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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
------------------
(AMENDMENT NO. 3)
[x] Filed by the Registrant
[_] Filed by a Party other than the Registrant
Check the appropriate box:
[ ] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by Rule
14-a6(e)(2))
[x] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
LEUCADIA NATIONAL CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
PAYMENT OF FILING FEE (Check the appropriate box):
[x] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined.):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: $
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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<PAGE>
LEUCADIA NATIONAL CORPORATION
315 PARK AVENUE SOUTH
NEW YORK, NEW YORK 10010
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD November 3, 1997
October 3, 1997
To Our Common Shareholders:
You are cordially invited to attend the Annual Meeting of Shareholders
(the "Meeting") of Leucadia National Corporation (the "Company") to be held on
November 3, 1997, at 10:00 a.m., at Credit Suisse First Boston, 11 Madison
Avenue, Level 2B Auditorium, New York, New York:
1. To consider and vote upon a proposal to approve and adopt a Purchase
Agreement, dated as of June 30, 1997 (the "Purchase Agreement"), among General
Electric Capital Corporation (the "Purchaser" or "GE Capital"), the Company and
the Company's subsidiaries, Charter National Life Insurance Company, Colonial
Penn Group, Inc. and Colonial Penn Holdings Inc. ("CP Holdings"), a copy of
which is attached as Annex A to the accompanying Proxy Statement. Pursuant to
the Purchase Agreement, CP Holdings has agreed to sell its Colonial Penn
property and casualty insurance operations (the "Colonial Penn P&C Group") to
the Purchaser for an amount equal to $950 million, plus an aggregate of $156,164
per day from and including January 1, 1997 through and including the closing
date. In addition, the Purchase Agreement provides that Colonial Penn Insurance
Company, a member of the Colonial Penn P&C Group, pay a $20 million cash
dividend on the Closing Date to CP Holdings.
2. To elect six directors.
3. To consider and vote upon a proposal to approve the Company's Senior
Executive Annual Incentive Bonus Plan.
4. To ratify the selection of Coopers & Lybrand L.L.P. as independent
auditors to audit the Consolidated Financial Statements of the Company and its
subsidiaries for the year ended December 31, 1997.
5. To transact such other business as may properly come before the Meeting
or any adjournments of the Meeting.
Only holders of record of the Company's common shares, par value $1.00 per
share, at the close of business on September 18, 1997 will be entitled to notice
of and to vote at the Meeting. Please sign, date and mail the enclosed proxy so
that your shares may be represented at the Meeting if you are unable to attend
and vote in person.
By Order of the Board of Directors.
IAN M. CUMMING
Chairman of the Board of Directors
<PAGE>
LEUCADIA NATIONAL CORPORATION
315 PARK AVENUE SOUTH
NEW YORK, NEW YORK 10010
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
October 3, 1997
This Proxy Statement is being furnished to the Shareholders (the
"Shareholders") of Leucadia National Corporation, a New York corporation (the
"Company"), in connection with the solicitation of proxies by the Board of
Directors for use at the Annual Meeting of Shareholders (the "Meeting") of the
Company to be held on November 3, 1997 and at any adjournments thereof.
At the Meeting, Shareholders will be asked:
1. To consider and vote upon a proposal to approve and adopt a Purchase
Agreement, dated as of June 30, 1997 (the "Purchase Agreement"), among General
Electric Capital Corporation (the "Purchaser" or "GE Capital"), the Company and
the Company's subsidiaries, Charter National Life Insurance Company ("Charter"),
Colonial Penn Group, Inc. ("CPG") and Colonial Penn Holdings Inc. ("CP Holdings"
and together with the Company, Charter and CPG, the "Sellers"), a copy of which
is attached hereto as Annex A. Pursuant to the Purchase Agreement, CP Holdings
has agreed to sell its Colonial Penn property and casualty insurance operations
(collectively, the "Colonial Penn P&C Group") to the Purchaser for an amount
equal to $950 million, plus an aggregate of $156,164 per day from and including
January 1, 1997 through and including the closing date (the "Proposed Sale"). In
addition, the Purchase Agreement provides that Colonial Penn Insurance Company
("CPI"), a member of the Colonial Penn P&C Group, pay a $20 million dividend on
the Closing Date to CP Holdings.
2. To elect six directors.
3. To consider and vote upon a proposal to approve the Company's Senior
Executive Annual Incentive Bonus Plan (the "Incentive Bonus Plan").
4. To ratify the selection of Coopers & Lybrand L.L.P. as independent
auditors to audit the Consolidated Financial Statements of the Company and its
subsidiaries for the year ended December 31, 1997.
5. To transact such other business as may properly come before the Meeting
or any adjournments of the Meeting.
The Board of Directors has fixed the close of business on September 18,
1997 as the record date (the "Record Date") for the determination of the holders
of the Company's common shares, par value $1.00 per share (the "Common Shares")
entitled to notice of and to vote at the Meeting. Each such Shareholder will be
entitled to one vote for each Common Share held on all matters to
<PAGE>
come before the Meeting and may vote in person or by proxy authorized in
writing. At the close of business on September 18, 1997, there were 63,840,351
Common Shares entitled to vote.
All references in this Proxy Statement to the Common Shares and to prices
of the Common Shares reflect a two-for-one stock split in the form of a 100%
stock dividend effective on November 15, 1995.
This Proxy Statement and the accompanying form of proxy are first being
sent to holders of the Common Shares on or about October 3, 1997.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New
York 10048. Copies of such material can also be obtained at prescribed rates by
writing to the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549. Such information may also be
accessed electronically by means of the Commission's home page on the Internet
(http://www.sec.gov). In addition, such reports, proxy statements and other
information can be inspected at the New York Stock Exchange, Inc. (the "NYSE"),
20 Broad Street, New York, New York 10005 and the Pacific Stock Exchange,
Incorporated, 301 Pine Street, San Francisco, California 94104, on which the
Common Shares are traded.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company (File No. 1-5721) with the
Commission are incorporated by reference into this Proxy Statement:
(a) the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 as amended on Forms 10-K/A filed April 29, 1997 and October 3,
1997 (the "Annual Report");
(b) the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997;
(c) the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997 (the "Second Quarter 10-Q");
(d) the Company's Current Reports on Form 8-K dated January 14, 1997,
April 7, 1997, April 30, 1997, June 30, 1997, September 5, 1997 (the "September
8-K") and September 30, 1997; and
(e) the Company's Current Report on Form 8-K/A filed October 3, 1997,
amending and restating the September 8-K (the "October 8-K/A"). The October
8-K/A restates the Company's financial statements for the three years ended
December 31, 1996 contained in the Annual Report to reflect the Colonial Penn
Life Group (as hereinafter defined) as discontinued operations.
All documents and reports subsequently filed by the Company pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Proxy Statement and prior to the date of the Meeting shall be deemed to be
incorporated by reference in this Proxy Statement and to be a part hereof from
the date of filing of such documents or reports. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Proxy Statement to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such
(ii)
<PAGE>
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Proxy Statement.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN EXHIBITS TO
SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE)
ARE AVAILABLE TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY
STATEMENT IS DELIVERED, ON WRITTEN OR ORAL REQUEST, WITHOUT CHARGE, DIRECTED TO
LEUCADIA NATIONAL CORPORATION, 315 PARK AVENUE SOUTH, NEW YORK, N.Y. 10010
(TELEPHONE NUMBER (212) 460-1900), ATTENTION: CORPORATE SECRETARY. IN ORDER TO
ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUESTS SHOULD BE MADE BY
OCTOBER 24, 1997.
(iii)
<PAGE>
TABLE OF CONTENTS
Page
AVAILABLE INFORMATION................................................ ii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...................... ii
SUMMARY.............................................................. 1
The Meeting.................................................... 1
The Proposed Sale.............................................. 3
Other Transactions............................................. 7
SELECTED FINANCIAL DATA.............................................. 8
UNAUDITED PRO FORMA FINANCIAL DATA................................... 10
THE MEETING.......................................................... 15
Date, Time and Place........................................... 15
Matters to Be Considered....................................... 15
Record Date; Shares Outstanding and Entitled to Vote........... 15
Required Votes................................................. 15
Voting and Revocation of Proxies............................... 18
Proxy Solicitation............................................. 18
Independent Auditors........................................... 18
THE PROPOSED SALE.................................................... 19
General........................................................ 19
Description of the Colonial Penn P&C Group Business............ 19
Background of the Proposed Sale................................ 19
Fairness Opinion............................................... 21
Recommendation of the Board of Directors; Reasons for
the Proposed Sale ........................................... 25
Use of Proceeds; Proposed Business of the Company
Subsequent to the Proposed Sale and the Conseco
Transaction.................................................. 26
The Conseco Transaction........................................ 27
Absence of Appraisal Rights.................................... 29
Potential Claim................................................ 29
THE PURCHASE AGREEMENT............................................... 30
Purchase Price................................................. 30
The Closing.................................................... 30
Representations and Warranties................................. 30
Certain Covenants.............................................. 31
No Solicitation................................................ 31
Employment and Employee Benefit Plans.......................... 32
Other Agreements............................................... 33
Closing Date Cash Distributions................................ 34
Non-Competition Agreement...................................... 34
Conditions..................................................... 35
Termination.................................................... 36
(iv)
<PAGE>
Termination Fees............................................... 36
Indemnification; Survival of Representations and Warranties.... 36
Expenses....................................................... 37
MARKET PRICES AND DIVIDEND POLICY.................................... 38
ELECTION OF DIRECTORS................................................ 39
INFORMATION CONCERNING THE BOARD OF DIRECTORS AND BOARD COMMITTEES... 41
Meetings and Committees........................................ 41
Certain Litigation............................................. 42
PRESENT BENEFICIAL OWNERSHIP OF COMMON SHARES........................ 43
EXECUTIVE COMPENSATION............................................... 46
Summary Compensation Table..................................... 46
Option Grants in 1996.......................................... 48
Aggregate Option Exercises in 1996 and Option Values at
December 31, 1996............................................ 49
Retirement Plan................................................ 49
Employment Agreements.......................................... 50
Compensation of Directors...................................... 51
Indemnification................................................ 52
Certain Relationships and Related Transactions................. 52
Report of the Compensation Committee of the Board of Directors. 52
Compensation Committee Interlocks and Insider Participation.... 56
Section 16(a) Beneficial Ownership Reporting Compliance........ 57
Shareholder Return Performance Graph........................... 58
PROPOSED SENIOR EXECUTIVE ANNUAL INCENTIVE BONUS PLAN................ 59
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS.................... 60
ANNUAL REPORT........................................................ 60
PROPOSALS BY SHAREHOLDERS............................................ 60
INDEX TO FINANCIAL STATEMENTS OF THE COLONIAL PENN P&C GROUP......... 61
ANNEX A - Purchase Agreement
ANNEX B - Opinion of Jefferies & Company, Inc.
ANNEX C - Sections 630 and 910 of the New York Business Corporation Law
ANNEX D - Senior Executive Annual Incentive Bonus Plan
(v)
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement. Reference is made to, and this summary is qualified in its
entirety by, the more detailed information and the financial statements,
including the notes thereto, appearing elsewhere herein or incorporated by
reference herein and in the Annexes hereto. As used herein, the term "Company"
means Leucadia National Corporation and its subsidiaries, except as the context
otherwise may require. Shareholders are urged to read this Proxy Statement, the
Annexes attached hereto and the documents incorporated herein by reference
carefully and in their entirety.
THE MEETING
Date, Time and Place...... Novenber 3, 1997 at 10:00 a.m., local
time, at Credit Suisse First Boston, 11
Madison Avenue, Level 2B Auditorium, New
York, New York.
Matters to be Considered.. The approval and adoption of the Purchase
Agreement; the election of six directors;
the approval of the Incentive Bonus Plan;
the ratification of the selection of the
independent auditors; and such other matters
as may properly come before the Meeting.
Record Date............... The close of business on September 18, 1997.
Shares Outstanding and
Entitled to Vote.......... 63,840,351 Common Shares.
Required Votes............ The Board of Directors has determined that,
because of the significance of the Proposed
Sale to the Company, the affirmative vote of
at least two-thirds of the outstanding
Common Shares shall be required to approve
and adopt the Purchase Agreement. The
Company believes that Shareholder approval
of the Purchase Agreement is not required
under New York law, inasmuch as the sale by
CP Holdings to the Purchaser of the Colonial
Penn P&C Group does not constitute a sale by
the Company of "all or substantially all" of
the assets of the Company within the meaning
of Section 909 of the Business Corporation
Law of the State of New York (the "NYBCL").
However, by requiring the approval of at
least two-thirds of the outstanding voting
shares of the Company, the Purchase
Agreement provides that the statutory
two-thirds voting requirement, which would
be compulsory if Section 909 were
applicable, will be satisfied in any event.
In the event that the Company fails to
obtain the requisite Shareholder approval,
the Company will either re-solicit
Shareholder approval or abandon the
transaction.
Under New York law, the affirmative vote of
a plurality of the Common Shares voted at
the Meeting is required to elect directors.
1
<PAGE>
Under New York law, the affirmative vote of
the holders of a majority of the Common
Shares voted at the Meeting is required to
approve the Incentive Bonus Plan.
The ratification of the selection of Coopers
& Lybrand L.L.P. as independent auditors is
being submitted to Shareholders because the
Board of Directors believes that such action
follows sound corporate practice and is in
the best interests of the Shareholders. If
the Shareholders do not ratify the selection
by the affirmative vote of the holders of a
majority of the Common Shares voted at the
Meeting, the selection of independent
auditors will be reconsidered by the Board.
If the Shareholders ratify the selection,
the Board, in its discretion, may still
direct the appointment of new independent
auditors at any time during the year if the
Board believes that such a change would be
in the best interests of the Company and its
Shareholders.
Ian M. Cumming, Chairman of the Board of
Directors, beneficially owns 9,884,002 or
approximately 15.5% of the Common Shares
outstanding at the Record Date, Joseph S.
Steinberg, a Director and President,
beneficially owns 9,112,340 or approximately
14.3% of the Common Shares outstanding at
the Record Date and two trusts for the
benefit of Mr. Steinberg's minor children
(the "Steinberg Children Trusts")
beneficially own 1,127,400 or approximately
1.8% of the Common Shares outstanding at the
Record Date. Mr. Steinberg disclaims
beneficial ownership of the Common Shares
held by the Steinberg Children Trusts. The
Cumming Foundation and the Joseph S. and
Diane H. Steinberg 1992 Charitable Trust,
private charitable foundations independently
established by Messrs. Cumming and
Steinberg, respectively, beneficially own
712,859 or approximately 1.1% and 542,407 or
approximately .8% of the Common Shares
outstanding at the Record Date,
respectively. Mr. Cumming and Mr. Steinberg
each disclaims beneficial ownership of the
Common Shares held by their respective
private charitable foundations. Pursuant to
a Voting Agreement, dated as of June 30,
1997 (the "Voting Agreement") among the
Purchaser and Mr. Cumming and Mr. Steinberg,
Messrs. Cumming and Steinberg have agreed to
cause all Common Shares that they
beneficially own and all Common Shares
beneficially owned by their charitable
foundations to be voted in favor of approval
and adoption of the Purchase Agreement and
Messrs. Cumming and Steinberg have advised
the Company that they intend to do so.
Messrs. Cumming and Steinberg have further
advised the Company that they intend to
cause all Common Shares that they
beneficially own and all Common Shares
beneficially owned by their charitable
foundations to be voted in favor of each
nominee named herein, in favor of
approval of the Incentive Bonus Plan and in
favor of ratification of the selection of
independent auditors. In addition to Messrs.
Cumming and Steinberg, all other directors
and officers of the Company beneficially own
approximately .6% of the Common Shares
outstanding at the Record Date (excluding
Common Shares which such directors and
officers have the right to
2
<PAGE>
acquire upon exercise of currently
exercisable options). ACCORDINGLY, ASSUMING
MESSRS. CUMMING AND STEINBERG, THE TWO
PRIVATE CHARITABLE FOUNDATIONS, ALL OF SUCH
DIRECTORS AND OFFICERS AND THE STEINBERG
CHILDREN TRUSTS CAUSE ALL COMMON SHARES
BENEFICIALLY OWNED BY THEM (EXCLUDING COMMON
SHARES ACQUIRABLE UPON THE EXERCISE OF
OPTIONS) TO BE VOTED IN FAVOR OF APPROVAL
AND ADOPTION OF THE PURCHASE AGREEMENT,
APPROVAL AND ADOPTION OF THE PURCHASE
AGREEMENT WILL REQUIRE THE AFFIRMATIVE VOTE
OF AN ADDITIONAL APPROXIMATELY 32.6% OF THE
OUTSTANDING COMMON SHARES. THE ADDITIONAL
32.6% OF THE OUTSTANDING COMMON SHARES WILL
BE OBTAINED IF 49.5% OF THE COMMON SHARES
HELD BY THE PUBLIC ARE VOTED IN FAVOR OF
APPROVAL AND ADOPTION OF THE PURCHASE
AGREEMENT. FURTHER, ASSUMING ALL OF THE
FOREGOING PERSONS CAUSE ALL COMMON SHARES
BENEFICIALLY OWNED BY THEM (EXCLUDING COMMON
SHARES ACQUIRABLE UPON THE EXERCISE OF
OPTIONS) TO BE VOTED IN FAVOR OF EACH
NOMINEE, IN FAVOR OF THE INCENTIVE BONUS
PLAN AND IN FAVOR OF THE RATIFICATION OF THE
SELECTION OF INDEPENDENT AUDITORS, ELECTION
OF EACH NOMINEE, APPROVAL OF THE INCENTIVE
BONUS PLAN AND RATIFICATION OF THE SELECTION
OF INDEPENDENT AUDITORS WILL BE ASSURED
UNLESS MORE THAN 68.3% OF THE OUTSTANDING
COMMON SHARES ARE VOTED ON SUCH MATTERS.
THE PROPOSED SALE
The Company............... The Company is a diversified financial
services holding company principally engaged
in personal and commercial lines of property
and casualty insurance, life and health
insurance, banking and lending and
manufacturing. In April 1997, the Company
signed an agreement with Conseco, Inc.
("Conseco") to sell its subsidiaries engaged
in the sale of graded benefit life insurance
policies through direct marketing and
agent-sold Medicare supplement insurance.
See "The Proposed Sale-The Conseco
Transaction."
The Purchaser............. The Purchaser, General Electric Capital
Corporation, is engaged in the financial
services business. General Electric Capital
Corporation is a wholly owned subsidiary of
General Electric Company.
Business to Be Sold....... Pursuant to the Purchase Agreement, CP
Holdings, an indirect wholly owned
subsidiary of the Company, has agreed to
sell the Colonial Penn P&C Group to the
Purchaser. The Colonial Penn P&C Group's
primary business is providing private
passenger automobile insurance to the mature
adult population through direct response
marketing. See "The Proposed
Sale-Description of the Colonial Penn P&C
Group Business." The Proposed Sale does not
include CPI's subsidiary,
3
<PAGE>
Intramerica Life Insurance Company
("Intramerica"). Following consummation of
the Proposed Sale and the Conseco
Transaction, the Company will remain in the
property and casualty insurance business
through Empire Insurance Company and Allcity
Insurance Company (collectively, the "Empire
Group") and in the life insurance business
through Charter and Intramerica. See "Use of
Proceeds; Proposed Business of the Company
Subsequent to the Proposed Sale and the
Conseco Transaction."
Purchase Price............ The Purchase Agreement provides for a
purchase price equal to $950 million, plus
an aggregate of $156,164 per day from and
including January 1, 1997 through and
including the Closing Date (as defined
below). See "The Purchase Agreement-Purchase
Price."
Closing Date Cash
Distributions............. Pursuant to the Purchase Agreement, the
Colonial Penn P&C Group will declare and to
the extent permitted by applicable law pay
the following cash dividends: (a) a $3
million cash dividend from Colonial Penn
Franklin Insurance Company ("CPF") that is
to be funded by the proceeds from the
Conseco Transaction (as defined below); and
(b) a cash dividend from CPI, which shall
consist of the dividend from CPF, together
with a $20 million cash dividend from CPI,
the sources of which may include dividends
from CPI's subsidiaries. See "The Purchase
Agreement-Closing Date Cash Distributions."
Non-Competition
Agreement................. Pursuant to the Purchase Agreement, the
Company has agreed, for a period of three
years following the Closing Date, to
restrict its insurance activities in certain
respects. See "The Purchase
Agreement-Non-Competition Agreement."
Closing Date.............. If the Purchase Agreement is approved and
adopted by the Shareholders at the Meeting,
the Proposed Sale will be consummated on the
second business day after satisfaction or
waiver of certain conditions specified in
the Purchase Agreement (the "Closing Date").
The Company currently does not intend to
waive any material conditions to the
Proposed Sale. However, if the Company does
waive any such material conditions, the
Company would resolicit proxies at that
time.
Conditions to the
Proposed Sale............. The respective obligations of the Sellers
and the Purchaser to consummate the Proposed
Sale are conditioned on, among other things,
receipt of governmental and regulatory
consents (including termination or
expiration of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, and the rules and
regulations promulgated thereunder (the "HSR
Act") and approvals of various state
insurance commissioners), receipt of
Shareholder approval, the distribution of
Intramerica from CPI to CP Holdings and the
absence of injunctions or restraints
preventing consummation of such transaction.
On August 8, 1997, notice of early
termination of the waiting period under the
HSR Act was received. The Company has been
advised by the Purchaser that the remaining
consents (from New Jersey and Pennsylvania
regulatory authorities) are expected to be
obtained prior to the date of the Meeting.
See "The Purchase Agreement-Conditions."
4
<PAGE>
Use of Proceeds; Proposed
Business of the Company
Subsequent to the Proposed
Sale and the Conseco
Transaction............... The Company has made no determination as to
the use of the proceeds of the Proposed Sale
(which is expected to be approximately $1
billion). In evaluating potential uses of
the proceeds of the Proposed Sale, the
Company will endeavor to maximize value to
the Shareholders, which could involve the
repurchase of Common Shares, an
extraordinary dividend, investments,
acquisitions and working capital uses. The
Company has no material arrangement,
commitment or understanding with respect to
any such uses. Pending such uses, the
proceeds will be primarily invested in
short/intermediate-term investment grade
obligations.
Inasmuch as the Company does not intend to
conduct its affairs in a manner which would
require registration as an investment
company under the Investment Company Act of
1940, as amended (the "Investment Company
Act"), such considerations will be taken
into account in determining the use of the
proceeds from the Proposed Sale. If the
Company were required to register as an
investment company under the Investment
Company Act, it could have a material
adverse effect on the Company. See "The
Proposed Sale-Use of Proceeds; Proposed
Business of the Company Subsequent to the
Proposed Sale and the Conseco Transaction."
Recommendation of the
Board of Directors........ The Company's Board of Directors believes
the Proposed Sale is in the best interests
of the Company. The Board of Directors has
unanimously approved the Purchase Agreement
and the transactions contemplated thereunder
and recommends that the Shareholders vote
FOR approval and adoption of the Purchase
Agreement. See "The Proposed
Sale-Recommendation of the Board of
Directors."
Fairness Opinion.......... Jefferies & Company, Inc. ("Jefferies") was
retained by the Company to render an opinion
as to the fairness from a financial point of
view of the consideration to be received by
the Company in connection with the Proposed
Sale. On June 27, 1997, the date the Board
of Directors of the Company approved the
Purchase Agreement, Jefferies delivered to
the Board of Directors its written opinion
to the effect that, as of the date of its
opinion and subject to the considerations
set forth in such opinion, the consideration
to be received by the Company pursuant to
the Purchase Agreement is fair from a
financial point of view to the Company. A
copy of the opinion of Jefferies is attached
to this Proxy Statement as Annex B. The
attached opinion sets forth the assumptions
made, the matters considered, the scope and
limitations of the review undertaken and
procedures followed by Jefferies.
Jefferies has not been requested by the
Company to update its fairness opinion. See
"The Proposed Sale-Fairness Opinion."
Absence of Appraisal Rights The Company does not believe that rights of
dissent are available under New York law in
connection with the Purchase Agreement,
since the sale of the Colonial Penn P&C
Group by CP Holdings does not consti-
5
<PAGE>
tute a sale by the Company of "all or
substantially all" of the assets of the
Company within the meaning of Section 909 of
the NYBCL.
If, however, Section 909 of the NYBCL were
applicable to the Proposed Sale,
Shareholders entitled to vote would be able,
pursuant to Sections 910 and 623 of the
NYBCL, a copy of each of which is attached
hereto as Annex C, to dissent from the
proposed transaction and demand payment of
the fair value of their Common Shares in the
event the Proposed Sale is consummated. To
exercise such right, a Shareholder opposing
the sale would be required to first file
with the Company a written objection to the
sale prior to the taking of the vote
thereon, would not be able to vote any of
his Common Shares in favor of the proposed
transaction and would otherwise be required
to follow the procedures specified in
Section 623.
AS STATED ABOVE, THE COMPANY DOES NOT
BELIEVE THAT SECTION 909 IS APPLICABLE AND
INTENDS TO DISPUTE THE RIGHT OF A
SHAREHOLDER TO DISSENT FROM THE PROPOSED
TRANSACTION. See "The Proposed Sale-Absence
of Appraisal Rights."
Termination............... The Purchase Agreement may be terminated at
any time prior to the Closing Date, whether
before or after approval by the Shareholders
at the Meeting: (a) by mutual written
consent of the Purchaser and the Sellers;
(b) by either the Purchaser or the Sellers,
if the Proposed Sale shall not have been
consummated on or before December 31, 1997;
(c) by either the Purchaser or the Sellers,
upon any court order prohibiting the
Proposed Sale becoming final; (d) by either
the Purchaser or the Sellers, if, upon a
vote at the Meeting (or any adjournment
thereof), Shareholder approval of the
Purchase Agreement shall not have been
obtained; (e) by the Purchaser, if the Board
of Directors of the Company shall have taken
any Permitted Action (as defined under "The
Purchase Agreement-No Solicitation"); or (f)
by the Sellers, if the Company enters into a
definitive agreement providing for the
implementation of an Acquisition Proposal
(as defined under "The Purchase Agreement-No
Solicitation").
In the event of termination of the Purchase
Agreement by either the Sellers or the
Purchaser as provided above, the Purchase
Agreement will become void and there will be
no liability or obligation on the part of
the Purchaser or the Sellers, other than
under certain specified provisions of the
Purchase Agreement, which include the
payment of a fee to the Purchaser under
certain circumstances. See "The Purchase
Agreement-Termination" and "The Purchase
Agreement-Termination Fees."
Termination Fee........... If (a) the Purchase Agreement is terminated
by any party because Shareholder approval
has not been obtained and (b) at or prior to
the Meeting, there shall have been an
Acquisition Proposal, whether or not such
Acquisition Proposal shall have been reject-
ed or shall have been withdrawn prior to the
time of such termination or of the Meeting,
the Sellers shall pay to the Purchaser a
termination fee of $10 million in
6
<PAGE>
cash; if, within one year of any such
termination described in clause (a) above, a
transaction implementing any Acquisition
Proposal shall have been consummated, the
Sellers shall pay to the Purchaser an
additional termination fee of $20 million in
cash. Alternatively, if the Purchase
Agreement is terminated by the Purchaser
pursuant to clause (e) under "Termination"
above, or by the Sellers pursuant to clause
(f) under "Termination" above, the Sellers
shall pay to the Purchaser a termination fee
of $30 million in cash. In no event shall
the Sellers be obligated to pay more than
$30 million in termination fees to the
Purchaser. See "The Purchase
Agreement-Termination Fees."
OTHER TRANSACTIONS
The Conseco Transaction On April 30, 1997, the Company signed an
agreement (the "Conseco Agreement") to sell
its subsidiaries, Colonial Penn Life
Insurance Company ("CPL") and Providential
Life Insurance Company ("PLC") and certain
related assets, including its health
insurance operations, to Conseco for $460
million, including $400 million in notes
secured by non-cancelable letters of credit
and $60 million in cash (the "Conseco
Transaction"). CPL, PLC and PLC's
subsidiaries (the "Colonial Penn Life
Group") are engaged in the sale of graded
benefit life insurance policies through
direct marketing and agent-sold Medicare
supplement insurance. The Conseco
Transaction, which was not subject to
Shareholder approval, closed on September
30, 1997. The Colonial Penn Life Group has
been classified as discontinued operations.
7
<PAGE>
SELECTED FINANCIAL DATA
The information set forth below reflects the life and health insurance
businesses conducted by the Colonial Penn Life Group as discontinued operations.
