-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AB/GsvSgaLr2fH1h+olDXHpS7AadsAK9loSB6WYrOIwk5U9ea15bipRU5XSqmyCN CFbz8TXuJhAtlCc4ebVW5w== 0000909518-99-000190.txt : 19990319 0000909518-99-000190.hdr.sgml : 19990319 ACCESSION NUMBER: 0000909518-99-000190 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990318 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEUCADIA NATIONAL CORP CENTRAL INDEX KEY: 0000096223 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 132615557 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-05721 FILM NUMBER: 99568141 BUSINESS ADDRESS: STREET 1: 315 PARK AVE S CITY: NEW YORK STATE: NY ZIP: 10010 BUSINESS PHONE: 2124601900 MAIL ADDRESS: STREET 1: 315 PARK AVENUE SOUTH CITY: NEW YORK STATE: NY ZIP: 10010 FORMER COMPANY: FORMER CONFORMED NAME: TALCOTT NATIONAL CORP DATE OF NAME CHANGE: 19800603 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended December 31, 1998 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from ___________ to ___________ Commission file number: 1-5721 LEUCADIA NATIONAL CORPORATION - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) NEW YORK 13-2615557 - -------------------------------------- ---------------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 315 PARK AVENUE SOUTH NEW YORK, NEW YORK 10010 (212) 460-1900 - -------------------------------------------------------------------------------- (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered - -------------------------------------- ---------------------------------------- COMMON SHARES, PAR VALUE $1 PER SHARE NEW YORK STOCK EXCHANGE PACIFIC STOCK EXCHANGE 7-3/4% SENIOR NOTES DUE AUGUST 15, 2013 NEW YORK STOCK EXCHANGE 8-1/4% SENIOR SUBORDINATED NOTES DUE JUNE 15, 2005 NEW YORK STOCK EXCHANGE 7-7/8% SENIOR SUBORDINATED NOTES DUE OCTOBER 15, 2006 NEW YORK STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: NONE. - -------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. Aggregate market value of the voting stock of the registrant held by non-affiliates of the registrant at March 12, 1999 (computed by reference to the last reported closing sale price of the Common Stock on the New York Stock Exchange on such date): $1,220,637,876. On March 12, 1999, the registrant had outstanding 60,246,116 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE: Certain portions of the registrant's definitive proxy statement pursuant to Regulation 14A of the Securities Exchange Act of 1934 in connection with the 1999 annual meeting of shareholders of the registrant are incorporated by reference into Part III of this Report. ================================================================================ NYFS04...:\30\76830\0146\347\FRM1129V.19N PART I Item 1. Business. THE COMPANY The Company is a diversified financial services holding company principally engaged in personal and commercial lines of property and casualty insurance, banking and lending, manufacturing and real estate activities. The Company concentrates on return on investment and cash flow to build long-term shareholder value, rather than emphasizing volume or market share. Additionally, the Company continuously evaluates the retention and disposition of its existing operations and investigates possible acquisitions of new businesses in order to maximize shareholder value. Shareholders' equity has grown from a deficit of $7,657,000 at December 31, 1978 (prior to the acquisition of a controlling interest in the Company by the Company's Chairman and President), to a positive shareholders' equity of $1,853,159,000 at December 31, 1998, equal to a book value per common share of the Company (a "Common Share") of negative $.11 at December 31, 1978 and $29.90 at December 31, 1998. In 1998, the Company announced that it was considering the payment of a significant cash dividend. The Company has received a ruling from the Internal Revenue Service providing that any gain realized on such a dividend (up to a maximum of approximately $812,000,000) would be treated as a capital gain. The Company anticipates that, prior to the date of its 1999 Annual Meeting scheduled for May 5, 1999, its Board of Directors will declare a dividend in an aggregate amount of approximately $812,000,000, minus amounts paid to repurchase Common Shares from March 17, 1999 through the date of declaration. Payment of such dividend would require the Company to make an offer to purchase all of its outstanding 8-1/4% Senior Subordinated Debentures due 2005 and its 7-7/8% Senior Subordinated Debentures due 2006, outstanding in the aggregate principal amount of $235,000,000, at a purchase price of 101% of principal, plus accrued and unpaid interest thereon pursuant to the terms of the indentures governing these Debentures. These offers would be required to be made within five business days after the payment of such dividend, unless the terms of the Debentures can be modified on terms that are acceptable to the Company. As of December 31, 1998, the Company owned a 30% interest in Caja de Ahorro y Seguro S.A. ("Caja"), a holding company whose subsidiaries are engaged in property and casualty insurance, life insurance, workers' compensation insurance and banking in Argentina. During 1998, the Company's previously announced agreement to sell substantially all of its interest in Caja to its Argentine partner was restructured. In March 1999, the Company sold all of its interest in Caja to Assicurazioni Generali Group, an Italian insurance company, for $126,000,000 in cash and a $40,000,000 collateralized note maturing April 2001 from its Argentine partner. The Company will record a pre-tax gain of approximately $120,000,000 in its first quarter 1999 results of operations in connection with this transaction. In February 1999, the Company sold its entire interest in its Russian joint venture to its joint venture partner, PepsiCo, Inc. for consideration of approximately $39,190,000. Although the Company will recognize a pre-tax gain of approximately $29,545,000 in the first quarter 1999 results of operations, when combined with the Company's share of the joint venture's losses since inception, the Company's net loss from this investment is approximately $40,310,000. For more information concerning this transaction, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Report. In February 1999, the Company sold its wholly-owned subsidiary, The Sperry and Hutchinson Company, Inc. (through which the Company had conducted a trading stamps business) and will reflect a pre-tax gain of approximately $19,000,000 in its first quarter 1999 results of operations. In the fourth quarter of 1998, the Company acquired a 95.4% interest in Fidei S.A., a French company listed on the Paris Stock Exchange that is engaged directly and through subsidiaries in real estate activities, for approximately $62,300,000. In connection with this acquisition, the Company entered into currency swap agreements to hedge approximately $55,000,000 of its foreign currency exposure. In September 1998, the Company reinsured substantially all of its life insurance business to Allstate Life Insurance Company ("Allstate") and a subsidiary thereof in an indemnity reinsurance transaction (the "Reinsurance Transaction"). In December 1998, the Company agreed to sell its life insurance subsidiaries, Charter National Life Insurance Company ("Charter") and Intramerica Life Insurance Company ("Intramerica"), to Allstate. Consummation of this transaction, which is expected to occur in the second quarter of 1999, is subject to regulatory approval and the satisfaction of certain other conditions. The transaction is expected to result in a pre-tax gain of approximately $20,000,000, principally resulting from the recognition of deferred gains from prior reinsurance transactions. The consolidated financial statements of the Company included in this Report reflect the life insurance operations as discontinued operations and the consolidated financial statements for prior periods have been restated to be consistent with such presentation. In 1998, the Company declared a special pro rata dividend to shareholders of record on August 25, 1998 relating to the stock of HomeFed Corporation ("HomeFed"), a publicly held real estate development company. For additional information concerning this dividend, see Item 5, "Market for Registrant's Common Equity and Related Stockholder Matters" of this Report. The Company's insurance operations consist of personal and commercial property and casualty insurance primarily conducted through Empire Insurance Company ("Empire") and Allcity Insurance Company ("Allcity"). For the year ended December 31, 1998, these insurance operations accounted for 57% of the Company's revenues from continuing operations and at December 31, 1998, 25% of the Company's assets. The Company's insurance operations have a diversified investment portfolio of securities, of which approximately 84% are issued or guaranteed by the U.S. Treasury or by U.S. governmental agencies or are rated "investment grade" by Moody's Investors Service Inc. ("Moody's") and/or Standard & Poor's Corporation ("S&P"). The Company's banking and lending operations principally consist of making instalment loans to niche markets primarily funded by customer banking deposits insured by the Federal Deposit Insurance Corporation (the "FDIC"). The Company's principal lending activities consist of providing collateralized personal automobile loans to individuals with poor credit histories. The Company's manufacturing operations manufacture and market plastic netting used for a variety of purposes including, among other things, construction, agriculture, packaging, carpet padding and filtration. The Company and certain of its subsidiaries have tax loss carryforwards. The amount and availability of the tax loss carryforwards are subject to certain qualifications, limitations and uncertainties as more fully discussed in the Notes to the Consolidated Financial Statements. As used herein, the term "Company" refers to Leucadia National Corporation, a New York corporation organized in 1968, and its subsidiaries, except as the context otherwise may require. 2 FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS In 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which requires a "management" approach for segment disclosure. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS 131 also requires disclosures about products and services, geographic areas and major customers. The Company's reportable segments consist of its operating units, which offer different products and services and are managed separately. These reportable segments are: property and casualty insurance, banking and lending, manufacturing and other operations. The property and casualty insurance operations provide personal and commercial lines of insurance primarily to niche markets in the New York metropolitan area. The banking and lending operations principally make collateralized personal automobile instalment loans to individuals who have difficulty obtaining credit, at interest rates above those charged to individuals with good credit histories. Such loans are primarily funded by deposits insured by the FDIC. The manufacturing operations manufacture and market proprietary plastic netting used for a variety of purposes. Other operations primarily consist of real estate activities. Associated companies consists of entities which the Company does not control but has the ability to exercise significant influence over and which are accounted for on the equity method of accounting. The information in the following tables for corporate assets primarily consists of investments, notes receivable from the sale of certain businesses and cash and cash equivalents. Corporate revenues primarily consist of investment income on the above corporate assets. Corporate assets, revenues, overhead expenses and interest expense are not allocated to the operating units. The Company's business is conducted principally in the United States; foreign operations and investments have not been material. Certain information concerning the Company's segments for 1998, 1997 and 1996 is presented in the following table. 1998 1997 1996 ---- ---- ---- (In millions) Revenues: - --------- Property and Casualty Insurance $ 299.8 $ 363.2 $ 419.4 Banking and Lending 46.0 45.8 55.1 Manufacturing 56.6 133.7 148.4 Other Operations 69.9 102.0 55.8 ------- ------- ------- Total revenue for reportable segments 472.3 644.7 678.7 Equity in Associated Companies 23.3 (56.5) (33.6) Corporate (a) 34.9 42.5 25.3 ------- ------- ------- Total consolidated revenues $ 530.5 $ 630.7 $ 670.4 ======= ======= ======= 3 1998 1997 1996 ---- ---- ---- (In millions) Income (loss) from continuing operations before income taxes, minority expense of trust preferred securities and extraordinary loss: - ---------------------------------------- Property and Casualty Insurance $ (7.9) $ 4.1 $ 22.4 Banking and Lending 13.9 5.8 14.5 Manufacturing 10.1 .3 .4 Other Operations 22.8 57.3 (1.3) ------- ------- ------- Total income (loss) from continuing operations before income taxes, minority expense of trust preferred securities and extraordinary loss for reportable segments 38.9 67.5 36.0 Equity in Associated Companies 23.3 (56.5) (33.6) Corporate (a) (32.8) (35.2) (50.6) -------- -------- -------- Total consolidated income (loss) from continuing operations before income taxes, minority expense of trust preferred securities and extraordinary loss $ 29.4 $ (24.2) $ (48.2) ======= ======= ======= Identifiable assets employed: - ----------------------------- Property and Casualty Insurance $ 990.1 $1,047.8 $1,082.5 Banking and Lending 269.3 265.1 291.3 Manufacturing 41.8 45.4 68.7 Other Operations 673.6 170.0 218.9 -------- -------- -------- Total assets of reportable segments 1,974.8 1,528.3 1,661.4 Investments in Associated Companies 172.4 207.9 202.5 Net Assets of Discontinued Operations 45.0 71.9 596.1 Corporate 1,766.8 1,937.2 315.6 -------- -------- -------- Total consolidated assets $3,959.0 $3,745.3 $2,775.6 ======== ======== ======== - ------------------ (a) Includes securities losses relating to the writedown of investments in Russian and Polish securities, as described in Item 7, "Management's Discussion and Analysis of Financial Condition and Operations" of this Report. At December 31, 1998, the Company and its consolidated subsidiaries had 1,391 full-time employees. 4 PROPERTY AND CASUALTY INSURANCE General The Company's principal property and casualty insurance operations are conducted through the Empire Group, which consists of Empire and Allcity. The Empire Group specializes in personal and commercial property and casualty insurance business primarily in the New York metropolitan area. The Empire Group provides personal automobile and homeowners insurance and commercial insurance coverage for vehicles (including medallion and radio-controlled livery vehicles), multi-family residential real estate, workers' compensation and various other business classes. The Empire Group is rated "B+" (very good) by A.M. Best Company ("Best") and rated "BBB+" (good) by S&P. As with all ratings, Best and S&P ratings are subject to change at any time. In 1998, a new president and chief executive officer was named at the Empire Group and, effective in 1999, the business was reorganized into three divisions: the Small Business Division, the Personal Lines and Residual Market Division, and the Mid-Market Division. Each of these divisions has separate management teams responsible for all marketing, sales and underwriting decisions within their divisions. The reorganization is designed to provide a greater degree of accountability for underwriting results and to create a closer relationship with agents and customers of the Empire Group. The Small Business Division will primarily focus on commercial package products for small businesses; the Personal Lines and Residual Market Division will primarily concentrate on personal automobile and homeowners insurance; and the Mid-Market Division will focus on commercial auto, commercial package and workers' compensation insurance for larger accounts. For the years ended December 31, 1998, 1997 and 1996, net earned premiums for the Empire Group were $228,600,000, $275,000,000 and $326,400,000, respectively. The decline in the Empire Group's net earned premiums is primarily due to the continuing reduction in the assigned risk business and reductions in certain commercial lines. During the year ended December 31, 1998, approximately 56%, 30% and 14% of net earned premiums of the Empire Group were derived from personal and commercial automobile lines, other commercial lines and other personal lines, respectively. Substantially all of the Empire Group's policies are written in New York for a one-year period. The Empire Group is licensed in New York to write most lines of insurance that may be written by a property and casualty insurer. The Empire Group is also licensed to write insurance in Connecticut, Massachusetts, Missouri, New Hampshire and New Jersey. The voluntary business of the Empire Group is produced through general agents, local agents and insurance brokers, who are compensated for their services by payment of commissions on the premiums they generate. There are seven general agents, one of which is owned by Empire, and approximately 379 local agents and insurance brokers presently acting under agreements with the Empire Group. These agents and brokers also represent other competing insurance companies. The Empire Group's owned general agent is its largest producer and generated approximately 12% of its total premium volume for the year ended December 31, 1998. The Empire Group has acquired blocks of assigned risk business from other insurance companies (the "service business") relating to private passenger and commercial automobile insurance. These contractual arrangements, which are negotiated for one or two year periods, provide for fees paid to the Empire Group within parameters established by the New York Insurance Department. On a quarterly basis, the Empire Group reviews and adjusts its estimated loss reserves for any changes in trends and actual loss experience. Included in the Empire Group's results for 1998 was approximately $42,000,000 for reserve strengthening related to losses from prior accident years. The Empire Group will 5 continue to evaluate the adequacy of its loss reserves and record future adjustments to its loss reserves as appropriate. Beginning in 1996, the Empire Group has taken certain steps to improve its operations, including systems enhancements and actions relating to pricing and improved underwriting and claims handling; these efforts have continued into 1999. In addition, the Empire Group may initiate additional changes in the future. The Company believes that the results of these efforts taken to date will not be known for some time, given the nature of the property and casualty insurance business and the inherently long period of time involved in settling claims. Set forth below is certain statistical information for the Empire Group prepared in accordance with generally accepted accounting principles ("GAAP") and statutory accounting principles ("SAP"). The Loss Ratio is the ratio of net incurred losses and loss adjustment expenses to net premiums earned. The Expense Ratio is the ratio of underwriting expenses (policy acquisition costs, commissions, and a portion of administrative, general and other expenses attributable to underwriting operations) to net premiums written, if determined in accordance with SAP, or to net premiums earned, if determined in accordance with GAAP. A Combined Ratio below 100% indicates an underwriting profit and a Combined Ratio above 100% indicates an underwriting loss. The Combined Ratio does not include the effect of investment income. YEAR ENDED DECEMBER 31, --------------------------------- 1998 1997 1996 ---- ---- ---- Loss Ratio: GAAP 102.6% 100.3% 92.1% SAP 102.6% 100.3% 89.5% Industry (SAP) (a) N/A 72.8% 78.4% Expense Ratio: GAAP 26.7% 18.2% 22.6% SAP 31.4% 17.5% 18.4% Industry (SAP) (a) N/A 28.8% 27.4% Combined Ratio (b): GAAP 129.3% 118.5% 114.7% SAP 134.0% 117.8% 107.9% Industry (SAP) (a) N/A 101.6% 105.8% - --------------- (a) Source: Best's Aggregates & Averages, Property/Casualty, 1998 Edition. Industry Combined Ratios may not be fully comparable as a result of, among other things, differences in geographical concentration and in the mix of property and casualty insurance products. (b) For 1998, the difference in the accounting treatment for curtailment gains relating to defined benefit pension plans was the principal reason for the difference between the GAAP Combined Ratio and the SAP Combined Ratio. For 1996, a change in the statutory accounting treatment for retrospectively rated reinsurance agreements was the principal reason for the difference between the GAAP Combined Ratio and the SAP Combined Ratio. Additionally for all three years, the difference relates to the accounting for certain costs which are treated differently under SAP and GAAP. For further information about the Empire Group's Combined Ratios, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Report. 6 Losses and Loss Adjustment Expenses Liabilities for unpaid losses, which are not discounted (except for certain workers' compensation liabilities), and loss adjustment expenses ("LAE") are determined using case-basis evaluations, statistical analyses and estimates for salvage and subrogation recoverable and represent estimates of the ultimate claim costs of all unpaid losses and LAE. Liabilities include a provision for losses that have occurred but have not yet been reported. These estimates are subject to the effect of trends in future claim severity and frequency experience. Adjustments to such estimates are made from time to time due to changes in such trends as well as changes in actual loss experience. These adjustments are reflected in current earnings. The Empire Group relies upon standard actuarial ultimate loss projection techniques to obtain estimates of liabilities for losses and LAE. These projections include the extrapolation of both losses paid and incurred by business line and accident year and implicitly consider the impact of inflation and claims settlement patterns upon ultimate claim costs based upon historical patterns. In addition, methods based upon average loss costs, reported claim counts and pure premiums are reviewed in order to obtain a range of estimates for setting the reserve levels. For further input, changes in operations in pertinent areas including underwriting standards, product mix, claims management and legal climate are periodically reviewed. In the following table, the liability for losses and LAE of the Empire Group is reconciled for each of the three years ended December 31, 1998. Included therein are current year data and prior year development. 7 RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES 1998 1997 1996 ---- ---- ---- (In thousands) Net SAP liability for losses and LAE at beginning of year $487,116 $481,138 $476,692 -------- --------- -------- Provision for losses and LAE for claims occurring in the current year 191,482 248,408 271,633 Increase in estimated losses and LAE for claims occurring in prior years 42,290 27,027 28,183 -------- --------- -------- Total incurred losses and LAE 233,772 275,435 299,816 -------- --------- -------- Losses and LAE payments for claims occurring during: Current year 64,739 80,149 93,036 Prior years 186,831 189,308 202,334 -------- --------- -------- 251,570 269,457 295,370 -------- --------- -------- Net SAP liability for losses and LAE at end of year 469,318 487,116 481,138 Reinsurance recoverable 72,956 58,592 51,181 -------- --------- -------- Liability for losses and LAE at end of year as reported in financial statements (GAAP) $542,274 $545,708 $532,319 ======== ========= ======== The following table presents the development of balance sheet liabilities from 1988 through 1998 for the Empire Group. The liability line at the top of the table indicates the estimated liability for unpaid losses and LAE recorded as of the dates indicated. The middle section of the table shows the re-estimated amount of the previously recorded liability based on experience as of the end of each succeeding year. As more information becomes available and claims are settled, the estimated liabilities are adjusted upward or downward with the effect of decreasing or increasing net income at the time of adjustment. The lower section of the table shows the cumulative amount paid with respect to the previously recorded liability as of the end of each succeeding year. The "cumulative redundancy (deficiency)" represents the aggregate change in the estimates over all prior years. For example, the initial 1988 liability estimate indicated on the table of $222,814,000 has been 8 re-estimated during the course of the succeeding ten years, resulting in a re-estimated liability at December 31, 1998 of $210,837,000, or a redundancy of $11,977,000. If the re-estimated liability exceeded the liability initially established, a cumulative deficiency would be indicated. In evaluating this information, it should be noted that each amount shown for "cumulative redundancy (deficiency)" includes the effects of all changes in amounts for prior periods. For example, the amount of the redundancy (deficiency) related to losses settled in 1992, but incurred in 1988, will be included in the cumulative redundancy (deficiency) amount for 1988, 1989, 1990 and 1991. This table is not intended to and does not present accident or policy year loss and LAE development data. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it would not be appropriate to extrapolate future redundancies or deficiencies based on these tables. For further discussion of the Empire Group's loss development experience, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Report. 9
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT Year Ended December 31, -------------------------------------------------------------------------------------------------------------------- 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (In thousands) Liability for Unpaid Losses and Loss Adjustment Expenses $222,814 $235,223 $251,401 $280,679 $322,516 $353,917 $ 406,695 $ 476,692 $481,138 $487,116 $469,318 Liability Re-estimated as of: One Year Later $213,671 $227,832 $249,492 $280,020 $321,954 $344,156 $ 441,165 $ 504,875 $508,165 $529,406 $ - Two Years Later 206,088 217,432 245,141 277,866 324,262 374,158 467,659 537,372 546,724 Three Years Later 198,500 212,649 243,849 284,052 345,576 394,418 500,286 577,266 Four Years Later 194,324 211,859 247,314 296,484 361,903 415,251 534,014 Five Years Later 196,070 211,952 255,045 306,094 377,097 442,696 Six Years Later 196,646 216,545 260,031 316,887 395,291 Seven Years Later 199,502 219,786 265,525 330,866 Eight Years Later 201,600 222,556 277,626 Nine Years Later 202,989 231,152 Ten Years Later 210,837 Cumulative Redundancy (Deficiency) $ 11,977 $ 4,071 $(26,225) $(50,187) $(72,775) $(88,779) $(127,319)$(100,574) $(65,586) $(42,290) $ - ======== ======== ======== ======== ======== ======== ========= ========= ======== ======== ======== Cumulative Amount of Liability Paid Through: One Year Later $ 64,140 $ 65,822 $ 78,954 $ 89,559 $113,226 $116,986 $ 152,904 $ 202,334 $189,308 $186,831 $ - Two Years Later 101,206 109,479 126,908 150,043 182,250 199,214 270,020 318,693 314,755 Three Years Later 131,705 140,916 167,330 197,848 239,092 272,513 353,649 407,833 Four Years Later 152,330 166,023 196,099 233,244 285,880 326,637 415,919 Five Years Later 168,117 182,001 216,749 259,946 320,044 363,873 Six Years Later 178,095 193,943 231,892 279,682 341,636 Seven Years Later 185,310 203,169 242,275 293,860 Eight Years Later 191,292 209,115 253,104 Nine Years Later 194,965 214,687 Ten Years Later 198,618 Gross Liability - End of Year $ 391,829 $ 451,442 $ 517,422 $532,319 $545,708 $542,274 Reinsurance 37,912 44,747 40,730 51,181 58,592 72,956 --------- --------- --------- -------- -------- -------- Net Liability - End of Year as Shown Above $ 353,917 $ 406,695 $ 476,692 $481,138 $487,116 $469,318 ========= ========= ========= ======== ======== ======== Gross Re-estimated Liability - Latest $ 514,882 $ 605,549 $ 649,486 $623,588 $592,063 Re-estimated Reinsurance - Latest 72,186 71,535 72,220 76,864 62,657 --------- --------- --------- -------- -------- Net Re-estimated Liability - Latest $ 442,696 $ 534,014 $ 577,266 $546,724 $529,406 ========= ========= ========= ======== ======== Gross Cumulative (Deficiency) $(123,053) $(154,107) $(132,064) $(91,269) $(46,355) ========= ========= ========= ======== ========
10 Investments Investment activities represent a significant part of the Company's insurance related revenues and profitability. Investments are managed by the Company's investment advisors under the direction of, and upon consultation with, the Company's investment committees. The Company's insurance subsidiaries have a diversified investment portfolio of securities, substantially all of which are rated "investment grade" by Moody's and/or S&P or issued or guaranteed by the U.S. Treasury or by governmental agencies. The Company's insurance subsidiaries do not generally invest in less than "investment grade" or "non-rated" securities, real estate or mortgages, although from time to time they may make such investments in amounts not expected to be material. The composition of the Company's insurance subsidiaries' investment portfolio as of December 31, 1998 and 1997 was as follows: 1998 1997 ---- ---- (Dollars in thousands) Bonds and notes: U.S. Government and agencies 76% 87% Rated investment grade 8 11 Non rated - other 4 1 Rated less than investment grade - - Equity securities, primarily preferred 10 - Other, principally accrued interest 2 1 --- --- Total 100% 100% === === Estimated average yield to maturity of bonds and notes (a) 5.3% 6.1% Estimated average remaining life of bonds and notes (a) 3.3 yrs. 3.5 yrs. Carrying value of investment portfolio $748,818 $869,073 Market value of investment portfolio $749,147 $869,232 - ------------------------- (a) Excludes trading securities, which are not significant. Reinsurance The Empire Group's maximum retained limit was $500,000 for workers' compensation; for other property and casualty lines, the Empire Group's maximum retained limit was $300,000 for 1998, 1997 and 1996. Additionally, the Empire Group has entered into certain excess of loss and catastrophe treaties to protect against certain losses. The Empire Group's retention of lower level losses in such treaties is $7,500,000 for 1999, and was $7,500,000 for 1998, $5,000,000 for 1997 and $3,000,000 for 1996. Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of the policy liability, it does make the assuming reinsurer liable to the insurer to the extent of the reinsurance ceded. The Company's reinsurance generally has been placed with certain of the largest reinsurance companies, including (with their respective Best ratings) American Re-Insurance Company (A++), General Reinsurance Corporation (A++) and Zurich Reinsurance (North America), Inc. (A). The Company has reinsured substantially all of its discontinued life insurance operations pursuant to the Reinsurance Transaction with Allstate and certain other transactions. As mentioned above, the Company has agreed to sell its remaining life insurance subsidiaries to Allstate, and expects to close this sale in the second quarter of 1999. The Company believes its reinsurers to be financially capable of meeting their respective obligations. However, to the extent that any reinsuring company is unable to meet its 11 obligations, the Company's insurance subsidiaries would be liable for the reinsured risks. The Company has established reserves, which the Company believes are adequate, for any nonrecoverable reinsurance. Competition The insurance industry is a highly competitive industry, in which many of the Company's competitors have substantially greater financial resources, larger sales forces, more widespread agency and broker relationships, and more diversified lines of insurance coverage. Additionally, certain competitors market their products with endorsements from affinity groups, while the Company's products are unendorsed, which may give these other companies a competitive advantage. Federal administrative, legislative and judicial activity may result in changes to federal banking laws that increase the ability of national banks to offer insurance products in direct competition with the Company. The Company is unable to determine what effect, if any, such changes may have on the Company's operations. The Company believes that property and casualty insurers generally compete on the basis of price, customer service, consumer recognition, product design, product mix and financial stability. The industry has historically been cyclical in nature, with periods of less intense price competition generating significant profits, followed by periods of increased price competition resulting in reduced profitability or loss. The current cycle of intense price competition has continued for a longer period than in the past, suggesting that the significant infusion of capital into the industry in recent years, coupled with larger investment returns has been, and may continue to be, a depressing influence on policy rates. In addition, the Company is experiencing increased competition from low cost insurance providers that write personal lines business on a direct response basis through direct mail and telemarketing. The profitability of the property and casualty insurance industry is affected by many factors, including rate competition, severity and frequency of claims (including catastrophe losses), interest rates, state regulation, court decisions and judicial climate, all of which are outside the Company's control. Government Regulation Insurance companies are subject to detailed regulation and supervision in the states in which they transact business. Such regulation pertains to matters such as approving policy forms and various premium rates, minimum reserves and loss ratio requirements, the type and amount of investments, minimum capital and surplus requirements, granting and revoking licenses to transact business, levels of operations and regulating trade practices. Insurance companies are required to file detailed annual reports with the supervisory agencies in each of the states in which they do business, and are subject to examination by such agencies at any time. Increased regulation of insurance companies at the state level and new regulation at the federal level is possible, although the Company cannot predict the nature or extent of any such regulation or what impact it would have on the Company's operations. The National Association of Insurance Commissioners ("NAIC") has adopted model laws incorporating the concept of a "risk based capital" ("RBC") requirement for insurance companies. Generally, the RBC formula is designed to measure the adequacy of an insurer's statutory capital in relation to the risks inherent in its business. The RBC formula is used by the states as an early warning tool to identify weakly capitalized companies for the purpose of initiating regulatory action. The Company's continuing insurance operations' RBC ratio as of December 31, 1998 exceeded minimum requirements. The NAIC also has adopted various ratios for insurance companies which, in addition to the RBC ratio, are designed to serve as a tool to assist state regulators in discovering potential weakly capitalized companies or companies with unusual trends. While the Company's continuing insurance operations had certain "other than normal" NAIC ratios for the year ended December 31, 1998, the Company believes that there are no material underlying problems or weaknesses in its insurance operations and that it is unlikely that material adverse regulatory action will be taken. 12 The Company's insurance subsidiaries are members of state insurance funds which provide certain protection to policyholders of insolvent insurers doing business in those states. Due to insolvencies of certain insurers in recent years, the Company's insurance subsidiaries have been assessed certain amounts which have not been material and are likely to be assessed additional amounts by state insurance funds. The Company believes that it has provided for all anticipated assessments and that any additional assessments will not have a material adverse effect on the Company's financial condition or results of operations. BANKING AND LENDING The Company's banking and lending operations principally are conducted through American Investment Bank, N.A. ("AIB"), a national bank subsidiary, and American Investment Financial ("AIF"), an industrial loan corporation. AIB and AIF take money market and other non-demand deposits that are eligible for insurance provided by the FDIC. AIB and AIF had deposits of $189,782,000 and $198,582,000 at December 31, 1998 and 1997, respectively. AIB and AIF currently have several deposit-taking and lending facilities in the Salt Lake City area. The funds generated by the deposits are primarily used to fund consumer instalment loans. The Company's consolidated banking and lending operations had outstanding loans (net of unearned finance charges) of $185,183,000 and $202,938,000 at December 31, 1998 and 1997, respectively. At December 31, 1998, 76% were loans to individuals generally collateralized by automobiles; 12% were instalment loans to consumers, substantially all of which were collateralized by real or personal property; 5% were unsecured loans to individuals acquired from others in connection with investments in limited partnerships; 4% were unsecured loans to executives and professionals, generally with good credit histories; and 3% were loans to small businesses. It is the Company's policy to charge to income an allowance for losses which, based upon management's analysis of numerous factors, including current economic trends, aging of the loan portfolio and historical loss experience, is deemed adequate to cover reasonably expected losses on outstanding loans. At December 31, 1998, the allowance for loan losses for the Company's entire loan portfolio was $9,398,000 or 5.1% of the net outstanding loans, compared to $10,199,000 or 5% of net outstanding loans at December 31, 1997. Collateralized personal automobile instalment loans are made to individuals who have difficulty obtaining credit, at interest rates above those charged to individuals with good credit histories. In determining which individuals qualify for these loans, the Company takes into account a number of highly selective criteria with respect to the individual as well as the collateral to attempt to minimize the number of defaults. Additionally, the Company closely monitors these loans and takes prompt possession of the collateral in the event of a default. For the three year period ended December 31, 1998, the Company generated $146,085,000 of these loans ($72,848,000 during 1998). Due in part to the recent failures of some of the Company's competitors, the Company has been able to increase its new loan volume at acceptable risk levels. In addition, during 1998 the Company purchased a $36,900,000 portfolio of such loans. The Company intends to continue to acquire additional portfolios of such loans that meet the Company's underwriting standards if they can be purchased on attractive terms. During 1998, AIB and AIF sold substantially all of their executive and professional loan portfolios for aggregate proceeds of $89,500,000. The Company's banking and lending operations compete with banks, savings and loan associations, credit unions, credit card issuers and consumer finance companies, many of which are able to offer financial services on very competitive terms. Additionally, substantial national financial services networks have been formed by major brokerage firms, insurance companies, retailers and bank holding companies. Some competitors have substantial local market positions; others are part of large, diversified organizations. 13 The Company's principal banking and lending operations are subject to detailed supervision by state authorities, as well as federal regulation pursuant to the Federal Consumer Credit Protection Act and regulations promulgated by the Federal Trade Commission. The Company's banking operations are subject to federal and state regulation and supervision by, among others, the Office of the Comptroller of the Currency (the "OCC"), the FDIC and the State of Utah. AIB's primary federal regulator is the OCC, while the primary federal regulator for AIF is the FDIC. The Competitive Equality Banking Act of 1987 ("CEBA") places certain restrictions on the operations of AIB and restricts further acquisitions of banks and savings institutions by the Company. CEBA does not restrict AIF as currently operated. MANUFACTURING Through its plastics division, the Company manufactures and markets proprietary plastic netting used for a variety of purposes including, among other things, construction, agriculture, packaging, carpet padding and filtration. The plastics division markets its products both domestically and internationally, with approximately 13% of its 1998 sales exported to Europe, Latin America, Japan and Australia. New product development focuses on niches where the division's proprietary technology and expertise can lead to sustainable competitive economic advantages. For the years ended December 31, 1998, 1997 and 1996, the plastics division's revenues were approximately $56,600,000, $50,900,000 and $47,600,000, respectively. The plastics division is subject to domestic and international competition, generally on the basis of price, service and quality. Additionally, certain products are dependent on cyclical industries, including the construction industry. The Company holds patents on certain improvements to the basic manufacturing processes and on applications thereof. The Company believes that the expiration of these patents, individually or in the aggregate, is unlikely to have a material effect on the plastics division. OTHER OPERATIONS The Company has a 90% interest in two operating wineries, Pine Ridge Winery in Napa Valley, California and Archery Summit in the Willamette Valley of Oregon. Pine Ridge, which was acquired in 1991, has been an operating winery since 1981, while Archery Summit was started by the Company in 1993. These wineries produce and sell super-ultra-premium wines. During 1998, the wineries sold approximately 62,000 9-liter equivalent cases of wine generating revenues of approximately $8,987,000. Since acquisition, the Company's investment in winery operations has grown, principally to fund the Company's acquisition of land for vineyard development and to increase production capacity and storage facilities at both of the wineries. It can take up to five years for a new vineyard property to reach full production and, depending upon the varietal produced, up to an additional two years before the wine can be sold. At December 31, 1998, the Company's combined investment in these wineries was approximately $49,000,000. At December 31, 1998, the carrying value of the Company's real estate investments totaled $397,404,000. Of such amount, approximately $245,870,000 consists of real estate assets held by the Company's 95.4% French subsidiary, Fidei. These assets consisted of 150 buildings (primarily office buildings located in Paris, France and its environs) totaling more than 3,500,000 square feet of space. The Company acquired Fidei to maximize its value by marketing all of its real estate holdings for sale. The remainder of the Company's real estate investments consist of a variety of domestic projects, some of which are in the process of development and all of which are available for sale. Included in the Company's domestic real estate is an office complex located on Capitol Hill in Washington, D.C. This complex consists of two office buildings with a total of 630,000 square feet of rentable office and retail space and two underground garages. A comprehensive renovation upgrade to the building is in process. The D.C. Government has signed a ten year lease for the 14 space and full occupancy is anticipated in the second quarter of 1999. At December 31, 1998, the Company's investment in this complex had a carrying value of $60,200,000. OTHER INVESTMENTS The Company owns equity interests representing more than 5% of the outstanding capital stock of each of the following domestic public companies at December 31, 1998: Carmike Cinemas, Inc. ("Carmike") (approximately 6% of Class A shares), GFSI Holdings, Inc. ("GFSI") (approximately 6%), Jordan Industries, Inc. ("JII") (approximately 10%) , Jordan Telecommunications Products, Inc. ("JTP") (approximately 10%) and MK Gold Company ("MK Gold") (approximately 46%). During 1998, the Company's previously announced agreement to sell substantially all of its interest in Caja to its Argentine partner was restructured, and in March 1999, the Company sold all of its interest in Caja to Assicurazioni Generali Group for $126,000,000 in cash and a $40,000,000 collateralized note maturing April 2001 from its Argentine partner. The Company will record a pre-tax gain of approximately $120,000,000 in its first quarter 1999 results of operations in connection with this transaction. A subsidiary of the Company is an owner in The Jordan Company LLC and Jordan/Zalaznick Capital Company. These entities each specialize in structuring leveraged buyouts in which the owners are given the opportunity to become equity participants. Since 1982, the Company has invested an aggregate of $68,021,000 in these entities and related companies and, through December 31, 1998, has received $104,456,000 (including cash, interest bearing notes and other receivables) relating to the disposition of investments and management and other fees. At December 31, 1998, through these entities, the Company had interests in JII, JTP, Carmike, GFSI and a total of 21 other companies, which in total are carried in the Company's consolidated financial statements at $27,564,000. For further information about the Company's business, reference is made to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Report and Notes to Consolidated Financial Statements. Item 2. Properties. Through its various subsidiaries, the Company owns and utilizes in its operations two offices in Salt Lake City, Utah used for corporate and banking and lending activities (totaling approximately 77,000 sq. ft.). In addition, a subsidiary of the Company owns a facility (totaling approximately 158,500 sq. ft.) primarily used for manufacturing located in Georgia. The Company and its subsidiaries lease numerous manufacturing, warehousing, office and headquarters facilities. The facilities vary in size and have leases expiring at various times, subject, in certain instances, to renewal options. See Notes to Consolidated Financial Statements. Item 3. Legal Proceedings. On May 11, 1994, a shareholder of the Company filed a purported derivative action entitled Pinnacle Consultants, Ltd. v. Leucadia National Corporation, et al. (C.A. No. 94 Civ. 3496) against the Company's current Board of Directors and two former directors, John W. Jordan II and Melvin Hirsch. The action, which was filed in the United States District Court for the Southern District of New York, alleged certain Racketeer Influence and Corrupt Organizations Act, securities law, conversion and fraud claims. On December 10, 1996, the Second Circuit Court of Appeals affirmed the judgment of the District Court dismissing these claims. 15 On May 13, 1997, Pinnacle filed a purported derivative complaint in New York State Supreme Court. The action, entitled Pinnacle Consultants, Ltd. v. Leucadia National Corp., et al. (no. 602470/97), is substantially similar to the federal court complaint that was dismissed in 1996. Pinnacle has alleged claims for fraud, waste, breach of fiduciary duty and conversion against the same current and former Leucadia directors who were named as defendants in the federal court action. Defendants' motion to dismiss was granted in part and denied in part. This decision is being appealed to the Appellate Division, First Department, by Pinnacle and the defendants. The appeal remains sub judice. In addition to the foregoing, the Company and its subsidiaries are parties to legal proceedings that are considered to be either ordinary, routine litigation incidental to their business or not material to the Company's consolidated financial position. The Company does not believe that any of the foregoing actions will have a material adverse effect on its consolidated financial position or consolidated results of operations. 16 Item 10. Executive Officers of the Registrant. All executive officers of the Company are elected at the organizational meeting of the Board of Directors of the Company held annually and serve at the pleasure of the Board of Directors. As of March 12, 1999, the executive officers of the Company, their ages, the positions held by them and the periods during which they have served in such positions were as follows: NAME AGE POSITION WITH LEUCADIA OFFICE HELD SINCE - ---- --- ---------------------- ----------------- Ian M. Cumming 58 Chairman of the Board June 1978 Joseph S. Steinberg 55 President January 1979 Thomas E. Mara 53 Executive Vice President May 1980; and Treasurer January 1993 Joseph A. Orlando 43 Vice President and January 1994; Chief Financial Officer April 1996 Barbara L. Lowenthal 44 Vice President and April 1996 Comptroller Paul J. Borden 50 Vice President August 1988 Mark Hornstein 51 Vice President July 1983 Mr. Cumming has served as a director and Chairman of the Board of the Company since June 1978. In addition, he has served as a director of Allcity since February 1988 and MK Gold since June 1995. Mr. Cumming has also been a director of Skywest, Inc., a Utah-based regional air carrier, since June 1986. Mr. Steinberg has served as a director of the Company since December 1978 and as President of the Company since January 1979. In addition, he has served as a director of Allcity since February 1988, as a director of MK Gold since June 1995, as a director of JII since June 1988, and as a director of HomeFed, a California real estate developer, since August 1998. Mr. Mara joined the Company in April 1977 and was elected Vice President of the Company in May 1977. He has served as Executive Vice President of the Company since May 1980 and as Treasurer of the Company since January 1993. In addition, he has served as a director of Allcity since October 1994. Mr. Orlando, a certified public accountant, has served as Chief Financial Officer of the Company since April 1996 and as Vice President of the Company since January 1994. Mr. Orlando previously served in a variety of capacities with the Company and its subsidiaries since 1987, including Comptroller of the Company from March 1994 to April 1996. In addition, he served as a director of Allcity since October 1998. Ms. Lowenthal, a certified public accountant, has served as Vice President and Comptroller of the Company since April 1996. For the prior four years, Ms. Lowenthal served as Director of Policies, Systems and Procedures and Assistant Controller of W.R. Grace & Co., a specialty chemicals company. Mr. Borden joined the Company as Vice President in August 1988 and has served in a variety of other capacities with the Company and its subsidiaries. Mr. Borden has served as a director of HomeFed since May 1998. Mr. Hornstein joined the Company as Vice President in July 1983 and has served in a variety of other capacities with the Company and its subsidiaries. 17 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. (a) Market Information. The Common Shares of the Company are traded on the New York Stock Exchange and Pacific Stock Exchange under the symbol LUK. The following table sets forth, for the calendar periods indicated, the high and low sales price per Common Share on the consolidated transaction reporting system, as reported by the Dow Jones Historical Stock Quote Reporter Service. COMMON SHARE ------------ HIGH LOW ---- --- 1997 ---- First Quarter $29.00 $25.75 Second Quarter 31.88 27.38 Third Quarter 34.75 31.00 Fourth Quarter 36.63 33.00 1998 ---- First Quarter $41.13 $33.56 Second Quarter 40.13 32.81 Third Quarter 34.75 27.63 Fourth Quarter 32.38 26.25 1999 ---- First Quarter (through March 12, 1999) $33.06 $29.50 (b) Holders. As of March 12, 1999, there were approximately 3,685 record holders of the Common Shares. (c) Dividends. The Company paid a cash dividend of $.25 per Common Share on December 31, 1997. The payment of dividends in the future is subject to the discretion of the Board of Directors and will depend upon general business conditions, legal and contractual restrictions on the payment of dividends and other factors that the Board of Directors may deem to be relevant. The HomeFed Dividend. The Company acquired a 41.2% interest in HomeFed in 1995. HomeFed is a publicly traded real estate development company (OTC (Non-NASDAQ): "HFDC") with its principal office at 1903 Wright Place, Suite 220, Carlsbad, California 92008 (telephone number 706-918-8200). In 1998, the Company distributed to its shareholders of record on August 25, 1998 (the "HomeFed Dividend Holders") a pro rata dividend of all of the beneficial interests in a trust that holds 41.2% of the common stock of HomeFed and contracts to increase that ownership to 89.6% of HomeFed. This dividend resulted in 1998 dividend income to the HomeFed Dividend Holders of $.1426 for each Common Share of the Company held on August 25, 1998, even though no physical distribution was made because the trust interests are uncertificated. A Form 1099-DIV was sent to HomeFed Dividend Holders reflecting this distribution. 18 The Company anticipates that, following effectiveness of a registration statement to be filed with respect to the HomeFed shares, the HomeFed Dividend Holders will receive 1.0 share of HomeFed common stock for each 1.26 Common Shares of the Company owned of record on August 25, 1998. The Company expects that the distribution of HomeFed securities will be made in the third quarter of 1999. In connection with the declaration of dividends or the making of distributions on, or the purchase, redemption or other acquisition of Common Shares, the Company is required to comply with certain restrictions contained in certain of its debt instruments. The Company's regulated subsidiaries are restricted in the amount of distributions that can be made to the Company without regulatory approval. For further information see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Report. 19 Item 6. Selected Financial Data. The following selected financial data have been summarized from the Company's consolidated financial statements and are qualified in their entirety by reference to, and should be read in conjunction with, such consolidated financial statements and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Report.
