10-K 1 LEUCADIA NATIONAL CORP 1994 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, 1994 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, 1995 (computed by reference to the last reported closing sale price of the Common Stock on the New York Stock Exchange on such date): $694,255,320. On March 16, 1995, the registrant had outstanding 28,130,812 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 1995 annual meeting of shareholders of the registrant are incorporated by reference into Part III of this Report. PART I Item 1. Business. ------ -------- THE COMPANY GENERAL The Company is a diversified financial services holding company principally engaged in personal and commercial lines of property and casualty insurance, life and health insurance, banking and lending, manufacturing and the trading stamps business. The Company concentrates on return on investment and cash flow to build long-term shareholder value, rather than emphasizing volume or market share. Additionally, the Company continuously evaluates the retention and disposition of its existing operations and investigates possible acquisitions of new businesses in order to maximize shareholder value. Shareholders' equity has grown from a deficit of $7,657,000 at December 31, 1978 (prior to the acquisition of a controlling interest in the Company by the Company's Chairman and President), to a positive shareholders' equity of $881,815,000 at December 31, 1994, equal to a book value per common share of negative $.22 at December 31, 1978 and $31.44 at December 31, 1994. 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, 1994, the Company's insurance segments contributed 79% of total revenue and, at December 31, 1994, constituted 78% 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 less than 2% of the insurance subsidiaries' portfolio at December 31, 1994. In the recent rising interest rate environment, the Company's primary goal has been to preserve investment capital. The Company's banking and lending operations principally consist of making instalment loans primarily funded by customer banking 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. The Company's manufacturing operations primarily manufacture products for the "do- it-yourself" home improvement market and for industrial and agricultural markets. The Company and certain of its subsidiaries have substantial tax loss carryforwards. The amount and availability of the tax loss carryforwards are subject to certain qualifications, limitations and uncertainties as more fully discussed in the Notes to the Consolidated Financial Statements. As used herein, the term "Company" refers to Leucadia National Corporation, a New York corporation organized in 1968, and its subsidiaries, except as the context otherwise may require. Financial Information About Industry Segments --------------------------------------------- Certain information concerning the Company's operations is presented in the following table.
Year Ended December 31, ------------------------------- 1994 1993 1992 ---- ---- ---- (In millions) Revenues: -------- Property and Casualty Insurance $ 872.1 $ 842.1 $ 849.0 Life Insurance 223.3 286.3 395.5 Banking and Lending 49.0 38.2 56.4 Incentive Services (a) 19.4 30.7 95.7 Manufacturing 180.1 173.8 168.8 Corporate and Other (b) 40.5 37.0 7.6 -------- -------- -------- $1,384.4 $1,408.1 $1,573.0 ======== ======== ======== Income (loss) before income taxes: --------------------------------- Property and Casualty Insurance $ 96.4 $ 128.0 $ 108.4 Life Insurance 49.1 62.0 63.7 Banking and Lending 16.3 12.6 17.4 Incentive Services (a) 10.3 13.9 12.9 Manufacturing (11.7) (2.2) (6.6) Corporate and Other (b)(c) (60.1) (37.4) (52.2) -------- -------- -------- $ 100.3 $ 176.9 $ 143.6 ======== ======== ======== Identifiable assets employed: ---------------------------- Property and Casualty Insurance $2,117.9 $2,169.6 $1,843.3 Life Insurance 1,515.1 1,610.5 1,857.0 Banking and Lending 316.4 262.6 268.9 Incentive Services (a) 5.9 37.8 41.2 Manufacturing 93.5 101.0 105.8 Corporate and Other (d) 625.2 507.8 214.4 -------- -------- -------- $4,674.0 $4,689.3 $4,330.6 ======== ======== ======== At December 31, 1994, the Company and its consolidated subsidiaries had 4,374 full-time employees. ---------------- (a) Includes trading stamp operations for all years and motivation services operations for 1992. Certain investments that are reflected in the caption Incentive Services in 1993 and 1992 are reflected in the caption Corporate and Other in 1994. (b) Includes Jordan Associated Companies (described below), gains (losses) from certain investments and real estate and other operations. (c) Includes corporate interest expense and overhead, including expenses related to acquisition and certain investing activities. (d) Principally consists of cash, investments, real estate, receivables and, at December 31, 1994 and 1993, the deferred income tax asset of $144,631,000 and $114,001,000, respectively.
2 INSURANCE OPERATIONS GENERAL The Company engages in the personal property and casualty and life and health insurance businesses on a nationwide basis and specializes in commercial property and casualty insurance business in the New York metropolitan area. The Company's principal property and casualty insurance subsidiaries are the Colonial Penn P&C Group, consisting of Colonial Penn Insurance Company ("CPI"), Colonial Penn Madison Insurance Company ("Madison"), Colonial Penn Franklin Insurance Company ("Franklin") and Bay Colony Insurance Company ("Bay Colony"), and the Empire Group, consisting of Empire Insurance Company ("Empire") and Allcity Insurance Company ("Allcity"). The Company's principal life insurance subsidiaries are Charter National Life Insurance Company ("Charter"), Colonial Penn Life Insurance Company ("CPL") and Intramerica Life Insurance Company ("Intramerica"). In conducting its insurance operations, the Company focuses primarily on profitability and persistency rather than volume. A.M. Best Company ("Best"), an independent rating agency, has rated CPL, Charter, Madison, and the Empire Group "A" (excellent), Intramerica "A-" (excellent) and CPI, Franklin and Bay Colony "B++" (very good). PROPERTY AND CASUALTY INSURANCE The Colonial Penn P&C Group, which maintains its headquarters in Valley Forge, Pennsylvania, is licensed in all 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands and writes insurance throughout most of the United States. The Colonial Penn P&C Group has regional offices in Wayne, Pennsylvania, Tampa, Florida and Phoenix, Arizona. The Empire Group is licensed in five states and operates primarily in the New York metropolitan area. During the year ended December 31, 1994, 80%, 14% and 6% of net earned premiums of the Company's property and casualty insurance operations were derived from personal and commercial automobile lines, other commercial lines and other personal lines, respectively. Total property and casualty net earned premiums for the year ended December 31, 1994 were $746,400,000, of which $447,200,000 was attributable to the Colonial Penn P&C Group. Set forth below is certain statistical information for the Company's property and casualty operations prepared in accordance with generally accepted accounting principles ("GAAP") and statutory accounting principles ("SAP"). The Loss Ratio is the ratio of incurred losses and loss adjustment expenses to net premiums earned. The Expense Ratio is the ratio of underwriting expenses (policy acquisition costs, commissions, and a portion of administrative, general and other expenses attributable to underwriting operations) to net premiums written, if determined in accordance with SAP, or to net premiums earned, if determined in accordance with GAAP. A Combined Ratio below 100% indicates an underwriting profit and a Combined Ratio above 100% indicates an underwriting loss. The Combined Ratio does not include the effect of investment income. 3
YEAR ENDED DECEMBER 31, ----------------------------- 1994 1993 1992 ---- ---- ---- Loss Ratio: GAAP 81.2% 76.9% 82.3% SAP 81.6% 76.1% 85.3% Industry (SAP) (a) N/A 79.5% 88.1% Expense Ratio: GAAP 17.9% 20.0% 19.4% SAP 17.2% 17.6% 17.5% Industry (SAP) (a) N/A 27.4% 27.6% Combined Ratio (b): GAAP 99.1% 96.9% 101.7% SAP 98.8% 93.7% 102.8% Industry (SAP) (a) N/A 106.9% 115.7% --------------- (a) Source: Best's Aggregates & Averages, Property/Casualty, 1994 Edition. Industry combined ratios may not be fully comparable as a result of, among other things, differences in geographical concentration and in the mix of property and casualty insurance products. (b) For 1993, the difference in the treatment of certain costs for GAAP and SAP purposes was a principal reason for the difference between the GAAP Combined Ratio and the SAP Combined Ratio. For 1992, the results of certain accident and health insurance business, which are reflected in the SAP Combined Ratio but are not reflected in the GAAP Combined Ratio, included a non-recurring income item which reduced the SAP Combined Ratio. In addition, in 1992 certain income credits were recognized only for GAAP purposes.
Based on published reports, the Colonial Penn P&C Group's SAP Expense Ratio for 1993, 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 mature adult population. As of December 31, 1994, the Group had approximately 352,000 voluntary auto policies in force. Substantially all of the Group's policies are written for a one-year period. However, in many states CPI and Franklin offer a "guaranteed lifetime protection" provision to certain qualifying policyholders that ensures their policies will be renewed at rates then in effect for their classification. The Colonial Penn P&C Group primarily markets its insurance products to the standard and preferred risk market segments through direct response marketing methods. Direct response marketing includes any form of marketing in which a company and a customer deal directly with each other, rather than through an insurance agent. The Colonial Penn P&C Group has become a low cost provider of its products to its niche markets, 4 enabling it to charge competitive rates. Since acquisition of the Colonial Penn P&C Group in 1991, the Company has substantially reduced the Group's marketing expenses, which the Company did not believe were justified by prior operating results, and also refined its marketing efforts. This strategy has resulted in a decrease in policies in force; however, the rate of decline has slowed in each year since acquisition. The Company believes that new business generated in 1995 will exceed lapsed premiums, although there can be no assurance that this will be achieved. In recent years, the Colonial Penn P&C Group has acquired blocks of private passenger automobile assigned risk business from other insurance companies. In addition to the premiums paid by policyholders, the Group also receives fee income from the insurance company from which the business was acquired. The Group's low expense ratio enables it to offer competitive rates for this business. The Colonial Penn P&C Group currently has contracts in force covering approximately $100,000,000 of annualized written premium. Net earned premiums for the Colonial Penn P&C Group for the year ended December 31, 1994 were concentrated in the states listed below:
Percentage of Net Earned Premiums ----------------- State Automobile (1) Homeowners ----- -------------- ---------- California (2) 19% 15% Florida 17 26 New York 13 11 Connecticut 7 4 Arizona 7 6 Pennsylvania 4 6 All others 33 32 --- --- Total 100% 100% === === -------------- (1) Excludes net earned premiums related to acquired assigned risk business described above and mandatory assumed risk business, which generally relates to the amount of writings in the applicable state. (2) For a discussion of the impact of legislation relating to California property and casualty operations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Prior to the Company's acquisition of Colonial Penn, CPI wrote as primary insurer or as a reinsurer a variety of diverse commercial property and casualty insurance business known as "Special Risks." The nature of most of this insurance, which was not written after 1988, involves exposures which can be expected to develop over a relatively long period of time before a definitive determination of ultimate losses and loss adjustment expenses can be established and the relevant reinsurance collected. Although losses with respect to this block of business are particularly difficult to predict accurately, the Company believes, based in part upon a 5 recently completed independent actuarial review, that it has recorded adequate reserves as of December 31, 1994 ($63,700,000, before reinsurance). The Empire Group The Empire Group provides personal insurance coverage to automobile owners and homeowners and commercial insurance 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, 1994, 1993 and 1992, net earned premiums and commissions for the Empire Group were $299,200,000, $259,400,000 and $243,100,000, respectively. Substantially all of the Empire Group policies are written in New York for a one-year period. The Empire Group is licensed in New York to write all lines of insurance that may be written by a property and casualty insurer, except residual value, credit, unemployment, animal and marine protection and indemnity insurance and ocean marine insurance. As is true with the Company's other insurance subsidiaries, the Empire Group's marketing strategy emphasizes profitability rather than volume. The voluntary business of the Empire Group is produced through general agents, local agents and insurance brokers, who are compensated for their services by payment of commissions on the premiums they generate. There are five general agents, one of which is owned by Empire, and approximately 396 local agents and insurance brokers presently acting under agreements with the Empire Group. These agents and brokers also represent other competing insurance companies. Like the Colonial Penn P&C Group, the Empire Group also has acquired blocks of private passenger automobile and commercial automobile assigned risk business from other insurance companies. The Empire Group currently has contracts in force covering approximately $100,000,000 of annualized written premiums. In addition, the Empire Group receives 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. Losses and Loss Adjustment Expenses Liabilities for unpaid losses, which are not discounted (except for certain workers' compensation liabilities), and loss adjustment expenses ("LAE") are determined using case-basis evaluations, statistical analyses and estimates for salvage and subrogation recoverable and represent estimates of the ultimate claim costs of all unpaid losses and LAE. Liabilities include a provision for losses which have occurred but have not yet been reported. These estimates are subject to the effect of trends in future claim severity and frequency experience. Adjustments to such estimates are made from time to time due to changes in loss experience and are reflected in current earnings. The Company's property and casualty insurance subsidiaries rely upon standard actuarial ultimate loss projection techniques to obtain estimates of liabilities for losses and LAE. These projections include the extrapolation of both losses paid and incurred by business line and accident year and implicitly consider the impact of inflation and claims settlement patterns upon ultimate claim costs based upon historical patterns. In addition, methods based upon average loss costs, reported claim counts and pure premiums are reviewed in order to obtain a consistent range of estimates for setting the reserve levels. For further input, loss reserve committees periodically review changes in operations in pertinent areas including underwriting standards, product mix, claims management and legal climate. 6 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, 1994. Included therein are current year data and prior year development. RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
1994 1993 1992 ---- ---- ---- (In thousands) Net liability for losses and LAE at beginning of year (a) $ 889,082 $ 904,326 $938,384 ---------- ---------- -------- Provision for losses and LAE for claims occurring in the current year 679,377 624,048 619,691 Decrease in estimated losses and LAE for claims occurring in prior years (71,484) (84,382) (41,912) ---------- ---------- -------- Total incurred losses and LAE 607,893 539,666 577,779 ---------- ---------- -------- Reclassification of uncollectible reinsurance reserves due to commutations- prior years 15,528 - - ---------- ---------- -------- Losses and LAE payments for claims occurring during: Current year 259,295 236,369 239,055 Prior years 329,303 318,541 372,782 ---------- ---------- -------- 588,598 554,910 611,837 ---------- ---------- -------- 923,905 889,082 904,326 Reserve deducted above for reinsurance not considered collectible 26,547 41,065 34,273 ---------- ---------- -------- 950,452 930,147 938,599 Reinsurance recoverable (b) 117,566 121,721 - ---------- ---------- -------- Liability for losses and LAE at end of year as reported in financial statements $1,068,018 $1,051,868 $938,599 ========== ========== ======== ------------- (a) The liability for losses and LAE at January 1, 1992 excludes approximately $41,998,000 of reinsurance not considered collectible. (b) For 1992, liability for losses and LAE is shown net of reinsurance recoverable.