Certain previously reported amounts have been restated to segregate the results
of these discontinued businesses from continuing operations. Except for such
restatements, 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," contained in the Company's
October 8-K/A (which restates such information contained in the Company's Annual
Report to reflect the Colonial Penn Life Group as discontinued operations) and
with the unaudited financial statements contained in the Company's Second
Quarter 10-Q, which are incorporated by reference herein. The information set
forth below for the six months ended June 30, 1997 and 1996 is unaudited;
however, in the opinion of the Company's management, such financial information
contains all adjustments, consisting only of normal recurring items, necessary
to present fairly the financial information for such periods. The results of
operations for the six months ended June 30, 1997 may not be indicative of
annual results of operations.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(Unaudited)
(In thousands, except per share amounts)
SELECTED INCOME
STATEMENT DATA: (a)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $654,090 $649,605 $1,276,329 $1,347,786 $1,172,423 $1,175,888 $1,272,883
Net securities gains (losses) 1,739 10,320 34,953 20,687 (8,440) 44,696 39,494
Interest expense (b) 24,780 27,247 53,931 52,819 43,999 39,442 38,476
Insurance losses, policy benefits
and amortization of deferred
acquisition costs 396,435 415,605 813,324 809,123 688,703 639,358 705,629
Income from continuing operations
before income taxes, minority expense
of trust preferred securities,
cumulative effects of changes in
accounting principles
and extraordinary loss 58,455 13,791 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 32,976 11,410 24,174 80,203 35,483 89,715 87,521
Income from discontinued operations 15,337 17,364 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 (2,044) - (6,838) - - - -
Net income 46,269 28,774 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 operations
before cumulative effects of
changes in accounting principles
and extraordinary loss $.54 $.19 $ .40 $1.35 $ .61 $1.53 $1.79
Income from discontinued operations .25 .29 .51 .46 .61 .45 .88
Cumulative effects of changes in
accounting principles - - - - - 2.21 -
Extraordinary loss (.03) - (.11) - - - -
---- ---- ---- ---- ---- ---- ----
Net income $.76 $.48 $ .80 $1.81 $1.22 $4.19 $2.67
- ------------------------------ ==== ==== ==== ==== ==== ==== =====
Footnotes on following page.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- ------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(Unaudited)
(In thousands, except per share amounts)
<S> <C> <C> <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 $.54 $.19 $ .40 $1.33 $ .64 $1.51 $1.78
Income from discontinued operations .24 .29 .51 .44 .57 .43 .88
Cumulative effects of changes in
accounting principles - - - - - 2.10 -
Extraordinary loss (.03) - (.11) - - - -
---- ---- ---- ---- ---- ---- ----
Net income $.75 $.48 $ .80 $1.77 $1.21 $4.04 $2.66
==== ==== ==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
------------ -------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
(Unaudited)
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA: (a)
Cash and investments $2,610,227 $2,400,656 $2,381,087 $1,997,014 $2,174,405 $2,501,412
Total assets 4,687,237 4,331,361 4,265,516 3,819,703 3,849,530 3,460,078
Debt, including current maturities 579,384 523,366 518,177 425,848 401,335 225,588
Customer banking deposits 200,170 209,261 203,061 179,888 173,365 186,339
Common shareholders' equity 1,188,370 1,118,107 1,111,491 881,815 907,856 618,161
Book value per common share $19.31 $18.51 $18.47 $15.72 $16.27 $11.06
Cash dividends declared per
common share $ - $.25 $.25 $.13 $.13 $.10
</TABLE>
<TABLE>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
--------------- --------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED INFORMATION ON
PROPERTY AND CASUALTY
INSURANCE OPERATIONS
(Unaudited): (a)(c)
GAAP Combined Ratio 105.3% 104.5% 105.0% 103.5% 99.1% 96.9% 101.7%
SAP Combined Ratio 103.3% 100.5% 101.5% 101.2% 98.8% 93.7% 102.8%
Industry SAP Combined Ratio (d) N/A 106.2% 105.8% 106.4% 108.4% 106.9% 115.7%
Premium to Surplus Ratio (e) N/A N/A 1.6x 1.8x 1.9x 1.6x 2.0x
</TABLE>
- --------------------------
(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
with respect to annual information for 1992 through 1996, and Best Week
P/C Supplement, March 24, 1997 Release 1, with respect to interim
information for 1996. 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.
9
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma balance sheet gives pro forma effect to the
Proposed Sale and the Conseco Transaction as if such transactions had been
consummated on June 30, 1997. The following unaudited pro forma income
statements give pro forma effect to the Proposed Sale to GE Capital as if such
sale had occurred on January 1, 1996 and do not give pro forma effect to the
Conseco Transaction in as much as the Colonial Penn Life Group is classified as
discontinued operations. The pro forma adjustments are described in the
following notes and are based upon available information and certain assumptions
that the Company believes are reasonable. The pro forma data may not be
indicative of the results of operations and financial position of the Company as
it may be in the future or as it might have been had the transactions been
consummated on the respective dates assumed. The information should be read in
conjunction with the Company's historical financial statements and accompanying
notes incorporated by reference in this Proxy Statement and the Company's
unaudited interim financial data appearing elsewhere in this Proxy Statement.
See "Selected Financial Data."
The unaudited pro forma financial statements included in this Proxy Statement
should be read in conjunction with the following notes:
1. Pro Forma Adjustments for Proposed Sale:
The pro forma balance sheet reflects proceeds from the Proposed Sale of the
Colonial Penn P&C Group of approximately $1,025 million in cash (before
reduction for the Colonial Penn P&C Group's cash acquired by the Purchaser),
consisting of a purchase price of $950 million plus an aggregate of $156,164
per day from and including January 1, 1997 through and including the Closing
Date (estimated at approximately $40 million), a $20 million cash dividend
from CPI and approximately $15 million for the Company's retention of certain
employee benefit plan liabilities; the elimination of the assets and
liabilities of the Colonial Penn P&C Group; estimated expenses related to the
transaction; estimated income taxes; and increased retained earnings for the
estimated after-tax gain of approximately $414 million. The pro forma income
statements reflect the elimination of the Colonial Penn P&C Group.
2. Pro Forma Adjustments for Conseco Transaction:
The pro forma balance sheet reflects proceeds from the pending sale of the
Colonial Penn Life Group to Conseco of $460 million (consisting of $400
million in notes secured by non-cancelable letters of credit and $60 million
in cash); the elimination of the net assets of the Colonial Penn Life Group;
estimated expenses related to the transaction; estimated income taxes; and
increased retained earnings for the estimated after-tax gain of approximately
$220 million. The "Historical" columns reflect the Colonial Penn Life Group as
a discontinued operation. At June 30, 1997, the Colonial Penn Life Group had
total assets of approximately $1,007 million and total liabilities of
approximately $856 million. The Conseco Transaction is not subject to
Shareholder approval and is not conditioned on the consummation of the
Proposed Sale of the Colonial Penn P&C Group. See "The Conseco Transaction."
3. Other:
The pro forma income statements do not reflect earnings on the net cash
proceeds from the Proposed Sale or the net cash proceeds or interest on the
notes from the pending Conseco Transaction. Assuming the net cash proceeds
from the Proposed Sale were invested in short/intermediate-term investment
grade obligations (with yields of 5.36% and 6.04% at January 1, 1996 and
January 1, 1997, respectively), the after tax earnings (assuming a 35%
statutory rate) on the net proceeds from the Proposed Sale would have been
approximately
10
<PAGE>
$31.0 million ($.51 per share on a fully diluted basis) for the year ended
December 31, 1996 and $17.5 million ($.29 per share on a fully diluted basis)
for the six months ended June 30, 1997. Assuming the net cash proceeds from
the Conseco Transaction were invested in the same manner as described above
and using the interest rate of the notes (as set forth in such notes), the
after tax earnings (assuming a 35% statutory rate) on the combined net
proceeds from the Conseco Transaction and the Proposed Sale would have been
approximately $47.4 million ($.78 per share on a fully diluted basis) for the
year ended December 31, 1996 and $25.8 million ($.40 per share on a fully
diluted basis) for the six months ended June 30, 1997.
Certain amounts in the "Historical" column of the pro forma balance sheet have
been reclassified to be consistent with the pro forma presentation.
11
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
<TABLE>
<CAPTION>
Pro Forma
Pro Forma Pro Forma Pro Forma After Proposed
Adjustments for After Adjustments Sale to GE Capital
Proposed Sale Proposed Sale for Conseco and Conseco
Historical to GE Capital to GE Capital Transaction Transaction
---------- ------------- ------------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
Investments $2,350,919 $ (997,279) $1,353,640 $ $1,353,640
Cash and cash equivalents 259,308 928,885 1,188,193 60,000 1,248,193
Reinsurance receivable, net 246,657 (61,811) 184,846 184,846
Trade, notes and other receivables, net 565,543 (151,241) 414,302 400,000 814,302
Prepaids and other assets 194,123 (10,655) 183,468 183,468
Property, equipment and leasehold
improvements, net 89,392 (19,595) 69,797 69,797
Deferred policy acquisition costs 42,521 (15,372) 27,149 27,149
Separate and variable accounts 507,603 507,603 507,603
Investments in associated companies 207,874 (3,842) 204,032 204,032
Net assets of discontinued operations 151,180 151,180 (151,180)
---------- ---------- ---------- --------- ----------
Total $4,615,120 $ (330,910) $4,284,210 $ 308,820 $4,593,030
========== ========== ========== ========= ==========
LIABILITIES
Customer banking deposits $ 200,170 $ $ 200,170 $ $ 200,170
Trade payables and expense accruals 165,552 (41,564) 123,988 6,000 129,988
Other liabilities 129,242 (39,173) 90,069 90,069
Income taxes payable 50,603 166,978 217,581 15,000 232,581
Deferred income taxes (72,117) 58,487 (13,630) 68,000 54,370
Policy reserves 1,251,119 (582,353) 668,766 668,766
Unearned premiums 455,677 (304,113) 151,564 151,564
Separate and variable accounts 507,603 507,603 507,603
Debt, including current maturities 579,384 (3,135) 576,249 576,249
---------- ---------- ---------- --------- ----------
Total liabilities 3,267,233 (744,873) 2,522,360 89,000 2,611,360
---------- ---------- ---------- --------- ----------
Minority interest 9,517 9,517 9,517
---------- ---------- ---------- --------- ----------
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely subordinated debt
securities of the Company 150,000 150,000 150,000
---------- ---------- ---------- --------- ----------
SHAREHOLDERS' EQUITY
Common shares 61,553 61,553 61,553
Additional paid-in capital 190,674 190,674 190,674
Net unrealized (loss) on investments (5,030) (5,030) (5,030)
Retained earnings 941,173 413,963 1,355,136 219,820 1,574,956
---------- ---------- ---------- --------- ----------
Total shareholders' equity 1,188,370 413,963 1,602,333 219,820 1,822,153
---------- ---------- ---------- --------- ----------
Total $4,615,120 $ (330,910) $4,284,210 $ 308,820 $4,593,030
========== ========== ========== ========= ==========
</TABLE>
See preceding accompanying notes.
12
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Pro Forma
Adjustments Pro Forma
for Proposed After Proposed
Sale to Sale to
Historical GE Capital GE Capital
---------- ---------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C>
REVENUES:
Insurance revenues and commissions $ 405,193 $ (256,051) $ 149,142
Manufacturing 70,570 70,570
Finance 20,861 20,861
Investment and other income 176,120 (44,267) 131,853
Net securities gains (losses) 1,739 (1,199) 540
Equity in losses of associated companies (20,393) (20,393)
---------- ----------- -----------
654,090 (301,517) 352,573
---------- ----------- -----------
EXPENSES:
Provision for insurance losses and policy benefits 354,517 (218,030) 136,487
Amortization of deferred policy acquisition costs 41,918 (15,847) 26,071
Manufacturing cost of goods sold 49,253 49,253
Interest 24,780 (142) 24,638
Salaries 39,639 (17,745) 21,894
Selling, general and other expenses 85,528 (19,573) 65,955
---------- ----------- -----------
595,635 (271,337) 324,298
---------- ----------- -----------
Income from continuing operations before income taxes
and minority expense of trust preferred securities 58,455 (30,180) 28,275
---------- ----------- -----------
Income taxes:
Current 10,716 (4,340) 6,376
Deferred 10,897 (5,482) 5,415
---------- ----------- -----------
21,613 (9,822) 11,791
---------- ----------- -----------
Income from continuing operations before minority expense
of trust preferred securities 36,842 (20,358) 16,484
Minority expense of trust preferred securities, net of taxes 3,866 3,866
---------- ----------- -----------
Income from continuing operations $ 32,976 $ (20,358) $ 12,618
========== =========== ===========
Earnings from continuing operations per common and dilutive common
equivalent share $ .54 $ .21
========== ===========
Fully diluted earnings from continuing operations per common share $ .54 $ .21
========== ===========
Number of shares in calculation:
Primary 61,001 61,001
====== ======
Fully diluted 64,124 61,001
====== ======
</TABLE>
See preceding accompanying notes.
13
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Pro Forma
Adjustments Pro Forma
for Proposed After Proposed
Sale to Sale to
Historical GE Capital GE Capital
---------- ---------- ----------
(In thousands, except per share amounts)
REVENUES:
<S> <C> <C> <C>
Insurance revenues and commissions $ 827,758 $ (497,084) $ 330,674
Manufacturing 148,284 148,284
Finance 49,150 49,150
Investment and other income 249,815 (88,477) 161,338
Net securities gains (losses) 34,953 (6,444) 28,509
Equity in losses of associated companies (33,631) (33,631)
----------- ----------- -----------
1,276,329 (592,005) 684,324
----------- ----------- -----------
EXPENSES:
Provision for insurance losses and policy benefits 723,485 (421,823) 301,662
Amortization of deferred policy acquisition costs 89,839 (34,507) 55,332
Manufacturing cost of goods sold 107,667 107,667
Interest 53,931 (332) 53,599
Salaries 77,089 (32,590) 44,499
Selling, general and other expenses 194,135 (33,231) 160,904
----------- ----------- -----------
1,246,146 (522,483) 723,663
----------- ----------- -----------
Income (loss) from continuing operations before
income taxes and extraordinary loss 30,183 (69,522) (39,339)
----------- ----------- -----------
Income taxes:
Current 5,904 (2,449) 3,455
Deferred 105 (19,839) (19,734)
----------- ----------- -----------
6,009 (22,288) (16,279)
----------- ----------- -----------
Income (loss) from continuing operations before
extraordinary loss $ 24,174 $ (47,234) $ (23,060)
=========== =========== ===========
Earnings (loss) from continuing operations before extraordinary loss
per common and dilutive common equivalent share $ .40 $ (.38)
=========== ===========
Fully diluted earnings (loss) from continuing operations before
extraordinary loss per common share $ .40 $ (.38)
=========== ===========
Number of shares in calculation:
Primary 60,560 60,560
=========== ===========
Fully diluted 60,560 60,560
=========== ===========
</TABLE>
See preceding accompanying notes.
14
<PAGE>
THE MEETING
DATE, TIME AND PLACE
The Meeting will be held on November 3, 1997, at 10:00 a.m., local time,
at Credit Suisse First Boston, 11 Madison Avenue, Level 2B Auditorium, New
York, New York.
MATTERS TO BE CONSIDERED
At the Meeting, Shareholders will be asked to consider and vote upon a
proposal to approve and adopt the Purchase Agreement, to elect six directors, to
approve the Incentive Bonus Plan and to ratify the selection of independent
auditors. See "THE PROPOSED SALE," "THE PURCHASE AGREEMENT," "ELECTION OF
DIRECTORS," "PROPOSED SENIOR EXECUTIVE ANNUAL INCENTIVE BONUS PLAN" and
"RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS." The Board of Directors
knows of no matters that are to be brought before the Meeting other than as set
forth in the Notice of Meeting. If any other matters properly come before the
Meeting, the persons named in the enclosed form of proxy or their substitutes
will vote in accordance with their best judgment on such matters.
RECORD DATE; SHARES OUTSTANDING AND ENTITLED TO VOTE
Shareholders as of the Record Date (i.e., the close of business on
September 18, 1997) are entitled to notice of and to vote at the Meeting. As of
the Record Date, there were 63,840,351 Common Shares outstanding and entitled to
vote, with each share entitled to one vote.
REQUIRED VOTES
Approval and Adoption of the Purchase Agreement. The Board of Directors
has determined that, because of the significance of the Proposed Sale to the
Company, the affirmative vote of at least two-thirds of the outstanding Common
Shares shall be required to approve and adopt the Purchase Agreement. The
Company believes that Shareholder approval of the Purchase Agreement is not
required under New York law, inasmuch as the sale by CP Holdings to the
Purchaser of the Colonial Penn P&C Group does not constitute a sale by the
Company of "all or substantially all" of the assets of the Company within the
meaning of Section 909 of the NYBCL. However, by requiring the approval of at
least two-thirds of the outstanding voting shares of the Company, the Purchase
Agreement provides that the statutory two-thirds voting requirement, which would
be compulsory if Section 909 were applicable, will be satisfied in any event. In
the event that the Company fails to obtain the requisite Shareholder approval,
the Company will either re-solicit Shareholder approval or abandon the
transaction. Abstentions and broker non-votes are considered in determining the
number of votes required to attain two-thirds of the outstanding shares in
connection with the proposal to approve and adopt the Purchase Agreement.
Because abstentions and broker non-votes are not affirmative votes for the
matter, they will have the same effect as votes against the matter.
Election of Directors. Under New York law, the affirmative vote of the
holders of a plurality of the Common Shares voted at the Meeting is required to
elect each director. Consequently, only shares that are voted in favor of a
particular nominee will be counted toward such nominee's achievement of a
plurality. Shares present at the Meeting that are not voted for a particular
nominee or shares present by proxy where the Shareholder properly withheld
authority to vote for such nominee (including broker non-votes) will not be
counted toward such nominee's achievement of a plurality.
15
<PAGE>
Incentive Bonus Plan. Under New York law, the affirmative vote of the
holders of a majority of the Common Shares voted at the Meeting is required to
approve the Incentive Bonus Plan. Absentions and broker non-votes are not
counted in determining the votes cast in connection with the approval of the
Incentive Bonus Plan, but do have the effect of reducing the number of
affirmative votes required to achieve a majority for such matter by reducing the
total number of shares from which the majority is calculated.
Other Matters. The ratification of the selection of Coopers & Lybrand
L.L.P. as independent auditors is being submitted to Shareholders because the
Board of Directors believes that such action follows sound corporate practice
and is in the best interests of the Shareholders. If the Shareholders do not
ratify the selection by the affirmative vote of the holders of a majority of the
Common Shares voted at the Meeting, the selection of independent auditors will
be reconsidered by the Board. If the Shareholders ratify the selection, the
Board, in its discretion, may still direct the appointment of new independent
auditors at any time during the year if the Board believes that such a change
would be in the best interests of the Company and its Shareholders. Abstentions
and broker non-votes are not counted in determining the votes cast in connection
with the ratification of auditors, but do have the effect of reducing the number
of affirmative votes required to achieve a majority for such matter by reducing
the total number of shares from which the majority is calculated.
Ian M. Cumming, Chairman of the Board of Directors, beneficially owns
9,884,002 or approximately 15.5% of the Common Shares outstanding at the Record
Date, Joseph S. Steinberg, a Director and President, beneficially owns 9,112,340
or approximately 14.3% of the Common Shares outstanding at the Record Date and
the Steinberg Children Trusts beneficially own 1,127,400 or approximately 1.8%
of the Common Shares outstanding at the Record Date. Mr. Steinberg disclaims
beneficial ownership of the Common Shares held by the Steinberg Children Trusts.
The Cumming Foundation and the Joseph S. and Diane H. Steinberg 1992 Charitable
Trust, private charitable foundations independently established by Messrs.
Cumming and Steinberg, respectively, beneficially own 712,859 or approximately
1.1% and 542,407 or approximately .8% of the Common Shares outstanding at the
Record Date, respectively. Mr. Cumming and Mr. Steinberg each disclaims
beneficial ownership of the Common Shares held by their respective private
charitable foundations. Pursuant to the Voting Agreement, Messrs. Cumming and
Steinberg have agreed to cause all Common Shares that they beneficially own and
all Common Shares beneficially owned by their charitable foundations to be voted
in favor of approval and adoption of the Purchase Agreement and Messrs. Cumming
and Steinberg have advised the Company that they intend to do so. Messrs.
Cumming and Steinberg have further advised the Company that they intend to cause
all Common Shares that they beneficially own and all Common Shares beneficially
owned by their charitable foundations to be voted in favor of each nominee named
herein, in favor of approval of the Incentive Bonus Plan and in favor of
ratification of the selection of independent auditors. In addition to Messrs.
Cumming and Steinberg, all other directors and executive officers of the Company
beneficially own approximately .6% of the Common Shares outstanding at the
Record Date (excluding Common Shares which such directors and officers have the
right to acquire upon exercise of currently exercisable options). ACCORDINGLY,
ASSUMING MESSRS. CUMMING AND STEINBERG, THE TWO PRIVATE CHARITABLE FOUNDATIONS,
ALL OF SUCH DIRECTORS AND OFFICERS AND THE STEINBERG CHILDREN TRUSTS CAUSE ALL
COMMON SHARES BENEFICIALLY OWNED BY THEM (EXCLUDING COMMON SHARES ACQUIRABLE
UPON THE EXERCISE OF OPTIONS) TO BE VOTED IN FAVOR OF APPROVAL AND ADOPTION OF
THE PURCHASE AGREEMENT, APPROVAL AND ADOPTION OF THE PURCHASE AGREEMENT WILL
REQUIRE
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THE AFFIRMATIVE VOTE OF AN ADDITIONAL APPROXIMATELY 32.6% OF THE OUTSTANDING
COMMON SHARES. THE ADDITIONAL 32.6% OF THE OUTSTANDING COMMON SHARES WILL BE
OBTAINED IF 49.5% OF THE COMMON SHARES HELD BY THE PUBLIC ARE VOTED IN FAVOR OF
APPROVAL AND ADOPTION OF THE PURCHASE AGREEMENT. FURTHER, ASSUMING ALL OF THE
FOREGOING PERSONS CAUSE ALL COMMON SHARES BENEFICIALLY OWNED BY THEM (EXCLUDING
COMMON SHARES ACQUIRABLE UPON THE EXERCISE OF OPTIONS) TO BE VOTED IN FAVOR OF
EACH NOMINEE, IN FAVOR OF APPROVAL OF THE INCENTIVE BONUS PLAN AND IN FAVOR OF
THE RATIFICATION OF THE SELECTION OF INDEPENDENT AUDITORS, ELECTION OF EACH
NOMINEE, APPROVAL OF THE INCENTIVE BONUS PLAN AND RATIFICATION OF THE SELECTION
OF INDEPENDENT AUDITORS WILL BE ASSURED UNLESS MORE THAN 68.3% OF THE
OUTSTANDING COMMON SHARES ARE VOTED ON SUCH MATTERS.
The following table summarizes the votes required to approve the matters
to be considered and voted on at the Meeting and the percentage of Common Shares
needed to approve such matters assuming that Common Shares beneficially owned by
certain insiders and affiliated parties (as described above) are voted in favor
of the matters:
Percentage of
Outstanding Percentage of
Shares Not Held Shares Held
by Insiders by Public
Matter to be Vote Required Needed to Needed to
Considered to Approve Matter Approve Matter* Approve Matter*
---------- ----------------- --------------- ---------------
Approval of
the Purchase Two-thirds of 32.6% 49.5%
Agreement outstanding
Election of
Directors Plurality of ** **
votes cast
Approval of
Incentive Majority of ** **
Bonus Plan votes cast
Ratification
of Selection Majority of ** **
of Auditors votes cast
- -----------------
* Assuming that Messrs. Cumming and Steinberg, the two private charitable
foundations, all other directors and officers of the Company and the
Steinberg Children Trusts cause all Common Shares beneficially owned by
them (excluding Common Shares acquirable upon the exercise of options) to
be voted in favor of the matter. Such persons beneficially own an
aggregate of approximately 34.1% of the outstanding Common Shares.
** Assured unless more than 68.3% of the outstanding Common Shares are voted
on such matter.
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VOTING AND REVOCATION OF PROXIES
Shareholders are requested to complete, date, sign and promptly return the
accompanying form of proxy in the enclosed envelope. Common Shares represented
by properly executed proxies received by the Company and not revoked will be
voted at the Meeting in accordance with the instructions contained therein. If
instructions are not given, proxies will be voted FOR approval and adoption of
the Purchase Agreement, FOR election of each nominee for director named herein,
FOR approval of the Incentive Bonus Plan and FOR ratification of the selection
of independent auditors.
If any other matters are properly presented at the Metting for
consideration, including among other things, consideration of a motion to
adjourn the Meeting to another time and/ or place (including, without
limitation, for the purpose of solicitating additional proxies), the persons
named in the enclosed form of proxy and acting thereunder will have discretion
to vote on such matters in accordance with their best judgement.
Any proxy signed and returned by a Shareholder may be revoked at any time
before it is voted by filing with the Secretary of the Company, at the address
of the Company set forth herein, written notice of such revocation or a duly
executed proxy bearing a later date or by attending the Meeting and voting in
person. Attendance at the Meeting will not in and of itself constitute
revocation of a proxy.
PROXY SOLICITATION
The Company will bear the costs of solicitation of proxies for the
Meeting. In addition to solicitation by mail, directors, officers and regular
employees of the Company may solicit proxies from Shareholders by telephone,
telegram, personal interview or otherwise. Such directors, officers and
employees will not receive additional compensation, but may be reimbursed for
out-of-pocket expenses in connection with such solicitation. In addition to
solicitation by directors, officers and regular employees of the Company, the
Company may engage a solicitation agent in connection with the solicitation of
proxies for the Meeting. In such event, the Company would bear the costs of any
fees to such solicitation agent (which would not be expected to exceed
$25,000). Brokers, nominees, fiduciaries and other custodians have been
requested to forward soliciting material to the beneficial owners of Common
Shares held of record by them, and such custodians will be reimbursed for their
reasonable expenses.
INDEPENDENT AUDITORS
The Company has been advised that representatives of Coopers & Lybrand
L.L.P., the Company's independent auditors for 1996, will attend the Meeting,
will have an opportunity to make a statement if they desire to do so and will be
available to respond to appropriate questions.
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THE PROPOSED SALE
GENERAL
The Purchase Agreement provides, among other things, for the sale by CP
Holdings to the Purchaser of the Colonial Penn P&C Group for $950 million, plus
an aggregate of $156,164 per day from and including January 1, 1997 through and
including the Closing Date. In addition, the Sellers are entitled to receive up
to $23 million in cash dividends ($3 million of which is to be funded by
proceeds from the Conseco Transaction) from the Colonial Penn P&C Group at the
Closing. See "The Purchase Agreement-Closing Date Cash Dividends." The Proposed
Sale does not include Intramerica, the GAAP book value of which, at June 30,
1997, was approximately $33 million. The Purchaser, General Electric Capital
Corporation, is engaged in the financial services business. General Electric
Capital Corporation is a wholly owned subsidiary of General Electric Company.
DESCRIPTION OF THE COLONIAL PENN P&C GROUP BUSINESS
The Colonial Penn P&C Group consists of CPI, CP General Agency, Inc.,
Colonial Penn Madison Insurance Company, CPF, Bayside Casualty Insurance Company
and Bay Colony Insurance Company. The Colonial Penn P&C Group's primary business
is providing private passenger automobile and homeowners insurance coverage to
the mature adult population. Substantially all of the Colonial Penn P&C Group's
policies are written for a one-year period. However, in many states CPI and CPF
offer a "guaranteed lifetime protection" provision to certain qualifying
policyholders that ensures their policies will be renewed at rates then in
effect for their classification. As of December 31, 1996, the Group had
approximately 379,000 voluntary automobile policies in force.
The Colonial Penn P&C Group primarily markets its insurance products to
the standard and preferred risk market segments through direct response
marketing methods. Direct response marketing includes any form of marketing in
which a company and a customer deal directly with each other, rather than
through an insurance agent. The Colonial Penn P&C Group has become a low cost
provider of its products to its niche markets, enabling it to charge competitive
rates. For the years ended December 31, 1996, 1995 and 1994, net earned premiums
for the Colonial Penn P&C Group were $497 million, $490 million and $447
million, respectively.
In recent years, the Colonial Penn P&C Group has acquired blocks of
assigned risk business from other insurance companies relating to private
passenger automobile insurance. In addition to the premiums paid by
policyholders, the Colonial Penn P&C Group also receives fee income from the
insurance company from which the business was acquired. The Colonial Penn P&C
Group's low expense ratio enables it to bid competitively. As of December 31,
1996, the Colonial Penn P&C Group had contracts in force covering approximately
$80 million of annualized written premium.
BACKGROUND OF THE PROPOSED SALE
The Company acquired the Colonial Penn P&C Group, along with the Colonial
Penn Life Group (collectively, the "Colonial Penn Group"), in August 1991 for an
aggregate cash purchase price of approximately $128 million, including costs.
Following its acquisition, the Company restructured the Colonial Penn Group,
increasing its profitability without impairing service to existing
policyholders.
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Over the course of the past several years, approximately ten parties
have contacted the Company, either directly or through representatives, and
indicated an interest in acquiring the Colonial Penn P&C Group and/or the
Colonial Penn Life Group, but no formal offers were made as a result of such
inquiries. In May 1996, the Purchaser expressed interest concerning a possible
transaction involving the Colonial Penn Group and entered into a confidentiality
agreement with the Company. Discussions with the Purchaser followed, resulting
only in certain joint venture marketing arrangements with the Purchaser. In late
February and early March 1997, discussions concerning a possible transaction for
all or certain of the Colonial Penn Group resumed with the Purchaser. Also at
approximately that time, discussions commenced with Conseco regarding the sale
of the Colonial Penn Life Group. The Conseco discussions were deferred in late
March 1997 while the Company continued discussions with the Purchaser regarding
the sale of the entire Colonial Penn Group by means of a "Morris Trust"
reorganization structure. Following the introduction of certain Congressional
legislation on April 17, 1997 which eliminated certain tax benefits available
under the Morris Trust structure, the Company recommenced discussions with
Conseco for the sale of the Colonial Penn Life Group, and on April 30, 1997, the
Company entered into the Conseco Agreement with Conseco.
At that time, discussions and negotiations again resumed between the
Company and the Purchaser regarding the sale of the Colonial Penn P&C Group,
with the Purchaser offering to pay approximately $950 million for the Colonial
Penn P&C Group, plus interest at a simple annual rate of 6% on the purchase
price (i.e., $156,154 per day) from January 1, 1997 through closing of the
transaction, and indicating that they would permit the Company to take a closing
date cash dividend from CPI. During May 1997, numerous telephonic meetings took
place between the Company, the Purchaser, and their respective counsel and
advisors. During the course of these meetings, discussions focused on the
purchase price, the scope of representations and warranties, indemnification
obligations, particularly with respect to environmental, litigation and tax
matters, employee benefit matters, transaction bonuses, service obligations,
intellectual property issues and matters relating to the Conseco Transaction.
