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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K/A
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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AMENDMENT NO. 1
Date of Report (Date of Earliest Event Reported): September 5, 1997
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LEUCADIA NATIONAL CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
NEW YORK
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(State or Other Jurisdiction of Incorporation)
1-5721 13-2615557
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(Commission File Number) (I.R.S. Employer Identification No.)
315 PARK AVENUE SOUTH, NEW YORK, N.Y. 10010
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(Address of Principal Executive Offices) (Zip Code)
(212) 460-1900
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(Registrant's Telephone Number, Including Area Code)
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(Former Name or Former Address, if Changed Since Last Report)
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NYFS04...:\30\76830\0227\1980\FRM9027K.59A
<PAGE>
EXPLANATORY NOTE
This Report on Form 8-K/A amends and restates in its entirety the Current Report
on Form 8-K of Leucadia National Corporation (the "Company") dated September 5,
1997.
Item 5. Other Events.
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On April 30, 1997, the Company signed an agreement to sell its subsidiaries,
Colonial Penn Life Insurance Company and Providential Life Insurance Company and
certain related assets, including its health insurance operations, to Conseco,
Inc. ("Conseco") for $460,000,000, including $400,000,000 in notes
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 sale was consummated on September 30, 1997.
The operations which were sold to Conseco represented a separate major line of
business and their assets, results of operations, and activities had been
clearly distinguished, physically and operationally and for financial reporting
purposes, from the other assets, results of operations, and activities of
Leucadia National Corporation. These businesses comprised over 90% of the
pre-tax profits of the life insurance segment. The other businesses which
comprise the remainder of the life insurance segment, were not sold, and consist
of the Company's variable annuity business, which is conducted through Charter
National Life Insurance Company and Intramerica Life Insurance Company.
Accordingly the operations sold to Conseco had been classified as discontinued
operations as of January 1, 1997.
The Company's financial statements contained in its 1996 Annual Report on Form
10-K have been restated in this Form 8-K/A to reflect such operations as
discontinued operations.
1
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Selected Financial Data.
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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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
SELECTED INCOME
STATEMENT DATA: (a)
Revenues $1,276,329 $1,347,786 $1,172,423 $1,175,888 $1,272,883
Net securities gains (losses) 34,953 20,687 (8,440) 44,696 39,494
Interest expense (b) 53,931 52,819 43,999 39,442 38,476
Insurance losses, policy benefits
and amortization of deferred
acquisition costs 813,324 809,123 688,703 639,358 705,629
Income from continuing operations
before income taxes, minority
expense of trust preferred
securities, cumulative effects
of changes in accounting
principles and extraordinary
loss 30,183 89,483 51,174 137,086 91,035
Income from continuing
operations before cumulative
effects of changes in accounting
principles and extraordinary loss 24,174 80,203 35,483 89,715 87,521
Income from discontinued operations 31,341 27,300 35,353 26,544 43,086
Cumulative effects of changes in
accounting principles - - - 129,195 -
Extraordinary loss from early
extinguishment of debt, net of
income tax benefit (6,838) - - - -
Net income 48,677 107,503 70,836 245,454 130,607
Per share:
Primary earnings (loss) per
common and dilutive common
equivalent share:
Income from continuing oper-
ations before cumulative
effects of changes in
accounting principles and
extraordinary loss $ .40 $1.35 $ .61 $1.53 $1.79
Income from discontinued
operations .51 .46 .61 .45 .88
Cumulative effects of changes
in accounting principles - - - 2.21 -
Extraordinary loss (.11) - - - -
----- ----- ----- ----- -----
Net income $ .80 $1.81 $1.22 $4.19 $2.67
===== ===== ===== ===== =====
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Footnotes on following page.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
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1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Fully diluted earnings (loss)
per common share:
Income from continuing operations
before cumulative effects of
changes in accounting principles
and extraordinary loss $ .40 $1.33 $ .64 $1.51 $1.78
Income from discontinued operations .51 .44 .57 .43 .88
Cumulative effects of changes in
accounting principles - - - 2.10 -
Extraordinary loss (.11) - - - -
----- ----- ----- ----- -----
Net income $ .80 $1.77 $1.21 $4.04 $2.66
===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA: (a)
Cash and investments $2,400,656 $2,381,087 $1,997,014 $2,174,405 $2,501,412
Total assets 4,331,361 4,265,516 3,819,703 3,849,530 3,460,078
Debt, including current maturities 523,366 518,177 425,848 401,335 225,588
Customer banking deposits 209,261 203,061 179,888 173,365 186,339
Common shareholders' equity 1,118,107 1,111,491 881,815 907,856 618,161
Book value per common share $18.51 $18.47 $15.72 $16.27 $11.06
Cash dividends declared per
common share $.25 $.25 $.13 $.13 $.10
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
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1996 1995 1994 1993 1992
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<S> <C> <C> <C> <C> <C>
SELECTED INFORMATION ON
PROPERTY AND CASUALTY
INSURANCE OPERATIONS
(Unaudited): (a)(c)
GAAP Combined Ratio 105.0% 103.5% 99.1% 96.9% 101.7%
SAP Combined Ratio 101.5% 101.2% 98.8% 93.7% 102.8%
Industry SAP Combined Ratio (d) 105.8% 106.4% 108.4% 106.9% 115.7%
Premium to Surplus Ratio (e) 1.6x 1.8x 1.9x 1.6x 2.0x
</TABLE>
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(a) Data includes acquired companies from date of acquisition.
(b) Includes interest on customer banking deposits.
(c) Certain accident and health insurance business, which is included in the
statutory results of operations of the property and casualty insurance
segment and is reflected in the SAP Combined Ratio, is reported in the life
insurance segment for financial reporting purposes and therefore is not
included in the GAAP Combined Ratios reflected herein. The Combined Ratio
does not reflect the effect of investment income. For 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 1996,
the difference relates to the accounting for certain expenses which are
treated differently under statutory accounting principles ("SAP") and
generally accepted accounting principles ("GAAP"). For 1993, the difference
reflects the different treatment of certain costs for GAAP and SAP purposes.
For 1992, the results of certain accident and health insurance business had
a non-recurring income item which reduced the SAP Combined Ratio. In
addition, in 1992 certain income credits were recognized only for GAAP
purposes.
(d) Source: Best's Aggregates & Averages, Property/Casualty, 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.
(e) Premium to Surplus Ratio was calculated by dividing statutory property and
casualty insurance premiums written by statutory capital at the end of the
year.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations.
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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.
The Parent maintains the principal borrowings for the Company and its
non-banking subsidiaries and has provided working capital to certain of its
subsidiaries. These borrowings have primarily been made on an unsecured basis
from banks through various credit agreement facilities and term loans, and
through public
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financings. During the year ended December 31, 1996, the Company did not use its
$150,000,000 bank credit agreement facilities, except for minor amounts borrowed
to meet daily cash requirements. At December 31, 1996, there were no amounts
outstanding under such bank credit agreement facilities. The Company's bank
borrowings bear interest based on the prime rate or LIBOR.
In February 1997, the Company replaced these credit facilities and its
$50,000,000 of outstanding bank term loans with a new contractual bank credit
facility of $200,000,000. The new facility bears interest based on the prime
rate or LIBOR and matures in February 2002.
In October 1996, the Company sold $135,000,000 principal amount of its newly
authorized 7-7/8% Senior Subordinated Notes due 2006 in an underwritten public
offering at 99.487% of the principal amount. As of December 31, 1996,
$114,000,000 of the net proceeds were used to purchase $102,656,000 aggregate
principal amount of the Company's 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. In the fourth quarter of 1996, the Company reported an
extraordinary loss on early extinguishment of these 10-3/8% Notes of $6,838,000,
net of income tax benefit of $3,682,000. The Company intends to retire the
10-3/8% Notes that remain outstanding either through open market purchases or
through early redemption of the 10-3/8% Notes in June 1997. The refinancing of
the 10-3/8% Notes will result in annual expense savings of approximately
$2,600,000.
At December 31, 1996, a maximum of approximately $33,962,000 was available to
the Parent as dividends from its regulated subsidiaries without regulatory
approval. Additional amounts may be available to the Parent in the form of loans
or cash advances from regulated subsidiaries, although no amounts were
outstanding at December 31, 1996 or borrowed to date in 1997. 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 $194,500,000 at December 31, 1996. 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
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<PAGE>
provided by the Parent. Payments from regulated subsidiaries for dividends, tax
sharing payments and other services totaled approximately $104,400,000
($19,858,000 from discontinued operations), for the year ended December 31,
1996.
On March 12, 1997, the Company called for redemption on April 11, 1997 all of
its outstanding $100,000,000 5-1/4% Convertible Subordinated Debentures due
2003, at a redemption price of 102.625% of the principal amount of the
Debentures, plus accrued interest. The funds to be used for this redemption are
expected to be provided from general corporate funds available to the Parent.
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 Investors Service Inc., Standard & Poor's
Corporation and Duff & Phelps Inc. Ratings issued by bond rating agencies are
subject to change at any time.
Consolidated Liquidity
During each of the three years in the period ended December 31, 1996, the
Company operated profitably and net cash was provided from operations.
The Company has entered into interest rate agreements to manage the impact of
changes in interest rates on its variable rate debt and customer banking
deposits. Counterparties to these agreements are major financial institutions,
which the Company believes are able to fulfill their obligations; however, if
they are not, the Company believes that any losses are unlikely to be material.
In April 1996, the Company formed PIB with PepsiCo, Inc to be the exclusive
bottler and distributor of PepsiCo beverages in a large portion of central and
eastern Russia, Kyrgyzstan and Kazakstan. The Company and PepsiCo have committed
to make capital contributions to PIB of $79,500,000 and $26,500,000,
respectively. As of December 31, 1996, the Company contributed $51,000,000; the
balance was funded in January 1997. In February 1997, the Company, PepsiCo and
PIB signed a term sheet with third party lenders to provide $90,000,000 of
additional financing to Pepsi International Bottlers ("PIB"). Actual funding
will require satisfactory negotiation and execution of definitive loan
agreements, as well as, among other things, a license from the Russian Central
Bank. Pending satisfaction of such requirements, bridge financing to
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<PAGE>
PIB to cover operating costs and capital expenditures will be necessary. The
Company estimates that its share of the bridge financing should not exceed
$30,000,000.
The Company has a 75% economic interest in PIB and PepsiCo owns the remaining
25%. Under the terms of the joint venture agreement, the Company and PepsiCo
have equal voting rights over all significant aspects of PIB's operations.
Accordingly, since the Company does not control PIB despite its larger economic
interest, the Company accounts for its share of PIB's operating results under
the equity method of accounting. The Company's equity in losses of PIB was
$17,104,000 for the year ended December 31, 1996, resulting from significant
start-up costs of this operation. The Company anticipates that PIB will continue
to experience operating losses during the period that PIB is building production
and distribution capacity and market share.
In July 1996, the Company committed to invest up to $25,000,000 for a 57.5%
equity interest in an 809,000 square foot office building and garage and a
minority interest in a Marriott hotel. This real estate project in Brooklyn, New
York is currently under construction. The Company's equity investment is
expected to be contributed toward the end of the anticipated two year
construction period. The Empire Group will be a major tenant in the project, and
as such will receive certain benefits, primarily from the City of New York, with
a present value of approximately $36,000,000.
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 its program to convert 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 companies.
The funds for the investments described above were or are expected to be
provided from general corporate funds available to the Parent company.
In January 1997, the Company sold $150,000,000 aggregate liquidation amount of
8.65% trust issued preferred securities of its 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
7
<PAGE>
undivided beneficial interests in the Trust's assets, which consist solely of
8.65% Junior Subordinated Deferrable Interest Debentures due 2027 of the
Company. The obligations of the Trust related to its preferred securities are
fully and unconditionally guaranteed by the Company.