7 The Company's property and casualty insurance subsidiaries' liability for losses and LAE as of December 31, 1994 was $933,033,000 determined in accordance with SAP and $1,068,018,000 determined in accordance with GAAP. The difference principally relates to liabilities assumed by reinsurers, which are not deducted from GAAP liabilities ($144,113,000), reduced by $4,035,000, net, included in accounts other than property and casualty loss reserves for GAAP and $5,093,000 for salvage and subrogation. The tables below present the development of balance sheet liabilities from 1984 through 1994 and include periods prior to acquisition for the Empire Group and the Colonial Penn P&C Group. Because of substantial differences in the development of reserves of the Empire Group and the Colonial Penn P&C Group, loss and LAE development data is presented separately for each group. The liability line at the top of each table indicates the estimated liability for unpaid losses and LAE recorded as of the dates indicated. The middle section of the table shows the re-estimated amount of the previously recorded liability based on experience as of the end of each succeeding year. As more information becomes available and claims are settled, the estimated liabilities are adjusted upward or downward with the effect of decreasing or increasing net income at the time of adjustment. The lower section of the table shows the cumulative amount paid with respect to the previously recorded liability as of the end of each succeeding year. The "cumulative redundancy (deficiency)" represents the aggregate change in the estimates over all prior years. For example, the initial 1984 liability estimate indicated on the Empire Group table ($156,434,000) has been re-estimated during the course of the succeeding ten years, resulting in a re-estimated liability at December 31, 1994 of $140,989,000, or a redundancy of $15,445,000. If the re-estimated liability exceeded the liability initially established, a cumulative deficiency would be indicated. The cumulative deficiencies reflected in the Colonial Penn P&C Group table are for periods prior to the Company's acquisition of that Group. The Company believes that the Colonial Penn P&C Group's conservatism and improved claims management procedures since acquisition in 1991 have contributed significantly to the creation of the redundancies included in its table below. In evaluating this information, it should be noted that each amount shown for "cumulative redundancy (deficiency)" includes the effects of all changes in amounts for prior periods. For example, the amount of the redundancy (deficiency) related to losses settled in 1988, but incurred in 1984, will be included in the cumulative redundancy (deficiency) amount for 1984, 1985, 1986 and 1987. 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. 8 ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT (THE EMPIRE GROUP)
Year Ended December 31, --------------------------------------------------------------------------------------------------------- 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (In thousands) Liability for Unpaid Losses and Loss Adjustment Expenses $156,434 $165,713 $182,133 $206,709 $222,814 $235,223 $251,401 $280,679 $322,516 $353,917 $406,695 Liability Re-estimated as of: One Year Later $142,474 $160,728 $180,975 $198,384 $213,671 $227,832 $249,492 $280,020 $321,954 $344,156 $ - Two Years Later 144,504 162,962 175,305 194,530 206,088 217,432 245,141 277,866 324,262 Three Years Later 143,635 156,870 170,152 188,843 198,500 212,649 243,849 284,052 Four Years Later 139,113 157,001 168,574 184,564 194,324 211,859 247,314 Five Years Later 139,441 155,413 165,717 181,990 196,070 211,952 Six Years Later 139,584 154,045 164,487 183,015 196,646 Seven Years Later 139,435 154,151 166,266 183,082 Eight Years Later 139,741 155,727 165,953 Nine Years Later 141,054 155,411 Ten Years Later 140,989 Cumulative Redundancy (Deficiency) $ 15,445 $ 10,302 $ 16,180 $ 23,627 $ 26,168 $ 23,271 $ 4,087 $ (3,373) $ (1,746) $ 9,761 $ - ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== Cumulative Amount of Liability Paid Through: One Year Later $ 44,056 $ 51,795 $ 54,359 $ 60,446 $ 64,140 $ 65,822 $ 78,954 $ 89,559 $113,226 $116,986 $ - Two Years Later 74,265 83,249 88,770 97,627 101,206 109,479 126,908 150,043 182,250 Three Years Later 95,527 106,348 114,322 123,092 131,705 140,916 167,330 197,848 Four Years Later 110,368 123,275 130,433 142,910 152,330 166,023 196,099 Five Years Later 120,479 132,618 141,346 155,786 168,117 182,001 Six Years Later 126,094 139,276 149,079 164,213 178,095 Seven Years Later 130,015 143,926 153,681 170,215 Eight Years Later 132,600 146,840 157,332 Nine Years Later 134,881 149,645 Ten Years Later 137,100 Gross Liability - End of Year $391,829 $451,442 Reinsurance 37,912 44,747 -------- -------- Net Liability - End of Year as Shown Above $353,917 $406,695 ======== ======== Gross Re-estimated Liability - Latest $393,045 Re-estimated Reinsurance - Latest 48,889 -------- Net Re-estimated Liability - Latest $344,156 ======== Gross Cumulative Deficiency $ (1,216) ========
9 ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT (THE COLONIAL PENN P&C GROUP)
Year Ended December 31, ---------------------------------------------------------------------------------------------------------- 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (In thousands) Liability for Unpaid Losses and Loss Adjustment Expenses $215,200 $217,000 $324,700 $386,200 $ 410,500 $ 448,800 $626,300 $657,700 $581,810 $535,165 $517,210 Liability Re-estimated as of: One Year Later $193,200 $236,500 $352,600 $389,900 $ 445,600 $ 555,900 $659,800 $616,400 $497,994 $473,442 $ - Two Years Later 198,800 245,900 340,600 409,000 506,800 588,600 619,600 574,000 463,885 Three Years Later 203,500 241,600 338,700 443,700 535,600 563,800 614,000 555,800 Four Years Later 200,000 248,100 359,400 467,300 522,800 565,800 605,900 Five Years Later 197,100 231,200 384,000 459,400 526,700 562,900 Six Years Later 193,500 257,600 375,700 464,700 526,200 Seven Years Later 199,200 250,800 381,300 465,300 Eight Years Later 201,100 255,900 384,900 Nine Years Later 202,900 261,700 Ten Years Later 206,900 Cumulative Redundancy (Deficiency) $ 8,300 $(44,700) $(60,200) $(79,100)$(115,700) $(114,100)$ 20,400 $101,900 $117,925 $ 61,723 $ - ======== ======== ======== ======== ========= ========= ======== ======== ======== ======== ======== Cumulative Amount of Liability Paid Through: One Year Later $105,500 $126,200 $177,100 $207,700 $ 243,300 $ 258,500 $279,300 $283,200 $205,200 $212,317 $ - Two Years Later 156,600 178,500 249,800 304,000 353,300 387,500 432,500 390,100 317,492 Three Years Later 177,500 208,600 288,700 356,800 419,900 467,500 492,900 461,000 Four Years Later 187,600 227,600 313,700 393,100 462,200 496,400 536,500 Five Years Later 195,600 213,100 332,700 416,800 476,400 523,400 Six Years Later 187,000 223,000 343,600 425,500 496,900 Seven Years Later 190,800 227,800 349,200 441,800 Eight Years Later 192,700 231,100 366,000 Nine Years Later 194,400 245,800 Ten Years Later 203,200 Gross Liability - End of Year $660,039 $616,576 Reinsurance 124,874 99,366 -------- -------- Net Liability - End of Year as Shown Above $535,165 $517,210 ======== ======== Gross Re-estimated Liability - Latest $592,052 Re-estimated Reinsurance - Latest 118,610 -------- Net Re-estimated Liability - Latest $473,442 ======== Gross Cumulative Redundancy $ 67,987 ========
10 LIFE INSURANCE The principal life insurance products offered during the three year period ended December 31, 1994 were "Graded Benefit Life" and variable annuity products. The Company profitably increased sales of these products in 1994 and continues to explore the development of other new products for its niche markets. Through its various subsidiaries, the Company is licensed in all 50 states, the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands and generally sells its products throughout most of the United States. Total direct life insurance in force as of December 31, 1994 was $2.3 billion. The following table reflects premium receipts on variable annuity and other investment oriented products and premiums earned on other life and health insurance products. Variable annuity and other investment oriented product premium receipts are not recorded as revenue under GAAP but are recorded in a manner similar to a deposit, and are included below.
Year Ended December 31, ---------------------------------------- 1994 1993 1992 ---- ---- ---- (In thousands) Graded Benefit Life $113,678 $109,838 $109,552 Variable Annuity 98,557 81,484 58,207 Other Investment Oriented Products 9,523 6,828 9,828 Agent-sold Medicare Supplement Products (1) 35,967 47,364 62,724 Other Health Products 16,225 18,992 22,367 Other 2,629 495 1,847 -------- -------- -------- Total (2) $276,579 $265,001 $264,525 ======== ======== ======== ------------------ (1) Effective December 31, 1992, the Company ceased marketing Medicare Supplement products through agents. (2) Excludes premium receipts (refunds) in 1993 and 1992 of ($1,655,000) and $28,745,000, 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. Benefits paid are less than the face amount of the policy during the first two years, except in cases of accidental death. Graded Benefit Life is marketed using direct response marketing techniques. New policyholder leads are generated primarily from television advertisements. The Company intends to continue to concentrate its marketing efforts towards soliciting new policyholders where the cost is justified, upgrading existing policyholders' policy packages and obtaining referrals from existing policyholders. Investment Oriented Products. The principal investment oriented product offered is a no-load variable annuity ("VA") product. The VA product is marketed as an investment vehicle to individuals seeking to defer, 11 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 Scudder, Stevens and Clark, a mutual fund manager. Medicare Supplement Products. In 1992, the Company decided to discontinue actively marketing Medicare supplement products due to increased competition in this market. The increased competition resulted from federal and state regulation that mandated standardization of such products. The Company does continue to offer, on a profitable basis, renewals of its non-standardized products to existing policyholders. The Company expects its renewals of these products will continue to decline in the future. INSURANCE OPERATIONS - GENERAL Investments Investment activities represent a significant part of the Company's insurance related revenues and profitability. Investments are managed by the Company's investment advisors under the direction of, and upon consultation with, the Company's several investment committees. The Company's insurance subsidiaries have a diversified investment portfolio of securities, substantially all of which are rated "investment grade" by Moody's and/or S&P or issued or guaranteed by the U.S. Treasury or by governmental agencies. The Company's insurance subsidiaries do not generally invest in less than "investment grade" or "non-rated" securities, real estate or mortgages, although from time to time they may make such investments in amounts not expected to be material. In the recent rising interest rate environment, the Company's primary goal has been to preserve investment capital. The composition of the Company's insurance subsidiaries' investment portfolio as of December 31, 1994 and 1993 was as follows:
PROPERTY AND CASUALTY LIFE AND HEALTH --------------------- --------------------- 1994 1993 1994 1993 ---- ---- ---- ---- (Dollars in thousands) Bonds and notes: U.S. Government and agencies 73% 75% 77% 75% Rated investment grade 23 22 16 19 Non rated - other - - 1 1 Rated less than investment grade 1 - 1 - Policyholder loans - - 2 2 Equity securities 1 1 1 1 Other, principally accrued interest 2 2 2 2 --- --- --- --- Total 100% 100% 100% 100% Estimated average yield to maturity === === === === of bonds and notes (a) 6.5% 6.2% 6.2% 6.2% Estimated average remaining life of bonds and notes (a) 3.5 yrs. 4.5 yrs. 3.9 yrs. 5.1 yrs. Carrying value of investment portfolio $1,603,083 $1,650,085 $772,137 $779,739 Market value of investment portfolio $1,602,242 $1,651,411 $771,553 $780,867 ----------------- (a) Excludes trading securities, which are not significant.
12 Reinsurance Reinsurance is obtained for investment oriented products for face amounts in excess of $500,000 per life. The life insurance subsidiaries generally do not obtain reinsurance for the Graded Benefit Life products because these policies generally have a low face amount. The Colonial Penn P&C Group obtained reinsurance for casualty risks in excess of $2,000,000 in 1994 and 1993, although 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 retained limit for workers' compensation was $500,000 from July 1, 1992 through December 31, 1994 and $200,000 from January 1, 1992 through June 30, 1992; for other property and casualty lines, the Empire Group's maximum retained limit was $225,000 for 1994 and 1993 and $175,000 for 1992. Additionally, the Company's property and casualty insurance subsidiaries have entered into certain excess of loss and catastrophe treaties to protect against certain losses. The Colonial Penn P&C Group's retention of lower level losses in such treaties was $11,000,000 in 1994 and 1993, and $4,000,000 in 1992. Although the Group has completed its 1995 reinsurance program at acceptable upper loss limits, it was unable to obtain 1994 levels of deductibility at reasonable cost. Accordingly, the Group's retention of lower level losses was increased to $15,000,000. The Empire Group's retention of lower level losses in such treaties was $3,000,000 for 1994 and 1993, and $1,750,000 for 1992. The Company has not experienced any material losses to date in 1995, including losses relating to recent storm damage in California. Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of the policy liability, it does make the assuming reinsurer liable to the insurer to the extent of the reinsurance ceded. The Company's reinsurance generally has been placed with certain of the largest reinsurance companies, including (with their respective Best ratings) General Reinsurance Corporation (A++), Lincoln National Life Insurance Co. (A+) and Munich American Reinsurance Company (A++), each of which the Company believes to be financially capable of meeting its respective obligations. However, to the extent that any reinsuring company is unable to meet its obligations, the Company's insurance subsidiaries would be liable for the reinsured risks. The Company has established reserves, which the Company believes are adequate, for any nonrecoverable reinsurance. Competition The insurance industry is a highly competitive industry, in which many of the Company's competitors have substantially greater financial resources, larger sales forces, more widespread agency and broker relationships, and more diversified lines of insurance coverage. Additionally, certain competitors market their products with endorsements from affinity groups, while the Company's products are for the most part unendorsed, which may give such other companies a competitive advantage. Congress is considering changes to federal banking laws, certain of which could result in banks being able to offer insurance products in direct competition with the Company. The Company is unable to determine what effect, if any, such changes may have on the Company's operations. VA products are subject to regulation both as insurance policies and as securities. 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 distributions is taxed as ordinary income. 13 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 (including catastrophe losses), interest rates, state regulation, court decisions and judicial climate, all of which are outside the Company's control. Government Regulation Insurance companies are subject to detailed regulation and supervision in the states in which they transact business. Such regulation pertains to matters such as approving policy forms and various premium rates, minimum reserves and loss ratio requirements, the type and amount of investments, minimum capital and surplus requirements, granting and revoking licenses to transact business, levels of operations and regulating trade practices. The majority of the Company's property and casualty insurance operations are in states requiring prior approval by regulators before proposed rates may be implemented. Certain states have indicated that they may change the bases (e.g., age, sex and geographic location) on which rates traditionally have been established. Rates proposed for life insurance generally become effective immediately upon filing. Insurance companies are required to file detailed annual reports with the supervisory agencies in each of the states in which they do business, and are subject to examination by such agencies at any time. Increased regulation of insurance companies at the state level and new regulation at the federal level is possible, although the Company cannot predict the nature or extent of any such regulation or what impact it would have on the Company's operations. The National Association of Insurance Commissioners ("NAIC") has adopted model laws incorporating the concept of a "risk based capital" ("RBC") requirement for insurance companies. Generally, the RBC formula is designed to measure the adequacy of an insurer's statutory capital in relation to the risks inherent in its business. The RBC formula is used by the states as an early warning tool to identify weakly capitalized companies for the purpose of initiating regulatory action. Each of the Company's insurance subsidiaries' RBC ratio as of December 31, 1994 substantially exceeded minimum requirements. The NAIC also has adopted various ratios for insurance companies which, in addition to the RBC ratio, are designed to serve as a tool to assist state regulators in discovering potential weakly capitalized companies or companies with unusual trends. Generally, insurance companies having three or more of such ratios outside their "normal" range may be designated as requiring regulatory attention. Charter had four "other than normal" NAIC ratios for the year ended December 31, 1994, three of which related to either the 1993 reinsurance of a block of life insurance business described under "Management's Discussion and Analysis of Financial Condition and Results of Operations" or Charter's investment in its insurance subsidiaries. The Company believes that there are no underlying problems or weaknesses at Charter and that it is unlikely that material adverse regulatory action will be taken. On November 8, 1988, California voters passed Proposition 103, an insurance initiative that requires, among other things, a 20% rollback in insurance rates for policies written or renewed during the twelve month period beginning November 8, 1988. In November 1994, the Colonial Penn P&C Group received an order requiring it to refund $35,300,000, plus $21,700,000 of interest as its rollback obligation. The Colonial Penn P&C Group disagrees with the calculation of the assessment. The Company is in discussions with the California Department of Insurance and has filed a request for a formal hearing should informal discussions fail 14 to come to a satisfactory conclusion. The Company believes that the ultimate resolution of this matter will not have a material adverse effect on the Company's financial condition or results of operations and will not exceed reserves established in prior years. The Company's insurance subsidiaries are members of state insurance funds which provide certain protection to policyholders of insolvent insurers doing business in those states. Due to insolvencies of certain insurers in recent years, the Company's insurance subsidiaries have been assessed certain amounts which have not been material and are likely