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In thousands, except per share amounts) SELECTED INCOME STATEMENT DATA: Revenues $530,506 $630,737 $670,443 $753,999 $646,380 Net securities gains (losses) (60,871) 3,249 24,117 15,101 (7,239) Interest expense (a) 45,139 46,007 53,599 52,538 43,751 Insurance losses, policy benefits and amortization of deferred acquisition costs 279,110 327,468 355,148 364,957 292,872 Income (loss) from continuing operations before income taxes, minority expense of trust preferred securities and extraordinary loss 29,377 (24,238) (48,187) 10,286 (11,477) Income (loss) from continuing operations before minority expense of trust preferred securities and extraordinary loss 54,450 (14,347) (28,861) 24,203 (3,731) Minority expense of trust preferred securities, net of taxes (8,248) (7,942) - - - Income (loss) from continuing operations before extraordinary loss 46,202 (22,289) (28,861) 24,203 (3,731) Income from discontinued operations, including gain on sale, net of taxes 8,141 686,161 84,376 83,300 74,567 Extraordinary loss from early extinguishment of debt, net of taxes - (2,057) (6,838) - - Net income 54,343 661,815 48,677 107,503 70,836 Per share: Basic earnings (loss) per common share: Income (loss) from continuing operations before extraordinary loss $.73 $ (.36) $(.48) $ .42 $(.07) Income from discontinued operations, including gain on sale .13 11.03 1.40 1.45 1.33 Extraordinary loss - (.03) (.11) - - ---- ------ ----- ----- ----- Net income $.86 $10.64 $ .81 $1.87 $1.26 ==== ====== ===== ===== ===== Diluted earnings (loss) per common share: Income (loss) from continuing operations before extraordinary loss $.73 $ (.36) $(.48) $ .41 $(.07) Income from discontinued operations, including .13 11.03 1.40 1.40 1.33 gain on sale Extraordinary loss - (.03) (.11) - - ---- ------ ----- ----- ----- Net income $.86 $10.64 $ .81 $1.81 $1.26 ==== ====== ===== ===== ===== AT DECEMBER 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In thousands, except per share amounts) SELECTED BALANCE SHEET DATA: Cash and investments $2,229,895 $2,453,555 $1,246,220 $1,250,746 $ 940,993 Total assets 3,958,951 3,745,336 2,776,591 2,766,501 2,343,295 Debt, including current maturities 722,601 352,872 520,263 513,810 422,166 Customer banking deposits 189,782 198,582 209,261 203,061 179,888 Common shareholders' equity 1,853,159 1,863,531 1,118,107 1,111,491 881,815 Book value per common share $29.90 $29.17 $18.51 $18.47 $15.72 Cash dividends per common share $ - $ .25 $ .25 $ .25 $ .13
20
YEAR ENDED DECEMBER 31, -------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- SELECTED INFORMATION ON PROPERTY AND CASUALTY INSURANCE OPERATIONS (Unaudited): (b) GAAP Combined Ratio 129.3% 118.5% 114.7% 113.0% 103.5% SAP Combined Ratio 134.0% 117.8% 107.9% 107.4% 101.3% Industry SAP Combined Ratio (c) N/A 101.6% 105.8% 106.4% 108.4% Premium to Surplus Ratio (d) 1.2x 1.4x 1.8x 2.2x 2.3x
- --------------------- (a) Includes interest on customer banking deposits. (b) The Combined Ratio does not reflect the effect of investment income. For 1998, the difference in the accounting treatment for curtailment gains relating to the defined benefit pension plans was the principal reason for the difference between the GAAP Combined Ratio and the SAP Combined Ratio. For 1996 and 1995, a change in the statutory accounting treatment for retrospectively rated reinsurance agreements was the principal reason for the difference between the GAAP Combined Ratios and the SAP Combined Ratios. Additionally in 1998, 1997 and 1996, the difference relates to the accounting for certain costs which are treated differently under SAP and GAAP. (c) Source: Best's Aggregates & Averages, Property/Casualty, 1998 Edition. Industry Combined Ratios may not be fully comparable as a result of, among other things, differences in geographical concentration and in the mix of property and casualty insurance products. (d) Premium to Surplus Ratio was calculated by dividing statutory property and casualty insurance premiums written by statutory capital at the end of the year. 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The purpose of this section is to discuss and analyze the Company's consolidated financial condition, liquidity and capital resources and results of operations. This analysis should be read in conjunction with the consolidated financial statements and related notes which appear elsewhere in this Report. LIQUIDITY AND CAPITAL RESOURCES Parent Company Liquidity Leucadia National Corporation (the "Parent") is a holding company whose assets principally consist of the stock of its several direct subsidiaries and cash and liquid investments. The Parent continuously evaluates the retention and disposition of its existing operations and investigates possible acquisitions of new businesses in order to maximize shareholder value. Accordingly, while the Parent does not have any material arrangement, commitment or understanding with respect thereto (except as disclosed in this Report), further acquisitions, divestitures, investments and changes in capital structure are possible. Its principal sources of funds are its available cash resources, bank borrowings, public financings, repayment of subsidiary advances, funds distributed from its subsidiaries as tax sharing payments, management and other fees, and borrowings and dividends from its regulated and non-regulated subsidiaries. It has no substantial recurring cash requirements other than payment of interest and principal on its debt, tax payments and corporate overhead expenses. As of December 31, 1998, the Company's cash, cash equivalents and marketable securities, excluding those amounts held by its regulated subsidiaries and collateralizing letters of credit, totaled approximately $1,219,000,000. In addition, the book value of the principal amount of promissory notes received from Conseco, Inc. upon the 1997 sale of the Colonial Penn Life Group was $400,000,000 at December 31, 1998. In 1998, the Company announced that it was considering the payment of a significant cash dividend. The Company has received a ruling from the Internal Revenue Service providing that any gain realized on such a dividend (up to a maximum of approximately $812,000,000) would be treated as a capital gain. The Company anticipates that, prior to the date of its 1999 Annual Meeting scheduled for May 5, 1999, its Board of Directors will declare a dividend in an aggregate amount of approximately $812,000,000, minus amounts paid to repurchase Common Shares from March 17, 1999 through the date of declaration. Payment of such dividend would require the Company to make an offer to purchase all of its outstanding 8-1/4% Senior Subordinated Debentures due 2005 and its 7-7/8% Senior Subordinated Debentures due 2006, outstanding in the aggregate principal amount of $235,000,000, at a purchase price of 101% of principal, plus accrued and unpaid interest thereon pursuant to the terms of the indentures governing these Debentures. These offers would be required to be made within five business days after the payment of such dividend, unless the terms of the Debentures can be modified on terms that are acceptable to the Company. Except for the Euro denominated debt of Fidei, which is described below, the Parent maintains the principal borrowings for the Company and its non-banking subsidiaries and has provided working capital to certain of its subsidiaries. These borrowings have primarily been made from banks through various credit agreement facilities and through public financings. The Company borrowed $62,300,000 under its $100,000,000 bank credit facility to fund the purchase price of Fidei, including expenses. In addition, the Company entered into currency swap agreements to hedge approximately $55,000,000 of its foreign currency exposure. The counterparties to these currency swap agreements are major financial institutions, which management believes are able to fulfill their obligations. The swap agreements mature in tranches in March 2000 and September 2001. At December 31, 1998, $65,500,000 was outstanding under the bank credit facility. 22 During 1998, the Company's Board of Directors increased to 6,000,000 the maximum number of its Common Shares that the Company is authorized to purchase. Through December 31, 1998, the Company repurchased in the open market 1,996,400 Common Shares for an aggregate cost of approximately $58,071,000. From January 1, 1999 through March 12, 1999, the Company acquired 1,738,570 Common Shares for an aggregate cost of approximately $52,119,000. As a result, as of March 13, 1999, the Company is authorized to repurchase 3,788,717 Common Shares. At December 31, 1998, a maximum of approximately $25,200,000 was available to the Parent as dividends from its regulated subsidiaries without regulatory approval. Additional amounts may be available to the Parent in the form of loans or cash advances from regulated subsidiaries, although no amounts were outstanding at December 31, 1998 or borrowed to date in 1999. There are no restrictions on distributions from the non-regulated subsidiaries. The Parent also receives tax sharing payments from subsidiaries included in its consolidated income tax return, including certain regulated subsidiaries. Because of the tax loss carryforwards available to the Parent and certain subsidiaries, together with current interest deductions and corporate expenses, the amount paid by the Parent for income taxes has been substantially less than tax sharing payments received from its subsidiaries. Payments from regulated subsidiaries for dividends, tax sharing payments and other services totaled approximately $1,295,600,000 (including $1,230,000,000 relating to the sales of the Colonial Penn companies in 1997) for the year ended December 31, 1998. Based on discussions with commercial and investment bankers, the Company believes that it has the ability to raise additional funds under acceptable conditions for use in its existing businesses or for appropriate investment opportunities. Since 1993, the Company's senior debt obligations have been rated as investment grade by S&P and Duff & Phelps Inc. Ratings issued by bond rating agencies are subject to change at any time. Consolidated Liquidity In 1998, net cash was used for operations, principally to purchase investments classified as trading and for the payment of income taxes, partially offset by the repayment of the Company's bridge financing to PIB, its Russian joint venture described below. In 1997, net cash was used for operations principally to fund the Company's capital commitments and bridge financing to PIB, and for the purchase of investments classified as trading. In December 1998, a subsidiary of the Company repurchased for $42,200,000 plus accrued interest, $51,800,000 liquidation amount of 8.65% trust issued preferred securities of Leucadia Capital Trust I, a wholly-owned subsidiary of the Company. The difference between the book value and the amount paid was credited directly to shareholders' equity. During 1998, the Company's previously announced agreement to sell substantially all of its interest in Caja to its Argentine partner was restructured and, in March 1999, the Company sold all of its interest in Caja to Assicurazioni Generali Group, an Italian insurance company, for $126,000,000 in cash and a $40,000,000 collateralized note maturing April 2001 from its Argentine partner. The Company will record a pre-tax gain of approximately $120,000,000 in its first quarter 1999 results of operations in connection with this transaction. In September 1998, the Company reinsured, retroactive to January 1, 1998, substantially all of its remaining life insurance business to Allstate and a subsidiary thereof in an indemnity reinsurance transaction. While the premium received on this transaction was approximately $28,675,000, the gain on the reinsurance transaction was deferred and is being amortized into income based upon actuarial estimates of the premium revenue of the underlying insurance contracts. In December 1998, the Company signed an agreement to sell its 23 remaining life insurance subsidiaries, Charter and Intramerica, to Allstate for statutory surplus at the date of sale (approximately $62,200,000 at December 31, 1998), plus $3,575,000. The transaction is expected to result in a pre-tax gain of approximately $20,000,000, principally resulting from recognition of deferred gains from prior reinsurance transactions (including the September 1998 Allstate transaction described above). The transaction is subject to regulatory approvals and customary closing conditions and is expected to close in the second quarter of 1999. As of December 31, 1998, the Company's consolidated debt was $722,601,000 as compared to $352,872,000 as of December 31, 1997. This increase is primarily related to the Company's acquisition of 95.4% of Fidei in 1998. At December 31, 1998, the principal amount of Fidei's Euro denominated outstanding debt, all of which is non-recourse to the Company, was approximately $249,400,000 (approximately 213,656,000 Euros). Inasmuch as Fidei's Euro demoninated assets will be sold over time and such assets are presently funded with Fidei's Euro demoninated debt, the Company has determined not to acquire a currency hedge for Fidei's Euro denominated debt. In 1996, the Company formed PIB, a joint venture with PepsiCo, Inc., to be the exclusive bottler and distributor of PepsiCo beverages in a large portion of central and eastern Russia, Kyrgyzstan and Kazakstan. The Company contributed $79,500,000 to PIB for a 75% equity interest. Effective as of January 30, 1998, the Company entered into an agreement with PepsiCo, pursuant to which, among other things, PIB repaid in full the Company's $77,705,000 bridge financing (which was funded in 1997) and the Company's equity interest in PIB was reduced to 37.9%. The agreement relieved the Company of any future funding obligation with respect to PIB and created an option, exercisable by either the Company or PepsiCo, pursuant to which PepsiCo was obligated to purchase all of the Company's interest in PIB (the "Option") for $37,000,000, plus interest. In February 1999, PepsiCo exercised the Option for approximately $39,190,000, including interest, and the Company recognized a pre-tax gain of approximately $29,545,000. However, when combined with the Company's share of the joint venture losses since inception, the Company's net loss from this investment was approximately $40,310,000. The investment portfolios of the Company's insurance subsidiaries are principally fixed maturity investments; the balance of their portfolio consists largely of preferred securities. Of the fixed maturity securities, the majority consists of those rated "investment grade" or U.S. governmental agency issued or guaranteed obligations, although limited investments in "non-rated" or rated less than investment grade securities have been made from time to time. Principally as a result of changes in market interest rates during 1998, the unrealized gain on investments at the end of 1997 of approximately $5,630,000 (net of taxes) decreased to an unrealized loss of approximately $982,000 (net of taxes) as of December 31, 1998. While this has resulted in a decrease in shareholders' equity, it had no effect on results of operations or cash flows. The Company provides collateralized automobile loans to individuals with poor credit histories. Prior to 1998, the Company's loan volume was in decline primarily as a result of heavy competition in this line of business. However, in 1998, the Company began to see growth in its automobile lending business as it expanded into new locations and developed new programs. The Company also benefited from the decline in competition due to the failure of certain competitors and a reduction in capital available for securitizations. In addition, in December 1998, the Company purchased a $36,900,000 sub-prime automobile portfolio. The Company's investment in automobile loans was $140,400,000, $77,607,000 and $96,338,000 at December 31, 1998, 1997 and 1996, respectively. During 1998, the Company's banking and lending subsidiaries sold substantially all of their executive and professional loan portfolios for aggregate proceeds of $89,500,000 and reported a pre-tax gain on these sales of approximately $6,500,000. 24 The Company and certain of its subsidiaries have loss carryforwards and other tax attributes. The amount and availability of tax loss carryforwards are subject to certain qualifications, limitations and uncertainties. As described in the Notes to the Consolidated Financial Statements, significant additional amounts of loss carryforwards may be available under certain circumstances. In order to reduce the possibility that certain changes in ownership could impose limitations on the use of these carryforwards, the Company's certificate of incorporation contains provisions which generally restrict the ability of a person or entity from accumulating at least five percent of the Common Shares and the ability of persons or entities now owning at least five percent of the Common Shares from acquiring additional Common Shares. RESULTS OF OPERATIONS Property and Casualty Insurance The Company's most significant operation is its insurance business, where it is a provider of property and casualty insurance primarily in the New York metropolitan area. For the year ended December 31, 1998, the Company's insurance segment contributed 57% of total revenues from continuing operations and, at December 31, 1998, constituted 25% of total assets. Net earned premium revenues of the Empire Group were $228,600,000, $275,000,000 and $326,400,000 for the years ended December 31, 1998, 1997 and 1996, respectively. In 1998, the decrease in earned premium revenues was primarily due to a decline in the number of assigned risk automobile pool contracts acquired due to competition and the depopulation of the assigned risk automobile pools ($24,600,000) and a reduction in certain lines, principally voluntary commercial automobile ($8,500,000), private passenger automobile ($6,000,000), commercial package policies ($4,300,000) and workers' compensation ($3,700,000), due to tighter underwriting standards, reunderwriting and increased competition. In 1997, the decline in earned premium revenues was primarily due to the depopulation of the assigned risk pools ($31,700,000) and a reduction in certain commercial lines, principally voluntary commercial automobile ($10,200,000) and workers' compensation ($8,800,000) due to competition, reunderwriting and repricing. In addition, earned premium revenues were reduced in 1997 by $5,500,000 to record premiums due under retrospectively rated reinsurance contracts written for 1995 and prior accident years. The Empire Group re-estimated the premium due based upon its then current estimate of loss ratios for 1995 and prior accident years. Partially offsetting these reductions was an increase in certain voluntary personal lines, principally private passenger automobile and homeowners. The Empire Group's combined ratios as determined under GAAP and SAP were as follows: Year Ended December 31, ----------------------- 1998 1997 1996 ---- ---- ---- GAAP 129.3% 118.5% 114.7% SAP 134.0% 117.8% 107.9% The Empire Group's combined ratios increased in 1998 primarily due to the reduction in premium volume at a rate greater than the reduction in net underwriting and other costs. In addition, the reduction in servicing fees in 1998 negatively affected the expense ratios. Included in the Empire Group's results for 1998, 1997 and 1996 were approximately $42,000,000, $27,000,000 and $28,000,000, respectively, for reserve strengthening related to losses from prior accident years. 25 During 1998, the Empire Group reviewed the adequacy of the reserves carried for its open claims' files, focusing on workers' compensation, commercial auto and other commercial liability lines of business. Such reviews are part of the Empire Group's normal ongoing practice. Particular emphasis during this review was placed on reserves carried for the workers' compensation line of business. As part of the review, substantially all open workers' compensation claim files were reviewed for every accident year up to and including 1998. The Empire Group also conducted a comprehensive review of reserves carried for other commercial liability lines of business in which approximately 28% of the open claim files were reviewed, with a primary focus on accident years 1995 to 1997. As a result of these reviews, the Empire Group revised its assumptions regarding average claims costs and probable ultimate losses and, accordingly, reserves were strengthened by $13,000,000 for workers' compensation and $14,000,000 for other commercial liability lines of business. Additionally, during 1998, the Empire Group reorganized the commercial auto claims department. As part of this realignment, more complex claims files were reviewed by the most experienced claims examiners and assumptions regarding average claims severity and probable ultimate losses were revised and reserves were strengthened by $14,000,000 for commercial automobile lines of business. The 1997 reserve strengthening included approximately $11,000,000 for commercial package lines of business and approximately $7,000,000 for voluntary commercial automobile lines of business. During 1997, the Empire Group reviewed the adequacy of the reserves carried for its open claims' files, as part of its normal ongoing practice, focusing on the commercial package, general liability and commercial automobile lines of business. As a result of this review and the continued unfavorable development of prior accident years losses, particularly the 1992 through 1994 accident years, the Empire Group revised its assumptions regarding future increases in average claims severity and reserves were strengthened. The 1996 reserve strengthening included approximately $20,000,000, for voluntary commercial automobile lines of business and approximately $8,000,000 for commercial package lines of business. Beginning in 1992, the Empire Group entered into new market segments of the voluntary commercial business, including specialty programs for sanitation trucks, gas stations, fuel oil deliveries and limousines. Initially, the Empire Group based its loss ratio estimate upon its experience with similar lines of business, industry statistics and standard actuarial ultimate loss projection techniques, which consider expected loss ratios. During 1996, claims began to develop unfavorably and the Empire Group used such claim development to revise the assumptions that formed the basis of actuarial studies and reserves were increased. With respect to commercial package lines, general liability claims for business written in 1992 through 1994 also developed unfavorably. These claims showed an increased frequency of losses as well as an increase in the time between the date the loss occurred and when the loss was reported compared to prior experience. General liability claims are susceptible to the emergence of losses over an extended period of time. For the lines of business discussed above, as well as all other property and casualty lines of business, the Company employs a variety of standard actuarial ultimate loss projection techniques, statistical analyses and case-basis evaluations to estimate its liability for unpaid losses. The actuarial projections include an extrapolation of both losses paid and incurred by business line and accident year and implicitly consider the impact of inflation and claims settlement patterns upon ultimate claim costs based upon historical patterns. These estimates are performed quarterly and consider any changes in trends and actual loss experience. Any resulting change in the estimate of the liability for unpaid losses, including those discussed above, is reflected in current year earnings during the quarter the change in estimate is identified. The reserving process relies on the basic assumption that past experience is an appropriate basis for predicting future events. The probable effects of current developments, trends and other relevant matters are also considered. Since the establishment of loss reserves is affected by many factors, some of which are outside the Company's control or affected by future conditions, reserving for property and casualty claims is a complex and uncertain process requiring the use of informed estimates and judgements. As additional experience and 26 other data become available and are reviewed, the Company's estimates and judgements may be revised. While the effect of any such changes in estimates could be material to future results of operations, the Company does not expect such changes to have a material effect on its liquidity or financial condition. In management's judgment, information currently available has been appropriately considered in estimating the Company's loss reserves. The Company will continue to evaluate the adequacy of its loss reserves on a quarterly basis, incorporating any future changes in trends and actual loss experience, and record adjustments to its loss reserves as appropriate. Manufacturing In December 1997, the Company completed the disposition of certain of its manufacturing operations. As a result, since December 1997, the Company's manufacturing operations solely have consisted of its plastics division. In 1998, the gross profit for the plastics division increased by 14% to approximately $21,400,000. This increase was primarily due to greater sales in most of the division's product lines and lower raw material costs. The decline in manufacturing revenues during the last three years was due to the sale of certain divisions and the discontinuance of certain non-performing product lines in 1997 and prior years. The Company recorded charges of $4,300,000 in 1997 and $3,700,000 in 1996 for losses on sales and shutdown expenses, which are primarily reflected in the caption "Selling, general and other expenses." Banking and Lending Finance revenues and operating profits reflect the level of consumer instalment loans, and for 1998, the sale of substantially all of the Company's executive and professional loan portfolio which resulted in a pre-tax gain of approximately $6,500,000, as discussed above. In addition, automobile loan losses declined in 1998 and 1997. In 1997, operating profit was also adversely affected by $3,500,000 in costs to settle litigation related to a lending program that is in liquidation. In 1996, operating profit was also affected by increased interest expense on customer banking deposits. Other In 1998, investment and other income increased by approximately $16,300,000 primarily due to increased interest income ($63,700,000), the sale of the Company's executive and professional loan portfolio referred to above ($6,500,000) and increased income from real estate activities ($8,800,000), partially offset by reduced gains from sales of real estate and other assets ($40,700,000) and reduced income relating to the service business ($19,100,000). In 1997, investment and other income increased by approximately $81,800,000, primarily due to increased gains from sales of real estate properties ($63,500,000) including the sale of a New York City office building and increased interest income ($28,100,000) including earnings on the proceeds from the sales of the Colonial Penn Life Group and Colonial Penn P&C Group. Such increases were partially offset by reduced trading stamp and miscellaneous other revenues in 1997 and a litigation settlement gain recorded in 1996. During 1998, due to declines in values that were deemed other than temporary, the Company recorded a pre-tax writedown of approximately $75,000,000 related to its investments in Russian and Polish debt and equity securities. Such writedowns are reflected in the caption "Net securities gains (losses)." At December 31, 1998, the remaining book value of the Company's investments in these debt and equity securities was approximately $19,000,000. Equity in income (losses) of associated companies improved in 1998 as compared to 1997 primarily due to a reduction of approximately $48,400,000 in the Company's equity losses related to PIB resulting from 27 discontinuance of the equity method of accounting in early 1998 and income from an investment partnership of approximately $30,800,000. In December 1997, the Company invested $20,000,000 to acquire a limited partnership interest in this partnership. The partnership currently is in the process of liquidating and making final distributions. The Company does not anticipate that the amount of income to be realized from this investment will be significant in 1999. Equity in losses of associated companies increased in 1997 as compared to 1996 primarily due to start-up losses from the Company's equity investment in PIB of $50,481,000 in 1997 as compared to $17,104,000 in 1996. The equity in losses of associated companies included losses from the Company's investment in MK Gold of $4,251,000 in 1997 and $6,478,000 in 1996 and a write-off of $6,540,000 in 1996, representing the Company's investment in an unsuccessful well drilled by its Siberian oil exploration joint venture. Interest expense primarily reflects the level of external borrowings outstanding throughout the periods. The reduction in interest expense in 1997 was primarily due to the decline in such borrowings. The decrease in selling, general and other expenses in 1998 as compared to 1997 principally reflects decreased expenses of the manufacturing segment principally as a result of the sale of certain divisions in 1997, decreased pension expense due to the recognition of net curtailment gains of $6,500,000, a 1997 charge for estimated costs to settle litigation relating to a lending program that is in liquidation and lower provisions for bad debts. The decrease in selling, general and other expenses in 1997 as compared to 1996 principally reflects the Empire Group's decreased expenses related to reduced premium volume, decreased operating expenses of real estate properties, decreased expenses relating to certain investment activities and lower provisions for bad debts. This decrease was partially offset by the losses recorded by the manufacturing segment related to sold divisions and the charge for estimated costs to settle litigation relating to a lending program that is in liquidation. Income taxes for 1998 reflect a benefit of approximately $39,000,000 for a change in the Company's estimated 1997 federal tax liability and the favorable resolution of certain contingencies. The 1997 and 1996 income tax benefits were greater than the expected normal corporate tax rate primarily due to the favorable resolution of certain contingencies. As discussed above, in December 1998, the Company signed an agreement to sell its remaining life insurance subsidiaries, Charter and Intramerica, to Allstate. The transaction is subject to regulatory approvals and customary closing conditions and is expected to close in the second quarter of 1999. In 1998, the Company classified these life insurance operations as discontinued operations and the consolidated financial statements for prior periods have been restated to be consistent with such presentation. The number of shares used to calculate basic earnings (loss) per share was 63,409,000, 62,205,000 and 60,301,000 for 1998, 1997 and 1996, respectively. The number of shares used to calculate diluted earnings (loss) per share was 63,510,000, 62,205,000 and 60,301,000 for 1998, 1997 and 1996, respectively. For diluted per share amounts, the Company's 5-1/4% Convertible Subordinated Debentures due 2003 (which were redeemed in 1997) were not assumed to have been converted since the effect of such assumed conversion would have been to increase earnings per share. Year 2000 and Information Technology Systems The Company is in the process of evaluating its information technology systems to determine the potential impact of the Year 2000. The Year 2000 issue is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or 28 system failures. As a result, before the end of 1999, computer hardware and software may need to be upgraded with new hardware and software which can distinguish 21st century dates from 20th century dates. Since 1996, the Company has been evaluating its Year 2000 readiness. Its program to address its Year 2000 readiness consists of (i) the preparation of an inventory of all computer related hardware and software, all non-computer related hardware that may have embedded technology and all third parties that are material to the Company's business operations, (ii) the identification of a senior officer at each of the Company's operating subsidiaries and significant investments to be responsible for overseeing the implementation of the Year 2000 program and reporting on compliance therewith to the Company's senior management, (iii) the identification of mission critical aspects of the Company's business, and assessment of the Year 2000 readiness of such mission critical systems and components, (iv) the development of a plan to upgrade, repair or replace systems as required for Year 2000 compliance, (v) the development of a plan to test the readiness of all critical systems, (vi) making inquiry of material third parties as to the state of their Year 2000 compliance, and (vii) as appropriate, the development of a contingency plan for either non-compliant internal systems or non-compliant material third parties. Where appropriate, outside consultants have been engaged to advise the Company on its Year 2000 readiness. Substantially all of the Company's operations have completed the inventory and identification process and are in the process of upgrading and testing critical systems. The Company's primary focus during the balance of 1999 will be on continued testing of mission critical systems and software provider upgrades, as well as monitoring the readiness of material third parties. In 1996, the Empire Group began to evaluate its information technology systems and their ability to support future business needs. This led to a decision to acquire new policy management and accounting systems. These systems provide enhanced functionality and improved processing for underwriting, claims, billing, collection, reinsurance, reporting and accounting and are designed to be Year 2000 compliant. The Empire Group anticipates that these new systems will be fully implemented in 1999 and that any non-compliant programs will become compliant during 1999. All but one of the manufacturing operation's material systems (involving the storage of historical information) have tested as being Year 2000 compliant. The Company is exploring alternative systems to maintain this information. Until an acceptable replacement for this system can be found, the Company can maintain these records in hard copy. The banking and lending operations have successfully completed testing of mission critical systems and testing of non-mission critical systems is currently underway. In addition, deposit customers have been sent letters to inform them about the Year 2000 issue and to educate them about the progress made in addressing this issue. The Year 2000 issue may affect other entities with which the Company transacts business. The Company has made inquiry of third parties with whom it has material relationships as to the Year 2000 compliance of such third parties. Many of such parties have reported plans to be fully compliant by the end of 1999 and most have reported substantial progress at the end of 1998. However, at this time the Company cannot predict the effect of the Year 2000 on its material third parties or the impact any deficiency in the Year 2000 readiness of such parties could have on the Company. Through December 31, 1998, expenses incurred by the Company in connection with the Year 2000 issue (excluding expenses related to the Empire Group's acquisition of new systems, which was not motivated by Year 2000 concerns) did not exceed $500,000. Based upon current information, the Company does not expect that the Year 2000 issue will have a material effect on its consolidated financial position or consolidated results of operations. Cautionary Statement for Forward-Looking Information Statements included in this Report may contain forward-looking statements. Such forward-looking statements are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 29 1995. Such statements may relate, but are not limited, to projections of revenues, income or loss, capital expenditures, fluctuations in insurance reserves, plans for growth and future operations (including Year 2000 compatibility), competition and regulation as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted or quantified. When used in this Report, the words "estimates", "expects", "anticipates", "believes", "plans", "intends" and variations of such words and similar expressions are intended to identify forward-looking statements that involve risks and uncertainties. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. The factors that could cause actual results to differ materially from those suggested by any such statements include, but are not limited to, those discussed or identified from time to time in the Company's public filings, including general economic and market conditions, changes in foreign and domestic laws, regulations and taxes, changes in competition and pricing environments, regional or general changes in asset valuation, the occurrence of significant natural disasters, the inability to reinsure certain risks economically, the adequacy of loss reserves, prevailing interest rate levels, weather related conditions that may affect the Company's operations, the difficulty in identifying hardware and software that may not be Year 2000 compliant, the lack of success of third parties to adequately address the Year 2000 issue, vendor delays and technical difficulties affecting the Company's ability to upgrade or replace its hardware and/or software for Year 2000 compliance, and changes in the composition of the Company's assets and liabilities through acquisitions or divestitures. Undue reliance should not be placed on these forward-looking statements, which are applicable only as of the date hereof. The Company undertakes no obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this Report or to reflect the occurrence of unanticipated events. 30 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The following includes "forward-looking statements" that involve risk and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. The Company's market risk arises principally from interest rate risk related to its investment portfolio, its borrowing activities and the banking and lending activities of certain subsidiaries. The Company does not enter into material derivative financial instrument transactions. The Company's investment portfolio is primarily classified as available for sale, and consequently, is recorded on the balance sheet at fair value with unrealized gains and losses reflected in shareholders' equity. Included in the Company's investment portfolio are fixed income securities, which comprised approximately 90% of the Company's total investment portfolio at December 31, 1998. These fixed income securities are primarily rated "investment grade" or are U.S. governmental agency issued or guaranteed obligations, although limited investments in "non-rated" or rated less than investment grade securities have been made from time to time. The estimated weighted average remaining life of these fixed income securities was approximately 2.5 years at December 31, 1998. The Company's fixed income securities, like all fixed income instruments, are subject to interest rate risk and will fall in value if market interest rates increase. At December 31, 1998, the Company's portfolio of trading securities was not material. The Company manages the investment portfolio of its insurance subsidiaries to preserve principal, maintain a high level of quality, comply with applicable insurance industry regulations and achieve an acceptable rate of return. In addition, the Company considers the duration of its insurance reserves in comparison with that of its investments. The Company is subject to interest rate risk on its long-term fixed interest rate debt and the Company-obligated mandatorily redeemable preferred securities of its subsidiary trust holding solely subordinated debt securities of the Company. Generally, the fair market value of debt and preferred securities with a fixed interest rate will increase as interest rates fall, and the fair market value will decrease as interest rates rise. The Company's banking and lending operations are subject to risk resulting from interest rate fluctuations to the extent that there is a difference between the amount of the interest-earning assets and the amount of interest-bearing liabilities that are prepaid/withdrawn, mature or reprice in specified periods. The principal objectives of the Company's banking and lending asset/liability management activities are to provide maximum levels of net interest income while maintaining acceptable levels of interest rate and liquidity risk and to facilitate funding needs. The Company utilizes an interest rate sensitivity model as the primary quantitative tool in measuring the amount of interest rate risk that is present. The model quantifies the effects of various interest rate scenarios on the projected net interest margin over the ensuing twelve-month period. Derivative financial instruments, including interest rate swaps, may be used to modify the Company's indicated net interest sensitivity to levels deemed to be appropriate based on risk management policies and the Company's current economic outlook. Counterparties to such agreements are major financial institutions, which the Company believes are able to fulfill their obligations; however, if they are not, the Company believes that any losses are unlikely to be material. The following table provides information about the Company's financial instruments used for purposes other than trading that are sensitive to changes in interest rates. For investment securities and debt obligations, the table presents principal cash flows by expected maturity dates. For the variable rate notes receivable and variable rate borrowings, the weighted average interest rates are based on implied forward rates in the yield curve at the reporting date. For loans, securities and liabilities with contractual maturities, the table presents contractual principal cash flows adjusted for the Company's historical experience of loan prepayments and prepayments of mortgage-backed securities. For banking and lending's variable rate products, the weighted average variable rates are based upon the respective pricing index at the reporting date. For money market 31 deposits that have no contractual maturity, the table presents principal cash flows based on the Company's historical experience and management's judgment concerning their most likely withdrawal behaviors. For interest rate swaps, the table presents notional amounts by contractual maturity date. 32
Expected Maturity Date ---------------------- 1999 2000 2001 2002 2003 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- (Dollars in thousands) THE COMPANY, EXCLUDING BANKING AND LENDING: RATE SENSITIVE ASSETS: Available for Sale Fixed Income Securities: U.S. Government $783,303 $146,339 $9,306 $198,045 $12,784 $160,629 $1,310,406 $1,310,406 Weighted Average Interest Rate 5.08% 5.91% 7.17% 6.38% 5.86% 6.22% Other Fixed Maturities: Rated Investment Grade $7,555 $3,808 $15,020 $2,832 $18,112 $46,063 $93,390 $93,390 Weighted Average Interest Rate 6.84% 8.03% 9.35% 12.15% 7.29% 7.99% Rated Less Than Investment Grade/Not Rated $20,440 $25,727 $18,040 $33,598 $10,248 $11,575 $119,628 $119,628 Weighted Average Interest Rate 9.26% 1.84% 2.04% 5.12% 6.80% 8.05% Held to Maturity Fixed Income Securities: U.S. Government $774 $- $- $5,230 $- $2,148 $8,152 $8,481 Weighted Average Interest Rate 6.75% - - 6.47% - 6.88% Variable Rate Notes Receivable $- $- $- $- $400,000 $- $400,000 $400,000 Weighted Average Interest Rate 5.66% 5.64% 5.71% 5.75% 5.79% - RATE SENSITIVE LIABILITIES: Fixed Interest Rate Borrowings $865 $870 $71,170 $8,006 $97,803 $435,795 $614,509 $621,435 Weighted Average Interest Rate 6.83% 6.83% 6.83% 7.10% 7.11% 7.44% Variable Rate Borrowings $78,479 $- $- $- $- $9,815 $88,294 $88,294 Weighted Average Interest Rate 7.25% 5.14% 5.21% 5.25% 5.29% 5.44% OTHER RATE SENSITIVE FINANCIAL INSTRUMENTS: Company-obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debt Securities of the Company $- $- $- $- $- $98,200 $98,200 $99,182 Weighted Average Interest Rate 8.65% 8.65% 8.65% 8.65% 8.65% 8.65%
33
Expected Maturity Date ---------------------- 1999 2000 2001 2002 2003 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- (Dollars in thousands) BANKING AND LENDING: RATE SENSITIVE ASSETS: Certificates of Deposit $15,030 $1,090 $- $- $- $- $16,120 $16,121 Weighted Average Interest Rate 5.622% 5.821% - - - - 5.635% Fixed Interest Rate Securities $9,971 $1,582 $1,354 $931 $5,824 $12,839 $32,501 $32,499 Weighted Average Interest Rate 6.136% 5.988% 6.028% 6.084% 6.074% 6.382% 6.206% Variable Interest Rate Securities $5 $5 $5 $5 $2 $- $22 $21 Weighted Average Interest Rate 8.125% 8.125% 8.125% 8.125% 8.125% - 8.125% Fixed Interest Rate Loans $65,464 $45,222 $29,560 $11,898 $7,540 $17,623 $177,307 $178,148 Weighted Average Interest Rate 21.067% 20.709% 20.640% 22.187% 19.590% 16.900% 20.489% Variable Interest Rate Loans $1,022 $564 $427 $335 $269 $5,259 $7,876 $7,951 Weighted Average Interest Rate 13.097% 14.514% 14.583% 14.492% 14.644% 10.651% 11.759% RATE SENSITIVE LIABILITIES: Money Market Deposits $5,803 $3,669 $3,261 $2,854 $2,446 $4,076 $22,109 $21,986 Weighted Average Interest Rate 3.792% 4.000% 4.000% 4.000% 4.000% 4.000% 3.945% Time Deposits $121,437 $23,264 $10,771 $7,534 $4,667 $- $167,673 $170,836 Weighted Average Interest Rate 5.455% 6.174% 5.787% 5.777% 5.731% - 5.610% Fixed Interest Rate Borrowings $19,798 $- $- $- $- $- $19,798 $19,798 Weighted Average Interest Rate 4.875% - - - - - 4.875% RATE SENSITIVE DERIVATIVE FINANCIAL INSTRUMENTS: Pay Fixed/Receive Variable Interest Rate Swap $- $- $- $- $60,000 $- $60,000 $292 Average Pay Rate 5.067% 5.067% 5.067% 5.067% 5.067% - 5.067% Average Receive Rate 5.313% 5.313% 5.313% 5.313% 5.313% - 5.313% OFF-BALANCE SHEET ITEMS: Commitments to Extend Credit $31 $31 $31 Weighted Average Interest Rate 14.650% 14.650% Unused Lines of Credit $3,000 $- $- $- $- $5,202 $8,202 $8,202 Weighted Average Interest Rate 7.75% - - - - 4.875% 5.927%
34 Item 8. Financial Statements and Supplementary Data. Financial Statements and supplementary data required by this Item 8 are set forth at the pages indicated in Item 14(a) below. Item 9. Disagreements on Accounting and Financial Disclosure. Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant. The information to be included under the caption "Nominees for Election as Directors" in the Company's definitive proxy statement to be filed with the Commission pursuant to Regulation 14A of the 1934 Act in connection with the 1999 annual meeting of shareholders of the Company (the "Proxy Statement") is incorporated herein by reference. In addition, reference is made to Item 10 in Part I of this Report. Item 11. Executive Compensation. The information to be included under the caption "Executive Compensation" in the Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information to be included under the caption "Present Beneficial Ownership of Common Shares" in the Proxy Statement is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. The information to be included under the caption "Executive Compensation - Certain Relationships and Related Transactions" in the Proxy Statement is incorporated herein by reference. 35 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a)(1)(2) Financial Statements and Schedules. Report of Independent Accountants............................. F-1 Financial Statements: Consolidated Balance Sheets at December 31, 1998 and 1997... F-2 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996.......................... F-3 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.......................... F-4 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996...... F-6 Notes to Consolidated Financial Statements.................. F-7 Financial Statement Schedules: Schedule III - Supplementary Insurance Information.......... F-33 Schedule V - Valuation and Qualifying Accounts.............. F-34 Schedule VI - Schedule of Supplemental Information for Property and Casualty Insurance Underwriters.............. F-35 36 (3) Executive Compensation Plans and Arrangements. 1992 Stock Option Plan (filed as Annex C to the Company's Proxy Statement dated July 21, 1992). Amended and Restated Shareholders Agreement dated as of December 16, 1997 among the Company, Ian M. Cumming and Joseph S. Steinberg. Leucadia National Corporation Senior Executive Annual Incentive Bonus Plan (filed as Annex D to the Company's Proxy Statement dated October 3, 1997 (the "1997 Proxy Statement")). Deferred Compensation Agreement between the Company and Joseph S. Steinberg dated December 8, 1998. (b) Reports on Form 8-K. None. (c) Exhibits. 3.1 Restated Certificate of Incorporation (filed as Exhibit 5.1 to the Company's Current Report on Form 8-K dated July 14, 1993).* 3.2 Amended and Restated By-laws as amended through February 23, 1999. 4.1 The Company undertakes to furnish the Securities and Exchange Commission, upon request, a copy of all instruments with respect to long-term debt not filed herewith. 10.1 1992 Stock Option Plan (filed as Annex C to the Company's Proxy Statement dated July 21, 1992).* 10.2 Articles and Agreement of General Partnership, effective as of April 15, 1985, of Jordan/Zalaznick Capital Company (filed as Exhibit 10.20 to the Company's Registration Statement No. 33-00606).* 10.3 Operating Agreement of The Jordan Company LLC, dated as of July 23, 1998. 10.4 Stock Purchase and Sale Agreement dated as of April 5, 1991, by and between FPL Group Capital Inc and the Company (filed as Exhibit B to the Company's Current Report on Form 8-K dated August 23, 1991).* 10.5 Amended and Restated Shareholders Agreement dated as of December 16, 1997 among the Company, Ian M. Cumming and Joseph S. Steinberg (filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "1997 10-K")).* - ------------------------- *Incorporated by reference. 37 10.6 Deferred Compensation Agreement between the Company and Joseph S. Steinberg dated December 8, 1998. 10.7 Settlement Agreement between Baldwin-United Corporation and the United States dated August 27, 1985 concerning tax issues (filed as Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (the "1992 10-K")).* 10.8 Acquisition Agreement, dated as of December 18, 1992, by and between Provident Mutual Life and Annuity Company of America and Colonial Penn Annuity and Life Insurance Company (filed as Exhibit 10.15 to the 1992 10-K).* 10.9 Amended and Restated Revolving Credit Agreement dated as of November 3, 1997 between the Company, BankBoston, N.A. as Administrative Agent, The Chase Manhattan Bank, as Syndication Agent, Bank of America National Trust and Savings Association, as Documentation Agent and the Banks signatory thereto (filed as Exhibit 10.13 to the 1997 10-K).* 10.10 Purchase Agreement among Conseco, the Company, Charter, Colonial Penn Group, Inc., Colonial Penn Holdings, Inc., Leucadia Financial Corporation, Intramerica, Colonial Penn Franklin Insurance Company and Colonial Penn Insurance Company dated as of April 30, 1997 (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997).* 10.11 Purchase Agreement among GECC, the Company, Charter, Colonial Penn Group Inc. and Colonial Penn Holdings, Inc. dated as of June 30, 1997 (filed as Annex A to the 1997 Proxy Statement).* 10.12 Purchase Agreement by and among Allstate Life Insurance Company, Allstate Life Insurance Company of New York, Charter, Intramerica and the Company, dated February 11, 1998 (filed as Exhibit 10.16 to the 1997 10-K).* 10.13 Leucadia National Corporation Senior Executive Annual Incentive Bonus Plan (filed as Annex D to the 1997 Proxy Statement.)* 10.14 Stock Purchase Agreement by and between the Company and Allstate Life Insurance Company dated as of December 18, 1998. 10.15 Trust Agreement dated August 14, 1998 between the Company for the benefit of its shareholders as of August 25, 1998 and Joseph A. Orlando, as Trustee. 21 Subsidiaries of the registrant. - ------------------------- *Incorporated by reference. 38 23 Consents of independent accountants with respect to the incorporation by reference into the Company's Registration Statements on Form S-8 (File No. 2-84303), Form S-8 and S-3 (File No. 33-6054), Form S-8 and S-3 (File No. 33-26434), Form S-8 and S-3 (File No. 33-30277), Form S-8 (File No. 33-61682) and Form S-8 (File No. 33-61718). 27 Financial Data Schedule. (d) Financial Statements of 50%-or-Less-Owned Entity Gotham Partners Acquisition I, L.P. financial statements as of December 31, 1998 and for the year ended December 31, 1998. 39 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LEUCADIA NATIONAL CORPORATION March 18, 1999 By: /s/ Barbara L. Lowenthal --------------------------------------- Barbara L. Lowenthal Vice President and Comptroller Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on the date set forth above. Signature Title --------- ----- /s/ Ian M. Cumming Chairman of the Board - ------------------------------- (Principal Executive Officer) Ian M. Cumming /s/ Joseph S. Steinberg President and Director - ------------------------------- (Principal Executive Officer) Joseph S. Steinberg /s/ Joseph A. Orlando Vice President and Chief Financial Officer - ------------------------------- (Principal Financial Officer) Joseph A. Orlando /s/ Barbara L. Lowenthal Vice President and Comptroller - ------------------------------- (Principal Accounting Officer) Barbara L. Lowenthal /s/ Paul M. Dougan Director - ------------------------------- Paul M. Dougan /s/ Lawrence D. Glaubinger Director - ------------------------------- Lawrence D. Glaubinger /s/ James E. Jordan Director - ------------------------------- James E. Jordan /s/ Jesse Clyde Nichols, III Director - ------------------------------- Jesse Clyde Nichols, III 40 REPORT OF INDEPENDENT ACCOUNTANTS March 8, 1999 To the Board of Directors and Shareholders of Leucadia National Corporation In our opinion, the consolidated financial statements listed in the index appearing under item 14(a) (1) (2) of this Form 10-K, present fairly, in all material respects, the financial position of Leucadia National Corporation and Subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules listed in the index appearing under item 14(a) (1) (2) of this Form 10-K, present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP New York, New York F-1 LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997 (Dollars in thousands, except par value)
1998 1997 ---- ---- ASSETS Investments: Available for sale (aggregate cost of $1,555,789 and $1,643,679) $1,553,126 $1,651,389 Trading securities (aggregate cost of $132,907 and $108,479) 132,576 115,416 Held to maturity (aggregate fair value of $47,583 and $36,316) 47,256 36,198 Other investments, including accrued interest income 37,247 69,366 ---------- ---------- Total investments 1,770,205 1,872,369 Cash and cash equivalents 459,690 581,186 Reinsurance receivables, net 48,070 31,972 Trade, notes and other receivables, net 833,301 751,337 Prepaids and other assets 490,242 144,314 Property, equipment and leasehold improvements, net 121,790 60,433 Deferred policy acquisition costs 18,255 23,906 Investments in associated companies 172,390 207,902 Net assets of discontinued operations 45,008 71,917 ---------- ---------- Total $3,958,951 $3,745,336 ========== ========== LIABILITIES Customer banking deposits $ 189,782 $ 198,582 Trade payables and expense accruals 233,485 208,762 Other liabilities 109,397 93,141 Income taxes payable 96,500 172,593 Deferred tax liability 7,709 22,739 Policy reserves 542,274 545,708 Unearned premiums 94,572 127,666 Debt, including current maturities 722,601 352,872 ---------- ---------- Total liabilities 1,996,320 1,722,063 ---------- ---------- Minority interest 11,272 9,742 ---------- ---------- Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debt securities of the Company 98,200 150,000 ---------- ---------- SHAREHOLDERS' EQUITY Common shares, par value $1 per share, authorized 150,000,000 shares; 61,984,686 and 63,879,155 shares issued and outstanding, after deducting 56,430,847 and 54,398,456 shares held in treasury 61,985 63,879 Additional paid-in capital 205,227 253,267 Accumulated other comprehensive income (771) 5,630 Retained earnings 1,586,718 1,540,755 ---------- ---------- Total shareholders' equity 1,853,159 1,863,531 ---------- ---------- Total $3,958,951 $3,745,336 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-2 LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, 1998, 1997 and 1996 (In thousands, except per share amounts)