The investment portfolios of the Company's insurance subsidiaries are
principally fixed maturity investments rated "investment grade" or U.S.
governmental agency issued or guaranteed obligations, although limited
investments in "non-rated" or rated less than investment grade securities have
been made from time to time. The investment strategy of the insurance
subsidiaries has been to maintain a high quality portfolio of publicly traded,
fixed income securities with a relatively short duration. Principally as a
result of increases in market interest rates during 1996, the unrealized gain on
investments at the end of 1995 of approximately $30,086,000 (net of taxes)
decreased to approximately $1,759,000 (net of taxes) as of December 31, 1996.
While this has resulted in a decrease in shareholders' equity, it had no effect
on results of operations or cash flows.
The Company provides collateralized automobile loans to individuals with poor
credit histories. In 1996, the Company continued to experience increased
competition resulting in reduced volume and increased loan losses. 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 $96,338,000, $134,668,000 and
$129,512,000 at December 31, 1996, 1995 and 1994, respectively.
The Company and certain of its 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. 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. The Company has
recognized as an asset (net of reserves) certain of the benefits of such loss
carryforwards and other tax attributes. As described in the Notes to the
Consolidated Financial Statements, significant additional amounts may be
available under certain circumstances.
8
<PAGE>
RESULTS OF OPERATIONS
The Company's most significant operations are its insurance businesses, where it
is a specialty markets provider of property and casualty insurance to niche
markets and of variable annuity ("VA") products. For the year ended December 31,
1996, the Company's insurance segments contributed 68% of total revenues and, at
December 31, 1996, constituted 59% of total assets.
Earned premium revenues of the Colonial Penn P&C Group were approximately
$497,100,000, $490,500,000 and $447,200,000, for the years ended December 31,
1996, 1995 and 1994, respectively. Earned premiums from voluntary automobile
policies were 10.2% higher in 1996 and voluntary automobile policies in force
increased 6.6% from December 31, 1995. Since the first quarter of 1995, the
Colonial Penn P&C Group has been successful in growing its voluntary automobile
business, principally through direct mail and referral marketing techniques. The
increase in earned premium revenues was partially offset by reduced service
business and the depopulation of state assigned risk automobile pools. The
growth in earned premiums in 1995, as compared to 1994, principally resulted
from service business and a modest increase in earned premiums related to
voluntary automobile polices.
Earned premium revenues and commissions of the property and casualty insurance
operations of the Empire Group were $326,400,000, $326,100,000 and $299,200,000
for the years ended December 31, 1996, 1995 and 1994, respectively. Beginning in
the fourth quarter of 1995, higher premium rates were charged on certain lines
of business, including in 1996 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 have not been profitable, primarily certain
specialty programs within voluntary commercial automobile lines. In addition,
the Empire Group has experienced increased competition, primarily in workers'
compensation and commercial package policies, which has reduced volume. The
increase in 1995 as compared to 1994 principally was attributable to growth in
policies in force and increased premium rates. The majority of the growth in
1995 resulted from service business.
9
<PAGE>
The Company's property and casualty insurance operations combined ratios as
determined under GAAP and SAP were as follows:
Year Ended December 31,
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1996 1995 1994
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Colonial Penn P&C Group:
GAAP 98.6% 97.0% 96.1%
SAP 97.4% 97.3% 97.1%
Empire Group:
GAAP 114.7% 113.0% 103.5%
SAP 107.9% 107.4% 101.3%
Property and Casualty
Insurance Group:
GAAP 105.0% 103.5% 99.1%
SAP 101.5% 101.2% 98.8%
The provision for insurance losses and policy benefits includes catastrophe
losses, net of reinsurance recoveries, estimated at approximately $5,000,000,
$4,600,000 and $18,300,000, for the years ended December 31, 1996, 1995 and
1994, respectively. The 1994 losses include approximately $11,700,000 related to
the Northridge, California earthquake.
In 1996, the combined ratios of the Colonial Penn P&C Group increased due to
increased levels of new voluntary automobile business for which higher loss
reserves are provided than on renewal business and a retroactive adjustment to
its New Jersey automobile pool involuntary assignment, offset in part by a
favorable settlement of a special risk claim. The costs incurred to acquire new
business combined with the related loss reserving policies depress operating
results while the business grows. The Colonial Penn P&C Group believes that its
strong underwriting procedures, emphasis on mature adult insureds and claims
handling and settlement practices have enabled it to record combined ratios that
compare favorably with the industry. The combined ratios for the Colonial Penn
P&C Group increased slightly in 1995 as compared to 1994. The 1995 combined
ratios reflected higher losses related to service business that were partially
offset by increased service fee income. In addition, the combined ratios in 1995
were favorably affected by reduced catastrophe losses as compared to 1994.
The combined ratios of the Empire Group increased in 1996 due to high
assessments from the New York State workers' compensation fund, severance
benefits for certain employees, a reduction in the estimate of fees earned as a
servicing carrier for the New York Public Automobile Pool and reduced assigned
risk business,
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offset in part by an improved 1996 accident year loss ratio. The Empire Group
believes that the improvement in the 1996 accident year loss ratio results from
its efforts to increase the profitability of its product lines, primarily
through rate increases and improved underwriting procedures. Included in the
Empire Group's results for 1996 and 1995 were approximately $28,000,000 and
$34,500,000, respectively, for reserve strengthening related to losses from
prior accident years. In 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. In 1995, the Empire Group's combined ratios
increased as compared to 1994 primarily due to the reserve strengthening.
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. The Empire Group has implemented changes
in its claim handling practices which it believes will result in a more timely
and effective resolution of claims. 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 as soon as the change in development
was identified.
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.
11
<PAGE>
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 judgement, 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 investment oriented products ("IOP products") of the
life insurance subsidiaries (which are not reflected as revenues) were
$47,265,000 in 1996, $43,717,000 in 1995 and $98,578,000 in 1994. The principal
IOP product sold during the three years ended December 31, 1996 was a VA product
marketed directly to consumers. The Company believes the decline in premium
revenue receipts of the VA product in 1995 was due to a combination of factors,
including the public's perception of potential tax law changes, increased
competition and the performance of the fund manager.
Manufacturing revenues declined during each of the last two years due to the
sale of certain divisions and the discontinuance of certain non-performing
product lines. The Company recorded charges of $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." The pre-tax results for
this segment improved in 1996, primarily due to manufacturing and operating
efficiencies at the bathroom vanities and plastics divisions and the disposal of
non-performing businesses.
Finance revenues and operating profits reflect the reduced level of consumer
instalment loans and the increase in automobile loan losses, as discussed above.
In addition, in 1996, the decline in operating profit was also caused by
increased interest expense on customer banking deposits. In 1995, the increase
in finance revenues from consumer instalment loans as compared to 1994 was
offset in part by increased interest expense on customer banking deposits and
greater losses on automobile loans.
12
<PAGE>
Investment and other income decreased in 1996 and increased in 1995 primarily
due to the gain on the return of the WMAC Companies. 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. Interest and dividend income increased
in 1995, reflecting higher investment yields and increased funds available for
investment. Investment and other income also reflected increased fee income in
1995 related to service business. Investment and other income in 1994 included
$8,458,000 related to the disposition of El Salvador government bonds and
$14,490,000 related to the sale of the Company's remaining shares in Bolivian
Power Company.
Equity in losses of associated companies increased in 1996 primarily due to
start-up losses from the Company's equity investment in PIB of $17,104,000,
losses from its interest in MK Gold Company of $6,478,000 and a $7,041,000
write-off of the Company's investment in an unsuccessful well drilled by its
Siberian oil exploration joint venture.
Higher interest expense in each of 1996 and 1995 compared to the prior year
principally reflected the increased level of outstanding debt. Interest expense
also reflected the increased level of deposits at American Investment Bank and
American Investment Financial and an increase in rates related to those
deposits. Generally, interest rates on deposits are lower than on other
available funds. Interest expense on deposits was $12,575,000 in 1996,
$12,034,000 in 1995 and $8,304,000 in 1994.
The increase in 1995 as compared to 1994 in selling, general and other expenses
principally reflected the losses recorded by the manufacturing segment as
described above, operating expenses of real estate properties acquired during
1994, expenses relating to certain investing activities, including expenses
related to exploring opportunities in Russia, and increased provisions for bad
debts at the banking and lending segment. In 1995 and 1994, statistical studies
and estimates of service costs indicated that the recorded liability for
unredeemed trading stamps was in excess of the amount that ultimately would be
required to redeem trading stamps outstanding. As a result, selling, general and
other expenses applicable to the trading stamp operations included credits of
$9,400,000 and $11,700,000 for the years ended December 31, 1995 and 1994,
respectively, reflecting adjustments made to the liability for unredeemed
trading stamps. The Company's most recent analysis of the liability for
13
<PAGE>
unredeemed trading stamps had not identified any remaining excess as of
December 31, 1996.
The 1996 provision for income taxes was below the expected normal corporate tax
rate primarily due to the favorable resolution of certain contingencies. The
provision for income taxes for 1995 was below the expected normal corporate
income 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 provision for income taxes for 1994 was below the expected
normal corporate income tax rate principally because of a reduction in the
valuation allowance applicable to the deferred tax asset due to the resolution
of certain contingencies.
Income from discontinued operations increased in 1996 as compared to 1995
primarily due to the acquisition of Providential Life Insurance Company
("Providential") in April 1996, which markets agent-sold Medicare supplement
products, and continued growth of the Company's ordinary life insurance product.
The Company had stopped marketing its own agent-sold Medicare supplement
products in 1992 due to inadequate profitability. Providential markets
agent-sold Medicare supplement products in communities where health maintenance
organizations are less prevalent, which the Company believes results in adequate
profitability. The decrease in 1995 as compared to 1994 primarily reflected the
run-off of the agent-sold Medicare supplement business, which had less
favorable loss experience in 1995.
The number of shares used to calculate primary earnings per share was
60,560,000, 59,271,000 and 58,202,000 for 1996, 1995 and 1994, respectively. The
number of shares used to calculate fully diluted earnings per share was
60,560,000, 62,807,000 and 61,715,000 for 1996, 1995 and 1994, respectively. The
increase in the number of shares utilized in calculating per share amounts
principally related to the sale of common shares in an underwritten public
offering in September 1995. In addition, for fully diluted per share amounts,
the 5-1/4% Convertible Subordinated Debentures due 2003 were not assumed to have
been converted in 1996 since the effect of such assumed conversion would have
been to increase earnings per share.
14
<PAGE>
Index to Financial Statements and Schedules.
- --------------------------------------------
Financial Statements and Schedules.
-----------------------------------
Report of Independent Accountants........................F-1
Financial Statements:
Consolidated Balance Sheets at
December 31, 1996 and 1995...........................F-2
Consolidated Statements of Income
for the years ended December 31,
1996, 1995 and 1994..................................F-3
Consolidated Statements of Cash
Flows for the years ended
December 31, 1996, 1995 and 1994.....................F-4
Consolidated Statements of Changes
in Shareholders' Equity for the
years ended December 31, 1996, 1995
and 1994.............................................F-6
Notes to Consolidated Financial
Statements...........................................F-7
Financial Statement Schedules:
Schedule II - Condensed Financial
Information of Registrant...........................F-42
Schedule III - Supplementary
Insurance Information...............................F-47
Schedule IV - Schedule of
Reinsurance.........................................F-48
Schedule V - Valuation and
Qualifying Accounts.................................F-49
Schedule VI - Schedule of Supplemental
Information for Property and
Casualty Insurance Underwriters.....................F-50
15
<PAGE>
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 on
page 14 of this Form 8-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, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, 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 21, 1997,
except for Notes 6 and 23,
as to which the date is September 3, 1997.
