-----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, J3gd/TtTFU/Ubs1dDFw96Jg3R0v645/jVY2OrbaEexOCgTBN4YbMbUoKVG8FsVWT AB/GxeXZNthl3VVR89M69w== 0000909518-98-000205.txt : 19980330 0000909518-98-000205.hdr.sgml : 19980330 ACCESSION NUMBER: 0000909518-98-000205 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NYSE SROS: PCX 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-K405 SEC ACT: SEC FILE NUMBER: 001-05721 FILM NUMBER: 98576613 BUSINESS ADDRESS: STREET 1: 315 PARK AVE S CITY: NEW YORK STATE: NY ZIP: 10010 BUSINESS PHONE: 2124601900 FORMER COMPANY: FORMER CONFORMED NAME: TALCOTT NATIONAL CORP DATE OF NAME CHANGE: 19800603 10-K405 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, 1997 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 [x]. Aggregate market value of the voting stock of the registrant held by non-affiliates of the registrant at March 19, 1998 (computed by reference to the last reported closing sale price of the Common Stock on the New York Stock Exchange on such date): $1,735,935,127. On March 19, 1998, the registrant had outstanding 63,930,739 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 1998 annual meeting of shareholders of the registrant are incorporated by reference into Part III of this Report. ================================================================================ PART I Item 1. Business. - ------- --------- THE COMPANY GENERAL The Company is a diversified financial services holding company principally engaged in personal and commercial lines of property and casualty insurance, life insurance, banking and lending and manufacturing. 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 $1,863,531,000 at December 31, 1997, equal to a book value per common share of negative $.11 at December 31, 1978 and $29.17 at December 31, 1997. During 1997, the Company sold its Colonial Penn insurance operations in two separate transactions. In September 1997, the Company sold its life insurance subsidiaries, Colonial Penn Life Insurance Company ("Colonial Penn Life") and Providential Life Insurance Company ("Providential Life") and certain related assets, including its health insurance operations (the "Colonial Penn Life Group"), to Conseco, Inc. ("Conseco") for $460,000,000. The price consisted of $400,000,000 in notes maturing on January 2, 2003 collateralized by non-cancelable letters of credit and $60,000,000 in cash. As a result of the sale, the Company reported a pre-tax gain of approximately $272,000,000. For calendar year 1996, the operations sold, which principally consisted of the sale of "graded benefit life" insurance policies through direct marketing and agent-sold Medicare supplement insurance, accounted for revenues of approximately $230,000,000 and pre-tax earnings of approximately $48,000,000. In November 1997, the Company sold the property and casualty business of Colonial Penn Insurance Company and its subsidiaries (the "Colonial Penn P&C Group") to General Electric Capital Corporation ("GECC") for total cash consideration of $1,018,100,000, plus $14,300,000 for retention of certain employee benefit liabilities. As a result of the sale, the Company reported a pre-tax gain of approximately $590,000,000. For calendar year 1996, the Colonial Penn P&C Group, the primary business of which is providing private passenger automobile insurance to the mature adult population through direct response marketing, had revenues of approximately $592,000,000 and pre-tax earnings of approximately $70,000,000. The Company has made no determination as to the use of the net proceeds from the sales of the Colonial Penn Life Group and the Colonial Penn P&C Group. In evaluating potential uses of such proceeds, the Company will endeavor to maximize value to the shareholders, which could involve the repurchase of common shares of the Company, an extraordinary dividend, investments, acquisitions and working capital uses. At this time the Company has no material arrangement, commitment or understanding with respect to any such uses. Pending such uses, the cash proceeds of these sales primarily are invested in short/intermediate-term investment grade obligations. The consolidated financial statements of the Company included in this Report reflect the Colonial Penn Life Group and the Colonial Penn P&C Group as discontinued operations and the consolidated financial statements for prior periods have been restated to be consistent with such presentation. The Company's remaining insurance operations consist of personal and commercial property and casualty insurance primarily conducted through Empire Insurance Company ("Empire") and Allcity Insurance Company ("Allcity") and life insurance operations conducted through Charter National Life Insurance Company ("Charter") and Intramerica Life Insurance Company ("Intramerica"). For the year ended December 31, 1997, these insurance operations accounted for 59% of the Company's revenues and at December 31, 1997, 68% of the Company's assets, including the net proceeds from the above sales. In February 1998, the Company agreed to reinsure all of its remaining life insurance business to Allstate Life Insurance Company and a subsidiary thereof (collectively, "Allstate") in an indemnity reinsurance transaction (the "Life Reinsurance Transaction"). Consummation of this transaction, which is expected to occur in the second quarter of 1998, is subject to regulatory approval and the satisfaction of certain other conditions. The premium to be received on this transaction is approximately $30,000,000. The Company's insurance operations have a diversified investment portfolio of securities, substantially all of which are issued or guaranteed by the U.S. Treasury or by U.S. governmental agencies or are rated "investment grade" by Moody's Investors Service Inc. ("Moody's") and/or Standard & Poor's Corporation ("S&P"). Investments in mortgage loans, real estate and non-investment grade securities represented less than 1% of the insurance subsidiaries' portfolio at December 31, 1997. 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 and unsecured loans to executives and professionals generally with good credit histories. The Company's manufacturing operations primarily manufacture and market plastic netting used for a variety of purposes including, among other things, construction, agriculture, packaging, carpet backing and filtration. The Company has investments in Russia and Argentina. For more information concerning these investments see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Report. Certain of the Company's subsidiaries have substantial tax loss carryforwards. The amount and availability of the tax loss carryforwards are subject to certain qualifications, limitations and uncertainties as more fully discussed in the Notes to the Consolidated Financial Statements. As used herein, the term "Company" refers to Leucadia National Corporation, a New York corporation organized in 1968, and its subsidiaries, except as the context otherwise may require. 2 Financial Information About Industry Segments --------------------------------------------- Certain information concerning the Company's operations is presented in the following table. Year Ended December 31, --------------------------- 1997 1996 1995 ---- ---- ---- (In millions) Revenues: - --------- Property and Casualty Insurance $ 363.2 $ 419.4 $ 403.0 Life Insurance 13.5 14.2 15.5 Banking and Lending 45.8 55.1 58.6 Manufacturing 133.7 148.4 166.3 Corporate and Other (a) 87.3 47.2 125.5 ------- -------- -------- $ 643.5 $ 684.3 $ 768.9 ======= ======== ======== Income (loss) from continuing operations before income taxes and minority expense of trust preferred securities: - -------------------------------------- Property and Casualty Insurance $ 4.1 $ 22.3 $ 10.0 Life Insurance 4.7 10.2 13.5 Banking and Lending 5.8 14.5 16.7 Manufacturing .3 .4 (18.0) Corporate and Other (a)(b) (39.8) (86.7) .9 ------- ------- ------- $ (24.9) $ (39.3) $ 23.1 ======= ======= ======= Identifiable assets employed: - ----------------------------- Property and Casualty Insurance $1,047.8 $1,082.5 $1,093.4 Life Insurance (c) 2,035.0 645.8 602.7 Banking and Lending 265.1 291.3 336.8 Manufacturing 45.4 68.7 83.6 Corporate and Other (d) 1,107.1 1,274.3 1,191.8 -------- -------- -------- $4,500.4 $3,362.6 $3,308.3 ======== ======== ======== At December 31, 1997, the Company and its consolidated subsidiaries had 1,378 full-time employees. - -------------------- (a) Includes equity in losses of associated companies ($56,515,000 in 1997, $33,631,000 in 1996 and $2,613,000 in 1995), gains (losses) from certain investments and real estate and other operations. In 1995, includes a $41,030,000 gain related to the return of two of the Company's legal subsidiaries, which were formerly under the control of the Wisconsin Insurance Commissioner (the "WMAC Companies"). (b) Includes corporate interest expense and overhead, including expenses related to certain acquisition and investing activities. (c) Includes the net proceeds from the sales of the Colonial Penn Life Group and Colonial Penn P&C Group. (d) Principally consists of cash, investments, real estate, receivables and, in 1996 and 1995, the deferred income tax asset and the net assets of discontinued operations. 3 INSURANCE OPERATIONS PROPERTY AND CASUALTY INSURANCE The Company's principal property and casualty insurance operations are conducted through the Empire Group, which consists of Empire and Allcity. The Empire Group specializes in personal and commercial property and casualty insurance business primarily in the New York metropolitan area. The Empire Group provides personal automobile and homeowners insurance and commercial insurance coverage for vehicles (including medallion and radio-controlled livery vehicles), multi-family residential real estate, workers' compensation and various other business classes. The Empire Group is rated "B++" (very good) by A.M. Best Company ("Best") and rated "A-" (good) by S&P. As with all ratings, Best and S&P ratings are subject to change at any time. For the years ended December 31, 1997, 1996 and 1995, net earned premiums for the Empire Group were $275,000,000, $326,400,000 and $326,100,000, respectively. During the year ended December 31, 1997, 62%, 28% and 10% of net earned premiums of the Empire Group were derived from personal and commercial automobile lines, other commercial lines and other personal lines, respectively. Substantially all of the Empire Group's policies are written in New York for a one-year period. The Empire Group is licensed in New York to write most lines of insurance that may be written by a property and casualty insurer. The Empire Group is also licensed to write insurance in Connecticut, Massachusetts, Missouri, New Hampshire and New Jersey. The voluntary business of the Empire Group is produced through general agents, local agents and insurance brokers, who are compensated for their services by payment of commissions on the premiums they generate. There are five general agents, one of which is owned by Empire, and approximately 400 local agents and insurance brokers presently acting under agreements with the Empire Group. These agents and brokers also represent other competing insurance companies. The Empire Group's owned general agent is its largest producer and generated approximately 11% of its total premium volume for the year ended December 31, 1997. The Empire Group has acquired blocks of assigned risk business from other insurance companies (the "service business") relating to private passenger and commercial automobile insurance. These contractual arrangements, which are negotiated for one or two year periods, provide for fees paid to the Empire Group within parameters established by the New York Insurance Department. In addition, the Empire Group receives a fee for providing administrative services, including claims processing, underwriting and collection activities, for the New York Public Automobile Pool ("NYPAP") and the Massachusetts Taxi and Limousine Pool. These latter arrangements do not involve the assumption of any material underwriting risk by the Empire Group. 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 1997 was approximately $27,000,000 for reserve strengthening 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. The Empire Group has taken certain steps to improve its operations, including systems enhancements and actions relating to pricing and improved underwriting and claims handling, and may initiate additional changes in the future. The Company believes that the results of efforts taken to date 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 4 Ratio is the ratio of incurred losses and loss adjustment expenses to net premiums earned. The Expense Ratio is the ratio of underwriting expenses (policy acquisition costs, commissions, and a portion of administrative, general and other expenses attributable to underwriting operations) to net premiums written, if determined in accordance with SAP, or to net premiums earned, if determined in accordance with GAAP. A Combined Ratio below 100% indicates an underwriting profit and a Combined Ratio above 100% indicates an underwriting loss. The Combined Ratio does not include the effect of investment income. Year Ended December 31, ------------------------------ 1997 1996 1995 ---- ---- ---- Loss Ratio: GAAP 100.3% 92.1% 93.2% SAP 100.3% 89.5% 91.0% Industry (SAP) (a) N/A 78.4% 78.9% Expense Ratio: GAAP 18.2% 22.6% 19.8% SAP 17.5% 18.4% 16.4% Industry (SAP) (a) N/A 27.4% 27.5% Combined Ratio (b): GAAP 118.5% 114.7% 113.0% SAP 117.8% 107.9% 107.4% Industry (SAP) (a) N/A 105.8% 106.4% - --------------- (a) Source: Best's Aggregates & Averages, Property/Casualty, 1997 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 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 Ratio and the SAP Combined Ratio. Additionally in 1997 and 1996, 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. 5 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, 1997. Included therein are current year data and prior year development. 6 RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES 1997 1996 1995 ---- ---- ---- (In thousands) Net liability for losses and LAE at beginning of year $481,138 $476,692 $406,695 -------- -------- -------- Provision for losses and LAE for claims occurring in the current year 248,408 271,633 268,493 Increase in estimated losses and LAE for claims occurring in prior years 27,027 28,183 34,470 -------- -------- -------- Total incurred losses and LAE 275,435 299,816 302,963 -------- -------- -------- Losses and LAE payments for claims occurring during: Current year 80,149 93,036 80,062 Prior years 189,308 202,334 152,904 -------- -------- -------- 269,457 295,370 232,966 -------- -------- -------- 487,116 481,138 476,692 Reinsurance recoverable 58,592 51,181 40,730 -------- -------- -------- Liability for losses and LAE at end of year as reported in financial statements $545,708 $532,319 $517,422 ======== ======== ======== The Empire Group's liability for losses and LAE as of December 31, 1997 was $487,116,000 determined in accordance with SAP and $545,708,000 determined in accordance with GAAP. The difference relates to liabilities assumed by reinsurers, which are not deducted from GAAP liabilities. The following table presents the development of balance sheet liabilities from 1987 through 1997 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 1987 liability estimate indicated on the table of $206,709,000 has been re-estimated during the course of the succeeding ten years, resulting in a re-estimated liability at December 31, 7 1997 of $188,962,000, or a redundancy of $17,747,000. If the re-estimated liability exceeded the liability initially established, a cumulative deficiency would be indicated. In evaluating this information, it should be noted that each amount shown for "cumulative redundancy (deficiency)" includes the effects of all changes in amounts for prior periods. For example, the amount of the redundancy (deficiency) related to losses settled in 1991, but incurred in 1987, will be included in the cumulative redundancy (deficiency) amount for 1987, 1988, 1989 and 1990. This table is not intended to and does not present accident or policy year loss and LAE development data. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it would not be appropriate to extrapolate future redundancies or deficiencies based on these tables. For further discussion of the Empire Group's loss development experience, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Report. 8
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT Year Ended December -------------------------------------------------------------------------------------------------------------------- 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (In thousands) Liability for Unpaid Losses and Loss Adjustment Expenses $206,709 $222,814 $235,223 $251,401 $280,679 $322,516 $353,917 $ 406,695 $476,692 $481,138 $487,116 Liability Re-estimated as of: One Year Later $198,384 $213,671 $227,832 $249,492 $280,020 $321,954 $344,156 $ 441,165 $504,875 $508,165 $ - Two Years Later 194,530 206,088 217,432 245,141 277,866 324,262 374,158 467,659 537,372 Three Years Later 188,843 198,500 212,649 243,849 284,052 345,576 394,418 500,286 Four Years Later 184,564 194,324 211,859 247,314 296,484 361,903 415,251 Five Years Later 181,990 196,070 211,952 255,045 306,094 377,097 Six Years Later 183,015 196,646 216,545 260,031 316,887 Seven Years Later 183,082 199,502 219,786 265,525 Eight Years Later 185,609 201,600 222,556 Nine Years Later 187,252 202,989 Ten Years Later 188,962 Cumulative Redundancy (Deficiency) $ 17,747 $ 19,825 $ 12,667 $(14,124) $(36,208) $(54,581) $(61,334) $ (93,591) $(60,680) $(27,027) $ - ======== ======== ======== ======== ======== ======== ======== ========= ======== ======== ======== Cumulative Amount of Liability Paid Through: One Year Later $ 60,446 $ 64,140 $ 65,822 $ 78,954 $ 89,559 $113,226 $116,986 $ 152,904 $202,334 $189,308 $ - Two Years Later 97,627 101,206 109,479 126,908 150,043 182,250 199,214 270,020 318,693 Three Years Later 123,092 131,705 140,916 167,330 197,848 239,092 272,513 353,649 Four Years Later 142,910 152,330 166,023 196,099 233,244 285,880 326,637 Five Years Later 155,786 168,117 182,001 216,749 259,946 320,044 Six Years Later 164,213 178,095 193,943 231,892 279,682 Seven Years Later 170,215 185,310 203,169 242,275 Eight Years Later 175,117 191,292 209,115 Nine Years Later 179,368 194,965 Ten Years Later 182,106 Gross Liability - End of Year $391,829 $ 451,442 $517,422 $532,319 $545,708 Reinsurance 37,912 44,747 40,730 51,181 58,592 -------- --------- -------- -------- -------- Net Liability - End of Year as Shown Above $353,917 $ 406,695 $476,692 $481,138 $487,116 ======== ========= ======== ======== ======== Gross Re-estimated Liability - Latest $484,550 $ 570,042 $604,887 $579,347 Re-estimated Reinsurance - Latest 69,299 69,756 67,515 71,182 -------- --------- -------- -------- Net Re-estimated Liability - Latest $415,251 $ 500,286 $537,372 $508,165 ======== ========= ======== ======== Gross Cumulative (Deficiency) $(92,721) $(118,600) $(87,465) $(47,028) ======== ========= ======== ========
9 LIFE INSURANCE The Company has two life insurance subsidiaries, Charter and Intramerica, each rated "A-" (excellent) by Best. Through Charter and Intramerica, the Company is licensed in all 50 states and the District of Columbia, and generally has sold its products throughout most of the United States. The principal life insurance product offered by Charter and Intramerica is a no-load variable annuity ("VA") product. The VA product is marketed as an investment vehicle to individuals seeking to defer, for federal income tax purposes, the annual increase in their account balance. Premiums from this VA product are invested at the policyholders' election in either unaffiliated mutual funds, where the policyholder bears the entire investment risk, or in a fixed account, where the funds earn interest at rates determined by the Company. The Company's VA product is currently marketed in conjunction with Scudder Kemper Investment, Inc., a mutual fund manager. Premium receipts on the VA product are not recorded as revenue under GAAP but are recorded in a manner similar to a deposit. Premium receipts on the VA product for the years ended December 31, 1997, 1996 and 1995 were $53,178,000, $47,265,000 and $43,717,000, respectively. In February 1998, the Company agreed to reinsure all of its remaining life insurance business to Allstate in the Life Reinsurance Transaction. Consummation of this transaction, which is expected to occur in the second quarter of 1998, is subject to regulatory approval and the satisfaction of certain other conditions. The premium to be received on this transaction is approximately $30,000,000. The terms of the Life Reinsurance Transaction generally prohibit the Company from selling variable annuities or variable life insurance policies in the United States for a three year period and prohibit the Company from certain marketing and solicitation agreements with the fund advisor for this variable annuity product. INSURANCE OPERATIONS Investments Investment activities represent a significant part of the Company's insurance related revenues and profitability. Investments are managed by the Company's investment advisors under the direction of, and upon consultation with, the Company's investment committees. The Company's insurance subsidiaries have a diversified investment portfolio of securities, substantially all of which are rated "investment grade" by Moody's and/or S&P or issued or guaranteed by the U.S. Treasury or by governmental agencies. The Company's insurance subsidiaries do not generally invest in less than "investment grade" or "non-rated" securities, real estate or mortgages, although from time to time they may make such investments in amounts not expected to be material. 10 The composition of the Company's insurance subsidiaries' investment portfolio as of December 31, 1997 and 1996 was as follows: 1997 1996 ---- ---- (Dollars in thousands) Bonds and notes: U.S. Government and agencies 91% 95% Rated investment grade 7 3 Non rated - other 1 - Rated less than investment grade - - Policyholder loans - 1 Equity securities - - Other, principally accrued interest 1 1 --- --- Total 100% 100% === === Estimated average yield to maturity of bonds and notes 6.1% 6.1% Estimated average remaining life of bonds and notes 2.6 yrs. 3.5 yrs. Carrying value of investment portfolio $1,400,160 $907,992 Market value of investment portfolio $1,400,327 $908,072 Reinsurance The Empire Group's maximum retained limit was $500,000 for workers' compensation; for other property and casualty lines, the Empire Group's maximum retained limit was $300,000 for 1997 and 1996 and $225,000 for 1995. 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 1998 and was $5,000,000 for 1997 and $3,000,000 for 1996 and 1995. Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of the policy liability, it does make the assuming reinsurer liable to the insurer to the extent of the reinsurance ceded. The Company's reinsurance generally has been placed with certain of the largest reinsurance companies, including (with their respective Best ratings) General Reinsurance Corporation (A++), American Re-Insurance Company (A+) and Zurich Reinsurance (North America), Inc. (A). The Company has reinsured a block of Intramerica's business with a subsidiary of Conseco as part of the sale of such business to Conseco. As collateral for this reinsurance, assets equal to the reserves for this business were placed in a trust for the benefit of Intramerica. In addition, the Company has reinsured a block of business with a subsidiary of John Hancock Mutual Life Insurance Company ("Hancock") as part of the 1993 sale of such business to Hancock. 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 11 give such other companies a competitive advantage. Federal administrative, legislative and judicial activity may result in changes to federal banking laws that will enable national banks to act as agents in order to offer certain 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 and financial stability. The industry has historically been cyclical in nature, with periods of less intense price competition generating significant profits, followed by periods of increased price competition resulting in reduced profitability or loss. The current cycle of intense price competition has continued for a longer period than in the past, suggesting that the significant infusion of capital into the industry in recent years, coupled with larger investment returns has been, and may continue to be, a depressing influence on policy rates. In addition, the Company is experiencing increased competition from low cost insurance providers that write personal lines business on a direct response basis through direct mail and telemarketing. The profitability of the property and casualty insurance industry is affected by many factors, including rate competition, severity and frequency of claims (including catastrophe losses), interest rates, state regulation, court decisions and judicial climate, all of which are outside the Company's control. Government Regulation Insurance companies are subject to detailed regulation and supervision in the states in which they transact business. Such regulation pertains to matters such as approving policy forms and various premium rates, minimum reserves and loss ratio requirements, the type and amount of investments, minimum capital and surplus requirements, granting and revoking licenses to transact business, levels of operations and regulating trade practices. Insurance companies are required to file detailed annual reports with the supervisory agencies in each of the states in which they do business, and are subject to examination by such agencies at any time. Increased regulation of insurance companies at the state level and new regulation at the federal level is possible, although the Company cannot predict the nature or extent of any such regulation or what impact it would have on the Company's operations. The National Association of Insurance Commissioners ("NAIC") has adopted model laws incorporating the concept of a "risk based capital" ("RBC") requirement for insurance companies. Generally, the RBC formula is designed to measure the adequacy of an insurer's statutory capital in relation to the risks inherent in its business. The RBC formula is used by the states as an early warning tool to identify weakly capitalized companies for the purpose of initiating regulatory action. Each of the Company's insurance subsidiaries' RBC ratio as of December 31, 1997 substantially exceeded minimum requirements. The NAIC also has adopted various ratios for insurance companies which, in addition to the RBC ratio, are designed to serve as a tool to assist state regulators in discovering potential weakly capitalized companies or companies with unusual trends. The insurance companies had certain "other than normal" NAIC ratios for the year ended December 31, 1997. The Company believes that there are no material underlying problems or weaknesses in its insurance operations and that it is unlikely that material adverse regulatory action will be taken. The Company's insurance subsidiaries are members of state insurance funds which provide certain protection to policyholders of insolvent insurers doing business in those states. Due to insolvencies of certain insurers in recent years, the Company's insurance subsidiaries have been assessed certain amounts which have not been material and are likely to be assessed additional amounts by state insurance funds. The Company believes that it has provided for all anticipated assessments and that any additional assessments will not have a material adverse effect on the Company's financial condition or results of operations. 12 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 $198,582,000 and $209,261,000 at December 31, 1997 and 1996, 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 make consumer instalment loans. The Company's consolidated banking and lending operations had outstanding loans (net of unearned finance charges) of $202,938,000 and $233,351,000 at December 31, 1997 and 1996, respectively. At December 31, 1997, 38% were loans to individuals generally collateralized by automobiles; 9% were unsecured loans to individuals acquired from others in connection with investments in limited partnerships; 46% were unsecured loans to executives and professionals, generally with good credit histories; and 7% were instalment loans to consumers, substantially all of which were collateralized by real or personal property. It is the Company's policy to charge to income an allowance for losses which, based upon management's analysis of numerous factors, including current economic trends, aging of the loan portfolio and historical loss experience, is deemed adequate to cover reasonably expected losses on outstanding loans. At December 31, 1997, the allowance for loan losses for the Company's entire loan portfolio was $10,199,000 or 5% of the net outstanding loans, compared to $12,177,000 or 5.2% of net outstanding loans at December 31, 1996. Collateralized personal automobile instalment loans are made to individuals, who have difficulty obtaining credit, at interest rates above those charged to individuals with good credit histories. In determining which individuals qualify for these loans, the Company takes into account a number of highly selective criteria with respect to the individual as well as the collateral to attempt to minimize the number of defaults. Additionally, the Company closely monitors these loans and takes prompt possession of the collateral in the event of a default. For the three year period ended December 31, 1997, the Company generated $152,717,000 of these loans ($34,554,000 during 1997). Beginning in 1995, primarily as a result of increased competition, together with the Company's tightening of its underwriting standards, the portfolio has declined. The Company expects that competition will continue to be a significant factor which may inhibit its ability to grow the portfolio in the future. As a result, the Company expects that any expansion of this business would be modest. In 1997, the loan losses for this portfolio decreased primarily due to enhanced collection efforts and strengthened underwriting. At December 31, 1997, the allowance for loan losses for this portfolio was $6,460,000 or 8.3% of net outstanding loans. 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 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. 13 The Competitive Equality Banking Act of 1987 ("CEBA") places certain restrictions on the operations of AIB and restricts further acquisitions of banks and savings institutions by the Company. CEBA does not restrict AIF as currently operated. MANUFACTURING During 1997, the Company sold three of its manufacturing divisions. As of December 31, 1997, the Company's remaining manufacturing operation is its plastics division. This division manufactures and markets proprietary plastic netting used for a variety of purposes including, among other things, construction, agriculture, packaging, carpet backing and filtration. The plastics division markets its products both domestically and internationally, with approximately 20% of its 1997 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, 1997, 1996 and 1995, the plastics division's revenues were approximately $50,900,000, $47,600,000 and $43,800,000, respectively. The plastics division is subject to domestic and international competition, generally on the basis of price, service and quality. Additionally, certain products are dependent on cyclical industries, including the construction industry. The Company holds patents on certain improvements to the basic manufacturing processes and on applications thereof. The Company believes that the expiration of these patents, individually or in the aggregate, is unlikely to have a material effect on the plastics division. OTHER OPERATIONS AND INVESTMENTS The Company owns equity interests representing more than 5% of the outstanding capital stock of each of the following domestic public companies at December 31, 1997: Carmike Cinemas, Inc. ("Carmike") (approximately 6% of Class A shares), HomeFed Corporation ("HFC") (approximately 41%), Jordan Industries, Inc. ("JII") (approximately 10%) and MK Gold Company ("MK Gold") (approximately 46%). In 1997, the Company had a majority economic interest in a joint venture, Pepsi International Bottlers ("PIB"), which it had formed 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. After reflecting its share of losses since inception, the book value of the Company's equity investment in PIB was $11,744,000 at December 31, 1997. Effective as of January 30, 1998, the Company entered into an agreement with PepsiCo (described in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Report) whereby the Company's economic interest was reduced to a minority position and all prior loans from the Company to PIB were repaid in full. The Company owns 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. Caja distributes its insurance products primarily on a direct basis, and therefore does not pay commissions to agents. Caja is the largest insurance company in Argentina, with total annual premium revenues of approximately $586,123,000 and total assets (including banking operations) of approximately $691,736,000. At December 31, 1997, the carrying amount of the Company's investment in Caja was $45,046,000. The Company's equity in Caja's results of operations since acquisition has not been material. A subsidiary of the Company is a partner in The Jordan Company and Jordan/Zalaznick Capital Company. These partnerships each specialize in structuring leveraged buyouts in which the partners are given 14 the opportunity to become equity participants. Since 1982, the Company has invested an aggregate of $44,311,000 in these partnerships and related companies and, through December 31, 1997, has received $94,233,000 (including cash, interest bearing notes and other receivables) relating to the disposition of investments and management and other fees. At December 31, 1997, through these partnerships, the Company had interests in JII, Carmike and a total of 20 other companies (the "Jordan Associated Companies"), which in total are carried in the Company's consolidated financial statements at $10,344,000. At December 31, 1997, the carrying value of the Company's real estate investments totaled $93,264,000. These investments consist of a variety of projects, including some which are available for sale and others which are in the process of development. For further information about the Company's business, reference is made to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Report and Notes to Consolidated Financial Statements. Item 2. Properties. - ------- ----------- Through its various subsidiaries, the Company owns and utilizes in its operations two offices in Salt Lake City, Utah used for corporate and banking and lending activities (totaling approximately 77,000 sq. ft.). In addition, a subsidiary of the Company owns a facility (totaling approximately 158,500 sq. ft.) primarily used for manufacturing and storage located in Georgia. The Company and its subsidiaries lease numerous manufacturing, warehousing, office and headquarters facilities. The facilities vary in size and have leases expiring at various times, subject, in certain instances, to renewal options. See Notes to Consolidated Financial Statements. Item 3. Legal Proceedings. - ------- ------------------ PINNACLE LITIGATION On May 11, 1994, a shareholder of the Company filed a purported derivative action entitled Pinnacle Consultants, Ltd. v. Leucadia National Corporation, et al. (C.A. No. 94 Civ. 3496) against the Company's current Board of Directors and two former directors, John W. Jordan II and Melvin Hirsch. The action, which was filed in the United States District Court for the Southern District of New York, alleged certain Racketeer Influence and Corrupt Organizations Act, securities law, conversion and fraud claims. On December 10, 1996, the Second Circuit Court of Appeals affirmed the judgment of the District Court dismissing these claims. On May 13, 1997, Pinnacle filed a purported derivative complaint in New York State Supreme Court. The action, entitled Pinnacle Consultants, Ltd. v. Leucadia National Corp., et al. (no. 602470/97), is substantially similar to the federal court complaint that was dismissed in 1996. Pinnacle has alleged claims for fraud, waste, breach of fiduciary duty and conversion against the same current and former Leucadia directors who were named as defendants in the federal court action. Defendants motion to dismiss the complaint remains sub judice. 15 OTHER PROCEEDINGS In addition to the foregoing, the Company and its subsidiaries are parties to legal proceedings that are considered to be either ordinary, routine litigation incidental to their business or not material to the Company's consolidated financial position. The Company does not believe that any of the foregoing actions will have a material adverse effect on its consolidated financial position or consolidated results of operations. Item 4. Submission of Matters to a Vote of Security Holders. - ------- ---------------------------------------------------- The following matters were submitted to a vote of shareholders at the Company's 1997 Annual Meeting of Shareholders held on November 3, 1997: 16 (a) Approval of the purchase agreement pursuant to which the Company agreed to sell the Colonial Penn P&C Group to GECC. For 45,863,088 Against 51,531 Abstentions 58,414 Broker non-votes 7,843,993 (b) Election of directors. Number of Shares -------------------------- For Withheld --- -------- Ian M. Cumming 53,697,705 119,321 Paul M. Dougan 53,727,457 89,569 Lawrence D. Glaubinger 53,755,137 61,889 James E. Jordan 53,756,457 60,569 Jesse Clyde Nichols, III 53,757,743 59,283 Joseph S. Steinberg 53,726,377 90,649 (c) Approval of the Company's Senior Executive Annual Incentive Bonus Plan. For 44,895,846 Against 1,223,049 Abstentions 355,063 Broker non-votes 7,343,068 (d) Ratification of Coopers & Lybrand L.L.P. as independent auditors for the year ended December 31, 1997. For 53,663,759 Against 72,043 Abstentions 81,224 Broker non-votes -- 17 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 23, 1998, 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 57 Chairman of the Board June 1978 Joseph S. Steinberg 54 President January 1979 Thomas E. Mara 52 Executive Vice President May 1980; and Treasurer January 1993 Joseph A. Orlando 42 Vice President and January 1994; Chief Financial Officer April 1996 Barbara L. Lowenthal 43 Vice President and April 1996 Comptroller Paul J. Borden 49 Vice President August 1988 Mark Hornstein 50 Vice President July 1983 Mr. Cumming has served as a director and Chairman of the Board of the Company since June 1978. In addition, he has served as a director of Allcity since February 1988 and MK Gold since June 1995. Mr. Cumming has also been a director of Skywest, Inc., a Utah-based regional air carrier, since June 1986. Mr. Steinberg has served as a director of the Company since December 1978 and as President of the Company since January 1979. In addition, he has served as a director of Allcity since February 1988, as a director of MK Gold since June 1995 and as a director of JII since June 1988. Mr. Mara joined the Company in April 1977 and was elected Vice President of the Company in May 1977. He has served as Executive Vice President of the Company since May 1980 and as Treasurer of the Company since January 1993. 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. Ms. Lowenthal, a certified public accountant, has served as Vice President and Comptroller of the Company since April 1996. For the prior four years, Ms. Lowenthal served as Director of Policies, Systems and Procedures and Assistant Controller of W.R. Grace & Co., a specialty chemicals company. Mr. Borden joined the Company as Vice President in August 1988 and has served in a variety of other capacities with the Company and its subsidiaries. Mr. 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. 18 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. - ------- ---------------------------------------------------------------------- (a) Market Information. The Common Shares of the Company (the "Common Shares") are traded on the New York Stock Exchange and Pacific Stock Exchange under the symbol LUK. The following table sets forth, for the calendar periods indicated, the high and low sales price per Common Share on the consolidated transaction reporting system, as reported by the Dow Jones Historical Stock Quote Reporter Service. COMMON SHARE ------------ HIGH LOW ---- --- 1996 ---- First Quarter $29.00 $23.75 Second Quarter 26.50 23.88 Third Quarter 25.00 21.63 Fourth Quarter 28.50 23.13 1997 ---- First Quarter $29.00 $25.75 Second Quarter 31.88 27.38 Third Quarter 34.75 31.00 Fourth Quarter 36.63 33.00 1998 ---- First Quarter (through March 19, 1998) $40.38 $33.56 (b) Holders. As of March 19, 1998, there were approximately 4,212 record holders of the Common Shares. (c) Dividends. The Company paid dividends of $.25 per Common Share on December 31, 1997 and December 31, 1996. The payment of dividends in the future is subject to the discretion of the Board of Directors and will depend upon general business conditions, legal and contractual restrictions on the payment of dividends and other factors that the Board of Directors may deem to be relevant. In connection with the declaration of dividends or the making of distributions on, or the purchase, redemption or other acquisition of Common Shares, the Company is required to comply with certain restrictions contained in certain of its debt instruments. The Company's regulated subsidiaries are restricted in the amount of distributions that can be made to the Company without regulatory approval. For further information see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Report. 19 Item 6. Selected Financial Data. - ------- ------------------------ The following selected financial data have been summarized from the Company's consolidated financial statements and are qualified in their entirety by reference to, and should be read in conjunction with, such consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations," below.