1998 1997 1996 ---- ---- ---- Revenues: Insurance revenues and commissions $228,576 $275,015 $326,433 Manufacturing 56,572 133,406 148,284 Finance 31,560 40,529 49,150 Investment and other income 251,379 235,053 156,090 Equity in income (losses) of associated companies 23,290 (56,515) (33,631) Net securities gains (losses) (60,871) 3,249 24,117 -------- -------- -------- 530,506 630,737 670,443 -------- -------- -------- Expenses: Provision for insurance losses and policy benefits 233,772 275,435 299,816 Amortization of deferred policy acquisition costs 45,338 52,033 55,332 Manufacturing cost of goods sold 35,201 94,077 107,667 Interest 45,139 46,007 53,599 Salaries 41,413 52,987 43,183 Selling, general and other expenses 100,266 134,436 159,033 -------- -------- -------- 501,129 654,975 718,630 -------- -------- -------- Income (loss) from continuing operations before income taxes, minority expense of trust preferred securities and extraordinary loss 29,377 (24,238) (48,187) -------- -------- -------- Income taxes: Current (32,649) (6,138) 1,303 Deferred 7,576 (3,753) (20,629) -------- -------- -------- (25,073) (9,891) (19,326) -------- -------- -------- Income (loss) from continuing operations before minority expense of trust preferred securities and extraordinary loss 54,450 (14,347) (28,861) Minority expense of trust preferred securities, net of taxes 8,248 7,942 - -------- -------- -------- Income (loss) from continuing operations before extraordinary loss 46,202 (22,289) (28,861) Income from discontinued operations, net of taxes 8,141 58,516 84,376 Gain on disposal of discontinued operations, net of taxes of $234,059 - 627,645 - -------- -------- -------- Income before extraordinary loss 54,343 663,872 55,515 Extraordinary loss from early extinguishment of debt, net of income tax benefit of $1,108 and $3,682 - (2,057) (6,838) -------- -------- -------- Net income $ 54,343 $661,815 $ 48,677 ======== ======== ======== Basic earnings (loss) per common share: Income (loss) from continuing operations before extraordinary loss $.73 $ (.36) $(.48) Income from discontinued operations .13 .94 1.40 Gain on disposal of discontinued operations - 10.09 - Extraordinary loss - (.03) (.11) ---- ------ ----- Net income $.86 $10.64 $ .81 ==== ====== ===== Diluted earnings (loss) per common share: Income (loss) from continuing operations before extraordinary loss $.73 $ (.36) $(.48) Income from discontinued operations .13 .94 1.40 Gain on disposal of discontinued operations - 10.09 - Extraordinary loss - (.03) (.11) ---- ------ ----- Net income $.86 $10.64 $ .81 ==== ====== =====
The accompanying notes are an integral part of these consolidated financial statements. F-3 LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ---- ---- ---- (In thousands) Net cash flows from operating activities: - ----------------------------------------- Net income $ 54,343 $ 661,815 $ 48,677 Adjustments to reconcile net income to net cash (used for) operations: Extraordinary loss, net of income tax benefit - 2,057 6,838 Provision (benefit) for deferred income taxes 7,576 (3,753) (20,629) Depreciation and amortization of property, equipment and leasehold improvements 10,250 10,913 12,889 Other amortization 38,098 59,253 65,418 Provision for doubtful accounts 9,473 11,135 18,412 Net securities (gains) losses 60,871 (3,249) (24,117) Equity in (income) losses of associated companies (23,290) 56,515 33,631 (Gain) on disposal of real estate, property and equipment (33,802) (66,940) (7,485) (Gain) on sale of loan portfolio (6,535) - - (Gain) on disposal of discontinued operations - (627,645) - Investments classified as trading, net (139,715) (108,254) 6,724 Deferred policy acquisition costs incurred and deferred (39,687) (49,354) (52,763) Net change in: Reinsurance receivables (16,098) 24,459 (14,186) Trade, notes and other receivables 79,960 (65,374) 1,999 Prepaids and other assets (11,054) (80,002) (64,246) Net assets of discontinued operations 26,909 (37,746) (55,036) Trade payables and expense accruals 24,816 60,306 14,889 Other liabilities (43,980) (6,024) (7,427) Income taxes payable (79,191) (9,638) 17,753 Policy reserves (3,434) 13,389 14,897 Unearned premiums (33,094) (22,753) (14,372) Other 1,321 3,470 734 ---------- --------- -------- Net cash (used for) operating activities (116,263) (177,420) (17,400) ---------- --------- -------- Net cash flows from investing activities: - ----------------------------------------- Acquisition of real estate, property, equipment and leasehold improvements (79,296) (57,130) (19,932) Proceeds from disposals of real estate, property and equipment 59,814 198,287 46,043 Proceeds from disposal of discontinued operations, net of expenses - 1,042,067 - Investment in Providential Life in 1996 and Fidei in 1998 (62,264) - (11,196) Advances on loan receivables (153,920) (97,898) (113,787) Principal collections on loan receivables 79,258 114,411 128,756 Proceeds from sales of loan receivables 89,516 - - Purchases of investments (other than short-term) (2,897,174) (1,716,242) (877,542) Proceeds from maturities of investments 844,384 324,415 329,440 Proceeds from sales of investments 2,134,113 732,361 604,259 ---------- ---------- --------- Net cash provided by investing activities 14,431 540,271 86,041 ---------- ---------- --------- (continued) The accompanying notes are an integral part of these consolidated financial statements. F-4 LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, continued For the years ended December 31, 1998, 1997 and 1996 1998 1997 1996 ---- ---- ---- (In thousands) Net cash flows from financing activities: - ----------------------------------------- Net change in short-term borrowings $ 84,911 $ (50,000) $ 207 Net change in customer banking deposits (8,670) (10,646) 6,199 Issuance of Company-obligated mandatorily redeemable preferred securities of subsidiary trust - 147,465 - Reduction of Company-obligated mandatorily redeemable preferred securities of subsidiary trust (42,217) - - Issuance of long-term debt, net of issuance costs 14,428 9,566 141,581 Reduction of long-term debt (388) (30,944) (139,861) Purchase of common shares for treasury (59,348) (1,484) (837) Dividends paid (8,380) (15,964) (15,100) --------- --------- --------- Net cash provided by (used for) financing activities (19,664) 47,993 (7,811) --------- --------- --------- Net (decrease) increase in cash and cash equivalents (121,496) 410,844 60,830 Cash and cash equivalents at January 1, 581,186 170,342 109,512 --------- --------- --------- Cash and cash equivalents at December 31, $ 459,690 $ 581,186 $ 170,342 ========= ========= ========= Supplemental disclosures of cash flow information: - -------------------------------------------------- Cash paid during the year for: Interest $46,469 $48,456 $53,854 Income tax payments, net of refunds $60,266 $28,100 $ 6,682
The accompanying notes are an integral part of these consolidated financial statements. F-5 LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the years ended December 31, 1998, 1997 and 1996 (In thousands, except per share amounts)
Common Accumulated Shares Additional Other $1 Par Paid-in Comprehensive Retained Value Capital Income Earnings Total ----- ------- ------------- -------- ----- Balance, January 1, 1996 $60,164 $159,914 $ 30,086 $ 861,327 $1,111,491 ---------- Comprehensive income: Net changes in unrealized gain (loss) on investments, net of tax benefit of $15,670 (28,327) (28,327) Net income 48,677 48,677 ---------- Comprehensive income 20,350 ---------- Exercise of options to purchase common shares 288 1,915 2,203 Purchase of stock for treasury (34) (803) (837) Dividends ($.25 per common share) (15,100) (15,100) ------- -------- -------- --------- ---------- Balance, December 31, 1996 60,418 161,026 1,759 894,904 1,118,107 ---------- Comprehensive income: Net changes in unrealized gain (loss) on investments, net of taxes of $2,291 3,871 3,871 Net income 661,815 661,815 ---------- Comprehensive income 665,686 ---------- Exercise of options to purchase common shares 248 3,263 3,511 Conversion of 5 1/4% Convertible Subordinated Debentures 3,258 90,417 93,675 Purchase of stock for treasury (45) (1,439) (1,484) Dividends ($.25 per common share) (15,964) (15,964) ------- -------- ------- ---------- ---------- Balance, December 31, 1997 63,879 253,267 5,630 1,540,755 1,863,531 ---------- Comprehensive income: Net changes in unrealized gain (loss) on investments, net of tax benefit of $3,596 (6,612) (6,612) Net change in unrealized foreign exchange gain (loss), net of tax benefit of $61 211 211 Net income 54,343 54,343 ---------- Comprehensive income 47,942 ---------- Buyback of trust preferred securities, net of taxes of $3,354 6,229 6,229 Exercise of options to purchase common shares 137 3,048 3,185 Purchase of stock for treasury (2,031) (57,317) (59,348) Dividends (8,380) (8,380) ------- -------- ------- ---------- ---------- Balance, December 31, 1998 $61,985 $205,227 $ (771) $1,586,718 $1,853,159 ======= ======== ======= ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-6 LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Operations: The Company is a diversified financial services holding company engaged in personal and commercial lines of property and casualty insurance, principally in the New York metropolitan area, banking and lending and manufacturing, principally in markets in the United States, and real estate activities. The Company's principal operations are its insurance businesses, of which its principal personal lines insurance products are automobile insurance and homeowners insurance. The Company's principal commercial lines are property and casualty products provided for vehicles (including medallion and radio-controlled livery vehicles), multi-family residential real estate, workers' compensation and various other business classes. The Company's banking and lending operations principally consist of making instalment loans to niche markets primarily funded by deposits insured by the Federal Deposit Insurance Corporation. The Company's manufacturing operations manufacture and market proprietary plastic netting used for a variety of purposes. In 1998, the Company classified as discontinued operations its life insurance subsidiaries, Charter National Life Insurance Company ("Charter") and Intramerica Life Insurance Company ("Intramerica"). Prior period financial statements have been restated to conform with this presentation. 2. Significant Accounting Policies: (a) Use of Estimates in Preparing Financial Statements: The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts in the financial statements and disclosures of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. (b) Consolidation Policy: The consolidated financial statements include the accounts of the Company and all majority-owned and controlled entities. All significant intercompany transactions and balances are eliminated in consolidation. Investments in entities which the Company does not control but has the ability to exercise significant influence are accounted for on the equity method of accounting. Certain amounts for prior periods have been reclassified to be consistent with the 1998 presentation and for discontinued operations. (c) Statements of Cash Flows: The Company considers short-term investments, which have maturities of less than three months at the time of acquisition, to be cash equivalents. Cash and cash equivalents include short-term investments of $323,305,000 and $414,833,000 at December 31, 1998 and 1997, respectively. (d) Investments: At acquisition, marketable debt and equity securities are designated as either i) held to maturity, which are carried at amortized cost, ii) trading, which are carried at estimated fair value with unrealized gains and losses reflected in results of operations, or iii) available for sale, which are carried at estimated fair value with unrealized gains and losses reflected as a separate component of shareholders' equity, net of taxes. Held to maturity investments are made with the intention of holding such securities to maturity, which the Company has the ability to do. Estimated fair values are principally based on quoted market prices. F-7 2. Significant Accounting Policies, continued: Investments with an impairment in value considered to be other than temporary are written down to estimated net realizable values. The writedowns are included in "Net securities gains (losses)" in the Consolidated Statements of Income. The cost of securities sold is based on average cost. The Company's investments in Russian and Polish equity securities ($18,992,000 and $51,025,000 as of December 31, 1998 and 1997, respectively), none of which is held by the insurance or banking subsidiaries, do not have readily determinable fair values. Given the uncertainties inherent in investing in the emerging markets of Russia and Poland, the Company is accounting for these investments under the cost recovery method, whereby all receipts are applied to reduce the investment. Quarterly, the Company reviews its investment in Russian and Polish equity securities to determine that the carrying amount is realizable. In performing such reviews, the Company considers current market prices, prior sale transactions, the current political and economic environment and other factors. These investments are included in "Other investments" in the Consolidated Balance Sheets. During 1998, due to declines in values that were deemed other than temporary, the Company recorded a pre-tax writedown of approximately $75,000,000 related to its investments in Russian and Polish debt and equity securities. Such writedowns are reflected in the caption "Net securities gains (losses)." (e) Property, Equipment and Leasehold Improvements: Property, equipment and leasehold improvements are stated at cost, net of accumulated depreciation and amortization ($76,397,000 and $67,116,000 at December 31, 1998 and 1997, respectively). Depreciation and amortization are provided principally on the straight-line method over the estimated useful lives of the assets or, if less, the term of the underlying lease. (f) Income Recognition from Insurance Operations: Premiums on property and casualty insurance products are recognized as revenues over the term of the policy using the monthly pro rata basis. (g) Policy Acquisition Costs: Policy acquisition costs principally consist of commissions, premium taxes and other underwriting expenses (net of reinsurance allowances). If recoverability of such costs from future premiums and related investment income is not anticipated, the amounts not considered recoverable are charged to operations. Policy acquisition costs are deferred and amortized ratably over the terms of the related policies. (h) Reinsurance: In the normal course of business, the Company seeks to reduce the loss that may arise from catastrophes and to limit losses from large exposures by reinsuring certain levels of risk with other insurance enterprises. Catastrophe reinsurance treaties serve to reduce property and casualty insurance risk in geographic areas where the Company is exposed to natural disasters, primarily the New York metropolitan area. Reinsurance contracts do not necessarily legally relieve the Company from its obligations to policyholders. Reinsurance recoverables are reported as assets net of provisions for uncollectible amounts. Premiums earned and other underwriting expenses are stated net of reinsurance. (i) Policy Reserves and Unearned Premiums: Liabilities for unpaid losses and loss adjustment expenses ("LAE") applicable to the property and casualty insurance operations are determined using case basis evaluations, statistical analyses for losses incurred but not reported and estimates for salvage and subrogation recoverable and represent estimates of ultimate claim costs and loss adjustment expenses. As more information becomes available and claims are settled, the F-8 2. Significant Accounting Policies, continued: estimated liabilities are adjusted upward or downward with the effect of decreasing or increasing net income at the time of adjustment. (j) Income Taxes: The Company provides for income taxes using the liability method. The future benefit of certain tax loss carryforwards and future deductions is recorded as an asset and the provisions for income taxes are not reduced for the benefit from utilization of tax loss carryforwards. A valuation allowance is provided if deferred tax assets are not considered more likely than not to be realized. (k) Derivative Financial Instruments: The Company enters into interest rate agreements to manage the impact of changes in interest rates on its customer banking deposits. The difference between the amounts paid and received is accrued and recognized as an adjustment to interest expense (the accrual accounting method). Cash flows related to the agreements are classified as operating activities in the Consolidated Statements of Cash Flows, consistent with the interest payments on the underlying debt. The Company also enters into currency rate swap agreements to hedge net investments in foreign subsidiaries. Gains and losses on such hedges are reported as a component of shareholders' equity. The Company does not have material derivative financial instruments. (l) Translation of Foreign Currency: Foreign currency denominated investments and financial statements are translated into U.S. dollars at current exchange rates, except that revenues and expenses are translated at average exchange rates during each reporting period; resulting translation adjustments are reported as a component of shareholders' equity. Net foreign exchange gains (losses) were not material. (m) Recently Issued Accounting Standard: In June 1998, the Financial Accounting Standards Board issued Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which will be effective for fiscal years beginning after June 15, 1999. The Company is reviewing the impact of the implementation of SFAS 133 on the Company's financial position and results of operations. 3. Acquisitions: In 1996, the Company formed a joint venture, Pepsi International Bottlers ("PIB") with PepsiCo, Inc. to be the exclusive bottler and distributor of PepsiCo beverages in a large portion of central and eastern Russia, Kyrgyzstan and Kazakstan. The Company contributed $79,500,000 to PIB for a 75% equity interest. Effective as of January 30, 1998, the Company entered into an agreement with PepsiCo, pursuant to which, among other things, PIB repaid in full the Company's $77,705,000 bridge financing and the Company's equity interest in PIB was reduced to 37.9%. Pursuant to this agreement, the Company no longer had any ability to influence PIB; effective February 1, 1998, the Company discontinued accounting for this investment under the equity method of accounting. The agreement relieved the Company of any future funding obligation with respect to PIB and created an option exercisable by either the Company or PepsiCo, pursuant to which PepsiCo was obligated to purchase all of the Company's interest in PIB (the "Option") for $37,000,000, plus interest. In February 1999, PepsiCo exercised the Option for approximately $39,190,000, including interest. The Company will recognize a pre-tax gain of approximately $29,545,000 in the first quarter of 1999. However, when combined with the Company's share of the joint venture losses since inception, the Company's net loss from this investment was approximately $40,310,000. The Company's investment in PIB is included in the caption "Investments in associated companies." F-9 3. Acquisitions, continued: In the fourth quarter of 1998, the Company acquired a 95.4% interest in Fidei S.A., a French company listed on the Paris Stock Exchange that is engaged directly and through subsidiaries in real estate activities, for approximately $62,300,000, including expenses. In connection with this acquisition, the Company entered into currency swap agreements to hedge approximately $55,000,000 of its foreign currency exposure. The counterparties to these currency swap agreements are major financial institutions, which management believes are able to fulfill their obligations. The swap agreements mature in tranches in March 2000 and September 2001. 4. Investments in Associated Companies: The Company has investments in several Associated Companies that have adopted various fiscal year-ends. The Company records its portion of the earnings of such companies based on fiscal periods ended up to three months prior to the end of the Company's reporting period. The following table provides certain summarized data with respect to the Associated Companies accounted for on the equity method of accounting included in 1998, 1997 and 1996 results of operations. (Amounts are in thousands.) 1998 1997 ---- ---- Assets $2,058,222 $1,162,394 ---------- ---------- Liabilities 1,903,463 1,104,100 --------- ---------- Minority interest - 6,446 ---------- ---------- Net assets $ 154,759 $ 51,848 ========== ========== The Company's portion of the reported net assets $ 47,788 $ 13,160 ========== ==========
1998 1997 1996 ---- ---- ---- Total revenues $790,778 $716,320 $627,568 Income (loss) from continuing operations before extraordinary items $ 79,641 $(66,525) $(90,607) Net income (loss) $ 79,641 $(66,525) $(90,607) The Company's equity in net income (loss) $ 23,290 $(56,515) $(33,631)
In December 1997, the Company invested $20,000,000 to acquire a limited partnership interest in an investment partnership. During 1998, the Company recognized income from this partnership of approximately $30,800,000. The partnership currently is in the process of liquidating and making final distributions. The Company does not anticipate that the amount of income to be realized from this investment will be significant in 1999. As of December 31, 1998, the Company owned a 30% interest in Caja de Ahorro y Seguro S.A. ("Caja"), a holding company whose subsidiaries are engaged in property and casualty insurance, life insurance, workers' compensation insurance and banking in Argentina. During 1998, the Company's previously announced agreement to sell substantially all of its interest in Caja to its Argentine partner was restructured, and in March 1999, the Company sold all of its interest in Caja to Assicurazioni Generali Group, an Italian insurance company, for $126,000,000 in cash and a $40,000,000 collateralized note F-10 4. Investments in Associated Companies, continued: maturing April 2001 from its Argentine partner. The Company will record a pre-tax gain of approximately $120,000,000 in its first quarter 1999 results of operations. At December 31, 1998, investments in associated companies included publicly traded common stock equity interests of 5% or more in the following non-consolidated companies: Carmike Cinemas, Inc. (6% of Class A shares) and MK Gold Company (46%). 5. Insurance Operations: The changes in deferred policy acquisition costs were as follows (in thousands): 1998 1997 1996 ---- ---- ---- Balance, January 1, $ 23,906 $ 26,585 $ 29,154 Policy acquisition costs incurred and deferred 39,687 49,354 52,763 Amortization of deferred acquisition costs (45,338) (52,033) (55,332) -------- -------- -------- Balance, December 31, $ 18,255 $ 23,906 $ 26,585 ======== ======== ======== The effect of reinsurance on premiums written and earned for the years ended December 31, 1998, 1997 and 1996 is as follows (in thousands):
1998 1997 1996 ---- ---- ---- Premiums Premiums Premiums Premiums Premiums Premiums Written Earned Written Earned Written Earned ------- ------ ------- ------ ------- ------ Direct $214,878 $247,913 $282,217 $304,891 $338,648 $353,902 Assumed 93 148 200 280 1,030 1,115 Ceded (17,528) (19,485) (29,184) (30,156) (29,898) (28,584) -------- -------- -------- -------- -------- -------- Net $197,443 $228,576 $253,233 $275,015 $309,780 $326,433 ======== ======== ======== ======== ======== ======== Percentage of amount assumed to net .05% .06% .08% .10% .33% .34% === === === === === ===
Recoveries recognized on reinsurance contracts were $38,958,000 in 1998, $29,786,000 in 1997 and $25,473,000 in 1996. Net income (loss) as determined in accordance with statutory accounting principles ("SAP") as reported to the domiciliary state of the Company's property and casualty insurance subsidiaries were $(9,410,000), $3,405,000 and $26,905,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The related statutory surplus was $199,772,000, $217,925,000 and $220,317,000 at December 31, 1998, 1997 and 1996, respectively. As of December 31, 1998, the statutory surplus of the Empire Insurance Group was $160,603,000. The insurance subsidiaries are subject to regulatory restrictions which limit the amount of cash and other distributions available to the Company without F-11 5. Insurance Operations, continued: regulatory approval. As of December 31, 1998, $15,079,000 could be distributed to the Company without regulatory approval. The Company's insurance subsidiaries are contingently liable for possible assessments under state regulatory requirements pertaining to potential insolvencies of unaffiliated insurance companies. Liabilities, which are established based upon regulatory guidance, have not been material. In the following table, the liabilities for unpaid losses and LAE, of the Empire Insurance Group is reconciled for each of the three years in the period ended December 31, 1998. The changes in the liabilities include adjustments for the current year's business and changes in estimates of prior years' liabilities. 1998 1997 1996 ---- ---- ---- (In thousands) Net SAP liability for losses and LAE at beginning of year $487,116 $481,138 $476,692 -------- -------- -------- Provision for losses and LAE for claims occurring in the current year 191,482 248,408 271,633 Increase in estimated losses and LAE for claims occurring in prior years 42,290 27,027 28,183 -------- -------- -------- Total incurred losses and LAE 233,772 275,435 299,816 -------- -------- -------- Losses and LAE payments for claims occurring during: Current year 64,739 80,149 93,036 Prior years 186,831 189,308 202,334 -------- -------- -------- 251,570 269,457 295,370 -------- -------- -------- Net SAP liability for losses and LAE at end of year 469,318 487,116 481,138 Reinsurance recoverable 72,956 58,592 51,181 -------- -------- -------- Liability for losses and LAE at end of year as reported in financial statements (GAAP) $542,274 $545,708 $532,319 ======== ======== ======== 6. Discontinued Operations: In September 1998, the Company reinsured, retroactive to January 1, 1998, substantially all of its life insurance business to Allstate Life Insurance Company ("Allstate") and a subsidiary thereof in an indemnity reinsurance transaction. While the premium received on this transaction was approximately $28,675,000, the gain on the reinsurance transaction was deferred and is being amortized into income based upon actuarial estimates of the premium revenue of the underlying insurance contracts. In December 1998, the Company signed an agreement to sell its life insurance subsidiaries, Charter and Intramerica, to Allstate for statutory surplus at the date of sale (approximately $62,200,000 at December 31, 1998), plus $3,575,000. This transaction is expected to result F-12 6. Discontinued Operations, continued: in a pre-tax gain of approximately $20,000,000, principally resulting from recognition of deferred gains from prior reinsurance transactions, including the reinsurance transaction described above. The transaction is subject to regulatory approvals and customary closing conditions and is expected to close in the second quarter of 1999. In September 1997, the Company completed the sale of the Colonial Penn Life Group to Conseco, Inc. for $460,000,000, including $400,000,000 in notes maturing on January 2, 2003 collateralized by non-cancelable letters of credit and $60,000,000 in cash. These companies were principally engaged in the sale of graded benefit life insurance policies through direct marketing and agent-sold Medicare supplement insurance. The Company reported a pre-tax gain of approximately $271,750,000 on the sale. In connection with the sale of the Colonial Penn Life Group, the Company reinsured certain life insurance policies for a premium of $25,000,000. The gain on this reinsurance transaction was deferred and is being amortized into income based on actuarial estimates of the premium revenue of the underlying insurance contracts. Upon the closing of the sale to Allstate described above, the remaining deferred gain will be recognized in income. In November 1997, the Company completed the sale of the property and casualty insurance business of the Colonial Penn P&C Group to General Electric Capital Corporation for total cash consideration of $1,018,100,000, plus $14,300,000 for retention of certain employee benefit liabilities. The Group's primary business was providing private passenger automobile insurance to the mature adult population through direct response marketing. The Company reported a pre-tax gain of approximately $589,950,000 on the sale. At December 31, 1998 and 1997 the components of net assets of discontinued operations are as follows (in thousands): 1998 1997 ---- ---- Investments $ 65,788 $ 83,431 Cash and cash equivalents 3,032 25,995 Separate account assets 619,578 541,546 Notes and other receivables 179,580 175,777 Other 15,425 201 -------- -------- Total assets 883,403 826,950 -------- -------- Policy reserves 179,083 191,374 Separate account liabilities 619,578 541,546 Other 39,734 22,113 -------- -------- Total liabilities 838,395 755,033 -------- -------- Net assets of discontinued operations $ 45,008 $ 71,917 ======== ======== F-13 6. Discontinued Operations, continued: A summary of the results of discontinued operations (through the dates of sale) is as follows for each of the three years in the period ended December 31, 1998 (in thousands):
1998 1997 1996 ---- ---- ---- Charter and Intramerica: Revenues $10,799 $12,739 $13,881 ------- ------- ------- Expenses: Provision for insurance losses and policy benefits (646) 1,898 1,846 Other operating expenses (1,079) 11,537 3,187 ------- ------- ------- (1,725) 13,435 5,033 ------- ------- ------- Income (loss) before income taxes 12,524 (696) 8,848 Income taxes 4,383 (360) 3,047 ------- ------- ------- Income (loss) from discontinued operations, net of taxes $ 8,141 $ (336) $ 5,801 ======= ======= ======= Colonial Penn P&C Group: Revenues $512,811 $592,005 -------- -------- Expenses: Provision for insurance losses and policy benefits 373,602 421,823 Other operating expenses 86,519 100,660 -------- -------- 460,121 522,483 -------- -------- Income before income taxes 52,690 69,522 Income taxes 18,329 22,288 -------- -------- Income from discontinued operations, net of taxes $ 34,361 $ 47,234 ======== ======== Colonial Penn Life Group: Revenues $166,078 $230,228 -------- -------- Expenses: Provision for insurance losses and policy benefits 100,964 139,135 Other operating expenses 28,341 42,764 -------- -------- 129,305 181,899 -------- -------- Income before income taxes 36,773 48,329 Income taxes 12,282 16,988 -------- -------- Income from discontinued operations, net of taxes $ 24,491 $ 31,341 ======== ========
F-14 7. Investments: The amortized cost, gross unrealized gains and losses and estimated fair value of investments classified as held to maturity and as available for sale at December 31, 1998 and 1997 are as follows (in thousands):
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- Held to maturity: 1998 - ---- Bonds and notes: United States Government agencies and authorities $23,743 $348 $22 $24,069 States, municipalities and political subdivisions 6,818 3 - 6,821 All other corporates 349 - 2 347 Other fixed maturities 16,346 - - 16,346 ------- ---- --- ------- $47,256 $351 $24 $47,583 ======= ==== === ======= 1997 - ---- Bonds and notes: United States Government agencies and authorities $22,161 $166 $46 $22,281 States, municipalities and political subdivisions 3,002 3 - 3,005 All other corporates 141 - 5 136 Other fixed maturities 10,894 - - 10,894 ------- ---- --- ------- $36,198 $169 $51 $36,316 ======= ==== === ======= Available for sale: 1998 - ---- Bonds and notes: United States Government agencies and authorities $1,313,764 $ 5,736 $ 1,290 $1,318,210 States, municipalities and political subdivisions 126 - - 126 Foreign governments 2,955 3,131 - 6,086 Public utilities 2,166 - 1 2,165 All other corporates 204,288 8,241 7,762 204,767 ---------- ------- ------- ---------- Total fixed maturities 1,523,299 17,108 9,053 1,531,354 ---------- ------- ------- ---------- Equity securities: Preferred stocks 5,571 281 16 5,836 Common stocks: Banks, trusts and insurance companies 20,036 - 6,312 13,724 Industrial, miscellaneous and all other 6,833 276 4,914 2,195 ---------- ------- ------- ---------- Total equity securities 32,440 557 11,242 21,755 ---------- ------- ------- ---------- Other 50 - 33 17 ---------- ------- ------- ---------- $1,555,789 $17,665 $20,328 $1,553,126 ========== ======= ======= ========== F-15 7. Investments, continued: Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- 1997 - ---- Bonds and notes: United States Government agencies and authorities $1,361,597 $ 5,778 $2,241 $1,365,134 Foreign governments 34,364 3,511 175 37,700 All other corporates 239,254 3,054 2,207 240,101 ---------- ------- ------ ---------- Total fixed maturities 1,635,215 12,343 4,623 1,642,935 Equity securities: Common stocks - industrial, miscellaneous and all other 3,464 998 945 3,517 Other 5,000 - 63 4,937 ---------- ------- ------ ---------- $1,643,679 $13,341 $5,631 $1,651,389 ========== ======= ====== ==========
Reclassification amounts included in comprehensive income for the year ended December 31, 1998 are as follows (in thousands): Unrealized holding (losses) arising during the period, net of taxes of $1,366 $(2,467) Less: reclassification adjustment for gains included in net income, net of taxes of $2,230 (4,145) ------- Net change in unrealized gain (loss) on investments, net of taxes of $3,596 $(6,612) ======= The amortized cost and estimated fair value of investments classified as held to maturity and as available for sale at December 31, 1998, by contractual maturity are shown below. Expected maturities are likely to differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Held to Maturity Available for Sale ---------------- ------------------ Estimated Estimated Amortized Fair Amortized Fair Cost Value Cost Value --------- --------- --------- --------- (In thousands) Due in one year or less $18,320 $18,327 $ 803,748 $ 811,298 Due after one year through five years 15,631 15,712 495,065 492,083 Due after five years through ten years 6,431 6,680 141,124 142,781 Due after ten years 4,554 4,544 4,943 4,951 ------- ------- ---------- ---------- 44,936 45,263 1,444,880 1,451,113 Mortgage-backed securities 2,320 2,320 78,419 80,241 ------- ------- ---------- ---------- $47,256 $47,583 $1,523,299 $1,531,354 ======= ======= ========== ==========
At December 31, 1998 and 1997 securities with book values aggregating $8,119,000 and $8,003,000, respectively, were on deposit with various regulatory authorities. Additionally, at December 31, 1998 and 1997, securities with book values of approximately $105,000,000 collateralized a letter of credit issued in connection with the sale of the Colonial Penn P&C Group. F-16 7. Investments, continued: Certain information with respect to trading securities at December 31, 1998 and 1997 is as follows (in thousands):
Amortized Estimated Carrying Cost Fair Value Value ---- ---------- ----- 1998 - ---- Fixed maturities - corporate bonds and notes $ 16,782 $ 17,477 $ 17,477 Equity securities: Preferred stocks 105,775 101,964 101,964 Common stocks - industrial, miscellaneous and all other 72 105 105 Options and warrants 1,119 431 431 Other investments 9,159 12,599 12,599 -------- -------- -------- Total trading securities $132,907 $132,576 $132,576 ======== ======== ======== 1997 - ---- Fixed maturities - corporate bonds and notes $ 5,360 $ 5,419 $ 5,419 Equity securities: Preferred stocks 100,483 107,567 107,567 Common stocks - industrial, miscellaneous and all other 1,600 1,600 1,600 Options and warrants 1,036 830 830 -------- -------- ------- Total trading securities $108,479 $115,416 $115,416 ======== ======== ========
8. Trade, Notes and Other Receivables, Net: A summary of trade, notes and other receivables, net at December 31, 1998 and 1997 is as follows (in thousands):
1998 1997 ---- ---- Note receivable from Conseco, Inc. from sale of the Colonial Penn Life Group (including accrued interest) (see Note 6) $405,854 $406,223 Instalment loan receivables, net of unearned finance charges of $3,026 and $919(a) 185,183 202,938 Receivables related to securities 112,684 343 Receivables relating to real estate activities 68,863 8,552 Tenant receivables of Fidei 53,775 - Premiums receivable 40,374 49,451 Bridge financing to PIB - 77,705 Other 23,590 22,455 -------- -------- 890,323 767,667 Allowance for doubtful accounts (including $9,398 and $10,199 applicable to loan receivables of banking and lending subsidiaries and, in 1998, $40,955 relating to Fidei) (57,022) (16,330) -------- -------- $833,301 $751,337 ======== ========
(a) Contractual maturities of instalment loan receivables at December 31, 1998 were as follows (in thousands): 1999 - $44,017; 2000 - $37,474; 2001 - $33,236; 2002 - $30,362 and 2003 and thereafter - $40,094. Experience shows that a substantial portion of such notes will be repaid or renewed prior to contractual maturity. Accordingly, the foregoing is not to be regarded as a forecast of future cash collections. F-17 9. Prepaids and Other Assets: At December 31, 1998 and 1997, prepaids and other assets included real estate assets, net, of $397,404,000 and $93,264,000, respectively. Approximately $245,870,000 of the 1998 real estate investment consists of real estate assets held by Fidei. These assets are primarily office buildings located in Paris, France and its environs which Fidei is currently marketing for sale. 10. Trade Payables, Expense Accruals and Other Liabilities: A summary of trade payables and expense accruals and other liabilities at December 31, 1998 and 1997 is as follows (in thousands): 1998 1997 ---- ---- Trade Payables and Expense Accruals: Payables related to securities $144,088 $ 97,844 Trade and drafts payable 27,629 20,512 Accrued compensation, severance and other employee benefits 18,695 33,269 Accrued interest payable 14,420 5,709 Taxes, other than income 8,441 2,817 Provision for servicing carrier claims 5,768 12,337 Amount due on reinsurance 3,017 16,160 Other 11,427 20,114 -------- -------- $233,485 $208,762 ======== ======== Other Liabilities: Liability for unredeemed trading stamps $ 19,517 $ 22,227 Postretirement and postemployment benefits 18,855 21,584 Liabilities related to real estate activities 13,446 19 Unearned service fees 7,465 15,129 Other 50,114 34,182 -------- -------- $109,397 $ 93,141 ======== ======== F-18 11. Indebtedness: The principal amount, stated interest rate and maturity of debt outstanding at December 31, 1998 and 1997 are as follows (dollars in thousands): 1998 1997 ---- ---- Payable in U.S. dollars: Senior Notes: Bank credit facility $ 65,500 $ - 7 3/4% Senior Notes due 2013, less debt discount of $731 and $781 99,269 99,219 Industrial Revenue Bonds (with variable interest) 9,815 9,815 Other due 1999 through 2016 with a weighted average interest rate of 8.3% 64,182 9,447 -------- -------- 238,766 118,481 -------- -------- Subordinated Notes: 8 1/4% Senior Subordinated Notes due 2005 100,000 100,000 7 7/8% Senior Subordinated Notes due 2006, less debt discount of $540 and $609 134,460 134,391 -------- -------- 234,460 234,391 -------- -------- Payable in other currencies: Euro denominated debt due 2001 through 2009 with a weighted average effective interest rate of 5.1% 249,375 - -------- -------- $722,601 $352,872 ======== ======== At December 31, 1998 the Company had an unsecured bank credit facility of $100,000,000 which bears interest based on the prime rate or LIBOR and matures in November 2002. $65,500,000 was borrowed under this bank credit facility as of December 31, 1998. The Euro denominated debt, which is non-recourse to the Company, is entirely related to the acquisition of Fidei. The most restrictive of the Company's debt instruments require maintenance of minimum Tangible Net Worth and limit Indebtedness, as defined in the agreements. In addition, the debt instruments contain limitations on dividends, investments, liens, contingent obligations and certain other matters. As of December 31, 1998, cash dividends of approximately $579,000,000 would be eligible to be paid under the most restrictive covenants. The Company reported extraordinary losses on early extinguishment of its 5 1/4% Convertible Subordinated Debentures due 2003 (the "5 1/4% Debentures") and its 10 3/8% Senior Subordinated Notes due 2002 of $3,165,000 ($2,057,000 after taxes or $.03 per share) in 1997 and $10,520,000 ($6,838,000 after taxes or $.11 per share) in 1996. Approximately $10,470,000 of the manufacturing division's net property, equipment and leasehold improvements are pledged as collateral for the Industrial Revenue Bonds; and approximately $94,030,000 of other assets (primarily investments and property) are pledged for other indebtedness aggregating approximately $49,182,000. Interest rate agreements are used to manage the potential impact of changes in interest rates on customer banking deposits. Under interest rate swap agreements, the Company has agreed with other parties to pay fixed rate interest amounts and receive variable rate interest amounts calculated by reference to an agreed notional amount. The variable interest rate portion of the swaps is a specified LIBOR interest rate. At December 31, 1998 and 1997, the notional amounts of the Company's interest rate swaps were $60,000,000 and $25,000,000, respectively. These interest rate swaps expire in 2003 and require fixed rate payments of 5.07%. The Company would have been required to pay $292,000 at December 31, 1998 and $636,000 at December 31, 1997 to retire these agreements. The LIBOR rate at December 31, 1998 was 5.07%. Changes in LIBOR interest rates in the future will change the amounts to be received under the agreements as well as interest to be paid under the related variable debt obligations. In connection with F-19 11. Indebtedness, continued: the acquisition of Fidei, the Company borrowed $62,300,000 under its bank credit facility and entered into currency swap agreements to hedge approximately $55,000,000 of its foreign currency exposure. The swap agreements mature in tranches in March 2000 and September 2001. Counterparties to interest rate and currency swap agreements are major financial institutions, which management believes are able to fulfill their obligations. Any losses due to default by the counterparties are likely to be immaterial. The aggregate annual mandatory redemptions of debt during the five year period ending December 31, 2003 are as follows (in thousands): 1999 - $99,142; 2000 - $870; 2001 - $71,170; 2002 - $8,006; and, 2003 - $97,803. The weighted average interest rate on short-term borrowings (primarily customer banking deposits) was 5.8% and 5.9% at December 31, 1998 and 1997, respectively. 12. Preferred Securities of Subsidiary Trust: In January 1997, the Company sold $150,000,000 aggregate liquidation amount of 8.65% trust issued preferred securities of its wholly-owned subsidiary, Leucadia Capital Trust I (the "Trust"). These Company-obligated mandatorily redeemable preferred securities have an effective maturity date of January 15, 2027 and represent undivided beneficial interests in the Trust's assets, which consist solely of $154,640,000 principal amount of 8.65% Junior Subordinated Deferrable Interest Debentures due 2027 of the Company. Considered together, the "back-up undertakings" of the Company related to the Trust's preferred securities constitute a full and unconditional guarantee by the Company of the Trust's obligations under the preferred securities. During 1998, a subsidiary of the Company repurchased $51,800,000 aggregate liquidation amount of the 8.65% trust issued preferred securities for $42,200,000, plus accrued interest. The difference between the purchase price and the book value was credited directly to shareholders' equity, net of taxes. 13. Common Shares, Stock Options and Preferred Shares: The Board of Directors from time to time has authorized acquisitions of the Company's Common Shares. In October 1998, the Company's Board of Directors increased to 6,000,000 the maximum number of shares that the Company is authorized to purchase. During the three year period ended December 31, 1998, the Company acquired 2,111,193 Common Shares at an average price of $29.23 per Common Share. From January 1, 1999 through March 12, 1999, the Company acquired 1,738,570 Common Shares at an average price of $29.98 per Common Share. As a result, as of March 13, 1999, the Company is authorized to repurchase 3,788,717 Common Shares. The Company has a fixed stock option plan which provides for grants of options or rights to non-employee directors and certain employees up to a maximum grant of three hundred thousand shares to any individual in a given taxable year. The plan provides for the issuance of stock options and stock appreciation rights at not less than the fair market value of the underlying stock at the date of grant. Options generally become exercisable in five equal annual instalments starting one year from date of grant. No stock appreciation rights have been granted. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", ("SFAS 123"), establishes a fair value method for accounting for stock-based compensation plans, either through recognition in the statements of income or disclosure. As permitted, the Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized in the statements of income for its stock-based compensation plans. Had compensation cost for the Company's stock option plans been recorded in the statements of income consistent with the provisions of SFAS 123, the Company's net income and earnings per share for 1998, 1997 and 1996 would not have been materially different from those reported. F-20 13. Common Shares, Stock Options and Preferred Shares, continued: A summary of activity with respect to the Company's stock options for the three years ended December 31, 1998 is as follows:
Available Common Weighted for Shares Average Options Future Subject Exercise Exercisable Option to Option Prices at Year-End Grants --------- ------ ----------- ------ Balance at January 1, 1996 772,618 $12.79 443,018 1,583,100 ======= ========= Granted 630,200 $26.54 Exercised (287,792) $ 7.66 Cancelled (41,100) $16.54 --------- Balance at December 31, 1996 1,073,926 $22.09 317,826 974,400 ======= ========= Granted 77,500 $26.67 Exercised (248,196) $14.15 Cancelled (393,470) $24.69 --------- Balance at December 31, 1997 509,760 $24.64 171,980 1,278,770 ======= ========= Granted 4,000 $35.38 Exercised (137,922) $23.10 Cancelled (53,800) $25.02 --------- Balance at December 31, 1998 322,038 $25.37 147,378 1,328,570 ========= ======= =========
The weighted-average fair value of the options granted was $8.50 per share for 1998, $6.39 per share for 1997 and $7.04 per share for 1996 as estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (1) expected volatility of 20.0% for 1998, 20.3% for 1997 and 25.3% for 1996 (2) risk-free interest rates of 5.6% for 1998, 6.1% for 1997 and 6.0% for 1996; (3) expected lives of 4.0 years for 1998 and 3.7 years for 1997 and 1996; and (4) dividend yields of .7% for 1998 and .9% for 1997 and 1996. The following table summarizes information about fixed stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable ---------------------------------------- ---------------------------- Weighted Common Average Weighted Common Weighted Shares Remaining Average Shares Average Range of Subject to Contractual Exercise Subject to Exercise Exercise Prices Option Life Price Option Price - --------------- ------ ---- ----- ------ ----- $17.88 - $20.44 68,238 .9 years $20.25 67,038 $20.29 $23.25 - $26.63 241,800 3.2 years $26.37 78,540 $26.33 $31.50 - $35.63 12,000 4.2 years $34.17 1,800 $33.79 ------- ------- $17.88 - $35.63 322,038 2.8 years $25.37 147,378 $23.68 ======= =======
At December 31, 1998 and 1997, 1,650,608 and 1,788,530, respectively, of the Company's Common Shares were reserved for stock options. At December 31, 1998 and 1997, 6,000,000 preferred shares (redeemable and non-redeemable), par value $1 per share, were authorized. F-21 14. Net Securities Gains (Losses): The following summarizes net securities gains (losses) for each of the three years in the period ended December 31, 1998 (in thousands):
1998 1997 1996 ---- ---- ---- Net realized gains on fixed maturities $ 13,021 $ 1,340 $ 6,990 Writedown related to investments in Russian and Polish debt and equity securities (75,371) - - Net unrealized gains (losses) on trading securities (1,456) 2,932 (3,834) Net realized gains (losses) on equity and other securities 2,935 (1,023) 20,961 -------- ------- ------- $(60,871) $ 3,249 $24,117 ======== ======= =======
Proceeds from sales of investments classified as available for sale were $1,687,385,000, $734,443,000 and $594,286,000 during 1998, 1997 and 1996, respectively. Gross gains of $24,964,000, $6,054,000 and $24,351,000 and gross losses of $33,784,000, $2,403,000 and $5,123,000 were realized on these sales during 1998, 1997 and 1996, respectively. 15. Other Results of Operations Information: Investment and other income for each of the three years in the period ended December 31, 1998 consist of the following (in thousands):
1998 1997 1996 ---- ---- ---- Interest on short-term investments $ 24,246 $ 14,301 $ 8,532 Interest on fixed maturities 94,547 72,084 58,609 Interest on notes receivable 26,717 6,789 615 Other investment income 15,592 4,191 4,337 Service fee income 13,169 32,257 25,084 Trading stamp revenues 4,032 8,194 12,017 Rental income 16,864 8,082 10,560 Gains on sale of real estate and other assets, net of costs 34,629 75,298 11,078 Gain on sale of loan portfolio 6,535 - - Litigation settlements - 579 5,434 Other 15,048 13,278 19,824 -------- -------- -------- $251,379 $235,053 $156,090 ======== ======== ========
During 1998, the Company's subsidiaries, American Investment Bank, N.A. and American Investment Financial, sold substantially all of their executive and professional loan portfolios for aggregate proceeds of $89,500,000. The Company reported a pre-tax gain on the sales of approximately $6,535,000 for the year ended December 31, 1998. In June 1997 the Company sold its investment in a New York City office building for $100,000,000 in cash. The Company reported a pre-tax gain of approximately $35,600,000 on the sale. Taxes, other than income or payroll, included in operations amounted to $10,563,000 (including $3,131,000 of premium taxes) for the year ended December 31, 1998, $10,707,000 (including $4,137,000 of premium taxes) for the year ended December 31, 1997 and $16,150,000 (including $5,099,000 of premium taxes) for the year ended December 31, 1996. Advertising costs amounted to $2,150,000, $4,026,000 and $5,138,000 for the years ended December 31, 1998, 1997 and 1996, respectively. F-22 16. Income Taxes: The principal components of the deferred tax liability at December 31, 1998 and 1997 are as follows (in thousands):
1998 1997 ---- ---- Deferred Tax Asset: Insurance reserves and unearned premiums $ 30,868 $ 33,831 Securities valuation reserves 47,112 20,129 Other accrued liabilities 1,556 7,890 Unrealized losses on investments 1,106 - Tax loss carryforwards, net of tax sharing payments 63,228 39,047 -------- -------- 143,870 100,897 Valuation allowance (102,403) (71,776) -------- -------- 41,467 29,121 -------- -------- Deferred Tax Liability: Instalment sale (12,000) (12,000) Unrealized (gains) on investments - (2,613) Depreciation (6,098) (5,864) Policy acquisition costs (6,389) (8,367) Other, net (24,689) (23,016) -------- -------- (49,176) (51,860) -------- -------- Net deferred tax liability $ (7,709) $(22,739) ======== ========
The valuation allowance principally relates to capital loss carryforwards, certain acquired tax loss carryforwards, the usage of which is subject to certain limitations and certain other matters which may restrict their utilization, and unrealized capital losses. Upon the closing of the sale of the Company's interest in Caja (see Note 4), the valuation allowance will be reduced by approximately $30,000,000 due to the availability of capital loss carryforwards to offset a portion of the capital gain. The (benefit) for income taxes for each of the three years in the period ended December 31, 1998 was as follows (in thousands):
1998 1997 1996 ---- ---- ---- State income taxes (principally currently payable) $ (1,500) $ 3,729 $ 1,200 Federal income taxes: Current (31,249) (10,375) (397) Deferred 7,576 (3,753) (20,629) Foreign income taxes (principally currently payable) 100 508 500 -------- -------- -------- $(25,073) $ (9,891) $(19,326) ======== ======== ========
The table below reconciles expected statutory federal income tax to actual income tax (benefit) (in thousands):
1998 1997 1996 ---- ---- ---- Expected federal income tax $ 10,282 $(8,483) $(16,865) State income taxes, net of federal income tax benefit (975) 2,424 780 Reduction in valuation allowance (8,065) (1,890) (1,693) Recognition of additional tax benefits (30,870) (2,719) (2,500) Tax on policyholder surplus account 5,406 - - Other (851) 777 952 -------- ------- -------- Actual income tax (benefit) $(25,073) $(9,891) $(19,326) ======== ======= ========
F-23 16. Income Taxes, continued: Reflected above as recognition of additional tax benefits, are reductions to the Company's income tax provision for the favorable resolution of certain contingencies and, in 1998, for a change in the Company's 1997 estimated federal income tax liability. The valuation allowance applicable to the deferred income tax asset gives effect to the possible unavailability of certain income tax deductions. During 1998, 1997 and 1996 certain matters were favorably resolved and the Company reduced the valuation allowance as reflected in the above reconciliation. However, during 1998, the valuation allowance was also increased by approximately $38,000,000 for capital losses. At December 31, 1998, the Company had tax loss carryforwards of $15,000,000, which are available to reduce federal income tax payments for the entire consolidated group, and certain of the Company's subsidiaries had tax loss carryforwards of $47,000,000, which can only be used to reduce federal income tax payments for the group that generated the carryforward. The tax loss carryforwards of the Company and its subsidiaries have been reflected in the deferred tax liability after applying the statutory federal income tax rate less any applicable tax sharing payments to the Internal Revenue Service. The tax loss carryforwards of the Company expire primarily in 2010. The tax loss carryforwards of the Company's subsidiaries expire in 2002 and 2003. In addition, at December 31, 1998 the Company had capital loss carryforwards of $110,000,000 which expire in 2002 and 2003. Limitations exist under the tax law which may restrict the utilization of the tax loss carryforwards. In addition, the capital loss carryforwards can only be used to offset capital gains. These limitations are considered in the determination of the valuation allowance. Under certain circumstances, the value of the carryforwards available could be substantially reduced if certain changes in ownership were to occur. In order to reduce this possibility, the Company's certificate of incorporation includes restrictions which prohibit transfers of the Company's Common Stock under certain circumstances. In connection with the sale of certain of the Company's operations in recent years, the Company had indemnified the purchasers for certain tax matters. The Company does not believe that such indemnification obligation will result in any additional material liability to the Company. F-24 17. Pension Plans and Postretirement Benefits: The Company maintains defined benefit pension plans covering employees of certain units who meet age and service requirements. Benefits are generally based on final average salary and years of service. The Company funds its pension plans in amounts sufficient to satisfy minimum ERISA funding requirements. Effective December 31, 1998, the Company froze its defined benefit pension plans which resulted in the recognition of approximately $6,500,000 of net curtailment gains. A summary of activity with respect to the Company's pension plans for 1998 and 1997 is as follows (in thousands): 1998 1997 ---- ---- Projected Benefit Obligation: Projected benefit obligation at January 1, $100,314 $ 98,733 Service cost (a) 2,590 4,234 Interest cost (a) 5,536 7,411 Actuarial loss 561 10,016 Benefits paid (5,055) (10,111) Settlements (31,060) (2,021) Curtailment (9,491) (7,948) -------- -------- Projected benefit obligation at December 31, $ 63,395 $100,314 ======== ======== Change in Plan Assets: Fair value of plan assets at January 1, $ 93,088 $ 90,902 Actual return of plan assets 5,186 8,967 Employer contributions 1,076 6,059 Benefits paid (5,012) (10,111) Administrative expenses (626) (74) Settlements (31,230) (2,655) -------- -------- Fair value of plan assets at December 31, $ 62,482 $ 93,088 ======== ======== Funded Status $ (913) $ (7,226) Unrecognized prior service cost 66 84 Unrecognized net loss at January 1, 1987 - 378 Unrecognized net loss from experience differences and assumption changes 2,356 4,341 -------- -------- Accrued pension asset (liability) $ 1,509 $ (2,423) ======== ======== (a) Includes $369 and $5,760 for 1998 and 1997, respectively, relating to discontinued operations' obligations which were retained. Pension expense charged to operations included the following components (in thousands):
1998 1997 1996 ---- ---- ---- Service cost $ 2,542 $ 2,240 $ 2,496 Interest cost 5,215 3,645 3,606 Expected return on plan assets (5,108) (3,330) (2,989) Amortization of prior service cost (89) (72) 1,001 Amortization of transition obligation 121 95 90 Recognized net actuarial loss 171 152 502 ------- ------- ------- Net pension expense $ 2,852 $ 2,730 $ 4,706 ======= ======= =======