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(Dollars in thousands, except par value)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
- ------
Investments:
Available for sale (aggregate cost of $1,926,201
and $1,965,762) $1,928,938 $2,005,927
Trading securities (aggregate cost of $32,317
and $29,623) 31,030 31,993
Held to maturity (aggregate fair value of $68,198
and $62,080) 68,202 61,223
Policyholder loans 4,955 5,916
Other investments, including accrued interest income 68,059 69,299
---------- ----------
Total investments 2,101,184 2,174,358
Cash and cash equivalents 299,472 206,729
Reinsurance receivables, net 246,946 257,935
Trade, notes and other receivables, net 456,088 489,934
Prepaids and other assets 222,141 236,707
Property, equipment and leasehold improvements, net 89,640 101,253
Deferred policy acquisition costs 41,654 46,721
Deferred income taxes 81,102 73,118
Separate and variable accounts 436,992 370,968
Investments in associated companies 206,384 184,088
Net assets of discontinued operations 149,758 123,705
---------- ----------
Total $4,331,361 $4,265,516
========== ==========
LIABILITIES
- -----------
Customer banking deposits $ 209,261 $ 203,061
Trade payables and expense accruals 187,561 164,017
Other liabilities 120,753 122,900
Income taxes payable 42,240 43,016
Policy reserves 1,253,445 1,295,023
Unearned premiums 431,323 426,823
Separate and variable accounts 435,937 370,968
Debt, including current maturities 523,366 518,177
---------- ----------
Total liabilities 3,203,886 3,143,985
---------- ----------
Minority interest 9,368 10,040
---------- ----------
SHAREHOLDERS' EQUITY
- --------------------
Common shares, par value $1 per share, authorized
150,000,000 shares; 60,417,579 and 60,163,824
shares issued and outstanding, after deducting
54,353,691 and 54,319,654 shares held in treasury 60,418 60,164
Additional paid-in capital 161,026 159,914
Net unrealized gain on investments 1,759 30,086
Retained earnings 894,904 861,327
---------- ----------
Total shareholders' equity 1,118,107 1,111,491
---------- ----------
Total $4,331,361 $4,265,516
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1996, 1995 and 1994
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Insurance revenues and commissions $ 827,758 $ 820,796 $ 751,220
Manufacturing 148,284 166,237 180,050
Finance 49,150 53,958 45,835
Investment and other income 249,815 288,721 208,934
Equity in losses of associated companies (33,631) (2,613) (5,176)
Net securities gains (losses) 34,953 20,687 (8,440)
---------- ---------- ----------
1,276,329 1,347,786 1,172,423
---------- ---------- ----------
Expenses:
Provision for insurance losses and policy
benefits 723,485 714,347 610,478
Amortization of deferred policy acquisition
costs 89,839 94,776 78,225
Manufacturing cost of goods sold 107,667 129,279 137,507
Interest 53,931 52,819 43,999
Salaries 77,089 77,549 74,308
Selling, general and other expenses 194,135 189,533 176,732
---------- ---------- ----------
1,246,146 1,258,303 1,121,249
---------- ---------- ----------
Income from continuing operations before
income taxes and extraordinary loss 30,183 89,483 51,174
---------- ---------- ----------
Income taxes:
Current 5,904 3,167 8,299
Deferred 105 6,113 7,392
---------- ---------- ----------
6,009 9,280 15,691
---------- ---------- ----------
Income from continuing operations before
extraordinary loss 24,174 80,203 35,483
Income from discontinued operations,
net of taxes 31,341 27,300 35,353
---------- ---------- ----------
Income before extraordinary loss 55,515 107,503 70,836
Extraordinary loss from early extinguishment
of debt, net of income tax benefit of $3,682 (6,838) - -
---------- ---------- ----------
Net income $ 48,677 $ 107,503 $ 70,836
========== ========== ==========
Earnings (loss) per common and dilutive
common equivalent share:
Income from continuing operations before
extraordinary loss $ .40 $1.35 $ .61
Income from discontinued operations .51 .46 .61
Extraordinary loss (.11) - -
----- ----- -----
Net income $ .80 $1.81 $1.22
===== ===== =====
Fully diluted earnings (loss) per common share:
Income from continuing operations before
extraordinary loss $ .40 $1.33 $ .64
Income from discontinued operations .51 .44 .57
Extraordinary loss (.11) - -
----- ----- -----
Net income $ .80 $1.77 $1.21
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Thousands of dollars)
<S> <C> <C> <C>
Net cash flows from operating activities:
Net income $ 48,677 $ 107,503 $ 70,836
Adjustments to reconcile net income to net
cash provided by operations:
Extraordinary loss, net of income tax benefit 6,838 - -
Provision for deferred income taxes 105 6,113 7,392
Depreciation and amortization of property,
equipment and leasehold improvements 16,876 17,254 16,856
Other amortization 100,929 97,217 86,776
Provision for doubtful accounts 17,424 17,849 10,579
Net securities (gains) losses (34,953) (20,687) 8,440
Equity in losses of associated companies 33,631 2,613 5,176
(Gain) loss on disposal of real estate, property
and equipment (7,485) 3,430 (459)
(Gains) related to foreign power companies - - (22,948)
(Gain) related to the return of the WMAC Companies - (41,030) -
Purchases of investments classified as trading (151,677) (91,433) (66,553)
Proceeds from sales of investments classified
as trading 155,935 91,684 59,569
Deferred policy acquisition costs incurred and deferred (84,772) (99,247) (84,167)
Net change in:
Reinsurance receivables 11,977 48,367 151,371
Trade, notes and other receivables (14,137) (23,892) (22,468)
Prepaids and other assets (64,147) (17,742) (22,811)
Net assets of discontinued operations (10,739) 7,765 (2,699)
Trade payables and expense accruals 28,550 10,834 27,370
Other liabilities (1,785) (11,414) (17,241)
Income taxes payable (1,053) 2,247 (4,054)
Policy reserves (41,552) 27,599 (124,625)
Unearned premiums 4,500 23,316 36,264
Other 735 4,452 3,215
--------- ---------- ----------
Net cash provided by operating activities 13,877 162,798 115,819
--------- ---------- ----------
Net cash flows from investing activities:
Acquisition of real estate, property, equipment
and leasehold improvements (24,507) (50,438) (115,679)
Proceeds from disposals of real estate, property
and equipment 46,043 22,521 7,741
Investment in Providential Life in 1996,
MK Gold in 1995 and Caja in 1994 (11,196) (22,593) (45,711)
Advances on loan receivables (113,787) (154,329) (182,289)
Principal collections on loan receivables 128,756 123,266 118,484
Purchases of investments (other than short-term) (1,815,398) (1,401,550) (855,480)
Proceeds from maturities of investments 547,992 526,635 302,724
Proceeds from sales of investments 1,330,430 688,812 658,658
---------- ---------- ----------
Net cash provided by (used for)
investing activities 88,333 (267,676) (111,552)
---------- ---------- ----------
(continued)
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
For the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
(Thousands of dollars)
Net cash flows from financing activities:
Net change in short-term borrowings $ 207 $ (80) $ (582)
Net change in customer banking deposits 6,199 22,785 6,346
Net change in policyholder account balances (26) (13,559) (1,372)
Issuance of long-term debt, net of issuance
costs 141,581 98,590 50,000
Reduction of long-term debt (141,491) (9,360) (27,940)
Sale of common shares and exercise of warrants,
net of expenses - 43,857 -
Purchase of common shares for treasury (837) (727) (472)
Dividends paid (15,100) (15,025) (7,021)
---------- ---------- ----------
Net cash provided by (used for)
financing activities (9,467) 126,481 18,959
---------- ---------- ----------
Net increase in cash and
cash equivalents 92,743 21,603 23,226
Cash and cash equivalents at January 1, 206,729 185,126 161,900
---------- ---------- ----------
Cash and cash equivalents at December 31, $ 299,472 $ 206,729 $ 185,126
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $54,186 $52,867 $43,133
Income tax payments, net of refunds $ 7,577 $ 1,875 $13,370
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Net
Common Unrealized
Shares Additional Gain (Loss)
$1 Par Paid-in On Retained
Value Capital Investments Earnings Total
------- -------- ----------- -------- -------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $55,794 $ 97,116 $ 49,912 $705,034 $ 907,856
Exercise of options to
purchase common shares 330 1,507 1,837
Purchase of stock for treasury (24) (448) (472)
Net change in unrealized gain
(loss) on investments (91,221) (91,221)
Dividend ($.125 per common share) (7,021) (7,021)
Net income 70,836 70,836
------- -------- -------- -------- --------
Balance, December 31, 1994 56,100 98,175 (41,309) 768,849 881,815
Exercise of options to
purchase common shares 415 2,201 2,616
Purchase of stock for treasury (29) (698) (727)
Exercise of warrants to purchase
common shares (net of expenses)
and related income tax benefit 3,200 47,845 51,045
Issuance of common shares, net
of underwriting discounts 478 12,391 12,869
Net change in unrealized gain
(loss) on investments 71,395 71,395
Dividend ($.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
======= ======== ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
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, 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 variable annuity products. The
Company's principal personal lines insurance products are automobile insurance,
homeowners insurance and variable annuity products. The Company's principal
commercial lines are property and casualty products provided for workers'
compensation, multi-family residential real estate, retail establishments and
livery vehicles in the New York metropolitan area.
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 products for the "do-it-yourself" home improvement market
and for industrial markets.
The Company has classified as discontinued operations its health insurance
operations and certain life insurance businesses. See Note 6.
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.
F-7
<PAGE>
2. Significant Accounting Policies, continued:
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 1996 presentation and as required with respect to 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
$267,831,000 and $144,145,000 at December 31, 1996 and 1995, respectively.
(d) Investments: At acquisition, marketable debt and equity securities are
designated as either i) held to maturity, which are carried at amortized cost,
ii) trading, which are carried at estimated fair value with unrealized gains and
losses reflected in results of operations, or iii) available for sale, which are
carried at estimated fair value with unrealized gains and losses reflected as a
separate component of shareholders' equity, net of taxes. Held to maturity
investments are made with the intention of holding such securities to maturity,
which the Company has the ability to do. Estimated fair values are principally
based on quoted market prices.
Investments with an impairment in value considered to be other than temporary
are written down to estimated net realizable values. The writedowns are included
in "Net securities gains (losses)" in the Consolidated Statements of Income. The
cost of securities sold is based on average cost.
The Company's investments in Russian equity securities ($43,800,000 and
$39,700,000 as of December 31, 1996 and 1995, 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 ($97,470,000 and $100,713,000 at December 31, 1996 and 1995,
respectively).
F-8
<PAGE>
2. Significant Accounting Policies, continued:
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, 1996 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
direct response marketing costs, commissions, premium taxes and other
underwriting expenses (net of reinsurance allowances). If recoverability of such
costs from future premiums and related investment income is not anticipated, the
amounts not considered recoverable are charged to operations.
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,
principally Florida, California and the East Coast. 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.
F-9
<PAGE>
2. Significant Accounting Policies, continued:
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 credits of $9,400,000 and
$11,700,000 for the years ended December 31, 1995 and 1994, respectively,
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, 1996.
(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 variable
rate debt and customer banking deposits. The difference between the amounts paid
and received
F-10
<PAGE>
2. Significant Accounting Policies, continued:
is accrued and recognized as an adjustment to interest expense. Gains and losses
related to interest rate agreements are amortized as yield adjustments over the
remaining life of the underlying hedged security. 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.