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (In thousands, except per share amounts) SELECTED INCOME STATEMENT DATA: Revenues $643,476 $684,324 $768,927 $661,308 $634,938 Net securities gains (losses) 2,948 28,509 20,020 (3,469) 22,013 Interest expense (a) 46,007 53,599 52,538 43,751 38,830 Insurance losses, policy benefits and amortization of deferred acquisition costs 329,366 356,994 364,491 300,889 280,050 Income (loss) from continuing operations before income taxes, minority expense of trust preferred securities, cumulative effects of changes in accounting principles and extraordinary loss (24,934) (39,339) 23,092 (8,153) 25,393 Income (loss) from continuing operations before minority expense of trust preferred securities, cumulative effects of changes in accounting principles and extraordinary loss (14,683) (23,060) 32,532 (1,567) 15,457 Minority expense of trust preferred securities, net of taxes (7,942) - - - - Income (loss) from continuing operations before cumulative effects of changes in accounting principles and extraordinary loss (22,625) (23,060) 32,532 (1,567) 15,457 Income from discontinued operations, including gain on sale, net of taxes 686,497 78,575 74,971 72,403 100,802 Cumulative effects of changes in accounting principles - - - - 129,195 Extraordinary loss from early extinguishment of debt, net of taxes (2,057) (6,838) - - - Net income 661,815 48,677 107,503 70,836 245,454 Per share: Basic earnings (loss) per common share: Income (loss) from continuing operations before cumulative effects of changes in accounting principles and extraordinary loss $ (.36) $(.38) $ .57 $(.03) $ .28 Income from discontinued operations, including gain on sale 11.03 1.30 1.30 1.29 1.81 Cumulative effects of changes in accounting principles - - - - 2.31 Extraordinary loss (.03) (.11) - - - ------ ----- ----- ----- ----- Net income $10.64 $ .81 $1.87 $1.26 $4.40 ====== ===== ===== ===== ===== Diluted earnings (loss) per common share: Income (loss) from continuing operations before cumulative effects of changes in accounting principles and extraordinary loss $ (.36) $(.38) $ .55 $ (.03) $ .26 Income from discontinued operations, including gain on sale 11.03 1.30 1.26 1.29 1.72 Cumulative effects of changes in accounting principles - - - - 2.21 Extraordinary loss (.03) (.11) - - - ------ ----- ----- ----- ----- Net income $10.64 $ .81 $1.81 $1.26 $4.19 ====== ===== ===== ===== ===== AT DECEMBER 31, -------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (In thousands, except per share amounts) SELECTED BALANCE SHEET DATA: Cash and investments $ 2,562,981 $1,325,991 $ 1,334,385 $1,019,877 $1,091,127 Total assets 4,500,369 3,362,556 3,308,288 2,878,213 2,905,815 Debt, including current maturities 352,872 520,263 513,810 422,166 398,007 Customer banking deposits 198,582 209,261 203,061 179,888 173,365 Common shareholders' equity 1,863,531 1,118,107 1,111,491 881,815 907,856 Book value per common share $29.17 $18.51 $18.47 $15.72 $16.27 Cash dividends per common share $ .25 $ .25 $ .25 $ .13 $ .13
- -------------------------------- Footnotes on following page. 20
YEAR ENDED DECEMBER 31, -------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- SELECTED INFORMATION ON PROPERTY AND CASUALTY INSURANCE OPERATIONS (Unaudited): (b) GAAP Combined Ratio 118.5% 114.7% 113.0% 103.5% 105.2% SAP Combined Ratio 117.8% 107.9% 107.4% 101.3% 101.7% Industry SAP Combined Ratio (c) N/A 105.8% 106.4% 108.4% 106.9% Premium to Surplus Ratio (d) 1.4x 1.8x 2.2x 2.3x 2.1x
- ----------------- (a) Includes interest on customer banking deposits. (b) The Combined Ratio does not reflect the effect of investment income. 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 1997, 1996 and 1993, 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, 1997 Edition. Industry Combined Ratios may not be fully comparable as a result of, among other things, differences in geographical concentration and in the mix of property and casualty insurance products. (d) Premium to Surplus Ratio was calculated by dividing statutory property and casualty insurance premiums written by statutory capital at the end of the year. 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------- of Operations. ----------------------------------------------------------------------- The purpose of this section is to discuss and analyze the Company's consolidated financial condition, liquidity and capital resources and results of operations. This analysis should be read in conjunction with the consolidated financial statements and related notes which appear elsewhere in this Report. LIQUIDITY AND CAPITAL RESOURCES Parent Company Liquidity Leucadia National Corporation (the "Parent") is a holding company whose assets principally consist of the stock of its several direct subsidiaries. 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. In September 1997, the Company completed the sale of the Colonial Penn Life Group to Conseco for $460,000,000, consisting of $400,000,000 in notes due January 2, 2003 collateralized by non-cancelable letters of credit (the "Conseco Notes") and $60,000,000 in cash. In November 1997, the Company completed the sale of the Colonial Penn P&C Group to GECC for total cash consideration of $1,018,100,000, plus $14,300,000 for retention of certain employee benefit liabilities. Approximately $32,000,000 of the cash proceeds from the Colonial Penn sales were paid to the Parent. Subsequent to the completion of the sales, $189,000,000 of the cash proceeds was transferred to the Parent pursuant to tax sharing agreements. The balance of the cash proceeds and the notes was held by Charter as of December 31, 1997. During the first quarter of 1998, having made the required regulatory notification, $1,230,000,000 (consisting of $830,000,000 in cash and the Conseco Notes) was distributed to the Parent. 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 term loans, and through public financings. In February 1997, the Company replaced its unsecured $150,000,000 bank credit agreement facilities and its $50,000,000 of outstanding unsecured bank term loans with a new unsecured bank credit facility of $200,000,000. In connection with the sale of the Colonial Penn P&C Group, the Company replaced the February 1997 bank credit facility with a new unsecured bank credit facility of $100,000,000 and provided the purchaser of the Colonial Penn P&C Group with a $100,000,000 non-cancelable letter of credit to secure certain indemnification obligations. This letter of credit was issued by one of the Company's credit facility banks and is collateralized by certain deposits of the Company aggregating approximately $105,000,000. The new $100,000,000 credit facility bears interest based on the prime rate or LIBOR and matures in November 2002. During the year ended December 31, 1997, the Company used a portion of its bank credit facility primarily to fund the redemption 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 (the "10-3/8% Notes") and to provide bridge financing to PIB. At December 31, 1997, there were no amounts outstanding under the bank credit facility. 22 In March 1997, the Company called for redemption all of its outstanding 5-1/4% Debentures at a redemption price of 102.625% of the principal amount of the Debentures, plus accrued interest. Of the $100,000,000 principal amount of the 5-1/4% Debentures outstanding, $93,675,000 was converted into 3,258,145 Common Shares and $6,325,000 was redeemed. In June 1997, the Company also redeemed all of the aggregate principal amount outstanding of its 10-3/8% Notes for a total redemption price of $23,112,000. At December 31, 1997, a maximum of approximately $23,400,000 was available to the Parent as dividends from its regulated subsidiaries without regulatory approval. This amount does not include the $1,230,000,000 dividended to the Parent in March 1998. 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, 1997 or borrowed to date in 1998. There are no restrictions on distributions from the non-regulated subsidiaries; the Parent and its non-regulated subsidiaries had aggregate cash and temporary investments of approximately $426,000,000 at December 31, 1997. The Parent also receives tax sharing payments from subsidiaries included in its consolidated income tax return, including certain regulated subsidiaries. Because of the tax loss carryforwards available to the Parent and certain subsidiaries, together with current interest deductions and corporate expenses, the amount paid by the Parent for income taxes is substantially less than tax sharing payments received from its subsidiaries. In addition, the Parent receives payments from the regulated and non-regulated entities for services provided by the Parent. Payments from regulated subsidiaries for dividends, tax sharing payments and other services totaled approximately $281,571,000 for the year ended December 31, 1997, of which $226,098,000 was received from the Colonial Penn Life Group and the Colonial Penn P&C Group. Based on discussions with commercial and investment bankers, the Company believes that it has the ability to raise additional funds under acceptable conditions for use in its existing businesses or for appropriate investment opportunities. Since 1993, the Company's senior debt obligations have been rated as investment grade by Moody's, S&P and Duff & Phelps Inc. Ratings issued by bond rating agencies are subject to change at any time. Consolidated Liquidity In 1997 and 1996, net cash was used for operations principally to fund its capital commitments and bridge financing to PIB, and, in 1997, for the purchase of investments classified as trading. In 1996, the Company formed PIB, a joint venture with PepsiCo, Inc., to be the exclusive bottler and distributor of PepsiCo beverages in a large portion of central and eastern Russia, Kyrgyzstan and Kazakstan. Although the Company's $79,500,000 aggregate equity investment in PIB ($28,500,000 of which was funded in January 1997 and $51,000,000 during 1996) resulted in an initial 75% economic interest in PIB, under the original terms of the joint venture agreement, the Company and PepsiCo equally shared voting rights over all significant aspects of PIB's operations. Consequently, since the Company did not control PIB despite its larger economic interest, the Company accounted for its share of PIB's operating results under the equity method of accounting. After reflecting its share of losses since inception, the book value of the Company's equity investment in PIB was $11,744,000 at December 31, 1997. During 1997, the Company and PepsiCo provided bridge financing to PIB to cover operating costs and capital expenditures, of which $77,705,000 was funded by the Company. Although PIB continues to need additional funds while it is developing its business, since November 3, 1997, the Company has not provided any 23 additional funding. As a result, the Company's equity interest in PIB at December 31, 1997 was reduced to 71%. Effective as of January 30, 1998, the Company entered into an agreement with PepsiCo, pursuant to which, among other things, PIB repaid in full the Company's $77,705,000 bridge financing and the Company's equity interest in PIB was reduced to 37.9%. The agreement relieves the Company of any future funding obligation with respect to PIB and gives the Company the right to require that PepsiCo purchase all of the Company's interest in PIB (the "Put Option") for $37,000,000, plus interest (the "Exercise Price"), and gives PepsiCo the right (the "Call Option") to require that the Company sell to PepsiCo all of the Company's interest in PIB for the Exercise Price. The Call Option is exercisable for the five year period beginning on January 30, 1998 and the Put Option is exercisable for the three year period beginning January 30, 2000 (although, in certain limited circumstances it can be exercised earlier). During the period that the Call Option is exercisable, PepsiCo will have sole voting rights and the unilateral ability to make all capital, operational and managerial decisions of PIB, including future funding needs. As a result of this agreement with PepsiCo, the Company no longer has any ability to influence PIB. Effective February 1, 1998, the Company will no longer account for its investment in PIB under the equity method of accounting. Although the Exercise Price exceeds the book value of the Company's equity investment in PIB at December 31, 1997 by $25,256,000, the Company will not recognize any gain in its results of operations until the Put Option or Call Option is exercised. The Company retains a portfolio of Russian debt and equity securities with a book value of approximately $36,000,000 at December 31, 1997. In addition, the Company continues to explore other investment opportunities in Russia and the Commonwealth of Independent States. The Company's investments in Russia and Argentina are subject to foreign exchange and other risks. Investing in the emerging markets of Russia is subject to political risk and uncertainty concerning the government's ability to succeed in converting to a market economy, both of which are beyond the Company's control. The Company's investments in Argentina and Russia are subject to foreign currency exchange risks, the volatility of the banking systems and securities markets in these countries, the overall health of their respective economies and the usual competitive factors experienced by businesses. 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. 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. The investment portfolios of the Company's insurance subsidiaries are principally fixed maturity investments rated "investment grade" or U.S. governmental agency issued or guaranteed obligations, although limited investments in "non-rated" or rated less than investment grade securities have been made from time to time. The investment strategy of the insurance subsidiaries has been to maintain a high quality portfolio of publicly traded, fixed income securities with a relatively short duration. Principally as a result of changes in market interest rates during 1997, the unrealized gain on investments at the end of 1996 of approximately $1,759,000 (net of taxes) increased to approximately $5,630,000 (net of taxes) as of December 31, 1997. 24 While this has resulted in an increase in shareholders' equity, it had no effect on results of operations or cash flows. The Company provides collateralized automobile loans to individuals with poor credit histories. In 1997, the Company continued to experience competition resulting in reduced volume. During 1996, the Company tightened its underwriting standards in an effort to improve its loan loss experience and increased the reserve maintained on this portfolio. The Company's investment in these loans was $77,607,000, $96,338,000 and $134,668,000 at December 31, 1997, 1996 and 1995, respectively. Certain of the Company's subsidiaries have substantial loss carryforwards and other tax attributes. The amount and availability of tax loss carryforwards are subject to certain qualifications, limitations and uncertainties. As described in the Notes to the Consolidated Financial Statements, significant additional amounts of loss carryforwards may be available under certain circumstances. In order to reduce the possibility that certain changes in ownership could impose limitations on the use of these carryforwards, the Company's certificate of incorporation contains provisions which generally restrict the ability of a person or entity from accumulating at least five percent of the Common Shares and the ability of persons or entities now owning at least five percent of the Common Shares from acquiring additional Common Shares. RESULTS OF OPERATIONS The Company's most significant operations are its insurance businesses, where it is a specialty markets provider of property and casualty and life insurance to its niche markets. For the year ended December 31, 1997, the Company's insurance segments contributed 59% of total revenues and, at December 31, 1997, constituted 68% of total assets, including the net proceeds from the sales of the Colonial Penn Life Group and Colonial Penn P&C Group. Net earned premium revenues of the Empire Group were $275,000,000, $326,400,000 and $326,100,000 for the years ended December 31, 1997, 1996 and 1995, respectively. In 1997, the decline in earned premium revenues was primarily due to the depopulation of the assigned risk pools ($31,700,000) and a reduction in certain commercial lines, principally voluntary commercial automobile ($10,200,000) and workers' compensation ($8,800,000) due to competition, reunderwriting and repricing. In addition, earned premium revenues were reduced in 1997 by $5,500,000 to record premiums due under retrospectively rated reinsurance contracts written for 1995 and prior accident years. The Empire Group re-estimated the premium due based upon its current estimate of loss ratios for 1995 and prior accident years. Partially offsetting these reductions was an increase in certain voluntary personal lines, principally private passenger automobile and homeowners. In 1996, although higher premium rates were charged on certain lines of business than in 1995, including amounts related to increased minimum automobile liability coverage required by New York State, such rate increases were largely offset by a decrease in the number of policies in force. This decrease primarily resulted from the depopulation of the assigned risk pools and reduced volume in other lines of business that were not profitable, primarily certain specialty programs within voluntary commercial automobile lines. In addition, in 1996 the Empire Group experienced increased competition, primarily in workers' compensation and commercial package policies, which reduced volume. During the three years ended December 31, 1997, the Empire Group received servicing fees for providing administrative and claims services for the NYPAP. During 1997, the premium volume that the Empire Group managed under this program significantly declined primarily due to the ongoing depopulation of the NYPAP, which is expected to continue, and increased competition. During 1997, the Empire Group's agreement with the NYPAP contributed approximately $3,000,000 to pre-tax income, net of servicing expenses. Effective February 28, 1998, the Empire Group ceased serving as a servicing carrier for the NYPAP, thereby 25 enabling the Empire Group to concentrate its resources on its core non-service businesses and redeploy certain resources previously dedicated to the NYPAP. Accordingly, the Empire Group will not provide such services in 1998, except for the run-off of the remaining NYPAP claims, which will occur over approximately a two-year period. The Empire Group believes it has provided sufficient reserves for future claims servicing costs related to such run-off business. The Empire Group's combined ratios as determined under GAAP and SAP were as follows: Year Ended December 31, ----------------------- 1997 1996 1995 ---- ---- ---- GAAP 118.5% 114.7% 113.0% SAP 117.8% 107.9% 107.4% The combined ratios of the Empire Group increased in 1997, primarily reflecting an increase in the 1997 accident year loss ratios, principally for the private passenger automobile and commercial assigned risk lines of business, based upon increased claim frequency and continued unfavorable development of prior accident year losses. This increase was partially offset by a decrease in expenses primarily due to a reduction in the reserve for prior years' servicing carrier expenses and reduced expenses reflecting reduced premium volume in 1997. Included in the Empire Group's results for 1997, 1996 and 1995 were approximately $27,000,000, $28,000,000 and $34,500,000, respectively, for reserve strengthening related to losses from prior accident years. In 1997 and 1996, the reserve strengthening primarily related to voluntary commercial automobile and commercial package lines of business, while in 1995 the reserve strengthening primarily related to automobile and workers' compensation lines of business. The 1997 reserve strengthening included approximately $11,000,000 for commercial package lines of business and approximately $7,000,000 for voluntary commercial automobile lines of business. During 1997, the Empire Group reviewed the adequacy of the reserves carried for its open claims' files, as part of its normal ongoing practice, focusing on the commercial package, general liability and commercial automobile lines of business. As a result of this review and the continued unfavorable development of prior accident years losses, particularly the 1992 through 1994 accident years, the Empire Group has revised its assumptions regarding future increases in average claims severity and reserves were strengthened. The 1996 reserve strengthening included approximately $20,000,000 for voluntary commercial automobile lines of business and approximately $8,000,000 for commercial package lines of business. Beginning in 1992, the Empire Group entered into new market segments of the voluntary commercial business, including specialty programs for sanitation trucks, gas stations, fuel oil deliveries and limousines. Initially, the Empire Group based its loss ratio estimate upon its experience with similar lines of business, industry statistics and standard actuarial ultimate loss projection techniques, which consider expected loss ratios. During 1996, claims began to develop unfavorably and the Empire Group used such claim development to revise the assumptions that formed the basis of actuarial studies and reserves were increased. With respect to commercial package lines, general liability claims for business written in 1992 through 1994 also developed unfavorably. These claims showed an increased frequency of losses as well as an increase in the time between the date the loss occurred and when the loss was reported compared to prior experience. General liability claims are susceptible to the emergence of losses over an extended period of time. 26 The 1995 reserve strengthening included approximately $23,000,000 for private passenger automobile lines of business and $10,000,000 for workers' compensation lines of business. In early 1994, the private passenger automobile business increased significantly as a result of the acquisition of a large block of assigned risk business. The acquisition of this block of business nearly doubled the volume previously written by the Empire Group. Early in 1995, losses began to develop in this line of business that indicated a higher ultimate loss ratio than the Empire Group had experienced on similar blocks of assigned risk business from earlier periods, which experience formed the basis of the Empire Group's original loss estimate. The Empire Group believes the increased losses in this line resulted primarily from its inability to effectively process a much larger volume of claims from its significantly increased customer base. Consequently, claims investigation and file documentation were not conducted timely which led to higher claim costs. With respect to workers' compensation lines, the Empire Group's policies provide insurance coverage to the employer if employees are able to successfully assert liability for employer negligence in providing a safe working environment. During 1995, a relatively small number of such claims with large dollar values emerged that had not been previously anticipated. The emergence of these claims, and the fact that the workers' compensation line of business is susceptible to the emergence of losses over an extended period, resulted in a revision of the Empire Group's estimate of ultimate losses and reserves were increased. 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 loss projection techniques, statistical analyses and case-base evaluations to estimate its liability for unpaid losses. The actuarial projections include an extrapolation of both losses paid and incurred by business line and accident year and implicitly consider the impact of inflation and claims settlement patterns upon ultimate claim costs based upon historical patterns. These estimates are performed quarterly and consider any changes in trends and actual loss experience. Any resulting change in the estimate of the liability for unpaid losses, including those discussed above, is reflected in current year earnings during the quarter the change in estimate is identified. The reserving process relies on the basic assumption that past experience is an appropriate basis for predicting future events. The probable effects of current developments, trends and other relevant matters are also considered. Since the establishment of loss reserves is affected by many factors, some of which are outside the Company's control or affected by future conditions, reserving for property and casualty claims is a complex and uncertain process, requiring the use of informed estimates and judgements. As additional experience and other data become available and are reviewed, the Company's estimates and judgements may be revised. While the effect of any such changes in estimates could be material to future results of operations, the Company does not expect such changes to have a material effect on its liquidity or financial condition. In management's judgment, information currently available has been appropriately considered in estimating the Company's loss reserves. The Company will continue to evaluate the adequacy of its loss reserves on a quarterly basis, incorporating any future changes in trends and actual loss experience, and record adjustments to its loss reserves as appropriate. Premium revenue receipts on the VA product of the life insurance subsidiaries (which are not reflected as revenues) were $53,178,000 in 1997, $47,265,000 in 1996 and $43,717,000 in 1995. In February 1998, the Company agreed to reinsure all of its remaining life insurance business to Allstate in the Life Reinsurance Transaction. Consummation of this transaction, which is expected to occur in the second quarter of 1998, is subject to regulatory approval and the satisfaction of certain other conditions. The premium to be received on this transaction is approximately $30,000,000. The gain on the reinsurance transaction will be deferred and amortized into income based upon actuarial estimates of the premium revenue of the underlying insurance contracts or will be recognized earlier in income if converted to assumption reinsurance. In connection with the sale of the Colonial Penn Life Group, the Company reinsured certain life insurance policies 27 for a premium of $25,000,000. The gain on this reinsurance will also be deferred and amortized into income in the same manner as described above. Manufacturing revenues declined during the last three years due to the sale of certain divisions and the discontinuance of certain non-performing product lines. The Company recorded charges of $4,300,000 in 1997, $3,700,000 in 1996 and $7,300,000 in 1995 for losses on sales and shutdown expenses, which are primarily reflected in the caption "Selling, general and other expenses." As of December 31, 1997, the Company's remaining manufacturing operation is its plastics division. For the year ended December 31, 1997, the plastics division reported gross profits of approximately $18,800,000. The pre-tax results for this segment improved in 1996 as compared to 1995, primarily due to manufacturing and operating efficiencies at the plastics division and the former bathroom vanities division, as well as the disposal of non-performing businesses. Finance revenues and operating profits in 1997 and 1996 reflect the reduced level of consumer instalment loans, as discussed above. In addition, in 1997, although automobile loan losses declined, operating profit was adversely affected by a $3,500,000 reserve for estimated costs to settle litigation related to a lending program that is in liquidation. In 1996, the decline in operating profit was also caused by increased interest expense on customer banking deposits. In 1997, investment and other income increased by $81,787,000 primarily due to increased gains from sales of real estate properties ($63,500,000) including the previously described sale of a New York City office building and increased interest income ($28,100,000) including earnings on the proceeds from the sales of the Colonial Penn Life Group and Colonial Penn P&C Group. Such increases were partially offset by reduced trading stamp and miscellaneous other revenues in 1997 and a litigation settlement gain recorded in 1996. Investment and other income decreased in 1996 primarily due to the gain on the return of the WMAC Companies in 1995. In 1995, control of the WMAC Companies was returned to the Company and such subsidiaries were consolidated, resulting in a gain of $41,030,000, representing the difference between the carrying amount of the Company's investment prior to consolidation and the net assets of such subsidiaries. Equity in losses of associated companies increased in 1997 as compared to 1996 primarily due to start-up losses from the Company's equity investment in PIB of $50,481,000 in 1997 as compared to $17,104,000 in 1996. During 1997, PIB's increased efforts to build production, distribution capacity and market share, combined with sales that did not meet expectations, resulted in greater operating losses than in 1996. As mentioned above, as a result of the Company's recent agreement with PepsiCo, from February 1, 1998, the Company will no longer account for its investment in PIB under the equity method of accounting. The equity in losses of associated companies included losses from the Company's investment in MK Gold of $4,251,000 in 1997 and $6,478,000 in 1996 and a write-off of $6,540,000 in 1996, representing the Company's investment in an unsuccessful well drilled by its Siberian oil exploration joint venture. The Company's equity in losses of associated companies increased in 1996 compared to 1995 as a result of its investment in PIB, MK Gold and the Siberian oil joint venture. The reduction in interest expense in 1997 was primarily due to the decline in external borrowings as described above. The decrease in selling, general and other expenses in 1997 as compared to 1996 principally reflects the Empire Group's decreased expenses related to reduced premium volume, decreased operating expenses of real estate properties, decreased expenses relating to certain investment activities and lower provisions for bad debts. This decrease was partially offset by the losses recorded by the manufacturing segment related to sold 28 divisions and the charge for estimated costs to settle litigation relating to a lending program that is in liquidation. The 1997 and 1996 income tax benefits were greater than the expected normal corporate tax rate primarily due to the favorable resolution of certain contingencies. The income tax benefit for 1995 was different than the expected normal corporate tax rate principally due to the gain related to the return of the WMAC Companies, which was not taxable, and the favorable resolution of certain contingencies. The number of shares used to calculate basic earnings per share was 62,205,000, 60,301,000 and 57,465,000 for 1997, 1996 and 1995, respectively. The number of shares used to calculate diluted earnings per share was 62,205,000, 60,301,000 and 59,271,000 for 1997, 1996 and 1995, respectively. For diluted per share amounts, the 5-1/4% Debentures were not assumed to have been converted since the effect of such assumed conversion would have been to increase earnings per share. Year 2000 and Information Technology Systems The Company has evaluated its information technology systems to determine the potential impact of the year 2000. The year 2000 issue is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. In 1996, the Empire Group began to evaluate its information technology systems and their ability to support future business needs. This led to a decision to acquire new policy management and accounting systems. These systems provide enhanced functionality and improved processing for underwriting, claims, billing, collection, reinsurance, reporting and accounting and are designed to be year 2000 compliant. The Empire Group anticipates that these new systems will be fully implemented in 1999. The Company does not expect that the year 2000 will have a material effect on its consolidated financial position or consolidated results of operations. However, the year 2000 issue may affect other entities with which the Company transacts business, and the Company cannot predict the effect of the year 2000 issue on such entities. 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 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 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 29 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 90% of the Company's total investment portfolio at December 31, 1997. These fixed income securities are primarily rated "investment grade" or are U.S. governmental agency issued or guaranteed obligations, although limited investments in "non-rated" or rated less than investment grade securities have been made from time to time. The estimated weighted average remaining life of these fixed income securities was approximately 2.7 years at December 31, 1997. The Company's fixed income securities, like all fixed income instruments, are subject to interest rate risk and will fall in value if market interest rates increase. 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. At December 31, 1997, the Company's portfolio of trading securities was not material. 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 30 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. 31
EXPECTED MATURITY DATE ---------------------- 1998 1999 2000 2001 2002 THEREAFTER Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- (In thousands) THE COMPANY, EXCLUDING BANKING AND LENDING: RATE SENSITIVE ASSETS: Available for Sale Fixed Income Securities: U.S. Government $399,979 $265,400 $413,060 $45,762 $154,607 $149,782 $1,428,590 $1,428,590 Weighted Average Interest Rate 5.61% 5.91% 5.94% 6.33% 6.25% 7.00% Other Fixed Maturities: Rated Investment Grade $25,763 $26,317 $10,990 $26,068 $12,559 $83,560 $185,257 $185,257 Weighted Average Interest Rate 5.77% 6.95% 6.93% 7.03% 8.20% 7.71% Rated Less Than Investment Grade/ Not Rated $4,223 $3,516 $11,980 $39,818 $12,527 $21,046 $93,110 $93,110 Weighted Average Interest Rate 7.78% 10.88% 5.61% 11.12% 10.01% 5.67% Held to Maturity Fixed Income Securities: U.S. Government $7,989 $943 $443 $880 - $4,346 $14,601 $14,760 Weighted Average Interest Rate 5.76% 7.69% 7.27% 7.50% - 6.67% Variable Rate Notes Receivable - - - - - $400,000 $400,000 $400,000 Weighted Average Interest Rate 6.47% 6.55% 6.62% 6.63% 6.66% 6.68% RATE SENSITIVE LIABILITIES: Fixed Interest Rate Borrowings - - - - - $342,521 $342,521 $361,407 Weighted Average Interest Rate 7.94% 7.94% 7.94% 7.94% 7.94% 7.94% Variable Rate Borrowings $387 - - - - $9,815 $10,202 $10,202 Weighted Average Interest Rate 5.97% 6.05% 6.12% 6.13% 6.16% 6.25% OTHER RATE SENSITIVE FINANCIAL INSTRUMENTS: Company-obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debt Securities of the Company - - - - - $150,000 $150,000 $159,000 Weighted Average Interest Rate 8.65% 8.65% 8.65% 8.65% 8.65% 8.65% 32 EXPECTED MATURITY DATE ---------------------- 1998 1999 2000 2001 2002 THEREAFTER Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- (In thousands) BANKING AND LENDING: RATE SENSITIVE ASSETS: Certificates of Deposit $10,733 $197 - - - - $10,930 $10,930 Weighted Average Interest Rate 6.046% 6.175% - - - - 6.044% Fixed Interest Rate Securities $16,388 $2,926 $576 $207 $405 $4,190 $24,692 $24,653 Weighted Average Interest Rate 5.873% 6.685% 6.302% 6.634% 6.254% 6.901% 6.443% Variable Interest Rate Securities $11 $5 $5 $5 $6 $310 $342 $341 Weighted Average Interest Rate 3.744% 8.875% 8.875% 8.875% 8.875% 4.951% 5.236% Fixed Interest Rate Loans $68,077 $27,795 $14,485 $7,352 $3,428 $4,077 $125,214 $126,112 Weighted Average Interest Rate 19.634% 22.247% 22.300% 21.056% 19.140% 14.644% 20.432% Variable Interest Rate Loans $41,555 $16,445 $10,098 $6,036 $2,312 $1,278 $77,724 $77,851 Weighted Average Interest Rate 15.409% 15.515% 15.372% 14.228% 14.823% 15.154% 15.314% RATE SENSITIVE LIABILITIES: Money Market Deposits $4,236 $3,831 $3,406 $2,980 $2,554 $4,257 $21,264 $21,921 Weighted Average Interest Rate 4.521% 4.521% 4.521% 4.521% 4.521% 4.521% 4.521% Time Deposits $105,117 $27,166 $28,413 $4,893 $11,729 - $177,318 $177,493 Weighted Average Interest Rate 5.968% 6.202% 6.690% 6.218% 6.484% - 6.161% Fixed Interest Rate Borrowings $149 - - - - - $149 $148 Weighted Average Interest Rate 4.390% - - - - - 4.390% RATE SENSITIVE DERIVATIVE FINANCIAL INSTRUMENTS: Pay Fixed/Receive Variable - $25,000 $25,000 ($636) Interest Rate Swap Average Pay Rate 7.325% 7.325% 7.325% Average Receive Rate 5.871% 5.871% 5.871% OFF-BALANCE SHEET ITEMS: Commitments to Extend Credit $68,653 $68,653 Weighted Average Interest Rate 15.90% Unused Lines of Credit $47,575 $47,575 Weighted Average Interest Rate 15.90%
33 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 1998 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. 34 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, 1997 and 1996......................... F-2 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995................................ F-3 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995................... F-4 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995........................................... F-6 Notes to Consolidated Financial Statements......................................... F-7 Financial Statement Schedules: Schedule II - Condensed Financial Information of Registrant.......................... F-33 Schedule III - Supplementary Insurance Information.............................. F-37 Schedule IV - Schedule of Reinsurance........................................ F-38 Schedule V - Valuation and Qualifying Accounts................................ F-39 Schedule VI - Schedule of Supplemental Information for Property and Casualty Insurance Underwriters.................... F-40 35 (3) Executive Compensation Plans and Arrangements. ---------------------------------------------- 1992 Stock Option Plan (filed as Annex C to the Company's Proxy Statement dated July 21, 1992). Amended and Restated Shareholders Agreement dated as of December 16, 1997 among the Company, Ian M. Cumming and Joseph S. Steinberg. Agreement made as of December 28, 1993 by and between the Company and Ian M. Cumming (filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (the "1993 10-K")). Agreement made as of December 28, 1993 by and between the Company and Joseph S. Steinberg (filed as Exhibit 10.18 to the 1993 10-K). Agreement between the Company and Ian M. Cumming dated as of December 28, 1993 (filed as Exhibit 10.19(a) to the 1993 10-K). Escrow and Security Agreement by and among the Company, Ian M. Cumming and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1993 (filed as Exhibit 10.19(b) to the 1993 10-K). Agreement between the Company and Joseph S. Steinberg, dated as of December 28, 1993 (filed as Exhibit 10.20(a) to the 1993 10-K). Escrow and Security Agreement by and among the Company, Joseph S. Steinberg and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1993 (filed as Exhibit 10.20(b) to the 1993 10-K). Deferred Compensation Agreement between the Company and Lawrence S. Hershfield, dated March 29, 1995 (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the Quarterly Period ended March 31, 1995). (b) Reports on Form 8-K. -------------------- The Company filed a current report on Form 8-K dated November 4, 1997 which set forth information under Item 5. Other Events and Item 7. Financial Statements, Pro Forma Financial Statements and Exhibits. The Company filed a current report on Form 8-K dated November 4, 1997 which set forth information under Item 2. Acquisition or Disposition of Assets and Item 7. Financial Statements, Pro Forma Financial Statements and Exhibits. 36 (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 December 4, 1996 (filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "1996 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 1992 Stock Option Plan (filed as Annex C to the Company's Proxy Statement dated July 21, 1992).* 10.2(a) Fourth Restatement, dated as of December 31, 1996, of the Articles and Agreement of General Partnership of The Jordan Company (filed as Exhibit 10.3(d) to the 1996 10-K).* 10.2(b) 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 Stock Purchase and Sale Agreement dated as of April 5, 1991, by and between FPL Group Capital Inc and the Company (filed as Exhibit B to the Company's Current Report on Form 8-K dated August 23, 1991).* 10.4 Amended and Restated Shareholders Agreement dated as of December 16, 1997 among the Company, Ian M. Cumming and Joseph S. Steinberg. 10.5 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")).* - ------------------------- * Incorporated by reference. 37 10.6 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).* 10.7 Reinsurance Agreement, dated as of December 31, 1991, by and between Colonial Penn Insurance Company and American International Insurance Company (filed as Exhibit 10.16 to the 1992 10-K).* 10.8 Agreement made as of December 28, 1993 by and between the Company and Ian M. Cumming (filed as Exhibit 10.17 to the 1993 10-K).* 10.9 Agreement made as of December 28, 1993 by and between the Company and Joseph S. Steinberg (filed as Exhibit 10.18 to the 1993 10-K).* 10.10(a) Agreement between the Company and Ian M. Cumming, dated as of December 28, 1993 (filed as Exhibit 10.19(a) to the 1993 10-K).* 10.10(b) Escrow and Security Agreement by and among the Company, Ian M. Cumming and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1993 (filed as Exhibit 10.19(b) to the 1993 10-K).* 10.11(a) Agreement between the Company and Joseph S. Steinberg, dated as of December 28, 1993 (filed as Exhibit 10.20(a) to the 1993 10-K).* 10.11(b) Escrow and Security Agreement by and among the Company, Joseph S. Steinberg and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1993 (filed as Exhibit 10.20(b) to the 1993 10-K).* 10.12 Deferred Compensation Agreement between the Company and Lawrence S. Hershfield, dated March 29, 1995 (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the Quarterly Period ended March 31, 1995).* 10.13 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. 10.14 Purchase Agreement among Conseco, the Company, Charter, Colonial Penn Group, Inc., Colonial Penn Holdings, Inc., Leucadia Financial Corporation, Intramerica, Colonial Penn Franklin Insurance Company and Colonial Penn Insurance Company dated as of April 30, 1997 (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997).* 10.15 Purchase Agreement among GECC, the Company, Charter, Colonial Penn Group Inc. and Colonial Penn Holdings, Inc. dated as of June 30, 1997 (filed as Annex A to the Company's Proxy Statement dated October 3, 1997).* - ------------------------- * Incorporated by reference. 38 10.16 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. 21 Subsidiaries of the registrant. 23 Consent of independent accountants with respect to the incorporation by reference into the Company's Registration Statements on Form S-8 (File No. 2-84303), Form S-8 and S-3 (File No. 33-6054), Form S-8 and S-3 (File No. 33-26434), Form S-8 and S-3 (File No. 33-30277), Form S-8 (File No. 33-61682) and Form S-8 (File No. 33- 61718). 27 Financial Data Schedule. (d) Financial Statements of Greater than 50% Owned Entity ----------------------------------------------------- Pepsi International Bottlers, LLC combined financial statements as of December 31, 1997 and 1996 and for the year ended December 31, 1997 and for the period from inception, April 8, 1996 to December 31, 1996................. S-1 - ------------------------- * Incorporated by reference. 39 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LEUCADIA NATIONAL CORPORATION March 27, 1998 By: /s/ Barbara L. Lowenthal ------------------------------------ Barbara L. Lowenthal Vice President and Comptroller Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on the date set forth above. Signature Title --------- ----- /s/ Ian M. Cumming Chairman of the Board - ------------------------------- (Principal Executive Officer) Ian M. Cumming /s/ Joseph S. Steinberg President and Director - ------------------------------- (Principal Executive Officer) Joseph S. Steinberg /s/ Joseph A. Orlando Vice President and Chief Financial Officer - ------------------------------- (Principal Financial Officer) Joseph A. Orlando /s/ Barbara L. Lowenthal Vice President and Comptroller - ------------------------------- (Principal Accounting Officer) Barbara L. Lowenthal /s/ Paul M. Dougan Director - ------------------------------- Paul M. Dougan /s/ Lawrence D. Glaubinger Director - ------------------------------- Lawrence D. Glaubinger /s/ James E. Jordan Director - ------------------------------- James E. Jordan /s/ Jesse Clyde Nichols, III Director - ------------------------------- Jesse Clyde Nichols, III 40 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Leucadia National Corporation: We have audited the consolidated financial statements and the financial statement schedules of LEUCADIA NATIONAL CORPORATION and SUBSIDIARIES listed in Item 14(a) of this Form 10-K. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of LEUCADIA NATIONAL CORPORATION and SUBSIDIARIES as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. New York, New York March 23, 1998 F-1 LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996 (Dollars in thousands, except par value)
1997 1996 ---- ---- ASSETS Investments: Available for sale (aggregate cost of $1,713,653 and $1,037,049) $1,721,640 $1,033,793 Trading securities (aggregate cost of $108,479 and $3,000) 115,416 375 Held to maturity (aggregate fair value of $43,154 and $45,875) 43,036 45,925 Policyholder loans 5,050 4,955 Other investments, including accrued interest income 70,658 56,914 ---------- ---------- Total investments 1,955,800 1,141,962 Cash and cash equivalents 607,181 184,029 Reinsurance receivables, net 207,712 182,662 Trade, notes and other receivables, net 751,374 326,388 Prepaids and other assets 144,426 211,548 Property, equipment and leasehold improvements, net 60,522 71,563 Deferred policy acquisition costs 23,906 26,585 Deferred tax asset - 43,070 Separate and variable accounts 541,546 436,992 Investments in associated companies 207,902 202,496 Net assets of discontinued operations - 535,261 ---------- ---------- Total $4,500,369 $3,362,556 ========== ========== LIABILITIES Customer banking deposits $ 198,582 $ 209,261 Trade payables and expense accruals 216,818 120,076 Other liabilities 115,364 88,926 Income taxes payable 175,289 34,902 Deferred tax liability 11,874 - Policy reserves 737,082 675,297 Unearned premiums 127,669 150,419 Separate and variable accounts 541,546 435,937 Debt, including current maturities 352,872 520,263 ---------- ---------- Total liabilities 2,477,096 2,235,081 ---------- ---------- Minority interest 9,742 9,368 ---------- ---------- Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debt securities of the Company 150,000 - ---------- ---------- SHAREHOLDERS' EQUITY Common shares, par value $1 per share, authorized 150,000,000 shares; 63,879,155 and 60,417,579 shares issued and outstanding, after deducting 54,398,456 and 54,353,691 shares held in treasury 63,879 60,418 Additional paid-in capital 253,267 161,026 Net unrealized gain on investments 5,630 1,759 Retained earnings 1,540,755 894,904 ---------- ---------- Total shareholders' equity 1,863,531 1,118,107 ---------- ---------- Total $4,500,369 $3,362,556 ========== ==========
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, 1997, 1996 and 1995 (In thousands, except per share amounts)
1997 1996 1995 ---- ---- ---- Revenues: Insurance revenues and commissions $279,983 $330,674 $330,321 Manufacturing 133,406 148,284 166,237 Finance 40,529 49,150 53,958 Investment and other income 243,125 161,338 201,004 Equity in losses of associated companies (56,515) (33,631) (2,613) Net securities gains 2,948 28,509 20,020 -------- -------- -------- 643,476 684,324 768,927 -------- -------- -------- Expenses: Provision for insurance losses and policy benefits 277,333 301,662 302,497 Amortization of deferred policy acquisition costs 52,033 55,332 61,994 Manufacturing cost of goods sold 94,077 107,667 129,279 Interest 46,007 53,599 52,538 Salaries 53,419 44,499 46,510 Selling, general and other expenses 145,541 160,904 153,017 -------- -------- -------- 668,410 723,663 745,835 -------- -------- -------- Income (loss) from continuing operations before income taxes, minority expense of trust preferred securities and extraordinary loss (24,934) (39,339) 23,092 -------- -------- -------- Income taxes: Current (3,285) 3,455 3,700 Deferred (6,966) (19,734) (13,140) -------- -------- -------- (10,251) (16,279) (9,440) -------- -------- -------- Income (loss) from continuing operations before minority expense of trust preferred securities and extraordinary loss (14,683) (23,060) 32,532 Minority expense of trust preferred securities, net of taxes 7,942 - - -------- -------- -------- Income (loss) from continuing operations before extraordinary loss (22,625) (23,060) 32,532 Income from discontinued operations, net of taxes 58,852 78,575 74,971 Gain on disposal of discontinued operations, net of taxes of $234,059 627,645 - - -------- -------- -------- Income before extraordinary loss 663,872 55,515 107,503 Extraordinary loss from early extinguishment of debt, net of income tax benefit of $1,108 and $3,682 (2,057) (6,838) - -------- -------- -------- Net income $661,815 $ 48,677 $107,503 ======== ======== ======== Basic earnings (loss) per common share: Income (loss) from continuing operations before extraordinary loss $ (.36) $(.38) $ .57 Income from discontinued operations .94 1.30 1.30 Gain on disposal of discontinued operations 10.09 - - Extraordinary loss (.03) (.11) - ------ ----- ----- Net income $10.64 $ .81 $1.87 ====== ===== ===== Diluted earnings (loss) per common share: Income (loss) from continuing operations before extraordinary loss $ (.36) $(.38) $ .55 Income from discontinued operations .94 1.30 1.26 Gain on disposal of discontinued operations 10.09 - - Extraordinary loss (.03) (.11) - ------ ----- ----- Net income $10.64 $ .81 $1.81 ====== ===== =====
The accompanying notes are an integral part of these consolidated financial statements. F-3 LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1997, 1996 and 1995
1997 1996 1995 ---- ---- ---- (Thousands of dollars) Net cash flows from operating activities: Net income $ 661,815 $ 48,677 $ 107,503 Adjustments to reconcile net income to net cash provided by (used for) operations: Extraordinary loss, net of income tax benefit 2,057 6,838 - (Benefit) for deferred income taxes (6,966) (19,734) (13,140) Depreciation and amortization of property, equipment and leasehold improvements 10,991 12,904 14,293 Other amortization 58,236 64,854 66,891 Provision for doubtful accounts 13,314 18,412 16,299 Net securities (gains) (2,948) (28,509) (20,020) Equity in losses of associated companies 56,515 33,631 2,613 (Gain) loss on disposal of real estate, property and equipment (66,940) (7,485) 3,430 (Gain) on disposal of discontinued operations (627,645) - - (Gain) related to the return of the WMAC Companies - - (41,030) Purchases of investments classified as trading (109,116) - (13,034) Proceeds from sales of investments classified as trading 862 6,724 10,138 Deferred policy acquisition costs incurred and deferred (49,354) (52,763) (62,310) Net change in: Reinsurance receivables (25,050) 5,966 41,945 Trade, notes and other receivables (67,104) 837 (16,510) Prepaids and other assets (80,230) (64,359) (34,906) Net assets of discontinued operations - (50,897) (1,045) Trade payables and expense accruals 60,518 13,033 13,741 Other liabilities (980) (7,429) (13,840) Income taxes payable (11,787) 21,862 22,434 Policy reserves 61,785 (8,196) 19,086 Unearned premiums (22,750) (14,372) 10,425 Other (5,041) 735 5,033 --------- -------- --------- Net cash provided by (used for) operating activities (149,818) (19,271) 117,996 --------- -------- --------- Net cash flows from investing activities: Acquisition of real estate, property, equipment and leasehold improvements (57,172) (19,852) (44,979) Proceeds from disposals of real estate, property and equipment 198,547 46,043 22,521 Proceeds from disposal of discontinued operations, net of expenses 1,042,067 - - Investment in Providential Life in 1996 and MK Gold in 1995 - (11,196) (22,593) Advances on loan receivables (97,898) (113,787) (154,329) Principal collections on loan receivables 114,411 128,756 123,266 Purchases of investments (other than short-term) (1,849,448) (969,644) (784,405) Proceeds from maturities of investments 370,301 382,523 342,216 Proceeds from sales of investments 804,169 649,619 274,255 ---------- --------- --------- Net cash provided by (used for) investing activities 524,977 92,462 (244,048) ---------- --------- --------- (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, 1997, 1996 and 1995
1997 1996 1995 ---- ---- ---- (Thousands of dollars) Net cash flows from financing activities: Net change in short-term borrowings $ (50,000) $ 207 $ (80) Net change in customer banking deposits (10,646) 6,199 22,785 Issuance of Company-obligated mandatorily redeemable preferred securities of subsidiary trust 147,465 - - Issuance of long-term debt, net of issuance costs 9,566 141,581 98,590 Reduction of long-term debt (30,944) (139,861) (8,403) Sale of common shares and exercise of warrants, net of expenses - - 43,857 Purchase of common shares for treasury (1,484) (837) (727) Dividends paid (15,964) (15,100) (15,025) --------- --------- --------- Net cash provided by (used for) financing activities 47,993 (7,811) 140,997 --------- --------- --------- Net increase in cash and cash equivalents 423,152 65,380 14,945 Cash and cash equivalents at January 1, 184,029 118,649 103,704 --------- --------- --------- Cash and cash equivalents at December 31, $ 607,181 $ 184,029 $ 118,649 ========= ========= ========= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $48,456 $53,854 $52,586 Income tax payments, net of refunds $28,492 $ 7,577 $ 1,875
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, 1997, 1996 and 1995
