the valuation allowance under SFAS 109. 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 shareholders at a special meeting held on December 30, 1992, approved certain charter restrictions which prohibit transfers of the Company's Common Stock under certain circumstances. Under prior law, Charter National had accumulated approximately $19,561,000 of special federal income tax deductions allowed life insurance companies as of December 31, 1993 and the Colonial Penn life insurance subsidiaries had accumulated approximately $161,000,000 of such special deductions. Under certain conditions, such amounts could become taxable in future periods. Except with respect to amounts applicable to Colonial Penn's life insurance subsidiaries for which the seller has assumed such liability contractually, the Company does not anticipate any transaction occurring which would cause these amounts to become taxable. In connection with the IRS's examination of certain pre-acquisition tax returns of the Colonial F-27 13. Income Taxes, continued: ------------ Penn life insurance companies, the IRS has asserted that approximately $93,025,000 of special federal income tax deductions allowed life insurance companies should have been reflected in taxable income in 1986, resulting in a tax (exclusive of interest and penalties) of approximately $42,792,000. As noted above, the seller is contractually liable for any such taxes (including interest and penalties). The seller has contested the IRS assessment. 14. Pension Plans and Other Postemployment and Postretirement Benefits: ------------------------------------------------------------------ Pension expense charged to operations included the following components (in thousands):
1993 1992 1991 ---- ---- ---- Service cost $ 4,297 $ 4,657 $ 2,629 Interest cost 6,100 5,995 3,746 Actual return on plan assets (8,662) (4,536) (8,126) Net amortization and deferral 2,399 (1,870) 3,521 ------- ------- ------- Net pension expense $ 4,134 $ 4,246 $ 1,770 ======= ======= =======
Settlement and curtailment gains (losses) of approximately ($292,000), ($366,000) and $1,154,000 were realized in the years ended December 31, 1993, 1992 and 1991, respectively. The funded status of the pension plans at December 31, 1993 and 1992 was as follows (in thousands):
1993 1992 ---- ---- Actuarial present value of accumulated benefit obligation: Vested $73,153 $62,101 Non-vested 2,005 3,335 ------- ------- $75,158 $65,436 ======= ======= Projected benefit obligation $95,849 $86,764 Plan assets at fair value 92,577 86,756 ------- ------- Funded status (3,272) (8) Unrecognized prior service cost 289 374 Unrecognized net loss at January 1, 1987 709 714 Unrecognized net loss from experience differences and assumption changes 4,986 2,988 ------- ------- Accrued pension asset $ 2,712 $ 4,068 ======= =======
The plans' assets consist primarily of fixed income securities (principally U.S. government and agencies' bonds). The projected benefit obligation at December 31, 1993 and 1992 was determined using an assumed discount rate of 7.0% and 7.5%, respectively, and an assumed compensation increase rate of 5.9% and 6.6%, respectively. The assumed long-term rate of return on plan assets was 7.3% and 7.5% at December 31, 1993 and 1992, 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 $2,066,000, $2,106,000 and $2,491,000 for the years ended December 31, 1993, 1992 and 1991, respectively. F-28 14. Pension Plans and Other Postemployment and Postretirement --------------------------------------------------------- Benefits, continued: -------- Several subsidiaries provide certain health care and other benefits to certain retired employees. The costs of such benefits prior to January 1, 1993 were expensed generally as incurred, although liabilities for benefits were recorded in connection with certain acquisitions, including that of Colonial Penn and the Phlcorp Minority Interest. SFAS 106 and SFAS 112 require companies to accrue the cost of providing certain postretirement and postemployment benefits during the employee's period of service. Amounts charged to expense related to such benefits were $2,594,000 in 1993 (principally interest), $1,527,000 in 1992 and $1,256,000 in 1991. The accumulated postretirement benefit obligation at December 31, 1993 is as follows (in thousands):
Retirees $18,154 Fully eligible active plan participants 3,481 Other active plan participants 2,067 ------- 23,702 Unrecognized net loss from experience differences and assumption changes (1,607) ------- Accrued postretirement benefit liability $22,095 =======
The discount rate used in determining the accumulated postretirement benefit obligation was 7.0% at December 31, 1993. The assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation were between approximately 8% and 15% for 1993 declining to an ultimate rate of between 5% and 8% by 2006. If the health care cost trend rates were increased by 1%, the accumulated postretirement obligation as of December 31, 1993 would have increased by approximately $1,404,000. The effect of this change on the estimated aggregate of service and interest cost for 1993 would be immaterial. 15. Commitments: ----------- The Company and its subsidiaries rent office space and office equipment under non-cancelable operating leases with terms generally varying from one to fifteen years. Rental expense (net of sublease rental income) charged to operations was approximately $17,555,000 in 1993, $20,791,000 in 1992 and $13,934,000 in 1991. Aggregate minimum annual rentals (exclusive of real estate taxes, maintenance and certain other charges) and related minimum sublease rentals relating to facilities under lease in effect at December 31, 1993 were as follows (in thousands):
Future Minimum Minimum Sublease Net Rental Payments Rental Income Minimum Rentals --------------- ---------------- --------------- 1994 $18,411 $4,287 $14,124 1995 17,216 3,258 13,958 1996 9,981 1,115 8,866 1997 5,258 - 5,258 1998 4,189 - 4,189 Thereafter 6,173 - 6,173
In connection with the sale of certain subsidiaries, the Company has made or guaranteed the accuracy of certain representations given to the acquirer. No material loss is expected in connection with such matters. F-29 15. Commitments, continued: ----------- In addition, certain of the WMAC Companies that have been returned to the control of the Company have guaranteed the adequacy of certain other matters. The maximum amount of such contingencies is approximately $5,000,000 at December 31, 1993. The Company does not expect a material loss in connection with these guarantees. The insurance subsidiaries and the banking 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 $735,000,000 at December 31, 1993. 16. 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. 17. Earnings Per Common Share: ------------------------- Earnings per common and dilutive common equivalent share was calculated by dividing net income by the sum of the weighted average number of Common Shares outstanding and the incremental weighted average number of Common Shares issuable upon exercise of warrants for the periods they were outstanding. The number of common and dilutive common equivalent shares used for this calculation was 29,270,000 in 1993, 24,435,000 in 1992 and 23,704,000 in 1991. Fully diluted earnings per share was calculated as described above except that in 1992 the incremental number of shares utilized the year end market price for the Company's Common Shares, since the year end market price was above the average for the year. In addition, in 1993, the calculations assume the Convertible Debentures had been converted into Common Shares for the period they were outstanding and earnings increased for the interest on such debentures, net of the income tax effect. The number of shares used for this calculation was 30,743,000 in 1993, 24,516,000 in 1992 and 23,916,000 in 1991. 18. Fair Value of Financial Instruments: ----------------------------------- Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" ("SFAS 107"), requires disclosure of 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. In addition, SFAS 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Therefore, the aggregate fair value amounts presented do not purport to represent and should not be considered representative of the underlying "market" or franchise value of the Company. The methods and assumptions used to estimate the fair values of each class of the financial instruments described below are as follows: (a) Investments: The fair values of marketable equity securities and fixed maturity securities are substantially based on quoted market prices, as disclosed in Note 5. It is not practicable to determine the fair value of policyholder loans since such loans generally have no stated maturity, are not separately transferable and are often repaid by reductions to benefits and surrenders. (b) Cash and short-term investments: For short-term investments, the carrying amount approximates fair value. F-30 18. Fair Value of Financial Instruments, continued: ----------------------------------- (c) Loans receivable of banking and lending subsidiaries: The fair value of loans receivable of the banking and lending subsidiaries is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities. (d) El Salvador Government bonds receivable, net of deferred gain: The fair value of the bonds receivable at December 31, 1993 is based on estimated market prices. (e) Separate and variable accounts: Separate and variable accounts assets and liabilities are carried at market value, which is a reasonable estimate of fair value. (f) Investments in Associated Companies: The fair values of certain foreign power companies are principally estimated based upon quoted market prices. The fair value of CAESS at December 31, 1992 was estimated based upon the agreement with the government of El Salvador as to the amounts to be paid to the Company for the assets which were seized by the government. The carrying value of the remaining investments in associated companies approximates fair value. (g) The WMAC Companies: The fair value of the WMAC Companies is estimated based upon the Company's assessment of the fair value of their underlying net tangible assets to be received. (h) Customer banking deposits: The fair value of customer banking deposits is estimated using rates currently offered for deposits of similar remaining maturities. (i) Long-term and other indebtedness: The fair values of non-variable rate debt are estimated using quoted market prices, estimated rates which would be available to the Company for debt with similar terms and, with respect to the Swiss Franc Bonds, the cost to terminate the currency and interest rate hedging agreement. The fair value of variable rate debt is estimated to be the carrying amount. (j) Investment contract reserves: SPDA reserves are carried at account value, which is a reasonable estimate of fair value. The fair value of other investment contracts is estimated by discounting the future payments at rates which would currently be offered for contracts with similar terms. F-31 18. Fair Value of Financial Instruments, continued: ----------------------------------- The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1993 and 1992 are as follows (in thousands):
1993 1992 ---- ---- Carrying Fair Carrying Fair Amount Value Amount Value -------- ----- -------- ----- Financial Assets: Investments: Practicable to estimate fair value $2,679,832 $2,682,287 $2,581,413 $2,643,692 Policyholder loans 18,138 - 119,612 - Cash and short-term investments 291,414 291,414 670,599 670,599 Loans receivable of banking and lending subsidiaries, net of allowance 197,403 205,231 162,579 168,071 El Salvador Government bonds receivable, net of deferred gain 1 8,458 - - Separate and variable accounts 335,357 335,357 215,988 215,988 Investments in Associated Companies 80,873 101,921 48,677 75,731 WMAC Companies 24,051 56,870 23,348 50,886 Financial Liabilities: Customer banking deposits 173,365 174,994 186,339 188,891 Long-term and other indebtedness 401,335 418,689 225,588 236,940 Investment contract reserves 105,398 109,597 186,274 192,042 Separate and variable accounts 334,636 334,636 213,492 213,492
19. Segment Information: ------------------- For information with respect to the Company's business segments, see "Financial Information about Industry Segments" in Item 1 included elsewhere herein, which is incorporated by reference into these consolidated financial statements. 20. Other Results of Operations Information: --------------------------------------- Investment and other income for each of the three years in the period ended December 31, 1993 consist of the following (in thousands):
1993 1992 1991 ---- ---- ---- Interest on short-term investments $ 14,867 $ 17,750 $ 13,699 Interest on fixed maturities 158,203 213,224 160,199 Service fee income 15,309 12,321 8,187 Gain on sale of Bolivian Power 12,981 - - Gain on sale of loan origination offices - 12,128 - Gains related to Cambrian & General - - 9,359 Other 29,873 31,929 34,977 -------- -------- -------- $231,233 $287,352 $226,421 ======== ======== ========
During 1991, settlement of certain litigation related to Cambrian & General, a subsidiary, was approved and, accordingly, reserves which were no longer required were eliminated. In addition, payments on certain investments, which were carried at no value, were received in that year. As a result, during 1991, the Company recognized income of approximately $9,359,000. F-32 20. Other Results of Operations Information, continued: --------------------------------------- Taxes, other than income or payroll, included in operations amounted to approximately $36,839,000 (including $21,295,000 of premium taxes) for the year ended December 31, 1993, $35,051,000 (including $21,153,000 of premium taxes) for the year ended December 31, 1992 and $19,627,000 (including $9,321,000 of premium taxes) for the year ended December 31, 1991. Advertising costs amounted to approximately $10,394,000, $9,578,000 and $10,623,000 for the years ended December 31, 1993, 1992 and 1991, respectively. Research and development costs, principally applicable to development of a database marketing program by the trading stamp subsidiary prior to 1992, approximated $8,928,000 in 1991 and were not material in 1992 and 1993. During 1991, the Company decided to discontinue development of the database marketing program. Accordingly, amounts for 1991 include shutdown costs. 21. Subsequent Event: ---------------- During the first quarter of 1994, the Company and an equal partner agreed to acquire a 60% interest in Caja de Ahorro y Seguro S.A. ("Caja") for a purchase price of approximately $85,000,000, subject to final adjustment. Caja is a holding company whose subsidiaries are engaged in property and casualty insurance, life insurance and banking in Argentina. Caja has (unaudited) assets in excess of approximately $500,000,000. Reliable historical operating data for Caja is not available. F-33 22. Selected Quarterly Financial Data (Unaudited): ---------------------------------------------
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (In thousands, except per share amounts) 1993: - ---- Revenues $360,086 $372,068 $336,086 $339,818 ======== ======== ======== ======== Income before cumulative effects of changes in accounting principles $ 25,852 $ 32,935 $ 32,806 $ 24,666 ======== ======== ======== ======== Cumulative effects of changes in accounting principles $129,195 $ - $ - $ - ======== ======== ======== ======== Net income $155,047 $ 32,935 $ 32,806 $ 24,666 ======== ======== ======== ======== Earnings per common and dilutive common equivalent share: Income before cumulative effects of changes in accounting principles $ .88 $1.13 $1.12 $.85 Cumulative effects of changes in accounting principles 4.37 - - - ----- ------ ------ ----- Net income $5.25 $1.13 $1.12 $.85 ===== ===== ===== ==== Number of shares used in calculation 29,514 29,209 29,216 29,145 ====== ====== ====== ====== Fully diluted earnings per common share: Income before cumulative effects of changes in accounting principles $ .87 $1.09 $1.09 $.83 Cumulative effects of changes in accounting principles 4.25 - - - ----- ----- ----- ---- Net income $5.12 $1.09 $1.09 $.83 ===== ===== ===== ==== Number of shares used in calculation 30,383 30,955 30,955 30,884 ====== ====== ====== ====== 1992: - ---- Revenues $427,291 $383,732 $383,474 $378,518 ======== ======== ======== ======== Net income $ 23,436 $ 34,256 $ 28,632 $ 44,283 ======== ======== ======== ======== Earnings per common and dilutive common equivalent share $.97 $1.42 $1.17 $1.79 ==== ===== ===== ===== Number of shares used in calculation 24,214 24,188 24,578 24,763 ====== ====== ====== ====== Earnings per fully diluted common share $.97 $1.42 $1.16 $1.78 ==== ===== ===== ===== Number of shares used in calculation 24,292 24,188 24,670 24,916 ====== ====== ====== ======
In 1993 and 1992, the total of quarterly per share amounts do not necessarily equal annual per share amounts. F-34 SCHEDULE I - Summary of Investments - Other Than Investments in Affiliates LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES December 31, 1993 and 1992
1993 ---------------------------------------- Original Market Book Cost(a) Value Value -------------------------------- (Thousands of dollars) Investments Held to Maturity: Bonds and notes: U.S. Government agencies and authorities $ 55,556 $ 57,965 $ 55,556 States, municipalities and political subdivisions 2,175 2,220 2,175 All other corporates 477 470 477 Other fixed maturities 16,588 16,588 16,588 ---------- ---------- ---------- Total investments held to maturity 74,796 77,243 74,796 ---------- ---------- ---------- Investments Available for Sale: Fixed maturities: Bonds and notes: U.S. Government agencies and authorities 1,924,697 1,965,647 1,965,647 States, municipalities and political subdivisions 68,469 69,295 69,295 Foreign governments 9,726 13,625 13,625 Public utilities 117,927 122,002 122,002 All other corporates 307,420 327,726 327,726 Preferred stock (non-equity) 392 368 368 ---------- ---------- ---------- Total fixed maturities 2,428,631 2,498,663 2,498,663 ---------- ---------- ---------- Equity securities: Preferred stocks 1,346 1,412 1,412 Common stocks: Banks, trusts and insurance companies 15,570 15,492 15,492 Industrial, miscellaneous and all other 1,633 8,926 8,926 ---------- ---------- ---------- Total equity securities 18,549 25,830 25,830 ---------- ---------- ---------- Total investments available for sale 2,447,180 2,524,493 2,524,493 ---------- ---------- ---------- Trading Securities: Fixed maturities - corporate bonds and notes 25,029 26,172 26,172 ---------- ---------- ---------- Equity securities: Preferred stocks 13,115 13,681 13,681 Common stocks - industrial, miscellaneous and all other 222 220 220 ---------- ---------- ---------- Total equity securities 13,337 13,901 13,901 ---------- ---------- ---------- Options 2,212 1,911 1,911 ---------- ---------- ---------- Total trading securities 40,578 41,984 41,984 ---------- ---------- ---------- Short-term investments 247,403 247,403 247,403 Policyholder loans 18,138 18,138 18,138 Other, including accrued interest 38,745 38,747 38,739 ---------- ---------- ---------- Total investments 2,866,840 2,948,008 2,945,553 Less, amounts included in cash and short-term investments 247,583 247,583 247,583 ---------- ---------- ---------- Net investments $2,619,257 $2,700,425 $2,697,970 ========== ========== ========== (a) Original cost has been adjusted for repayments and amortization of premium and discounts on bonds and write-downs to reflect impairment in value.