On June 3, 1997, Joseph S. Steinberg, President of the Company, Joseph A.
Orlando, Vice President and Chief Financial Officer of the Company, and Richard
G. Petitt, Chairman of CPL, met with representatives of the Purchaser at the
Company's offices in New York City. Also in attendance were legal and financial
advisors of the Company and legal advisors of the Purchaser. At that meeting, in
addition to continued discussions concerning the matters already under
consideration, the Company indicated that it would be willing to sell the
Colonial Penn P&C Group for approximately $975 million, plus interest at a rate
of 6% per year on the purchase price from January 1, 1997 through the closing
date, and a closing date cash dividend. However, the Purchaser was unwilling to
agree to such purchase price.
Shortly thereafter, negotiation of the Purchase Agreement commenced,
with in-person and telephonic meetings taking place. On June 12, 1997, Mr.
Orlando and Mr. Petitt, together with legal and financial advisors to the
Company, met with representatives of the Purchaser and their legal advisors at
the offices of the Company's legal advisors to negotiate the Purchase Agreement.
An additional meeting between the Company, the Purchaser and their respective
advisors was held on June 21, 1997 at the offices of the Company's legal
advisors to negotiate the Purchase Agreement. Telephonic and in-person
discussions continued through the month of June, and on June 30, 1997, the
Company and the Purchaser entered into the Purchase Agreement.
20
<PAGE>
As previously stated, the Company acquired the entire Colonial Penn
Group in August 1991 for aggregate consideration of approximately $128 million.
Since acquisition, the Company has received approximately $300 million in cash
from the Colonial Penn Group in respect of tax sharing payments, management and
service fees, interest and dividends. If both the Proposed Sale of the Colonial
Penn P&C Group to the Purchaser and the pending sale of the Colonial Penn Life
Group to Conseco are consummated, the Company will have sold the Colonial Penn
Group (exclusive of Intramerica's variable annuity business) for aggregate
consideration of approximately $1.47 billion in cash and notes secured by
non-cancelable letters of credit, including the $20 million dividend from CPI.
Furthermore, after giving effect to the two transactions, the Company will
retain Intramerica, which had a GAAP book value at June 30, 1997 of
approximately $33 million.
FAIRNESS OPINION
On June 27, 1997, Jefferies rendered its written opinion, dated June 27,
1997 (the "Opinion"), to the Board of Directors of the Company that based upon
and subject to the various considerations set forth in the Opinion, as of June
27, 1997, the consideration to be received by the Company in connection with the
Proposed Sale (the "Consideration") was fair from a financial point of view to
the Company. No limitations were imposed by the Company's Board of Directors
upon Jefferies with respect to the investigations made or procedures followed by
it in rendering the Opinion.
The full text of the Opinion, which sets forth assumptions made, matters
considered and limitations on the review undertaken is attached (with the
consent of Jefferies) as Annex B to this Proxy Statement. Shareholders are urged
to read the Opinion carefully and in its entirety. Jefferies has not been
requested by the Company to update its fairness opinion.
In arriving at the Opinion, Jefferies did not ascribe a specific range of
fair value to the Consideration, but made its determination on the basis of
financial and comparative analyses, including (without limitation) those
described below. The Opinion is based on economic and market conditions
prevailing and other circumstances and conditions existing, on the date thereof,
and Jefferies did not express any opinion as to the market value of Common
Shares of the Company, or the price or trading range at which Common Shares of
the Company will trade following consummation of the Proposed Sale.
Jefferies' opinion is directed to the Company's Board of Directors and
does not constitute a recommendation to any Shareholder as to how such
Shareholder should vote at the Meeting. The summary of the Opinion set forth in
this Proxy Statement is qualified in its entirety by reference to the full text
of the Opinion. In addition, Jefferies was not requested to opine as to, and the
Opinion did not address, the underlying business decision of the Board of
Directors of the Company to proceed with or to effect the Proposed Sale.
In rendering the Opinion, Jefferies reviewed, among other things, the
draft of the Purchase Agreement dated June 20, 1997 and certain financial and
other information about each of the Company and the Colonial Penn P&C Group that
was in each case publicly available or furnished to Jefferies by the Company or
the Colonial Penn P&C Group, as the case may be, including certain internal
analyses, financial forecasts, an actuarial report on the loss and loss
adjustment reserves of CPI, reports and other information prepared by management
of the Company and the Colonial Penn P&C Group. Jefferies also held discussions
with members of senior management of both the Company and the Colonial Penn P&C
Group concerning the Colonial Penn P&C Group's historical and current
operations, financial condition and prospects. In addition, Jefferies conducted
such financial studies, analyses and investigations and reviewed such other
factors as were deemed appropriate for purposes of the Opinion. Jefferies
assumed and relied upon without independent investigation or verification, the
accuracy, completeness and fairness of all financial and other information
reviewed by Jefferies for purposes of rendering the Opinion, and the Opinion is
expressly conditioned upon all such information (whether written or oral) being
accurate, complete and fair in all respects.
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<PAGE>
With regard to the financial projections examined by Jefferies (the
"Projections"), which were provided by the Company and the Colonial Penn P&C
Group, Jefferies assumed that they were reasonably prepared on bases reflecting
the best currently available estimates and good faith judgments of the
respective management of the Company and the Colonial Penn P&C Group as to the
future performance of the Colonial Penn P&C Group and, although Jefferies
performed sensitivity analysis thereon, in rendering the Opinion, Jefferies
assumed that the Company will perform in accordance with the Projections for all
periods specified therein. Jefferies has disclaimed any undertaking or
obligation to advise any person of any change in any fact or matter affecting
the Opinion of which it becomes aware after the date of the Opinion. Jefferies
was not requested to, and did not, participate in the structuring or negotiation
of the Proposed Sale, solicit third party indications of acquiring all or any
part of the Colonial Penn P&C Group, or make any independent evaluation or
appraisal of the assets or liabilities, contingent or otherwise, of the Company
or the Colonial Penn P&C Group, nor was it furnished with any such evaluation or
appraisals, other than the actuarial report previously described
The following is a brief summary of the report presented by Jefferies to
the Board of Directors of the Company on June 27, 1997, which includes all
material analysis performed by Jefferies in connection with the delivery of the
fairness opinion.
The preparation of a fairness opinion involves various determinations as
to the most appropriate and relevant methods of financial analyses and the
application of those methods to particular circumstances and, therefore, such an
opinion is not readily susceptible to summary description. Furthermore, in
arriving at the Opinion, Jefferies did not attribute any particular weight to
any analysis or factor considered by it, but rather made qualitative judgments
as to the significance and relevance of each analysis and factor. Accordingly,
Jefferies' analyses must be considered as a whole. Considering any portion of
such analyses and of the factors considered, without considering all analyses
and factors, could create a misleading or incomplete view of the process
underlying the Opinion. In its analyses, Jefferies made many assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of the Company and the
Colonial Penn P&C Group. Any estimates contained in these analyses are not
necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than as set forth
therein. In addition, analyses relating to the value of businesses do not
purport to be appraisals or to reflect the prices at which businesses actually
may be sold. Because such estimates are inherently subject to uncertainty, none
of the Company, Jefferies or any other person assumes responsibility for the
accuracy thereof.
Analysis of Comparable Publicly Traded Companies
As part of its analysis, Jefferies compared the financial information of
the Colonial Penn P&C Group with the following publicly traded insurance
companies: Allstate Corporation; Commerce Group, Inc.; Mercury General
Corporation; The Progressive Corporation; 20th Century Industries; Horace Mann
Educators Corporation; Integon Corporation; SAFECO Corporation; The St. Paul
Companies, Inc.; USF&G Corporation; and W.R. Berkley Corporation. Among other
things, Jefferies studied acquisition value divided by latest twelve month
("LTM") total revenues, acquisition value divided by LTM operating income,
acquisition value divided by LTM pre-tax income, estimated 1997 and 1998 price
to earnings ratios ("P/E"s), market capitalization divided by last fiscal year
statutory net income, price to GAAP and statutory book values and price to GAAP
tangible book values. The multiples and market capitalizations for the Colonial
Penn P&C Group were calculated using an estimated acquisition value of the
Colonial Penn P&C Group of $989.8 million. The $989.8 million consists of $950
million, plus an aggregate of $156,164 per day from and including January 1,
1997
22
<PAGE>
through and including the closing date (assumed for this purpose to be October
1, 1997), less the estimated cost to the Company of the letter of credit
referred to under "The Purchase Agreement-Indemnification; Survival of
Representations and Warranties."
The range of comparables for the acquisition value divided by LTM total
revenue showed a low of 0.8x, a high of 2.4x, with an average of 1.5x, compared
to a ratio for the Colonial Penn P&C Group of 1.7x. With respect to acquisition
value divided by LTM operating income, the low was 9.2x, the high was 13.9x, and
the average was 12.2x, compared to 14.4x for the Colonial Penn P&C Group. The
range of comparables for acquisition value to LTM pre-tax income was a low of
8.6x, a high of 13.7x and an average of 10.5x, compared to 13.6x for the
Colonial Penn P&C Group. The range of comparables for the latest twelve months
P/E ratios showed a low of 11.1x, a high of 24.9x, with an average of 14.5x,
compared to a P/E ratio for the Colonial Penn P&C Group of 20.9x. With respect
to estimated 1997 P/E ratios, the low was 11.4x, the high was 19.0x, and the
average was 15.1x, compared to 22.1x for the Colonial Penn P&C Group. The range
of comparables for estimated 1998 P/E ratios was a low of 10.3x, a high of 27.2x
and an average of 13.9x, compared to 21.3x for the Colonial Penn P&C Group. The
range of comparables for the ratio of market capitalization to last fiscal year
statutory net income showed a low of 11.3x, a high of 57.2x, and an average of
16.5x, compared to 19.9x for the Colonial Penn P&C Group. The price to GAAP book
value for the comparables ranged from a low of 1.3x to a high of 4.6x, with an
average of 2.3x, compared to 2.6x for the Colonial Penn P&C Group. The price to
GAAP tangible book value ranged from a low of 1.7x to a high of 20.3x, with an
average of 2.9x, compared to 3.3x for the Colonial Penn P&C Group. The ratio of
price to statutory book value ranged from a low of 1.3x to a high of 4.8x, with
an average of 2.4x, compared to 3.2x for the Colonial Penn P&C Group. In
addition, Jefferies analyzed a subset of the comparable companies which are
engaged primarily in the auto property and casualty business.
None of the companies used in the above analysis is identical to the
Colonial Penn P&C Group or to the surviving corporation. Consequently, an
appropriate use of a comparable company analysis in this instance necessarily
involves qualitative judgments concerning, among other things, differences
between the financial and operating characteristics of the Colonial Penn P&C
Group and the selected comparable companies.
Pro Forma Earnings Per Share Analysis
Jefferies analyzed certain pro forma effects of the Proposed Sale on the
earnings of the Company. These analyses were based on the Projections provided
by senior management of the Company and the Colonial Penn P&C Group regarding
the financial performance of the Colonial Penn P&C Group. Based on such
analysis, Jefferies observed that, if the proceeds of the Proposed Sale (before
tax effects) are able to be invested at a return on assets greater than 7.0% in
1997, the Proposed Sale would be accretive to the Company's earnings per share.
Merger and Acquisition Transactions
Jefferies examined ten mergers and acquisitions of property and casualty
insurance companies that have occurred subsequent to 1992 where the enterprise
value was greater than $200 million, the percentage of shares acquired was
greater than 50% and offering ratios were available. For each transaction,
Jefferies studied the ratios of offer price to LTM total revenue, offering price
to LTM operating income, offer price to LTM earnings and offer price to GAAP
book value. Excluding the highest and lowest values, the LTM total revenue ratio
of the comparables ranged from a low of 0.5x
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to a high of 6.7x, with an average of 1.2x, compared to 1.7x for the Colonial
Penn P&C Group. The LTM operating income ratio of the comparables ranged from a
low of 6.7x to a high of 20.7x, with an average of 10.2x, compared to 14.4x for
the Colonial Penn P&C Group. The offer price to LTM earnings ratio of the
comparables ranged from a low of 9.0x to a high of 31.9x, with an average of
15.2x, compared to 20.9x for the Colonial Penn P&C Group. The ratio of price to
GAAP book value ranged from a low of 0.9x to a high of 3.0x, with an average of
1.5x, compared to 2.6x for the Colonial Penn P&C Group. As part of the analysis,
Jefferies analyzed the acquisition multiples of GEICO Corp. by Berkshire
Hathaway, Inc. Jefferies noted that bid premiums for control positions in
publicly traded companies are approximately 25%.
Because the reasons for and circumstances surrounding each of the
transactions analyzed were diverse and because of the inherent differences
between the operations of the Colonial Penn P&C Group and the companies engaged
in the selected transaction, an appropriate use of a comparable transaction
analysis in this instance necessarily involves qualitative judgments concerning,
among other things, differences between the characteristics of these
transactions and the Proposed Sale that would affect the acquisition value of
the transaction comparables and the Colonial Penn P&C Group.
Discounted Cash Flow Analysis
In performing its evaluation of the Proposed Sale, Jefferies also relied
on a discounted cash flow analysis. Using the Projections and other financial
information supplied by the Company and the Colonial Penn P&C Group, Jefferies
analyzed the sum of (i) the present value of tax-effected operating cash flow
for the years 1997 to 2001, using discount rates of 10.3% to 14.3%, plus (ii)
the estimated "terminal value" of the appropriate entity based upon a range of
multiples of 11.0x to 13.0x projected 2001 operating income, discounted to the
present. The discounted cash flow analysis implies a value of the Colonial Penn
P&C Group of $578.4 million to $1,187.9 million depending upon the sensitivity
scenario, compared to an acquisition valuation of the Colonial Penn P&C Group of
$989.8 million.
Other Matters
The summary set forth above does not purport to be a complete description
of the presentation by Jefferies to the Board of Directors of the Company.
Jefferies believes that its analyses and the summary set forth above must be
considered as a whole and that selecting portions of its analyses, without
considering all analyses, or the above summary, without considering all factors
and analyses could create an incomplete view of the process underlying the
analyses and the Opinion.
In the past, Jefferies has provided advisory and underwriting services to
the Company for which it has received customary fees. The Company retained
Jefferies on the basis of the Company's past relationship with Jefferies and
Jefferies' knowledge with respect to the Company and its subsidiaries and
Jefferies' expertise and experience in similar advisory capacities.
Pursuant to an engagement letter dated June 16, 1997 between the Company
and Jefferies, the Company has paid Jefferies a fee of $150,000 for delivering
the Opinion and shall reimburse Jefferies for out-of-pocket expenses incurred in
connection with rendering its services. The Company has also agreed to indemnify
Jefferies against certain liabilities, including liabilities under the federal
securities laws. In the ordinary course of its business, Jefferies may actively
trade securities of the Company and General Electric Company for its own account
and for the accounts of its customers and, accordingly, may at any time hold a
long or short position in such securities.
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<PAGE>
RECOMMENDATION OF THE BOARD OF DIRECTORS; REASONS FOR THE PROPOSED SALE
At a meeting of the Board of Directors held on June 27, 1997, after
consultation with Jefferies and the Company's legal counsel and receipt of
Jefferies' opinion that the consideration to be received by the Company pursuant
to the Purchase Agreement is fair from a financial point of view to the Company,
the Board of Directors approved the Purchase Agreement and the transactions
contemplated thereby, authorized the execution, delivery and performance of the
Purchase Agreement and resolved to recommend that the Shareholders approve and
adopt the Purchase Agreement and the transactions contemplated thereby.
ACCORDINGLY, THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT THE
SHAREHOLDERS APPROVE AND ADOPT THE PURCHASE AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY.
The Board of Directors believes that the terms of the Purchase Agreement
are in the best interests of the Company. Accordingly, the Board of Directors
approved the Purchase Agreement and the transactions contemplated thereby and
has recommended that the Shareholders approve and adopt the Purchase Agreement
and the transactions contemplated thereby. In reaching its conclusions, the
Board of Directors considered the following principal factors:
(a)(i) the terms and conditions of the Purchase Agreement, including
(x) the amount and form of consideration, which is significantly in excess of
the $393.6 million book value of the Colonial Penn P&C Group at March 31, 1997,
(y) the $20 million closing date cash distributions from the Colonial Penn P&C
Group to the Company and (z) indemnification provisions which could result in
certain payments not to exceed $200 million being made in the future by the
Sellers and (ii) the fact that the Company will retain Intramerica, which had a
GAAP book value at June 30, 1997 of approximately $33 million;
(b) current industry conditions relating to the business of the
Colonial Penn P&C Group, primarily increased competition resulting from large
amounts of capital flowing into the direct automobile insurance business and the
belief of the Board of Directors that the return on marketing expenditures
(which would likely have to be increased to remain competitive) would become
less attractive;
(c) the financial condition, assets, liabilities, businesses and
operations of the Colonial Penn P&C Group, both on a historical and prospective
basis, and in particular the belief of the Board of Directors that, without
additional investments, the business of the Colonial Penn P&C Group is mature
and that historical rates of return on the Company's original investment from
the Colonial Penn P&C Group are unlikely to continue as the majority of the
benefits from the Company's restructuring of the Colonial Penn Group since
acquisition have been realized and the possibility that the Purchaser may enter
into the business of the Colonial Penn P&C Group with a lower cost of capital
than the Company, whether or not the Proposed Sale was consummated;
(d) Jefferies' presentation to the Board of Directors on June 27,
1997 and Jefferies' written opinion dated June 27, 1997 that the consideration
to be received in connection with the Proposed Sale is fair from a financial
point of view to the Company;
(e) the fact that the Company had engaged in preliminary discussions
with certain other parties which had expressed interest in acquiring the
Colonial Penn P&C Group and that none of such parties were willing to pursue a
transaction for the amount of consideration proposed by the Purchaser;
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(f) the fact that, although the Company may not solicit Acquisition
Proposals, the Company may, in accordance with the Purchase Agreement, at any
time prior to Shareholder approval of the Purchase Agreement and the
transactions contemplated thereby, furnish information to, and discuss and
negotiate with, third parties in accordance with the terms of the Purchase
Agreement, and that the Company may terminate the Purchase Agreement and enter
into an agreement with respect to an Acquisition Proposal if the Board of
Directors determines in good faith that it is necessary to do so to comply with
its fiduciary duties, subject to the payment of certain fees to the Purchaser
(see "The Purchase Agreement-No Solicitation," "The Purchase
Agreement-Termination" and "The Purchase Agreement-Termination Fees");
(g) the fact that the Closing of the Proposed Sale is conditioned
upon obtaining Shareholder approval of the Purchase Agreement; and
(h) the terms of the non-competition agreement of the Company
contained in the Purchase Agreement, (see "The Purchase
Agreement-Non-Competition Agreement").
In reaching its conclusions, the Board assigned the greatest weight
to the consideration to be received described in (a) above, the industry
conditions discussed in (b) above and the facts and views discussed in (c)
above. The Board did not give great weight to the limitations imposed by the
non-competition provisions of the Purchase Agreement, because of the Company's
belief that such restrictions would not significantly affect its remaining
insurance operations or to the prohibition on solicitation of Acquisition
Proposals or the termination payment provisions of the Purchase Agreement
because the Company did not believe that a more favorable Acquisition Proposal
was a realistic possibility. The Board focused on the advisability of the
Proposed Sale at this time and did not discuss alternatives to or disadvantages
of the Proposed Sale, especially in view of its concerns outlined in (c) above
and the fact that no other interested parties were willing to pursue a
transaction for the amount of the consideration proposed by the Purchaser, as
stated in (e) above.
Except as otherwise disclosed herein, the Board did not discuss the
structure, business and operations of the Company following consummation of the
Proposed Sale. While, as stated below under "Use of Proceeds," the Company has
made no determination as to the use of the proceeds of the Proposed Sale, the
proceeds will provide the Company with funds to make investments and
acquisitions. As with any new investment or acquisition, it is possible that any
such investments or acquisitions would not be as advantageous to the Company as
maintaining the Company's investment in the Colonial Penn P&C Group would have
been. Furthermore, the impact of the Investment Company Act will be taken into
consideration with respect to possible future uses of the proceeds of the
Proposed Sale, possibly resulting in a lower rate of return on such proceeds
than would otherwise be available to the Company. See "Use of Proceeds" below.
USE OF PROCEEDS; PROPOSED BUSINESS OF THE COMPANY SUBSEQUENT TO THE
PROPOSED SALE AND THE CONSECO TRANSACTION
Use of Proceeds
The Company has made no determination as to the use of the proceeds of the
Proposed Sale (which is expected to be approximately $1 billion). In evaluating
potential uses of the proceeds of the Proposed Sale, the Company will endeavor
to maximize value to the Shareholders, which could involve the repurchase of
Common Shares, an extraordinary dividend, investments, acquisitions and working
capital uses. The Company has no material arrangement, commitment or
understanding with respect to any such uses. In determining the use of such
proceeds, the Company will take into account the Investment Company Act
considerations discussed below. Pending such uses, the proceeds will be
primarily invested in short/intermediate-term investment grade obligations.
Remaining Insurance Operations
Following the consummation of the sale of the Colonial Penn P&C Group to
the Purchaser pursuant to the Purchase Agreement, the Company will remain in the
property and casualty insurance business through the Empire Group. The Empire
Group provides personal insurance coverage to
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automobile owners and homeowners and commercial insurance for workers'
compensation, residential real estate, restaurants, retail establishments,
livery vehicles (both medallion and radio-controlled) and several types of
service contractors. In addition, following consummation of the sale of the
Colonial Penn Life Group to Conseco pursuant to the Conseco Agreement, the
Company will remain in the life insurance business through Charter and
Intramerica. The principal life insurance products offered by Charter and
Intramerica are variable annuity products. These remaining insurance operations
accounted for approximately 34% of total revenues from the Company's insurance
operations in 1996.
In addition to exploring the acquisition of businesses in other
industries, the Company may, subject to the restrictions described under "The
Purchase Agreement-Non-Competition Agreement," explore the acquisition of
additional companies in the insurance business.
Investment Company Act Considerations
The Company does not intend to conduct its affairs in a manner which would
require registration as an investment company under the Investment Company Act
of 1940.
The Investment Company Act places restrictions on the capital structure,
business activities and corporate transactions of companies registered
thereunder. Generally, an issuer is deemed to be an investment company subject
to registration if its holdings of "investment securities" (generally,
securities other than securities issued by majority controlled, non-investment
company subsidiaries and government securities) exceed 40% of the value of its
total assets exclusive of government securities and cash items on an
unconsolidated basis. Pursuant to a rule of the Commission under the Investment
Company Act, a company that otherwise would be deemed to be an investment
company may be excluded from such status for a one-year period provided that
such company has a bona fide intent to be engaged primarily, as soon as
reasonably possible (and in any event within that one-year period), in a
business other than that of investing, reinvesting, owning, holding or trading
in securities. If the Company would otherwise be deemed to be an investment
company under the Investment Company Act, the Company intends to rely on such
exemption while it considers the acquisition of controlling interests in other
businesses with the proceeds of the Proposed Sale, and will not register as an
investment company under the Investment Company Act during the one-year period
commencing with the closing of the later of the Proposed Sale and the Conseco
Transaction.
Registration by the Company under the Investment Company Act would require
the Company to comply with various reporting and other requirements under the
Investment Company Act, would subject the Company to certain additional expense
and could limit the Company's options for future operations.
If the Company has not acquired sufficient operating businesses within the
one-year period referred to above, the Company may be required to invest certain
of its assets in government securities and/or cash equivalents that are not
considered "investment securities" under the Investment Company Act. Such
investments could yield a significantly lower rate of return than alternative
investments which the Company could make if it chose to register as an
investment company.
THE CONSECO TRANSACTION
On April 30, 1997, the Company signed an agreement to sell its
subsidiaries, CPL and PLC, and certain related assets to Conseco for $460
million, including $400 million in notes secured by non-
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cancelable letters of credit and $60 million in cash. The operations to be
acquired by Conseco include all of the Company's "Graded Benefit Life" insurance
operations and its health insurance operations. The Conseco Transaction, which
was not conditioned on the consummation of the Proposed Sale, closed on
September 30, 1997. The Company expects to report a pre-tax gain of
approximately $300 million for the third quarter of 1997. The Colonial Penn Life
Group has been classified as discontinued operations.
The Colonial Penn Life Group engages in the sale of Graded Benefit Life
insurance policies through direct marketing and agent-sold Medicare supplement
insurance.
Graded Benefit Life is a guaranteed-issue product. These modified-benefit,
whole life policies are offered on an individual basis primarily to persons age
50 to 80, principally in face amounts of $350 to $10,000, without medical
examination or evidence of insurability. Premiums are paid as frequently as
monthly. Benefits paid are less than the face amount of the policy during the
first two years, except in cases of accidental death. Graded Benefit Life is
marketed using direct response marketing techniques. New policyholder leads are
generated primarily from television advertisements.
In 1992, CPL discontinued marketing its Medicare supplement products due
to increased competition in this market and expectations that such competition
would result in inadequate profitability. However, CPL has continued to offer,
on a profitable basis, renewals of its Medicare supplement products. In April
1996, the Company acquired PLC, which markets agent-sold standardized Medicare
supplement products in communities where health maintenance organizations are
less prevalent. The absence of health maintenance organizations allows PLC to
charge premium rates that provide for an adequate return on investments.
Pursuant to the Conseco Agreement, an affiliate of the Company and Conseco
entered into a licensing agreement (the "Conseco License Agreement") pursuant to
which the affiliate, as licensor, granted to Conseco, as licensee, a personal,
non-transferable, non-exclusive license (the "License"), without the right to
sublicense except as provided therein, to use certain trademarks, service-marks
and/or trade-names (the "Life Marks") in connection with certain products and
services within the United States during a period from the closing date of the
Conseco Transaction to but not including the 18th month anniversary of such date
(the "License Term"). The Conseco License Agreement provides that following the
License Term CPL may continue with its current name and use the License in
connection with premium collections and maintenance of polices of CPL existing
at the end of the License Term; provided, however, that CPL may not use the
words "Colonial," "Penn" or "Colonial Penn" after the License Term in connection
with the marketing of any products, including, without limitation, add-ons or
upgrades of existing policies of CPL.
Pursuant to the Conseco License Agreement, neither Conseco nor the
Colonial Penn Life Group has the right to limit or restrict the Company (or any
affiliate or any assignee or transferee of the Company) from using the Life
Marks or the words "Colonial," "Penn" or "Colonial Penn" except that the Company
agreed that following the closing date of the Conseco Transaction, any life
insurance products marketed or sold by the Company or any affiliate shall be
issued by an entity that does not have the words "Colonial," "Penn" or "Colonial
Penn" in its corporate name and does not use such words in any life insurance
product name and that following the date hereof it will not sell, assign or
transfer any rights to use the words "Colonial," "Penn" or "Colonial Penn" in
connection
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with the insurance business without obtaining from the purchaser, assignee or
transferee of such rights an agreement to be bound by the foregoing restriction.
ABSENCE OF APPRAISAL RIGHTS
The Company does not believe that rights of dissent are available under
New York law in connection with the Purchase Agreement, since the sale of the
Colonial Penn P&C Group by CP Holdings does not constitute a sale by the Company
of "all or substantially all" of the assets of the Company within the meaning of
Section 909 of the NYBCL.
If, however, Section 909 of the NYBCL were applicable to the Proposed
Sale, Shareholders entitled to vote would be able, pursuant to Sections 910 and
623 of the NYBCL, a copy of each of which is attached hereto as Annex C, to
dissent from the proposed transaction and demand payment of the fair value of
their Common Shares in the event the Proposed Sale is consummated. To exercise
such right, a Shareholder opposing the sale would first be required to file with
the Company a written objection to the sale prior to the taking of the vote
thereon, would not be able to vote any of his Common Shares in favor of the
proposed transaction and would otherwise be required to follow the procedures
specified in Section 623. Such objection would also be required to include a
statement that the Shareholder intends to demand payment for his Common Shares
if the Proposed Sale is consummated. A vote against, or a direction in a proxy
to vote against, the Proposed Sale would not of itself constitute such written
objection. Assuming such written objection were timely made, if, within 20 days
after the date upon which the Shareholder were to receive formal notice from the
Company of the authorization of the Proposed Sale, the Shareholder were to file
with the Company a written notice of election to dissent, including a demand for
payment of the fair value of all of his or her Common Shares, such dissenting
Shareholder's right to the payment of the fair value of his or her Common Shares
would be determined in accordance with the applicable provisions of Section 623.
AS STATED ABOVE, THE COMPANY DOES NOT BELIEVE THAT SECTION 909 IS
APPLICABLE AND INTENDS TO DISPUTE THE RIGHT OF A SHAREHOLDER TO DISSENT FROM THE
PROPOSED TRANSACTION.
POTENTIAL CLAIM
On August 18, 1997, the Company received a letter from purported holders
of approximately $60 million liquidation amount of the 8.65% Capital Trust
Pass-Through Securities ("TRUPS") issued by Leucadia Capital Trust I and
guaranteed by the Company. The letter expresses the view that the Proposed Sale
taken together with the Conseco Transaction will constitute the sale of the
property of the Company "substantially as an entirety" pursuant to the terms of
the indenture entered into in connection with the TRUPS transaction (the "TRUPS
Indenture"). The letter alleges that since the Purchaser does not assume the
obligations of the Company under the TRUPS Indenture, the TRUPS Indenture has
been violated and therefore certain representations made by the Company in the
Purchase Agreement may be incorrect. The letter states that the holders of the
TRUPS intend to take all action permissible to protect their rights. On August
29, 1997, a second letter was received by the Company from the same parties
reiterating the positions set forth in their August 18th letter. On September
5, 1997, the Company responded to such letters, stating that it disagrees with
the positions taken in the letters and that it intends to hold such parties
fully responsible for any actions that jeopardize in any way the currently
contemplated transactions. The Company intends to defend vigorously against any
attempt to declare a default under the TRUPS Indenture.