Net Common Unrealized Shares Additional Gain (Loss) $1 Par Paid-in On Retained Value Capital Investments Earnings Total ----- ------- ----------- -------- ----- (Thousands of dollars) Balance, January 1, 1995 $56,100 $ 98,175 $(41,309) $ 768,849 $ 881,815 Exercise of options to purchase common shares 415 2,201 2,616 Purchase of stock for treasury (29) (698) (727) Exercise of warrants to purchase common shares (net of expenses) and related income tax benefit 3,200 47,845 51,045 Issuance of common shares, net of underwriting discounts 478 12,391 12,869 Net change in unrealized gain (loss) on investments 71,395 71,395 Dividend ($.25 per common share) (15,025) (15,025) Net income 107,503 107,503 ------- -------- -------- ---------- ---------- Balance, December 31, 1995 60,164 159,914 30,086 861,327 1,111,491 Exercise of options to purchase common shares 288 1,915 2,203 Purchase of stock for treasury (34) (803) (837) Net change in unrealized gain (loss) on investments (28,327) (28,327) Dividend ($.25 per common share) (15,100) (15,100) Net income 48,677 48,677 ------- -------- -------- ---------- ---------- Balance, December 31, 1996 60,418 161,026 1,759 894,904 1,118,107 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) Net change in unrealized gain (loss) on investments 3,871 3,871 Dividend ($.25 per common share) (15,964) (15,964) Net income 661,815 661,815 ------- -------- -------- ---------- ---------- Balance, December 31, 1997 $63,879 $253,267 $ 5,630 $1,540,755 $1,863,531 ======= ======== ======== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-6 LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Operations: --------------------- The Company is a diversified financial services holding company engaged in personal and commercial lines of property and casualty insurance, principally in the New York metropolitan area, and life insurance, banking and lending and manufacturing, principally in markets throughout the United States. The Company's principal operations are its insurance businesses, where it is a specialty markets provider of property and casualty insurance to niche markets and of a variable annuity product. The Company's principal personal lines insurance products are automobile insurance, homeowners insurance and a variable annuity product. The Company's principal commercial lines are property and casualty products provided for vehicles (including medallion and radio-controlled livery vehicles), multi-family residential real estate, workers' compensation and various other business classes. The Company's banking and lending operations principally consist of making instalment loans to niche markets primarily funded by deposits insured by the Federal Deposit Insurance Corporation. The Company's manufacturing operations primarily manufacture and market proprietary plastic netting used for a variety of purposes. In 1997, the Company classified as discontinued operations the property and casualty insurance operations of Colonial Penn Insurance Company and its subsidiaries (the "Colonial Penn P&C Group") and the life and health insurance operations of Colonial Penn Life Insurance Company and Providential Life Insurance Company (the "Colonial Penn Life Group"). Prior period financial statements have been restated to conform with this presentation. In addition, see Note 22, with respect to the variable annuity business. 2. Significant Accounting Policies: -------------------------------- (a) Use of Estimates in Preparing Financial Statements: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the financial statements and disclosures of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. (b) Consolidation Policy: The consolidated financial statements include the accounts of the Company and all majority-owned and controlled entities. All significant intercompany transactions and balances are eliminated in consolidation. Prior to December 31, 1995, two of the Company's legal subsidiaries (the "WMAC Companies") were not consolidated while under the control of the Wisconsin Insurance Commissioner. Effective as of December 31, 1995, control of the WMAC Companies was returned to the Company and such subsidiaries are included in the consolidated financial statements since such date. 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 1997 presentation and for discontinued operations. (c) Statements of Cash Flows: The Company considers short-term investments, which have maturities of less than three months at the time of acquisition, to be cash equivalents. Cash and cash equivalents include short-term investments of $440,699,000 and $157,707,000 at December 31, 1997 and 1996, respectively. F-7 2. Significant Accounting Policies, continued: -------------------------------------------- (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. 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" in the Consolidated Statements of Income. The cost of securities sold is based on average cost. The Company's investments in Russian equity securities ($31,000,000 and $43,800,000 as of December 31, 1997 and 1996, 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, the Company is accounting for these investments under the cost recovery method, whereby all receipts are applied to reduce the investment. Monthly, the Company reviews its investment in Russian equity securities to determine that the carrying amount of this portfolio is realizable. In performing such reviews, the Company considers current market prices, prior sale transactions, the current political and economic environment in Russia and other factors. These investments are included in "Other investments" in the Consolidated Balance Sheets. (e) Property, Equipment and Leasehold Improvements: Property, equipment and leasehold improvements are stated at cost, net of accumulated depreciation and amortization ($67,148,000 and $87,447,000 at December 31, 1997 and 1996, respectively). Depreciation and amortization are provided principally on the straight-line method over the estimated useful lives of the assets or, if less, the term of the underlying lease. (f) Income Recognition from Insurance Operations: Premiums on property and casualty insurance products are recognized as revenues over the term of the policy using the monthly pro rata basis. Premiums for investment oriented insurance products ("IOP products") are reflected in a manner similar to a deposit; revenues reflect only mortality charges and other amounts assessed against the holder of the insurance policies and annuity contracts. The principal IOP product offered during the three year period ended December 31, 1997 was a variable annuity ("VA") product. Premiums for the VA product are directed by the policyholder to be invested in a unit trust solely for the benefit and risk of the policyholder. Policyholders' accounts are charged for the cost of insurance provided, administrative and certain other charges. The amount included in the balance sheet liability caption "Separate and variable accounts" represents the current value of the policyholders' funds. (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. F-8 2. Significant Accounting Policies, continued: -------------------------------------------- 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. The Company has also entered into reinsurance transactions in connection with dispositions of blocks of businesses. 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: Policy reserves and unearned premiums for traditional annuity policies are computed on a net level premium method based upon standard and Company developed tables with provision for adverse deviation and estimated withdrawals. Liabilities for unpaid losses and loss adjustment expenses applicable to the property and casualty insurance operations are determined using case basis evaluations, statistical analyses for losses incurred but not reported and estimates for salvage and subrogation recoverable and represent estimates of ultimate claim costs and loss adjustment expenses. 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. (j) Liability for Unredeemed Trading Stamps: The Company's liability for unredeemed trading stamps is estimated based upon recent experience, statistical evaluation and estimated costs to service redemptions of unredeemed trading stamps in the future. In prior years, statistical studies and estimates of service costs indicated that the recorded liability for unredeemed trading stamps was in excess of the amount that ultimately will be required to redeem trading stamps outstanding. As a result, selling, general and other expenses applicable to the trading stamp operations include a credit of $9,400,000 for the year ended December 31, 1995, reflecting the adjustments made to the liability for unredeemed trading stamps. The Company's most recent analysis of the liability for unredeemed trading stamps has not identified any remaining excess as of December 31, 1997. (k) 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. (l) Derivative Financial Instruments: The Company enters into interest rate agreements to manage the impact of changes in interest rates on its customer banking deposits. The difference between the amounts paid and received is accrued and recognized as an adjustment to interest expense (the accrual accounting method). Cash flows related to the agreements are classified as operating activities in the Consolidated Statements of Cash Flows, consistent with the interest payments on the underlying debt. The Company does not have material derivative financial instruments. F-9 2. Significant Accounting Policies, continued: -------------------------------------------- (m) Translation of Foreign Currency: Foreign currency denominated investments which are not subject to hedging agreements and currency rate swap agreements not meeting the accounting requirements for hedges are converted into U.S. dollars at exchange rates in effect at the end of the period. Resulting net exchange gains or losses were not material. 3. Acquisitions: ------------- In June 1995, the Company purchased a 46.4% common stock interest in MK Gold Company ("MK Gold") for an aggregate cash purchase price of $22,500,000. MK Gold is an international gold mining company whose shares are quoted on the Nasdaq National Market System. At December 31, 1997, the carrying amount of the Company's investment in MK Gold was $11,374,000. In July 1995, pursuant to the chapter 11 reorganization of HomeFed Corporation ("HFC"), the Company acquired 41.2% of HFC's common stock for net cash of approximately $4,200,000. As part of the reorganization plan, the Company provided HFC with a $20,000,000 eight year collateralized loan, which is convertible into additional shares of HFC common stock after three years (subject to certain conditions) and which bears interest at the rate of 12% per annum. HFC is a public company whose subsidiaries develop real property. The Company's investment in HFC was $18,358,000 at December 31, 1997. 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. Although the Company's $79,500,000 aggregate equity investment in PIB ($28,500,000 of which was funded in January 1997 and $51,000,000 during 1996) resulted in an initial 75% economic interest in PIB, under the original terms of the joint venture agreement, the Company and PepsiCo equally shared voting rights over all significant aspects of PIB's operations. Consequently, since the Company did not control PIB despite its larger economic interest, the Company accounted for its share of PIB's operating results under the equity method of accounting. After reflecting its share of losses since inception, the book value of the Company's equity investment in PIB was $11,744,000 at December 31, 1997. During 1997, the Company and PepsiCo provided bridge financing to PIB to cover operating costs and capital expenditures, of which $77,705,000 was funded by the Company. Although PIB continues to need additional funds while it is developing its business, since November 3, 1997, the Company has not provided any additional funding. As a result, the Company's equity interest in PIB at December 31, 1997 was reduced to 71%. Effective as of January 30, 1998, the Company entered into an agreement with PepsiCo, pursuant to which, among other things, PIB repaid in full the Company's $77,705,000 bridge financing and the Company's equity interest in PIB was reduced to 37.9%. The agreement relieves the Company of any future funding obligation with respect to PIB and gives the Company the right to require that PepsiCo purchase all of the Company's interest in PIB (the "Put Option") for $37,000,000, plus interest (the "Exercise Price"), and gives PepsiCo the right (the "Call Option") to require that the Company sell to PepsiCo all of the Company's interest in PIB for the Exercise Price. The Call Option is exercisable for the five year period beginning on January 30, 1998 and the Put Option is exercisable for the three year period beginning January 30, 2000 (although, in certain limited circumstances it can be exercised earlier). During the period that the Call Option is exercisable, PepsiCo will have sole voting rights and the unilateral ability to make all capital, operational and managerial decisions of PIB, including future funding needs. F-10 3. Acquisitions, continued: ------------------------ As a result of this agreement with PepsiCo, the Company no longer has any ability to influence PIB. Effective February 1, 1998, the Company will no longer account for its investment in PIB under the equity method of accounting. Although the Exercise Price exceeds the book value of the Company's equity investment in PIB at December 31, 1997 by $25,256,000, the Company will not recognize any gain in its results of operations until the Put Option or Call Option is exercised. The Company's investments described above are included in the caption "Investments in associated companies." 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 1997 and 1996 results of operations. Such results were not material in 1995. (Amounts are in thousands.) 1997 1996 ---- ---- Assets $1,162,394 $1,004,675 ---------- ---------- Liabilities 1,104,100 915,703 ---------- ---------- Minority interest 6,446 2,929 ---------- ---------- Net assets $ 51,848 $ 86,043 ========== ========== The Company's portion of the reported net assets $ 13,160 $ 48,703 ========== ========== Total revenues $ 716,320 $ 627,658 (Loss) from continuing operations before extraordinary items $ (66,525) $ (90,607) Net (loss) $ (66,525) $ (90,607) The Company's equity in net (loss) $ (56,515) $ (33,631) At December 31, 1997, investments in associated companies included common stock equity interests of 5% or more in the following domestic publicly owned non-consolidated companies: Carmike Cinemas, Inc. (6% of Class A shares), HFC (41%) and MK Gold (46%). F-11 5. Insurance Operations: --------------------- Premiums received on IOP products were $53,178,000, $47,265,000 and $43,717,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The changes in deferred policy acquisition costs were as follows (in thousands): 1997 1996 1995 ---- ---- ---- Balance, January 1, $ 26,585 $ 29,154 $ 28,838 Policy acquisition costs incurred and deferred 49,354 52,763 62,310 Amortization of deferred acquisition costs (52,033) (55,332) (61,994) -------- -------- -------- Balance, December 31, $ 23,906 $ 26,585 $ 29,154 ======== ======== ======== The effect of reinsurance on premiums written and earned for the years ended December 31, 1997, 1996 and 1995 is as follows (in thousands):
1997 1996 1995 ---- ---- ---- Premiums Premiums Premiums Premiums Premiums Premiums Written Earned Written Earned Written Earned ------- ------ ------- ------ ------- ------ Direct $296,725 $323,671 $339,789 $358,463 $354,428 $347,759 Assumed 200 280 1,031 1,149 (3,487) 1,390 Ceded (42,726) (43,968) (30,253) (28,938) (24,224) (18,828) -------- -------- -------- -------- -------- -------- Net $254,199 $279,983 $310,567 $330,674 $326,717 $330,321 ======== ======== ======== ======== ======== ========
Recoveries recognized on reinsurance contracts were $48,751,000 in 1997, $34,160,000 in 1996 and $18,638,000 in 1995. Net income and statutory surplus as determined in accordance with statutory accounting principles as reported to the domiciliary state of the Company's insurance subsidiaries are as follows (in thousands):
Year Ended December 31, ----------------------- 1997 1996 1995 ---- ---- ---- Net income: Property and casualty insurance $ 3,405 $26,905 $7,578 Life insurance $1,286,463 $36,354 $9,554 At December 31, --------------- 1997 1996 1995 ---- ---- ---- Statutory surplus: Property and casualty insurance $ 217,925 $561,060 $520,700 Life insurance $1,285,763 $406,503 $376,223
The statutory net income of the life insurance subsidiaries is net of certain management and other fees paid to the Company or other subsidiaries of the Company. Under generally accepted accounting principles, the reported income of the life insurance segment is increased by these fees, since all intercompany transactions are eliminated in consolidation. Certain insurance subsidiaries were owned by other insurance subsidiaries. As a result, the statutory net income of the life insurance subsidiaries includes F-12 5. Insurance Operations, continued: -------------------------------- statutory dividend income from property and casualty operations of $20,000,000, $36,120,000 and $6,840,000 for 1997, 1996 and 1995, respectively. In the data above, for the years ended December 31, 1996 and 1995, investments in such subsidiary-owned insurance companies are reflected in statutory surplus of both the parent and subsidiary-owned insurance company. As a result, at December 31, 1996 and 1995, statutory surplus of $316,300,000 and $292,800,000, respectively, related to property and casualty operations is also included in the statutory surplus of the life insurance parent, and statutory surplus of $24,500,000 and $29,300,000, respectively, related to life operations is also included in the statutory surplus of the property and casualty insurance parent. The insurance subsidiaries are subject to regulatory restrictions which limit the amount of cash and other distributions available to the Company without regulatory approval. As of January 1, 1998, $1,247,102,000 could be distributed to the Company without regulatory approval, including $1,230,000,000 of net proceeds from the sales of the Colonial Penn P&C Group and the Colonial Penn Life Group. During the first quarter of 1998, having made the required regulatory notification, such amount, consisting of $830,000,000 in cash and the notes from Conseco, Inc., was distributed to the Company. The Company's insurance subsidiaries are contingently liable for possible assessments under state regulatory requirements pertaining to potential insolvencies of unaffiliated insurance companies. Liabilities, which are established based upon regulatory guidance, have not been material. For information with respect to the activity in property and casualty loss reserves see "Reconciliation of Liability and Loss Adjustment Expenses" in Item 1 included elsewhere herein, which is incorporated by reference into these consolidated financial statements. 6. Discontinued Operations: ------------------------ 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 are 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 will be deferred and amortized into income based on actuarial estimates of the premium revenue of the underlying insurance contracts or will be recognized earlier if converted to assumption reinsurance to the extent permitted. 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 is 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. F-13 6. Discontinued Operations, continued: ----------------------------------- At December 31, 1996, the components of net assets of discontinued operations are as follows (in thousands): Investments $1,648,158 Cash and cash equivalents 202,778 Separate account assets 109,082 Deferred policy acquisition costs 79,082 Other 327,541 ---------- Total assets 2,366,641 ---------- Policy reserves 1,265,348 Unearned premiums 290,524 Separate account liabilities 109,082 Other 166,426 ---------- Total liabilities 1,831,380 ---------- Net assets of discontinued operations $ 535,261 ========== A summary of the results of discontinued operations is as follows for 1997 (through the date of sale) and for the years ended December 31, 1996 and 1995 (in thousands):
1997 1996 1995 ---- ---- ---- Colonial Penn P&C Group: Revenues $512,811 $592,005 $578,859 -------- -------- -------- Expenses: Provision for insurance losses and policy benefits 373,602 421,823 411,850 Other operating expenses 86,519 100,660 100,618 -------- -------- -------- 460,121 522,483 512,468 -------- -------- -------- Income before income taxes 52,690 69,522 66,391 Income taxes 18,329 22,288 18,720 -------- -------- -------- Income from discontinued operations, net of taxes $ 34,361 $ 47,234 $ 47,671 ======== ======== ======== Colonial Penn Life Group: Revenues $166,078 $230,228 $210,528 -------- -------- -------- Expenses: Provision for insurance losses and policy benefits 100,964 139,135 127,779 Other operating expenses 28,341 42,764 40,050 -------- -------- -------- 129,305 181,899 167,829 -------- -------- -------- Income before income taxes 36,773 48,329 42,699 Income taxes 12,282 16,988 15,399 -------- -------- -------- Income from discontinued operations, net of taxes $ 24,491 $ 31,341 $ 27,300 ======== ======== ========
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, 1997 and 1996 are as follows (in thousands):
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- Held to maturity: 1997 Bonds and notes: United States Government agencies and authorities $28,999 $175 $55 $29,119 States, municipalities and political subdivisions 3,002 3 - 3,005 All other corporates 141 - 5 136 Other fixed maturities 10,894 - - 10,894 ------- ---- --- ------- $43,036 $178 $60 $43,154 ======= ==== === ======= 1996 Bonds and notes: United States Government agencies and authorities $29,630 $164 $204 $29,590 States, municipalities and political subdivisions 1,825 - - 1,825 All other corporates 212 - 10 202 Other fixed maturities 14,258 - - 14,258 ------- ---- ---- ------- $45,925 $164 $214 $45,875 ======= ==== ==== ======= Available for sale: 1997 Bonds and notes: United States Government agencies and authorities $1,431,020 $ 6,218 $2,419 $1,434,819 Foreign governments 34,364 3,511 175 37,700 All other corporates 239,795 3,084 2,212 240,667 ---------- ------- ------ ---------- Total fixed maturities 1,705,179 12,813 4,806 1,713,186 Equity securities: Common stocks - industrial, miscellaneous and all other 3,474 998 955 3,517 Other 5,000 - 63 4,937 ---------- ------- ------ ---------- $1,713,653 $13,811 $5,824 $1,721,640 ========== ======= ====== ==========
F-15 7. Investments, continued: -----------------------
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- 1996 Bonds and notes: United States Government agencies and authorities $ 987,300 $2,726 $10,877 $ 979,149 States, municipalities and political subdivisions 100 - - 100 Foreign governments 442 3,553 16 3,979 Public utilities 4,947 70 1 5,016 All other corporates 40,807 1,646 186 42,267 ---------- ------ ------- ---------- Total fixed maturities 1,033,596 7,995 11,080 1,030,511 ---------- ------ ------- ---------- Equity securities: Common stocks - industrial, miscellaneous and all other 3,453 145 316 3,282 ---------- ------ ------- ---------- $1,037,049 $8,140 $11,396 $1,033,793 ========== ====== ======= ==========
The amortized cost and estimated fair value of investments classified as held to maturity and as available for sale at December 31, 1997, by contractual maturity are shown below. Expected maturities are likely to differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Held to Maturity Available for Sale ---------------- ------------------ Estimated Estimated Amortized Fair Amortized Fair Cost Value Cost Value ---- ----- ---- ----- (In thousands) Due in one year or less $19,716 $19,706 $ 431,142 $ 433,444 Due after one year through five years 10,429 10,429 1,003,769 1,005,748 Due after five years through ten years 8,219 8,373 147,212 149,438 Due after ten years 1,499 1,500 7,428 7,662 ------- ------- ---------- ---------- 39,863 40,008 1,589,551 1,596,292 Mortgage-backed securities 3,173 3,146 115,628 116,894 ------- ------- ---------- ---------- $43,036 $43,154 $1,705,179 $1,713,186 ======= ======= ========== ==========
At December 31, 1997 and 1996 securities with book values aggregating $14,841,000 and $16,693,000, respectively, were on deposit with various regulatory authorities. Additionally, at December 31, 1997, securities with book values of approximately $105,000,000 collateralized a letter of credit issued in connection with the sale of the Colonial Penn P&C Group. F-16 7. Investments, continued: ----------------------- Certain information with respect to trading securities at December 31, 1997 and 1996 is as follows (in thousands):
Amortized Estimated Carrying Cost Fair Value Value ---- ---------- ----- 1997 Fixed maturities - corporate bonds and notes $ 5,360 $ 5,419 $ 5,419 Equity securities: Preferred stocks 100,483 107,567 107,567 Common stocks - industrial, miscellaneous and all other 1,600 1,600 1,600 Options and warrants 1,036 830 830 -------- -------- -------- Total trading securities $108,479 $115,416 $115,416 ======== ======== ======== 1996 Options $3,000 $375 $375 ------ ---- ---- Total trading securities $3,000 $375 $375 ====== ==== ====
8. Trade, Notes and Other Receivables, Net: ---------------------------------------- A summary of trade, notes and other receivables, net at December 31, 1997 and 1996 is as follows (in thousands):
1997 1996 ---- ---- Note receivable from Conseco, Inc. on sale of the Colonial Penn Life Group (including accrued interest) $406,223 $ - Instalment loan receivables net of unearned finance charges of $919 and $1,910 (a) 202,938 233,351 Bridge financing to PIB (repaid in 1998) 77,705 - Premiums receivable 49,451 63,869 Trade receivables 8,110 20,856 Service fee receivable 2,090 7,806 Amount due on sale of real estate 8,552 3,927 Other 14,814 15,962 -------- -------- 769,883 345,771 Allowance for doubtful accounts (including $10,199 and $12,177 applicable to loan receivables of banking and lending subsidiaries) (18,509) (19,383) -------- -------- $751,374 $326,388 ======== ========
(a) Contractual maturities of instalment loan receivables at December 31, 1997 were as follows (in thousands): 1998 - $94,068; 1999 - $42,756; 2000 - $30,680; 2001 - $19,477 and 2002 and thereafter - $15,957. Experience shows that a substantial portion of such notes will be repaid or renewed prior to contractual maturity. Accordingly, the foregoing is not to be regarded as a forecast of future cash collections. F-17 9. Prepaids and Other Assets: -------------------------- At December 31, 1997 and 1996, a summary of prepaids and other assets is as follows (in thousands):
1997 1996 ---- ---- Real estate assets, net $ 93,264 $142,089 Inventories, net 11,353 21,281 Balances in risk sharing pools and associations 2,712 941 Prepaid reinsurance premium 7,482 8,360 Unamortized debt expense 7,385 7,415 Other 22,230 31,462 -------- -------- $144,426 $211,548 ======== ======== 10. Trade Payables, Expense Accruals and Other Liabilities: ------------------------------------------------------- A summary of trade payables, expense accruals and other liabilities at December 31, 1997 and 1996 is as follows (in thousands): 1997 1996 ---- ---- Trade Payables and Expense Accruals: Payables related to securities $ 97,844 $ 277 Amount due on reinsurance 16,711 16,394 Trade and drafts payable 24,141 27,268 Accrued compensation, severance and other employee benefits 33,347 17,505 Pension liability 2,423 5,712 Accrued interest payable 5,709 8,375 Taxes, other than income 5,607 7,628 Accrued dividends 5,960 13 Provision for servicing carrier claims 12,337 26,811 Other 12,739 10,093 -------- -------- $216,818 $120,076 ======== ======== Other Liabilities: Deferred gain on reinsurance $ 16,664 $ - Unearned service fees 15,129 18,203 Liability for unredeemed trading stamps 22,227 23,735 Postretirement and postemployment benefits 21,840 25,657 Holdbacks on loans 2,272 3,806 Unclaimed funds and dividends 1,193 1,269 Other 36,039 16,256 -------- -------- $115,364 $ 88,926 ======== ========
F-18 11. Long-term and Other Indebtedness: --------------------------------- The principal amount, stated interest rate and maturity of long-term debt outstanding at December 31, 1997 and 1996 are as follows (dollars in thousands):
1997 1996 ---- ---- Senior Notes: Term loans with banks $ - $ 50,000 7 3/4% Senior Notes due 2013, less debt discount of $781 and $831 99,219 99,169 Industrial Revenue Bonds (with variable interest) 9,815 4,900 Other 9,447 9,620 -------- -------- 118,481 163,689 -------- -------- Subordinated Notes: 10 3/8% Senior Subordinated Notes due 2002, less debt discount of $92 - 22,252 8 1/4% Senior Subordinated Notes due 2005 100,000 100,000 7 7/8% Senior Subordinated Notes due 2006, less debt discount of $609 and $678 134,391 134,322 5 1/4% Convertible Subordinated Debentures due 2003 - 100,000 -------- -------- 234,391 356,574 -------- -------- $352,872 $520,263 ======== ========
In February 1997, the Company replaced its unsecured $150,000,000 bank credit agreement facilities and its $50,000,000 of outstanding unsecured bank term loans with a new unsecured bank credit facility of $200,000,000. In connection with the sale of the Colonial Penn P&C Group, the Company replaced the February 1997 bank credit facility with a new unsecured bank credit facility of $100,000,000 which bears interest based on the prime rate or LIBOR and matures in November 2002. No amounts were borrowed under this bank credit facility as of December 31, 1997. The most restrictive of the Company's debt instruments require maintenance of minimum Tangible Net Worth and limit Indebtedness, as defined in the agreements. In addition, the debt instruments contain limitations on dividends, investments, liens, contingent obligations and certain other matters. As of December 31, 1997, cash dividends of $616,840,000 would be eligible to be paid under the most restrictive covenants. In March 1997, the Company called for redemption all of its outstanding $100,000,000 5 1/4% Convertible Subordinated Debentures due 2003 (the "5 1/4% Debentures"), at a redemption price of 102.625% of the principal amount of the Debentures, plus accrued interest. $93,675,000 par value of the 5 1/4% Debentures was converted into 3,258,145 Common Shares and $6,325,000 par value of the 5 1/4% Debentures was redeemed. As of December 31, 1996, the Company purchased $102,656,000 aggregate principal amount of the 10 3/8% Senior Subordinated Notes due 2002 (the "10 3/8% Notes") plus accrued interest through a tender offer and in open market purchases for approximately $114,000,000. In June 1997, the Company redeemed the remaining aggregate principal amount outstanding of its 10 3/8% Notes for a total redemption price of $23,112,000. The Company reported extraordinary losses on early extinguishment of the 5 1/4% Debentures and 10 3/8% Notes of $3,165,000 ($2,057,000 after taxes or $.03 per share) in 1997 and $10,520,000 ($6,838,000 after taxes or $.11 per share) in 1996. Approximately $10,390,000 of the manufacturing division's net property, equipment and leasehold improvements are pledged as collateral for the Industrial Revenue Bonds; and approximately $15,715,000 of other assets (primarily property) are pledged for other indebtedness aggregating approximately $9,060,000. F-19 11. Long-term and Other Indebtedness, continued: -------------------------------------------- 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, 1997 and 1996, the notional amount of the Company's interest rate swaps was $25,000,000. These interest rate swaps expire in 1999 and require fixed rate payments of 7.33%. The Company would have been required to pay $636,000 at December 31, 1997 and $782,000 at December 31, 1996 to retire these agreements. The LIBOR rate at December 31, 1997 was 5.9%. 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. Counterparties to interest rate swap agreements are major financial institutions, which management believes are able to fulfill their obligations. However, any losses due to default by the counterparties are likely to be immaterial. The aggregate annual mandatory redemptions of debt during the five year period ending December 31, 2002 are as follows (in thousands): 1998 - $759; 1999 - $241; 2000 - $260; 2001 - $281; and, 2002 - $303. The weighted average interest rate on short-term borrowings (primarily customer banking deposits) was 5.9% and 5.8% at December 31, 1997 and 1996, respectively. 12. Preferred Securities of Subsidiary Trust: ----------------------------------------- In January 1997, the Company sold $150,000,000 aggregate liquidation amount of 8.65% trust issued preferred securities of its wholly-owned subsidiary, Leucadia Capital Trust I (the "Trust"). These Company-obligated mandatorily redeemable preferred securities have an effective maturity date of January 15, 2027 and represent undivided beneficial interests in the Trust's assets, which consist solely of $154,640,000 principal amount of 8.65% Junior Subordinated Deferrable Interest Debentures due 2027 of the Company. Considered together, the "back-up undertakings" of the Company related to the Trust's preferred securities constitute a full and unconditional guarantee by the Company of the Trust's obligations under the preferred securities. 13. Common Shares, Stock Options, Warrants and Preferred Shares: ------------------------------------------------------------ The Board of Directors from time to time has authorized acquisitions of the Company's Common Shares. Pursuant to such authorization, during the three year period ended December 31, 1997, the Company acquired 108,078 Common Shares (44,765 shares in 1997, 34,037 shares in 1996 and 29,276 shares in 1995) at an average price of $28.54 per Common Share. The Company has a fixed stock option plan which provides for grants of options or rights to non-employee directors and certain employees up to a maximum grant of three hundred thousand shares to any individual in a given taxable year. The plan provides for the issuance of stock options and stock appreciation rights at not less than the fair market value of the underlying stock at the date of grant. Options generally become exercisable in five equal annual instalments starting one year from date of grant. No stock appreciation rights have been granted. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", ("SFAS 123"), establishes a fair value method for accounting for stock-based compensation plans, either through recognition in the statements of income or disclosure. 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 F-20 13. Common Shares, Stock Options, Warrants and Preferred Shares, continued: ----------------------------------------------------------------------- 1997, 1996 and 1995 would not have been materially different from those reported. A summary of activity with respect to the Company's stock options for the three years ended December 31, 1997 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, 1995 1,215,944 $10.47 553,868 1,574,800 Granted 10,000 $23.25 ======= ========= Exercised (414,826) $ 6.31 Cancelled (38,500) $12.16 --------- Balance at December 31, 1995 772,618 $12.79 443,018 1,583,100 Granted 630,200 $26.54 ======= ========= Exercised (287,792) $ 7.66 Cancelled (41,100) $16.54 --------- Balance at December 31, 1996 1,073,926 $22.09 317,826 974,400 Granted 77,500 $26.67 ======= ========= Exercised (248,196) $14.15 Cancelled (393,470) $24.69 --------- Balance at December 31, 1997 509,760 $24.64 171,980 1,278,770 ========= ======= =========
The weighted-average fair value of the options granted was $6.39 per share for 1997, $7.04 per share for 1996 and $6.47 per share for 1995 as estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (1) expected volatility of 20.3% for 1997, 25.3% for 1996 and 27.4% for 1995; (2) risk-free interest rates of 6.1% for 1997, 6.0% for 1996 and 5.9% for 1995; (3) expected lives of 3.7 years for 1997 and 1996 and 4.0 years for 1995; and (4) dividend yields of .9% for 1997 and 1996 and 1.1% for 1995. The following table summarizes information about fixed stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable --------------------------------------- -------------------------- Weighted Common Average Weighted Common Weighted Shares Remaining Average Shares Average Range of Subject to Contractual Exercise Subject to Exercise Exercise Prices Option Life Price Option Price - --------------- ------ ---- ----- ------ ----- $17.88 - $21.50 158,960 1.9 years $20.34 117,560 $20.39 $23.25 - $26.63 342,800 4.2 years $26.42 54,420 $26.45 $31.50 - $35.63 8,000 5.2 years $33.56 - - ------- ------- $17.88 - $35.63 509,760 3.5 years $24.64 171,980 $22.31 ======= =======
On September 13, 1995, Ian M. Cumming and Joseph S. Steinberg, Chairman of the Board and President of the Company, respectively, and certain members of Mr. Cumming's family exercised previously granted warrants to purchase an aggregate of 3,188,000 Common Shares and sold such shares in an underwritten public offering. In connection with such public offering, the Company granted the underwriters an over allotment F-21 13. Common Shares, Stock Options, Warrants and Preferred Shares, continued: ----------------------------------------------------------------------- option, which was exercised, for 478,200 Common Shares. Under the terms of the warrant agreement, the Company was required to pay expenses of the sale, other than underwriting discounts. As a result of the exercise of the warrants and the exercise of the over allotment option, the Company realized aggregate cash proceeds, net of expenses, of $43,736,000. For income tax purposes, the exercise of the warrants resulted in a current income tax deduction of $57,305,000. For financial reporting purposes, the benefit of such deduction ($20,057,000) was credited directly to shareholders' equity. At December 31, 1997 and 1996, the Company's Common Shares were reserved as follows: 1997 1996 ---- ---- Stock Options 1,788,530 2,048,326 Convertible Debentures - 3,478,261 --------- --------- 1,788,530 5,526,587 ========= ========= At December 31, 1997 and 1996, 6,000,000 preferred shares (redeemable and non-redeemable), par value $1 per share, were authorized. 14. Net Securities Gains: --------------------- The following summarizes net securities gains for each of the three years in the period ended December 31, 1997 (in thousands):
1997 1996 1995 ---- ---- ---- Net realized gains on fixed maturities $1,000 $11,382 $ 9,377 Net unrealized gains (losses) on trading securities 2,932 (3,834) 2,580 Net realized gains (losses) on equity and other securities (984) 20,961 8,063 ------ ------- ------- $2,948 $28,509 $20,020 ====== ======= =======
Proceeds from sales of investments classified as available for sale were $766,399,000, $639,449,000 and $267,282,000 during 1997, 1996 and 1995, respectively. Gross gains of $6,259,000, $24,460,000 and $17,601,000 and gross losses of $3,225,000, $1,014,000 and $2,059,000 were realized on these sales during 1997, 1996 and 1995, respectively. 15. Other Results of Operations Information: ---------------------------------------- Investment and other income for each of the three years in the period ended December 31, 1997 consist of the following (in thousands):
1997 1996 1995 ---- ---- ---- Interest on short-term investments $ 15,567 $ 9,777 $ 8,807 Interest on fixed maturities 78,130 62,261 59,525 Interest on notes receivable 6,789 615 703 Service fee income 23,757 25,084 27,110 Trading stamp revenues 8,194 12,017 17,957 Rental income 8,082 10,560 9,994 Gains on sale of property, net of costs 74,560 11,078 4,833 Gain on return of the WMAC Companies - - 41,030 Litigation settlements 579 5,434 4,666 Other 27,467 24,512 26,379 -------- -------- -------- $243,125 $161,338 $201,004 ======== ======== ========
F-22 15. Other Results of Operations Information, continued: --------------------------------------------------- On June 30, 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. Effective as of December 31, 1995, control of the WMAC Companies was returned to the Company and such subsidiaries were consolidated. The gain related to the return of the WMAC Companies reflects the difference between the carrying amount of the Company's investment prior to consolidation and the net assets of such subsidiaries. Taxes, other than income or payroll, included in operations amounted to $10,794,000 (including $4,139,000 of premium taxes) for the year ended December 31, 1997, $16,526,000 (including $5,120,000 of premium taxes) for the year ended December 31, 1996 and $15,574,000 (including $5,588,000 of premium taxes) for the year ended December 31, 1995. Advertising costs amounted to $4,026,000, $5,138,000 and $6,785,000 for the years ended December 31, 1997, 1996 and 1995, respectively. 16. Income Taxes: ------------- The principal components of the deferred tax asset (liability) at December 31, 1997 and 1996 are as follows (in thousands):
1997 1996 ---- ---- Deferred Tax Asset: Insurance reserves and unearned premiums $ 39,815 $ 35,031 Securities valuation reserves 19,985 15,707 Other accrued liabilities 7,980 8,143 Unrealized losses on investments - 1,113 Tax loss carryforwards, net of tax sharing payments 39,047 37,388 -------- -------- 106,827 97,382 Valuation allowance (71,776) (40,584) -------- -------- 35,051 56,798 -------- -------- Deferred Tax Liability: Instalment sale (12,000) - Unrealized (gains) on investments (2,796) - Depreciation (5,876) (3,022) Policy acquisition costs (6,626) (8,087) Other, net (19,627) (2,619) -------- -------- (46,925) (13,728) -------- -------- Net deferred tax asset (liability) $(11,874) $ 43,070 ======== ========
At December 31, 1997, the amount included above for tax loss carryforwards includes capital loss carryforwards resulting from the sale of certain subsidiaries. The valuation allowance principally relates to certain acquired tax loss carryforwards, the usage of which is subject to certain limitations and certain other matters which may restrict their utilization, capital loss carryforwards and unrealized capital losses. During 1997 the valuation allowance was increased in part to reflect the uncertainty of utilizing the capital loss carryforwards and the unrealized capital losses. In addition, the amounts reflected above are based on the minimum amount of tax loss carryforwards of Phlcorp, Inc. ("Phlcorp"), a subsidiary of the Company. As described more fully herein, substantial additional amounts may be available under certain circumstances and as uncertainties are resolved. If these uncertainties are resolved in the Company's favor, the deferred tax asset related to tax loss carryforwards would increase by approximately $81,000,000, exclusive of any additional valuation allowance. F-23 16. Income Taxes, continued: ------------------------ The (benefit) for income taxes for each of the three years in the period ended December 31, 1997 was as follows (in thousands):
1997 1996 1995 ---- ---- ---- State income taxes (principally currently payable) $ 3,750 $ 1,200 $ 2,500 Federal income taxes: Current (7,543) 1,755 704 Deferred (6,966) (19,734) (13,140) Foreign income taxes (principally currently payable) 508 500 496 -------- -------- -------- $(10,251) $(16,279) $ (9,440) ======== ======== ======== The table below reconciles expected statutory federal income tax to actual income tax (benefit) (in thousands): 1997 1996 1995 ---- ---- ---- Expected federal income tax $ (8,727) $(13,769) $ 8,082 State income taxes, net of federal income tax benefit 2,438 780 1,625 Return of the WMAC Companies - - (14,360) Reduction in valuation allowance (1,890) (1,693) - Recognition of additional tax benefits (2,719) (2,500) (5,547) Other 647 903 760 -------- -------- -------- Actual income tax (benefit) $(10,251) $(16,279) $ (9,440) ======== ======== ========
The valuation allowance applicable to the deferred income tax asset gives effect to the possible unavailability of certain income tax deductions. During 1997 and 1996 certain matters were favorably resolved and the Company reduced the valuation allowance as reflected in the above reconciliation. Since the WMAC Companies have previously been included in the Company's consolidated federal income tax return, the gain recorded upon return of the WMAC Companies is not taxable. Phlcorp, in connection with its 1986 reorganization, entered into a tax settlement agreement (the "Tax Settlement Agreement") with the United States whereby, among other things, Phlcorp agreed that upon utilization of certain pre-reorganization tax loss carryforwards, it would pay 25% of any resultant tax savings to the government, subject to certain limitations. The Tax Settlement Agreement provides that post-reorganization tax attributes and net operating losses will be utilized prior to pre-reorganization tax operating loss carryforwards in calculating tax sharing payments. Due to unresolved issues concerning certain post-reorganization deductions, Phlcorp is unable to state with certainty the amount of its available carryforwards. However, Phlcorp believes that it has tax operating loss carryforwards of between $64,000,000 and $296,000,000 at December 31, 1997. The expiration dates for Phlcorp's tax loss carryforwards will depend on the outcome of the matters referred to above, although it is unlikely such carryforwards will begin to expire before 1998. F-24 16. Income Taxes, continued: ------------------------ At December 31, 1997 certain of the Company's subsidiaries other than Phlcorp had tax loss carryforwards of $2,000,000, which have been reflected in the deferred tax asset (liability) after applying the statutory federal income tax rate. These carryforwards begin to expire in 1998. In addition, at December 31, 1997 the Company had capital loss carryforwards of $53,000,000 which expire in 2002. Limitations exist under the tax law which may restrict the utilization of the tax loss carryforwards. In addition, the capital loss carryforwards can only be used to offset capital gains. Further, certain of the future deductions may only be utilized in the tax returns of certain life insurance subsidiaries. These limitations are considered in the determination of the valuation allowance. Under certain circumstances, the value of the carryforwards available could be substantially reduced if certain changes in ownership were to occur. In order to reduce this possibility, the Company's certificate of incorporation was amended to include certain charter restrictions which prohibit transfers of the Company's Common Stock under certain circumstances. Under prior law, Charter National had accumulated $15,447,000 of special federal income tax deductions allowed life insurance companies and Colonial Penn's life insurance subsidiaries had accumulated $161,000,000 of such special deductions. Under certain conditions, such amounts could become taxable in future periods. Except with respect to amounts applicable to Colonial Penn's life insurance subsidiaries, the Company does not anticipate any transaction occurring which would cause these amounts to become taxable. With respect to Colonial Penn's life insurance subsidiaries, the IRS has asserted that a portion of such special federal income tax deductions should have been reflected in taxable income in prior years, and has assessed additional taxes (excluding interest) of $2,899,000 and $19,132,000, for 1989 and 1988, respectively. Under the terms of the purchase agreement whereby Colonial Penn was acquired from FPL Group Capital Inc ("FPL"), FPL is obligated to reimburse the Company for any such taxes. Pursuant to the purchase agreement, the Company complied with FPL's instructions and agreed to the 1989 IRS assessment. To date, FPL has failed to comply with its contractual obligation to reimburse the Company for payment of the 1989 IRS assessment, the related interest and the loss of certain minimum tax credit carryforwards, an aggregate of $3,766,000, to which the Company is entitled under FPL's indemnification. In a response to a legal proceeding initiated by the Company to collect such amount due under FPL's indemnification obligation, FPL has alleged that the Company has breached the purchase agreement and, on that basis, FPL has denied liability for the 1989 IRS assessment. The Company believes it has not breached the purchase agreement and FPL remains liable for all such taxes and interest. FPL is currently exercising its right under the purchase agreement to control the contest of the 1988 IRS assessment. If FPL is unsuccessful in contesting the 1988 IRS assessment, the Company believes that FPL may again refuse to comply with its indemnification obligations under the purchase agreement. Should that occur, the Company would seek to compel FPL to honor its indemnification obligations under the purchase agreement and to pursue all other available remedies against FPL. During 1995, in connection with other litigation, FPL agreed to pay the Company certain amounts pursuant to another tax indemnification provision included in the purchase agreement. Such amounts are reflected in investment and other income for the year ended December 31, 1995. In September 1997, the Company sold the Colonial Penn Life Group to Conseco, Inc. Under the terms of the purchase agreement, the Company indemnified Conseco, Inc. for Colonial Penn Life Group's taxes for periods prior to 1997, which include periods for which FPL has indemnified the Company. F-25 17. Pension Plans and Postretirement Benefits: ------------------------------------------ The Company maintains defined benefit pension plans covering employees of certain units who meet age and service requirements. Benefits are generally based on final average salary and years of service. The Company funds its pension plans in amounts sufficient to satisfy minimum ERISA funding requirements. Pension expense charged to operations included the following components (in thousands):
1997 1996 1995 ---- ---- ---- Service cost $ 2,261 $ 2,999 $ 1,859 Interest cost 3,685 4,284 2,107 Actual return on plan assets (4,925) (4,098) (4,727) Net amortization and deferral 1,738 2,208 2,114 ------- ------- ------ Net pension expense $ 2,759 $ 5,393 $ 1,353 ======= ======= =======
The funded status of the pension plans at December 31, 1997 and 1996 was as follows (in thousands):
1997 1996 ---- ---- Actuarial present value of accumulated benefit obligation: Vested $ 89,210 $74,562 Non-vested 1,457 2,021 -------- ------- $ 90,667 $76,583 ======== ======= Projected benefit obligation $100,314 $98,733 Plan assets at fair value 93,088 90,902 -------- ------- Funded status (7,226) (7,831) Unrecognized prior service cost 84 2,773 Unrecognized net loss at January 1, 1987 378 431 Unrecognized net (gain) loss from experience differences and assumption changes 4,341 (1,085) -------- ------- Accrued pension liability $ (2,423) $(5,712) ======== =======
The plans' assets consist primarily of U.S. government and agencies' bonds and corporate bonds and notes. The projected benefit obligation at December 31, 1997 and 1996 was determined using an assumed discount rate of 7.0% and 7.5%, respectively, and an assumed compensation increase rate of 4.3% and 5.0%, respectively. The assumed long-term rate of return on plan assets was 7.4% at December 31, 1997 and 1996, respectively. The Company also has defined contribution pension plans covering certain employees. Contributions and costs are a percent of each covered employee's salary. Amounts charged to expense related to such plans were $1,209,000, $1,344,000 and $1,348,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Several subsidiaries provide certain health care and other benefits to certain retired employees under plans which are currently unfunded. The Company pays the cost of postretirement benefits as they are incurred. Amounts charged (credited) to expense (principally amortization of a curtailment gain in 1997 and interest in 1996 and 1995) related to such benefits were ($2,851,000) in 1997, $1,355,000 in 1996 and $1,240,000 in 1995. F-26 17. Pension Plans and Postretirement Benefits, continued: ----------------------------------------------------- Included in other liabilities at December 31, 1997 and 1996 are the following (in thousands):
1997 1996 ---- ---- Accumulated postretirement benefit obligation: Retirees $ 9,857 $12,624 Fully eligible active plan participants 586 2,818 Other active plan participants 647 450 ------- ------- Accumulated postretirement benefit obligation 11,090 15,892 Unrecognized prior service cost 4,847 5,623 Unrecognized net gain from experience differences and assumption changes 3,622 1,580 ------- ------- Accrued postretirement benefit obligation $19,559 $23,095 ======= =======
The discount rate used in determining the accumulated postretirement benefit obligation was 7.0% and 7.5% at December 31, 1997 and 1996, respectively. The assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation were between 6.9% and 10.5% for 1997 and 7.3% and 13.0% for 1996, declining to an ultimate rate of between 5.0% and 6.0% by 2007. If the health care cost trend rates were increased by 1%, the accumulated postretirement obligation as of December 31, 1997 and 1996 would have increased by $633,000 and $1,046,000, respectively. The effect of this change on the aggregate of service and interest cost for 1997 and 1996 would be immaterial. 18. Commitments: ------------ The Company and its subsidiaries rent office space and office equipment under non-cancelable operating leases with terms generally varying from one to twenty years. Rental expense (net of sublease rental income) charged to operations was $7,362,000 in 1997, $8,635,000 in 1996 and $8,247,000 in 1995. Aggregate minimum annual rentals (exclusive of real estate taxes, maintenance and certain other charges) relating to facilities under lease in effect at December 31, 1997 are as follows (in thousands): 1998 - $4,494; 1999 - $6,597; 2000 - $6,071; 2001 - $5,989; 2002 - $5,889; and thereafter - $106,801. Future minimum sublease rental income is not material. Included in the amounts shown above are the gross future minimum annual rental payments relating to a twenty year lease which the Empire Group entered into beginning November 1998 for its executive and administrative offices. These offices will be 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, which is expected to be contributed in 1998. 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 return of the WMAC Companies, the WMAC Companies have guaranteed the collectibility of reinsurance agreements applicable to a block of mortgage reinsurance business. The maximum amount of such contingency is $27,415,000 at December 31, 1997. The reinsurance agreements are with highly rated institutions and/or are secured in part by letters of credit or trust funds; as a result the Company does not expect a material loss in connection with this guarantee. F-27 18. Commitments, continued: ----------------------- 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 secure certain indemnification obligations. This letter of credit is collateralized by certain deposits of the Company aggregating approximately $105,000,000. The insurance and the banking and lending subsidiaries are limited by regulatory requirements and agreements in the amount of dividends and other transfers of funds that are available to the Company. Principally as a result of such restrictions, the net assets of subsidiaries which are subject to limitations on transfer of funds to the Company were approximately $305,486,000 at December 31, 1997, exclusive of amounts related to the sales of the Colonial Penn P&C Group and Colonial Penn Life Group distributed to the Company in March 1998. See Note 5. 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: --------------------------------- During 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share", which revised the computation and presentation of earnings per share data. A reconciliation of the numerators and denominators of the basic and diluted earnings (loss) per share calculations for income (loss) from continuing operations before extraordinary loss for each of the three years in the period ended December 31, 1997 is as follows (in thousands):
Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ------ 1997: - ----- Basic (Loss) Per Share: (Loss) from continuing operations before extraordinary loss $(22,625) 62,205 $(.36) ===== Effect of Dilutive Securities: Options - - 5 1/4% Debentures - - -------- ------ Diluted (loss) per share $(22,625) 62,205 $(.36) ======== ====== ===== 1996: - ----- Basic (Loss) Per Share: (Loss) from continuing operations before extraordinary loss $(23,060) 60,301 $(.38) ===== Effect of Dilutive Securities: Options - - 5 1/4% Debentures - - -------- ------ Diluted (loss) per share $(23,060) 60,301 $(.38) ======== ====== ===== 1995: - ----- Basic Earnings Per Share: Income from continuing operations before extraordinary loss $ 32,532 57,465 $.57 ==== Effect of Dilutive Securities: Options - 1,311 Warrants - 495 5 1/4% Debentures - - -------- ------ Diluted earnings per share $ 32,532 59,271 $.55 ======== ====== ====
F-28 20. Earnings (Loss) Per Common Share, continued: -------------------------------------------- Options to purchase 886,730 weighted average shares of common stock and 1,144,431 weighted average shares of common stock, were outstanding during the years ended December 31, 1997 and 1996, respectively, but were not included in the computation of diluted earnings (loss) per share as those options were antidilutive. Additionally, during the years ended December 31, 1996 and 1995, and for the period January 1, 1997 through April 11, 1997, the 5 1/4% Debentures, which were convertible into 3,478,260 Common Shares, were outstanding. Such debentures were not included in the computation of diluted earnings (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: (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. It is not practicable to determine the fair value of policyholder loans since such loans generally have no stated maturity, are not separately transferable and are often repaid by reductions to benefits and surrenders. (b) Cash and cash equivalents: For cash equivalents, the carrying amount approximates fair value. (c) Note receivable on sale of the Colonial Penn Life Group: The fair value of variable rate note receivable is estimated to be the carrying amount. (d) Loans receivable of banking and lending subsidiaries: The fair value of loans receivable of the banking and lending subsidiaries is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities. (e) Separate and variable accounts: Separate and variable accounts assets and liabilities are carried at market value, which is a reasonable estimate of fair value. (f) Investments in associated companies: The fair values of 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. (g) Customer banking deposits: The fair value of customer banking deposits is estimated using rates currently offered for deposits of similar remaining maturities. (h) Long-term and other indebtedness: The fair values of non-variable rate debt are estimated using quoted market prices and estimated rates which would be available to the Company for debt with similar terms. The fair value of variable rate debt is estimated to be the carrying amount. F-29 21. Fair Value of Financial Instruments, continued: ----------------------------------------------- (i) Investment contract reserves: Single premium deferred annuity reserves are carried at account value, which is a reasonable estimate of fair value. The fair value of other investment contracts is estimated by discounting the future payments at rates which would currently be offered for contracts with similar terms. The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1997 and 1996 are as follows (in thousands):
1997 1996 ---- ---- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Financial Assets: Investments: Practicable to estimate fair value $1,950,750 $1,950,876 $1,137,007 $1,136,957 Policyholder loans 5,050 - 4,955 - Cash and cash equivalents 607,181 607,181 184,029 184,029 Note receivable on sale of the Colonial Penn Life Group (including accrued interest) 406,223 406,223 - - Loans receivable of banking and lending subsidiaries, net of allowance 192,739 203,963 221,174 234,771 Separate and variable accounts 541,546 541,546 436,992 436,992 Investments in associated companies 207,902 217,499 202,496 210,574 Financial Liabilities: Customer banking deposits 198,582 199,414 209,261 210,160 Long-term and other indebtedness 352,872 371,757 520,263 530,206 Securities sold not owned 97,708 97,708 - - Investment contract reserves 8,107 8,107 6,331 6,331 Separate and variable accounts 541,546 541,546 435,937 435,937 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debt securities of the Company 150,000 159,000 - -
22. Event Subsequent to the Balance Sheet Date: ------------------------------------------- In February 1998, the Company agreed to reinsure all of its remaining life insurance business to Allstate Life Insurance Company and a subsidiary thereof in an indemnity reinsurance transaction. Consummation of this transaction, which is expected to occur in the second quarter of 1998, is subject to regulatory approval and the satisfaction of certain other conditions. The premium to be received on this transaction is approximately $30,000,000. The gain on the reinsurance transaction will be deferred and amortized into income based upon actuarial estimates of the premium revenue of the underlying insurance contracts or will be recognized earlier in income if converted to assumption reinsurance. F-30 23. Selected Quarterly Financial Data (Unaudited): ----------------------------------------------
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (In thousands, except per share amounts) 1997: - ----- Revenues $162,045 $190,528 $144,310 $146,593 ======== ======== ======== ======== Income (loss) from continuing operations before extraordinary loss $ (6,064) $ 18,682 $(11,435) $(23,808) ======== ======== ======== ======== Income from discontinued operations, net of taxes $ 18,784 $ 16,911 $ 15,318 $ 7,839 ======== ======== ======== ======== Gain on disposal of discontinued operations, net of taxes $ - $ - $200,337 $427,308 ======== ======== ======== ======== Extraordinary loss from early extinguishment of debt, net of income tax benefit $ - $ (2,044) $ (13) $ - ======== ======== ======== ======== Net income $ 12,720 $ 33,549 $204,207 $411,339 ======== ======== ======== ======== Basic earnings (loss) per common share: Income (loss) from continuing operations $(.10) $ .30 $(.18) $(.37) Income from discontinued operations .31 .28 .24 .12 Gain on disposal of discontinued operations - - 3.17 6.69 Extraordinary loss - (.03) - - ----- ----- ----- ----- Net income $ .21 $ .55 $3.23 $6.44 ===== ===== ===== ===== Number of shares used in calculation 60,441 61,072 63,259 63,856 ====== ====== ====== ====== Diluted earnings (loss) per common share: Income (loss) from continuing operations $(.10) $ .30 $(.18) $(.37) Income from discontinued operations .31 .26 .24 .12 Gain on disposal of discontinued operations - - 3.17 6.69 Extraordinary loss - (.03) - - ----- ----- ----- ----- Net income $ .21 $ .53 $3.23 $6.44 ===== ===== ===== ===== Number of shares used in calculation 60,441 64,113 63,259 63,856 ====== ====== ====== ====== F-31 23. Selected Quarterly Financial Data (Unaudited), continued: --------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (In thousands, except per share amounts) 1996: - ----- Revenues $178,443 $173,484 $179,275 $153,122 ======== ======== ======== ======== Income (loss) from continuing operations before extraordinary loss $ (5,706) $ (6,768) $ 846 $(11,432) ======== ======== ======== ======== Income from discontinued operations, net of taxes $ 21,307 $ 19,941 $ 18,339 $ 18,988 ======== ======== ======== ======== Extraordinary loss from early extinguishment of debt, net of income tax benefit $ - $ - $ - $ (6,838) ======== ======== ======== ======== Net income $ 15,601 $ 13,173 $ 19,185 $ 718 ======== ======== ======== ======== Basic earnings (loss) per common share: Income (loss) from continuing operations before extraordinary loss $(.09) $(.11) $.02 $(.19) Income from discontinued operations .35 .33 .30 .31 Extraordinary loss - - - (.11) ----- ----- ---- ----- Net income $ .26 $ .22 $.32 $ .01 ===== ===== ==== ===== Number of shares used in calculation 60,218 60,278 60,330 60,380 ====== ====== ====== ====== Diluted earnings (loss) per common share: Income (loss) from continuing operations before extraordinary loss $(.09) $(.11) $.02 $(.19) Income from discontinued operations .35 .33 .30 .31 Extraordinary loss - - - (.11) ----- ----- ---- ----- Net income $ .26 $ .22 $.32 $ .01 ===== ===== ==== ===== Number of shares used in calculation 60,218 60,278 60,534 60,380 ====== ====== ====== ======
In 1997 and 1996, the totals of quarterly per share amounts do not necessarily equal annual per share amounts. F-32 SCHEDULE II - Condensed Financial Information of Registrant LEUCADIA NATIONAL CORPORATION BALANCE SHEETS December 31, 1997 and 1996 (Dollars in thousands, except par value)
1997 1996 ---- ---- ASSETS - ------ Cash and cash equivalents $ 27,325 $ 61,330 Investments 336,650 115,443 Deferred tax asset - 43,070 Miscellaneous receivables and other assets 124,219 42,221 Investments in and advances to/from subsidiaries, net (includes net assets of discontinued operations of $535,261 in 1996) 2,061,268 1,386,214 ---------- ---------- $2,549,462 $1,648,278 ========== ========== LIABILITIES - ----------- Accounts payable and expense accruals $ 37,752 $ 12,757 Income taxes payable 152,308 11,286 Deferred tax liability 11,874 - Debt, including current maturities 333,997 506,128 ---------- ---------- 535,931 530,171 ---------- ---------- Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debt securities of the Company 150,000 - ---------- ---------- SHAREHOLDERS' EQUITY - -------------------- Common shares, par value $1 per share, authorized 150,000,000 shares; 63,879,155 and 60,417,579 shares issued and outstanding, after deducting 54,398,456 and 54,353,691 shares held in treasury 63,879 60,418 Additional paid-in capital 253,267 161,026 Net unrealized gain on investments 5,630 1,759 Retained earnings 1,540,755 894,904 ---------- ---------- Total shareholders' equity 1,863,531 1,118,107 ---------- ---------- $2,549,462 $1,648,278 ========== ==========
See notes to this schedule. F-33 SCHEDULE II - Condensed Financial Information of Registrant, continued: LEUCADIA NATIONAL CORPORATION STATEMENTS OF INCOME For the years ended December 31, 1997, 1996 and 1995 (In thousands, except per share amounts)