(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:
During 1994, the Company acquired a 30% interest in Caja de Ahorro y Seguro S.A.
("Caja") from the government of Argentina for a purchase price of $46,000,000,
including costs. Caja is a holding company whose subsidiaries are engaged in
property and casualty insurance, life insurance and banking in Argentina. The
difference between the Company's investment in Caja and its share of Caja's
underlying net tangible assets is being amortized over 20 years. At December 31,
1996, the carrying amount of the Company's investment in Caja was $44,333,000.
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, 1996, the carrying amount of the
Company's investment in MK Gold was $15,716,000.
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 $21,385,000 at December 31, 1996.
F-11
<PAGE>
3. Acquisitions, continued:
During 1996, the Company formed a joint venture, Pepsi International Bottlers
("PIB"), with PepsiCo, Inc to be the exclusive bottler and distributor of
PepsiCo beverages in a large portion of central and eastern Russia, Kyrgyzstan
and Kazakstan. The Company and PepsiCo have committed to make capital
contributions to PIB of $79,500,000 and $26,500,000, respectively. As of
December 31, 1996, the Company contributed $51,000,000; the balance was funded
in January 1997. The Company has a 75% economic interest in PIB and PepsiCo owns
the remainder. Under the terms of the joint venture agreement, the Company and
PepsiCo have equal voting rights over all significant aspects of PIB's
operations. Accordingly, since the Company does not control PIB despite its
larger economic interest, the Company accounts for its share of PIB's operating
results under the equity method of accounting. At December 31, 1996, the
carrying amount of the Company's investment in PIB was $33,896,000.
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 1996 results of operations. Such results were not material in 1995 and 1994.
(Amounts are in thousands.)
Assets $1,004,675
----------
Liabilities 915,703
----------
Minority interest 2,929
----------
Net assets $ 86,043
==========
The Company's portion of the
reported net assets $ 48,703
==========
Total revenues $ 627,658
(Loss) from continuing operations
before extraordinary items $ (90,607)
Net (loss) $ (90,607)
The Company's equity in net (loss) $ (33,631)
F-12
<PAGE>
4. Investments in Associated Companies, continued:
At December 31, 1996, 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%).
5. Insurance Operations:
Premiums received on IOP products were $47,265,000, $43,717,000 and $98,578,000
for the years ended December 31, 1996, 1995 and 1994, respectively.
The changes in deferred policy acquisition costs were as follows (in thousands):
1996 1995 1994
---- ---- ----
Balance, January 1, $ 46,721 $ 42,250 $ 36,308
Policy acquisition costs incurred
and deferred 84,772 99,247 84,167
Amortization of deferred
acquisition costs (89,839) ( 94,776) (78,225)
-------- -------- --------
Balance, December 31, $ 41,654 $ 46,721 $ 42,250
======== ======== ========
The effect of reinsurance on premiums written and earned for the years ended
December 31, 1996, 1995 and 1994 is as follows (in thousands):
1996 1995 1994
---- ---- ----
Premiums Premiums Premiums Premiums Premiums Premiums
Written Earned Written Earned Written Earned
------- ------ ------- ------ ------- ------
Direct $885,453 $882,487 $871,594 $841,779 $789,808 $754,155
Assumed 3,063 5,946 7,298 22,431 31,697 32,154
Ceded (61,537) (60,675) (47,892) (43,414) (38,323) (35,089)
-------- -------- -------- -------- -------- --------
Net $826,979 $827,758 $831,000 $820,796 $783,182 $751,220
======== ======== ======== ======== ======== ========
Recoveries recognized on reinsurance contracts were $45,925,000 in 1996,
$28,334,000 in 1995 and $43,410,000 in 1994.
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):
F-13
<PAGE>
5. Insurance Operations, continued:
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Net income:
Property and casualty insurance $78,275 $69,145 $59,048
Life insurance $36,354 $ 9,554 $ 8,693
At December 31,
---------------
1996 1995 1994
---- ---- ----
Statutory surplus:
Property and casualty insurance $561,060 $520,700 $425,128
Life insurance $406,503 $376,223 $335,903
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 are owned by other insurance subsidiaries. As a
result, the statutory net income of the life insurance subsidiaries includes
statutory dividend income from property and casualty operations of $36,120,000,
$6,840,000 and $9,162,000 for 1996, 1995 and 1994, respectively. In the data
above, investments in such subsidiary-owned insurance companies are reflected in
statutory surplus of both the parent and subsidiary-owned insurance company. As
a result, at December 31, 1996, 1995 and 1994, statutory surplus of
$316,300,000, $292,800,000 and $252,800,000, 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, $29,300,000 and
$35,900,000, respectively, related to life operations is also included in the
statutory surplus of the property and casualty insurance parent. The insurance
subsidiaries are subject to regulatory restrictions which limit the amount of
cash and other distributions available to the Company without regulatory
approval. At December 31, 1996, $27,082,000 could be distributed to the Company
without regulatory approval.
In December 1995, the Company entered into an agreement with the California
Department of Insurance to settle its Proposition 103 liability for $17,700,000.
The settlement did not exceed reserves established in prior years. The Company
paid the settlement amount during the first quarter of 1996.
F-14
<PAGE>
5. Insurance Operations, continued:
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.
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 Company's property and casualty insurance subsidiaries rely upon standard
actuarial ultimate loss projection techniques to obtain estimates of liabilities
for losses and LAE. These projections include the extrapolation of both losses
paid and incurred by business line and accident year and implicitly consider the
impact of inflation and claims settlement patterns upon ultimate claim costs
based upon historical patterns. In addition, methods based upon average loss
costs, reported claim counts and pure premiums are reviewed in order to obtain a
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 Company's
property and casualty insurance subsidiaries are reconciled for each of the
three years ended December 31, 1996. Included therein are current year data and
prior year development.
F-15
<PAGE>
5. Insurance Operations, continued:
RECONCILIATION OF LIABILITY FOR LOSSES AND
LOSS ADJUSTMENT EXPENSES
1996 1995 1994
---- ---- ----
(In thousands)
Net liability for losses
and LAE at beginning of
year $ 999,641 $ 923,905 $ 889,082
----------- ----------- ----------
Provision for losses and
LAE for claims occurring
in the current year 733,263 735,071 679,377
Decrease in estimated
losses and LAE for
claims occurring in
prior years (8,631) (16,378) (71,484)
----------- ----------- ----------
Total incurred losses
and LAE 724,632 718,693 607,893
----------- ----------- ----------
Reclassification of
uncollectible
reinsurance reserves
due to commutations-
prior years 2,947 - 15,528
----------- ----------- ----------
Losses and LAE payments for
claims occurring during:
Current year 304,533 276,212 259,295
Prior years 439,511 366,745 329,303
----------- ----------- ----------
744,044 642,957 588,598
----------- ----------- ----------
983,176 999,641 923,905
Reserve deducted above for
reinsurance not considered
collectible 14,511 22,432 26,547
----------- ----------- ----------
997,687 1,022,073 950,452
Reinsurance recoverable 112,780 106,879 117,566
----------- ----------- ----------
Liability for losses and
LAE at end of year as
reported in financial
statements $ 1,110,467 $ 1,128,952 $1,068,018
=========== =========== ==========
The Company's property and casualty insurance subsidiaries' liability for losses
and LAE as of December 31, 1996 was $999,981,000 determined in accordance with
SAP and $1,110,467,000 determined in accordance with GAAP. The difference
principally relates to liabilities assumed by reinsurers, which are not deducted
from GAAP liabilities.
F-16
<PAGE>
6. Discontinued Operations:
On April 30, 1997, the Company signed an agreement to sell its subsidiaries,
Colonial Penn Life Insurance Company and Providential Life Insurance Company and
certain related assets, including its health insurance operations, to Conseco,
Inc. for $460,000,000, including $400,000,000 in notes 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 sale
is subject to customary terms and conditions, including the receipt of
regulatory approvals, and is expected to close in the third quarter of 1997. The
operations of these companies have been classified as discontinued operations
and the consolidated financial statements have been restated to conform with
this presentation.
At December 31, 1996 and 1995, the components of net assets of discontinued
operations are as follows (in thousands):
1996 1995
---- ----
Investments $ 688,936 $ 706,123
Cash and cash equivalents 87,335 59,429
Separate account assets 109,082 101,869
Deferred policy acquisition costs 64,013 45,423
Other 62,967 53,219
---------- ----------
Total assets 1,012,333 966,063
---------- ----------
Policy reserves 687,200 676,057
Separate account liabilities 109,082 101,869
Other 66,293 64,432
---------- ----------
Total liabilities 862,575 842,358
---------- ----------
Net assets of discontinued
operations $ 149,758 $ 123,705
========== ==========
A summary of the results of discontinued operations is as follows for the three
years in the period ended December 31, 1996 (in thousands):
1996 1995 1994
---- ---- ----
Revenues $ 230,228 $ 210,528 $ 211,962
--------- --------- ---------
Expenses:
Provision for insurance losses
and policy benefits 139,135 127,779 127,152
Other operating expenses 42,764 40,050 35,666
--------- --------- ---------
181,899 167,829 162,818
--------- --------- ---------
Income before income taxes 48,329 42,699 49,144
Income taxes 16,988 15,399 13,791
--------- --------- ---------
Income from discontinued
operations, net of taxes $ 31,341 $ 27,300 $ 35,353
========= ========= =========
F-17
<PAGE>
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, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- -------- ------- -----------
<S> <C> <C> <C> <C>
Held to maturity:
1996
Bonds and notes:
United States Government
agencies and authorities $ 51,907 $ 410 $ 404 $ 51,913
States, municipalities
and political subdivisions 1,825 - - 1,825
All other corporates 212 - 10 202
Other fixed maturities 14,258 - - 14,258
---------- -------- ------- -----------
$ 68,202 $ 410 $ 414 $ 68,198
========== ======== ======= ===========
1995
Bonds and notes:
United States Government
agencies and authorities $ 46,500 $ 979 $ 120 $ 47,359
States, municipalities
and political subdivisions 920 8 - 928
All other corporates 310 - 10 300
Other fixed maturities 13,493 - - 13,493
---------- -------- ------- -----------
$ 61,223 $ 987 $ 130 $ 62,080
========== ======== ======= ===========
</TABLE>
F-18
<PAGE>
7. Investments, continued:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- -------- ------- -----------
<S> <C> <C> <C> <C>
Available for sale:
1996
Bonds and notes:
United States Government
agencies and authorities $1,681,970 $ 7,369 $15,517 $ 1,673,822
States, municipalities
and political subdivisions 11,979 33 5 12,007
Foreign governments 442 3,553 16 3,979
Public utilities 20,880 183 152 20,911
All other corporates 207,151 8,355 895 214,611
---------- -------- ------- -----------
Total fixed maturities 1,922,422 19,493 16,585 1,925,330
---------- -------- ------- -----------
Equity securities:
Preferred stocks 326 - - 326
Common stocks - industrial,
miscellaneous and all other 3,453 145 316 3,282
---------- -------- ------- -----------
Total equity securities 3,779 145 316 3,608
---------- -------- ------- -----------
$1,926,201 $ 19,638 $16,901 $ 1,928,938
========== ======== ======= ===========
1995
Bonds and notes:
United States Government
agencies and authorities $1,671,854 $ 18,587 $ 2,383 $ 1,688,058
States, municipalities
and political subdivisions 1,095 48 - 1,143
Foreign governments 1,657 2,189 38 3,808
Public utilities 27,522 508 16 28,014
All other corporates 237,263 11,945 861 248,347
---------- -------- ------- -----------
Total fixed maturities 1,939,391 33,277 3,298 1,969,370
---------- -------- ------- -----------
Equity securities:
Common stocks:
Banks, trusts and
insurance companies 10,001 3,217 1 13,217
Industrial, miscellaneous
and all other 16,370 7,865 895 23,340
---------- -------- ------- -----------
Total equity securities 26,371 11,082 896 36,557
---------- -------- ------- -----------
$1,965,762 $ 44,359 $ 4,194 $ 2,005,927
========== ======== ======= ===========
</TABLE>
The amortized cost and estimated fair value of investments classified as held to
maturity and as available for sale at December 31, 1996, by contractual maturity
are shown below. Expected maturities are likely to differ from contractual
maturities
F-19
<PAGE>
7. Investments, continued:
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
---------------- ------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
(In thousands)
<S> <C> <C> <C> <C>
Due in one year or less $28,749 $28,868 $ 251,263 $ 256,376
Due after one year
through five years 31,704 31,554 1,054,291 1,048,296
Due after five years
through ten years 2,146 2,153 196,745 197,182
Due after ten years 1,643 1,751 16,641 18,413
------- ------- ---------- -----------
64,242 64,326 1,518,940 1,520,267
Mortgage-backed securities 3,960 3,872 403,482 405,063
------- ------- ---------- -----------
$68,202 $68,198 $1,922,422 $ 1,925,330
======= ======= ========== ===========
</TABLE>
At December 31, 1996 and 1995 securities with book values aggregating
$37,854,000 and $41,746,000, respectively, were on deposit with various
regulatory authorities.