to be assessed additional amounts by state insurance funds. The Company believes that it has provided for all anticipated assessments and that any additional assessments will not have a material adverse effect on the Company's financial condition or results of operations. BANKING AND LENDING The Company's banking and lending operations primarily are conducted through American Investment Bank, N.A. ("AIB"), its national bank subsidiary, American Investment Financial ("AIF"), an industrial loan corporation, and Transportation Capital Corp. ("TCC"), a small business investment company. AIB and AIF take money market and other non-demand deposits that are eligible for insurance provided by the FDIC. At December 31, 1994, AIB and AIF had deposits of $179,888,000 compared to $173,365,000 at December 31, 1993. AIB and AIF currently have several deposit-taking and lending facilities in the Salt Lake City area. TCC makes collateralized loans to operators of medallion taxicabs and limousines. At December 31, 1994, the Company's consolidated banking and lending operations had outstanding loans (net of unearned finance charges) of $264,196,000 compared to $205,744,000 at December 31, 1993. At December 31, 1994, 49% were loans to individuals generally collateralized by automobiles; 22% were unsecured loans to individuals acquired from others in connection with investments in limited partnerships; 23% were unsecured loans to executives and professionals; 4% were loans to small business concerns collateralized principally by taxicab medallions and other personal property; and 2% were instalment loans to consumers, substantially all of which were collateralized by real or personal property. It is the Company's policy to charge to income an allowance for losses which, based upon management's analysis of numerous factors, including current economic trends, aging of the loan portfolio and historical loss experience, is deemed adequate to cover reasonably expected losses on outstanding loans. At December 31, 1994, the allowance for loan losses for the Company's entire loan portfolio was $12,308,000 or 4.7% of the net outstanding loans, compared to $8,341,000 or 4.1% of net outstanding loans at December 31, 1993. The funds generated by the deposits are primarily used to make instalment loans, including collateralized personal automobile loans to individuals who have difficulty in obtaining credit. These automobile loans are made at interest rates above those charged to individuals with good credit histories. In determining which individuals qualify for these loans, the Company takes into account a number of highly selective criteria with respect to the individual as well as the collateral to attempt to minimize the number of defaults. Additionally, the Company closely monitors these loans and takes prompt possession of the collateral in the event of a default. For the three year period ended December 31, 1994, the Company generated $182,448,000 of these loans ($101,000,000 during 1994). At December 31, 1994, the allowance for loan losses for this portfolio was $7,771,000 or 6% of net outstanding loans; actual loss experience has been 1.7% 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 continued growth in this niche market. 15 The Company's lending operations compete with banks, savings and loan associations, credit unions, credit card issuers and consumer finance companies, many of which are able to offer financial services on very competitive terms. Additionally, substantial national financial services networks have been formed by major brokerage firms, insurance companies, retailers and bank holding companies. Some competitors have substantial local market positions; others are part of large, diversified organizations. The Company's principal lending operations are subject to detailed supervision by state authorities, as well as federal regulation pursuant to the Federal Consumer Credit Protection Act and regulations promulgated by the Federal Trade Commission. The Company's banking operations are subject to federal and state regulation and supervision by, among others, the Office of the Comptroller of the Currency (the "OCC"), the FDIC and the State of Utah. AIB's primary federal regulator is the OCC, while the primary federal regulator for AIF is the FDIC. The Competitive Equality Banking Act of 1987 ("CEBA") places certain restrictions on the operations and growth of AIB and restricts further acquisitions of banks and savings institutions by the Company. CEBA does not restrict the growth of AIF as currently operated. TRADING STAMPS The Company's trading stamp business is conducted by The Sperry and Hutchinson Company, Inc. ("S&H"). 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, sales for both the industry and S&H have been declining. The Company expects that this 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. 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. The Company's trading stamp business competes with other incentive companies and other forms of promotional and merchandising techniques. Retail establishments, 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, and padding, absorbent, erosion control and proprietary plastic netting products for various industrial and agricultural markets. Bathroom vanities and related products are sold through manufacturers' representatives, primarily to home improvement centers. Principally due to operating inefficiencies and pricing pressures, this division has not operated profitability in recent years. In 1994, the Company commenced a restructuring program to 16 reevaluate and reduce its existing product lines, to review the manufacturing process and to reduce overhead. The Company is unable to predict if this division's restructuring efforts will result in a return to profitability. 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 and automobile industries. Through its various manufacturing divisions, the Company holds patents on certain improvements to the basic manufacturing processes and on applications thereof. The Company believes that the expiration of these patents, individually or in the aggregate, is unlikely to have a material effect on manufacturing operations. OTHER OPERATIONS AND INVESTMENTS The Company also owns non-controlling equity interests representing more than 5% of the outstanding capital stock of each of the following domestic public companies at December 31, 1994: Carmike Cinemas, Inc. ("Carmike") (approximately 8% of Class A shares), Jones Plumbing Systems, Inc. ("Jones") (approximately 21%), Jordan Industries, Inc. ("JII") (approximately 11%) and Olympus Capital Corporation (approximately 17%). In April 1994, the Company acquired a 30% interest in Caja de Ahorro y Seguro S.A. ("Caja") from the government of Argentina for a preliminary purchase price of approximately $46,000,000, including costs. Caja is a holding company whose subsidiaries are engaged in property and casualty insurance, life insurance and banking in Argentina. The preliminary purchase price is subject to adjustment based upon the reduction in Caja's net assets from December 31, 1993 to the acquisition date. Amounts included in the Company's results of operations for Caja since acquisition have not been material. A subsidiary of the Company is a partner in The Jordan Company and Jordan/Zalaznick Capital Company. These partnerships each specialize in structuring leveraged buyouts in which the partners are given the opportunity to become equity participants. 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 $29,147,000 in these partnerships and related companies and, through December 31, 1994, has received approximately $69,728,000 (consisting of cash, interest bearing notes and other receivables) relating to the disposition of investments and management and other fees. At December 31, 1994, through these partnerships, the Company had interests in an aggregate of 16 companies (the "Jordan Associated Companies"), which are carried in the Company's consolidated financial statements at $12,270,000. The Jordan Associated Companies include JII, Carmike and Jones. Certain subsidiaries of the Company remain under the control of the Wisconsin Insurance Commissioner as a result of rehabilitation or liquidation proceedings initiated prior to their acquisition by the Company. The Company believes only two of these subsidiaries have any residual value to the Company. The Company estimates that the fair value of the net tangible assets of these subsidiaries is approximately $34,000,000 in excess of their recorded carrying value at December 31, 1994. Although the Company expects to receive these assets, the Company is unable to predict when these subsidiaries will be returned to its control. 17 In 1994, the Company expanded its real estate investments by acquiring a 615,000 square foot office building located near Grand Central Terminal in New York City, and two luxury residential condominium towers in downtown San Diego, California. The New York City office building, which was purchased for $50,800,000, has 355,000 square feet of contiguous space available for occupancy. After certain improvements to the building are completed, the Company intends to lease the available space. The San Diego towers were acquired for $42,000,000 through the Company's acquisition of HSD Venture. HSD Venture, a California general partnership that had been in reorganization proceedings under chapter 11 of the Bankruptcy Code, is the developer and owner of the towers, which include 202 residential units, 180 of which are for sale, and 42,000 square feet of retail space. For further information about the Company's business, reference is made to "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this report. Item 2. Properties. ------ ---------- Through its various subsidiaries, the Company owns and utilizes in its operations the following significant properties: two office buildings located in Valley Forge, Pennsylvania used by the Colonial Penn P&C Group (totaling approximately 198,700 sq. ft.), one of which is located on land leased from a third party; two offices in Salt Lake City, Utah used for corporate and banking and lending activities (totaling approximately 77,000 sq. ft.); and an office building in Philadelphia, Pennsylvania used by the life insurance companies (approximately 127,000 sq. ft.). In addition, subsidiaries of the Company own 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 and its subsidiaries lease numerous manufacturing, warehousing, office and headquarters facilities. The facilities vary in size and have leases expiring at various times, subject, in certain instances, to renewal options. See Notes to Consolidated Financial Statements. 18 Item 3. Legal Proceedings. ------ ----------------- PHLCORP MERGER As previously disclosed, in connection with the 1992 merger of Phlcorp, Inc. ("Phlcorp"), (then a 63.1% owned public subsidiary of the Company), with and into a wholly owned subsidiary of the Company (the "Phlcorp Merger"), two actions were filed by minority shareholders of Phlcorp in the Supreme Court of the State of New York, County of New York. The parties entered into a memorandum of understanding to settle the matter on terms not material to the Company, subject to plaintiffs' conducting confirmatory discovery and the court's approval of the settlement. Discovery has been completed and the parties have entered into a stipulation of settlement, subject to court approval, which dismisses these actions with prejudice. Defendants believe that the material allegations of these complaints are without merit and, if not settled, intend to defend these actions vigorously. PINNACLE LITIGATION On May 11, 1994, a shareholder of the Company filed a purported derivative action on behalf of the Company against the Company's current Board of Directors and one former director, Melvin Hirsch. The action was filed in the United States District Court for the Southern District of New York and is entitled Pinnacle Consultants, --------------------- Ltd. v. Leucadia National Corporation, et al. (C.A. No. 94 Civ. 3496). ---- ------------------------------------- Plaintiff alleges that the New York Business Corporation Law (the "BCL") prohibited the Company from issuing warrants to Ian Cumming and Joseph Steinberg, Chairman and President, respectively, of the Company, for the purchase of common shares of the Company. Plaintiff also alleges that the Company's 1990 Proxy Statement, which sought approval of a merger of Marks Investing Company into the Company, was false and misleading because it did not disclose that, under the BCL, common shares of the Company owned by the partnership that was the principal shareholder of the Company could not be voted on the merger. The complaint alleges claims for violations of the Racketeer Influence and Corrupt Organizations Act, Section 14(a) of the Securities Exchange Act of 1934 and state law claims for waste, breach of fiduciary duty and fraud and seeks monetary damages in an unspecified amount. Defendants have moved to dismiss the complaint. Briefing on the motion to dismiss is complete and the motion is currently scheduled to be argued on June 23, 1995. The Court has stayed all discovery in the action pending resolution of defendants' motion to dismiss. 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. 19 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, 1995, 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 54 Chairman of the Board June 1978 Joseph S. Steinberg 51 President January 1979 Thomas E. Mara 49 Executive Vice President May 1980; and Treasurer January 1993 Lawrence S. Hershfield 38 Executive Vice President July 1993 Joseph A. Orlando 39 Vice President and January 1994; Comptroller March 1994 Paul J. Borden 46 Vice President August 1988 Mark Hornstein 47 Vice President July 1983 Ruth Klindtworth 60 Secretary and Vice President- February 1976; Corporate Administrator January 1990 David K. Sherman 29 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 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 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. In addition, he has served as a director of Allcity since October 1994. 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. From 1981 to April 1990, he served in a variety of executive positions with a former public subsidiary of the Company, including President. Mr. Orlando, a certified public accountant, has served as Comptroller of the Company since March 1994 and as Vice President of the Company since January 1994. Mr. Orlando previously served in a variety of capacities with the Company and its subsidiaries since 1987, including Chairman of S&H. Mr. Borden joined the Company as Vice President in August 1988 and has served in a variety of other capacities with the Company and its subsidiaries. Mr. Hornstein joined the Company as Vice President in July 1983 and has served in a variety of other capacities with the Company and its subsidiaries. 20 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. 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. 21 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 ---- --- 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 $43.63 $38.25 Second Quarter 38.88 35.50 Third Quarter 37.63 34.63 Fourth Quarter 46.25 36.13 1995 ---- First Quarter (through March 16, 1995) $48.63 $42.88
(b) Holders. ------- As of March 16, 1995, there were approximately 5,803 record holders of the Common Shares. (c) Dividends. --------- The Company paid dividends of $.25 per Common Share on December 30, 1994 and December 15, 1993. 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. 22 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 31, --------------------------------------------------------------------- 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- (In thousands, except per share amounts) SELECTED INCOME STATEMENT DATA: (a) Revenues $1,384,385 $1,408,058 $1,573,015 $1,086,748 $674,914 Net securities gains (losses) (12,004) 51,923 51,778 50,391 (1,525) Interest expense (b) 44,003 39,465 38,507 36,925 34,604 Insurance losses, policy benefits and amortization of deferred acquisition costs 819,010 789,752 896,673 558,127 232,986 Income from continuing operations before income taxes and cumulative effects of changes in accounting principles 100,318 176,868 143,553 95,030 78,938 Income from continuing operations before cumulative effects of changes in accounting principles 70,836 116,259 130,607 94,830 65,010 (Loss) from discontinued operations less applicable income taxes - - - - (17,670) Income before cumulative effects of changes in accounting principles 70,836 116,259 130,607 94,830 47,340 Cumulative effects of changes in accounting principles - 129,195 - - - Net income 70,836 245,454 130,607 94,830 47,340 Per share: Primary earnings (loss) per common and dilutive common equivalent share: Continuing operations before cumulative effects of changes in accounting principles $2.43 $3.97 $5.35 $4.00 $2.68 Discontinued operations - - - - (.73) Cumulative effects of changes in accounting principles - 4.41 - - - ----- ----- ----- ----- ----- Net income $2.43 $8.38 $5.35 $4.00 $1.95 ===== ===== ===== ===== ===== Fully diluted earnings (loss) per common share: Continuing operations before cumulative effects of changes in accounting principles $2.41 $3.89 $5.33 $3.97 $2.68 Discontinued operations - - - - (.73) Cumulative effects of changes in accounting principles - 4.20 - - - ----- ----- ----- ----- ----- Net income $2.41 $8.09 $5.33 $3.97 $1.95 ===== ===== ===== ===== ===== -------------------------------- Footnotes on following page. 23 AT DECEMBER 31, --------------------------------------------------------------------- 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- (In thousands, except per share amounts) SELECTED BALANCE SHEET DATA: (a) Cash and investments $2,764,890 $2,989,384 $3,371,624 $3,627,542 $1,741,273 Total assets 4,674,046 4,689,272 4,330,580 4,590,096 2,406,438 Debt, including current maturities 425,848 401,335 225,588 220,728 208,458 Customer banking deposits 179,888 173,365 186,339 194,862 176,366 Common shareholders' equity 881,815 907,856 618,161 365,495 268,567 Book value per common share $31.44 $32.54 $22.12 $15.89 $11.82 YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- SELECTED INFORMATION ON PROPERTY AND CASUALTY INSURANCE OPERATIONS (Unaudited): (a)(c) GAAP Combined Ratio 99.1% 96.9% 101.7% 102.1% 105.2% SAP Combined Ratio 98.8% 93.7% 102.8% 103.3% 100.8% Industry SAP Combined Ratio (d) N/A 106.9% 115.7% 108.8% 109.5% Premium to Surplus Ratio (e) 1.9x 1.6x 2.0x 2.2x 1.4x ------------------------- (a) Data includes acquired companies from date of acquisition. (b) Includes interest on customer banking deposits. (c) Certain accident and health insurance business, which is included in the statutory results of operations of the property and casualty insurance segment and is reflected in the SAP Combined Ratio, is reported in the life insurance segment for financial reporting purposes and therefore is not included in the GAAP Combined Ratios reflected herein. The Combined Ratio does not reflect the effect of investment income. For 1993, the difference in the treatment of costs for GAAP and SAP purposes was a principal reason for the difference between the GAAP Combined Ratio and the SAP Combined Ratio. For 1992, the results of certain accident and health insurance business had a non-recurring income item which reduced the SAP Combined Ratio. In addition, in 1992 certain income credits were recognized only for GAAP purposes. (d) Source: Best's Aggregates & Averages, Property/Casualty, 1994 Edition. Industry Combined Ratios may not be fully comparable as a result of, among other things, differences in geographical concentration and in the mix of property and casualty insurance products. (e) Premium to Surplus Ratio was calculated by dividing statutory property and casualty insurance premiums written by statutory capital at the end of the year.