F-25 17. Pension Plans and Postretirement Benefits, continued: The projected benefit obligation at December 31, 1998 and 1997 was determined using an assumed discount rate of 6.75% and 7.0%, respectively, and, for 1997, an assumed compensation increase rate of 4.3%. The assumed long-term rate of return on plan assets was 7.5% and 7.4% at December 31, 1998 and 1997, respectively. The Company also has defined contribution pension plans covering certain employees. Contributions and costs are a percent of each covered employee's salary. Amounts charged to expense related to such plans were $1,057,000, $1,202,000 and $1,340,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Several subsidiaries provide certain health care and other benefits to certain retired employees under plans which are currently unfunded. The Company pays the cost of postretirement benefits as they are incurred. Amounts charged (credited) to expense (principally amortization of a curtailment gain in 1998 and 1997 and interest in 1996) related to such benefits were $(1,990,000) in 1998, $(2,851,000) in 1997 and $1,355,000 in 1996. A summary of activity with respect to the Company's postretirement plans for 1998 and 1997 is as follows: 1998 1997 ---- ---- Accumulated postretirement benefit obligation at January 1, $11,090 $15,892 Service cost 30 23 Interest cost 805 776 Contributions by plan participants 401 68 Actuarial loss (gain) 906 (4,770) Benefits paid (1,341) (899) ------- ------- Accumulated postretirement benefit obligation at December 31, 11,891 11,090 Unrecognized prior service cost 2,259 4,847 Unrecognized net actuarial gain 2,482 3,622 ------- ------- Accrued postretirement benefit obligation $16,632 $19,559 ======= ======= The discount rate used in determining the accumulated postretirement benefit obligation was 6.75% and 7.0% at December 31, 1998 and 1997, respectively. The assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation were between 6.0% and 9.5% for 1998 and 6.9% and 10.5% for 1997, declining to an ultimate rate of between 5.0% and 6.0% by 2006. If the health care cost trend rates were increased or decreased by 1%, the accumulated postretirement obligation as of December 31, 1998 would have increased or decreased by $823,000 and $729,000, respectively. The effect of these changes on the aggregate of service and interest cost for 1998 would be immaterial. 18. Commitments: The Company and its subsidiaries rent office space and office equipment under non-cancelable operating leases with terms generally varying from one to twenty years. Rental expense (net of sublease rental income) charged to operations was $7,680,000 in 1998, $7,307,000 in 1997 and $8,583,000 in 1996. Aggregate minimum annual rentals (exclusive of real estate taxes, maintenance and certain other F-26 18. Commitments, continued: charges) relating to facilities under lease in effect at December 31, 1998 are as follows (in thousands): 1999 - $7,144; 2000 - $6,982; 2001 - $6,912; 2002 - $6,772; 2003 - $6,495; and thereafter - $103,802. Future minimum sublease rental income relating to facilities under lease in effect at December 31, 1998 are as follows (in thousands): 1999 - $848; 2000 - $863; 2001 - $868; 2002 - $876; 2003 - - $883; and thereafter - $4,049. Included in the amounts shown above are the gross future minimum annual rental payments relating to a twenty year lease which the Empire Group entered into beginning November 1998 for its executive and administrative offices. These offices are in an office building in which the Company has an equity interest. The above amounts have not been reduced for the Company's share of rental income due to its equity participation in this office building. In connection with this equity investment, the Company has committed to invest up to $25,000,000, of which $5,000,000 is currently invested. In connection with the sale of certain subsidiaries, the Company has made or guaranteed the accuracy of certain representations given to the acquiror. No material loss is expected in connection with such matters. In connection with the sale of the Colonial Penn P&C Group, the Company provided the purchaser with a $100,000,000 non-cancelable letter of credit to collateralize certain indemnification obligations. This letter of credit is collateralized by certain deposits of the Company aggregating approximately $105,000,000. The insurance and the banking and lending subsidiaries are limited by regulatory requirements and agreements in the amount of dividends and other transfers of funds that are available to the Company. Principally as a result of such restrictions, the net assets of subsidiaries which are subject to limitations on transfer of funds to the Company were approximately $293,888,000 at December 31, 1998. 19. Litigation: The Company is subject to various litigation which arises in the course of its business. Based on discussions with counsel, management is of the opinion that such litigation will have no material adverse effect on the consolidated financial position of the Company or its consolidated results of operations. F-27 20. Earnings (Loss) Per Common Share: A reconciliation of the numerators and denominators of the basic and diluted earnings (loss) per share calculations for income (loss) from continuing operations before extraordinary loss for each of the three years in the period ended December 31, 1998 is as follows (in thousands, except per share amounts):
Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- 1998: - ----- Basic Earnings Per Share: Income from continuing operations before extraordinary loss $ 46,202 63,409 $ .73 ===== Effect of Dilutive Securities: Options - 101 -------- ------ Diluted earnings per share $ 46,202 63,510 $ .73 ======== ====== ===== 1997: - ----- Basic (Loss) Per Share: (Loss) from continuing operations before extraordinary loss $(22,289) 62,205 $(.36) ===== Effect of Dilutive Securities: Options - - 5 1/4% Debentures - - -------- ------ Diluted (loss) per share $(22,289) 62,205 $(.36) ======== ====== ===== 1996: - ----- Basic (Loss) Per Share: (Loss) from continuing operations before extraordinary loss $(28,861) 60,301 $(.48) ===== Effect of Dilutive Securities: Options - - 5 1/4% Debentures - - -------- ------ Diluted (loss) per share $(28,861) 60,301 $(.48) ======== ====== =====
Options to purchase 886,730 and 1,144,431 weighted average shares of common stock were outstanding during the years ended December 31, 1997 and 1996, respectively, but were not included in the computation of diluted (loss) per share, as those options were antidilutive. Additionally, during the year ended December 31, 1996, and for the period January 1, 1997 through April 11, 1997, the 5 1/4% Debentures, which were convertible into 3,478,260 Common Shares, were outstanding. Such debentures were not included in the computation of diluted (loss) per share, as those debentures were antidilutive. 21. Fair Value of Financial Instruments: The following table presents fair value information about certain financial instruments, whether or not recognized on the balance sheet. Where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The fair value amounts presented do not purport to represent and should not be considered representative of the underlying "market" or franchise value of the Company. The methods and assumptions used to estimate the fair values of each class of the financial instruments described below are as follows: F-28 21. Fair Value of Financial Instruments, continued: (a) Investments: The fair values of marketable equity securities, fixed maturity securities and investments held for trading purposes (which include securities sold not owned) are substantially based on quoted market prices, as disclosed in Note 7. (b) Cash and cash equivalents: For cash equivalents, the carrying amount approximates fair value. (c) Notes receivable on the sale of the Colonial Penn Life Group: The fair value of variable rate note receivable is estimated to be the carrying amount. (d) Loan receivables of banking and lending subsidiaries: The fair value of loan receivables of the banking and lending subsidiaries is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities. (e) Investments in associated companies: For 1998, the fair value of Caja is based upon the sales price as discussed in Note 4. For 1997, the fair value of Caja was estimated to be the carrying amount. The fair values of a foreign power company are principally estimated based upon quoted market prices. The carrying value of the remaining investments in associated companies approximates fair value. (f) Customer banking deposits: The fair value of customer banking deposits is estimated using rates currently offered for deposits of similar remaining maturities. (g) Long-term and other indebtedness: The fair values of non-variable rate debt are estimated using quoted market prices and estimated rates which would be available to the Company for debt with similar terms. The fair value of variable rate debt is estimated to be the carrying amount. F-29 21. Fair Value of Financial Instruments, continued: The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1998 and 1997 are as follows (in thousands):
1998 1997 ---- ---- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Financial Assets: Investments $1,770,205 $1,770,532 $1,872,369 $1,872,487 Cash and cash equivalents 459,690 459,690 581,186 581,186 Note receivable on sale of the Colonial Penn Life Group (including accrued interest) 405,854 405,854 406,223 406,223 Loan receivables of banking and lending subsidiaries, net of allowance 175,785 186,099 192,739 203,963 Investments in associated companies 172,390 306,071 207,902 217,499 Financial Liabilities: Customer banking deposits 189,782 192,822 198,582 199,414 Debt 722,601 729,527 352,872 371,757 Securities sold not owned 144,088 144,088 97,708 97,708 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debt securities of the Company 98,200 99,182 150,000 159,000
22. Segment Information: In 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which requires a "management" approach for segment disclosure. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS 131 also requires disclosures about products and services, geographic areas and major customers. For information with respect to the Company's segments, see "Financial Information about Industry Segments" in Item 1 of the Report, which is incorporated by reference into these consolidated financial statements. 23. Events Subsequent to the Balance Sheet Date: In February 1999, the Company sold its wholly-owned subsidiary, The Sperry and Hutchinson Company, Inc. and will recognize a pre-tax gain of approximately $19,000,000 in the first quarter of 1999. F-30 24. Selected Quarterly Financial Data (Unaudited):
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (In thousands, except per share amounts) 1998: - ----- Revenues $144,987 $146,717 $ 77,705 $161,097 ======== ======== ======== ======== Income (loss) from continuing operations $ 11,124 $ 13,339 $ (5,448) $ 27,187 ======== ======== ======== ======== Income from discontinued operations, net of taxes $ 1,459 $ 1,503 $ 3,411 $ 1,768 ======== ======== ======== ======== Net income (loss) $ 12,583 $ 14,842 $ (2,037) $ 28,955 ======== ======== ======== ======== Basic earnings (loss) per common share: Income (loss) from continuing operations $.18 $.21 $(.08) $.43 Income from discontinued operations .02 .02 .05 .03 ---- ---- ----- ---- Net income (loss) $.20 $.23 $(.03) $.46 ==== ==== ===== ==== Number of shares used in calculation 63,904 63,941 63,600 62,310 ====== ====== ====== ====== Diluted earnings (loss) per common share: Income (loss) from continuing operations $.18 $.21 $(.08) $.43 Income from discontinued operations .02 .02 .05 .03 ---- ---- ----- ---- Net income (loss) $.20 $.23 $(.03) $.46 ==== ==== ===== ==== Number of shares used in calculation 64,053 64,063 63,600 62,367 ====== ====== ====== ======
F-31 24. Selected Quarterly Financial Data (Unaudited), continued:
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (In thousands, except per share amounts) 1997: - ----- Revenues $159,607 $188,397 $138,675 $144,058 ======== ======== ======== ======== Income (loss) from continuing operations before extraordinary loss $ (6,796) $ 18,859 $(13,983) $(20,369) ======== ======== ======== ======== Income from discontinued operations, net of taxes $ 19,516 $ 16,734 $ 17,866 $ 4,400 ======== ======== ======== ======== Gain on disposal of discontinued operations, net of taxes $ - $ - $200,337 $427,308 ======== ======== ======== ======== Extraordinary loss from early extinguishment of debt, net of income tax benefit $ - $ (2,044) $ (13) $ - ======== ======== ======== ======== Net income $ 12,720 $ 33,549 $204,207 $411,339 ======== ======== ======== ======== Basic earnings (loss) per common share: Income (loss) from continuing operations $(.11) $ .31 $(.22) $(.32) Income from discontinued operations .32 .27 .28 .07 Gain on disposal of discontinued operations - - 3.17 6.69 Extraordinary loss - (.03) - - ----- ----- ----- ----- Net income $ .21 $ .55 $3.23 $6.44 ===== ===== ===== ===== Number of shares used in calculation 60,441 61,072 63,259 63,856 ====== ====== ====== ====== Diluted earnings (loss) per common share: Income (loss) from continuing operations $(.11) $ .30 $(.22) $(.32) Income from discontinued operations .32 .26 .28 .07 Gain on disposal of discontinued operations - - 3.17 6.69 Extraordinary loss - (.03) - - ----- ----- ----- ----- Net income $ .21 $ .53 $3.23 $6.44 ===== ===== ===== ===== Number of shares used in calculation 60,441 64,113 63,259 63,856 ====== ====== ====== ======
In 1998 and 1997, the totals of quarterly per share amounts do not necessarily equal annual per share amounts. F-32 SCHEDULE III - Supplementary Insurance Information LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES For the years ended December 31, 1998, 1997 and 1996
Insurance Losses, Policy Benefits and Amortization Deferred Policy of Policy and Net Deferred Other Non-Life Acquisition Unearned Contract Premium Investment Acquisition Operating Premiums Costs Premiums Claims Revenue Income Costs Expenses Written ----- -------- ------ ------- ------ ----- -------- ------- (In thousands) 1998 - ---- Property and casualty insurance: Automobile $ 7,407 $47,734 $252,348 $128,855 $24,686 $141,011 $ 4,644 $105,341 Commercial 7,245 31,533 266,423 68,655 19,738 111,626 5,460 61,681 Miscellaneous and personal 3,603 15,305 23,503 31,066 2,668 26,473 2,334 30,421 ------- ------- -------- -------- ------- -------- ------- -------- $18,255 $94,572 $542,274 $228,576 $47,092 $279,110 $12,438 $197,443 ======= ======= ======== ======== ======= ======== ======= ======== 1997 - ---- Property and casualty insurance: Automobile $11,130 $ 72,614 $297,810 $169,586 $28,415 $208,521 $(15,649) $148,944 Commercial 8,594 39,119 232,057 77,657 19,427 95,024 9,693 73,716 Miscellaneous and personal 4,182 15,933 15,841 27,772 2,372 23,923 2,079 30,573 ------- -------- -------- -------- ------- -------- -------- -------- $23,906 $127,666 $545,708 $275,015 $50,214 $327,468 $ (3,877) $253,233 ======= ======== ======== ======== ======= ======== ======== ======== 1996 - ---- Property and casualty insurance: Automobile $14,392 $ 93,957 $295,634 $212,821 $30,890 $248,506 $ (5,160) $200,541 Commercial 8,847 43,336 225,705 92,414 20,564 86,593 16,627 84,187 Miscellaneous and personal 3,346 13,126 10,980 21,198 1,767 20,049 1,997 25,052 ------- -------- -------- -------- ------- -------- -------- -------- $26,585 $150,419 $532,319 $326,433 $53,221 $355,148 $ 13,464 $309,780 ======= ======== ======== ======== ======= ======== ======== ========
F-33 SCHEDULE V - Valuation and Qualifying Accounts LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES For the years ended December 31, 1998, 1997 and 1996
Additions Deductions -------------------------------- ------------------ Charged Balance at to Costs Balance Beginning and Write- Sale of at End of Description of Period Expenses Recoveries Acquisitions Offs Receivables Period ----------- --------- -------- ---------- ------------ ---- ----------- --------- (In thousands) 1998 - ---- Loan receivables of banking and lending subsidiaries $10,199 $ 4,900 $4,915 $ - $ 8,996 $1,620 $ 9,398 Trade, notes and other receivables 6,131 4,573 876 48,307 12,138 125 47,624 ------- ------- ------ ------- ------- ------ ------- Total allowance for doubtful accounts $16,330 $ 9,473 $5,791 $48,307 $21,134 $1,745 $57,022 ======= ======= ====== ======= ======= ====== ======= 1997 - ---- Loan receivables of banking and lending subsidiaries $12,177 $ 6,140 $5,021 $ - $13,139 $ - $10,199 Trade, notes and other receivables 7,206 4,995 1,412 - 7,054 428 6,131 ------- ------- ------ ------- ------- ------ ------- Total allowance for doubtful accounts $19,383 $11,135 $6,433 $ - $20,193 $ 428 $16,330 ======= ======= ====== ======= ======= ====== ======= 1996 - ---- Loan receivables of banking and lending subsidiaries $13,893 $ 9,966 $5,104 $ - $16,174 $ 612 $12,177 Trade, notes and other receivables 6,609 8,446 1,269 - 9,040 78 7,206 ------- ------- ------ ------- ------- ------ ------- Total allowance for doubtful accounts $20,502 $18,412 $6,373 $ - $25,214 $ 690 $19,383 ======= ======= ====== ======= ======= ====== =======
F-34 SCHEDULE VI - Schedule of Supplemental Information for Property and Casualty Insurance Underwriters LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES For the years ended December 31, 1998, 1997 and 1996
Discount, if any, Claims and Claim Deducted in Reserves Adjustment Expenses Paid Claims for Unpaid Claims and Incurred Related to: and Claim Claim Adjustment ------------------------ Adjustment Expenses Current Year Prior Year Expenses --------------------- ------------ ---------- ---------- (In thousands) 1998 - ---- Automobile $ - $125,675 $(6,782) $169,224 Commercial 1,122 47,343 48,814 71,396 Miscellaneous and personal - 18,464 258 10,950 ------ -------- ------- -------- Total property and casualty $1,122 $191,482 $42,290 $251,570 ====== ======== ======= ======== 1997 - ---- Automobile $ - $179,984 $ 635 $181,161 Commercial 409 53,022 24,939 76,259 Miscellaneous and personal - 15,402 1,453 12,037 ------ -------- ------- -------- Total property and casualty $ 409 $248,408 $27,027 $269,457 ====== ======== ======= ======== 1996 - ---- Automobile $ - $194,183 $21,478 $209,179 Commercial 347 64,171 4,779 73,916 Miscellaneous and personal - 13,279 1,926 12,275 ------ -------- ------- -------- Total property and casualty $ 347 $271,633 $28,183 $295,370 ====== ======== ======= ========
F-35 Financial Statements Gotham Partners Acquisition I, L.P. Year ended December 31, 1998 with Report of Independent Auditors Gotham Partners Acquisition I, L.P. Financial Statements Year ended December 31, 1998 CONTENTS Report of Independent Auditors................................ 1 Statement of Financial Condition.............................. 2 Condensed Schedule of Investments............................. 3 Statement of Income........................................... 4 Statement of Changes in Partners' Capital..................... 5 Statement of Cash Flows....................................... 6 Notes to Financial Statements................................. 7 Report of Independent Auditors To the Partners of Gotham Partners Acquisition I, L.P. We have audited the accompanying statement of financial condition of Gotham Partners Acquisition I, L.P. (the "Partnership"), including the condensed schedule of investments, as of December 31, 1998, and the related statements of income, changes in partners' capital and cash flows for the year then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gotham Partners Acquisition I, L.P. at December 31, 1998, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. Ernst & Young LLP New York, New York January 27, 1999 1 Gotham Partners Acquisition I, L.P. Statement of Financial Condition December 31, 1998 ASSETS Cash $ 1,800 Due from broker 49,338,354 Investments in securities--at value (cost $7,230,744) 10,056,002 Other assets 8,179 ---------------- Total assets $ 59,404,335 ================ LIABILITIES AND PARTNERS' CAPITAL Accrued expenses $ 10,000 Partners' capital 59,394,335 ---------------- Total liabilities and partners' capital $ 59,404,335 ================ See notes to financial statements. 2 Gotham Partners Acquisition I, L.P. Condensed Schedule of Investments December 31, 1998
PERCENTAGE OF PARTNERS' CAPITAL VALUE ----------------- --------------------- INVESTMENTS IN SECURITIES Options-Food and Beverages: McDonald's Corp. (cost $7,223,816) 16.91% $ 10,044,480 Equity securities-Food and Beverages: McDonald's Corp.-150 shares (cost $6,928) 0.02 11,522 ----------------- --------------------- Total investments in securities (cost $7,230,744) 16.93% $ 10,056,002 ================= =====================
See notes to financial statements. 3 Gotham Partners Acquisition I, L.P. Statement of Income Year ended December 31, 1998 GAIN FROM SECURITIES TRANSACTIONS Net realized gain from securities transactions $ 87,483,920 Net change in unrealized appreciation on securities positions 2,953,731 -------------------- Net gain from securities transactions $ 90,437,651 INVESTMENT INCOME AND EXPENSE Income: Interest 1,197,861 Dividends 5,417 -------------------- 1,203,278 Dividend expense 12,600 -------------------- Net investment income 1,190,678 OPERATING EXPENSES Professional fees 19,343 Other expenses 9,349 -------------------- Total operating expenses 28,692 -------------------- Net income $ 91,599,637 ====================
See notes to financial statements. 4 Gotham Partners Acquisition I, L.P. Statement of Changes in Partners' Capital Year ended December 31, 1998
GENERAL LIMITED TOTAL PARTNER PARTNERS ---------------------------------------------------------- Partners' capital at beginning of year $ 49,489,013 $ - $ 49,489,013 Capital contributions 15,800,000 - 15,800,000 Capital distributions (97,494,315) (6,448,938) (91,045,377) Allocation of net income: Pro-rata allocation 86,909,122 1,758,423 85,150,699 Special allocation 4,690,515 4,690,515 - ---------------------------------------------------------- Net income 91,599,637 6,448,938 85,150,699 ---------------------------------------------------------- Partners' capital at end of year $ 59,394,335 $ - $ 59,394,335 ==========================================================
See notes to financial statements. 5 Gotham Partners Acquisition I, L.P. Statement of Cash Flows Year ended December 31, 1998 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 91,599,637 Adjustments to reconcile net income to net cash provided by operating activities: Net change in unrealized appreciation on securities positions (2,953,731) Changes in assets and liabilities: Increase in due from broker (30,736,434) Decrease in investments in securities--cost 23,776,146 Decrease in other assets 4,677 Decrease in accrued expenses (11,064) ---------------------- Total adjustments (9,920,406) ---------------------- Net cash provided by operating activities 81,679,231 ---------------------- CASH FLOWS FROM FINANCING ACTIVITIES Capital contributions 15,800,000 Capital distributions (97,494,315) ---------------------- Net cash used in financing activities (81,694,315) ---------------------- Net decrease in cash (15,084) Cash at beginning of year 16,884 ---------------------- Cash at end of year $ 1,800 ======================
See notes to financial statements. 6 Gotham Partners Acquisition I, L.P. Notes to Financial Statements December 31, 1998 1. ORGANIZATION Gotham Partners Acquisition I, L.P. (the "Partnership") was organized as a limited partnership under the laws of the state of Delaware and commenced operations on October 22, 1997. The Partnership's investment objective is to achieve maximum capital appreciation through investments in securities of McDonald's Corp. (the "Company"). In order to achieve its objective, the Partnership may invest in the shares of the capital stock of the Company and any options, warrants, convertible securities or derivative instruments related to the Company and in the securities resulting from any spin-off, reorganization, merger or recapitalization of the Company. GPA I, L.L.C. (the "General Partner") makes all investment decisions on behalf of the Partnership and is solely responsible for the development and implementation of the Partnership's investment policy and strategy. The Partnership is in the process of liquidating its investments and distributing the capital to the partners. Once all of the capital has been distributed, the Partnership will be terminated. 2. SIGNIFICANT ACCOUNTING POLICIES The Partnership records its securities transactions on a trade date basis. Securities listed on a national securities exchange are valued at their last reported sales price. Securities for which no such market prices are available are valued at fair value by the General Partner on a reasonable basis and in good faith. At December 31, 1998, over-the-counter options totaling $10,044,480 were valued at their estimated fair values using prices furnished by the counterparty to the respective contracts. Net income was allocated in accordance with the terms of the Partnership Agreement. No Federal, state or local income taxes have been provided since the partners are individually liable for the taxes on their share of the Partnership's income. 7 Gotham Partners Acquisition I, L.P. Notes to Financial Statements (continued) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The fair value of the Partnership's assets and liabilities which qualify as financial instruments under Statement of Financial Accounting Standards No. 107, "Disclosure About Fair Value of Financial Instruments," approximates the carrying amounts presented in the statement of financial condition. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 3. DUE FROM BROKER Due from broker represents cash balances with the clearing broker. 4. CONCENTRATIONS OF CREDIT RISK The Partnership is engaged in trading over-the-counter stock options with certain counterparties. These financial instruments expose the Partnership to credit risk arising from the potential inability of counterparties to perform under the terms of the contracts. All securities transactions of the Partnership listed on a national securities exchange are cleared by a major U.S. securities firm pursuant to a customer agreement. At December 31, 1998, all of the investments in equity securities and due from broker are positions with and amounts due from this broker. 5. DERIVATIVE FINANCIAL INSTRUMENTS All options are reported at fair value and changes in fair values are reflected in the statement of income. The average monthly fair value of options held during the year was $67,672,760. The fair value of options held at December 31, 1998 was $10,044,480. Net realized and unrealized gains on options held during the year was $91,714,634. 8 Gotham Partners Acquisition I, L.P. Notes to Financial Statements (continued) 6. INCENTIVE ALLOCATION AND DISTRIBUTIONS The General Partner is entitled to an incentive allocation of 20% of the net capital appreciation attributable to a limited partner's capital account at the end of each measuring period, defined in the Partnership Agreement, in part, to be the period beginning on the date of admission and ending on the date designated as the record date as of which a distribution is to be made to such limited partner. Each limited partner is entitled to a 15% compounded annual preferred return, as defined in the Partnership Agreement, on its capital investment during the measuring period before the General Partner is allocated an incentive allocation. Upon satisfaction of the preferred return, the General Partner receives priority allocations to "catch up" to a 20% share of net capital appreciation during the measuring period. After the preferred return and the "catch up" allocations, any remaining net capital appreciation is allocated, at the end of each measuring period, 80% to the limited partner and 20% to the General Partner. In the event of a partial distribution being made to all limited partners on a pro rata basis, the General Partner is not entitled to its full incentive allocation, but rather a partial incentive allocation based on the amount being distributed. The General Partner, in its sole discretion, may elect to waive all or any portion of the incentive allocation with respect to any one or more limited partners. August 31, 1998 was designated as the end of the first measuring period. Accordingly, the Partnership distributed $91,045,377 to the limited partners on September 14, 1998. In connection with the pro rata distribution, the General Partner received an incentive allocation of $4,690,515, of which $2,954,623 was paid to the General Partner on September 14, 1998. The remaining $1,735,892 of the General Partner's incentive allocation was distributed to the General Partner on October 22, 1998, along with $1,758,423, the General Partner's pro rata share of the Partnership's earnings from September 1, 1998 to October 21, 1998. Because the Partnership Agreement provides that incentive allocations can only be made at the end of a measuring period, no incentive allocation of the net capital appreciation from September 1, 1998 through December 31, 1998 is reflected in the financial statements. January 21, 1999 was designated as the end of the second measuring period. Accordingly, the Partnership distributed $37,263,233 to the limited partners on January 22, 1999. In connection with the pro rata distribution, the General Partner received an incentive allocation of $5,247,250, which was paid to the General Partner on January 22, 1999. 9 Gotham Partners Acquisition I, L.P. Notes to Financial Statements (continued) The Partnership intends to make final distributions to all partners once all investments have been liquidated and the Partnership's final audit has been completed. 10 EXHIBIT INDEX Exhibit Exemption Number Description Indication - ------ ----------- ---------- 3.1 Restated Certificate of Incorporation (filed as Exhibit 5.1 to the Company's Current Report on Form 8-K dated July 14, 1993).* 3.2 Amended and Restated By-laws as amended through February 23, 1999. 4.1 The Company undertakes to furnish the Securities and Exchange Commission, upon request, a copy of all instruments with respect to long-term debt not filed herewith. 10.1 1992 Stock Option Plan (filed as Annex C to the Company's Proxy Statement dated July 21, 1992).* 10.2 Articles and Agreement of General Partnership, effective as of April 15, 1985, of Jordan/Zalaznick Capital Company (filed as Exhibit 10.20 to the Company's Registration Statement No. 33-00606).* 10.3 Operating Agreement of The Jordan Company LLC, dated as of July 23, 1998. 10.4 Stock Purchase and Sale Agreement dated as of April 5, 1991, by and between FPL Group Capital Inc and the Company (filed as Exhibit B to the Company's Current Report on Form 8-K dated August 23, 1991).* 10.5 Amended and Restated Shareholders Agreement dated as of December 16, 1997 among the Company, Ian M. Cumming and Joseph S. Steinberg (filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "1997 10-K")).* 10.6 Deferred Compensation Agreement between the Company and Joseph S. Steinberg dated December 8, 1998. 10.7 Settlement Agreement between Baldwin-United Corporation and the United States dated August 27, 1985 concerning tax issues (filed as Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (the "1992 10-K")).* 10.8 Acquisition Agreement, dated as of December 18, 1992, by and between Provident Mutual Life and Annuity Company of America and Colonial Penn Annuity and Life Insurance Company (filed as Exhibit 10.15 to the 1992 10-K).* - ---------------------------------- *Incorporated by reference. Exhibit Exemption Number Description Indication - ------ ----------- ---------- 10.9 Amended and Restated Revolving Credit Agreement dated as of November 3, 1997 between the Company, BankBoston, N.A. as Administrative Agent, The Chase Manhattan Bank, as Syndication Agent, Bank of America National Trust and Savings Association, as Documentation Agent and the Banks signatory thereto (filed as Exhibit 10.13 to the 1997 10-K).* 10.10 Purchase Agreement among Conseco, the Company, Charter, Colonial Penn Group, Inc., Colonial Penn Holdings, Inc., Leucadia Financial Corporation, Intramerica, Colonial Penn Franklin Insurance Company and Colonial Penn Insurance Company dated as of April 30, 1997 (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997).* 10.11 Purchase Agreement among GECC, the Company, Charter, Colonial Penn Group Inc. and Colonial Penn Holdings, Inc. dated as of June 30, 1997 (filed as Annex A to the 1997 Proxy Statement).* 10.12 Purchase Agreement by and among Allstate Life Insurance Company, Allstate Life Insurance Company of New York, Charter, Intramerica and the Company, dated February 11, 1998 (filed as Exhibit 10.16 to the 1997 10-K).* 10.13 Leucadia National Corporation Senior Executive Annual Incentive Bonus Plan (filed as Annex D to the 1997 Proxy Statement.)* 10.14 Stock Purchase Agreement by and between the Company and Allstate Life Insurance Company dated as of December 18, 1998. 10.15 Trust Agreement dated August 14, 1998 between the Company for the benefit of its shareholders as of August 25, 1998 and Joseph A. Orlando, as Trustee. 21 Subsidiaries of the registrant. 23 Consents of independent accountants with respect to the incorporation by reference into the Company's Registration Statements on Form S-8 (File No. 2-84303), Form S-8 and S-3 (File No. 33-6054), Form S-8 and S-3 (File No. 33-26434), Form S-8 and S-3 (File No. 33-30277), Form S-8 (File No. 33-61682) and Form S-8 (File No. 33-61718). 27 Financial Data Schedule. - --------------------------------- *Incorporated by reference. EX-3 2 Exhibit 3.2 AMENDED AND RESTATED BY - LAWS of LEUCADIA NATIONAL CORPORATION Incorporated under the laws of the State of New York - May 24, 1968 As amended through February 23, 1999 AMENDED AND RESTATED BY - LAWS of LEUCADIA NATIONAL CORPORATION ARTICLE I. SHAREHOLDERS MEETING Section 1. The annual meeting of shareholders of the Corporation shall be held at the principal office of the Corporation, or at such other place within or without the State of New York, on such date and at such time as shall be determined by the Board of Directors in each year for the purpose of electing Directors, and for the transaction of such other business as may be brought before the meeting. Section 2. Special meetings of shareholders may be called at any time by the Board of Directors. Section 3. Written notice of meetings of shareholders shall be given whenever shareholders are to take any action at a meeting. Such notice shall state the place, date and hour of the meeting and, unless it is the annual meeting, indicate that it is being issued by or at the direction of the person or persons calling the meeting. Notice of a special meeting shall, in addition, state the purpose or purposes for which the meeting was called. A copy of the notice of any meeting shall be given, personally or by mail, not less than ten nor more than fifty days before the date of the meeting, to each shareholder entitled to vote at such meeting. If mailed, such notice is given when deposited in the United States mail, with postage thereon prepaid, directed to the shareholder at his address as it appears on the record of shareholders, or, if he shall have filed with the Secretary of the Corporation a written request that such notices to him be mailed to some other address, then directed to him at such other address. Section 4. For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to or dissent from any proposal without a meeting, or for the purpose of determining shareholders entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action, the Board shall fix, in advance, a date as the record date for any such determination of shareholders. Such date shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. 2 Section 5. Except as may be otherwise required by laws of the State of New York, the Certificate of Incorporation or these By-Laws, the holders of a majority of the shares entitled to vote thereat present in person or by proxy shall constitute a quorum at a meeting of shareholders for the transaction of any business, provided that when a specified item of business is required to be voted on by a class or a series, voting as a class, the holders of a majority of shares of such class or series present in person or by proxy shall constitute a quorum for the transaction of such specified item of business. Section 6. In order to properly submit any business to an annual meeting of shareholders, a shareholder must give timely notice in writing to the Secretary of the Corporation of such shareholder's intention to present such business. To be considered timely, a shareholder's notice must be delivered, either in person or by United States certified mail, postage prepaid, and received at the principal executive office of the Corporation, not less than one hundred twenty (120) days prior to the first anniversary date of the Corporation's proxy statement in connection with the last Annual Meeting or if no Annual Meeting was held in the previous year, not less than a reasonable time, as determined by the Board of Directors, prior to the date of the applicable Annual Meeting. 3 Each notice to the Secretary shall set forth (i) the name and address of the shareholder and his or her nominees, (ii) a representation that the shareholder is entitled to vote at such meeting, indicating the number of shares owned of record and beneficially by such shareholder, together with a statement that such shareholder intends to appear in person or by proxy at the meeting to present such proposal or proposals, (iii) a description of the proposal or proposals to be presented, including the complete text of any resolutions to be presented at the meeting and the reasons for conducting such business at the meeting and (iv) any material interest of the shareholder in the business to be submitted at the meeting. In addition, the shareholder shall promptly provide any other information reasonably requested by the Corporation. The presiding officer of the meeting may, if the facts warrant, determine that a proposal was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective proposal shall be disregarded. 4 Notwithstanding the foregoing provisions of this Section 6, a shareholder who seeks to have any proposal included in the Corporation's proxy statement shall comply with applicable state law and the requirements of the rules and regulations promulgated by the Securities and Exchange Commission. ARTICLE II. DIRECTORS Section 1. The number of the Directors of the Corporation shall be such number not less than three, as is designated from time to time by resolution adopted by a majority of the members of the Board of Directors, plus the number of Directors, if any, elected by the holders of the Preferred Stock, voting as a class, pursuant to Section 5 of the General Provisions Relating to All Series of the Preferred Stock in Article FOURTH of the Certificate of Incorporation of the Corporation. The terms of the Directors, if any, elected by the holders of the Preferred Stock, voting as a class, pursuant to Section 5 of the General Provisions Relating to All Series of the Preferred Stock in Article FOURTH of the Certificate of Incorporation of the Corporation shall be as set forth in such Section 5. The Directors other than those, if any, elected by the holders of the Preferred Stock, voting as a class, shall, except as otherwise set forth 5 herein, be elected for one year terms which shall expire at each annual meeting of shareholders and when their successors shall have been elected and qualified. Such election shall be by ballot by the shareholders entitled to vote and present in person or by proxy at such meeting. In case of any vacancy in the Board of Directors (including any vacancy due to an increase in the size of the Board of Directors), the remaining Directors, although less than a quorum, by affirmative vote of a majority thereof, may elect a successor to fill such vacancy to serve until the next annual meeting of shareholders and when such Director's successor shall have been elected and qualified. Any Director or Directors (other than a Director or Directors elected by the holders of the Preferred Stock pursuant to Section 5 of the General Provisions Relating to All Series of the Preferred Stock in Article FOURTH of the Certificate of Incorporation of the Corporation) may be removed for cause by the affirmative vote of a majority of the Directors present (including by means of a conference telephone or similar communications equipment) at a meeting at which such action is considered, provided a quorum is present. Section 2. Nominations for the election of Directors may be made by a committee appointed by the Board of Directors (or, in the absence of such committee, by the Board of Directors) or by any shareholder entitled to vote 6 generally in the election of Directors. However, any shareholder entitled to vote generally in the election of Directors may nominate one or more persons for election as Directors at a meeting only if written notice of such shareholder's intention to make such nomination or nominations has been given, to the Secretary of the Corporation, either by personal delivery or by-United States certified mail, postage prepaid, and received at the principal executive office of the Corporation (1) with respect to an election to be held at an Annual Meeting of Shareholders, (a) not less than one hundred twenty (120) days prior to the first anniversary date of the Corporation's proxy statement in connection with the last Annual Meeting or (b) if no Annual Meeting was held in the previous year, not less than a reasonable time, as determined by the Board of Directors, prior to the date of the applicable Annual Meeting and (2) with respect to an election to be held at a Special Meeting of Shareholders, the close of business on the tenth (10th) day following the date on which notice of such meeting is first given to shareholders. Each such notice to the Secretary shall set forth (i) the name and address of the shareholder and his or her nominees; (ii) a representation that the shareholder is entitled to vote at such meeting and 7 intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) a description of all arrangements or understandings between the shareholder and each such nominee; (iv) such other information as would be required to be included in a proxy statement soliciting proxies for the election of the nominees of such shareholder; and (v) the consent of each nominee to serve as a Director of the Corporation if so elected. The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as a Director of the Corporation. The presiding officer of the meeting may, if the facts warrant, determine that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Section 3. The Board of Directors may adopt such rules and regulations for the conduct of their meetings and management of the affairs of the Corporation, as they may deem proper, not inconsistent with the laws of the State of New York, the Certificate of Incorporation or these By-Laws. 8 Section 4. The regular meetings of the Board of Directors shall be held as determined by the Board of Directors. Special meetings shall be held whenever called by direction of the Chairman of the Board or any Vice Chairman, or the President or of any two of the Directors, on at least three days previous notice by mail or two days previous notice by telegraph to each Director. Notice of such meeting shall be effective as of the sending of the notice by mail or telegram. Unless otherwise indicated in the notice thereof or otherwise provided by the laws of the State of New York, the Certificate of Incorporation or these By-Laws, any and all business may be transacted at a special meeting. One-third of the Directors shall constitute a quorum at any meeting of the Board of Directors. At the first meeting of the Board of Directors held after the annual meeting of shareholders, the Board shall proceed to the election of the officers of the Corporation. Section 5. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting if all members of the Board of Directors consent in writing to the adoption of a resolution authorizing such action. Section 6. Any one or more members of the Board of Directors may participate in a meeting of the Board of Directors by means of a conference 9 telephone or similar communications equipment allowing all persons participating in such meeting to hear each other at the same time. Participation by such means shall constitute presence in person at such meeting. ARTICLE III. COMMITTEES OF THE BOARD Section 1. The Board of Directors may, by resolution or resolutions adopted by a majority of the members of the Board of Directors designate a committee of the board to be known as the Finance Committee of the Board ("Finance Committee") and to consist of the Chairman of the Board and such number of other Directors as shall be designated from time to time by resolution adopted by a majority of the members of the Board of Directors. The Board of Directors may designate one or more Directors as alternate members of the Finance Committee, who may replace any absent member or members of the Committee at any meeting of the Finance Committee. The Board shall have the power at any time to fill vacancies in, to change the membership of, or to dissolve the Finance Committee. The Finance Committee shall have and may exercise, when the Board is not in session, all authority of the Board of Directors with respect to designating as a depository any bank, banker or trust company, opening lines of 10 credit with any bank, banker or trust company and all matters appertaining thereto, including, but not limited to, the authorization of all resolutions and agreements and the execution of all instruments required by any bank, banker or trust company in connection therewith, including the certification thereof by the Secretary of the Corporation, the designation of officers and employees of the Corporation authorized to withdraw or charge any of the funds of the Corporation so deposited upon checks, notes, drafts, bills of exchange, acceptances, undertakings or other instruments or orders for the payment of money drawn against the account of the Corporation, the designation of officers authorized to borrow or obtain credit for the Corporation from any bank, banker or trust company or to endorse for discount or otherwise, negotiable or non-negotiable instruments held by the Corporation, the authorization of leases of safe deposit boxes, the designation of officers and employees authorized to have access to said boxes, and the authorization of guarantees required by symbol endorsement. Section 2. The Board of Directors may, by resolution or resolutions, passed by a majority of the members of the Board of Directors designate a committee of the Board to be known as the Executive Committee of the Board ("Executive Committee") and to consist of the Chairman of the Board of Directors, who shall be Chairman of the Executive Committee, and such number of 11 other Directors as shall be designated from time to time by resolution adopted by a majority of the members of the Board of Directors. The Executive Committee shall have and may exercise when the Board of Directors is not in session, all authority of the Board of Directors, except as may be limited by Section 712 of the Business Corporation Law of New York State. The Board of Directors may designate one or more Directors as alternate members of such committee who may replace any absent member or members at any meeting of the Executive Committee. Section 3. The Board of Directors shall, by resolution or resolutions, designate three of its members, none of whom are members of management, as the Audit Committee of the Board ("Audit Committee"), and will further designate one member as Chairman of the Audit Committee. The Audit Committee shall have responsibility for recommending to the Board the retention or replacement of the independent auditors of the company; for administration of the internal audit function of the corporation; and for such other matters pertaining to the internal control, audit, or reporting of the financial affairs of the company as the Audit Committee, in its sole discretion, deems advisable and necessary. A full report of the activities of the Audit Committee will be made by the Chairman or his designee to each meeting of the Board of Directors. 12 Section 4. The Board of Directors may, by resolution or resolutions, passed by a majority of the members of the Board of Directors designate three of its members as the Nominating Committee of the Board ("Nominating Committee"), and will further designate one member as Chairman of the Nominating Committee. The Nominating Committee shall meet annually for the purpose of considering and presenting to the Board its nominations for officers and directors. Section 5. The Board of Directors may, by resolution or resolutions adopted by a majority of the members of the Board of Directors designate such other committees of the Board as shall be designated from time to time. Such committees shall have such number of Directors as are designated by the Board and shall have such powers designated by the Board as are consistent with the provisions of the Business Corporation Law of New York State. The Board of Directors may designate one or more Directors as alternate members of such committee who may replace any absent member or members at any meeting of any such committee. Any such committee shall have and exercise the authority of the Board of Directors. 13 Section 6. Such committees may meet either regularly at stated times or specially on notice given twenty-four hours in advance by any member thereof by mail, telegraph or telephone to all the other members thereof provided such notice is received before the meeting takes place; but no notice of any regular meeting need be given; and no notice need be given of any special meeting at which all the members shall be present or notice of which shall be waived by all the absent members before or after such meeting. Such committees may make rules for the holding and conduct of their meetings and may appoint such subcommittees and assistants, as they shall from time to time deem necessary. A number of regular members or alternate members or both equal to a majority of the number of regular members of a committee shall constitute a quorum and the act of a majority of those present at a meeting at which a quorum is present and action shall be the act of a committee. All action taken by a committee shall be reported to the Board of Directors at its meeting next succeeding such action. The Secretary or an Assistant Secretary shall attend and act as secretary of all meetings of a committee and keep the minutes thereof. Section 7. Any action required or permitted to be taken by any committee of the Board may be taken without a meeting if all members of the 14 committee consent in writing to the adoption of a resolution authorizing such action. Section 8. Any one or more members of any committee of the Board may participate in a meeting of such committee by means of a conference telephone or similar communications equipment allowing all persons participating in such meeting to hear each other at the same time. Participation by such means shall constitute presence in person at such meeting. ARTICLE IV. OFFICERS Section 1. The officers of the Corporation shall be a Chairman of the Board of Directors, a President, one or more Vice Presidents, one or more of whom may be designated Executive Vice President and one or more of whom may be designated Senior Vice President, a Treasurer, a Secretary and a Comptroller, all of whom may be appointed by the Board of Directors, and such other officers as the Board of Directors, from time to time may appoint and each officer shall serve at the discretion of the Board of Directors until the next annual election of officers. One person may serve as more than one of such officers, except that the same person shall not serve both as President and Secretary. 15 Section 2. The Board of Directors shall appoint from their number a Chairman of the Board of Directors who shall be the chief executive officer of the Corporation and, subject to the control of the Board of Directors, shall have general charge of the management of the affairs of the Corporation. He shall preside at meetings of the Board of Directors and of the shareholders of the Corporation. Section 3. The Board of Directors may appoint from their number one or more Vice Chairmen of the Board of Directors who shall perform such duties as may be assigned to them by the Board of Directors or the Chairman of the Board of Directors. In the absence or incapacity of the Chairman of the Board of Directors, the Vice Chairmen, in order of seniority determined by time of appointment to office, shall preside over meetings of the Board of Directors. The Board of Directors may appoint from their number a Chairman of the Executive Committee who shall preside at meetings of the Executive Committee and perform such other duties as may be assigned to him by the Board of Directors. Section 4. The Board of Directors shall appoint from their number a President who shall be the chief operating officer of the Corporation and, subject to the direction of the Board of Directors and of the Chairman of the 16 Board of Directors, shall direct and supervise the administration of the business and affairs of the Corporation. In the absence or incapacity of the Chairman of the Board of Directors, the President shall exercise all of the powers and duties of the Chairman of the Board of Directors, provided that he shall preside at meetings of the Board of Directors only in the absence or incapacity of all the Vice Chairmen, if any, of the Board of Directors. Section 5. The Board of Directors shall appoint one or more Vice Presidents, one or more of whom may be designated Executive Vice President or Senior Vice President, and one of whom may be designated Vice President-Finance, who shall have such powers and shall perform such duties as may be assigned by the Board of Directors. In the absence or incapacity of the President, the Executive Vice Presidents, in order of seniority determined by time of appointment to office, shall exercise all of the powers and duties of the President. Section 6. The Board of Directors shall elect a Treasurer who shall have such powers and shall perform such duties as may be assigned to him by the Board of Directors. 17 Section 7. The Board of Directors shall appoint a Secretary who shall keep the minutes of all meetings of the Board of Directors and of the shareholders of the Corporation. He shall give or cause to be given notice of all meetings of the shareholders and of such meetings of the Board of Directors as may require notice. He shall keep in safe custody the seal of the Corporation and shall affix the same to all instruments requiring it when authorized by the Board of Directors, the Chairman of the Board of Directors or the President. He shall have such further powers and shall perform such further duties as may be assigned to him by the Board of Directors. The Secretary shall enforce the restrictions on the transfer of the capital stock of the Corporation set forth in Part III of Article FOURTH of the Certificate of Incorporation. In connection therewith, the Secretary shall supervise the Corporation's transfer agent and/or registrar for the capital stock. Section 8. The Board of Directors shall elect a Comptroller who shall be the chief accounting officer of the Corporation and shall be in charge of its books of account and accounting records and of its accounting procedures. He shall have such further powers and shall perform such further duties as may be assigned to him by the Board of Directors. 18 Section 9. The Board of Directors shall from time to time appoint such other officers to have such powers and to perform such duties as may be assigned to them by the Board of Directors. ARTICLE V. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Corporation, to the full extent permitted and in the manner required by the laws of the State of New York as in effect at the time of the adoption of this Article V or as the law may be amended from time to time, shall (i) indemnify any person (and the heirs and legal representatives of such person) made, or threatened to be made, a party in an action or proceeding (including, without limitation, one by or in the right of the Corporation to procure a judgement in its favor), whether civil, criminal, administrative or investigative, including an action by or in the right of any other corporation of any type or kind, domestic or foreign, or any partnership, joint venture, trust, employee benefit plan or other enterprise, which any director or officer 19 of the Corporation served in any capacity at the request the Corporation, by reason of the fact that he, his testator or intestate, was a director or officer of the Corporation or served such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity and (ii) provide to any such person (and their heirs and legal representatives of such person) advances for expenses incurred in pursuing such action or proceeding, upon receipt of an undertaking by or on behalf of such director or officer to repay such amount as, and to the extent, required by Section 725(a) of the Business Corporation Law. The indemnification and advancement of expenses provided herein shall not be deemed exclusive of any other rights to which the person seeking indemnification or advancement of expenses may be entitled (i) under the Certificate of Incorporation or By-Laws of this or any other corporation, or (ii) by any resolution of shareholders, resolution of directors or agreement providing for such indemnification or advancement, all of which are authorized by these By-Laws (except with respect to matters which at the time of indemnification is sought are prohibited by applicable law), or (iii) otherwise. 