Certain information with respect to trading securities at December 31, 1996
and 1995 is as follows (in thousands):
Amortized Estimated Carrying
Cost Fair Value Value
---- ---------- -----
1996
Fixed maturities -
Corporate bonds and notes $ 16,721 $ 16,956 $ 16,956
Equity securities:
Preferred stocks 8,629 8,969 8,969
Common stocks - industrial,
miscellaneous and all other 3,367 3,857 3,857
Options 3,600 1,248 1,248
--------- --------- ----------
Total trading securities $ 32,317 $ 31,030 $ 31,030
========= ========= ==========
1995
Fixed maturities:
Corporate bonds and notes $ 13,185 $ 13,599 $ 13,599
Foreign governments 2,080 3,880 3,880
Equity securities:
Preferred stocks 8,892 9,535 9,535
Common stocks - industrial,
miscellaneous and all other 71 74 74
Options 5,395 4,905 4,905
--------- --------- ----------
Total trading securities $ 29,623 $ 31,993 $ 31,993
========= ========= ==========
F-20
<PAGE>
8. Trade, Notes and Other Receivables, Net:
A summary of trade, notes and other receivables, net at December 31, 1996 and
1995 is as follows (in thousands):
1996 1995
---- ----
Instalment loan receivables net of unearned
finance charges of $1,910 and $3,680 (a) $ 233,351 $ 268,470
Loans to small business concerns, including
accrued interest - 9,921
Premiums receivable 191,047 185,542
Trade receivables 20,856 22,669
Service fee receivable 7,806 5,176
Amount due on sale of securities 2,771 3,932
Other 19,640 14,726
--------- ----------
475,471 510,436
Allowance for doubtful accounts (including
$12,177 and $13,893 applicable to loan
receivables of banking and lending subsidiaries) (19,383) (20,502)
--------- ----------
$ 456,088 $ 489,934
========= ==========
(a) Contractual maturities of instalment loan receivables at December 31, 1996
were as follows (in thousands): 1997 - $111,891; 1998 - $62,489; 1999 - $34,557;
2000 - $17,233 and 2001 and thereafter - $7,181. Experience shows that a
substantial portion of such notes will be repaid or renewed prior to contractual
maturity. Accordingly, the foregoing is not to be regarded as a forecast of
future cash collections.
9. Prepaids and Other Assets:
At December 31, 1996 and 1995, a summary of prepaids and other assets is as
follows (in thousands):
1996 1995
---- ----
Real estate assets, net $ 142,089 $ 147,508
Inventories, net 21,281 30,573
Excess of acquisition cost over net
tangible assets acquired - 173
Balances in risk sharing pools and associations 6,943 9,896
Prepaid reinsurance premium 8,956 6,388
Unamortized debt expense 7,415 7,588
Other 35,457 34,581
--------- ----------
$ 222,141 $ 236,707
========= ==========
10. Trade Payables, Expense Accruals and Other Liabilities:
A summary of trade payables, expense accruals and other liabilities at December
31, 1996 and 1995 is as follows (in thousands):
F-21
<PAGE>
10. Trade Payables, Expense Accruals and Other Liabilities, continued:
1996 1995
---- ----
Trade Payables and Expense Accruals:
Payables related to securities $ 23,837 $ 22,570
Amount due on reinsurance 16,394 11,744
Trade and drafts payable 36,921 32,542
Accrued compensation, severance and other
employee benefits 23,668 23,553
Pension liability 5,712 5,735
Accrued interest payable 8,375 8,965
Taxes, other than income 14,065 14,621
Amounts withheld on account of others 17,238 2,914
Provision for servicing carrier claims 26,986 23,513
Other 14,365 17,860
--------- ----------
$ 187,561 $ 164,017
========= ==========
Other Liabilities:
Unearned service fees $ 41,576 $ 32,333
Lease obligations 1,278 1,677
Liability for unredeemed trading stamps 23,735 30,574
Postretirement and postemployment benefits 26,532 25,560
Holdbacks on loans 3,806 6,035
Unclaimed funds and dividends 2,488 2,681
Other 21,338 24,040
--------- ----------
$ 120,753 $ 122,900
========= ==========
11. Long-term and Other Indebtedness:
The principal amount, stated interest rate and maturity of long-term debt
outstanding at December 31, 1996 and 1995 are as follows (dollars in thousands):
1996 1995
---- ----
Senior Notes:
Term loans with banks $ 50,000 $ 50,000
7 3/4% Senior Notes due 2013, less debt
discount of $831 and $881 99,169 99,119
Industrial Revenue Bonds (with variable interest) 4,900 5,600
Other 12,723 11,808
--------- ----------
166,792 166,527
--------- ----------
Subordinated Notes:
10 3/8% Senior Subordinated Notes due 2002,
less debt discount of $92 and $605 22,252 124,395
8 1/4% Senior Subordinated Notes due 2005 100,000 100,000
7 7/8% Senior Subordinated Notes due 2006,
less debt discount of $678 134,322 -
6% Swiss Franc Bonds due March 10, 1996 - 27,255
5 1/4% Convertible Subordinated Debentures due 2003 100,000 100,000
--------- ----------
356,574 351,650
--------- ----------
$ 523,366 $ 518,177
========= ==========
F-22
<PAGE>
11. Long-term and Other Indebtedness, continued:
At December 31, 1996, credit agreements provided for aggregate contractual
credit facilities of $150,000,000, bore interest based on the prime rate or
LIBOR, plus commitment and other fees, and were due to expire in June 1997. No
amounts were borrowed under these facilities as of December 31, 1996 and 1995.
The term loans with banks also bore interest based on the prime rate or LIBOR.
In February 1997, the Company replaced these credit facilities and the
$50,000,000 of outstanding bank term loans with a new contractual bank credit
facility of $200,000,000. The new facility bears interest based on the prime
rate or LIBOR and expires in February 2002.
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. Had the new credit
facility been in effect as of December 31, 1996, cash dividends of $300,300,000
would be eligible to be paid under the most restrictive covenants.
In October 1996, the Company sold $135,000,000 principal amount of its newly
authorized 7 7/8% Senior Subordinated Notes due 2006 in an underwritten public
offering at 99.487% of the principal amount. As of December 31, 1996,
$114,000,000 of the net proceeds were used to purchase $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. The Company intends to retire the 10 3/8% Notes that remain
outstanding either through open market purchases or through early redemption in
June 1997. In the fourth quarter of 1996, the Company reported an extraordinary
loss on early extinguishment of these 10 3/8% Notes of $10,520,000 ($6,838,000
after taxes or $.11 per share).
The 5 1/4% Convertible Subordinated Debentures due 2003 (the "5 1/4%
Debentures") are convertible into Common Shares at $28.75 per Common Share, an
aggregate of 3,478,261 Common Shares, subject to anti-dilution provisions. On
March 12, 1997, the Company called for redemption on April 11, 1997 all of its
outstanding $100,000,000 5 1/4% Debentures, at a redemption price of 102.625% of
the principal amount of the Debentures, plus accrued interest.
Approximately $9,425,000 of the manufacturing division's net property, equipment
and leasehold improvements are pledged as collateral for the Industrial Revenue
Bonds; and approximately
F-23
<PAGE>
11. Long-term and Other Indebtedness, continued:
$26,259,000 of other assets (primarily property) are pledged for other
indebtedness aggregating approximately $14,691,000.
Interest rate agreements are used to manage the potential impact of changes in
interest rates on term loans with banks, customer banking deposits and credit
agreement borrowings. 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, 1995, the notional amount of the Company's
interest rate swaps were $75,000,000. Swaps that expired in 1996 required fixed
rate payments of 7.23% on a $50,000,000 notional amount. The remaining
$25,000,000, which comprises the notional amount of the Company's interest rate
swaps at December 31, 1996, expire in 1999 and require fixed rate payments of
7.33%. The Company would have been required to pay $782,000 at December 31, 1996
and $2,351,000 at December 31, 1995 to retire these agreements. The LIBOR rate
at December 31, 1996 was 5.6%. 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, 2001 are as follows (in thousands): 1997 - $2,649; 1998 -
$2,266; 1999 - $51,678; 2000 - $960; and 2001 - $980.
The weighted average interest rate on short-term borrowings (primarily customer
banking deposits) was 5.8% and 6.1% at December 31, 1996 and 1995, respectively.
12. 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, 1996, the Company acquired 87,285 Common Shares
(34,037 shares in 1996, 29,276 shares in 1995 and 23,972 shares in 1994) at an
average price of $23.77 per Common Share.
F-24
<PAGE>
12. Common Shares, Stock Options, Warrants and Preferred Shares, continued:
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 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, 1996 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, 1994 1,552,944 $ 9.31 443,992 1,587,000
======= =========
Granted 26,000 $18.28
Exercised (330,000) $ 5.57
Cancelled (33,000) $11.16
---------
Balance at December 31, 1994 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
========= ======= =========
F-25
<PAGE>
12. Common Shares, Stock Options, Warrants and Preferred Shares, continued:
The weighted-average fair value of the options granted was $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 25.3% for 1996 and 27.4% for 1995; (2) risk-free interest rates of
6.0% for 1996 and 5.9% for 1995; (3) expected lives of 3.7 years for 1996 and
4.0 years for 1995; and (4) dividend yields of .9% for 1996 and 1.1% for 1995.
The following table summarizes information about fixed stock options outstanding
at December 31, 1996:
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
- --------------- ------ ---- ----- ------ -----
$ 6.13 127,326 0.7 years $ 6.13 127,326 $ 6.13
$11.25 - $14.25 14,800 1.0 years $12.87 12,400 $13.19
$17.88 - $21.50 314,100 2.9 years $20.33 176,100 $20.39
$23.25 - $26.63 617,700 5.1 years $26.49 2,000 $23.25
--------- -------
$ 6.13 - $26.63 1,073,926 3.9 years $22.09 317,826 $14.41
========= =======
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 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, 1996 and 1995, the Company's Common Shares were reserved as
follows:
F-26
<PAGE>
12. Common Shares, Stock Options, Warrants and Preferred Shares, continued:
1996 1995
--------- ---------
Stock Options 2,048,326 2,355,718
Convertible Debentures 3,478,261 3,478,261
--------- ---------
5,526,587 5,833,979
========= =========
At December 31, 1996 and 1995, 6,000,000 preferred shares (redeemable and
non-redeemable), par value $1 per share, were authorized.