1997 1996 1995 ---- ---- ---- Investment income $ 44,747 $ 32,469 $ 38,931 Equity in losses of associated companies (4,853) (14,720) (24) Net securities gains (losses) 15 96 (1) Equity in income of subsidiaries 30,863 45,587 78,242 -------- -------- -------- 70,772 63,432 117,148 -------- -------- -------- Interest expense 44,893 62,242 58,723 Other expenses 40,562 24,250 25,893 -------- -------- -------- 85,455 86,492 84,616 -------- -------- -------- Income (loss) from continuing operations before minority expense of trust preferred securities and extraordinary loss (14,683) (23,060) 32,532 Minority expense of trust preferred securities, net of taxes 7,942 - - -------- -------- -------- Income (loss) from continuing operations before extraordinary loss (22,625) (23,060) 32,532 Equity in income from discontinued operations of subsidiaries 58,852 78,575 74,971 Equity in gain on disposal of discontinued operations, net of taxes 627,645 - - -------- -------- -------- Income before extraordinary loss 663,872 55,515 107,503 Extraordinary loss from early extinguishment of debt, net of income tax benefit of $1,108 and $3,682 (2,057) (6,838) - -------- -------- -------- Net income $661,815 $ 48,677 $107,503 ======== ======== ======== Basic earnings (loss) per common share: Income (loss) from continuing operations before extraordinary loss $ (.36) $(.38) $ .57 Income from discontinued operations .94 1.30 1.30 Gain on disposal of discontinued assets 10.09 - - Extraordinary loss (.03) (.11) - ------ ----- ----- Net income $10.64 $ .81 $1.87 ====== ===== ===== Diluted earnings (loss) per common share: Income (loss) from continuing operations before extraordinary loss $ (.36) $(.38) $ .55 Income from discontinued operations .94 1.30 1.26 Gain on disposal of discontinued assets 10.09 - - Extraordinary loss (.03) (.11) - ------ ----- ----- Net income $10.64 $ .81 $1.81 ====== ===== ===== See notes to this schedule. F-34 SCHEDULE II - Condensed Financial Information of Registrant, continued: LEUCADIA NATIONAL CORPORATION STATEMENTS OF CASH FLOWS For the years ended December 31, 1997, 1996 and 1995 1997 1996 1995 ---- ---- ---- (Thousands of dollars) Net cash flows from operating activities: - ----------------------------------------- Net income $661,815 $ 48,677 $ 107,503 Adjustments to reconcile net income to net cash provided by (used for) operations: Amortization 1,175 (487) 681 Net securities (gains) losses (15) (96) 1 Equity in earnings of subsidiaries (717,360) (124,162) (153,213) Equity in losses of associated companies 4,853 14,720 24 Extraordinary loss, net of income tax benefit 2,057 6,838 - Net change in: Miscellaneous receivables (83,566) 1,121 (582) Other assets (9,957) (7,327) (1,714) Investments in and advances to/from subsidiaries, net 62,776 125,508 26,641 Accounts payable and expense accruals 24,927 (3,272) (1,206) Income taxes payable 141,022 1,611 10,253 Other 3,512 2,204 2,616 --------- --------- --------- Net cash provided by (used for) operating activities 91,239 65,335 (8,996) --------- --------- --------- Net cash flows from investing activities: - ----------------------------------------- Dividends received from subsidiaries 38,775 32,581 10,076 Capital contribution to subsidiaries (25) (12,068) (13,319) Investment in Providential Life in 1996 and MK Gold Company in 1995 - (11,504) (22,593) Purchases of investments (other than short-term) (674,291) (149,228) (124,855) Proceeds from maturities of investments 272,892 116,930 43,300 Proceeds from sales of investments 187,241 25,117 76 --------- --------- --------- Net cash provided by (used for) investing activities (175,408) 1,828 (107,315) --------- --------- --------- Net cash flows from financing activities: - ----------------------------------------- Net change in short-term borrowings (50,000) 207 (80) Issuance of Company-obligated mandatorily redeemable preferred securities of subsidiary trust 147,465 - - Issuance of long-term debt, net of issuance costs - 132,793 98,590 Reduction of long-term debt (29,853) (137,773) (5,702) Sale of common shares and exercise of warrants, net of expenses - - 43,857 Purchase of common shares for treasury (1,484) (837) (727) Dividends paid (15,964) (15,100) (15,025) --------- --------- --------- Net cash provided by (used for) financing activities 50,164 (20,710) 120,913 --------- --------- --------- Net (decrease) increase in cash and cash equivalents (34,005) 46,453 4,602 Cash and cash equivalents at January 1, 61,330 14,877 10,275 --------- --------- --------- Cash and cash equivalents at December 31, $ 27,325 $ 61,330 $ 14,877 ========= ========= ========= Supplemental disclosures of cash flow information: - -------------------------------------------------- Cash paid during the year for: Interest $34,998 $40,238 $39,768 Income tax payments, net of refunds $24,233 $ 2,490 $(3,723)
See notes to this schedule. F-35 SCHEDULE II - Condensed Financial Information of Registrant, continued: LEUCADIA NATIONAL CORPORATION NOTES TO SCHEDULE A. The notes to consolidated financial statements of Leucadia National Corporation and Subsidiaries are incorporated by reference to this schedule. B. The statements of shareholders' equity are the same as those presented for Leucadia National Corporation and Subsidiaries. C. Equity in the income of the subsidiaries is after reflecting income taxes recorded by the subsidiaries. In 1997, 1996 and 1995, there was no provision or benefit for income taxes provided by the parent company, other than the benefits related to the minority expense of the trust preferred securities and the extraordinary losses. Tax sharing payments received from subsidiaries were $229,246,000 in 1997, $48,017,000 in 1996 and $42,078,000 in 1995. D. The deferred income tax asset (liability) of $(11,874,000) and $43,070,000 at December 31, 1997 and 1996, respectively, had not been allocated to the individual subsidiaries. F-36 SCHEDULE III - Supplementary Insurance Information LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES For the years ended December 31, 1997, 1996 and 1995
Insurance Losses, Policy Benefits and Separate Amortization Deferred and Policy of Policy Future Variable and Net Deferred Other Non-Life Acquisition Policy Unearned Accounts Contract Premium Investment Acquisition Operating Premiums Costs Benefits Premiums Liabilities Claims Revenue Income Costs Expenses Written ----- -------- -------- ----------- ------ ------- ------ ----- -------- ------- (Thousands of dollars) 1997 - ---- Life insurance $ - $187,157 $ - $541,546 $ 4,217 $ 4,968 $ 8,658 $ 1,898 $ 9,166 $ - ------- -------- -------- -------- -------- -------- ------- -------- -------- -------- Property and casualty insurance: Automobile 11,130 - 72,617 - 297,810 169,586 28,415 208,521 (15,649) 148,944 Commercial 8,594 - 39,119 - 232,057 77,657 19,427 95,024 9,693 73,716 Miscellaneous and personal 4,182 - 15,933 - 15,841 27,772 2,372 23,923 2,079 30,573 ------- -------- -------- -------- -------- -------- ------- -------- -------- -------- 23,906 - 127,669 - 545,708 275,015 50,214 327,468 (3,877) 253,233 ------- -------- -------- -------- -------- -------- ------- -------- -------- -------- $23,906 $187,157 $127,669 $541,546 $549,925 $279,983 $58,872 $329,366 $ 5,289 $253,233 ======= ======== ======== ======== ======== ======== ======= ======== ======== ======== 1996 - ---- Life insurance $ - $140,110 $ - $435,937 $ 2,868 $ 4,241 $ 6,209 $ 1,846 $ 4,017 $ - ------- -------- -------- -------- -------- -------- ------- -------- -------- -------- Property and casualty insurance: Automobile 14,392 - 93,957 - 295,634 212,821 30,890 248,506 (5,160) 200,541 Commercial 8,847 - 43,336 - 225,705 92,414 20,564 86,593 16,627 84,187 Miscellaneous and personal 3,346 - 13,126 - 10,980 21,198 1,767 20,049 1,997 25,052 ------- -------- -------- -------- -------- -------- ------- -------- -------- -------- 26,585 - 150,419 - 532,319 326,433 53,221 355,148 13,464 309,780 ------- -------- -------- -------- -------- -------- ------- -------- -------- -------- $26,585 $140,110 $150,419 $435,937 $535,187 $330,674 $59,430 $356,994 $ 17,481 $309,780 ======= ======== ======== ======== ======== ======== ======= ======== ======== ======== 1995 - ---- Life insurance $ - $163,414 $ - $370,968 $ 2,657 $ 4,228 $ 7,055 $ (466) $ 5,229 $ - ------- -------- -------- -------- -------- -------- ------- -------- -------- -------- Property and casualty insurance: Automobile 16,857 - 103,712 - 282,596 208,604 26,450 272,014 (15,156) 211,725 Commercial 10,141 - 51,808 - 226,850 102,711 18,436 82,487 9,458 100,340 Miscellaneous and personal 2,156 - 9,271 - 7,976 14,778 1,596 10,456 2,324 17,820 ------- -------- -------- -------- -------- -------- ------- -------- -------- -------- 29,154 - 164,791 - 517,422 326,093 46,482 364,957 (3,374) 329,885 ------- -------- -------- -------- -------- -------- ------- -------- -------- -------- $29,154 $163,414 $164,791 $370,968 $520,079 $330,321 $53,537 $364,491 $ 1,855 $329,885 ======= ======== ======== ======== ======== ======== ======= ======== ======== ========
F-37 SCHEDULE IV - Schedule of Reinsurance LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES For the years ended December 31, 1997, 1996 and 1995
Percentage of Ceded Assumed Amount Direct to Other from Other Net Assumed Business Companies Companies Amount to Net -------- --------- --------- ------ ------ (Thousands of dollars) 1997 - ---- Life insurance in force $310,508 $241,360 $ - $ 69,148 .00% ======== ======== ====== ======== Premiums: Life insurance $ 18,757 $ 13,789 $ - $ 4,968 .00% Accident and health insurance 23 23 - - .00% Property and liability insurance 304,891 30,156 280 275,015 .10% -------- -------- ------ -------- Total premiums $323,671 $ 43,968 $ 280 $279,983 .10% ======== ======== ====== ======== 1996 - ---- Life insurance in force $145,000 $72,000 $ - $ 73,000 .00% ======== ======= ====== ======== Premiums: Life insurance $ 4,561 $ 354 $ 34 $ 4,241 .80% Accident and health insurance 153 - - 153 .00% Property and liability insurance 353,749 28,584 1,115 326,280 .34% -------- ------- ------ -------- Total premiums $358,463 $28,938 $1,149 $330,674 .35% ======== ======= ====== ======== 1995 - ---- Life insurance in force $177,000 $98,000 $ - $ 79,000 .00% ======== ======= ====== ======== Premiums: Life insurance $ 4,228 $ 297 $ 297 $ 4,228 7.02% Accident and health insurance 1,169 - - 1,169 .00% Property and liability insurance 342,362 18,531 1,093 324,924 .34% -------- ------- ------ -------- Total premiums $347,759 $18,828 $1,390 $330,321 .42% ======== ======= ====== ========
F-38 SCHEDULE V - Valuation and Qualifying Accounts LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES For the years ended December 31, 1997, 1996 and 1995
Additions Deductions ------------------- ------------------- Charged (Credited) Balance at to Costs Balance Beginning and Write- Sale of at End of Description of Period Expenses Recoveries Offs Receivables Period ----------- --------- -------- ---------- ---- ----------- ------ (Thousands of dollars) 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 7,174 1,412 7,054 428 8,310 ------- ------- ------ ------- ---- ------- Total allowance for doubtful accounts $19,383 $13,314 $6,433 $20,193 $428 $18,509 ======= ======= ====== ======= ==== ======= 1996 - ---- Loan receivables of banking and lending subsidiaries $13,893 $ 9,966 $5,104 $16,174 $612 $12,177 Trade, notes and other receivables 6,609 8,446 1,269 9,040 78 7,206 ------- ------- ------ ------- ---- ------- Total allowance for doubtful accounts $20,502 $18,412 $6,373 $25,214 $690 $19,383 ======= ======= ====== ======= ==== ======= 1995 - ---- Loan receivables of banking and lending subsidiaries $12,308 $ 9,467 $4,163 $12,045 $ - $13,893 Trade, notes and other receivables 5,773 6,832 1,283 7,124 155 6,609 ------- ------- ------ ------- ---- ------- Total allowance for doubtful accounts $18,081 $16,299 $5,446 $19,169 $155 $20,502 ======= ======= ====== ======= ==== =======
F-39 SCHEDULE VI - Schedule of Supplemental Information for Property and Casualty Insurance Underwriters LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES For the years ended December 31, 1997, 1996 and 1995
Discount, if any, Deducted in Reserves Claims and Claim Paid Claims for Unpaid Claims and Adjustment Expenses and Claim Claim Adjustment Incurred Related to: Adjustment Expenses Current Year Prior Year Expenses -------- ----------------------- -------- (Thousands of dollars) 1997 Automobile $ - $179,984 $ 635 $181,161 Commercial 409 53,022 24,939 76,259 Miscellaneous and personal - 15,402 1,453 12,037 ---- -------- -------- -------- Total property and casualty $409 $248,408 $ 27,027 $269,457 ==== ======== ======== ======== 1996 Automobile $ - $194,183 $ 21,478 $209,179 Commercial 347 64,171 4,779 73,916 Miscellaneous and personal - 13,279 1,926 12,275 ---- -------- -------- -------- Total property and casualty $347 $271,633 $ 28,183 $295,370 ==== ======== ======== ======== 1995 Automobile $ - $189,774 $ 45,520 $192,974 Commercial 252 71,329 (10,610) 33,912 Miscellaneous and personal - 7,390 (440) 6,080 ---- -------- -------- -------- Total property and casualty $252 $268,493 $ 34,470 $232,966 ==== ======== ======== ========
F-40 PEPSI INTERNATIONAL BOTTLERS, LLC COMBINED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND 1996 AND FOR THE YEAR ENDED DECEMBER 31, 1997 AND FOR THE PERIOD FROM INCEPTION, APRIL 8, 1996 TO DECEMBER 31, 1996 S-1 PEPSI INTERNATIONAL BOTTLERS, LLC COMBINED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- CONTENTS PAGE Report of Independent Accountants 3 Combined Balance Sheets 4 Combined Statements of Operations 5 Combined Statements of Cash Flows 6 Combined Statements of Changes in Stockholders' Equity 7 Notes to the Combined Financial Statements 8-18 - -------------------------------------------------------------------------------- S-2 PEPSI INTERNATIONAL BOTTLERS, LLC COMBINED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF PEPSI INTERNATIONAL BOTTLERS, LLC: We have audited the accompanying combined balance sheet of Pepsi International Bottlers, LLC (the "Company") as of December 31, 1997 and 1996, and the related combined statements of operations, shareholders' equity and cash flows for the year ended December 31, 1997 and for the period from inception, April 8, 1996 to December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1997 and 1996 and of the results of operations and cash flows for the year ended December 31, 1997 and for the period from inception, April 8, 1996 to December 31, 1996, in conformity with generally accepted accounting principles in the United States. Coopers & Lybrand Moscow, Russia February 16, 1998 - -------------------------------------------------------------------------------- S-3 PEPSI INTERNATIONAL BOTTLERS, LLC COMBINED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- COMBINED BALANCE SHEETS As of December 31, 1997 and 1996
(In thousands of US dollars) Notes 1997 1996 - ------------------------------------------------------------------------------------------------------------------ ASSETS CURRENT ASSETS Cash and cash equivalents 2 6,131 15,392 Accounts receivable, net 3 2,952 1,579 Inventories 4 13,710 2,980 Other current assets 5 9,407 12,923 ------- ------- TOTAL CURRENT ASSETS 32,200 32,874 ------- ------- NON-CURRENT ASSETS Property, plant and equipment, net 6 103,730 23,882 Identifiable intangible assets, net 2 3,372 1,957 Other non-current assets 3,658 29 ------- ------- TOTAL NON-CURRENT ASSETS 110,760 25,868 ------- ------- TOTAL ASSETS 142,960 58,742 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities 7 9,815 4,292 Short term borrowings 8 0 6,329 Amounts payable to related parties 12 3,805 1,313 Accrued taxes payable 5,120 1,843 Loans from shareholders 9 103,605 0 ------- ------- TOTAL CURRENT LIABILITIES 122,345 13,777 ------- ------- COMMITMENTS AND CONTINGENCIES 10 SHAREHOLDERS' EQUITY Capital contributions 111,950 68,000 Accumulated deficit (91,335) (23,035) ------- ------- TOTAL SHAREHOLDERS' EQUITY 20,615 44,965 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 142,960 58,742 ======= =======
The accompanying notes form an integral part of these combined financial statements. - -------------------------------------------------------------------------------- S-4 PEPSI INTERNATIONAL BOTTLERS, LLC COMBINED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- COMBINED STATEMENTS OF OPERATIONS For the year ended December 31, 1997 and for the period from inception, April 8, 1996 to December 31, 1996
(In thousands of US dollars) Notes 1997 1996 - ------------------------------------------------------------------------------------------------------------------ Sales, net 56,105 5,839 Costs and expenses: Costs of sales 58,206 5,512 Selling, marketing and general and administrative expenses 58,329 22,066 Depreciation and amortization 5,107 529 -------- -------- LOSS FROM OPERATIONS (65,537) (22,268) Interest income (expense) 607 540 Other expense (2,208) (892) Foreign exchange loss (1,031) (340) -------- -------- LOSS BEFORE INCOME TAXES (68,169) (22,960) Income tax provision 11 (131) (75) -------- -------- NET LOSS (68,300) (23,035) ======== ========
The accompanying notes form an integral part of these combined financial statements. - -------------------------------------------------------------------------------- S-5 PEPSI INTERNATIONAL BOTTLERS, LLC COMBINED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- COMBINED STATEMENTS OF CASH FLOWS For the year ended December 31, 1997 and for the period from inception, April 8, 1996 to December 31, 1996
(In thousands of US dollars) 1997 1996 - ------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss (68,300) (23,035) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 5,107 529 Other 883 103 Increases in assets and liabilities: Accounts receivable (1,738) (1,674) Inventories (11,248) (2,988) Other current assets and non-current VAT recoverable (113) (12,952) Accounts payable and accrued liabilities 5,523 4,291 Amounts payable to related parties 2,492 1,313 Accrued taxes payable 3,277 1,843 -------- -------- NET CASH USED IN OPERATING ACTIVITIES (64,117) (32,570) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment (84,104) (26,367) -------- -------- NET CASH USED IN INVESTING ACTIVITIES (84,104) (26,367) -------- -------- CASH FLOWS FROM FINANCING Proceeds from capital contributions 43,950 68,000 Proceeds from loans from shareholders 103,605 0 Payments for loan facility (2,266) 0 Repayment of short term borrowings (6,329) 0 Proceeds from short term borrowings 0 6,329 -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 138,960 74,329 -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (9,261) 15,392 Cash and cash equivalents at the beginning of the period 15,392 0 -------- -------- Cash and cash equivalents at the end of the period 6,131 15,392 ======== ========
The accompanying notes form an integral part of these combined financial statements. - -------------------------------------------------------------------------------- S-6 PEPSI INTERNATIONAL BOTTLERS, LLC COMBINED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the year ended December 31, 1997 and for the period from inception, April 8, 1996 to December 31, 1996
CAPITAL ACCUMULATED TOTAL (In thousands of US dollars) CONTRIBUTIONS DEFICIT EQUITY - ------------------------------------------------------------------------------------------------------------------ Balance at April 8, 1996 0 0 0 Capital contributions 68,000 0 68,000 Net loss 0 (23,035) (23,035) -------- -------- -------- Balance at December 31, 1996 68,000 (23,035) 44,965 Capital contributions 43,950 0 43,950 Net loss 0 (68,300) (68,300) -------- -------- -------- BALANCE AT DECEMBER 31, 1997 111,950 (91,335) 20,615 ======== ======== ========
The accompanying notes form an integral part of these combined financial statements. - -------------------------------------------------------------------------------- S-7 PEPSI INTERNATIONAL BOTTLERS, LLC NOTES TO THE COMBINED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1 THE COMPANY AND ITS PRINCIPAL OPERATIONS Pepsi International Bottlers, Russia ("PIB" or the "Company") is a joint venture formed by the Leucadia National Corporation ("Leucadia") and PepsiCo, Inc. ("PepsiCo"). The Company is the exclusive bottler and distributor of PepsiCo beverages in a large portion of central and eastern Russia, Kazakhstan and Kirgystan. 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies followed in the preparation of the accompanying combined financial statements are described below. (A) BASIS OF PRESENTATION The combined financial statements are presented in US dollars and have been prepared in accordance with generally accepted accounting principles in the United States ("US GAAP"). These principles differ in certain respects from accounting principles applied by the Russian and Kazakh companies in their local currency financial statements, which are prepared in accordance with generally accepted accounting principles in Russia and Kazakhstan, respectively. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the financial statement dates and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. (B) PRINCIPLES OF COMBINATION AND CONSOLIDATION The combined financial statements are comprised of a group of holding and operating companies incorporated in the United States, Russia and Kazakhstan. All significant account balances and transactions among the combined entities have been eliminated. - -------------------------------------------------------------------------------- S-8 PEPSI INTERNATIONAL BOTTLERS, LLC NOTES TO THE COMBINED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The companies included in the financial statements are as follows:
Ownership interest as of December 31, ---------------------- Company 1997 1996 -------------------------------------------------------------------------------------------------------- International Bottlers LLC 100% 100% International Bottlers Employment Co. LLC 100% 100% International Bottlers Leasing Co. LLC 100% 100%
(C) CURRENCY REMEASUREMENT In accordance with Statement of Financial Accounting Standards ("FAS") No. 52, "Foreign Currency Transactions", the US dollar has been assumed to be the functional currency as Russia and Kazakhstan are considered highly inflationary countries for the periods presented. As such, the Russian and Kazakh accounts of the Company have been translated into US dollars as follows: - Nonmonetary assets and liabilities are translated at historical rates. All other assets and liabilities are translated at current rates (see below). - Income and expenses are translated at the average exchange rates in effect each month, except for those related to assets and liabilities which are translated at historical exchange rates. Translation gains and losses are recognized in the statement of operations. The official Russian and Kazakh exchange rate in effect at December 31, 1997 and 1996 were as follows: Amount equal to US$1 at December 31, ---------------------- 1997 1996 ---------------------- Russian rubles (old denomination) 5,960 5,560 Kazakh tenges 75.5 77.3 (D) CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and cash in banks, and highly liquid investments with original maturities of three months or less at the time of purchase. The fair value of cash and cash equivalents approximates their book value. - -------------------------------------------------------------------------------- S-9 PEPSI INTERNATIONAL BOTTLERS, LLC NOTES TO THE COMBINED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (E) ACCOUNTS RECEIVABLE An allowance for doubtful accounts is established on the basis of an analysis of the accounts receivable, in light of the risks involved, and is considered sufficient to cover any losses incurred in realization of credits. (F) INVENTORIES Inventories are stated at the lower of cost, calculated on the average cost method, or market. Cost of finished goods inventories includes materials, direct labor and an appropriate proportion of variable and fixed overhead expenditure. (G) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at historical cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The estimated useful lives are as follows: Years ----- Buildings 20 Machinery and equipment 3-10 Leasehold improvements are amortized over the remaining lease term, up to a maximum of 20 years. Land is not depreciated as it is considered to have an infinite life. (H) IMPAIRMENT OF LONG LIVED ASSETS The carrying amounts of long lived assets and certain identifiable intangibles are reviewed whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is assessed on the basis of the forecasted undiscounted cash flows related to the use and eventual disposition of an asset or group of assets. The carrying value is adjusted to the estimated fair value of the asset when impairment occurs. (I) IDENTIFIABLE INTANGIBLE ASSETS Identifiable intangible assets, which consist of start-up expenses and deferred loan facility costs, are recorded at cost and amortized on a straight-line basis over their expected useful lives. The estimated useful lives of start-up expenses and deferred loan facility costs are five years and the life of the loan, respectively. In addition, it is uncertain if the loan will be utilized. If the loan is not utilized, the deferred loan costs of $2,266,000 will be written off. - -------------------------------------------------------------------------------- S-10 PEPSI INTERNATIONAL BOTTLERS, LLC NOTES TO THE COMBINED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (J) INCOME TAXES The Company provides deferred income taxes for the tax effects of temporary differences between the financial reporting and income tax reporting bases of the Company's assets and liabilities. Valuation allowances are recognized in connection with deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized. (K) FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The carrying values of the Company's financial instruments as of December 31, 1997 and 1996, approximate management's best estimate of their fair values. Fair value estimates are made at a specific point in time based on the relevant market information about the financial instrument. The fair value of certain financial assets and liabilities, including cash, accounts receivable, accounts payable, amounts payable to related parties and certain other short-term assets and liabilities, is considered to approximate their respective carrying value due to their short term nature. (L) REVENUE RECOGNITION Revenue from the sale of goods is recognized at the date goods are delivered. (M) ADVERTISING COSTS Advertising costs, including sales promotions, are expensed as incurred. (N) RETIREMENT BENEFIT OBLIGATIONS The Company does not have pension arrangements separate from the State Pension scheme of the Russian Federation, which requires contributions by the employer calculated as a percentage of current gross salary payments; such expense is charged to the statement of operations. - -------------------------------------------------------------------------------- S-11 PEPSI INTERNATIONAL BOTTLERS, LLC NOTES TO THE COMBINED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (O) RECENT ACCOUNTING PRONOUNCEMENTS FAS No. 130, "Reporting comprehensive Income", was issued by the FASB in June 1997 and is effective for fiscal years beginning after December 15, 1997. It will be effective for the Company's combined financial statements for the year ended June 30, 1999. Reclassification of financial statements for earlier periods provided for comparative purposes is required. This statement establishes guidelines for the reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. It requires that all items required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements; it does not address issues of recognition or measurement. The Company is currently assessing the impact of adopting this statement on its combined financial statements. 3 ACCOUNTS RECEIVABLE
(In thousands of US dollars) DECEMBER 31, 1997 December 31, 1996 - ------------------------------------------------------------------------------------------------------------------ Trade accounts receivable 2,785 811 Other 627 863 Allowance for doubtful accounts (460) (95) ------ ------ 2,952 1,579 ====== ====== 4 INVENTORIES (In thousands of US dollars) DECEMBER 31, 1997 December 31, 1996 - ------------------------------------------------------------------------------------------------------------------ Raw materials 7,763 1,550 Finished goods 6,473 1,438 Inventory reserve (526) (8) ------ ------ 13,710 2,980 ====== ======
- -------------------------------------------------------------------------------- S-12 PEPSI INTERNATIONAL BOTTLERS, LLC NOTES TO THE COMBINED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
5 OTHER CURRENT ASSETS (In thousands of US dollars) DECEMBER 31, 1997 December 31, 1996 - ------------------------------------------------------------------------------------------------------------------ Value added tax recoverable 5,080 3,202 Prepaid expenses and other 4,327 9,721 ------- ------- 9,407 12,923 ======= ======= 6 PROPERTY, PLANT AND EQUIPMENT (In thousands of US dollars) DECEMBER 31, 1997 December 31, 1996 - ------------------------------------------------------------------------------------------------------------------ Land and buildings 25,422 301 Machinery and equipment 47,028 5,905 Construction in progress 36,040 18,180 ------- ------- Total property, plant and equipment, at cost 108,490 24,386 Less: Accumulated depreciation (4,760) (504) ------- ------- Property, plant and equipment, net 103,730 23,882 ======= ======= At December 31, 1997 the Company had entered into purchase commitments of approximately $7,677,000, related to construction of a plant. 7 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES (In thousands of US dollars) DECEMBER 31, 1997 December 31, 1996 - ------------------------------------------------------------------------------------------------------------------ Trade accounts payable 2,171 1,313 Accrued payroll, including taxes 3,374 1,125 Customer deposits 1,069 0 Other 3,201 1,854 ------- ------- 9,815 4,292 ======= =======
- -------------------------------------------------------------------------------- S-13 PEPSI INTERNATIONAL BOTTLERS, LLC NOTES TO THE COMBINED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 8 SHORT TERM BORROWINGS (In thousands of US dollars) December 31, 1996 - ------------------------------------------------------------------------- Bank overdraft 2,829 Notes payable 3,500 ------ 6,329 ====== Notes payable represents the amount outstanding under a loan and deposit agreement which was collateralized by deposits included in cash and cash equivalents. Under the loan and deposit agreement, the Company was required to deposit, at a minimum, an amount equal to the principal amount of the loan. The weighted average interest rate on short term borrowings during the period ended December 31, 1996 was 5.8%. 9 LOANS FROM SHAREHOLDERS The loans are noninterest bearing and are payable on demand. Subsequent to year end, $77,705 was repaid. 10 COMMITMENTS AND CONTINGENCIES Operating lease payments are charged to expense when incurred. Such rental expenses included in the combined statements of operations were $3,657,000 and $734,000 for the year ended December 31, 1997 and the period ended December 31, 1996, respectively. The majority of the Company's operating leases may be terminated in three months or less by either the Company or the lessor. The following is a summary of future minimum lease payments for all operating leases at December 31, 1997: (In thousands of US dollars) DECEMBER 31, 1997 - -------------------------------------------------------------------------------- 1998 1,435 1999 228 2000 58 ------ Total minimum lease payments 1,721 ====== - -------------------------------------------------------------------------------- S-14 PEPSI INTERNATIONAL BOTTLERS, LLC NOTES TO THE COMBINED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The Company has entered into various purchase agreements for aluminum cans, bottles, concentrate and other raw materials. The majority of these arrangements are with affiliates of PepsiCo and expire at various dates through July 1998, except for the agreement to purchase concentrate from PepsiCo which has no expiry date. As of December 31, 1997, purchase commitments under these agreements were approximately $3,257,000 in aggregate. Tax authorities in Russia often carry out detailed examinations of tax payers' books and records months or even years after the period of assessment. During 1997, the Company received notification from the Russian tax authorities asserting deficiencies related to income taxes, value added taxes and import duties. The Company strongly disagrees with the Russian tax authorities and is vigorously contesting the allegations. Should the Russian tax authorities prevail, however, it may result in additional taxes payable of approximately $1 million. Although it cannot be predicted with certainty, the outcomes of these charges are not expected to have a material impact on the Company's financial position or results of operations. The Company is exposed to various claims and legal proceedings which arise in the ordinary course of its business. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters will not have a material adverse effect on the financial position or results of operations of the Company. 11 INCOME TAXES Deferred income taxes are recognized based upon differences between the financial reporting and the tax bases of assets and liabilities and operating loss carryforwards. Temporary differences and carryforwards that comprised a significant part of the deferred tax assets and liabilities were as follows:
(In thousands of US dollars) DECEMBER 31, 1997 December 31, 1996 - ------------------------------------------------------------------------------------------------------------------ Deferred tax assets arising from: Net operating loss carry forwards 5,476 1,348 Depreciation and amortization 1,579 66 Prepaid expenses 1,276 248 Accrued liabilities 738 671 Other 1,064 545 ------- ------- Net deferred tax assets 10,133 2,878 Deferred tax liabilities: Accrued liabilities (660) 0 Less: valuation allowance (9,473) (2,878) ------- ------- Net deferred tax assets 0 0 ======= =======
- -------------------------------------------------------------------------------- S-15 PEPSI INTERNATIONAL BOTTLERS, LLC NOTES TO THE COMBINED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Realization of future tax benefits related to the deferred tax assets is dependent on many factors, including the Company's ability to generate taxable income within the net operating loss carryforward period. The Company has considered these factors in establishing the valuation allowance for financial reporting purposes. The Company does not file a consolidated tax return and therefore, tax credits and net operating loss carryforwards are generated and applied on an individual company basis. As of December 31, 1997 and 1996, the Company had combined net operating loss carryforwards of $15,647,000 and $3,851,000, respectively. Net operating loss carryforwards expire from 1998 to 2013. The Company's provision for income taxes consisted of the following:
FOR THE YEAR ENDED For the period ended (In thousands of US dollars) DECEMBER 31, 1997 December 31, 1996 - ------------------------------------------------------------------------------------------------------------------ Current: Russia (35%) 71 75 United States (35%) 60 0 ------ ------ Income tax expense 131 75 ====== ====== The statutory income tax rate is different from the Company's effective income tax rate as a result of the following: FOR THE YEAR ENDED For the period ended DECEMBER 31, 1997 December 31, 1996 - ------------------------------------------------------------------------------------------------------------------ % % Statutory tax rate (benefit) (35.0) (35.0) Effect of income not subject to tax (1.0) (0.6) Effect of expenses not deductible for tax purposes 20.6 16.0 Effect of expenses passed through directly to owners 6.1 17.9 Other 9.5 2.0 ------ ------ Effective tax rate 0.2 0.3 ====== ======
12 RELATED PARTY TRANSACTIONS The Company's business consists primarily of the production, marketing and distribution of PepsiCo beverages. As described in Note 13, the Company purchases all of its concentrate and the majority of other raw materials from PepsiCo affiliates. During the year ended December 31, 1997 and the period ended December 31, 1996, the Company purchased $28,723,000 and $4,325,000, respectively, from affiliated companies. - -------------------------------------------------------------------------------- S-16 PEPSI INTERNATIONAL BOTTLERS, LLC NOTES TO THE COMBINED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 13 RISKS AND UNCERTAINTIES The Company sells its products to a large number of individual customers and extends credit based upon an evaluation of the customers' financial condition, generally without requiring collateral. Potential losses on accounts receivable are dependent on each individual customer's financial condition. The Company monitors its exposure to losses on receivables and maintains allowances for potential losses or adjustments. The Company purchases a significant portion of its raw materials from affiliates of PepsiCo, the sole supplier of the concentrates required to produce PepsiCo products. 14 SUPPLEMENTAL CASH FLOW INFORMATION
(In thousands of US dollars) DECEMBER 31, 1997 December 31, 1996 - ------------------------------------------------------------------------------------------------------------------ Cash paid for interest 125 181 ---- ---- Cash paid for income taxes 131 75 ---- ----
15 VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT THE BALANCE AT THE END BEGINNING OF THE PERIOD CHARGED TO EXPENSE OF THE PERIOD (In thousands of US dollars) - ------------------------------------------------------------------------------------------------------------------- 1997 Allowance for doubtful accounts 95 365 460 Inventory reserve 8 518 526 Allowance for deferred tax assets 2,878 6,595 9,473 1996 Allowance for doubtful accounts 0 95 95 Inventory reserve 0 8 8 Allowance for deferred tax assets 0 2,878 2,878
- -------------------------------------------------------------------------------- S-17 PEPSI INTERNATIONAL BOTTLERS, LLC NOTES TO THE COMBINED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 16 SUBSEQUENT EVENT Effective as of January 30, 1998, Leucadia and PepsiCo entered into an agreement pursuant to which, among other things, PepsiCo made an additional equity investment in the Company (thereby diluting Leucadia to a minority interest in the Company). The agreement relieves Leucadia of funding obligation for the next five years with respect to the Company. - -------------------------------------------------------------------------------- S-18 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 December 4, 1996 (filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "1996 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 1992 Stock Option Plan (filed as Annex C to the Company's Proxy Statement dated July 21, 1992).* 10.2(a) Fourth Restatement, dated as of December 31, 1996, of the Articles and Agreement of General Partnership of The Jordan Company (filed as Exhibit 10.3(d) to the 1996 10-K).* 10.2(b) 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 Stock Purchase and Sale Agreement dated as of April 5, 1991, by and between FPL Group Capital Inc and the Company (filed as Exhibit B to the Company's Current Report on Form 8-K dated August 23, 1991).* 10.4 Amended and Restated Shareholders Agreement dated as of December 16, 1997 among the Company, Ian M. Cumming and Joseph S. Steinberg. - ------------------------- * Incorporated by reference. Exhibit Exemption Number Description Indication - ------ ----------- ---------- 10.5 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 filed on Form 10-K for the fiscal year ended December 31, 1992 (the "1992 10-K")).* 10.6 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).* 10.7 Reinsurance Agreement, dated as of December 31, 1991, by and between Colonial Penn Insurance Company and American International Insurance Company (filed as Exhibit 10.16 to the 1992 10-K).* 10.8 Agreement made as of December 28, 1993 by and between the Company and Ian M. Cumming (filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993).* 10.9 Agreement made as of December 28, 1993 by and between the Company and Joseph S. Steinberg (filed as Exhibit 10.18 to the 1993 10-K).* 10.10(a) Agreement between the Company and Ian M. Cumming, dated as of December 28, 1993 (filed as Exhibit 10.19(a) to the 1993 10-K).* 10.10(b) Escrow and Security Agreement by and among the Company, Ian M. Cumming and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1993 (filed as Exhibit 10.19(b) to the 1993 10-K).* 10.11(a) Agreement between the Company and Joseph S. Steinberg, dated as of December 28, 1993 (filed as Exhibit 10.20(a) to the 1993 10-K).* 10.11(b) Escrow and Security Agreement by and among the Company, Joseph S. Steinberg and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1993 (filed as Exhibit 10.20(b) to the 1993 10-K).* 10.12 Deferred Compensation Agreement between the Company and Lawrence S. Hershfield, dated March 29, 1995 (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the Quarterly Period ended March 31, 1995).* 10.13 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. - ------------------------- * Incorporated by reference. Exhibit Exemption Number Description Indication - ------ ----------- ---------- 10.14 Purchase Agreement among Conseco, the Company, Charter, Colonial Penn Group, Inc., Colonial Penn Holdings, Inc., Leucadia Finaicial 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).* 10.15 Purchase Agreement among GECC, the Company, Charter, Colonial Penn Group, Inc., and Colonial Penn Holdings, Inc., dated as of June 30, 1997 (filed as Annex A to the Company's Proxy Statement dated October 3, 1997).* 10.16 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. 21 Subsidiaries of the registrant. 23 Consent of independent accountants with respect to the incorporation by reference into the Company's Registration Statements on Form S-8 (File No. 2-84303), Form S-8 and S-3 (File No. 33-6054), Form S-8 and S-3 (File No. 33-26434), Form S-8 and S-3 (File No. 33-30277), Form S-8 (File No. 33-61682) and Form S-8 (File No. 33-61718). 27 Financial Data Schedule. - ------------------------- * Incorporated by reference. EX-10 2 EXHIBIT 10.4 Exhibit 10.4 AMENDED AND RESTATED SHAREHOLDERS AGREEMENT AMENDED AND RESTATED AGREEMENT made as of December 16, 1997 by and between IAN M. CUMMING ("Cumming"), residing at 1470 Military Way, Salt Lake City, Utah, 84103, JOSEPH S. STEINBERG ("Steinberg"), residing at 84 Remsen Street, Brooklyn, New York 11201 (Cumming and Steinberg sometimes are collectively referred to as the "Stockholders" and individually as a "Stockholder") and LEUCADIA NATIONAL CORPORATION("Leucadia"), a New York corporation having its principal place of business at 315 Park Avenue South, New York, New York 10010. WHEREAS, each Stockholder is the direct owner of the number of shares of the common stock, par value $1.00 per share, of Leucadia (the "Common Shares") set forth on Exhibit A hereto; and WHEREAS, the parties to this Agreement wish to provide for the purchase by Leucadia of certain of the Common Shares beneficially owned by a deceased Stockholder; and WHEREAS, the parties to this Agreement wish to provide the funds necessary for the purchase by Leucadia of the Common Shares of a Stockholder under the terms of this Agreement through insurance on the life of each Stockholder; 1. By-Sell Obligation. Upon the death of either Stockholder, ------------------ Leucadia agrees to purchase from the estate of the deceased Stockholder (the "Estate"), such number of Common Shares owned by the deceased Stockholder as of the deceased Stockholder's date of death (the "Deceased Stockholder's Common Shares") having an aggregate purchase price determined in accordance with paragraph 2 hereof equal to the Insurance Proceeds (as hereinafter defined); provided, however, that Leucadia shall not be obligated to purchase from the Estate and the Estate shall not be obligated to sell to Leucadia more than 55% of the Deceased Stockholder's Common Shares (the "Shares") and further provided, however, that Leucadia shall not be obligated to purchase from the Estate and the Estate shall not be obligated to sell to Leucadia any portion of the Deceased Stockholder's Common Shares to the extent a purchase thereof would result in the imposition of limitations under Section 382 of the Internal Revenue Code of 1986 on the use, for federal income tax purposes, of the net operating losses and other credit or loss carryovers of Leucadia or any subsidiary thereof. Each Stockholder agrees that the Shares to be acquired pursuant to this Agreement shall be sold and transferred by the legal representative of his Estate (the "Legal Representative") to Leucadia in accordance with the terms of this Agreement. 2. Purchase Price for the Common Shares. ------------------------------------ (a) The purchase price for each Share shall be equal to the greater of (i) "Net Book Value Per Share" (as hereinafter defined) as at the end of the fiscal quarter immediately preceding the fiscal quarter in which the date of death of the deceased Stockholder occurs; or (ii) the average of the closing price for the Common Shares on the New York Stock Exchange for the forty (40) trading days preceding the date of death of the deceased Stockholder. (b) For the purposes of this Agreement, the "Net Book Value Per Share" shall be the difference between the book value of Leucadia's assets and the book value of its liabilities, determined in accordance with generally accepted accounting principles applicable to Leucadia's then most recent audited financial statements and the regular methods and practices used by Leucadia in calculating book value applied on a basis consistent with those used by Leucadia at September 30, 1987, divided by the number of Common Shares then outstanding. Net Book Value Per Share shall be calculated on a fully diluted basis. 3. Payment of the Purchase Price. The purchase price for ----------------------------- the Shares shall be paid in cash to the Estate of the deceased Stockholder within the later of (i) five days of receipt of the Insurance Proceeds or (ii) thirty days after the death of the deceased Stockholder, unless the Legal Representative has not been qualified, in which event the purchase price shall be paid on the fifth business day after qualification of the Legal Representative. 4. Insurance. --------- (a) Leucadia acknowledges that it has purchased from each of the insurance carriers set forth on Exhibit B hereto a policy of term life insurance on the life of each of Cumming and Steinberg in the aggregate amount per individual of $50,000,000 (the "Insurance"). Each Stockholder agrees to do everything necessary to cause such policy to be issued. 2 (b) Leucadia agrees (i) to use its best efforts to maintain the Insurance during the term of this Agreement, (ii) to pay the premiums on the Insurance as such premiums fall due, (iii) to give proof of such payment to the insured Stockholder within twenty days after the due date of each premium and (iv) upon the death of a Stockholder, to use the proceeds of the Insurance (the "Insurance Proceeds") to fund its purchase of Shares in accordance with the terms of this Agreement. Upon the failure of Leucadia to pay a premium when it becomes due, the insured Stockholder shall have the right to pay the premium and to be reimbursed therefor by Leucadia. (c) In the event that the Insurance with respect to a Stockholder is not in effect for any reason other than as a result of a breach by Leucadia of the terms of this Agreement, this Agreement shall terminate with respect to such Stockholder. 5. Transfer of Common Shares. Each Stockholder agrees ------------------------- that upon receipt of cash in full payment for all or a portion of his Shares in accordance with the terms hereof the Legal Representative of his Estate will execute and deliver to Leucadia all the documents which are required to transfer such Shares to Leucadia, including within limitation, the release or waiver of any tax liens, along with the certificates for such Shares. 6. Restriction on Alienation of Shares. Each ----------------------------------- Shareholder agrees that, until the Shares are sold pursuant to the terms hereof, his Estate shall not sell, assign, encumber or otherwise dispose of any direct or indirect interest in the Common Shares except pursuant to this Agreement. Nothing contained in this Agreement, however, shall restrict in any manner a Stockholder's right or ability to sell, assign, encumber or otherwise dispose of any direct or indirect interest in the Common Shares during his lifetime. 7. Specific Performance. The parties recognize that -------------------- irreparable harm will result in the event that this Agreement shall not be specifically enforced. If any dispute arises concerning the disposition hereunder of any of the Common Shares, the parties hereto agree that an injunction may be issued restraining such disposition pending determination of such controversy and that no bond or other security shall be required in connection therewith. If any dispute arises concerning the right or obligation of 3 any party hereto to purchase or sell any of the Common Shares, such right or obligation shall be enforceable by a decree of specific performance. Such remedies shall not, however, be exclusive and shall be in addition to the other remedy or remedies which the parties may have. 8. Termination. This Agreement shall terminate upon the ----------- occurrence of any of the following events: (a) The mutual consent in writing of the parties to this Agreement; or (b) The expiration of thirty (30) days after a petition in bankruptcy shall have been filed by or against Leucadia and such petition shall not have been discharged during such thirty (30) day period; or upon an assignment by Leucadia for the benefit of creditors; or upon the expiration of thirty (30) days after the commencement of any proceeding under any act of Congress or governmental authority for the relief of debtors seeking the relief or readjustment of indebtedness either through reorganization, composition, extension, or otherwise, and such proceedings involving Leucadia as debtor shall not have been vacated within such thirty (30) day period; or upon the voluntary or involuntary dissolution of Leucadia; (c) The occurrence of the event described in Section 4(c) hereof; or (d) June 30, 2003. 9. Entire Agreement. This Agreement constitutes the ---------------- complete understanding and agreement among the parties hereto with respect to the subject matter hereof and can be amended, supplemented or modified, and any provision hereof can be waived, only by written instrument making specific reference to this Agreement signed by the party against whom enforcement of any such amendment, supplement, modification or waiver is sought. 10. Successors and Assigns. All of the terms and ---------------------- provisions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, successors, personal representatives, and assigns. 11. Governing Law. This Agreement has been made in, and ------------- shall be governed by, construed and enforced in accordance with, the laws of the State of New York. 4 12. Notices. All notices, offers, acceptances and other ------- communications to be made, served or given under or pursuant to the terms hereof shall be in writing and shall be personally delivered or sent by registered or certified mail, return receipt requested, postage prepaid, addressed to the parties hereto at their respective addresses as set forth at the beginning of this Agreement, or to such other address as a party hereto shall have given notice of pursuant hereto. 13. Severability. If at any time subsequent to the date ------------ hereof, any provision of this Agreement shall be held by any court of competent jurisdiction to be illegal, void or unenforceable, such provision shall be of no force and effect, but the illegality or unenforceability of such provision shall have no effect upon and shall not impair the enforceability of any other provision of this Agreement. 14. Counterparts. This Agreement may be executed in one ------------ or more counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. 15. Paragraph Headings. The paragraph headings ------------------ contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 5 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. /s/ Ian M. Cumming --------------------------- IAN M. CUMMING /s/ Joseph S. Steinberg --------------------------- JOSEPH S. STEINBERG LEUCADIA NATIONAL CORPORATION By: /s/ Joseph A. Orlando -------------------------- Joseph A. Orlando Vice President and Chief Financial Officer 6 NYFS04...:\30\76830\0001\570\AGRN137J.400 EX-10 3 EXHIBIT 10.13 Exhibit 10.13 ================================================================================ AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT Dated as of November 3, 1997 between LEUCADIA NATIONAL CORPORATION and 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 listed on Schedule 1 hereto ---------- ================================================================================ TABLE OF CONTENTS ----------------- SECTION 1 DEFINITIONS ----------- 1.1 Defined Terms............................................1 1.2 Other Definitional Provisions...........................11 SECTION 2 REVOLVING CREDIT FACILITY ------------------------- 2.1 Revolving Credit Commitment.............................12 2.2 Notes...................................................13 2.3 Procedure for Credit Borrowing..........................13 2.4. Interest Rate...........................................15 2.5. Interest Rate Conversion Options........................15 2.6. Termination or Reduction of Commitment..................16 2.7. Prepayments.............................................16 2.8. Repayment of Loans......................................16 SECTION 3 SWING LINE FACILITY ------------------- 3.1. The Swing Line Loans....................................16 3.2. Notice of Borrowing.....................................17 3.3. Interest on Swing Line Loans............................17 3.4. Repayment of Swing Line Loans...........................17 3.5. The Swing Line Note.....................................18 SECTION 4 CERTAIN GENERAL PROVISIONS -------------------------- 4.1. Use of Proceeds.........................................18 4.2. Annual/Commitment Fees..................................19 4.3. Agents' Fees............................................19 4.4. Computation of Interest and Fees........................19 4.5. Inability to Determine Interest Rate....................20 4.6. Overdue Amounts; Interest Payments......................20 4.7. Payments................................................20 4.8. Foreign Taxes...........................................20 4.9. Illegality..............................................21 4.10. Additional Costs, Etc...................................21 4.11. Indemnity...............................................24 SECTION 5 REPRESENTATIONS AND WARRANTIES ------------------------------ 5.1. Financial Condition.....................................24 5.2. No Change...............................................24 5.3. Corporate Existence; Compliance with Law................24 5.4. Corporate Power; Authorization; Enforceable Obligations............................................25 5.5. No Legal Bar............................................25 i 5.6. No Material Litigation..................................25 5.7. No Default..............................................26 5.8. Ownership of Property; Liens............................26 5.9. No Burdensome Restrictions..............................26 5.10. Taxes...................................................26 5.11. Federal Regulations.....................................26 5.12. ERISA...................................................27 5.13. Investment Company Act..................................27 5.14. Full Disclosure.........................................27 5.15. Certain Contingent Obligations..........................27 5.16. Environmental Compliance................................27 5.17 Nonrecourse Indebtedness................................28 SECTION 6 CONDITIONS PRECEDENT -------------------- 6.1. Conditions of Initial Loan..............................28 6.2. Conditions to All Loans.................................29 SECTION 7 AFFIRMATIVE COVENANTS --------------------- 7.1. Financial Statements....................................29 7.2. Certificates; Other Information.........................30 7.3. Payment of Obligations..................................31 7.4. Conduct of Business, and Maintenance of Existence.......31 7.5. Maintenance of Property, Insurance......................31 7.6. Inspection of Property; Books and Records; Discussions..31 7.7. Notices.................................................32 SECTION 8 NEGATIVE COVENANTS ------------------ 8.1. Total Liquid Assets Ratio...............................33 8.2. Maintenance of Consolidated Tangible Net Worth..........33 8.3. Debt Leverage Ratio.....................................33 8.4. Limitations on Liens....................................33 8.5. Prohibition of Fundamental Changes......................34 8.6. Investments.............................................35 8.7. Limitation on Contingent Obligations....................35 8.8. Limitation on Subsidiary Indebtedness...................35 SECTION 9 EVENTS OF DEFAULT.......................................36 ----------------- SECTION 10 THE AGENTS ---------- 10.1. Authorization...........................................38 10.2. Employees and Agents....................................39 10.3. No Liability............................................39 10.4. No Representations......................................39 10.5. Payments................................................39 ii 10.6. Holders of Notes........................................40 10.7. Indemnity...............................................40 10.8. Administrative Agent as Bank............................40 10.9. Resignation.............................................40 10.10. Notification of Defaults and Events of Default..........41 SECTION 11 ASSIGNMENT AND PARTICIPATION ---------------------------- 11.1. Conditions to Assignment by Banks.......................41 11.2. Certain Representations and Warranties; Limitations; Covenants...............................................41 11.3. Register................................................42 11.4. New Notes...............................................43 11.5. Participations..........................................43 11.6. Disclosure..............................................43 11.7. Assignee or Participant Affiliated with the Company.....44 11.8. Miscellaneous Assignment Provisions.....................44 11.9. Assignment by the Company...............................44 SECTION 12 MISCELLANEOUS ------------- 12.1. Consents, Amendments and Waivers........................44 12.2. Notices.................................................45 12.3. No Waiver; Cumulative Remedies..........................47 12.4. Survival of Representations and Warranties..............47 12.5. Payment of Expenses.....................................47 12.6. Indemnification.........................................47 12.7. Successors and Assigns..................................48 12.8. Set-off.................................................48 12.9. Termination.............................................49 12.10. Counterparts............................................49 12.11. Governing Law...........................................50 12.12. Effective Date..........................................50 SCHEDULES - --------- Schedule 1 List of Banks Schedule 4.1 Indebtedness To Be Repaid Schedule 5.16 Environmental Compliance Schedule 5.17 Nonrecourse Indebtedness Schedule 8.4 Permitted Liens EXHIBITS - -------- Exhibit A Revolving Credit Note Exhibit B Swing Line Note Exhibit C Legal Opinion Exhibit D Officer's Certificate Exhibit E Assignment and Acceptance iii AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT ----------------------------------------------- This AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT (this "Agreement") is entered into as of November 3, 1997, to become effective as of the Effective Date as defined in Section 12.12 hereof only upon satisfaction of the conditions specified therein, between LEUCADIA NATIONAL CORPORATION, a New York corporation (the "Company"), the lending institutions listed on Schedule 1 attached hereto (the "Banks"), BANKBOSTON, N.A. (formerly named The First National Bank of Boston), as administrative agent for itself and the other Banks (the "Administrative Agent"), THE CHASE MANHATTAN BANK, as syndication agent for itself and the other Banks (the "Syndication Agent") and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as documentation agent for itself and the other Banks (the "Documentation Agent"), amending and restating in its entirety the Revolving Credit Agreement dated as of February 28, 1997 (the "Prior Agreement") between the Company, the Banks, First Union National Bank of North Carolina ("First Union"), the Administrative Agent, the Syndication Agent and the Documentation Agent. SECTION 1. DEFINITIONS ----------- 1.1 DEFINED TERMS. As used in this Agreement, the following terms have the following meanings: "Administrative Agent": BankBoston, N.A. acting in the capacity of administrative agent for the Banks, or any successor in such capacity. "Affiliate": any Person that would be considered to be an affiliate of the Company under Rule 144(a) of the Rules and Regulations of the Securities and Exchange Commission, as in effect on the date hereof, if the Company were issuing securities. "Agreement": this Amended and Restated Revolving Credit Agreement, as it may be further amended, supplemented or modified from time to time. "Annual Fee": as defined in Subsection 4.2. "Assignment and Acceptance": as defined in Subsection 11.1. "Available Commitment": at a particular time, an amount equal to the positive remainder of (a) the aggregate amount of the Total Commitment at such time, less (b) the aggregate unpaid principal amount of all Loans. "Banking Subsidiaries": (i) so long as they are Subsidiaries of the Company, (x) American Investment Bank, N.A., and (y) American Investment Financial and (ii) any other Subsidiary of the Company taking Federal Deposit Insurance Corporation (or other similar entity) insured deposits. "Banks": at any time of reference thereto, those lending institutions listed on Schedule 1 hereto (including without limitation the Swing Line Bank acting in such capacity) and any other Person who becomes an Assignee of any rights and obligations of a Bank pursuant to Section 11 hereof; and any one of the Banks individually, a "Bank". "Base Rate": the interest rate per annum equal to the higher of (a) the rate of interest publicly announced by the Administrative Agent at its head office in Boston, Massachusetts from time to time as its base rate (the base rate is not intended to be the lowest rate of interest charged by BankBoston, N.A. in connection with extensions of credit to debtors), and (b) one-half of one percentage point (0.5%) above the overnight Federal Funds Effective Rate. For the purposes of this definition, "Federal Funds Effective Rate" shall mean, for any day, the rate per annum equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three funds brokers of recognized standing selected by the Administrative Agent. "Base Rate Loans": Loans hereunder at any time of reference bearing interest at a rate based upon the Base Rate. "Borrowing Date": any Business Day specified in a notice pursuant to Subsections 2.3, 3.2 or 3.4 as a date on which the Company requests (or is deemed to have requested) the Banks to make Revolving Credit Loans or the Swing Line Bank to make a Swing Line Loan hereunder. "Business Day": any day on which banking institutions in Boston, Massachusetts, are open for the transaction of banking business and, in the case of Eurodollar Loans, which is also a Eurodollar Business Day. "Code": the Internal Revenue Code of 1986, as amended and in effect from time to time. "Commitment": with respect to each Bank, the amount set forth herein as its commitment to make Loans to the Company as such amount may be reduced from time to time as provided herein. "Commitment Fee": as defined in Subsection 4.2. "Commitment Percentage": with respect to each Bank, the percentage set forth beside its name in Schedule 1 (subject to adjustment upon any assignment permitted by Section 11 hereof) as such Bank's percentage of the Total Commitment and such Bank's interest in the aggregate amount of all Swing Line Loans. "Commitment Period": the period from and including the date hereof to, but not including, the Termination Date or such earlier date as the Commitment shall terminate as provided herein. 