20 ARTICLE VI. CAPITAL STOCK Section 1. Subject to Part III of Article FOURTH of the Certificate of Incorporation, certificates for each class and series of stock shall be in such form as shall be adopted by the Board of Directors, shall be duly numbered and registered in the order issued and shall be signed by the Chairman or Vice Chairman of the Board or the President or a Vice President and the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer of the Corporation, and may be sealed with the seal of the Corporation or facsimile thereof. The signatures of the officers upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent or registered by a registrar other than the Corporation itself or its employee. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of issue. Section 2. Subject to Part III of Article FOURTH of the Certificate of Incorporation, transfers of shares shall only be made upon the books of the Corporation by the registered holder in person or by attorney, duly authorized, and upon surrender of the certificate or certificates for such shares, properly signed for transfer. 21 Section 3. A new certificate of stock may in the discretion of the Board of Directors, and under such regulations with respect to indemnification and otherwise as they may prescribe, be issued in place of the certificate claimed to have been lost, stolen or destroyed. Section 4. So long as the restrictions set forth in Part III of Article FOURTH of the Certificate of Incorporation shall not have lapsed, all share certificates representing shares of capital stock shall bear a conspicuous legend as follows: "THE SHARES OF STOCK REPRESENTED HEREBY ARE SUBJECT TO RESTRICTIONS PURSUANT TO PART III OF ARTICLE FOURTH OF THE CERTIFICATE OF INCORPORATION OF THE CORPORATION REPRINTED IN ITS ENTIRETY ON THE BACK OF THE CERTIFICATE." Section 5. Subject to Part III of Article FOURTH of the Certificate of Incorporation, the Corporation shall be entitled to treat the registered holder of any share or shares as the holder thereof in fact and law and shall not be bound to recognize any equitable or other claim to, or interest in, such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, save as otherwise expressly provided by statute. 22 ARTICLE VII. DIVIDENDS Dividends shall be declared and paid out of the surplus of the Corporation as often and at such times as the Board of Directors may determine, and in accordance with the New York Business Corporation Law. ARTICLE VIII. INSPECTORS OF ELECTION The Board of Directors, in advance of any shareholders' meeting, shall appoint two inspectors to act at the meeting or any adjournment thereof. If inspectors are not so appointed, the person presiding at a shareholders' meeting shall appoint two inspectors. In case any person appointed fails to appear or act, the vacancy may be filled by appointment made by the Board of Directors in advance of the meeting or at the meeting by the person presiding thereat. 23 ARTICLE IX. SEAL The seal of the Corporation shall be in the form of a circle and shall bear the name of the Corporation and the year of its incorporation. ARTICLE X. AMENDMENTS By-Laws of the Corporation may be adopted, amended or repealed by vote of the holders of the shares at the time entitled to vote in the election of any Directors. By-Laws may also be adopted, amended or repealed by the Board of Directors by vote of a majority of the Directors present at the time of the vote if a quorum is then present. If any By-Law regulating an impending election of directors is adopted, amended or repealed by the Board of Directors, there shall be set forth in the notice of the next meeting of shareholders for the election of Directors the By-Law so adopted, amended or repealed, together with a concise statement of the changes made. 24 ARTICLE XI. WAIVERS OF NOTICE Whenever the Corporation or the Board of Directors or any committee of the Board is authorized to take any action after notice to any person or persons or after the lapse of a prescribed period of time, such action may be taken without notice and without the lapse of such period of time, if at any time before or after such action is completed the person or persons entitled to such notice or entitled to participate in the action to be taken or, in the case of a shareholder, his attorney-in-fact or proxy, submits a signed waiver of notice of such requirement. 25 EX-10 3 Exhibit 10.3 OPERATING AGREEMENT OF THE JORDAN COMPANY LLC OPERATING AGREEMENT of The Jordan Company LLC, a New York limited liability company (the "LLC"), dated as of July 23, 1998, among THE JOHN W. JORDAN II REVOCABLE TRUST, DAVID W. ZALAZNICK and LEUCADIA, INC., a New York corporation (hereinafter referred to collectively as the "Members" and individually as a "Member"). WHEREAS, effective as of February 1, 1982, The Jordan Company, a New York general partnership (the "Partnership"), was formed pursuant to the Articles and Agreement of General Partnership, as amended and restated by the Fourth Restatement, dated as of December 31, 1996, of the Articles and Agreement of General Partnership, as further amended to date (the "Partnership Agreement"); and WHEREAS, the partners of the Partnership are The John W. Jordan II Revocable Trust, David W. Zalaznick and Leucadia, Inc., a New York corporation (in such capacity, the "Partners"); and WHEREAS, pursuant to that certain Agreement of Conversion, dated as of July 22, 1998 among the Partners, the Partners have agreed to convert the Partnership into a limited liability company pursuant to Section 1006 of the NYFS04...:\30\76830\0001\1197\AGR0247V.40D Limited Liability Company Law of the State of New York (the "NYLLC Law") (the "Conversion"); and WHEREAS, a Certificate of Conversion of Partnership to a Limited Liability Company was filed with the Department of State of the State of New York by the Partnership on July 23, 1998; and WHEREAS, in accordance with the Conversion, the Partners desire to amend the Partnership Agreement for the purpose of converting the Partnership Agreement into an Operating Agreement and to make such other changes to the Partnership Agreement in accordance with the NYLLC Law. WHEREAS, all references to the LLC contained herein are deemed to be references to the Partnership for periods prior to the effective time of this Operating Agreement. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I ORGANIZATION Section 1.1. Formation and Name of LLC The parties do hereby convert the Partnership into a limited liability company pursuant to the provisions of the NYLLC Law to engage, for the period and upon the terms and conditions hereinafter set forth, in the business of 2 generating fees by seeking out attractive businesses for acquisition; arranging the terms of acquisition and the financing thereof and assisting the management of such businesses after acquisition (the companies acquiring such businesses are hereinafter collectively called the "Clients" and individually as a "Client"). The business of the LLC shall be conducted under the name "The Jordan Company LLC." Section 1.2. Purposes and Powers The purposes for which the LLC is formed are as follows: (a) to seek out attractive businesses (other than in the financial services area) for acquisition (herein referred to as "Buy-Outs") for Clients, to arrange the terms of the Buy-Outs, to arrange financing to effect the Buy-Outs for Clients, to negotiate opportunities to invest in Clients in connection with the Buy-Outs, to assist Clients in the management and financing of their businesses after Buy-Outs, and to perform investment banking services generally; (b) to hold, maintain and/or invest all or any part of the assets, properties or funds of the LLC in cash or in cash equivalents, including, without limitation, interest-bearing securities of the United States of America or any agency or instrumentality thereof, or other 3 governmental securities, high-rated state and municipal bonds and debt obligations of U.S. national banks; (c) to lend (for any term or period, whether or not beyond the term of the LLC hereunder) any of its assets, properties or funds, either with or without security; (d) to open, maintain and close accounts, including margin accounts, with brokers; (e) to open, maintain and close bank accounts and draw checks and other orders for the payment of monies; (f) to engage appraisers, accountants, custodians, investment advisors, attorneys and all other agents and assistants, both professional and nonprofessional, and to compensate them in such amounts as may be necessary or advisable; (g) to enter into, make and perform all contracts, agreements and other undertakings as may be reasonably necessary or advisable or incident to carrying out its purposes; and (h) to sue, prosecute, settle or compromise claims against third parties, to compromise, settle or accept judgment or claims against the LLC and to execute all documents and to make all representations and waivers in connection therewith. 4 In furtherance of the aforesaid purposes, the LLC shall have all powers necessary, suitable or convenient for the accomplishment thereof, alone or with others, as principal or agent. Section 1.3. Principal Office The principal place of business of the LLC shall be at 767 Fifth Avenue, New York, New York 10153, or at such place as may be designated by a Managing Director (hereinafter defined). Section 1.4. Term The LLC shall commence as of the date of filing of the Certificate of Conversion of Partnership to a Limited Liability Company with the Department of State of the State of New York and shall continue until dissolved as provided in Section 5.4 hereof. Section 1.5. Definitions (a) For purposes of this Agreement, the following terms (in addition to other terms defined herein) shall have the following meanings: "Additional Capital Contributions" shall have the meaning set forth in Section 3.3 hereof. "Affiliate" shall mean a natural person, partnership, corporation or other entity that, directly or indirectly, through one or more intermediaries, controls or 5 is controlled by or is under common control with another person, partnership, corporation or other entity. "Bankruptcy" with respect to any Member shall mean an adjudication that the Member is bankrupt or insolvent, the admission by the Member of inability to pay debts as they mature, the making by the Member of an assignment for the benefit of creditors, the filing by the Member of a petition in bankruptcy or a petition for relief under any section of the United States Federal Bankruptcy Act or any other applicable state insolvency statute or an answer admitting or failing to deny the allegations of such petition, the filing against the Member of any such petition unless such petition is discharged, vacated or stayed within 60 days from the date of filing thereof, the appointment of a trustee, conservator or receiver for all or a substantial part of the Member's assets unless such appointment is discharged, vacated or stayed within 60 days from its effective date, or the imposition of a judicial or statutory lien on all or a substantial part of the Member's assets unless such lien is discharged or vacated or the enforcement thereof stayed within 60 days from its effective date. "Capital Accounts" shall have the meaning set forth in Section 3.1 hereof. 6 "Capital Contributions" shall mean, with respect to any Capital Account, the sum of the Initial Capital Contribution and any Additional Capital Contributions made with respect to such Capital Account. "Committee" shall mean the four individuals then serving, one of whom shall be appointed by each Managing Director so long as there are two Managing Directors (initially John W. Jordan II as appointee of The John W. Jordan II Revocable Trust and David W. Zalaznick as appointee of David W. Zalaznick) and two of whom shall be appointed by Leucadia, Inc. (initially Ian M. Cumming and Joseph S. Steinberg). If, at any time, there shall only be one Managing Director, he shall have the right to appoint two members of the Committee. "Initial Capital Contribution" shall have the meaning set forth in Section 3.2 hereof. "Legal Representative" shall mean any and all executors, administrators, personal representatives, committees, guardians, receivers, fiduciaries, conservators or trustees, in Bankruptcy or otherwise, of a Member. "Leucadia Committee Members" shall mean Ian M. Cumming and Joseph S. Steinberg, or such other members of the Committee as shall be appointed by Leucadia, Inc. 7 "Liquidating Agent" shall have the meaning set forth in subsection (b) of Section 5.4 hereof. "Manager" shall mean the Managing Directors and any member of the Committee, in each case acting in such capacity. "Managing Director" shall mean each of The John W. Jordan II Revocable Trust and David W. Zalaznick and, unless the context indicates otherwise, shall include any successor Managing Director. Where action is required to be taken under this Agreement by a Managing Director, the Managing Directors shall mutually agree on which Managing Director shall so act. If the Managing Directors are unable to so agree, the Managing Director to take action shall be determined by the Leucadia Committee Members. "Permanent Disability" shall mean, with respect to any natural person, (i) his inability, by reason of illness, insanity or incompetence (whether or not adjudicated) or otherwise to perform his principal duties and functions hereunder for a period of four consecutive months or (ii) the earlier adjudication of his insanity or incompetency. "Termination" shall mean, with respect to The John W. Jordan II Revocable Trust, (i) the revocation or other termination of such trust, (ii) the failure of John W. Jordan II to be sole trustee or (iii) the death or Permanent 8 Disability of John W. Jordan II, unless in the case of (ii) and (iii) the Members, each in the exercise of its sole discretion, shall have unanimously approved a substitute therefor. (b) The words "herein", "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole as the same may from time to time be amended or supplemented, and not to any particular Article, Section or subsection contained in this Agreement. Section 1.6. Fiscal Year The fiscal year of the LLC for financial, accounting and tax purposes shall end upon each December 31. ARTICLE II MANAGEMENT OF BUSINESS Section 2.1. Services of Messrs. Jordan and Zalaznick Throughout the term of the LLC: (a) Leucadia, Inc. shall include Messrs. Jordan and Zalaznick and the LLC's other employees under its medical and other employee benefit plans (other than pension, stock option, retirement, bonus and similar plans) if arrangements toward that end can be effected with the carriers and the LLC shall reimburse Leucadia, Inc. for the incremental costs thereof; 9 (b) The John W. Jordan II Revocable Trust agrees to use its best efforts to cause John W. Jordan II (or, in the event of his death or Permanent Disability, such substitute, if any, as the Members shall unanimously approve) to fulfill the obligations set forth in Section 2.1(c) hereof; and (c) Each of Messrs. Jordan (or his substitute, if any) and Zalaznick, and any other individual retained pursuant to Section 2.2 hereof shall, for the term of the LLC, not be obligated to devote full time to the conduct of the LLC's affairs but shall devote so much of his business time as shall be necessary for the proper conduct of the LLC's affairs, to implement the purposes set forth in Section 1.2 hereof and to perform services for The Jordan/Zalaznick Capital Company ("JZCC"), JZ Equity Partners PLC, Jordan/Zalaznick Advisers, Inc., Jordan Industries, Inc. ("JII") and any other partnerships or entities of which The John W. Jordan II Revocable Trust, David W. Zalaznick and Leucadia, Inc. are the sole general partners or controlling shareholders. 10 Section 2.2. Managing Directors Third parties dealing with the LLC may rely conclusively upon the power and authority of a Managing Director as herein set forth. A Managing Director shall have the right to manage the LLC's business including the right to (i) sign, endorse, negotiate, and transfer any check, draft or other instrument of the LLC; and (ii) take all other action on behalf of the LLC authorized by this Agreement to be taken by a Managing Director. A Managing Director shall have the right to select an individual to be retained by the LLC to perform services in implementation of the purposes set forth in Section 1.2 hereof, subject to the terms set forth in Section 2.1 hereof. A Managing Director shall not, without the written consent of three other members of the Committee, have the authority to do any of the following: (i) to pledge, hypothecate, assign, encumber or otherwise so act with respect to LLC assets; (ii) to borrow on behalf of the LLC; (iii) to take any action in contravention of this Agreement; (iv) to taken any action which would make it impossible to carry on the LLC's business; (v) to sell or exchange all or substantially all of the LLC's assets; (vi) to admit any additional Members; (vii) to amend this Agreement or to 11 change or reorganize the LLC into any other legal form; or (viii) modify the terms under which Messrs. Jordan and Zalaznick are retained by the LLC. Section 2.3. Delegation of Authority Each of the Managing Directors is delegated the authority to cause or permit the LLC to do any and all other things not specifically permitted in Section 2.2 as in his judgment shall be necessary or desirable for the benefit of the LLC, with the prior written consent of at least three members of the Committee; provided the LLC shall not without the unanimous prior written consent of the Members engage in any business activity other than as set forth in Section 1.2. Section 2.4. Permitted Transactions (a) Each of the Members consents that any Member and any Affiliate of any Member may, directly or indirectly, engage in or possess an interest in any other present or future business venture of any nature or description for his or its own account, independently or with others, including, without limitation, any aspect of the securities or financing business; and neither the LLC nor any Member shall have any rights in or to such independent venture or the outcome or profit derived therefrom. Notwithstanding the foregoing, neither the John W. Jordan II Revocable Trust, 12 John W. Jordan II nor David W. Zalaznick shall, during the term hereof, engage in any activities of the nature set forth in Section 1.2 except (i) for the account of and on behalf of the LLC, the Jordan/Zalaznick Capital Company or any other partnership of which The John W. Jordan II Revocable Trust, David W. Zalaznick and Leucadia, Inc. are the sole general partners or (ii) as set forth in Exhibit A hereto. (b) The fact that any employee, partner, officer or director of either a Member or an Affiliate of a Member, or that any Member, Affiliate of a Member or member of any individual Member's family, is employed by, or is directly or indirectly interested in or connected with, or is, any person, firm or corporation employed by the LLC to render or perform a service, or from or through whom the LLC may make any sale or purchase, shall not prohibit the LLC from engaging in any transaction with such person, firm or corporation, or create any duty of legal justification additional to that which would exist if such person, firm or corporation was not so related to the LLC, and neither the LLC nor any other Member shall have any rights in or to any income or profit derived from such transaction by such Member, person, firm or corporation. 13 (c) The LLC is specifically authorized to utilize any Affiliate of an LLC, or any of the legal counsel, accountants and/or other experts or advisers heretofore or hereafter utilized by a Member or any of his or its Affiliates, to provide services to the LLC. Each Managing Director is specifically authorized to cause the LLC to pay any such Affiliate, legal counsel, accountant and/or other expert or adviser a fee for any such services to the LLC, provided that the Managing Director, in good faith, determines that such fee is comparable to that which would be charged to customers not affiliated with a Member for similar services. (d) The retention by the LLC of the services of any Affiliates of a Member shall not constitute any such Affiliate a co-partner or joint venturer with the LLC, and the relationship of the LLC to each such Affiliate shall at all times remain that of principal and independent contractor, respectively. Section 2.5. Loans Any Member may, but shall not be required to, make loans to the LLC and in respect of such loans shall, to the extent permitted by applicable law, be treated as a creditor of the LLC. Such loans and interest thereon (at terms agreed upon by the lending Member and at least three members 14 of the Committee) shall constitute obligations of the LLC. Any such loans shall not increase such Member's capital contribution or entitle him or it to any increase in his or its share of the profits of the LLC nor subject him or it to any greater allocated portion of losses which he or it may sustain as provided herein. Section 2.6. Liability of Members; Exculpation of Manager; Indemnification (a) The Members shall not have any liability for the obligations or liabilities of the LLC except to the extent provided in the NYLLCL. (b) No Manager (which shall include a Member in his or its capacity as a Manager) shall be liable, in damages or otherwise, to the LLC or to any of the Members, for any act or omission on his or its part, or any act or omission of any employee, agent or attorney-in-fact of the LLC, except for the results of his or its own gross negligence, willful misconduct or bad faith. The LLC shall indemnify, defend and hold harmless each Member or Manager (including a Managing Director) from and against any costs, expenses, damages, claims, and personal liability including judgments, fines, amounts paid in settlement (with the consent of three members of the Committee) and related expenses (including fees and expenses of counsel) arising 15 out of any claim or liability of any nature whatsoever in respect of the assets or business of the LLC, except where attributable to the gross negligence, willful misconduct or bad faith of the Member or the Manager (including a Managing Director). (c) The indemnification permitted under Section 420 of the NYLLC Law shall be in addition to any other rights to which each Member and Manager (an "Indemnitee") may be entitled under any agreement or vote of the Members, as a matter of law or otherwise, both (i) as to action in the Indemnitee's capacity as a Member, Manager or as an officer, director, shareholder, member or partner of a Member, Manager or of an Affiliate, and (ii) as to action in another capacity, and shall continue as to an Indemnitee who has ceased to serve in such capacity and shall inure to the benefit of the heirs, successors, assigns, administrators and personal representatives of the Indemnitee. (d) The LLC may purchase and maintain insurance on behalf of one or more Indemnitees and other persons against any liability which may be asserted against, or expense which may be incurred by, any such person in connection with the LLC's activities, whether or not the LLC would have the power to indemnify such person against such liability under the provisions of this Agreement. 16 (e) Any indemnification hereunder shall be satisfied only out of the assets of the LLC, and the Members and the Manager shall not be subject to personal liability by reason of these indemnification provisions. (f) An Indemnitee shall not be denied indemnification in whole or in part under this Section 2.6 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted or not prohibited by the terms of this Agreement. (g) The provisions of this Section 2.6 are for the benefit of each Indemnitee and his heirs, successors, assigns, administrators and personal representatives as provided herein, and shall not be deemed to create any rights for the benefit of any other persons. Section 2.7. Other Matters Concerning the Members (a) Each Member or Manager may rely on, and shall be protected in acting or refraining from acting upon, any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, or other paper or document reasonably believed by him to be genuine and to have been signed or presented by the proper party or parties. 17 (b) For purposes of this Agreement, each Member or Manager may consult with legal counsel, accountants, appraisers, management consultants, investment bankers, other consultants and advisers selected by it, any one or more agents or employees of the LLC and any advice or opinion of any such person as to matters which such Member reasonably believes to be within such person's professional or expert competence, and any act or omission, if done or omitted to be done in reliance upon any such advice or opinion, will be conclusively presumed to have been done or omitted to be done in good faith and not to constitute fraud, gross negligence or willful or wanton misconduct. ARTICLE III CAPITAL ACCOUNTS; CAPITAL CONTRIBUTIONS Section 3.1. Capital Accounts There shall be one class of capital account ("Capital Accounts") maintained on the books of the LLC. Separate Capital Accounts shall be maintained for each Member for the Member's respective capital contributions to the LLC. Each Capital Account for a Member shall consist of (i) the Initial Capital Contribution with respect to such Capital Account, (ii) increased by (a) any Additional Capital Contributions to such Capital Account made by the Member and (b) the Member's share of income and gains 18 allocated to such Capital Account and (iii) decreased by (a) any distributions made to the Member with respect to such Capital Account and (b) the Member's share of losses and deductions with respect to such Capital Account. Section 3.2. Initial Capital Contributions The initial Capital Contributed in cash on behalf of each Member with respect to each Capital Account (the "Initial Capital Contribution") was as follows: The John W. Jordan II Revocable Trust - $1; David W. Zalaznick - $1; and Leucadia, Inc. - $75,000. Section 3.3. Additional Capital Contributions During the time of the LLC, Leucadia, Inc. shall make additional cash contributions to the LLC with respect to its Capital Account as follows: (i) on each of January 2, 1990, April 1, 1990, July 1, 1990 and October 1, 1990 - - $625,000; (ii) on each of January 2, 1991, April 1, 1991, July 1, 1991 and October 1, 1991 - $687,500 and (iii) on each of January 2, 1992, 1993, 1994, 1995 and 1996, April 1, 1992, 1993, 1994, 1995 and 1996, July 1, 1992, 1993, 1994, 1995 and 1996 and October 1, 1992, 1993, 1994, 1995 and 1996, - $750,000; on each of January 2, 1997, 1998 and 1999, April 1, 1997, 1998 and 1999, July 1, 1997, 1998, and 1999 and October 1, 1997, 1998 and 1999 - $1,000,000. 19 Section 3.4. No Interest on or Withdrawal of Capital Contributions No interest shall be paid to any Member on his or its Capital Contributions to the LLC. No Member shall be entitled to withdraw any of his or its Capital contributions to the LLC, nor shall any Member have any right to receive any funds or property of the LLC, except as provided in this Agreement. ARTICLE IV ADMISSION AND WITHDRAWAL OF MEMBERS Section 4.1. Withdrawal by Member Without the written consent of at least three members of the Committee, no Member shall withdraw from the LLC prior to its dissolution pursuant to subsection (a) of Section 5.4 hereof. Section 4.2. Admission of Additional Members Except as provided in Section 4.3 hereof or as otherwise agreed to in writing by all Members, no additional Member shall be admitted to the LLC. Section 4.3. Sale of LLC Interest; Substituted Member Without the written consent of all members of the Committee, no Member may sell, assign, transfer, pledge, hypothecate or encumber all or any part of his interest (including a beneficial interest in the right to receive 20 distributions and allocations of profit and loss) in the LLC. Section 4.4. Resignation, Removal, Termination, Bankruptcy, Death or Permanent Disability of a Managing Director (a) A Managing Director shall be removed as Managing Director by a writing signed by at least three members of the Committee. (b) In the event of the resignation, removal, Bankruptcy, Termination, death or Permanent Disability of all Managing Directors, if at such time there is more than one Managing Director, or, if there is only one Managing Director at such time, in the event of such sole Managing Director's resignation, removal, Bankruptcy, Termination, death or Permanent Disability, the LLC shall dissolve; provided, however, that the Members acting unanimously may appoint a successor Managing Director(s) within 60 days of the resignation, removal, Bankruptcy, Termination, death or Permanent Disability of the Managing Director(s) to continue the business of the LLC. For purposes of the appointment of a successor Managing Director, a Managing Director who has been removed or otherwise is no longer serving as such pursuant to (a) above shall be deemed to have appointed such successor as shall have been designated by the other Members. 21 (c) Notwithstanding anything to the contrary contained herein, a Managing Director who has resigned or been removed shall have the right to retain his interest in the LLC, and the Legal Representative of such a Managing Director shall succeed to the rights of the Managing Director to receive allocations and distributions hereunder. In the event that the Members elect to continue the business of the LLC in accordance with subsection (b) above following the Termination, death or Permanent Disability of the Managing Director, the right of the Managing Director (or his Legal Representative) to receive distributions pursuant to Section 5.1(a) shall be limited to, and shall terminate in full upon payment of, (i) Net Buy-Out Fees and Net Investment Banking Fees in respect of Buy-Outs completed on or before the date of Termination, death or Permanent Disability or for which a definitive agreement had been executed on or before such date and (ii) Net Consulting Fees (and directors fees) accrued to the date of Termination, death or Permanent Disability. Section 4.5. Bankruptcy, Dissolution, Liquidation, Termination, Death or Permanent Disability of a Member (a) In the event of the Bankruptcy, dissolution, liquidation, Termination, death or Permanent Disability of a Member (other than an event dealt with under Section 4.4 22 hereof) (the "Withdrawing Member"), the LLC shall dissolve; provided, however, that the remaining Members acting unanimously shall have the right, but not the obligation, to continue the business of the LLC by notifying a Managing Director within 60 days after the Bankruptcy, dissolution, liquidation, Termination, death or Permanent Disability of the Withdrawing Member. In the event that the Members so elect to continue the business of the LLC, the Legal Representative of the Withdrawing Member shall succeed to the rights of such Withdrawing Member hereunder. (b) In the event that the Members elect to continue the business of the LLC in accordance with subsection (a) above following the Termination, death or Permanent Disability of a Member other than the Managing Director, the right of the Withdrawing Member to receive distributions pursuant to Section 5.1(a) shall be limited to, and shall terminate in full upon payment of, (i) Net Buy-Out Fees and Net Investment Banking Fees in respect of Buy-Outs completed on or before the date of Termination, death or Permanent Disability or for which a definitive agreement had been executed on or before such date and (ii) Net Consulting Fees (and directors fees) accrued to the date of Termination, death or Permanent Disability. 23 ARTICLE V DISTRIBUTIONS AND EXPENSES; ALLOCATION OF PROFIT AND LOSS; OPPORTUNITIES; DISSOLUTION AND LIQUIDATION; RESERVES Section 5.1. Distributions (a) A Managing Director, upon the written consent of at least three members of the Committee, may cause the LLC to make distributions to the Members. The amount of distributions to which each Member shall be entitled shall be calculated by the Managing Director based on fees received to date. Specifically, the Managing Director shall allocate fees to the Members as follows: (i) Fees received by the LLC in connection with effecting Buy-Outs ("Net Buy-Out Fees") shall be allocated as follows: (A) Fees earned prior to December 31, 1983 (plus the David B. Lilly transaction) The John W. Jordan II Revocable Trust - 30%; David W. Zalaznick - 20%; and Leucadia, Inc. - 50%. (B) Fees earned in calendar 1984 - The John W. Jordan II Revocable Trust - 39%; David W. Zalaznick - 26%; and Leucadia, Inc. - 35%. 24 (C) Fees earned in calendar 1985 - The John W. Jordan II Revocable Trust - 35%; David W. Zalaznick - 35%; and Leucadia, Inc. - 30%. (D) Fees earned in calendar 1986 - The John W. Jordan II Revocable Trust - 37.5%; David W. Zalaznick - 37.5%; and Leucadia, Inc. - 25%. (E) Fees earned in calendar 1987 and thereafter - The John W. Jordan II Revocable Trust - 37.5%; David W. Zalaznick - 37.5%; and Leucadia, Inc. - 25%. (ii) Fees received from other investment banking services ("Net Investment Banking Fees") shall be allocated in the same manner as the Net Buy-Out Fees. (iii) Fees received by the LLC for consulting, management or financing services after Buy-Outs ("Net Consulting Fees") shall be allocated as follows: (A) Fees earned from companies involved in Buy-Outs which closed prior to December 31, 1983 (plus the David B. Lilly transaction) - The John W. Jordan II 25 Revocable Trust - 25%; David W. Zalaznick - 25%; and Leucadia, Inc. - 50%. (B) Fees earned from companies involved in Buy-Outs which closed in calendar 1984 (except David B. Lilly) - The John W. Jordan II Revocable Trust - 32-1/2%; David W. Zalaznick - 32-1/2%; and Leucadia, Inc. - 35%. (C) Fees earned from companies involved in Buy-Outs which closed in calendar 1985 The John W. Jordan II Revocable Trust - 35%; David W. Zalaznick - 35%; and Leucadia, Inc. - 30%. (D) Fees earned from companies involved in Buy-Outs which closed in calendar 1986 The John W. Jordan II Revocable Trust - 37- 1/2%; David W. Zalaznick - 37-1/2%; and Leucadia, Inc. - 25%. (E) Fees earned from companies involved in Buy-Outs which closed in calendar 1987 and thereafter - The John W. Jordan II Revocable Trust - 37-1/2%; David W. Zalaznick - 37-1/2%; and Leucadia, Inc. - 25%. 26 (iv) Any directors fees earned from Clients shall belong to the individual directors and shall not be LLC property. (b) Any distributions pursuant to Section 5.1 shall be made in cash, unless a Managing Director, with the written consent of at least three members of the Committee, shall determine to make all or any portion of such determinations in kind. Section 5.2. Allocation of Net Profit and Net Loss For federal, state and local income tax purposes, the LLC's income, gains, deductions and losses shall be allocated among the Members as follows: (a) For each fiscal year of the LLC, the income and gains of the LLC (other than Client reimbursement) shall be allocated among the parties in the same ratio as cash was distributed or would be distributable pursuant to Section 5.1(a) for the fiscal year. (b) For each fiscal year of the LLC, the deductions and losses (other than the expenses reimbursed by Clients) of the LLC shall be allocated as follows: (i) first, to Leucadia, Inc. an amount of deductions and losses equal to, in respect of the LLC's initial fiscal year, the sum of Leucadia, Inc.'s Initial Capital Contribution and Additional 27 Capital Contributions pursuant to subsection (a) of Section 3.3 hereof to the LLC for such fiscal year and, in respect of each fiscal year of the LLC thereafter, the amount of Leucadia, Inc.'s Additional Capital Contributions pursuant to subsection (a) of Section 3.3 hereof to the LLC for such fiscal year; and (ii) then, to the Members to the extent of income and gains of the LLC for such fiscal year, in the same manner as income and gains are allocated for such fiscal year. Section 5.3. Client Opportunities To the extent that the LLC, in arranging Buy-Outs, becomes aware of opportunities to invest in Clients in connection with Buy-Outs, the LLC shall make available such opportunities to the Members in the percentages set forth in Section 5.01(a)(i). If any Member chooses not to so invest after being given 10 days to decide, the LLC shall make the opportunity available to the Members who choose to invest in the Client, each such opportunity to be made available to the Members pro rata in accordance with the percentages set forth in Section 5.1(a)(i). It is contemplated that the LLC, in each case subject to the written approval of each of the Members, shall make a portion of the opportunities of 28 which it becomes aware available to persons other than Members, and that the opportunities made available to the Members in accordance with the two preceding sentences of this paragraph shall be net of the opportunities accepted by such other persons. It is acknowledged and agreed that Jordan/Zalaznick Advisers, Inc./JZ Equity Partners PLC constituted the "Vehicle" referred to in the Second Restatement of the Articles and Agreement of General Partnership of the Partnership in which the opportunity was made available to the Members in the following percentages: The John W. Jordan II Revocable Trust - 45; David W. Zalaznick - 45%; and Leucadia, Inc. - 10%. Leucadia, Inc. shall be given the opportunity to name a director of each Client to the extent that such naming is within the control of the Members or the Managing Directors. The Committee shall meet at least once every twelve months to review the activities of the Managing Director. Sections 5.4. Dissolution and Liquidation (a) The LLC shall be dissolved on the earliest to occur of the following: (i) the sale, transfer or other disposition of all or substantially all of the assets held by the LLC; 29 (ii) the removal, resignation, Bankruptcy, expulsion, Termination, death or Permanent Disability of both of the Managing Directors, unless the Members unanimously elect to continue the business of the LLC, as provided for in Section 4.4(b) hereof; (iii) Upon the consent in writing of at least three members of the Committee; (iv) Upon the unanimous written consent of all the Members; (v) Upon the entry of a decree of judicial dissolution under Section 702 of the NYLLC Law; (vi) The Bankruptcy, dissolution, expulsion liquidation, Termination, death or Permanent Disability of a Member (other than that of both of the Managing Directors), unless, within 60 days after such event, the Members unanimously elect to continue the business of the LLC as provided for in Section 4.5 hereof; (vii) On the last day of a calendar quarter upon at least 30 days' prior written notice to that effect given by The John W. Jordan II Revocable Trust or David Zalaznick, as a Managing Director, which notice may only be given if such Managing Director has raised a "Fund." For this purpose, a "Fund" shall be an arrangement or arrangements pursuant to which such Managing Director or his 30 Affiliate shall have the right to direct the investment of at least $100 million of capital; (viii) On the last day of any calendar year upon at least 90 days prior written notice to that effect is given by any Member; or (ix) December 31, 1999. (b) Upon dissolution of the LLC for any reason, the LLC shall continue in existence for the purpose of winding up its affairs, and the property and business of the LLC shall be liquidated (except as otherwise provided in subsection (d) of this Section 5.4) by a Managing Director, or in the event of the unavailability of either of the Managing Directors, by such Member or other person (the "Liquidating Agent") as shall be designated by Leucadia, Inc. (c) As soon as practicable after the effective date of dissolution of the LLC, the LLC's assets shall be distributed in the following manner and order of priority: (i) claims of all creditors of the LLP who are not Members shall be paid and discharged; (ii) claims of all creditors of the LLC who are Members shall be paid and discharged; (iii) the remaining assets shall be distributed to the Members in accordance with Section 5.1(a)(i). 31 (d) Whether any assets of the LLC shall be liquidated through sale or shall be distributed in kind, shall be a matter for the discretion of the Managing Director (or the Liquidating Agent) acting with the written consent of three members of the Committee; provided, however, that if distribution is made in kind, in whole or in part, to the extent practicable, the amount of particular securities held by the LLC shall be distributed pro rata in accordance with the applicable priorities set forth in subsections (c)(ii) and (iii) of this Section 5.4. Upon dissolution of the LLC the name "The Jordan Company LLC" shall belong to The John W. Jordan II Revocable Trust; provided, however, that in the event of the death or Permanent Disability of John W. Jordan II, such name shall belong to David W. Zalaznick (if he shall be alive). (e) Each of the Members shall be furnished with a statement prepared by the LLC's accountants which shall set forth the assets and liabilities of the LLC as at the date of complete liquidation. Upon compliance by a Managing Director with the foregoing distribution plan, the Members shall cease to be such, and a Managing Director shall execute, acknowledge and cause to be filed articles of dissolution of the LLC; however, a Managing Director shall retain full authority to direct the disbursement and/or the 32 distribution of the funds, if any, held pursuant to the provisions of this Agreement (including subsection (a) of Section 5.5), which funds shall be distributed in accordance with the priorities set forth in subsection (c) of this Section 5.4. (f) No Member shall be personally liable to any other Member for the return of his or its Capital Contributions or any portion thereof; any such return shall be made solely from LLC assets in accordance with the priorities established by this Agreement. Section 5.5. Amounts Reserved (a) If there is any pending transaction or claim by or against the LLC as to which the interest or obligation of the LLC therein cannot, in the judgment of a Managing Director (or the Liquidating Agent), be then ascertained, then, notwithstanding any other provision of this Agreement to the contrary, (i) if such transaction or claim shall constitute an asset or potential asset of the LLC, the value or potential value thereof as specified by a Managing Director with the written consent of three members of the Committee, shall be added to the valuation of the assets of the LLC for purposes of computing the distributions to be made pursuant to Section 5.1 and/or Section 5.4 hereof, or (ii) if such transaction or claim shall constitute a 33 liability or potential liability of the LLC, then an amount specified by a Managing Director acting with the written consent of three members of the Committee as a reserve for any loss or probable loss therefrom shall be deducted from the valuation of assets of the LLC for purposes of computing the distributions to be made pursuant to Section 5.1 and/or Section 5.4 hereof, whether or not such reserve is required to be established therefor for financial accounting purposes. (b) Upon determination by a Managing Director (or the Liquidating Agent) with the written consent of three members of the Committee that circumstances no longer require the retention of any sum or assets as provided in this Section 5.5, a Managing Director (or the Liquidating Agent) shall, at the earliest practical time pay such sum or deliver such assets, without interest, in accordance with applicable priorities set forth in this Agreement. Section 5.6. Special Arrangements (a) If the John W. Jordan II Revocable Trust or David W. Zalaznick, as a Managing Director or any of their respective Affiliates raises a "Fund," then Leucadia, Inc. shall have a 10% interest in all profit participations received by such Managing Director or his Affiliates from such Fund and a 10% interest in all Net Consulting Fees and 34 Net Investment Banking Fees (collectively, "Net Fees") received by such Managing Director or his Affiliates from transactions and/or investee companies of the Fund, but Leucadia, Inc. shall have no interest in any Management Fees received by such Managing Director or his Affiliates from such Fund or in any profit participations, Net Fees or Management Fees received by such Managing Director or his Affiliates from or in respect of any other fund raised by the Managing Director or his Affiliates. For example, if such Managing Director or his Affiliates receives from such Fund a $500,000 asset management fee, $500,000 in Net Fees and $2,000,000 in profit participation, Leucadia, Inc. shall be entitled to no part of the asset management fee, $50,000 of the Net Fees ($500,000 x 10% = $50,000) and $200,000 of the profit participation ($2,000,000 x 10% = $200,000) received by the Managing Director or his Affiliates from or in respect of the Fund. Payments in respect of Leucadia, Inc.'s interest in such sums shall be made promptly upon receipt thereof by the Managing Director or his Affiliates from or in respect of the Fund. (b) If the LLC is dissolved pursuant to Section 5.04(a) because of any of the events enumerated therein, then, 35 (i) in addition to all other sums to which Leucadia, Inc. shall be entitled under this Agreement, Leucadia, Inc. shall be entitled to receive its pro rata interest in all Net Buyout Fees and Net Investment Banking Fees received from Clients pursuant to definitive agreements entered into prior to the dissolution of the LLC; and (ii) for so long as either or both of The John W. Jordan II Revocable Trust and David W. Zalaznick or any Affiliate receive Net Consulting Fees from Clients (including Clients of the affiliated entities referred to in subparagraph (d) below) existing at the time of dissolution of the LLC, Leucadia, Inc. shall be entitled to promptly receive from The John W. Jordan II Revocable Trust and David W. Zalaznick a percentage of Net Consulting Fees received from Clients. The percentages to be received by Leucadia, Inc. are as follows: (A) Fees earned from companies involved in Buy-Outs which closed prior to December 3, 1983 (plus the David B. Lilly transaction) - 50% (See Exhibit I, Schedule A); 36 (B) Fees earned from companies involved in Buy-Outs which closed in calendar year 1984 (except David B. Lilly) - 35% (See Exhibit I, Schedule B); (C) Fees earned from companies involved in Buy-Outs which closed in calendar year 1985 - 30% (See Exhibit I - Schedule C); (D) Fees earned from companies involved in Buy-Outs which closed in calendar year 1986 and all years thereafter - 25% (See Exhibit I, Schedule D). The foregoing percentages shall only be payable with respect to that portion of Net Consulting Fees received from each Client that exceeds $50,000 in any calendar year. A Managing Director shall cause Exhibit I, Schedule D to be updated annually as of December 31 of each year and each such updated Exhibit I shall be incorporated automatically as an exhibit to this Agreement. Notwithstanding anything to the contrary contained herein, with respect to Net Consulting Fees paid by JII, Leucadia, Inc. shall be entitled to receive (x) 37 16.975% of the first $1 million of Net Consulting Fees paid in any calendar year, and (y) for so long as Leucadia remains a shareholder of JII, 10% of all Net Consulting Fees paid in excess of $1 million in any calendar year. The foregoing fees shall not be reduced by the $50,000 amount referenced above. With respect to Jordan/Zalaznick Advisors, Inc. ("JZAI"), no provision of this Agreement shall affect Leucadia, Inc.'s right to receive 10% of the net income of JZAI for so long as JZAI remains in existence. The foregoing payments shall not be reduced by the $50,000 amount referenced. (c) It is expressly agreed by the Members that all consulting fees paid to the LLC by the companies listed on Exhibit I, Schedule E, shall be the exclusive property of The John W. Jordan II Revocable Trust and David W. Zalaznick. (d) It is expressly acknowledged that all companies listed on Exhibit I, Schedules A,B,C & D are Clients of either the LLC, JZCC or TJC Management Corp. ("TJM"). For purposes of this Agreement, JZCC and TJM shall each be deemed an Affiliated Entity. In the event that the LLC is dissolved pursuant to Section 5(a) hereof, all of The John W. Jordan II Revocable Trust's and David W. Zalaznick's 38 obligations to make payments to Leucadia, Inc. pursuant to Section 5.06(b) hereof may be satisfied by any Affiliated Entity. ARTICLE VI LLC COSTS AND EXPENSES Section 6.1. Compensation to Managing Directors (a) The LLC shall pay, as a fee (the "Management Fee") for the services set forth in Section 2.1(a)(iii), the excess of the Additional Capital Contributions made by Leucadia, Inc. over the expenses of the LLC (to the extent not reimbursed by Clients) to John W. Jordan II and David W. Zalaznick in such proportions as they may agree but not in excess of $625,000 per calendar quarter of 1990, $687,500 per calendar quarter of 1991 and $750,000 per calendar quarter of 1992 and thereafter. The Management Fee will be treated by the LLC as a deduction. Any Managing Director is authorized to make the payments set forth in this paragraph. The Managing Directors shall not receive any other compensation or fee for services hereunder, except as provided for in this Agreement. (b) In 1991, the LLC acquired a controlling interest in Fannie May Candy Company, a Chicago based candy manufacturer. The LLC will open a Chicago office to allow the John W. Jordan II Revocable Trust, as a Managing 39 Director, to monitor the LLC's investment in Fannie May Candy Company as well as to more closely monitor its continuing investment in Jordan Industries, Inc., which is headquartered in Deerfield, Illinois, a Chicago suburb. In order to manage the LLC's increasing Chicago area business investments better, in 1991 Mr. Jordan relocated his permanent residence from New York to Illinois. The LLC's continued New York business interests, however, requires Mr. Jordan periodically to return to New York. In recognition of the additional expenses incurred by Mr. Jordan on behalf of the LLC in maintaining a New York place of abode for this purpose, and in order to facilitate Mr. Jordan's New York business trips, as compensation for the expenses Mr. Jordan incurs in continuing to maintain a New York place of abode for LLC business purposes, it is hereby agreed that for purposes of Section 6.1(a) hereof, Messrs. Jordan and Zalaznick agree that the LLC shall pay to Mr. Jordan the first $250,000 of the Management Fee per calendar year commencing in calendar 1992, with the balance of the Management Fee to be allocated as agreed upon by Messrs. Jordan and Zalaznick pursuant to Section 6.1(a). The allocation of $250,000 of the Management Fee pursuant to this subsection 6.1(b) will be reviewed annually. 40 Section 6.2. Organizational Expenses The LLC shall pay all expenses, including any legal and accounting fees and disbursements, incurred in connection with the organization of the LLC. Section 6.3. Operating Expenses (a) A Managing Director may, in his sole discretion, as needed for the proper conduct of the LLC business, incur telephone, telegraph, secretarial, bookkeeping, publication, consulting, accounting and legal expenses, and such other ordinary operating costs and expenses. (b) Messrs. Jordan and Zalaznick shall be reimbursed for their reasonable out-of-pocket expenses incurred by them in discharging their functions and responsibilities hereunder. (c) The expenses of the LLC, including the management fee, shall be paid from the Additional Capital Contributions, to the extent thereof. ARTICLE VII REPORT TO MEMBERS Section 7.1. Books of Account Appropriate books of account shall be kept at the principal place of business of the LLC, and each Member and its representatives shall have access to all books, records 41 and accounts and the right to make copies thereof during regular business hours. Section 7.2. Audit and Reports (a) If requested by at least two members of the Committee, the books and records of the LLC shall be audited as of the end of each fiscal year of the LLC by a firm of independent accountants selected by three members of the Committee. Within 90 days after the end of each fiscal year, the LLC shall furnish to each Director a report setting forth as at the end of such fiscal year: (i) a balance sheet and income statement (for each such fiscal year) of the LLC reported on by such accounting firm, if applicable; (ii) such Member's Capital Account; (iii) the amount of such Member's share in the LLC's taxable income or loss for such year, in sufficient detail to enable him or it to prepare his or its applicable federal, state and other tax returns; and (iv) any other additional information which a Managing Director shall deem necessary or appropriate. (b) A Managing Director shall prepare or cause to be prepared all applicable federal, state and local tax 42 returns ("Returns") for each year for which such Returns are required to be filed. With the approval of at least three members of the Committee, a Managing Director shall also determine whether to make any applicable election, claim any available credit or adopt any other method or procedure relating to the preparation of the Returns, and shall have the power to take any and all action necessary or appropriate under applicable or relevant laws or regulations thereunder. All tax elections and determinations so made by the Managing Director shall be final and binding upon all Members and their respective successors, assigns, heirs and Legal Representatives. ARTICLE VIII MISCELLANEOUS Section 8.1. Binding Effect This Agreement shall be binding upon and inure to the benefit of the successors, assigns, heirs and Legal Representatives of the respective Members. Section 8.2. Notices All notices hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or mailed by registered or certified mail, postage prepaid, return receipt requested, to the LLC, 767 Fifth Avenue, New York, New York 10153, and to Leucadia at 315 43 Park Avenue South, New York, New York 10010, or such other address of the LLC as to which the Members shall have been given notice, and to the Members, at the respective addresses last made known to the LLC. A Member may designate a new address by notice to that effect given to the LLC. Section 8.3. Counterparts This Agreement may be executed in any number of counterparts, each of which shall be an original instrument and all of which, when taken together, shall constitute one and the same Agreement. Section 8.4. Completeness; Amendment This Agreement sets forth the entire understanding of the parties hereto, and no provision hereof may be amended, waived or modified at any time except with the written consent of all Members. Section 8.5. Power of Attorney Each of the Members hereby irrevocably constitutes and appoints each of the Managing Directors his or its true and lawful representative and attorney in fact, in his or its name, place and stead, to make, execute, acknowledge and file with the appropriate authority: (i) any certificate and other instruments which may be required to be filed by the LLC under 44 the laws of any jurisdiction or which such Managing Director shall deem advisable, in his sole discretion, to file; and (ii) any certificate or other instruments which may be required to effectuate the dissolution and termination of the LLC as provided for hereunder; it being expressly understood and intended by each of the Members that such power of attorney shall be irrevocable and shall survive any assignment or attempted assignment of the whole or any part of the interest in the LLC of a Member and, in the event of a permitted assignment hereunder, shall be binding upon the assignee thereof. Section 8.6. Section Headings The section headings contained in this Agreement are for convenience of reference only and shall not limit or define the text hereof. Section 8.7. Governing Law This Agreement shall be governed by and construed in accordance with the laws of New York. 45 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. THE JOHN W. JORDAN II REVOCABLE TRUST By: /s/ John W. Jordan II ------------------------------------------ John W. Jordan II, Trustee /s/ David W. Zalaznick ------------------------------------------ DAVID W. ZALAZNICK LEUCADIA, INC. By: /s/ Joseph A. Orlando ------------------------------------------ Joseph A. Orlando, Vice President 46 EXHIBIT I Acquisition Date ---------------- Schedule A - ---------- Cape Craftsmen, Inc. 11/23/83 David B. Lilly Co., Inc. 01/31/84 Schedule B - ---------- Jones Plumbing Systems, Inc. 07/12/84 Schedule C - ---------- Coronet Manufacturing Company, Inc. 04/02/85 Schedule D - ---------- Eastern Home Products, Inc. 08/07/86 Allied International Holdings, Inc. 11/26/86 Gator Industries, Inc. 12/29/86 Wintermute Industries, Inc. 04/07/88 Rally Manufacturing, Inc. 04/18/88 Rockwood Industries Inc. 06/23/88 Sea Gull Lighting, Inc. 11/18/88 Polaris Pool Systems, Inc. 03/08/89 American Safety Razor, Inc. 04/14/89 Custom Chrome, Inc. 08/25/89 Newpac Industries Inc. 03/23/90 Schedule E - ---------- House of Ronnie, Inc. Marisa Christina, Inc. Roanna Togs, Inc. 47 EX-10 4 Exhibit 10.6 DEFERRED COMPENSATION AGREEMENT THIS DEFERRED COMPENSATION AGREEMENT (the "Agreement") is made and entered into on December 8, 1998 by and between LEUCADIA NATIONAL CORPORATION, a New York corporation (the "Company"), and Joseph S. Steinberg (the "Executive"), collectively the parties ("Parties"). WITNESSETH: WHEREAS, Executive is employed by the Company as President; and WHEREAS, in connection with the provision of services to the Company in his capacity as President the Executive desires to defer the receipt of certain compensation from the Company to which in the future he may become entitled, and the Company agrees to do so, in accordance with the terms and provisions herein contained; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, the Parties hereby agree as follows: 1. Deferral of Payments. The Company, commencing January 1, 1999 for the calendar year ending December 31, 1999, shall defer the payment of all compensation to be paid to the Executive by the Company attributable to services performed or to be performed by the Executive for the Company at any time. Each deferred payment shall accrue simple interest (on the basis of a 360-day year), from the first day of the month immediately following the date on which payment otherwise would have been made if no deferral had existed (the "First New Month Date") until the date of actual payment, at a rate of interest equal to the 1-year Treasury bill rate in effect at each First New Month Date, and the rate of interest shall be reset on the first day of each subsequent quarter. For purposes hereof, the quarters for calendar year 1999 shall begin January 1, April 1, July 1, and October 1. All amounts deferred pursuant to this Agreement, including interest, shall be payable to the Executive in calendar year 2000 by no later than March 15th of that year. Notwithstanding the preceding sentence, to the extent that the aggregate deferred payments hereunder (including interest) exceed the maximum annual amount deductible as compensation by the Company under applicable U.S. federal NYFS04...:\30\76830\0198\1651\AGRD018J.41B tax laws, the Company may make such payments in two or more installments in different taxable years to permit the Company to obtain the maximum annual deduction available. The Executive shall fully reimburse the Company for the dollar value of any benefits provided by the Company to the Executive during calendar year 1999 which, in the absence of such reimbursement obligation, would be taxable as compensation to the Executive if made available to him by the Company without such obligation. Such benefits would include, without limitation, the personal use by the Executive of a Company car, Company airplane, life insurance premiums, etc. This reimbursement shall include an interest component equal to the minimum rate permitted to avoid the imposition of any interest under Section 7872 of the Internal Revenue Code of 1986, as amended. Amounts to be reimbursed to the Company under this paragraph shall be paid by Executive upon demand therefor by the Company, which shall be made in 2000 as promptly as practicable following availability of the Company's audited financial statements for the fiscal year ended December 31, 1999. The rights of the Executive to the payment of the amounts pursuant to this Agreement shall be no greater than the rights of an unsecured general creditor of the Company and may not be assigned, pledged or otherwise transferred by him during his lifetime to any person, whether by operation of law or otherwise, and shall not be subject to execution, attachment or similar proceeding. By written notice delivered to the Company, the Executive may designate (or change a prior designation of) one or more beneficiaries (or his estate) to receive payment hereunder in the event of his death. 