13. Net Securities Gains (Losses):
The following summarizes net securities gains (losses) for each of the three
years in the period ended December 31, 1996 (in thousands):
1996 1995 1994
---- ---- ----
Net realized gains (losses) on fixed
maturities $ 16,664 $ 12,977 $ (7,644)
Provision for write-down of fixed
maturity investments - - (3,126)
Net unrealized gain (loss) on trading
securities (2,886) 2,883 (1,231)
Net realized gains on equity and other
securities 21,175 4,827 3,561
--------- --------- ---------
$ 34,953 $ 20,687 $ (8,440)
========= ========= =========
Proceeds from sales of investments classified as available for sale were
$1,320,260,000, $694,560,000 and $625,994,000 during 1996, 1995 and 1994,
respectively. Gross gains of $32,168,000, $20,415,000 and $7,252,000 and gross
losses of $4,046,000, $4,105,000 and $14,193,000 were realized on these sales
during 1996, 1995 and 1994, respectively.
14. Other Results of Operations Information:
Investment and other income for each of the three years in the period ended
December 31, 1996 consist of the following (in thousands):
F-27
<PAGE>
14. Other Results of Operations Information, continued:
1996 1995 1994
---- ---- ----
Interest on short-term investments $ 17,158 $ 15,864 $ 9,283
Interest on fixed maturities 118,865 113,753 101,345
Service fee income 48,959 53,021 30,115
Trading stamp revenues 12,017 17,957 19,489
Rental income 10,560 9,994 7,134
Gains on sale of property, net of costs 11,078 4,833 1,741
Gain on sale of Transportation Capital Corp. 1,516 - -
Gains related to foreign power companies - - 22,948
Gain on return of the WMAC Companies - 41,030 -
Litigation settlements 5,434 4,666 -
Other 24,228 27,603 16,879
--------- --------- ---------
$ 249,815 $ 288,721 $ 208,934
========= ========= =========
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
$31,110,000 (including $16,743,000 of premium taxes) for the year ended December
31, 1996, $30,837,000 (including $17,193,000 of premium taxes) for the year
ended December 31, 1995 and $30,290,000 (including $16,625,000 of premium taxes)
for the year ended December 31, 1994.
Advertising costs amounted to $13,351,000, $13,079,000 and $12,541,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
15. Income Taxes:
The principal components of the deferred tax asset at December 31, 1996 and 1995
are as follows (in thousands):
1996 1995
--------- ---------
Insurance reserves and unearned premiums $ 72,454 $ 69,003
Securities valuation reserves 13,820 9,308
Other accrued liabilities 5,424 12,493
Employee benefits and compensation 7,004 6,473
Unrealized (gains) on investments (1,297) (13,837)
Depreciation (4,261) (6,612)
Policy acquisition costs (13,892) (15,907)
Tax loss carryforwards, net of tax sharing payments 37,388 49,026
Other, net 5,046 7,231
--------- ---------
121,686 117,178
Valuation allowance (40,584) (44,060)
--------- ---------
$ 81,102 $ 73,118
========= =========
F-28
<PAGE>
15. Income Taxes, continued:
The valuation allowance principally relates to certain acquired tax loss
carryforwards, the usage of which is subject to certain limitations and certain
other matters which may restrict their availability, and unrealized capital
losses.
In addition, the amounts reflected above are based on the minimum 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.
The Company believes it is more likely than not that the recorded deferred tax
asset will be realized principally from taxable income generated by profitable
operations.
The provision for income taxes for each of the three years in the period ended
December 31, 1996 was as follows (in thousands):
1996 1995 1994
---- ---- ----
State income taxes (principally
currently payable) $ 1,200 $ 2,500 $ 6,000
Federal income taxes:
Current 4,204 171 2,120
Deferred 105 6,113 7,392
Foreign income taxes (principally
currently payable) 500 496 179
--------- --------- ---------
$ 6,009 $ 9,280 $ 15,691
========= ========= =========
The table below reconciles expected statutory federal income tax to actual
income tax expense (in thousands):
1996 1995 1994
---- ---- ----
Expected federal income tax $ 10,564 $ 31,319 $ 17,911
State income taxes, net of federal
income tax benefit 780 1,625 3,900
Amortization of excess of acquisition
cost over net tangible assets acquired - 910 1,028
Tax exempt interest (30) (469) (1,144)
Return of the WMAC Companies - (14,360) -
Reduction in valuation allowance (3,476) - (5,340)
Recognition of additional tax benefits (2,500) (9,547) (1,041)
Other 671 (198) 377
--------- --------- ---------
Actual income tax expense $ 6,009 $ 9,280 $ 15,691
========= ========= =========
F-29
<PAGE>
15. Income Taxes, continued:
The valuation allowance applicable to the deferred income tax asset recorded
upon adoption of SFAS 109 gave effect to the possible unavailability of certain
income tax deductions. During 1996 and 1994 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 operating losses
in calculating tax sharing payments. Due to unresolved issues concerning certain
post-reorganization deductions, Phlcorp is unable to state with certainty the
amount of its available carryforwards. However, Phlcorp believes that it has
minimum tax operating loss carryforwards of between $70,000,000 and $302,000,000
at December 31, 1996. The expiration dates for Phlcorp's carryforwards will
depend on the outcome of the matters referred to above, although it is unlikely
such carryforwards will begin to expire before 1998.
At December 31, 1996 the Company had tax loss carryforwards, which have been
reflected in the deferred tax asset after applying the statutory federal income
tax rate, as follows (in thousands):
Year of Loss
Expiration Carryforwards
---------- -------------
1997 $ 463
1998 1,311
1999 433
2000 21
2002 272
2003 11,045
2005 13,150
2010 12,657
-----------
39,352
Phlcorp minimum amount, as described above 70,000
-----------
Total minimum tax loss carryforwards $ 109,352
===========
F-30
<PAGE>
15. Income Taxes, continued:
Limitations exist under the tax law which may restrict the utilization of the
Phlcorp carryforwards and the utilization of an aggregate of approximately
$2,797,000 of non-Phlcorp tax loss carryforwards. Further, certain of the future
deductions may only be utilized in the tax returns of certain life insurance
subsidiaries. These limitations are considered in the determination of the
valuation allowance.
Under certain circumstances, the value of the carryforwards available could be
substantially reduced if certain changes in ownership were to occur. In order to
reduce this possibility, the Company's certificate of incorporation was amended
to include certain charter restrictions which prohibit transfers of the
Company's Common Stock under certain circumstances.
Under prior law, Charter National had accumulated $15,447,000 of special federal
income tax deductions allowed life insurance companies and the Colonial Penn
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 certain
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 (the "Seller"), the Seller assumed the obligation to reimburse
the Company for any such taxes.
Pursuant to the purchase agreement, the Company complied with the Seller's
instructions and agreed to the 1989 assessment. To date, Seller has failed to
comply with its contractual obligation to reimburse the Company for payment of
the 1989 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 Seller's indemnification. In a response to a legal proceeding
initiated by the Company to collect such amount due under the Seller's
indemnification obligation, the Seller has alleged that the Company has breached
the purchase agreement and, on that basis, Seller has denied liability for the
1989 assessment. The Company believes it has not breached the purchase agreement
and the Seller remains liable for all such taxes and interest. The Seller is
currently exercising its right under the
F-31
<PAGE>
15. Income Taxes, continued:
purchase agreement to control the contest of the 1988 IRS assessment. If the
Seller is unsuccessful in contesting the 1988 IRS assessment, no assurance can
be given that the Seller will comply with its indemnification obligations under
the purchase agreement. The Company intends to enforce its indemnification
rights against the Seller and to seek other relief, including relief for
Seller's bad faith.
During 1995, the Company entered into an agreement with the Seller to settle a
lawsuit initiated by the Company to collect certain amounts due from the Seller
under a tax indemnification included in the purchase agreement for other taxable
periods. The settlement required the Seller to pay certain amounts to the
Company, which are reflected in investment and other income for the year ended
December 31, 1995.
16. 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):
1996 1995 1994
---- ---- ----
Service cost $ 4,660 $ 3,735 $ 4,833
Interest cost 6,480 5,414 5,622
Actual return on plan assets (5,704) (9,281) 2,222
Net amortization and deferral 2,188 3,649 (7,190)
--------- --------- ---------
Net pension expense $ 7,624 $ 3,517 $ 5,487
========= ========= =========
F-32
<PAGE>
16. Pension Plans and Postretirement Benefits, continued:
The funded status of the pension plans at December 31, 1996 and 1995 was as
follows (in thousands):
1996 1995
---- ----
Actuarial present value of accumulated
benefit obligation:
Vested $ 74,562 $ 81,245
Non-vested 2,021 1,880
--------- ---------
$ 76,583 $ 83,125
========= =========
Projected benefit obligation $ 98,733 $ 103,683
Plan assets at fair value 90,902 85,033
--------- ---------
Funded status (7,831) (18,650)
Unrecognized prior service cost 2,773 2,953
Unrecognized net loss at January 1, 1987 431 1,706
Unrecognized net (gain) loss from experience
differences and assumption changes (1,085) 8,256
--------- ---------
Accrued pension liability $ (5,712) $ (5,735)
========= =========
The plans' assets consist primarily of U.S. government and agencies' bonds and
corporate bonds and notes. The projected benefit obligation at December 31, 1996
and 1995 was determined using an assumed discount rate of 7.5% and 7.0%,
respectively, and an assumed compensation increase rate of 5.0% and 5.6%,
respectively. The assumed long-term rate of return on plan assets was 7.4% at
December 31, 1996 and 1995.
The Company also has defined contribution pension plans covering certain
employees. Contributions and costs are a percent of each covered employee's
salary. Amounts charged to expense related to such plans were $2,058,000,
$2,028,000 and $3,064,000 for the years ended December 31, 1996, 1995 and 1994,
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 to expense
(principally interest) related to such benefits were $1,677,000 in 1996,
$1,521,000 in 1995 and $1,500,000 in 1994.
F-33
<PAGE>
16. Pension Plans and Postretirement Benefits, continued:
Included in other liabilities at December 31, 1996 and 1995 are the following
(in thousands):
1996 1995
--------- ---------
Accumulated postretirement benefit obligation:
Retirees $ 12,624 $ 16,091
Fully eligible active plan participants 2,818 2,827
Other active plan participants 450 2,218
--------- ---------
Accumulated postretirement benefit obligation 15,892 21,136
Unrecognized prior service cost 5,623 455
Unrecognized net gain from experience
differences and assumption changes 1,580 436
--------- ---------
Accrued postretirement benefit obligation $ 23,095 $ 22,027
========= =========
The discount rate used in determining the accumulated postretirement benefit
obligation was 7.5% and 7.0% at December 31, 1996 and 1995, respectively. The
assumed health care cost trend rates used in measuring the accumulated
postretirement benefit obligation were between 7.3% and 13.0% for 1996 and 7.6%
and 14.0% for 1995, declining to an ultimate rate of between 5.0% and 8.0% by
2006.
If the health care cost trend rates were increased by 1%, the accumulated
postretirement obligation as of December 31, 1996 and 1995 would have increased
by $1,046,000 and $1,317,000, respectively. The effect of this change on the
aggregate of service and interest cost for 1996 and 1995 would be immaterial.