If the Company did not prevail in any litigation concerning any alleged
default of the TRUPS Indenture, the Company intends, after receipt of an
effective and valid notice of acceleration in accordance with the terms of the
TRUPS Indenture, to make payment to the trustee under the TRUPS Indenture of the
full amount of principal and accrued interest on the indenture securities in
accordance with the terms of the TRUPS Indenture.
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THE PURCHASE AGREEMENT
Although the Company believes that the following summary of the Purchase
Agreement describes the material terms and conditions of the Purchase Agreement,
such summary is qualified in its entirety by reference to the Purchase
Agreement, a copy of which is attached hereto as Annex A and is incorporated
herein by reference. Terms which are not otherwise defined in this summary have
the meaning set forth in the Purchase Agreement.
PURCHASE PRICE
The Purchase Agreement provides for the sale by CP Holdings to the
Purchaser of the Colonial Penn P&C Group for an amount equal to $950 million,
plus an aggregate of $156,164 per day from and including January 1, 1997 through
and including the Closing Date. The Purchase Price shall be payable on the
Closing Date in cash. In addition, the Purchase Agreement provides that CPI pay
a $20 million dividend on the Closing Date to CP Holdings. See "-Closing Date
Cash Dividends."
THE CLOSING
If the Purchase Agreement is approved by the requisite vote of the
Shareholders at the Meeting, the closing of the Proposed Sale (the "Closing")
will take place on the second business day after satisfaction or waiver of
certain conditions specified in the Purchase Agreement, unless another date is
agreed to in writing by the Purchaser and the Company; provided, that if the
Closing would but for this provision occur during the two weeks immediately
preceding the end of a calendar quarter, the Closing will take place on the
first business day following the end of such calendar quarter. See
"-Conditions."
REPRESENTATIONS AND WARRANTIES
The Purchase Agreement contains various customary representations and
warranties of the Sellers and the Purchaser. These include representations and
warranties by the Sellers relating to, among other things: (a) each of the
Seller's organization and similar corporate matters; (b) each of the Colonial
Penn P&C Group member's capital structure; (c) authorization, execution,
delivery, performance and enforceability of the Purchase Agreement and related
matters; (d) accuracy of financial statements filed with various insurance
regulators and unaudited combining financial statements; (e) absence of
undisclosed liabilities; (f) absence of certain changes or events; (g) taxes;
(h) benefit plans; (i) compliance with laws; (j) litigation; (k) title to assets
and properties of the Colonial Penn P&C Group; (l) certain contracts; (m)
insurance; (n) brokers and advisors; (o) intellectual property; (p) insurance
and reinsurance issued by the Colonial Penn P&C Group and related matters; (q)
labor matters; (r) accuracy of information; (s) environmental matters; (t)
financial matters relating to CPI; and (u) absence of regulatory disqualifiers.
The Purchaser's representations and warranties include those relating to, among
other things: (a) Purchaser's organization and similar corporate matters; (b)
authorization, execution, delivery, performance and enforceability of the
Purchase Agreement and related matters; (c) litigation; (d) brokers; (e)
investment intent; (f) absence of regulatory disqualifiers; (g) accuracy of
information; and (h) sufficiency of available funds.
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CERTAIN COVENANTS
Pursuant to the Purchase Agreement, each of the Sellers and the Purchaser
has made various customary covenants for transactions of this type, including,
among others, that from the date of the Purchase Agreement through the Closing
Date, except (a) as permitted by or contemplated in the Purchase Agreement or
(b) as otherwise consented to in writing by the Purchaser, the Sellers shall
cause the members of the Colonial Penn P&C Group to conduct their respective
businesses in the ordinary course consistent with past practice and, to the
extent consistent therewith, use reasonable efforts to preserve intact their
current business organizations, keep available the services of their current key
officers and employees and preserve the goodwill of those engaged in material
business relationships with them. In addition, subject to the same qualifiers as
in the preceding sentence, the Sellers have agreed to cause the Colonial Penn
P&C Group not to, among other things, (i) declare or pay any dividends or make
other distributions in respect of any of their capital stock, and will not
effect certain other changes in their capitalization; (ii) issue capital stock,
rights, warrants, options or similar securities; (iii) amend their articles or
certificate of organization, bylaws or other comparable charter or
organizational documents; (iv) acquire or commence the operations of any
business or acquire any assets having a purchase price in excess of $250,000,
except purchases of investments in accordance with specified guidelines; (v)
incur indebtedness for borrowed money or guarantee or otherwise become
responsible for any such indebtedness or make any loans or advances or capital
contributions to any other person other than any of the members of the Colonial
Penn P&C Group; (vi) discharge, settle or satisfy any claims, liabilities or
obligations, other than in the ordinary course of business consistent with past
practice; (vii) invest cash unless in accordance with specified guidelines;
(viii) make any change in accounting practices; (ix) except for ordinary salary
and wage increases in the ordinary course of business and consistent with past
practices, amend the contracts, salaries, wages or other compensation of any
employee, agent or consultant of the Colonial Penn P&C Group, other than
amendments that are required under existing contracts as disclosed, enter into
any employment, severance or termination agreement (other than pursuant to
existing policies) with any officer or employee, which grants any such person an
increase in severance or termination pay, or adopt, enter into, amend, alter or
terminate, any Benefit Plan; (x) except in the ordinary course of business
consistent with past practices, modify, amend or terminate any material
agreement to which a member of the Colonial Penn P&C Group is a party, or waive
any material rights or claims thereunder; (xi) sell, lease, mortgage or
otherwise encumber or transfer or dispose of assets having an aggregate book
value in excess of $200,000 other than in the ordinary course; (xii) enter into
any material contract; (xiii) make capital expenditures in excess of $250,000 in
the aggregate; (xiv) settle or compromise specified litigation or other
litigation involving payments in excess of $250,000; (xv) move the operations of
any business; or (xvi) authorize any of, or commit to agree to take any of, the
foregoing actions.
NO SOLICITATION
The Purchase Agreement provides that the Company shall not, nor shall it
knowingly permit any of its subsidiaries or any of their respective officers,
directors, employees, agents, investment bankers, attorneys, financial advisors
or other representatives (collectively, "Representatives") to (a) solicit,
initiate or knowingly encourage the submission of, any Acquisition Proposal, (b)
enter into any agreement with respect to any Acquisition Proposal, or (c)
participate in any discussions or negotiations regarding, or furnish to any
person any non-public information with respect to, or take any other action to
knowingly facilitate any inquiries or the making of any proposal that
constitutes or would reasonably be expected to lead to, an Acquisition Proposal;
provided, however, that, notwithstanding anything to
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the contrary in the Purchase Agreement, (x) the Company may advise any third
party of the existence of this restriction, (y) at any time prior to Shareholder
approval of the Purchase Agreement and the transactions contemplated thereby,
the Company may participate in discussions or negotiations with, and may furnish
information (pursuant to a confidentiality agreement in customary form)
concerning the Sellers and/or the Colonial Penn P&C Group and their business,
properties and assets to, a third party who, without any solicitation by the
Company or any Representatives after the date of the Purchase Agreement, submits
an Acquisition Proposal, if the Board of Directors of the Company in good faith
determines, based on advice of outside counsel, that it is necessary to do so to
comply with its fiduciary duties to Shareholders under applicable law and (z)
the Board of Directors of the Company may take and disclose to the Shareholders
a position with regard to a tender offer or exchange offer contemplated by Rules
14d-9 and 14e-2(a) promulgated under the Exchange Act and may make such
disclosure to the Shareholders as may be required under applicable law;
provided, that the Board of Directors of the Company shall not recommend that
the Shareholders tender their Common Shares unless such recommendation is a
Permitted Action. "Acquisition Proposal" means a proposal or offer for a tender
or exchange offer, merger, consolidation or other business combination (i)
involving all or substantially all of the Company and its subsidiaries, taken as
a whole, or any member of the Colonial Penn P&C Group or (ii) to acquire or
cause to be acquired in any manner, directly or indirectly, including without
limitation through any reinsurance transaction not in the ordinary course of
business, all or substantially all of the business or assets of the Company and
its subsidiaries, taken as a whole, or of any member of the Colonial Penn P&C
Group, or all or a substantial percentage of the capital stock or other
ownership interests in the Company or any member of the Colonial Penn P&C Group,
or any similar transaction.
Notwithstanding anything to the contrary in the Purchase Agreement, the
Board of Directors of the Company shall be permitted from time to time to take
the following actions in the circumstances described below: (a) to withdraw or
modify its approval or recommendation of the Purchase Agreement and the
transactions contemplated thereby; or (b) to approve, recommend or enter into an
agreement with respect to an Acquisition Proposal; if, in each such case, prior
to Shareholder approval (i) an unsolicited Acquisition Proposal is communicated
to the Sellers, publicly proposed or publicly disclosed and (ii) the Board of
Directors of the Company determines in good faith, based on advice of outside
counsel, that it is necessary to do so to comply with its fiduciary duties under
applicable law. No action by the Board of Directors of the Company permitted by
the preceding sentence (each a "Permitted Action") shall constitute a breach of
the Purchase Agreement by the Company; provided, however, that the Sellers shall
be obligated to pay fees as described under "Termination Fees."
EMPLOYMENT AND EMPLOYEE BENEFIT PLANS
Pursuant to the Purchase Agreement, except for persons noticed for
termination or pursuant to a generally advertised solicitation, for a four-year
period following the Closing Date, the Sellers and their affiliates shall not
directly or indirectly solicit for employment or, to the knowledge of the
Sellers, hire any employees of the Colonial Penn P&C Group. In addition, the
Sellers have agreed to retain certain employee benefit obligations of the
Colonial Penn P&C Group, for which the Purchaser will pay additional cash
consideration to the Sellers.
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OTHER AGREEMENTS
Intercompany Agreements
Except for certain specified agreements, which have been extended, all
intercompany agreements between either the Sellers or any of their affiliates
(other than the Colonial Penn P&C Group), on the one hand, and any of the
members of the Colonial Penn P&C Group, on the other hand, including without
limitation, any allocation, indemnification or similar agreement or arrangement
by any Seller for the benefit of any of the members of the Colonial Penn P&C
Group, will terminate on or prior to the Closing Date.
Intramerica Distribution
Pursuant to the Purchase Agreement, the Sellers shall cause CPI to
distribute or otherwise transfer its 98% interest in the common stock of
Intramerica to CP Holdings (the "Intramerica Distribution").
Trademark Assignment or Limited License
Pursuant to the Purchase Agreement, effective upon the Closing Date, CPG
shall assign to the Purchaser all of its right, title and interest, including
all goodwill associated therewith, in and to the trademarks, service marks
and/or tradenames of the Colonial Penn P&C Group set forth in the Purchase
Agreement (collectively, the "P&C Marks"), free and clear of all Liens other
than the Conseco License Agreement and the Purchaser covenants that it agrees to
be bound by the terms of the Conseco License Agreement.
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The Sellers acknowledge that none of the Sellers has the right to use the
P&C Marks or the Life Marks and except as contemplated by the Purchase
Agreement, none of the Sellers has the right to limit or restrict the Purchaser
(or any affiliate or any assignee or transferee of any of them) from using the
same or the words "Colonial," "Penn" or "Colonial Penn".
Prior to the Closing Date, the Colonial Penn P&C Group will waive any
ownership interest in certain computer software and the Sellers and Sellers'
affiliates, including the Colonial Penn P&C Group, will enter into a license
agreement licensing the Colonial Penn P&C Group's ability to use such computer
software for an indefinite term, without any software maintenance responsibility
by the Sellers.
CLOSING DATE CASH DISTRIBUTIONS
Pursuant to the Purchase Agreement, the Colonial Penn P&C Group will
declare and to the extent permitted by applicable law pay the following cash
dividends: (a) a $3 million cash dividend from CPF (the "CPF Dividend") that is
to be funded by the proceeds of the Conseco Transaction; and (b) a cash dividend
from CPI, which shall consist of the CPF Dividend, together with a $20 million
cash dividend from CPI, the sources of which may include dividends from CPI's
subsidiaries (the "CPI Dividend").
The dividends shall be paid on the Closing Date. To the extent that any
dividend shall not have been paid in full on the Closing Date, such unpaid
dividend shall remain an obligation of the CPI subsidiary declaring such unpaid
dividend until paid in full. If CPI does not pay the CPI Dividend to CP Holdings
on the Closing Date, the Purchaser shall purchase from CP Holdings the right to
receive the CPI Dividend for $20 million plus the amount of the CPF Dividend
(the "Dividend Amount") in cash. If for any reason CPI is unable to declare and
pay to CP Holdings the full amount of the CPI Dividend on the Closing Date, then
the Purchaser shall pay to CP Holdings at the Closing the difference between the
amount of the CPI Dividend paid to CP Holdings and the Dividend Amount.
NON-COMPETITION AGREEMENT
Pursuant to the Purchase Agreement, the Company has agreed, that for a
period of three years following the Closing Date (the "Restricted Period"),
without the prior written consent of the Purchaser, (a) the Company will not and
will not permit any of its affiliates to start (de novo) a personal lines
automobile insurance business in the United States; (b) the personal lines
automobile business of the Empire Group will not expand beyond the states in
which any member of the Empire Group is licensed as of the date of the Purchase
Agreement; (c) the voluntary personal lines automobile insurance business of the
Empire Group will not have more than $250 million of gross written premium in
any one statutory year; (d) if, during the Restricted Period, the Company or any
of its affiliates acquires any insurance company with gross written personal
lines automobile insurance premium in excess of $300 million in the last
completed statutory year of such acquired insurance company immediately
preceding the date of such acquisition by the Company (the "Acquired Company"),
the Company or such affiliate shall promptly, but in no event later than nine
months after the date of such acquisition, divest itself of the personal lines
automobile insurance operations of such Acquired Company, subject to certain
exceptions. In no event shall gross written voluntary personal lines automobile
premium of the Company and its affiliates (including as a result of activities
and acquisitions permitted under clauses (b), (c) and (d) above) exceed $500
million in any 12 month period
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during the Restricted Period. In addition, for a period of four years following
the Closing Date, the Company will not directly or indirectly acquire any
company the primary business of which is the direct marketing of personal lines
automobile insurance.
CONDITIONS
The respective obligations of the parties to consummate the Proposed Sale
are subject to the following conditions, among others: (a) all filings required
to be made prior to the Closing Date with, and all consents, approvals, permits
and authorizations required to be obtained prior to the Closing Date from, any
Governmental Entity, in connection with the execution and delivery of the
Purchase Agreement and the consummation of the Proposed Sale shall have been
made or obtained, including without limitation, from the Insurance Regulators in
all appropriate jurisdictions and such consents, approvals, permits and
authorizations shall be in full force and effect and shall be subject to no
conditions other than those customarily imposed by insurance regulatory
authorities in connection with similar acquisitions; (b) the applicable waiting
period applicable to the Proposed Sale under the HSR Act shall have been
terminated or shall have otherwise expired; (c) no temporary restraining order,
preliminary or permanent injunction or other order preventing the consummation
of the Proposed Sale shall be in effect or threatened; (d) the Purchase
Agreement shall have been approved and adopted by the Shareholders; and (e) if
the Conseco Transaction shall not have been consummated, certain agreements set
forth in the Purchase Agreement shall be in full force and effect. On August 8,
1997, notice of early termination of the waiting period under the HSR Act was
received. The Company has been advised by the Purchaser that the remaining
consents (from New Jersey and Pennsylvania regulatory authorities) are expected
to be obtained prior to the date of the Meeting. The Company currently does not
intend to waive any material condition to the Proposed Sale. However, if the
Company does waive any such material conditions, the Company would resolicit
proxies at that time.
The Purchaser's obligation to consummate the Proposed Sale is subject to
additional conditions, including that (a) the representations and warranties of
the Sellers that are qualified as to materiality shall be true and correct and
the representations and warranties of the Sellers that are not so qualified
shall be true and correct in all respects that reasonably are material, in each
case as of the date of the Purchase Agreement and as of the Closing Date as
though made on and as of the Closing Date, except as a result of any actions
contemplated or permitted by the Purchase Agreement and except to the extent any
such representation and warranty speaks as of an earlier date, in which event
such representation and warranty shall be true and correct, or true and correct
in all respects that reasonably are material, as applicable, as of such date;
(b) the Sellers shall have performed in all material respects all of the
obligations required to be performed by them under the Purchase Agreement; and
(c) Purchaser shall have received an opinion of the General Counsel of the
Colonial Penn P&C Group and an opinion of Weil, Gotshal & Manges LLP, counsel to
the Sellers.
The Sellers' obligations to consummate the Proposed Sale are subject to
additional conditions, including that: (a) the representations and warranties of
the Sellers that are qualified as to materiality shall be true and correct and
the representations and warranties of the Purchaser that are not so qualified
shall be true and correct in all respects that reasonably are material, in each
case as of the date of the Purchase Agreement and as of the Closing Date as
though made on and as of the Closing Date, except as a result of any actions
contemplated by the Purchase Agreement and except to the extent any such
representation and warranty speaks as of an earlier date, in which event such
representation and warranty shall be true and correct, or true and correct in
all respects that reasonably are material, as applicable, as of such date; (b)
the Purchaser shall have performed in all material respects all of the
obligations required to be performed by it under the Purchase Agreement; (c)
Sellers shall have received an opinion of LeBoeuf, Lamb, Greene & MacRae,
L.L.P., counsel to the
35
<PAGE>
Purchaser; (d) the CPI Dividend shall have been paid to the Company and/or the
Purchaser shall have purchased the right to receive the CPI Dividend in
accordance with the Purchase Agreement; and (e) the Intramerica Distribution
shall have been effected.
TERMINATION
The Purchase Agreement may be terminated at any time prior to the Closing
Date, whether before or after approval by the Shareholders at the Meeting: (a)
by mutual written consent of the Purchaser and the Sellers; (b) by either the
Purchaser or the Sellers, if the Proposed Sale shall not have been consummated
on for before December 31, 1997; (c) by either the Purchaser or the Sellers,
upon any court order prohibiting the Proposed Sale becoming final; (d) by either
the Purchaser or the Sellers, if, upon a vote at the Meeting (or any adjournment
thereof), Shareholder approval of the Purchase Agreement shall not have been
obtained; (e) by the Purchaser, if the Board of Directors of the Company shall
have taken any Permitted Action; or (f) by the Sellers, if the Company enters
into a definitive agreement providing for the implementation of an Acquisition
Proposal.
In the event of termination of the Purchase Agreement by either the
Sellers or the Purchaser as provided above, the Purchase Agreement will become
void and there will be no liability or obligation on the part of the Purchaser
or the Sellers, other than under certain specified provisions of the Purchase
Agreement which include the payment of a fee to the Purchaser under certain
circumstances. See "-Termination Fees."
TERMINATION FEES
If (a) the Purchase Agreement is terminated by any party because
Shareholder approval shall not have been obtained and (b) at or prior to the
Meeting, there shall have been an Acquisition Proposal, whether or not such
Acquisition Proposal shall have been rejected or shall have been withdrawn prior
to the time of such termination or of the Meeting, the Sellers shall pay to the
Purchaser a termination fee of $10 million in cash within five business days of
the termination of the Purchase Agreement; if, within one year of any such
termination described in clause (a) above, a transaction implementing any
Acquisition Proposal shall have been consummated, the Sellers shall pay to the
Purchaser an additional termination fee of $20 million in cash within five
business days of the consummation of such transaction. Alternatively, if the
Purchase Agreement is terminated by the Purchaser pursuant to clause (e) under
"Termination" above, or by the Sellers pursuant to clause (f) under
"Termination" above, the Sellers shall pay to the Purchaser a termination fee
equal to $30 million in cash within five business days of the termination of the
Purchase Agreement. In no event shall the Sellers be obligated to pay more than
$30 million in termination fees to the Purchaser.
INDEMNIFICATION; SURVIVAL OF REPRESENTATIONS AND WARRANTIES
The Purchase Agreement provides that the Sellers will indemnify and hold
harmless the Purchaser and the Colonial Penn P&C Group (the "Purchaser
Indemnitees") for any and all monetary damages, charges, losses, deficiencies,
liabilities, obligations, costs, fees, and expenses (including, without
limitation, reasonable fees and disbursements of counsel including but not
limited to those incident to the enforcement of indemnification rights under the
Purchase Agreement) ("Damages") resulting from or relating to any breach by the
Sellers of any representation, warranty, covenant or agreement made by the
Sellers in the Purchase Agreement.
36
<PAGE>
The Purchase Agreement provides that the Purchaser will indemnify and hold
harmless each Seller for any and all Damages resulting from or relating to any
breach by the Purchaser of any representation, warranty, covenant or agreement
made by the Purchaser in the Purchase Agreement.
Generally, no claims may be made by the Purchaser Indemnitees or the
Sellers unless and until the Purchaser Indemnitees or the Sellers, as the case
may be, have incurred Damages in excess of $2.5 million, at which time, Damages
in excess of such amount may be claimed; provided, however, that with respect to
claims made by the Purchaser Indemnitees (i) arising out of or relating to
certain lawsuits, the applicable deductible shall be $3.5 million, (ii) relating
to certain environmental matters, the applicable deductible shall be $1.5
million and (iii) for taxes or ERISA matters, there shall be no applicable
deductible. The Company has agreed to provide the Purchaser with a
non-cancelable letter of credit in the amount of $100 million to secure certain
of the Sellers' indemnification obligations under the Purchase Agreement. In no
event shall either the Purchaser, on the one hand, or the Sellers, on the other
hand, be liable for indemnification in excess of $200 million; provided,
however, that such limitation shall not apply to Damages attributable to
breaches by the Sellers of certain representations, including ERISA and
environmental matters, and intentional breaches of any covenants or certain
agreements.
The representations and warranties of the parties in the Purchase
Agreement or in any certificate delivered pursuant thereto will survive the
Closing until March 31, 1999, except for the representations and warranties of
the Sellers relating to: (a) taxes and benefit plans, which shall survive until
30 days after the expiration of applicable statutes of limitation; and (b) the
Sellers' title to the issued and outstanding shares of capital stock of the
Colonial Penn P&C Group and environmental matters, which shall survive
indefinitely.
EXPENSES
The Purchase Agreement provides that regardless of whether or not the
Proposed Sale is consummated, each of the Sellers and the Purchaser will pay its
own costs and expenses incident to preparing for, entering into and carrying out
the Purchase Agreement and the consummation of the transactions contemplated
thereby, including, without limitation, this Proxy Statement.
37
<PAGE>
MARKET PRICES AND DIVIDEND POLICY
The Common Shares of the Company are traded on the NYSE and Pacific Stock
Exchange under the symbol LUK. The following table sets forth, for the calendar
periods indicated, the high and low sales price per Common Share on the
consolidated transaction reporting system, as reported on the NYSE Composite
Tape. On November 15, 1995, the Company effected a two-for-one stock split of
the Common Shares in the form of a 100% stock dividend (the "Stock Split"). The
dividend was paid to shareholders of record at the close of business on November
1, 1995. Per share amounts set forth in this Proxy Statement have been adjusted
to reflect the Stock Split.
COMMON SHARE
HIGH LOW
---- ---
1995
----
First Quarter $24.31 $21.44
Second Quarter 26.00 21.81
Third Quarter 29.63 24.56
Fourth Quarter 29.44 24.50
1996
----
First Quarter $29.00 $23.75
Second Quarter 26.50 23.88
Third Quarter 25.00 21.63
Fourth Quarter 28.50 23.13
1997
----
First Quarter $29.00 $25.75
Second Quarter 31.88 27.38
Third Quarter 34.75 31.00
On April 29, 1997, the last full trading day prior to the public
announcement of the Conseco Transaction, the closing price of the Common Shares
on the NYSE Composite Tape was $29.63 per share. On June 27, 1997, the last full
trading day prior to the public announcement of the Proposed Sale, the closing
price on the NYSE Composite Tape of the Common Shares was $30.00 per share.
Shareholders are urged to obtain a current market quotation for the Common
Shares.
The Company paid dividends of $.25 per Common Share on December 31, 1996
and $.25 per Common Share on December 29, 1995. The payment of dividends in the
future is subject to the discretion of the Board of Directors and will depend
upon general business conditions, legal and contractual restrictions on the
payment of dividends and other factors that the Board of Directors may deem to
be relevant.
In connection with the declaration of dividends or the making of
distributions on, or the purchase, redemption or other acquisition of Common
Shares, the Company is required to comply with certain restrictions contained in
certain of its debt instruments.
38
<PAGE>
ELECTION OF DIRECTORS
At the Meeting, six directors are to be elected to serve until the next
Meeting or until their successors are elected and qualified. The persons named
in the enclosed form of proxy have advised that, unless contrary instructions
are received, they intend to vote FOR the six nominees named by the Board of
Directors and listed on the following table. The Board of Directors does not
expect that any of the nominees will be unavailable for election as a director.
However, if by reason of an unexpected occurrence one or more of the nominees is
not available for election, the persons named in the form of proxy have advised
that they will vote for such substitute nominees as the Board of Directors of
the Company may propose. The following information is as of September 18, 1997.
Age, period served as director, other business
Name and present position, experience during the last five years and
if any, with the Company family relationships, if any
- ------------------------ ----------------------------------------------
Ian M. Cumming,
Chairman of the Board.... Mr. Cumming, 56, has served as a director and
Chairman of the Board of the Company since June
1978. In addition, he is a director of Allcity
Insurance Company ("Allcity") and MK Gold
Company ("MK Gold"). Allcity, a consolidated
subsidiary of the Company, is a property and
casualty insurer. MK Gold, approximately 46% of
the common stock of which is beneficially owned
by the Company, is an international gold mining
company. Mr. Cumming is also a director of
Skywest, Inc., a Utah-based regional air
carrier.
Paul M. Dougan.............. Mr. Dougan, 59, has served as a director of the
Company since May 1985. He has been a director
and President and Chief Executive Officer of
Equity Oil Company ("Equity Oil"), a company
engaged in oil and gas exploration and
production, since January 1994. Prior thereto,
he served as corporate secretary and manager of
corporate development of Equity Oil since May
1968.
Lawrence D. Glaubinger...... Mr. Glaubinger, 71, has served as a director of
the Company since May 1979. He has been Chairman
of the Board of Stern & Stern Industries, Inc.,
a New York corporation, primarily engaged in the
manufacture and sale of textiles, since November
1977. He has also been President of Lawrence
Economic Consulting Inc., a management
consulting firm, since January 1977. Mr.
Glaubinger is a director of Marisa Christina
Inc., an importer of women's clothing.
James E. Jordan............. Mr. Jordan, 53, has served as a director of the
Company since February 1981. Mr. Jordan is an
investor for his own account. From October 1986
to June 1997, he was
39
<PAGE>
President of The William Penn Corporation
("William Penn"). William Penn, approximately
19.7% of the common stock of which during such
period was beneficially owned by the Company, is
a holding company for an investment advisor to
The William Penn family of mutual funds. Mr.
Jordan is a director of Mezzanine Capital &
Income Trust 2001 PLC, a British investment
trust company.
Jesse Clyde Nichols, III.... Mr. Nichols, 57, has served as a director of the
Company since June 1978. He has been President,
since May 1974, of Nichols Industries, Inc., a
holding company engaged, through subsidiaries,
in manufacturing.
Joseph S. Steinberg,
President................ Mr. Steinberg, 53, has served as a director of
the Company since December 1978 and as President
of the Company since January 1979. He is also a
director of Allcity, MK Gold and Jordan
Industries, Inc., a public company,
approximately 11% of the common stock of which
is beneficially owned by the Company, which
owns and manages manufacturing companies.
The Board of Directors recommends a vote FOR the above-named nominees.
40
<PAGE>
INFORMATION CONCERNING THE BOARD OF DIRECTORS AND BOARD COMMITTEES
MEETINGS AND COMMITTEES
During 1996, the Board of Directors held ten meetings.
The Board of Directors has a standing Audit Committee, Executive
Committee, Employee Benefits Committee and Nominating Committee.
The functions of the Audit Committee are to recommend to the Board
independent auditors for the Company, to analyze the reports and recommendations
of such auditors and to review internal audit procedures and controls. The Audit
Committee met once during 1996 and consists of Messrs. Dougan (Chairman),
Nichols and Glaubinger.
The function of the Executive Committee is to exercise the authority of
the Board of Directors in the management of the business of the Company at such
times as the full Board of Directors is unavailable. The Executive Committee,
which did not meet during 1996, consists of Messrs. Cumming (Chairman),
Steinberg, Jordan and Glaubinger.
The functions of the Employee Benefits Committee are to review
compensation of the Chairman of the Board and President, and employee benefit
and incentive plans and to present recommendations thereon to the Board. Until
April 2, 1997, the Employee Benefits Committee also functioned as the Option
Committee under the Company's 1992 Stock Option Plan. The Employee Benefits
Committee met three times during 1996 and consists of Messrs. Nichols
(Chairman), Dougan and Jordan. Effective April 2, 1997, the Board of Directors
formed the Option Committee to administer the terms of the Company's 1992 Stock
Option Plan. The Option Committee consists of Messrs. Jordan (Chairman),
Glaubinger and Nichols.