2. Withholding. The Executive acknowledges and agrees that the Company shall be entitled to withhold from his compensation all federal, state, local or other taxes which the Company determines are required to be withheld on amounts payable to the Executive pursuant to this Agreement or otherwise. The Executive further agrees to indemnify the Company and hold it harmless from and against any and all taxes (and penalties thereon) and interest with respect thereto arising out of the Executive's failure to pay fully his tax liability pursuant to any present or future law, regulation or ordinance of the United States of America or any state, city or municipality therein. 2 3. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 4. Entire Agreement. This Agreement constitutes the entire agreement between the Parties hereto with respect to the subject matter hereof and supersedes all prior agreements, understandings and arrangements, both oral and written, between the Parties hereto with respect to such subject matter. This Agreement may not be modified in any manner, except by a written instrument signed by both the Company and the Executive. 5. Notices. Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given when delivered by hand or facsimile transmission or when deposited in the United States mail by registered or certified mail, return receipt requested, postage prepaid, as follows: If to the Company: Leucadia National Corporation 315 Park Avenue South New York, NY 10010 with a copy to: Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, New York 10153 Attention: Stephen E. Jacobs 3 If to Executive: Joseph S. Steinberg c/o Leucadia National Corporation 315 Park Avenue South New York, New York 10010 or to such other addresses as either the Company or the Executive may from time to time specify to the other. 6. Notice of Termination; Applicability of Agreement. Amounts deferred pursuant to this Agreement shall be paid to the Executive only as provided herein. At any time, by notice in writing from the Executive to the Company, the Executive may terminate this Agreement whereupon any compensation earned by the Executive subsequent to such notification shall not be subject to the provisions hereof. Amounts earned prior to any such notification shall remain subject to the terms hereof even after such termination. 7. Benefit; Binding Effect. This Agreement shall be for the benefit of and binding upon the Parties hereto and their respective heirs, personal representatives, legal representatives, successors and, where applicable, assigns. IN WITNESS WHEREOF, the Parties hereto have executed and delivered this Agreement as of the day and year first above written. LEUCADIA NATIONAL CORPORATION By: /s/ Joseph A. Orlando ----------------------------------- JOSEPH A. ORLANDO /s/ Joseph S. Steinberg ----------------------------------- JOSEPH S. STEINBERG 4 EX-10 5 Exhibit 10.14 ================================================================================ STOCK PURCHASE AGREEMENT by and between LEUCADIA NATIONAL CORPORATION and ALLSTATE LIFE INSURANCE COMPANY Dated as of December 18, 1998 ================================================================================ B3 359475.9 03340 00721 1/5/99 6:48 pm TABLE OF CONTENTS Page 1. DEFINITIONS; INTERPRETATION...........................................1 1.1. Definitions.....................................................1 1.2. Interpretation..................................................8 2. PURCHASE AND SALE OF SHARES...........................................8 2.1. Purchase and Sale of Shares.....................................8 2.2. Consideration...................................................8 2.3. Closing.........................................................8 2.4. Payment of Purchase Price; Delivery of Shares...................9 2.5. Balance Sheets..................................................9 3. CONDITIONS TO CLOSING................................................11 3.1. Conditions Precedent to Obligation of Buyer.....................11 3.1.1. Compliance by Seller...................................11 3.1.2. Compliance Certificate.................................11 3.1.3. No Injunctions or Restraints...........................11 3.1.4. Consents and Approvals.................................11 3.1.5. Opinion of Counsel to Seller...........................12 3.1.6. HSR Act................................................12 3.1.7. Termination of Agreements..............................12 3.1.8. Investment Assets......................................12 3.1.9. Resignation of Officers and Directors..................12 3.1.10. Corporate Action.......................................12 3.1.11. Surplus Debenture......................................12 3.2. Conditions Precedent to Obligation of Seller....................12 3.2.1. Compliance by Buyer....................................12 3.2.2. Compliance Certificate.................................13 3.2.3. No Injunctions or Restraints...........................13 3.2.4. Consents and Approvals.................................13 3.2.5. Opinion of Counsel to Buyer............................13 3.2.6. HSR Act................................................13 3.2.7. Corporate Action.......................................13 4. REPRESENTATIONS AND WARRANTIES OF SELLER.............................14 4.1. Corporate Existence............................................14 4.2. Authorization; Enforcement.....................................14 4.3. Capital Stock of the Company; Ownership of the Company Shares...............................................14 4.4. Subsidiaries; Capital Stock of ILIC; Ownership of ILIC Shares................................................15 4.5. No Conflict....................................................16 4.6. Certificate of Incorporation and By-laws.......................16 4.7. Consents.......................................................17 4.8. Compliance with Law............................................17 4.9. Products.......................................................17 4.10. Litigation....................................................18 4.11. Insurance Licenses............................................18 4.12. Regulatory Filings............................................19 4.13. Contracts.....................................................19 4.14. Finder's Fees.................................................20 4.15. Statutory Statements..........................................20 i 4.16. Assets and Properties.........................................21 4.17. Employee Benefits.............................................21 4.18. No Material Adverse Change....................................21 4.19. Intangible Property...........................................21 4.20. Insurance.....................................................21 4.21. Employees.....................................................22 4.22. Security Deposits.............................................22 4.23. Powers of Attorney; Guarantees; Required Insurance; Agents...........................................22 4.24. Bank Accounts.................................................22 4.25. Disclosure ...................................................22 4.26. Environmental Protection .....................................22 4.27. Guaranty Fund Assessments.....................................23 5. REPRESENTATIONS AND WARRANTIES OF BUYER..............................23 5.1. Corporate Existence............................................23 5.2. Authorization; Enforcement.....................................23 5.3. No Conflict ...................................................23 5.4. Consents.......................................................24 5.5. Litigation.....................................................24 5.6. Finder's Fees .................................................24 5.7. Investment Purpose.............................................25 6. COVENANTS AND AGREEMENTS.............................................25 6.1. Conduct of Business of the Companies...........................25 6.2. Restrictions...................................................25 6.3. Access to Information; Due Diligence; Confidentiality..............................................26 6.4. Acquisition Proposals..........................................27 6.5. Approvals of Governmental Authorities..........................28 6.6. Further Assurances.............................................28 6.7. Notification of Changes........................................28 6.8. Performance of Conditions......................................29 6.9. Publicity......................................................29 6.10. Authority, Bank Accounts, Etc. ...............................29 6.11. Pre-Closing Dividends; Subsidiaries...........................30 6.12. Employee Benefits.............................................30 6.13. Administrative Services.......................................30 7. TAXES................................................................30 7.1. Tax Returns Filed and Taxes Paid by Seller.....................30 7.2. Seller's Non-Foreign Status....................................31 7.3. Post-Closing Access to Books and Records and Cooperation....................................................31 7.4. Liability for Taxes and Related Matters........................32 7.4.1. Seller's Liability for Taxes...........................32 7.4.2. Buyer's Liability for Taxes............................33 7.4.3. Taxes for Short Taxable Year...........................33 7.4.4. Adjustment to Purchase Price...........................34 7.4.5. Pre-Closing Taxes......................................34 7.4.6. Post-Closing Taxes.....................................34 7.4.7. Contest Provisions.....................................35 7.5. Termination of Existing Tax Sharing Agreements.................36 7.6. Section 338(h)(10) Election....................................36 ii 7.7. Survival of Representations, Warranties and Obligations..................................................37 7.8. Transfer Taxes.................................................37 7.9. Continuation of Reinsurance Agreements.........................38 7.10. Indemnification Payments Net of any Tax Benefit..................................................38 8. INDEMNIFICATION......................................................38 8.1. Indemnification by Seller......................................38 8.2. Buyer's Obligation to Indemnify................................40 8.3. Right to Contest Third Party Claims............................41 8.4. Indemnification for Taxes......................................42 8.5. Limitations on Indemnification.................................42 9. TERMINATION..........................................................43 9.1. Termination....................................................43 9.2. Effect of Termination..........................................43 10. SURVIVAL OF REPRESENTATIONS AND WARRANTIES...........................43 11. MISCELLANEOUS........................................................44 11.1. Amendments and Waivers........................................44 11.2. Assignment....................................................44 11.3. Entire Agreement..............................................44 11.4. Governing Law.................................................44 11.5. Enforcement; Jurisdiction.....................................44 11.6. Notices.......................................................45 11.7. Counterparts..................................................45 11.8. Certain Fees and Expenses.....................................45 11.9. No Joint Venture or Partnership Intended......................46 11.10. Severability.................................................46 11.11. No Third Party Beneficiaries.................................46 EXHIBITS Exhibit A - Form of Opinion of Weil, Gotshal & Manges LLP, counsel to Seller Exhibit B - Form of Opinion of Susan L. Lees, counsel to Buyer Exhibit C - Services iii SCHEDULES Schedule 2.2 Allocation of Purchase Price Schedule 4.1 Jurisdictions Schedule 4.9(a) Products Schedule 4.10 Litigation Schedule 4.11(a) Restricted Insurance Licenses Schedule 4.11(b) Lines of Authority Schedule 4.13(a) Scheduled Contracts Schedule 4.13(b) Prior Transactions Schedule 4.13(c) Terminated Contracts Schedule 4.18 Exceptions To No Material Adverse Change Schedule 4.20 Insurance Schedule 4.22 Security Deposits Schedule 4.23 Powers of Attorney; Guarantees Schedule 4.24 Bank Accounts Schedule 6.2 Restrictions Schedule 6.11 Asset Dividend Schedule 7.1 Taxes iv STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT, dated as of December 18, 1998 (this "Agreement"), by and between ALLSTATE LIFE INSURANCE COMPANY, an Illinois insurance company ("Buyer"), and LEUCADIA NATIONAL CORPORATION, a New York corporation ("Seller"). WHEREAS, Seller owns beneficially and of record 110,000 shares of the common stock, par value $31.00 per share (the "Company Shares"), of Charter National Life Insurance Company, a Missouri stock insurance company (the "Company"), constituting all of the issued and outstanding shares of the capital stock of the Company; and WHEREAS, on or prior to the Closing Date (as defined below), the Company will, in turn, own beneficially and of record 6,000 shares of the common stock, par value $7.00 per share (the "Company-Owned ILIC Shares"), of Intramerica Life Insurance Company, a New York stock insurance company ("ILIC"; and together with the Company, the "Companies"), and Seller will, in turn, own beneficially and of record 294,000 shares (the "Seller-Owned ILIC Shares") of the common stock, par value $7.00 per share, of ILIC, which, together with the Company-Owned ILIC Shares, constitute all of the issued and outstanding shares of the capital stock of ILIC (the "ILIC Shares"); and WHEREAS, Buyer desires to purchase from Seller, and Seller desires to sell to Buyer, the Company Shares and the Seller-Owned ILIC Shares (collectively, the "Shares"), on the terms and subject to the conditions set forth herein; NOW, THEREFORE, in consideration of the premises and of the respective representations, warranties, covenants, agreements and conditions contained herein, each of the parties hereto agrees as follows: 1. DEFINITIONS; INTERPRETATION. 1.1. Definitions. The terms defined in this Section 1.1, whenever used in this Agreement, shall have the following meanings for all purposes of this Agreement: "Acquisition Proposal" has the meaning set forth in Section 6.4. "Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "Affiliate" of a specified Person means a Person that (at the time when the determination is to be made) directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the specified Person. As used in the foregoing sentence, the term "control" (including, with correlative meaning, the terms "controlling", "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Allstate NY" means Allstate Life Insurance Company of New York, a New York stock insurance company. "Annual Statement" means, with respect to any Person, the annual statement of such Person prepared in accordance with SAP, as filed with or submitted to the appropriate insurance Governmental Authority in the Person's jurisdiction of domicile on the forms prescribed or permitted by such Governmental Authority. "Asserted Liability" has the meaning set forth in Section 8.1(c). "Asset Dividend" has the meaning set forth in Section 6.11. "Books and Records" means all of the Companies' books and records (including all data and other information stored on discs, tapes or other media) relating to the assets, Properties, business and operations of the Companies' business, including the Insurance Licenses and all such items relating to the Companies' legal existence, stock ownership, corporate management or other such corporate records. "Business Day" means any day that is not a Saturday or a Sunday or a day on which banks in the State of New York are authorized or required by law to close. "Buyer" has the meaning set forth in the first paragraph of this Agreement. "Buyer Indemnitees" has the meaning set forth in Section 8.1(a). "Closing" has the meaning set forth in Section 2.3. "Charter Coinsurance Agreement" means that certain Coinsurance Agreement by and between the Company and Buyer dated as of September 2, 1998. "Charter Reinsurance Agreement" means that certain Reinsurance Agreement by and between the Company and Buyer dated as of September 2, 1998. "Closing Balance Sheets" has the meaning set forth in Section 2.5(a). "Closing Date" has the meaning set forth in Section 2.3. 2 "Code" means the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder. "Companies" has the meaning set forth in the second recital of this Agreement. "Company" has the meaning set forth in the first recital of this Agreement. "Company-Owned ILIC Shares" has the meaning set forth in the second recital of this Agreement. "Contract" means any written or oral agreement, instrument, commitment or other contract. "Election" has the meaning set forth in Section 7.6(a). "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the regulations promulgated thereunder. "Fair Market Value" means (i) in the case of securities (other than Short Term Treasuries) listed on an exchange or in an over-the-counter market, the closing price on such exchange or market (or the average of the closing bid and asked prices if there is no closing price) plus all accrued but unpaid interest on such securities through the last Business Day preceding the Closing Date if such amount is not already reflected in such closing price (or such bid and asked prices) and (ii) in the case of cash, cash equivalents and Short Term Treasuries, the face amount thereof. "Final Balance Sheets" has the meaning set forth in Section 2.5(b). "General Services Agreement" means that certain General Services and Expense Reimbursement Agreement, effective January 1, 1990, between Seller and the Company. "Governmental Authority" means any foreign, federal, state, local or other court, arbitration, administrative agency or commission, insurance or securities regulatory or self-regulatory body or securities or commodities exchange. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "ILIC Coinsurance Agreement" means that certain Coinsurance Agreement by and between ILIC and Allstate NY dated as of September 2, 1998. "ILIC Dividends" has the meaning set forth in Section 6.11. 3 "ILIC Shares" has the meaning set forth in the second recital of this Agreement. "Insurance Licenses" has the meaning set forth in Section 4.11. "Investment Advisory Agreement" means that certain Investment Advisory Services Agreement, dated as of January 1, 1990, between Seller and the Company. "Knowledge" or "Known" means, with respect to any representation or warranty in which such term is contained, to the best knowledge of any officer of the applicable person, after a due and diligent inquiry. "Laws" has the meaning set forth in Section 4.8(a). "Liability" means, with respect to any Person, any direct or indirect indebtedness, liability, claim, loss, damage, deficiency, obligation or responsibility (whether known, unknown, accrued, absolute, contingent, unliquidated or otherwise) and regardless of when such liability or obligation was or is asserted. "Liable Party" has the meaning set forth in Section 7.4.6(d). "Lien" means any lien, encumbrance, pledge, mortgage, security interest, claim, charge, lease, option, right of first refusal, easement, servitude, encumbrance, equity, claim or other third party right (including a right of preemption), restriction or other limitation, in each case of any nature whatsoever. "Losses" has the meaning set forth in Section 8.1(b). "Market Conduct Activities" means the marketing, solicitation, application, underwriting, acceptance, sale, purchase, operation, retention, administration, or replacement by means of surrender, partial surrender, loans respecting, withdrawal and/or termination of any insurance policy or annuity (each, a "policy"), including any or all of the acts, omissions, facts, matters, transactions, occurrences, or any oral or written statements or representations made or allegedly made in connection with or directly or indirectly relating to Market Conduct Activities, including those relating to: (A) the vanishing premium concept; (B) the nature, characteristics, terms, appropriateness, suitability, descriptions and operation of any policy; (C) whether any policy was, would operate or could function as a pension or retirement plan, investment or savings account, tuition-funding or mortgage-protection plan or other type of investment, savings or thrift vehicle; (D) the fact that a part of the premiums paid would not be credited toward an 4 investment or savings account or the policy's cash value, but would be used to offset the insurer's commission, sales, administration or mortality expenses; (E) the use of an existing policy's cash value or cash-surrender value by means of a surrender, withdrawal/partial surrender or loan to purchase or maintain a policy; and (F) the insurer's dividend, interest, crediting and cost of insurance and administrative charge policies; dividend scales, illustrations of dividend values, cash values or death benefits; or any other matters relating to dividends, interest crediting rates or cost of insurance and administrative charges. "Material Adverse Effect" means a material adverse effect on the assets, results of operations, business or condition (financial or otherwise) of the Company or of ILIC. "New York Court" has the meaning set forth in Section 11.5. "1940 Act" has the meaning set forth in Section 4.8(c). "Owned Property" has the meaning set forth in Section 4.26. "Person" means any individual, corporation, limited liability company, partnership, firm, joint venture, association, trust, unincorporated organization, Governmental Authority or other entity. "Plan" means any "employee benefit plan" (as that term is defined in Section 3(3) of ERISA), as well as any other written or unwritten plan or Contract involving direct or indirect compensation, established, maintained or contributed to by the Company or ILIC, or under which the Company or ILIC has any present or future Liability on behalf of its employees or former employees or their dependents or beneficiaries, including each retirement, pension, profit-sharing, thrift, savings, target benefit or employee stock ownership plan, cash or deferred, each other deferred or incentive compensation, bonus, stock option, employee stock purchase, "phantom stock" or stock appreciation right plan, each other program providing payment or reimbursement for or of medical, dental or visual care, psychiatric counseling, or vacation, sick or disability pay and each other "fringe benefit" plan or arrangement. "Preparer" has the meaning set forth in Section 7.4.6(d). "Prior Transactions" has the meaning set forth in Section 4.13(a). "Property" means real, personal or mixed property, tangible or intangible. 5 "Proposed Balance Sheets" has the meaning set forth in Section 2.5(b). "Purchase Agreement" means that certain Purchase Agreement, dated as of February 11, 1998 by and among Buyer, Allstate NY, the Company, ILIC and Seller, as amended by Amendment To Purchase Agreement, dated August 5, 1998, and Second Amendment To Purchase Agreement, dated September 2, 1998. "Purchase Price" has the meaning set forth in Section 2.2. "Quarterly Statement" means, with respect to any Person, the quarterly statement of such Person prepared in accordance with SAP, as filed with or submitted to the appropriate insurance Governmental Authority in such Person's jurisdiction of domicile on the forms prescribed or permitted by such Governmental Authority. "SAP" means, with respect to any Person, the statutory accounting practices prescribed or permitted by the insurance commissioner (or similar authority) of such Person's jurisdiction of domicile, applied on a basis consistent with that of prior years (other than where a lack of consistency results from changes in the statutory accounting practices so prescribed or permitted). "Scheduled Contracts" has the meaning set forth in Section 4.13(a). "Seller" has the meaning set forth in the first paragraph of this Agreement. "Seller Indemnitees" has the meaning set forth in Section 8.2(a). "Seller-Owned ILIC Shares" has the meaning set forth in the second recital of this Agreement. "Seller's Group" shall mean any "affiliated group" (as defined in Section 1504(a) of the Code, without regard to the limitations contained in Section 1504(b) of the Code) that includes Seller or any predecessor of or successor to Seller. "Separate Accounts" means the investment accounts maintained by the Company or ILIC to which funds have been allocated for certain life insurance policies and annuity contracts issued by the Company or ILIC under provisions of applicable state insurance law. "Shares" has the meaning set forth in the third recital of this Agreement. 6 "Short Term Treasuries" means U.S. Treasury obligations having a remaining term to maturity as of the last Business Day preceding the Closing Date of less than 90 days. "Statutory Capital" means (i) capital and surplus determined in accordance with SAP (as reflected in line 38 of the "Liabilities, Surplus and Other Funds" page of the 1997 NAIC Annual Statement Blank) plus (ii) asset valuation reserve (as reflected in line 24.1 of such Annual Statement Blank) plus (iii) interest maintenance reserve (as reflected in line 11.4 of such Annual Statement Blank), in each case adjusted to reflect investment assets held in the general account at their Fair Market Value. Statutory Capital with respect to the Company shall be determined without regard to its ownership of shares of common stock of ILIC. "Statutory Statements" has the meaning set forth in Section 4.15(a). "Subsidiary" means, with respect to any Person, any corporation, limited liability company, limited or general partnership, joint venture, association, joint stock company, trust, unincorporated organization, or other entity analogous to any of the foregoing of which a majority of the equity ownership (whether voting stock or comparable interest) is, at the time, owned, directly or indirectly, by such Person. "Subsidiary Dividend" has the meaning set forth in Section 6.11. "Surplus Debenture" means the surplus debenture, dated July 31, 1992, issued by the Company to Seller in the original principal amount of $25 million, together with all interest accrued thereon. "Tax Allocation Agreements" means (i) that certain Tax Allocation Agreement, dated as of August 16, 1991, among Seller, ILIC and the other parties thereto and (ii) that certain Federal Income Tax Allocation Agreement, dated September 15, 1986, between Seller and the Company. "Tax Returns" shall mean all reports, returns, statements, forms or other documents or information required to be filed with a taxing authority with respect to the Taxes of the Company, ILIC or the Seller's Group including consolidated federal income tax returns of the Seller's Group. "Taxes" means all United States federal, state, county, local, foreign and other taxes (including income taxes, premium taxes, excise taxes, sales taxes, use taxes, gross receipts taxes, franchise taxes, ad valorem taxes, severance taxes, capital levy taxes, transfer taxes, employment and payroll-related taxes, property taxes, import duties and other governmental charges and assessments (other than state guaranty fund assessments)), and includes interest, additions to tax, 7 penalties and reasonable attorneys' fees and accountants' fees and disbursements with respect thereto. "Third Party Accountant" has the meaning set forth in Section 2.5(b). 1.2. Interpretation. When a reference is made in this Agreement to a Section, Article, Schedule or Exhibit, such reference shall be to a Section, Article, Schedule or Exhibit of this Agreement unless otherwise indicated or unless the context shall otherwise require. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. The definitions of terms in this Agreement shall be applicable to both the plural and the singular forms of the terms defined when either such form is used in this Agreement. Whenever the words "include", "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation". The words "hereof", "herein" and "hereunder", and other words of similar import, refer to this Agreement as a whole and not to any particular Article, Section, subsection, paragraph or clause. 2. PURCHASE AND SALE OF SHARES. 2.1. Purchase and Sale of Shares. On the terms and subject to the conditions set forth herein, Seller agrees to sell, transfer and deliver to Buyer, free and clear of all Liens, and Buyer agrees to purchase from Seller, the Shares for the consideration specified in Section 2.2. 2.2. Consideration. As consideration for the purchase of the Shares, Buyer shall pay to Seller an aggregate amount (the "Purchase Price") equal to the sum of (a) $3.575 million plus (b) an amount equal to the aggregate Statutory Capital of the Company and ILIC as of the Business Day immediately preceding the Closing Date. The Purchase Price shall be determined and paid in accordance with the provisions of Sections 2.4 and 2.5. The Purchase Price shall be allocated between the Company Shares and the ILIC Shares in the manner set forth in Schedule 2.2 hereto. 2.3. Closing. The closing of the purchase and sale of the Shares (the "Closing") shall take place at the offices of LeBoeuf, Lamb, Greene & MacRae, L.L.P., 125 West 55th Street, New York, New York, 10019-5389 at 10:00 a.m., New York City time, on the later of (i) April 1, 1999, (ii) if elected by Buyer, April 5, 1999 or (iii) the last day of the month in which the last remaining condition set forth in Article 3 has been satisfied or waived, or at such other place, time or date as the parties may mutually determine in writing. (The actual date the Closing occurs is referred to herein as the "Closing Date".) 8 2.4. Payment of Purchase Price; Delivery of Shares. At the Closing: (a) Buyer shall deliver to Seller, by wire transfer to a bank account designated by Seller, immediately available funds in an amount equal to the Purchase Price; and (b) Seller shall deliver to Buyer (i) a certificate or certificates representing all of the Shares, duly endorsed in blank or accompanied by duly executed instruments of transfer acceptable to Buyer and accompanied by all requisite stock transfer tax stamps, and (ii) the Books and Records. 2.5. Balance Sheets. (a) On the Closing Date, Seller will deliver to Buyer estimated balance sheets of the Company and ILIC as of the Business Day immediately preceding the Closing Date (the "Closing Balance Sheets"), together with a calculation in reasonable detail of the Statutory Capital of the Company and ILIC as of the date of the Closing Balance Sheets and a certification of the chief financial officer of Seller that (i) the Closing Balance Sheets were prepared from and in accordance with the Books and Records and in accordance with SAP and (ii) the general account reserves and separate account liabilities set forth therein (A) were determined in accordance with generally accepted actuarial standards consistently applied, (B) were fairly stated in accordance with sound actuarial principles, (C) were based on actuarial assumptions that were appropriate for obligations of the Company and ILIC, respectively, and (D) met the requirements of SAP. Such certification shall also set forth Seller's calculation of the Statutory Capital of the Company and ILIC as of the date of the Closing Balance Sheets and shall certify that such calculation was made in accordance with the definition of Statutory Capital set forth in Section 1.1. (b) Seller shall, on or before the date that is 45 days after the Closing Date, prepare proposed balance sheets of the Company and ILIC as of the Business Day immediately preceding the Closing Date (the "Proposed Balance Sheets"), in the same format as the Closing Balance Sheets, together with a calculation in reasonable detail of the Statutory Capital of the Company and ILIC as of the date of the Proposed Balance Sheets and a certification of the chief financial officer of Seller to the same effect with respect to the Proposed Balance Sheets and the Statutory Capital of the Company and ILIC as the certification provided by such officer with respect to the Closing Balance Sheets and the Statutory Capital of the Company and ILIC pursuant to Section 2.5(a). Buyer agrees that Seller and its accountants may have access to the Books and Records (including accounting records) for purposes of preparing the Proposed Balance Sheets and calculating the Statutory Capital of the Company and ILIC as of the Business Day immediately preceding the Closing Date. Promptly after their preparation, Seller shall deliver copies of the Proposed Balance Sheets and calculation of the Statutory Capital of the Company and ILIC to Buyer. Buyer 9 shall have the right to review such balance sheets and calculation of the Statutory Capital of the Company and ILIC and comment thereon for a period of 45 days after receipt thereof. Seller agrees that Buyer and its accountants may have access to the accounting records of Seller relating to its preparation of the Proposed Balance Sheets and calculation of the Statutory Capital of the Company and ILIC for the purpose of conducting their review. Any changes in the Proposed Balance Sheets or calculation of the Statutory Capital of the Company and ILIC that are agreed to by Buyer and Seller within 45 days of the aforementioned delivery of such balance sheets by Seller shall be incorporated into final balance sheets of the Companies as of the Business Day immediately preceding the Closing Date (the "Final Balance Sheets") and a final calculation of the Statutory Capital of the Company and ILIC as of the date of the Final Balance Sheets. In the event that Buyer and Seller are unable to agree on the manner in which any item or items should be treated in the preparation of the Final Balance Sheets or calculation of the Statutory Capital of the Company and ILIC within such 45-day period, separate written reports of such item or items shall be made in concise form and shall be referred to Arthur Anderson LLP (the "Third Party Accountant"). The Third Party Accountant shall determine within 14 days the manner in which such item or items shall be treated on the Final Balance Sheets or calculation of the Statutory Capital of the Company and ILIC, as the case may be; provided, however, that the dollar amount of each item in dispute shall be determined between the range of dollar amounts proposed by Seller and Buyer, respectively. The determinations by the Third Party Accountant as to the items in dispute shall be in writing and shall be binding and conclusive on Seller and Buyer and shall be so reflected in the Final Balance Sheets and the calculation of the Statutory Capital of the Company and ILIC. The fees, costs and expenses of retaining the Third Party Accountant shall be allocated by the Third Party Accountant between Seller and Buyer, in accordance with the Third Party Accountant's judgment as to the relative merits of Seller's and Buyer's proposals in respect of the disputed items. Such determination shall be binding and conclusive on Seller and Buyer. Following the resolution of all disputed items, Seller shall prepare the Final Balance Sheets and calculation of the Statutory Capital of the Company and ILIC and shall deliver copies of such balance sheets and such calculation to Buyer. (c) In the event the aggregate amount of the Statutory Capital of the Company and ILIC reflected on the Closing Balance Sheets is less than the amount of the Statutory Capital of the Company and ILIC reflected on the Final Balance Sheets, Buyer shall transfer to Seller additional cash in the amount of such difference, together with interest thereon from and including the Closing Date to but not including the date of such transfer computed at an annual rate equal to the 90-day Treasury rate in effect on the Closing Date. In the event the aggregate amount of the Statutory Capital of the Company and ILIC reflected on the Closing Balance Sheets is more than the amount of the Statutory Capital of the Company and ILIC reflected on the 10 Final Balance Sheets, Seller shall transfer to Buyer cash in the amount of such difference, together with interest thereon computed at the annual rate as specified above from and including the Closing Date to but not including the date of such transfer. Any transfer of cash required under this Section 2.5(c) shall be made within ten Business Days of the date of the delivery of the Final Balance Sheets and calculation of the Statutory Capital of the Company and ILIC to Buyer. 3. CONDITIONS TO CLOSING. 3.1. Conditions Precedent to Obligation of Buyer. The obligation of Buyer to consummate the Closing is subject to satisfaction of the following conditions on or prior to the Closing Date (unless expressly waived in writing by Buyer on or prior to the Closing Date): 3.1.1. Compliance by Seller. All of the terms, covenants and conditions of this Agreement to be complied with and performed by Seller on or prior to the Closing Date shall have been complied with and performed by it in all material respects, and the representations and warranties made by Seller in this Agreement shall be true and correct in all material respects on and as of the Closing Date (except that representations and warranties qualified by the terms "material" or "Material Adverse Effect" shall be true and correct in all respects) with the same force and effect as though such representations and warranties had been made on and as of the Closing Date, except as a result of actions contemplated or permitted by this Agreement and except that any such representations and warranties that are given as of a particular date and relate solely to a particular date or period shall be true and correct as of such date or period. 3.1.2. Compliance Certificate. Seller shall deliver to Buyer a certificate dated as of the Closing Date and signed by an executive officer of Seller certifying that the conditions specified in this Section 3.1 have been fulfilled. 3.1.3. No Injunctions or Restraints. No temporary restraining order, preliminary or permanent injunction or other order issued by any Governmental Authority or other legal restraint or prohibition preventing the consummation of the Closing shall be in effect. 3.1.4. Consents and Approvals. All consents, approvals, authorizations, licenses, permits and orders of, and registrations and filings with, and notices to, any Governmental Authority required to be obtained, made or given prior to the Closing Date in connection with the consummation of the transactions contemplated hereby shall have been duly obtained, made or given and shall be in full force and effect at the Closing, without the imposition of any conditions or limitations other than conditions customarily imposed by 11 insurance regulatory authorities in connection with similar transactions. 3.1.5. Opinion of Counsel to Seller. Buyer shall have received an opinion, dated as of the Closing Date, of Weil, Gotshal & Manges LLP, counsel to Seller, in the form attached hereto as Exhibit A. 3.1.6. HSR Act. The waiting period (and any extensions thereof) applicable to the transactions contemplated hereby under the HSR Act shall have been terminated or shall have otherwise expired. 3.1.7. Termination of Agreements. Seller shall have delivered to Buyer evidence, satisfactory in form and substance to Buyer, that all Contracts listed on Schedule 4.13(c) shall have been terminated as to the Company and/or ILIC, as applicable, and Seller will have caused the Company and ILIC to be fully released from all Liabilities with respect to such Contracts. 3.1.8. Investment Assets. Buyer shall have received the certificate of the chief financial officer of Seller as set forth in Section 2.5(a). 3.1.9. Resignation of Officers and Directors. Buyer shall have received the written resignation of each officer and director of each of the Company and ILIC, effective as of the Closing Date. 3.1.10. Corporate Action. Buyer will have received from Seller a certificate of its Secretary or Assistant Secretary certifying as to (i) the resolutions of the Board of Directors of Seller approving this Agreement and authorizing the consummation of the transactions contemplated hereby and (ii) the incumbency and signatures of the officers of Seller executing this Agreement. 3.1.11. Surplus Debenture. Seller shall have used all commercially reasonable efforts to (i) cause the Company to pay in full to Seller the principal amount of the Surplus Debenture, plus any interest, fees or expenses due or accrued thereon or arising out of such payment or (ii) contribute the Surplus Debenture to the capital of the Company and caused the Company to cancel the Surplus Debenture. 3.2. Conditions Precedent to Obligation of Seller. The obligation of Seller to consummate the Closing is subject to satisfaction of the following conditions on or prior to the Closing Date (unless expressly waived in writing by Seller on or prior to the Closing Date): 3.2.1. Compliance by Buyer. All of the terms, covenants and conditions of this Agreement to be complied with and performed by Buyer on or prior to the Closing Date shall 12 have been complied with and performed by it in all material respects, and the representations and warranties made by Buyer in this Agreement shall be true and correct in all material respects on and as of the Closing Date (except that representations and warranties qualified by the terms "material" or "material adverse effect" shall be true and correct in all respects) with the same force and effect as though such representations and warranties had been made on and as of the Closing Date, except as a result of actions contemplated or permitted by this Agreement and except that any such representations and warranties that are given as of a particular date and relate solely to a particular date or period shall be true and correct as of such date or period. 3.2.2. Compliance Certificate. Buyer shall deliver to Seller a certificate dated as of the Closing Date and signed by an executive officer of Buyer certifying that the conditions specified in this Section 3.2 have been fulfilled. 3.2.3. No Injunctions or Restraints. No temporary restraining order, preliminary or permanent injunction or other order issued by any Governmental Authority or other legal restraint or prohibition preventing the consummation of the Closing shall be in effect. 3.2.4. Consents and Approvals. All consents, approvals, authorizations, licenses, permits and orders of, and registrations and filings with, and notices to, any Governmental Authority required to be obtained, made or given prior to the Closing Date in connection with the consummation of the transactions contemplated hereby shall have been duly obtained, made or given and shall be in full force and effect at the Closing, without the imposition of any conditions or limitations other than conditions customarily imposed by insurance regulatory authorities in connection with similar transactions. 3.2.5. Opinion of Counsel to Buyer. Seller shall have received the opinion, dated as of the Closing Date, of Susan L. Lees, counsel to Buyer, in the form attached hereto as Exhibit B. 3.2.6. HSR Act. The waiting period (and any extension thereof) applicable to the transactions contemplated hereby under the HSR Act shall have been terminated or shall have otherwise expired. 3.2.7. Corporate Action. Seller will have received from Buyer a certificate of its Secretary or Assistant Secretary certifying as to (i) the resolutions of the Board of Directors of Buyer approving this Agreement and authorizing the consummation of the transactions contemplated hereby and (ii) the incumbency and signatures of the officers of Buyer executing this Agreement. 13 4. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller hereby represents and warrants to Buyer as follows: 4.1. Corporate Existence. Each of Seller, the Company and ILIC is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is organized. Each of the Company and ILIC has full power and authority to own, lease and operate its assets and Properties and to conduct its business as now being conducted. Except as otherwise disclosed on Schedule 4.1, each of the Company and ILIC is licensed to transact business and is in good standing in each of the respective jurisdictions listed on Schedule 4.1. 4.2. Authorization; Enforcement. Seller has the full corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder. Seller has taken all necessary corporate action to duly and validly authorize its execution and delivery of this Agreement and the consummation of the transactions contemplated hereby. This Agreement has been duly executed and delivered by Seller. This Agreement, assuming due execution and delivery by Buyer, constitutes a valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, except to the extent enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar Laws affecting creditors' rights in general and subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 4.3. Capital Stock of the Company; Ownership of the Company Shares. (a) The authorized capital stock of the Company consists of 110,000 shares of common stock, par value $31.00 per share, of which 110,000 are issued and outstanding and constitute the Company Shares. All of the Company Shares have been duly authorized and validly issued, are fully paid and non-assessable. The Company Shares have not been issued in violation of, and none of the Company Shares is subject to, any preemptive or subscription rights, right of first refusal or any other right of any Person. Except as set forth above and except for the Surplus Debenture, there are no shares of capital stock or other securities of the Company outstanding. There are no outstanding warrants, options, Contracts, convertible or exchangeable securities or other commitments (other than this Agreement) pursuant to which Seller or the Company is or may be obligated to issue, sell, purchase, return or redeem any shares of capital stock or other securities of the Company, and there are no equity securities of the Company reserved for issuance for any purpose. (b) Seller is the record and beneficial owner of the Company Shares, free and clear of any Liens (other than restrictions imposed by applicable Laws with respect to the offering, distribution, acquisition and disposition of securities 14 generally and of securities of insurance companies in particular). Upon consummation of the transactions contemplated by this Agreement, Buyer will acquire record and beneficial ownership of the Company Shares, free and clear of any Liens (other than Liens created by, or permitted to be created by, Buyer, and other than restrictions imposed by applicable Laws with respect to the offering, distribution, acquisition and disposition of securities generally and of securities of insurance companies in particular). Other than this Agreement, the Company Shares are not subject to any voting trust agreement or other contract, agreement, arrangement, commitment or understanding, including any such agreement, arrangement, commitment or understanding restricting or otherwise relating to the voting, dividend rights or disposition of the Company Shares. 4.4. Subsidiaries; Capital Stock of ILIC; Ownership of ILIC Shares. (a) As of the Closing Date, the Company will not directly or indirectly own of record or beneficially any capital stock of or other equity interest in any Person, other than the Company-Owned ILIC Shares. ILIC does not have any Subsidiaries and, as of the Closing Date, will not directly or indirectly own of record or beneficially any capital stock of or other equity interest in any Person. (b) The authorized capital stock of ILIC consists of 300,000 shares of common stock, par value $7.00 per share, of which 300,000 are issued and outstanding and constitute the ILIC Shares. All outstanding shares of capital stock of ILIC have been duly authorized and validly issued, are fully paid and non-assessable. The ILIC Shares have not been issued in violation of, and none of the ILIC Shares is subject to, any preemptive or subscription rights, right of first refusal or any other right of any Person. Except as set forth above, there are no shares of capital stock or other securities of ILIC outstanding. There are no outstanding warrants, options, Contracts, convertible or exchangeable securities or other commitments (other than this Agreement) pursuant to which Seller, the Company or ILIC is or may be obligated to issue, sell, purchase, return or redeem any shares of capital stock or other securities of ILIC, and there are no equity securities of ILIC reserved for issuance for any Person. (c) Seller is the record and beneficial owner of the Seller-Owned ILIC Shares, and Seller is the beneficial owner (by virtue of its ownership of the Company) of the Company-Owned ILIC Shares, in each case free and clear of any Liens (other than restrictions imposed by applicable Laws with respect to the offering, distribution, acquisition and disposition of securities generally and voting or equity securities of insurance companies in particular). The Company is the record owner of the Company-Owned ILIC Shares, free and clear of any Liens (other than restrictions imposed by applicable Laws with respect to the offering, distribution, acquisition and disposition or securities generally and voting or equity securities of insurance companies in particular). Upon consummation of the transactions 15 contemplated by this Agreement, Buyer will acquire record and beneficial ownership of the Seller-Owned ILIC Shares, and beneficial ownership (by virtue of its ownership of the Company) of the Company-Owned ILIC Shares, free and clear of any Liens (other than Liens created by, or permitted to be created by, Buyer, and other than restrictions imposed by applicable Laws with respect to the offering, distribution, acquisition and disposition of securities generally and of securities of insurance companies in particular). Other than this Agreement, the ILIC Shares are not subject to any voting trust agreement or other contract, agreement, arrangement, commitment or understanding restricting or otherwise relating to the voting, dividend rights or disposition of the ILIC Shares. 4.5. No Conflict. Neither the execution, delivery and performance by Seller of this Agreement nor the consummation of the transactions contemplated hereby will: (i) violate any provision of the certificate of incorporation, by-laws or other charter or organizational document of Seller, the Company or ILIC; (ii) violate, conflict with or result in the breach of any of the terms of, result in any modification of the effect of, otherwise give any other contracting party the right to terminate, or constitute (or with notice or lapse of time or both constitute) a default under, any Contract to which Seller, the Company or ILIC is a party or by or to which either of them or their assets or Properties may be bound or subject, except for such violations, conflicts or breaches that individually or in the aggregate do not have and could not reasonably be expected to have a Material Adverse Effect; (iii) violate any order, judgment, injunction, award or decree of any Governmental Authority against, or binding upon, or any Contract with, or condition imposed by, any Governmental Authority binding upon, Seller, the Company or ILIC, or upon the business, Properties or assets of Seller, the Company or ILIC, except for such violations that individually or in the aggregate do not have and could not reasonably be expected to have a Material Adverse Effect; (iv) subject to making the filings and obtaining the consents contemplated by Section 4.7, violate any statute, law or regulation of any jurisdiction as such statute, law or regulation relates to Seller, the Company or ILIC, or to the business, Properties or assets of Seller, the Company or ILIC, except for such violations that individually or in the aggregate do not have and could not reasonably be expected to have a Material Adverse Effect; or (v) except for this Agreement, result in the creation or imposition of any Lien on any of the Properties or assets of Seller, the Company or ILIC. 4.6. Certificate of Incorporation and By-laws. Seller has delivered to Buyer true, complete and correct copies of the certificate of incorporation or charter, as applicable, and the by-laws of each of the Company and ILIC and all amendments thereof. The minute books of each of the Company and ILIC accurately reflect in all material respects all resolutions adopted at all meetings (and consents in lieu of meetings) of its shareholders and all resolutions adopted at all meetings (and 16 consents in lieu of meetings) of its Board of Directors and all committees of its Board of Directors. 4.7. Consents. No consent, license, approval, order or authorization of, or registration, declaration or filing with, any third party, including any Governmental Authority, is required to be obtained, made or given by or with respect to Seller, the Company or ILIC in connection with the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby other than (i) those required under the insurance laws of the States of New York and Missouri and under the HSR Act, (ii) placement of appropriate disclosure stickers on product prospectuses relating to this Agreement and the transactions contemplated hereby, (iii) compliance with the relicensing requirements of various jurisdictions in which the Company and ILIC are licensed to transact business, and (iv) those required or appropriate in connection with the election contemplated under Section 7.6. 