-----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, UpH7zYk07suD3eulOOZRQ2+NdXPmMMuS6ZB+522+wdxmefiJFAjzbQI/emfL31mC dLZInWWvAykAwDS7uviFHA== 0000909518-00-000210.txt : 20000411 0000909518-00-000210.hdr.sgml : 20000411 ACCESSION NUMBER: 0000909518-00-000210 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 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: 583047 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, 1999 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 13, 2000 (computed by reference to the last reported closing sale price of the Common Stock on the New York Stock Exchange on such date): $735,648,529. On March 13, 2000, the registrant had outstanding 55,296,728 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 2000 annual meeting of shareholders of the registrant are incorporated by reference into Part III of this Report. ================================================================================ NY2:\874896\20\76830.0146 PART I Item 1. Business. - ------ -------- THE COMPANY The Company is a diversified financial services holding company principally engaged in commercial and personal 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 $1,121,988,000 at December 31, 1999, equal to a book value per common share of the Company (a "Common Share") of negative $.11 at December 31, 1978 and $19.75 at December 31, 1999. The December 31, 1999 shareholders' equity and book value per share amounts have been reduced for the cash dividends described below. In May and December 1999, the Company paid an aggregate $13.58 per share cash dividend (the "Dividend"), totaling $811,925,000. Pursuant to a ruling from the Internal Revenue Service, the Company was able to pay the Dividend and have any gain realized treated as capital gain income for non-corporate shareholders. Payment of the Dividend required the Company to make an offer to purchase all of its 8-1/4% Senior Subordinated Notes due 2005 (the "8-1/4% Notes") and all of its 7-7/8% Senior Subordinated Notes due 2006 (the "7-7/8% Notes"), at a purchase price of 101% of principal, plus accrued and unpaid interest thereon. Pursuant to such offers, in June 1999, the Company repurchased $194,223,000 aggregate principal amount of the 8-1/4% Notes and 7-7/8% Notes for $198,000,000, including accrued interest. During the year ended December 31, 1999, the Company repurchased 5,182,958 Common Shares for an aggregate cost of $125,481,000. From January 1, 2000 through March 13, 2000, the Company repurchased 1,505,000 Common Shares for an aggregate cost of $32,095,000 ($21.33 per share). As of March 13, 2000, the Company is authorized to repurchase an additional 4,495,000 Common Shares. Such purchases may be made from time to time in the open market, through block trades or otherwise. Depending on market conditions and other factors, such purchases may be commenced or suspended without prior notice. During 1999, the Company acquired substantially all of the assets of Tranex Credit Corp. ("Tranex"), a subprime automobile lender, for aggregate cash consideration of $128,000,000. The assets purchased included Tranex's $67,900,000 subprime automobile portfolio, $44,200,000 of residual interests and excess servicing assets of related securitized trusts and $16,000,000 of certain other assets. In 1999, the Company increased its interest in MK Gold Company ("MK Gold") to 72.5% for aggregate cash consideration of $15,800,000. In addition, the Company lent $20,000,000 to MK Gold, which used the proceeds from the Company's stock purchase and loan to acquire Cobre Las Cruces, S.A., a Spanish company that holds the exploration and mining rights to the Las Cruces copper deposit in the pyrite belt of Spain, for total cash consideration of $42,000,000. The initial stages of a feasibility study conducted by the former owner indicate the existence of a resource of 15.2 million metric tonnes grading 6.1% copper that is overlain by a gold-bearing gossan (which has not been evaluated) and by 150 meters of unconsolidated overburden. Actual mining will be subject to permitting, after which significant financing would be required to engineer, construct and develop the mine. MK Gold's interest in Cobre Las Cruces is subject to a one-year option held by an Australian mining company to purchase a 35% interest in Cobre Las Cruces at MK Gold's cost, plus interest. During 1999, the Company sold all of its interests in Caja de Ahorro y Seguro S.A. ("Caja"), its Russian joint venture with PepsiCo, Inc. ("PIB"), The Sperry and Hutchinson Company, Inc. and Charter National Life Insurance Company ("Charter") and Intramerica Life Insurance Company ("Intramerica") for aggregate cash and other consideration of $249,700,000, and recorded aggregate pre-tax gains of $185,200,000. In January 2000, the Company sold its 10% equity interest in Jordan Telecommunication Products, Inc. The Company expects to report a pre-tax gain of $24,600,000 in first quarter of 2000 results of operations. Further consideration of approximately $7,500,000 may be received in the future upon the favorable resolution of certain contingencies. The Company's insurance operations consist of commercial and personal property and casualty insurance primarily conducted through Empire Insurance Company ("Empire"), Allcity Insurance Company ("Allcity") and Centurion Insurance Company ("Centurion"). For the year ended December 31, 1999, these insurance operations accounted for 26% of the Company's revenues and at December 31, 1999, 26% of the Company's assets. The Company's insurance operations have a diversified investment portfolio of securities, of which 75% 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's foreign real estate operations are conducted through Compagnie Fonciere FIDEI, a French company whose bonds are listed on the Paris Stock Exchange ("Fidei"). 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 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, foreign real estate, manufacturing and other operations. The property and casualty insurance operations provide commercial and personal lines of insurance 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 foreign real estate consists of the operations of Fidei in France. The manufacturing operations manufacture and market proprietary plastic netting used for a variety of purposes. Other operations primarily consist of domestic real estate activities and winery operations. Associated companies primarily include equity interests in entities that the Company does not control and that are accounted for on the equity method of accounting. The information in the following table 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 corporate assets. Corporate assets, revenues, overhead expenses and interest expense are not allocated to the operating units. Other than the Company's foreign real estate operations, the Company does not have material foreign operations and investments. Certain information concerning the Company's segments for 1999, 1998 and 1997 is presented in the following table. Prior period amounts have been restated for the foreign real estate operations, which were previously included in the Other Operations segment.
1999 1998 1997 ------ ------ ------ (In millions) REVENUES: Property and Casualty Insurance $185.3 $299.8 $363.2 Banking and Lending 59.0 46.0 45.8 Foreign Real Estate 65.0 11.0 - Manufacturing 64.0 56.6 133.7 Other Operations (a) 238.4 58.9 102.0 ------ ------ ------ Total revenue for reportable segments 611.7 472.3 644.7 Equity in Associated Companies (2.9) 23.3 (56.5) Corporate (b) 97.8 34.9 42.5 ------ ------ ------ Total consolidated revenues $706.6 $530.5 $630.7 ====== ====== ======
(continued) 3
1999 1998 1997 -------- -------- -------- (In millions) INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES, MINORITY EXPENSE OF TRUST PREFERRED SECURITIES AND EXTRAORDINARY LOSS: Property and Casualty Insurance $ (22.4) $ (7.9) $ 4.1 Banking and Lending 12.7 13.9 5.8 Foreign Real Estate 31.8 1.2 - Manufacturing 11.9 10.1 .3 Other Operations (a) 198.9 21.6 57.3 -------- -------- -------- Total income (loss) from continuing operations before income taxes, minority expense of trust preferred securities and extraordinary loss for reportable segments 232.9 38.9 67.5 Equity in Associated Companies (2.9) 23.3 (56.5) Corporate (b) 13.5 (32.8) (35.2) -------- --------- --------- Total consolidated income (loss) from continuing operations before income taxes, minority expense of trust preferred securities and extraordinary loss $ 243.5 $ 29.4 $ (24.2) ======== ======== ======== IDENTIFIABLE ASSETS EMPLOYED: Property and Casualty Insurance $ 803.9 $ 990.1 $1,047.8 Banking and Lending 467.1 269.3 265.1 Foreign Real Estate 276.7 365.1 - Manufacturing 42.9 41.8 45.4 Other Operations 416.5 308.5 170.0 -------- -------- -------- Total assets of reportable segments 2,007.1 1,974.8 1,528.3 Investments in Associated Companies 74.0 172.4 207.9 Net Assets of Discontinued Operations - 45.0 71.9 Corporate 989.1 1,766.8 1,937.2 -------- -------- -------- Total consolidated assets $3,070.2 $3,959.0 $3,745.3 ======== ======== ========
- ---------------- (a) For 1999, includes pre-tax gains on sale of Caja, The Sperry & Hutchinson Company and PIB, as described in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Report. (b) For 1998, 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 Results of Operations" of this Report. At December 31, 1999, the Company and its consolidated subsidiaries had 1,585 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, Allcity and Centurion. The Empire Group specializes in commercial and personal property and casualty insurance business primarily in the New York metropolitan area. The Empire Group offers insurance products for vehicles (including medallion and radio-controlled livery vehicles), general liability coverage, property coverage (including mercantile and multi-family residential real estate) and workers' compensation to commercial accounts and private passenger automobile and homeowners products to individuals. 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. The business of the Empire Group is organized into three divisions: the Small Business Division, the Personal Lines 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 Small Business Division focuses on commercial package products for small businesses; the Personal Lines Division concentrates on personal automobile and homeowners insurance; and the Mid-Market Division focuses on commercial auto, commercial package and workers' compensation insurance for larger accounts. Over the past two years, the Empire Group has invested resources to enhance and market its products, to upgrade the quality of customer service and to provide its agents with the ability to sell products, process applications, receive price quotes and obtain other policy and claim information via the Internet. The Empire Group plans to expand its Internet services in the future. For the years ended December 31, 1999, 1998 and 1997, net earned premiums for the Empire Group were $145,200,000, $228,600,000 and $275,000,000, respectively. While net earned premiums declined in all lines of business, the most significant reductions were in assigned risk automobile and voluntary private passenger automobile lines. As a result of poor operating results in the assigned risk business, the Empire Group no longer participates in this line of business. Effective January 1, 2000, all policy renewal obligations have been assigned to another insurance company. However, the Empire Group remains liable for the claim settlement costs for assigned risk claims that occured during the policy term. The Empire Group believes it has provided adequate reserves for such liabilities, including loss adjustment expenses. With respect to private passenger automobile insurance, poor underwriting results have resulted in a re-underwriting of the existing book of business, the termination of certain agency relationships and, for certain other agents, a determination not to accept any applications for new private passenger automobile business. Additionally, re-underwriting efforts in other commercial lines, along with terminated and/or reduced agency relationships referred to above, have resulted in reduced commercial lines premiums. The Empire Group's reduced premium volume does not support its current overhead structure. The Empire Group is currently examining its overhead costs and plans to implement an expense reduction program this year to more closely align these costs with its current volume of business. In order to return to profitability, the Empire Group also will have to generate new business, primarily in the Small Business Division and in the radio-controlled livery line of the Mid-Market Division, and improve retention of its existing profitable business. An important customer service feature, which is designed to enable the Empire Group to attract profitable business, is the ability to provide producers faster quoting of policy prices and underwriting approval over the Internet. The Empire Group is currently providing this service for commercial policies issued by the Small Business Division, and plans to continue to invest in technology in order to expand this service to other lines of business in the future. During the year ended December 31, 1999, 13% of net earned premiums of the Empire Group were derived from assigned risk business, 12% from commercial automobile lines, 35% from other commercial lines and 40% from personal lines. 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. 5 The business of the Empire Group is produced through general agents, local agents and insurance brokers, who are compensated for their services by payment of commissions on the premiums they generate. There are seven general agents, one of which is owned by Empire, and 398 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 12% of its total premium volume for the year ended December 31, 1999. 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 1999 was $17,000,000 for reserve increases related to losses from prior accident years. The Empire Group will continue to evaluate the adequacy of its loss reserves and record future adjustments to its loss reserves as appropriate. Over the past few years, the Empire Group has taken steps to improve its operations, enhance its information systems, redefine its markets and improve its underwriting and claims handling procedures. The Company believes that the results of these efforts may 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, ------------------------------------------ 1999 1998 1997 -------- -------- -------- Loss Ratio: GAAP 98.5% 102.6% 100.3% SAP 98.5% 102.6% 100.3% Industry (SAP) (a) N/A 76.5% 72.8% Expense Ratio: GAAP 39.9% 26.7% 18.2% SAP 44.8% 31.4% 17.5% Industry (SAP) (a) N/A 29.5% 28.8% Combined Ratio (b): GAAP 138.4% 129.3% 118.5% SAP 143.3% 134.0% 117.8% Industry (SAP) (a) N/A 106.0% 101.6% - --------------- (a) Source: Best's Aggregates & Averages, Property/Casualty, 1999 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. 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, 1999. Included therein are current year data and prior year development. RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