2 "Commonly Controlled Entity": an entity, whether or not incorporated, which is under common control with the Company within the meaning of Section 414(b) or (c) of the Code. "Company": Leucadia National Corporation, a New York corporation. "Consolidated" or "consolidated": with reference to any term defined herein, that term as applied to the accounts of the Company and its Subsidiaries, consolidated in accordance with GAAP. "Consolidated Intangibles": at a particular date, all assets of the Company and its Subsidiaries, determined on a consolidated basis at such date, that would be classified as intangible assets in accordance with GAAP, but in any event including, without limitation, unamortized debt discount and expense, unamortized organization and reorganization expense, costs in excess of the net asset value of acquired companies, patents, trade or service marks, franchises, trade names, goodwill and deferred tax assets. Notwithstanding anything to the contrary contained in the preceding sentence, Consolidated Intangibles shall not include deferred insurance policy acquisition costs or the value of life insurance in force. "Consolidated Net Worth": as to any Person at a particular date, all amounts which should be included under shareholders' equity on a balance sheet of such Person and its Subsidiaries determined on a consolidated basis as at such date; provided that, in calculating shareholders' equity, marketable securities that have not suffered a decline in value (other than a decline of a temporary nature) shall be reflected at the amortized cost thereof and marketable securities that have suffered a decline in value considered to be other than temporary shall be reflected at the current value thereof. For purposes of this definition, the recorded value of the Company's outstanding preferred stock shall be included under shareholders' equity. "Consolidated Tangible Net Worth": at a particular date, the excess, if any, of Consolidated Net Worth over Consolidated Intangibles as at such date. "Contingent Obligation": as to any Person, any reimbursement obligation of such Person in respect of the face amount of all letters of credit for the account of such Person and (without duplication) all drafts thereunder (other than trade letters of credit or interest or currency swap transactions entered into in the ordinary course of business) and any obligation of such Person guarantying or in effect guarantying any Indebtedness, leases, dividends or other obligations ("primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (a) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (b) to advance or supply funds (i) for the purchase or payment of any such primary obligation or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary 3 obligation of the ability of the primary obligor to make payment of such primary obligation or (d) otherwise to assure or hold harmless the owner of such primary obligation against loss in respect thereof; provided, however, that the term Contingent Obligation shall not include (i) endorsements of instruments for deposit or collection in the ordinary course of business, (ii) indemnities granted in the ordinary course of business (including in connection with dispositions by the Company and/or its Subsidiaries), (iii) any insurance or reinsurance obligation of any Subsidiary of the Company entered into in the ordinary course of the insurance business of such Subsidiary, (iv) any guaranty by a Subsidiary of the Company of the obligation of another Subsidiary (other than the Company, if the guarantied obligation of the Subsidiary is reflected in the Company's consolidated financial statements as a liability, (v) any obligation (other than the guaranty by a Subsidiary of an obligation of the Company) reflected as a liability in the Company's consolidated financial statements, including without limitation the Company's obligations in respect of the TRUPS and (vi) any Indebtedness. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by the Company in good faith. For the purposes of this definition, Contingent Obligations shall not include (x) any guaranty or indemnification undertaking given in connection with the return of the assets of Colonial Penn Madison Insurance Company ("Madison"), Commercial Loan Insurance Corporation ("CLIC") and WMAC Credit Insurance Corporation ("WMAC Credit"), or the assets of any other Insurance Subsidiary under the jurisdiction of the Wisconsin Insurance Commissioner (collectively, the "Returned Companies") to the control of the Company or any of its Subsidiaries, or (y) any contingent obligation arising from the operations of such Returned Companies; provided, that, any such guaranty, indemnification, undertaking or contingent obligation has recourse solely to such Returned Companies and the operations of such Returned Companies are kept separate and apart from those of the Company and each of the Company's other Subsidiaries. "Contractual Obligation": as to any Person, any provision of any security issued by such Person or of any agreement, instrument or undertaking to which such Person is a party or by which it or any of its property is bound. "Default": any of the events specified in Section 9, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "Delinquent Bank": any Bank that fails to make available when due to the Administrative Agent its pro rata share of any Loan, or fails to make available when due to the Swing Line Bank its pro rata share of any Swing Line Loan. "Documentation Agent": Bank of America National Trust and Savings Association acting as documentation agent for the Banks. "Dollars or $:" dollars in lawful currency of the United States of America. "Domestic Lending Office": initially, the office of each Bank; thereafter, such other office of such Bank, if any, located within the United States that will be making or maintaining Base Rate Loans. 4 "Eligible Assignee": Any of (i) a commercial bank organized under the laws of the United States, or any State thereof or the District of Columbia, and having total assets in excess of $1,000,000,000; (ii) a savings and loan association or savings bank organized under the laws of the United States, or any State thereof or the District of Columbia, and having a net worth of at least $500,000,000, calculated in accordance with generally accepted accounting principles; (iii) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development (the "OECD"), or a political subdivision of any such country, and having total assets in excess of $1,000,000,000, provided that such bank is acting through a branch or agency located in the country in which it is organized or another country which is also a member of the OECD; (iv) the central bank of any country which is a member of the OECD; and (v) if, but only if, any Event of Default has occurred and is continuing, any other bank, insurance company, commercial finance company or other financial institution approved by the Administrative Agent, such approval not to be unreasonably withheld. "Entity": any partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture or other business entity of whatever nature. "Environmental Laws": any judgment, decree, order, law, license, rule or regulation of any Governmental Authority pertaining to protection of the environment, or any United States state or local statute, regulation, ordinance, order or decree relating to health, safety or the environment. "ERISA": the Employee Retirement Income Security Act of 1974, as amended from time to time. "Eurodollar Business Day": any day on which commercial banks are open for international business (including dealings in Dollar deposits) in London or such other eurodollar interbank market as may be selected by the Administrative Agent in its sole discretion acting in good faith. "Eurodollar Lending Office": initially, the office of each Bank; thereafter, such other office of such Bank, if any, that shall be making or maintaining Eurodollar Rate Loans. "Eurodollar Loans": Loans hereunder at any time of reference bearing interest at a rate based upon the Eurodollar Rate. "Eurodollar Rate": with respect to each Interest Period pertaining to Eurodollar Loans, the rate of interest per annum (rounded upwards to the nearest 1/100 of one percent) determined by the Administrative Agent to be equal to the quotient of (a) the rate at which its Eurodollar Lending Office is offered Dollar deposits two Eurodollar Business Days prior to the beginning of such Interest Period pertaining to any such Eurodollar Loan in the eurodollar interbank market selected by the Administrative Agent in its sole discretion in good faith at 10:00 a.m., Boston time, for delivery on the first day of such Interest Period for the number of days comprised therein and in an amount equal to the amount of the Eurodollar Loan to be outstanding during such Interest 5 Period, divided by (b) a number equal to l.00 minus the daily average of the maximum rates in effect on each day of such Interest Period (expressed as a decimal fraction) at which the Banks subject thereto would be required to maintain reserves under Regulation D of the Board of Governors of the Federal Reserve System (or any successor or similar regulations relating to such reserve requirements) against "Eurocurrency Liabilities" (as such term is used in Regulation D), if such liabilities were outstanding. "Event of Default": any of the events specified in Section 9, provided that any requirement for the giving of notice or the lapse of time, or both, or any other condition specified therein, has been satisfied. "First Union": First Union National Bank of North Carolina, one of the Banks under the Prior Agreement. "Foreign Recipient": any Bank or Participant which is a recipient of payments under Subsection 4.8 and that is organized under a jurisdiction other than the United States of America or a state thereof. "Foreign Taxes": as defined in Subsection 4.8. "Funded Debt": all Indebtedness of the Company and its Subsidiaries on a consolidated basis in respect of (i) Loans under this Agreement, and (ii) any other Indebtedness for borrowed money (other than Nonrecourse Debt); provided that Funded Debt shall not be deemed to include customer deposits of Banking Subsidiaries. "F&H Guaranty": the Guaranty of the Company in the form of Exhibit E to the Master Agreement dated as of November 1989, by and among CX Partners, L.P., a Delaware limited partnership, each of its Limited Partners, including F&H Associates, C.V., a Netherlands Antilles limited partnership ("F&H"), its Liquidating Trustee, and the parties named therein, with respect to the obligations of F&H under said Master Agreement. "GAAP": (i) When used in Section 8 means generally accepted accounting principles that are consistent with the accounting practices of the Company reflected in its financial statements for the fiscal year ended on December 31, 1996 referred to in Subsection 5.1, and (ii) when used in general, other than in Section 8, means generally accepted accounting principles that are consistent with the principles promulgated or adopted by the Financial Accounting Standards Board and its predecessors, as in effect from time to time. "Governmental Authority": any nation or government (other than Kazakstan, Kyrgyzstan, or Russia), any state or other political subdivision thereof, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to such government. "Hazardous Substances": hazardous waste, pollutants or contaminants, toxic substances, oil or hazardous materials or other chemicals or substances regulated by any Environmental Laws. 6 "Indebtedness": as to any Person at a particular time, all items which, in conformity with GAAP, would be classified as liabilities on a balance sheet of such Person as at such time and which constitute (a) indebtedness for borrowed money or constituting the deferred purchase price of assets or other property, (b) obligations with respect to any conditional sale agreement or title retention agreement, (c) indebtedness arising under acceptance facilities and all drafts drawn under all letters of credit issued for the account of such Person, (d) all liabilities secured by any Lien on any property owned by such Person even though it has not assumed or otherwise become liable for the payment thereof, (e) obligations under leases which have been, or under GAAP are required to be, capitalized, (f) obligations with respect to interest payable and (g) any asserted withdrawal liability of such Person or a Commonly Controlled Entity to a Multiemployer Plan. "Insurance Subsidiary": Any Subsidiary of the Company licensed as an insurance company. "Interest Payment Date": (a) as to any Base Rate Loan, the last day of each March, June, September and December and the Termination Date or such earlier date as the Commitment shall terminate as provided herein, and (b) as to any Eurodollar Loan in respect of which the Interest Period is (i) three months or less, the last day of such Interest Period and (ii) more than three months, the date which is three months from the first day of such Interest Period and in addition the last day of such Interest Period. "Interest Period": (a) with respect to any Eurodollar Loan, the period commencing on the Borrowing Date with respect to such Eurodollar Loan and ending one, two, three or six months thereafter, as selected by the Company in its notice of borrowing as provided in Subsection 2.3; (b) with respect to any Base Rate Loan, the period commencing on the Borrowing Date with respect to such Base Rate Loan and ending on the earlier to occur of the date of repayment or conversion of such Base Rate Loan or the Termination Date; and (c) with respect to any Swing Line Loan, the period commencing on the Borrowing Date and ending on the maturity date specified in the request therefor pursuant to Subsection 3.2; provided, that, all of the foregoing provisions relating to Interest Periods are subject to the following: (i) if any Interest Period pertaining to a Eurodollar Loan would otherwise end on a day which is not a Eurodollar Business Day, that Interest Period shall be extended to the next succeeding Eurodollar Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding Eurodollar Business Day; (ii) if any Interest Period pertaining to a Base Rate Loan or Swing Line Loan would otherwise end on a day which is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day; (iii) any Interest Period pertaining to a Eurodollar Loan that begins on the last Eurodollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Eurodollar Business Day of a calendar month; and 7 (iv) any Interest Period that would otherwise extend beyond the Termination Date shall end on the Termination Date. "Investments": any advance, loan, extension of credit or capital contribution to, or purchase of any stocks, bonds, notes, debentures or other securities of, or any other investment in, any Person. "Lien": any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, and any financing lease having substantially the same economic effect as any of the foregoing). "Loans": the Revolving Credit Loans and the Swing Line Loans; and any one of such Loans individually, a "Loan". "Majority Banks": as of any date, the Banks holding at least fifty-one percent (51%) of the outstanding principal amount of the Revolving Credit Notes on such date; and if no such principal is outstanding, the Banks whose aggregate Commitments constitute at least fifty-one percent (51%) of the Total Commitment. "Market Price": with reference to the Company's Common Shares ("Common Share") for any Trading Day, the last reported sale price of a Common Share as reported on the New York Stock Exchange or on any principal stock exchange on which the Common Shares are then listed or admitted to trading or on the National Association of Securities Dealers National Market System, if quoted; or, if the Common Shares are not then listed or admitted to trading on any national securities exchange and there is no reported last sale price or bid and asked prices available, the average of the reported high-bid and low-asked prices on such day as reported by a reputable quotation service or a newspaper of general circulation in the Borough of Manhattan, City and State of New York, customarily published on each business day; or, in the absence of one or more such quotations, the current market price determined in good faith by the Board of Directors of the Company on the basis of such quotations or factors as it deems appropriate. "Market Value": with reference to the Company's Common Shares, the average Market Price of such Common Shares for the twenty Trading Days immediately preceding the date of the sale, transfer or disposition giving rise to the need to determine Market Value. "Maximum Swing Line Loan Amount": as defined in Subsection 3.1. "Multiemployer Plan": a Plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "Nonrecourse Debt": (x) Indebtedness of any Subsidiary of the Company which is not guaranteed by, is not secured by assets (other than assets of such Subsidiary) of, and does not otherwise have recourse to, the Company or its assets (other than assets of such Subsidiary) and (y) Indebtedness of the Company incurred to finance one or more assets of the Company, which Indebtedness has recourse only to such asset or assets for payment. 8 "Note Record": the grid attached to a Revolving Credit Note or the Swing Line Note, or the continuation of such grid, or any other similar record, including computer records, maintained by any Bank with respect to any Loan referred to in such Note. "Notes": the Revolving Credit Notes and the Swing Line Note; and any one of such Notes individually, a "Note". "Participant": as defined in Subsection 11.5. "PBGC": the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA. "Permitted Distribution": any distribution to the Company's shareholders of equity shares of one or more Subsidiaries, provided, that (i) the aggregate book value of such Subsidiary or Subsidiaries, when added together with the aggregate book value of all other Subsidiaries with respect to which such a Permitted Distribution has been effected from and after January 1, 1997, shall not exceed $150,000,000, and (ii) no Default or Event of Default exists at the time of declaration of such distribution or at the time of the consummation thereof, either before or after giving effect thereto. "Permitted Liens": as defined in Subsection 8.4. "Permitted Voluntary Proceeding": the commencement by the Company of a voluntary case or proceeding under Title 11, U.S. Code or any similar federal or state law for the relief of debtors with respect to any Subsidiary if (i) the sum of the Company's total investment at cost, after write-downs, in such Subsidiary and the Company's Contingent Obligations in respect of liabilities of such Subsidiary does not exceed $90,000,000, and (ii) the commencement of such case or proceeding does not create nor occasion any violation or noncompliance with other provisions of this Agreement. "Person": an individual, Entity or Governmental Authority. "Plan": any pension plan which is covered by Title IV of ERISA and in respect of which the Company or a Commonly Controlled Entity is an "employer" as defined in Section 3(5) of ERISA. "Prior Agreement": as defined in the preamble. "Real Estate": the real properties owned or leased by the Company or any of its Subsidiaries. "Recipient": as defined in Subsection 12.9. "Register": as defined in Subsection 11.3. 9 "Reportable Event": any of the events set forth in Section 4043(b) of ERISA or the regulations thereunder. "Requirements of Law": as to any Person, the Certificate of Incorporation and By-Laws or other organizational or governing documents of such Person, and (other than with respect to Kazakstan, Kyrgyzstan and Russia) any law, treaty, rule or regulation, or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Responsible Officer": the Chairman of the Board of Directors, President, Treasurer or any Vice President of the Company. "Revolving Credit Loans": as defined in Subsection 2.1. "Revolving Credit Notes": as defined in Subsection 2.2. "Shareholders' Equity": at any particular date, the total shareholders' equity of the Company (including without limitation equity in respect of the Company's outstanding preferred stock, if any), determined on a consolidated basis in accordance with GAAP; provided that, if any Nonrecourse Debt is excluded from the computation of Funded Debt under Subsection 8.3, then, for purposes of determining Shareholders' Equity under Subsection 8.3, Shareholders' Equity shall be reduced (x) by the carrying value of the assets of the Company to which such Nonrecourse Debt has recourse, to the extent of such Nonrecourse Debt of the Company, and/or (y) by the Company's equity investment in any Subsidiary having such Nonrecourse Debt, to the extent of such Subsidiary's Nonrecourse Debt. "Single Employer Plan": any Plan which is not a Multiemployer Plan. "Subsidiary": as to any Person, any Entity which is consolidated in such Person's consolidated financial statements determined in accordance with GAAP as in effect on December 31, 1996. "Swing Line Bank": BankBoston, N.A. acting in such capacity under Section 3 hereof, or any successor in such capacity. "Swing Line Loan": any loan made by the Swing Line Bank pursuant to Section 3. "Swing Line Loan Maturity Date": as defined in Subsection 3.2. "Swing Line Note": as defined in Subsection 3.5. "Syndication Agent": The Chase Manhattan Bank acting in the capacity of syndication agent for the Banks. "Taxes": as defined in Subsection 4.10. 10 "Terminating Event": any of the events specified in Subsection 12.9, whether or not any requirement for the lapse of time, or any other condition, has been satisfied. "Termination Date": November 3, 2002. "Total Commitment": the aggregate amount of the Commitments of the Banks to make Loans to the Company as provided herein. "Total Liquid Assets": at any date of determination, the sum of (i) the book value (as determined in accordance with GAAP) of all marketable securities (adjusted by the net unrealized gain or loss on such securities not reflected in book value) and aggregate cash and cash equivalent balances, in each case held by the Company and/or its consolidated Subsidiaries (other than Banking Subsidiaries and Insurance Subsidiaries), (ii) balances available under the Company's bank credit agreements maturing twelve months or more after the date of determination, (iii) all amounts legally distributable from the Company's Insurance Subsidiaries and Banking Subsidiaries, and (iv) amounts payable under negotiable promissory notes issued by Conseco, Inc. to Colonial Penn Holdings Inc. in the aggregate principal amount of $400,000,000, which notes are backed by letters of credit. For purposes of this definition, "marketable securities" shall mean (A) securities that are publicly traded or (B) securities offered by an independent broker that the Company in good faith believes can be sold within 180 days; and "legally distributable from the Company's Insurance Subsidiaries and Banking Subsidiaries" shall mean, in the case of the Company's Insurance Subsidiaries, the maximum sum which those regulators with supervisory authority over such Subsidiaries in the state or states of their incorporation permit them to distribute by statute, regulation or otherwise, and in the case of the Company's Banking Subsidiaries, the maximum sum which those regulators with supervisory authority over such Subsidiaries either at the national level or in the state of their incorporation permit them to distribute by statute, regulation or otherwise. "Trading Day": any day on which the principal exchange or quotation system on which the Company's Common Shares are listed or traded, is open for trading. "TRUPS": the $150,000,000 8.65% Capital Trust Pass-through Securities issued in January 1997 by Leucadia Capital Trust I, all of the common capital securities of which are owned by the Company. "Type": as to all or any portion of any Loan, its nature as a Base Rate Loan or Eurodollar Loan. "Voting Stock": as to the Company, shares of stock having ordinary voting power (other than stock having such power only by reason of the happening of a contingency). 1.2. OTHER DEFINITIONAL PROVISIONS. ----------------------------- (a) All terms defined in this Agreement shall have the defined meanings when used in the Notes or any certificate or other document made or delivered pursuant hereto or thereto. 11 (b) As used herein and in the Notes, and any certificate or other document made or delivered pursuant hereto, accounting terms relating to the Company and its Subsidiaries not defined in Subsection 1.1, and accounting terms partly defined in Subsection 1.1 to the extent not defined, shall have the respective meanings given to them under GAAP. (c) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and section, subsection, schedule and exhibit references are to this Agreement unless otherwise specified. SECTION 2. REVOLVING CREDIT FACILITY ------------------------- 2.1. REVOLVING CREDIT COMMITMENT. --------------------------- (a) Subject to the terms and conditions hereof, each of the Banks severally agrees to make revolving credit loans (individually, a "Revolving Credit Loan"; collectively the "Revolving Credit Loans") to the Company from time to time during the Commitment Period upon notice by the Company to the Administrative Agent given in accordance with Subsection 2.3 hereof, in an amount equal to such Bank's Commitment Percentage of the aggregate principal amount of Loans requested in the Company's notice. The respective amount of each Bank's Commitment and its Commitment Percentage shall be as set forth in Schedule 1 attached hereto. (b) Notwithstanding any other provision of this Agreement but subject to the following paragraph (c) of this Subsection 2.1, at no time shall the sum of (i) the aggregate principal amount of all Revolving Credit Loans outstanding (after giving effect to all Loans requested), plus (ii) the aggregate principal amount of all Swing Line Loans outstanding exceed the Total Commitment of the Banks then in effect. The principal amount of the Revolving Credit Loans outstanding from each Bank to the Company shall not at any time exceed in the aggregate an amount (after giving effect to all Loans requested) equal to such Bank's Commitment Percentage times (i) the Total Commitment minus (ii) the aggregate principal amount of all Swing Line Loans outstanding. Within the foregoing limits, and subject to all of the other terms and conditions set forth in this Agreement, the Company may borrow, prepay pursuant to Subsection 2.7 hereof, and reborrow Revolving Credit Loans. (c) Notwithstanding the foregoing, each of the Banks agree to, on one or more occasions during the Commitment Period, and regardless of whether the conditions set forth in Section 6 are satisfied, make Revolving Credit Loans to the Company solely for the purposes of repaying Swing Line Loans pursuant to Subsection 3.4 hereof. Section 3 hereof shall govern the Company's obligations with respect to Swing Line Loans. In the event that any advances of Revolving Credit Loans pursuant to this Subsection 2.1(c) cause the sum of the aggregate principal amount of Revolving Credit Loans and Swing Line Loans outstanding to exceed the Total Commitment then in effect, the Company shall immediately prepay such excess amount together with any interest accrued thereon. 12 (d) The Revolving Credit Loans may be Eurodollar Loans or Base Rate Loans, or combinations thereof, as determined by the Company and notified to the Administrative Agent and the Banks in accordance with Subsection 2.3; provided that no Eurodollar Loan shall be made with an Interest Period extending beyond the Termination Date. Eurodollar Loans shall be made and maintained by the Administrative Agent for the accounts of the Banks at its Eurodollar Lending Office, and Base Rate Loans shall be made and maintained by the Administrative Agent for the accounts of the Banks at its Domestic Lending Office. 2.2. NOTES. The Revolving Credit Loans made pursuant hereto are ----- evidenced by separate promissory notes of the Company, substantially in the form of Exhibit A (together with any promissory notes in substantially such form issued in substitution or replacement therefor, the "Revolving Credit Notes" or, in the singular, a "Revolving Credit Note"); one Revolving Credit Note being payable to the order of each Bank in a principal amount equal to such Bank's Commitment and representing the obligation of the Company to pay to such Bank the amount of the Commitment or, if less, the aggregate unpaid principal amount of all Revolving Credit Loans made by such Bank hereunder, plus accrued interest thereon, as set forth below. Each Bank is hereby authorized to record the date and amount of its Revolving Credit Loan, the maturity date thereof, the date and amount of each repayment of principal thereof, and, in the case of Eurodollar Loans, the interest rate with respect thereto, on such Bank's Note Record. The outstanding amount of the Revolving Credit Loans set forth on such Bank's Note Record shall be prima facie evidence of the principal amount thereof owing and unpaid to such Bank, but the failure to record, or any error in so recording, any such amount on such Bank's Note Record shall not limit or otherwise affect the actual amount of the obligations of the Company hereunder or under any Revolving Credit Note to make payments of principal of or interest on any Revolving Credit Note when due. 2.3. PROCEDURE FOR REVOLVING CREDIT BORROWING. ---------------------------------------- (a) The Company may borrow Revolving Credit Loans under the Commitments during the Commitment Period on any Eurodollar Business Day if the borrowing is a Eurodollar Loan or on any Business Day if the borrowing is a Base Rate Loan; provided, that, the Company shall give the Administrative Agent irrevocable notice, which notice must be received by the Administrative Agent (i) prior to 10:00 A.M., Boston time two Eurodollar Business Days prior to the requested Borrowing Date, in the case of Eurodollar Loans, and (ii) prior to 12:00 noon Boston time on the requested Borrowing Date, in the case of Base Rate Loans, specifying (A) the amount to be borrowed, (B) the requested Borrowing Date, (C) whether the borrowing is to be a Eurodollar Loan or a Base Rate Loan, or a combination thereof, and (D) the length of the Interest Period for each Eurodollar Loan included in such notice. No more than ten (10) Eurodollar Loans with different Interest Periods shall be outstanding at one time. Promptly upon receipt of such notice, the Administrative Agent shall notify each of the Banks thereof. Each borrowing of Base Rate Loans pursuant to the Commitments shall be in a minimum aggregate principal amount equal to the lesser of (i) $1,000,000 and (ii) the Available Commitment, and shall be in an integral multiple of $250,000 in excess thereof. Each borrowing of Eurodollar Loans pursuant to the Commitments shall be in a minimum amount equal to $4,000,000 and shall be in an integral multiple of $500,000 in excess thereof. 13 (b) Not later than 2:00 P.M. (Boston time) on any requested Borrowing Date (including without limitation pursuant to notice under Subsection 3.4 with regard to the repayment of any Swing Line Loan), each of the Banks will make available to the Administrative Agent, at its head office, in immediately available funds, the amount of the Revolving Credit Loan to be loaned by it on such Borrowing Date. Upon receipt from each Bank of the amount of its Revolving Credit Loan, the Administrative Agent will make the aggregate amount of such Revolving Credit Loans available to the Company. The failure or refusal of any Bank to make available to the Administrative Agent at the aforesaid time on any Borrowing Date the amount of the Revolving Credit Loan to be made by such Bank shall not relieve any other Bank from its several obligations hereunder to make its respective Commitment Percentage of any requested Loans. (c) The Administrative Agent may (unless notified to the contrary by a Bank prior to a Borrowing Date) assume that each Bank has made available to the Administrative Agent on such Borrowing Date such Bank's Commitment Percentage of the Revolving Credit Loans to be made on such Borrowing Date, and the Administrative Agent may (but it shall not be required to), in reliance upon such assumption, make available to the Company a corresponding amount. If any Bank makes available all or any portion of such amount to the Administrative Agent on a date after such Borrowing Date, then such Delinquent Bank shall pay to the Administrative Agent on demand an amount equal to the product of (i) the average computed for the period referred to in clause (iii) below, of the weighted average interest rate paid by the Administrative Agent for federal funds acquired by the Administrative Agent during each day included in such period, times (ii) the amount equal to the lesser of such Bank's Commitment Percentage of such borrowing or the portion thereof made available after such Borrowing Date, times (iii) a fraction, the numerator of which is the number of days that elapse from and including such Borrowing Date to the date on which such Bank's Commitment Percentage of such borrowing shall become immediately available to the Administrative Agent, and the denominator of which is 360. A statement of the Administrative Agent submitted to any Bank with respect to any amounts owing under this paragraph shall be prima facie evidence of the amount due and owing. If any portion of such Bank's Commitment Percentage of such Loan is not in fact made available to the Administrative Agent by such Bank within three Business Days of such Borrowing Date, the Administrative Agent shall be entitled to recover such amount from the Company on demand, with interest thereon at the rate per annum applicable to the Loans made on such Borrowing Date. (d) The provisions of Subsection 2.3(a) notwithstanding, if the Company shall not have given a timely notice of a borrowing to be made on the last day of any Interest Period for an outstanding Eurodollar Loan, then unless the Administrative Agent shall have received notice that the Company elects not to make a borrowing on such a day (such notice to have been received at least one Business Day prior to such day) the Company shall be deemed irrevocably to have requested a Base Rate Loan to be made on such day in an amount equal to the amount of such outstanding Loan (reduced to the extent necessary to reflect any reductions of the Total Commitment on or prior to such day). 14 (e) If the Administrative Agent, for the account of a Bank, makes a new Revolving Credit Loan on a day on which the Company is to repay all or any part of any outstanding Revolving Credit Loan from such Bank, such Bank shall apply the proceeds of its new Loan to make such repayment, and only an amount equal to the difference (if any) between the amount being borrowed and the amount being repaid shall be made available by such Bank to the Company or remitted by the Company to such Bank as provided in Subsection 4.7, as the case may be. 2.4. INTEREST RATE. ------------- (a) Each Eurodollar Loan shall bear interest, for the period commencing on the Borrowing Date thereof and ending on the last day of the Interest Period with respect thereto, on the unpaid principal amount thereof at a rate per annum equal to the Eurodollar Rate determined by the Administrative Agent for the Interest Period therefor plus 0.50%. (b) Each Base Rate Loan shall bear interest for the period commencing on the Borrowing Date thereof on the unpaid principal amount thereof at a fluctuating rate per annum equal to the Base Rate. 2.5. INTEREST RATE CONVERSION OPTIONS. -------------------------------- (a) The Company may elect from time to time to convert any outstanding Loan (other than a Swing Line Loan) to a Loan of another Type, provided that (i) with respect to any such conversion of a Eurodollar Loan to a Base Rate Loan, the Company shall give the Administrative Agent at least one (1) Business Day prior written notice of such election; (ii) with respect to any such conversion of a Base Rate Loan to a Eurodollar Loan, the Company shall give the Administrative Agent at least two (2) Eurodollar Business Days' prior written notice of such election; (iii) with respect to any such conversion of a Eurodollar Loan into a Base Rate Loan, such conversion shall only be made on the last day of the Interest Period with respect thereto, and (iv) no Base Rate Loan may be converted into a Eurodollar Loan when any Default or Event of Default has occurred and is continuing. On the date on which such conversion is being made each Bank shall take such action as is necessary to transfer its portion of such Loans to its Domestic Lending Office or its Eurodollar Lending Office, as the case may be. All or any part of outstanding Revolving Credit Loans of any Type may be converted into a Revolving Credit Loan of another Type as provided herein, provided that any conversion shall comply with the minimum aggregate principal amount requirements set forth in Subsection 2.3(a). Each Conversion Request relating to the conversion of a Base Rate Loan to a Eurodollar Loan shall be irrevocable by the Company. (b) Any Revolving Credit Loan of any Type may be continued as a Revolving Credit Loan of the same Type upon the expiration of an Interest Period with respect thereto by compliance by the Company with the notice provisions contained in Subsection 2.5(a) hereof; provided that no Eurodollar Loan may be continued as such when any Default or Event of Default has occurred and is continuing, but shall be automatically converted to a Base Rate Loan on the last day of the first Interest Period relating thereto ending during the continuance of any Default or Event of Default. The Administrative Agent shall notify the Banks promptly when any such automatic conversion contemplated by this Subsection 2.5(b) is scheduled to occur. 15 (c) Any conversion to or from Eurodollar Loans shall be in such amounts and be made pursuant to such elections so that, after giving effect thereto, the aggregate principal amount of all Eurodollar Loans having the same Interest Period shall not be less than $4,000,000 or a whole multiple of $500,000 in excess thereof. No more than ten (10) Eurodollar Loans with different Interest Periods shall be outstanding at one time. 2.6. TERMINATION OR REDUCTION OF COMMITMENT. The Company shall have the -------------------------------------- right, upon not less than five (5) Business Days' notice to the Administrative Agent, to terminate the Total Commitment or, from time to time, reduce the amount of the Total Commitment, provided, that, (i) each reduction (other than a termination) shall be in a minimum amount of $10,000,000 and in integral multiples of $5,000,000 in excess thereof, (ii) no such reduction or termination shall be permitted if, after giving effect thereto and to any prepayments of the Loans made on the effective date thereof, the then outstanding principal amount of the Loans would exceed the amount of the Total Commitment then in effect and (iii) each Bank's Commitment shall be reduced proportionately. Termination of the Commitments shall also terminate the obligation of the Banks to make Loans. The portions of Commitments once terminated or reduced may not be reinstated. 2.7. PREPAYMENTS. The Company may (i) at any time and from time to time ----------- prepay the Base Rate Loans, in whole or in part, without premium or penalty and (ii) subject to payment of the amounts set forth in Subsection 4.11, prepay the Eurodollar Loans, in either case upon at least one Business Day's irrevocable notice to the Administrative Agent, specifying the date and amount of prepayment and whether the prepayment is of Eurodollar Loans or Base Rate Loans, or a combination thereof, and if of a combination thereof, the amount of prepayment allocable to each. If such notice is given, the Administrative Agent shall thereupon transmit such notice to the Banks, the Company shall make such prepayment to the Administrative Agent for the accounts of the Banks, and the prepayment amount specified in such notice shall be due and payable on the date specified therein, together with accrued interest to such date on the amount prepaid. Partial prepayments shall be in an amount equal to $100,000 or a whole multiple thereof and may only be made if, after giving effect thereto, Subsection 2.6 shall not have been contravened, and each partial prepayment shall be allocated among the Banks, in proportion, as nearly as practicable, to the respective unpaid principal amount of each Bank's Revolving Credit Note, with adjustments to the extent practical to equalize any prior prepayments not exactly in proportion. 2.8. REPAYMENT OF LOANS. The Company will pay to the Administrative ------------------ Agent for the accounts of the Banks the unpaid principal amount of each Revolving Credit Loan made by the Banks on the last day of the Interest Period therefor. SECTION 3. SWING LINE FACILITY ------------------- 3.1. THE SWING LINE LOANS. Subject to the terms and conditions -------------------- hereinafter set forth, upon notice by the Company made to the Swing Line Bank in accordance with Subsection 3.2 hereof, the Swing Line Bank agrees to lend to the Company Swing Line Loans on any Business Day during the Commitment Period in an aggregate principal amount not to exceed $10,000,000 (the "Maximum Swing Line 16 Loan Amount"). Each Swing Line Loan shall be in such minimum amount as determined by the Swing Line Bank. Notwithstanding any other provisions of this Agreement and in addition to the limit set forth above, (a) at no time shall the aggregate principal amount of all outstanding Swing Line Loans exceed the Total Commitment of the Banks then in effect minus the aggregate principal amount of all Revolving Credit Loans outstanding, provided however that, subject to the limitations set forth in this Subsection, from time to time the sum of the aggregate outstanding Swing Line Loans plus all outstanding Revolving Credit Loans made by the Swing Line Bank may exceed the Swing Line Bank's Commitment then in effect. 3.2. NOTICE OF BORROWING. When the Company desires the Swing Line Bank ------------------- to make a Swing Line Loan, it shall send to the Administrative Agent and the Swing Line Bank a Swing Line Loan request, which shall set forth the principal amount of the proposed Swing Line Loan and the date on which the proposed Swing Line Loan would mature (the "Swing Line Loan Maturity Date") which shall be not earlier than the first day after the Borrowing Date nor later than the third day after the Borrowing Date thereof, and in no event shall be later than the last day of the Commitment Period. Each such Loan request must be received by the Swing Line Bank not later than 3:00 p.m. (Boston time) on the date of the proposed borrowing. Each Swing Line Loan request shall be irrevocable and binding on the Company and shall obligate the Company to borrow the Swing Line Loan from the Borrowing Date thereof. Upon satisfaction of the applicable conditions set forth in this Agreement, on the proposed Borrowing Date the Swing Line Bank shall make the Swing Line Loan available to the Company by 5:00 p.m. (Boston time) on the proposed Borrowing Date by crediting the amount of the Swing Line Loan to the Company's account maintained with the Administrative Agent at the Head Office; provided that the Swing Line Bank shall not advance any Swing Line Loans after it has received notice that a Default or Event of Default has occurred and has not been cured or waived in accordance with the provisions of this Agreement. The Swing Line Bank shall not be obligated to make any Swing Line Loans at any time when any Bank is a Delinquent Bank unless the Swing Line Bank has entered into arrangements satisfactory to it to eliminate the Swing Line Bank's risk with respect to such Delinquent Bank, including by cash collateralizing such Delinquent Bank's Commitment Percentage of the outstanding Swing Line Loans and any such additional Swing Line Loans to be made. 3.3. INTEREST ON SWING LINE LOANS. Each Swing Line Loan shall bear ---------------------------- interest from the Borrowing Date thereof until the Swing Line Loan Maturity Date thereof at the rate quoted by the Administrative Agent in its sole discretion (which shall not be greater than the then applicable Base Rate) at the time the request for such Swing Line Loan is made. 3.4. REPAYMENT OF SWING LINE LOANS. The Company shall repay each ----------------------------- outstanding Swing Line Loan on the Swing Line Loan Maturity Date. Upon notice by the Swing Line Bank on any Business Day, the Company shall be deemed irrevocably to have requested, and each of the Banks hereby agrees to make, a Revolving Credit Loan bearing interest at the Base Rate to the Company on the next succeeding Business Day following such notice, in an amount equal to such Bank's Commitment Percentage of the aggregate amount of all Swing Line Loans 17 outstanding. The proceeds thereof shall be applied directly to repay the Swing Line Bank for such outstanding Swing Line Loans. In the event that it is impracticable for such Revolving Credit Loan to be made for any reason on the date otherwise required above, then each Bank hereby agrees that it shall forthwith purchase (as of the date such Revolving Credit Loan would have been made, but adjusted for any payments received from the Company on or after such date and prior to such purchase) from the Swing Line Bank, and the Swing Line Bank shall sell to each Bank, such participations in the Swing Line Loans (including all accrued and unpaid interest thereon) outstanding as shall be necessary to cause the Banks to share in such Swing Line Loans pro rata based on their respective Commitment Percentages by making available to the Swing Line Bank an amount equal to such Bank's participation in the Swing Line Loans; provided that all interest payable on the Swing Line Loans shall be for the account of the Swing Line Bank as a funding and administrative fee until the date as of which the respective participation is purchased. The obligation of each Bank to make such Revolving Credit Loan, or as the case may be to purchase such participation in a Swing Line Loan, upon one Business Day's notice as set forth above, is absolute, unconditional and irrevocable notwithstanding (i) that the amount of such Loan may not comply with the applicable minimums set forth in Subsection 2.3 hereof, (ii) the failure of the Company to meet the conditions set forth in Section 6 hereof, (iii) the occurrence or continuance of a Default or an Event of Default hereunder, (iv) the date of such Revolving Credit Loan or participation, and (v) the Commitment of the Swing Line Bank in effect at such time. 3.5. THE SWING LINE NOTE. The obligation of the Company to repay the ------------------- Swing Line Loans made pursuant to this Agreement and to pay interest thereon as set forth in this Agreement shall be evidenced by a promissory note of the Company with appropriate insertions substantially in the form of Exhibit B attached hereto (the "Swing Line Note"), of even date herewith and payable to the order of the Swing Line Bank in a principal amount stated to be the lesser of (i) the Maximum Swing Line Loan Amount, or (ii) the aggregate principal amount of Swing Line Loans at any time advanced by the Swing Line Bank and outstanding thereunder. The Borrower irrevocably authorizes the Swing Line Bank to make or cause to be made, at or about the time of the Borrowing Date of any Swing Line Loan or at the time of receipt of any payment of principal on the Swing Line Note, an appropriate notation on the Note Record reflecting the making of such Swing Line Loan or (as the case may be) the receipt of such payment. The outstanding amount of the Swing Line Loans set forth on such Note Record shall be prima facie evidence of the principal amount thereof owing and unpaid to the Swing Line Bank, but the failure to record, or any error in so recording, any such amount on such Note Record shall not limit or otherwise affect the actual amount of the obligations of the Company hereunder or under the Swing Line Note to make payments of principal of or interest on the Swing Line Note when due. SECTION 4. CERTAIN GENERAL PROVISIONS -------------------------- 4.1. USE OF PROCEEDS. The Company shall use the proceeds of the Loans --------------- to refinance existing senior revolver and term debt set forth on Schedule 4.1 and for general corporate purposes in the ordinary course of its business. No part of the proceeds of any Loans hereunder will be used (a) for "purchasing" or "carrying" any "margin security" or "margin stock" within the respective meanings of each of the quoted terms under Regulations U and X of the Board of 18 Governors of the Federal Reserve System as now and from time to time hereafter in effect unless (i) the Company shall have theretofore furnished to the Banks a statement on Federal Reserve Form U-1 with respect to such Loans or (ii) not more than 25% of the value of the assets of either the Company or the Company and its Subsidiaries on a consolidated basis, respectively, is represented by "margin stock" as so defined, or (b) for any purpose which violates, or which would be inconsistent with, the provisions of the Regulations of the Board of Governors of the Federal Reserve System. 4.2. ANNUAL/COMMITMENT FEES. The Company agrees to pay to the ---------------------- Administrative Agent for the accounts of the Banks in accordance with their respective Commitment Percentages: (a) an annual fee (the "Annual Fee") computed at the rate of 0.025% per annum on the amount of the Total Commitment, and payable on the date hereof and on each successive anniversary of the date hereof up to but not including the Termination Date or such earlier date as the Commitment shall terminate as provided herein, and (b) an unused commitment fee (the "Commitment Fee") from and including the date hereof to the Termination Date, computed at the rate of 0.375% per annum on the average daily amount of the Available Commitment during the period for which payment is made, payable quarterly on the last day of each March, June, September and December and on the Termination Date or such earlier date as the Commitment shall terminate as provided herein, commencing on the first of such dates to occur after the date hereof. 4.3. AGENTS' FEES. The Company shall pay to each of the Administrative ------------ Agent, Syndication Agent, and Documentation Agent on the date hereof an agent's closing fee for each agent's own respective account, and shall pay to the Administrative Agent on the date hereof and on each anniversary of such date, up to but not including the Termination Date or such earlier date as the Commitment shall terminate as provided herein, an administration fee for the Administrative Agent's own account, all as set forth in certain letter agreements dated as of February 28, 1997. 4.4. COMPUTATION OF INTEREST AND FEES. (a) Interest in respect of Base -------------------------------- Rate Loans shall be calculated on the basis of a 365-day year for the actual number of days elapsed (including the first day but excluding the last day). Commitment fees and interest in respect of Eurodollar Loans and Swing Line Loans shall be calculated on the basis of a 360-day year for the actual number of days elapsed. The Administrative Agent shall as soon as practicable notify the Company and the Banks of each determination of a Eurodollar Rate. Any change in the interest rate on a Loan resulting from a change in the Base Rate shall become effective as of the opening of business on the day on which such change in the Base Rate is announced. The Administrative Agent shall as soon as practicable notify the Company of the effective date and the amount of each such change. The outstanding amount of the Loans as reflected on the Administrative Agent's records from time to time shall be considered correct and binding on the Company and the Banks unless within five Business Days after receipt of any notice by the Administrative Agent of such outstanding amount, the Company or any of the Banks, as the case may be, shall notify the Administrative Agent to the contrary. 19 (b) Each determination of an interest rate by the Administrative Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Company in the absence of manifest error. The Administrative Agent shall, at the request of the Company, deliver to the Company a statement showing the quotations used by the Administrative Agent in determining any interest rate pursuant to Subsection 2.4(a). 4.5. INABILITY TO DETERMINE INTEREST RATE. In the event that the ------------------------------------ Administrative Agent shall have determined (which determination shall be conclusive and binding upon the Company) that, by reason of circumstances affecting the eurodollar interbank markets, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate applicable pursuant to Subsection 2.4(a) for any requested Interest Period with respect to a proposed Loan that the Company has requested be made as a Eurodollar Loan, the Administrative Agent shall forthwith give telex or telecopy notice of such determination to the Company and the Banks at least one day prior to the proposed Borrowing Date for such Eurodollar Loan. If such notice is given, any requested Eurodollar Loan shall be made as a Base Rate Loan. Until such notice has been withdrawn by the Administrative Agent, no further Eurodollar Loans may be requested by the Company. 4.6. OVERDUE AMOUNTS; INTEREST PAYMENTS. ---------------------------------- (a) Overdue principal of any Loan and (to the extent permitted by law) overdue interest on the Loans and all other overdue amounts payable hereunder shall, without limiting any rights of the Administrative Agent under Section 9, bear interest at a rate per annum which is 2% above the Base Rate until paid in full (after as well as before judgment). (b) Interest on each Loan shall be payable in arrears on each Interest Payment Date with respect thereto and after the occurrence of any Event of Default, shall be payable upon demand. 4.7. PAYMENTS. All payments (including prepayments) to be made by the -------- Company on account of principal, interest and fees shall be made without set off or counterclaim and shall be made to the Administrative Agent for the accounts of the Banks at the Administrative Agent's office set forth in Subsection 12.2 in lawful money of the United States of America and in immediately available funds. If any payment hereunder (other than payments on the Eurodollar Loans) becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest thereon shall be payable at the Base Rate. If any payment on a Eurodollar Loan becomes due and payable on a day other than a Eurodollar Business Day, the maturity thereof shall be extended to the next succeeding Eurodollar Business Day unless the result of such extension would be to extend such payment into another calendar month in which event such payment shall be made on the immediately preceding Eurodollar Business Day. 4.8. FOREIGN TAXES. All payments made by the Company under this ------------- Agreement shall be made free and clear of, and without reduction for or on account of, any present or future income, stamp or other taxes, levies, imposts, 20 duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority excluding income and franchise taxes of the United States of America or any political subdivision or taxing authority thereof or therein (including Puerto Rico), and the country in which the Administrative Agent's Eurodollar Lending Office is located or any political subdivision or taxing authority thereof or therein (such non-excluded taxes being herein called "Foreign Taxes"). If any Foreign Taxes are required to be withheld from any amounts payable to the Banks hereunder or under the Notes, the amounts so payable to the Banks shall be increased to the extent necessary to yield to the Banks (after payment of all Foreign Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement and the Notes. Whenever any Foreign Tax is payable by the Company, as promptly as possible thereafter, the Company shall send to the Administrative Agent a certified copy of an original official receipt showing payment thereof. If the Company fails to pay any Foreign Taxes when due to the appropriate taxing authority or fails to remit to the Administrative Agent the required receipts or other required documentary evidence, the Company shall indemnify the Administrative Agent and the Banks for any incremental taxes, interest or penalties that may become payable by the Banks as a result of any such failure. 