4.8. Compliance with Law. (a) Each of the Company and ILIC has complied in all material respects with, and is now complying in all material respects with, all foreign, federal, state and local statutes, laws, regulations, ordinances, judgments, injunctions, orders, licenses, approvals, permits and other requirements (collectively, "Laws") applicable to the Company or ILIC, as the case may be, or its business, Properties or assets, except for such failures to so comply that individually or in the aggregate do not have and could not reasonably be expected to have a Material Adverse Effect. (b) The Separate Accounts have been duly established by all necessary corporate action of the Company and ILIC, as applicable, under the laws of the respective state of domicile of the Company and ILIC. (c) Each of the Separate Accounts is registered as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), or is exempt from the registration requirements of the 1940 Act. The operations of the registered Separate Accounts are in material compliance with the 1940 Act and all applicable regulations, rules, releases and orders of the SEC. All registration forms, amendments, reports and filings required to be made by the Separate Accounts have been timely filed and are accurate in all material respects. 4.9. Products. (a) Except for those contracts listed on Schedule 4.9(a), all life insurance contracts issued or assumed by the Company or ILIC which are subject to Sections 101 or 7702 of the Code qualify (and have qualified since issuance) as "life insurance contracts" within the meaning of Section 101 or 7702 of the Code and have been administered in accordance with Sections 101 and 7702 of the Code, as applicable, except for any failures to so qualify or administer that individually or in the aggregate do not have and could not reasonably be expected to have a Material Adverse Effect. Except for those contracts 17 listed on Schedule 4.9(a), no life insurance contract issued or assumed by any of the Company or ILIC is a "modified endowment contract" within the meaning of Section 7702A of the Code, except for those life insurance contracts that qualify and are administered as modified endowment contracts and with respect to which the policyholder acknowledged and agreed, before the date of issuance of such contract (or if any such contract became a modified endowment contract upon conversion subsequent to the date of issuance, before the date of such conversion), to such qualification and administration, and except for any such characterizations as a "modified endowment contract" that individually or in the aggregate do not have and could not reasonably be expected to have a Material Adverse Effect. (b) All annuity contracts issued or assumed by the Company or ILIC that are subject to Section 72 of the Code contain all of the necessary provisions of Section 72 of the Code, and all annuity contracts that are represented as qualifying under Sections 130, 401, 403, 408 or 457 of the Code contain (and have contained since issuance) all provisions required for qualification under such sections of the Code, except, in either such case, for any failures to contain all such provisions that individually or in the aggregate do not have and could not reasonably be expected to have a Material Adverse Effect. (c) All contracts issued or assumed by the Company or ILIC that are subject to Section 817 of the Code have met the diversification requirements applicable thereto since issuance. The issuer of each such contract is treated, for federal Tax purposes, as the owner of the assets underlying such contract. (d) The Company and ILIC have each complied with all of the reporting and withholding requirements provided in Sections 3405 and 6047 of the Code. 4.10. Litigation. Except as disclosed on Schedule 4.10, there are no actions, suits, proceedings, claims or legal, administrative or arbitration proceedings or investigations pending or, to the Knowledge of Seller, threatened (i) against or involving the Company or ILIC or its business, Properties or assets (other than insurance claims arising in the ordinary course of business with respect to policies and annuity contracts issued by the Company or ILIC) or (ii) which question the validity of this Agreement or any action taken by Seller, the Company or ILIC pursuant to this Agreement or the transactions contemplated hereby. 4.11. Insurance Licenses. Seller has made available to Buyer true, complete and correct copies of all insurance licenses issued to the Company or ILIC from each jurisdiction set forth on Schedule 4.1 in which each of the Company and ILIC is licensed (collectively, the "Insurance Licenses"). Except as set forth on Schedule 4.11(a), to the 18 Knowledge of Seller, no event has occurred that, with or without notice or lapse of time or both, could reasonably be expected to result in the revocation, suspension, lapse or limitation of any of such Insurance Licenses. Neither the Company nor ILIC has transacted any insurance business in any jurisdiction requiring an insurance license therefor in which it did not possess such an insurance license, other than those that the failure to own or hold individually or in the aggregate with other such failures do not have and cannot reasonably be expected to have a Material Adverse Effect. Schedule 4.11(b) sets forth a true, correct and complete list of the lines of insurance which each of the Company and ILIC is authorized to write in each of the respective jurisdictions set forth on Schedule 4.1. 4.12. Regulatory Filings. Each of the Company and ILIC has filed all reports, data, registrations, filings, other information and applications required to be filed with or otherwise provided to Governmental Authorities with jurisdiction over the Company or ILIC, as the case may be, or its business, Properties or assets, in each case except such failures to file that individually or in the aggregate do not have and could not reasonably be expected to have a Material Adverse Effect, and all required regulatory approvals in respect thereof are in full force and effect in all material respects. All such regulatory filings were in compliance in all material respects with applicable Laws, and no material deficiencies have been asserted by any such Governmental Authority with respect to such regulatory filings that have not been satisfied. 4.13. Contracts. (a) Schedule 4.13(a) sets forth a true, complete and correct list of each Contract (collectively, the "Scheduled Contracts") to which the Company or ILIC is a party or by which either is bound that is currently in effect or is not otherwise terminable without penalty or payment on not more than 30 days notice (other than direct insurance policies written by the Company or ILIC in the ordinary course of business), including all Contracts relating to: reinsurance or loss portfolio transfers; transactions between Affiliates; managing general agents; agents and brokers; borrowing of money; purchase of materials; supplies, equipment, products or services; the use of trademarks, trade names or copyrights; distribution of insurance products; or leases (capital or otherwise). The Scheduled Contracts which consist of transactions under which the Company or ILIC previously sold Subsidiaries or blocks of its business and under which the Company or ILIC retains responsibilities, obligations and/or potential liability are set forth on Schedule 4.13(b) (the "Prior Transactions"). The Scheduled Contracts which Seller and Buyer have agreed will be terminated as to the Company and/or ILIC, as applicable, as of the Closing Date are set forth on Schedule 4.13(c). (b) With respect to either the Company's or ILIC's performance of its obligations under the Scheduled Contracts, no event of default or non-compliance, or event which with the passage of time, giving of notice or both, would 19 constitute such an event of default or non-compliance, has occurred or is continuing under any such Scheduled Contract. With respect to the performance by any other party of its obligations under the Scheduled Contracts, to the Knowledge of Seller, no event of default or non-compliance, or event which with the passage of time, giving of notice or both, would constitute such an event of default or non-compliance, has occurred or is continuing under any such Scheduled Contract. 4.14. Finder's Fees. No broker or finder has acted directly or indirectly for Seller or any of its Affiliates in connection with this Agreement or the transactions contemplated hereby, nor has Seller or any of its Affiliates taken any action in connection with this Agreement or the transactions contemplated hereby so as to give rise to any valid claim against Buyer, the Company or ILIC for any broker's or finder's fee or other commission or compensation. 4.15. Statutory Statements. (a) Seller has delivered to Buyer true, correct and complete copies of (i) the Annual Statements of the Company as filed with the Missouri Insurance Department for the years ended December 31, 1995, 1996 and 1997, (ii) the Quarterly Statement of the Company as filed with the Missouri Insurance Department for the quarterly period ended September 30, 1998, (iii) the Annual Statements of ILIC as filed with the New York Insurance Department for the years ended December 31, 1995, 1996 and 1997, and (iv) the Quarterly Statement of ILIC as filed with the New York Insurance Department for the quarterly period ended September 30, 1998, in each case including all exhibits, interrogatories, schedules and any actuarial opinions, affirmations or certifications or other supporting documents filed in connection therewith (collectively, the "Statutory Statements"). The Statutory Statements were prepared in conformity with SAP prescribed or permitted by the Missouri Insurance Department with respect to the Statutory Statements of the Company and the New York Insurance Department with respect to the Statutory Statements of ILIC, and present fairly the respective statutory financial positions of the Company and ILIC as at the respective dates thereof and the respective results of operations of the Company and ILIC for the respective periods then ended. The Statutory Statements complied in all material respects with all applicable laws, rules and regulations when filed, and no material deficiency has been asserted with respect to any Statutory Statements by any Governmental Authority. (b) The amounts shown in the Statutory Statements as reserves and liabilities for past and future insurance policy and annuity benefits, losses, claims and expenses under insurance policies and annuities as of the end of each such year were determined in accordance with generally accepted actuarial standards consistently applied, were fairly stated in accordance with sound actuarial principles, were based on actuarial assumptions that were appropriate for obligations of the Company and ILIC, respectively, and met the requirements of SAP. 20 4.16. Assets and Properties. Except for securities deposited by the Company or ILIC with Governmental Authorities as set forth on Schedule 4.22, each of the Company and ILIC has good and marketable title to all assets and Properties that it purports to own, free of any Liens, other than restrictions imposed by applicable Laws with respect to the offering, distribution, acquisition and disposition of securities generally and of securities of insurance companies in particular. 4.17. Employee Benefits. As of the Closing Date, to the Knowledge of Seller, neither the Company nor ILIC will have any Liabilities under any Plan, ERISA or the minimum funding requirements of the Code which have not been assumed by Seller. 4.18. No Material Adverse Change. Except as set forth on Schedule 4.18, except as the result of transactions with Buyer and its Subsidiaries and except for changes in general economic conditions, changes in prevailing interest rates and changes in applicable law, since June 30, 1998, there has been (a) no change, or development involving a prospective change, in the general affairs, management, shareholders' equity, assets, Liabilities Known to Seller, Properties, business, operations, condition (financial or otherwise) or results of operations of either the Company or ILIC, that has resulted in or may reasonably be expected to result in, either alone or in conjunction with all other such changes and developments, a Material Adverse Effect, other than those resulting from matters relating to or contemplated under this Agreement, (b) no material change in the manner in which the business of the Company or ILIC is conducted other than those resulting from matters relating to or contemplated under this Agreement and (c) no event of the type prohibited by Section 6.2. 4.19. Intangible Property. Neither the Company nor ILIC has received written notice that it is infringing (or is alleged to be infringing) on any trademark, trade name registration, copyright or any application pending therefor. 4.20. Insurance. Schedule 4.20 sets forth a true, correct and complete list and brief description (specifying the insurer, describing each pending claim thereunder affecting or involving the Company or ILIC as the insured party, setting forth the aggregate amounts paid out with respect to such claims under each such policy through the date hereof, and the aggregate limit, if any, of the insurer's liability thereunder) of all policies or binders of errors and omissions, theft, life, fidelity, fire, liability, products liability, workers' compensation, vehicular and other insurance held by or on behalf of, or issued to, the Company or ILIC. All of such policies and binders are, to Seller's Knowledge, in full force and effect; there are no overdue premiums thereon; and neither the Company nor ILIC has received any notice of any proposed cancellation or non-renewal of any such policy or binder; provided, however, that, effective as of the Closing Date, Seller intends to remove 21 the Companies from future coverage under all insurance policies issued to Seller. 4.21. Employees. As of the Closing Date, to the Knowledge of Seller, neither the Company nor ILIC will have any employees or any Liabilities with respect to any former employees which have not been assumed by Seller. 4.22. Security Deposits. Schedule 4.22 sets forth a true, correct and complete list of all securities deposited by each of the Company and ILIC with Governmental Authorities as of the date hereof. 4.23. Powers of Attorney; Guarantees; Required Insurance; Agents. Except as set forth on Schedule 4.23, neither the Company nor ILIC has any outstanding powers of attorney or any Liability Known to Seller as guarantor, surety, cosigner or endorser (other than for purposes of collection in the ordinary course of business of the Company or ILIC). Neither the Company nor ILIC is obligated to maintain insurance for the benefit of any Person, including its customers, other than in the ordinary course of its insurance business. Except with respect to CNL, Inc., Scudder Fund Distributors, Inc. and Scudder Variable Life Investment Fund and authorized agents of such entities, as of the Closing Date, the Company and ILIC will have each cancelled all Contracts with, and otherwise withdrawn the authority of, all brokers or agents previously appointed by it. 4.24. Bank Accounts. Schedule 4.24 sets forth a true, correct and complete list of bank accounts and investment accounts maintained by each of the Company and ILIC, including the name of each bank or other institution, account numbers and a list of signatories to such account. 4.25. Disclosure. Neither the representations or warranties made by Seller in this Agreement nor any certificate or other document furnished by or on behalf of Seller to Buyer pursuant hereto contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances in which they were made. 4.26. Environmental Protection. To the Knowledge of Seller, the Company or ILIC, neither Seller, the Company or ILIC, nor any prior owners or occupants, has disposed of hazardous waste (as that term is defined under the environmental protection laws and regulations of all applicable federal, state and local authorities) on, or failed to remove hazardous waste from, nor is there any hazardous waste of any kind present on or under the surface of, any real property currently or previously owned by the Company or ILIC (the "Owned Property") in violation of any applicable environmental law. To the Knowledge of Seller, the Company or ILIC, the Owned Property and its use complies in all material respects and has complied in all material respects with all applicable Environmental Protection Agency, Occupational 22 Safety and Health Administration and all other federal, state and local laws and administrative rules and regulations governing the soil, water and air in or around the Owned Property. To the Knowledge of Seller, the Company or ILIC, there is no pending or threatened enforcement action, administrative order or proceeding, nor is there any notice, violation or investigation, relating to such laws, ordinances, rules or regulations concerning the Company, ILIC or the Owned Property, or any portion thereof, or concerning the Owned Property and any previous owner of any portions thereof, nor has any event occurred or is any event occurring which could give rise to any such action, order, proceeding, violation or investigation. 4.27. Guaranty Fund Assessments. The Company and ILIC have each (i) timely paid all guaranty fund assessments that are due, or claimed or asserted by any insurance regulatory authority to be due from it, or (ii) provided for all such assessments in its financial statements to the extent necessary to be in conformity with SAP. 5. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer hereby represents and warrants to Seller as follows: 5.1. Corporate Existence. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Illinois. 5.2. Authorization; Enforcement. Buyer has the full corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder. Buyer has taken all necessary corporate action to duly and validly authorize its execution and delivery of this Agreement and the consummation of the transactions contemplated hereby. This Agreement has been duly executed and delivered by Buyer. This Agreement, assuming due execution and delivery by Seller, constitutes a valid and binding obligation of Buyer, enforceable against Buyer in accordance with its terms, except to the extent enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar Laws affecting creditors' rights in general and subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 5.3. No Conflict. Neither the execution, delivery and performance by Buyer of this Agreement nor the consummation of the transactions contemplated hereby will: (i) violate any provision of the charter or by-laws of Buyer; (ii) violate, conflict with or result in the breach of any of the terms of, result in any modification of the effect of, otherwise give any other contracting party the right to terminate, or constitute (or with notice or lapse of time or both constitute) a default under, any Contract to which Buyer is a party or by or to which it or its assets or Properties may be bound or subject 23 except for such violations, conflicts or breaches that individually or in the aggregate do not have and could not reasonably be expected to have a material adverse effect on the validity or enforceability of this Agreement or on the ability of Buyer to perform its obligations under this Agreement in a timely manner; (iii) violate any order, judgment, injunction, award or decree of any Governmental Authority against, or binding upon, or any Contract with, or condition imposed by, any Governmental Authority binding upon, Buyer, or upon the business, Properties or assets of Buyer except for such violations that individually or in the aggregate do not have and could not reasonably be expected to have a material adverse effect on the validity or enforceability of this Agreement or on the ability of Buyer to perform its obligations under this Agreement in a timely manner; or (iv) subject to making the filings and obtaining the consents contemplated by Section 4.7, violate any statute, law or regulation of any jurisdiction as such statute, law or regulation relates to Buyer, or to the business, Properties or assets of Buyer except for such violations that individually or in the aggregate do not have and could not reasonably be expected to have a material adverse effect on the validity or enforceability of this Agreement or on the ability of Buyer to perform its obligations under this Agreement in a timely manner. 5.4. Consents. No consent, license, approval, order or authorization of, or registration, declaration or filing with, any third party, including any Governmental Authority, is required to be obtained, made or given by or with respect to Buyer in connection with the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby other than (i) those required under the insurance laws of the States of New York and Missouri and under the HSR Act, (ii) placement of appropriate disclosure stickers on product prospectuses relating to this Agreement and the transactions contemplated hereby, (iii) compliance with the relicensing requirements of various jurisdictions in which the Company and ILIC are licensed to transact business, and (iv) those required or appropriate in connection with the election contemplated under Section 7.6. 5.5. Litigation. There are no actions, suits, proceedings, claims or legal, administrative or arbitration proceedings or investigations pending or, to the Knowledge of Buyer, threatened which question the validity of this Agreement or any action taken by Buyer pursuant to this Agreement or the transactions contemplated hereby. 5.6. Finder's Fees. No broker or finder has acted directly or indirectly for Buyer or any of its Affiliates in connection with this Agreement or the transactions contemplated hereby, nor has Buyer or any of its Affiliates taken any action in connection with this Agreement or the transactions contemplated hereby so as to give rise to any valid claim against Seller for any broker's or finder's fee or other commission or compensation. 24 5.7. Investment Purpose. Buyer is buying the Shares for investment only and not with a view to resale in connection with any distribution of any of the Shares except in compliance with the Act and all other applicable securities laws. Buyer understands that the Shares have not been registered under the Act or under the securities laws of any state and that the Shares may not be sold, transferred, offered for sale, pledged, hypothecated or otherwise disposed of in the absence of an effective registration under the Act except pursuant to a valid exemption from such registration. 6. COVENANTS AND AGREEMENTS. 6.1. Conduct of Business of the Companies. Except as otherwise contemplated by this Agreement or specifically consented to in writing by Buyer, from the date of this Agreement through the Closing Date, Seller shall cause the Companies to (i) conduct their business only in the ordinary course consistent with past practices, (ii) maintain insurance coverages, (iii) comply in all material respects with all applicable Laws, (iv) preserve and maintain in full force and effect the Insurance Licenses and (v) perform in all material respects their obligations under all Contracts to which either is a party or by which either is bound. 6.2. Restrictions. (a) Except as otherwise contemplated by this Agreement, set forth on Schedule 6.2 or specifically consented to in writing by Buyer, from the date of this Agreement through the Closing Date, Seller shall not permit either the Company or ILIC to: (i) amend its certificate of incorporation or charter, as applicable, or by-laws; (ii) declare or pay any dividend, make any other distributions to its shareholder(s) whether or not upon or in respect of any shares of its capital stock or make any expenditure, unless such declaration, payment or making would be permitted under applicable insurance Laws to be declared, paid or made without the approval of the Insurance Department of the State of Missouri (with respect to the Company) or New York (with respect to ILIC) (in either case, a "State Regulator") as the case may be, or, if such approval of such State Regulator is required by applicable insurance Laws, unless such approval is obtained, provided, however, that no such declaration, payment or making that would individually or in the aggregate reduce the statutory capital and surplus of the Company below $10,000,000 or of ILIC below $10,000,000 is permitted irrespective of any approval of such State Regulator. (iii) redeem or otherwise acquire any shares of its capital stock or issue any capital stock or any option, warrant or right relating thereto or any securities 25 convertible into or exchangeable for any shares of capital stock; (iv) incur or assume any Liability for borrowed money or guarantee any such Liability; (v) subject to any Lien any of its Properties or assets; (vi) except for dividends and distributions permitted by Sections 6.2(a)(ii) and 6.11 and normal intercompany payments relating to Taxes and other operating expenses paid by Seller on either the Company's or ILIC's behalf (including pursuant to the General Services Agreement, the Investment Advisory Agreement and the Tax Allocation Agreements), pay, lend or advance any amount to, or sell, transfer or lease any of its Properties or assets to, or enter into any agreement or arrangement with, Seller or any of its Affiliates; (vii) make any change in any method of accounting or accounting practice or policy other than those required by SAP; (viii) acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of, or by any other manner, any Person or division thereof or otherwise acquire or agree to acquire any assets that are material individually or in the aggregate to the Company or ILIC; (ix) except for dividends and distributions permitted by Sections 6.2(a)(ii) and 6.11, sell, lease or otherwise dispose of, or agree to sell, lease or otherwise dispose of, any of its Properties or assets that are material, individually or in the aggregate, to the Company or ILIC, except in the ordinary course of business consistent with past practice; (x) enter into any lease of Property; (xi) issue any new insurance policies or appoint any insurance agents or managing general agents; or (xii) agree, whether in writing or otherwise, to do any of the foregoing. (b) Except as specifically consented to in writing by Buyer, Seller shall not, and shall not permit the Company or ILIC to, take any action or omit to take any action that would result in a breach of any representation or warranty of Seller contained in this Agreement. 6.3. Access to Information; Due Diligence; Confidentiality. Prior to the Closing Date, Buyer shall be 26 entitled, through its employees, agents and representatives, to make such reasonable investigation of the assets, liabilities, financial condition, Properties, business and operations of the Company and ILIC as Buyer may reasonably deem necessary or appropriate, and for such purposes to have access to the Books and Records and Contracts and facilities of the Company and ILIC, and access to the personnel of the Company, ILIC and Seller with respect to the Company and ILIC, including an examination of the corporate records and minute books, financial statements and projections, insurance department filings, reports and examinations, summaries of pending litigation, tax returns, accounting and actuarial methods, business plans and prospects, in each case wherever located, of the Company and ILIC. Any such investigation, access and examination shall be conducted during regular business hours upon reasonable prior notice and under other reasonable circumstances, and Seller, the Company and ILIC and their respective employees, agents and representatives, including their respective counsel and independent public accountants, shall cooperate fully with such employees and representatives in connection with such investigation, access and examination. Buyer shall hold such documents and other material, including information concerning Seller, in confidence in accordance with the terms and conditions of the Confidentiality Agreement by and between the Company and Buyer dated November 12, 1997, as amended as of November 12, 1998 (the "Confidentiality Agreement"). Buyer shall hold all documents and other material and information described in this Section 6.3 relating to Seller's tax positions, information, analyses, returns, filings, and similar matters in confidence in accordance with the terms and conditions of the Confidentiality Agreement without regard to the term of such agreement. 6.4. Acquisition Proposals. From the date hereof through the Closing Date, Seller shall not and shall not permit any of its Affiliates or any of the officers, directors, employees, representatives or agents of Seller or such Affiliates, directly or indirectly, to solicit, initiate or participate in any way in discussions or negotiations with, or provide any information or assistance to, or enter into any agreement with, any Person or group of Persons (other than Buyer) concerning any acquisition of a substantial equity interest in, or in a merger, consolidation, liquidation, dissolution, disposition of assets (other than in the ordinary course of business) of the Company or ILIC, or any disposition of any of the securities of the Company or ILIC (other than sales of investment securities in its investment portfolio and other than the dividend by the Company of stock of LUK-CPG, Inc. and its Subsidiaries to Seller to be consummated on or prior to the Closing Date) (each, an "Acquisition Proposal"), or assist or participate in, facilitate or encourage any effort or attempt by any other Person to do or seek to do any of the foregoing. Notwithstanding the foregoing, an "Acquisition Proposal" shall not include the direct or indirect solicitation, initiation or participation by Seller, its Affiliates, or any of the officers, directors, employees, representatives or agents of Seller or such 27 Affiliates, in any way in discussions or negotiations with, or providing any information or assistance to, or entering into any agreement with, any Person or group of Persons concerning any acquisition of a substantial equity interest in, or in a merger, consolidation, liquidation, dissolution, disposition of assets of Seller or any of Seller's Affiliates (other than the Company or ILIC), or any disposition of any of the securities of Seller or any of Seller's Affiliates (other than the Company or ILIC). Seller shall promptly communicate to Buyer the terms of any Acquisition Proposal which it or any such other Person may receive. 6.5. Approvals of Governmental Authorities. (a) Buyer shall take, and shall cause its Affiliates to take, all reasonable steps necessary or appropriate, and shall use, and shall cause its Affiliates to use, all commercially reasonable efforts, to obtain as promptly as practicable all consents, approvals, authorizations, licenses and orders of Governmental Authorities (including termination of the waiting period under the HSR Act and any extension thereof) required to be obtained by Buyer or any of its Affiliates in connection with the consummation of the transactions contemplated by this Agreement. Without limiting the generality of the foregoing, Buyer shall use all commercially reasonable efforts to promptly (but in no event later than January 31, 1999) make all insurance regulatory filings necessary to obtain approval of the transactions contemplated by this Agreement. (b) Seller shall cooperate with Buyer and its Affiliates in seeking to obtain all such consents, approvals, authorizations, licenses and orders (including termination of the waiting period under the HSR Act and any extension thereof), and shall provide and shall cause their respective Affiliates to provide, such information and communications to Governmental Authorities as such Governmental Authorities may reasonably request in connection therewith. Without limiting the generality of the foregoing, Seller shall cooperate with Buyer in promptly (but in no event later than January 31, 1999) making all insurance regulatory filings necessary to obtain approval of the transactions contemplated by this Agreement. 6.6. Further Assurances. On and after the Closing Date, each of the parties shall execute, and shall cause their respective Affiliates to execute, such reasonable documents, instruments and conveyances and take, and cause their respective Affiliates to take, such further reasonable actions as may be reasonably required or desirable to carry out the transactions contemplated by this Agreement. From and after the Closing Date, any notice or inquiries received by Seller on behalf of the Company or ILIC will be promptly forwarded or referred to Buyer. 6.7. Notification of Changes. (a) Seller shall promptly notify Buyer in writing of any event or the existence of any state of facts that Seller becomes aware of prior to the 28 Closing Date that would (i) make any of the representations and warranties of Buyer or Seller contained in this Agreement untrue or inaccurate in any material respect or (ii) otherwise constitute a Material Adverse Effect. Seller shall also promptly notify Buyer in writing of any breach by Buyer of any representation, warranty or covenant of Buyer contained in this Agreement that Seller becomes aware of prior to the Closing Date. (b) Buyer shall promptly notify Seller in writing of any event or the existence of any state of facts that Buyer becomes aware of prior to the Closing Date that would (i) make any of the representations and warranties of Buyer or Seller contained in this Agreement untrue or inaccurate in any material respect or (ii) otherwise constitute a material adverse effect on the validity or enforceability of this Agreement or on the ability of Buyer to perform its obligations under this Agreement in a timely manner. Buyer shall also promptly notify Seller in writing of any breach by Seller of any representation, warranty or covenant of Seller contained in this Agreement that Buyer becomes aware of prior to the Closing Date. 6.8. Performance of Conditions. Seller shall, and shall cause the Company and ILIC to, take all reasonable steps necessary or appropriate, and shall use all commercially reasonable efforts, to effect as promptly as practicable the satisfaction of the conditions required to be satisfied in order for Buyer and Seller to consummate the transactions contemplated by this Agreement, including all conditions set forth in Section 3.1. Buyer shall take all reasonable steps necessary or appropriate, and shall use all commercially reasonable efforts, to effect as promptly as practicable the satisfaction of the conditions required to be satisfied in order for Buyer and Seller to consummate the transactions contemplated by this Agreement, including all conditions set forth in Section 3.2. 6.9. Publicity. Seller and Buyer agree that, from the date hereof through the Closing Date, no public release or announcement concerning the transactions contemplated hereby shall be issued by either party without the prior written consent of the other party (which consent shall not be unreasonably withheld), except such release or announcement as may be required by law, in which case the party required to make the release or announcement shall allow the other party three Business Days or such shorter amount of time as is practicable under the circumstances to comment on such release or announcement in advance of such issuance. 6.10. Authority, Bank Accounts, Etc. Resignations, appropriately executed signature cards, and all other documentation needed in preparation for closing bank and other investment accounts of the Companies and deposits maintained by the Companies with any Governmental Authority, or transferring signature authority therefor, will be provided to Buyer by Seller upon Closing. Seller will cooperate with and assist Buyer in obtaining, subsequent to Closing, any statutory 29 or regulatory approvals required to enable the Companies to make the appropriate closings or transfers, including transfers of signature authorization, and in providing all notices thereof as may be required by appropriate Governmental Authorities. From and after the Closing, no agent or officer of Seller shall take any action with respect to any such accounts or deposits other than as may be expressly authorized in writing by Buyer. 6.11. Pre-Closing Dividends; Subsidiaries. On or prior to the Closing Date, (i) Seller shall cause the Company to distribute to Seller, directly or indirectly, whether through liquidating or dividend distributions (the "Subsidiary Dividend"), all of the issued and outstanding shares of the capital stock of LUK-CPG, Inc. and its Subsidiaries (including all of the 294,000 shares of ILIC currently indirectly owned by LUK-CPG, Inc.), (ii) Seller shall cause the Company to distribute to Seller, whether through liquidating or dividend distributions (the "Asset Dividend"), the assets of the Company listed on Schedule 6.11 and (iii) Seller shall cause the Companies to repay any and all amounts then owed to Affiliates of Seller and the Company (including under the Tax Allocation Agreements). 6.12. Employee Benefits. Prior to the Closing Date, Seller shall take any and all necessary actions to assume any and all Liabilities of the Company and ILIC which otherwise would have existed as of the Closing Date, regardless of when such Liabilities arise or are asserted: (i) with respect to any former employees, (ii) under ERISA and/or the minimum funding requirements of the Code and (iii) under all Plans sponsored by the Company or ILIC at any time prior to the Closing Date. 6.13. Administrative Services. From and after April 1, 1999, Buyer shall provide to the Company and ILIC all administrative and accounting services ("Services") necessary to enable the Company and ILIC to continue to operate in the manner that such entities operate as of the date hereof. The Services shall include, without limitation, the services described on Exhibit C hereto. If this Agreement is terminated in accordance with its terms, (i) Buyer shall continue to provide the Services until the earlier of April 1, 2000 or 30 days after receipt of notice from the Company and ILIC requesting that Buyer discontinue providing the Services and (ii) Seller shall pay Buyer an amount of cash equal to 110% of the sum of all expenses (including, without limitation, the following expense categories: employee benefits, payroll, taxes, rent, supplies and other overhead expenses) incurred by Buyer for costs relating to Buyer's provision of the Services from April 1, 1999 through the date on which such Services are discontinued pursuant to clause (i) above. 7. TAXES. 7.1. Tax Returns Filed and Taxes Paid by Seller. Seller represents and warrants to Buyer that: (i) all Tax Returns required to be filed by Seller, the Company or ILIC on or 30 before the Closing Date with respect to the Company or ILIC have been or will be filed in a timely manner (taking into account all extensions of due dates) and all such Tax Returns are true, complete and correct in all material respects; (ii) all Taxes payable by Seller, the Company or ILIC attributable to the Company or ILIC that are or were due and payable on or before the Closing Date (without regard to whether such Taxes have been assessed) have been or will be timely paid, or properly accrued or adequately reserved on the books of the Company and ILIC in accordance with applicable accounting practices consistently applied; (iii) except as set forth on Schedule 7.1, no deficiencies for any material Taxes for which the Company or ILIC may be liable have been asserted by a taxing authority in a writing received by Seller, the Company or ILIC or assessed by a taxing authority against the Company, ILIC or any member of Seller's Group which remain unpaid; (iv) except as set forth on Schedule 7.1, neither the Company, ILIC nor any member of Seller's Group has been notified in writing by any taxing authority of any audit or investigation with respect to any liability for Taxes imposed on the income, operations or assets of the Company or ILIC and with respect to which the applicable statute of limitations has not expired; (v) except as set forth on Schedule 7.1, there are no agreements in effect to extend the period of limitations for the assessment or collection of any Tax imposed on the income, operations or assets of the Company or ILIC; and (vi) Seller is currently the common parent of an affiliated group of which the Company and ILIC are members and will file a federal consolidated income tax return on behalf of that affiliated group which will include the operations of the Company and ILIC through the Closing Date. 7.2. Seller's Non-Foreign Status. Seller is not a foreign person within the meaning of Section 1445(f)(3) of the Code. 7.3. Post-Closing Access to Books and Records and Cooperation. Buyer will cause the Company and ILIC after the Closing to afford, or will itself afford, to Seller and its representatives and agents reasonable access during normal business hours (on terms not unreasonably disruptive to the business, operations or employees of Buyer, the Company or ILIC) to the Books and Records pertaining to periods ending on or prior to the Closing Date and to the Company's and ILIC's employees and auditors for the purpose of obtaining information relating to periods ending on or prior to the Closing Date, to the extent such access is reasonably necessary as determined by Seller: (i) to prepare and complete any Tax or other regulatory filings required to be made by Seller after the Closing Date; (ii) to prosecute or defend on behalf of the Company or ILIC any inquiry, assessment, contest, proceeding or litigation ("Contest") controlled by Seller under Section 7.4.7 of this Agreement; (iii) to comply with requests made of Seller by any Tax or other regulatory authority in the conduct of any Contest relating to the Company's or ILIC's activities during periods ending on or prior to the Closing Date; and (iv) to satisfy any other request 31 of Seller which is reasonable under the circumstances. Seller will hold all information provided to it pursuant to this Section 7.3 (and any information derived therefrom) in confidence (except to the extent it otherwise becomes public other than through actions of Seller) and will not disclose any such information other than (i) as is reasonably necessary in connection with the Contest or (ii) as required by applicable law or regulation. Buyer will hold Seller's requests for information, and the contents of Buyer's responses thereto, in confidence (except to the extent such information otherwise becomes public other than through the actions of Buyer) and will not disclose any such information other than (i) to directors, officers, employees, and agents of Buyer who need to know such information for the purposes for which it was requested or provided and (ii) as required by applicable law or regulation. 7.4. Liability for Taxes and Related Matters. 7.4.1. Seller's Liability for Taxes. Except as provided otherwise in the last sentence of this Section 7.4.1., and except as otherwise provided in Section 7.5, Seller shall be liable for and shall indemnify Buyer for all Taxes, (including any obligation imposed on Buyer, the Company or ILIC to contribute to the payment of a Tax determined on a consolidated, combined or unitary basis with respect to a group of corporations that includes or included the Company or ILIC, and Taxes resulting from the Company or ILIC ceasing to be members of Seller's Group) to the extent, and only to the extent, any such Tax is (A) imposed on Seller's Group for any taxable year and (B) imposed on the Company or ILIC or for which the Company or ILIC may otherwise be liable (1) for any taxable year or period that ends on or before the Closing Date, (2) with respect to any taxable year or period beginning before and ending after the Closing Date, for the portion of such taxable year or period ending on the Closing Date as determined in accordance with the principles set forth in Section 7.4.3, (3) arising out of a breach or inaccuracy of any representation or warranty contained in Section 7.1 (assuming that each representation and warranty qualified by the terms "material" or "Material Adverse Effect" were not so qualified), or (4) arising out of a breach of any covenant contained in this Article 7, in each case, only to the extent in excess of the aggregate amounts reserved for Taxes on the Final Balance Sheets. Buyer may not, without Seller's consent, amend any Tax Return of the Company or ILIC for any taxable period including any portion of time on or prior to the Closing Date. Seller shall be entitled to a refund of Taxes of the Company or ILIC received for any taxable year or period ending on or before the Closing Date; provided, however, that any refund for such periods that results from a carryback of any loss, deduction or other tax benefit attributable to the Company or ILIC with respect to a period subsequent to the Closing Date shall be paid to or retained by the Company, ILIC or Buyer, as the case may be; provided, further, that if, and only if, any such refund that results from such carryback affects Seller's ability to obtain a refund for any pre-Closing taxable year or 32 period, the Company, ILIC or Buyer, as the case may be, shall be entitled to only fifty percent (50%) of such refund and Seller shall be entitled to the balance of such refund. Notwithstanding anything contained in this Section 7.4.1. or anywhere else in this Agreement to the contrary, nothing in this Agreement shall in any way alter or affect Buyer's (and its Affiliate's, excluding the Company or ILIC) obligation and ultimate responsibility to pay or reimburse the Company (and, thereby, indirectly Seller) any and all amounts of DAC Taxes and premium Taxes as provided in (A) the Charter Coinsurance Agreement, (B) the Charter Reinsurance Agreement and (C) the ILIC Coinsurance Agreement, and all provisions of this Agreement shall be construed so as not to subvert or alter such obligations or responsibilities of Buyer and its Affiliates; provided, however, that no payment to Seller or Seller's Affiliates shall be required for any Tax attributable to a period after the Closing unless Seller or its Affiliates is required to make a payment of any such Tax; provided, further, that no payment to Seller or Seller's Affiliates shall be required for any amounts of such DAC Taxes or premium Taxes reflected as an asset or a reduction of a liability (net of any offset) on the Final Balance Sheets, and only to the extent such amounts, as so reflected on the Final Balance Sheets, are taken into account in determining Statutory Capital. 7.4.2. Buyer's Liability for Taxes. Buyer shall be liable for and shall indemnify Seller for the Taxes of the Company and ILIC (i) for any taxable year or period that begins after the Closing Date, (ii) with respect to any taxable year or period beginning before and ending after the Closing Date, for the portion of such taxable year beginning after the Closing Date as determined in accordance with the principles set forth in Section 7.4.3, (iii) for any amount for which the Company, ILIC, Buyer or any successor of any of them remains responsible under Section 7.5, (iv) for amounts that are the responsibility of Buyer or its Affiliates (or successors) under the Charter Coinsurance Agreement, the Charter Reinsurance Agreement and the ILIC Coinsurance Agreement, to the extent such amounts are not reflected as an asset or a reduction of a liability on the Final Balance Sheets, and only to the extent such amounts, as so reflected on the Final Balance Sheets, are taken into account in determining Statutory Capital, and (v) arising out of a breach of any covenant contained in this Article 7. Buyer shall be entitled to any refund of Taxes of the Company or ILIC for the periods referred to in clauses (i) and (ii) of the preceding sentence. 7.4.3. Taxes for Short Taxable Year. Seller and Buyer shall close the taxable period of the Company and ILIC as of the close of business on the Closing Date, unless such action is prohibited by Law. In any case where applicable law prohibits the Company or ILIC from closing its taxable year on the Closing Date then, for purposes of Sections 7.4.1, 7.4.2 and 7.4.6, the determination of the Taxes of the Company and ILIC for the portion of the year or period ending on, and the portion of 33 the year or period beginning after, the Closing Date shall be determined on the basis of an interim closing of the books as of the close of business on the Closing Date, except that exemptions, allowances or deductions that are calculated on an annual basis, such as the deduction for depreciation, shall be ratably apportioned on a time basis. The parties hereto expressly recognize that the allocation of Taxes in the preceding sentence will be determined by allocating any provision of reserves on the basis of an interim closing of the books. Seller shall be responsible for Taxes allocable according to this paragraph to the portion of such year ending on the Closing Date only to the extent such Taxes exceed the aggregate amount reserved for Taxes on the Final Balance Sheets. 7.4.4. Adjustment to Purchase Price. Any payment by Buyer or Seller under Section 7.4 will be an adjustment to the Purchase Price unless a determination (as defined in Section 1313 of the Code, except that no appeal to the U.S. Supreme Court shall be required) with respect to such payment causes any such payment not to constitute an adjustment to the Purchase Price for income tax purposes. 7.4.5. Pre-Closing Taxes. Seller shall (i) timely prepare and file all Tax Returns of the Company and ILIC required to be filed for any taxable period ending on or prior to the Closing Date and (ii) timely pay or cause to be paid any Tax due thereon. Seller shall prepare such Tax Returns on a basis consistent with past practices. In the case of any such Tax Return required to be signed by the Company or ILIC, Seller shall provide such Tax Returns to Buyer at least 5 Business Days prior to the due date, including any extensions for the filing thereof, together with such tax information reasonably relevant to such Tax Returns (including any supporting schedules, workpapers and information as to the method of computing separate taxable income or other relevant measure of income of the Company and ILIC), and Buyer shall cause the Company or ILIC, as the case may be, duly to execute such Return and return it to Seller at least three Business Days prior to the due date thereof. Notwithstanding this Section 7.4.5, liability for the Taxes due on such Tax Returns shall be determined in accordance with the other provisions of this Article 7. 7.4.6. Post-Closing Taxes. (a) Buyer shall (i) timely prepare and file all Tax Returns of the Company and ILIC required to be filed for any taxable period beginning after the Closing Date and (ii) timely pay or cause to be paid any Tax due thereon. (b) Buyer shall timely prepare and file all Tax Returns of the Company and ILIC required to be filed for any taxable period beginning prior to the Closing Date and ending after the Closing Date. Liability for the Taxes due on such Tax Returns shall be determined in accordance with the principles set forth in Section 7.4.3. 34 (c) The provisions of this Section 7.4.6(c) shall apply to all Taxes and Tax Returns covered by this Article 7. Buyer and Seller shall share information and cooperate in all matters (including securing proper signatures) related to the filing of Tax Returns. In cases where one party prepares a Tax Return (the "Preparer") but another party is liable for part of the Tax on such Tax Return (the "Liable Party"), the Preparer shall pay the appropriate amount of Tax to the taxing authority and provide written notice requesting payment of the portion of Tax due from the Liable Party. Such notice shall be provided at least 10 Business Days prior to the due date of the Tax Return (including any extensions for the filing thereof) and shall include the Tax Return together with such Tax information reasonably relevant to such Tax Return, including supporting schedules, workpapers and information as to the method of computing separate taxable income or other relevant measure of income of the Company and ILIC. Payment from the Liable Party to the Preparer shall be made within 7 Business Days of the receipt of such written notice, provided, however, that payment shall not be due prior to three Business Days before the time the Tax payment is due to the taxing authority. If the parties do not agree on the amount of the payment, the dispute resolution mechanism set forth in Section 2.5(b) shall be utilized. Any late payment of Tax from the Liable Party to the Preparer shall bear interest at the overpayment rate set forth in Section 6621(a)(1) of the Code. 7.4.7. Contest Provisions. Buyer shall promptly notify Seller in writing upon receipt by Buyer, any of Buyer's Affiliates or Subsidiaries, the Company or ILIC of notice of any pending or threatened federal, state, local or foreign Tax audits or assessments which may affect the Tax liabilities of the Company or ILIC for which Seller could be required to indemnify Buyer pursuant to Section 7.4.1 (assuming, for this purpose, no exception to or limitation on such indemnity obligation attributable to the existence of any reserve for Taxes on the Final Balance Sheet), provided that failure to comply with this provision shall not affect Buyer's right to indemnification hereunder except to the extent such failure results in an increase in the amount for which Seller is liable under Section 7.4.1 or otherwise results in a Loss to Seller or a Seller Affiliate. Seller shall have the sole right to represent and control the Company's and ILIC's interests in any Contest relating to taxable periods ending on or before the Closing Date, or relating to any claim for Taxes which could be subject to indemnification by Seller pursuant to Section 7.4.1. other than Taxes described in the next paragraph, and to employ counsel of its choice at its expense. Notwithstanding the foregoing, Seller shall not be entitled to settle after the Closing Date, either administratively or after the commencement of litigation, any claim for Taxes which would materially adversely affect the liability for Taxes of Buyer, the Company or ILIC for any period (including, but not limited to, the imposition of income tax deficiencies, the reduction of asset basis or cost adjustments, the lengthening of any amortization or depreciation periods, the 35 denial of amortization or depreciation deductions or the reduction of loss or credit carryforwards) without the prior written consent of Buyer, which consent shall not be unreasonably withheld, and shall not be necessary to the extent that Seller has indemnified Buyer against the effects of any such settlement. Seller shall be entitled to participate at its expense in the defense of any claim for Taxes for a year or period ending after the Closing Date which may be subject to indemnification by Seller pursuant to Section 7.4.1 and, with the written consent of Buyer and at its sole expense, may assume the entire defense of such Tax claim if assumption of such defense is permitted by law. Neither Buyer, the Company, nor ILIC may agree to settle any Tax claim for the portion of the year or period ending on the Closing Date which may be the subject of indemnification by Seller under Section 7.4.1 without the prior written consent of Seller, which consent shall not be unreasonably withheld. Buyer shall have the sole right to represent the Company's or ILIC's interests in the defense of any claim for Taxes relating to taxable periods beginning on or after the Closing Date. Notwithstanding the foregoing, Buyer shall not be entitled to settle after the Closing Date, either administratively or after the commencement of litigation, any claim for Taxes which would materially adversely affect the liability for Taxes of Seller, the Company or ILIC for any period for which Seller must indemnify Buyer pursuant to Section 7.4.1 (including, but not limited to, the imposition of income tax deficiencies, the reduction of asset basis or cost adjustments, the lengthening of any amortization or depreciation periods, the denial of amortization or depreciation deductions or the reduction of loss or credit carryforwards) without the prior written consent of Seller, which consent shall not be unreasonably withheld, and shall not be necessary to the extent that Buyer has indemnified Seller against the effects of any such settlement. 7.5. Termination of Existing Tax Sharing Agreements. All Tax sharing agreements or similar arrangements with respect to or involving the Company or ILIC shall be terminated as of the Closing Date. Notwithstanding the preceding sentence or anything contained herein to the contrary, the Company, ILIC and Buyer (and any successor thereto) shall continue to be obligated, even after the Closing Date, to pay Seller any amounts owing under the Tax Allocation Agreements for any amount of Taxes for which a reserve or accrual has been established and reflected on the Final Balance Sheets. 