F-35 SCHEDULE I - Summary of Investments - Other Than Investments in Affiliates, continued LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES December 31, 1993 and 1992
1992 ---------------------------------------------- Original Market Book Cost(a) Value Value -------------------------------------------- (Thousands of dollars) Fixed maturities: Bonds and notes: U.S. Government agencies and authorities $1,720,936 $1,755,396 $1,720,936 States, municipalities and political subdivisions 23,709 24,789 23,709 Foreign governments 53,137 56,550 53,137 Public utilities 115,681 120,043 115,681 All other corporates 379,762 389,634 379,762 Preferred stock (non-equity) 3,194 3,194 3,194 Other 31,346 31,346 31,346 ---------- ---------- ---------- Total fixed maturities 2,327,765 2,380,952 2,327,765 ---------- ---------- ---------- Equity securities: Preferred stocks 2,152 2,217 2,217 Common stocks: Banks, trusts and insurance companies 5,763 5,925 5,763 Industrial, miscellaneous and all other 1,867 4,902 2,275 ---------- ---------- ---------- Total equity securities 9,782 13,044 10,255 ---------- ---------- ---------- Short-term investments 616,635 616,635 616,635 Policyholder loans 119,612 119,612 119,612 Other, including accrued interest 38,801 38,366 38,366 Investments held for sale 205,364 211,667 205,364 ---------- ---------- ---------- Total investments 3,317,959 3,380,276 3,317,997 Less, amounts included in cash and short-term investments 616,972 616,972 616,972 ---------- ---------- ---------- Net investments $2,700,987 $2,763,304 $2,701,025 ========== ========== ========== (a) Original cost has been adjusted for repayments and amortization of premium and discounts on bonds and write-downs to reflect impairment in value.
F-36 SCHEDULE III - Condensed Financial Information of Registrant LEUCADIA NATIONAL CORPORATION BALANCE SHEETS December 31, 1993 and 1992
1993 1992 ---- ---- (Thousands of dollars) ASSETS ------ Investments $ 87,853 $ - Deferred income taxes 114,001 - Miscellaneous receivables and other assets 31,457 5,957 Investments in and advances to/from subsidiaries, net 1,069,096 817,809 ---------- -------- $1,302,407 $823,766 ========== ======== LIABILITIES ----------- Accounts payable, expense accruals and income taxes payable $ 16,458 $ 11,327 Debt, including current maturities 378,093 194,278 ---------- -------- 394,551 205,605 ---------- -------- SHAREHOLDERS' EQUITY -------------------- Common shares, par value $1 per share, authorized 150,000,000 and 60,000,000 shares; 27,897,023 and 27,944,535 shares issued and outstanding, after deducting 30,260,664 and 29,978,256 shares held in treasury 27,897 27,945 Additional paid-in capital 125,013 123,656 Net unrealized gain on investments 49,912 9 Retained earnings 705,034 466,551 ---------- -------- Total shareholders' equity 907,856 618,161 ---------- -------- $1,302,407 $823,766 ========== ========
See notes to this schedule. F-37 SCHEDULE III - Condensed Financial Information of Registrant, continued: LEUCADIA NATIONAL CORPORATION STATEMENTS OF INCOME For the years ended December 31, 1993, 1992 and 1991 [CAPTION] 1993 1992 1991 ---- ---- ---- (In thousands, except per share amounts) Investment income, net $23,538 $ 25,852 $ 15,257 Equity in income from operations of subsidiaries 155,515 139,605 114,805 -------- -------- -------- 179,053 165,457 130,062 -------- -------- -------- Interest expense 38,778 32,609 31,745 Other expenses, net 24,016 2,241 3,487 -------- -------- -------- 62,794 34,850 35,232 -------- -------- -------- Income before cumulative effects of changes in accounting principles 116,259 130,607 94,830 Cumulative effects of changes in accounting principles, including amounts related to subsidiaries 129,195 - - -------- -------- -------- Net income $245,454 $130,607 $ 94,830 ======== ======== ======== Earnings per common and dilutive common equivalent share: Income before cumulative effects of changes in accounting principles $3.97 $5.35 $4.00 Cumulative effects of changes in accounting principles 4.41 - - ----- ----- ----- Net income $8.38 $5.35 $4.00 ===== ===== ===== Fully diluted earnings per common share: Income before cumulative effects of changes in accounting principles $3.89 $5.33 $3.97 Cumulative effects of changes in accounting principles 4.20 - - ----- ----- ----- Net income $8.09 $5.33 $3.97 ===== ===== =====
See notes to this schedule. F-38 SCHEDULE III - Condensed Financial Information of Registrant, continued: LEUCADIA NATIONAL CORPORATION STATEMENTS OF CASH FLOWS For the years ended December 31, 1993, 1992 and 1991
1993 1992 1991 ---- ---- ---- (Thousands of dollars) Net cash flows from operating activities: ---------------------------------------- Net income $ 245,454 $ 130,607 $ 94,830 Adjustments to reconcile net income to net cash provided by (used for) operations: Depreciation and amortization 1,066 429 390 Net securities (gains) - - (99) Equity in earnings of subsidiaries (excluding cumulative effects of changes in accounting principles) (155,515) (139,605) (114,805) Cumulative effects of changes in accounting principles, including amounts related to subsidiaries (129,195) - - Net change in miscellaneous receivables (215) (257) (1,309) Net change in other assets (13,095) (3,730) 50 Net change in investments in and advances to/from subsidiaries, net (22,917) 45,743 23,632 Net change in accounts payable, expense accruals and income taxes 5,131 (8,070) 6,397 Other 2,263 5,419 216 --------- -------- --------- Net cash provided by (used for) operating activities (67,023) 30,536 9,302 --------- -------- --------- Net cash flows from investing activities: ---------------------------------------- Dividends received from subsidiaries - 375 9,295 Capital contribution to subsidiaries (6,008) (40) (25,464) Purchase of investments (other than short-term) (96,349) - - Proceeds from sales of investments - - 205 -------- --------- --------- Net cash provided by (used for) investing activities (102,357) 335 (15,964) --------- --------- --------- Net cash flows from financing activities: ---------------------------------------- Net change in credit agreement and other short-term borrowings (1,547) (72,793) (19,000) Issuance of long-term debt, net of issuance costs 194,140 124,063 35,000 Reduction of long-term debt (13,750) (59,217) (7,750) Purchase of warrants to acquire common shares - (14,700) - Purchase of common shares for treasury (2,492) (2,850) (1,373) Dividends paid (6,971) (5,589) - --------- --------- --------- Net cash provided by (used for) financing activities 169,380 (31,086) 6,877 --------- --------- --------- Net increase (decrease) in cash and short-term investments - (215) 215 Cash and short-term investments at January 1, - 215 - --------- --------- --------- Cash and short-term investments at December 31, $ - $ - $ 215 ========= ========= ========= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $23,296 $24,305 $19,676 Net income tax payments (refunds) $ 19 $ 4,924 $(2,539)
See notes to this schedule. F-39 SCHEDULE III - Condensed Financial Information of Registrant, continued: LEUCADIA NATIONAL CORPORATION NOTES TO SCHEDULE For the years ended December 31, 1993, 1992 and 1991 A. The notes to consolidated financial statements of Leucadia National Corporation and Subsidiaries are incorporated by reference to this schedule. B. The statements of shareholders' equity are the same as those presented for Leucadia National Corporation and Subsidiaries. C. Equity in the income of the subsidiaries is after reflecting income taxes recorded by the subsidiaries. In 1993, 1992 and 1991, there was no provision for income taxes provided by the parent company. Tax sharing payments received from subsidiaries were $64,566,000 in 1993, $38,773,000 in 1992, and $6,698,000 in 1991. D. The deferred income tax asset of $114,001,000 at December 31, 1993 has not been allocated to the individual subsidiaries. F-40 SCHEDULE V - Supplementary Insurance Information LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES For the years ended December 31, 1993, 1992 and 1991
Life and Other Benefits and Increase in Future Deferred Policy Policy Benefits Acquisition Separate Net of Costs and and Policy Increase in Value of Future Variable and Net Deferred Other Non-Life Insurance Policy Unearned Accounts Contract Premium Investment Acquisition Operating Premiums In Force Benefits Premiums Liabilities Claims Revenue Income Costs Expenses Written ---------- -------- -------- ----------- -------- ------- ---------- ----------- --------- -------- (Thousands of dollars) 1993 - ---- Life Insurance $21,204 $1,023,736 $ 13,035 $334,636 $ 29,804 $181,802 $ 74,443 $179,127 $ 84,239 $ 60,119 ------- ---------- -------- -------- ---------- -------- -------- -------- -------- -------- Property and Casualty Insurance: Automobile 22,230 - 254,670 - 762,228 573,037 72,937 488,472 53,214 611,530 Commercial 10,233 - 79,002 - 251,919 91,164 18,364 85,270 10,057 95,389 Miscellaneous and personal 1,743 - 33,553 - 37,721 47,847 3,637 36,883 7,761 45,844 ------- ---------- -------- -------- ---------- -------- -------- -------- -------- -------- 34,206 - 367,225 - 1,051,868 712,048 94,938 610,625 71,032 752,763 ------- ---------- -------- -------- ---------- -------- -------- -------- -------- -------- $55,410 $1,023,736 $380,260 $334,636 $1,081,672 $893,850 $169,381 $789,752 $155,271 $812,882 ======= ========== ======== ======== ========== ======== ======== ======== ======== ======== 1992 - ---- Life Insurance $45,700 $1,420,182 $ 19,186 $213,492 $ 31,438 $233,744 $123,217 $261,287 $ 87,160 $114,640 ------- ---------- -------- -------- ---------- -------- -------- -------- -------- -------- Property and Casualty Insurance: Automobile 21,810 - 241,046 - 701,253 561,673 84,710 503,424 59,715 607,726 Commercial 9,574 - 46,475 - 199,934 86,596 22,797 82,555 8,725 84,015 Miscellaneous and personal 1,811 - 32,927 - 37,412 50,930 4,419 49,407 7,656 47,592 ------- ---------- -------- -------- --------- -------- -------- -------- -------- -------- 33,195 - 320,448 - 938,599 699,199 111,926 635,386 76,096 739,333 ------- ---------- -------- -------- --------- -------- -------- -------- -------- -------- $78,895 $1,420,182 $339,634 $213,492 $ 970,037 $932,943 $235,143 $896,673 $163,256 $853,973 ======= ========== ======== ======== ========== ======== ======== ======== ======== ======== 1991 - ---- Life Insurance $56,601 $1,604,090 $ 29,235 $162,424 $ 35,508 $131,379 $102,441 $196,300 $ 33,034 $ 68,790 ------- ---------- -------- -------- ---------- -------- -------- -------- -------- -------- Property and Casualty Insurance: Automobile 15,315 - 195,889 - 717,696 272,703 40,861 267,715 12,367 253,705 Commercial 9,431 - 47,238 - 229,389 87,491 24,111 72,495 11,845 86,099 Miscellaneous and personal 1,635 - 36,265 - 33,297 25,711 2,848 21,617 3,582 24,014 ------- ---------- -------- -------- ---------- -------- -------- -------- -------- -------- 26,381 - 279,392 - 980,382 385,905 67,820 361,827 27,794 363,818 ------- ---------- -------- -------- ---------- -------- -------- -------- -------- -------- $82,982 $1,604,090 $308,627 $162,424 $1,015,890 $517,284 $170,261 $558,127 $ 60,828 $432,608 ======= ========== ======== ======== ========== ======== ======== ======== ======== ========
F-41 SCHEDULE VI - Schedule of Reinsurance LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES For the years ended December 31, 1993, 1992 and 1991
Percentage of Ceded Assumed Amount Direct To Other From Other Net Assumed Business Companies Companies Amount To Net ---------- ----------- ------------ -------- ---------- (Thousands of dollars) 1993 ---- Life insurance in force $2,696,000 $623,000 $ 192,000 $ 2,265,000 8.48% ========== ======== =========== =========== Premiums: Life insurance $ 118,095 $ 1,084 $ 143 $ 117,154 .12% Accident and health insurance 68,109 771 (1,735) 65,603 (2.64%) Property and liability insurance 707,593 31,720 35,220 711,093 4.95% ---------- -------- ----------- ---------- Total premiums $ 893,797 $ 33,575 $ 33,628 $ 893,850 3.76% ========== ======== =========== =========== 1992 ---- Life insurance in force $3,540,000 $ 63,000 $ 189,000 $ 3,666,000 5.16% ========== ======== =========== =========== Premiums: Life insurance $ 117,539 $ (1,762) $ (632) $ 118,669 (.53%) Accident and health insurance 87,550 822 29,377 116,105 25.30% Property and liability insurance 771,213 91,571 18,527 698,169 2.65% ---------- -------- ----------- ----------- Total premiums $ 976,302 $ 90,631 $ 47,272 $ 932,943 5.07% ========== ======== =========== =========== 1991 ---- Life insurance in force $3,698,000 $572,000 $13,706,000 $16,832,000 81.43% ========== ======== =========== =========== Premiums: Life insurance $ 43,265 $ 1,585 $ 20,064 $ 61,744 32.50% Accident and health insurance 34,084 488 37,080 70,676 52.46% Property and liability insurance 441,610 63,344 6,598 384,864 1.71% ---------- -------- ----------- ----------- Total premiums $ 518,959 $ 65,417 $ 63,742 $ 517,284 12.32% ========== ======== =========== ===========
F-42 SCHEDULE VIII - Valuation and Qualifying Accounts LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES For the years ended December 31, 1993, 1992 and 1991
Additions Deductions --------------------------------- ----------------------- Balance at Charged to Balance Beginning Costs and Sale of at End of Description of Period Expenses Recoveries Other(*) Write Offs Receivable Period ----------- ----------- ----------- ---------- ------ ---------- ---------- -------- (Thousands of dollars) 1993 - ---- Loan receivables of banking and lending subsidiaries $ 6,973 $ 2,364 $1,891 $ - $ 2,887 $ - $ 8,341 Trade, notes and other receivables 5,094 4,315 1,796 - 6,020 - 5,185 ------- ------- ------ ------- ------- ----- ------- Total allowance for doubtful accounts $12,067 $ 6,679 $3,687 $ - $ 8,907 $ - $13,526 ======= ======= ====== ======= ======= ====== ======= Reinsurance receivable $ - $ 5,753 $ - $78,072 $ - $ - $83,825 ======= ======= ====== ======= ======= ====== ======= 1992 - ---- Loan receivables of banking and lending subsidiaries $ 7,704 $ 4,865 $1,420 $ 2,000 $ 5,920 $3,096 $ 6,973 Trade, notes and other receivables 5,733 4,572 1,304 - 6,515 - 5,094 ------- ------- ------ ------- ------- ------ ------- Total allowance for doubtful accounts $13,437 $ 9,437 $2,724 $ 2,000 $12,435 $3,096 $12,067 ======= ======= ====== ======= ======= ====== ======= 1991 - ---- Loan receivables of banking and lending subsidiaries $ 6,782 $ 4,537 $1,143 $ - $ 4,758 $ - $ 7,704 Trade, notes and other receivables 6,465 3,839 1,088 - 5,659 - 5,733 ------- ------- ------ ------- ------- ------ ------- Total allowance for doubtful accounts $13,247 8,376 $2,231 $ - $10,417 $ - $13,437 ======= ====== ======= ======= ====== ======= Reinsurance 4,739 ------- Total charged to operations $13,115 ======= (*) Principally relates to implementation of SFAS 113 in 1993 and acquisition of companies in 1992.