1999 1998 1997 -------- -------- -------- (In thousands) Net SAP liability for losses and LAE at beginning of year $469,318 $487,116 $481,138 -------- -------- -------- Provision for losses and LAE for claims occurring in the current year 124,172 191,482 248,408 Increase in estimated losses and LAE for claims occurring in prior years 18,255 42,290 27,027 -------- -------- -------- Total incurred losses and LAE 142,427 233,772 275,435 -------- -------- -------- Losses and LAE payments for claims occurring during: Current year 41,955 64,739 80,149 Prior years 188,240 186,831 189,308 -------- -------- -------- 230,195 251,570 269,457 -------- -------- -------- Net SAP liability for losses and LAE at end of year 381,550 469,318 487,116 Reinsurance recoverable 61,492 72,956 58,592 -------- -------- -------- Liability for losses and LAE at end of year as reported in financial statements (GAAP) $443,042 $542,274 $545,708 ======== ======== ========
7 The following table presents the development of balance sheet liabilities from 1989 through 1999 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 1989 liability estimate indicated on the table of $235,223,000 has been re-estimated during the course of the succeeding ten years, resulting in a re-estimated liability at December 31, 1999 of $235,230,000 or a deficiency of $7,000. If the re-estimated liability were less than the liability initially established, a cumulative redundancy 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 1993, but incurred in 1989, will be included in the cumulative redundancy (deficiency) amount for 1989, 1990, 1991 and 1992. 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 this table. 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. 8 ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
Year Ended December 31, -------------------------------------------------------------------------------------------------------------------- 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (In thousands) Liability for Unpaid Losses and Loss Adjustment Expenses $235,223 $251,401 $280,679 $322,516 $353,917 $ 406,695 $ 476,692 $481,138 $487,116 $469,318 $381,550 Liability Re-estimated as of: One Year Later $227,832 $249,492 $280,020 $321,954 $344,156 $ 441,165 $ 504,875 $508,165 $529,406 $487,573 $ - Two Years Later 217,432 245,141 277,866 324,262 374,158 467,659 537,372 546,724 546,643 Three Years Later 212,649 243,849 284,052 345,576 394,418 500,286 577,266 599,015 Four Years Later 211,859 247,314 296,484 361,903 415,251 534,014 609,425 Five Years Later 211,952 255,045 306,094 377,097 442,696 556,072 Six Years Later 216,545 260,031 316,887 395,291 459,573 Seven Years Later 219,786 265,525 330,866 406,188 Eight Years Later 222,556 277,626 337,660 Nine Years Later 231,152 281,995 Ten Years Later 235,230 Cumulative Redundancy (Deficiency) $ (7) $(30,594) $(56,981) $(83,672) $(105,656)$(149,377)$(132,733) $(117,877)$(59,527) $(18,255) $ - ======== ======== ======== ======== ========= ========= ========= ========= ======== ======== ======== Cumulative Amount of Liability Paid Through: One Year Later $ 65,822 $ 78,954 $ 89,559 $113,226 $116,986 $ 152,904 $ 202,334 $189,308 $186,831 $188,240 $ - Two Years Later 109,479 126,908 150,043 182,250 199,214 270,020 318,693 314,755 313,040 Three Years Later 140,916 167,330 197,848 239,092 272,513 353,649 407,833 410,631 Four Years Later 166,023 196,099 233,244 285,880 326,637 415,919 472,384 Five Years Later 182,001 216,749 259,946 320,044 363,873 456,410 Six Years Later 193,943 231,892 279,682 341,636 390,027 Seven Years Later 203,169 242,275 293,860 357,735 Eight Years Later 209,115 253,104 304,610 Nine Years Later 214,687 260,340 Ten Years Later 219,372 Net Liability - End of Year $353,917 $406,695 $476,692 $481,138 $487,116 $469,318 $381,550 Reinsurance 37,912 44,747 40,730 51,181 58,592 72,956 61,492 -------- -------- -------- -------- -------- -------- -------- Gross Liability - End of Year $391,829 $451,442 $517,422 $532,319 $545,708 $542,274 $443,042 ======== ======== ======== ======== ======== ======== ======== Net Re-estimated Liability - Latest $459,573 $556,072 $609,425 $599,015 $546,643 $487,573 Re-estimated Reinsurance - Latest 70,197 72,491 70,780 73,881 63,453 77,883 -------- -------- -------- -------- -------- -------- Gross Re-estimated Liability - Latest $529,770 $628,563 $680,205 $672,896 $610,096 $565,456 ======== ======== ======== ======== ======== ======== Gross Cumulative (Deficiency) $(137,941) $(177,121)$(162,783)$(140,577) $(64,388) $(23,182) ========= ========= ========= ========= ======== ========
9 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, a substantial portion of which is 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, 1999 and 1998 was as follows:
1999 1998 ---- ---- (Dollars in thousands) Bonds and notes: U.S. Government and agencies 60% 76% Rated investment grade 15 8 Non rated - other 2 4 Rated less than investment grade 3 - Equity securities, primarily preferred 15 10 Other, principally accrued interest 5 2 --- --- Total 100% 100% === === Estimated average yield to maturity of bonds and notes (a) 6.8% 5.3% Estimated average remaining life of bonds and notes (a) 2.7 yrs. 3.3 yrs. Carrying value of investment portfolio $584,906 $748,818 Market value of investment portfolio $584,788 $749,147
--------------------------- (a) Excludes trading securities, which are not significant. Reinsurance The Empire Group's maximum retained limit for all lines of business was $300,000 for 1999. The Empire Group's maximum retained limit for 1998 and 1997 was $500,000 for workers' compensation and $300,000 for other property and casualty lines. 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 2000, and was $7,500,000 for 1999 and 1998, and $5,000,000 for 1997. Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of the policy liability, it does make the assuming reinsurer liable to the insurer to the extent of the reinsurance ceded. The Company's reinsurance generally has been placed with certain of the largest reinsurance companies, including (with their respective Best ratings) General Reinsurance Corporation 10 (A++) and Zurich Reinsurance (North America), Inc. (A+). The Company believes its reinsurers to be financially capable of meeting their respective obligations. However, to the extent that any reinsuring company is unable to meet its obligations, the Company's insurance subsidiaries would be liable for the reinsured risks. The Company has established reserves, which the Company believes are adequate, for any nonrecoverable reinsurance. Competition The insurance industry is a highly competitive industry, in which many of the Company's competitors have substantially greater financial resources, larger sales forces, more widespread agency and broker relationships, and more diversified lines of insurance coverage. Additionally, certain competitors market their products with endorsements from affinity groups, while the Company's products are unendorsed, which may give these other companies a competitive advantage. Federal administrative, legislative and judicial activity has resulted 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 many lines of business on a direct response basis through direct mail, telemarketing and the Internet. 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 insurance operations' RBC ratio as of December 31, 1999 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 11 with unusual trends. While the Company's insurance operations had certain "other than normal" NAIC ratios for the year ended December 31, 1999, the Company believes that it is unlikely that material adverse regulatory action will be taken. The Company's insurance subsidiaries are members of state insurance funds which provide certain protection to policyholders of insolvent insurers doing business in those states. Due to insolvencies of certain insurers, 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 $329,301,000 and $189,782,000 at December 31, 1999 and 1998, 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. During 1999, the Company acquired substantially all of the assets of Tranex. AIB purchased Tranex's subprime automobile portfolio for $67,900,000 and certain other assets for $4,000,000. Another subsidiary of the Company acquired $44,200,000 of residual interests and excess servicing assets of related securitized trusts and $12,000,000 of certain other assets. Since acquisition, AIB has been integrating Tranex's operations with its own automobile lending operations, focusing its efforts on establishing uniform underwriting criteria and procedures and reducing expenses through elimination of overhead redundancies and closing unprofitable offices. Prior to acquisition, Tranex's monthly new loan volume was at least equal to the Company's volume. While the Company's stricter underwriting standards have resulted in a reduction in Tranex's new loan volume, consolidated new loan volumes have increased significantly. The Company's consolidated banking and lending operations had outstanding loans (net of unearned finance charges) of $339,773,000 and $185,183,000 at December 31, 1999 and 1998, respectively. At December 31, 1999, 82% were loans to individuals generally collateralized by automobiles; 12% were loans to consumers, substantially all of which were collateralized by real or personal property; 1% were unsecured loans to individuals acquired from others in connection with investments in limited partnerships; 2% 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, 1999, the allowance for loan losses for the Company's entire loan portfolio was $16,975,000 or 5.0% of the net outstanding loans, compared to $9,398,000 or 5.1% of net outstanding loans at December 31, 1998. The Company's loss experience has been very favorable in recent years. While the Company attributes some of this experience to its underwriting procedures, it also recognizes it has derived substantial benefit from the strong domestic economy. Should economic conditions change and the economy weaken, the Company expects its losses would increase and a tightening of underwriting standards and procedures would be required, resulting in reduced new loan volume. 12 Collateralized personal automobile instalment loans are primarily made through automobile dealerships to individuals who have difficulty obtaining credit, at interest rates above those charged to individuals with good credit histories. The contractual maturity for automobile loans originated in 1999 was 57 months, with an anticipated average life of 22 months. The Company currently generates automobile loans in 29 states through non-exclusive relationships with dealers, with no individual state or dealership representing a significant portion of the Company's loan volume. 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, 1999, the Company generated $252,013,000 of these loans ($144,611,000 during 1999). Such amounts exclude the Tranex acquisition and the Company's purchase of a $36,900,000 portfolio of such loans in 1998. 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. The Company's banking and lending operations compete with banks, savings and loan associations, credit unions, credit card issuers and consumer finance companies, many of which are able to offer financial services on very competitive terms. Additionally, substantial national financial services networks have been formed by major brokerage firms, insurance companies, retailers and bank holding companies. Some competitors have substantial local market positions; others are part of large, diversified organizations. The Company's principal banking and lending operations are subject to detailed supervision by state authorities, as well as federal regulation pursuant to the Federal Consumer Credit Protection Act, the Truth in Lending Act, the Equal Credit Opportunity Act, the Right to Financial Privacy Act, the Community Reinvestment Act, the Fair Credit Reporting 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. FOREIGN REAL ESTATE Through its French subsidiary, Fidei, the Company owns foreign real estate properties with a book value of $87,566,000 at December 31, 1999. After considering Fidei's other assets and non-recourse liabilities, the Company's net investment in this segment was $38,129,000 at December 31, 1999. During 1999, Fidei sold 62 properties resulting in pre-tax gains of $37,900,000; at December 31, 1999, a total of 88 properties aggregating approximately 2,100,000 square feet remain. For 1999, Fidei generated $31,800,000 of pre-tax income. Since acquisition, Fidei has been marketing all of its real estate holdings for sale, which is anticipated to be substantially completed by the end of 2001. Given Fidei's attractive financing and tax loss carryforwards, the Company is seeking new investemnts for it. 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 1999 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, 1999, 1998 and 1997, the plastics division's revenues were $64,000,000, $56,600,000 and $50,900,000, respectively. 13 In order to meet existing and expected product demand in the future, the plastics division is increasing its manufacturing capacity and opening a manufacturing facility in Europe. The European facility is expected to service customers in the European and Asian markets, which are currently being serviced by the Company's domestic manufacturing facilities. The Company expects that the European facility and equipment will require a capital investment of approximately $19,500,000, some or all of which may be financed. The facility is expected to be operational in the second quarter of 2001 and should increase capacity by approximately 20% when fully operational. 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 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 conducting operations since 1981, while Archery Summit was started by the Company in 1993. These wineries produce and sell super-ultra-premium wines. During 1999, the wineries sold 76,300 9-liter equivalent cases of wine generating revenues of $13,347,000. 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. The Company expects all of its vineyards will be in substantially full production for the 2001 harvest, and with normal farming yields should result in total production of approximately 100,000 9-liter equivalent cases of wine. At December 31, 1999, the Company's combined investment in these wineries was $51,900,000. At December 31, 1999, the Company's domestic real estate investments had a book value of $196,500,000. Such real estate consists of office buildings, residential land development projects and other unimproved land, all in various stages of development and available for sale. The Company's largest domestic real estate investment is an office complex located on Capitol Hill in Washington, D.C., with a book value of $76,500,000. This complex, which consists of two office buildings totaling 630,000 square feet, is fully occupied by the D.C. Government. The Company expects to obtain financing for this complex in 2000, which is intended to repay its investment. Also included in the Company's domestic real estate is a project located in San Diego County, California, that will be a master-planned community of approximately 3,400 homes and apartments as well as commercial properties expected to be completed over the next ten years. The Company expects to earn a preferred return of 15% on its investment in this project (approximately $71,400,000 through December 31, 1999); any amounts generated above this preferred return will primarily benefit the development manager, HomeFed Corporation ("HomeFed"), the shares of which were distributed to the Company's shareholders as described in Item 5 of this Report. The Company manages each of its real estate projects separately to maximize returns on investment. 