7.6. Section 338(h)(10) Election. (a) Buyer and Seller shall make a joint election under Section 338(h)(10) of the Code and under any comparable or equivalent provisions of state or local law with respect to the purchase of the Shares by Buyer (the "Election"). Seller and Buyer shall report, in connection with the determination of Taxes, the transactions contemplated by this Agreement in a manner consistent with the Election, including the reasonable determination of the fair market value of the assets of the Company and ILIC and the 36 allocation of the deemed purchase price among the assets of the Company and ILIC within the meaning of Section 338(h)(10) of the Code. (b) Buyer shall be responsible for the preparation and filing of all forms and documents required in connection with the Election. In connection with the Election, not later than 20 Business Days prior to the required due date thereof, Buyer shall provide Seller with copies of (i) a properly executed Form 8023 (or any successor form), (ii) all attachments required to be filed therewith pursuant to the Code and (iii) any comparable forms and attachments with respect to any applicable state or local elections being made pursuant to the Election. Seller shall execute and deliver to Buyer within 120 days of the required due date therefor, such documents or forms as are required by any Tax laws to properly complete the Election. Seller and Buyer shall cooperate fully with each other and make available to each other such Tax data and other information as may be reasonably required by Seller or Buyer in order to prepare any documents, forms, or information, or to timely file the Election and any other required statements or schedules. Buyer shall promptly execute and deliver to Seller any amendments made to Form 8023 (or any successor form) (and any comparable state and local forms) subsequent to the filing of the Election and any attachments which are required to be filed under applicable law, including any amendments to Form 8023 (or any successor form) necessitated by any indemnification payments made pursuant to Section 8.1 or 7.4.1. (c) Buyer shall comply with all of the requirements of Section 338(h)(10) of the Code. Seller shall take no action which is inconsistent with the requirements for filing the Election under the Code. (d) To the extent permitted by state or local laws, the principles and procedures of this Section 7.6 shall also apply with respect to a Section 338(h)(10) election or equivalent or comparable provision under state or local law. (e) Buyer shall have no liability to Seller for, and shall not be deemed to have indemnified, under any provision of this Agreement or otherwise, Seller from and against, for or in respect of, any Taxes which may be imposed upon or assessed against Seller as a result of the Election. 7.7. Survival of Representations, Warranties and Obligations. The representations, warranties and obligations of the parties set forth in this Article 7 shall survive the Closing, shall be unconditional and absolute and shall remain in effect, in each case, until termination of the applicable period of limitations with respect to Taxes, plus 90 days. 7.8. Transfer Taxes. Buyer shall be liable for and shall pay all excise, sales, use, transfer (including real property transfer or gains), stamp, documentary, filing, 37 recordation and other similar taxes which may be imposed in connection with the transactions contemplated by this Agreement (including any transfer taxes imposed by reason of the Section 338(h)(10) election), together with any interest, additions or penalties with respect thereto. Each party hereto hereby agrees to file all necessary documentation (including, but not limited to, all Tax Returns) with respect to all such amounts in a timely manner. 7.9. Continuation of Reinsurance Agreements. Buyer expressly covenants that the Charter Coinsurance Agreement, the Charter Reinsurance Agreement and the ILIC Coinsurance Agreement will continue in full force and effect until at least the day after the Closing Date. 7.10. Indemnification Payments Net of any Tax Benefit. Notwithstanding anything contained herein to the contrary, if any payment by one party to the other party with respect to a single item under this Article 7 or under Article 8 hereof exceeds (or would exceed but for this Section 7.10) $25,000, the amount of such payment shall be reduced by the amount of any tax benefit actually realized or reasonably expected to be realized by the payee as a result of either the payment or the circumstances underlying or giving rise to the payment, provided, however, any such tax benefit shall be reduced by any tax cost resulting to the payee as a result of the receipt of such indemnity payment. 8. INDEMNIFICATION. 8.1. Indemnification by Seller. (a) Subject to the provisions of Sections 8.3 and 8.5 and Article 10 of this Agreement, Seller hereby agrees to indemnify, defend and hold harmless Buyer, the Company and ILIC and their respective officers, directors, employees, Affiliates, agents, successors and assigns (collectively, the "Buyer Indemnitees") from and against, for and in respect of any and all Losses which any of them may sustain based upon, arising out of or otherwise in respect of (i) any inaccuracy in or breach of any representation or warranty of Seller contained in this Agreement (other than the representations and warranties of Seller contained in Article 7, the indemnification obligations of which are governed by Article 7) or in any schedule, certificate, instrument or other document delivered pursuant hereto (assuming that each representation and warranty qualified by the terms "material" or "Material Adverse Effect" were not so qualified and without regard to the Knowledge of Seller), (ii) any breach of any covenant or agreement of Seller contained in this Agreement (other than the covenants of Seller contained in Article 7, the indemnification obligations of which are governed by Article 7), (iii) any matter relating to or arising out of the Prior Transactions (including any indemnification obligations (including product tax compliance indemnification obligations and indemnification obligations for any liability arising from the Teter lawsuit set forth on Schedule 4.10) of the Company or ILIC 38 with respect thereto), (iv) any matter relating to or arising out of Market Conduct Activities arising as a result of any acts, errors or omissions prior to the Closing Date by the Company or ILIC, any of their respective Affiliates or any of their respective officers, employees, agents or representatives, (v) any guaranty fund assessments for insolvencies occurring prior to the Closing Date to the extent such assessments are not reflected on the Final Balance Sheets, (vi) any liability of the Company or ILIC incurred on or before the Closing Date, not paid as of such date and not reflected on the Final Balance Sheets or (vii) the failure of any policies listed on Schedule 4.9(a) to qualify as "life insurance contracts" under, and to be administered in accordance with, Section 101 or Section 7702 of the Code, or the characterization of any such contract as a "modified endowment contract" within the meaning of Section 7702A of the Code, except for any such contract that qualifies and is administrated as a modified endowment contract, and with respect to which the policyholder acknowledged and agreed, before the date of issuance of such contract (or if any such contract became a modified endowment contract upon conversion subsequent to the date of issuance, before the date of conversion), to such qualification and administration. Notwithstanding anything in Article 7 or this Article 8 to the contrary, in no event shall Seller be obligated to indemnify, defend or hold harmless any Buyer Indemnitee with respect to (i) any Losses arising as a result of any acts, errors or omissions by Buyer or Allstate NY, or any inaccuracy in or breach of any representation or warranty of Buyer or Allstate NY and any breach of any covenant or agreement of Buyer or Allstate NY contained in (A) the Charter Coinsurance Agreement, (B) the Charter Reinsurance Agreement, (C) the Administrative Service Agreement, dated as of September 2, 1998, between Buyer and the Company, (D) the ILIC Coinsurance Agreement, (E) the Administrative Services Agreement, dated as of September 2, 1998, between Allstate NY and ILIC, and (F) the Purchase Agreement or (ii) any Policy Liabilities (as such term is used in the Charter Coinsurance Agreement, the Charter Reinsurance Agreement and the ILIC Coinsurance Agreement); provided, however, that all obligations and responsibilities of Seller under the Purchase Agreement shall remain in full force and effect without regard to this Agreement. (b) For purposes hereof, "Loss" and/or "Losses" shall mean any and all losses, liabilities, damages, deficiencies, costs or expenses, including interest, penalties and reasonable attorneys' and accountants' fees and disbursements, after deducting all amounts received by the indemnified party as a recovery under any insurance policy or bond. Without limiting the generality thereof, Losses arising out of or related to Market Conduct Activities include: the cost to the Indemnified Party of any obligation (whether arising out of a judgment or a settlement) to increase crediting rates, to credit cash or other account values, to provide one or more additional coverages, to forgive future premium payments, to make a policy loan at a discount from contractual rates, or to provide any other benefits to current or former policyholders; the costs 39 of administering a global settlement, including costs of communicating with policyholders; the costs of any individualized arbitration process provided for as part of a settlement or judgment, including all costs of administering such a process and of awards granted therein; the costs of any employees or facilities to the extent dedicated to devising or facilitating a settlement; and the fees and expenses of counsel for third parties agreed or required to be paid by the Indemnified Party. (c) Promptly after receipt by Buyer of notice of (i) any demand, claim or circumstances which, with the lapse of time, would give rise to a Loss with respect to which a Buyer Indemnitee would be entitled to indemnification pursuant to this Section 8.1 or (ii) any claim or the commencement (or threatened commencement) of any action, proceeding or investigation (an "Asserted Liability") that may result in a Loss with respect to which a Buyer Indemnitee would be entitled to indemnification pursuant to this Section 8.1, Buyer shall give notice thereof to Seller, describing in reasonable detail such demand, claim, circumstances or Asserted Liability, the provision or provisions under this Agreement under which the right to indemnification is asserted and the specific circumstances thereof, and indicating the amount (estimated, if necessary) of the Loss that has been or may be suffered by such Buyer Indemnitee in connection therewith. Buyer's failure to give notice of any such demand, claim, circumstances or Asserted Liability to Seller in a prompt manner will not be deemed a waiver of the Buyer Indemnitee's right to indemnification hereunder for Losses in connection herewith, but the amount of indemnification to which the Buyer Indemnitee is entitled shall be reduced by the amount, if any, by which the Buyer Indemnitee's Losses would have been less had such notice been given promptly. 8.2. Buyer's Obligation to Indemnify. (a) Subject to the provisions of Section 8.3 and 8.5 and Article 10 of this Agreement, Buyer hereby agrees to indemnify, defend and hold harmless Seller and Seller's officers, directors, employees, Affiliates, agents, successors and assigns (collectively, the "Seller Indemnitees") from and against, for and in respect of any and all Losses which any of them may sustain based upon, arising out of or otherwise in respect of (i) any inaccuracy in or breach of any representation or warranty of Buyer contained in this Agreement or in any schedule, certificate, instrument or other document delivered pursuant hereto (assuming that each representation and warranty qualified by the terms "material" or "material adverse effect" were not so qualified and without regard to the Knowledge of Buyer), or (ii) any breach of any covenant or agreement of Buyer contained in this Agreement (other than the covenant of Buyer contained in Article 7, the indemnification obligations of which are governed by Article 7). (b) Promptly after receipt by Seller of notice of (i) any demand, claim or circumstances which, with the lapse of time, would give rise to a Loss with respect to which a Seller Indemnitee would be entitled to indemnification pursuant to this 40 Section 8.2 or (ii) an Asserted Liability that may result in a Loss with respect to which a Seller Indemnitee would be entitled to indemnification pursuant to this Section 8.2, Seller shall give notice thereof to Buyer, describing in reasonable detail such demand, claim, circumstances or Asserted Liability, the provision or provisions under this Agreement under which the right to indemnification is asserted and the specific circumstances thereof, and indicating the amount (estimated, if necessary) of the Loss that has been or may be suffered by such Seller Indemnitee in connection therewith. Seller's failure to give notice of any such demand, claim, circumstances or Asserted Liability to Buyer in a prompt manner will not be deemed a waiver of the Seller Indemnitee's right to indemnification hereunder for Losses in connection herewith, but the amount of indemnification to which the Seller Indemnitee is entitled shall be reduced by the amount, if any, by which the Seller Indemnitee's Losses would have been less had such notice been given promptly. 8.3. Right to Contest Third Party Claims. (a) Defense (including the right to settle or compromise) of any Asserted Liability, including selection of counsel (subject to the consent of Buyer, for all Buyer Indemnities or of Seller, for all Seller Indemnitees, as applicable, which consent shall not be unreasonably withheld) and the sole power to direct, investigate and control such defense, shall be by the indemnifying party, if within 30 days after receiving the notice required under Section 8.1(c) or Section 8.2(b), as the case may be, the indemnifying party gives written notice to Buyer on behalf of all Buyer Indemnities, or Seller on behalf of all Seller Indemnitees, as the case may be, stating that the indemnifying party intends to dispute and defend against such Asserted Liability at its own cost and expense. The indemnified party shall make no payment in respect of such Asserted Liability to any third party as long as the indemnifying party is conducting a good faith and diligent defense. (b) Notwithstanding the foregoing, the indemnified party shall at all times have the right to fully participate in such defense at its own cost and expense directly or through counsel. If no such notice of intent to dispute and defend is given by the indemnifying party, or if such diligent good faith defense is not being or ceases to be conducted, the Buyer on behalf of all Buyer Indemnitees, or Seller on behalf of all Seller Indemnitees, as applicable, (x) shall, at the expense of the indemnifying party, undertake the defense of such Asserted Liability with one counsel selected by Buyer on behalf of all Buyer Indemnities, or Seller on behalf of all Seller Indemnities, as applicable, and (y) shall have the right to compromise or settle the same exercising reasonable business judgment with the consent of the indemnifying party, which consent shall not be unreasonably withheld. (c) Except as provided herein, Buyer on behalf of all Buyer Indemnitees, and Seller on behalf of all Seller Indemnitees, as applicable, shall have the right to consent to 41 any settlement or compromise of any Asserted Liability, which consent shall not be withheld unreasonably. If the indemnified party refuses to consent to a bona fide compromise or settlement that the indemnifying party desires to agree to (the "Bona Fide Settlement"), the indemnified party may continue to pursue the defense of such Asserted Liability, free of any participation by the indemnifying party and at the sole expense of the indemnified party; provided that in such event, the obligation of the indemnifying party to the indemnified paty will equal the lesser of (i) the amount of such Bona Fide Settlement or (ii) the actual out-of-pocket amount that the indemnified party is obligated to pay as a result of the indemnified party's continued defense of such Asserted Liability, plus the reasonable out-of-pocket expenses incurred by the indemnified party after the date of notice from the indemnified party of its refusal to consent to a Bona Fide Settlement (the "Refusal Date") in connection with such Asserted Liability, minus the reasonable out-of-pocket expenses of the indemnifying party incurred after the Refusal Date by the indemnifying party in connection with such Asserted Liability. The indemnifying party shall give the indemnified party such notice of the Bona Fide Settlement as is reasonable under then existing circumstances and the indemnified party shall notify the indemnifying party of its consent or lack of consent to such Bona Fide Settlement within a reasonable period of time under then existing circumstances. Notwithstanding anything herein to the contrary, the indemnifying party shall have the right to settle all claims of third parties for which indemnification is payable hereunder without the consent of the indemnified party so long as such settlement releases the indemnified party from all liability for or in connection with such action, is exclusively on monetary terms, does not materially and adversely impair the ability of the indemnified party to carry on its business and does not contain any admission of wrongdoing on the part of the indemnified party. (d) The indemnified party shall make available all information and assistance that the indemnifying party may reasonably request and shall cooperate with the indemnifying party in such defense. Any failure to make available such information and/or to cooperate shall reduce the amount, if any, by which the indemnified party's Losses would have been reduced had such information been made available or such cooperation been provided. 8.4. Indemnification for Taxes. Notwithstanding anything in this Article 8 to the contrary, any indemnifiable Loss or third party claims based on, attributable to or resulting from any misrepresentation or the breach or inaccuracy of any representation or warranty made by Seller in Article 7, or the failure to comply with any covenant or agreement on the part of the parties hereto contained in Article 7, will be governed exclusively by Article 7. 8.5. Limitations on Indemnification. (a) If any party seeking indemnification under this Article 8 (an 42 "indemnified party") recovers from any third party (including insurers) all or any part of any amount paid to it by an indemnifying party (herein so called) pursuant to Section 8.1 or 8.2, such indemnified party shall promptly pay over to the indemnifying party the amount so recovered (after deducting therefrom the full amount of the expenses incurred by it in procuring such recovery, including any taxes and net of any tax benefit resulting from such recovery and payment), but not in excess of any amount previously so paid by the indemnifying party. If an indemnified party recovers from any third party (including insurers) any amount as to which indemnification may be claimed pursuant to Section 8.1 or 8.2, such indemnified party shall have no right to claim indemnification for such amount from the indemnifying party. (b) The indemnified party shall prosecute diligently and in good faith any claim for indemnification with any applicable third party (including insurers), but such attempt shall not be a condition precedent to the indemnified party seeking to collect any indemnification payment pursuant to Section 8.1 or 8.2. 9. TERMINATION. 9.1. Termination. This Agreement may be terminated at any time prior to the Closing: (i) by mutual written consent of Seller and Buyer or (ii) by either Buyer or Seller if the Closing shall not have occurred on or before June 30, 1999; provided, however, that the right to terminate this Agreement under Section 9.1(ii) will not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Closing to occur on or before such date. 9.2. Effect of Termination. If this Agreement is terminated pursuant to Section 9.1, this Agreement shall become void and of no effect with no liability on the part of any party hereto, except with respect to Section 11.8 and the confidentiality provisions set forth in Section 6.3 and except that nothing herein will relieve any party from liability for any prior breach of this Agreement. 10. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Notwithstanding any right of Buyer fully to investigate the affairs of the Companies, Buyer has the right to rely fully upon the representations and warranties of Seller contained in this Agreement or in any other certificate or instrument delivered at Closing. Each of the representations and warranties of Seller and Buyer under this Agreement will survive the execution and delivery of this Agreement and the Closing and remain in effect until the expiration of the twenty-four month period immediately following the Closing Date, except that the representations and warranties of Seller contained in Sections 4.1, 4.2, 4.3, 4.4, 4.9, 4.13, 4.17 and 4.26 shall 43 survive the Closing and remain in effect indefinitely and the representations and warranties of Seller contained in Article 7 shall survive the Closing and remain in effect for the period set forth in Article 7. 11. MISCELLANEOUS. 11.1. Amendments and Waivers. This Agreement may not be amended, and none of its provisions may be modified, except expressly by an instrument signed by the parties hereto. No failure or delay of a party in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. No waiver by a party of any provision of this Agreement or consent to any departure therefrom shall in any event be effective unless the same shall be in writing and signed by such party, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. 11.2. Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by either of the parties hereto without the prior written consent of the other party. This Agreement shall be binding upon and shall inure to the benefit of each of the parties hereto and its respective successors and permitted assigns. 11.3. Entire Agreement. This Agreement (including the Schedules hereto) constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all other prior negotiations, commitments, agreements and understandings, both written and oral, between the parties or any of them with respect to the subject matter hereof. 11.4. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York (regardless of the laws that might otherwise govern under applicable principles of conflicts law). 11.5. Enforcement; Jurisdiction. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in any court of the United States located in the State of New York or any state court sitting in The City of New York, New York (any such federal or state court, a "New York Court"), this being in addition to any other remedy to which they are entitled to in law or in equity. Each of the parties hereto (i) consents to submit itself to the personal jurisdiction of any 44 such New York Court, in the event any dispute arises out of this Agreement or any of the transactions contemplated by this Agreement, (ii) agrees that it will not attempt to deny or defeat such personal jurisdiction or venue by motion or other request for leave from any such New York Court and (iii) agrees that it will not bring any action relating to this Agreement or any of the transactions contemplated by this Agreement in any court other than a New York Court. 11.6. Notices. All written notices required under this Agreement shall be given in writing and shall be deemed to have been given upon (i) transmitter's confirmation of a receipt of a facsimile transmission, (ii) confirmed delivery by a standard overnight carrier or when delivered by hand or (iii) the expiration of five Business Days after the day when mailed by certified or registered mail, postage prepaid, addressed at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Seller, to: Leucadia National Corporation 315 Park Avenue South 20th Floor New York, NY 10010 Attention: President Facsimile: (212) 598-3245 Telephone: (212) 460-1900 (b) if to Buyer, to: Allstate Life Insurance Company 3075 Sanders Road, Suite G2H Northbrook, IL 60062 Attention: Treasurer Facsimile: (847) 402-9116 Telephone: (847) 402-3073 11.7. Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same instrument. 11.8. Certain Fees and Expenses. Whether or not the transactions contemplated hereby are consummated, all costs and expenses incurred in connection with this Agreement and transactions contemplated hereby, including all fees and expenses of agents, representatives, counsel, actuaries and accountants, shall be paid by the party incurring such costs or expenses; provided, however, that Buyer shall pay any filing fees required in connection with the filing with the New York or Missouri Insurance Departments of an application to acquire control of the Company and ILIC and the filing of any notification required under the HSR Act. 45 11.9. No Joint Venture or Partnership Intended. Notwithstanding anything herein to the contrary, the parties hereby acknowledge and agree that it is their intention and understanding that the transactions contemplated hereby do not in any way constitute or imply the formation of a joint venture or partnership between Buyer, on the one hand, and Seller, on the other hand. 11.10. Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, each of Seller and Buyer direct that such court interpret and apply the remainder of this Agreement in the manner that it determines most closely effectuates their intent in entering into this Agreement, and in doing so particularly take into account the relative importance of the term, provision, covenant or restriction being held invalid, void or unenforceable. 11.11. No Third Party Beneficiaries. Except as otherwise specifically provided in Article 8, nothing in this Agreement is intended or shall be construed to give any Person, other than the parties hereto, their successors and permitted assigns, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. 46 IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed on its behalf by its officers thereunto duly authorized, all as of the day and year first above written. LEUCADIA NATIONAL CORPORATION By --------------------------------------- Name: Title: ALLSTATE LIFE INSURANCE COMPANY By --------------------------------------- Name: Title: 47 Schedule 2.2 ALLOCATION OF PURCHASE PRICE Company Shares $2,000,000 plus Statutory Capital of the Company as of the Business Day immediately preceding the Closing Date ILIC Shares $1,575,000 plus Statutory Capital of ILIC as of the Business Day immediately preceding the Closing Date Exhibit C SERVICES I. GENERAL FINANCIAL SERVICES Buyer shall perform all accounting and reporting of direct and ceded premiums, claims and other policyholder disbursements, reserves, policy loans, commissions and other policy related transactions. Any audits conducted by external auditors shall be conducted at the Companies' sole expense. Additionally, Buyer shall provide accounting services of a general corporate nature to the Companies including, but not limited to, the following: 1. All required GAAP financial filings; and 2. All required statutory financial filings. II. COMPLIANCE SERVICES Buyer shall provide the Companies with the following services: 1. State regulatory review and compliance; development, filing and maintenance of policy and variable contract forms, riders, endorsements, disclosure statements and similar materials; review and approval of advertising materials and other customer communications; 2. SEC and NASD compliance for variable contracts, prospectuses, and registration statements including (i) the submission of any required information and conducting annual compliance audits and (ii) preparation and filing of Forms N-4 as necessary; and 3. Coordination of mailings for statements, reports, and prospectuses for variable contracts. EX-10 6 Exhibit 10.15 TRUST AGREEMENT THIS TRUST AGREEMENT (the "Agreement") is made this 14th day of August, 1998, between Leucadia National Corporation ("Leucadia") for the benefit of its shareholders, and Joseph A. Orlando (the "Trustee"). WHEREAS, Leucadia is the beneficial owner of 4,117,986 shares of common stock of HomeFed Corporation (the "Owned HomeFed Common Stock") which represents approximately 41% of the outstanding shares of common stock of HomeFed Corporation ("HomeFed Stock"); and WHEREAS, Leucadia has entered into a Stock Purchase Agreement, dated as of August 14, 1998 (the "Purchase Agreement"), among Leucadia and HomeFed Corporation, pursuant to which Leucadia is entitled and obligated to purchase for an aggregate purchase price of $6,670,100, a portion of which has already been paid (the "Purchase Price") a number of additional shares of common stock of HomeFed Corporation (the "Additional HomeFed Stock" and together with the Owned HomeFed Stock, the "HomeFed Stock Interest") such that Leucadia would beneficially own 87.5% of the outstanding shares of HomeFed Stock, ; and WHEREAS, Leucadia wishes to convey all of its right, title and interest in and to the HomeFed Stock Interest and all of its right, title and interest in and to the Purchase Agreement and the remainder of the Purchase Price, together with any right, title and interest that Leucadia may acquire on or before November 10, 1998 in and to additional shares of HomeFed Stock or any contract to acquire shares of HomeFed Stock, together with the purchase price for such shares (collectively, the "Trust Property"), to and for the benefit of and account of the holders of common shares, par value $1.00 per share, of Leucadia as of August 25, 1998 (the "Beneficiaries"); and WHEREAS, the Trustee has agreed to act as the Trustee under this Agreement for the purposes herein provided; NOW, THEREFORE, in consideration of the premises and of the acceptance by the Trustee of the Trust hereby created and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the parties hereto, the parties hereby agree as follows: NYFS04...:\30\76830\0194\2037\AGR8068V.43J ARTICLE 1 THE TRUST Section 1.1 All of Leucadia's right, title and interest in and to the Trust Property is hereby vested in the Trust. Any property that may in the future be vested in the Trust pursuant to the provisions of this Agreement shall thereafter also be considered Trust Property. To the extent any law or regulation prohibits the transfer of ownership of any of the Trust Property from Leucadia to the Trustee, the Trustee's interest shall be a lien upon and security interest in such Trust Property, in trust, nevertheless, for the sole use and purposes set forth in Section 2.1, and this Agreement shall be deemed a security agreement granting such interest thereon. Section 1.2 Leucadia shall, upon reasonable request of the Trustee, execute, acknowledge and deliver such further instruments and do such further acts as may be necessary or appropriate to more effectively vest in the Trust any portion of the Trust Property intended to be vested herein. ARTICLE 2 PURPOSES OF THE TRUST Section 2.1 The purposes of this Trust are (i) to hold the assets transferred to it by Leucadia on behalf of the Beneficiaries and collect income derived from such assets, (ii) to close the transaction contemplated by the Purchase Agreement, (iii) to take such other action as is necessary to conserve and protect the Trust Property, and (iv) to liquidate and distribute the Trust Property. ARTICLE 3 POWERS OF TRUSTEE Section 3.1 The Trustee accepts and undertakes to discharge the Trust created by this Agreement upon the terms and conditions hereof and agrees, for the benefit of the Beneficiaries, to exercise such of the rights and powers vested in it by this Agreement in the same manner, and use the same degree of care and skill in its exercise, as a prudent person would exercise and use under the circumstances in the conduct of 2 his own affairs, having due regard to the purposes of the Trust set forth in Article 2 hereof. Section 3.2 In accepting the Trust hereby created, the Trustee acts solely as Trustee hereunder, and all persons having any claim against the Trustee in connection with its performance of its rights, powers and duties as such Trustee shall only look to the Trust Property for payment or satisfaction thereof. Section 3.3 The Trustee shall not commingle any of the Trust Property with its own property or the property of any other person. Section 3.4 The Trustee is hereby empowered to: (a) perform all of the obligations and agreements of the Trust provided for in this Agreement; (b) make payment under the Purchase Agreement and perform any other obligations and agreements under the Purchase Agreement necessary for the issuance by HomeFed Corporation of the Additional HomeFed Stock; (c) keep and maintain an account in the name of the Trustee for the benefit of the Beneficiaries into which the Trustee shall deposit all Trust Property consisting of cash or cash equivalents (the "Trust Account"); the Trustee shall not permit any person other than the Trustee to have authority to make withdrawals from, or to issue drafts against, the Trust Account and no Trust Account may be maintained with any bank unless such bank has been furnished a copy of this Agreement; (d) collect and receive all sums of money or other property due to the Trust; (e) engage professionals, including attorneys, accountants, experts and others, to assist the Trustee in carrying out its duties hereunder; (f) receive additional Trust Property and take all appropriate action necessary to preserve the value of Trust Property as the Trustee in the reasonable exercise of its discretion shall determine, subject to Article 4 hereof; (g) vote and/or act with respect to the disposition of the Owned HomeFed Common Stock and, upon issuance, the 3 Additional HomeFed Stock and any other shares of common stock of HomeFed Corporation that may then be Trust Property as directed in a written notice jointly signed by mutual agreement of Ian M. Cumming and Joseph S. Steinberg, each of whom is a Beneficiary of the Trust and, accordingly, are together thereby acting on behalf of all of the Beneficiaries; (h) pay all reasonable and necessary Trust expenses incurred in the administration of the Trust, including without limitation, attorneys' fees and disbursements, accounting fees, expert fees and other costs and expenses arising out of the consummation of the transactions contemplated by the Purchase Agreement; (i) prepare and deliver written statements or notices, annually or otherwise, required by law to be delivered to Beneficiaries; provided that the Trustee shall have no obligation to deliver any statements or notices to a permitted transferee of a beneficial trust interest unless, prior to the date on which the statement or notice is required to be delivered, the Trustee receives (1) written notice adequately identifying the permitted transferee (including the transferee's name, address and tax identification number), and (2) reasonable evidence that the transfer was authorized by this Agreement; (j) to file and execute, on behalf of the Trust such applications, surety bonds, irrevocable consents, appointments of attorney for service of process and other papers and documents that shall be necessary or desirable to register or establish the exemption from registration of the HomeFed Stock Interest, and/or any additional shares of common stock of HomeFed Corporation that may become Trust Property, under the Securities Act of 1933, as amended (the "Securities Act"), and under state securities or blue sky laws and to otherwise assist in the registration of such shares of common stock of HomeFed Corporation; (k) maintain and preserve the originals of any and all instruments and documents pertaining to Trust Property; and (l) take any of the foregoing action, and execute any documents relating thereto, in the Trustee's own name, on behalf of the Trust. Notwithstanding any other provision of this Agreement, the Trustee shall not, and is not empowered to, acquire any 4 property after the date hereof other than the Trust Property (and any proceeds arising therefrom) or vary the investment of the Trust within the meaning of Treasury Regulation Section 301.7701-4(c)(i). Section 3.5 The Trustee shall prepare or have prepared, and file on behalf of the Trust all United States, federal, state and local income tax returns and information returns required to be filed by the Trust, and shall prepare and distribute to the Beneficiaries any reports regarding any income, gain, deduction, credit or loss of the Trust as are required by applicable law and, in addition thereto, as the Trustee in its sole discretion may from time to time determine is appropriate or necessary to enable the Beneficiaries to determine their respective tax obligations arising out of operations of the Trust. Section 3.6 The Trustee may withhold from the amount distributable from the Trust at any time to any person such sum or sums as may be sufficient to pay any taxes which have been or may be imposed on such person or upon the Trust with respect to the amount distributable or to be distributed under the income tax laws of the United States or of any state or political subdivision or entity by reason of any distribution provided for hereunder, wherever such withholding is determined by the Trustee in its reasonable sole discretion to be required. Section 3.7 The Trustee shall maintain records and books of account relating to the Trust Property, in accordance with generally accepted accounting principles consistently applied and shall, at all reasonable times, permit any authorized representative designated by a Beneficiary to have access, during normal business hours and upon reasonable notice, to inspect and/or copy (at Beneficiary's expense payable at the time of copying), the financial records relating to the Trust Property. The Trustee shall provide to each Beneficiary, as soon as practicable after each anniversary of its creation and, in addition, after termination of the Trust, an unaudited financial statement and a report showing all transactions and the amounts thereof (including all sales or other dispositions of Trust Property and expenses relating to the operation of the Trust) consummated during the reporting period. Section 3.8 The Trustee may rely upon and shall be protected in acting or refraining from acting upon any certificates, opinions, statements, instruments or reports believed by it to be genuine and to have been signed or presented by the proper person or persons; provided, however, that the 5 Trustee shall be under a duty to have examined the same to determine whether or not such writings conform to the requirements of this Agreement. Section 3.9 The Trustee and its agents shall not be liable for any error of business judgment or with respect to any action taken or omitted to be taken by them in their capacity as Trustee or agent, unless it shall be proved that the Trustee or its agents shall have been grossly negligent or shall have acted with willful misconduct in ascertaining the pertinent facts or in performing any of their rights, powers or duties hereunder. In the event such liability is proven, the Beneficiaries shall be entitled to reimbursement of their reasonable costs, including attorneys' fees and disbursements. The Trustee makes no representations as to the value or condition of the Trust Property or any part thereof, or as to the security afforded by this Agreement, or as to the validity, execution (except its own execution), enforceability, legality or sufficiency of this Agreement, and the Trustee shall incur no liability or responsibility in respect of such matters. Section 3.10 The Trustee shall have no duty to accomplish any recording, filing or registration of any instrument (including any financing or continuation statement or any filing under tax or securities law) or any rerecording, refiling or reregistration thereof. Section 3.11 The Trustee shall be indemnified by and receive reimbursement from the Trust against and from any and all loss, liability, cost, damage or expense, including reasonable attorneys' fees and disbursements, which it may incur or sustain in the exercise and performance of any of its powers and duties as such Trustee under this Agreement, unless such loss, liability, cost, damage or expense shall be incurred or sustained as a result of the Trustee's gross negligence or willful misconduct. ARTICLE 4 PERMITTED INVESTMENTS OF TRUST PROPERTY Section 4.1 The cash constituting the remainder of the Purchase Price shall, to the extent permitted by applicable law and to the extent provided in Section 4.2, be invested by the Trustee as soon as practicable after establishment of the Trust in state or local government securities with a maturity date on or about June 15, 1999 and the income from which will not result 6 in any federal tax liabilities to the Beneficiaries. All investments of Trust Property shall be made in a manner such that the Trust will at all times be classified as a grantor trust of which the Beneficiaries are the grantors for United States federal income tax purposes (each such investment, a "Permitted Investment"); provided, however, that (i) each Permitted Investment shall be held solely in the name of the Trustee as Trustee, (ii) to the extent practicable, the Trustee shall take physical possession of all such securities and secure them in a safe deposit box registered solely in the name of the Trustee as Trustee, and (iii) no Permitted Investment may be made unless the Trustee shall furnish the bank or brokerage firm through which such Permitted Investment is made with a copy of this Agreement, and such bank shall have acknowledged to the Trustee in writing that upon the maturity of such Permitted Investment the proceeds thereof, if not reinvested in a Permitted Investment in accordance with the instructions of the Trustee, shall be deposited solely in a Trust Account in accordance with Section 3.4(c). Section 4.2 The Trustee may pay litigation and administrative expenses, deposit money from the Trust Account in one or more FDIC insured demand deposit accounts at any bank or trust company, excluding that of the Trustee, which has a capital stock and surplus aggregating at least $100,000,000; provided that total deposits in each account and with each institution do not exceed the FDIC insurance limits for such account or accounts. Section 4.3 All Permitted Investments shall be on terms consistent with the distribution requirements of Article 7 of this Agreement and the other obligations of the Trust. Section 4.4 Any of the foregoing investments purchased with any of the Trust Property shall be deemed a part of the Trust Property. Any earned interest, dividends, distributions or gains from Permitted Investments shall be included in the Trust Property. ARTICLE 5 CONCERNING THE TRUSTEE Section 5.1 The Trustee may resign as Trustee at any time by giving prior written notice to Leucadia; provided, however, that such resignation shall not be effective earlier than sixty (60) days after the date of such notice unless an 7 earlier effective date is agreed to by Leucadia and a new Trustee shall have been appointed. Section 5.2 Upon resignation, death, or removal of a Trustee, a successor trustee (a "Successor Trustee") shall be appointed by Leucadia on behalf of the Beneficiaries, and the appointment of the Successor Trustee shall be binding upon all Beneficiaries then holding beneficial interests in the Trust. Section 5.3 Any Successor Trustee shall execute and deliver to the Beneficiaries and to the predecessor Trustee an instrument accepting such appointment, the terms and conditions of which shall be the same as those contained in this Agreement, and thereupon such Successor Trustee, without further act, shall be vested with all the estates, properties, rights, powers, duties and trusts of the predecessor Trustee in the Trust with like effect as if originally named as Trustee herein; but nevertheless, upon the written request of such Successor Trustee, the predecessor Trustee shall (i) execute, acknowledge and deliver such instruments of conveyance and further assurances and do such other things as may reasonably be required for more fully and certainly vesting and confirming unto said Successor Trustee all the right, title and interest of the predecessor Trustee in and to the Trust Property; (ii) duly assign, transfer, deliver, account for and pay over to such Successor Trustee any property or money then held by such predecessor Trustee upon the trusts herein expressed; and (iii) deliver to such Successor Trustee any and all records, or copies thereof, in respect of the Trust which it may have. ARTICLE 6 TRUSTEE'S COMPENSATION Section 6.1 The Trustee hereby waives any commission or fees for the performance of its obligations as Trustee under this Agreement. ARTICLE 7 DISTRIBUTIONS TO BENEFICIARIES Section 7.1 All Trust Property shall be distributed by the Trustee to the Beneficiaries, as beneficiaries under the Trust solely in accordance with Section 7.2, on one or more distribution dates as determined by the Trustee. 8 Section 7.2 The Trustee shall not be obligated to make any distributions of Trust Property prior to July 5, 1999. As promptly as practicable following the acquisition by the Trust of the Additional HomeFed Stock under the Purchase Agreement, the Trust shall distribute the HomeFed Stock Interest (and any other shares of HomeFed Stock that may then be Trust Property) and any cash then held as Trust Property to the Beneficiaries; provided, however, that the distribution of such shares of HomeFed Stock from the Trust to the Beneficiaries shall be pursuant to an effective registration statement under the Securities Act, unless the Trustee shall have received an opinion of counsel to the effect that no such registration statement is required for such distribution. In the event that the shares of Additional HomeFed Stock are not purchased by July 31, 1999 and the Purchase Agreement is then terminated, the Trustee as promptly as practicable shall distribute to the Beneficiaries the Trust Property then owned by the Trust; provided, however, that the distribution of shares of the Owned HomeFed Stock from the Trust to the Beneficiaries shall be pursuant to an effective registration statement under the Securities Act, unless the Trustee shall have received an opinion of counsel to the effect that no such registration statement is required for such distribution. No certificates representing fractional shares of HomeFed Stock will be distributed by the Trustee to the Beneficiaries. In lieu of any fractional shares of HomeFed Stock, (the "Fractional Shares"), the Trustee shall, on behalf of all holders of such Fractional Shares, (i) determine the number of shares of HomeFed Stock that would otherwise have been distributed as Fractional Shares, (ii) sell such shares at the then prevailing market price, and (iii) determine the portion, if any, of the net proceeds of such sale to which each holder of a Fractional Share interest is entitled, by multiplying the amount of the aggregate net proceeds of the sale of the Factional Shares, by a fraction, the numerator of which is the amount of the Fractional Share to which such holder of a Fractional Share is entitled, and the denominator of which is the aggregate amount of Fractional Shares to which all holders of Fractional Shares are entitled. As soon as practicable after the determination of the amount of cash, if any, to be paid to holders of Fractional Shares in lieu of such Fractional Shares, the Trustee shall distribute such amounts, without interest, to such holders. Any cash received on distribution in respect of, or proceeds from the sale of, the HomeFed Stock Interest (or any other shares of HomeFed Stock that may then be Trust Property) shall be distributed by the Trustee as promptly as practicable. 9 ARTICLE 8 LIMITATION ON BENEFICIARY'S ASSIGNMENT OF RIGHT TO DISTRIBUTION Section 8.1 Beneficial interests in the Trust, and any other interests therein, (i) cannot be assigned, conveyed, hypothecated, pledged or otherwise transferred, voluntarily or involuntarily, directly or indirectly, except by will or under the laws of descent and distribution; (ii) shall not be evidenced by a certificate or other instrument; (iii) shall not possess any voting rights; (iv) shall not be entitled to receive any distributions, except pursuant to Article 7; and (v) shall not represent any equity interest in HomeFed Corporation. ARTICLE 9 TERMINATION OF THE TRUST Section 9.1 Other than the obligations of the Trustee under Section 3.5 hereof, this Agreement and the Trust created hereby shall terminate and this Agreement shall be of no further force or effect on the earlier to occur of (i) the date on which all of the Trust Property has been distributed to the Beneficiaries in accordance with Article 7 or (ii) December 31, 2001. Section 9.2 No transfer, by operation of law or death, of the right, title and interest of any Beneficiary in and to the Trust Property or hereunder shall operate to terminate this Agreement or the Trust hereunder or entitle any successor or transferee of such Beneficiary to an accounting (except to the extent generally required under Section 3.7) or to the transfer to it of legal title to any part of the Trust Property. ARTICLE 10 JURISDICTION Section 10.1 Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 10 ARTICLE 11 MISCELLANEOUS Section 11.1 As used in this Agreement (including the recitals herein), capitalized terms shall have the meanings assigned to them (such meanings to be equally applicable to both the singular and plural forms of the terms defined or to the feminine, masculine or neuter gender, as the case may be), unless the context otherwise requires. Section 11.2 This Agreement is not intended to create and shall not be interpreted as creating an association, corporation, partnership or joint venture of any kind; it is intended to create an investment trust within the meaning of Treasury Regulation Section 301.7701-4(c)(i), to be governed and construed in all respects as a trust without transferable interests; any ambiguities in this Agreement shall be resolved, and any income tax reporting obligations of the Trust and the Beneficiaries shall be fulfilled, in a manner consistent with such treatment. Section 11.3 Leucadia shall not have or incur any obligation or liability to any other person on account of any act or failure to act by the Trustee or any other person. Section 11.4 The Trustee shall not assume any liability or incur any obligation or liability to any other person in connection with the transfer by Leucadia to the Trustee of the Trust Property, and no delegation of duty of performance to the Trustee or assumption of liabilities of Leucadia by the Trustee is intended hereby except as expressly set forth in Section 1.1 of this Trust Agreement. Section 11.5 As promptly as practicable after the date hereof, Leucadia shall certify to the Trustee the names of the Beneficiaries and the amount of beneficial interests in the Trust held by each such Beneficiary. Leucadia shall indemnify, defend and hold the Trustee harmless against claims of any nature whatsoever with respect to Leucadia's determination of a Beneficiary's share of beneficial interests in the Trust. Section 11.6 This Trust Agreement may be amended from time to time by the Trustee and Leucadia, without the consent of any holders of beneficial interests in the Trust, but only (i) to cure any ambiguity, correct or supplement any provision herein which may be inconsistent with any other provision herein, or to 11 make any other provisions with respect to matters or questions arising under this Trust Agreement not inconsistent with the other provisions of this Trust Agreement, or (ii) to modify, eliminate or add to any provisions of this Trust Agreement to such extent as shall be necessary to ensure that the Trust will be classified for United States federal income tax purposes as a grantor trust at all times or to ensure that the Trust will not be required to register as an "investment company" under the 1940 Act, or be classified as other than a grantor trust for United States federal income tax purposes; provided, however, that in the case of clause (i), such action shall not adversely affect in any material respect the interests of any holder of a beneficial interest in the Trust. In all other cases, this Trust Agreement may be amended with the approval of holders of a majority of beneficial interests in the Trust, except with respect to changes to the definition of Trust Property, which shall require a favorable vote of all Beneficiaries. Any amendments to this Trust Agreement shall become effective upon execution by the Trustee and Leucadia and notice thereof shall be given to the Beneficiaries. Section 11.7 Except as provided herein, the obligations, duties and/or rights of the Trustee under this Agreement shall not be assignable, voluntarily, involuntarily or by operation of law, and any such assignment shall be void. All covenants and agreements contained herein shall be binding upon and are personal to the Trustee and shall inure to the benefit of the Trustee and any Successor Trustee in the same manner. Section 11.8 This Agreement, together with the related instruments expressly referred to herein, constitutes the entire agreement of the parties, and all such agreements shall be construed as integrated and complimentary of each other. Section 11.9 Article headings in this Agreement are included for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. SECTION 11.10 This Agreement, shall be construed in accordance with and governed by the laws of the State of New York. SECTION 11.11 This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, and all of which together shall constitute one and the same instrument. This Agreement shall become effective immediately upon the exchange of executed signature pages, which may be by facsimile. 12 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the first date hereinabove written. Leucadia National Corporation By: /s/ Barbara L. Lowenthal ------------------------------------ Title: Vice President Trustee: /s/ Joseph A. Orlando ----------------------------------- Joseph A. Orlando EX-21 7 Exhibit 21 LEUCADIA NATIONAL CORPORATION Subsidiaries as of December 31, 1998 STATE/COUNTRY OF NAME INCORPORATION - ---- ------------- CDS Devco, Inc. California HSD Venture California San Elijo Ranch, Inc. California Baldwin Enterprises, Inc. Colorado NSAC, Inc. Colorado RRP, Inc. Colorado 330 Mad. Parent Corp. Delaware AIC Financial Corporation Delaware American Investment Company Delaware Baldwin-CIS L.L.C. Delaware Bellpet, Inc. Delaware CDS Holding Corporation Delaware Conwed Corporation Delaware Leucadia Aviation, Inc. Delaware Leucadia Cellars, Ltd. Delaware LNC Investments, Inc. Delaware LUK-Asia LLC Delaware LUK-CPG, Inc. Delaware LUK-CPH, Inc. Delaware LUK-Fidei LLC Delaware LUK-Flats LLC Delaware LUK-Israel LLC Delaware Neward Corporation Delaware Rastin Investing Corp. Delaware RERCO, Inc. Delaware San Elijo Hills Development Company, LLC Delaware Wedgewood Investments L.L.C. Delaware Rosemary Beach Cottage Rental Company Florida Rosemary Beach Land Company Florida College Life Development Corporation Indiana Professional Data Management, Inc. Indiana Charter National Life Insurance Company Missouri The Sperry and 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 LUK-REN, Inc. New York Phlcorp, Inc. Pennsylvania Pine Ridge Associates, L.P. Texas American Investment Bank, N.A. United States American Investment Financial Utah Leucadia Bottling L.L.C. Utah Leucadia Film Corporation Utah Leucadia Financial Corporation Utah Leucadia Power Holdings, Inc. Utah Leucadia Properties, Inc. Utah Silver Mountain Industries, Inc. Utah Telluride Properties Acquisition, Inc. Utah Terracor II Utah Exhibit 21 LEUCADIA NATIONAL CORPORATION SUBSIDIARIES AS OF DECEMBER 31, 1998, CONTINUED STATE/COUNTRY OF NAME INCORPORATION - ---- ------------- Commercial Loan Insurance Corporation Wisconsin WMAC Credit Insurance Corporation Wisconsin WMAC Investment Corporation Wisconsin LUK-Japan Ltd. British Virgin Islands Fidei S.A. France - -------------------------------- Subsidiaries not included on this list, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary as of December 31, 1998. EX-23 8 CONSENT OF INDEPENDENT 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. 33-61682) and (vi) Form S-8 (File No. 33-61718) of our report dated March 8, 1999, on our audits of the consolidated financial statements and financial statement schedules of Leucadia National Corporation and Subsidiaries as of December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997, and 1996, which report is included in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP New York, New York March 16, 1999 CONSENT OF INDEPENDENT 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. 33-61682) and (vi) Form S-8 (File No. 33-61718) of our report dated January 27, 1999, with respect to our audit of the financial statements of Gotham Partners Acquisition I, L.P. as of December 31, 1998 and for the year then ended, included in this Annual Report on Form 10-K for the year ended December 31, 1998. ERNST & YOUNG LLP New York, New York March 16, 1999 NYFS04...:\30\76830\0146\347\CON3059L.380 EX-27 9
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN THE ACCOMPANYING FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 DEC-31-1998 459,690 1,770,205 881,371 57,022 0 0 121,790 76,397 3,958,951 0 722,601 0 0 61,985 1,791,174 3,958,951 56,572 530,506 35,201 314,311 132,206 9,473 45,139 29,377 (25,073) 46,202 8,141 0 0 54,343 .86 .86
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