F-43 SCHEDULE IX - Short-Term Borrowings LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES For the years ended December 31, 1993, 1992 and 1991
At December 31, -------------------- Weighted Maximum Average Weighted Average Amount Amount Average Interest Outstanding Outstanding Interest Balance Rate(1) During Year(2) During Year(2) Rate(1) ------- -------- -------------- -------------- ------- (Thousands of dollars) 1993 ---- Credit agreements $ - - % $ - $ 2,658 4.1% Commercial paper 660 3.4% 1,461 979 3.4% Other 173,365 4.7% 190,485 180,797 5.1% -------- -------- -------- $174,025 $191,946 $184,434 ======== ======== ======== 1992 ---- Credit agreements $ - - % $167,500 $ 68,334 5.9% Commercial paper 2,207 3.8% 1,236 1,495 3.9% Other 190,470 5.1% 206,916 201,190 6.2% -------- -------- -------- $192,677 $375,652 $271,019 ======== ======== ======== 1991 ---- Credit agreements $ 75,000 6.4% $144,000 $ 81,106 8.0% Other 194,862 6.8% 198,927 196,691 7.7% -------- -------- -------- $269,862 $342,927 $277,797 ======== ======== ======== (1) The weighted average interest rates do not necessarily represent the financial statement impact of short-term borrowings since the Company's "interest rate swap" agreements have the practical effect of converting borrowings under short-term arrangements to a fixed borrowing rate (see Note 9). (2) The average amount outstanding is the average of the daily balances except for customer banking deposits which are based on month-end balances; the maximum amount outstanding is based on the month-end which had the highest aggregate balance.
F-44 SCHEDULE X - Schedule of Supplemental Information for Property and Casualty Insurance Underwriters LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES For the years ended December 31, 1993, 1992 and 1991
Discount, if any, Claims and Claim Deducted in Reserves Adjustment Expenses Paid Claims for Unpaid Claims and Incurred Related to: and Claim Claim Adjustment -------------------- Adjustment Expenses Current Year Prior Year Expenses -------------- ------------ ---------- ----------- (Thousands of dollars) 1993 ---- Automobile $ - $512,832 $(66,571) $464,254 Commercial 271 68,543 (1,679) 53,355 Miscellaneous and personal - 42,657 (9,324) 37,301 ---- -------- -------- -------- Total property and casualty $271 $624,032 $(77,574) $554,910 ==== ======== ======== ======== 1992 ---- Automobile $ - $487,240 $(22,849) $513,165 Commercial 151 83,543 (19,063) 58,647 Miscellaneous and personal - 48,908 (2,928) 45,370 ---- -------- -------- -------- Total property and casualty $151 $619,691 $(44,840) $617,182 ==== ======== ======== ======== 1991 ---- Automobile $ - $235,943 $ 8,825 $248,341 Commercial 168 64,924 (9,963) 51,750 Miscellaneous and personal - 19,644 (771) 20,986 ---- -------- -------- -------- Total property and casualty $168 $320,511 $ (1,909) $321,077 ==== ======== ======== ========
F-45 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 By-laws (as amended) (filed as Exhibit 4.5 to the Company's Registration Statement No. 33- 57054).* 4.1 The Company undertakes to furnish the Securities and Exchange Commission, upon request, a copy of all instruments with respect to long-term debt not filed herewith. 10.1 1982 Stock Option Plan, as amended August 28, 1991 (filed as Annex B to the Company's Proxy Statement dated July 21, 1992).* 10.2 1992 Stock Option Plan (filed as Annex C to the Company's Proxy Statement dated July 21, 1992).* 10.3(a) Restated Articles and Agreement of General Partnership, effective as of February 1, 1982, of The Jordan Company (filed as Exhibit 10.3(d) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1986).* 10.3(b) Amendments dated as of December 31, 1989 and December 1, 1990 to the Partnership Agreement referred to in 10.3(a) above (filed as Exhibit 10.2(b) to the Company's 1991 10-K).* 10.3(c) Amendment dated as of December 17, 1992 to the Partnership Agreement referred to in 10.3(a) above (filed as Exhibit 10.3(c) to the l992 10- K).* 10.3(d) Articles and Agreement of General Partnership, effective as of April 15, 1985, of Jordan/Zalaznick Capital Company (filed as Exhibit 10.20 to the Company's Registration Statement No. 33-00606).* 10.4 Agreement made as of March 12, 1984 by and between Leucadia, Inc. and Ian M. Cumming (filed as Exhibit 10.14 to the 1983 10-K).* 10.5 Agreement made as of March 12, 1984 by and between Leucadia, Inc. and Joseph S. Steinberg (filed as Exhibit 10.15 to the 1983 10-K).* 10.6 Stock Purchase and Sale Agreement dated as of April 5, 1991, by and between FPL Group Capital Inc. and the Company (filed as Exhibit B to the Company's Current Report on Form 8-K dated August 23, 1991).* 10.7 Agreement dated as of August 1, 1988 among the Company, Ian M. Cumming and Joseph S. Steinberg (filed as Exhibit 10.6 to the Company's 1991 10-K).* 10.8 Agreement dated as of January 10, 1992 between Ian M. Cumming, certain other persons listed on Schedule A thereto and the Company (filed as Exhibit 10.7 to the Company's 1991 10-K).* _________________________ * Incorporated by reference. EXHIBIT INDEX Exhibit Exemption Number Description Indication ------- ----------- ---------- 10.9 Agreement dated as of January 10, 1992 between Joseph S. Steinberg, certain other persons listed on Schedule A thereto and the Company (filed as Exhibit 10.8 to the Company's 1991 10- K).* 10.10(a) Agreement dated April 23, 1992 between AIC Financial Services, Inc. (an Alabama corporation), AIC Financial Services (a Mississippi corporation) and AIC Financial Services (a South Carolina corporation) (collectively, "Seller") and Norwest Financial Resources, Inc. (filed as Exhibit 10.10(a) to the 1992 10-K).* 10.10(b) Purchase Agreement between A.I.C. Financial Services, Inc., American Investment Bank, N.A., American Investment Financial and Terracor II d/b/a AIC Financial Fund, Seller, and Associates Financial Services Company, Inc., Buyer, dated November 5, 1992 (filed as Exhibit 10.10(b) to the Company's Registration Statement No. 33- 55120).* 10.11(a) Agreement and Plan of Merger, dated as of October 22, 1992, by and among the Company, Phlcorp Acquisition Company and PHLCORP, Inc. (filed as Exhibit 5.2 to the Company's Current Report on Form 8-K dated October 22, 1992).* 10.11(b) Amendment dated December 10, 1992, to the Merger Agreement referred to in 10.11(a) above (filed as Exhibit 5.2 to the Company's Current Report on Form 8-K dated December 14, 1992).* 10.12(a) Agreement between Leucadia, Inc. and Ian M. Cumming, dated as of December 28, 1992 (filed as Exhibit 10.12(a) to the 1992 10-K).* 10.12(b) Escrow and Security Agreement by and among Leucadia, Inc., Ian M. Cumming and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1992 (filed as Exhibit 10.12(b) to the 1992 10-K).* 10.13(a) Agreement between Leucadia, Inc. and Joseph S. Steinberg, dated as of December 28, 1992 (filed as Exhibit 10.13(a) to the 1992 10-K).* 10.13(b) Escrow and Security Agreement by and among Leucadia, Inc., Joseph S. Steinberg and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1992 (filed as Exhibit 10.13(b) to the 1992 10-K).* 10.14 Settlement Agreement between Baldwin-United Corporation and the United States dated August 27, 1985 concerning tax issues (filed as Exhibit 10.14 to the 1992 10-K).* 10.15 Acquisition Agreement, dated as of December 18, 1992, by and between Provident Mutual Life and Annuity Company of America and Colonial Penn Annuity and Life Insurance Company (filed as Exhibit 10.15 to the 1992 10-K).* 10.16 Reinsurance Agreement, dated as of December 31, 1991, by and between Colonial Penn Insurance Company and American International Insurance Company (filed as Exhibit 10.16 to the 1992 10- K).* _________________________ * Incorporated by reference. EXHIBIT INDEX Exhibit Exemption Number Description Indication ------- ----------- ---------- 10.17 Agreement made as of December 28, 1993 by and between the Company and Ian M. Cumming. 10.18 Agreement made as of December 28, 1993 by and between the Company and Joseph S. Steinberg. 10.19(a) Agreement between the Company and Ian M. Cumming, dated as of December 28, 1993. 10.19(b) Escrow and Security Agreement by and among the Company, Ian M. Cumming and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1993. 10.20(a) Agreement between the Company and Joseph S. Steinberg, dated as of December 28, 1993. 10.20(b) Escrow and Security Agreement by and among the Company, Joseph S. Steinberg and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1993. 21 Subsidiaries of the registrant. 23 Consent of independent certified public 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). 28 Schedule P of the 1993 Annual Statement to P Insurance Departments of the Colonial Penn Insurance Company and Affiliated Fire & Casualty Insurers, the Empire Insurance Company, Principal Insurer, and Colonial Penn Madison Insurance Company. _________________________ * Incorporated by reference. EX-10.17 2 CUMMING AGREEMENT 12/28/93 Exhibit 10.17 AGREEMENT made as of the 28 day of December, 1993 by and between LEUCADIA NATIONAL CORPORATION, a New York corporation (the "Corporation"), and IAN M. CUMMING (the "Executive"). W I T N E S S E T H: ------------------- WHEREAS, Executive has been serving as Chairman of the Board and Chief Executive Officer of the Corporation pursuant to an Agreement, dated as of March 12, l984, by and between the Corporation's subsidiary, Leucadia, Inc. and the Executive (the "Existing Agreement"); and WHEREAS, the term of employment under the Existing Agreement extends through June 30, 1994; and WHEREAS, the Corporation desires to continue the services of Executive as its Chairman and Chief Executive Officer upon expiration of the Existing Agreement for an extended period and on revised terms and Executive desires to accept such employment, for the period and upon the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto agree as follows: 1. Employment. The Corporation hereby employs Executive ---------- as Chairman and Chief Executive Officer, and Executive hereby accepts such employment, upon the terms and conditions hereinafter set forth. 2. Term. The term of employment of Executive hereunder ---- shall be for the period commencing July 1, 1994 and ending at the close of business on June 30, 2003, unless sooner terminated in the manner hereinafter provided. 3. Duties and Services. Executive agrees to serve the ------------------- Corporation as Chairman and Chief Executive Officer and also agrees to serve such of its subsidiary and affiliated companies in that capacity as may be designated by the Corporation, faithfully, diligently and to the best of his ability, under the direction of the Board of Directors of the Corporation and of such subsidiary and affiliated companies, devoting his time, energy and skill to such employment, and to perform from time to time such executive services as the Board of Directors shall request, provided that such services shall be consistent with his position and status as Chairman and Chief Executive Officer and except that Executive may devote time to his personal investments so long as the same does not interfere with the performance of his duties hereunder. 4. Compensation. As full compensation for the services to ------------ be rendered hereunder by Executive, the Corporation agrees to pay the Executive, and Executive agrees to accept: (a) A base salary for his services at the rate of $500,000 per annum, payable in accordance with the Corporation's payroll practices for executives; (b) Such additional compensation as may from time to time be authorized by the Board of Directors of the Corporation; and (c) In the event that the "Consumer Price Index, New York, Northeastern New Jersey, all items," published by the Bureau of Labor Statistics of the United States Department of Labor, shall indicate as of June 30 of any year commencing with 1995 that the average cost of living during the year then ended and any succeeding year, if any, during the period of Executive's employment hereunder shall have increased over the average cost of living during the year ending June 30, 1994, (determined on a cumulative basis), then the $500,000 base rate of compensation referred to above (as from time to time increased pursuant to this Subparagraph) shall be increased prospectively effective that July 1 to reflect a percentage increase equal to the increase in the average cost of living. 5. Other Benefits. -------------- (a) Nothing contained herein shall be deemed to limit or affect the right of Executive to receive other forms of additional compensation or to participate in any retirement, disability, profit sharing, stock option, cash or stock bonus or other plan or arrangement, or in any other benefits now or hereafter provided by the Corporation or any of its subsidiary and affiliated companies for their respective employees or directors, as the case may be, in the sole discretion of the respective Board of Directors of the Corporation and such subsidiary and affiliated companies. Without limiting the foregoing, the Corporation shall provide Executive with the use of suitable cars during the term hereof. (b) It is contemplated that, in connection with his employment hereunder, Executive may be required to incur reasonable business, entertainment and travel expenses. The Corporation agrees to reimburse Executive in full for all reasonable and necessary business, entertainment and other related expenses, including travel expenses, incurred or expended by him incident to the performance of his duties hereunder, upon submission by Executive to the Corporation of such vouchers or expense statements satisfactorily evidencing such expenses as may be reasonably requested by the Corporation. (c) It is understood and agreed by the parties hereto that during the term of Executive's employment hereunder, he shall be entitled to annual vacations (taken consecutively or in segments) the length of which shall be determined by the Corporation consistent with the effective discharge of Executive's duties and the general customs and practices of the Corporation applicable to executives of Executive's status. 6. Insurance. --------- (a) Executive agrees that the Corporation may at any time or times and for the Corporation's own benefit apply for and take out life, health, accident, and other insurance covering Executive either independently or together with others in any amount which the Corporation may deem to be in its best interests and the Corporation may maintain any existing insurance policies on the life of Executive owned by the Corporation. The Corporation shall own all rights in such insurance and in the cash value and proceeds thereof and Executive shall not have any right, title or interest therein. (b) The Corporation agrees to procure and maintain throughout the term of Executive's employment hereunder, at the Corporation's sole expense, term life insurance on Executive's life in the amount of One Million Dollars ($1,000,000). Such insurance shall be payable to such beneficiaries as Executive shall designate from time to time by written notice to the Corporation, or, failing such designation, to his estate. (c) Executive agrees to assist the Corporation at the Corporation's expense in obtaining the insurance referred to in Subparagraphs (a) and (b) above by, among other things, submitting to the customary examinations and correctly preparing, signing and delivering such applications and other documents as reasonably may be required. 7. Death or Disability. The term of employment of ------------------- Executive shall terminate forthwith in the event of his death, or, at the option of the Corporation in the event that Executive shall fail to render and perform because of physical or mental incapacity or disability the services required of him under this Agreement either for (a) a continuous period of more than one hundred twenty (120) days or (b) an aggregate of more than one hundred eighty (180) days during any period of twelve (12) successive months. In the event of the death of Executive during the period of employment or in the event of the termination of this Agreement by the Corporation because of physical or mental disability of Executive, Executive or his personal representative, as the case may be, shall be entitled to receive the compensation specified in Subparagraphs 4(a), (b) and (c) hereof prorated through the end of the month in which death or termination occurs. The Corporation thereafter shall be discharged and released of and from any further obligations under this Agreement except for its obligation to pay any accrued and/or vested employee benefits referred to in Paragraph 5 hereof. 