The function of the Nominating Committee is to consider and present to the
Board of Directors its nominations for officers and directors of the Company.
The Nominating Committee, consisting of Messrs. Jordan (Chairman), Dougan and
Nichols, was formed in December 1996 and, accordingly, did not meet during 1996.
A Shareholder entitled to vote in the election of directors may nominate
one or more persons for election as directors at a meeting if written notice of
such Shareholder's intent to make such nomination has been given to the Company,
with respect to an election to be held at an annual meeting of Shareholders, not
less than 60 days prior to the first anniversary of the Company's proxy
statement in connection with the last Annual Meeting, and, with respect to an
election to be held at a special meeting of Shareholders, not later than the
tenth day following the date on which notice of such meeting is first given to
Shareholders. Such notice shall set forth the name and address of the
Shareholder and his or her nominees, a representation that the Shareholder is
entitled to vote at such meeting and intends to nominate such person, a
description of all arrangements or understandings between the Shareholder and
each such nominee, such other information as would be required to be included in
a proxy statement soliciting proxies for the election of such Shareholder's
nominees, and the consent of each nominee to serve as a director of the Company
if so elected. The Company may require any proposed nominee to furnish such
other information as may reasonably be required to determine the eligibility of
such proposed nominee to serve as a director of the Company. The Company did not
receive any nominations from Shareholders for election as directors at the
Meeting.
41
<PAGE>
All directors attended at least 75% of the meetings of the Board and
committees of the Board on which they served.
CERTAIN LITIGATION
On May 11, 1994, a shareholder of the Company filed a purported derivative
action entitled Pinnacle Consultants, Ltd. v. Leucadia National Corporation, et
al. (C.A. No. 94 Civ. 3496) against the Company's current Board of Directors and
two former directors, John W. Jordan II and Melvin Hirsch. The action, which was
filed in the United States District Court for the Southern District of New York,
alleged certain Racketeer Influence and Corrupt Organizations Act, securities
law, conversion and fraud claims that were dismissed with prejudice by the Court
and two state law claims of waste and breach of fiduciary duty that were
dismissed by the Court for lack of jurisdiction. On December 10, 1996, the
Second Circuit Court of Appeals affirmed the order of the District Court
dismissing plaintiff's complaint.
On May 13, 1997, Pinnacle filed a purported derivative complaint in New
York State Supreme Court. The action, entitled Pinnacle Consultants, Ltd. v.
Leucadia National Corp., et al. (No. 602470/97), is substantially similar to the
federal court complaint that was dismissed in 1996. Pinnacle has alleged claims
for fraud, waste, breach of fiduciary duty and conversion against the same
current and former Leucadia directors who were named as defendants in the
federal court action. On August 1, 1997, defendants moved to dismiss the
complaint. On October 1, 1997 plaintiff served defendant with a brief in
opposition to defandant's motion to dismiss the complaint.
42
<PAGE>
PRESENT BENEFICIAL OWNERSHIP OF COMMON SHARES
Set forth below is certain information as of September 18, 1997 with
respect to the beneficial ownership of Common Shares by (i) each person who, to
the knowledge of the Company, is the beneficial owner of more than 5% of the
outstanding Common Shares (the Company's only class of voting securities), (ii)
each director and nominee for director, (iii) each of the executive officers
named in the Summary Compensation Table under "Executive Compensation," (iv) the
Steinberg Children Trusts and private charitable foundations established by Mr.
Cumming and Mr. Steinberg and (v) all executive officers and directors of the
Company as a group.
Number of Shares
Name and Address and Nature of Percent
of Beneficial Owner Beneficial Ownership of Class
------------------- --------------------- --------
Group consisting of
CMCO, Inc., Robert
Davidoff, Edwin S.
Marks, Nancy A.
Marks, Boas GRAT
No. 1 Trust, Marks
Family Foundation,
Marjorie M. Boas,
Mark Claster and Andrew
Boas (a)(b).......... 3,203,384 5.0%
Paul J. Borden......... 8,700 (c) *
Ian M. Cumming......... 9,884,002 (d)(e) 15.5%
Paul M. Dougan......... 1,350 (f) *
Lawrence D. Glaubinger. 76,250 (g) .1%
James E. Jordan........ 25,750 (h) *
Thomas E. Mara......... 137,713 (i) .2%
Jesse Clyde Nichols, III 62,087 (h) .1%
Joseph A. Orlando...... 10,356 (j) *
Joseph S. Steinberg.... 9,112,340 (e)(k) 14.3%
The Steinberg Children
Trusts............... 1,127,400 (l) 1.8%
Cumming Foundation .... 712,859 (m) 1.1%
The Joseph S. and Diane
H. Steinberg 1992
Charitable Trust..... 542,407 (n) .8%
All directors and executive
officers as a group
(11 persons)........... 19,417,448 (o) 30.4%
- -------------------
* Less than .1%.
43
<PAGE>
(a) The business address of this beneficial owner is c/o CMCO, Inc., 135
East 57th Street, New York, New York 10022.
(b) Based upon Amendment No. 1 to a Statement on Schedule 13D dated
December 1, 1992 filed by CMCO, Inc., Robert Davidoff, Edwin S. Marks,
Nancy A. Marks, Boas GRAT No. 1 Trust, Marks Family Foundation,
Marjorie M. Boas, Mark Claster and Andrew Boas and information
provided by CMCO, Inc.
(c) Includes 5,100 Common Shares that may be acquired upon the exercise of
currently exercisable stock options.
(d) Includes 266,712 (.4%) Common Shares beneficially owned by Mr.
Cumming's wife (directly and through trusts for the benefit of Mr.
Cumming's children of which Mr. Cumming's wife is trustee (the
"Trusts")) as to which Mr. Cumming may be deemed to be the beneficial
owner.
(e) Messrs. Cumming and Steinberg have an oral agreement pursuant to which
they will consult with each other as to the election of a mutually
acceptable Board of Directors of the Company.
(f) Includes 1,250 Common Shares that may be acquired upon the exercise of
currently exercisable stock options.
(g) Includes 2,250 Common Shares that may be acquired upon the exercise of
currently exercisable stock options.
(h) Includes 4,750 Common Shares that may be acquired upon the exercise
of currently exercisable stock options.
(i) Includes (i) 17,000 Common Shares that may be acquired upon the
exercise of currently exercisable stock options and (ii) 49,200 (less
than .1%) Common Shares owned by Mr. Mara's wife and minor daughter as
to which Mr. Mara disclaims beneficial ownership.
(j) Includes 8,000 Common Shares that may be acquired upon the exercise of
currently exercisable stock options.
(k) Includes 46,400 (less than .1%) Common Shares beneficially owned by
Mr. Steinberg's wife and minor daughter as to which Mr. Steinberg may
be deemed to be the beneficial owner.
(l) Mr. Steinberg disclaims beneficial ownership of the Common Shares held
by the Steinberg Children Trusts.
(m) Mr. Cumming is a trustee and President of the foundation and disclaims
beneficial ownership of the Common Shares held by the foundation.
(n) Mr. Steinberg and his wife are the trustees of the foundation. Mr.
Steinberg disclaims beneficial ownership of the Common Shares held by
the foundation.
(o) Includes 49,200 Common Shares owned of record by the wife and minor
daughter of Mr. Mara as to which he disclaims beneficial ownership. In
addition, because they may be acquired within 60 days, includes (i)
13,000 Common Shares that may be acquired by directors pursuant to the
44
<PAGE>
exercise of currently exercisable stock options; and (ii) 35,000
Common Shares that may be acquired by certain officers pursuant to the
exercise of currently exercisable stock options.
As of September 18, 1997, Cede & Co. held of record 39,313,140 Common
Shares (approximately 61.6% of the total number of Common Shares outstanding).
Cede & Co. held such shares as a nominee for broker-dealer members of The
Depository Trust Company, which conducts clearing and settlement operations for
securities transactions involving its members.
45
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information in respect of the compensation
of the Chairman of the Board, the President, and each of the other three most
highly compensated current executive officers of the Company in 1996, for
services in all capacities to the Company and its subsidiaries in 1996, 1995 and
1994.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
----------------------------------------------- ------------
Name and Principal Other Annual Options All Other
Position(s) Year Salary Bonus(1) Compensation (# of shares) Compensation
- ------------------------- -------- ------------ --------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Ian M. Cumming, 1996 $ 517,356 $ 15,759(2) $ 257,830(5) -- $ 91,885(6)
Chairman of the Board 1995 504,808 1,115,300(3) 174,759(5) -- 115,092
1994 491,497 965,000(4) 306,906(5) -- 93,875
Joseph S. Steinberg, 1996 $ 517,356 $ 15,759(2) $ 298,220(5) -- $ 98,452(6)
President 1995 505,960 1,115,300(3) 254,443(5) -- 118,728
1994 491,500 965,000(4) 270,722(5) -- 82,020
Thomas E. Mara, 1996 $ 250,000 $ 757,500 -- 25,000 $ 30,920(6)
Executive Vice 1995 210,000 856,300 -- -- 19,250
President and Treasurer 1994 205,006 506,150 -- -- 9,500
Paul J. Borden, 1996 $ 125,000 $ 303,750 -- 7,500 $ 3,750(7)
Vice President 1995 106,000 203,180 -- -- 3,750
1994 103,012 203,090 -- -- 2,652
Joseph A. Orlando, 1996 $ 160,000 $ 154,800 -- 20,000 $ 6,750(6)
Vice President and 1995 135,000 154,050 -- -- 6,750
Chief Financial 1994 130,768 128,900 -- -- 6,348
Officer
</TABLE>
- ----------------------
(1) Generally, performance bonuses for Messrs. Cumming and Steinberg for
services rendered during a year are considered at the organizational
meeting of the Board of Directors for the following year (which is
generally held during the second fiscal quarter). However, in response to
federal tax laws affecting the tax consequences associated with certain
executive compensation in excess of $1,000,000 per year, portions of the
performance bonuses for Messrs. Cumming and Steinberg for services rendered
in 1994 and 1995 were determined and paid in 1994 and 1995, respectively,
as described below.
(2) Represents annual year-end bonus (based on a percentage of salary) paid to
all employees. The Board of Directors has determined not to award any
additional bonus for services rendered in 1996.
(3) Includes $494,853 and $427,320 (net of withholding taxes already paid by
Messrs. Cumming and Steinberg) for each of Messrs. Cumming and Steinberg,
respectively, out of the $2,500,000 placed in escrow in 1992 for the
benefit of each of Messrs. Cumming and Steinberg (the "1992 Escrows") by
Leucadia, Inc., a wholly owned subsidiary of the Company ("LI"), pursuant
to agreements dated as of December 28, 1992 between LI and each of Messrs.
Cumming and Steinberg (the "1992 Escrow Agreements"). These amounts were
paid in May 1996 to fund a portion of the 1995 performance bonuses, net of
withholding taxes already paid by
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<PAGE>
Messrs. Cumming and Steinberg. The funds in the 1992 Escrows vest at the
rate of 20% for each full calendar year after December 31, 1992 during
which Messrs. Cumming and Steinberg, respectively, continue to be employed
by the Company or any of its subsidiaries. Each of Messrs. Cumming and
Steinberg is entitled to be 100% vested upon (i) termination without cause,
death or disability, (ii) the merger of the Company with another
corporation which results in a change of control of the Company, the sale
of all or substantially all of the Company's assets or the acquisition by a
person or group of persons of more than 50% of the Common Shares, or (iii)
the Company becoming subject to bankruptcy, insolvency or similar
proceedings. The vesting and payment schedule is also subject to
acceleration at the sole discretion of the Board of Directors, excluding
Messrs. Cumming and Steinberg, upon recommendation of the Employee Benefits
Committee. Amounts vested are to be paid to Messrs. Cumming and Steinberg
on January 1, 1998, unless payment is accelerated by the Board. Any amount
unvested will be returned to the Company. The amounts in the escrow
accounts are invested at the direction of the Company, which is entitled to
receipt of the investment income. As of December 31, 1996, Messrs. Cumming
and Steinberg each have vested with respect to an aggregate of $2,000,000
of the 1992 Escrow. The funds paid out of the 1992 Escrow reflected in this
table were paid out of vested amounts. See "Report of the Compensation
Committee of the Board of Directors-Compensation of Messrs. Cumming and
Steinberg."
As required under the agreements, Messrs. Cumming and Steinberg timely
filed a tax election resulting in their 1992 recognition for tax purposes
of the full $2,500,000 placed in escrow. As a result, for tax purposes
Messrs. Cumming and Steinberg reported income equal to the amount of the
escrowed funds, and the Company deducted that amount for 1992. As
permitted under the agreements, Messrs. Cumming and Steinberg directed
that the Company's tax withholding obligation be paid with funds from the
escrow accounts, leaving a reduced amount available for actual
distribution to Messrs. Cumming and Steinberg from the escrow accounts as
bonus compensation. The application of the escrow funds toward
satisfaction of the Company's withholding obligation had no affect on the
vesting schedule; accordingly, in the event either Mr. Cumming or Mr.
Steinberg does not ultimately become fully vested in the respective amount
placed in escrow, to the extent the funds remaining in escrow are less
than the unvested portion for such person, Mr. Cumming and/or Mr.
Steinberg, as the case may be, will be obligated to repay such deficiency
to the Company.
The funds placed in escrow will be reported in the table in the
appropriate columns for those years in which amounts are released from the
escrow accounts.
(4) Includes $373,990 and $348,008 (net of withholding taxes already paid by
Messrs. Cumming and Steinberg) for each of Messrs. Cumming and Steinberg,
respectively, out of the 1992 Escrows. These amounts were paid in May 1995
to fund a portion of the 1994 performance bonuses, net of withholding taxes
already paid by Messrs. Cumming and Steinberg.
(5) Consists of non-cash compensation valued in accordance with the disclosure
rules of the Securities and Exchange Commission, as follows: personal use
of corporate aircraft (Mr. Cumming: $251,754, $165,645 and $305,995 in
1996, 1995 and 1994, respectively, and Mr. Steinberg: $293,682, $248,971
and $264,338 in 1996, 1995 and 1994, respectively). The value of such other
compensation for federal tax purposes may differ.
(6) Included in this amount is the annual premium on a term life insurance
policy paid by the Company for the benefit of such person ($2,631 for Mr.
Cumming and $2,530 for Mr. Steinberg), directors' fees from affiliates of
the Company ($85,504 for Mr. Cumming, $92,172 for Mr. Steinberg, $27,170
for Mr. Mara and $3,000 for Mr. Orlando) and a contribution of $3,750 made
by the Company to a defined contribution 401(k) plan on behalf of the named
person.
(7) Consists of a contribution by the Company to a defined contribution 401(k)
plan.
47
<PAGE>
OPTION GRANTS IN 1996
The following table shows all grants of options to the named executive in
1996.
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation
Individual Grants For Option Term (2)
----------------------------------------------------------- ------------------------------
Securities
Underlying % of Total Exercise
Options Granted Options Granted to Price Expiration
Name (# of shares)(1) Employees in 1996 ($/Sh) Date 0%($) 5%($) 10%($)
- ---- ----------------- ------------------- --------- ----------- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Thomas E. Mara 25,000 4.0% $26.625 03/05/02 $0 $183,900 $406,371
Paul J. Borden 7,500 1.2% 26.625 03/05/02 0 55,170 121,911
Joseph A. Orlando 20,000 3.2% 26.625 03/05/02 0 147,120 325,097
</TABLE>
- ----------------
(1) The options were granted pursuant to the Company's 1992 Stock Option
Plan, as amended, at an exercise price equal to the fair market
value of the Common Shares on the date of grant. The options become
exercisable at the rate of 20% per year commencing one year after
date of grant. The grant date of the options is March 5, 1996.
(2) The potential realizable values represent future opportunity and
have not been reduced to reflect the time value of money. The
amounts shown under these columns are the result of calculations at
0% and at the 5% and 10% rates required by the Securities and
Exchange Commission, and are not intended to forecast future
appreciation of the Common Shares and are not necessarily indicative
of the values that may be realized by the named executive officers.
48
<PAGE>
AGGREGATE OPTION EXERCISES IN 1996 AND OPTION VALUES AT DECEMBER 31, 1996
The following table provides information as to options exercised by each
of the named executives in 1996 and the value of options held by such executives
at year end measured in terms of the last reported sale price for the Common
Shares on December 31, 1996 ($26.75, as reported on the New York Stock Exchange
Composite Tape).
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options In-the-Money Options
at December 31, 1996 at December 31, 1996
-------------------- --------------------
Number of Shares
Underlying Options Exercisable/ Exercisable/
Name Excercised Value Realized Unexercisable Unexercisable
- ---- ---------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Ian M. Cumming -- -- 0/0 $0/0
Joseph S. Steinberg -- -- 0/0 $0/0
Thomas E. Mara 33,728 $720,652 22,000/33,000 $282,000/$53,625
Paul J. Borden 2,400 $ 43,500 3,600/9,900 $22,725/$16,088
Joseph A. Orlando -- -- 6,000/24,000 $37,875/$27,750
</TABLE>
RETIREMENT PLAN
The Company and certain of its affiliated companies maintain a retirement
plan, as amended December 31, 1995 (the "Retirement Plan"), for certain of its
employees and employees of these affiliated companies. The Retirement Plan is
intended to qualify under the provisions of Section 401 of the Internal Revenue
Code of 1986, as amended (the "Code"). Benefits under the Retirement Plan are
provided by an insurance company separate account which receives and invests
company contributions. Participants are not required to make any contributions
under the Retirement Plan.
An employee is eligible for participation in the Retirement Plan after he
is at least age 21 and has completed one year of service.
For a participant employed by the Company retiring at normal retirement
(age 65 with at least five years of service), the Retirement Plan provides a
retirement benefit payable for life, equal to 1.25% of his final average pay up
to the Covered Compensation level plus 1.75% of his final average pay in excess
of the Covered Compensation level (subject to the limitations of Section 415 of
the Code), times his years of credited service. The Covered Compensation level
is the average of the maximum Social Security taxable wage base in the 35 years
preceding retirement or termination. Final average pay is the average of the
five highest consecutive years of compensation in the last ten years before
retirement or termination. Years of credited service include all calendar years
during which an employee has at least 1,000 hours of service while employed by
the Company or an affiliate participating in the plan, but not before January 1,
1989.
The Retirement Plan contains provisions for optional forms of payment and
provides that the normal form of benefit in the case of a married participant is
a benefit actuarially equivalent to an annuity for the life of the participant
payable in the form of a 50% joint and survivor annuity for the participant and
his spouse.
49
<PAGE>
A participant employed by the Company becomes 100% vested in his accrued
benefit under the Retirement Plan after he has five years of service. If he
terminates employment with less than five years of service, he will forfeit any
benefits under the Retirement Plan.
A participant employed by the Company with 10 or more years of service,
who is age 55 or over, but less than age 65, and who has retired from the
Company or a participating affiliate, may elect to receive an early retirement
benefit. A participant with less than 10 years of service or who is under age
55, who has terminated employment with the Company or a participating affiliate,
may elect to receive an early deferred vested benefit. The amount of such
benefits are actuarially reduced to reflect payment before age 65.
The projected annual retirement benefits under the Retirement Plan of the
executive officers named in the Summary Compensation Table, expressed in the
form of a straight-life annuity with no reduction for early commencement, and
assuming continuous employment until age 65, are estimated as follows:
Ian M. Cumming.............$16,765*
Joseph S. Steinberg........ 21,746*
Thomas E. Mara............. 10,691*
Paul J. Borden............. 63,490*
Joseph A. Orlando.......... 79,869*
- --------------------
* The benefits shown take into account limitations contained in Section 415 of
the Code, and other limits on plan benefits that exist because of distributions
received from a prior plan terminated as of December 31, 1988.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with Messrs. Cumming and Steinberg
that provide for Mr. Cumming's employment as Chairman of the Board and Chief
Executive Officer of the Company and for Mr. Steinberg's employment as President
and Chief Operating Officer of the Company through June 30, 2003 at annual
salaries of $500,000 (subject to cost-of-living adjustments), plus such
additional compensation as may be voted by the Board of Directors of the
Company. Messrs. Cumming and Steinberg are entitled to participate in all
incentive plans of the Company and other subsidiary and affiliated companies,
and the Company has agreed to carry at its expense term life insurance policies
on their lives in the amount of $1,000,000 each, payable to such beneficiaries
as each of Messrs. Cumming and Steinberg shall designate. Under the agreements,
if there is a change in control of the Company and if either the employment of
Messrs. Cumming or Steinberg is terminated by the Company without cause or
Messrs. Cumming or Steinberg terminates his employment within one year of
certain occurrences (such as the appointment or election of another person to
his offices, the occurrence of the aggregate compensation and other benefits to
be received by him for any twelve full calendar months falling below 115% of
that received by him during the comparable preceding period, or a change in the
location of his principal place of employment), Messrs. Cumming or Steinberg
will be entitled to receive a severance allowance equal to the remainder of the
aggregate annual salary (as adjusted for increases in the cost of living) that
he would have received under his employment agreement. In addition, the Company
or its successors will continue to carry through the scheduled termination of
the employment agreements the life insurance payable to the beneficiaries of
Messrs. Cumming and Steinberg.
50
<PAGE>
In addition, $4,000,000 was placed in escrow in 1993 (the "1993 Escrow")
by the Company for the benefit of each of Ian M. Cumming and Joseph S. Steinberg
pursuant to agreements dated as of December 28, 1993 between the Company and
each of Messrs. Cumming and Steinberg (the "1993 Escrow Agreements"). The 1993
Escrow Agreements are identical to those described in footnote (3) to the
Summary Compensation Table above, except (i) such funds vest at the rate of 20%
for each full calendar year after December 31, 1997, during which Messrs.
Cumming and Steinberg continue to be employed by the Company or any of its
subsidiaries, (ii) in the event of the death or disability of Mr. Cumming or Mr.
Steinberg, the funds would be 50% vested and (iii) amounts vested are to be paid
to Messrs. Cumming and Steinberg on January 1, 2003, unless payment is
accelerated by the Board. See "Report of the Compensation Committee of the Board
of Directors-Compensation of Messrs. Cumming and Steinberg."
As required under the agreements, Messrs. Cumming and Steinberg timely
filed a tax election resulting in their 1993 recognition for tax purposes of the
full $4,000,000 placed in escrow. As a result, for tax purposes Messrs. Cumming
and Steinberg reported income equal to the amount of the escrowed funds, and the
Company deducted that amount for 1993. As permitted under the agreements,
Messrs. Cumming and Steinberg directed that the Company's tax withholding
obligation be paid with funds from the escrow accounts, leaving a reduced amount
available for actual distribution to Messrs. Cumming and Steinberg from the
escrow accounts as bonus compensation. The application of the escrow funds
toward satisfaction of the Company's withholding obligation had no effect on the
vesting schedule; accordingly, in the event either Mr. Cumming or Mr. Steinberg
does not ultimately become fully vested in the respective amount placed in
escrow, to the extent the funds remaining in escrow are less than the unvested
portion for such person, Mr. Cumming and/or Mr. Steinberg, as the case may be,
will be obligated to repay such deficiency to the Company.
The funds placed in escrow will be reported in the Summary Compensation
Table above in the appropriate columns for those years in which amounts are
released from the escrow accounts.
In early April 1997, the Board of Directors approved the issuance of
certain warrants to purchase Common Shares, subject to Shareholder approval. In
view of the Proposed Sale to GE Capital and the Conseco Transaction, the Board
of Directors and Messrs. Cumming and Steinberg have agreed to withdraw these
warrants.
For information concerning certain other compensation awards placed in
escrow for the benefit of Messrs. Cumming and Steinberg, see footnote (3) to the
Summary Compensation Table above.
COMPENSATION OF DIRECTORS
Directors who are also employees of the Company receive no remuneration
for services as a member of the Board or any committee of the Board. In 1996,
each director who was not an employee of the Company received a retainer of
$18,000 plus $500 for each meeting of the Board and $300 for each meeting of a
committee of the Board ($400 if a committee chairman) that he attended. In
addition, under the terms of the 1992 Stock Option Plan, each non-employee
director is automatically granted options to purchase 1,000 Common Shares on the
date on which the annual meeting of the Company's shareholders is held each
year. The purchase price of the Common Shares covered by such options is the
fair market value of such Common Shares on the date of grant. These options
become exercisable at the rate of 25% per year commencing one year after the
date of grant. As a result of this provision, options to purchase 1,000 Common
Shares at an exercise price of $24.75 per Common Share were awarded to each of
Messrs. Paul M. Dougan, Lawrence D. Glaubinger, James E. Jordan and Jesse Clyde
Nichols, III on May 14, 1996.
For additional information, see "Certain Relationships and Related
Transactions" and "Compensation Committee Interlocks and Insider Participation"
below.
51
<PAGE>
INDEMNIFICATION
Pursuant to a contract of insurance dated December 4, 1996 with National
Union Fire Insurance Company of Pittsburgh, Pennsylvania, 70 Pine Street, New
York, New York 10270, the Company maintains a $20 million indemnification
insurance policy covering all directors and officers of the Company and its
named subsidiaries. The annual premium for such insurance is $888,000. During
1996, no payments were received under the Company's indemnification insurance.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to an agreement dated as of August 1, 1988 among the Company, Ian
M. Cumming and Joseph S. Steinberg, upon the death of either Mr. Cumming or Mr.
Steinberg, the Company has agreed to purchase from the respective estate up to
55% of his direct and/or indirect interest in the Company, subject to reduction
in certain circumstances, not to exceed $50 million in value. The agreement
provides that Mr. Cumming's and Mr. Steinberg's interests in the Company will be
valued at the higher of the average closing price of the Common Shares on the
New York Stock Exchange for the 40 trading days preceding the date of death or
the net book value of the Common Shares at the end of the fiscal quarter
preceding the date of death. The Company has agreed to fund the purchase of
Common Shares pursuant to this Agreement by purchasing and maintaining insurance
on the life of each of Messrs. Cumming and Steinberg in the aggregate face
amount of $50 million per individual. This agreement will expire in December
1997 (subject to earlier termination in certain circumstances). The Company has
purchased the life insurance contemplated by this agreement, the premiums for
which aggregated approximately $337,000 in 1996. These amounts are not included
in the Summary Compensation Table appearing elsewhere in this Proxy Statement.
For information concerning certain compensation awards placed in escrow
for the benefit of Messrs. Cumming and Steinberg, see footnote (3) to the
Summary Compensation Table and "Employment Agreements" above.
For additional information, see "Compensation Committee Interlocks and
Insider Participation," below.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS*
Compensation Policies for Executive Officers (other than Ian M. Cumming
and Joseph S. Steinberg)
The Employee Benefits Committee of the Board of Directors (the
"Committee"), consisting of Mr. Nichols (Chairman), Mr. Dougan and Mr. Jordan,
each of whom is a non-employee director, recommends to the Board of Directors
the compensation of Messrs. Cumming and Steinberg, Chairman of the Board and
President of the Company, respectively. Prior to this year, the Committee also
awarded stock options to Company employees upon the recommendation of Messrs.
Cumming and Steinberg. Effective upon its formation in April 1997, the Stock
Option Committee of the Board of Directors now awards options upon the
- -------------------
* The disclosure contained in this section of this Proxy Statement is not
incorporated by reference into any filings by the Company under the Securities
Act of 1933 or the Securities Exchange Act of 1934 that incorporate filings or
portions thereof (including this Proxy Statement or the "Executive Compensation"
section of this Proxy Statement) without specific reference to the incorporation
of this section of this Proxy Statement.
52
<PAGE>
recommendation of Messrs. Cumming and Steinberg. Salary and bonus compensation
of executive officers of the Company are determined by Messrs. Cumming and
Steinberg under authority of the Board of Directors.
The Company's compensation package for executive officers consists of four
basic elements: (1) base salary; (2) annual bonus compensation; (3) long-term
incentives in the form of stock options granted pursuant to the Company's 1992
Stock Option Plan; and (4) retirement benefits pursuant to the Company's
Retirement Plan. Other elements of compensation include a defined contribution
401(k) plan and medical and life insurance benefits available to employees
generally.
Each element of compensation has a different purpose. Salary and bonus
payments are designed mainly to reward current and past performance. Stock
options are primarily designed to provide strong incentive for superior
long-term performance and are directly linked to shareholders' interests because
the value of the awards will increase or decrease based upon the future price of
the Common Shares. Retirement benefits generally are designed to reward prior
service.
Base compensation of each executive officer is determined by Messrs.
Cumming and Steinberg consistent with the executive's office and level of
responsibility, with annual salary increases, which generally amount to a small
percentage of the executive's prior base salary, primarily reflecting cost of
living increases. However, where appropriate to reflect an executive's increase
in office and/or responsibility, annual salary increases may be significant.
The Company's executive compensation policy emphasizes performance-based
compensation. Accordingly, a large percentage of annual compensation consists of
bonus compensation. This ensures that compensation paid to an executive reflects
the individual's specific contributions to the success of the Company, as well
as the level and degree of complexity involved in his contributions to the
Company (which historically often have involved restructuring newly acquired
enterprises, the success of which may not be evident for several years). Bonus
compensation is determined on the basis of Messrs. Cumming's and Steinberg's
subjective assessment of an executive's performance, the Company's performance
and each individual's contribution thereto. Bonus compensation is not based on
any specific formula.
The Company, by means of the 1992 Stock Option Plan, seeks to retain the
services of persons now holding key positions and to secure the services of
persons capable of filling such positions. From time to time, stock options may
be awarded which, under the terms of the 1992 Stock Option Plan, permit the
executive officer or other employee to purchase Common Shares at not less than
the fair market value of the Common Shares on the date of grant. The extent to
which the employee realizes any gain is, therefore, directly related to
increases in the price of the Common Shares and hence, shareholder value, during
the period of the option. Options granted to executive officers generally become
exercisable at the rate of 20% per year, commencing one year after the date of
grant. As with base salary and bonuses, the amount of stock options awarded to
an executive officer is not based on any specific formula, but rather on a
subjective assessment of the executive's performance and the Company's
performance.