24 Item 7. Management's Discussion and Analysis of Financial Condition ----------------------------------------------------------- and Results of Operations. ------------------------- The purpose of this section is to discuss and analyze the Company's consolidated financial condition, liquidity and capital resources and results of operations. This analysis should be read in conjunction with the consolidated financial statements and related notes which appear elsewhere in this report. LIQUIDITY AND CAPITAL RESOURCES Parent Company Liquidity. Leucadia National Corporation (the ------------------------ "Parent") is a holding company whose assets principally consist of the stock of its several direct subsidiaries. Additionally, the Parent 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 Parent does not have any material arrangement, commitment or understanding with respect thereto, further acquisitions, divestitures, investments and changes in capital structure are possible. Its principal sources of funds are its available cash resources, bank borrowings, public financings, repayment of subsidiary advances, funds distributed from its subsidiaries as tax sharing payments, management and other fees, and borrowings and dividends from its regulated and non-regulated subsidiaries. It has no substantial recurring cash requirements other than payment of interest and principal on its debt, tax payments and corporate overhead expenses. The Parent maintains the principal borrowings for the Company and its non-banking subsidiaries and has provided working capital to certain of its subsidiaries. These borrowings have primarily been made on an unsecured basis from banks through various credit agreement facilities and term loans, and through public financings. During the year ended December 31, 1994, the Company did not utilize its $150,000,000 bank credit agreement facilities, except for certain minor amounts borrowed to meet daily cash requirements. These agreements were renewed during 1994 to expire in June 1997. In June 1994, the Parent entered into a $50,000,000 five-year term loan agreement with certain of its bank lenders. The term loan and the bank credit agreement facilities bear interest based on the prime rate or LIBOR. The Company is exposed to interest rate risk related to its variable rate borrowings. The Company has entered into interest rate swap and interest rate option agreements to reduce the impact of changes in interest rates on its variable rate debt. Counterparties to these agreements are major financial institutions, which the Company believes are able to fulfill their obligations; however, if they are not, the Company believes that any losses would not be material. There are no restrictions on distributions from the non-regulated subsidiaries and therefore all cash available to these subsidiaries is available to the Parent for general corporate purposes, including acquisitions. The Parent and its non-regulated subsidiaries had aggregate cash and temporary investments of approximately $63,500,000 at December 31, 1994. Based on discussions with commercial and investment bankers, the Company believes that it has the ability to raise additional funds under acceptable conditions for use in its existing businesses or for appropriate investment opportunities. Since 1993, the Company's senior debt obligations have been rated as "investment grade" by Moody's, S&P and Duff & Phelps Inc. Ratings issued by bond rating agencies are subject to change at any time. At December 31, 1994, a maximum of approximately $38,200,000 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 regulated subsidiaries, although no amounts were outstanding at December 31, 1994 or borrowed to date in 1995. The Parent also receives tax sharing payments from subsidiaries included in its consolidated income tax return, including certain regulated subsidiaries. Because of the tax loss carryforwards available to the Parent and certain subsidiaries, together with current interest deductions and corporate expenses, the amount paid by the Parent for income taxes is substantially less 25 than tax sharing payments received from its subsidiaries. In addition, the Parent receives payments from the regulated and non-regulated entities for services provided by the Parent. Payments from regulated subsidiaries for dividends, tax sharing payments, other services and purchases of assets totaled $105,400,000 and $101,000,000 during the years ended December 31, 1994 and 1993, respectively. Consolidated Liquidity. During each of the three years in the ---------------------- period ended December 31, 1994, the Company operated profitably and in the year ended December 31, 1994, 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, principally as a result of payments made in connection with reinsurance transactions. In April 1994, the Company acquired a 30% interest in Caja from the government of Argentina for a preliminary purchase price of approximately $46,000,000, including costs. The preliminary purchase price is subject to adjustment based upon the reduction in Caja's net assets from December 31, 1993 to the acquisition date. The Company believes that the level of Caja's operating costs could not be justified by its existing revenue base. Accordingly, the new management of Caja has implemented an extensive restructuring plan including a substantial reduction in the number of employees and a consolidation of Caja's offices. The Company believes Caja's restructuring efforts have increased its operating efficiency since acquisition, although there can be no assurance that this will continue. Amounts included in the Company's results of operations for Caja since acquisition have not been material. Recent economic instability in Mexico has affected several Latin American countries and has caused a withdrawal of foreign funds invested in publicly traded Argentine government and corporate securities, a contraction in the money supply and significantly higher interest rates in Argentina. Although Argentina's economic policies appear sound, and the recently announced multi-billion dollar international loan package for Argentina should aid its economic program, if the liquidity crisis does not improve, the Company's investment in Caja could suffer. In addition, the Company's investment is subject to the foreign currency exchange risk of a devaluation of the Argentine peso against the United States dollar, although the Argentine government has indicated that a devaluation is not being considered. During 1994, the Company invested approximately $25,000,000 in the Russian privatization program. Through this program, the Company acquired equity interests in various companies through auctions conducted by the Russian government. Investing in the emerging markets of Russia is subject to foreign exchange risk, political risk and uncertainty concerning the government's ability to succeed in its program to convert to a market economy, all of which are beyond the Company's control. Given these uncertainties, the Company is accounting for these investments under the cost recovery method. These investments have a balance of approximately $19,600,000 at December 31, 1994. In May 1994, the Company acquired a 615,000 square foot office building located near Grand Central Terminal in New York City for approximately $50,800,000. The building has approximately 355,000 square feet of contiguous space available for occupancy. After certain improvements to the building are completed, the Company intends to lease the available space to third parties. Should lease rates not be deemed adequate, the Company may use some of the available space for its operations. In July 1994, the Company acquired HSD Venture, a California general partnership which was in reorganization proceedings under chapter 11 of the Bankruptcy Code, for approximately $42,000,000. HSD Venture is the developer and owner of two luxury condominium towers in downtown San Diego, California. The property includes approximately 202 residential units, of which approximately 180 are available for sale, and approximately 42,000 square feet of retail space. Marketing of the remaining units has commenced. 26 The funds for the investments described above were provided from general corporate funds available to the Parent company. The investment portfolios of the Company's insurance subsidiaries are principally fixed maturity investments rated "investment grade" or U.S. governmental agency issued or guaranteed obligations, although limited investments in "non rated" or rated less than "investment grade" securities have been made from time to time. The investment strategy of the insurance subsidiaries has been to maintain a high quality portfolio of publicly traded, fixed income securities with a relatively short duration. Principally as a result of increases in market interest rates during 1994, the unrealized gain on investments at the end of 1993 of approximately $49,912,000 (net of taxes) became an unrealized loss of approximately $41,309,000 (net of taxes) as of December 31, 1994. While this has resulted in a reduction in shareholders' equity, it had no effect on results of operations or cash flows. The estimated average yield to maturity of bonds and notes in the Company's investment portfolio was higher at December 31, 1994 than at the end of the preceding year. During the three years ended December 31, 1994, the property and casualty insurance industry suffered unprecedented losses from natural disasters, including the Northridge, California earthquake and winter storms in 1994, winter storm and fire related losses in 1993 and Hurricane Andrew in 1992. The Company's insurance subsidiaries also suffered certain of such losses, although as described below in "Results of Operations," their catastrophe reinsurance programs substantially reduced the economic losses in 1994 and 1992. As a result of the industry's losses, the Company has seen a notable decrease in the availability of reinsurance at reasonable rates, particularly at low levels of deductibility. Although the reinsurance programs have been completed at acceptable upper loss limits (albeit at a somewhat increased cost), the insurance subsidiaries have been unable to maintain previous levels of deductibility at reasonable cost. Accordingly, in 1995, the Company raised its retention of lower level losses from $11,000,000 to $15,000,000. In spite of the natural disasters, the Company did not incur losses in excess of its maximum reinsurance during the last three years. Further, the Company has not experienced any material losses to date in 1995, including losses relating to recent storm damage in California. On November 8, 1988, California voters passed Proposition 103, an insurance initiative that requires, among other things, a 20% rollback in insurance rates for policies written or renewed during the twelve month period beginning November 8, 1988. In November 1994, the Colonial Penn P&C Group received an order requiring it to refund $35,300,000, plus $21,700,000 of interest as its rollback obligation. The Colonial Penn P&C Group disagrees with the calculation of the assessment. The Company is in discussions with the California Department of Insurance and has filed a request for a formal hearing should informal discussions fail to come to a satisfactory conclusion. The Company believes that the ultimate resolution of this matter will not have a material adverse effect on the Company's financial condition or results of operations and will not exceed reserves established in prior years. In recent years there has been significant uncertainty with respect to potential additional assessments from the New Jersey insurance pool for high-risk drivers. During 1994, there were significant legislative and other developments which resolved the uncertainty. In February 1994, the Colonial Penn P&C Group paid approximately $5,300,000, which had been reserved for in prior years, representing its share of the losses of this insurance pool. The NAIC has adopted a model law incorporating the concept of a risk based capital ("RBC") requirement for insurance companies. 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 is used by the states as an early warning tool to identify weakly capitalized companies for the purpose of initiating regulatory action. Each 27 of the Company's insurance subsidiaries' RBC ratio as of December 31, 1994 substantially exceeded the minimum requirements. Based on its experience since 1988 in providing collateralized automobile 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 these loans. The Company's investment in these loans was $129,512,000, $73,321,000 and $47,890,000 at December 31, 1994, 1993 and 1992, respectively. The Company expects to further increase its investment in these loans in 1995. 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. As a result of receiving required prepayments and the subsequent sale of the bonds in the first quarter of 1994, the Company reported a pre-tax gain of $8,458,000. In the fourth quarter of 1994, the Company sold its remaining interest in Bolivian Power Company Limited ("Bolivian Power") to an unaffiliated party for cash of approximately $18,000,000. The Company recorded a pre-tax gain of approximately $14,500,000. The Company's 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 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 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 has been amortizing the aggregate apparent excess over a five year period. Based upon the most recent studies, the unamortized apparent excess was approximately $5,358,000 at December 31, 1994 and $17,067,000 at December 31, 1993. The Company will continue to monitor current redemptions and estimates of ultimate redemptions. The Company is to receive, without additional consideration, the residual interest in two subsidiaries that remain under the control of the Wisconsin Insurance Commissioner; however the timing of receipt of these assets is uncertain. The Company estimates that the fair value of the net tangible assets of these subsidiaries was approximately $34,000,000 in excess of their carrying amount at December 31, 1994. The underlying assets of these subsidiaries are principally invested in high quality, interest bearing securities. The Company and certain of its subsidiaries, including Phlcorp and its subsidiaries, have substantial loss carryforwards and other tax attributes (as more fully discussed in the 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 certificate of incorporation contains provisions which generally restrict the ability of a person or entity from accumulating at least five percent of the Common Shares and the ability of persons or entities now owning at least five percent of the 28 Common Shares from acquiring additional Common Shares. The Company has 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 is based, in part, on certain proposed regulations affecting the use of Phlcorp's tax loss carryforwards. As described in the Notes to the Consolidated Financial Statements, significant additional amounts may be available under certain circumstances. Results of Operations --------------------- The Company's most significant operations are its insurance businesses, where it is a specialty markets provider of property and casualty and life insurance to its niche markets. For the year ended December 31, 1994, the Company's insurance segments contributed 79% of total revenues and, at December 31, 1994, constituted 78% of total assets. Earned premium revenues and commissions of the property and casualty insurance operations of the Empire Group were approximately $299,200,000 in 1994, $259,400,000 in 1993 and $243,100,000 in 1992. The increase in 1994 principally resulted from growth in policies in force, while the increase in 1993 was attributable to a combination of increased premium rates and increased insurance in force. Earned premium revenues of the Colonial Penn P&C Group were approximately $447,200,000 in 1994, $452,600,000 in 1993 and $456,000,000 in 1992. The decline in earned premiums principally reflects the Company's strategy to substantially reduce the marketing programs employed prior to acquisition, which the Company believes were not justified by prior operating results. The Company's current marketing efforts have resulted in new business, which to some degree has offset the normal attrition of existing business. Additionally, the rate of decline in policies in force has slowed in each year since acquisition of the Colonial Penn P&C Group. The Company believes that new business generated in 1995 will exceed lapsed business, although there can be no assurance that this will be achieved. Earned premiums in 1994 and 1993 also reflect an increase, as compared to the prior year, resulting from acquired blocks of automobile assigned risk business from other insurance companies. 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 ----------------------- ---- --- 1994 99.1% 98.8% 1993 96.9% 93.7% 1992 101.7% 102.8%
The provision for insurance losses and policy benefits includes natural catastrophe losses, net of reinsurance recoveries, estimated at approximately $18,300,000, $10,900,000 and $12,300,000 for the years ended December 31, 1994, 1993 and 1992, respectively. The 1994 losses include approximately $11,700,000 related to the Northridge, California earthquake and the 1992 losses include approximately $6,000,000 related to Hurricane Andrew. In addition to higher catastrophe losses, the combined ratio for 1994 increased as compared to 1993 principally due to settlements in 1993 of Colonial Penn P&C Group prior years claims at amounts less than provided. The Company believes this experience reflects its improved underwriting procedures, emphasis on mature adult insureds, prior rate increases and improved claims handling and settlement practices. Although Colonial Penn's loss experience continued to develop favorably in 1994, the Company believes that as a result 29 of the reduction in claims outstanding, there will be a reduced positive effect on future results of operations from claim settlements, in spite of providing loss reserves on current operations at conservative levels. The increase in the 1994 combined ratio was partially offset by increased fee income related to acquired blocks of automobile assigned risk business. Loss experience for 1992 included a $3,000,000 retroactive assessment for a workers' compensation fund applicable to the Empire Group. Premium revenue receipts on IOP products of the life insurance subsidiaries (which are not reflected as revenues) were approximately $108,080,000 in 1994, $88,312,000 in 1993 and $68,035,000 in 1992. The principal IOP product sold during the three year period ended December 31, 1994 was a variable annuity product marketed directly to consumers. Earned premium revenues of the life and health insurance operations were approximately $172,400,000 for 1994, $181,800,000 for 1993 and $233,700,000 for 1992. The decline in earned premium revenues reflect the run-off of the agent sold Medicare supplement business, which the Company ceased marketing at December 31, 1992 due to inadequate profitability. In addition, the Company terminated certain assumed life and health reinsurance contracts which had revenues of approximately $28,750,000 for 1992 and minimal profitability. During 1992 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, the Company increased its marketing efforts with respect to this product. Earned premiums for this product were $113,700,000, $109,800,000 and $109,600,000 for the years ended December 31, 1994, 1993 and 1992, respectively. Insurance losses, policy benefits and amortization of deferred acquisition costs of the life and health insurance operations were $138,300,000, $179,100,000 and $261,300,000 for the years ended December 31, 1994, 1993 and 1992, respectively. The decrease reflects the run-off of the agent sold Medicare supplement business and also reflects improved loss experience in this business during 1994. In addition, due to expectations of decreased or inadequate future profitability of its Single Premium Deferred Annuity ("SPDA") and Single Premium Whole Life ("SPWL") products, in 1992 and 1993 the Company sold blocks of such business or otherwise made permitted exchanges, which substantially reduced the amount of remaining policies. The SPWL business was reinsured in 1993, resulting in a net pre-tax gain of approximately $16,700,000. Such net pre-tax gain consisted of net security gains on investments sold in connection with the transaction (approximately $24,100,000), which are included in the caption "Net securities gains (losses)," 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 "Insurance losses, policy benefits and amortization of deferred acquisition costs." During 1993, the Company reinvested proceeds from sales of certain securities at the lower prevailing interest rates. Since these reinvestment rates were, in certain instances, lower than had previously been expected on certain fixed rate annuity policies, the Company recorded an additional provision for insurance losses in the amount of $6,800,000. Principally starting in the fourth quarter of 1992, the Company realized security gains and reinsured or exchanged a substantial portion of its SPDA business. The Company also reinvested proceeds from security sales at prevailing interest rates lower than had been expected on certain fixed income products. In connection with these transactions, the Company recorded an additional provision for insurance losses and policy benefits of approximately $13,900,000, principally from the elimination of deferred policy acquisition costs. In addition, as a result of the termination of certain reinsurance agreements in 1992, the provision for insurance 30 losses and policy benefits was reduced by approximately $6,200,000, representing amounts that were no longer required. Although manufacturing revenues in 1994 were higher than in each of 1993 and 1992, gross profit declined significantly, principally at the bathroom vanities division. This division has experienced manufacturing inefficiencies during the last three years that, in combination with pricing pressures and provisions for obsolete inventory, have resulted in operating losses. During 1994, the Company commenced a restructuring program of this division to reevaluate and reduce existing product lines, to review the manufacturing process and to reduce overhead. The Company is unable to predict if this division's restructuring efforts will result in a return to profitability. Trading stamps revenues declined in each of the last three years principally due to the loss of business of certain customers. The Company believes that 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 sold in each of the last three years ultimately will be redeemed. 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 not been material. Finance revenues reflect the level of consumer instalment loans, which increased during 1994 as discussed above. The operating profit applicable to this segment increased in 1993 as compared to 1992 due to the 1992 sale of certain consumer loan development offices which had operated at a loss. Investment and other income was substantially unchanged in 1994 as compared to 1993 and lower in both years as compared to 1992. Investment and other income reflects the lower level of investments due to the disposition of the SPWL and SPDA business and lower interest rates in both 1994 and 1993. Other income in 1994 includes $8,458,000 related to the disposition of the El Salvador government bonds receivable and $14,500,000 related to the sale of the Company's remaining shares in Bolivian Power. Other income in 1993 includes a $12,981,000 gain from the sale of a portion of the investment in Bolivian Power and other income in 1992 includes a $12,128,000 gain from sale of certain consumer loan development offices. Net securities gains (losses) were ($12,004,000), $51,923,000 and $51,778,000 for the years ended December 31, 1994, 1993 and 1992, respectively. Realized security losses during 1994 principally reflected the Company's strategy to further shorten the duration of its investment portfolio during a time of rising interest rates. Security gains in 1993 and 1992 were realized, in part, to effect the reinsurance and transfer of the SPWL and SPDA businesses described above. The decision to exit these businesses also resulted in write- downs of deferred policy acquisition costs and additional provisions for policyholder benefits, which do not reduce security gains but do reduce pre-tax income. As described above, in 1993, reserves for policyholder benefits were also increased for certain fixed rate annuity policies because the proceeds from security sales were reinvested at rates lower than previously expected. Net securities gains (losses) include provisions for write-downs of investments of $3,126,000, $2,000,000 and $20,041,000 for the years ended December 31, 1994, 1993 and 1992, respectively. Higher interest expense in each of 1994 and 1993 compared to the prior year principally reflects the increased level of borrowings outstanding. Interest expense also reflects the level of deposits at AIB and AIF. Generally, interest rates on deposits are lower than on other available funds. Interest expense on deposits was approximately $8,304,000 in 1994, $9,001,000 in 1993 and $11,954,000 in 1992. 31 The provisions for income taxes for 1994 and 1993 were calculated under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which does not reflect the benefit from utilization of tax loss carryforwards. The provision for income taxes for 1992 has been reduced for the benefit from utilization of tax loss carryforwards. The provision for income taxes for 1994 and 1993 is below the expected normal corporate income tax rate principally because of a reduction in the valuation allowance applicable to the deferred tax asset due to the resolution of certain contingencies. In addition, the provision for income taxes for 1993 was reduced by approximately $4,215,000 as a result of changes in federal income tax rates. The provision for income taxes for 1992 principally consists of state income taxes, the federal alternative minimum income tax and federal income taxes applicable to the life insurance subsidiaries which cannot utilize the Company's tax loss carryforwards. As noted above, the tax provision for 1992 also reflects the benefit from utilization of tax loss carryforwards. The number of shares used to calculate primary earnings per share was 29,101,000, 29,270,000 and 24,435,000 for 1994, 1993 and 1992, respectively. The number of shares used to calculate fully diluted earnings per share was 30,857,000, 30,743,000 and 24,516,000 for 1994, 1993 and 1992, respectively. The increase in 1994 and 1993 as compared to 1992 was principally caused by the acquisition of the minority interest in Phlcorp and, with respect to fully diluted per share amounts, the effect of the assumed conversion of the Company's 5 1/4% Convertible Subordinated Debentures. 