8. Severance Allowance. ------------------- (a) For the purposes of this Paragraph 8, the following terms shall have the following respective meanings: (i) Cause - The commission by Executive of any act of gross negligence in the performance of his duties or obligations to the Corporation or any of its subsidiary or affiliated companies, or the commission by Executive of any material act of disloyalty, dishonesty or breach of trust against the Corporation or any of its subsidiary or affiliated companies. (ii) Event of Involuntary Termination - Each of the following, if not agreed to in writing by Executive, shall be deemed an Event of Involuntary Termination: (A) The termination of Executive's employment by Corporation other than (1) for Cause or (2) pursuant to Paragraphs 2 or 7 hereof; or (B) The termination by Executive of his employment with the Corporation within one (1) year following: (1) the appointment or election of a person other than Executive to serve as Chairman or as Chief Executive Officer of the Corporation, or the diminution of Executive's duties, responsibilities or powers to duties, responsibilities or powers less than those customarily exercised or held by the chief executive officer of a major corporation; or (2) the occurrence of the aggregate amount of compensation and other benefits to be received by Executive pursuant to Paragraphs 4 and 5 hereof for any twelve full calendar months falling below 115% of that received by Executive during the comparable preceding period; or (3) a transfer of Executive's principal place of employment to a location other than Salt Lake City, Utah. (iii) Initiating Event - The consolidation or merger of the Corporation with or into another corporation or other reorganization of the Corporation, any of which results in a change in control of the Corporation; the sale of all or substantially all of the assets of the Corporation (other than to a subsidiary or affiliate of the Corporation); or the acquisition, directly or indirectly, by any Person, or by any two or more Persons acting together, of beneficial ownership of more than fifty percent (50%) of the outstanding voting securities of the Corporation, including, without limitation, any such acquisition by means of a tender or exchange offer or proxy solicitation or pursuant to a judgment, decree or final order of a judicial or administrative body of competent jurisdiction. (iv) Person - An individual, partnership, joint venture, corporation, trust, unincorporated association, other business entity or government or department, agency or instrumentality thereof (whether domestic or foreign). (b) Upon the occurrence of an Event of Involuntary Termination following an Initiating Event, Executive shall be entitled to receive, and the Corporation agrees to pay, an amount (the "Severance Allowance") equal to the salary Executive would have received pursuant to Subparagraphs 4(a) and (c) hereof during the period commencing upon the Event of Involuntary Termination and terminating at the close of business on June 30, 2003 (the "Severance Period"). The Severance Allowance shall be paid in the manner in which Executive's salary was paid by the Corporation immediately prior to the occurrence of the first initiating Event. (c) In the event Executive dies before receiving the full amount of the Severance Allowance, his personal representative shall be entitled to receive the Severance Allowance specified in Subparagraph (b) above prorated through the end of the month in which death occurs. (d) In addition to the Severance Allowance, the Corporation or its successors shall pay or cause to be paid to Executive an amount equal to that which Executive would have received under any pension plan of the Corporation and/or its subsidiaries or affiliates had he continued to be an active, full-time employee of the Corporation during the Severance Period and had he received during such period a salary equal to, and paid in the manner of, the Severance Allowance. Such payments shall be made at such times as Executive would have received payments under such pension plan had he continued to be an active full-time employee of the Corporation during the Severance Period. (e) During the Severance Period, the Corporation or its successors shall maintain, in full force and effect, term life insurance on Executive's life in accordance with the provisions of Subparagraph 5(b) hereof. 9. Restrictive Covenants and Confidentiality; Injunctive ----------------------------------------------------- Relief. ------ (a) Executive further agrees that during the term of this Agreement, any renewals or extensions hereof, and for a period of six months following termination of his employment with the Corporation, whether pursuant to this Agreement or otherwise, Executive shall not, without the prior written approval of the Board of Directors of the Corporation, directly or indirectly, through any person, firm or corporation: (i) Solicit, raid, entice or induce any person, firm or corporation which presently is or at any time during the term hereof shall be a client or customer of the Corporation and/or its subsidiaries or affiliates, to become a client or customer of any other person, firm or corporation, and Executive shall not approach any such person, firm or corporation for such purpose or authorize or knowingly approve the taking of such actions by any other person; or (ii) Solicit, raid, entice or induce any person who presently is or at any time during the term hereof shall be an employee of the Corporation and/or its subsidiaries or affiliates to become employed by any other person, firm or corporation, and Executive shall not approach any such employee for such purpose or authorize or knowingly approve the taking of such actions by any other person. (b) Executive consents and agrees that if he violates any of the provisions of this Paragraph 9, the Corporation and its subsidiaries and affiliates would sustain irreparable harm and, therefore, in addition to any other remedies which the Corporation may have under this Agreement or otherwise, the Corporation shall be entitled to apply to any court of competent jurisdiction for an injunction restraining Executive or any third party from committing, continuing or participating in any such violation of this Agreement. 10. Deductions and Withholding. Executive agrees that the -------------------------- Corporation and/or its subsidiaries shall withhold from any and all payments required to be made to Executive pursuant to this Agreement all Federal, state, local and/or other taxes which the Corporation determines are required to be withheld in accordance with applicable statutes and/or regulations from time to time in effect. 11. Assignability and Binding Effect. This Agreement shall -------------------------------- inure to the benefit of and shall be binding upon the heirs, executors, administrators, successors and legal representatives of Executive, and shall inure to the benefit of and be binding upon the Corporation and its successors, but the obligations of Executive hereunder may not be assigned to another person, firm or corporation nor may they be delegated. 12. Complete Understanding. This Agreement constitutes the ---------------------- complete understanding between the parties with respect to the employment of Executive hereunder, and no statement, representation, warranty or covenant has been made by either party with respect thereto except as expressly set forth herein. This Agreement shall not be altered, modified, amended or terminated except by written instrument signed by each of the parties hereto. 13. Severability. If any provision of this Agreement or ------------ any party hereof is invalid, unlawful or incapable of being enforced, by reason of any rule of law or public policy, all other conditions and provisions of this Agreement which can be given effect without such invalid, unlawful or unenforceable provision shall, nevertheless, remain in full force and effect. 14. Warranty. Executive warrants and represents that he is -------- not a party to any agreement, contract or understanding, whether of employment or otherwise, which would in any way restrict or prohibit him from undertaking or performing employment in accordance with the terms and conditions of this Agreement. 15. Governing Law. This Agreement shall be governed by and ------------- construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the day and year first above written. LEUCADIA NATIONAL CORPORATION By /s/ Norman P. Kiken /s/ Ian M. Cumming ------------------------------- -------------------------------- Norman P. Kiken, Vice President Ian M. Cumming and Comptroller EX-10.18 3 STEINBERG AGREEMENT 12/28/93 Exhibit 10.18 AGREEMENT made as of the 28 day of December, 1993 by and between LEUCADIA NATIONAL CORPORATION, a New York corporation (the "Corporation"), and JOSEPH S. STEINBERG (the "Executive"). W I T N E S S E T H: ------------------- WHEREAS, Executive has been serving as President and Chief Operating Officer of the Corporation pursuant to an Agreement, dated as of March 12, l984, by and between the Corporation's subsidiary, Leucadia, Inc. and the Executive (the "Existing Agreement"); and WHEREAS, the term of employment under the Existing Agreement extends through June 30, 1994; and WHEREAS, the Corporation desires to continue the services of Executive as its President and Chief Operating Officer upon expiration of the Existing Agreement for an extended period and on revised terms and Executive desires to accept such employment, for the period and upon the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto agree as follows: 1. Employment. The Corporation hereby employs Executive ---------- as President and Chief Operating Officer, and Executive hereby accepts such employment, upon the terms and conditions hereinafter set forth. 2. Term. The term of employment of Executive hereunder ---- shall be for the period commencing July 1, 1994 and ending at the close of business on June 30, 2003, unless sooner terminated in the manner hereinafter provided. 3. Duties and Services. Executive agrees to serve the ------------------- Corporation as President and Chief Operating Officer and also agrees to serve such of its subsidiary and affiliated companies in that capacity as may be designated by the Corporation, faithfully, diligently and to the best of his ability, under the direction of the Board of Directors of the Corporation and of such subsidiary and affiliated companies, devoting his time, energy and skill to such employment, and to perform from time to time such executive services as the Board of Directors shall request, provided that such services shall be consistent with his position and status as President and Chief Operating Officer and except that Executive may devote time to his personal investments so long as the same does not interfere with the performance of his duties hereunder. 4. Compensation. As full compensation for the services to ------------ be rendered hereunder by Executive, the Corporation agrees to pay the Executive, and Executive agrees to accept: (a) A base salary for his services at the rate of $500,000 per annum, payable in accordance with the Corporation's payroll practices for executives; (b) Such additional compensation as may from time to time be authorized by the Board of Directors of the Corporation; and (c) In the event that the "Consumer Price Index, New York, Northeastern New Jersey, all items," published by the Bureau of Labor Statistics of the United States Department of Labor, shall indicate as of June 30 of any year commencing with 1995 that the average cost of living during the year then ended and any succeeding year, if any, during the period of Executive's employment hereunder shall have increased over the average cost of living during the year ending June 30, 1994, (determined on a cumulative basis), then the $500,000 base rate of compensation referred to above (as from time to time increased pursuant to this Subparagraph) shall be increased prospectively effective that July 1 to reflect a percentage increase equal to the increase in the average cost of living. 5. Other Benefits. -------------- (a) Nothing contained herein shall be deemed to limit or affect the right of Executive to receive other forms of additional compensation or to participate in any retirement, disability, profit sharing, stock option, cash or stock bonus or other plan or arrangement, or in any other benefits now or hereafter provided by the Corporation or any of its subsidiary and affiliated companies for their respective employees or directors, as the case may be, in the sole discretion of the respective Board of Directors of the Corporation and such subsidiary and affiliated companies. Without limiting the foregoing, the Corporation shall provide Executive with the use of suitable cars during the term hereof. (b) It is contemplated that, in connection with his employment hereunder, Executive may be required to incur reasonable business, entertainment and travel expenses. The Corporation agrees to reimburse Executive in full for all reasonable and necessary business, entertainment and other related expenses, including travel expenses, incurred or expended by him incident to the performance of his duties hereunder, upon submission by Executive to the Corporation of such vouchers or expense statements satisfactorily evidencing such expenses as may be reasonably requested by the Corporation. (c) It is understood and agreed by the parties hereto that during the term of Executive's employment hereunder, he shall be entitled to annual vacations (taken consecutively or in segments) the length of which shall be determined by the Corporation consistent with the effective discharge of Executive's duties and the general customs and practices of the Corporation applicable to executives of Executive's status. 6. Insurance. --------- (a) Executive agrees that the Corporation may at any time or times and for the Corporation's own benefit apply for and take out life, health, accident, and other insurance covering Executive either independently or together with others in any amount which the Corporation may deem to be in its best interests and the Corporation may maintain any existing insurance policies on the life of Executive owned by the Corporation. The Corporation shall own all rights in such insurance and in the cash value and proceeds thereof and Executive shall not have any right, title or interest therein. (b) The Corporation agrees to procure and maintain throughout the term of Executive's employment hereunder, at the Corporation's sole expense, term life insurance on Executive's life in the amount of One Million Dollars ($1,000,000). Such insurance shall be payable to such beneficiaries as Executive shall designate from time to time by written notice to the Corporation, or, failing such designation, to his estate. (c) Executive agrees to assist the Corporation at the Corporation's expense in obtaining the insurance referred to in Subparagraphs (a) and (b) above by, among other things, submitting to the customary examinations and correctly preparing, signing and delivering such applications and other documents as reasonably may be required. 7. Death or Disability. The term of employment of ------------------- Executive shall terminate forthwith in the event of his death, or, at the option of the Corporation in the event that Executive shall fail to render and perform because of physical or mental incapacity or disability the services required of him under this Agreement either for (a) a continuous period of more than one hundred twenty (120) days or (b) an aggregate of more than one hundred eighty (180) days during any period of twelve (12) successive months. In the event of the death of Executive during the period of employment or in the event of the termination of this Agreement by the Corporation because of physical or mental disability of Executive, Executive or his personal representative, as the case may be, shall be entitled to receive the compensation specified in Subparagraphs 4(a), (b) and (c) hereof prorated through the end of the month in which death or termination occurs. The Corporation thereafter shall be discharged and released of and from any further obligations under this Agreement except for its obligation to pay any accrued and/or vested employee benefits referred to in Paragraph 5 hereof. 8. Severance Allowance. ------------------- (a) For the purposes of this Paragraph 8, the following terms shall have the following respective meanings: (i) Cause - The commission by Executive of any act of gross negligence in the performance of his duties or obligations to the Corporation or any of its subsidiary or affiliated companies, or the commission by Executive of any material act of disloyalty, dishonesty or breach of trust against the Corporation or any of its subsidiary or affiliated companies. (ii) Event of Involuntary Termination - Each of the following, if not agreed to in writing by Executive, shall be deemed an Event of Involuntary Termination: (A) The termination of Executive's employment by Corporation other than (1) for Cause or (2) pursuant to Paragraphs 2 or 7 hereof; or (B) The termination by Executive of his employment with the Corporation within one (1) year following: (1) the appointment or election of a person other than Executive to serve as President or as Chief Operating Officer of the Corporation, or the diminution of Executive's duties, responsibilities or powers to duties, responsibilities or powers less than those customarily exercised or held by the chief operating officer of a major corporation; or (2) the occurrence of the aggregate amount of compensation and other benefits to be received by Executive pursuant to Paragraphs 4 and 5 hereof for any twelve full calendar months falling below 115% of that received by Executive during the comparable preceding period; or (3) a transfer of Executive's principal place of employment to a location other than New York, New York. (iii) Initiating Event - The consolidation or merger of the Corporation with or into another corporation or other reorganization of the Corporation, any of which results in a change in control of the Corporation; the sale of all or substantially all of the assets of the Corporation (other than to a subsidiary or affiliate of the Corporation); or the acquisition, directly or indirectly, by any Person, or by any two or more Persons acting together, of beneficial ownership of more than fifty percent (50%) of the outstanding voting securities of the Corporation, including, without limitation, any such acquisition by means of a tender or exchange offer or proxy solicitation or pursuant to a judgment, decree or final order of a judicial or administrative body of competent jurisdiction. (iv) Person - An individual, partnership, joint venture, corporation, trust, unincorporated association, other business entity or government or department, agency or instrumentality thereof (whether domestic or foreign). (b) Upon the occurrence of an Event of Involuntary Termination following an Initiating Event, Executive shall be entitled to receive, and the Corporation agrees to pay, an amount (the "Severance Allowance") equal to the salary Executive would have received pursuant to Subparagraphs 4(a) and (c) hereof during the period commencing upon the Event of Involuntary Termination and terminating at the close of business on June 30, 2003 (the "Severance Period"). The Severance Allowance shall be paid in the manner in which Executive's salary was paid by the Corporation immediately prior to the occurrence of the first initiating Event. (c) In the event Executive dies before receiving the full amount of the Severance Allowance, his personal representative shall be entitled to receive the Severance Allowance specified in Subparagraph (b) above prorated through the end of the month in which death occurs. (d) In addition to the Severance Allowance, the Corporation or its successors shall pay or cause to be paid to Executive an amount equal to that which Executive would have received under any pension plan of the Corporation and/or its subsidiaries or affiliates had he continued to be an active, full-time employee of the Corporation during the Severance Period and had he received during such period a salary equal to, and paid in the manner of, the Severance Allowance. Such payments shall be made at such times as Executive would have received payments under such pension plan had he continued to be an active full-time employee of the Corporation during the Severance Period. (e) During the Severance Period, the Corporation or its successors shall maintain, in full force and effect, term life insurance on Executive's life in accordance with the provisions of Subparagraph 5(b) hereof. 