Under the provisions of Section 162(m) of the Code, the Company would not
be able to deduct compensation to its executive officers whose compensation is
required to be disclosed in the Company's proxy statement for such year in
excess of $1 million per year unless such compensation was within the definition
of "performance-based compensation" or meets certain other criteria. To qualify
as "performance-based compensation," in addition to certain other requirements,
compensation generally must be based on achieving certain pre-established
objective performance criteria. The Committee believes that ordinarily it is in
the best
53
<PAGE>
interest of the Company to retain maximum flexibility in its compensation
programs to enable it to appropriately reward, retain and attract the executive
talent necessary to the Company's success. To the extent such goals can be met
with compensation that is designed to be deductible under Section 162(m), such
as the 1992 Stock Option Plan and, subject to Shareholder approval, the
Incentive Bonus Plan, each of which is described in this Proxy Statement, such
compensation plans will be used. However, the Committee recognizes that, in
appropriate circumstances, compensation that is not deductible under Section
162(m) may be paid in the future in the Committee's discretion.
The Company believes that its executive compensation program has enabled
it to attract, motivate and retain senior management by providing a competitive
total compensation opportunity based on performance. Base salaries, combined
with annual variable performance-based bonus awards that reflect the
individual's level of responsibility, performance and contribution to the
Company are important elements of the Company's cash compensation philosophy.
Together with the Company's executive stock ownership, the Company's total
executive compensation program not only aligns the interest of executive
officers and shareholders, but also permits the Company to attract talented
senior management. Messrs. Cumming and Steinberg and the Board believe the
program strikes an appropriate balance between short- and long-term performance
objectives.
Compensation of Messrs. Cumming and Steinberg
The base compensation of Messrs. Ian M. Cumming and Joseph S. Steinberg,
Chairman of the Board and President of the Company, respectively, is set
pursuant to employment agreements between the Company and each of Messrs.
Cumming and Steinberg entered into as of December 28, 1993, that cover the
period from July 1, 1994 through June 30, 2003. See "Employment Agreements." The
base salaries of Messrs. Cumming and Steinberg provided for in the current
employment agreements were determined by the Committee, which presented its
recommendation to the entire Board of Directors (with Messrs. Cumming and
Steinberg abstaining) and represents an increase over their prior base salaries,
primarily reflecting cost-of-living increases. The Committee reviews other
compensation for each of Messrs. Cumming and Steinberg and presents its
recommendations thereon to the entire Board of Directors.
The Committee met once in May 1996 to consider the 1995 performance
bonuses for Messrs. Cumming and Steinberg and twice in 1997 to consider and
adopt the Incentive Bonus Plan, each subject to Shareholder approval. The
Committee has determined not to award any performance bonus to Messrs. Cumming
and Steinberg in respect of services rendered in 1996.
1995 Performance Bonus. As disclosed in the 1996 proxy statement, a
portion of the 1995 performance bonuses ($290,545 for Mr. Cumming and $354,944
for Mr. Steinberg) was determined and paid in 1995. This was done to permit the
Company to take advantage of the maximum 1995 federal deduction available to the
Company resulting from the application of Section 162(m) of the Code, which
limits to $1 million per employee per year the deductibility of non-performance
based compensation payable to each of the Company's five most highly compensated
executive officers.
The Committee's ultimate determination of 1995 performance bonuses for
Messrs. Cumming and Steinberg was based upon their subjective assessment of the
performance of Messrs. Cumming and Steinberg and the performance of the Company.
In making this assessment, the Committee reviewed certain financial information,
including information concerning the historical relationship between the
Company's audited pre-tax income and annual bonuses paid to Messrs. Cumming and
Steinberg. The Committee determined that a performance bonus of $1,100,000
(representing approximately .83% of 1995 audited pre-tax income for each of
54
<PAGE>
Messrs. Cumming and Steinberg, which was not inconsistent with the relationship
between prior years' performance bonuses awarded to Messrs. Cumming and
Steinberg and the audited pre-tax income for such years) was appropriate for
1995. Thereafter, the Committee unanimously recommended to the Board of
Directors that such annual bonuses be awarded to Messrs. Cumming and Steinberg.
The Committee then considered whether to use the funds in the 1992 Escrow
to pay the unpaid portion of the recommended 1995 performance bonuses (after
giving effect to the 1995 bonus payments made in 1995). The Committee noted that
the 1992 Escrows and the 1993 Escrow were established to provide the Company
with a fund for which the Company had already received a tax deduction (and in
respect of which applicable withholding taxes had already been paid) from which
compensation in excess of the Section 162(m) deduction limitation could be paid.
The Committee also noted that any payments from the Escrows would not be applied
toward the Section 162(m) deduction limitation threshold. The Committee was
advised that funds had vested under the 1992 Escrow to each of Messrs. Cumming
and Steinberg and that no funds had vested under the 1993 Escrow. After
considering the acceleration and vesting provisions of the 1992 Escrow and
various payment alternatives, the Committee determined to pay the balance of the
recommended 1995 performance bonuses out of the 1992 Escrow and recommended the
acceleration of payment of such bonuses out of previously vested funds from the
1992 Escrow (after giving effect to withholding taxes previously paid by each of
Messrs. Cumming and Steinberg).
Thereafter, based upon the Committee's recommendation and the factors
considered by the Committee, the Board of Directors approved (with Messrs.
Cumming and Steinberg abstaining) the recommended 1995 performance bonuses and
the acceleration of payment from the 1992 Escrow of so much of the previously
vested amount necessary to pay such bonuses to Messrs. Cumming and Steinberg.
55
<PAGE>
Senior Executive Incentive Bonus Plan. Following execution of the purchase
agreements for both the Proposed Sale to GE Capital and the Conseco Transaction,
the Committee met in July 1997 to consider the adoption of the Plan. The
Committee noted that if the Proposed Sale to GE Capital and the Conseco
Transaction are consummated, substantial performance bonuses are likely to be
awarded to Messrs. Cumming and Steinberg for calendar year 1997. In such event,
in order to maximize the deductibility of such bonuses, it is likely that the
Committee would recommend the use of funds from the 1992 Escrows and the 1993
Escrows to pay such bonuses, thereby significantly depleting or eliminating such
Escrows. As a result, the Company would no longer have available to it funds to
pay bonuses to Messrs. Cumming and Steinberg that were not included in
determining the Section 162(m) compensation limitation, thereby significantly
reducing or eliminating the Company's ability to pay deductible bonuses in the
future to Messrs. Cumming and Steinberg. To address this issue, and recognizing
the likelihood that future annual compensation to each of Messrs. Cumming and
Steinberg will exceed $1 million, the Committee determined that to the extent
possible future performance bonuses for Messrs. Cumming and Steinberg should be
paid under a plan designed to meet the requirements of Section 162(m). The
Committee considered the terms of the Plan, which provides for annual incentive
bonuses to be paid to each of Messrs. Cumming and Steinberg in an amount equal
to 1.00% of the audited pre-tax earnings of the Company and its consolidated
subsidiaries for each of the five fiscal years commencing 1998, subject to
unlimited downward adjustments as determined by the Committee. In determining
the formula for the maximum bonuses under the Plan, the Committee reviewed
certain financial information, including information concerning the historical
relationship between the Company's audited pre-tax income and annual bonuses
paid to Messrs. Cumming and Steinberg since 1985. Such bonuses ranged from .81%
to 1.32% of audited pre-tax income for such years. The Committee determined that
the bonuses to each of Messrs. Cumming and Steinberg under the Plan of 1.00% of
audited pre-tax income was not inconsistent with the relationship between prior
years' performance bonuses awarded to Messrs. Cumming and Steinberg and the
audited pre-tax income for such years. The Committee also noted the Plan was
consistent with the Company's philosophy of maintaining flexibility in its
compensation programs because the Plan permits the Committee to reduce the Plan
bonus amounts, and leaves the Committee with discretion, where appropriate, to
recommend bonuses outside the Plan.
Based on the foregoing, and the Committee's belief that it is in the best
interests of the Company to have a program that will permit it to deduct bonus
compensation paid to executives of the Company, the Committee unanimously
recommended to the Board of Directors that the Plan be adopted, subject to
Shareholder approval.
Thereafter, on August 8, 1997, based on the Committee's recommendation and
the factors considered by the Committee, the Board of Directors adopted (with
Messrs. Cumming and Steinberg not present) the Plan, subject to Shareholder
approval.
The Committee consists of Jesse Clyde Nichols, III, Chairman, Paul M.
Dougan and James E. Jordan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Committee consists of Jesse Clyde Nichols, III, Chairman, Paul M.
Dougan and James E. Jordan.
56
<PAGE>
In January 1994, the Company acquired 50% of Symskaya Exploration, Inc.
("SEI"), a company engaged in the exploration and development of oil and gas in
the Krasnoyarsk region of eastern Siberia. Equity Oil (of which Paul Dougan, a
director of the Company, is President and Chief Executive Officer) owns the
remaining 50% of SEI. In connection with such acquisition, the Company entered
into a shareholders' agreement with Equity Oil, pursuant to which the Company
has agreed to make certain contributions to SEI for SEI's projects. In 1996, the
Company wrote-off $7,041,000 representing its investment in an unsuccessful well
drilled by SEI.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors, and persons who beneficially own
more than ten percent of a registered class of the Company's equity securities,
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission, the New York Stock Exchange and the Pacific Stock Exchange.
Based solely upon a review of the copies of such forms furnished to the Company
and written representations from the Company's executive officers, directors and
greater than 10% beneficial shareholders, the Company believes that during the
year ended December 31, 1996, all persons subject to the reporting requirements
of Section 16(a) filed the required reports on a timely basis.
57
<PAGE>
SHAREHOLDER RETURN PERFORMANCE GRAPH**
Set forth below is a graph comparing the cumulative total shareholder
return on Common Shares against cumulative total return of the Standard & Poor's
500 Stock Index (the "S&P 500 Index") and the Standard & Poor's Financial
(Multi-Line Insurance Companies) Index (the "S&P Insurance Index") for the
five-year period commencing December 31, 1991 (as required by the Securities and
Exchange Commission). The data was furnished by Standard & Poor's Compustat
Services, Inc.
Comparison of Five-Year Cumulative Total Return of the Company, S&P 500
Index and S&P Insurance Index
The following graph assumes that $100 was invested on December 31, 1991 in
each of the Common Shares, the S&P 500 Index and the S&P Insurance Index and
that all dividends were reinvested.
<TABLE>
<CAPTION>
Value at Year End
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
The Company $100 $215.32 $224.91 $245.48 $278.58 $300.86
S&P 500 Index 100 107.62 118.46 120.03 165.13 203.05
S&P Insurance Index 100 117.97 124.76 124.90 177.81 220.38
</TABLE>
- --------
** The disclosure contained in this section of the Proxy Statement is not
incorporated by reference into any prior filings by the Company under the
Securities Act of 1933 or the Securities Exchange Act of 1934 that incorporated
future filings or portions thereof (including this Proxy Statement or the
"Executive Compensation" section of this Proxy Statement).
58
<PAGE>
PROPOSED SENIOR EXECUTIVE ANNUAL INCENTIVE BONUS PLAN
The Board of Directors of the Company, upon the unanimous recommendation
of the Employee Benefits Committee, resolved on August 8, 1997, subject to
Shareholder approval, to adopt the Senior Executive Annual Incentive Bonus Plan.
The Plan provides for annual incentive cash bonuses to be paid to Messrs.
Cumming and Steinberg, provided certain performance goals are attained. The Plan
is intended to directly link the annual incentive bonus of Messrs. Cumming and
Steinberg with the performance of the Company, while providing the Committee the
flexibility to reduce the amounts to be paid thereunder. The Board of Directors
recommends that the Plan be approved by the Shareholders. A copy of the Plan is
annexed hereto as Annex D. The description of the Plan included herein is
qualified in its entirety by reference to the Plan.
In the past, performance bonuses awarded to Messrs. Cumming and Steinberg
have been based upon the Employee Benefits Committee's subjective view of the
contributions of Messrs. Cumming and Steinberg to the Company's annual
performance. As described below, the Plan will maintain the Employee Benefit
Committee's ability to determine annual bonuses, subject to the limitations set
forth in the Plan.
The Plan is designed so that the cash bonuses awarded thereunder will
qualify as "performance-based compensation" under Section 162(m) of the Code,
which limits to $1 million per employee per year the deductibility of
non-performance based compensation payable to each of the Company's five most
highly compensated executive officers. To qualify as "performance-based
compensation," compensation generally must be paid pursuant to a pre-established
objective performance criterion or standard that precludes the exercise of
discretion to increase the amount of compensation payable upon the attainment of
the performance goal. The Plan is designed to comply with such standard. To
allow the awards to qualify under Section 162(m), the Company is seeking
Shareholder approval of the Plan. While the Employee Benefits Committee will
retain the ability to award bonuses to Messrs. Cumming and Steinberg, if
Shareholder approval of the Plan is not obtained, the Plan will be null and void
and no amounts will be paid to Messrs. Cumming and Steinberg pursuant to the
Plan. In such event, bonus compensation paid to Messrs. Cumming and Steinberg
may not qualify as "performance-based compensation."
The Plan provides for annual incentive bonuses to be paid to each of
Messrs. Cumming and Steinberg in an amount equal to 1.00% of the audited pre-tax
earnings of the Company and its consolidated subsidiaries for each of the five
fiscal years commencing 1998. The amount of the annual incentive bonus awarded
to each participant in any given year is subject to reduction by the Committee,
in its sole discretion. Payments under the Plan will be made in cash following
written certification by the Committee as to the amount of the annual incentive
bonus for any given year.
As discussed in the Report of the Compensation Committee of the Board of
Directors, the Committee's determination of annual performance bonuses, if any,
for Messrs. Cumming and Steinberg is based upon their subjective assessment of
the performance of Messrs. Cumming and Steinberg and the performance of the
Company. In making this assessment, the Committee typically reviews certain
financial information, including information concerning the historical
relationship between the Company's audited pre-tax income and annual bonuses
paid to Messrs. Cumming and Steinberg. The Committee will retain discretion,
where appropriate, to pay additional bonuses to Messrs. Cumming and Steinberg
outside the Plan. In such event, the Committee will consider amounts paid to
Messrs. Cumming and Steinberg under the Plan. To the extent that the Committee
determines to award performance bonuses for a given year outside the Plan, such
compensation may not be deemed to be performance-based compensation. See
"Executive Compensation -- Report of the Compensation
59
<PAGE>
Committee of the Board of Directors" included in this Proxy Statement for
certain additional information concerning the Plan.
Under the provisions of the New York Business Corporation Law, approval of
the Incentive Bonus Plan requires the affirmative vote of the holders of a
majority of the Common Shares voted at the Meeting and entitled to vote. The
persons named in the enclosed form of proxy have advised that, unless contrary
instructions are received, they intend to vote FOR approval of the Incentive
Bonus Plan. Messrs. Cumming and Steinberg have advised the Company that they
intend to cause all Common Shares that they beneficially own to be voted in
favor of approval of the Incentive Bonus Plan. Assuming Messrs. Cumming and
Steinberg, all other directors and officers of the Company, the previously
described Steinberg Children Trusts and the two private charitable foundations
cause all Common Shares beneficially owned by them to be voted in favor of
approval of the Incentive Bonus Plan, approval of the issuance of the Incentive
Bonus Plan will be assured unless more than 68.3% of the outstanding Common
Shares are voted on such matter.
The Board of Directors recommends a vote FOR this proposal.
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Board of Directors recommends that the Shareholders ratify the
selection of Coopers & Lybrand L.L.P. certified public accountants, as
independent auditors to audit the accounts of the Company and its subsidiaries
for 1997. The selection of Coopers & Lybrand L.L.P. was recommended to the Board
of Directors by its Audit Committee. Coopers & Lybrand L.L.P. are currently
independent auditors for the Company.
The Board of Directors recommends a vote FOR this proposal.
ANNUAL REPORT
A copy of the Company's 1996 Annual Report to Shareholders is being
furnished to Shareholders concurrently herewith.
PROPOSALS BY SHAREHOLDERS
Proposals that Shareholders wish to include in the Company's Proxy
Statement and form of proxy for presentation at the Company's 1998 Annual
Meeting of Shareholders must be received by the Company at 315 Park Avenue
South, New York, New York 10010, Attention of Laura Ulbrandt, Assistant
Secretary, no later than January 5, 1998.
By Order of the Board of Directors
Ian M. Cumming
Chairman of the Board of Directors
60
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF THE COLONIAL PENN P&C GROUP
The Colonial Penn P&C Group unaudited combined financial statements listed below
include the historical accounts of Colonial Penn Insurance Company and its
subsidiaries (excluding Intramerica Life Insurance Company ("ILIC") and the
health business), and are combined with the accounts of CP General Agency, Inc.,
which is an affiliate of the Colonial Penn P&C Group but not a subsidiary. Such
financial statements represent the historical financial position and results of
operations of the entities which are being purchased by GE Capital in the
Proposed Sale. ILIC and the health business are not included in the Proposed
Sale to GE Capital and, therefore, have been excluded from these combined
financial statements.
Unaudited Combined Balance Sheets at
December 31, 1996 and 1995 F-1
Unaudited Combined Statements of Income
for the years ended December 31,
1996, 1995 and 1994 F-2
Unaudited Combined Statements of Cash Flows
for the years ended December 31, 1996,
1995 and 1994 F-3
Unaudited Combined Statements of Changes in
Shareholder's Equity for the years
ended December 31, 1996, 1995 and 1994 F-4
Notes to Unaudited Combined Financial Statements F-5
Unaudited Combined Statements of Cash Flows
for the six months ended June 30,
1997 and 1996 F-17
61
<PAGE>
THE COLONIAL PENN P&C GROUP
UNAUDITED COMBINED BALANCE SHEETS
December 31, 1996 and 1995
(Dollars in thousands, except par value)
1996 1995
---- ----
ASSETS
- ------
Investments:
Available for sale (aggregate cost of $906,597
and $918,804) $ 905,634 $ 925,767
Trading securities (aggregate cost of $29,317
and $22,543) 30,655 23,704
Held to maturity (aggregate fair value of $22,323
and $19,551) 22,277 19,100
Accrued interest income 11,211 11,926
---------- ----------
Total investments 969,777 980,497
Cash and cash equivalents 106,438 78,201
Reinsurance receivables, net 64,284 69,307
Premiums receivable 127,178 111,626
Other receivables 2,522 3,898
Prepaids and other assets 15,523 15,735
Property, equipment and leasehold
improvements, net 18,077 17,028
Deferred policy acquisition costs 15,069 17,567
Deferred income taxes 51,562 43,833
---------- ----------
Total $1,370,430 $1,337,692
========== ==========
LIABILITIES
- -----------
Trade payables and expense accruals $ 71,818 $ 56,626
Other liabilities 43,324 37,571
Income taxes payable 7,338 1,905
Policy reserves 578,788 612,170
Unearned premiums 280,904 262,032
---------- ----------
Total liabilities 982,172 970,304
---------- ----------
SHAREHOLDER'S EQUITY
- --------------------
Common shares, par value $25 per share,
200,000 authorized shares; 168,000 shares
issued and outstanding 4,200 4,200
Additional paid-in capital 318,405 318,405
Net unrealized gain (loss) on investments (498) 4,526
Retained earnings 66,151 40,257
---------- ----------
Total shareholder's equity 388,258 367,388
---------- ----------
Total $1,370,430 $1,337,692
========== ==========
The accompanying notes are an integral part of
these combined financial statements.
F-1
<PAGE>
THE COLONIAL PENN P&C GROUP
UNAUDITED COMBINED STATEMENTS OF INCOME
For the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
(Thousands of dollars)
Revenues:
Insurance revenues and commissions $497,084 $490,475 $447,022
Investment and other income 96,023 95,440 73,628
Net securities gains (losses) 6,444 668 (5,911)
-------- -------- --------
599,551 586,583 514,739
-------- -------- --------
Expenses:
Provision for insurance losses and
policy benefits 421,823 411,850 367,595
Amortization of deferred policy
acquisition costs 34,507 32,782 20,170
Salaries 32,590 30,706 26,224
Selling, general and other expenses 34,069 36,777 37,105
-------- -------- --------
522,989 512,115 451,094
-------- -------- --------
Income before income taxes 76,562 74,468 63,645
-------- -------- --------
Income taxes:
Current 30,835 16,797 16,598
Deferred (benefit) (4,287) 3,805 2,546
-------- -------- --------
26,548 20,602 19,144
-------- -------- --------
Net income $ 50,014 $ 53,866 $ 44,501
======== ======== ========
The accompanying notes are an integral part of
these combined financial statements.
F-2
<PAGE>
THE COLONIAL PENN P&C GROUP
UNAUDITED COMBINED 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 $ 50,014 $ 53,866 $44,501
Adjustments to reconcile net income to net
cash provided by operations:
Provision (benefit) for deferred income taxes (4,287) 3,805 2,546
Depreciation and amortization of property,
equipment and leasehold improvements 3,972 2,961 1,499
Other amortization 35,087 31,295 19,995
Net securities (gains) losses (6,444) (668) 5,911
Purchases of investments classified as trading (151,677) (78,399) (66,553)
Proceeds from sales of investments classified
as trading 149,211 86,320 59,569
Deferred policy acquisition costs incurred
and deferred (32,009) (36,937) (25,298)
Net change in:
Reinsurance receivables 6,011 6,422 14,369
Premiums receivable (15,552) (9,056) (14,324)
Other receivables 650 1,613 5,274
Prepaids and other assets 212 17,164 (1,780)
Trade payables and expense accruals 14,473 (1,893) 9,720
Other liabilities 5,387 (1,433) 4,596
Income taxes payable 4,696 (2,738) 9,880
Policy reserves (33,382) (4,406) (43,304)
Unearned premiums 18,872 10,958 16,559
--------- --------- --------
Net cash provided by operating activities 45,234 78,874 43,160
--------- --------- --------
Net cash flows from investing activities:
- ----------------------------------------
Acquisition of property, equipment
and leasehold improvements (4,655) (5,459) (8,507)
Investment in Colonial Penn Madison - - (37,539)
Purchases of investments
(other than short-term) (845,750) (648,313) (380,003)
Proceeds from maturities of investments 176,717 177,428 138,963
Proceeds from sales of investments 680,811 426,206 264,675
--------- --------- ---------
Net cash provided by (used for)
investing activities 7,123 (50,138) (22,411)
--------- --------- ---------
Net cash flows from financing activities:
- ----------------------------------------
Capital contributions 5,880 6,860 7,938
Dividends paid (30,000) (25,000) (40,333)
--------- --------- ---------
Net cash (used for) financing activities (24,120) (18,140) (32,395)
--------- --------- ---------
Net increase (decrease) in cash and
cash equivalents 28,237 10,596 (11,646)
Cash and cash equivalents at January 1, 78,201 67,605 79,251
--------- --------- ---------
Cash and cash equivalents at December 31, $ 106,438 $ 78,201 $ 67,605
========= ========= =========
Supplemental disclosures of cash flow
- -------------------------------------
information:
- -----------
Cash paid during the year for:
Interest $332 $281 $248
Income tax payments, net of refunds $ - $ - $ -
The accompanying notes are an integral part of
these combined financial statements.
F-3
<PAGE>
THE COLONIAL PENN P&C GROUP
UNAUDITED COMBINED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
For the years ended December 31, 1996, 1995 and 1994
Net
Common Unrealized
Shares Additional Gain (Loss)
$25 Par Paid-in On Retained
Value Capital Investments Earnings Total
------- ---------- ------------ -------- -----
(Thousands of dollars)
Balance, January 1, 1994 $4,200 $ 318,405 $ 12,412 $ (7,575) $327,442
Capital contribution 7,938 7,938
Net change in unrealized gain
(loss) on investments (34,387) (34,387)
Dividend paid (40,333) (40,333)
Net income 44,501 44,501
------ -------- ------- -------- --------
Balance, December 31, 1994 4,200 318,405 (21,975) 4,531 305,161
Capital contribution 6,860 6,860
Net change in unrealized gain
(loss) on investments 26,501 26,501
Dividend paid (25,000) (25,000)
Net income 53,866 53,866
------ -------- ------- -------- --------
Balance, December 31, 1995 4,200 318,405 4,526 40,257 367,388
Capital contribution 5,880 5,880
Net change in unrealized gain
(loss) on investments (5,024) (5,024)
Dividend paid (30,000) (30,000)
Net income 50,014 50,014
------ -------- ------- -------- --------
Balance, December 31, 1996 $4,200 $318,405 $ (498) $ 66,151 $388,258
====== ======== ======= ======== ========
The accompanying notes are an integral part of
these combined financial statements.
F-4
<PAGE>
THE COLONIAL PENN P&C GROUP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
1. Nature of Operations:
--------------------
The Colonial Penn P&C Group consists of Colonial Penn Insurance Company ("CPI"),
CP General Agency, Inc., Colonial Penn Madison Insurance Company, Colonial Penn
Franklin Insurance Company, Bayside Casualty Insurance Company and Bay Colony
Insurance Company. The Colonial Penn P&C Group's primary business is providing
private passenger automobile and homeowners insurance coverage to the mature
adult population. Substantially all of the Colonial Penn P&C Group's policies
are written for a one-year period.
The Colonial Penn P&C Group primarily markets its insurance products to the
standard and preferred risk market segments through direct response marketing
methods. Direct response marketing includes any form of marketing in which a
company and a customer deal directly with each other, rather than through an
insurance agent. The Colonial Penn P&C Group has become a low cost provider of
its products to its niche markets, enabling it to charge competitive rates.
In recent years, the Colonial Penn P&C Group has acquired blocks of assigned
risk business from other insurance companies relating to private passenger
automobile insurance. In addition to the premiums paid by policyholders, the
Colonial Penn P&C Group also receives fee income from the insurance company from
which the business was acquired.
The Colonial Penn P&C Group is an indirect wholly-owned subsidiary of Leucadia
National Corporation ("Leucadia"). On June 30, 1997, Leucadia signed an
agreement to sell the Colonial Penn P&C Group to General Electric Capital
Corporation ("GECC") 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 transaction is subject to Leucadia shareholder and regulatory approval and
is expected to close during the fourth quarter of 1997.
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) Combination Policy and Basis of Presentation: The Colonial Penn P&C Group
--------------------------------------------
unaudited combined financial statements include the historical accounts of CPI
and its subsidiaries (excluding Intramerica Life Insurance Company ("ILIC") and
the health business), and are combined with the accounts of CP General Agency,
Inc., which is an affiliate of the Colonial Penn P&C Group but not a subsidiary.
Such financial statements represent the historical financial position and
results of operations of the entities which are being purchased by GECC. Prior
to the sale to GECC, the stock of ILIC (CPI's 98% owned subsidiary) will be
distributed to CPI's parent. Also prior to the sale, the Colonial Penn P&C
Group's health business will be reinsured to an affiliate of CPI. Accordingly,
the assets, liabilities and results of operations of ILIC and the health
business are excluded from these combined financial statements.
All significant intercompany transactions and balances between members of the
Colonial Penn P&C Group have been eliminated. All significant intercompany
transactions between members of the Colonial Penn P&C Group and other Leucadia
affiliates have not been eliminated but have been disclosed in Note 12.
F-5
<PAGE>
2. Significant Accounting Policies, continued:
------------------------------------------
(c) Statements of Cash Flows: The Colonial Penn P&C Group 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 $101,119,000 and $75,005,000 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 shareholder's equity, net of taxes. Held to maturity
investments are made with the intention of holding such securities to maturity,
which the Colonial Penn P&C Group 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 Unaudited Combined Statements of
Income. The cost of securities sold is based on average cost.
(e) Property, Equipment and Leasehold Improvements: Property, equipment and
----------------------------------------------
leasehold improvements are stated at cost, net of accumulated depreciation and
amortization ($10,023,000 and $6,051,000 at December 31, 1996 and 1995,
respectively). Depreciation and amortization are provided principally on the
straight-line method over the estimated useful lives of the assets or, if less,
the term of the underlying lease.
(f) Income Recognition from Insurance Operations: Premiums on property and
--------------------------------------------
casualty insurance products are recognized as revenues over the term of the
policy using the monthly pro rata basis.
(g) Policy Acquisition Costs: Policy acquisition costs principally consist of
------------------------
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 Colonial Penn P&C Group
-----------
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 Colonial Penn P&C Group is
exposed to natural disasters, principally Florida, California and the East
Coast. Reinsurance contracts do not necessarily legally relieve the Colonial
Penn P&C Group from its obligations to policyholders.
Reinsurance recoverables are reported as assets net of provisions for
uncollectible amounts. Premiums earned and other underwriting expenses are
stated net of reinsurance.
(i) Policy Reserves and Unearned Premiums: Liabilities for unpaid losses and
-------------------------------------
loss adjustment expenses 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.
F-6
<PAGE>
2. Significant Accounting Policies, continued:
-------------------------------
(j) Income Taxes: The Colonial Penn P&C Group 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.
In accordance with a tax sharing agreement with Leucadia, each member of the
Colonial Penn P&C Group pays to Leucadia its current taxes due calculated on a
separate return basis.