14 The Company has a 72.5% interest in MK Gold, a company that is traded on the NASD OTC Bulletin Board. During 1999, MK Gold acquired Cobre Las Cruces, S.A., a Spanish company that holds the exploration and mining rights to the Las Cruces copper deposit in the pyrite belt of Spain. The initial stages of a feasibility study conducted by the former owner indicate the existence of a resource of 15.2 million metric tonnes grading 6.1% copper that is overlain by a gold-bearing gossan (which has not been evaluated) and by 150 meters of unconsolidated overburden. This resource calculation was based upon the analysis of 279 drill holes totaling over 272,000 feet. The aforementioned feasibility study, prepared in 1998, estimated the capital cost would be approximately $300,000,000 to bring the mine into production. A bankable feasibility study is currently underway. This study will better define the future capital and operating costs of the Las Cruces Project. Actual mining will be subject to permitting (currently underway), significant financing, engineering and construction. MK Gold's interest in Cobre Las Cruces is subject to a one-year option held by an Australian mining company to purchase 35% of the company at MK Gold's cost, plus interest. 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 March 13, 2000: Carmike Cinemas, Inc. ("Carmike") (approximately 6% of Class A shares), GFSI Holdings, Inc. ("GFSI") (approximately 6%), Jordan Industries, Inc. ("JII") (approximately 10%) and PhoneTel Technologies, Inc. (approximately 7%). 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 $80,400,000 in these entities and related companies and, through December 31, 1999, has received $118,000,000 relating to the disposition of investments and management and other fees. At December 31, 1999, through these entities, the Company had interests in JII, Carmike, GFSI, JZ Equity Partners PLC (a British company traded on the London Stock Exchange in which the Company holds an approximately 6% equity interest) and a total of 31 other companies, which in total are carried in the Company's consolidated financial statements at $39,800,000. In January 2000, the Company sold its 10% equity interest in one of these entities, Jordan Telecommunication Products, Inc., for $27,000,000. 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 offices in Salt Lake City, Utah used for corporate and banking and lending activities (totaling approximately 77,000 sq. ft.). Subsidiaries of the Company own a facility (totaling approximately 158,500 sq. ft.) primarily used for manufacturing located in Georgia and facilities and land in California and Oregon (totaling approximately 98,000 square feet and 390 acres, respectively) used for winemaking operations. 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 13, 1997, a purported derivative complaint was filed in New York State Supreme Court against the Company's current Board of Directors and two former directors. The action, entitled Pinnacle Consultants, Ltd. v. Leucadia 15 National Corp., et al. (no. 602470/97), alleged violations of New York Business Corporation Law and claims for fraud, waste, breach of fiduciary duty and conversion. In February 2000, the New York Court of Appeals affirmed the Appellate Division's prior order dismissing the complaint in its entirety. In addition to the foregoing, the Company and its subsidiaries are parties to legal proceedings that are considered to be either ordinary, routine litigation incidental to their business or not material to the Company's consolidated financial position. The Company does not believe that any of the foregoing actions will have a material adverse effect on its consolidated financial position or consolidated results of operations. Item 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 13, 2000, 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 59 Chairman of the Board June 1978 Joseph S. Steinberg 56 President January 1979 Thomas E. Mara 54 Executive Vice President May 1980; and Treasurer January 1993 Joseph A. Orlando 44 Vice President and January 1994; Chief Financial Officer April 1996 Barbara L. Lowenthal 45 Vice President and April 1996 Comptroller Paul J. Borden 51 Vice President August 1988 Mark Hornstein 52 Vice President July 1983 H.E. Scruggs 43 Vice President March 2000
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 and a director of HomeFed, a California real estate developer, since May 1999. 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 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. 16 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. Mr. Scruggs joined the Company in 1995 and became Vice President in March 2000. Since 1997, Mr. Scruggs has been Chairman of AIB, the Company's national bank subsidiary. Mr. Scruggs has been a member of the faculty of Brigham Young University since 1991. 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 Bloomberg Professional Service provided by Bloomberg L.P. Historical sales prices for 1998 and 1999 have been adjusted by Bloomberg L.P. to reflect the Dividend. COMMON SHARE ------------ HIGH LOW ---- --- 1998 ---- First Quarter $23.91 $19.52 Second Quarter 23.33 19.08 Third Quarter 20.20 16.06 Fourth Quarter 18.81 15.27 1999 ---- First Quarter $19.22 $17.14 Second Quarter 23.58 17.11 Third Quarter 23.22 19.28 Fourth Quarter 23.38 19.39 2000 ---- First Quarter (through March 13, 2000) $23.00 $20.94 (b) Holders. ------- As of March 13, 2000, there were approximately 3,487 record holders of the Common Shares. (c) Dividends. --------- The Company paid no cash dividends in 1998. In 1999, the Company paid aggregate cash dividends of $13.58 per Common Share, as described more fully in Item 1, "Business", and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Report. 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"). 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 held 41.2% of the common stock of HomeFed and contracts to increase that ownership to 89.6% of HomeFed. In October 1999, the HomeFed Dividend Holders received .79 shares of HomeFed common stock for each Common Share of the Company owned on August 25, 1998. 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 18 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. 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, -------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (In thousands, except per share amounts) SELECTED INCOME STATEMENT DATA: Revenues $706,632 $530,506 $630,737 $670,443 $753,999 Net securities gains (losses) 10,885 (60,871) 3,249 24,117 15,101 Interest expense (a) 50,665 45,139 46,007 53,599 52,538 Insurance losses, policy benefits and amortization of deferred acquisition costs 174,132 279,110 327,468 355,148 364,957 Income (loss) from continuing operations before income taxes, minority expense of trust preferred securities and extraordinary loss 243,471 29,377 (24,238) (48,187) 10,286 Income (loss) from continuing operations before minority expense of trust preferred securities and extraordinary loss 198,950 54,450 (14,347) (28,861) 24,203 Minority expense of trust preferred securities, net of taxes (5,521) (8,248) (7,942) - - Income (loss) from continuing operations before extraordinary loss 193,429 46,202 (22,289) (28,861) 24,203 Income from discontinued operations, including gain on sale, net of taxes 24,201 8,141 686,161 84,376 83,300 Extraordinary loss from early extinguishment of debt, net of taxes (2,588) - (2,057) (6,838) - Net income 215,042 54,343 661,815 48,677 107,503 Per share: Basic earnings (loss) per common share: Income (loss) from continuing operations before extraordinary loss $3.26 $.73 $ (.36) $(.48) $ .42 Income from discontinued operations, including gain on sale .40 .13 11.03 1.40 1.45 Extraordinary loss (.04) - (.03) (.11) - ----- ---- ------ ----- ----- Net income $3.62 $.86 $10.64 $ .81 $1.87 ===== ==== ====== ===== ===== Diluted earnings (loss) per common share: Income (loss) from continuing operations before extraordinary loss $3.26 $.73 $ (.36) $(.48) $ .41 Income from discontinued operations, including gain on sale .40 .13 11.03 1.40 1.40 Extraordinary loss (.04) - (.03) (.11) - ----- ---- ------ ----- ----- Net income $3.62 $.86 $10.64 $ .81 $1.81 ===== ==== ====== ===== ===== (continued) 19 At December 31, -------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (In thousands, except per share amounts) SELECTED BALANCE SHEET DATA: Cash and investments $1,466,551 $2,229,895 $2,453,555 $1,246,220 $1,250,746 Total assets 3,070,227 3,958,951 3,745,336 2,776,591 2,766,501 Debt, including current maturities 483,309 722,601 352,872 520,263 513,810 Customer banking deposits 329,301 189,782 198,582 209,261 203,061 Common shareholders' equity 1,121,988 1,853,159 1,863,531 1,118,107 1,111,491 Book value per common share $19.75 $29.90 $29.17 $18.51 $18.47 Cash dividends per common share $13.58 $ - $.25 $.25 $.25 Year Ended December 31, -------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- SELECTED INFORMATION ON PROPERTY AND CASUALTY INSURANCE OPERATIONS (Unaudited): (b) GAAP Combined Ratio 138.4% 129.3% 118.5% 114.7% 113.0% SAP Combined Ratio 143.3% 134.0% 117.8% 107.9% 107.4% Industry SAP Combined Ratio (c) N/A 106.0% 101.6% 105.8% 106.4% Premium to Surplus Ratio (d) 0.8X 1.2x 1.4x 1.8x 2.2x
- -------------------- (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 1999, 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, 1999 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. 20 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, cash and other 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, 1999, the Company's readily available cash, cash equivalents and marketable securities, excluding those amounts held by its regulated subsidiaries, totaled $390,900,000. Additional sources of liquidity as of December 31, 1999 include $110,600,000 of marketable securities collateralizing letters of credit and $125,600,000 of cash, cash equivalents and marketable securities held by Fidei. 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 $250,000,000 at December 31, 1999. During 1999, the Company paid the Dividend of $13.58 per Common Share totaling $811,925,000. Pursuant to a ruling from the Internal Revenue Service, any gain realized on the Dividend will be treated as capital gain income for non-corporate shareholders. Payment of the Dividend required the Company to make an offer to purchase all of its 8-1/4% Notes and its 7-7/8% Notes at a purchase price of 101% of principal, plus accrued and unpaid interest thereon. Pursuant to such offers, in 1999, the Company repurchased $80,899,000 principal amount of the 8-1/4% Notes and $113,324,000 principal amount of the 7-7/8% Notes for $198,000,000, including accrued interest. Funds received from repayment of $150,000,000 of the Conseco Notes were used for a portion of this repurchase. Except for the Euro denominated debt of Fidei, which is non-recourse to the Company, 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. During 1999, the Company repurchased 5,182,958 Common Shares for an aggregate cost of $125,481,000. From January 1, 2000 through March 13, 2000, the Company repurchased 1,505,000 Common Shares for an aggregate cost of $32,095,000. As of March 13, 2000, the Company is authorized to repurchase an additional 4,495,000 Common Shares. Such purchases may be made from time to time 21 in the open market, through block trades or otherwise. Depending on market conditions and other factors, such purchases may be commenced or suspended at any time without prior notice. In February 1999, PepsiCo, Inc. exercised its option to purchase the Company's equity interest in PIB, its joint venture with PepsiCo, for $39,190,000, including interest. The Company recognized a pre-tax gain of $29,545,000 in connection with the purchase. 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 recorded a pre-tax gain of $120,800,000 on this sale. In July 1999, the Company sold its discontinued life insurance subsidiaries, Charter and Intramerica, to Allstate Life Insurance Company for statutory surplus, as adjusted, at the date of sale ($39,560,000), plus $3,575,000. Income in 1999 from these operations, net of taxes, was $24,201,000, of which $15,582,000 resulted from the sale, including the recognition of deferred gains from prior reinsurance transactions. In September 1999, the Company lent to MK Gold $35,800,000 and entered into a purchase agreement to increase its equity interest to 72.5%. In October 1999, the stock purchase was consummated for approximately $15,800,000 and the loan was reduced by such amount. During 1999, MK Gold acquired Cobre Las Cruces, S.A., a Spanish company that holds the exploration and mining rights to the Las Cruces copper deposit in Spain for total cash consideration of $42,000,000. The Company has replaced its two corporate owned aircraft it has used for ten years with two newer models of used aircraft. During 1999, the Company paid $43,900,000 of generally available corporate funds to acquire these aircraft, net of $8,500,000 received upon the sale of one of its older aircraft. The Company expects to receive approximately $8,000,000 for its remaining aircraft. At December 31, 1999, a maximum of $31,900,000 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, 1999 or borrowed to date in 2000. There are no restrictions on distributions from 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 $17,100,000 for the year ended December 31, 1999. 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 1999, net cash was provided by operations. 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. The investment portfolio of the Company's insurance subsidiaries principally consists of fixed maturity investments; the balance of their portfolio consists largely of preferred securities. Of the fixed maturity 22 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. During 1999, the Company acquired substantially all of the assets of Tranex, a subprime automobile lender, for $128,000,000. The Company's banking and lending subsidiary purchased Tranex's subprime automobile portfolio for $67,900,000 and certain other assets for $4,000,000. Another subsidiary of the Company acquired $44,200,000 of residual interests and excess servicing assets of related securitized trusts and $12,000,000 of certain other assets. The Company provides collateralized automobile loans to individuals with poor credit histories. The Company's investment in automobile loans was $277,100,000 and $140,400,000 at December 31, 1999 and 1998, respectively. Investments in auto loans increased in 1999 due to the purchase of Tranex's subprime automobile portfolio and due to increased new loan originations. The Company has expanded into new locations and is offering new programs. The Company believes its new loan volume has benefited from a decline in competition due to the failure of certain competitors and a reduction in capital available for securitizations. As of December 31, 1999, the principal amount of Fidei's Euro denominated outstanding debt, all of which is non-recourse to the Company, was $214,600,000 (213,200,000 Euros). Inasmuch as Fidei's Euro denominated assets will be sold over time and such assets are presently funded with Fidei's Euro denominated debt, the Company has determined not to acquire a currency hedge for Fidei's Euro denominated debt. During 1999, Fidei paid the Company $41,400,000, thereby reducing the Company's net investment in Fidei to $38,129,000 at December 31, 1999. In January 2000, the Company committed to invest up to $100,000,000 in the equity of a limited liability company ("LLC"). The LLC is managed and controlled by a third party investment manager and will invest in high yield securities. The Company may redeem its interest in the LLC annually beginning on Decmeber 31, 2001, or otherwise in certain specified circumstances. The Company will account for this investment on the equity method. 