4.9. ILLEGALITY. Notwithstanding any other provisions herein, (i) if ---------- any Requirement of Law enacted after the date hereof, or (ii) if any change in the interpretation or application of any Requirement of Law as in effect on the date hereof, shall make it unlawful for the Banks to make or maintain Eurodollar Loans as contemplated by this Agreement, (a) the Commitment to make Eurodollar Loans shall forthwith be cancelled and (b) the Loans then outstanding as Eurodollar Loans, if any, shall be repaid on the last day of the Interest Period therefor, or within such earlier period as required by law, and reborrowed as Base Rate Loans. If any such prepayment of a Eurodollar Loan is made on a day which is not the last day of the Interest Period therefor, the Company shall pay to the Administrative Agent for the accounts of the Banks such amounts, if any, as may be required pursuant to Subsection 4.11. 4.10. ADDITIONAL COSTS, ETC. --------------------- (a) In the event that any Requirement of Law or any change therein or in the interpretation or application thereof or compliance by any Bank with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority or any agency or instrumentality thereof: (i) does or shall subject any Bank to any tax of any kind whatsoever other than taxes imposed on or measured by the net income or any franchise taxes imposed in lieu of a tax on or measured by net income of such Bank or any Participant (such non-excluded items being hereinafter referred to as "Taxes") with respect to this Agreement, the Notes or any Loans made hereunder, or changes the basis of taxation of payments to such Bank of principal, Annual Fees, Commitment Fees, interest or any other amount payable hereunder (except for changes in the rate of tax on the overall net income of such Bank); (ii) does or shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, or deposits or other liabilities in or for the account of, advances or 21 loans by, or other credit extended by, or any other acquisition of funds by, any office of such Bank which are not otherwise included in the determination of the Eurodollar Rate; or (iii) does or shall impose on such Bank any other condition; and the result of any of the foregoing is, in respect of Eurodollar Loans, to increase the cost to such Bank of making, renewing or maintaining Loans or extensions of credit hereunder or to reduce any amount receivable hereunder, then the Company shall promptly pay to the Administrative Agent, for the account of such Bank, upon demand, any additional amounts necessary to compensate such Bank for such additional cost or reduced amount receivable which such Bank deems to be material as determined by such Bank with respect to such Eurodollar Loans. If such Bank becomes entitled to claim any additional amounts pursuant to this subsection, it shall promptly notify the Administrative Agent which will promptly notify the Company of the event by reason of which such Bank has become so entitled. A statement as to any additional amounts payable pursuant to the foregoing sentence submitted by the Administrative Agent to the Company shall be conclusive in the absence of manifest error. This covenant shall survive the termination of this Agreement and payment of the Notes. (b) If any change in, or the introduction, adoption, effectiveness, interpretation, reinterpretation or phase-in of, any law or regulation, directive, guideline, decision or request (whether or not having the force of law) of any court, central bank, regulator or other Governmental Authority affects or would affect the amount of capital required or expected to be maintained by any Bank or any corporation controlling any Bank, and such Bank determines (in its sole and absolute discretion) that the rate of return on such Bank's or such controlling corporation's capital as a consequence of its obligation hereunder is reduced to a level below that which such Bank or such controlling corporation could have achieved but for the occurrence of any such circumstance, then, in any such case, upon the notice from time to time by the Administrative Agent or such Bank to the Company, the Company shall pay to the Administrative Agent, for the account of such Bank, on demand, any additional amount or amounts as may be sufficient to compensate such Bank or such controlling corporation for such reduction in rate of return. A statement of the Administrative Agent or such Bank as to any such additional amount or amounts (including calculations thereof in reasonable detail) shall, in the absence of manifest error, be conclusive and binding on the Company. In determining such amount or amounts, such Bank may use any method of averaging and attribution that it (in its sole and absolute discretion) shall deem applicable. This covenant shall survive the termination of this Agreement and payment of the Notes. (c) Any Foreign Recipient, no later than the date of the initial Loan (or the date of assignment or transfer, as the case may be) and, subject to clause (e) below, annually (or at such other times as the Company may reasonably request) thereafter, shall timely deliver two accurate and complete signed originals of either of Internal Revenue Forms 1001 or 4224 (or any successor of such form) to the Company (or in the case of a Participant which holds a participation interest which it acquired from any Bank, to such Bank which shall 22 provide copies thereof to the Company), in either case, indicating that all payments by the Company of principal of, and interest on, the Loans and all other amounts payable hereunder to such Foreign Recipient may be made free and clear of, and without deduction for, any United States withholding tax. In addition, if required under statute, treaty, regulation, or administrative practice of the United States, the Foreign Recipient that is claiming exemption from U.S. withholding tax under a treaty agrees to provide the Company with proof of tax residence in the applicable country by providing a certified taxpayer identification number (TIN), a certificate of residence or other documentary evidence. The obligation to deliver forms set forth in the preceding sentence shall not apply for any period during which any change in law or circumstance shall have eliminated any and all obligations imposed on the Company to withhold or deduct United States withholding tax in respect of payments made by the Company hereunder; provided that the Foreign Recipient has complied with all requirements, if any, imposed by statute, treaty, regulation or administrative practice of the United States necessary to eliminate such obligation to withhold by the Company. (d) The Company shall not be required to pay any additional amounts to a Foreign Recipient in respect of United States withholding tax pursuant to Subsection 4.08 or this Subsection 4.10 if the obligation to pay such additional amounts would not have arisen but for a failure by such Foreign Recipient to comply with the provisions of Subsection 4.10(c) for any reason (including a change in circumstances that renders such Foreign Recipient unable to so comply) other than (x) a change in applicable law, regulation or official interpretation thereof or (y) an amendment, modification or revocation of any applicable tax treaty or a change in official position regarding the application or interpretation thereof, in each case after the date hereof (and in the case of a Participant, after the date of assignment or transfer). In no event, however, will the Company be required to pay additional amounts if any obligation to pay such additional amounts would not have arisen but for the failure of the Foreign Recipient to comply with any requirement under a statute, treaty, regulations, or administrative practice of the United States to establish exemption from all or part of the tax in respect of which the additional amount would otherwise be paid. (e) If, solely as a result of an event described in clause (x) or (y) of Subsection 4.10(d), after the date hereof (or, in the case of a Participant, after the date of assignment or transfer), (i) any Foreign Recipient is unable to furnish the Company with a form otherwise required to be delivered by it pursuant to Subsection 4.10(c), or (ii) any Bank or any Foreign Recipient makes any payment or becomes liable to make any payment on account of any Taxes, other than a United States withholding tax, with respect to payments by the Company hereunder, the Company may, at its option, either (x) prepay the Loans held by such Bank (or such Foreign Recipient) or (y) continue to make payments to the Administrative Agent on behalf of such Bank or such Foreign Recipient under the terms of this Agreement and the Notes, which payments shall be made in accordance with the provisions hereof if the condition set forth in the next succeeding sentence is satisfied. If the Company exercises its option under clause (y) of the preceding sentence, the Company's obligation to make payments to the Administrative Agent on behalf of such Bank (or such Foreign Recipient) under the terms of this Agreement and the Notes without deduction for Taxes shall be conditioned on such Bank (or such Foreign Recipient), prior to the time that the next payment under the Notes is due (and thereafter as is required by 23 applicable law), having furnished the Company with such certificate as may be required, and having taken such other steps as reasonably may be available to it, under applicable tax laws and any applicable tax treaty or convention to obtain an exemption from, or reduction (to the lowest applicable rate) of, such Taxes. 4.11. INDEMNITY. The Company agrees to indemnify each Bank and to hold --------- each Bank harmless from and against any loss, cost or expense or loss of margin that such Bank may sustain or incur as a consequence of (i) default by the Company in payment of the principal amount of or any interest on any Eurodollar Loans as and when due and payable, including any such loss or expense arising from interest or fees payable by such Bank to lenders of funds obtained by it in order to maintain its Eurodollar Loans, (ii) default by the Company in making a borrowing or conversion after the Company has given (or is deemed to have given) a notice of borrowing or conversion in accordance with Subsections 2.3 and 2.5 hereof, (iii) default by the Company in making any prepayment of a Loan after the Company has given a notice in accordance with Subsection 2.7 hereof or (iv) the making of any payment of a Eurodollar Loan (including, without limitation, any prepayment made as a result of action taken under Subsection 4.9 or as a result of the Administrative Agent's exercise of rights under Section 9 hereof) on a day that is not the last day of the applicable Interest Period with respect thereto, or the making of any payment on a Swing Line Loan on a day other than the maturity date thereof, including (in the case of either such Eurodollar Loan or Swing Line Loan payments) interest or fees payable by such Bank to lenders of funds obtained by it in order to maintain any such Loans. This covenant shall survive termination of this Agreement and payment of the Notes. SECTION 5. REPRESENTATIONS AND WARRANTIES ------------------------------ To induce the Banks to enter into this Agreement and to make the Loans herein provided for, the Company hereby covenants, represents and warrants to the Banks that: 5.1. FINANCIAL CONDITION. The consolidated balance sheet of the Company ------------------- and its consolidated Subsidiaries as at December 31, 1996, and the related consolidated statements of income, statements of changes in shareholders equity and statements of cash flows for the fiscal year ended on such date, certified by Coopers & Lybrand, copies of which have heretofore been furnished to the Banks, are complete and correct and present fairly in accordance with GAAP the consolidated financial condition of the Company and its consolidated Subsidiaries as at such date, and the consolidated results of their operations and changes in cash flows for the fiscal year then ended. All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently with the preceding year. 5.2. NO CHANGE. Except as set forth in the filings of the Company with --------- the Securities and Exchange Commission prior to the date hereof, copies of which have been delivered to the Banks, since December 31, 1996 there has been no material adverse change in the business, operations, assets or financial or other condition of the Company and its Subsidiaries taken as a whole. 5.3. CORPORATE EXISTENCE; COMPLIANCE WITH LAW. Each of the Company and ---------------------------------------- its Subsidiaries (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, (b) has the corporate power and authority and the legal right to own and operate its property, to lease the property it operates and to conduct the business in which it is 24 currently engaged, (c) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification, except in those jurisdictions in which the failure to be so qualified or in good standing would not be reasonably likely to have a material adverse effect upon the business, operations or condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole, and (d) is in compliance with all Requirements of Law, except (with reference to each of clauses (a), (b), (c) and (d) above) to the extent that the failure to comply therewith would not, in the aggregate, be reasonably likely to have a material adverse effect on the business, operations, property or financial or other condition of the Company and its Subsidiaries taken as a whole, and would not be reasonably likely to have a material adverse affect on the ability of the Company to perform its obligations under this Agreement and the Notes. 5.4. CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. The ------------------------------------------------------- Company has the corporate power and authority and the legal right to make, deliver and perform this Agreement and the Notes and to borrow hereunder and has taken all necessary corporate action to authorize the borrowings on the terms and conditions of this Agreement and the Notes and to authorize the execution, delivery and performance of this Agreement and the Notes. No consent or authorization of, filing with, or other act by or in respect of any Governmental Authority, is required in connection with the borrowings hereunder or with the execution, delivery, performance, validity or enforceability of this Agreement or the Notes. This Agreement has been, and the Notes will be, duly executed and delivered on behalf of the Company and this Agreement constitutes, and the Notes when executed and delivered will constitute, legal, valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally. 5.5. NO LEGAL BAR. The execution, delivery and performance of this ------------ Agreement and the Notes, the borrowings hereunder and the use of the proceeds thereof, (a) will not violate any Requirement of Law, (b) will not violate any Contractual Obligation of the Company or any of its Subsidiaries, and (c) will not result in, or require, the creation or imposition of any Lien on any of its or their respective properties or revenues pursuant to any Requirement of Law or Contractual Obligation, except in the case of clauses (b) and (c) any contractual violations and/or Liens which in the aggregate would not be reasonably likely to have a material adverse effect on the business, operations, property or financial or other condition of the Company and its Subsidiaries taken as a whole and would not be reasonably likely to have a material adverse affect on the ability of the Company to perform its obligations under this Agreement and the Notes. 5.6. NO MATERIAL LITIGATION. Except as set forth in the filings of the ---------------------- Company with the Securities and Exchange Commission, copies of which have been delivered to the Banks, no litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the Company, threatened by or against the Company or any of its Subsidiaries or 25 against any of its or their respective properties or revenues (a) with respect to this Agreement or the Notes or any of the transactions contemplated hereby, or (b) which would be reasonably likely to result in any material adverse change in the business, operations, property or financial or other condition of the Company and its Subsidiaries taken as a whole. 5.7. NO DEFAULT. Neither the Company nor any of its Subsidiaries is in ---------- default under or with respect to any Contractual Obligation in any respect which would be reasonably likely to be materially adverse to the business, operations, property or financial or other condition of the Company and its Subsidiaries taken as a whole, or which would be reasonably likely to materially adversely affect the ability of the Company to perform its obligations under this Agreement and the Notes. No Default or Event of Default has occurred and is continuing. 5.8. OWNERSHIP OF PROPERTY; LIENS. Each of the Company and its ---------------------------- Subsidiaries (a) has good record and marketable title in fee simple to or valid leasehold interests in all its real property, and good title to all its other property (except that such representation is not made for any such property with a book value of $1,000,000 or less provided that the aggregate book value of such property for which such representation is not made shall not exceed $10,000,000), and (b) none of such property is subject to any Lien, except as permitted in Subsection 8.4, except (with reference to clauses (a) and (b)) any defects in title or Liens which in the aggregate would not be reasonably likely to have a material adverse effect on the business, operations, property or financial or other condition of the Company and its Subsidiaries taken as a whole and would not be reasonably likely to have a material adverse affect on the ability of the Company to perform its obligations under this Agreement and the Notes. 5.9. NO BURDENSOME RESTRICTIONS. No Contractual Obligation of the -------------------------- Company or any of its Subsidiaries and no Requirement of Law materially adversely affects, or insofar as the Company may reasonably foresee may so affect, the business, operations, property or financial or other condition of the Company and its Subsidiaries taken as a whole. 5.10. TAXES. Each of the Company and its Subsidiaries has filed or ----- caused to be filed all tax returns which to the knowledge of the Company are required to be filed, and has paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority (other than (i) those the amount or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of the Company or its Subsidiaries, as the case may be or (ii) those which if not paid would not, either individually or in the aggregate, be reasonably likely to have a material adverse effect upon the business, operations, property or financial or other condition of the Company and its Subsidiaries taken as a whole); and no tax liens have been filed (other than those which, if foreclosed, would not, either individually or in the aggregate, be reasonably likely to have a material adverse effect upon the business, operations, property or financial or other condition of the Company and its Subsidiaries taken as a whole) and, to the knowledge of the Company, no claims are being asserted with respect to any such taxes, fees or other charges. 5.11. FEDERAL REGULATIONS. Neither the Company nor any of its ------------------- Subsidiaries is engaged or will engage, principally or as one of its important 26 activities, in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulations U and X of the Board of Governors of the Federal Reserve System as now and from time to time hereafter in effect. No part of the proceeds of any Loans hereunder will be used (a) for "purchasing" or "carrying" "margin stock" as so defined unless (i) the Company shall have theretofore furnished to the Banks a statement on Federal Reserve Form U-1 with respect to such Loans or (ii) not more than 25% of the value of the assets of either the Company or the Company and its Subsidiaries on a consolidated basis, respectively is represented by "margin stock" as so defined, or (b) for any purpose which violates, or which would be inconsistent with, the provisions of the Regulations of such Board of Governors. 5.12. ERISA. As of January 1, 1997 the actuarially determined aggregate ----- amount of unfunded vested benefits under the Plans administered by the Company and its Subsidiaries was less than $1,000,000. The Company and its Subsidiaries are in compliance with all applicable provisions of ERISA except for any noncompliance which, either individually or in the aggregate with all other instances of such noncompliance, would not be reasonably likely to have a material adverse effect upon the business, operations or condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole. 5.13. INVESTMENT COMPANY ACT. The Company is not an "investment ---------------------- company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. 5.14. FULL DISCLOSURE. Neither this Agreement nor any other --------------- certificate, report, statement or other writing furnished to the Administrative Agent or the Banks by the Company in connection with the negotiation of this Agreement, at the time of execution or delivery, contained any untrue fact or omits to state a material fact necessary to make the statements contained herein or therein, in light of the circumstances under which they were made, not misleading. 5.15. CERTAIN CONTINGENT OBLIGATIONS. As of June 30, 1997, each of ------------------------------ Madison, CLIC and WMAC Credit has assets in excess of its liabilities. The guaranties or indemnification undertakings given by Madison, CLIC and/or WMAC Credit referenced in the definition of Contingent Obligation are obligations of Madison, CLIC or WMAC Credit, as the case may be, without recourse to the Company. 5.16. ENVIRONMENTAL COMPLIANCE. With respect to the Real Estate and ------------------------ operations thereon by the Company or its Subsidiaries, and except as set forth on Schedule 5.16, to the knowledge of the Company: (a) none of the Company, its Subsidiaries or any operator of the Real Estate which is a Subsidiary, has received any written notice from any Governmental Authority of any actual or alleged violation of any Environmental Laws which has not heretofore been resolved, which violation would be reasonably likely to have a material adverse effect on the business, assets or financial condition of the Company and its Subsidiaries taken as a whole; 27 (b) neither the Company nor any of its Subsidiaries has received any written notice from any Governmental Authority or other third party (i) that any one of them is currently identified by the United States Environmental Protection Agency as a potentially responsible party under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, with respect to a site listed on the National Priorities List, 40 C.F.R. Part 300 Appendix B, or that any of them is currently identified as a potentially responsible party for environmental damage under any state or local Environmental Laws; (ii) that any Hazardous Substances which any one of them has generated, transported or disposed of has been found at any site at which a federal, state or local governmental agency has conducted or has ordered that the Company or any of its Subsidiaries conduct a remedial investigation, removal or other response action pursuant to any Environmental Law and which has not heretofore been resolved or from which the Company or its Subsidiaries have not heretofore been dismissed; or (iii) that it is currently a named party to any claim, action, cause of action, complaint, or legal or administrative proceeding (in each case, contingent or otherwise) arising out of any third party's incurrence of costs, expenses, losses or damages of any kind whatsoever in connection with the release of Hazardous Substances and which would be reasonably likely to have a material adverse effect on the business, assets or financial condition of the Company and its Subsidiaries taken as a whole; and (c) in the conduct of its business by the Company and its Subsidiaries, the Company or its Subsidiaries have exercised reasonable diligence in taking appropriate measures so that no Hazardous Substances are generated, stored, used or disposed of except in material compliance with applicable Environmental Laws. 5.17. NONRECOURSE INDEBTEDNESS. Schedule 5.17 sets forth, as of June ------------------------ 30, 1997, the aggregate outstanding amount on a consolidated basis of the Nonrecourse Debt. SECTION 6. CONDITIONS PRECEDENT -------------------- 6.1. CONDITIONS OF INITIAL LOAN. The obligation of the Banks to make -------------------------- Loans hereunder on the first Borrowing Date is subject to the satisfaction of the following conditions precedent: (a) Loan Documents. This Agreement shall have been duly executed and delivered to the Administrative Agent by the respective parties and shall be in full force and effect. The Administrative Agent shall have received each of the Notes, conforming to the requirements hereof and executed by a duly authorized officer of the Company. (b) Legal Opinion. The Banks shall have received an opinion addressed to the Administrative Agent and the Banks of Weil, Gotshal & Manges LLP, counsel to the Company, dated the first Borrowing Date, substantially in the form of Exhibit C. Such opinion shall also cover such other matters incident to the transactions contemplated by this Agreement as the Administrative Agent shall reasonably require. (c) Payment of Existing Notes, Etc. The Administrative Agent shall have received evidence in form and substance satisfactory to it that the principal of and interest on the notes and all other obligations and 28 liabilities of the Company under the credit agreements listed on Schedule 4.1 shall have been paid in full or discharged; and each of the Banks holding notes of the Company evidencing Indebtedness to be paid off listed on Schedule 4.1 shall have returned such notes to the Company or other arrangements satisfactory to the Company have been made with respect thereto. (d) Officer's Certificate. The Administrative Agent shall have received an Officer's Certificate dated the first Borrowing Date, substantially in the form of Exhibit D, with appropriate insertions and attachments satisfactory to the Administrative Agent and its counsel, executed by the Secretary or Assistant Secretary of the Company. (e) Additional Matters. All other documents and legal matters in connection with the transactions contemplated by this Agreement shall be satisfactory in form and substance to the Administrative Agent and its counsel. 6.2. CONDITIONS TO ALL LOANS. The obligation of the Banks to make any ----------------------- Loans to be made by them hereunder (including the initial Loans) is subject to the satisfaction of the following conditions precedent on the relevant Borrowing Date: (a) Representations and Warranties. The representations and warranties contained in Section 5 shall be correct on and as of the Borrowing Date for such Loan with the same effect as if made on and as of such date. (b) No Existing Default. No Default, Event of Default or Terminating Event shall have occurred and be continuing hereunder on the Borrowing Date with respect to such Loan or after giving effect to the Loans to be made on such Borrowing Date. Each borrowing by the Company hereunder shall constitute a representation and warranty by the Company hereunder as of the date of each such borrowing that the conditions in clauses (a) and (b) of this Subsection applicable thereto have been satisfied. SECTION 7. AFFIRMATIVE COVENANTS --------------------- The Company hereby agrees that, so long as the Commitment remains in effect, any Note remains outstanding and unpaid or any other amount is owing to any of the Banks hereunder, the Company shall, and in the case of the agreements set forth in Subsections 7.3, 7.4, 7.5, and 7.6 shall cause each of its Subsidiaries to: 7.1. FINANCIAL STATEMENTS. Furnish to each of the Banks: -------------------- (a) as soon as available, but in any event within one hundred days after the end of each fiscal year of the Company, a copy of (i) the consolidated balance sheet of the Company and its consolidated Subsidiaries as at the end of such year and the related consolidated statements of income, statements of change in shareholder equity and statements of cash flows for such year, setting forth in each case in comparative form the figures for the previous year, certified, without a going concern or like qualification or exception arising out of the scope of the audit, by independent certified public accountants of nationally recognized standing not unacceptable to the 29 Administrative Agent, (ii) the consolidating balance sheet of the Company and its consolidated Subsidiaries as at the end of such fiscal year and the related consolidating statements of income for such fiscal year, showing in each case inter-company eliminations, certified by a Responsible Officer as being fairly stated in all material respects when considered in relation to the consolidated financial statements of the Company and its consolidated Subsidiaries taken as a whole; and (b) as soon as available, but in any event not later than fifty-five days after the end of each of the first three quarterly periods of each fiscal year of the Company, (i) the Company's quarterly report to shareholders on Form 10-Q, as filed with the Securities and Exchange Commission, certified by a Responsible Officer as being fairly stated in all material respects (subject to normal year-end audit adjustments) and (ii) the consolidating balance sheet of the Company and its Subsidiaries as at the end of each such quarter, showing inter-company eliminations, and the related consolidating statements of income, showing inter-company eliminations, certified by a Responsible Officer as being fairly stated in all material respects; all such financial statements to be prepared in accordance with GAAP applied consistently throughout the periods reflected therein except as approved by such accountants or Responsible Officer, as the case may be, and disclosed therein. 7.2. CERTIFICATES; OTHER INFORMATION. Furnish to each of the Banks: ------------------------------- (a) concurrently with the delivery of the financial statements referred to in Subsection 7.1(a) above, a certificate of the independent certified public accountants certifying such financial statements stating that in making the examination necessary therefor no knowledge was obtained of any Default or Event of Default, except as specified in such certificate; (b) concurrently with the delivery of the financial statements referred to in Subsections 7.1(a) and (b) above, a certificate of a Responsible Officer (i) stating that, to the best of such officer's knowledge, the Company during such period has observed or performed all of its covenants and other agreements, and satisfied every condition contained in this Agreement and in the Notes to be observed, performed or satisfied by it, and that such officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate, and (ii) showing in detail the calculations supporting such statement in respect of Subsections 8.1, 8.2, 8.3, 8.7, and 8.8; (c) within ten days after the same are sent, copies of all financial statements and reports which the Company sends to its stockholders, and within ten days after the same are filed, copies of all financial statements and reports which the Company may make to, or file with, the Securities and Exchange Commission or any successor or analogous Governmental Authority; (d) as soon as available, but in any event within thirty days after filing with the appropriate insurance department, the annual statements for each Insurance Subsidiary as filed with the insurance department in its state of domicile, provided that the Company shall deliver one copy 30 thereof to the Administrative Agent who shall make such copy available upon request to the Banks, and upon request by any Bank the Company shall deliver additional copies thereof to such Bank; and (e) promptly, any such additional financial and other information as the Administrative Agent or any Bank may from time to time reasonably request. 7.3. PAYMENT OF OBLIGATIONS. Pay, discharge or otherwise satisfy at or ---------------------- before maturity or before they become delinquent, as the case may be, all its Indebtedness and other obligations of whatever nature, except (a) when the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of the Company or its Subsidiaries, as the case may be, or (b) where the failure so to pay, discharge or satisfy would not be reasonably likely to have a material adverse effect on the business, operations, property or financial or other condition of the Company and its Subsidiaries taken as a whole; provided that for purposes of this Subsection 7.3, the term "Indebtedness" shall not include any Nonrecourse Debt. 7.4. CONDUCT OF BUSINESS, AND MAINTENANCE OF EXISTENCE. (a) Continue to ------------------------------------------------- engage in business of the same general type as now conducted by it, and preserve, renew and keep in full force and effect its corporate existence and take all reasonable action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business, provided, however, that a Permitted Distribution shall not be prohibited or limited by this Subsection 7.4 and further provided that, subject to Section 8 hereof, this Subsection 7.4 shall not prohibit the Company or any Subsidiary from taking any action if such action would not reasonably be likely to have a material adverse effect upon the business, operations, property or financial or other condition of the Company and its Subsidiaries taken as a whole; and (b) comply with all Contractual Obligations and Requirements of Law except to the extent that the failure to comply therewith would not be reasonably likely to, in the aggregate, have a material adverse effect on the business, operations, property or financial or other condition of the Company and its Subsidiaries taken as a whole. 7.5. MAINTENANCE OF PROPERTY, INSURANCE. Keep all property useful and ---------------------------------- necessary in its business in good working order and condition, except where the failure to comply herewith would not be reasonably likely to have a material adverse effect on the business, operations, property, or financial or other condition of the Company and its Subsidiaries taken as a whole; to the extent obtainable on terms which its management deems reasonable, maintain with financially sound and reputable insurance companies insurance on all its property against such casualties and contingencies and in such types and amounts as, in the judgment of its executive officers, is deemed adequate; and furnish to the Administrative Agent, upon written request, full information as to the insurance carried. 7.6. INSPECTION OF PROPERTY; BOOKS AND RECORDS; DISCUSSIONS. Keep ------------------------------------------------------ proper books of record and account in which entries, which are accurate and complete in all material respects, in conformity with GAAP and Requirements of Law shall be made of all dealings and transactions in relation to its business and activities; and permit the Banks, through the Administrative Agent or any of 31 their designated representatives, to visit and inspect any of its properties and examine and make abstracts from any of its books and records at any reasonable time and as often as may reasonably be desired, and to discuss the business, investments, operations, properties and financial and other condition of the Company and its Subsidiaries with officers and employees of the Company and its Subsidiaries and with its independent certified public accountants. 7.7. NOTICES. Promptly give notice in writing to each of the Banks: ------- (a) of the occurrence of any Default, Terminating Event or Event of Default; (b) of any (i) default or event of default under any Contractual Obligation of the Company or any of its Subsidiaries or (ii) litigation, investigation or proceeding which may exist at any time between the Company or any of its Subsidiaries and any Governmental Authority, which in either case would be reasonably likely to have a material adverse effect on the business, operations, property or financial or other condition of the Company and its Subsidiaries taken as a whole; (c) of any litigation or proceeding affecting the Company or any of its Subsidiaries in which the relief sought is $30,000,000 or more and not covered by insurance, or in which injunctive or similar relief is sought and, if granted, would be reasonably likely to have a material adverse effect on the business, assets, operations, financial or other condition of the Company and its Subsidiaries taken as a whole; (d) of the following events, as soon as possible and in any event within 30 days after the Company knows or has reason to know thereof: (i) the occurrence or expected occurrence of any Reportable Event with respect to any Plan, or (ii) the institution of proceedings or the taking or expected taking of any other action by PBGC or the Company or any Commonly Controlled Entity to terminate, withdraw or partially withdraw from any Plan and with respect to a Multiemployer Plan, the reorganization or insolvency of the Plan, and in addition to such notice, deliver to each of the Banks whichever of the following may be applicable: (A) a certificate of a Responsible Officer of the Company setting forth details as to such Reportable Event and the action that the Company or Commonly Controlled Entity proposes to take with respect thereto, together with a copy of any notice of such Reportable Event that may be required to be filed with PBGC, or (B) any notice delivered by PBGC evidencing its intent to institute such proceedings or any notice to PBGC that such Plan is to be terminated, as the case may be; and (e) of a material adverse change in the business, operations, property or financial or other condition of the Company, or the Company and its Subsidiaries taken as a whole. Each notice pursuant to this subsection shall be accompanied by a statement of a Responsible Officer of the Company setting forth details of the occurrence referred to therein and stating what action the Company proposes to take with respect thereto. For all purposes of clause (d) of this subsection, the Company shall be deemed to have all knowledge of all facts attributable to the administrator of such Plan. 32 SECTION 8. NEGATIVE COVENANTS ------------------ The Company hereby agrees that, so long as the Commitment of any Bank remains in effect, any Note remains outstanding and unpaid or any other amount is owing to any Bank hereunder: 8.1. TOTAL LIQUID ASSETS RATIO. At the end of any calendar quarter, the ------------------------- Company will not permit the ratio of (a) Total Liquid Assets to (b) the sum of (i) the principal of all outstanding consolidated Indebtedness due within twelve months (excluding, with respect to any calculation date within twelve months of the Termination Date, principal becoming due under this Agreement on the Termination Date, and further excluding Indebtedness of the Company's Banking Subsidiaries), and (ii) interest accruing within the next twelve months on all outstanding consolidated Indebtedness determined on a pro forma basis based on the interest rate or rates on such debt in effect on the calculation date, to be less than 1 to 1. 8.2. MAINTENANCE OF CONSOLIDATED TANGIBLE NET WORTH. At any time during ---------------------------------------------- each fiscal year or portion thereof commencing on the date hereof the Company will not permit Consolidated Tangible Net Worth to be less than an amount equal to the sum of (i) $800,000,000 (the "Baseline Amount"), plus (ii) an amount equal to the sum of 40% of the Consolidated Net Income of the Company and its Subsidiaries (as determined in accordance with GAAP) for each prior full calendar year commencing after December 31, 1997 (provided (A) that the amount determined pursuant to clause (ii) shall be equal to zero for any calendar year for which there is a net loss and (B) that the amounts included in net income (determined in accordance with GAAP) resulting from changes in accounting principles to the extent that such changes increase intangibles shall not be included in net income for purposes of this Subsection). 8.3. DEBT LEVERAGE RATIO. The Company will not at any time permit the ------------------- ratio of (a) Funded Debt to (b) the sum of (x) Shareholders' Equity and (y) Funded Debt to exceed 0.6 to 1.0. 8.4. LIMITATIONS ON LIENS. The Company will not, nor shall it permit -------------------- any Subsidiary to, at any time directly or indirectly create, incur, assume or suffer to exist, any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, other than the following ("Permitted Liens"): (a) Liens for taxes not yet due or which are being contested in good faith and by appropriate proceedings if adequate reserves with respect thereto are maintained on the books of the Company or its Subsidiaries, as the case may be, in accordance with GAAP; (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 30 days or which are being contested in good faith and by appropriate proceedings; 33 (c) pledges or deposits in connection with workmen's compensation, unemployment insurance and other social security legislation; (d) pledges or deposits to secure the performance of bids, trade contracts (other than for borrowed money), option agreements (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (e) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the business of the Company or its Subsidiaries; (f) Liens described in Schedule 8.4; (g) Liens on assets owned by the Company or any Subsidiary securing an amount not to exceed (i) $315,000,000 in the aggregate for all such assets or (ii) $200,000,000 in the aggregate for Liens imposed in connection with any single transaction or related series of transactions, provided that the aggregate book value of all assets securing such Liens shall not exceed 200% of the aggregate amounts secured thereby; (h) pledges or deposits effected by the Company or any Insurance Subsidiary as a condition to obtaining or maintaining any license, permit or authorization to transact insurance or reinsurance business; (i) deposits with insurance regulatory authorities; (j) Liens arising under ceding reinsurance agreements entered into by any Insurance Subsidiary; and (k) Liens on cash and/or securities deposited with The Chase Manhattan Bank ("Chase") as collateral for the standby letter of credit referred to in Section 8.7 pursuant to the Collateral Agreement dated as of October __, 1997 between Chase and the Company. 8.5. PROHIBITION OF FUNDAMENTAL CHANGES. The Company will not, nor will ---------------------------------- it permit any Subsidiary to, at any time enter into any transaction of merger or consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or substantially all of its business or assets, except that: (a) any Subsidiary of the Company may be merged or consolidated with or into the Company (provided, that, the Company shall be the continuing or surviving corporation) or with any one or more Subsidiaries of the Company; 34 (b) the Company or any Subsidiary may sell, lease, transfer or otherwise dispose of any or all of its assets (upon voluntary liquidation or otherwise) to the Company or any Subsidiary; (c) the Company may, or may permit a Subsidiary to, liquidate, sell or dispose of all or substantially all of a Subsidiary's business or assets at any time, provided that (i) the book value of the Subsidiary business or assets being liquidated, sold or disposed of shall not exceed 10% of the then Consolidated Tangible Net Worth of the Company, and (ii) no Default or Event of Default then exists or shall exist after giving effect to such liquidation, sale or disposition; (d) for purposes of this Subsection, a Permitted Distribution shall not constitute a transfer or disposition of all or substantially all of the Company's business or assets; and (e) a Permitted Voluntary Proceeding shall not be prohibited by this Subsection. 8.6. INVESTMENTS. The Company will not nor will it permit any ----------- Subsidiary to make or commit to make any Investment in a single Person, other than an Investment in any Governmental Authority of the United States of America, in an aggregate amount exceeding the then Consolidated Tangible Net Worth of the Company. 8.7. LIMITATION ON CONTINGENT OBLIGATIONS. The Company will not, nor ------------------------------------ will it permit any Subsidiary to, create, incur, assume, guarantee, endorse or otherwise in any way be or become responsible or liable for, directly or indirectly, or suffer to exist Contingent Obligations in an aggregate amount for the Company and its Subsidiaries in excess of $200,000,000; provided, that such amount shall not include the F&H Guaranty or the reimbursement obligation of the Company in respect of a standby letter of credit issued by Chase for the benefit of General Electric Capital Corporation in an aggregate maximum face amount of up to $100,000,000; and provided, further, that as of any time of determination under this Subsection 8.7, if the aggregate amount of any then outstanding Contingent Obligations of the Company and/or any Subsidiary would be permitted under Subsection 8.3 hereof had the amount of such Contingent Obligations been incurred as Funded Debt, then for the purposes of this Subsection 8.7, only 50% of the amount of such Contingent Obligations shall be counted towards the $200,000,000 limitation. 8.8. LIMITATION ON SUBSIDIARY INDEBTEDNESS. At the end of any calendar ------------------------------------- quarter commencing December 31, 1997, the Company will not permit the aggregate Indebtedness of all of the Company's consolidated Subsidiaries to be greater than 25% of Consolidated Tangible Net Worth at such date; provided that, for purpose of this Subsection, Indebtedness of a Subsidiary shall not include: (i) any Indebtedness outstanding at December 31, 1996; (ii) any Indebtedness secured by Permitted Liens ; (iii) any Indebtedness of the Company's Banking Subsidiaries; 35 (iv) Indebtedness of any Subsidiary the ownership of which is acquired by the Company, directly or indirectly, after the date hereof, or which is established by the Company after the date hereof for the purpose of acquiring assets or equity of any Person not owned, directly or indirectly, by the Company on the date hereof; provided, that, such Indebtedness is not guarantied by, is not secured by assets (other than assets of such Subsidiary) of, and does not otherwise have recourse to the Company or its assets (other than the assets of such Subsidiary); and (v) any Indebtedness of a Subsidiary to another Subsidiary or to the Company. SECTION 9. EVENTS OF DEFAULT ----------------- Upon the occurrence of any of the following events: (a) The Company shall fail to pay any principal of the Notes when due in accordance with the terms thereof or hereof; or (b) The Company shall fail to pay any interest on the Notes, any Commitment Fees, agents' fees or other sums due hereunder or under the Notes, when the same become due in accordance with the terms thereof or hereof, and such default shall continue unremedied for a period of five Business Days; or (c) Any representation or warranty made or deemed made by the Company herein or which is contained in any certificate, document or financial or other statement furnished at any time under or in connection with this Agreement shall prove to have been incorrect in any material respect on or as of the date made or deemed made; or (d) The Company shall default in the observance or performance of any agreement contained in Sections 7.4, 7.7 or 8; or (e) The Company shall default in the observance or performance of any other agreement contained in this Agreement, and such default shall continue unremedied for a period of 30 days; or (f) The Company or any of its Subsidiaries shall (i) default in any payment of principal of or interest on any Indebtedness (other than the Notes and other than any Nonrecourse Debt) or in the payment of any Contingent Obligation, in any case having a principal amount exceeding $30,000,000 or in the aggregate having a principal amount exceeding $50,000,000, in either case beyond the period of grace (not to exceed 30 days), if any, provided in the instrument or agreement under which such Indebtedness or Contingent Obligation was created; or (ii) default in the observance or performance of any other agreement or condition relating to any such Indebtedness or Contingent Obligation or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall 36 occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness or beneficiary or beneficiaries of such Contingent Obligation (or a trustee or Administrative Agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity or such Contingent Obligation to become payable, provided, however, that if any such default shall occur in respect of the TRUPS, no Event of Default under this ss.9(f) shall be deemed to have occurred (x) so long as no acceleration of payment obligations in respect of the TRUPS shall have been declared in accordance with the governing provisions thereof, or (y) if such acceleration shall have been declared, so long as the existence of such default shall be contested in good faith by appropriate legal proceedings by the Company and/or the issuer of the TRUPS and the enforcement of such acceleration shall be judicially stayed pending final judgment or settlement. (g)(i) The Company or any Subsidiary shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, rehabilitation, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts (and except for the commencement of a Permitted Voluntary Proceeding), or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or the Company or any Subsidiary shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against the Company or any Subsidiary any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of 60 days; or (iii) there shall be commenced against the Company or any Subsidiary any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) the Company or any Subsidiary shall have taken any action indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii) or (iii) above; or (v) the Company or any Subsidiary shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or (h)(i) Any Person shall engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or institution of proceedings is, in the reasonable opinion of the Administrative Agent, likely to result in the termination of such Plan for purposes of Title IV of ERISA, and, in the case of a Reportable Event, the continuance of such Reportable Event unremedied for ten days after notice of such Reportable Event pursuant to Section 4043(a), (c) or (d) of ERISA is given or the continuance of such proceedings for ten days after commencement thereof, as the case may be, 37 (iv) any Single Employer Plan shall terminate for purposes of Title V of ERISA, or (v) any other event or condition shall occur or exist with respect to a Single Employer Plan; and in each case in clauses (i) through (v) above, such event or condition, together with all other such events or conditions, if any, could subject the Company or any of its Subsidiaries to any tax, penalty or other liabilities which are, in the aggregate, material in relation to the business, operations, property or financial or other conditions of the Company and its Subsidiaries taken as a whole; or (i) One or more judgments or decrees shall be entered against the Company or any of its Subsidiaries involving in the aggregate a liability (not paid or fully covered by insurance) of $30,000,000 or more and all such judgments or decrees shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; then, and in any such event, (A) if such event is an Event of Default specified in clauses (i), (ii) or (iv) of paragraph (g) above, automatically the Commitment shall immediately terminate and the Loan or Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement and the Notes shall immediately become due and payable, and (B) if such event is any other Event of Default, either or both of the following actions may be taken: (I) the Administrative Agent may, and upon the request of the Majority Banks shall, by notice of default to the Company, declare the Commitment to be terminated forthwith whereupon the Commitment shall immediately terminate; and (II) the Administrative Agent may, and upon the request of the Majority Banks shall, by notice of default to the Company, declare the Loan or Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement and the Notes to be due and payable forthwith, whereupon the same shall immediately become due and payable. Except as expressly provided above in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived. SECTION 10. THE AGENTS ---------- 10.1. AUTHORIZATION. ------------- (a) Each Bank hereby irrevocably designates and appoints BankBoston, N.A. as the Administrative Agent, Bank of America National Trust and Savings Association as the Documentation Agent, and The Chase Manhattan Bank as the Syndication Agent under this Agreement and irrevocably authorizes said agents for such Bank to take such action on its behalf under the provisions of this Agreement and to exercise such powers and perform such duties as are expressly delegated to said agents by the terms of this Agreement together with such other powers as are reasonably incident thereto, provided that no duties or responsibilities not expressly assumed herein or therein shall be implied to have been assumed by said agents. (b) The relationship between the Administrative Agent, the Documentation Agent and the Syndication Agent and each of the Banks is that of an independent contractor. The use of the term "Agent" is for convenience only and is used to describe, as a form of convention, the independent contractual relationship between the respective party and each of the Banks. Nothing contained in this Agreement shall be construed to create an agency (except to the extent of the specific contractual obligations of the Administrative Agent hereunder), trust or other fiduciary relationship between any of the Administrative Agent, the Documentation Agent or the Syndication Agent and any of the Banks. 38 10.2. EMPLOYEES AND AGENTS. The Administrative Agent may exercise its -------------------- powers and execute its duties by or through employees or agents and shall be entitled to take, and to rely on, advice of counsel concerning all matters pertaining to its rights and duties under this Agreement. The Administrative Agent may utilize the services of such Persons as the Administrative Agent in its sole discretion may reasonably determine, and all reasonable fees and expenses of any such Persons shall be paid by the Company. 10.3. NO LIABILITY. Neither the Administrative Agent nor any of its ------------ shareholders, directors, officers or employees nor any other Person assisting them in their duties nor any Administrative Agent or employee thereof, shall be liable for any waiver, consent or approval given or any action taken, or omitted to be taken, in good faith by it or them hereunder, or in connection herewith, or be responsible for the consequences of any oversight or error of judgment whatsoever, except that the Administrative Agent or such other Person, as the case may be, may be liable for losses due to its willful misconduct or gross negligence. 10.4. NO REPRESENTATIONS. The Administrative Agent shall not be ------------------ responsible for the execution or validity or enforceability of this Agreement, the Notes, or for any recitals or statements, warranties or representations made herein or in any certificate or instrument hereafter furnished to it by or on behalf of the Company or any of its Subsidiaries, or be bound to ascertain or inquire as to the performance or observance of any of the terms, conditions, covenants or agreements herein or in any books or records of the Company or any of its Subsidiaries. The Administrative Agent shall not be bound to ascertain whether any notice, consent, waiver or request delivered to it by the Company or any holder of any of the Notes shall have been duly authorized or is true, accurate and complete. The Administrative Agent has not made nor does it now make any representations or warranties, express or implied, nor does it assume any liability to the Banks, with respect to the credit worthiness or financial conditions of the Company or any of its Subsidiaries. Each Bank acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Bank, and based upon such information and documents as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. 10.5. PAYMENTS. -------- (a) Payments to Administrative Agent. A payment by the Company to the Administrative Agent hereunder for the account of any Bank shall constitute a payment to such Bank. The Administrative Agent agrees promptly to distribute to each Bank such Bank's pro rata share of payments received by the Administrative Agent for the account of the Banks except as otherwise expressly provided herein. (b) Distribution by Administrative Agent. If in the opinion of the Administrative Agent the distribution of any amount received by it in such capacity hereunder or under the Notes might involve it in liability, it may refrain from making distribution until its right to make distribution shall have been adjudicated by a court of competent jurisdiction. If a court of competent 39 jurisdiction shall adjudge that any amount received and distributed by the Administrative Agent is to be repaid, each Person to whom any such distribution shall have been made shall either repay to the Administrative Agent its proportionate share of the amount so adjudged to be repaid or shall pay over the same in such manner and to such Persons as shall be determined by such court. (c) Delinquent Banks. Notwithstanding anything to the contrary contained in this Agreement, any Bank that fails to make available to the Administrative Agent its pro rata share of any Loan, or fails to make available to the Swing Line Bank its pro rata share of any Swing Line Loan, when and to the full extent required by the provisions of this Agreement, shall be deemed a Delinquent Bank and shall be deemed a Delinquent Bank until such time as such delinquency is satisfied. A Delinquent Bank shall be deemed to have assigned any and all payments due to it from the Company to the remaining nondelinquent Banks for application to, and reduction of, their respective pro rata shares of all outstanding Loans. The Delinquent Bank hereby authorizes the Administrative Agent to distribute such payments to the nondelinquent Banks in proportion to their respective pro rata shares of all outstanding Loans. A Delinquent Bank shall be deemed to have satisfied in full a delinquency when and if, as a result of application of the assigned payments to all outstanding Loans of the nondelinquent Banks, the Banks' respective pro rata shares of all outstanding Loans have returned to those in effect immediately prior to such delinquency and without giving effect to the nonpayment causing such delinquency. 10.6. HOLDERS OF NOTES. The Administrative Agent may deem and treat the ---------------- payee of any Note as the absolute owner or purchaser thereof for all purposes hereof until it shall have been furnished in writing with a different name by such payee or by a subsequent holder, assignee or transferee. 