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. 32 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 1995 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. 33 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, 1994 and 1993 . . . . . . . . F-2 Consolidated Statements of Income for the years ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . F-3 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992 . . . . . F-4 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . F-6 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . F-7 Financial Statement Schedules: Schedule II - Condensed Financial Information of Registrant . . . . . . . . F-34 Schedule III - Supplementary Insurance Information . . . . . . . . . . F-38 Schedule IV - Schedule of Reinsurance . . . . . . . . . . . . . . . F-39 Schedule V - Valuation and Qualifying Accounts . . . . . . . . . . . F-40 Schedule VI - Schedule of Supplemental Information for Property and Casualty Insurance Underwriters . . . . . F-41 34 (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 the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (the "1993 10-K"). Agreement made as of December 28, 1993 by and between the Company and Joseph S. Steinberg (filed as Exhibit 10.18 to the 1993 10-K). Agreement between the Company and Ian M. Cumming dated as of December 28, 1993 (filed as Exhibit 10.19(a) to the 1993 10-K). Escrow and Security Agreement by and among the Company, Ian M. Cumming and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1993 (filed as Exhibit 10.19(b) to the 1993 10-K). Agreement between the Company and Joseph S. Steinberg, dated as of December 28, 1993 (filed as Exhibit 10.20(a) to the 1993 10-K). Escrow and Security Agreement by and among the Company, Joseph S. Steinberg and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1993 (filed as Exhibit 10.20(b) to the 1993 10-K). 35 (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. 36 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. 37 10.13(b) Escrow and Security Agreement by and among Leucadia, Inc., Joseph S. Steinberg and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1992 (filed as Exhibit 10.13(b) to the 1992 10-K).* 10.14 Settlement Agreement between Baldwin-United Corporation and the United States dated August 27, 1985 concerning tax issues (filed as Exhibit 10.14 to the 1992 10-K).* 10.15 Acquisition Agreement, dated as of December 18, 1992, by and between Provident Mutual Life and Annuity Company of America and Colonial Penn Annuity and Life Insurance Company (filed as Exhibit 10.15 to the 1992 10-K).* 10.16 Reinsurance Agreement, dated as of December 31, 1991, by and between Colonial Penn Insurance Company and American International Insurance Company (filed as Exhibit 10.16 to the 1992 10-K).* 10.17 Agreement made as of December 28, 1993 by and between the Company and Ian M. Cumming (filed as Exhibit 10.17 to the 1993 10-K).* 10.18 Agreement made as of December 28, 1993 by and between the Company and Joseph S. Steinberg (filed as Exhibit 10.18 to the 1993 10-K).* 10.19(a) Agreement between the Company and Ian M. Cumming, dated as of December 28, 1993 (filed as Exhibit 10.19(a) to the 1993 10-K).* 10.19(b) Escrow and Security Agreement by and among the Company, Ian M. Cumming and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1993 (filed as Exhibit 10.19(b) to the 1993 10-K).* 10.20(a) Agreement between the Company and Joseph S. Steinberg, dated as of December 28, 1993 (filed as Exhibit 10.20(a) to the 1993 10-K).* 10.20(b) Escrow and Security Agreement by and among the Company, Joseph S. Steinberg and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1993 (filed as Exhibit 10.20(b) to the 1993 10-K).* 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), Form S-8 (File No. 33-61680) and Form S-8 (File No. 33-61718). ___________________ * Incorporated by reference. 38 27 Financial Data Schedule. 28 Schedule P of the 1994 Annual Statement to Insurance Departments of the Colonial Penn Insurance Company and Affiliated Property/Casualty Insurers and the Empire Insurance Company, Principal Insurer. 39 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LEUCADIA NATIONAL CORPORATION March 24, 1995 By: /s/ Joseph A. Orlando -------------------------------- Joseph A. Orlando Vice President and Comptroller Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on the date set forth above. Signature Title --------- ----- /s/ Ian M. Cumming Chairman of the Board ------------------------------ (Principal Executive Officer) Ian M. Cumming /s/ Joseph S. Steinberg President and Director ------------------------------ (Principal Executive Officer) Joseph S. Steinberg /s/ Joseph A. Orlando Vice President and Comptroller ------------------------------ (Principal Financial and Joseph A. Orlando 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 40 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, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, 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 discussed in the notes 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 L.L.P. New York, New York March 17, 1995 F-1 LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1994 and 1993 (Dollars in thousands, except par value)
1994 1993 ---- ---- ASSETS ------ Investments: Available for sale (aggregate cost of $2,396,288 and $2,447,180) $2,331,288 $2,524,493 Trading securities (aggregate cost of $53,312 and $40,578) 52,231 41,984 Held to maturity (aggregate fair value of $52,820 and $77,243) 54,586 74,796 Policyholder loans 17,943 18,138 Other investments, including accrued interest income 56,347 38,559 ---------- ---------- Total investments 2,512,395 2,697,970 Cash and cash equivalents 252,495 291,414 Reinsurance receivable, net 310,682 462,671 Trade, notes and other receivables, net 463,981 390,394 Prepaids and other assets 245,476 161,441 Property, equipment and leasehold improvements, net 110,887 99,741 Deferred policy acquisition costs 74,536 55,410 Deferred income taxes 144,631 114,001 Separate and variable accounts 420,398 335,357 Investments in associated companies 138,565 80,873 ---------- ---------- Total $4,674,046 $4,689,272 ========== ========== LIABILITIES ----------- Customer banking deposits $ 179,888 $ 173,365 Trade payables and expense accruals 189,280 164,533 Other liabilities 106,046 110,396 Income taxes payable 39,491 40,378 Policy reserves 1,964,730 2,105,408 Unearned premiums 413,546 380,260 Separate and variable accounts 419,355 334,636 Liability for unredeemed trading stamps 42,433 58,541 Debt, including current maturities 425,848 401,335 ---------- ---------- Total liabilities 3,780,617 3,768,852 ---------- ---------- Minority interest 11,614 12,564 ---------- ---------- SHAREHOLDERS' EQUITY -------------------- Common shares, par value $1 per share, authorized 150,000,000 shares; 28,050,037 and 27,897,023 shares issued and outstanding, after deducting 30,272,650 and 30,260,664 shares held in treasury 28,050 27,897 Additional paid-in capital 126,225 125,013 Net unrealized gain (loss) on investments (41,309) 49,912 Retained earnings 768,849 705,034 ---------- ---------- Total shareholders' equity 881,815 907,856 ---------- ---------- Total $4,674,046 $4,689,272 ========== ==========
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, 1994, 1993 and 1992
1994 1993 1992 ---- ---- ---- (In thousands, except per share amounts) Revenues: Insurance revenues and commissions $ 918,886 $ 893,850 $ 932,943 Manufacturing 180,050 173,638 168,687 Trading stamps 19,489 23,827 29,339 Motivation services - - 63,336 Finance 45,835 33,587 39,580 Investment and other income 232,129 231,233 287,352 Net securities gains (losses) (12,004) 51,923 51,778 ---------- ---------- ---------- 1,384,385 1,408,058 1,573,015 ---------- ---------- ---------- Expenses: Insurance losses, policy benefits and amortization of deferred acquisition costs 819,010 789,752 896,673 Insurance commissions 5,364 6,609 13,327 Cost of goods sold: Manufacturing 137,507 122,815 119,742 Trading stamps (529) 1,252 1,421 Motivation services - - 46,653 Interest 44,003 39,465 38,507 Salaries 87,650 83,179 97,758 Selling, general and other expenses 189,879 185,713 191,886 Minority interest 1,183 2,405 23,495 ---------- ---------- ---------- 1,284,067 1,231,190 1,429,462 ---------- ---------- ---------- Income before income taxes and cumulative effects of changes in accounting principles 100,318 176,868 143,553 ---------- ---------- ---------- Income taxes: Current 9,085 25,355 25,838 Deferred 20,397 35,254 (12,892) ---------- ---------- ---------- 29,482 60,609 12,946 ---------- ---------- ---------- Income before cumulative effects of changes in accounting principles 70,836 116,259 130,607 Cumulative effects of changes in accounting principles - 129,195 - ---------- ---------- ---------- Net income $ 70,836 $ 245,454 $ 130,607 ========== ========== ========== Earnings per common and dilutive common equivalent share: Income before cumulative effects of changes in accounting principles $2.43 $3.97 $5.35 Cumulative effects of changes in accounting principles - 4.41 - ----- ----- ----- Net income $2.43 $8.38 $5.35 ===== ===== ===== Fully diluted earnings per common share: Income before cumulative effects of changes in accounting principles $2.41 $3.89 $5.33 Cumulative effects of changes in accounting principles - 4.20 - ----- ----- ----- Net income $2.41 $8.09 $5.33 ===== ===== =====
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, 1994, 1993 and 1992
1994 1993 1992 ---- ---- ---- (Thousands of dollars) Net cash flows from operating activities: ---------------------------------------- Net income $ 70,836 $ 245,454 $ 130,607 Adjustments to reconcile net income to net cash provided by (used for) operations: Cumulative effects of changes in accounting principles - (129,195) - Provision (benefit) for deferred income taxes 20,397 35,254 (12,892) Depreciation and amortization of property, equipment and leasehold improvements 17,075 16,378 16,825 Other amortization 88,485 113,450 78,395 Provision for doubtful accounts 10,579 12,432 9,437 Net securities (gains) losses 12,004 (51,923) (51,778) (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 5,176 2,064 1,891 (Gains) related to foreign power companies (22,948) (13,111) - Purchases of investments classified as trading (132,752) (77,333) - Proceeds from sales of investments classified as trading 119,042 38,118 - Deferred policy acquisition costs incurred and deferred (100,506) (81,746) (77,448) Cash related to reinsurance transaction with John Hancock - (510,698) - Net change in: Reinsurance receivable 154,788 46,603 - Trade, notes and other receivables (23,661) (55,439) 2,412 Prepaids and other assets (23,488) (49,183) (27,902) Trade payables and expense accruals (the decrease in 1992 principally relates to a prior reinsurance transaction) 35,973 44,663 (101,508) Other liabilities (6,177) (3,954) (12,584) Income taxes (1,844) 8,195 16,780 Policy reserves (123,376) (56,327) (8,850) Unearned premiums 33,286 35,020 31,007 Liability for unredeemed trading stamps (16,108) (16,423) (19,095) Minority interest 1,183 2,405 23,495 Other 1,572 1,831 (981) ---------- ---------- ---------- Net cash provided by (used for) operating activities 119,536 (462,921) (14,317) ---------- ---------- ---------- Net cash flows from investing activities: ---------------------------------------- Acquisition of real estate, property, equipment and leasehold improvements (122,122) (19,368) (27,351) Proceeds from disposals of property, equipment and leasehold improvements 7,741 5,760 7,034 Investment in Caja (45,711) - - Advances on loan receivables (182,289) (132,324) (114,168) Principal collections on loan receivables 118,484 95,535 108,912 Proceeds from sales of instalment loan receivables - - 78,096 Purchases of investments (other than short- term) (1,251,643) (1,582,856) (2,650,517) Proceeds from maturities of investments 425,582 471,440 642,723 Proceeds from sales of investments 888,474 1,193,141 2,447,450 ---------- ---------- ---------- Net cash provided by (used for) investing activities (161,484) 31,328 492,179 ---------- ---------- ---------- (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, 1994, 1993 and 1992
1994 1993 1992 ---- ---- ---- (Thousands of dollars) Net cash flows from financing activities: ---------------------------------------- Net change in credit agreement and other short-term borrowings $ (582) $ (5,678) $ (79,893) Net change in customer banking deposits 6,346 (12,817) (8,117) Net change in policyholder account balances (17,302) (95,554) (220,888) Issuance of long-term debt, net of issuance costs 50,000 194,157 130,640 Reduction of long-term debt (27,940) (18,237) (63,433) Purchase of warrants to acquire common shares - - (14,700) Purchase of common shares for treasury (472) (2,492) (2,850) Dividends paid (7,021) (6,971) (5,589) ---------- ---------- ---------- Net cash provided by (used for) financing activities 3,029 52,408 (264,830) ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents (38,919) (379,185) 213,032 Cash and cash equivalents at January 1, 291,414 670,599 457,567 ---------- ---------- ---------- Cash and cash equivalents at December 31, $ 252,495 $ 291,414 $ 670,599 ========== ========== ========== Supplemental disclosures of cash flow ------------------------------------- information: ----------- Cash paid during the year for: Interest $43,137 $34,574 $39,745 Income tax payments, net of refunds $10,731 $17,025 $10,316
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, 1994, 1993 and 1992
Net Common Unrealized Shares Additional Gain (Loss) $1 Par Paid-in On Retained Value Capital Investments Earnings Total ------- ---------- ----------- -------- -------- (Thousands of dollars) Balance, January 1, 1992 $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 ($.25 per Common Share) (6,971) (6,971) Net income 245,454 245,454 ------- -------- -------- -------- -------- Balance, December 31, 1993 27,897 125,013 49,912 705,034 907,856 Exercise of options to purchase common shares 165 1,672 1,837 Net change in unrealized gain (loss) on investments (91,221) (91,221) Purchase of stock for treasury (12) (460) (472) Dividend ($.25 per Common Share) (7,021) (7,021) Net income 70,836 70,836 ------- -------- -------- -------- -------- Balance, December 31, 1994 $28,050 $126,225 $(41,309) $768,849 $881,815 ======= ======== ======== ======== ========
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) Consolidation Policy: The consolidated financial statements -------------------- include the accounts of the Company and all majority-owned subsidiaries. The Company has certain legal subsidiaries (the "WMAC Companies") which are under the control of the Wisconsin Insurance Commissioner (the "Commissioner"). These companies are not consolidated while under the control of the Commissioner. Investments in 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 1994 presentation. (b) Statement of Cash Flows: The Company considers short-term ----------------------- investments, which have maturities of less than three months at the time of acquisition, to be cash equivalents. Cash and cash equivalents include short-term investments of $200,232,000 and $247,583,000 at December 31, 1994 and 1993, respectively. On December 31, 1992, the Company acquired the minority interest in Phlcorp, Inc. ("Phlcorp") for approximately 4,408,000 of the Company's Common Shares, which were recorded at an aggregate cost of approximately $142,927,000. The cost of the acquisition was principally allocated to investments in associated companies (approximately $11,022,000), amounts related to the WMAC Companies (approximately $16,847,000), excess of purchase price over net assets acquired (approximately $22,277,000) and to eliminate the minority interest in Phlcorp (approximately $92,819,000). 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. The value of the shares received, which was based on the market price on the date of the transaction, was equal to the maturity value of the note. (c) Investments: 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"). The adoption of SFAS 115 resulted in an increase in reported shareholders' equity of approximately $49,500,000 at December 31, 1993. At acquisition, marketable debt and equity securities are designated as either i) held to maturity, which are carried at amortized cost, ii) trading, which are carried at estimated fair value with unrealized gains and losses reflected in results of operations, or iii) available for sale, which are carried at estimated fair value with unrealized gains and losses reflected as a separate component of shareholders' equity, net of taxes. Held to maturity investments are made with the intention of holding such securities to maturity, which the Company has the ability to do. Estimated fair values are principally based on quoted market prices. F-7 1. Significant Accounting Policies, continued: ------------------------------- Investments with an impairment in value considered to be other than temporary are written down to estimated net realizable values. The writedowns are included in "Net securities gains (losses)" in the Consolidated Statements of Income. The cost of securities sold is based on average cost. While the adoption of SFAS 115 did not have, and is not expected to have, a material effect on results of operations, the Company believes SFAS 115 is likely to result in substantial fluctuations in shareholders' equity, as occurred in 1994. During 1994, principally as a result of increases in market interest rates, the unrealized gain on investments reported in shareholders' equity at December 31, 1993 of $49,912,000 (net of taxes) became an unrealized loss of $41,309,000 (net of taxes) as of December 31, 1994. The Company's investments in Russian equity securities (approximately $19,600,000 as of December 31, 1994), none of which is held by its insurance or banking subsidiaries, do not have readily determinable fair values as defined by SFAS 115. Given the uncertainties inherent in investing in the emerging markets of Russia, the Company is accounting for these investments under the cost recovery method, whereby all receipts are applied to reduce the investment. These investments are included in "Other investments" in the Consolidated Balance Sheets. (d) Property, Equipment and Leasehold Improvements: Property, ---------------------------------------------- equipment and leasehold improvements are stated at cost, net of accumulated depreciation and amortization (approximately $87,067,000 and $73,640,000 at December 31, 1994 and 1993, respectively). Depreciation and amortization are provided principally on the straight-line method over the estimated useful lives of the assets or, if less, the term of the underlying lease. (e) Income Recognition from Insurance Operations: Premiums on -------------------------------------------- property and casualty and health insurance products are recognized as revenues over the term of the policy using the monthly pro rata basis. The life insurance subsidiaries have sold various investment oriented insurance products (collectively the "IOP products"), including single premium whole life ("SPWL") products, a variable life ("VL") product, a variable annuity ("VA") product and a single premium deferred annuity ("SPDA") product. The principal IOP product offered during the three year period ended December 31, 1994 was a VA 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 over the premium paying period. Premiums for the VA and VL products are directed by the policyholder to be invested in a unit trust solely for the benefit and risk of the policyholder. Policyholders' accounts are charged for the cost of insurance provided, administrative and certain other charges. The amount included in the balance sheet liability caption "Separate and variable accounts" represents the current value of the policyholders' funds. F-8 1. Significant Accounting Policies, continued: ------------------------------- (f) Policy Acquisition Costs: Policy acquisition costs principally ------------------------ consist of direct response marketing costs, commissions, premium taxes and other underwriting expenses (net of reinsurance allowances). If recoverability of such costs from future premiums and related investment income is not anticipated, the amounts not considered recoverable are charged to operations. Deferred policy acquisition costs also have been charged to operations in connection with dispositions of blocks of business or reinvestment of proceeds from security sales at prevailing lower 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. Policy acquisition costs applicable to other life insurance products are amortized over the expected premium paying period of the policies. (g) Reinsurance: In the normal course of business, the Company seeks ----------- to reduce the loss that may arise from catastrophes and to limit losses from large exposures by reinsuring certain levels of risk with other insurance enterprises. 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. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" ("SFAS 113"). Under SFAS 113 reinsurance recoverables are reported as assets rather than the previously accepted practice of netting such amounts against related liabilities. Appropriate provisions are made for uncollectible reinsurance receivables. Premiums earned and other underwriting expenses are stated net of reinsurance in the Consolidated Statements of Income. The adoption of SFAS 113 had no material effect on results of operations. (h) 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 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"), which specifies the accounting for certain retrospectively rated reinsurance agreements. F-9 1. Significant Accounting Policies, continued: ------------------------------- As a result of the adoption of EITF 93-6, the Company 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, the effect on results of continuing operations would not have been material. (i) 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 sold 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. The amount of the excess may be different than indicated by these studies. Accordingly, the Company has been amortizing the aggregate apparent excess over a five year period. As a result, cost of goods sold applicable to the trading stamp operations reflects a credit of approximately $11,700,000, $11,900,000 and $14,100,000 for the years ended December 31, 1994, 1993 and 1992, respectively. Based on the latest studies, the unamortized apparent excess at December 31, 1994 was approximately $5,358,000. The Company provided the liability for unredeemed trading stamps based on the estimate that approximately 75% of stamps sold in each of the three years ended December 31, 1994 ultimately will be redeemed. (j) Pension, Postemployment and Postretirement Costs: The Company has ------------------------------------------------ non-contributory trusteed pension plans covering certain employees, which generally provide retirement benefits based on salary and length of service. The plans are funded in amounts sufficient to satisfy minimum ERISA funding requirements. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions" ("SFAS 106") and Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("SFAS 112"), which require accruals for benefits that previously had been expensed as incurred. The Company does not expect SFAS 106 and SFAS 112 to have a material effect on results of operations. (k) Income Taxes: The Company provides for income taxes using the ------------ liability method. Effective as of January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). 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 F-10 1. Significant Accounting Policies, continued: ------------------------------- liabilities and for carryforwards. A valuation allowance is provided if deferred tax assets are not considered more likely than not to be realized. 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 and the provisions for income taxes for periods ending after December 31, 1992 are not reduced for the benefit from utilization of tax loss carryforwards. Accordingly, provisions for income taxes for 1994 and 1993 are not comparable to the 1992 provision. (l) Derivative Financial Instruments: The Company has entered into -------------------------------- interest rate swap and interest rate option agreements to reduce the impact of changes in interest rates on its variable rate debt. The difference between the amounts paid and received is accrued as an adjustment to interest expense over the term of the agreements. The premiums paid for interest rate option agreements are included in other assets and are amortized to expense over the term of the agreements. The Company does not have material derivative financial instruments for trading purposes. (m) Translation of Foreign Currency: Foreign currency denominated ------------------------------- investments which are not subject to hedging agreements and currency rate swap agreements not meeting the accounting requirements for hedges, are converted into U.S. dollars at exchange rates in effect at the end of the period. Resulting net exchange gains or losses were not material. 2. Acquisitions: ------------ 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 fifteen of the Jordan Associated Companies on the cost method of accounting and one company, which is not material, on the equity method of accounting. The investments acquired as a result of the partnership interests are considered Associated Companies. Prior to December 31, 1992, the Company owned approximately 63% of Phlcorp's common shares. On December 31, 1992, pursuant to a merger agreement, Phlcorp merged with a subsidiary of the Company and became a wholly owned subsidiary. Pursuant to the terms of the merger, the Company issued 4,408,000 of the Company's Common Shares, which were recorded at approximately $142,927,000. F-11 2. Acquisitions, continued: ------------ The following table provides certain unaudited consolidated pro forma results of operations data for the year ended December 31, 1992 assuming the acquisition of the minority interest in Phlcorp had occurred on January 1, 1992. (Amounts are in thousands, except per share amounts.)