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. 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, 1999, the Company's insurance segment contributed 26% of total revenues from continuing operations and, at December 31, 1999, constituted 26% of total assets. Net earned premium revenues of the Empire Group were $145,200,000, $228,600,000 and $275,000,000 for the years ended December 31, 1999, 1998 and 1997, respectively. While earned premiums declined in all lines of business, the most significant reductions during 1999 were in assigned risk automobile 23 ($24,100,000), voluntary private passenger automobile ($26,900,000) and commercial package policies ($11,600,000). As a result of poor operating results, the Empire Group is no longer entering into new assigned risk contracts. Effective January 1, 2000, all policy renewal obligations have been assigned to another insurance company. However, the Empire Group remains liable for the claim settlement costs for assigned risk claims that occurred during the policy term. The Empire Group believes it has provided adequate reserves for such liabilities, including loss adjustment expenses. The decline in voluntary private passenger automobile resulted from tighter underwriting standards, increased competition and the Empire Group's decision to no longer accept new policies from those agents who historically have had poor underwriting results. The Empire Group's termination of certain unprofitable agents has also adversely affected premium volume in other lines of business. 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. The Empire Group's combined ratios as determined under GAAP and SAP were as follows: Year Ended December 31, ----------------------- 1999 1998 1997 ---- ---- ---- GAAP 138.4% 129.3% 118.5% SAP 143.3% 134.0% 117.8% The Empire Group's combined ratios increased in 1999 and 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 negatively affected the expense ratios. Expense ratios were also adversely affected by increased expenditures related to the installation of new information systems, providing Internet access to agents and severance costs. Included in the Empire Group's results for 1999, 1998 and 1997 were $17,000,000, $42,000,000 and $27,000,000, respectively, for reserve strengthening related to losses from prior accident years. During 1999, the Empire Group experienced unfavorable development due to an increase in severity of 1998 accident year losses in the assigned risk automobile and voluntary private passenger automobile lines, and 1996 accident year losses in certain classes of the commercial automobile line. As a result, the Empire Group increased its reserves by $7,500,000 for assigned risk automobile, $5,000,000 for voluntary private passenger automobile and $4,500,000 for commercial automobile lines. As previously discussed, the Empire Group no longer accepts new policies from certain agents identified as having had poor underwriting results in the voluntary private passenger automobile line of business and, effective January 1, 2000, the Empire Group no longer participates in the assigned risk business. Additionally, the Empire Group no longer offers insurance in those classes of the commercial automobile line that contributed to the unfavorable development. 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. As part of the review, substantially all open workers' compensation claim files were reviewed for every accident year up to and including 1998. 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. Accordingly, reserves were strengthened by 24 $13,000,000 for workers' compensation, $14,000,000 for commercial automobile and $14,000,000 for other commercial liability lines of business. The 1997 reserve strengthening included $11,000,000 for commercial package lines of business and $7,000,000 for voluntary commercial automobile lines of business. These increases resulted from a review of open claim files and the continued unfavorable development of prior accident years losses, particularly the 1992 through 1994 accident years. As a consequence of its reserve increases, the Empire Group has reduced premiums and pre-tax profits to recognize reinsurance premiums due for 1995 and prior years under retrospectively rated reinsurance agreements. Such amounts totaled $4,569,000, $1,976,000, and $5,479,000 for the years ended December 31, 1999, 1998 and 1997, respectively. The Empire Group has not entered into retrospectively rated reinsurance agreements after 1995. 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 are affected by future conditions, reserving for property and casualty claims is a complex and uncertain process requiring the use of informed estimates and judgments. As additional experience and other data become available and are reviewed, the Company's estimates and judgments 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. Banking and Lending Finance revenues and operating profits reflect the level and mix of consumer instalment loans. For 1999, although finance revenues increased due to greater average loans outstanding, operating profit declined primarily due to an increase in the provision for loan losses for the larger volume of loans outstanding. In addition, 1998 results reflected the pre-tax gain of $6,500,000 from the sale of substantially all of the Company's executive and professional loan portfolio, as well as a decline in automobile loan losses. Average loans outstanding for 1999 were $238,600,000 as compared to $148,700,000 for 1998. This increase was primarily due to the purchase of a subprime automobile portfolio in December 1998, the Tranex acquisition in 1999 and increased new loan originations. 25 Manufacturing Since December 1997, the Company's manufacturing operations have consisted of its plastics division. In 1999, revenues of the plastics division reached a record level of $64,000,000, an increase of 13% over 1998. In addition, despite rising raw material prices, the gross profit increased 16% to $24,900,000. In 1998, the gross profit for the plastics division increased by 14% to $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 in 1998 compared to 1997 was due to the sale of certain divisions and the discontinuance of certain non-performing product lines in 1997 and prior years. Other Investment and other income in 1999 included the gains on sale of Caja ($120,800,000), The Sperry and Hutchinson Company, Inc. ($18,700,000) and PIB ($29,545,000), and the gain on sale of an equity interest in an associated company ($8,700,000). Investment and other income also increased in 1999 due to increased rent income and gains from sales of real estate properties, of which $49,800,000 related to Fidei. During 1999, Fidei sold 62 real estate properties; 88 properties remain at December 31, 1999, all of which are currently being marketed for sale. Such increases were partially offset by a reduction in investment income resulting primarily from payment of the Dividend and debt repurchases described above, a reduction in investments held by the Empire Group and the gain in 1998 on the sale of the executive and professional loan portfolio. In 1998, investment and other income increased by $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). During 1998, due to declines in values that were deemed other than temporary, the Company recorded a pre-tax writedown of $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, 1999, the remaining book value of the Company's investments in these securities was $10,000,000. Equity in income (losses) of associated companies declined in 1999 and improved in 1998, primarily due to income of $30,800,000 from an investment partnership that was liquidated in 1999. In addition, in 1998, equity in income (losses) of associated companies improved as compared to 1997 due to a reduction of $48,400,000 in the Company's equity losses related to PIB. Interest expense primarily reflects the level of external borrowings outstanding throughout the periods, which increased primarily due to Fidei's outstanding debt, partially offset by the Company's debt repurchases described above. The increase in selling, general and other expenses in 1999 principally relates to expenses incurred by Fidei, higher provisions for loan losses, expenses incurred in connection with the Dividend and the recognition in 1998 of net curtailment gains. 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 in 1998, a 1997 charge for estimated costs to settle litigation relating to a lending program that has been liquidated and lower provisions for loan losses. Income taxes for 1999 reflect a benefit of $40,100,000 from the utilization of capital loss carryforwards, of which $33,300,000 was previously included in the valuation allowance. Income taxes for 1999 also reflect a benefit of $3,400,000 for the favorable resolution of certain federal income tax 26 contingencies. Income taxes for 1998 reflect a benefit of $39,000,000 for a change in the Company's estimated 1997 federal tax liability and the favorable resolution of certain contingencies. The 1997 income tax benefit was greater than the expected normal corporate tax rate primarily due to the favorable resolution of certain contingencies. The number of shares used to calculate basic earnings (loss) per share was 59,338,000, 63,409,000 and 62,205,000 for 1999, 1998 and 1997, respectively. The number of shares used to calculate diluted earnings (loss) per share was 59,352,000, 63,510,000 and 62,205,000 for 1999, 1998 and 1997, respectively. 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 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, 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, adverse environmental developments in Spain that could delay or preclude the issuance of permits necessary to develop the Company's Spanish mining rights, 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. 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 77% of the Company's total investment portfolio at December 31, 1999. 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 3.5 years at December 31, 1999. The Company's fixed income securities, like all fixed income instruments, are 27 subject to interest rate risk and will fall in value if market interest rates increase. At December 31, 1998, fixed income securities comprised approximately 90% of the Company's total investment portfolio and had an estimated weighted average remaining life of 2.5 years. During 1999, the Company's fixed income investments declined at the Empire Group and to fund the Dividend. At December 31, 1999 and 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 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. For additional information, see Notes 7, 11 and 21 to Consolidated Financial Statements. 28
Expected Maturity Date ---------------------- 2000 2001 2002 2003 2004 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 $157,797 $59,787 $171,363 $10,229 $- $70,667 $469,843 $469,843 Weighted Average Interest Rate 4.86% 5.50% 6.41% 5.46% - 5.21% Other Fixed Maturities: Rated Investment Grade $6,664 $7,983 $16,679 $15,960 $33,583 $55,072 $135,941 $135,941 Weighted Average Interest Rate 6.48% 7.16% 7.10% 6.43% 6.98% 8.19% Rated Less Than Investment Grade/Not Rated $20,010 $28,516 $24,561 $30,496 $12,028 $60,490 $176,101 $176,101 Weighted Average Interest Rate 6.11% 3.80% 5.97% 2.55% 7.41% 7.00% Held to Maturity Fixed Income Securities: U.S. Government $502 $- $5,160 $- $- $2,154 $7,816 $7,698 Weighted Average Interest Rate 5.13% - 6.47% - - 6.88% Other Fixed Maturities: Rated Investment Grade $832 $- $- $- $- $- $832 $832 Weighted Average Interest Rate 4.81% - - - - - Variable Rate Notes Receivable $- $40,000 $- $250,000 $- $- $290,000 $290,000 Weighted Average Interest Rate - 7.43% - 7.43% - - RATE SENSITIVE LIABILITIES: Fixed Interest Rate Borrowings $850 $61,367 $7,011 $84,322 $50,101 $179,122 $382,773 $387,585 Weighted Average Interest Rate 6.28% 6.32% 6.64% 6.64% 7.01% 7.69% Variable Rate Borrowings $78,507 $- $- $- $- $9,815 $88,322 $88,322 Weighted Average Interest Rate 7.04% 6.74% 6.86% 6.93% 6.98% 7.09% 29 Expected Maturity Date ---------------------- 2000 2001 2002 2003 2004 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- (Dollars in thousands) 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% BANKING AND LENDING: ------------------- RATE SENSITIVE ASSETS: Certificates of Deposit $3,870 $- $- $- $- $- $3,870 $3,870 Weighted Average Interest Rate 5.427% - - - - - 5.427% Fixed Interest Rate Securities $20,915 $14,504 $12,269 $8,030 $2,781 $13,862 $72,361 $72,060 Weighted Average Interest Rate 14.264% 14.221% 14.714% 8.726% 14.672% 8.275% 12.562% Variable Interest Rate Securities $1,695 $1,335 $1,091 $889 $695 $4,993 $10,698 $10,697 Weighted Average Interest Rate 8.125% 8.125% 8.125% 8.125% 8.125% 8.125% 8.125% Fixed Interest Rate Loans $99,480 $73,160 $57,910 $41,941 $49,729 $65 $322,285 $318,397 Weighted Average Interest Rate 20.857% 21.081% 21.174% 21.078% 18.986% 11.626% 20.704% Variable Interest Rate Loans $5,232 $82 $26 $- $- $12,148 $17,488 $17,063 Weighted Average Interest Rate 12.732% 14.621% 12.915% - - 10.500% 11.193% RATE SENSITIVE LIABILITIES: Money Market Deposits $5,550 $3,533 $3,141 $2,748 $2,355 $3,926 $21,253 $21,082 Weighted Average Interest Rate 4.140% 4.300% 4.300% 4.300% 4.300% 4.300% 4.258% Time Deposits $250,103 $29,729 $17,557 $5,921 $4,738 $- $308,048 $308,387 Weighted Average Interest Rate 5.753% 6.072% 4.583% 6.082% 5.841% - 5.719% Fixed Interest Rate Borrowings $10,925 $1,243 $46 $- $- $- $12,214 $12,205 Weighted Average Interest Rate 5.844% 10.036% 18.688% - - - 6.319% RATE SENSITIVE DERIVATIVE FINANCIAL INSTRUMENTS: Pay Fixed/Receive Variable Interest Rate Swap $- $- $- $60,000 $- $- $60,000 $3,651 Average Pay Rate 5.067% 5.067% 5.067% 5.067% - - 5.067% Average Receive Rate 6.071% 6.071% 6.071% 6.071% - - 6.071% 30 Expected Maturity Date ---------------------- 2000 2001 2002 2003 2004 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- (Dollars in thousands) OFF-BALANCE SHEET ITEMS: Commitments to Extend Credit $10 $- $- $- $- $- $10 $10 Weighted Average Interest Rate 15.400% - - - - - 15.400% Unused Lines of Credit $3,000 $- $- $- $- $27,500 $30,500 $30,500 Weighted Average Interest Rate 8.500% - - - - 5.750% 6.020%