3. Insurance Operations:
--------------------
The changes in deferred policy acquisition costs were as follows (in thousands):
1996 1995 1994
---- ---- ----
Balance, January 1, $ 17,567 $ 13,412 $ 8,284
Policy acquisition costs incurred
and deferred 32,009 36,937 25,298
Amortization of deferred
acquisition costs (34,507) (32,782) (20,170)
-------- -------- --------
Balance, December 31, $ 15,069 $ 17,567 $ 13,412
======== ======== ========
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 $545,664 $524,024 $517,166 $494,020 $451,840 $434,245
Assumed 2,032 4,797 10,785 21,041 28,577 29,764
Ceded (31,284) (31,737) (23,668) (24,586) (16,572) (16,987)
-------- -------- -------- -------- -------- --------
Net $516,412 $497,084 $504,283 $490,475 $463,845 $447,022
======== ======== ======== ======== ======== ========
Recoveries recognized on reinsurance contracts were $11,765,000 in 1996,
$9,696,000 in 1995 and $10,737,000 in 1994.
F-7
<PAGE>
3. Insurance Operations, continued:
--------------------
Net income and statutory surplus as determined in accordance with statutory
accounting principles as reported to the domiciliary state of the Colonial Penn
P&C Group's insurance subsidiaries are as follows (in thousands):
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Net income $51,370 $61,567 $44,598
At December 31,
---------------
1996 1995 1994
---- ---- ----
Statutory surplus $340,743 $322,139 $288,738
Included in statutory net income are dividends received from ILIC of $5,880,000,
$6,860,000 and $7,938,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. Included in statutory surplus is the Colonial Penn P&C Group's
investment in ILIC of $24,500,000, $29,300,000 and $35,900,000 as of December
31, 1996, 1995 and 1994, respectively. As described in Note 2, ILIC is not
included in these combined financial statements.
The Colonial Penn P&C Group is subject to regulatory restrictions which limit
the amount of cash and other distributions available to Leucadia without
regulatory approval. At December 31, 1996, no amounts could be distributed to
Leucadia without regulatory approval.
In December 1995, the Colonial Penn P&C Group 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 Colonial Penn P&C Group paid the settlement amount during the first quarter
of 1996.
The Colonial Penn P&C Group is 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 Colonial Penn P&C Group relies upon standard actuarial ultimate loss
projection techniques to obtain estimates of liabilities for losses and LAE.
These projections include the extrapolation of both losses paid and incurred by
business line and accident year and implicitly consider the impact of inflation
and claims settlement patterns upon ultimate claim costs based upon historical
patterns. In addition, methods based upon average loss costs, reported claim
counts and pure premiums are reviewed in order to obtain a range of estimates
for setting the reserve levels. For further input, changes in operations in
pertinent areas including underwriting standards, product mix, claims management
and legal climate are periodically reviewed.
F-8
<PAGE>
3. Insurance Operations, continued:
---------------------
In the following table, the liability for losses and LAE of the Colonial Penn
P&C Group is reconciled for each of the three years ended December 31, 1996.
Included therein are current year data and prior year development.
RECONCILIATION OF LIABILITY FOR LOSSES AND
LOSS ADJUSTMENT EXPENSES
1996 1995 1994
---- ---- ----
(In thousands)
Net liability for losses
and LAE at
beginning of year $523,589 $517,210 $535,165
-------- -------- --------
Provision for losses and
LAE for claims occurring
in the current year 461,630 466,578 432,697
Decrease in estimated
losses and LAE for
claims occurring in
prior years (36,814) (50,848) (61,723)
-------- -------- --------
Total incurred losses
and LAE 424,816 415,730 370,974
-------- -------- --------
Reclassification of
uncollectible
reinsurance reserves
due to commutations-
prior years 2,947 - 15,528
-------- -------- --------
Losses and LAE payments for
claims occurring during:
Current year 211,497 196,150 192,140
Prior years 237,177 213,201 212,317
-------- -------- --------
448,674 409,351 404,457
-------- -------- --------
502,678 523,589 517,210
Reserve deducted above for
reinsurance not considered
collectible 14,511 22,432 26,547
-------- -------- -------
517,189 546,021 543,757
Reinsurance
recoverable 61,599 66,149 72,819
-------- -------- -------
Liability for losses and
LAE at end of year as
reported in financial
statements $578,788 $612,170 $616,576
======== ======== ========
The Colonial Penn P&C Group's liability for losses and LAE as of December 31,
1996 was $518,843,000 determined in accordance with SAP and $578,788,000
determined in accordance with GAAP. The difference principally relates to
liabilities assumed by reinsurers, which are not deducted from GAAP liabilities.
F-9
<PAGE>
4. 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):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Held to maturity: --------- ---------- ---------- ---------
1996
- ----
United States Government
agencies and authorities
bonds and notes $ 22,277 $ 246 $ (200) $ 22,323
======== ====== ======= ========
1995
- ----
United States Government
agencies and authorities
bonds and notes $ 19,100 $ 536 $ (85) $ 19,551
======== ====== ======= ========
Available for sale:
1996
- ----
Bonds and notes:
United States Government
agencies and authorities $696,201 $3,394 $(4,921) $694,674
States, municipalities
and political subdivisions 11,879 33 (5) 11,907
Public utilities 16,010 36 (152) 15,894
All other corporates 182,181 1,367 (715) 182,833
-------- ------ ------- --------
Total fixed maturities 906,271 4,830 (5,793) 905,308
-------- ------ ------- --------
Equity securities 326 - - 326
-------- ------ ------- --------
$906,597 $4,830 $(5,793) $905,634
======== ====== ======= ========
1995
- ----
Bonds and notes:
United States Government
agencies and authorities $683,083 $4,915 $(1,296) $686,702
States, municipalities
and political subdivisions 981 43 - 1,024
Foreign governments 1,209 51 - 1,260
Public utilities 20,944 268 (15) 21,197
All other corporates 211,587 3,349 (672) 214,264
-------- ------ ------- --------
Total fixed maturities 917,804 8,626 (1,983) 924,447
-------- ------ ------- --------
Equity securities 1,000 320 - 1,320
-------- ------ ------- --------
$918,804 $8,946 $(1,983) $925,767
======== ====== ======= ========
F-10
<PAGE>
4. Investments, continued:
-----------
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 because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
Held to Maturity Available for Sale
------------------ ----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ----------
(In thousands)
Due in one year or less $ 4,238 $ 4,230 $ 52,782 $ 52,847
Due after one year
through five years 16,923 16,870 465,094 462,250
Due after five years
through ten years - - 127,121 126,972
Due after ten years 1,116 1,223 15,456 17,220
------- ------- -------- --------
22,277 22,323 660,453 659,289
Mortgage-backed securities - - 245,818 246,019
------- ------- -------- --------
$22,277 $22,323 $906,271 $905,308
======= ======= ======== ========
At December 31, 1996 and 1995 securities with book values aggregating
$21,161,000 and $24,121,000, 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 11,996 12,826 12,826
Options 600 873 873
------- ------- -------
Total trading securities $29,317 $30,655 $30,655
======= ======= =======
1995
- ----
Fixed maturities -
Corporate bonds and notes $13,185 $13,599 $13,599
Equity securities 8,963 9,609 9,609
Options 395 496 496
------- ------- -------
Total trading securities $22,543 $23,704 $23,704
======= ======= =======
F-11
<PAGE>
5. Trade Payables and Expense Accruals:
-----------------------------------
A summary of trade payables and expense accruals at December 31, 1996 and 1995
is as follows (in thousands):
1996 1995
---- ----
Payables related to securities $23,560 $22,180
Trade and drafts payable 9,654 9,511
Accrued compensation, severance and other
employee benefits 9,679 8,153
Taxes, other than income 6,635 7,567
Amounts withheld on account of others 17,163 2,837
Other 5,127 6,378
------- -------
$71,818 $56,626
======= =======
6. 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 $5,282 $3,601 $(4,837)
Net unrealized gain (loss) on trading
securities 948 303 (153)
Net realized gains (losses) on equity and other
securities 214 (3,236) (921)
------ ------ -------
$6,444 $ 668 $(5,911)
====== ====== =======
Proceeds from sales of investments classified as available for sale were
$680,811,000, $427,278,000 and $264,678,000 during 1996, 1995 and 1994,
respectively. Gross gains of $6,519,000, $1,323,000 and $6,158,000 and gross
losses of $2,875,000, $1,972,000 and $11,667,000 were realized on these sales
during 1996, 1995 and 1994, respectively.
7. 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):
1996 1995 1994
---- ---- ----
Interest on short-term investments $ 7,381 $ 7,057 $ 4,545
Interest on fixed maturities 57,731 55,495 49,892
Service fee income 30,301 32,374 18,956
Other 610 514 235
------- ------- -------
$96,023 $95,440 $73,628
======= ======= =======
Taxes, other than income or payroll, included in operations amounted to
$14,584,000 (including $11,623,000 of premium taxes) for the year ended December
31, 1996, $15,263,000 (including $11,605,000 of premium taxes) for the year
ended December 31, 1995 and $15,126,000 (including $10,785,000 of premium taxes)
for the year ended December 31, 1994.
Advertising costs amounted to $8,213,000, $6,294,000 and $4,566,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
F-12
<PAGE>
8. 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 $41,107 $39,772
Other accrued liabilities 350 962
Employee benefits and compensation 7,783 8,339
Unrealized (gain) loss on investments 268 (2,437)
Policy acquisition costs (3,632) (6,148)
Tax loss carryforwards 5,092 1,164
Other, net 594 2,181
------- -------
$51,562 $43,833
======= =======
The Colonial Penn P&C Group 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
---- ---- ----
Federal income taxes:
Current $30,835 $16,797 $16,598
Deferred (benefit) (4,287) 3,805 2,546
------- ------- -------
$26,548 $20,602 $19,144
======= ======= =======
The table below reconciles expected statutory federal income tax to actual
income tax expense (in thousands):
1996 1995 1994
---- ---- ----
Expected federal income tax $26,797 $26,064 $22,276
Tax exempt income (142) (495) (1,183)
Recognition of additional tax benefits - (4,000) -
Other (107) (967) (1,949)
------- ------- -------
Actual income tax expense $26,548 $20,602 $19,144
======= ======= =======
At December 31, 1996 the Colonial Penn P&C Group had tax loss carryforwards,
which have been reflected in the deferred tax asset after applying the statutory
federal income tax rate, that expire in 2010.
9. Pension Plans and Postretirement Benefits:
-----------------------------------------
The Colonial Penn P&C Group participates in defined benefit pension plans
maintained by a parent company covering employees of certain units who meet age
and service requirements. Benefits are generally based on final average salary
and years of service. The Colonial Penn P&C Group funds its obligation to the
pension plans in amounts sufficient to satisfy minimum ERISA funding
requirements of those plans.
F-13
<PAGE>
9. Pension Plans and Postretirement Benefits, continued:
------------------------------------------
Pension expense charged to operations included the following components (in
thousands):
1996 1995 1994
---- ---- ----
Service cost $1,661 $1,875 $1,957
Interest cost 2,196 3,307 2,575
Actual return on plan assets (1,607) (4,554) 1,007
Net amortization and deferral (20) 1,536 (3,446)
------ ------ ------
Net pension expense $2,230 $2,164 $2,093
====== ====== ======
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 $41,996 $45,264
Non-vested 785 754
------- ------
$42,781 $46,018
======= =======
Projected benefit obligation $56,314 $56,293
Plan assets at fair value 49,025 45,678
------- -------
Funded status (7,289) (10,615)
Unrecognized prior service cost 2,945 3,291
Liability recorded by affiliates 2,122 3,819
Unrecognized net (gain) from
experience
differences and assumption changes (3,667) (247)
------- -------
Accrued pension liability $(5,889) $(3,752)
======= =======
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% at December 31,
1996 and 1995. The assumed long-term rate of return on plan assets was 7.5% at
December 31, 1996 and 1995.
The Colonial Penn P&C Group also participates in defined contribution pension
plans maintained by a parent company covering certain employees. Contributions
and costs are a percent of each covered employee's salary. Amounts charged to
expense related to such plans were $714,000, $680,000 and $667,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
The Colonial Penn P&C Group provides certain health care and other benefits to
certain retired employees under plans which are currently unfunded. The Colonial
Penn P&C Group pays the cost of postretirement benefits as they are incurred.
Amounts charged to expense (principally interest) related to such benefits were
$322,000 in 1996, $355,000 in 1995 and $436,000 in 1994.
F-14
<PAGE>
9. 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 $3,906 $4,138
Fully eligible active plan participants 636 631
------ ------
Accumulated postretirement benefit obligation 4,542 4,769
Unrecognized prior service cost - -
Unrecognized net gain from experience
differences and assumption changes 782 338
------ ------
Accrued postretirement benefit obligation $5,324 $5,107
====== ======
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 8.0% for 1996 and 9.0% for 1995,
declining to an ultimate rate of 6.0% 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 $365,000 and $381,000, respectively. The effect of this change on the
aggregate of service and interest cost for 1996 and 1995 would be immaterial.
10. Commitments:
-----------
The Colonial Penn P&C Group rents 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
$5,985,000 in 1996, $5,744,000 in 1995 and $5,596,000 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 - $3,897; 1998 - $3,584; 1999 - $3,308; 2000 -
$1,525; 2001 - $902; and thereafter - $2,723. Future minimum sublease rental
income is not material.
11. Litigation:
----------
The Colonial Penn P&C Group 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
combined financial position of the Colonial Penn P&C Group or its combined
results of operations.
12. Related Party Transactions:
--------------------------
The Colonial Penn P&C Group performs data processing services for certain of its
affiliates. Amounts charged for such services and included in investment and
other income were approximately $6,566,000, $6,653,000 and $6,756,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
From time to time the Colonial Penn P&C Group has purchased marketable
securities from affiliates at the then current fair value. Amounts paid to
affiliates for securities totaled $9,336,000 and $12,875,000 for the years ended
December 31, 1996 and 1995, respectively.
F-15
<PAGE>
12. Related Party Transactions, continued:
--------------------------
During 1995 the Colonial Penn P&C Group acquired debt securities of an affiliate
of Leucadia at par for $21,737,000. Investment income recorded on such
securities amounted to $1,127,000 and $1,267,000 for the years ended December
31, 1996 and 1995, respectively.
On June 30, 1994, the Colonial Penn P&C Group purchased the stock of Colonial
Penn Madison from an indirect subsidiary of Leucadia for approximately
$51,295,000 in cash and accounted for the acquisition as a purchase. At the time
of acquisition, Colonial Penn Madison did not have any material current
operations or premium volume and its net assets consisted primarily of
investments in government securities. The amount paid to Leucadia included a
small premium above the fair value of the underlying tangible net assets for the
value of the Company's insurance licenses, which premium was not material.
For each of the three years in the period ended December 31, 1996, the Colonial
Penn P&C Group received cash dividends from ILIC. As more fully discussed in
Note 2, ILIC is not part of the companies being purchased by GECC and its
assets, liabilities and results of operations have not been included in these
combined financial statements. In order not to distort the results of operations
of the Colonial Penn P&C Group, these cash dividends have been reflected in the
combined financial statements as capital contributions. Accordingly, cash
dividends from ILIC of $5,880,000, $6,860,000 and $7,938,000 for the years ended
December 31, 1996, 1995 and 1994, respectively, have been reflected as capital
contributions in the accompanying combined statements of shareholder's equity.
As reflected in the accompanying combined statements of shareholder's equity,
the Colonial Penn P&C Group paid cash dividends to its parent of $30,000,000,
$25,000,000 and $40,333,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
13. Fair Value of Financial Instruments:
-----------------------------------
The Colonial Penn P&C Group's only material financial instruments are: cash and
cash equivalents, for which the carrying amount approximates fair value and
investments, for which the fair values of marketable equity securities and fixed
maturity securities are substantially based on quoted market prices, as
disclosed in Note 4.
F-16
<PAGE>
THE COLONIAL PENN P&C GROUP
UNAUDITED COMBINED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
(Thousands of dollars)
<S> <C> <C>
Net cash flows from operating activities:
- -----------------------------------------
Net income $ 21,016 $ 23,922
Adjustments to reconcile net income to net
cash provided by operations:
(Benefit) for deferred income taxes (2,635) (2,485)
Depreciation and amortization of property,
equipment and leasehold improvements 2,300 1,917
Other amortization 15,425 18,905
Net securities (gains) (1,419) (1,462)
Purchases of investments classified as trading (71,306) (83,279)
Proceeds from sales of investments classified
as trading 74,264 81,092
Deferred policy acquisition costs incurred and deferred (16,150) (17,114)
Net change in:
Reinsurance receivables 2,473 13,620
Premiums receivable (22,203) (34,275)
Other receivables (70) 1,176
Prepaids and other assets (16) (1,665)
Trade payables and expense accruals (4,798) (4,425)
Other liabilities 6,563 21,549
Income taxes payable (1,257) 5,203
Policy reserves 4,205 (30,108)
Unearned premiums 23,209 21,535
-------- --------
Net cash provided by operating activities 29,601 14,106
-------- --------
Net cash flows from investing activities:
- -----------------------------------------
Acquisition of property, equipment
and leasehold improvements (3,094) (1,357)
Purchases of investments (other than short-term) (363,806) (353,611)
Proceeds from maturities of investments 84,849 83,239
Proceeds from sales of investments 235,877 306,204
-------- --------
Net cash provided by (used for)
investing activities (46,174) 34,475
-------- --------
Net cash flows from financing activities:
- -----------------------------------------
Capital contribution - 5,880
-------- --------
Net cash provided by financing activities - 5,880
-------- --------
Net increase (decrease) in cash and
cash equivalents (16,573) 54,461
Cash and cash equivalents at January 1, 106,438 78,201
-------- --------
Cash and cash equivalents at June 30, $ 89,865 $132,662
======== ========
Supplemental disclosures of cash flow information:
- --------------------------------------------------
Cash paid during the year for:
Interest $142 $184
Income tax payments, net of refunds $ - $ -
</TABLE>
F-17
<PAGE>
PROXY
LEUCADIA NATIONAL CORPORATION
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR ANNUAL
MEETING OF SHAREHOLDERS, November 3, 1997 AT 10:00 A.M..
The undersigned shareholder of Leucadia National Corporation (the
"Company") hereby appoints Ian M. Cumming, Joseph S. Steinberg and Thomas E.
Mara and each of them, as attorneys and proxies, each with power of substitution
and revocation, to represent the undersigned at the Annual Meeting of
Shareholders of Leucadia National Corporation to be held at Credit Suisse First
Boston, 11 Madison Avenue, Level 2B Auditorium, New York, New York on November
3, 1997 at 10:00 a.m., and at any adjournment or postponement thereof, with
authority to vote all shares held or owned by the undersigned in accordance with
the directions indicated herein.
Receipt of the Notice of Annual Meeting of Shareholders dated
October 3, 1997, the Proxy Statement furnished herewith, and a copy of the
Annual Report to Shareholders for the year ended December 31, 1996 is hereby
acknowledged.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER
DIRECTED BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR ITEMS 1, 2, 3 AND 4 AND PURSUANT TO ITEM 5.
(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE)
<PAGE>
ITEM 1. Approval and adoption of the Purchase Agreement (as described in the
Proxy Statement) pursuant to which, among other things, the Company's
subsidiary, Colonial Penn Holdings Inc. has agreed to sell its subsidiary
Colonial Penn Insurance Company and certain other assets to General Electric
Capital Corporation.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR SUCH APPROVAL.
ITEM 2. Election of Directors. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR
THE NOMINEES LISTED BELOW.
FOR all nominees listed WITHHOLD AUTHORITY to NOMINEES: IAN M. CUMMING,
on the right (except as vote for all nominees PAUL M. DOUGAN, LAWRENCE
marked to the contrary listed to the right. D. GLAUBINGER, JAMES E.
hereon). JORDAN, JESSE CLYDE
NICHOLS, III AND JOSEPH S.
[ ] [ ] STEINBERG.
(Instructions: To withhold
authority to vote for any
individual nominee write
that nominee's name in the
space provided below.)
---------------------------
ITEM 3. Approval of the Senior Executive Annual Incentive Bomus Plan.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR SUCH APPROVAL.
ITEM 4. Ratification of the selection of Coopers & Lybrand L.L.P. as
independent auditors of Leucadia for 1996.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR SUCH RATIFICATION.
ITEM 5. In their discretion, the Proxies are authorized to vote upon such other
business as may properly be presented to the meeting or any adjournment thereof.
P DATED: _____________, 1997
R ---------------------------------
(SIGNATURE)
O
---------------------------------
X (SIGNATURE IF HELD JOINTLY)
Y THE SIGNATURE SHOULD AGREE WITH
THE NAME ON YOUR STOCK CERTIFICATE.
IF ACTING AS ATTORNEY, EXECUTOR,
ADMINISTRATOR, TRUSTEE, GUARDIAN,
ETC., YOU SHOULD SO INDICATE WHEN
SIGNING. IF THE SIGNER IS A
CORPORATION, PLEASE SIGN THE FULL
CORPORATE NAME BY DULY AUTHORIZED
OFFICER. IF SHARES ARE HELD JOINTLY,
EACH SHAREHOLDER SHOULD SIGN.
<PAGE>
ANNEX A
================================================================================
PURCHASE AGREEMENT
DATED AS OF JUNE 30, 1997
Among
GENERAL ELECTRIC CAPITAL CORPORATION,
LEUCADIA NATIONAL CORPORATION,
CHARTER NATIONAL LIFE INSURANCE COMPANY,
COLONIAL PENN GROUP, INC.
and
COLONIAL PENN HOLDINGS INC.
with respect to all of the
outstanding capital stock of
COLONIAL PENN INSURANCE COMPANY, AND
CP GENERAL AGENCY, INC.
================================================================================
NYFS04...:\30\76830\0227\1980\AGR5087R.42N
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
SALE OF SHARES AND CLOSING ................................................ 2
1.1 Purchase and Sale of Shares.................................... 2
1.2 Purchase Price................................................. 2
1.3 Closing........................................................ 2
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE SELLERS.............................. 3
2.1 Organization, Standing and Corporate Power..................... 3
2.2 Capital Structure.............................................. 4
2.3 Authority; Noncontravention.................................... 5
2.4 Financial Statements........................................... 6
2.5 No Undisclosed Liabilities..................................... 7
2.6 Absence of Certain Changes or Events........................... 7
2.7 Taxes.......................................................... 10
2.8 Absence of Changes in Benefit Plans............................ 13
2.9 Benefit Plans.................................................. 13
2.10 Compliance with Applicable Laws................................ 16
2.11 Litigation..................................................... 18
2.12 Assets and Properties.......................................... 19
2.13 Contracts...................................................... 20
2.14 Insurance...................................................... 21
2.15 Brokers and Advisors........................................... 22
2.16 Intellectual Property.......................................... 22
2.17 Insurance and Reinsurance...................................... 23
2.18 Actuarial Studies.............................................. 24
2.19 Threats of Cancellation........................................ 25
2.20 Labor Matters.................................................. 25
2.21 Person Authorized to Act....................................... 25
2.22 Accuracy of Information........................................ 26
2.23 Environmental Matters.......................................... 26
2.24 Net Worth; Statutory Surplus; No Dividends..................... 28
2.25 No Regulatory Disqualifiers.................................... 28
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER............................ 28
3.1 Organization, Good Standing and Corporate Power................ 28
3.2 Authority; Noncontravention.................................... 29
3.3 Litigation..................................................... 30
3.4 Brokers........................................................ 30
3.5 Purchase for Investment........................................ 30
A-(i)
<PAGE>
3.6 No Regulatory Disqualifiers.................................... 30
3.7 Accuracy of Information........................................ 31
3.8 Funding........................................................ 31
ARTICLE IV
ADDITIONAL AGREEMENTS...................................................... 31
4.1 Access to Information; Confidentiality......................... 31
4.2 Commercially Reasonable Efforts; Structuring
Cooperation.................................................... 33
4.3 Public Announcements........................................... 33
4.4 Consents, Approvals and Filings................................ 33
4.5 Tax Matters.................................................... 34
4.6 Employee Benefit Matters....................................... 43
4.7 Intercompany Agreements........................................ 46
4.8 Closing Date Cash Distributions................................ 46
4.9 Hiring of Employees............................................ 47
4.10 Leucadia Stock Options......................................... 47
4.11 Resignations of Directors...................................... 47
4.12 Non-Competition Agreement...................................... 47
4.13 Conseco Contract............................................... 49
4.14 Intramerica.................................................... 50
4.15 Trademark Assignment or Limited License........................ 50
4.16 Closing Prior to Conseco Transaction........................... 51
4.17 Monroe Property................................................ 51
4.18 Commercial Lines Reinsurance................................... 52
4.19 Closing Date Audit............................................. 52
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS PRIOR TO CLOSING................. 52
5.1 Conduct of Business by the Companies........................... 52
5.2 Leucadia Shareholder Meeting................................... 55
5.3 Other Actions.................................................. 56
5.4 No Solicitation................................................ 56
ARTICLE VI
CONDITIONS PRECEDENT....................................................... 58
6.1 Conditions to Each Party's Obligation To
Consummate Transactions........................................ 58
6.2 Conditions to Obligations of the Purchaser..................... 59
6.3 Conditions to Obligations of the Sellers....................... 60
A-(ii)
<PAGE>
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER.......................................... 61
7.1 Termination.................................................... 61
7.2 Effect of Termination.......................................... 61
ARTICLE VIII
SURVIVAL OF PROVISIONS..................................................... 62
8.1 Survival....................................................... 62
ARTICLE IX
INDEMNIFICATION............................................................ 63
9.1 Indemnification by Sellers..................................... 63
9.2 Indemnification by the Purchaser............................... 63
9.3 Special Indemnification by Sellers............................. 63
9.4 Limitations on Indemnification................................. 64
9.5 Notice of Defense of Claims.................................... 66
9.6 FPL Agreement.................................................. 67
9.7 Purchase Price Adjustment...................................... 68
ARTICLE X
NOTICES.................................................................... 68
10.1 Notices........................................................ 68
ARTICLE XI
MISCELLANEOUS.............................................................. 70
11.1 Entire Agreement............................................... 70
11.2 Expenses....................................................... 70
11.3 Counterparts................................................... 70
11.4 No Third Party Beneficiary..................................... 70
11.5 Governing Law.................................................. 70
11.6 Amendments and Supplements..................................... 71
11.7 Assignment; Binding Effect..................................... 71
11.8 Enforcement.................................................... 71
11.9 Headings, Gender, etc.......................................... 71
11.10 Invalid Provisions............................................ 72
A-(iii)
<PAGE>
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT (this "Agreement") is made and entered into this
30th day of June, 1997 by and among General Electric Capital Corporation, a New
York corporation (the "Purchaser"), Leucadia National Corporation, a New York
corporation ("Leucadia"), Charter National Life Insurance Company, a Missouri
corporation and wholly-owned subsidiary of Leucadia ("Charter"), Colonial Penn
Group, Inc., a Delaware corporation and wholly-owned subsidiary of Charter
("CPG") and Colonial Penn Holdings Inc., a Delaware corporation and wholly-owned
subsidiary of CPG ("CP Holdings", and together with Leucadia, Charter and CPG,
the "Sellers").
WHEREAS, Leucadia, through wholly-owned subsidiaries, owns all of the
issued and outstanding shares of the common stock, par value $1.00 per share of
CP Holdings and CP Holdings owns all of the issued and outstanding shares of
common stock, par value $25.00 per share ("CPI Common Stock") of Colonial Penn
Insurance Company, a Pennsylvania corporation ("CPI");
WHEREAS, CP Holdings owns all of the issued and outstanding shares of the
common stock, par value $1.00 per share ("CPGA Common Stock") of CP General
Agency, Inc. ("CPGA");
WHEREAS, Leucadia and CP Holdings desire to sell all of the issued and
outstanding shares of CPI Common Stock and CPGA Common Stock (collectively, the
"Shares") to the Purchaser, and the Purchaser desires to purchase all of the
issued and outstanding Shares from CP Holdings on the terms and subject to the
conditions set forth in this Agreement;
WHEREAS, Leucadia indirectly owns all of the outstanding capital stock of
Empire Insurance Company, a New York corporation ("Empire") that is a property
and casualty insurance company and Purchaser wishes to assure that Leucadia and
Empire will not compete with CPI's personal lines automobile insurance
operations in the manner and to the extent contemplated in this Agreement; and
WHEREAS, pursuant to a Purchase Agreement dated as of April 30, 1997 among
Conseco, Inc. ("Conseco"), Leucadia, and Leucadia's subsidiaries, Charter , CPG,
CP Holdings, Leucadia Financial Corporation, Intramerica Life Insurance Company
("Intramerica"), Colonial Penn Franklin Insurance Company ("CPF")
A-1
<PAGE>
and CPI with respect to all of the outstanding capital stock of Colonial Penn
Life Insurance Company ("CPL"), Providential Life Insurance Company and certain
other assets (as such agreement may be amended from time to time, the "Conseco
Contract"), Leucadia and certain of its subsidiaries have agreed to sell (or
reinsure) to Conseco the non-variable life insurance business conducted by CPL
and Intramerica and certain accident and health insurance business conducted by
CPF and CPI (the "Conseco Transaction");
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
ARTICLE I
SALE OF SHARES AND CLOSING
1.1 Purchase and Sale of Shares. Subject to the terms and conditions, and
in reliance upon the representations and warranties, set forth in this
Agreement, CP Holdings agrees to sell all of the issued and outstanding Shares
to the Purchaser, and the Purchaser agrees to purchase all of the issued and
outstanding Shares from CP Holdings.
1.2 Purchase Price. The consideration for the Shares will equal (a)
$950,000,000, plus an aggregate of $156,164 per calendar day from and including
January 1, 1997 through and including the Closing Date (as defined herein), and
(b) such additional consideration as may be required to be paid by the Purchaser
hereunder pursuant to Section 4.8 hereof (collectively, the "Purchase Price").