Revenues $1,573,015 Income before income taxes $ 163,417 Income taxes $ 12,946 Net income $ 150,471 Per share: Primary $5.22 Fully diluted $5.20
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 acquisition had actually occurred on January 1, 1992. In April 1994, the Company acquired a 30% interest in Caja de Ahorro y Seguro S.A. ("Caja") from the government of Argentina for a preliminary purchase price of approximately $46,000,000, including costs. Caja is a holding company whose subsidiaries are engaged in property and casualty insurance, life insurance and banking in Argentina. The preliminary purchase price is subject to adjustment based upon the reduction in Caja's net assets from December 31, 1993 to the acquisition date. The difference between the Company's investment in Caja and its share of Caja's underlying net tangible assets is being amortized over 20 years. Since acquisition, the Company's equity in the earnings of Caja has not been material. The Company's investment in Caja is included in the caption "Investments in associated companies." In May 1994, the Company acquired a 615,000 square foot office building located near Grand Central Terminal in New York City for approximately $50,800,000. The building has approximately 355,000 square feet of contiguous space available for occupancy. After certain improvements to the building are completed, the Company intends to lease the available space. The investment is included in other assets. In July 1994, the Company acquired HSD Venture, a California general partnership which was in reorganization proceedings under chapter 11 of the Bankruptcy Code, for approximately $42,000,000. HSD Venture is the developer and owner of two luxury condominium towers in downtown San Diego, California. The property includes approximately 202 residential units, of which approximately 180 are available for sale, and approximately 42,000 square feet of retail space. The real estate investment is included in other assets. 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 F-12 3. Investments in Associated Companies, continued: ----------------------------------- Power Company Limited ("Bolivian Power") and, through the 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 has recognized the gain on the cash basis. During 1994, the Company disposed of the remaining bonds and reported a pre-tax gain of approximately $8,458,000, which is included in the caption "Investment and other income." Gains recognized in 1993 were not significant. 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. During 1994, the Company sold its remaining interest in Bolivian Power to an unaffiliated party and realized a pre-tax gain of approximately $14,500,000. The gains are reflected in the caption, "Investment and other income." The Company believes that it ultimately will receive the stock of two of the WMAC Companies; however, the timing of such receipt is uncertain. The Company estimates that the fair value of the net tangible assets yet to be received is approximately $34,000,000 in excess of their recorded cost at December 31, 1994. 4. Insurance Operations: -------------------- Premiums received on IOP products were approximately $108,080,000, $88,312,000 and $68,035,000 for the years ended December 31, 1994, 1993 and 1992, respectively. The changes in deferred policy acquisition costs were as follows (in thousands):
1994 1993 1992 ---- ---- ---- Balance, January 1, $ 55,410 $ 78,895 $ 82,982 -------- --------- -------- Additions 100,506 81,746 77,448 -------- --------- -------- Included in insurance losses, policy benefits and amortization of deferred acquisition costs: 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 (81,380) (71,702) (70,305) -------- --------- -------- (81,380) (101,450) (81,535) -------- --------- -------- Adoption of SFAS 109 - (3,781) - -------- --------- -------- Balance, December 31, $ 74,536 $ 55,410 $ 78,895 ======== ========= ========
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 F-13 4. Insurance Operations, continued: -------------------- Company realized a net pre-tax gain of approximately $16,700,000 during 1993. Such net pre-tax gain consists of net security gains on investments sold in connection with the transaction (approximately $24,100,000), which are included in the caption "Net securities gains (losses)," 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 "Insurance losses, policy benefits and amortization of deferred acquisition costs." For financial reporting purposes, the Company reflects 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. At December 31, 1994, reinsurance receivables, net includes approximately $179,452,000 due from John Hancock. During 1994, the Company was legally relieved of approximately $157,818,000 of SPWL policy liabilities. During 1993 and 1992, the Company sold, at gains, substantial amounts of investments, including dispositions in connection with the transfer of blocks of business, and, in certain cases, reinvested proceeds at prevailing lower interest rates. Since certain of these rates 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 and $2,700,000 in 1992. 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 effect of reinsurance on premiums written and earned for the years ended December 31, 1994 and 1993 is as follows (in thousands):
1994 1993 ---- ---- Premiums Premiums Premiums Premiums Written Earned Written Earned -------- -------- -------- -------- Direct $960,463 $923,131 $930,424 $893,797 Assumed 31,804 32,261 34,102 33,628 Ceded (39,722) (36,506) (33,191) (33,575) -------- -------- -------- -------- Net $952,545 $918,886 $931,335 $893,850 ======== ======== ======== ========
Recoveries recognized on reinsurance contracts were approximately $44,300,000 in 1994 and $22,800,000 in 1993. Reinsurance receivables are net of allowance for doubtful accounts of approximately $4,046,000 and $83,825,000 at December 31, 1994 and 1993, respectively. The decrease in the allowance from 1993 principally reflects the write-off of reinsurance receivables that had been fully reserved. F-14 4. Insurance Operations, continued: -------------------- 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, ---------------------- 1994 1993 1992 ---- ---- ---- Net income (loss): Property and casualty insurance $ 59,048 $ 96,279 $ 51,108 Life insurance $ 14,142 $ (2,951) $ 16,187 At December 31, -------------- 1994 1993 1992 ---- ---- ---- Statutory surplus: Property and casualty insurance $425,128 $475,408 $378,816 Life insurance $335,903 $303,986 $234,058
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, 1994, 1993 and 1992, statutory surplus of approximately $252,800,000, $246,600,000 and $122,000,000, respectively, related to property and casualty operations is also included in the statutory surplus of the life insurance parent and statutory surplus of approximately $35,900,000, $42,200,000 and $38,000,000, respectively, related to life operations is also included in the statutory surplus of the property and casualty insurance parent. The insurance subsidiaries are subject to regulatory restrictions which limit the amount of cash and other distributions available to the Company without regulatory approval. At December 31, 1994, approximately $21,134,000 could be distributed to the Company without regulatory approval. The Colonial Penn property and casualty insurance subsidiaries are subject to a rate "roll-back" refund on California insurance premiums for certain pre-acquisition years. In November 1994, Colonial Penn received an order requiring it to refund $35,300,000, plus $21,700,000 of interest. Colonial Penn disagrees with the calculation of this assessment. The Company is in discussions with the California Department of Insurance and has filed a request for a formal hearing should informal discussions fail to come to a satisfactory conclusion. The Company believes that the ultimate resolution of this matter will not have a material adverse effect on the Company's financial condition or results of operations and will not exceed reserves established in prior years. The Company's insurance subsidiaries are contingently liable for possible assessments under state regulatory requirements pertaining to potential insolvencies of unaffiliated insurance companies. Liabilities, which are established based upon regulatory guidance, have not been material. For information with respect to the activity in property and casualty loss reserves, see "Reconciliation of Liability for Losses and Loss Adjustment Expenses" in Item 1 included elsewhere herein, which is incorporated by reference into these consolidated financial statements. F-15 5. Investments: ----------- The amortized cost, gross unrealized gains and losses and estimated fair values of investments classified as held to maturity and as available for sale at December 31, 1994 and 1993 are as follows (in thousands):
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- Held to maturity: 1994 ---- Bonds and notes: United States Government agencies and authorities $40,300 $117 $1,861 $38,556 States, municipalities and political subdivisions 818 10 - 828 All other corporates 385 - 40 345 Other fixed maturities 13,083 8 - 13,091 ------- ---- ------ ------- $54,586 $135 $1,901 $52,820 ======= ==== ====== ======= 1993 ---- 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: 1994 ---- Bonds and notes: United States Government agencies and authorities $1,866,752 $ 2,241 $71,625 $1,797,368 States, municipalities and political subdivisions 91,892 63 771 91,184 Foreign governments 3,576 1,838 220 5,194 Public utilities 77,518 123 2,756 74,885 All other corporates 339,478 11,424 10,451 340,451 ---------- ------- ------- ---------- Total fixed maturities 2,379,216 15,689 85,823 2,309,082 ---------- ------- ------- ---------- Equity securities: Preferred stocks 39 - - 39 Common Stocks: Banks, trusts and insurance companies 10,001 312 1 10,312 Industrial, miscellaneous and all other 6,507 6,773 1,950 11,330 ---------- ------- ------- ---------- Total equity securities 16,547 7,085 1,951 21,681 ---------- ------- ------- ---------- Other 525 - - 525 ---------- ------- ------- ---------- $2,396,288 $22,774 $87,774 $2,331,288 ========== ======= ======= ==========
F-16 5. Investments, continued: -----------
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- Available for sale: 1993 ---- 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: Preferred stocks 1,346 89 23 1,412 Common Stocks: Banks, trusts and insurance companies 15,570 335 413 15,492 Industrial, miscellaneous and all other 1,633 7,350 57 8,926 ---------- ------- ------ ---------- Total equity securities 18,549 7,774 493 25,830 ---------- ------- ------ ---------- $2,447,180 $82,168 $4,855 $2,524,493 ========== ======= ====== ==========
The amortized cost and estimated fair value of investments classified as held to maturity and as available for sale at December 31, 1994, by contractual maturity are shown below. Expected maturities are likely to differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Held to Maturity Available For Sale ---------------- ------------------ Estimated Estimated Amortized Fair Amortized Fair Cost Value Cost Value --------- --------- --------- --------- (In thousands) Due in one year or less $13,110 $13,116 $ 269,286 $ 270,622 Due after one year through five years 29,339 28,424 1,323,468 1,283,212 Due after five years through ten years 5,398 4,874 116,099 114,303 Due after ten years 2,118 2,132 124,544 122,829 ------- ------- ---------- ---------- 49,965 48,546 1,833,397 1,790,966 Mortgage-backed securities 4,621 4,274 545,819 518,116 ------- ------- ---------- ---------- $54,586 $52,820 $2,379,216 $2,309,082 ======= ======= ========== ==========
F-17 5. Investments, continued: ----------- At December 31, 1994 and 1993 securities with book values aggregating approximately $39,908,000 and $55,145,000, respectively, were on deposit with various regulatory authorities. At December 31, 1994, 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 8% of Class A shares), Jones Plumbing Systems, Inc. (approximately 21%) and Olympus Capital Corporation (approximately 17%). Certain information with respect to trading securities at December 31, 1994 and 1993 is as follows (in thousands):
Amortized Estimated Carrying Cost Fair Value Value --------- ---------- -------- 1994 ---- Fixed maturities- Corporate bonds and notes $37,478 $37,961 $37,961 Equity securities- Preferred stocks 13,750 13,532 13,532 Options 2,084 738 738 ------- ------- ------- Total trading securities $53,312 $52,231 $52,231 ======= ======= ======= 1993 ---- Fixed maturities- Corporate bonds and notes $25,029 $26,172 $26,172 Equity securities- Preferred stocks 13,337 13,901 13,901 Options 2,212 1,911 1,911 ------- ------- ------- Total trading securities $40,578 $41,984 $41,984 ======= ======= =======
F-18 6. Receivables, Net: ---------------- A summary of trade, notes and other receivables, net at December 31, 1994 and 1993 is as follows (in thousands):
1994 1993 ---- ---- Instalment loan receivables net of unearned finance charges of $5,118 and $5,858 (a) $253,089 $187,694 Loans to small business concerns, including accrued interest 11,107 18,050 Agents' balances and premiums receivable 171,975 154,201 Amount due on sale of securities 6,133 2,513 Trade receivables 28,092 26,258 Service fee receivable 3,653 1,793 Other 8,013 13,411 -------- -------- 482,062 403,920 Allowance for doubtful accounts (including $12,308 and $8,341 applicable to loan receivables of banking and lending subsidiaries) (18,081) (13,526) -------- -------- $463,981 $390,394 ======== ========
(a) Contractual maturities of instalment loan receivables at December 31, 1994 were as follows (in thousands): 1995 - $96,912; 1996 - $64,230; 1997 - $42,997; 1998 - $26,891 and 1999 and thereafter - $22,059. 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. 7. Prepaids and Other Assets: ------------------------- At December 31, 1994 and 1993, a summary of prepaids and other assets is as follows (in thousands):
1994 1993 ---- ---- Real estate assets, net $123,423 $ 30,443 Inventories, net 30,974 34,817 Excess of acquisition cost over net tangible assets acquired 2,369 3,508 Amounts related to the WMAC Companies 24,611 24,051 Balances in risk sharing pools and associations 16,926 27,231 Prepaid reinsurance premium 5,127 2,639 Unamortized debt expense 7,143 8,024 Other 34,903 30,728 -------- -------- $245,476 $161,441 ======== ========
F-19 8. Trade Payables, Expense Accruals and Other Liabilities: ------------------------------------------------------ A summary of trade payables, expense accruals and other liabilities at December 31, 1994 and 1993 is as follows (in thousands):
1994 1993 ---- ---- Trade Payables and Expense Accruals: Payables related to securities $ 42,614 $ 32,393 Amount due on reinsurance 8,787 11,671 Trade and drafts payable 33,629 35,134 Accrued compensation, severance and other employee benefits 29,189 17,566 Accrued interest payable 9,253 8,950 Taxes, other than income 22,831 23,152 Provision for servicing carrier claims 17,935 13,159 Other 25,042 22,508 -------- -------- $189,280 $164,533 ======== ======== Other Liabilities: Unearned service fees $ 28,584 $ 12,905 Lease obligations 9,909 12,783 Postretirement and postemployment benefits 25,949 26,947 Premiums received in advance 5,300 6,032 Holdbacks on loans 7,363 7,083 Unclaimed funds and dividends 3,728 4,474 Liability for stock not tendered 3,794 19,977 Other 21,419 20,195 -------- -------- $106,046 $110,396 ======== ========
9. Long-term and Other Indebtedness: -------------------------------- The principal amount, stated interest rate and maturity of long-term debt outstanding at December 31, 1994 and 1993 are as follows (dollars in thousands):
1994 1993 ---- ---- Senior Notes: Credit agreements $ - $ - Term loans with banks 50,000 21,250 7 3/4% Senior Notes due 2013, less debt discount of $931 and $981 99,069 99,019 Industrial Revenue Bonds (principally with variable interest) 6,811 8,058 Other 12,710 15,844 -------- -------- 168,590 144,171 -------- -------- Subordinated Notes: 10 3/8% Senior Subordinated Notes due 2002, less debt discount of $699 and $793 124,301 124,207 6% Swiss Franc Bonds due March 10, 1996 ("Swiss Franc Bonds") 32,957 32,957 5 1/4% Convertible Subordinated Debentures due 2003 100,000 100,000 -------- -------- 257,258 257,164 -------- -------- $425,848 $401,335 ======== ========
F-20 9. Long-term and Other Indebtedness, continued: -------------------------------- Credit agreements provide for aggregate contractual credit facilities of $150,000,000 and bear interest based on the prime rate or LIBOR, plus commitment and other fees. Such credit facilities were renewed in 1994 and expire in June 1997. In June 1994, the Company entered into a $50,000,000 five-year term loan agreement with certain of its bank lenders. The loan bears interest based on the prime rate or LIBOR. Approximately $15,665,000 of the manufacturing division's net property, equipment and leasehold improvements are pledged as collateral for the Industrial Revenue Bonds; and approximately $6,493,000 of other assets (primarily property) is pledged for other indebtedness aggregating approximately $4,264,000. Interest rate swap and interest rate option agreements are used to reduce the potential impact of increases in interest rates on term loans with banks, customer banking deposits and credit agreement borrowings. Under the interest rate swap agreements, the Company has agreed with other parties to pay fixed rate interest amounts and receive variable rate interest amounts calculated by reference to an agreed notional amount. The variable interest rate portion of the swaps is a specified LIBOR interest rate. Swaps that expire in 1996 require fixed rate payments of 7.23% on a $50,000,000 notional amount. Swaps that expire in 1999 require fixed rate payments of 7.33% on a $25,000,000 notional amount. The weighted average LIBOR rate at December 31, 1994 is 5.9%. Changes in LIBOR interest rates in the future will change the amounts to be received under the agreements. In 1994, the Company purchased an option for $2,564,000 to enter into an interest rate swap, which is exercisable in August 1996. If exercised, the Company would be required to make fixed rate payments of 7.64% in exchange for receiving a LIBOR based variable payment on a $50,000,000 notional amount for the subsequent eight year term. Counterparties to interest rate swap agreements are major financial institutions, which management believes are able to fulfill their obligations. However, any losses due to default by the counterparties would be immaterial. During 1989, the Company entered into long-term hedging transactions whereby substantially all currency rate risk related to the Swiss Franc Bonds was eliminated and the cost of which increased the cost of the issue to approximately 10.4%. The 5 1/4% Convertible Subordinated Debentures due 2003 are convertible into Common Shares at $57.50 per Common Share, an aggregate of 1,739,130 Common Shares, subject to anti-dilution provisions. The most restrictive of the Company's debt instruments require maintenance of minimum Tangible Net Worth and limit Indebtedness, as defined in the agreements. In addition, the debt instruments contain limitations on dividends, investments, liens, contingent obligations and certain other matters. As of January 1, 1995, cash dividends of approximately $187,800,000 could be paid under the most restrictive covenants. F-21 9. Long-term and Other Indebtedness, continued: -------------------------------- The aggregate annual mandatory redemptions of debt during the five year period ending December 31, 1999 are as follows (in thousands): 1995 - $3,966; 1996 - $35,797; 1997 - $1,580; 1998 - $1,498; and, 1999 - $51,197. The weighted average interest rate on short-term borrowings (primarily customer banking deposits) was 5.4% and 4.7% at December 31, 1994 and 1993, respectively. 10. Common Shares, Stock Options, Warrants and Preferred Shares: ----------------------------------------------------------- The Board of Directors from time to time has authorized acquisitions of the Company's Common Shares. Pursuant to such authorization, during the three year period ended December 31, 1994, the Company acquired 405,195 Common Shares (11,986 shares in 1994, 282,409 shares in 1993 and 110,800 shares in 1992) at an average price of $34.82 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, 1994 is as follows:
Available Common For Shares Total Future Subject Option Option Option To Option Prices Price Grants --------- ------ ------ --------- Balance at January 1, 1992 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 ======= Granted 13,000 $35.75-$37.00 475,375 Exercised (165,000) $ 7.69-$40.88 (1,837,627) Cancelled (16,500) $ 9.38-$40.88 (368,388) --------- ----------- Balance at December 31, 1994 607,972 $ 7.69-$43.00 $12,731,363 787,400 ========= =========== =======
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, 1994 and 1993, options to purchase 276,934 and 221,996 Common Shares, respectively, were exercisable. In January 1992, the Company redeemed certain Warrants held by the Company's Chairman and President for an aggregate cash payment of 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 per Common Share (the then market value of the Company's shares) through F-22 10. Common Shares, Stock Options, Warrants and Preferred Shares, ----------------------------------------------------------- continued: 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, 1994 and 1993, the Company's Common Shares were reserved as follows:
1994 1993 ---- ---- Stock Options 1,395,372 1,569,972 Warrants 1,600,000 1,600,000 Convertible Debentures 1,739,130 1,739,130 --------- --------- 4,734,502 4,909,102 ========= =========
At December 31, 1994 and 1993, 6,000,000 preferred shares (redeemable and non-redeemable), par value $1 per share, were authorized. 11. Net Securities Gains (Losses): ----------------------------- The following summarizes net securities gains (losses) for each of the three years in the period ended December 31, 1994 (in thousands):
1994 1993 1992 ---- ---- ---- Net realized gains (losses) on fixed maturities: Resulting in additional provision for policyholder benefits $ - $ 6,800 $ 2,700 Resulting in increase in amortization of deferred policy acquisition costs - 24,100 11,230 Other (11,246) 19,352 51,797 -------- ------- -------- (11,246) 50,252 65,727 Provision for write-down of fixed maturity investments (3,126) (2,000) (19,677) Provision for write-down of equity investments - - (364) Net unrealized loss on trading securities (1,500) (685) - Net realized gains on equity and other securities 3,868 4,356 6,092 -------- ------- -------- $(12,004) $51,923 $ 51,778 ======== ======= ========
Proceeds from sales of investments classified as available for sale were approximately $854,824,000 during 1994. Gross gains and gross losses of approximately $8,461,000 and $18,446,000, respectively, were realized on these sales during 1994. Proceeds from sales of fixed maturity investments were approximately $1,171,574,000 and $2,421,057,000 during 1993 and 1992, respectively. Gross gains of approximately $51,839,000 and $70,551,000 and gross losses of approximately $1,587,000 and $4,824,000 were realized on those sales during 1993 and 1992, respectively. F-23 12. Other Results of Operations Information: --------------------------------------- Investment and other income for each of the three years in the period ended December 31, 1994 consist of the following (in thousands):
1994 1993 1992 ---- ---- ---- Interest on short-term investments $ 13,555 $ 14,867 $ 17,750 Interest on fixed maturities 141,279 158,203 213,224 Service fee income 31,608 15,309 12,321 Gain on disposition of the El Salvador government bonds receivable 8,458 130 - Gain on sale of Bolivian Power 14,490 12,981 - Gain on sale of consumer loan development offices - - 12,128 Other 22,739 29,743 31,929 -------- -------- -------- $232,129 $231,233 $287,352 ======== ======== ========
Taxes, other than income or payroll, included in operations amounted to approximately $37,310,000 (including $21,330,000 of premium taxes) for the year ended December 31, 1994, $36,839,000 (including $21,295,000 of premium taxes) for the year ended December 31, 1993 and $35,051,000 (including $21,153,000 of premium taxes) for the year ended December 31, 1992. Advertising costs amounted to approximately $12,541,000, $10,394,000 and $9,578,000 for the years ended December 31, 1994, 1993 and 1992, respectively. 13. Income Taxes: ------------ The principal components of the deferred tax asset at December 31, 1994 and 1993 are as follows (in thousands):
1994 1993 ---- ---- Insurance reserves and unearned premiums $ 91,177 $ 83,051 Securities valuation reserves 13,915 7,187 Other accrued liabilities 11,090 26,260 Liability for unredeemed trading stamps 8,960 9,690 State taxes 6,071 6,421 Employee benefits and compensation 7,013 11,496 Unrealized losses (gains) on investments 22,736 (27,091) Depreciation (4,901) (9,480) Policy acquisition costs (2,569) 3,097 Tax loss carryforwards, net of tax sharing payments 45,332 60,310 Other, net (10,133) (7,540) -------- -------- 188,691 163,401 Valuation allowance (44,060) (49,400) -------- -------- $144,631 $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 their availability, and unrealized capital losses. In addition, the amounts reflected above are F-24 13. Income Taxes, continued: ------------ based on the minimum tax loss carryforwards of Phlcorp and certain proposed regulations affecting the use of Phlcorp's tax loss carryforwards. As described more fully herein, substantial additional amounts may be available under certain circumstances and as uncertainties are resolved. The Company believes it is more likely than not that the recorded deferred tax asset will be realized principally from taxable income generated by profitable operations. The provision for income taxes for each of the three years in the period ended December 31, 1994 was as follows (in thousands):
1994 1993 1992 ---- ---- ---- State income taxes (principally currently payable) $ 6,000 $ 8,562 $ 5,847 Federal income taxes: Currently payable 2,906 16,793 19,703 Deferred 20,397 35,254 (12,892) Foreign income taxes (principally currently payable) 179 - 288 ------- ------- -------- $29,482 $60,609 $ 12,946 ======= ======= ========
The table below reconciles expected statutory federal income tax to actual income tax expense (in thousands):
1994 1993 1992 ---- ---- ---- Expected federal income tax $35,111 $61,904 $ 48,808 State income taxes, net of federal income tax benefit 3,900 5,565 3,900 Amortization of excess of acquisition cost over net tangible assets acquired 1,028 1,154 622 Tax exempt interest (1,144) (155) (101) Benefit from use of loss carryforwards - - (46,796) Minority interest 414 842 7,988 Alternative minimum tax - - 2,723 Amounts applicable to prior years taxes (principally United Kingdom in 1993) - (552) (4,183) Effects of changes in federal tax rates - (4,215) - Reduction in valuation allowance (5,340) (4,100) - Recognition of additional tax benefits (4,450) - - Other (37) 166 (15) ------- ------- -------- Actual income tax expense $29,482 $60,609 $ 12,946 ======= ======= ========
The provisions for income taxes for 1994 and 1993 were calculated under SFAS 109. Accordingly, the provisions for 1994 and 1993 are not comparable to the 1992 provision. F-25 13. Income Taxes, continued: ------------ 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 1994 and 1993 certain matters were resolved and the Company reduced the valuation allowance as reflected in the above reconciliation. 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 ========
Phlcorp, in connection with its 1986 reorganization, entered into a tax settlement agreement (the "Tax Settlement Agreement") with the United States whereby, among other things, Phlcorp agreed that upon utilization of certain pre-reorganization tax loss carryforwards, it would pay 25% of any resultant tax savings to the government, subject to certain limitations. The Tax Settlement Agreement provides that post-reorganization tax attributes and net operating losses will be utilized prior to pre-reorganization operating losses in calculating tax sharing payments. Due to unresolved issues concerning certain post-reorganization deductions, Phlcorp is unable to state with certainty the amount of its available carryforwards. However, Phlcorp believes that it has minimum tax operating loss carryforwards of between $95,000,000 and $260,000,000 at December 31, 1994. The expiration dates for Phlcorp's carryforwards will depend on the outcome of the matters referred to above, although it is unlikely such carryforwards will begin to expire before 1998. F-26 13. Income Taxes, continued: ------------ At December 31, 1994 the Company had tax loss carryforwards as follows (in thousands):
Year of Loss Expiration Carryforwards ---------- ------------- 1996 $ 3,515 1997 463 1998 1,311 1999 433 2000 21 2002 430 2003 17,318 2005 13,437 -------- 36,928 Phlcorp minimum amount, as described above 95,000 -------- Total minimum tax loss carryforwards $131,928 ========
Limitations exist under the tax law which may restrict the utilization of the Phlcorp carryforwards and the utilization of an aggregate of approximately $6,471,000 of non-Phlcorp tax loss carryforwards. Further, certain of the future deductions may only be utilized in the tax returns of certain life insurance subsidiaries. These limitations are considered in the determination of the valuation allowance. Under certain circumstances, the value of the carryforwards available could be substantially reduced if certain changes in ownership were to occur. In order to reduce this possibility, the Company's certificate of incorporation was amended to include certain charter restrictions which prohibit transfers of the Company's Common Stock under certain circumstances. Under prior law, Charter National had accumulated approximately $15,447,000 of special federal income tax deductions allowed life insurance companies as of December 31, 1994 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 previous owner 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 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 previous owner is contractually liable for any such taxes (including interest and penalties). The previous owner has contested the IRS assessment. F-27 14. 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 ======== ===== =====
15. Pension Plans and Other Postemployment and Postretirement Benefits: ------------------------------------------------------------------ Pension expense charged to operations included the following components (in thousands):
1994 1993 1992 ---- ---- ---- Service cost $ 5,529 $ 4,297 $ 4,657 Interest cost 6,596 6,100 5,995 Actual return on plan assets 2,610 (8,662) (4,536) Net amortization and deferral (8,507) 2,399 (1,870) ------- ------ ------- Net pension expense $ 6,228 $ 4,134 $ 4,246 ======= ======= =======
The funded status of the pension plans at December 31, 1994 and 1993 was as follows (in thousands):
1994 1993 ---- ---- Actuarial present value of accumulated benefit obligation: Vested $69,493 $73,153 Non-vested 1,640 2,005 ------- ------- $71,133 $75,158 ======= ======= Projected benefit obligation $88,452 $95,849 Plan assets at fair value 85,574 92,577 ------- ------- Funded status (2,878) (3,272) Unrecognized prior service cost 3,354 289 Unrecognized net loss at January 1, 1987 675 709 Unrecognized net (gain) loss from experience differences and assumption changes (2,343) 4,986 ------- ------- Accrued pension asset (liability) $(1,192) $ 2,712 ======= =======
F-28 15. Pension Plans and Other Postemployment and Postretirement --------------------------------------------------------- Benefits, continued: -------- The plans' assets consist primarily of U.S. government and agencies' bonds. The projected benefit obligation at December 31, 1994 and 1993 was determined using an assumed discount rate of 8.0% and 7.0%, respectively, and an assumed compensation increase rate of 5.6% and 5.9%, respectively. The assumed long-term rate of return on plan assets was 7.4% and 7.3% at December 31, 1994 and 1993, 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 $3,292,000, $2,066,000 and $2,106,000 for the years ended December 31, 1994, 1993 and 1992, respectively. Several subsidiaries provide certain health care and other benefits to certain retired employees. The costs of such benefits prior to January 1, 1993 were generally expensed as incurred, although liabilities for benefits were recorded in connection with certain acquisitions. 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 $1,762,000 in 1994 (principally interest), $2,594,000 in 1993 (principally interest) and $1,527,000 in 1992. The accumulated postretirement benefit obligation at December 31, 1994 and 1993 is as follows (in thousands):
1994 1993 ---- ---- Retirees $15,928 $18,154 Fully eligible active plan participants 3,377 3,481 Other active plan participants 1,830 2,067 ------- ------- 21,135 23,702 Unrecognized prior service cost 503 - Unrecognized net gain (loss) from experience differences and assumption changes 820 (1,607) ------- ------- Accrued postretirement benefit liability $22,458 $22,095 ======= =======
The discount rate used in determining the accumulated postretirement benefit obligation was 8% and 7% at December 31, 1994 and 1993, respectively. The assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation were between approximately 8.4% and 15% for 1994 and approximately 8% and 15% for 1993, declining to an ultimate rate of between 5.5% and 8% by 2005. If the health care cost trend rates were increased by 1%, the accumulated postretirement obligation as of December 31, 1994 and 1993 would have increased by approximately $1,335,000 and $1,404,000, respectively. The effect of this change on the aggregate of service and interest cost for 1994 and 1993 would be immaterial. F-29 16. Commitments: ----------- The Company and its subsidiaries rent office space and office equipment under non-cancelable operating leases with terms generally varying from one to fifteen years. Rental expense (net of sublease rental income) charged to operations was approximately $16,566,000 in 1994, $17,555,000 in 1993 and $20,791,000 in 1992. 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, 1994 were as follows (in thousands):
Future Minimum Minimum Sublease Net Rental Payments Rental Income Minimum Rentals --------------- ---------------- --------------- 1995 $17,932 $4,362 $13,570 1996 10,649 1,172 9,477 1997 6,024 - 6,024 1998 4,531 - 4,531 1999 2,793 - 2,793 Thereafter 1,517 - 1,517
In connection with the sale of certain subsidiaries, the Company has made or guaranteed the accuracy of certain representations given to the acquiror. No material loss is expected in connection with such matters. Certain subsidiaries that were formerly under the control of the Wisconsin Insurance Commissioner have guaranteed the adequacy of certain other matters. The maximum amount of such contingencies is approximately $5,000,000 at December 31, 1994. The Company does not expect a material loss in connection with these guarantees. The insurance and the banking and lending subsidiaries are limited by regulatory requirements and agreements in the amount of dividends and other transfers of funds that are available to the Company. Principally as a result of such restrictions, the net assets of subsidiaries which are subject to limitations on transfer of funds to the Company were approximately $675,300,000 at December 31, 1994. 17. Litigation: ---------- The Company is subject to various litigation which arises in the course of its business. Based on discussions with counsel, management is of the opinion that such litigation will have no material adverse effect on the consolidated financial position of the Company or its consolidated results of operations. 18. Earnings 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 options and warrants for the periods they were outstanding. The number of common and dilutive common equivalent shares used for this calculation was 29,101,000 in 1994, 29,270,000 in 1993 and 24,435,000 in 1992. F-30 18. Earnings Per Common Share, continued: ------------------------- Fully diluted earnings per share was calculated as described above except that in 1994 and 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 1994 and 1993, the calculations assume the 5 1/4% Convertible Subordinated 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 30,857,000 in 1994, 30,743,000 in 1993 and 24,516,000 in 1992. 19. Fair Value of Financial Instruments: ----------------------------------- The following table presents fair value information about certain financial instruments, whether or not recognized on the balance sheet. Where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The fair value amounts presented do not purport to represent and should not be considered representative of the underlying "market" or franchise value of the Company. The methods and assumptions used to estimate the fair values of each class of the financial instruments described below are as follows: (a) Investments: The fair values of marketable equity securities and fixed maturity securities are substantially based on quoted market prices, as disclosed in Note 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 cash equivalents: For cash equivalents, the carrying amount approximates fair value. (c) Loans receivable of banking and lending subsidiaries: The fair value of loans receivable of the banking and lending subsidiaries is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities. (d) 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 carrying value of the remaining investments in associated companies approximates fair value. F-31 19. Fair Value of Financial Instruments, continued: ----------------------------------- (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) Derivatives: The fair values of derivatives generally reflect the amounts that the Company would receive or pay to terminate the interest rate and currency swap contracts. (i) Customer banking deposits: The fair value of customer banking deposits is estimated using rates currently offered for deposits of similar remaining maturities. (j) Long-term and other indebtedness: The fair values of non-variable rate debt are estimated using quoted market prices and estimated rates which would be available to the Company for debt with similar terms. The fair value of variable rate debt is estimated to be the carrying amount. (k) 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. The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1994 and 1993 are as follows (in thousands):