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 2000 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. 31 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, 1999 and 1998................................................. F-2 Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997.......................................................................................... F-3 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997.......................................................................................... F-4 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997....................................................................... F-6 Notes to Consolidated Financial Statements................................................................ F-7 Financial Statement Schedule: Schedule V - Valuation and Qualifying Accounts............................................................ F-32
32 (3) Executive Compensation Plans and Arrangements. 1999 Stock Option Plan (filed as Annex A to the Company's Proxy Statement dated April 9, 1999 (the "1999 Proxy Statement")). 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. Deferred Compensation Agreement between the Company and Joseph S. Steinberg dated as of December 30, 1999. Deferred Compensation Agreement between the Company and Mark Hornstein dated as of January 10, 2000. Leucadia National Corporation Senior Executive Warrant Plan (filed as Annex B to the 1999 Proxy Statement). (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 (filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (the "1998 10-K")).* 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 1999 Stock Option Plan (filed as Annex A to the Company's 1999 Proxy Statement).* 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 (filed as Exhibit 10.3 to the 1998 10-K).* 10.4 Leucadia National Corporation Senior Executive Warrant Plan (filed as Annex B to the 1999 Proxy Statement).* - ---------------------------------- * Incorporated by reference. 33 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 (filed as Exhibit 10.6 to the 1998 10-K).* 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, Inc., 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 General Electric Capital Corporation, 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 (filed as Exhibit 10.14 to the 1998 10-K).* 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 (filed as Exhibit 10.15 to the 1998 10-K).* 10.16 Deferred Compensation Agreement between the Company and Joseph S. Steinberg dated as of December 30, 1999. 10.17 Deferred Compensation Agreement between the Company and Mark Hornstein dated as of January 10, 2000. - ---------------------------------- * Incorporated by reference. 34 21 Subsidiaries of the registrant. 27 Financial Data Schedule. 35 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 29, 2000 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 36 REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the index appearing under item 14(a) (1) (2) of this Form 10-K, presents 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 schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States 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 March 15, 2000 LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1999 and 1998 (Dollars in thousands, except par value)
1999 1998 ----------- ----------- ASSETS Investments: Available for sale (aggregate cost of $945,227 and $1,555,789) $ 944,667 $ 1,553,126 Trading securities (aggregate cost of $138,679 and $132,907) 168,285 132,576 Held to maturity (aggregate fair value of $23,983 and $47,583) 24,403 47,256 Other investments, including accrued interest income 33,138 37,247 ----------- ----------- Total investments 1,170,493 1,770,205 Cash and cash equivalents 296,058 459,690 Reinsurance receivables, net 38,086 48,070 Trade, notes and other receivables, net 876,411 833,301 Prepaids and other assets 418,447 490,242 Property, equipment and leasehold improvements, net 184,850 121,790 Deferred policy acquisition costs 11,845 18,255 Investments in associated companies 74,037 172,390 Net assets of discontinued operations -- 45,008 ----------- ----------- Total $ 3,070,227 $ 3,958,951 =========== =========== LIABILITIES Customer banking deposits $ 329,301 $ 189,782 Trade payables and expense accruals 292,677 233,485 Other liabilities 79,076 109,397 Income taxes payable 113,391 96,500 Deferred tax liability 30,423 7,709 Policy reserves 443,042 542,274 Unearned premiums 61,916 94,572 Debt, including current maturities 483,309 722,601 ----------- ----------- Total liabilities 1,833,135 1,996,320 ----------- ----------- Minority interest 16,904 11,272 ----------- ----------- Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debt securities of the Company 98,200 98,200 ----------- ----------- SHAREHOLDERS' EQUITY Common shares, par value $1 per share, authorized 150,000,000 shares; 56,801,728 and 61,984,686 shares issued and outstanding, after deducting 61,611,263 and 56,430,847 shares held in treasury 56,802 61,985 Additional paid-in capital 84,929 205,227 Accumulated other comprehensive income (loss) (9,578) (771) Retained earnings 989,835 1,586,718 ----------- ----------- Total shareholders' equity 1,121,988 1,853,159 ----------- ----------- Total $ 3,070,227 $ 3,958,951 =========== ===========
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, 1999, 1998 and 1997 (In thousands, except per share amounts)
1999 1998 1997 --------- --------- --------- Revenues: Insurance revenues and commissions $ 145,182 $ 228,576 $ 275,015 Manufacturing 64,041 56,572 133,406 Finance 50,254 31,560 40,529 Investment and other income 439,202 251,379 235,053 Equity in income (losses) of associated companies (2,932) 23,290 (56,515) Net securities gains (losses) 10,885 (60,871) 3,249 --------- --------- --------- 706,632 530,506 630,737 --------- --------- --------- Expenses: Provision for insurance losses and policy benefits 142,427 233,772 275,435 Amortization of deferred policy acquisition costs 31,705 45,338 52,033 Manufacturing cost of goods sold 39,179 35,201 94,077 Interest 50,665 45,139 46,007 Salaries 48,413 41,413 52,987 Selling, general and other expenses 150,772 100,266 134,436 --------- --------- --------- 463,161 501,129 654,975 --------- --------- --------- Income (loss) from continuing operations before income taxes, minority expense of trust preferred securities and extraordinary loss 243,471 29,377 (24,238) --------- --------- --------- Income taxes: Current 1,058 (32,649) (6,138) Deferred 43,463 7,576 (3,753) --------- --------- --------- 44,521 (25,073) (9,891) --------- --------- --------- Income (loss) from continuing operations before minority expense of trust preferred securities and extraordinary loss 198,950 54,450 (14,347) Minority expense of trust preferred securities, net of taxes 5,521 8,248 7,942 --------- --------- --------- Income (loss) from continuing operations before extraordinary loss 193,429 46,202 (22,289) Income from discontinued operations, net of taxes 8,619 8,141 58,516 Gain on disposal of discontinued operations, net of taxes of $508 and $234,059 15,582 -- 627,645 --------- --------- --------- Income before extraordinary loss 217,630 54,343 663,872 Extraordinary loss from early extinguishment of debt, net of income tax benefit of $1,394 and $1,108 (2,588) -- (2,057) --------- --------- --------- Net income $ 215,042 $ 54,343 $ 661,815 ========= ========= ========= Basic earnings (loss) per common share: Income (loss) from continuing operations before extraordinary loss $ 3.26 $ .73 $ (.36) Income from discontinued operations .14 .13 .94 Gain on disposal of discontinued operations .26 -- 10.09 Extraordinary loss (.04) -- (.03) --------- --------- --------- Net income $ 3.62 $ .86 $ 10.64 ========= ========= ========= Diluted earnings (loss) per common share: Income (loss) from continuing operations before extraordinary loss $ 3.26 $ .73 $ (.36) Income from discontinued operations .14 .13 .94 Gain on disposal of discontinued operations .26 -- 10.09 Extraordinary loss (.04) -- (.03) --------- --------- --------- Net income $ 3.62 $ .86 $ 10.64 ========= ========= =========
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, 1999, 1998 and 1997
1999 1998 1997 ----------- ----------- ----------- (In thousands) Net cash flows from operating activities: Net income $ 215,042 $ 54,343 $ 661,815 Adjustments to reconcile net income to net cash provided by (used for) operations: Extraordinary loss, net of income tax benefit 2,588 -- 2,057 Provision (benefit) for deferred income taxes 40,660 7,576 (3,753) Depreciation and amortization of property, equipment and leasehold improvements 15,399 10,250 10,913 Other amortization 32,509 38,098 59,253 Provision for doubtful accounts 15,386 9,473 11,135 Net securities (gains) losses (10,885) 60,871 (3,249) Equity in (income) losses of associated companies 2,932 (23,290) 56,515 (Gain) on disposal of real estate, property and equipment, and other assets (64,716) (33,802) (66,940) (Gain) on sales of PIB, Caja and S&H in 1999 and loan portfolio in 1998 (169,063) (6,535) -- (Gain) on disposal of discontinued operations (15,582) -- (627,645) Investments classified as trading, net (14,511) (139,715) (108,254) Deferred policy acquisition costs incurred and deferred (25,295) (39,687) (49,354) Net change in: Reinsurance receivables 9,984 (16,098) 24,459 Trade, notes and other receivables 141,490 79,960 (65,374) Prepaids and other assets (14,725) (11,054) (80,002) Net assets of discontinued operations 17,616 26,909 (37,746) Trade payables and expense accruals 33,350 24,816 60,306 Other liabilities (8,530) (43,980) (6,024) Income taxes payable 16,463 (79,191) (9,638) Policy reserves (99,232) (3,434) 13,389 Unearned premiums (32,656) (33,094) (22,753) Other 3,978 1,321 3,470 ----------- ----------- ----------- Net cash provided by (used for) operating activities 92,202 (116,263) (177,420) ----------- ----------- ----------- Net cash flows from investing activities: Acquisition of real estate, property, equipment and leasehold improvements (127,898) (79,296) (57,130) Proceeds from disposals of real estate, property and equipment, and other assets 182,128 59,814 198,287 Proceeds from sales of PIB, Caja and S&H in 1999 and loan portfolio in 1998 165,851 89,516 -- Proceeds from disposal of discontinued operations, net of expenses 43,132 -- 1,042,067 Investment in Tranex Credit Corp. and MK Gold Company in 1999 and Fidei in 1998 (133,541) (62,264) -- Advances on loan receivables (197,891) (153,920) (97,898) Principal collections on loan receivables 101,938 79,258 114,411 Purchases of investments (other than short-term) (1,810,983) (2,897,174) (1,716,242) Proceeds from maturities of investments 1,001,003 844,384 324,415 Proceeds from sales of investments 1,542,100 2,134,113 732,361 ----------- ----------- ----------- Net cash provided by investing activities 765,839 14,431 540,271 ----------- ----------- ----------- (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, 1999, 1998 and 1997
1999 1998 1997 ----------- ----------- ----------- (In thousands) Net cash flows from financing activities: Net change in short-term borrowings $ (9,798) $ 84,911 $ (50,000) Net change in customer banking deposits 138,039 (8,670) (10,646) 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 Reduction of long-term debt (200,673) (388) (30,944) Purchase of common shares for treasury (125,481) (59,348) (1,484) Dividends paid (811,925) (8,380) (15,964) ----------- ----------- ----------- Net cash provided by (used for) financing activities (1,009,838) (19,664) 47,993 ----------- ----------- ----------- Effect of foreign exchange rate changes on cash (11,835) -- -- ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents (163,632) (121,496) 410,844 Cash and cash equivalents at January 1, 459,690 581,186 170,342 ----------- ----------- ----------- Cash and cash equivalents at December 31, $ 296,058 $ 459,690 $ 581,186 =========== =========== =========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 55,237 $ 46,469 $ 48,456 Income tax payments, net of refunds $ (15,129) $ 60,266 $ 28,100
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, 1999, 1998 and 1997 (In thousands, except per share amounts)
Common Accumulated Shares Additional Other $1 Par Paid-in Comprehensive Retained Value Capital Income (Loss) Earnings Total ----- ------- ------------- -------- ----- Balance, January 1, 1997 $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 ---------- Comprehensive income: Net changes in unrealized gain (loss) on investments, net of tax benefit of $766 (1,573) (1,573) Net change in unrealized foreign exchange gain (loss), net of taxes of $1,967 (7,234) (7,234) Net income 215,042 215,042 ---------- Comprehensive income 206,235 ---------- Purchase of stock for treasury (5,183) (120,298) (125,481) Dividends ($13.58 per common share) (811,925) (811,925) ------- --------- ------- ---------- ---------- Balance, December 31, 1999 $56,802 $ 84,929 $(9,578) $ 989,835 $1,121,988 ======= ========= ======= ========== ==========
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 commercial and personal 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 commercial lines of insurance 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 principal personal lines insurance products are automobile insurance and homeowners insurance. 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"). 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 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 1999 presentation. (c) Statements of Cash Flows: The Company considers short-term investments, which have maturities of less than three months at the time of acquisition, to be cash equivalents. Cash and cash equivalents include short-term investments of $202,603,000 and $323,305,000 at December 31, 1999 and 1998, 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 ($9,981,000 and $18,992,000 as of December 31, 1999 and 1998, 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 1999 and 1998, due to declines in values that were deemed other than temporary, the Company recorded a pre-tax writedown of $2,650,000 and $75,000,000, respectively, 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 ($94,513,000 and $76,397,000 at December 31, 1999 and 1998, 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 daily pro rata method. (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 F-8 2. Significant Accounting Policies, continued: ------------------------------- settled, the 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. 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 $4,825,000 for 1999 and were not material for 1998 and 1997. Net unrealized foreign exchange gains (losses) were $(7,023,000) and $211,000 at December 31, 1999 and 1998, respectively. (m) Recently Issued Accounting Standard: In June 1999, the Financial Accounting Standards Board issued Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 ("SFAS 133")", which will be effective for fiscal years beginning after June 15, 2000. 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 the fourth quarter of 1998, the Company acquired a 95.4% interest in Compagnie Fonciere FIDEI ("Fidei"), a French company that is engaged directly and through subsidiaries in real estate activities, for approximately $62,300,000, including expenses. In the second quarter of 1999, the Company acquired the remainder of Fidei for approximately $4,700,000. During 1999, the Company acquired substantially all of the assets of Tranex Credit Corp. ("Tranex"), a subprime automobile lender, for approximately $128,000,000. Tranex's assets included its $67,900,000 subprime automobile portfolio, $44,200,000 of residual interests and excess servicing assets of related securitized trusts and approximately $16,000,000 of certain other assets. At December 31, 1998, the Company owned approximately 46% of MK Gold Company ("MK Gold") which was included in the caption "Investments in associated companies". In October 1999, the Company increased its equity interest to approximately 72.5% for cash consideration of approximately $15,800,000. During the third quarter of 1999, MK Gold acquired a company that holds the exploration and mining rights to the Las Cruces copper deposit in Spain for $42,000,000. MK Gold is now a consolidated subsidiary of the Company. F-9 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 and 1997 results of operations; data for 1999 is not shown due to immateriality. (Amounts are in thousands.) 