10.7. INDEMNITY. The Banks ratably agree hereby to indemnify and hold --------- harmless the Administrative Agent from and against any and all claims, actions and suits (whether groundless or otherwise), losses, damages, costs, expenses (including without limitation, any expenses for which the Administrative Agent has not been reimbursed by the Company as required by Subsection 10.5 hereof), and liabilities of every nature and character arising out of or related to this Agreement, the Notes, or the transactions contemplated or evidenced hereby, or the Administrative Agent's actions taken hereunder, except to the extent that any of the same shall be caused by the Administrative Agent's willful misconduct or gross negligence. 10.8. ADMINISTRATIVE AGENT AS BANK. In its individual capacity, ---------------------------- BankBoston, N.A. shall have the same obligations and the same rights, powers and privileges in respect to its Commitment and the Loans made by it, and as the holder of any of the Notes, as it would have were it not also the Administrative Agent. 10.9. RESIGNATION. The Administrative Agent may resign at any time by ----------- giving sixty (60) days prior written notice thereof to the Banks and the Company. Upon any such resignation, the Majority Banks shall have the right to appoint a successor Administrative Agent. Unless a Default or Event of Default shall have occurred and be continuing, such successor Administrative Agent shall be reasonably acceptable to the Company. If no successor Administrative Agent shall have been so appointed by the Majority Banks and shall have accepted such appointment within thirty (30) days after the retiring Administrative Agent's 40 giving of notice of resignation, then the retiring Administrative Agent may, on behalf of the Banks, appoint a successor Administrative Agent, which shall be a financial institution having a rating of not less than A or its equivalent by Standard & Poor's Corporation. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After any retiring Administrative Agent's resignation, the provisions of this Agreement shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Administrative Agent. 10.10. NOTIFICATION OF DEFAULTS AND EVENTS OF DEFAULT. Each Bank hereby ---------------------------------------------- agrees that, upon learning of the existence of a Default or an Event of Default, it shall promptly notify the Administrative Agent thereof. The Administrative Agent hereby agrees that upon receipt of any notice under this Subsection it shall promptly notify the other Banks of the existence of such Default or Event of Default. SECTION 11. ASSIGNMENT AND PARTICIPATION ---------------------------- 11.1. CONDITIONS TO ASSIGNMENT BY BANKS. Except as provided herein, --------------------------------- each Bank may assign to one or more Eligible Assignees all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of its Commitment Percentage and Commitment and the same portion of the Loans at the time owing to it and the Notes held by it); provided that (i) each of the Administrative Agent and, unless (x) a Default or Event of Default shall have occurred and be continuing or (y) the Assignee is an Affiliate of the assigning Bank, the Company shall have given its prior written consent to such assignment, which consent will not be unreasonably withheld, (ii) each such assignment shall be of a constant, and not a varying, percentage of all the assigning Bank's rights and obligations under this Agreement, (iii) each assignment shall be in an amount that is a whole multiple of $10,000,000, (iv) the parties to such assignment shall execute and deliver to the Administrative Agent, for recording in the Register, an Assignment and Acceptance, substantially in the form of Exhibit E hereto (an "Assignment and Acceptance"), together with any Notes subject to such assignment, and (v) the Company shall not, at the time of such assignment, incur any additional expenses solely as a result of such assignment other than as contemplated under Subsection 11.4 hereof. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five (5) Business Days after the execution thereof, (i) the assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Bank hereunder, and (ii) the assigning Bank shall, to the extent provided in such assignment and upon payment to the Administrative Agent of the registration fee referred to in Subsection 11.3, be released from its obligations under this Agreement. 11.2. CERTAIN REPRESENTATIONS AND WARRANTIES; LIMITATIONS; COVENANTS. -------------------------------------------------------------- By executing and delivering an Assignment and Acceptance, the parties to the assignment thereunder confirm to and agree with each other and the other parties hereto as follows: 41 (a) other than the representation and warranty that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim, the assigning Bank makes no representation or warranty, express or implied, and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; (b) the assigning Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Company and its Subsidiaries, or the performance or observance by the Company and its Subsidiaries of any of their obligations under this Agreement or any other instrument or document furnished pursuant hereto or thereto; (c) such assignee confirms that it has received a copy of this Agreement, together with copies of the most recent financial statements referred to herein and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (d) such assignee will, independently and without reliance upon the assigning Bank, the Administrative Agent or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (e) such assignee represents and warrants that it is an Eligible Assignee; (f) such assignee appoints and authorizes the Administrative Agent to take such action as Administrative Agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental thereto; (g) such assignee agrees that it will perform all of the obligations that by the terms of this Agreement are required to be performed by it as a Bank; (h) such assignee represents and warrants that it is legally authorized to enter into such Assignment and Acceptance. 11.3. REGISTER. The Administrative Agent shall maintain a copy of each -------- Assignment and Acceptance delivered to it and a register or similar list (the "Register") for the recordation of the names and addresses of the Banks and the Commitment Percentage of, and principal amount of the Loans owing to the Banks from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Company, the Administrative Agent and the Banks may treat each Person whose name is recorded in the Register as a Bank hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Company and the Banks at any reasonable time and from time to time upon reasonable prior notice. Upon each such recordation, the assigning Bank agrees to pay to the Administrative Agent a registration fee in the sum of $2,500. 42 11.4. NEW NOTES. Upon its receipt of an Assignment and Acceptance --------- executed by the parties to such assignment, together with each Note subject to such assignment, the Administrative Agent shall (i) record the information contained therein in the Register, and (ii) give prompt notice thereof to the Company and the Banks (other than the assigning Bank). Within five (5) Business Days after receipt of such notice, the Company, at its own expense, shall execute and deliver to the Administrative Agent, in exchange for each surrendered Note, a new Note to the order of such Eligible Assignee in an amount equal to the amount assumed by such Eligible Assignee pursuant to such Assignment and Acceptance and, if the assigning Bank has retained some portion of its obligations hereunder, a new Note to the order of the assigning Bank in an amount equal to the amount retained by it hereunder. Such new Notes shall provide that they are replacements for the surrendered Notes, shall be in an aggregate principal amount equal to the aggregate principal amount of the surrendered Notes, shall be dated the effective date of such in Assignment and Acceptance and shall otherwise be substantially the form of the assigned Notes. The surrendered Notes shall be cancelled and returned to the Company. 11.5. PARTICIPATIONS. Each Bank may sell participations to one or more -------------- banks or other entities (any such entity, a "Participant" in all or a portion of such Bank's rights and obligations under this Agreement; provided that (i) each such participation shall be in an amount of not less than $10,000,000, (ii) any such sale or participation shall not affect the rights and duties of the selling Bank hereunder to the Company, (iii) the only rights granted to the Participant pursuant to such participation arrangements with respect to waivers, amendments or modifications of this Agreement shall be the rights to approve waivers, amendments or modifications that would reduce the principal of or the interest rate on any Loans, extend the term or increase the amount of the Commitment of such Bank as it relates to such Participant, reduce the amount of any Annual Fees or Commitment Fees to which such Participant is entitled or extend any regularly scheduled payment date for principal or interest and (iv) the Company shall not, at the time of such transfer of a participation interest, incur any additional expenses solely as a result of such transfer. The Company agrees that each Participant may, subject to the provisions of this Agreement, exercise all rights of payment with respect to the portion of such Loans held by it as fully as if such Participant were the direct holder thereof, and that each Participant shall be entitled to the benefits of Subsections 4.7, 4.9 and 4.10 (including without limitation, with respect to Subsection 4.10, that the covenants therein shall survive termination of this Agreement and payment of the Notes) with respect to its participation in any Eurodollar Loans; provided that such Participant complies with the provisions of such Subsections, and provided further that the Company shall not be obligated to pay to a Bank and its Participants collectively, in respect of such Subsections, any greater amount than the Company would be obligated to pay to such Bank had it not entered into any participations. 11.6. DISCLOSURE. The Company agrees that in addition to disclosures ---------- made in accordance with standard and customary banking practices any Bank may disclose information obtained by such Bank pursuant to this Agreement to Eligible Assignees or Participants and potential Eligible Assignees or Participants hereunder; provided that such Eligible Assignees or Participants or potential Eligible Assignees or Participants shall agree (i) to treat in 43 confidence such information unless such information otherwise becomes public knowledge, (ii) not to disclose such information to a third party, except as required by law or legal process and (iii) not to make use of such information for purposes of transactions unrelated to such contemplated assignment or participation. 11.7. ASSIGNEE OR PARTICIPANT AFFILIATED WITH THE COMPANY. If any --------------------------------------------------- assignee Bank is an Affiliate of the Company, then any such assignee Bank shall have no right to vote as a Bank hereunder for purposes of granting consents or waivers or for purposes of agreeing to amendments or other modifications to this Agreement, and the determination of the Majority Banks shall for all purposes of this Agreement be made without regard to such assignee Bank's interest in any of the Loans. If any Bank sells a participating interest in any of the Loans to a Participant, and such Participant is the Company or an Affiliate of the Company, then such transferor Bank shall promptly notify the Administrative Agent of the sale of such participation. A transferor Bank shall have no right to vote as a Bank hereunder for purposes of granting consents or waivers or for purposes of agreeing to amendments or modifications to this Agreement to the extent that such participation is beneficially owned by the Company or any Affiliate of the Company, and the determination of the Majority Banks shall for all purposes of this Agreement be made without regard to the interest of such transferor Bank in the Loans to the extent of such participation. 11.8. MISCELLANEOUS ASSIGNMENT PROVISIONS. Any assigning Bank shall ----------------------------------- retain its rights to be indemnified pursuant to Subsection 12.6 with respect to any claims or actions arising prior to the date of such assignment. If any assignee Bank is not incorporated under the laws of the United States of America or any state thereof, it shall, prior to the date on which any interest or fees are payable hereunder for its account, deliver to the Company and the Administrative Agent certification as to its exemption from deduction or withholding of any United States federal income taxes. Anything contained in this Subsection to the contrary notwithstanding, any Bank may at any time pledge all or any portion of its interest and rights under this Agreement (including all or any portion of its Notes) to any of the twelve Federal Reserve Banks organized under ss.4 of the Federal Reserve Act, 12 U.S.C. ss.341. No such pledge or the enforcement thereof shall release the pledgor Bank from its obligations hereunder. 11.9. ASSIGNMENT BY THE COMPANY. The Company shall not assign or ------------------------- transfer any of its rights or obligations under any of this Agreement without the prior written consent of each of the Banks. SECTION 12. MISCELLANEOUS ------------- 12.1. CONSENTS, AMENDMENTS AND WAIVERS. Any consent or approval -------------------------------- required or permitted by this Agreement to be given by all of the Banks may be given, and any term of this Agreement or any instrument related hereto may be amended, and the performance or observance by the Company or any of its Subsidiaries of any terms of this Agreement or the continuance of any Default or Event of Default may be waived (either generally or in a particular instance and either retroactively or prospectively) with, but only with, the written consent of the Company and the written consent of the Majority Banks. Notwithstanding the foregoing, the rate of interest on the Notes, the term of the Notes, the Total Commitment, the Commitment Percentage of any Bank, and the amount of the 44 Annual Fee and Commitment Fee hereunder may not be changed without the written consent of the Company and the written consent of each Bank affected thereby; the definition of Majority Banks may not be amended without the written consent of all of the Banks; and the amount of the agents' fees and Section 10 may not be amended without the written consent of the Administrative Agent and, if affected thereby, the Syndication Agent and/or Documentation Agent. No waiver shall extend to or affect any obligation not expressly waived or impair any right consequent thereon. No course of dealing or delay or omission on the part of the Administrative Agent or any Bank in exercising any right shall operate as a waiver thereof or otherwise be prejudicial thereto. No notice to or demand upon the Company shall entitle the Company to other or further notice or demand in similar or other circumstances. 12.2. NOTICES. All notices, requests and demands to or upon the ------- respective parties hereto to be effective shall be in writing and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered by hand, or when deposited in the mail, postage prepaid, or, if sent by telecopy, when received, addressed as follows or to such other address as may be hereafter notified by the respective parties hereto and any future holders of the Notes: The Company: Leucadia National Corporation 315 Park Avenue South New York, New York 10010 Attention: President Telecopy: 212-598-4869 with a copy to: Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, New York 10153 Attention: Stephen E. Jacobs, Esq. Telecopy: 212-310-8007 The Banks: BankBoston, N.A. 100 Federal Street Boston, Massachusetts 02110 Attention: Maura C. Wadlinger Telecopy: 617-434-6685 The Chase Manhattan Bank 380 Madison Avenue, 14th Floor New York, New York 10017-2591 Attention: Leonard D. Noll Telecopy: 212-622-4407 45 Bank of America National Trust and Savings Association 231 South LaSalle Street Chicago, Illinois 60697 Attention: Elizabeth W.F. Bishop Telecopy: 312-987-0889 Republic National Bank of New York 452 Fifth Avenue New York, New York 10018 Attention: Thomas DeGeorge Telecopy: 212-525-5676 U.S. Bank National Association First Bank Place, MPFP 0704 601 Second Avenue, South Minneapolis, Minnesota 55402-5302 Attention: Jose A. Peris Telecopy: 612-973-0832 Fleet National Bank 777 Main Street, MS CT MO 0367 Hartford, Connecticut 06115 Attention: Howard Carpenter Telecopy: 860-986-1264 National Bank of Canada 125 55th Street, 23rd Floor New York, New York 10019 Attention: Teresa Carrasco Telecopy: 212-632-8545 The Administrative Agent: BankBoston, N.A. 100 Federal Street Boston, Massachusetts 02110 Attention: Maura C. Wadlinger Telecopy: 617-434-6685 provided that any notice, request or demand to or upon the Administrative Agent pursuant to Subsections 2.3 or 3.2 shall be subject to the time restrictions stated in those Subsections. 46 12.3. NO WAIVER; CUMULATIVE REMEDIES. No failure to exercise and no ------------------------------ delay in exercising, on the part of the Administrative Agent or the Banks, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 12.4. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations ------------------------------------------ and warranties made hereunder and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the Notes. 12.5. PAYMENT OF EXPENSES. Subject to a Bank's compliance with ------------------- Subsection 4.10 hereof, the Company agrees to pay (a) the reasonable costs of producing and reproducing this Agreement, (b) any taxes (including any interest and penalties in respect thereto) payable by the Administrative Agent or any of the Banks (other than taxes based upon the Administrative Agent's or any Bank's net income) on or with respect to the transactions contemplated by this Agreement (the Company hereby agreeing to indemnify the Administrative Agent and each Bank with respect thereto), (c) the reasonable fees, expenses and disbursements of the Administrative Agent's counsel incurred in connection with the preparation, administration or interpretation of this Agreement, each closing hereunder, and amendments, modifications, approvals, consents or waivers hereto or hereunder, (d) the fees, expenses and disbursements of the Administrative Agent incurred by the Administrative Agent in connection with the preparation, administration or interpretation of this Agreement, and (e) all reasonable out-of-pocket expenses (including without limitation reasonable attorneys' fees and costs, which attorneys may be employees of any Bank or the Administrative Agent, and reasonable consulting, accounting, appraisal, investment banking and similar professional fees and charges) incurred by any Bank or the Administrative Agent in connection with (i) the enforcement of or preservation of rights under this Agreement against the Company or any of its Subsidiaries or the administration thereof after the occurrence of a Default or Event of Default and (ii) any litigation, proceeding or dispute whether arising hereunder or otherwise, in any way related to any Bank's or the Administrative Agent's relationship with the Company or any of its Subsidiaries. The agreements in this subsection shall survive repayment of the Notes and all other amounts payable hereunder. 12.6. INDEMNIFICATION. The Company agrees to indemnify and hold --------------- harmless the Administrative Agent and the Banks from and against any and all claims, actions and suits whether groundless or otherwise, and from and against any and all liabilities, losses, damages and expenses of every nature and character arising out of this Agreement or the transactions contemplated hereby including, without limitation, (i) any actual or proposed use by the Company or any of its Subsidiaries of the proceeds of any of the Loans, (ii) the Company or any of its Subsidiaries entering into or performing this Agreement or any of the other Loan Documents or (iii) with respect to the Company and its Subsidiaries and their respective properties and assets, the violation of any Environmental Law, the presence, disposal, escape, seepage, leakage, spillage, discharge, 47 emission, release or threatened release of any Hazardous Substances or any action, suit, proceeding or investigation brought or threatened with respect to any Hazardous Substances (including, but not limited to, claims with respect to wrongful death, personal injury or damage to property), in each case including, without limitation, the reasonable fees and disbursements of counsel and allocated costs of internal counsel incurred in connection with any such investigation, litigation or other proceeding. The Company shall have control of any such litigation and the Company shall pay the reasonable fees and expenses of one counsel to be selected jointly by the Administrative Agent and the Banks, which counsel shall be reasonably acceptable to the Company. If, and to the extent that the obligations of the Company under this subsection are unenforceable for any reason, the Company hereby agrees to make the maximum contribution to the payment in satisfaction of such obligations which is permissible under applicable law. The agreements in this subsection shall survive repayment of the Notes and all other amounts payable hereunder. 12.7. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and ---------------------- inure to the benefit of the Company, the Administrative Agent, the Banks, all future holders of the Notes and their respective successors and assigns, except that the Company may not assign or transfer any of its rights under this Agreement without the prior written consent of each of the Banks. 12.8. SET-OFF. In addition to any rights or remedies of the Banks ------- provided by law, each Bank shall have the right, without prior notice to the Company, any such notice being expressly waived by the Company to the extent permitted by applicable law, upon the acceleration of obligations under and in respect of this Agreement and the Notes pursuant to Section 9, the filing of a petition under any of the provisions of the federal bankruptcy act or amendments thereto, by or against the Company, the making of an assignment for the benefit of creditors by the Company, the application for the appointment, or the actual appointment, of any receiver of the Company, or of any of the property of the Company, the issuance of any execution against any of the property of the Company, the issuance of a subpoena or order, in supplementary proceedings, against or with respect to any of the property of the Company, or the issuance of a warrant of attachment against any of the property of the Company, to set-off and apply against any indebtedness, whether matured or unmatured of the Company to such Bank, any amount owing from such Bank to the Company at, or at any time after, the happening of any of the above mentioned events, and the aforesaid right of set-off may be exercised by such Bank against the Company or against any trustee in bankruptcy, debtor in possession, assignee for the benefit of creditors, receiver or execution, judgment or attachment creditor of the Company, the Company or such trustee in bankruptcy, debtor in possession, assignee for the benefit of creditors, receiver or execution, judgment or attachment creditor, notwithstanding the fact that such right of set-off shall not have been exercised by such Bank prior to the making, filing or issuance, or service upon such Bank (either directly or through the Administrative Agent) of, or of notice of, any such petition; assignment for the benefit of creditors; appointment or application for the appointment of a receiver; or issuance of execution, subpoena, order or warrant. Such Bank agrees promptly to notify the Company and the Administrative Agent after any such set-off and application made by the Bank, provided, that, the failure to give such notice shall not affect the validity of such set-off and application. Each Bank agrees with the other Banks that (i) if an amount to be set off is to be applied to Indebtedness of 48 the Company to a Bank, other than Indebtedness evidenced by the then outstanding Notes held by all of the Banks, such amount shall be applied ratably to such other Indebtedness and to the Indebtedness evidenced by all such Notes, and (ii) if a Bank shall receive from the Company, whether by voluntary payment, exercise of the right of set-off, counterclaim, cross action, enforcement of the claim evidenced by the Notes held by a Bank by proceeding against the Company at law or in equity or by proof thereof in bankruptcy, reorganization, liquidation, receivership or similar proceedings, or otherwise, and shall retain and apply to the payment of the Note or Notes held by a Bank any amount in excess of its ratable portion of the payments received by all of the Banks, such Bank will make such disposition and arrangements with the other Banks with respect to such excess, either by way of distribution, pro tanto assignment of claims, subrogation or otherwise as shall result in each Bank receiving in respect of the Notes held by it its proportionate payment as contemplated by this Agreement; provided, however, that if all or any part of such excess payment is thereafter recovered from such Bank, such disposition and arrangements shall be rescinded and the amount restored to the extent of such recovery, but without interest. 12.9. TERMINATION. This Agreement shall terminate in the event (I) Ian ----------- Cumming and Joseph Steinberg cease to own, directly or indirectly, 32% or more of the Voting Stock of the Company, provided, that Messrs. Cumming and/or Steinberg may cease to own, directly or indirectly, 32% or more of the Voting Stock of the Company if: (a) in the aggregate, they own, directly or indirectly, at least 23% of the outstanding Voting Stock, and (b)(i) if during the lifetime of Mr. Cumming or Mr. Steinberg, the aggregate Market Value of the Voting Stock owned by them, directly or indirectly, is at least $200,000,000 or (ii) if upon the death of either Mr. Cumming or Mr. Steinberg, the aggregate Market Value of the Voting Stock owned, directly or indirectly, by the survivor would be at least $100,000,000 or (II) either Mr. Cumming or Mr. Steinberg ceases to be a principal executive officer (which shall include the office of Chairman of the Board of Directors) of the Company. For purposes hereof, the term "owned, directly or indirectly" shall be deemed to include all Voting Stock received from Mr. Cumming or Mr. Steinberg by any member of their respective immediate families or by any trust for the benefit of either of them or any member of their respective immediate families (a "Recipient"), which Voting Stock is held by a Recipient during the lifetime of Mr. Cumming or Mr. Steinberg. In determining the number of outstanding Common Shares then held by Messrs. Cumming and Steinberg and the total number of outstanding Common Shares, there shall be excluded Common Shares issued by the Company after December 31, 1991, or the conversion into or exchange for, after December 31, 1991, Common Shares or securities convertible into or exchangeable for Common Shares. Such termination shall be immediate if it arises from any event other than the death or incapacity of either or both of Ian Cumming and Joseph Steinberg. If such termination shall arise from the death or incapacity of either or both of Ian Cumming and Joseph Steinberg such termination shall take effect 120 days after such event. Upon any such termination, the Company shall pay to the Administrative Agent for the accounts of the Banks all amounts owing under this Agreement and the Notes. No such termination shall affect any rights acquired by the Banks under this Agreement prior to or as a result of such termination. 12.10. COUNTERPARTS. This Agreement may be executed by one or more of ------------ the parties to this Agreement in any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 49 12.11. GOVERNING LAW. This Agreement and the Notes and the rights and ------------- obligations of the parties under this Agreement and the Notes shall be governed by, and construed and interpreted in accordance with, the laws (excluding the laws applicable to conflicts or choice of law) of the Commonwealth of Massachusetts. 12.12. EFFECTIVE DATE. This Agreement shall become effective only upon -------------- the occurrence of the following events (the earliest date upon which all such events have occurred being the "Effective Date"): (a) the closing of the sale of Colonial Penn Insurance Company and its subsidiaries contemplated between the Company and General Electric Capital Corporation and scheduled to occur on or about November 3, 1997; (b) payment in full by the Company to First Union of all amounts owing to First Union under the Prior Agreement; and (c) payment by the Company to the Banks of the aggregate principal amount outstanding under the Prior Agreement (after repayment of First Union as provided in paragraph (b) above) in excess of the Total Commitment of the Banks under this Agreement. 50 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. LEUCADIA NATIONAL CORPORATION By: Name: Title: BANKBOSTON, N.A., as Administrative Agent By: Name: Title: THE CHASE MANHATTAN BANK, as Syndication Agent By: Name: Title: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Documentation Agent By: Name: Title: BANKBOSTON, N.A. By: Name: Title: 51 THE CHASE MANHATTAN BANK By: Name: Title: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (successor by merger to Bank of America Illinois) By: Name: Title: REPUBLIC NATIONAL BANK OF NEW YORK By: Name: Title: U.S. BANK NATIONAL ASSOCIATION By: Name: Title: FLEET NATIONAL BANK By: Name: Title: 52 NATIONAL BANK OF CANADA By: Name: Title: By: Name: Title: 53 EX-10 4 EXHIBIT 10.16 Exhibit 10.16 PURCHASE AGREEMENT THIS PURCHASE AGREEMENT (this "Agreement") is made this 11th day of February, 1998, by and among Allstate Life Insurance Company, an Illinois insurance corporation ("Buyer"), Allstate Life Insurance Company of New York, a New York insurance company ("Buyer Subsidiary"), Charter National Life Insurance Company, a Missouri insurance company ("Charter"), Intramerica Life Insurance Company, a New York insurance company ("ILIC"), and Leucadia National Corporation, a New York corporation ("Leucadia" and, together with Charter and ILIC, the "Sellers"). RECITALS: -------- WHEREAS, Charter and ILIC are engaged in the business of underwriting, issuing and administering variable life insurance products, variable annuity products and certain other life insurance products (the "Business"); WHEREAS, CNL, Inc., a Missouri corporation and wholly owned subsidiary of Leucadia ("CNL"), acts as principal underwriter for Charter and ILIC in connection with the Business; WHEREAS, Sellers wish to sell to Buyer and Buyer Subsidiary, and Buyer and Buyer Subsidiary wish to purchase from Sellers, the Business effective as of January 1, 1998 (the "Effective Time") and Leucadia wishes to sell to Buyer, and Buyer wishes to purchase from Leucadia, all of the outstanding capital stock of CNL (collectively, the "Transaction"); WHEREAS, in connection with the Transaction, Charter desires to cede to Buyer, and Buyer desires to reinsure from Charter, all of Charter's rights, liabilities and obligations in respect of Charter's variable life insurance products, variable annuity products and certain other life insurance and annuity products identified in the Charter Coinsurance Agreement and the Charter Reinsurance Agreement (as such terms are defined below) (collectively, the "Charter Policies") effective as of the Effective Time; WHEREAS, in connection with the Transaction, ILIC desires to cede to Buyer Subsidiary, a wholly owned subsidiary of Buyer and Buyer Subsidiary desires to reinsure from ILIC, all of ILIC's rights, liabilities and obligations in respect of ILIC's variable annuity products identified in the ILIC Coinsurance Agreement (as such term is defined below) (the "ILIC Policies" and together with the Charter Policies, the "Policies") effective as of the Effective Time; WHEREAS, in connection with the Transaction, Leucadia desires to sell to Buyer, and Buyer desires to purchase from Leucadia, all of the issued and outstanding shares of common stock, no par value, of CNL (the "Common Stock"), all in accordance with the provisions of this Agreement; WHEREAS, in connection with the Transaction, the parties hereto desire that Buyer or Buyer Subsidiary, as appropriate, (i) pay all costs and expenses associated with the administration of the Business from the Effective Time through the Closing Date and (ii) assume and provide all support and administrative services relating to the Business effective from and after the Closing Date; WHEREAS, in connection with the Transaction, (i) Charter and Buyer intend to enter into the Charter Administrative Services Agreement (as defined in Section 6.1) and (ii) ILIC and Buyer Subsidiary intend to enter into the ILIC Administrative Services Agreement (as defined in Section 6.1); and WHEREAS, each of Buyer, Buyer Subsidiary, Charter, ILIC, and Leucadia desire to make certain representations, warranties and agreements in connection with the Transaction and also desire to set forth various conditions precedent thereto. NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and agreements herein contained, the parties hereto agree as follows: ARTICLE I. THE TRANSACTION --------------- SECTION 1.1. Reinsurance and Administration. On the terms and subject to the conditions hereof, at the Closing (as hereinafter defined), Buyer and Charter shall execute and deliver each of the Charter Coinsurance Agreement and the Charter Reinsurance Agreement (as such terms are defined in Section 6.1), and Buyer Subsidiary and ILIC shall execute and deliver the ILIC Coinsurance Agreement (as such term is defined in Section 6.1). 2 SECTION 1.2. Purchase and Sale of Common Stock. On the terms and subject --------------------------------- to the conditions hereof, at the Closing, Leucadia will sell, assign, transfer and convey to Buyer, and Buyer will purchase and acquire from Leucadia, all right, title and interest of Leucadia in and to the Common Stock, free and clear of all liens, claims, pledges, encumbrances and security interests ("Liens"). SECTION 1.3. Payment of Consideration. The aggregate consideration payable ------------------------ by Buyer and Buyer Subsidiary in respect of the Transaction shall be $30.25 million (the "Purchase Price"). The Purchase Price shall be allocable to the Transaction as set forth in Exhibit A attached hereto. The Purchase Price shall be payable in accordance with Exhibit A-1 attached hereto which exhibit contains a schedule of payments and transfers contemplated under this Agreement, the Charter Coinsurance Agreement, Charter Reinsurance Agreement, and ILIC Coinsurance Agreement. Such schedule is intended to transfer to Buyer all of the income of the Business (excluding CNL) from and after the Effective Time to the Closing Date and to compensate Sellers fully for all expenses of the Business from and after the Effective Time to the Closing Date. If and to the extent that any items are inadvertently omitted from Exhibit A-1, such items shall be, for all purposes of this Agreement, the Charter Coinsurance Agreement, Charter Reinsurance Agreement, and ILIC Coinsurance Agreement, deemed to have been included therein. On the Closing Date, Buyer and Buyer Subsidiary shall pay, in the aggregate, that amount shown on Exhibit A-1 as "Total Cash Due Sellers at Closing" (the "Closing Payment") by wire transfer of immediately available funds to such account or accounts as Sellers shall have designated at least two days prior to the Closing Date. SECTION 1.4. Post-Closing Adjustment. As promptly as practicable after ----------------------- Closing (but in no event more than 30 days thereafter), Sellers shall recalculate each item under the "Post-Effective Time Cash Flows" on Exhibit A-1 for the period beginning with the first day of the quarter in which the Closing took place through the Closing Date (the "Adjustment Period"). Once the total of such items (as provided for in Exhibit A-1) has been calculated, Sellers shall send an exhibit in the same form as Exhibit A-1 for the Adjustment Period to Buyer, Buyer shall have five business days to review Sellers' calculation. Following such review period, Buyer and Buyer Subsidiary or Sellers (as applicable) shall pay the total amount due for the Adjustment Period to the appropriate party by wire transfer of immediately available funds to such account or accounts as Buyer and Buyer Subsidiary or Sellers (as applicable) shall have designated. 3 SECTION 1.5. Closing. ------- (a) The closing of the transactions contemplated by this Agreement (the "Closing") will take place at the offices of Weil, Gotshal & Manges, L.L.P., 767 Fifth Avenue, New York, New York 10153, at 10:00 a.m., local time on the later of (a) the last day of the month in which the last remaining condition set forth in ARTICLES V and VI hereof has been satisfied or waived, or (b) such other date as Buyer and Sellers may agree upon in writing (the "Closing Date"). (b) At the Closing, Buyer and Buyer Subsidiary shall (i) pay the Closing Payment to Sellers by wire transfer of immediately available funds to such accounts as Sellers specify to Buyer and Buyer Subsidiary; and (ii) deliver to Sellers such documents and instruments required to be delivered by Buyer and Buyer Subsidiary under the terms of this Agreement (including without limitation the documents described in Section 6.2 required to be executed and delivered by Buyer and Buyer Subsidiary (the "Buyer Documents")). (c) At the Closing, Sellers shall deliver to Buyer and Buyer Subsidiary such documents and instruments required to be delivered by Sellers under the terms of this Agreement (including without limitation the documents described in Section 6.1 required to be executed and delivered by Sellers (the "Seller Documents")). ARTICLE II. REPRESENTATIONS AND WARRANTIES OF SELLERS Each Seller, jointly and not severally, makes the following representations and warranties to Buyer and Buyer Subsidiary: SECTION 2.1. Organization and Good Standing. Sellers and CNL are ------------------------------ corporations duly organized, validly existing and in good standing under the Laws (as defined below) of their respective jurisdictions of incorporation. Sellers and CNL have all requisite corporate power and authority to own, lease or otherwise hold their respective assets and to conduct their respective portions of the Business as presently conducted. Each Seller and CNL is duly qualified as a foreign corporation and is in good standing in each jurisdiction which its respective ownership, lease or use of assets or property or conduct of business makes such 4 qualification necessary, except where the failure to be so qualified does not have and cannot reasonably be expected to have a Material Adverse Effect (as defined below). As used in this Agreement, the term "Laws" shall mean all laws, statutes, and regulations of the United States of America or any state or commonwealth thereof. As used in this Agreement, the term "Material Adverse Effect" shall mean a material adverse effect on (i) the Business, (ii) the validity or enforceability of this Agreement, or (iii) on Sellers' ability to perform their respective obligations under this Agreement. SECTION 2.2. Authorization of Agreement; Binding Obligation. Sellers have ---------------------------------------------- all requisite corporate power and authority to execute and deliver this Agreement and the Seller Documents and to perform their obligations hereunder and thereunder. The execution and delivery by Sellers of this Agreement and the Seller Documents and the performance by Sellers of their obligations hereunder and thereunder have been duly authorized by all necessary corporate and stockholder action on the part of Sellers. This Agreement has been (and the Seller Documents will be) duly executed and delivered by duly authorized officers of Sellers and, assuming the due execution and delivery of this Agreement and the Seller Documents by the other parties hereto and thereto, constitutes (and each of the Seller Documents will constitute) valid and binding obligations of Sellers enforceable against them in accordance with their respective terms, except to the extent enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar Laws affecting creditors' rights in general and subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). SECTION 2.3. No Conflicts. The execution and delivery of this Agreement ------------ and the Seller Documents by Sellers do not, and the performance by Sellers of their obligations hereunder and thereunder will not, (a) conflict with the articles or certificate of incorporation or by-laws of any Seller, (b) except as otherwise previously disclosed in writing to Buyer, conflict with, result in any violation of, constitute a default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration under, any contract, permit, order, judgment or decree to which any Seller is a party other than those that individually or in the aggregate with other such conflicts, violations, defaults, and rights of termination, cancellation, and acceleration, do not have and cannot reasonably be expected to have a Material Adverse Effect, (c) subject to obtaining the approvals and making the filings described on Schedule 2.3, constitute a violation of any Law applicable to any Seller other than those that, individually or in the aggregate with other such violations, do not have and cannot reasonably be expected to have a Material Adverse Effect, (d) 5 require any Seller to obtain or make any consent, approval, order or authorization of, or registration, declaration or filing with, any domestic or foreign court, government, governmental agency, authority, entity or instrumentality ("Governmental Entity") or other person or entity (a "Person"), other than (i) as described on Schedule 2.3 and (ii) those which the failure to obtain, make, or give individually or in the aggregate with other such failures do not have and cannot reasonably be expected to have a Material Adverse Effect. SECTION 2.4. Capitalization of CNL. The authorized capital stock of CNL --------------------- consists of 30,000 shares, all of which are designated Common Stock. As of the date hereof, CNL has 10,000 shares of Common Stock issued and outstanding, all of which have been validly issued, are fully paid and non-assessable and were not issued in violation of any preemptive rights. There are no options, warrants, calls, subscriptions, conversion or other rights, agreements or commitments obligating CNL to issue any additional shares of capital stock or any other securities convertible into, exchangeable for or evidencing the right to subscribe for any shares of capital stock of CNL. SECTION 2.5. Title to Common Stock of CNL. Leucadia is the holder of ---------------------------- record and owns beneficially all of the shares of Common Stock free and clear of any Liens. SECTION 2.6. Licenses. -------- (a) Sellers and CNL own or hold all licenses, permits and authorizations required in connection with the conduct of their respective portions of the Business other than those that the failure to own or hold individually or in the aggregate with other such failures do not have and cannot reasonably be expected to have a Material Adverse Effect. (b) Sellers and CNL have complied with the material terms and conditions of each license, permit and authorization required in connection with the conduct of their respective portions of the Business, and all such licenses, permits and authorizations are valid, binding and in full force and effect. (c) Charter has the right to use, free and clear of any royalty or other payment obligations, claims of infringement or alleged infringement or other liens, the Transferred Software (as defined in Section 4.8); and none of the Sellers is in conflict with or violation or infringement of, nor has any Seller received any notice of any 6 such conflict with or violation or infringement of, any asserted rights of any other Person with respect to the Transferred Software. SECTION 2.7. Reinsurance. Set forth on Schedule 2.7 is a list of all ----------- reinsurance agreements relating to all or any portion of the Business. Each such reinsurance agreement is in full force and effect and constitutes a legal, valid, and binding obligation of each party thereto. Neither Seller has received any notice, whether written or oral, of termination or intention to terminate from any other party to such reinsurance agreements. Neither Seller nor, to the best knowledge of Sellers, any other party to such reinsurance agreements is in violation or breach of or default under any such reinsurance agreements (or with or without notice or lapse of time or both, would be in violation or breach of or default under any such reinsurance agreements) other than those violations, breaches, or defaults that individually or in the aggregate with other such violations, breaches, or defaults do not have and cannot reasonably be expected to have a Material Adverse Effect. SECTION 2.8. Litigation. There are no actions, suits, investigations, ---------- arbitrations, or similar proceedings pending, or (to the knowledge of Sellers) threatened, against any Seller or CNL or any of their respective assets or properties, at law or in equity, in, before, or by any Governmental Entity other than actions, suits, investigations, arbitrations or proceedings that individually or in the aggregate with other such actions, suits, investigations, arbitrations or proceedings do not have and cannot reasonably be expected to have a Material Adverse Effect. There is no order, writ, judgment, injunction or decree outstanding against any Seller or CNL or any of their respective assets or properties other than orders, writs, judgments, injunctions or decrees that individually or in the aggregate with other such orders, writs, judgments, injunctions or decrees do not have and cannot reasonably be expected to have a Material Adverse Effect. SECTION 2.9. Compliance with Laws. Sellers and CNL are not in violation -------------------- (or with or without notice or lapse of time or both, would be in violation) of any Law, order, writ, judgment, injunction or decree applicable to their respective business, operations, affairs, assets or properties other than such violations which individually or in the aggregate with other such violations do not have and cannot reasonably be expected to have a Material Adverse Effect. 7 SECTION 2.10. Seller Financial Statements. Sellers have previously --------------------------- delivered or made available to Buyer true and complete copies of the following: (a) the annual statements for Charter and ILIC as of and for the years ended December 31, 1995 and 1996; and (b) the quarterly statements for Charter and ILIC as of and for the quarters ended March 31, 1997, June 30, 1997, and September 30, 1997. Each such statement (i) was prepared in all material respects in accordance with the accounting practices required or permitted by the insurance regulatory authority in the applicable state, consistently applied throughout the specified period and in the comparable period in the immediately preceding year and (ii) presents fairly in all material respects the financial position of Charter or ILIC (as appropriate) as of the respective dates thereof and the related summary of operations and changes in capital and surplus and in cash flows of Charter or ILIC (as appropriate) for and during the respective periods covered thereby (subject, in the case of the quarterly statements, to normal year-end adjustments). SECTION 2.11. CNL Financial Statements. ------------------------ (a) Sellers have previously delivered or made available to Buyer true and complete copies of the CNL's audited statements of financial condition as of December 31, 1995 and 1996, together with the related audited statements of income, changes in stockholders' equity and cash flows for the calendar years then ended. Each such statement (i) was prepared in all material respects in accordance with generally accepted accounting principles ("GAAP") consistently applied throughout the specified period and in the comparable period in the immediately preceding year and (ii) presents fairly in all material respects the financial position of CNL as of the respective dates thereof and the related results of operations and changes in cash flows of CNL for and during the respective periods covered thereby. (b) Sellers have previously delivered or made available to Buyer true and complete copies of CNL's unaudited FOCUS Reports - Part II(A) containing statements of assets, liabilities, and ownership equity as of March 31, 1997, June 30, 1997, and September 30, 1997, together with the related income statements for the respective quarters ended on such dates. The totals presented in the statements of 8 assets, liabilities, ownership equity, and income contained therein (i) were prepared in all material respects in accordance with GAAP consistently applied throughout the specified period and in the comparable period in the immediately preceding year and (ii) present fairly in all material respects the financial position of CNL as of the respective dates thereof and the related results of operations of CNL for and during the respective periods covered thereby. SECTION 2.12. Material Changes. Except as disclosed in Schedule 2.12 or ---------------- as permitted or otherwise contemplated by this Agreement, since September 30, 1997: (a) there has not been, occurred, or arisen any change, event (including without limitation any damage, destruction, or loss, whether or not covered by insurance), condition, circumstance, or development of any character other than those that individually or in the aggregate with other such changes, events, conditions, circumstances, and developments do not have and cannot reasonably be expected to have a Material Adverse Effect; and (b) Sellers and CNL have conducted their respective portions of the Business solely in the ordinary course of business and consistent with past practice. SECTION 2.13. Brokers' Fees and Commissions. None of Sellers (or any of ----------------------------- their respective directors, officers, employees or agents) has employed any investment banker, broker or finder in connection with the transactions contemplated hereby. SECTION 2.14. Tax Matters. ----------- (a) Except as set forth on Schedule 2.14(a)(i), Sellers have filed or caused to be filed, or will file or cause to be filed on or prior to the Closing Date, all Tax Returns (as defined in Section 2.14(c) below) that are required to be filed by, or with respect to, any subsidiaries included with the affiliated group that includes or included CNL on or prior to the Closing Date (collectively, the "Seller Returns"); (ii) CNL has filed or caused to be filed, or will file or cause to be filed on or prior to the Closing Date, all Tax Returns that are required to be filed by, or with respect to CNL on or prior to the Closing Date (collectively, the "CNL Returns"); (iii) the Seller Returns and CNL Returns are true, complete and accurate in all material respects; (iv) all Taxes (as defined in Section 2.14(c) below) due and payable by or with respect to 9 CNL have been, or prior to the Closing Date will be, timely paid or adequate reserves have been or will have been established therefor; (v) there is no claim, audit, action, suit, proceeding or investigation now pending or, to the knowledge of Sellers, threatened against or with respect to CNL with respect to any Tax for which CNL could be liable; (vi) there are no requests for rulings or determinations in respect of any Tax pending between CNL and any taxing authority; (vii) CNL has not been a member of an affiliated, consolidated, combined or unitary group other than the one of which any of Sellers is the common parent; (viii) CNL is not currently under any obligation to pay any amounts as a result of being party, or having been a party, to any tax sharing agreement other than the tax sharing agreement between Sellers and CNL; (ix) to the knowledge of Sellers, there are no Liens for Taxes upon the assets of CNL; (x) CNL will not be required to include any adjustment in taxable income for any tax period ending after the Closing Date under Section 481(c) of the Internal Revenue Code of 1986, as amended (the "Code") (or any similar provision of the Tax laws of any jurisdiction), as a result of a change in method of accounting for a taxable period ending before, or beginning before and ending after, the Closing Date or pursuant to the provisions of any agreement entered into with any taxing authority with regard to the Tax liability of CNL; and (xi) all Taxes that CNL is required by Law to withhold or collect have been duly withheld or collected, and have been paid over to the appropriate authorities to the extent due and payable. (b) Except to the extent that the tax treatment of any Policy is not materially less favorable than the tax treatment of substantially similar products sold or offered by other insurance companies, the tax treatment under the Code of all Policies is and at all times has been the same to the purchaser, policyholder or intended beneficiaries thereof as the tax treatment under the Code for which such Policies were purported to qualify or were treated as qualifying, and Sellers have complied in all respects with all requirements of the Code with respect to the Policies, including without limitation withholding and reporting requirements. For purposes of this Section 2.14(b), the provisions of the Code relating to the tax treatment of such contracts shall include, but not be limited to, Sections 72, 79, 101, 401, 408, 457, 818, 7702 and 7702A. (c) For purposes of this Agreement, (i) the term "Tax Return" means any return, declaration, report, claim for refund, or information return or statement relating to Taxes including any schedule or attachment thereto; and (ii) the term 10 "Taxes" means (A) any federal, foreign, state or local income, business, alternative or add-on minimum tax, gross income, gross receipts, sales, use, ad valorem, value added, transfer, transfer gains, net worth, franchise, profits, license, withholding, payroll, employment, salaries, interest, production, excise, severance, stamp, occupation, premium, property (real or personal), environmental or windfall profit tax, custom, duty or other tax, governmental fee, or other like assessment or charge of any kind whatsoever, together with any interest, penalty, addition to tax, or additional amount imposed by any governmental or taxing authority and (B) any liability of the relevant Person or any subsidiary of the relevant Person for the payment of any amounts of the type described in (i) as a result of being a member of an affiliated, consolidated, combined or unitary group, or being a party to any agreement or arrangement whereby liability of the relevant Person or any subsidiary of the relevant Person for payment of such amounts was determined or taken into account with reference to the liability of any other Person. SECTION 2.15. CNL Closing Date Equity. On the Closing Date, CNL will have ----------------------- net shareholders' equity (determined on a GAAP basis) of not less than $250,000. ARTICLE III. REPRESENTATIONS AND WARRANTIES OF BUYER Buyer makes the following representations and warranties to each Seller: SECTION 3.1. Organization and Qualification. Each of Buyer and Buyer ------------------------------ Subsidiary is a corporation duly organized, validly existing and in good standing under the Laws of the jurisdiction of its incorporation, with all requisite corporate power and authority to own, lease and operate its properties and to carry on its businesses as now being conducted. Each of Buyer and Buyer Subsidiary is qualified or licensed to do business and is in good standing in each jurisdiction in which the ownership or leasing of property by it or the conduct of its business requires such licensing or qualification, except where the failure to be so qualified or licensed does not have and cannot reasonably be expected to have a Buyer Material Adverse Effect (as defined below). As used in this Agreement, the term "Buyer Material Adverse Effect" shall mean a material adverse effect on (i) the validity or enforceability of this Agreement or (ii) on Buyer's and/or Buyer Subsidiary's ability to perform its obligations under this Agreement 11 SECTION 3.2. Authorization of Agreement; Binding Obligation. Each of Buyer and Buyer Subsidiary has all requisite corporate power and authority to execute and deliver this Agreement and the Buyer Documents to which it is a party and to perform its obligations hereunder and thereunder. The execution and delivery by Buyer and Buyer Subsidiary of this Agreement and the Buyer Documents to which it is a party and the performance by it of its obligations hereunder and thereunder have been duly authorized by all necessary corporate action on the part of Buyer and Buyer Subsidiary. This Agreement has been (and the Buyer Documents to which it is a party will be) duly executed and delivered by Buyer and Buyer Subsidiary and, assuming the due execution and delivery of this Agreement and the Buyer Documents by the other parties hereto and thereto, constitutes (and each of the Buyer Documents to which it is a party will constitute) valid and binding obligations of Buyer and Buyer Subsidiary, enforceable against Buyer and Buyer Subsidiary in accordance with their terms, except to the extent enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar Laws affecting creditors' rights in general and subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). SECTION 3.3. No Conflicts. The execution and delivery of this Agreement ------------ and the Buyer Documents by Buyer and Buyer Subsidiary do not, and the performance by Buyer and Buyer Subsidiary of their respective obligations hereunder and thereunder will not, (a) conflict with the articles or certificate of incorporation or by-laws of Buyer or Buyer Subsidiary, (b) conflict with, result in any violation of, constitute a default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration under, any contract, permit, order, judgment or decree to which Buyer or Buyer Subsidiary is a party other than those which individually or in the aggregate with other such conflicts, violations, defaults, and rights of termination, cancellation, and acceleration do not have and cannot reasonably be expected to have a Buyer Material Adverse Effect, (c) subject to obtaining the approvals described on Schedule 3.3, constitute a violation of any Law applicable to Buyer or Buyer Subsidiary, other than violations which individually or in the aggregate with other such violations do not have and cannot reasonably be expected to have a Buyer Material Adverse Effect, (d) require Buyer or Buyer Subsidiary to obtain or make any consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity or other Person, other than (i) as described on Schedule 3.3 and (ii) those which the failure to obtain, make, or give individually or in the aggregate with other such failures do not have and cannot reasonably be expected to have a Buyer Material Adverse Effect. 