1994 1993 ---- ---- Carrying Fair Carrying Fair Amount Value Amount Value -------- ----- -------- ----- Financial Assets: Investments: Practicable to estimate fair value $2,494,452 $2,492,686 $2,679,832 $2,682,287 Policyholder loans 17,943 - 18,138 - Cash and cash equivalents 252,495 252,495 291,414 291,414 Loans receivable of banking and lending subsidiaries, net of allowance 251,888 262,536 197,403 205,231 El Salvador Government bonds receivable, net of deferred gain - - 1 8,458 Separate and variable accounts 420,398 420,398 335,357 335,357 Investments in Associated Companies 138,565 146,469 80,873 101,921 WMAC Companies 24,611 58,573 24,051 56,870 Other assets (derivatives) 2,350 2,235 - - Financial Liabilities: Other liabilities (derivatives) - 6,102 - 5,336 Customer banking deposits 179,888 179,275 173,365 174,994 Long-term and other indebtedness 425,848 417,016 401,335 416,986 Investment contract reserves 84,606 86,170 105,398 109,597 Separate and variable accounts 419,355 419,355 334,636 334,636
F-32 20. Segment Information: ------------------- For information with respect to the Company's business segments, see "Financial Information about Industry Segments" in Item 1 included elsewhere herein, which is incorporated by reference into these consolidated financial statements. 21. Selected Quarterly Financial Data (Unaudited): ---------------------------------------------
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (In thousands, except per share amounts) 1994: ---- Revenues $336,108 $325,660 $347,463 $375,154 ======== ======== ======== ======== Net income $ 14,219 $ 12,348 $ 21,244 $ 23,025 ======== ======== ======== ======== Earnings per common and dilutive common equivalent share $.49 $.42 $.73 $.79 ==== ==== ==== ==== Number of shares used in calculation 29,146 29,059 29,028 29,172 ====== ====== ====== ====== Earnings per fully diluted common share $.49 $.42 $.72 $.77 ==== ==== ==== ==== Number of shares used in calculation 29,146 29,059 30,767 30,981 ====== ====== ====== ====== 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 ====== ====== ====== ======
In 1994 and 1993, the total of quarterly per share amounts do not necessarily equal annual per share amounts. F-33 SCHEDULE II - Condensed Financial Information of Registrant LEUCADIA NATIONAL CORPORATION BALANCE SHEETS December 31, 1994 and 1993
1994 1993 ---- ---- (Thousands of dollars) ASSETS ------ Cash and cash equivalents $ 10,275 $ - Investments 23,270 87,853 Deferred income taxes 144,631 114,001 Miscellaneous receivables and other assets 27,977 31,457 Investments in and advances to/from subsidiaries, net 1,102,586 1,069,096 ---------- ---------- $1,308,739 $1,302,407 ========== ========== LIABILITIES ----------- Accounts payable, expense accruals and income taxes $ 20,339 $ 16,458 Debt, including current maturities 406,585 378,093 ---------- ---------- 426,924 394,551 ---------- ---------- SHAREHOLDERS' EQUITY -------------------- Common shares, par value $1 per share, authorized 150,000,000 shares; 28,050,037 and 27,897,023 shares issued and outstanding, after deducting 30,272,650 and 30,260,664 shares held in treasury 28,050 27,897 Additional paid-in capital 126,225 125,013 Net unrealized gain (loss) on investments (41,309) 49,912 Retained earnings 768,849 705,034 ---------- ---------- Total shareholders' equity 881,815 907,856 ---------- ---------- $1,308,739 $1,302,407 ========== ==========
See notes to this schedule. F-34 SCHEDULE II - Condensed Financial Information of Registrant, continued: LEUCADIA NATIONAL CORPORATION STATEMENTS OF INCOME For the years ended December 31, 1994, 1993 and 1992
1994 1993 1992 ---- ---- ---- (In thousands, except per share amounts) Investment income, net $ 22,700 $ 23,538 $ 25,852 Net securities losses (2,160) - - Equity in income of subsidiaries 130,266 155,515 139,605 -------- -------- -------- 150,806 179,053 165,457 -------- -------- -------- Interest expense 50,060 38,778 32,609 Other expenses, net 29,910 24,016 2,241 -------- -------- -------- 79,970 62,794 34,850 -------- -------- -------- Income before cumulative effects of changes in accounting principles 70,836 116,259 130,607 Equity in cumulative effects of changes in accounting principles related to subsidiaries - 129,195 - -------- -------- -------- Net income $ 70,836 $245,454 $130,607 ======== ======== ======== Earnings per common and dilutive common equivalent share: Income before cumulative effects of changes in accounting principles $2.43 $3.97 $5.35 Cumulative effects of changes in accounting principles - 4.41 - ----- ----- ----- Net income $2.43 $8.38 $5.35 ===== ===== ===== Fully diluted earnings per common share: Income before cumulative effects of changes in accounting principles $2.41 $3.89 $5.33 Cumulative effects of changes in accounting principles - 4.20 - ----- ----- ----- Net income $2.41 $8.09 $5.33 ===== ===== =====
See notes to this schedule. F-35 SCHEDULE II - Condensed Financial Information of Registrant, continued: LEUCADIA NATIONAL CORPORATION STATEMENTS OF CASH FLOWS For the years ended December 31, 1994, 1993 and 1992
1994 1993 1992 ---- ---- ---- (Thousands of dollars) Net cash flows from operating activities: ---------------------------------------- Net income $ 70,836 $ 245,454 $ 130,607 Adjustments to reconcile net income to net cash provided by (used for) operations: Depreciation and amortization 1,486 1,066 429 Net securities losses 2,160 - - Equity in earnings of subsidiaries (excluding cumulative effects of changes in accounting principles) (130,266) (155,515) (139,605) Cumulative effects of changes in accounting principles related to subsidiaries - (129,195) - Net change in: Miscellaneous receivables 221 (215) (257) Other assets (5,347) (13,095) (3,730) Investments in and advances to/from subsidiaries, net (19,051) (22,917) 45,743 Accounts payable, expense accruals and income taxes 3,881 5,131 (8,070) Other 1,840 2,263 5,419 --------- --------- --------- Net cash provided by (used for) operating activities (74,240) (67,023) 30,536 --------- --------- --------- Net cash flows from investing activities: ---------------------------------------- Dividends received from subsidiaries 8,422 - 375 Capital contribution to subsidiaries (6,008) (6,008) (40) Purchase of investments (other than short-term) (8,022) (96,349) - Proceeds from sales of investments 69,268 - - --------- --------- --------- Net cash provided by (used for) investing activities 63,660 (102,357) 335 --------- --------- --------- Net cash flows from financing activities: ---------------------------------------- Net change in credit agreement and other short-term borrowings (402) (1,547) (72,793) Issuance of long-term debt, net of issuance costs 50,000 194,140 124,063 Reduction of long-term debt (21,250) (13,750) (59,217) Purchase of warrants to acquire common shares - - (14,700) Purchase of common shares for treasury (472) (2,492) (2,850) Dividends paid (7,021) (6,971) (5,589) --------- --------- --------- Net cash provided by (used for) financing activities 20,855 169,380 (31,086) --------- --------- --------- Net increase (decrease) in cash and cash equivalents 10,275 - (215) Cash and cash equivalents at January 1, - - 215 --------- --------- --------- Cash and cash equivalents at December 31, $ 10,275 $ - $ - ========= ========= ========= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $33,512 $23,296 $24,305 Income tax payments, net of refunds $ 5,799 $ 19 $ 4,924
See notes to this schedule. F-36 SCHEDULE II - Condensed Financial Information of Registrant, continued: LEUCADIA NATIONAL CORPORATION NOTES TO SCHEDULE For the years ended December 31, 1994, 1993 and 1992 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 1994, 1993 and 1992, there was no provision for income taxes provided by the parent company. Tax sharing payments received from subsidiaries were $35,385,000 in 1994, $64,566,000 in 1993 and $38,773,000 in 1992. D. The deferred income tax assets of $144,631,000 and $114,001,000 at December 31, 1994 and 1993, respectively, have not been allocated to the individual subsidiaries. F-37 SCHEDULE III - Supplementary Insurance Information LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES For the years ended December 31, 1994, 1993 and 1992
Insurance Losses, Policy Benefits and Separate Amortization Deferred and Policy of Policy Future Variable and Net Deferred Other Non-Life Acquisition Policy Unearned Accounts Contract Premium Investment Acquisition Operating Premiums Costs Benefits Premiums Liabilities Claims Revenue Income Costs Expenses Written ----------- -------- -------- ----------- -------- ------- ---------- ----------- --------- -------- (Thousands of dollars) 1994 ---- Life Insurance $32,286 $ 870,910 $ 10,039 $419,355 $ 25,802 $172,445 $ 55,218 $138,324 $ 68,872 $ 49,319 ------- ---------- -------- -------- ---------- -------- -------- -------- -------- -------- Property and Casualty Insurance: Automobile 29,741 - 314,145 - 766,276 599,180 70,275 553,916 33,093 629,555 Commercial 10,567 - 54,208 - 263,400 101,394 18,107 77,471 12,302 101,221 Miscellaneous and personal 1,942 - 35,154 - 38,342 45,867 4,964 49,299 6,220 46,968 ------- ---------- -------- -------- ---------- -------- -------- -------- -------- -------- 42,250 - 403,507 - 1,068,018 746,441 93,346 680,686 51,615 777,744 ------- ---------- -------- -------- ---------- -------- -------- -------- -------- -------- $74,536 $ 870,910 $413,546 $419,355 $1,093,820 $918,886 $148,564 $819,010 $120,487 $827,063 ======= ========== ======== ======== ========== ======== ======== ======== ======== ======== 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 ======= ========== ======== ======== ========== ======== ======== ======== ======== ========
F-38 SCHEDULE IV - Schedule of Reinsurance LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES For the years ended December 31, 1994, 1993 and 1992
Percentage of Ceded Assumed Amount Direct To Other From Other Net Assumed Business Companies Companies Amount To Net -------- --------- ---------- ------ ---------- (Thousands of dollars) 1994 ---- Life insurance in force $2,285,000 $271,000 $161,000 $2,175,000 7.40% ========== ======== ======== ========== Premiums: Life insurance $ 120,761 $ 1,484 $ 1,121 $ 120,398 .93% Accident and health insurance 53,775 683 6 53,098 .01% Property and liability insurance 748,595 34,339 31,134 745,390 4.18% ---------- -------- -------- ---------- Total premiums $ 923,131 $ 36,506 $ 32,261 $ 918,886 3.51% ========== ======== ======== ========== 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% ========== ======== ======== ==========
F-39 SCHEDULE V - Valuation and Qualifying Accounts LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES For the years ended December 31, 1994, 1993 and 1992
Additions Deductions ---------------------------------- ------------------------ Charged Balance at (Credited) Balance Beginning to Costs and Sale of at End of Description of Period Expenses Recoveries Other(a) Write-Offs Receivables Period ----------- --------- ------------ ---------- -------- ---------- ----------- -------- (Thousands of dollars) 1994 ---- Loan receivables of banking and lending subsidiaries $ 8,341 $ 7,634 $2,702 $ - $ 6,369 $ - $12,308 Trade, notes and other receivables 5,185 5,744 1,449 - 6,605 - 5,773 ------- ------- ------ ------- ------- ------ ------- Total allowance for doubtful accounts $13,526 $13,378 $4,151 $ - $12,974 $ - $18,081 ======= ======= ====== ======= ======= ====== ======= Reinsurance receivable $83,825 $(2,799) $ - $ - $76,980 (b) $ - $ 4,046 ======= ======= ====== ======= ======= ====== ======= 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 ======= ======= ====== ======= ======= ====== ======= (a) Principally relates to implementation of SFAS 113 in 1993 and acquisition of companies in 1992. (b) Principally relates to the write-off of fully reserved receivables for unpaid losses.
F-40 SCHEDULE VI - Schedule of Supplemental Information for Property and Casualty Insurance Underwriters LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES For the years ended December 31, 1994, 1993 and 1992
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) 1994 ---- Automobile $ - $556,736 $(55,771) $483,120 Commercial 276 70,658 (12,822) 59,436 Miscellaneous and personal - 51,983 (6,221) 46,042 ---- -------- -------- -------- Total property and casualty $276 $679,377 $(74,814) $588,598 ==== ======== ======== ======== 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 ==== ======== ======== ========
F-41 EXHIBIT INDEX Exhibit Exemption Number Description Indication ------- ----------- ----------- 3.1 Restated Certificate of Incorporation (filed as Exhibit 5.1 to the Company's Current Report on Form 8-K dated July 14, 1993).* 3.2 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).* 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).* ------------------------- * Incorporated by reference. EXHIBIT INDEX Exhibit Exemption Number Description Indication ------- ----------- ----------- 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).* ------------------------- * Incorporated by reference. EXHIBIT INDEX Exhibit Exemption Number Description Indication ------- ----------- ----------- 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 (filed as Exhibit 10.17 to the 1993 10-K).* 10.18 Agreement made as of December 28, 1993 by and between the Company and Joseph S. Steinberg (filed as Exhibit 10.18 to the 1993 10-K).* 10.19(a) Agreement between the Company and Ian M. Cumming, dated as of December 28, 1993 (filed as Exhibit 10.19(a) to the 1993 10-K).* 10.19(b) Escrow and Security Agreement by and among the Company, Ian M. Cumming and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1993 (filed as Exhibit 10.19(b) to the 1993 10-K).* 10.20(a) Agreement between the Company and Joseph S. Steinberg, dated as of December 28, 1993 (filed as Exhibit 10.20(a) to the 1993 10-K).* 10.20(b) Escrow and Security Agreement by and among the Company, Joseph S. Steinberg and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1993 (filed as Exhibit 10.20(b) to the 1993 10-K).*. 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), Form S-8 (File No. 33-61680) and Form S-8 (File No. 33-61718). 27 Financial Data Schedule. 28 Schedule P of the 1994 Annual Statement to P Insurance Departments of the Colonial Penn Insurance Company and Affiliated Property/ Casualty Insurers and the Empire Insurance Company, Principal Insurer. ------------------------- * Incorporated by reference. EX-21 2 LIST OF SUBSIDIARIES EXHIBIT 21 ---------- LEUCADIA NATIONAL CORPORATION SUBSIDIARIES AS OF DECEMBER 31, 1994 State of Name Incorporation ---- ------------- Bay Colony Insurance Company California HSD Venture 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 CPAX, Inc. Delaware CPI Investment, Inc. Delaware Leucadia Aviation, Inc. Delaware Leucadia Cellars, Ltd. Delaware LNC Investments, Inc. Delaware Neward Corporation Delaware Rastin Investing Corp. Delaware RERCO, Inc. Delaware Pennpark Investors, L.L.C. Illinois College Life Development Corporation Indiana Professional Data Management, Inc. Indiana Charter National Life Insurance Company Missouri Bayside Casualty Insurance Company New Jersey The Sperry & Hutchinson Company, Inc. New Jersey Allcity Insurance Company New York Empire Insurance Company New York Centurion 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 Leucadia Film Corporation Utah Leucadia Financial Corporation Utah Leucadia Properties, Inc. Utah Silver Mountain Industries, Inc. Utah Solana Corporation Utah Telluride Properties Acquisition, Inc. 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, 1994. EX-23 3 INDEPENDENT AUDITORS CONSENT 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. 33-61718) of our report dated March 17, 1995, on our audits of the consolidated financial statements and financial statement schedules of Leucadia National Corporation and Subsidiaries as of December 31, 1994 and 1993, and for the years ended December 31, 1994, 1993 and 1992, which report is included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. New York, New York March 23, 1995 EX-27 4 EXHIBIT 27 - FINANCIAL DATA SCHEDULE
5 This Schedule contains summary financial information extracted from the financial statements contained in the body of the accompanying Form 10-K and is qualified in its entirety by reference to such financial statements. 1000 YEAR DEC-31-1994 DEC-31-1994 252,495 2,512,395 774,663 22,127 30,974 0 110,887 87,067 4,674,046 0 425,848 0 0 28,050 853,765 4,674,046 180,050 1,384,385 137,507 964,151 265,334 10,579 44,003 100,318 29,482 70,836 0 0 0 70,836 2.43 2.41