1998 ---------- Assets $2,058,222 ---------- Liabilities 1,903,463 ---------- Minority interest -- ---------- Net assets $ 154,759 ========== The Company's portion of the reported net assets $ 47,788 ========== 1998 1997 -------- -------- Total revenues $790,778 $716,320 Income (loss) from continuing operations before extraordinary items $ 79,641 $(66,525) Net income (loss) $ 79,641 $(66,525) The Company's equity in net income (loss) $ 23,290 $(56,515) 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 was liquidated during 1999 and income realized from this investment in 1999 was not significant. 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 (which was funded in 1997) and the Company's equity interest in PIB was reduced to 37.9%. Effective February 1998, the Company discontinued accounting for this investment under the equity method of accounting as it no longer had any ability to influence PIB. In February 1999, the Company sold its interest in PIB for approximately $39,190,000 and recognized a pre-tax gain of approximately $29,545,000. However, when combined with the Company's share of the joint venture's losses since inception, the Company's net loss from this investment was approximately $40,310,000. F-10 4. Investments in Associated Companies, continued: ----------------------------------- 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. 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 recorded a pre-tax gain of approximately $120,800,000 in 1999 results of operations. 5. Insurance Operations: -------------------- The changes in deferred policy acquisition costs were as follows (in thousands): 1999 1998 1997 -------- -------- -------- Balance, January 1, $ 18,255 $ 23,906 $ 26,585 Policy acquisition costs incurred and deferred 25,295 39,687 49,354 Amortization of deferred acquisition costs (31,705) (45,338) (52,033) -------- -------- -------- Balance, December 31, $ 11,845 $ 18,255 $ 23,906 ======== ======== ======== The effect of reinsurance on premiums written and earned for the years ended December 31, 1999, 1998 and 1997 is as follows (in thousands):
1999 1998 1997 -------- -------- -------- Premiums Premiums Premiums Premiums Premiums Premiums Written Earned Written Earned Written Earned -------- -------- -------- -------- -------- ------- Direct $132,044 $164,684 $214,878 $247,913 $282,217 $304,891 Assumed 534 553 93 148 200 280 Ceded (19,317) (20,055) (17,528) (19,485) (29,184) (30,156) -------- -------- -------- -------- -------- -------- Net $113,261 $145,182 $197,443 $228,576 $253,233 $275,015 ======== ======== ======== ======== ======== ======== Percentage of amount assumed to net .47% .38% .05% .06% .08% .10% ======== ======== ======== ======== ======== ========
Recoveries recognized on reinsurance contracts were $8,396,000 in 1999, $38,958,000 in 1998 and $29,786,000 in 1997. F-11 5. Insurance Operations, continued: -------------------- 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 $(20,474,000), $(9,410,000) and $3,405,000 for the years ended December 31, 1999, 1998 and 1997, respectively. The related statutory surplus was $149,949,000, $199,772,000 and $217,925,000 at December 31, 1999, 1998 and 1997, respectively. As of December 31, 1999, the statutory surplus of the Empire Insurance Group was $139,561,000. The insurance subsidiaries are subject to regulatory restrictions which limit the amount of cash and other distributions available to the Company without regulatory approval. As of December 31, 1999, $12,963,000 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, 1999. The changes in the liabilities include adjustments for the current year's business and changes in estimates of prior years' liabilities. 1999 1998 1997 -------- -------- -------- (In thousands) Net SAP liability for losses and LAE at beginning of year $469,318 $487,116 $481,138 -------- -------- -------- Provision for losses and LAE for claims occurring in the current year 124,172 191,482 248,408 Increase in estimated losses and LAE for claims occurring in prior years 18,255 42,290 27,027 -------- -------- -------- Total incurred losses and LAE 142,427 233,772 275,435 -------- -------- -------- Losses and LAE payments for claims occurring during: Current year 41,955 64,739 80,149 Prior years 188,240 186,831 189,308 -------- -------- -------- 230,195 251,570 269,457 -------- -------- -------- Net SAP liability for losses and LAE at end of year 381,550 469,318 487,116 Reinsurance recoverable 61,492 72,956 58,592 -------- -------- -------- Liability for losses and LAE at end of year as reported in financial statements (GAAP) $443,042 $542,274 $545,708 ======== ======== ======== F-12 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") 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 was being amortized into income based upon actuarial estimates of the premium revenue of the underlying insurance contracts. In July 1999, the Company sold its life insurance subsidiaries, Charter and Intramerica, to Allstate for statutory surplus, as adjusted, at the date of sale (approximately $39,560,000), plus $3,575,000. The Company recorded a net gain of $15,582,000 in 1999, principally resulting from recognition of deferred gains from prior reinsurance transactions, including the reinsurance transaction described above. 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 was 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 was 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 the components of net assets of discontinued operations are as follows (in thousands): Investments $ 65,788 Cash and cash equivalents 3,032 Separate account assets 619,578 Notes and other receivables 179,580 Other 15,425 -------- Total assets 883,403 -------- Policy reserves 179,083 Separate account liabilities 619,578 Other 39,734 -------- Total liabilities 838,395 -------- Net assets of discontinued operations $ 45,008 ======== F-13 6. Discontinued Operations, continued: ----------------------- A summary of the results of discontinued operations for Charter and Intramerica (through the date of sale) is as follows for each of the three years in the period ended December 31, 1999 (in thousands): 1999 1998 1997 -------- -------- -------- Revenues $ 13,561 $ 10,799 $ 12,739 -------- -------- -------- Expenses: Provision for insurance losses and policy benefits -- (646) 1,898 Other operating expenses 279 (1,079) 11,537 -------- -------- -------- 279 (1,725) 13,435 -------- -------- -------- Income (loss) before income taxes 13,282 12,524 (696) Income taxes 4,663 4,383 (360) -------- -------- -------- Income (loss) from discontinued operations, net of taxes $ 8,619 $ 8,141 $ (336) ======== ======== ======== A summary of the results of discontinued operations for the Colonial Penn P&C Group and the Colonial Penn Life Group (through the dates of sale) is as follows for the year ended December 31, 1997 (in thousands): Colonial Penn Colonial Penn P&C Group Life Group ------------- ------------- Revenues $512,811 $166,078 -------- -------- Expenses: Provision for insurance losses and policy benefits 373,602 100,964 Other operating expenses 86,519 28,341 -------- -------- 460,121 129,305 -------- -------- Income before income taxes 52,690 36,773 Income taxes 18,329 12,282 -------- -------- Income from discontinued operations, net of taxes $ 34,361 $ 24,491 ======== ======== 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, 1999 and 1998 are as follows (in thousands):
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ------- Held to maturity: 1999 - ---- Bonds and notes: United States Government agencies and authorities $ 14,162 $ 10 $ 266 $ 13,906 States, municipalities and political subdivisions 5,389 -- 161 5,228 All other corporates 159 -- 3 156 Other fixed maturities 4,693 -- -- 4,693 -------- -------- -------- -------- $ 24,403 $ 10 $ 430 $ 23,983 ======== ======== ======== ======== 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 ======== ======== ======== ======== Available for sale: 1999 - ---- Bonds and notes: United States Government agencies and authorities $494,125 $ 113 $ 9,823 $484,415 States, municipalities and political subdivisions 853 -- 20 833 Foreign governments 13,660 32 199 13,493 Public utilities 1,872 -- 27 1,845 All other corporates 290,457 10,901 4,654 296,704 Other fixed maturities 52,933 -- -- 52,933 -------- -------- -------- -------- Total fixed maturities 853,900 11,046 14,723 850,223 -------- -------- -------- -------- Equity securities: Preferred stocks 5,570 -- 3,319 2,251 Common stocks: Banks, trusts and insurance companies 67,438 4,745 2,547 69,636 Industrial, miscellaneous and all other 15,858 5,381 1,142 20,097 -------- -------- -------- -------- Total equity securities 88,866 10,126 7,008 91,984 -------- -------- -------- -------- Other 2,461 -- 1 2,460 -------- -------- -------- -------- $945,227 $ 21,172 $ 21,732 $944,667 ======== ======== ======== ========
F-15 7. Investments, continued: -----------
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- 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 ========== ========== ========== ==========
At December 31, 1999, investments included publicly traded common stock equity interests of 5% or more in the following non-consolidated domestic companies: Carmike Cinemas, Inc. (6% of Class A shares) and PhoneTel Technologies, Inc. (7%). Net unrealized gains (losses) on investments were $(2,555,000), $(982,000) and $5,630,000 at December 31, 1999, 1998 and 1997, respectively. Reclassification amounts included in comprehensive income for the years ended December 31, 1999 and 1998 are as follows (in thousands): 1999 1998 ------- ------- Unrealized holding (losses) arising during the period, net of tax benefit of $3,058 and $1,366 $(5,829) $(2,467) Less: reclassification adjustment for (gains) losses included in net income, net of taxes of $(2,292) and $2,230 4,256 (4,145) ------- ------- Net change in unrealized gain (loss) on investments, net of tax benefit of $766 and $3,596 $(1,573) $(6,612) ======= ======= The amortized cost and estimated fair value of investments classified as held to maturity and as available for sale at December 31, 1999, 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. F-16 7. Investments, continued: ----------- Held to Maturity Available for Sale ---------------- ------------------ Estimated Estimated Amortized Fair Amortized Fair Cost Value Cost Value -------- -------- -------- -------- (In thousands) Due in one year or less $ 5,473 $ 5,464 $203,265 $204,274 Due after one year through five years 9,727 9,502 442,866 443,248 Due after five years through ten years 5,095 5,044 161,028 156,433 Due after ten years 3,017 2,893 17,780 17,509 ------- ------- -------- -------- 23,312 22,903 824,939 821,464 Mortgage-backed securities 1,091 1,080 28,961 28,759 ------- ------- -------- -------- $24,403 $23,983 $853,900 $850,223 ======= ======= ======== ======== At December 31, 1999 and 1998 securities with book values aggregating $8,056,000 and $8,119,000, respectively, were on deposit with various regulatory authorities. Additionally, at December 31, 1999 and 1998, 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. Certain information with respect to trading securities at December 31, 1999 and 1998 is as follows (in thousands): Amortized Estimated Carrying Cost Fair Value Value -------- -------- -------- 1999 - ---- Fixed maturities - corporate bonds and notes $ 22,248 $ 25,542 $ 25,542 Equity securities: Preferred stocks 97,668 115,704 115,704 Common stocks - industrial, miscellaneous and all other 23 34 34 Options and warrants 2,271 1,367 1,367 Other investments 16,469 25,638 25,638 -------- -------- -------- Total trading securities $138,679 $168,285 $168,285 ======== ======== ======== 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 ======== ======== ======== F-17 8. Trade, Notes and Other Receivables, Net: --------------------------------------- A summary of trade, notes and other receivables, net at December 31, 1999 and 1998 is as follows (in thousands): 1999 1998 --------- --------- Note receivable from Conseco, Inc. from sale of the Colonial Penn Life Group (including accrued interest) (see Note 6) $253,820 $405,854 Instalment loan receivables, net of unearned finance charges of $2,599 and $3,026(a) 339,773 185,183 Receivables related to securities 107,094 112,684 Receivables relating to real estate activities 90,868 68,863 Note receivable from sale of Caja (including accrued interest) (see Note 4) 41,543 -- Tenant receivables of Fidei 38,807 53,775 Premiums receivable 25,368 40,374 Other 32,977 23,590 -------- -------- 930,250 890,323 Allowance for doubtful accounts (53,839) (57,022) -------- -------- $876,411 $833,301 ======== ======== (a) Contractual maturities of instalment loan receivables at December 31, 1999 were as follows (in thousands): 2000 - $70,643; 2001 - $61,839; 2002 - $66,621; 2003 - $63,388; and 2004 and thereafter - $77,282. 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. 