17. 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
$14,620,000 in 1996, $13,991,000 in 1995 and $14,338,000 in 1994. Aggregate
minimum annual rentals (exclusive of real estate taxes, maintenance and certain
other charges) relating to facilities under lease in effect at December 31, 1996
are as follows (in thousands): 1997 - $7,796; 1998 - $6,901; 1999 - $9,040; 2000
- - $6,883; 2001 - $6,184; and thereafter - $109,751. 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
F-34
<PAGE>
17. Commitments, continued:
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
$26,237,000 at December 31, 1996. 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.
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 $907,295,000 (including
$149,758,000 relating to the Company's discontinued operations) at December 31,
1996.
18. 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.
19. Earnings (Loss) Per Common Share:
Earnings (loss) per common and dilutive common equivalent share was calculated
by dividing net income by the sum of the weighted average number of Common
Shares outstanding and the incremental weighted average number of Common Shares
issuable upon exercise of options and warrants for the periods they were
outstanding. The number of common and dilutive common equivalent shares used for
F-35
<PAGE>
19. Earnings (Loss) Per Common Share, continued:
this calculation was 60,560,000 in 1996, 59,271,000 in 1995 and 58,202,000 in
1994.
Fully diluted earnings (loss) per share was calculated as described above except
that in 1994 the incremental number of shares utilized the year end market price
for the Company's Common Shares, since the year end market price was above the
average for that year. In addition, for 1995 and 1994 the calculations assume
the 5 1/4% Debentures had been converted into Common Shares for the period they
were outstanding and earnings increased for the interest on such debentures, net
of the income tax effect. Conversion was not assumed for 1996 since the effect
of such assumed conversion would have been to increase earnings per share. The
number of shares used for this calculation was 60,560,000 in 1996, 62,807,000 in
1995 and 61,715,000 in 1994.
20. Fair Value of Financial Instruments:
The following table presents fair value information about certain financial
instruments, whether or not recognized on the balance sheet. Where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. The fair value amounts presented do not purport to represent and should
not be considered representative of the underlying "market" or franchise value
of the Company. The methods and assumptions used to estimate the fair values of
each class of the financial instruments described below are as follows:
(a) Investments: The fair values of marketable equity securities and fixed
maturity securities are substantially based on quoted market prices, as
disclosed in Note 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) 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.
F-36
<PAGE>
20. Fair Value of Financial Instruments, continued:
(d) Separate and variable accounts: Separate and variable accounts assets and
liabilities are carried at market value, which is a reasonable estimate of fair
value.
(e) 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.
(f) Derivatives: The fair values of derivatives generally reflect the amounts
that the Company would receive or pay to terminate the interest rate and
currency swap contracts.
(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.
(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, 1996 and 1995 are as follows (in thousands):
F-37
<PAGE>
20. Fair Value of Financial Instruments, continued:
<TABLE>
<CAPTION>
1996 1995
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial Assets:
Investments:
Practicable to estimate
fair value $2,096,229 $2,096,225 $2,168,442 $ 2,169,299
Policyholder loans 4,955 - 5,916 -
Cash and cash equivalents 299,472 299,472 206,729 206,729
Loans receivable of banking and
lending subsidiaries, net of
allowance 221,174 234,771 264,498 277,676
Separate and variable accounts 436,992 436,992 370,968 370,968
Investments in associated
companies 206,384 214,462 184,088 192,166
Other assets (derivatives) - - 1,838 9,180
Financial Liabilities:
Customer banking deposits 209,261 210,160 203,061 204,192
Long-term and other indebtedness 523,366 533,245 518,177 544,151
Investment contract reserves 6,331 6,331 9,284 9,284
Separate and variable accounts 435,937 435,937 370,968 370,968
Other liabilities (derivatives) 683 2,132 218 2,569
</TABLE>
21. Segment Information:
Certain information concerning the Company's operations for the three years
ended December 31, 1996 is presented in the following table.
1996 1995 1994
---- ---- ----
(In millions)
Revenues:
Property and Casualty Insurance $ 1,015.1 $ 984.3 $ 872.1
Life Insurance 10.5 13.1 11.3
Banking and Lending 55.1 58.6 49.0
Manufacturing 148.4 166.3 180.1
Corporate and Other (a) 47.2 125.5 59.9
--------- -------- ---------
$ 1,276.3 $1,347.8 $ 1,172.4
========= ======== =========
Income (loss) before income taxes:
Property and Casualty Insurance $ 95.5 $ 78.9 $ 96.4
Life Insurance 5.5 11.0 -
Banking and Lending 14.5 16.7 16.3
Manufacturing .4 (18.0) (11.7)
Corporate and Other (a)(b) (85.7) .9 (49.8)
-------- -------- ---------
$ 30.2 $ 89.5 $ 51.2
======== ======== =========
F-38
<PAGE>
21. Segment Information, continued:
1996 1995 1994
---- ---- ----
(In millions)
Identifiable assets employed:
Property and Casualty Insurance $2,398.8 $2,374.2 $ 2,117.9
Life Insurance 645.8 602.7 601.2
Banking and Lending 291.3 336.8 316.4
Manufacturing 68.7 83.6 93.5
Corporate and Other (c) 926.8 868.2 690.7
-------- -------- ---------
$4,331.4 $4,265.5 $ 3,819.7
======== ======== =========
At December 31, 1996, the Company and its consolidated subsidiaries had 3,589
full-time employees.
(a) Includes equity in losses of associated companies ($33,631,000 in
1996, $2,613,000 in 1995 and $5,176,000 in 1994), gains (losses) from
certain investments and real estate and other operations. In 1995,
includes a $41,030,000 gain related to the return of the WMAC
Companies.
(b) Includes corporate interest expense and overhead, including expenses
related to certain acquisition and investing activities.
(c) Principally consists of cash, investments, real estate, receivables,
the deferred income tax asset and the net assets of discontinued
operations.
22. Selected Quarterly Financial Data (Unaudited):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
1996:
Revenues $329,933 $319,672 $319,667 $307,057
======== ======== ======== ========
Income (loss) from continuing operations
before extraordinary loss $ 7,384 $ 4,026 $ 14,952 $ (2,188)
======== ======== ======== ========
Income from discontinued operations,
net of taxes $ 8,217 $ 9,147 $ 4,233 $ 9,744
======== ======== ======== ========
Extraordinary loss from early extinguish-
ment of debt, net of income tax benefit $ - $ - $ - $ (6,838)
======== ======== ======== ========
Net income $ 15,601 $ 13,173 $ 19,185 $ 718
======== ======== ======== ========
</TABLE>
F-39
<PAGE>
22. Selected Quarterly Financial Data (Unaudited), continued:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Earnings (loss) per common and dilutive
common equivalent share:
Income (loss) from continuing operations
before extraordinary loss $.12 $.07 $.25 $(.04)
Income from discontinued operations .14 .15 .07 .16
Extraordinary loss - - - (.11)
---- ---- ---- -----
Net income $.26 $.22 $.32 $ .01
==== ==== ==== =====
Number of shares used in calculation 60,586 60,552 60,534 60,571
====== ====== ====== ======
Earnings (loss) per fully diluted common share:
Income (loss) from continuing operations
before extraordinary loss $.12 $.07 $.24 $(.04)
Income from discontinued operations .14 .15 .07 .16
Extraordinary loss - - - (.11)
---- ---- ---- -----
Net income $.26 $.22 $.31 $ .01
==== ==== ==== =====
Number of shares used in calculation 60,586 60,552 64,022 60,571
====== ====== ====== ======
1995:
Revenues $306,852 $324,595 $339,045 $377,294
======== ======== ======== ========
Income from continuing operations $ 9,314 $ 11,574 $ 15,842 $ 43,473
======== ======== ======== ========
Income from discontinued operations,
net of taxes $ 7,009 $ 5,835 $ 5,884 $ 8,572
======== ======== ======== ========
Net income $ 16,323 $ 17,409 $ 21,726 $ 52,045
======== ======== ======== ========
Earnings per common and dilutive common
equivalent share:
Income from continuing operations $.16 $.20 $.27 $.72
Income from discontinued operations .12 .10 .10 .14
---- ---- ---- ----
Net income $.28 $.30 $.37 $.86
==== ==== ==== ====
Number of shares used in calculation 58,590 58,591 59,427 60,565
====== ====== ====== ======
Earnings per fully diluted common share:
Income from continuing operations $.17 $.20 $.27 $.70
Income from discontinued operations .11 .09 .09 .13
---- ---- ---- ----
Net income $.28 $.29 $.36 $.83
==== ==== ==== ====
Number of shares used in calculation 62,069 62,218 62,984 64,043
====== ====== ====== ======
</TABLE>
In 1996 and 1995, the totals of quarterly per share amounts do not necessarily
equal annual per share amounts.
F-40
<PAGE>
23. Subsequent Event:
On June 30, 1997, the Company signed an agreement to sell the property and
casualty insurance business of the Colonial Penn P&C Group to General Electric
Capital Corporation for $950,000,000 in cash, plus an aggregate of $156,164 per
day from and including January 1, 1997 through and including the closing date.
The Group's primary business is providing private passenger automobile insurance
to the mature adult population through direct response marketing. The
transaction is subject to the Company's shareholder approval, regulatory
approvals and customary closing conditions and is expected to close in the
fourth quarter of 1997.
F-41
<PAGE>
SCHEDULE II - Condensed Financial Information of Registrant
LEUCADIA NATIONAL CORPORATION
BALANCE SHEETS
December 31, 1996 and 1995
(Dollars in thousands, except par value)
1996 1995
---- ----
ASSETS
Cash and cash equivalents $ 61,330 $ 14,877
Investments 115,443 107,087
Deferred income taxes 107,903 103,466
Miscellaneous receivables and other assets 42,221 52,119
Investments in and advances to/from subsidiaries, net
(includes net assets of discontinued operations
of $149,758 and $123,705) 1,321,381 1,364,275
----------- -----------
$ 1,648,278 $ 1,641,824
=========== ===========
LIABILITIES
Accounts payable, expense accruals and income taxes $ 24,043 $ 29,386
Debt, including current maturities 506,128 500,947
----------- -----------
530,171 530,333
----------- -----------
SHAREHOLDERS' EQUITY
Common shares, par value $1 per share,
authorized 150,000,000 shares; 60,417,579
and 60,163,824 shares issued and
outstanding, after deducting 54,353,691
and 54,319,654 shares held in treasury 60,418 60,164
Additional paid-in capital 161,026 159,914
Net unrealized gain on investments 1,759 30,086
Retained earnings 894,904 861,327
----------- -----------
Total shareholders' equity 1,118,107 1,111,491
----------- -----------
$ 1,648,278 $ 1,641,824
=========== ===========
See notes to this schedule.
F-42
<PAGE>
SCHEDULE II - Condensed Financial Information of Registrant, continued:
LEUCADIA NATIONAL CORPORATION
STATEMENTS OF INCOME
For the years ended December 31, 1996, 1995 and 1994
(In thousands, except per share amounts)
1996 1995 1994
---- ---- ----
Investment income, net $ 32,469 $ 38,931 $ 22,700
Equity in losses of associated companies (14,720) (24) -
Net securities gains (losses) 96 (1) (2,160)
Equity in income of subsidiaries 92,821 125,913 94,913
-------- --------- ---------
110,666 164,819 115,453
--------- --------- ---------
Interest expense 62,242 58,723 50,060
Other expenses, net 24,250 25,893 29,910
-------- --------- ---------
86,492 84,616 79,970
--------- --------- ---------
Income from continuing operations
before extraordinary loss 24,174 80,203 35,483
Equity in income from discontinued
operations of subsidiaries 31,341 27,300 35,353
--------- --------- ---------
Income before extraordinary loss 55,515 107,503 70,836
Extraordinary loss from early
extinguishment of debt, net of income
tax benefit of $3,682 (6,838) - -
--------- --------- ---------
Net income $ 48,677 $ 107,503 $ 70,836
========= ========= =========
Earnings (loss) per common and dilutive
common equivalent share:
Income from continuing operations
before extraordinary loss $ .40 $1.35 $ .61
Income from discontinued operations .51 .46 .61
Extraordinary loss (.11) - -
----- ----- -----
Net income $ .80 $1.81 $1.22
===== ===== =====
Fully diluted earnings (loss) per common share:
Income from continuing operations
before extraordinary loss $ .40 $1.33 $ .64
Income from discontinued operations .51 .44 .57
Extraordinary loss (.11) - -
----- ----- -----
Net income $ .80 $1.77 $1.21
===== ===== =====
See notes to this schedule.