9. Restrictive Covenants and Confidentiality; Injunctive ----------------------------------------------------- Relief. ------ (a) Executive further agrees that during the term of this Agreement, any renewals or extensions hereof, and for a period of six months following termination of his employment with the Corporation, whether pursuant to this Agreement or otherwise, Executive shall not, without the prior written approval of the Board of Directors of the Corporation, directly or indirectly, through any person, firm or corporation: (i) Solicit, raid, entice or induce any person, firm or corporation which presently is or at any time during the term hereof shall be a client or customer of the Corporation and/or its subsidiaries or affiliates, to become a client or customer of any other person, firm or corporation, and Executive shall not approach any such person, firm or corporation for such purpose or authorize or knowingly approve the taking of such actions by any other person; or (ii) Solicit, raid, entice or induce any person who presently is or at any time during the term hereof shall be an employee of the Corporation and/or its subsidiaries or affiliates to become employed by any other person, firm or corporation, and Executive shall not approach any such employee for such purpose or authorize or knowingly approve the taking of such actions by any other person. (b) Executive consents and agrees that if he violates any of the provisions of this Paragraph 9, the Corporation and its subsidiaries and affiliates would sustain irreparable harm and, therefore, in addition to any other remedies which the Corporation may have under this Agreement or otherwise, the Corporation shall be entitled to apply to any court of competent jurisdiction for an injunction restraining Executive or any third party from committing, continuing or participating in any such violation of this Agreement. 10. Deductions and Withholding. Executive agrees that the -------------------------- Corporation and/or its subsidiaries shall withhold from any and all payments required to be made to Executive pursuant to this Agreement all Federal, state, local and/or other taxes which the Corporation determines are required to be withheld in accordance with applicable statutes and/or regulations from time to time in effect. 11. Assignability and Binding Effect. This Agreement shall -------------------------------- inure to the benefit of and shall be binding upon the heirs, executors, administrators, successors and legal representatives of Executive, and shall inure to the benefit of and be binding upon the Corporation and its successors, but the obligations of Executive hereunder may not be assigned to another person, firm or corporation nor may they be delegated. 12. Complete Understanding. This Agreement constitutes the ---------------------- complete understanding between the parties with respect to the employment of Executive hereunder, and no statement, representation, warranty or covenant has been made by either party with respect thereto except as expressly set forth herein. This Agreement shall not be altered, modified, amended or terminated except by written instrument signed by each of the parties hereto. 13. Severability. If any provision of this Agreement or ------------ any party hereof is invalid, unlawful or incapable of being enforced, by reason of any rule of law or public policy, all other conditions and provisions of this Agreement which can be given effect without such invalid, unlawful or unenforceable provision shall, nevertheless, remain in full force and effect. 14. Warranty. Executive warrants and represents that he is -------- not a party to any agreement, contract or understanding, whether of employment or otherwise, which would in any way restrict or prohibit him from undertaking or performing employment in accordance with the terms and conditions of this Agreement. 15. Governing Law. This Agreement shall be governed by and ------------- construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the day and year first above written. LEUCADIA NATIONAL CORPORATION By /s/ Norman P. Kiken /s/ Joseph S. Steinberg ------------------------------ -------------------------------- Norman P. Kiken, Vice President Joseph S. Steinberg and Comptroller EX-10.19A 4 CUMMING AGREEMENT 12/28/93 Exhibit 10.19(a) AGREEMENT --------- AGREEMENT, dated as of December 28, 1993, by and among LEUCADIA NATIONAL CORPORATION, a New York corporation ("Employer"), and Ian M. Cumming ("Executive"). W I T N E S S E T H: WHEREAS, pursuant to an agreement made as of the 12th day of March 1984 between Employer's subsidiary, Leucadia, Inc. ("LI") and Executive (the "Employment Agreement"), Executive is employed as Chairman and Chief Executive Officer of Employer; and WHEREAS, pursuant to the terms of the Employment Agreement, Executive serves as Chairman and Chief Executive Officer to such of Employer's subsidiaries and affiliates as Employer may designate, including LI; and WHEREAS, the Employment Agreement expires June 30, 1994; and WHEREAS, Employer and Executive have agreed to enter into a new employment agreement expiring June 30, 2003; and WHEREAS, the total annual compensation paid by Employer or LI to Executive over the past few years has exceeded $1 million, and may be expected to exceed $1 million in 1994 and subsequent years; and WHEREAS, in 1992, in anticipation of changes to the tax laws, LI and Executive entered into certain agreements (collectively, the "1992 Agreements") the effect of which was to accelerate the taxation and deductibility of bonus payments otherwise expected to be paid by LI to Executive within the five year period commencing January 1, 1993; and WHEREAS, federal tax law changes, in fact, have been implemented which will increase the cost of compensation to both Employer and its employees beginning in 1994; and WHEREAS, to address these developments Employer and Executive desire to accelerate the taxation and deductibility of bonus payments otherwise expected to be paid by Employer to Executive within the five year period commencing January 1, 1998; and WHEREAS, contemporaneously herewith Executive and Employer have entered in an Escrow and Security agreement (the "Escrow and Security Agreement") of even date herewith; and WHEREAS, Employer and Joseph S. Steinberg (Mr. Steinberg, together with Executive, collectively, the "Executives"), have entered into an Agreement identical to this Agreement and an escrow and security agreement identical to the Escrow and Security Agreement. NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound, the parties hereto agree as follows: SECTION ONE. ADDITIONAL COMPENSATION. ------------------------------------- The Employer hereby agrees to pay to (or for the benefit of) Executive, as additional compensation, the sum of $4,000,000 (the "Fund Amount"), upon the terms and conditions hereinafter set forth. SECTION TWO. VESTING IN GENERAL. -------------------------------- Subject to clause (b) of Section Four hereof, Executive's right to receive the Fund Amount shall vest at the rate of 20% for each full calendar year after December 31, 1997 during which Executive continues in the employ of Employer or any of its subsidiaries (collectively, the "Employer Group"). Notwithstanding the preceding sentence, Executive's right to receive the Fund Amount shall be 50% vested if Executive dies or becomes disabled (as defined in Section 7 of the Employment Agreement) prior to December 31, 2000 and shall be 100% vested if (i) Executive is terminated by Employer without cause (as defined in Section 8 (a)(i) of the Employment Agreement), (ii) an Initiating Event (as defined in Annex A hereto) occurs, or (iii) Employer becomes subject to the jurisdiction of a bankruptcy or similar court in the context of a bankruptcy, insolvency or similar proceeding. For purposes of this Agreement, any portion of the Fund Amount vested pursuant to this Section Two or pursuant to Section Four hereof shall be referred to as the "Vested Amount." SECTION THREE. PAYMENT IN GENERAL. ---------------------------------- (a) General -- Except as otherwise provided in this Section ------- Three, on January 1, 2003 the Vested Amount as of such date shall be paid by Employer to Executive. (b) Payment Upon Termination -- Except as otherwise provided in ------------------------ this Section Three, in the event that Executive's employment with the Employer Group terminates prior to January 1, 2003, promptly after the date of such termination Employer shall pay to Executive the Vested Amount as of the date of such termination. (c) Early Payments -- Pursuant to Section Four and Section Seven -------------- hereof, payments of the Fund Amount may be made to or on behalf of Executive prior to January 1, 2003 ("Early Payments"). For purposes hereof, the term "Available Fund Amount" shall mean, as of any date, an amount equal to the Fund Amount reduced by all Early Payments made prior to such date. If any Early Payment shall have been made, any amount required to be paid by Employer to Executive pursuant to clause (a) or (b) of this Section Three shall be reduced by the sum of all such Early Payments. To the extent that the sum of all Early Payments exceeds the Vested Amount on the earlier of January 1, 2003 or the date on which Executive's employment with the Employer Group terminates, Executive shall be obligated promptly to pay to Employer the amount of such deficiency, plus interest accruing at the prime rate, as announced from time to time by Citibank, N.A., compounded annually on the amount of the deficiency from the date hereof through the date on which Executive makes a payment to Employer pursuant to this clause (c). SECTION FOUR. ACCELERATION OF PAYMENT/VESTING. ---------------------------------------------- (a) Accelerated Payment -- In the sole discretion of the Board ------------------- of Directors of Employer, excluding Executives, upon recommendation of the Compensation Committee of Employer, Employer may accelerate payment to Executive of all or a portion of the Available Fund Amount. In determining whether or not to accelerate payment of all or any portion of the Available Fund Amount, the Board of Directors of Employer and the Compensation Committee thereof may consider, among other things, the then applicable tax law and the costs and benefits to the Employer Group, under the tax law, this Agreement, the Escrow and Security Agreement, the 1992 Agreements and otherwise, of effecting such acceleration. (b) Accelerated Vesting -- In the event of any accelerated ------------------- payment pursuant to clause (a) of this Section Four, for all purposes hereof the Vested Amount shall equal the greater of (i) the Vested Amount computed pursuant to Section Two hereof without regard to this Section Four, or (ii) the sum of all payments made pursuant to clause (a) of this Section Four, plus an amount equal to the product of the Withheld Amount (defined below), if any, and a fraction the numerator of which is the sum of all amounts paid pursuant to clause (a) of Section Four hereof and the denominator of which is the Fund Amount. SECTION FIVE. ESCROW ARRANGEMENT. --------------------------------- The obligations of Employer to Executive hereunder shall be implemented and secured by way of the Escrow and Security Agreement. Toward that end, any payment obligation of Employer hereunder shall be satisfied, to the extent possible, by directing a release from the Escrow Amount (as defined in the Escrow and Security Agreement) of the appropriate amount to be paid to the Executive. Such Escrow and Security Agreement shall be irrevocable and is intended by the parties to secure Employer's obligations to Executive hereunder, and to implement such obligations. As provided in the Escrow and Security Agreement, the escrow agent shall be Weil, Gotshal and Manges, the investment of the escrow funds shall be directed by the Chief Financial Officer of the Employer, the income and earnings realized in respect of the escrow fund shall be distributed promptly to Employer, and the tax responsibility for such income and earnings shall be borne by Employer. SECTION SIX. -- TAX ELECTION. ---------------------------- Executive shall timely and properly file an election under Section 83(b) of the Internal Revenue Code of 1986, as amended, in respect of his receipt, as compensation, of this Agreement and his interest in the escrow established pursuant to the Escrow and Security Agreement. Notwithstanding anything contained herein to the contrary, Executive's failure timely and properly to file such tax election shall result in the immediate termination of Employer's obligations hereunder and in a termination of the Escrow and Security Agreement, and an immediate return to Employer of the escrowed funds deposited by Employer pursuant to such Agreement. SECTION SEVEN. -- TAX WITHHOLDING. --------------------------------- Executive agrees that Employer and/or its subsidiaries or affiliates shall effect all required tax withholdings in respect of the additional compensation paid pursuant to this Agreement. At Executive's election, $1,912,000 (the "Withheld Amount") of the Fund Amount shall be applied by the Employer in satisfaction of its withholding obligations. If Executive makes such election, the Escrow Agent (as defined in the Escrow and Security Agreement) shall be directed to release the Withheld Amount to Employer. Notwithstanding such election, the Withheld Amount shall remain unvested except as otherwise provided in Section Two and Section Four hereof. SECTION EIGHT. -- AFFECT ON OTHER AGREEMENTS AND ARRANGEMENTS. ------------------------------------------------------------- This Agreement shall have no affect on the rights and obligations of the parties hereto under any other agreement. Notwithstanding this Agreement, the Board of Directors of Employer, excluding Executives, upon recommendation of the Compensation Committee of Employer, annually will determine the amount, if any, of bonuses to be paid to Executive. In determining the amount of any such bonus, the Board of Directors of Employer and the Compensation Committee thereof will consider the costs and benefits to Employer of implementing this Agreement, which shall include consideration of changes in the tax law, if any. SECTION NINE. -- ASSIGNABILITY AND BINDING EFFECT. ------------------------------------------------- This Agreement shall inure to the benefit of and shall be binding upon the heirs, executors, administrators, successors and legal representatives of Executive, and shall inure to the benefit of and be binding upon the Employer and its successors, but the obligations of Executive hereunder may not be assigned to another person, firm or corporation nor may they be delegated. SECTION TEN. -- COMPLETE UNDERSTANDING. -------------------------------------- This Agreement constitutes the complete understanding between the parties with respect to the compensation arrangement described herein, and no statement, representation, warranty or covenant has been made by either party with respect thereto except as expressly set forth herein. This Agreement shall not be altered, modified, amended or terminated except by written instrument signed by each of the parties hereto. SECTION ELEVEN. -- SEVERABILITY. ------------------------------- If any provision of this Agreement or any part hereof is invalid, unlawful or incapable of being enforced, by reason of any rule of law or public policy, all other conditions and provisions of this Agreement which can be given effect without such invalid, unlawful or unenforceable provision shall, nevertheless, remain