9. Prepaids and Other Assets: ------------------------- At December 31, 1999 and 1998, prepaids and other assets included real estate assets, net, of $284,093,000 and $397,404,000, respectively. Approximately $87,566,000 and $245,870,000, respectively, of the 1999 and 1998 real estate investments consist 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. Prepaids and other assets at December 31, 1999 also included approximately $44,000,000 of mining properties, net, related to MK Gold. F-18 10. Trade Payables, Expense Accruals and Other Liabilities: ------------------------------------------------------ A summary of trade payables and expense accruals and other liabilities at December 31, 1999 and 1998 is as follows (in thousands): 1999 1998 -------- -------- Trade Payables and Expense Accruals: Payables related to securities $203,164 $144,088 Trade and drafts payable 29,581 27,629 Accrued compensation, severance and other employee benefits 25,643 19,088 Accrued interest payable 10,552 14,420 Other 23,737 28,260 -------- -------- $292,677 $233,485 ======== ======== Other Liabilities: Liability for unredeemed trading stamps $ -- $ 19,517 Postretirement and postemployment benefits 16,397 18,855 Liabilities related to real estate activities 20,635 15,068 Unearned service fees 3,663 7,465 Other 38,381 48,492 -------- -------- $ 79,076 $109,397 ======== ======== 11. Indebtedness: ------------ The principal amount, stated interest rate and maturity of debt outstanding at December 31, 1999 and 1998 are as follows (dollars in thousands): 1999 1998 -------- -------- Payable in U.S. dollars: Senior Notes: Bank credit facility $ 65,500 $ 65,500 7 3/4% Senior Notes due 2013, less debt discount of $681 and $731 99,319 99,269 Industrial Revenue Bonds (with variable interest) 9,815 9,815 Other due 2000 through 2016 with a weighted average interest rate of 8.5% 53,401 64,182 -------- -------- 228,035 238,766 -------- -------- Subordinated Notes: 8 1/4% Senior Subordinated Notes due 2005 19,101 100,000 7 7/8% Senior Subordinated Notes due 2006, less debt discount of $76 and $540 21,600 134,460 -------- -------- 40,701 234,460 -------- -------- Payable in other currencies: Euro denominated debt due 2001 through 2009 with a weighted average effective interest rate of 5.1% 214,573 249,375 -------- -------- $483,309 $722,601 ======== ======== At December 31, 1999 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, 1999. F-19 11. Indebtedness, continued: ------------ The Euro denominated debt, which is non-recourse to the Company, is entirely related to the acquisition of Fidei. The Company's debt instruments require maintenance of minimum Tangible Net Worth, limit distributions to shareholders and limit Indebtedness, as defined in the agreements. In addition, the debt instruments contain limitations on investments, liens, contingent obligations and certain other matters. As of December 31, 1999, cash dividends of approximately $122,000,000 would be eligible to be paid under the most restrictive covenants. Under the terms of the indentures of the Company's senior subordinated notes, in connection with the payment of the dividends described in Note 13, the Company was required to make an offer to purchase all of its 8 1/4% Senior Subordinated Notes due 2005 (the "8 1/4% Notes") and its 7 7/8% Senior Subordinated Notes due 2006 (the "7 7/8% Notes"), at a purchase price of 101% of principal, plus accrued and unpaid interest thereon. Pursuant to such offers, in June 1999, the Company repurchased $80,899,000 principal amount of the 8 1/4% Notes and $113,324,000 principal amount of the 7 7/8% Notes for approximately $198,000,000, including accrued interest. The Company reported an extraordinary loss on early extinguishment of $3,982,000 ($2,588,000 after taxes or $.04 per share) in 1999. 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. Approximately $9,484,000 of the manufacturing division's net property, equipment and leasehold improvements are pledged as collateral for the Industrial Revenue Bonds; and approximately $126,800,000 of other assets (primarily investments and property) are pledged for other indebtedness aggregating approximately $53,401,000. 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, 1999 and 1998, the notional amounts of the Company's interest rate swaps were $60,000,000. These interest rate swaps expire in 2003 and require fixed rate payments of 5.07%. The Company would have received $3,651,000 at December 31, 1999 and $292,000 at December 31, 1998 on retirement of these agreements. The LIBOR rate at December 31, 1999 was 6.0%. 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 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 were terminated in 1999 and the gain on such termination (approximately $6,200,000) was deferred as a component of shareholders' equity. Counterparties to interest rate and currency swap agreements are major financial institutions, which management believes are able to fulfill their obligations. Management believes 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, 2004 are as follows (in thousands): 2000 - $90,282; 2001 - $62,610; 2002 - $7,057; 2003 - $84,322; and 2004 - $50,101. The weighted average interest rate on short-term borrowings (primarily customer banking deposits) was 6.0% and 5.8% at December 31, 1999 and 1998, respectively. F-20 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 December 1999, the Company's Board of Directors increased to 6,000,000 the maximum number of shares that the Company is authorized to purchase. From January 1, 2000 through March 13, 2000, the Company acquired 1,505,000 Common Shares at an average price of $21.33 per Common Share. As a result, as of March 13, 2000, the Company is authorized to repurchase 4,495,000 Common Shares. During 1999, the Company paid aggregate cash dividends of $13.58 per Common Share, totaling approximately $811,925,000. Pursuant to a ruling from the Internal Revenue Service, any gain realized on these dividends will be treated as capital gain income for non-corporate shareholders. 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 300,000 shares to any individual in a given taxable year. The maximum number of Common Shares which may be acquired through the exercise of options or rights under this plan cannot exceed, in the aggregate, 1,200,000. 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 options are outstanding at December 31, 1999. 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 1999, 1998 and 1997 would not have been materially different from those reported. F-21 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, 1999 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, 1997 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 ======= ========= Cancelled (322,038) $25.37 --------- Balance at December 31, 1999 -- $ -- -- 1,200,000 ========= ======= ========= The weighted-average fair value of the options granted was $8.50 per share for 1998 and $6.39 per share for 1997 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 and 20.3% for 1997; (2) risk-free interest rates of 5.6% for 1998 and 6.1% for 1997; (3) expected lives of 4.0 years for 1998 and 3.7 years for 1997; and (4) dividend yields of .7% for 1998 and .9% for 1997. At December 31, 1999 and 1998, 6,000,000 preferred shares (redeemable and non- redeemable), par value $1 per share, were authorized. 14. Net Securities Gains (Losses): ----------------------------- The following summarizes net securities gains (losses) for each of the three years in the period ended December 31, 1999 (in thousands): 1999 1998 1997 -------- -------- -------- Net realized gains on fixed maturities $ 32,616 $ 13,021 $ 1,340 Writedown related to investments in Russian and Polish debt and equity securities (2,650) (75,371) -- Net unrealized gains (losses) on trading securities 5,878 (1,456) 2,932 Net realized gains (losses) on equity and other securities (24,959) 2,935 (1,023) -------- -------- -------- $ 10,885 $(60,871) $ 3,249 ======== ======== ======== Proceeds from sales of investments classified as available for sale were $1,558,358,000, $1,687,385,000 and $734,443,000 during 1999, 1998 and 1997, respectively. Gross gains of $24,201,000, $24,964,000 and $6,054,000 and gross losses of $13,310,000, $33,784,000 and $2,403,000 were realized on these sales during 1999, 1998 and 1997, respectively. F-22 15. Other Results of Operations Information: --------------------------------------- Investment and other income for each of the three years in the period ended December 31, 1999 consist of the following (in thousands): 1999 1998 1997 -------- -------- -------- Interest on short-term investments $ 22,789 $ 24,246 $ 14,301 Interest on fixed maturities 55,252 94,547 72,084 Interest on notes receivable 23,989 27,326 6,789 Other investment income 18,749 14,983 4,191 Service fee income 9,143 13,169 32,257 Rental income 35,862 16,864 8,082 Gain on sale of Caja 120,793 -- -- Gain on sale of The Sperry and Hutchinson Company, Inc. 18,725 -- -- Gain on sale of PIB 29,545 -- -- Gains on sale of real estate and other assets, net of costs 64,896 34,733 75,298 Gain on sale of loan portfolio -- 6,535 -- Other 39,459 18,976 22,051 -------- -------- -------- $439,202 $251,379 $235,053 ======== ======== ======== 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 $10,819,000 (including $1,868,000 of premium taxes) for the year ended December 31, 1999, $10,563,000 (including $3,131,000 of premium taxes) for the year ended December 31, 1998 and $10,707,000 (including $4,137,000 of premium taxes) for the year ended December 31, 1997. Advertising costs amounted to $1,181,000, $2,150,000 and $4,026,000 for the years ended December 31, 1999, 1998 and 1997, respectively. F-23 16. Income Taxes: ------------ The principal components of the deferred tax liability at December 31, 1999 and 1998 are as follows (in thousands): 1999 1998 --------- --------- Deferred Tax Asset: Insurance reserves and unearned premiums $ 22,092 $ 30,868 Securities valuation reserves 41,554 47,112 Other accrued liabilities 3,833 1,556 Unrealized losses on investments 1,567 1,106 Foreign tax loss carryforwards 53,000 53,000 Tax loss carryforwards, net of tax sharing payments 21,597 63,228 --------- --------- 143,643 196,870 Valuation allowance (123,506) (156,806) --------- --------- 20,137 40,064 --------- --------- Deferred Tax Liability: Instalment sale (7,000) (12,000) Depreciation (9,515) (6,098) Policy acquisition costs (4,146) (6,389) Other, net (29,899) (23,286) --------- --------- (50,560) (47,773) --------- --------- Net deferred tax liability $ (30,423) $ (7,709) ========= ========= The valuation allowance principally relates to uncertainty as to the realization of certain acquired tax loss carryforwards, the foreign tax loss carryforwards and unrealized capital losses. The provision (benefit) for income taxes for each of the three years in the period ended December 31, 1999 was as follows (in thousands): 1999 1998 1997 -------- -------- -------- State income taxes (currently payable) $ 1,000 $ (1,500) $ 3,729 Federal income taxes: Current (517) (31,249) (10,375) Deferred 31,136 7,576 (3,753) Foreign income taxes: Current 575 100 508 Deferred 12,327 -- -- -------- -------- -------- $ 44,521 $(25,073) $ (9,891) ======== ======== ======== The table below reconciles expected statutory federal income tax to actual income tax provision (benefit) (in thousands): 1999 1998 1997 -------- -------- -------- Expected federal income tax $ 85,215 $ 10,282 $ (8,483) State income taxes, net of federal income tax benefit 650 (975) 2,424 Reduction in valuation allowance (33,300) (8,065) (1,890) Recognition of additional tax benefits (10,238) (30,870) (2,719) Tax on policyholder surplus account -- 5,406 -- Other 2,194 (851) 777 -------- -------- -------- Actual income tax provision (benefit) $ 44,521 $(25,073) $ (9,891) ======== ======== ======== F-24 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 federal income tax contingencies, in 1999, a $6,800,000 tax benefit from the recognition of additional capital losses, and, in 1998, a benefit for a change in the Company's 1997 estimated federal income tax liability. During 1999, the valuation allowance was reduced by $33,300,000 due to the availability of capital loss carryforwards to offset a portion of the capital gain from the sale of the Company's interest in Caja. During 1998 and 1997 certain matters were favorably resolved and the Company reduced the valuation allowance as reflected in the above reconciliation. At December 31, 1999, the Company had tax loss carryforwards of $34,000,000, 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 $25,000,000, which can only be used to reduce federal income tax payments for the group that generated the carryforwards. 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 as follows: $31,000,000 in 2003 through 2010 and $3,000,000 in 2018. The tax loss carryforwards of the Company's domestic subsidiaries expire in 2002 and 2003. At December 31, 1999, the Company's foreign subsidiary, Fidei, had tax loss carryforwards of $147,000,000, of which $103,000,000 expire in 2000 through 2007 and $44,000,000 have no expiration date. Limitations exist under the tax law which may restrict the utilization of the tax loss carryforwards and capital losses 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. 17. Pension Plans and Postretirement Benefits: ----------------------------------------- The Company has defined contribution pension plans covering certain employees. Contributions and costs are a percent of each covered employee's salary. Amounts charged to expense related to such plans were $2,816,000, $1,057,000 and $1,202,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Prior to 1999, the Company also maintained defined benefit pension plans covering employees of certain units who also met age and service 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. F-25 17. Pension Plans and Postretirement Benefits, continued: ----------------------------------------- A summary of activity with respect to the Company's defined benefit pension plans for 1999 and 1998 is as follows (in thousands): 1999 1998 --------- --------- Projected Benefit Obligation: Projected benefit obligation at January 1, $ 63,395 $ 100,314 Service cost (a) -- 2,590 Interest cost (a) 4,237 5,536 Actuarial (gain) loss (2,361) 561 Benefits paid (3,400) (5,055) Settlements (5,115) (31,060) Curtailment -- (9,491) --------- --------- Projected benefit obligation at December 31, $ 56,756 $ 63,395 ========= ========= Change in Plan Assets: Fair value of plan assets at January 1, $ 62,482 $ 93,088 Actual return of plan assets 577 5,186 Employer contributions 226 1,076 Benefits paid (3,400) (5,012) Administrative expenses (220) (626) Settlements (7,578) (31,230) --------- --------- Fair value of plan assets at December 31, $ 52,087 $ 62,482 ========= ========= Funded Status $ (4,669) $ (913) Unrecognized prior service cost 63 66 Unrecognized net loss from experience differences and assumption changes 5,802 2,356 --------- --------- Accrued pension asset $ 1,196 $ 1,509 ========= ========= (a) Includes $369 for 1998 relating to discontinued operations' obligations which were retained Pension expense related to the defined benefit pension plans charged to operations included the following components (in thousands): 1999 1998 1997 ------- ------- ------- Service cost $ -- $ 2,542 $ 2,240 Interest cost 4,237 5,215 3,645 Expected return on plan assets (4,537) (5,108) (3,330) Amortization of prior service cost 3 (89) (72) Amortization of transition obligation -- 121 95 Recognized net actuarial loss -- 171 152 ------- ------- ------- Net pension (income) expense $ (297) $ 2,852 $ 2,730 ======= ======= ======= The projected benefit obligation at December 31, 1999 and 1998 was determined using an assumed discount rate of 7.25% and 6.75%, respectively, and the assumed long-term rate of return on plan assets was 7.5% at December 31, 1999 and 1998. F-26 17. Pension Plans and Postretirement Benefits, continued: ----------------------------------------- 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 credited to expense (principally amortization of a curtailment gain) related to such benefits were $1,369,000 in 1999, $1,990,000 in 1998 and $2,851,000 in 1997. A summary of activity with respect to the Company's postretirement plans for 1999 and 1998 is as follows (in thousands): 1999 1998 -------- -------- Accumulated postretirement benefit obligation at January 1, $11,891 $11,090 Service cost 32 30 Interest cost 765 805 Contributions by plan participants 231 401 Actuarial (gain) loss (1,538) 906 Benefits paid (1,198) (1,341) ------- ------- Accumulated postretirement benefit obligation at December 31, 10,183 11,891 Unrecognized prior service cost 304 2,259 Unrecognized net actuarial gain 3,807 2,482 ------- ------- Accrued postretirement benefit obligation $14,294 $16,632 ======= ======= The discount rate used in determining the accumulated postretirement benefit obligation was 8.00% and 6.75% at December 31, 1999 and 1998, respectively. The assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation were between 6.0% and 9.0% for 1999, and 6.0% and 9.5% for 1998, 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, 1999 would have increased or decreased by $705,000 and $626,000, respectively. The effect of these changes on the aggregate of service and interest cost for 1999 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 $10,964,000 in 1999, $7,680,000 in 1998 and $7,307,000 in 1997. Aggregate minimum annual rentals (exclusive of real estate taxes, maintenance and certain other charges) relating to facilities under lease in effect at December 31, 1999 are as follows (in thousands): 2000 - $9,728; 2001 - $9,341; 2002 - $9,211; 2003 - - $8,361; 2004 - $8,683; and thereafter - $101,321. Future minimum sublease rental income relating to facilities under lease in effect at December 31, 1999 are as follows (in thousands): 2000 - $1,067; 2001 - $1,075; 2002 - $1,085; 2003 - - $1,094; 2004 - $963; and thereafter - $3,203. Included in the amounts shown above are the gross future minimum annual rental payments relating to a twenty year lease which the Empire Insurance 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 $23,138,000 was invested as of December 31, 1999. F-27 18. Commitments, continued: ----------- 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 $105,263,000. 