F-43
<PAGE>
SCHEDULE II - Condensed Financial Information of Registrant, continued:
LEUCADIA NATIONAL CORPORATION
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
(Thousands of dollars)
Net cash flows from operating activities:
- -----------------------------------------
Net income $ 48,677 $ 107,503 $ 70,836
Adjustments to reconcile net income to
net cash provided by (used for)
operations:
Amortization (487) 681 1,486
Net securities (gains) losses (96) 1 2,160
Equity in earnings of subsidiaries (124,162) (153,213) (130,266)
Equity in losses of associated
companies 14,720 24 -
Extraordinary loss, net of income
tax benefit 6,838 - -
Net change in:
Miscellaneous receivables 1,121 (582) 221
Other assets (7,327) (1,714) (5,347)
Investments in and advances to/from
subsidiaries, net 125,508 26,641 (19,051)
Accounts payable, expense accruals
and income taxes (1,661) 9,047 3,881
Other 2,204 2,616 1,840
--------- --------- ---------
Net cash provided by (used for)
operating activities 65,335 (8,996) (74,240)
--------- --------- ---------
Net cash flows from investing activities:
- -----------------------------------------
Dividends received from subsidiaries 32,581 10,076 8,422
Capital contribution to subsidiaries (12,068) (13,319) (6,008)
Investment in Providential Life in 1996
and MK Gold Company in 1995 (11,504) (22,593) -
Purchases of investments (other than
short-term) (149,228) (124,855) (8,022)
Proceeds from maturities of investments 116,930 43,300 1,000
Proceeds from sales of investments 25,117 76 68,268
--------- --------- ---------
Net cash provided by (used for)
investing activities 1,828 (107,315) 63,660
--------- --------- ---------
Net cash flows from financing activities:
- -----------------------------------------
Net change in short-term borrowings 207 (80) (402)
Issuance of long-term debt, net of
issuance costs 132,793 98,590 50,000
Reduction of long-term debt (137,773) (5,702) (21,250)
Sale of common shares and exercise of
warrants, net of expenses - 43,857 -
Purchase of common shares for treasury (837) (727) (472)
Dividends paid (15,100) (15,025) (7,021)
--------- --------- ---------
Net cash provided by (used for)
financing activities (20,710) 120,913 20,855
--------- --------- ---------
(continued)
F-44
<PAGE>
SCHEDULE II - Condensed Financial Information of Registrant, continued:
LEUCADIA NATIONAL CORPORATION
STATEMENTS OF CASH FLOWS - continued
For the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
(Thousands of dollars)
Net increase in cash and cash
equivalents $ 46,453 $ 4,602 $ 10,275
Cash and cash equivalents at January 1, 14,877 10,275 -
--------- --------- ---------
Cash and cash equivalents at
December 31, $ 61,330 $ 14,877 $ 10,275
========= ========= =========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $40,238 $39,768 $33,512
Income tax payments, net of refunds $ 2,490 $(3,723) $ 5,799
See notes to this schedule.
F-45
<PAGE>
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 1996, 1995 and 1994, there was no
provision or benefit for income taxes provided by the parent company,
other than the benefit related to the extraordinary loss. Tax sharing
payments received from subsidiaries were $48,017,000 in 1996, $42,078,000
in 1995 and $35,385,000 in 1994.
D. The deferred income tax asset of $107,903,000 and $103,466,000 at December
31, 1996 and 1995, respectively, had not been allocated to the individual
subsidiaries.
F-46
<PAGE>
SCHEDULE III - Supplementary Insurance Information
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996
Life insurance $ - $140,110 $ - $435,937 $ 2,868 $ 4,241 $ 6,209 $ 1,846 $ 4,017 $ -
------- -------- -------- -------- ---------- -------- -------- -------- ------- --------
Property and casualty
insurance:
Automobile 29,092 - 349,419 - 807,207 676,726 88,012 682,545 24,020 685,743
Commercial 8,847 - 43,336 - 267,034 92,414 21,948 81,349 16,638 84,187
Miscellaneous
and personal 3,715 - 38,568 - 36,226 54,377 5,812 47,584 5,987 56,262
------- -------- ------- -------- ---------- -------- -------- -------- ------- --------
41,654 - 431,323 - 1,110,467 823,517 115,772 811,478 46,645 826,192
------- -------- -------- -------- ---------- -------- -------- -------- ------- --------
$41,654 $140,110 $431,323 $435,937 $1,113,335 $827,758 $121,981 $813,324 $50,662 $826,192
======= ======== ======== ======== ========== ======== ======== ======== ======= ========
1995
Life insurance $ - $163,414 $ - $370,968 $ 2,657 $ 4,228 $ 7,055 $ (466) $ 5,229 $ -
------- -------- -------- -------- ---------- -------- -------- -------- ------- --------
Property and casualty
insurance:
Automobile 34,054 - 338,439 - 805,926 667,365 80,228 688,708 12,594 684,683
Commercial 10,141 - 51,808 - 285,637 102,722 19,936 85,493 9,679 100,351
Miscellaneous
and personal 2,526 - 36,576 - 37,389 46,481 5,601 35,388 5,672 49,134
------- -------- -------- -------- ---------- -------- -------- -------- ------- --------
46,721 - 426,823 - 1,128,952 816,568 105,765 809,589 27,945 834,168
------- -------- -------- -------- ---------- -------- -------- -------- ------- --------
$46,721 $163,414 $426,823 $370,968 $1,131,609 $820,796 $112,820 $809,123 $33,174 $834,168
======= ======== ======== ======== ========== ======== ======== ======== ======= ========
1994
Life insurance $ - $211,562 $ - $319,632 $ 1,403 $ 4,779 $ 7,358 $ 8,017 $ 8,757 $ -
------- -------- -------- -------- ---------- -------- -------- -------- ------- --------
Property and casualty
insurance:
Automobile 29,741 - 314,145 - 766,276 599,180 70,275 553,916 33,093 629,555
Commercial 10,567 - 54,208 - 263,400 101,394 18,107 77,471 12,302 101,221
Miscellaneous
and personal 1,942 - 35,154 - 38,342 45,867 4,964 49,299 6,220 46,968
------- -------- -------- -------- ---------- -------- -------- -------- ------- --------
42,250 - 403,507 - 1,068,018 746,441 93,346 680,686 51,615 777,744
------- -------- -------- -------- ---------- -------- -------- -------- ------- --------
$42,250 $211,562 $403,507 $319,632 $1,069,421 $751,220 $100,704 $688,703 $60,372 $777,744
======= ======== ======== ======== ========== ======== ======== ======== ======= ========
</TABLE>
F-47
<PAGE>
SCHEDULE IV - Schedule of Reinsurance
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Percentage
of
Ceded Assumed Amount
Direct to Other from Other Net Assumed
Business Companies Companies Amount to Net
-------- --------- --------- ------ ------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C>
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 877,773 60,321 5,912 823,364 .72%
-------- -------- -------- --------
Total premiums $882,487 $ 60,675 $ 5,946 $827,758 .72%
======== ======== ======== ========
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 836,382 43,117 22,134 815,399 2.71%
-------- -------- -------- --------
Total premiums $841,779 $ 43,414 $ 22,431 $820,796 2.73%
======== ======== ======== ========
1994
Life insurance in force $253,000 $160,000 $126,000 $219,000 57.53%
======== ======== ======== ========
Premiums:
Life insurance $ 4,509 $ 750 $ 1,020 $ 4,779 21.34%
Accident and health insurance 1,051 - - 1,051 .00%
Property and liability
insurance 748,595 34,339 31,134 745,390 4.18%
-------- -------- -------- --------
Total premiums $754,155 $ 35,089 $ 32,154 $751,220 4.28%
======== ======== ======== ========
</TABLE>
F-48
<PAGE>
SCHEDULE V - Valuation and Qualifying Accounts
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Additions Deductions
---------------------------------- ------------------------
Charged
Balance at (Credited) Balance
Beginning to Costs and Sale of at End of
Description of Period Expenses Recoveries Other Write-Offs Receivables Period
----------- --------- ------------- ---------- ----- ---------- ----------- ------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
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
======= ======= ====== ======= ======= ==== =======
Reinsurance receivable $ 4,804 $ (988) $ - $ - $ 358 $ - $ 3,458
======= ====== ====== ======= ======= ==== =======
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
======= ======= ====== ======= ======= ==== =======
Reinsurance receivable $ 4,046 $ 969 $ - $ - $ 211 $ - $ 4,804
======= ======= ====== ======= ======= ==== =======
1994
- ----
Loan receivables of banking
and lending subsidiaries $ 8,341 $ 7,634 $2,702 $ - $ 6,369 $ - $12,308
Trade, notes and other
receivables 5,185 5,744 1,449 - 6,605 - 5,773
------- ------- ------ ------- ------- ---- -------
Total allowance for
doubtful accounts $13,526 $13,378 $4,151 $ - $12,974 $ - $18,081
======= ======= ====== ======= ======= ==== =======
Reinsurance receivable $83,825 $(2,799) $ - $ - $76,980(a) $ - $ 4,046
======= ======= ====== ======= ======= ==== =======
</TABLE>
(a) Principally relates to the write-off of fully reserved receivables for
unpaid losses.
F-49
<PAGE>
SCHEDULE VI - Schedule of Supplemental Information for Property and Casualty
Insurance Underwriters
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Discount, if any, Claims and Claim
Deducted in Reserves Adjustment Expenses Paid Claims
for Unpaid Claims and Incurred Related to: and Claim
Claim Adjustment ------------------------ Adjustment
Expenses Current Year Prior Year Expenses
-------- ------------ ---------- --------
(Thousands of dollars)
<S> <C> <C> <C> <C>
1996
Automobile $ - $622,948 $ (6,995) $629,163
Commercial 347 64,171 (465) 75,069
Miscellaneous and personal - 45,687 (3,707) 41,793
---- -------- -------- --------
Total property and casualty $347 $732,806 $(11,167) $746,025
==== ======== ======== ========
1995
Automobile $ - $626,781 $ (6,614) $573,055
Commercial 252 71,329 (7,604) 38,497
Miscellaneous and personal - 36,961 (6,040) 31,640
---- -------- -------- --------
Total property and casualty $252 $735,071 $(20,258) $643,192
==== ======== ======== ========
1994
Automobile $ - $556,736 $(55,771) $483,120
Commercial 276 70,658 (12,822) 59,436
Miscellaneous and personal - 51,983 (6,221) 46,042
---- -------- -------- --------
Total property and casualty $276 $679,377 $(74,814) $588,598
==== ======== ======== ========
</TABLE>
F-50
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
LEUCADIA NATIONAL CORPORATION
By: /s/ Joseph A. Orlando
-------------------------------
Joseph A. Orlando
Vice President and
Chief Financial Officer
Date: October 3, 1997