in full force and effect. SECTION TWELVE. -- WARRANTY. --------------------------- Executive warrants and represents that he is not a party to any agreement, contract or understanding, whether of employment or otherwise, which would in any way restrict or prohibit him from undertaking or performing employment in accordance with the terms and conditions of this Agreement. SECTION THIRTEEN. -- GOVERNING LAW. ---------------------------------- This Agreement shall be governed by and construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the day and year first above written. LEUCADIA NATIONAL CORPORATION By /s/ Norman P. Kiken /s/ Ian M. Cumming --------------------------------- ------------------------------ Norman P. Kiken, Vice President Ian M. Cumming and Comptroller ANNEX A Initiating Event - The consolidation or merger of Leucadia National Corporation ("Leucadia") with or into another corporation or other reorganization of Leucadia, any of which results in a change in control of Leucadia; the sale of all or substantially all of the assets of the Leucadia (other than to a subsidiary or affiliate of the Leucadia); or the acquisition, directly or indirectly, by any Person, or by any two or more Persons acting together, of beneficial ownership of more than fifty percent (50%) of the outstanding voting securities of Leucadia, including, without limitation, any such acquisition by means of a tender or exchange offer or proxy solicitation or pursuant to a judgment, decree or final order of a judicial or administrative body of competent jurisdiction. For purposes hereof, the term "Person" shall mean an individual, partnership, joint venture, corporation, trust, unincorporated association, other business entity or government or department, agency or instrumentality thereof (whether domestic or foreign). EX-10.19B 5 CUMMING AND WGM AGREEMENT Exhibit 10.19(b) ESCROW AND SECURITY AGREEMENT ESCROW AND SECURITY AGREEMENT, dated as of December 28, 1993, by and among LEUCADIA NATIONAL CORPORATION, a New York corporation ("Employer"), Ian M. Cumming ("Executive") and Weil, Gotshal and Manges (a partnership including professional corporations) ("Escrow Agent"). W I T N E S S E T H: WHEREAS, pursuant to an agreement made as of the 12th day of March 1984 between Employer's subsidiary, Leucadia, Inc. ("LI") and Executive (the "Employment Agreement"), Executive is employed as Chairman and Chief Executive Officer of Employer; and WHEREAS, pursuant to the terms of the Employment Agreement, Executive serves as Chairman and Chief Executive Officer to such of Employer's subsidiaries and affiliates as Employer may designate, including LI; and WHEREAS, the Employment Agreement expires June 30, 1994; and WHEREAS, Employer and Executive have agreed to enter into a new employment agreement expiring June 30, 2003; and WHEREAS, in 1992, in anticipation of changes to the tax laws, LI and Executive entered into certain agreements (collectively, the "1992 Agreements") the effect of which was to accelerate the taxation and deductibility of bonus payments otherwise expected to be paid by Employer or LI to Executive within the five years period commencing January 1, 1993; and WHEREAS, federal tax law changes, in fact, have been implemented which will increase the cost of compensation to both Employer and its employees beginning in 1994; and WHEREAS, to address these developments, Employer and Executive have entered into an Agreement dated December 28, 1993 providing for the establishment of an executive compensation arrangement for the benefit of Executive, a copy of which is attached hereto as Exhibit A (the "Compensation Agreement"); and WHEREAS, the Compensation Agreement provides for the deposit by Employer of $4.0 million (the "Fund Amount") into an escrow account (the "Escrow Account") and the release of such funds in accordance with the provision of Section 4 hereof; and WHEREAS, contemporaneously herewith Employer and Joseph S. Steinberg (Mr. Steinberg, together with Executive, collectively, the "Executives") have entered into an agreement identical to the Compensation Agreement; and WHEREAS, the Escrow Agent is willing to serve as Escrow Agent and hold the Fund Amount, plus any interest earned thereon (the "Escrowed Property") in accordance with and subject to the terms and conditions hereof. NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound, the parties hereto agree as follows: 1. Employer and Executive hereby consent to the appointment of and hereby appoint Weil, Gotshal & Manges as Escrow Agent, to serve as escrow agent in accordance with the terms and conditions herein set forth, and Escrow Agent hereby accepts such appointment. 2. Security Interest. The parties hereto agree that the ----------------- Fund Amount is intended to secure any and all liabilities of Employer to Executive under the Compensation Agreement. Employer hereby grants to Employee an irrevocable security interest in the Fund Amount and the parties hereto agree that the Fund Amount (i) shall be received and held by Escrow Agent for the benefit of Employee and to protect the interest of Employee in the Fund Amount, and (ii) shall be disbursed by Escrow Agent in accordance with the terms hereof. 3. The Fund Amount shall be deposited with Escrow Agent as follows: (a) On the date hereof, Employer shall deliver to Escrow Agent the Fund Amount. Escrow Agent shall not be liable or responsible for the collection of the proceeds of any check payable or endorsed to Escrow Agent hereunder. (b) Escrow Agent shall, in accordance with direction provided by the Chief Financial Officer of the Employer, deposit the Fund Amount in certificates of deposit or interest bearing accounts of any bank or trust company, incorporated under the laws of the United States of America or any state, which has combined capital and surplus of not less than $100,000,000. (c) All interest earned on the Fund Amount ("Interest") shall be the property of the Employer and shall not be added to or become part of the Escrow Amount (as defined). All Interest shall be paid by the Escrow Agent, on a current basis, to Employer without the need for any further action on the part of Employer. (d) The Fund Amount, as such may from time to time be decreased by the release of monies from the Fund Amount pursuant to the terms hereof, shall constitute the "Escrow Amount." 4. The Escrow Amount shall be released by the Escrow Agent as follows: (a) Upon receipt by the Escrow Agent of Disbursing Instructions in the form attached as Annex A hereto executed by both Executive and Employer (as evidenced by the signature of a majority of the members of Employer's Compensation Committee), Escrow Agent shall release to Executive so much of the Escrow Amount as indicated in the Disbursing Instructions; and (b) Upon receipt by the Escrow Agent of Disbursing Instructions in the form attached as Annex B hereto executed by both Executive and Employer (as evidenced by the signature of a majority of the members of Employer's Compensation Committee), Escrow Agent shall release to Employer so much of the Escrow Amount as indicated in the Disbursing Instructions 5. Any notice or certificate given to Escrow Agent under Section 4 shall be by hand or overnight delivery to the parties at the addresses set forth in Section 16 of this Agreement. In the event of any dispute, Escrow Agent shall retain the Escrow Amount until the dispute is resolved by the final order or judgment of a court having jurisdiction with respect thereto. Reasonable fees and costs of the other party or parties shall be advanced by the party giving notice of a dispute, and shall be borne by the party or parties not prevailing in the action. 6. Escrow Agent shall be entitled to rely upon, and shall be fully protected from all liability, loss, cost, damage or expense in acting or omitting to act pursuant to, any instruction, order, judgment, certification, affidavit, demand, notice, opinion, instrument or other writing delivered to it hereunder without being required to determine the authenticity of such document, the correctness of any fact stated therein, the propriety of the service thereof or the capacity, identity or authority of any party purporting to sign or deliver such document. 7. The duties of Escrow Agent are only as herein specifically provided, and are purely ministerial in nature. Escrow Agent shall neither be responsible for, or under, nor chargeable with knowledge of, the terms and conditions of any other agreement, instrument or document in connection herewith, including, without limitation, the agreements referred to in the preamble to this Agreement, and shall be required to act in respect of the Fund Amount and the Escrow Property only as provided in this Agreement. This Agreement sets forth all the obligations of Escrow Agent with respect to any and all matters pertinent to the escrow contemplated hereunder and no additional obligations of Escrow Agent shall be implied from the terms of this Agreement or any other agreement. Escrow Agent shall incur no liability in connection with the discharge of its obligations under this Agreement or otherwise in connection therewith, except such liability as may arise from the willful misconduct or gross negligence of Escrow Agent. 8. Escrow Agent may consult with counsel of its choice, which may include attorneys in the firm of Weil, Gotshal & Manges, and shall not be liable for any action taken or omitted to be taken by Escrow Agent in accordance with the advice of such counsel. 9. Escrow Agent shall not be bound by any modification, cancellation or rescission of this Agreement unless in writing and signed by Escrow Agent. 10. Escrow Agent shall have no tax reporting duties with respect to the Fund Amount, the Escrow Amount, the Escrowed Property or income thereon, such duties being the responsibility of the party or parties which receive, or have the right to receive, any taxable income hereunder. Notwithstanding the foregoing, Escrow Agent has the authority to comply with the provisions of Section 468B(g) of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder. Such authority shall include, without limita- tion, (i) the filing of tax returns (including information returns) with respect to the Fund Amount, the Escrow Amount, the Escrowed Property or income thereon, (ii) the payment of any tax, interest or penalties imposed thereon, (iii) the withholding of any amounts which are required to be withheld and (iv) the payment over of such withheld amounts to the appropriate taxing authority. The parties to this Agreement, other than Escrow Agent, shall provide Escrow Agent with all information necessary to enable Escrow Agent to comply with the foregoing. Escrow Agent may withdraw from the Fund Amount or the Escrow Amount amounts necessary to pay all applicable income or withholding taxes (plus interest and penalties thereon) that are required to be paid. The parties hereto acknowledge that the Fund Amount and the Escrow Amount, excluding any Interest thereon, shall be the Executive's property unless and until disbursed to Employer pursuant to Section 4(b) hereof. 11. Escrow Agent is acting as a stakeholder only with respect to the Escrowed Property. If any dispute arises as to whether Escrow Agent is obligated to deliver the Escrowed Property or as to whom the Escrowed Property is to be delivered or the amount thereof, Escrow Agent shall not be required to make any delivery, but in such event Escrow Agent may hold the Escrowed Property until receipt by Escrow Agent of instructions in writing, signed by all parties which have, or claim to have, an interest in the Escrowed Property, directing the disposition of the Escrowed Property, or in the absence of such authorization, Escrow Agent may hold the Escrowed Property until receipt of a certified copy of a final judgment of a court of competent jurisdiction providing for the disposition of the Escrowed Property. Escrow Agent may require, as a condition to the disposition of the Escrowed Property pursuant to written instructions, indemnification and/or opinions of counsel, in form and substance satisfactory to Escrow Agent, from each party providing such instructions. If such written instructions, indemnification and opinions are not received, or proceedings for such determination are not commenced within 30 days after receipt by Escrow Agent of notice of any such dispute and diligently continued, or if Escrow Agent is uncertain as to which party or parties are entitled to the Escrowed Property, Escrow Agent may either (i) hold the Escrowed Property until receipt of (A) such written instructions and indemnification or (B) a certified copy of a final judgment of a court of competent jurisdiction providing for the disposition of the Escrowed Property, or (ii) deposit the Escrowed Property in the registry of a court of competent jurisdiction; provided, however, that notwithstanding the foregoing, Escrow Agent may, but shall not be required to, institute legal proceedings of any kind. 12. Employer and Executive, jointly and severally, agree to reimburse Escrow Agent on demand for, and to indemnify and hold Escrow Agent harmless against and with respect to, any and all loss, liability, damage, or expense (including, without limitation, taxes, attorneys' fees and costs) that Escrow Agent may suffer or incur in connection with the entering into of this Agreement and performance of its obligations under this Agreement or otherwise in connection therewith, except to the extent such loss, liability, damage or expense arises from the willful misconduct of Escrow Agent. Escrow Agent, after not less than ten days prior written notice to the other parties hereto, shall have the right at any time and from time from time to charge, and reimburse itself from, the Escrowed Property for all amounts to which it is entitled pursuant this Agreement. 13. Escrow Agent and any successor escrow agent may at any time resign as such by delivering the Escrowed Property to either (i) any successor escrow agent designated by all the parties hereto (other than Escrow Agent) in writing, or (ii) any court having competent jurisdiction. Upon its resignation and delivery of the Escrowed Property as set forth in this paragraph, Escrow Agent shall be discharged of, and from, any and all further obligations arising in connection with the escrow contemplated by this Agreement. 14. Escrow Agent shall have the right to represent any party hereto in any dispute between the parties hereto with respect to the Escrowed Property or otherwise. 15. This Agreement shall inure to the benefit of, and be binding upon, the parties hereto and their respective permitted successors and assigns. Nothing in this Agreement, express or implied, shall give to anyone, other than the parties hereto and their respective permitted successors and assigns, any benefit, or any legal or equitable right, remedy or claim, under or in respect of this Agreement or the escrow contemplated hereby. 16. Except as specifically provided otherwise herein, any notice authorized or required to be given to a party hereto pursuant to this Agreement shall be deemed to have been given when hand- delivered, or when mailed by United States certified or registered mail, postage prepaid, return receipt requested, addressed to the parties at the following addresses: If to Employer, to: Leucadia National Corporation 315 Park Avenue South New York, New York Attention: Chairman, Compensation Committee If to Executive, to: Ian M. Cumming 1470 Military Way Salt Lake City, Utah 84103 In each case, with a copy to: Weil, Gotshal & Manges 767 Fifth Avenue New York, New York 10153 Attention: Stephen E. Jacobs, Esq. If to Escrow Agent, to: Weil, Gotshal & Manges 767 Fifth Avenue New York, New York 10153 Attention: Stephen E. Jacobs, Esq. Any party may change its respective address by giving notice thereof in writing to the other parties hereto in the same manner as set forth above. 17. This Agreement shall terminate on the date on which all Escrowed Property has been fully disbursed from the Escrow Account in accordance with Section 3(c) and Section 4 hereof. 18. This Agreement shall be construed and enforced in accordance with the laws of the State of New York. All actions against Escrow Agent arising under or relating to this Agreement shall be brought against Escrow Agent exclusively in the appropriate court in the County of New York, State of New York. Each of the parties hereto agrees to submit to personal jurisdiction and to waive any objection as to venue in the County of New York, State of New York. Service of process on any party hereto in any action arising out of or relating to this Agreement shall be effective if mailed to such party and such party's counsel as set forth in Section 16 hereof. 19. TO THE FULL EXTENT PERMITTED BY LAW, EACH OF THE PARTIES HERETO HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT TO ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF ANY PARTY HERETO. THIS PROVISION IS A MATERIAL INDUCEMENT FOR ESCROW AGENT ENTERING INTO THIS AGREEMENT. 20. This Agreement may be executed in any number of separate counterparts, each of which shall, collectively and separately, constitute one agreement. 21. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine or neuter, singular or plural, as the identity of the parties hereto taken within context may require. 22. The rights of Escrow Agent contained in this Agreement, including without limitation the right to indemnification, shall survive the resignation of Escrow Agent and the termination of the escrow contemplated hereunder. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first written above. LEUCADIA NATIONAL CORPORATION By: /s/ Norman P. Kiken ------------------------------------ /s/ Ian M. Cumming --------------------------------------- Ian M. Cumming /s/ Weil, Gotshal & Manges ----------------------------------------- Weil, Gotshal & Manges, Escrow Agent ANNEX A ------- Disbursing Instructions for Release of Escrow Funds to Executive ------------------------------------ Weil, Gotshal & Manges 767 Fifth Avenue New York, NY 10153 Attn: Stephen E. Jacobs, Esq. Pursuant to and in accordance with that certain ESCROW AND SECURITY AGREEMENT, dated as of December 28, 1993, by and among Leucadia National Corporation, Ian M. Cumming, and Weil, Gotshal & Manges, as Escrow Agent, you are hereby directed to disburse from the Escrow Account established under said Agreement $ of --------------- the Escrow Amount, and to pay such disbursed amount to Ian M. Cumming. ________________________ ________________________ Ian M. Cumming Member of Leucadia National Corporation's Compensation Committee ________________________ Member of Leucadia National Corporation's Compensation Committee ANNEX B ------- Disbursing Instructions for Release of Escrow Funds to Employer ------------------------------------ Weil, Gotshal & Manges 767 Fifth Avenue New York, NY 10153 Attn: Stephen E. Jacobs, Esq. Pursuant to and in accordance with that certain ESCROW AND SECURITY AGREEMENT, dated as of December 28, 1993, by and among Leucadia National Corporation, Ian M. Cumming and Weil, Gotshal & Manges, as Escrow Agent, you are hereby directed to disburse from the Escrow Account established under said Agreement $___________ of the Escrow Amount and to pay such disbursed amount to Leucadia National Corporation. ________________________ ________________________ Ian M. Cumming Member of Leucadia National Corporation's Compensation Committee ________________________ Member of Leucadia National Corporation's Compensation Committee EX-10.20A 6 STEINBERG AGREEMENT 12/28/93 Exhibit 10.20(a) AGREEMENT --------- AGREEMENT, dated as of December 28, 1993, by and among LEUCADIA NATIONAL CORPORATION, a New York corporation ("Employer"), and Joseph S. Steinberg ("Executive"). W I T N E S S E T H: WHEREAS, pursuant to an agreement made as of the 12th day of March 1984 between Employer's subsidiary, Leucadia, Inc. ("LI") and Executive (the "Employment Agreement"), Executive is employed as President and Chief Operating Officer of Employer; and WHEREAS, pursuant to the terms of the Employment Agreement, Executive serves as President and Chief Operating Officer to such of Employer's subsidiaries and affiliates as Employer may designate, including LI; and WHEREAS, the Employment Agreement expires June 30, 1994; and WHEREAS, Employer and Executive have agreed to enter into a new employment agreement expiring June 30, 2003; and WHEREAS, the total annual compensation paid by Employer or LI to Executive over the past few years has exceeded $1 million, and may be expected to exceed $1 million in 1994 and subsequent years; and WHEREAS, in 1992, in anticipation of changes to the tax laws, LI and Executive entered into certain agreements (collectively, the "1992 Agreements") the effect of which was to accelerate the taxation and deductibility of bonus payments otherwise expected to be paid by LI to Executive within the five year period commencing January 1, 1993; and WHEREAS, federal tax law changes, in fact, have been implemented, which will increase the cost of compensation to both Employer and its employees beginning in 1994; and WHEREAS, to address these developments Employer and Executive desire to accelerate the taxation and deductibility of bonus payments otherwise expected to be paid by Employer to Executive within the five year period commencing January 1, 1998; and WHEREAS, contemporaneously herewith Executive and Employer have entered in an Escrow and Security agreement (the "Escrow and Security Agreement") of even date herewith; and WHEREAS, Employer and Ian M. Cumming (Mr. Cumming, together with Executive, collectively, the "Executives"), have entered into an Agreement identical to this Agreement and an escrow and security agreement identical to the Escrow and Security Agreement. NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound, the parties hereto agree as follows: SECTION ONE. ADDITIONAL COMPENSATION. ------------------------------------- The Employer hereby agrees to pay to (or for the benefit of) Executive, as additional compensation, the sum of $4,000,000 (the "Fund Amount"), upon the terms and conditions hereinafter set forth. SECTION TWO. VESTING IN GENERAL. -------------------------------- Subject to clause (b) of Section Four hereof, Executive's right to receive the Fund Amount shall vest at the rate of 20% for each full calendar year after December 31, 1997 during which Executive continues in the employ of Employer or any of its subsidiaries (collectively, the "Employer Group"). Notwithstanding the preceding sentence, Executive's right to receive the Fund Amount shall be 50% vested if Executive dies or becomes disabled (as defined in Section 7 of the Employment Agreement) prior to December 31, 2000 and shall be 100% vested if (i) Executive is terminated by Employer without cause (as defined in Section 8 (a)(i) of the Employment Agreement), (ii) an Initiating Event (as defined in Annex A hereto) occurs, or (iii) Employer becomes subject to the jurisdiction of a bankruptcy or similar court in the context of a bankruptcy, insolvency or similar proceeding. For purposes of this Agreement, any portion of the Fund Amount vested pursuant to this Section Two or pursuant to Section Four hereof shall be referred to as the "Vested Amount." SECTION THREE. PAYMENT IN GENERAL. ---------------------------------- (a) General -- Except as otherwise provided in this Section ------- Three, on January 1, 2003 the Vested Amount as of such date shall be paid by Employer to Executive. (b) Payment Upon Termination -- Except as otherwise provided in ------------------------ this Section Three, in the event that Executive's employment with the Employer Group terminates prior to January 1, 2003, promptly after the date of such termination Employer shall pay to Executive the Vested Amount as of the date of such termination. (c) Early Payments -- Pursuant to Section Four and Section Seven -------------- hereof, payments of the Fund Amount may be made to or on behalf of Executive prior to January 1, 2003 ("Early Payments"). For purposes hereof, the term "Available Fund Amount" shall mean, as of any date, an amount equal to the Fund Amount reduced by all Early Payments made prior to such date. If any Early Payment shall have been made, any amount required to be paid by Employer to Executive pursuant to clause (a) or (b) of this Section Three shall be reduced by the sum of all such Early Payments. To the extent that the sum of all Early Payments exceeds the Vested Amount on the earlier of January 1, 2003 or the date on which Executive's employment with the Employer Group terminates, Executive shall be obligated promptly to pay to Employer the amount of such deficiency, plus interest accruing at the prime rate, as announced from time to time by Citibank, N.A., compounded annually on the amount of the deficiency from the date hereof through the date on which Executive makes a payment to Employer pursuant to this clause (c). SECTION FOUR. ACCELERATION OF PAYMENT/VESTING. ---------------------------------------------- (a) Accelerated Payment -- In the sole discretion of the Board ------------------- of Directors of Employer, excluding Executives, upon recommendation of the Compensation Committee of Employer, Employer may accelerate payment to Executive of all or a portion of the Available Fund Amount. In determining whether or not to accelerate payment of all or any portion of the Available Fund Amount, the Board of Directors of Employer and the Compensation Committee thereof may consider, among other things, the then applicable tax law and the costs and benefits to the Employer Group, under the tax law, this Agreement, the Escrow and Security Agreement, the 1992 Agreements and otherwise, of effecting such acceleration. (b) Accelerated Vesting -- In the event of any accelerated ------------------- payment pursuant to clause (a) of this Section Four, for all purposes hereof the Vested Amount shall equal the greater of (i) the Vested Amount computed pursuant to Section Two hereof without regard to this Section Four, or (ii) the sum of all payments made pursuant to clause (a) of this Section Four, plus an amount equal to the product of the Withheld Amount (defined below), if any, and a fraction the numerator of which is the sum of all amounts paid pursuant to clause (a) of Section Four hereof and the denominator of which is the Fund Amount. SECTION FIVE. ESCROW ARRANGEMENT. --------------------------------- The obligations of Employer to Executive hereunder shall be implemented and secured by way of the Escrow and Security Agreement. Toward that end, any payment obligation of Employer hereunder shall be satisfied, to the extent possible, by directing a release from the Escrow Amount (as defined in the Escrow and Security Agreement) of the appropriate amount to be paid to the Executive. Such Escrow and Security Agreement shall be irrevocable and is intended by the parties to secure Employer's obligations to Executive hereunder, and to implement such obligations. As provided in the Escrow and Security Agreement, the escrow agent shall be Weil, Gotshal and Manges, the investment of the escrow funds shall be directed by the Chief Financial Officer of the Employer, the income and earnings realized in respect of the escrow fund shall be distributed promptly to Employer, and the tax responsibility for such income and earnings shall be borne by Employer. SECTION SIX. -- TAX ELECTION. ---------------------------- Executive shall timely and properly file an election under Section 83(b) of the Internal Revenue Code of 1986, as amended, in respect of his receipt, as compensation, of this Agreement and his interest in the escrow established pursuant to the Escrow and Security Agreement. Notwithstanding anything contained herein to the contrary, Executive's failure timely and properly to file such tax election shall result in the immediate termination of Employer's obligations hereunder and in a termination of the Escrow and Security Agreement, and an immediate return to Employer of the escrowed funds deposited by Employer pursuant to such Agreement. SECTION SEVEN. -- TAX WITHHOLDING. --------------------------------- Executive agrees that Employer and/or its subsidiaries or affiliates shall effect all required tax withholdings in respect of the additional compensation paid pursuant to this Agreement. At Executive's election, $2,097,400 (the "Withheld Amount") of the Fund Amount shall be applied by the Employer in satisfaction of its withholding obligations. If Executive makes such election, the Escrow Agent (as defined in the Escrow and Security Agreement) shall be directed to release the Withheld Amount to Employer. Notwithstanding such election, the Withheld Amount shall remain unvested except as otherwise provided in Section Two and Section Four hereof. SECTION EIGHT. -- AFFECT ON OTHER AGREEMENTS AND ARRANGEMENTS. ------------------------------------------------------------- This Agreement shall have no effect on the rights and obligations of the parties hereto under any other agreement. Notwithstanding this Agreement, the Board of Directors of Employer, excluding Executives, upon recommendation of the Compensation Committee of Employer, annually will determine the amount, if any, of bonuses to be paid to Executive. In determining the amount of any such bonus, the Board of Directors of Employer and the Compensation Committee thereof will consider the costs and benefits to Employer of implementing this Agreement, which shall include consideration of changes in the tax law, if any. SECTION NINE. -- ASSIGNABILITY AND BINDING EFFECT. ------------------------------------------------- This Agreement shall inure to the benefit of and shall be binding upon the heirs, executors, administrators, successors and legal representatives of Executive, and shall inure to the benefit of and be binding upon the Employer and its successors, but the obligations of Executive hereunder may not be assigned to another person, firm or corporation nor may they be delegated. SECTION TEN. -- COMPLETE UNDERSTANDING. -------------------------------------- This Agreement constitutes the complete understanding between the parties with respect to the compensation arrangement described herein, and no statement, representation, warranty or covenant has been made by either party with respect thereto except as expressly set forth herein. This Agreement shall not be altered, modified, amended or terminated except by written instrument signed by each of the parties hereto. SECTION ELEVEN. -- SEVERABILITY. ------------------------------- If any provision of this Agreement or any part hereof is invalid, unlawful or incapable of being enforced, by reason of any rule of law or public policy, all other conditions and provisions of this Agreement which can be given effect without such invalid, unlawful or unenforceable provision shall, nevertheless, remain in full force and effect. SECTION TWELVE. -- WARRANTY. --------------------------- Executive warrants and represents that he is not a party to any agreement, contract or understanding, whether of employment or otherwise, which would in any way restrict or prohibit him from undertaking or performing employment in accordance with the terms and conditions of this Agreement. SECTION THIRTEEN. -- GOVERNING LAW. ---------------------------------- This Agreement shall be governed by and construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the day and year first above written. LEUCADIA NATIONAL CORPORATION By /s/ Norman P. Kiken /s/Joseph S. Steinberg -------------------------------- ---------------------- Norman P. Kiken, Vice President Joseph S. Steinberg and Comptroller ANNEX A Initiating Event - The consolidation or merger of Leucadia National Corporation ("Leucadia") with or into another corporation or other reorganization of Leucadia, any of which results in a change in control of Leucadia; the sale of all or substantially all of the assets of the Leucadia (other than to a subsidiary or affiliate of the Leucadia); or the acquisition, directly or indirectly, by any Person, or by any two or more Persons acting together, of beneficial ownership of more than fifty percent (50%) of the outstanding voting securities of Leucadia, including, without limitation, any such acquisition by means of a tender or exchange offer or proxy solicitation or pursuant to a judgment, decree or final order of a judicial or administrative body of competent jurisdiction. For purposes hereof, the term "Person" shall mean an individual, partnership, joint venture, corporation, trust, unincorporated association, other business entity or government or department, agency or instrumentality thereof (whether domestic or foreign). EX-10.20B 7 WGM ESCROW AGREEMENT 12/28/93 Exhibit 10.20(b) ESCROW AND SECURITY AGREEMENT ESCROW AND SECURITY AGREEMENT, dated as of December 28, 1993, by and among LEUCADIA NATIONAL CORPORATION, a New York corporation ("Employer"), Joseph S. Steinberg ("Executive") and Weil, Gotshal and Manges (a partnership including professional corporations) ("Escrow Agent"). W I T N E S S E T H: WHEREAS, pursuant to an agreement made as of the 12th day of March 1984 between Employer's subsidiary, Leucadia, Inc. ("LI") and Executive (the "Employment Agreement"), Executive is employed as Chairman and Chief Executive Officer of Employer; and WHEREAS, pursuant to the terms of the Employment Agreement, Executive serves as Chairman and Chief Executive Officer to such of Employer's subsidiaries and affiliates as Employer may designate, including LI; and WHEREAS, the Employment Agreement expires June 30, 1994; and WHEREAS, Employer and Executive have agreed to enter into a new employment agreement expiring June 30, 2003; and WHEREAS, in 1992, in anticipation of changes to the tax laws, LI and Executive entered into certain agreements (collectively, the "1992 Agreements") the effect of which was to accelerate the taxation and deductibility of bonus payments otherwise expected to be paid by Employer or LI to Executive within the five year period commencing January 1, 1993; and WHEREAS, federal tax law changes, in fact, have been implemented, which will increase the cost of compensation to both Employer and its employees beginning in 1994; and WHEREAS, to address these developments, Employer and Executive have entered into an Agreement dated December 28, 1993 providing for the establishment of an executive compensation arrangement for the benefit of Executive, a copy of which is attached hereto as Exhibit A (the "Compensation Agreement"); and WHEREAS, the Compensation Agreement provides for the deposit by Employer of $4.0 million (the "Fund Amount") into an escrow account (the "Escrow Account") and the release of such funds in accordance with the provision of Section 4 hereof; and WHEREAS, contemporaneously herewith Employer and Ian M. Cumming (Mr. Cumming, together with Executive, collectively, the "Executives") have entered into an agreement identical to the Compensation Agreement; and WHEREAS, the Escrow Agent is willing to serve as Escrow Agent and hold the Fund Amount, plus any interest earned thereon (the "Escrowed Property") in accordance with and subject to the terms and conditions hereof. NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound, the parties hereto agree as follows: 1. Employer and Executive hereby consent to the appointment of and hereby appoint Weil, Gotshal & Manges as Escrow Agent, to serve as escrow agent in accordance with the terms and conditions herein set forth, and Escrow Agent hereby accepts such appointment. 