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 $259,300,000 at December 31, 1999. 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. 20. Earnings (Loss) Per Common Share: -------------------------------- For each of the three years in the period ended December 31, 1999, there were no differences in the numerators for the basic and diluted per share computations for income (loss) from continuing operations before extraordinary loss. These numerators were $193,429,000, $46,202,000 and $(22,289,000) for 1999, 1998 and 1997, respectively. The denominators for basic per share computations were 59,338,000, 63,409,000 and 62,205,000 for 1999, 1998 and 1997, respectively. There were no differences for the denominators for diluted per share computations except for the dilutive effect of approximately 14,000 and 101,000 options for 1999 and 1998, respectively, which had no impact on the per share amounts. Options to purchase approximately 887,000 weighted average shares of common stock were outstanding during the year ended December 31, 1997, but were not included in the computation of diluted (loss) per share, as those options were antidilutive. Additionally, during the period January 1, 1997 through April 11, 1997, the 5 1/4% Debentures, which were convertible into approximately 3,478,000 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 sales of the Colonial Penn Life Group and Caja: The fair values of variable rate notes receivable are 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. 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. The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1999 and 1998 are as follows (in thousands):
1999 1998 ---- ---- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Financial Assets: Investments $1,170,493 $1,170,073 $1,770,205 $1,770,532 Cash and cash equivalents 296,058 296,058 459,690 459,690 Notes receivable on sales of the Colonial Penn Life Group and Caja (including accrued interest) 295,363 295,363 405,854 405,854 Loan receivables of banking and lending subsidiaries, net of allowance 322,798 335,460 175,785 186,099 Investments in associated companies 74,037 87,853 172,390 306,071 Financial Liabilities: Customer banking deposits 329,301 329,469 189,782 192,822 Debt 483,309 488,112 722,601 729,527 Securities sold not owned 188,141 188,141 144,088 144,088 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debt securities of the Company 98,200 99,182 98,200 99,182
F-29 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, pages 3 and 4, of the Report, which is incorporated by reference into these consolidated financial statements. 23. Selected Quarterly Financial Data (Unaudited): ---------------------------------------------
First Second Third Fourth Quarter Quarter Quarter Quarter -------- -------- -------- -------- (In thousands, except per share amounts) 1999: Revenues $298,585 $139,397 $131,336 $137,314 ======== ======== ======== ======== Income from continuing operations before extraordinary loss $148,214 $ 15,318 $ 21,446 $ 8,451 ======== ======== ======== ======== Income from discontinued operations, net of taxes $ 8,101 $ 518 $ -- $ -- ======== ======== ======== ======== Gain on disposal of discontinued operations, net of taxes $ -- $ -- $ 15,582 $ -- ======== ======== ======== ======== Extraordinary loss from early extinguishment of debt, net of income tax benefit $ -- $ (2,588) $ -- $ -- ======== ======== ======== ======== Net income $156,315 $ 13,248 $ 37,028 $ 8,451 ======== ======== ======== ======== Basic earnings (loss) per common share: Income from continuing operations $ 2.42 $ .25 $ .36 $ .15 Income from discontinued operations .13 .01 -- -- Gain on disposal of discontinued operations -- -- .27 -- Extraordinary loss -- (.04) -- -- -------- -------- -------- -------- Net income $ 2.55 $ .22 $ .63 $ .15 ======== ======== ======== ======== Number of shares used in calculation 61,338 60,020 58,865 56,882 ======== ======== ======== ======== Diluted earnings (loss) per common share: Income from continuing operations $ 2.42 $ .25 $ .36 $ .15 Income from discontinued operations .13 .01 -- -- Gain on disposal of discontinued operations -- -- .27 -- Extraordinary loss -- (.04) -- -- -------- -------- -------- -------- Net income $ 2.55 $ .22 $ .63 $ .15 ======== ======== ======== ======== Number of shares used in calculation 61,393 60,020 58,865 56,882 ======== ======== ======== ========
F-30 23. Selected Quarterly Financial Data (Unaudited), continued: ---------------------------------------------
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 ======== ======== ======== ========
In 1999 and 1998, the totals of quarterly per share amounts do not necessarily equal annual per share amounts. First quarter 1999 includes pre-tax gains on the sale of Caja ($120,793,000), The Sperry and Hutchinson Company, Inc. ($18,725,000) and PIB ($29,545,000). F-31 SCHEDULE V - Valuation and Qualifying Accounts LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES For the years ended December 31, 1999, 1998 and 1997
Additions Deductions ------------------------------------- --------------------- Charged Balance at to Costs Balance Beginning and Write- Sale of Translation at End of Description of Period Expenses Recoveries Acquisitions Offs Receivables (Gain) Loss Period ----------- --------- -------- ---------- ------------ ---- ----------- ----------- ------ (In thousands) 1999 - ---- Loan receivables of banking and lending subsidiaries $ 9,398 $11,401 $ 5,455 $ -- $ 9,279 $ -- $ -- $16,975 Trade, notes and other receivables 47,624 3,985 2,828 -- 11,736 130 (5,707) 36,864 ------- ------- ------- ---------- ------- ------- ---------- ------- Total allowance for doubtful accounts $57,022 $15,386 $ 8,283 $ -- $21,015 $ 130 $ (5,707) $53,839 ======= ======= ======= ========== ======= ======= ========== ======= 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 ======= ======= ======= ========== ======= ======= ========== =======
F-32 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 (filed as Exhibit 3.2 to the 1998 10-K).* 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 1999 Stock Option Plan (filed as Annex A to the Company's 1999 Proxy Statement).* 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 (filed as Exhibit 10.3 to the 1998 10-K).* 10.4 Leucadia National Corporation Senior Executive Warrant Plan (filed as Annex B to the 1999 Proxy Statement).* 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 1997 10-K).* 10.6 Deferred Compensation Agreement between the Company and Joseph S. Steinberg dated December 8, 1998 (filed as Exhibit 10.6 to the 1998 10-K).* 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 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).* - ---------------------------------- * Incorporated by reference. Exhibit Exemption Number Description Indication - ------ ----------- ---------- 10.10 Purchase Agreement among Conseco, Inc., 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 General Electric Capital Corporation, 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 (filed as Exhibit 10.14 to the 1998 10-K).* 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 (filed as Exhibit 10.15 to the 1998 10-K).* 10.16 Deferred Compensation Agreement between the Company and Joseph S. Steinberg dated as of December 30, 1999. 10.17 Deferred Compensation Agreement between the Company and Mark Hornstein dated as of January 10, 2000. 21 Subsidiaries of the registrant. 27 Financial Data Schedule.
- ---------------------------------- * Incorporated by reference. EX-10.16 2 EXHIBIT 10.16 ------------- DEFERRED COMPENSATION AGREEMENT ------------------------------- THIS DEFERRED COMPENSATION AGREEMENT, (the "Agreement") is made as of December 30, 1999 and memorializes the oral agreement entered into on December 14, 1999 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 provisions 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 convenants and agreements herein contained, the Parties hereby agree as follows: 1. Deferral of Payments. The Company, commencing January 1, 2000 for the calendar year ending December 31, 2000, 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 2000 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 2001 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 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 2000 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. NY2:\882439\02\76830.0146 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 2001 as promptly as practicable following availability of the Company's audited financial statements for the fiscal year ended December 31, 2000. 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 or 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 hereon) 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. 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, execute 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 2 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 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 any binding upon the Parties hereto and their respective heirs, personal representatives, legal representatives, successors and, where applicable, assigns. [Remainder of page intentionally left blank] 3 IN WITNESS WHEREOF, the Parties hereto have duly executed and delivered this Agreement. LEUCADIA NATIONAL CORPORATION By: /s/ Joseph A. Orlando --------------------- JOSEPH A. ORLANDO /s/ Joseph S. Steinberg ----------------------- JOSEPH S. STEINBERG 4 EX-10.17 3 EXHIBIT 10.17 ------------- DEFERRED COMPENSATION AGREEMENT ------------------------------- THIS DEFERRED COMPENSATION AGREEMENT, (the "Agreement") is made and entered into on January 10, 2000 by and between LEUCADIA NATIONAL CORPORATION, a New York corporation (the "Company"), and Mark Hornstein (the "Executive"), collectively the parties ("Parties"). WITNESSETH: ----------- WHEREAS, Executive is employed by the Company as Vice President ; and WHEREAS, in connection with the provisions of services to the Company in his capacity as Vice 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 convenants and agreements herein contained, the Parties hereby agree as follows: 1. Deferral of Payments. The Company shall defer the payment of 50% of bonus compensation that may be awarded to the Executive by the Company from and after the date of this Agreement through the end of the calendar year 2000. The Executive acknowledges that the Company is under no obligation to award any bonus to the Executive and that the award of any bonus, as well as the amount of any bonus that may be awarded, remains fully discretionary with the Company. 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 shall begin January 1, April 1, July 1, and October 1. All amounts deferred pursuant to this Agreement shall be paid to the Executive in two equal installments, plus accrued interest thereon, on the first business day in January 2003 and 2004. 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 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. NY2:\867702\02\76830.0146 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 or 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 hereon) and interest with respect thereto arising out of the Executive's failure to pay fully his tax liability on such deferred payment pursuant to any present or future law, regulation or ordinance of the United States of America or any state, city or municipality therein. 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, execute 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 Attention: Chief Financial Officer 2 with a copy to: Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, New York 10153 Attention: Stephen E. Jacobs If to Executive: Mark Hornstein 25 Sutton Place South New York, New York 10022 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 any 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/ Mark Hornstein ------------------ MARK HORNSTEIN 3 EX-21 4 LEUCADIA NATIONAL CORPORATION EXHIBIT 21 Subsidiaries as of December 31, 1999 STATE/COUNTRY OF NAME INCORPORATION - ---- ------------- CDS Devco, Inc. California HSD Venture California San Elijo Ranch, Inc. California San Elijo Hills Construction Company 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-Fidei LLC Delaware LUK-Flats LLC Delaware LUK-Israel LLC Delaware LUK-Pinetree, LLC Delaware LUK-Shop, LLC Delaware MK Gold Company Delaware Neward Corporation Delaware Omaha Dodge, LLC Delaware PHX Capital, LLC Delaware Pinetree Group, LLC 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 Rosemary Beach Realty, Inc. Florida College Life Development Corporation Indiana Professional Data Management, Inc. Indiana Allcity Insurance Company New York Empire Insurance Company New York Centurion Insurance Company New York Leucadia, Inc. New York Leucadia Investors, Inc. New York LUK-REN, Inc. New York Monroe Investment, Inc. Pennsylvania Phlcorp, Inc. Pennsylvania Pine Ridge Winery, LLC Texas American Investment Bank, N.A. United States American Investment Financial Utah Leucadia Bottling L.L.C. Utah Leucadia Financial Corporation Utah Leucadia Power Holdings, Inc. Utah Leucadia Properties, Inc. Utah Silver Mountain Industries, Inc. Utah LEUCADIA NATIONAL CORPORATION EXHIBIT 21 SUBSIDIARIES AS OF DECEMBER 31, 1999, CONTINUED STATE/COUNTRY OF NAME INCORPORATION - ---- ------------- Telluride Properties Acquisition, Inc. Utah Terracor II Utah Commercial Loan Insurance Corporation Wisconsin WMAC Credit Insurance Corporation Wisconsin WMAC Investment Corporation Wisconsin LUK-Japan Ltd. British Virgin Islands MV Gold de Brazil Ltd. Brazil Compagnie Fonciere FIDEI France MK Gold de Mexico, S. de R.L. de. C.V. (Mexico) Mexico Cobre Las Cruces, S.A. Spain - ----------------- Subsidiaries not included on this list, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary as of December 31, 1999. 2 EX-27 5
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-31-1999 DEC-31-1999 296,058 1,170,493 914,497 53,839 0 0 184,850 94,513 3,070,227 0 483,309 0 0 56,802 1,065,186 3,070,227 64,041 706,632 39,179 213,311 183,799 15,386 50,665 243,471 44,521 193,429 24,201 (2,588) 0 215,042 3.62 3.62
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