12 SECTION 3.4. Licenses. -------- (a) Each of Buyer and Buyer Subsidiary owns or holds all licenses, permits and authorizations required in order to perform its obligations under this Agreement and the Buyer Documents to which it is a party other than those that the failure to own or hold individually or in the aggregate with other such failures do not have and cannot reasonably be expected to have a Buyer Material Adverse Effect. (b) Each of Buyer and Buyer Subsidiary has complied with the material terms and conditions of each license, permit and authorization required in order to perform its obligations under this Agreement and the Buyer Documents to which it is a party, and all such licenses, permits and authorizations are valid, binding and in full force and effect. SECTION 3.5. Brokers' Fees and Commissions. Except for Global Reinsurance ----------------------------- Intermediaries (all of the fees, expenses, and other liabilities of which will be paid by Buyer), neither Buyer nor Buyer Subsidiary nor any of their respective directors, officers, employees or agents has employed any investment banker, broker or finder in connection with the transactions contemplated hereby. SECTION 3.6. Litigation. There are no actions, suits, investigations, ---------- arbitrations, or similar proceedings pending, or (to the knowledge of Buyer or Buyer Subsidiary) threatened, against Buyer or Buyer Subsidiary or any of their respective assets or properties, at law or in equity, in, before, or by any Governmental Entity other than actions, suits, investigations, arbitrations, or proceedings that individually or in the aggregate with other such actions, suits, investigations, arbitrations, and proceedings do not have and cannot reasonably be expected to have a Buyer Material Adverse Effect. There is no order, writ, judgment, injunction or decree outstanding against Buyer or Buyer Subsidiary or any of their respective assets or properties other than orders, writs, judgments, injunctions or decrees that individually or in the aggregate with other such orders, writs, judgments, injunctions or decrees do not have and cannot reasonably be expected to have a Buyer Material Adverse Effect. SECTION 3.7. Compliance with Laws. Neither Buyer nor Buyer Subsidiary -------------------- is in violation (or with or without notice or lapse of time or both, would be in violation) of any 13 Law, order, writ, judgment, injunction or decree applicable to its business, operations, affairs, assets or properties other than such violations which individually or in the aggregate with other such violations do not have and cannot reasonably be expected to have a Buyer Material Adverse Effect. SECTION 3.8. Certain Agreements. Buyer has received and reviewed (i) the ------------------ Marketing and Solicitation Agreement dated September 30, 1988 by and among Scudder Fund Distributors, Inc. ("Scudder"), Charter, Charter National Variable Annuities Account and CNL and (ii) the Marketing and Solicitation Agreement dated October 25, 1989 by and among Scudder, ILIC, ILIC Variable Annuities Account and CNL (collectively, the "Scudder Agreements"). Buyer understands and acknowledges that the services under the Scudder Agreements are not exclusive and that each party thereunder is free to render similar services to others. In addition, Buyer understands and acknowledges that the Scudder Agreements (i) are not assignable without the consent of the parties thereto and (ii) may be terminated by Scudder, Charter, or ILIC at any time upon 90 days written notice. Buyer has also received and reviewed (i) the Participation Agreement dated September 3, 1993 by and between Scudder Variable Life Investment Fund (the "Fund Organization") and Charter and (ii) the Participation Agreement dated May 11, 1994 by and between the Fund Organization and ILIC (collectively, the "Participation Agreements"). Buyer understands and acknowledges that the Participation Agreements (i) are not assignable without the consent of the parties thereto and (ii) may be terminated by any of the parties thereto at any time upon 120 days written notice. ARTICLE IV. COVENANTS Each of the parties hereto covenants and agrees that it shall comply with all covenants and provisions of this ARTICLE IV applicable to it, except to the extent (i) Buyer may otherwise consent in writing, (ii) otherwise required by applicable Law, or (iii) otherwise required or permitted by this Agreement. SECTION 4.1. Access to Information. Prior to the Closing, Charter and ILIC --------------------- will (and Leucadia will cause CNL to) provide to the officers, employees, attorneys, accountants and other representatives of Buyer full access during normal business hours to the employees, agents, facilities and books and records of such entities reasonably related to this 14 Agreement and the transactions contemplated hereby. Buyer will be permitted to make copies of such books and records at Buyer's sole expense as may be reasonably necessary in connection therewith. SECTION 4.2. Conduct of Business. Except as otherwise provided by this ------------------- Agreement, during the period from the date of this Agreement and continuing until the Closing Date: (a) Charter and ILIC shall carry on their respective portions of the Business in the usual, regular and ordinary course as presently conducted and consistent with past practice; (b) Charter and ILIC shall use all commercially reasonable efforts to (i) maintain in full force and effect all licenses, permits and authorizations necessary to conduct their respective portions of the Business, (ii) keep available the services of the present employees of their respective portions of the Business, and (iii) maintain the goodwill associated with their respective portions of the Business, including but not limited to preserving the relationships with policyholders, agents, suppliers and others having business dealings with Charter and ILIC; (c) Charter and ILIC shall refrain from taking any action to terminate the Scudder Agreements or the Fund Distribution Agreements; and (d) Leucadia shall cause CNL to refrain from (i) paying any dividends or other distributions to Leucadia (provided, however, that Leucadia may cause CNL to pay one or more dividends to Leucadia at or prior to the Closing so long as CNL's shareholders' equity (determined in accordance with GAAP) on the Closing Date is not less than $250,000) or (ii) entering into any agreements of any kind outside of the ordinary usual, regular and ordinary course of business as presently conducted and consistent with past practice. SECTION 4.3. Consents. Each party hereto will (a) use all commercially -------- reasonable efforts to obtain before Closing all consents, approvals, orders and authorizations of (and prepare and submit all filings and notifications to) every Governmental Entity and other Person necessary for such party to perform its obligations hereunder; and (b) cooperate with the other parties hereto in obtaining before Closing all consents, approvals, orders and 15 authorizations of (and preparing and submitting all filings and notifications to) every Governmental Entity and other Person necessary for such other parties to perform their obligations hereunder. SECTION 4.4. Public Announcements and Employee Communications. At all ------------------------------------------------ times prior to the Closing Date, Buyer and Sellers will consult with each other and will mutually agree (the agreement of each party not to be unreasonably withheld) upon the content and timing of any press release or any written or oral communication with employees with respect to the Transaction, and shall not issue any such press release or employee communication prior to such consultation and agreement, except as may be required by applicable Law or by obligations pursuant to any listing agreement with any securities exchange or any stock exchange regulations; provided, however, that, if possible, Buyer and Sellers will give prior notice to the other party as promptly as practicable under the circumstances of the content and timing of any such press release or employee communication required by applicable Law or by obligations pursuant to any listing agreement with any securities exchange or any stock exchange regulations. SECTION 4.5. Disclosure Supplements. From time to time prior to the ---------------------- Closing, each of the parties hereto will supplement or amend the schedules delivered in connection herewith with respect to any matter which, if existing or occurring at or prior to the date of this Agreement, would have been required to be set forth or described in any such schedule or which is necessary to correct any information in such schedule which has been rendered inaccurate thereby. If the Closing occurs, Buyer waives any right or claim it may otherwise have or have had on account of any matter so disclosed in such supplement or amendment. SECTION 4.6. Financial Statements. -------------------- (a) As promptly as practicable until the Closing Date, Sellers shall deliver to Buyer true and complete copies of (i) the annual statement filed by Charter and ILIC with their respective states of domicile for the year ended December 31, 1997; and (ii) each quarterly statement filed by Charter and ILIC with their respective states of domicile for calendar quarters ended after December 31, 1997. Each such statement will be prepared in all material respects in accordance with the accounting practices required or permitted by the insurance regulatory authority in the applicable state, consistently applied throughout the specified period and in the comparable period in the immediately preceding year. 16 (b) As promptly as practicable until the Closing Date, Sellers shall deliver to Buyer true and complete copies of CNL's audited statement of financial condition as of December 31, 1997, together with the related audited statements of income, changes in stockholders' equity and cash flows for the calendar year then ended. Such statement will be prepared in all material respects in accordance with GAAP consistently applied throughout the specified period and in the comparable period in the immediately preceding year. (c) As promptly as practicable until the Closing Date, Sellers shall deliver to Buyer true and complete copies of CNL's unaudited FOCUS Reports - Part II(A) containing statements of assets, liabilities, and ownership equity as of the last day of each calendar quarter after December 31, 1997, together with the related income statements for the respective quarters ended on such dates. SECTION 4.7. Administration. -------------- (a) Administration of the Business. From and after the Closing Date, Buyer and Buyer Subsidiary shall administer the Business pursuant to and in accordance with the terms of the Charter Administrative Services Agreement and the ILIC Administrative Services Agreement, respectively. At the Closing, in accordance with Section 1.3 above, Buyer and Buyer Subsidiary shall pay Sellers an amount of cash equal to the sum of all expenses incurred by Sellers for costs relating to Sellers' operations conducted at the Facility and for all amounts paid to third parties in administering the Business, in each case from the Effective Time through the end of the last quarter preceding the Closing Date (collectively, "Administrative Expenses"). The term "Administrative Expenses" shall include without limitation the following expense categories: employee benefits, payroll, taxes, rent, supplies and other overhead expenses. (b) Employee Matters. (i) Effective as of the Closing, (x) Buyer shall offer employment to the employees of Sellers identified on Schedule 4.7 (the "Employees") at annual salaries not less than those identified on such schedule and (y) Buyer shall grant or make available (as appropriate) to such Employees all employee benefits granted or made available to other employees of Buyer employed in comparable positions at comparable locations; (ii) on or before February 18, 1998, Buyer will give each of the Employees individual letters detailing (x) the severance 17 program for such Employee, which for the two Employees identified on Schedule 4.7 with an asterisk (the "Identified Employees") will at least equal 26 weeks of severance, and which for each of the other Employees shall not exceed two weeks of severance for each year of service as an employee of Charter or Buyer, and (y) the terms of a retention bonus for each such Employee which shall be mutually acceptable to Buyer and Sellers; (iii) Sellers shall be responsible for all items listed on the May 5, 1997 letter to each of the Identified Employees (previously provided to Buyer), other than the severance provisions outlined in the first bullet point of each such letter for which Buyer's severance program shall be substituted; and (iv) in no event shall Buyer be liable or responsible for accrued liabilities under any of Seller's employee benefit plans. Nothing in this Agreement shall be construed as limiting in any way the rights of Buyer as the employer of the Employees on and after the Closing Date, including, but not limited to the right to change salary or wages or to modify benefits or other terms and conditions of employment of Employees to the extent that any such changes are done in accordance with Buyer's normal practices and to the further extent that any modification to benefits or other terms and conditions of employment of any Employee apply generally to employees of Buyer. (c) Facility Matters. At Closing, Buyer shall assume from Charter, and Charter shall assign to Buyer, all of Charter's rights and obligations under that certain lease agreement, dated April 1, 1994, between Kupper Parker Properties, Inc. and Charter (as amended through the Closing Date) relating to Charter's offices at 8301 Maryland Avenue, Clayton, Missouri 63105 (the "Facility"). (d) Sale of Facility Assets. At the Closing, Buyer shall purchase from Charter all of the furniture, fixtures, and other assets located at the Facility and described on Schedule 4.7(d) (the "Facility Assets") at the net book value thereof (determined in accordance with GAAP) as of December 31, 1997 (the "Assets Payment"), the consideration for which will be paid pursuant to Section 1.3. (e) Transition Services. To the extent that Sellers' Employees are reasonably able to perform such services, Sellers shall provide to Buyer reasonable and normal services relating to the effectuation of an orderly transition of the operation and administration of the Business to Buyer (the "Transition Services"). To the extent that Sellers' employees are not reasonably able to perform Transition Services requested by Buyer, Sellers shall promptly offer to arrange for the provision 18 of such Transition Services by one or more third parties (a "Third Party Provider"). Such offer shall be made by means of a written notice to Buyer indicating the estimated fees and expenses of such Third Party Provider to perform such services. Should Buyer respond in writing to Sellers that Buyer desires the Third Party Provider to provide such services, Sellers shall arrange for the provision of such services by the Third Party Provider and Buyer shall be solely responsible for all fees, expenses, and other costs of such Third Party Provider. In addition, prior to the Closing Date, Sellers shall provide to Buyer copies of all policy forms, and all other related forms, including drafts and check stock, used by Sellers in its administration of the Reinsured Policies. Buyer agrees to provide reasonable expense reimbursement to Sellers in the event that Sellers are requested by Buyer to provide services beyond the reasonable and normal Transition Services described in Section 2(e) above, such reimbursement to be negotiated by the parties in advance which shall be reasonable and customary under industry standards. In addition, Buyer shall reimburse Sellers for any amounts paid by Sellers to Third Party Providers in connection with Section 2(e) above. If and to the extent that Buyer requests that Sellers perform Transition Services, on or before the 15th day of each month, Sellers shall provide Buyer with a reasonably detailed invoice setting forth amounts due from Buyer with respect to Transition Services provided hereunder during the immediately preceding month. Within ten business days after receipt by Buyer of each such invoice, Buyer shall pay to Sellers in cash the amounts reflected on such invoice to the extent that such amounts have not already been paid to Sellers. SECTION 4.8. Transfer of Software Licenses. At Closing, Charter shall ----------------------------- assign and transfer to Buyer, and Buyer shall assume from Charter, all of Charter's right, title, and interest in and to the software licenses described on Schedule 4.8 hereto (the "Transferred Software"). 19 SECTION 4.9. Termination and Recapture of Reinsurance. From and after the ---------------------------------------- Closing Date, Sellers shall use all commercially reasonable efforts to terminate all reinsurance agreements relating to the Business and recapture all policy liabilities thereunder (other than the Charter Coinsurance Agreement, Charter Reinsurance Agreement, and ILIC Coinsurance Agreement). Notwithstanding the foregoing, Sellers shall not be obligated to terminate any reinsurance agreement if the costs and expenses associated with such termination, together with the costs and expenses associated with all other such terminations, is reasonably estimated to exceed 10% of the reinsurance reserve credits under such reinsurance agreements. Buyer shall reimburse Sellers for any costs and expenses incurred by Sellers in connection with such terminations, but in no event shall such costs and expenses exceed 10% of the reinsurance reserve credits under such reinsurance agreements. Upon termination of each such reinsurance agreement, Buyer shall reinsure (pursuant to and in accordance with the Charter Coinsurance Agreement and the Charter Reinsurance Agreement) all obligations under the portions of the Business that were covered by such agreement. To the extent that Sellers are unable to terminate any such reinsurance agreement on or before the first anniversary of the Closing Date, Sellers shall use all commercially reasonable efforts to assign all of Sellers' rights and obligations under such reinsurance agreement to Buyer. To the extent that any termination or recapture amounts are paid to Sellers as a result of any termination or recapture effected pursuant to this Section 4.9, Sellers shall promptly pay such amounts to Buyer. SECTION 4.10. New Policies. Pursuant to and in accordance with the Charter ------------ Coinsurance Agreement, Charter will, at Buyer's request, continue to underwrite and issue new annuity contracts at and after the Closing Date to residents of certain states until the earlier to occur of (i) 90 days after receipt by Charter of a written notice from Buyer requesting that Charter cease underwriting and issuing such contracts or (ii) the third anniversary of the Closing Date. Pursuant to and in accordance with the ILIC Coinsurance Agreement, ILIC will, at Buyer Subsidiary's request, continue to underwrite and issue new annuity contracts at and after the Closing Date to residents of the State of New York until the earlier to occur of (i) 90 days after receipt by ILIC of a written notice from Buyer Subsidiary requesting that ILIC cease underwriting and issuing such contracts or (ii) the third anniversary of the Closing Date. SECTION 4.11. Scudder and Participation Agreements. The parties agree ------------------------------------ that: (i) neither the Scudder Agreements nor the Participation Agreements will be assigned to Buyer or Buyer Subsidiary and (ii) under the Administrative Services Agreements, Buyer and 20 Buyer Subsidiary shall administer, perform and enforce the Scudder Agreements and the Participation Agreements, insofar as they relate to the Business, on behalf of Sellers, and will bear the cost of such administration, performance and enforcement. Buyer shall have the right to cause Sellers to effect the termination of any Scudder Agreement and/or Participation Agreement and/or to enter into new marketing and/or participation agreements relating to the Business or underlying funding media for the Separate Accounts. Any such termination shall be on terms and conditions acceptable to Buyer at no cost to Sellers. Without the prior written consent of Buyer, Sellers shall not agree to any amendment or termination of any of the Scudder Agreements or Participation Agreements or any other agreements or arrangements with Scudder or the Fund Organization. SECTION 4.12. Principal Underwriter Agreements. Immediately after Closing, -------------------------------- Buyer shall cause CNL to enter into, and Sellers shall enter into, any agreements (the "New CNL Underwriter Agreements") between CNL and Sellers that are required for CNL to perform, commencing on the Closing Date, the functions of a principal underwriter (as such term is defined in the Investment Company Act of 1940, as amended, together with related rules, regulations, interpretations, and releases thereunder) of the Policies and any New Policies sold pursuant to the Charter Coinsurance Agreement and the ILIC Coinsurance Agreement. Any such agreements shall contain terms substantially similar to those contained in the Principal Underwriter Agreements to which CNL is currently a party with Charter and ILIC. SECTION 4.13. Disclosure. Buyer and Sellers shall (i) draft disclosure ---------- materials describing the transactions contemplated by this Agreement to be distributed to policyholders and contractholders of Charter and ILIC in accordance with applicable Law and (ii) ensure that such materials are finalized by the Closing Date. As promptly as practicable after the Closing Date (but in no event more than 10 Business Days thereafter), Buyer and Buyer Subsidiary shall distribute such materials by first class U.S. mail to all holders of insurance policies and annuity contracts constituting part of the Business. In addition to the foregoing, Buyer, Buyer Subsidiary and Sellers shall draft post-effective amendments to the registration statements as may be necessary for the Policies describing the transactions contemplated by this Agreement. Such post-effective amendments shall include as exhibits material documents relating to the Transaction, including the Charter Coinsurance Agreement, the Charter Reinsurance Agreement, the Charter Administrative Services Agreement, the ILIC Coinsurance Agreement, and the ILIC Administrative Services Agreement. 21 SECTION 4.14. Post-Closing Form BD. As promptly as practicable following -------------------- the Closing Date (but in any event within the time prescribed therefor by applicable requirements of the National Association of Securities Dealers ("NASD")), Buyer shall cause CNL to file an amended FORM BD for CNL with the NASD reflecting the change in ownership of CNL resulting from the consummation of the transactions contemplated by this Agreement. SECTION 4.15. Cooperation; Contest. From and after the Closing Date, each -------------------- of Sellers and Buyer agrees to provide or cause its affiliates to provide at no cost and within a reasonable time any information reasonably necessary for the preparation of any Tax Returns or for addressing any audit issues. Each of Sellers, on the one hand, and Buyer, on the other hand, shall promptly notify the other (the "Other Party") in the event it becomes aware of any claim, audit, examination or proceeding relating to any Tax for which the Other Party would be responsible under the terms of this contract. The Other Party shall control every aspect of any such claim, examination or proceeding, including the contest, disposition and settlement thereof. SECTION 4.16. Other Tax Matters. Without limiting the generality of ----------------- Section 10.4 below, Buyer shall promptly notify Sellers of any claim, audit, examination, or proceeding of which it becomes aware relating to the matters described in Section 2.14 above. Responses to any such claim, audit, examination, or proceeding shall be subject to the prior review and approval of Sellers. Sellers shall file (or prior to the Closing Date cause CNL to file) (i) all federal tax returns for CNL for the period commencing on the Effective Time and ending on the Closing Date and (ii) all other tax returns for CNL that are required to be filed prior to the Closing Date. From and after the Closing Date, Buyer shall file (or cause CNL to file) all other tax returns for CNL that are required to be filed on and after the Closing Date. Sellers and Buyer shall cooperate fully with each other and make available to each other in a timely fashion such Tax data and other information as may be reasonably required by Sellers or Buyer in connection with the preparation or filing of any Tax Return and any audit, claim, examination, or proceeding in respect of Taxes. SECTION 4.17. Transfer of Administration. From and after the date hereof, -------------------------- Buyer and Sellers shall use all commercially reasonable efforts to (i) set up in the Facility information systems of Buyer to be used in providing administrative services under the Charter Administrative Services Agreement and the ILIC Administrative Services Agreement and (ii) transfer all data necessary to administer the Business to such information systems. 22 SECTION 4.18. Interim Administrative Platform. If the Closing does not ------------------------------- occur on or before the date of termination of Charter's temporary license (the "Continuum License") with CSC Continuum, Inc., as such may, at Buyer's sole expense, be (i) extended beyond June 30, 1998, (ii) modified or (iii) replaced with a permanent license or another temporary license, in each case upon consultation with Buyer (the "Expiration Date"), from and after the Expiration Date until the Closing Date, Buyer shall provide, to the extent permitted under Buyer's licenses (at Buyer's sole cost and expense), all software and information systems which, together with the Transferred Software, will enable Sellers to continue to administer the Business during such period in compliance with applicable Law and Sellers' administrative practices in effect as of the date hereof (collectively, the "Interim Administrative Platform"). Buyer shall make such software and information systems available to Sellers at the Facility. In the event that this Agreement is terminated for any reason, Buyer shall (i) continue to provide the Interim Administrative Platform to Sellers for a period of one year following the termination of this Agreement, (ii) assist and cooperate with Sellers to effectuate a prompt and orderly transfer to Sellers or its designee(s) of all data and other materials transferred to the Interim Administrative Platform pursuant to this Section and Section 4.17, and (iii) otherwise assist and cooperate with Sellers in transitioning the administration of the Business from the Interim Administrative Platform to a platform of Sellers' choice. In the event that this Agreement is terminated for any reason, Sellers shall (i) pay Buyer an aggregate fee of $10,000 per month for each month from the Expiration Date through the first anniversary of the termination of this Agreement and (ii) reimburse Buyer for any reasonable out-of-pocket costs and expenses incurred by Buyer in connection with such transition. If Buyer is unable to provide the Interim Administrative Platform under Buyer's software licenses then in effect, from and after the Expiration Date to the Closing Date (or, if this Agreement shall be terminated, from and after the Expiration Date to the first anniversary of the date of termination of this Agreement), Buyer shall pay all costs of obtaining licenses necessary to permit Sellers to continue to administer the Business in compliance with applicable Law and Sellers' administrative practices in effect on the date hereof. SECTION 4.19. Books and Records. On the Closing Date, Sellers will deliver ----------------- to Buyer all books and records of CNL. If (at any time after the Closing) any of Sellers discovers in its possession or under its control any other books and records of CNL, such Seller will promptly deliver such books and records to Buyer. 23 SECTION 4.20. CNL True-Up. Within 30 days after the Closing Date, either ----------- (i) Buyer shall pay Leucadia an amount of cash equal to the excess of the net shareholders' equity (determined on a GAAP basis) of CNL as of the Closing Date over $250,000 or (ii) Leucadia shall pay Buyer an amount of cash equal to the deficiency of the net shareholders' equity (determined on a GAAP basis) of CNL as of the Closing Date under $250,000. ARTICLE V. CONDITIONS TO CLOSING SECTION 5.1. Conditions Precedent to Obligations of Buyer and Buyer ------------------------------------------------------ Subsidiary. The obligations of Buyer and Buyer Subsidiary under this Agreement - ---------- to consummate the transactions contemplated hereby will be subject to the satisfaction, at or prior to Closing, of all of the following conditions, any one or more of which may be waived in whole or in part at the option of Buyer: (a) Representations, Warranties and Covenants. (i) All representations and warranties of Sellers contained in this Agreement (or in any exhibit, schedule, certificate or document delivered pursuant to this Agreement) that are qualified as to materiality shall be true and correct and all representations and warranties of Sellers made in this Agreement (or in any exhibit, schedule, certificate or document delivered pursuant to this Agreement) that are not so qualified shall be true and complete in all material respects, in each case as of the date hereof and on and as of the Closing Date as if made on and as of the Closing Date (except to the extent that they expressly relate only to an earlier time, in which case they shall have been true and complete as of such earlier time). (ii) All of the terms, covenants and conditions to be complied with and performed by Sellers on or prior to the Closing Date shall have been complied with or performed in all materials respects. 24 (iii) Buyer and Buyer Subsidiary shall have received a certificate, dated as of the Closing Date, executed by Sellers, certifying that the conditions specified in Sections 5.1(a)(i) and (ii) have been satisfied. (b) Closing Documents. Sellers shall have executed and delivered the Seller Documents. (c) No Injunction. There shall not be in effect on the Closing Date any writ, judgment, injunction, decree, or similar order of any court or governmental or regulatory authority restraining, enjoining, or otherwise preventing consummation of any of the transactions contemplated by this Agreement in accordance with the terms of this Agreement. (d) Consents. The consents, approvals, orders, authorizations, filings, and notifications described on Schedules 2.3 and 3.3 shall have been obtained or made. (e) Scudder Agreements. Buyer and Scudder and Buyer Subsidiary and Scudder shall have entered into marketing and solicitation agreements in form and substance reasonably satisfactory to Buyer. (f) Termination of Tax Allocation Agreement. Any tax allocation or tax sharing agreement that may have been entered into by CNL,Inc. shall be terminated as of the Closing Date. SECTION 5.2. Conditions Precedent to Obligations of Sellers. The ---------------------------------------------- obligations of Sellers under this Agreement to consummate the transactions contemplated hereby will be subject to the satisfaction, at or prior to the Closing, of all the following conditions, any one or more of which may be waived at the option of Sellers: (a) Representations, Warranties and Covenants. (i) All representations and warranties of Buyer contained in this Agreement (or in any exhibit, schedule, certificate or document delivered pursuant to this Agreement) that are qualified as to materiality shall be true and correct and all representations and warranties of Buyer made in this Agreement (or in any exhibit, schedule, certificate or document delivered 25 pursuant to this Agreement) that are not so qualified shall be true and complete in all material respects, in each case as of the date hereof and on and as of the Closing Date as if made on and as of the Closing Date (except to the extent that they expressly relate only to an earlier time, in which case they shall have been true and complete as of such earlier time). (ii) All of the terms, covenants and conditions to be complied with and performed by Buyer and Buyer Subsidiary on or prior to the Closing Date shall have been complied with or performed in all material respects. (iii) Sellers shall have received a certificate, dated as of the Closing Date, executed by Buyer, certifying that the conditions specified in Sections 5.2(a)(i) and (ii) have been satisfied. (b) Closing Documents. Each of Buyer and Buyer Subsidiary shall have executed and delivered the Buyer Documents to which it is a party. (c) No Injunction. There shall not be in effect on the Closing Date any writ, judgment, injunction, decree, or similar order of any court or governmental or regulatory authority restraining, enjoining, or otherwise preventing consummation of any of the transactions contemplated by this Agreement in accordance with the terms of this Agreement. (d) Consents. The consents, approvals, orders, authorizations, filings, and notifications described on Schedules 2.3 and 3.3 shall have been obtained or made. ARTICLE VI. DOCUMENTS TO BE DELIVERED AT THE CLOSING SECTION 6.1. Documents to be Delivered by Sellers. At the Closing, Sellers ------------------------------------ shall deliver to Buyer and Buyer Subsidiary, as applicable, the following: (a) Officer's Certificate. The certificate, dated the Closing Date, duly executed by Sellers as required by Section 5.1(a)(iii). 26 (b) Stock Certificates. A certificate or certificates representing all the shares of Common Stock in appropriate form for transfer to Buyer or accompanied by stock powers duly executed in blank. (c) Charter Coinsurance Agreement. A coinsurance agreement, in the form attached hereto as Exhibit B (the "Charter Coinsurance Agreement"), duly executed by Charter. (d) Charter Reinsurance Agreement. A reinsurance agreement, in the form attached hereto as Exhibit C (the "Charter Reinsurance Agreement"), duly executed by Charter. (e) Charter Administrative Services Agreement. An administrative services agreement, in the form attached hereto as Exhibit D (the "Charter Administrative Services Agreement"), duly executed by Charter. (f) ILIC Coinsurance Agreement. A coinsurance agreement, in the form attached hereto as Exhibit E (the "ILIC Coinsurance Agreement"), duly executed by ILIC. (g) ILIC Administrative Services Agreement. An administrative services agreement, in the form attached hereto as Exhibit F (the "ILIC Administrative Services Agreement"), duly executed by ILIC. (h) Evidence of Approvals. Evidence of receipt of the consents and approvals described on Schedule 2.3 and Section 4.3. (i) Bill of Sale. A bill of sale in a form mutually acceptable to the parties hereto effecting the sale of the Facility Assets to Buyer in exchange for the Assets Payment pursuant to Section 4.7(d), duly executed by Charter. 27 SECTION 6.2. Documents to be Delivered by Buyer. At the Closing, Buyer and Buyer Subsidiary, as applicable, will deliver to Sellers the following: (a) Closing Payment. Evidence of a wire transfer in the amount of the Closing Payment in accordance with Section 1.3. (b) Officer's Certificate. The certificate, dated the Closing Date, duly by Buyer as required by Section 5.2(a)(iii). (c) Other Buyer Documents. The Charter Coinsurance Agreement, the Charter Reinsurance Agreement, and the Charter Administrative Services Agreement, each duly executed by Buyer. (d) Other Buyer Subsidiary Documents. The ILIC Coinsurance Agreement and the ILIC Administrative Services Agreement, each duly executed by Buyer Subsidiary. (e) Evidence of Approvals. Evidence of receipt of the consents and approvals described on Schedule 3.3 and Section 4.3. ARTICLE VII. TERMINATION AND ABANDONMENT SECTION 7.1. Termination. This Agreement may be terminated and the ----------- transactions contemplated hereby may be abandoned at any time prior to the Closing: (a) by mutual consent of Sellers and Buyer; or (b) by any Seller or Buyer: (i) if a court of competent jurisdiction or Governmental Authority shall have issued an order, decree or ruling or taken any other action (which order, decree or ruling the parties hereto shall use their reasonable best efforts to lift), in each case permanently restraining, enjoining or otherwise 28 prohibiting the transactions contemplated by this Agreement, and such order, decree, ruling or other action shall have become final and nonappealable; or (ii) if the Closing shall not have occurred on or before September 30, 1998; provided, however, that (A) Sellers shall have the right, in their sole discretion, to extend the time period in this Section 7.1(b)(ii) for an additional 60 days and (B) the right to terminate this Agreement shall not be available to any party whose breach of this Agreement has been the cause of, or resulted in, the failure of the Closing to occur on or before such date. SECTION 7.2. Procedure and Effect of Termination. In the event of ----------------------------------- termination and abandonment of the transactions contemplated hereby pursuant to Section 7.1, written notice thereof shall be given to the other parties to this Agreement and this Agreement shall terminate and the transactions contemplated hereby shall be abandoned, without further action by any of the parties hereto. If this Agreement is terminated as provided herein: (a) Upon request therefor, each party will redeliver all documents, work papers and other material of any other party relating to the transactions contemplated hereby, whether obtained before or after the execution hereof, to the party furnishing the same; and (b) No party hereto shall have any liability or further obligation to any other party to this Agreement resulting from such termination except (i) that the provision of this Section 7.2 and Sections 4.18, 11.4, 11.11 and 11.13 shall remain in full force and effect, and (ii) no party waives any claim or right against a breaching party to the extent that such termination results from the breach by a party hereto of any of its representations, warranties, covenants or agreements set forth in this Agreement. ARTICLE VIII. NON-COMPETITION SECTION 8.1. Non-Competition. In consideration of the benefits of this Agreement to Leucadia and in order to induce Buyer and Buyer Subsidiary to enter into this Agreement, Leucadia hereby covenants and agrees that for a period of (a) three years following the 29 Closing Date neither Leucadia nor any of its affiliates under actual control of Leucadia shall commence selling any variable annuity contracts or variable life insurance policies in the United States and (b) ten years following the Closing Date, neither Leucadia nor any of its affiliates under actual control of Leucadia will enter into any form of a marketing and solicitation agreement with Scudder Kemper Investments, Inc., Scudder Fund Distributors, Inc., Scudder Variable Life Investment Fund, or any successor thereto for the sale of variable annuity products and variable life insurance products. Notwithstanding the foregoing, Leucadia retains the right to acquire insurance companies that are not engaged primarily in the business of offering variable annuity contracts or variable life insurance policies. Leucadia specifically agrees that this covenant is an integral part of the inducement of Buyer to enter into this Agreement and that Buyer (or its successor assigns) shall be entitled to injunctive relief in addition to all other legal and equitable rights and remedies available to it in connection with a breach by Leucadia or any of its affiliates of any provision of this Section 8.1 and that, notwithstanding the foregoing, no right, power or remedy conferred upon or reserved or exercised by Buyer in this Section 8.1 is intended to be exclusive of any other right, power or remedy, each and every one of which (now or hereafter existing at law, in equity, by status or otherwise) shall be cumulative and concurrent. Each of Leucadia and Buyer agrees that in the event that either the length of time or area set forth herein is deemed too restrictive by any governmental entity of competent jurisdiction, the covenants and agreements in this Section 8.1 shall be enforceable for such time and within such geographical area as such governmental entity may deem reasonable under the circumstances. ARTICLE IX. SURVIVAL OF PROVISIONS SECTION 9.1. Survival. The representations and warranties required to be -------- made by the Sellers and Buyer in this Agreement or in any certificate delivered pursuant hereto will survive until the second anniversary of the Closing Date, except that (i) the representations and warranties of Sellers set forth in Sections 2.4, 2.5, 2.13, and 2.14 hereof will survive until 30 days after the expiration of all statutes of limitation applicable to each such Section and (ii) the representations and warranties of Buyer set forth in Section 3.5 hereof will survive until 30 days after the expiration of all statutes of limitation applicable to such Section. Notwithstanding the foregoing, any representation or warranty shall survive the time it would otherwise terminate pursuant to this Section to the extent that notice of a 30 breach thereof giving rise to a right of indemnification shall have been given by a party hereto prior to the expiration of the relevant survival period in accordance with Article X below. ARTICLE X. INDEMNIFICATION SECTION 10.1. Indemnification by Sellers. Subject to the provisions of -------------------------- Sections 9.1, 10.3, and 10.4 hereof, the Sellers shall indemnify and hold harmless Buyer and Buyer Subsidiary for (a) any and all monetary damages, charges, losses, deficiencies, liabilities, obligations, costs, fees, and expenses (including, without limitation, reasonable fees and disbursements of counsel incident to the enforcement of rights under Section 10.1 or 10.2 hereof) (collectively, "Damages") resulting from or relating to any breach by the Sellers of any representation, warranty, covenant, or agreement made by the Sellers in this Agreement, (b)(i) any Taxes of CNL with respect to taxable periods ending on or before the Closing Date; (ii) any Taxes imposed on or in respect of CNL with respect to taxable periods including but not ending on the Closing Date which are allocable to the portion of such taxable period ending on the Closing Date; and (iii) any Taxes imposed on or in respect of any corporation (other than any Taxes imposed on CNL or Buyer or any affiliate of Buyer for any Tax period) with which CNL filed a Tax Return on a combined or consolidated basis for any taxable period that includes the Closing Date, or that ends on, as of the close of or before the Closing Date (including, without limitation, any Taxes for which CNL would be liable pursuant to the provisions of Treasury Regulation Section 1.1502-6), and (c) any Direct Economic Loss (as defined below) suffered by Buyer as a result of the rejection by Charter or ILIC of a recommendation of Buyer or Buyer Subsidiary, as the case may be (a "Recommendation"), pursuant to Article II(D) of the Charter Coinsurance Agreement, Article II(D) of the ILIC Coinsurance Agreement or Article II(D) of the Charter Reinsurance Agreement. Notwithstanding the foregoing, Sellers shall have no liability under clause (c) above if (i) following the Recommendation would create a violation of any applicable Law (a "Violation"), (ii) following the Recommendation would cause a breach of any Policy (a "Policy Breach"), or (iii) Buyer does not cause to be delivered to Sellers (within 30 days after receipt by Buyer of a request therefor based upon Sellers' good faith belief that implementation of such Recommendation could result in a Violation or a Policy Breach) an opinion of counsel reasonably acceptable to Sellers to the effect that following the Recommendation would neither create a Violation nor a Policy Breach. The term "Direct 31 Economic Loss" shall mean the amount due to holders of Policies in respect of the period to which such Recommendation relates in excess of the amount due to such holders in respect of such period if Charter or ILIC (as applicable) had followed such Recommendation. SECTION 10.2. Indemnification by Buyer. Subject to the provisions of ------------------------ Sections 9.1, 10.3, and 10.4 hereof, Buyer shall indemnify and hold harmless each Seller (a) in respect of any and all Damages resulting from or relating to any breach by Buyer of any representation, warranty, covenant, or agreement made by Buyer in this Agreement and (b)(i) any Taxes of CNL with respect to taxable periods that begin on or after the Closing Date, and (ii) any Taxes imposed on or in respect of CNL with respect to taxable periods including but not ending on the Closing Date which are allocable to the portion of such period beginning after the Closing Date. SECTION 10.3. Limitations on Indemnification. ------------------------------ (a) No claim by any Person for indemnification under this Article X (an "Indemnitee") against any Person (an "Indemnifying Party"), which claim relates to a breach of a representation or warranty made in this Agreement, may be made unless notice of such breach is given in accordance with this Article X prior to the time the survival period for such representation or warranty expired. (b) Notwithstanding anything to the contrary contained in this Agreement, (i) Sellers will not be liable under any circumstances for indemnification under Section 10.1 hereof in an aggregate amount in excess of $2,000,000 and (ii) Buyer will not be liable under any circumstances for indemnification under Section 10.2 hereof in an aggregate amount in excess of $2,000,000. (c) If an Indemnitee recovers from any third party (including insurers) all or any part of any amount paid to it by an Indemnifying Party pursuant to Section 10.1 or 10.2 hereof, such Indemnitee will promptly pay over to the Indemnifying Party the amount so recovered (after deducting therefrom the full amount of the expenses incurred by it in procuring such recovery, including any taxes and net of any tax benefit resulting from such recovery and payment), but not in excess of any amount previously so paid by the Indemnifying Party. If an Indemnitee recovers from any third party (including insurers) any amount as to which indemnification may be 32 claimed pursuant to Section 10.1 or 10.2 hereof, such Indemnitee will have no right to claim indemnification for such amount from the Indemnifying Party. (d) The Indemnitee shall prosecute diligently and in good faith any claim for indemnification with any applicable third party (including insurers) prior to collecting any indemnification payment pursuant to Section 10.1 or 10.2 hereof. SECTION 10.4. Notice of Defense of Claims. Promptly after receipt of --------------------------- notice of any claim or Damages for which an Indemnitee seeks indemnification under this Article, such Indemnitee shall give written notice thereof to the Indemnifying Party, but such notification shall not be a condition to indemnification hereunder except to the extent of actual prejudice to the Indemnifying Party. The notice shall state the information then available regarding the amount and nature of such claim or Damages and shall specify the provision or provisions of this Agreement under which the right to indemnification is asserted. If within 30 days after receiving such notice the Indemnifying Party gives written notice to the Indemnitee stating that it intends to defend against such claim or Damages at its own cost and expense, then defense of such matter, including selection of counsel (subject to the consent of the Indemnitee which consent shall not be unreasonably withheld), shall be by the Indemnifying Party and the Indemnitee shall make no payment in respect of such claim or Damages as long as the Indemnifying party is conducting a good faith and diligent defense. Notwithstanding the foregoing, the Indemnitee shall at all times have the right to fully participate in such defense at its own expense directly or through counsel; provided, however, if the named parties to the action or proceeding include both the Indemnifying Party and the Indemnitee and representation of both parties by the same counsel would be inappropriate under applicable standards of professional conduct, the expenses of one separate counsel for the Indemnitee shall be paid by the Indemnifying Party. If no such notice of intent to dispute and defend is given by the Indemnifying Party, or if such diligent good faith defense is not being or ceases to be conducted, the Indemnitee shall, at the expense of the Indemnifying Party, undertake the defense of such claim or Damages with counsel selected by the Indemnitee, and shall have the right to compromise or settle the same exercising reasonable business judgment with the consent of the Indemnifying Party, which consent shall not be unreasonably withheld. The Indemnitee shall make available all information and assistance that the Indemnifying Party may reasonably request and shall cooperate with the Indemnifying Party in such defense. Notwithstanding anything herein to the contrary, the Indemnifying Party shall have the right to settle all claims of third parties for which indemnification is payable hereunder without the consent of the Indemnitee so long 33 as such settlement releases the Indemnitee from all liability for or in connection with such action and does not materially and adversely impair the ability of the Indemnitee to carry on its business and does not contain any admission of wrong doing on the part of the Indemnitee. ARTICLE XI. MISCELLANEOUS PROVISIONS SECTION 11.1. Amendment and Modification. This Agreement may be amended, -------------------------- modified or supplemented by a written instrument signed by the parties hereto. SECTION 11.2. Waiver of Compliance; Consents. Any failure of Buyer or ------------------------------ Buyer Subsidiary, on the one hand, or of Sellers on the other hand, to comply with any obligation, covenant, agreement or condition contained herein may be waived in writing by Sellers or Buyer, respectively, but such waiver or failure to insist upon strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any other failure. SECTION 11.3. Validity. The invalidity or unenforceability of any -------- provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. SECTION 11.4. Expenses and Obligations. All costs and expenses incurred in ------------------------ connection with the consummation of the transactions contemplated by this Agreement by Buyer or Buyer Subsidiary shall be paid by Buyer or Buyer Subsidiary, and all costs and expenses incurred in connection with the consummation of the transactions contemplated by this Agreement by Sellers shall be paid by Sellers. SECTION 11.5. Notices. Any notice or other communication given pursuant to ------- this Agreement must be in writing and (a) delivered personally, (b) sent by telefacsimile or other similar facsimile transmission, (c) delivered by overnight express, or (d) sent by registered or certified mail, postage prepaid, as follows: 34 If to Buyer or Buyer Subsidiary, to: Allstate Life Insurance Company 3075 Sanders Road, Suite G2H Northbrook, Illinois 60062 Attention: James P. Zils Facsimile No.: (847) 402-9116 with a copy to: Allstate Insurance Company 2775 Sanders Road, Suite A8 Northbrook, Illinois 60062 Attention: Susan L. Lees Facsimile No.: (847) 402-0158 If to Sellers, to: Charter National Life Insurance Company Intramerica Life Insurance Company c/o Richard G. Petitt Empire Insurance Group 122 Fifth Avenue New York, New York 10011 Facsimile No.: (212) 387-2689 and to: Leucadia National Corporation 315 Park Avenue South New York, New York 10010 Attention: Joseph S. Steinberg, President Facsimile No.: (212) 598-3245 35 with a copy to: Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, New York 10153 Attention: Stephen E. Jacobs Facsimile No.: (212) 310-8007 All notices and other communications required or permitted under this Agreement that are addressed as provided in this Section will (A) if delivered personally or by overnight express, be deemed given upon delivery; (B) if delivered by telefacsimile or similar facsimile transmission, be deemed given when electronically confirmed; and (C) if sent by registered or certified mail, be deemed given when received. Any party from time to time may change its address for the purpose of notices to that party by giving a similar notice specifying a new address, but no such notice will be deemed to have been given until it is actually received by the party sought to be charged with the contents thereof. SECTION 11.6. Governing Law. This Agreement shall be governed by and ------------- construed in accordance with the Laws of the State of New York. SECTION 11.7. No Third Party Beneficiary. The terms and provisions of this -------------------------- Agreement are intended solely for the benefit of Sellers, Buyer, Buyer Subsidiary, and their respective successors and permitted assigns, and it is not the intention of the parties to confer third-party beneficiary rights upon any other Person. SECTION 11.8. Counterparts. This Agreement may be executed in two or ------------ more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. SECTION 11.9. Headings. The article and section headings contained in this -------- Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not affect in any way the meaning or interpretation of this Agreement. 36 SECTION 11.10. Entire Agreement. This Agreement and the exhibits and ---------------- schedules attached hereto embody the entire agreement and understanding of the parties hereto in respect of the subject matter contained herein or therein. There are no agreements, representations, warranties or covenants other than those expressly set forth herein or therein. This Agreement and the exhibits and schedules attached hereto supersede all prior agreements and understandings between the parties with respect to such subject matter. SECTION 11.11. Assignment. Neither this Agreement nor any right or ---------- obligation hereunder or part hereof may be assigned by any party hereto without the prior written consent of the other party hereto (and any attempt to do so will be void), except as otherwise specifically provided herein. SECTION 11.12. Jurisdiction and Venue. The parties hereto agree that any ---------------------- suit, action or proceeding arising out of or relating to this Agreement shall be instituted only in the County of New York in the State of New York. Each party waives any objection it may have now or hereafter to the laying of the venue of any such suit, action or proceeding, and irrevocably submits to the jurisdiction of any such court in any such suit, action or proceeding. SECTION 11.13. Confidentiality. Subject to Section 4.13 hereof, for the --------------- three years following the Effective Time, Buyer shall refrain, and shall cause its officers, directors, employees, agents, auditors, counsel, affiliates and other representatives (collectively, "Representatives") to refrain, from directly or indirectly: (a) disclosing to any Person, other than Representatives of Buyer or Buyer Subsidiary ("Buyer's Representatives") the terms and conditions of this Agreement or any records, files, documents, data (including without limitation claims or loss data), or information concerning any of Sellers or CNL or their respective affiliates that the Buyer or Buyer Subsidiary prepares, maintains, uses, or receives in connection with the transactions contemplated by this Agreement, unless (i) disclosure is compelled by any court or administrative agency or by other applicable requirements of law or (ii) such records, files, documents, data, or information can be shown to have been (x) generally available to the public other than as a result of a disclosure by Buyer, Buyer Subsidiary or Buyer's Representatives or (y) available to Buyer on a non-confidential basis from a source other than Sellers or their Representatives, provided that such source is not known by Buyer or Buyer Subsidiary to be bound by a 37 confidentiality agreement with, or other obligation of secrecy of, any Seller or another party; or (b) using such records, files, documents, data or information for any purpose (including without limitation directly or indirectly competing with Sellers or any affiliate thereof) except pursuant to this Agreement. Notwithstanding the foregoing, from and after the Closing Date, Buyer and Buyer Subsidiary shall be entitled to use information concerning, derived from, or related to the Business for any lawful purpose in connection with the transaction of Buyer's or Buyer Subsidiary's business under the Charter Coinsurance Agreement, the Charter Reinsurance Agreement, and the ILIC Coinsurance Agreement, provided that Buyer and Buyer Subsidiary shall comply with all Laws applicable to the use of such information (including, without limitation, Laws relating to the use of such information that would otherwise be applicable to Charter or ILIC, as applicable, as the issuers of the insurance policies and annuity contracts constituting the Business). 38 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be signed on its behalf by its duly authorized officers, all as of the day and year first above written. ALLSTATE LIFE INSURANCE COMPANY By: /s/ James P. Zils ---------------------------------------- Name: James P. Zils Title: Treasurer CHARTER NATIONAL LIFE INSURANCE COMPANY By: /s/ Richard G. Petitt ---------------------------------------- Richard G. Petitt, Chairman and Chief Executive Officer INTRAMERICA LIFE INSURANCE COMPANY By: /s/ Richard G. Petitt ---------------------------------------- Richard G. Petitt, Chairman and Chief Executive Officer LEUCADIA NATIONAL CORPORATION By: /s/ Joseph A. Orlando ---------------------------------------- Joseph A. Orlando, Vice President and Chief Financial Officer ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK By: /s/ James P. Zils ---------------------------------------- Name: James P. Zils Title: Treasurer DAFS01...:\30\76830\0137\1170\AGRD157T.55L EX-21 5 EXHIBIT 21 LEUCADIA NATIONAL CORPORATION EXHIBIT 21 SUBSIDIARIES AS OF DECEMBER 31, 1997 STATE OF NAME INCORPORATION - ---- ------------- CDS Devco, Inc. California HSD Venture California San Elijo Ranch, Inc. California Baldwin Enterprises, Inc. Colorado NSAC, Inc. Colorado RRP, Inc. Colorado 330 Mad. Parent Corp. Delaware AIC Financial Corporation Delaware American Investment Company Delaware Baldwin-CIS L.L.C. Delaware Bellpet, Inc. Delaware CDS Holding Corporation Delaware Conwed Corporation Delaware CPAX, Inc. Delaware International Bottlers L.L.C. Delaware Leucadia Aviation, Inc. Delaware Leucadia Cellars, Ltd. Delaware LNC Investments, Inc. Delaware LUK-CP Administrative Services, Inc. Delaware LUK-CPG, Inc. Delaware LUK-CPH, Inc. Delaware Neward Corporation Delaware Pepsi International Bottlers L.L.C. Delaware Rastin Investing Corp. Delaware RERCO, Inc. Delaware Wedgewood Investments L.L.C. Delaware Rosemary Beach Cottage Rental Company Florida Rosemary Beach Land Company Florida College Life Development Corporation Indiana Professional Data Management, Inc. Indiana Charter National Life Insurance Company Missouri The Sperry and Hutchinson Company, Inc. New Jersey Allcity Insurance Company New York Empire Insurance Company New York Centurion Insurance Company New York Intramerica Life Insurance Company New York Leucadia, Inc. New York Leucadia Investors, Inc. New York LUK-REN, Inc. New York Phlcorp, Inc. Pennsylvania Pine Ridge Associates, L.P. Texas American Investment Bank, N.A. United States LEUCADIA NATIONAL CORPORATION EXHIBIT 21 SUBSIDIARIES AS OF DECEMBER 31, 1997, continued STATE OF NAME INCORPORATION - ---- ------------- American Investment Financial Utah Leucadia Bottling L.L.C. Utah Leucadia Film Corporation Utah Leucadia Financial Corporation Utah Leucadia Power Holdings, Inc. Utah Leucadia Properties, Inc. Utah Silver Mountain Industries, Inc. Utah Telluride Properties Acquisition, Inc. Utah Terracor II Utah Commercial Loan Insurance Corporation Wisconsin WMAC Credit Insurance Corporation Wisconsin WMAC Investment Corporation Wisconsin - ---------------------- Subsidiaries not included on this list, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary as of December 31, 1997. 2 EX-23 6 EXHIBIT 23 Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Leucadia National Corporation on (i) Form S-8 (File No. 2-84303), (ii) Form S-8 and S-3 (File No. 33-6054), (iii) Form S-8 and S-3 (File No. 33-26434), (iv) Form S-8 and Form S-3 (File No. 33-30277), (v) Form S-8 (File No. 33-61682) and (vi) Form S-8 (File No. 33-61718) of our report dated March 23, 1998, on our audits of the consolidated financial statements and financial statement schedules of Leucadia National Corporation and Subsidiaries as of December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996 and 1995, which report is included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. New York, New York March 23, 1998 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS CONTAINED IN THE BODY OF THE ACCOMPANYING FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1997 DEC-31-1997 607,181 1,955,800 959,086 18,509 11,353 0 60,522 67,148 4,500,369 0 352,872 0 0 63,879 1,799,652 4,500,369 133,406 643,476 94,077 423,443 185,646 13,314 46,007 (24,934) (10,251) (22,625) 686,497 (2,057) 0 661,815 10.64 10.64
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