2. Security Interest. The parties hereto agree that the ----------------- Fund Amount is intended to secure any and all liabilities of Employer to Executive under the Compensation Agreement. Employer hereby grants to Employee an irrevocable security interest in the Fund Amount and the parties hereto agree that the Fund Amount (i) shall be received and held by Escrow Agent for the benefit of Employee and to protect the interest of Employee in the Fund Amount, and (ii) shall be disbursed by Escrow Agent in accordance with the terms hereof. 3. The Fund Amount shall be deposited with Escrow Agent as follows: (a) On the date hereof, Employer shall deliver to Escrow Agent the Fund Amount. Escrow Agent shall not be liable or responsible for the collection of the proceeds of any check payable or endorsed to Escrow Agent hereunder. (b) Escrow Agent shall, in accordance with direction provided by the Chief Financial Officer of the Employer, deposit the Fund Amount in certificates of deposit or interest bearing accounts of any bank or trust company, incorporated under the laws of the United States of America or any state, which has combined capital and surplus of not less than $100,000,000. (c) All interest earned on the Fund Amount ("Interest") shall be the property of the Employer and shall not be added to or become part of the Escrow Amount (as defined). All Interest shall be paid by the Escrow Agent, on a current basis, to Employer without the need for any further action on the part of Employer. (d) The Fund Amount, as such may from time to time be decreased by the release of monies from the Fund Amount pursuant to the terms hereof, shall constitute the "Escrow Amount." 4. The Escrow Amount shall be released by the Escrow Agent as follows: (a) Upon receipt by the Escrow Agent of Disbursing Instructions in the form attached as Annex A hereto executed by both Executive and Employer (as evidenced by the signature of a majority of the members of Employer's Compensation Committee), Escrow Agent shall release to Executive so much of the Escrow Amount as indicated in the Disbursing Instructions; and (b) Upon receipt by the Escrow Agent of Disbursing Instructions in the form attached as Annex B hereto executed by both Executive and Employer (as evidenced by the signature of a majority of the members of Employer's Compensation Committee), Escrow Agent shall release to Employer so much of the Escrow Amount as indicated in the Disbursing Instructions 5. Any notice or certificate given to Escrow Agent under Section 4 shall be by hand or overnight delivery to the parties at the addresses set forth in Section 16 of this Agreement. In the event of any dispute, Escrow Agent shall retain the Escrow Amount until the dispute is resolved by the final order or judgment of a court having jurisdiction with respect thereto. Reasonable fees and costs of the other party or parties shall be advanced by the party giving notice of a dispute, and shall be borne by the party or parties not prevailing in the action. 6. Escrow Agent shall be entitled to rely upon, and shall be fully protected from all liability, loss, cost, damage or expense in acting or omitting to act pursuant to, any instruction, order, judgment, certification, affidavit, demand, notice, opinion, instrument or other writing delivered to it hereunder without being required to determine the authenticity of such document, the correctness of any fact stated therein, the propriety of the service thereof or the capacity, identity or authority of any party purporting to sign or deliver such document. 7. The duties of Escrow Agent are only as herein specifically provided, and are purely ministerial in nature. Escrow Agent shall neither be responsible for, or under, nor chargeable with knowledge of, the terms and conditions of any other agreement, instrument or document in connection herewith, including, without limitation, the agreements referred to in the preamble to this Agreement, and shall be required to act in respect of the Fund Amount and the Escrow Property only as provided in this Agreement. This Agreement sets forth all the obligations of Escrow Agent with respect to any and all matters pertinent to the escrow contemplated hereunder and no additional obligations of Escrow Agent shall be implied from the terms of this Agreement or any other agreement. Escrow Agent shall incur no liability in connection with the discharge of its obligations under this Agreement or otherwise in connection therewith, except such liability as may arise from the willful misconduct or gross negligence of Escrow Agent. 8. Escrow Agent may consult with counsel of its choice, which may include attorneys in the firm of Weil, Gotshal & Manges, and shall not be liable for any action taken or omitted to be taken by Escrow Agent in accordance with the advice of such counsel. 9. Escrow Agent shall not be bound by any modification, cancellation or rescission of this Agreement unless in writing and signed by Escrow Agent. 10. Escrow Agent shall have no tax reporting duties with respect to the Fund Amount, the Escrow Amount, the Escrowed Property or income thereon, such duties being the responsibility of the party or parties which receive, or have the right to receive, any taxable income hereunder. Notwithstanding the foregoing, Escrow Agent has the authority to comply with the provisions of Section 468B(g) of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder. Such authority shall include, without limita- tion, (i) the filing of tax returns (including information returns) with respect to the Fund Amount, the Escrow Amount, the Escrowed Property or income thereon, (ii) the payment of any tax, interest or penalties imposed thereon, (iii) the withholding of any amounts which are required to be withheld and (iv) the payment over of such withheld amounts to the appropriate taxing authority. The parties to this Agreement, other than Escrow Agent, shall provide Escrow Agent with all information necessary to enable Escrow Agent to comply with the foregoing. Escrow Agent may withdraw from the Fund Amount or the Escrow Amount amounts necessary to pay all applicable income or withholding taxes (plus interest and penalties thereon) that are required to be paid. The parties hereto acknowledge that the Fund Amount and the Escrow Amount, excluding any Interest thereon, shall be the Executive's property unless and until disbursed to Employer pursuant to Section 4(b) hereof. 11. Escrow Agent is acting as a stakeholder only with respect to the Escrowed Property. If any dispute arises as to whether Escrow Agent is obligated to deliver the Escrowed Property or as to whom the Escrowed Property is to be delivered or the amount thereof, Escrow Agent shall not be required to make any delivery, but in such event Escrow Agent may hold the Escrowed Property until receipt by Escrow Agent of instructions in writing, signed by all parties which have, or claim to have, an interest in the Escrowed Property, directing the disposition of the Escrowed Property, or in the absence of such authorization, Escrow Agent may hold the Escrowed Property until receipt of a certified copy of a final judgment of a court of competent jurisdiction providing for the disposition of the Escrowed Property. Escrow Agent may require, as a condition to the disposition of the Escrowed Property pursuant to written instructions, indemnification and/or opinions of counsel, in form and substance satisfactory to Escrow Agent, from each party providing such instructions. If such written instructions, indemnification and opinions are not received, or proceedings for such determination are not commenced within 30 days after receipt by Escrow Agent of notice of any such dispute and diligently continued, or if Escrow Agent is uncertain as to which party or parties are entitled to the Escrowed Property, Escrow Agent may either (i) hold the Escrowed Property until receipt of (A) such written instructions and indemnification or (B) a certified copy of a final judgment of a court of competent jurisdiction providing for the disposition of the Escrowed Property, or (ii) deposit the Escrowed Property in the registry of a court of competent jurisdiction; provided, however, that notwithstanding the foregoing, Escrow Agent may, but shall not be required to, institute legal proceedings of any kind. 12. Employer and Executive, jointly and severally, agree to reimburse Escrow Agent on demand for, and to indemnify and hold Escrow Agent harmless against and with respect to, any and all loss, liability, damage, or expense (including, without limitation, taxes, attorneys' fees and costs) that Escrow Agent may suffer or incur in connection with the entering into of this Agreement and performance of its obligations under this Agreement or otherwise in connection therewith, except to the extent such loss, liability, damage or expense arises from the willful misconduct of Escrow Agent. Escrow Agent, after not less than ten days prior written notice to the other parties hereto, shall have the right at any time and from time from time to charge, and reimburse itself from, the Escrowed Property for all amounts to which it is entitled pursuant this Agreement. 13. Escrow Agent and any successor escrow agent may at any time resign as such by delivering the Escrowed Property to either (i) any successor escrow agent designated by all the parties hereto (other than Escrow Agent) in writing, or (ii) any court having competent jurisdiction. Upon its resignation and delivery of the Escrowed Property as set forth in this paragraph, Escrow Agent shall be discharged of, and from, any and all further obligations arising in connection with the escrow contemplated by this Agreement. 14. Escrow Agent shall have the right to represent any party hereto in any dispute between the parties hereto with respect to the Escrowed Property or otherwise. 15. This Agreement shall inure to the benefit of, and be binding upon, the parties hereto and their respective permitted successors and assigns. Nothing in this Agreement, express or implied, shall give to anyone, other than the parties hereto and their respective permitted successors and assigns, any benefit, or any legal or equitable right, remedy or claim, under or in respect of this Agreement or the escrow contemplated hereby. 16. Except as specifically provided otherwise herein, any notice authorized or required to be given to a party hereto pursuant to this Agreement shall be deemed to have been given when hand- delivered, or when mailed by United States certified or registered mail, postage prepaid, return receipt requested, addressed to the parties at the following addresses: If to Employer, to: Leucadia National Corporation 315 Park Avenue South New York, New York Attention: Chairman, Compensation Committee If to Executive, to: Joseph S. Steinberg 84 Remsen Street Brooklyn, New York 11201 In each case, with a copy to: Weil, Gotshal & Manges 767 Fifth Avenue New York, New York 10153 Attention: Stephen E. Jacobs, Esq. If to Escrow Agent, to: Weil, Gotshal & Manges 767 Fifth Avenue New York, New York 10153 Attention: Stephen E. Jacobs, Esq. Any party may change its respective address by giving notice thereof in writing to the other parties hereto in the same manner as set forth above. 17. This Agreement shall terminate on the date on which all Escrowed Property has been fully disbursed from the Escrow Account in accordance with Section 3(c) and Section 4 hereof. 18. This Agreement shall be construed and enforced in accordance with the laws of the State of New York. All actions against Escrow Agent arising under or relating to this Agreement shall be brought against Escrow Agent exclusively in the appropriate court in the County of New York, State of New York. Each of the parties hereto agrees to submit to personal jurisdiction and to waive any objection as to venue in the County of New York, State of New York. Service of process on any party hereto in any action arising out of or relating to this Agreement shall be effective if mailed to such party and such party's counsel as set forth in Section 16 hereof. 19. TO THE FULL EXTENT PERMITTED BY LAW, EACH OF THE PARTIES HERETO HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT TO ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF ANY PARTY HERETO. THIS PROVISION IS A MATERIAL INDUCEMENT FOR ESCROW AGENT ENTERING INTO THIS AGREEMENT. 20. This Agreement may be executed in any number of separate counterparts, each of which shall, collectively and separately, constitute one agreement. 21. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine or neuter, singular or plural, as the identity of the parties hereto taken within context may require. 22. The rights of Escrow Agent contained in this Agreement, including without limitation the right to indemnification, shall survive the resignation of Escrow Agent and the termination of the escrow contemplated hereunder. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first written above. LEUCADIA NATIONAL CORPORATION By: /s/ Norman P. Kiken -------------------------------- /s/ Joseph S. Steinberg ------------------------------------ Joseph S. Steinberg /s/ Weil, Gotshal & Manges ------------------------------------ Weil, Gotshal & Manges, Escrow Agent ANNEX A -------- Disbursing Instructions for Release of Escrow Funds to Executive ------------------------------------ Weil, Gotshal & Manges 767 Fifth Avenue New York, NY 10153 Attn: Stephen E. Jacobs, Esq. Pursuant to and in accordance with that certain ESCROW AND SECURITY AGREEMENT, dated as of December 28, 1993, by and among Leucadia National Corporation, Joseph S. Steinberg, and Weil, Gotshal & Manges, as Escrow Agent, you are hereby directed to disburse from the Escrow Account established under said Agreement $___________ of the Escrow Amount, and to pay such disbursed amount to Joseph S. Steinberg. ________________________ ________________________ Joseph S. Steinberg Member of Leucadia National Corporation's Compensation Committee ________________________ Member of Leucadia National Corporation's Compensation Committee ANNEX B ------- Disbursing Instructions for Release of Escrow Funds to Employer ------------------------------------ Weil, Gotshal & Manges 767 Fifth Avenue New York, NY 10153 Attn: Stephen E. Jacobs, Esq. Pursuant to and in accordance with that certain ESCROW AND SECURITY AGREEMENT, dated as of December 28, 1993, by and among Leucadia National Corporation, Joseph S. Steinberg and Weil, Gotshal & Manges, as Escrow Agent, you are hereby directed to disburse from the Escrow Account established under said Agreement $___________ of the Escrow Amount and to pay such disbursed amount to Leucadia National Corporation. ________________________ -------------------------- Joseph S. Steinberg Member of Leucadia National Corporation's Compensation Committee ________________________ Member of Leucadia National Corporation's Compensation Committee EX-21 8 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 LEUCADIA NATIONAL CORPORATION Subsidiaries as of December 31, 1993 State of Name Incorporation ---- ------------- Colonial Penn Heritage Insurance Company California Baldwin Enterprises, Inc. Colorado 330 Mad. Parent Corp. Delaware AIC Financial Corporation Delaware American Investment Company Delaware Bellpet, Inc. Delaware Colonial Penn Group, Inc. Delaware Colonial Penn Holdings, Inc. Delaware Conwed Corporation Delaware Leucadia Aviation, Inc. Delaware Leucadia Cellars, Ltd. Delaware LNC Investments, Inc. Delaware Neward Corporation Delaware Rastin Investing Corp. Delaware RERCO, Inc. Delaware College Life Development Corporation Indiana Charter National Life Insurance Company Missouri The Sperry and Hutchinson Company New Jersey Allcity Insurance Company New York Empire Insurance Company New York Intramerica Life Insurance Company New York Leucadia, Inc. New York Leucadia Investors, Inc. New York Transportation Capital Corp. New York Colonial Penn Franklin Insurance Company Pennsylvania Colonial Penn Insurance Company Pennsylvania Colonial Penn Life Insurance Company Pennsylvania Phlcorp, Inc. Pennsylvania American Investment Bank, N.A. United States American Investment Financial Utah Governor Financial Corporation Utah Governor Investments Holding Co., Inc. Utah Governor Investments, Inc. Utah State of Name Incorporation ---- ------------- Leucadia Film Corporation Utah Leucadia Financial Corporation Utah Leucadia Properties, Inc. Utah Solana Corporation Utah Terracor II Utah Colonial Penn Madison Insurance Company Wisconsin WMAC Investment Corporation Wisconsin Subsidiaries not included on this list considered in the aggregate as a single subsidiary would not constitute a significant subsidiary as of December 31, 1993. EX-23 9 CONSENT OF ACCOUNTANTS Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Leucadia National Corporation on (i) Form S-8 (File No. 2-84303), (ii) Form S-8 and S-3 (File No. 33-6054), (iii) Form S-8 and S-3 (File No. 33-26434), (iv) Form S-8 and Form S-3 (File No. 33-30277), (v) Form S-8 (File No. 33-61680) and (vi) Form S-8 (File No. 33-61678) of our report dated March 17, 1994, on our audits of the consolidated financial statements and financial statement schedules of Leucadia National Corporation and Subsidiaries as of December 31, 1993 and 1992, and for the years ended December 31, 1993, 1992 and 1991, which report is included in this Annual Report on Form 10-K. COOPERS & LYBRAND New York, New York March 21, 1994, -----END PRIVACY-ENHANCED MESSAGE-----