1.3 Closing.
(a) Unless this Agreement shall have been terminated and the transactions
contemplated hereby shall have been abandoned pursuant to Section 7.1, and
subject to the satisfaction or waiver of the conditions set forth in Article VI,
the closing of the transactions contemplated hereby (the "Closing") shall take
place at 10:00 a.m., New York time, on the second business day after
satisfaction or waiver of the conditions set forth in Article VI (the "Closing
Date"), at the offices of Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New
York, New York 10153, unless another date, time or place is agreed to in writing
by the Purchaser and the Sellers; provided, that if the Closing would but for
this provision occur during the two weeks immediately preceding the end of a
calendar quarter, the Closing instead
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shall take place on the first business day following the end of such calendar
quarter.
(b) At the Closing, the Purchaser shall pay the Purchase Price to CP
Holdings by wire transfer of immediately available funds to such account(s) as
CP Holdings specifies to the Purchaser and shall deliver to the Sellers such
documents and instruments required to be executed and delivered by the Purchaser
under the terms of this Agreement.
(c) At the Closing, CP Holdings shall execute and deliver to the Purchaser
(i) certificates representing all the issued and outstanding Shares, accompanied
by duly executed stock powers, and (ii) such documents and instruments required
to be delivered by the Sellers under the terms of this Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE SELLERS
Each of the Sellers hereby represents and warrants to the Purchaser as
follows:
2.1 Organization, Standing and Corporate Power. (a) Each of the Sellers,
CPI, the subsidiaries of CPI listed in Section 2.1 of the Seller Disclosure
Schedule (the "Subsidiaries"), and CPGA (the Subsidiaries, together with CPI and
CPGA are referred to herein as the "Companies") is a corporation duly organized,
validly existing, and in good standing under the laws of the jurisdiction set
forth opposite such entity's name in Section 2.1 of the Seller Disclosure
Schedule and has the requisite corporate power and authority to own, lease or
otherwise hold its properties and assets and to carry on its business as now
being conducted. Each of the Sellers and the Companies is duly qualified or
licensed to do business and is in good standing in each jurisdiction in which
the nature of its business or the ownership or leasing of its assets makes such
qualification or licensing necessary, except where the failure to be so
qualified or licensed and in good standing does not have and could not
reasonably be expected to have a material adverse effect on (i) the business,
financial condition or results of operations of the Companies, taken as a whole,
(ii) the ability of the Sellers to consummate the transactions contemplated by
this Agreement or (iii) the validity or enforceability of this Agreement (each,
a "Company Material Adverse Effect"). The Sellers have delivered or made
available to the Purchaser complete and correct copies of the articles or
certificate of incorporation and bylaws of each of the Sellers and each of the
Companies, in each case as amended
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through the date hereof. The minute books of the Companies accurately reflect in
all material respects all formal actions taken at all meetings and all consents
in lieu of meetings of the stockholders of the Companies since August 1991 (or
the date of such Company's incorporation, if later) and all formal actions taken
at all meetings and all consents in lieu of meetings of the boards of directors
of the Companies and all committees thereof since August 1991 (or the date of
such Company's incorporation, if later). True and complete copies of such minute
books have previously been made available for inspection by the Purchaser. The
"Seller Disclosure Schedule" is the disclosure schedule dated the date hereof
and delivered concurrently herewith by the Sellers to the Purchaser.
(b) Except as set forth in Section 2.1 of the Seller Disclosure Schedule,
none of the Companies owns, directly or indirectly, 5% or more of the
outstanding voting securities of or otherwise possesses, directly or indirectly,
the power to direct or cause the direction of the management or policies of any
person.
2.2 Capital Structure.
(a) Section 2.2 of the Seller Disclosure Schedule contains a true and
complete list of the authorized, issued, and outstanding capital stock of each
of the Companies.
(b) All issued and outstanding shares of capital stock of CPI and CPGA are
duly authorized, validly issued, fully paid, nonassessable and not subject to
preemptive rights, and are owned beneficially and of record by CP Holdings, free
and clear of any lien, security interest, mortgage, charge, pledge, claim,
encumbrance or restriction of any kind or nature whatsoever (a "Lien"), other
than those Liens disclosed in Section 2.2 of the Seller Disclosure Schedule. The
delivery to the Purchaser of the Shares (upon payment therefor by the Purchaser)
pursuant to this Agreement will transfer to the Purchaser good and marketable
title thereto, free and clear of all Liens. Except as disclosed in Section 2.2
of the Seller Disclosure Schedule, all issued and outstanding shares of capital
stock of, or other ownership interests in, each of the Subsidiaries are duly
authorized, validly issued, fully paid, non-assessable and are not subject to
preemptive rights, and are owned directly or indirectly by CPI, free and clear
of all Liens.
(c) No bonds, debentures, notes or other indebtedness of any of the
Companies having the right to vote (or convertible into, or exchangeable for,
securities having the right to vote) on any matters on which the stockholders of
such Company may
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vote, and no other ownership interest in any such Company, are issued or
outstanding. Other than this Agreement, none of the Sellers or the Companies has
any outstanding option, warrant, subscription or other right, agreement or
commitment which either (i) obligates any person to issue, sell, deliver or
transfer, repurchase, redeem or otherwise acquire or vote any shares of the
capital stock or other security of or any other ownership interest in any
Company or (ii) restricts the transfer of the Shares.
2.3 Authority; Noncontravention. Each of the Sellers has the requisite
corporate power and authority to enter into this Agreement and to consummate the
transactions contemplated by this Agreement. The execution and delivery of this
Agreement by each Seller and the consummation by each Seller of the transactions
contemplated by this Agreement have been duly authorized by all necessary
corporate action on the part of such Seller. This Agreement has been duly
executed and delivered by each Seller and, assuming that this Agreement
constitutes a valid and binding agreement of the Purchaser, constitutes a valid
and binding obligation of each Seller, enforceable against each Seller in
accordance with its terms, except to the extent that the enforcement hereof may
be limited by (i) bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or other similar laws now or hereafter in effect relating to
creditors' rights generally and (ii) general principles of equity (regardless of
whether enforceability is considered in a proceeding at law or in equity).
Except as disclosed in Section 2.3 of the Seller Disclosure
Schedule, the execution and delivery of this Agreement by the Sellers does not,
and the consummation by the Sellers of the transactions contemplated by this
Agreement and compliance with the provisions of this Agreement will not, (i)
conflict with any of the provisions of the articles or certificate of
incorporation or by-laws of any Seller or any of the Companies, (ii) subject to
the governmental filings and other matters referred to in the following
sentence, conflict with, result in a breach of or a default (with or without
notice or lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or loss of a material benefit
under, or require the consent of any person under, or result in the imposition
of any Lien on any of the properties or assets of any Company under, any
indenture, or other material agreement, permit, concession, franchise, license
or other instrument or undertaking to which any Seller or any Company is a party
or by which any of them or any of their respective properties or assets may be
bound or affected, or (iii) subject to the governmental filings and other
matters
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referred to in the following sentence, contravene any law, statute, ordinance,
rule, regulation, code, or any order, writ, judgment, injunction, decree,
determination or award (collectively, "Law"). No consent, approval or
authorization of, or declaration or filing with, or notice to, any court,
governmental agency, department, commission, board, bureau, regulatory authority
or instrumentality ("Governmental Entity") is required by or with respect to any
Seller or any Company in connection with the execution and delivery of this
Agreement by the Sellers or the consummation by the Sellers of any of the
transactions contemplated by this Agreement, except for (i) the filing of
premerger notification and report forms under the Hart- Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and the rules and regulations promulgated
thereunder (the "HSR Act"), (ii) the consents, filings and/or notices required
under the insurance laws of the jurisdictions set forth in Section 2.3 of the
Seller Disclosure Schedule, and (iii) such other consents, approvals,
authorizations, filings or notices of which the failure to obtain would not,
individually or in the aggregate, have a Company Material Adverse Effect.
2.4 Financial Statements. (a) The Sellers have previously delivered to the
Purchaser true and complete copies of the Annual Statements for the years ended
December 31, 1996 and 1995, together with all exhibits and schedules thereto,
and any actuarial opinion, affirmation or certification filed in connection
therewith (each a "Company Annual Statement"), and the Quarterly Statements for
the periods ended after January 1, 1997, together with all exhibits and
schedules thereto (each a "Company Quarterly Statement"), of each of the
Companies which operates as an insurance company in any jurisdiction, other than
Colonial Penn de Mexico, as filed with the insurance regulatory authority in the
state in which such Company is domiciled (an "Insurance Regulator"). Each such
Company Annual Statement and Company Quarterly Statement was prepared in
conformity with statutory accounting practices prescribed or permitted by such
Insurance Regulator, applied on a consistent basis ("SAP"), and presents fairly,
in all material respects, to the extent required by and in conformity with SAP,
the statutory assets, and statutory liabilities, surplus and other funds, of
such Company at the date thereof and the summary of operations, changes in
capital and surplus and cash flow of such Company for the period then ended, and
was correct in all material respects when filed and there were no material
omissions therefrom when filed. No deficiencies or required adjustments with
respect to such Company Annual Statements or Company Quarterly Statements have
been asserted in writing by any insurance regulatory authority which have not
been cured or otherwise resolved to the satisfaction of such insurance
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regulatory authority and which have not been disclosed in writing to Purchaser
prior to the date of this Agreement.
(b) Section 2.4(b) of the Seller Disclosure Schedule contains a true and
correct copy of the unaudited combining financial statements of the Companies
for the years ended December 31, 1996 and 1995, together with the notes thereon,
and the unaudited combined quarterly financial statements of the Companies for
the periods ended after January 1, 1997, with the notes thereon. Such financial
statements, taken together with the notes thereto, are based on the books and
records of the Companies, and fairly present, in all material respects, the
financial condition and results of operations of the Companies as of the dates
and for the periods indicated therein and, except with respect to the
adjustments described in the notes thereto, have been prepared in accordance
with generally accepted accounting principles consistently applied ("GAAP").
2.5 No Undisclosed Liabilities. Except as disclosed in Section 2.5 of the
Seller Disclosure Schedule, there is no liability against, relating to, or
affecting any of the Companies that is of the type required to be disclosed on a
balance sheet prepared in accordance with SAP or in the notes thereto, except
(i) liabilities disclosed in the balance sheet or notes thereto included in such
Company's 1996 Company Annual Statement or such Company's Quarterly Statements,
(ii) policyholder benefits payable, or other liabilities incurred since December
31, 1996, in the ordinary course of business and consistent with past practice
that could not, individually or in the aggregate, have a Company Material
Adverse Effect and (iii) obligations under the Conseco Contract and the
agreements required to be entered into pursuant to the Conseco Contract and
listed in Section 4.16 of the Seller Disclosure Schedule (each a "Conseco
Agreement").
2.6 Absence of Certain Changes or Events. Except (a) as disclosed in
Section 2.6 of the Seller Disclosure Schedule, (b) as contemplated or otherwise
permitted by this Agreement, (c) as required or contemplated under the Conseco
Contract and/or the Conseco Agreements or (d) for changes resulting from general
economic conditions, interest rates or the adoption, amendment or interpretation
of laws or regulations generally applicable to insurance companies, since
December 31, 1996, each of the Companies has conducted its business only in the
ordinary course consistent with past practices and there has not been (i) any
event, condition, occurrence or change that has had or could reasonably be
expected to have a Company Material Adverse Effect; (ii) any declaration,
setting aside or payment of any dividend or other distribution (whether in cash,
stock or property) with respect to the Shares or the capital stock of any of the
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Subsidiaries; (iii) any split, combination or reclassification of any of the
Shares or any issuance or the authorization of any issuance of any other
securities in respect of, in lieu of or in substitution for the Shares or any
direct or indirect redemption, purchase or other acquisition by the Companies of
any such stock or of any interest in or right to acquire any such stock; (iv)
(A) any granting by any of the Companies to any officer or employee of such
Company of any increase in compensation, except, in the case of employees, for
ordinary salary and wage increases in the ordinary course of business and
consistent with past practices, (B) any granting by any of the Companies to any
such officer or employee of any increase in severance or termination pay (other
than pursuant to existing policies of any of the Companies consistent with past
practices, which practices shall not include the agreements contemplated in
Section 4.9 of the Seller Disclosure Schedule) or (C) any entry by any of the
Companies into any employment, severance or termination agreement (other than
pursuant to existing policies of any of the Companies consistent with past
practices, which practices shall not include the agreements contemplated in
Section 4.9 of the Seller Disclosure Schedule) with any such officer or
employee; (v) any change in accounting or reserving methods, principles or
practices by any of the Companies except insofar as such changes were required
by SAP; (vi) any Lien created on or in any of the assets and properties of any
Company, or assumed by any Company with respect to any of such assets and
properties, which Lien relates to liabilities individually or in the aggregate
exceeding $250,000 for all such Companies; (vii) any prepayment of any
liabilities individually or in the aggregate exceeding $250,000; (viii) any
liability involving the borrowing of money by any of the Companies in an amount
in excess of $250,000 in the aggregate for all such borrowing; (ix) any
liability incurred by any of the Companies in any transaction not involving the
borrowing of money, in an amount in excess of $250,000 except in the ordinary
course of business and consistent with past practices for such Companies; (x)
any damage, destruction, or other casualty (whether or not covered by insurance)
affecting any of the assets and properties of any of the Companies which damage,
destruction, or loss individually or in the aggregate exceeds $250,000 or the
result of which individually or in the aggregate exceeds $250,000; (xi) any work
stoppage, strike, labor difficulty, or (to the best knowledge of Sellers) union
organizational campaign (in process or threatened) at or affecting any of the
Companies; (xii) any material payment, discharge, or satisfaction by any of the
Companies of any Lien or liability other than Liens or liabilities that (X) were
paid, discharged, or satisfied since December 31, 1996 in the ordinary course of
business and consistent with past practice, or (Y) were paid, discharged or
satisfied as required under this Agreement; (xiii) any
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cancellation of any liability in excess of an aggregate of $250,000 owed to any
of the Companies by any other Person; (xiv) any write-off or write-down of, or
any determination to write off or down any of, the assets and properties of any
of the Companies or any portion thereof, except for write-offs or write-downs
that do not exceed $250,000 in the aggregate for all such Companies (other than
the write-off of premiums in the ordinary course of business consistent with
past practices); (xv) any sale, transfer, or conveyance of any assets and
properties of any of the Companies with an individual book value or with an
aggregate book value in excess of $250,000, except for securities held for
investment in the ordinary course of business and consistent with past practice
for each such Company; (xvi) any amendment, termination, waiver, disposal, or
lapse of, or other failure to preserve, any license or other form of
authorization of any of the Companies (except as indicated on Section 2.6 of the
Seller Disclosure Schedule), which is material to the conduct of the business of
the Companies, taken as a whole; (xvii) any loan or advance to any Seller, any
affiliate of the Companies or Sellers or any of the directors, officers,
employees, consultants, agents or other representatives of any Seller or any
Company; (xviii) any material amendment of, or any failure to perform all of its
material obligations under, or any material default under, or any waiver of any
material right under, or any termination (other than on the stated expiration
date) of any contract that involves or reasonably could be expected to involve
the annual expenditure or receipt by any of the Companies of more than $250,000;
(xix) any amendment to the articles or certificate of incorporation or by-laws
of any of the Companies; (xx) any termination (other than on the stated
expiration date), amendment, or execution by any of the Companies of any
material reinsurance, material coinsurance, or other similar material contract,
as ceding insurer or assuming reinsurer; (xxi) any expenditure or commitment for
additions to property, plant, equipment or other tangible or intangible capital
assets of any of the Companies, except for any expenditure or commitment that
does not exceed $250,000 in the aggregate; (xxii) any material modification in
any material compensation contract entered into with insurance agents; (xxiii)
any material increase in the promotional expenses undertaken with respect to
direct response lines of insurance offered by any of the Companies; or (xxiv)
any action by any Company's board of directors authorizing any Company, or any
contract, to take any of the actions described in this Section 2.6, other than
actions expressly permitted under this Section 2.6.
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2.7 Taxes.
(a) Except as disclosed in Section 2.7 of the Seller Disclosure Schedule,
each of the Companies has filed all material Tax Returns (as hereinafter
defined), including those required under applicable withholding laws and
regulations required to be filed by it on or prior to the date hereof or
requests for extensions to file such Tax Returns have been timely filed, granted
(if required) and have not expired. All material Tax Returns filed by any of the
Companies are complete and accurate except to the extent that such failure to be
complete and accurate, individually or in the aggregate, would not reasonably be
expected to have a material adverse effect on the Companies considered in the
aggregate. Each of the Companies has paid (or has had paid on its behalf), or
has established adequate reserves for the payment of, all Taxes (as hereinafter
defined) shown due on such Tax Returns, and liabilities and reserves for Taxes
reflected on the Company Annual Statement for the year ended December 31, 1996
are adequate in all material respects for Taxes payable by the Companies for all
taxable periods and portions thereof through December 31, 1996.
(b) Except as set forth on Section 2.7 of the Seller Disclosure Schedule,
no deficiencies for any Taxes have been proposed, asserted or assessed in
writing against any of the Companies that are not adequately reserved for in
accordance with SAP, except for deficiencies that, individually or in the
aggregate, would not reasonably be expected to have a material adverse effect on
the Companies considered in the aggregate, and no written requests for waivers
of the time to assess any such Taxes have been granted or are pending. Except as
disclosed in Section 2.7 of the Seller Disclosure Schedule, the material Tax
Returns of the Companies for all years prior to 1993 have been examined by and
settled with the applicable Governmental Entity, or the statute of limitations
on assessment or collection of any Taxes due in respect of such Tax Returns from
the Companies has expired.
(c) As used in this Agreement, "Taxes" shall include all United States
federal, state, local and foreign income, property, premium, sales, excise,
employment, payroll, withholding and other taxes, tariffs or governmental
charges of any nature whatsoever (excluding any guarantee fund assessment or
escheat) and any interest, penalties and additions to taxes relating thereto. As
used in this Agreement, "Tax Returns" shall include any return, report,
information return, or other document (including any related or supporting
information) filed or required to be filed with any Governmental Entity in
connection
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with the determination, assessment, collection, or administration of any Taxes.
(d) Except as set forth in Section 2.7 of the Seller Disclosure Schedule,
none of the Companies has any plan or arrangement that will, as a result of the
transactions effected pursuant to this Agreement, give rise to "excess parachute
payments" within the meaning of Section 280G of the Internal Revenue Code of
1986, as amended (the "Code").
(e) None of the Sellers is a "foreign person" within the meaning of
Section 1445(b)(2) of the Code. At or prior to Closing, Seller will provide to
Purchaser a certification of nonforeign status to the extent and in the form
required under Treas. Reg. Section 1.1445-2(b).
(f) Except as set forth in Section 2.7 of the Seller Disclosure Schedule,
(i) none of the Companies has agreed, been requested to, has an application
pending or is required to make any adjustment under Section 446(e) or Section
481(a) of the Code, (ii) none of the Companies has any accounting method changes
pending, either initiated by the IRS or by any such Company and (iii) there are
no elections in effect under Sections 108, 168, 441, 472, 1017, 1033, 4977 or
341(f)(2) of the Code that would result, in conjunction with the Section 338
Elections (as defined below), in recognition of income for federal income tax
purposes on the Closing Date.
(g) Each of the Companies has paid or has established adequate reserves in
the Company Annual Statement or Company Quarterly Statement (as the case may be)
(each a "Financial Statement") for the payment of all guarantee fund assessments
in respect of any period through December 31, 1996. Such assessments have been
recorded in the Company Annual Statement or any Company Quarterly Statement only
if such assessment was received prior to the date of such Financial Statement.
(h) Except for CP Mexico (defined below), each of the corporations listed
in Section 2.7(h) of the Seller Disclosure Schedule (the "Section 338 Targets")
is a member of the group of corporations filing a consolidated federal income
tax return having Leucadia as its common parent, and each of such Section 338
Targets and Leucadia is a domestic corporation. Other than pursuant to this
Agreement, none of the Section 338 Targets, including Colonial Penn de Mexico de
Seguros S.A. de C.V. ("CP Mexico") has issued, granted or transferred any
outstanding call options, warrants, convertible obligations, put options,
redemption agreements (including any rights to cause the redemption of stock),
cash settlement options, phantom stock,
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stock appreciation rights, or any similar interests (except for stock), or any
other instruments that provide for the right to issue, redeem, or to transfer
the stock (including any option on an option), with respect to any such Section
338 Target, including CP Mexico.
(i) To the best knowledge of Sellers, (i) for any taxable year in respect
of which the applicable statute of limitations on assessment or collection of
Taxes has not yet expired, the Companies (or their predecessors) have not been
members of any group of corporations filing a consolidated federal income tax
return and having as a common parent any corporation other than Leucadia,
PHLCORP, Inc. or FPL Group Inc., and (ii) for any year after 1990, Sellers have
disclosed to Purchaser (or its representatives) each member of the group of
corporations filing a consolidated federal income tax return and having Leucadia
as the common parent of such group.
(j) The only tax year subject to indemnification by FPL under the FPL
Agreement (defined below) and in respect of which the applicable statute of
limitations on assessment or collection of any Taxes due has not expired is 1988
and, to the best knowledge of Sellers, no such indemnification relates to Taxes
for which any of the Companies would be liable.
(k) Sellers have properly prepared and filed information statements
required pursuant to Section 1.382-2T(a)(2)(ii) of the Treasury Regulations
promulgated under Section 382 of the Code.
(l) For all taxable years in respect of which the applicable statute of
limitations on assessment or collection of Taxes has not yet expired, each of
CPI, CPF, Colonial Penn Madison Insurance Company, Bay Colony Insurance Company
and Bayside Casualty Insurance Company has been subject to tax under Section 831
of the Code, and has calculated discounted unpaid losses in a manner consistent
with Section 846 of the Code.
(m) Sellers have provided to Purchaser (or its representatives) complete
and accurate copies, or reasonable access to review complete and accurate
copies, of each document listed in Section 2.7(m) of the Seller Disclosure
Schedule, to the extent any such document exists and is reasonably available.
Insofar as the inquiries made prior to the date hereof by Purchaser and its
representatives regarding the history, operations and transactions of Sellers
and their affiliates relate to material tax items concerning the Companies, to
Seller's knowledge Sellers and its representatives have to the extent of their
ability fully and accurately responded, whether orally or in writing, and in
each case taking into account the
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totality of Seller's and its representatives' response(s), to such inquiries.
2.8 Absence of Changes in Benefit Plans. Except as disclosed in Section
2.8 of the Seller Disclosure Schedule, since December 31, 1996 there has not
been any adoption or amendment by any of the Companies of any collective
bargaining agreement or any Benefit Plan (as defined in Section 2.9). Except as
disclosed in Section 2.8 of the Seller Disclosure Schedule, there exist no
written employment, consulting, severance, termination or indemnification
agreements, arrangements or understandings between any of the Companies and any
current or former employee, officer or director of any such Company ("Individual
Agreements") in which the amount remaining to be paid pursuant thereto on the
date of this Agreement would exceed $100,000.
2.9 Benefit Plans.
(a) None of the Companies (i) currently maintains, administers or
contributes to or (ii) during the six year period preceding the Closing Date
maintained, administered or contributed to: (1) any employee benefit plan (as
defined in Section 3 (3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA") ("Plan"), including, without limitation, any multiemployer
plan as defined in Section 3 (37) of ERISA ("Multiemployer Plan") or (2) any
bonus, deferred compensation, performance compensation, stock purchase, stock
option, stock appreciation, severance, salary continuation, vacation, sick
leave, holiday pay, fringe benefit, personnel policy, reimbursement program,
incentive, insurance, welfare or similar plan, program, policy or arrangement
("Benefit Plan"), other than those Plans and Benefit Plans described in Section
2.9 of the Seller Disclosure Schedule. All Plans and Benefit Plans and all
related trust agreements or annuity contracts (or related trust instruments)
comply in all material respects with and are, and during the six year period
preceding the Closing Date have been, operated in all material respects in
accordance with the terms of the Plans and Benefit Plans, ERISA, the Code, other
federal statutes, state law and the regulations and rules promulgated pursuant
thereto or in connection therewith. Except as described in Section 2.9 of the
Seller Disclosure Schedule, no withdrawals have occurred so as to cause any Plan
to become subject to the provisions of Section 4063 of ERISA, nor during the six
(6) year period prior to the date hereof have any of the Companies ceased making
contributions to any Plan subject to Section 4064(a) of ERISA to which any of
the Companies made contributions or ceased operations at a facility so as to
become subject to Section 4062(e) of ERISA. True and complete copies of each
Plan, Benefit Plan, related trust agreements, annuity
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contracts, determination letters, summary plan descriptions, annual reports on
Form 5500 and Form 990, if any, have been made available to Purchaser. None of
the Companies or any entity required to be aggregated with any of the Companies
pursuant to Code Section 414 or ERISA Section 4001(b) ("ERISA Affiliate") have
incurred any liability to the Pension Benefit Guaranty Corporation ("PBGC"),
including as a result of the voluntary or involuntary termination of any Plan
which is subject to Title IV of ERISA. There is currently no active filing by
any of the Companies with the PBGC (and no proceeding has been commenced by the
PBGC and no condition exists and no event has occurred that could constitute
grounds for the termination of any Plan by the PBGC) to terminate any Plan which
is subject to Title IV of ERISA and which has been maintained or funded, in
whole or in part, by any of the Companies. None of the Companies or any ERISA
Affiliate have contributed to or been obligated to contribute to a Multiemployer
Plan.
(b) Except as disclosed in Section 2.9 of the Seller Disclosure Schedule,
there has been no reportable event, as defined in Section 4043(c) of ERISA, nor
has there been any event which would require a report to the PBGC, Department of
Labor or Internal Revenue Service under ERISA or the Code (other than summary
plan descriptions and annual reports filed in the normal course), with respect
to any Plan or any Benefit Plan for which notice has not been waived by rule or
regulation. Except as disclosed in Section 2.9 of the Seller Disclosure
Schedule, none of the Companies or any ERISA Affiliate have any liability to the
PBGC (other than any liability for insurance premiums not yet due to the PBGC),
to any present or former participant in or beneficiary of any Plan or Benefit
Plan, or any beneficiary of any such participant or beneficiary, (except with
respect to normal benefits due under any Plan or Benefit Plan) or to any Plan or
Benefit Plan (except with respect to normal funding obligations). Except as
disclosed in Section 2.9 of the Seller Disclosure Schedule, no event, fact or
circumstance has arisen or occurred that has, subject only to the exceptions in
the preceding sentence, resulted in or may reasonably be expected to result in
any such liability or a claim against any of the Companies or any ERISA
Affiliate by the PBGC, by any present or former participant in or any
beneficiary of any Plan or Benefit Plan (or any beneficiary of any such
participant or beneficiary), or any such Plan or Benefit Plan. Except as
disclosed in Section 2.9 of the Seller Disclosure Schedule, (1) no filing has
been or will be made by any of the Companies in connection with the complete or
partial termination of any Benefit Plan, (2) no complete or partial termination
of any Plan has occurred or, as a result of the execution or delivery of this
Agreement or the consummation of the transactions contemplated by this
Agreement,
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will occur, except as otherwise disclosed in Section 2.9 of the Seller
Disclosure Schedule, and (3) none of the Companies has engaged in any
transaction, within the meaning of Section 4069 of ERISA.
(c) The actuarial assumptions utilized, where appropriate, in connection
with determining the funding of each Plan which is a defined benefit pension
plan (as set forth in the actuarial report for such Plan) are reasonable. A copy
of the latest such actuarial report has been previously furnished to the
Purchaser. Based on such actuarial assumptions, as of December 31, 1996, the
actuarially determined present value of all accrued benefits of all such Benefit
Plans (whether or not vested) determined on a termination basis did not exceed
the fair market value of the assets and property held under such Plans by an
amount in excess of $12,000,000.
(d) Except as disclosed in Section 2.9 of the Seller Disclosure Schedule,
there are no pending or, to the knowledge of the Sellers, threatened actions,
suits, investigations or other proceedings by any present or former participant
or beneficiary under any Plan or Benefit Plan (or any beneficiary of any such
participant or beneficiary) involving any Plan or Benefit Plan or any rights or
benefits under any Plan or Benefit Plan other than ordinary and usual claims for
benefits by participants or beneficiaries thereunder. There is no writ,
judgment, decree, injunction or similar order of any court, governmental or
regulatory authority, or other similar person outstanding or in favor of any
Plan or Benefit Plan or any fiduciary thereof.
(e) Except as disclosed in Section 2.9 of the Seller Disclosure Schedule,
none of the Companies maintains or contributes to any Benefit Plan which
provides, or has any liability or obligation to provide, life insurance, medical
or other employee welfare benefits to any employee (or his beneficiary) upon
and/or after such employee's retirement or termination of employment, except as
may be required by federal, state or local laws, rules or regulations, and none
of the Companies has ever represented, promised or contracted to or with any
employee (or former employee) that such employee (or former employee) would be
provided life insurance, medical or other employee welfare benefit upon their
retirement or termination of employment except to the extent required by
federal, state or local laws, rules or regulations.
(f) Except as disclosed in Section 2.9 of the Seller Disclosure Schedule,
none of the Plans, Benefit Plans, or Individual Agreements contain any provision
which would result in any additional benefits, accelerated vesting and/or
accelerated
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payments solely as a result of the consummation of the transactions contemplated
by this Agreement.
(g) Except as set forth in Section 2.9 of the Seller Disclosure Schedule,
none of the payments contemplated by any of the Plans, Benefit Plans, and/or
Individual Agreements would, in the aggregate as to any one individual,
constitute an "excess parachute payment" under Code Section 280G.
(h) The employee benefit plans of Colonial Penn de Mexico Compania de
Seguros S.A. de C.V. ("Mexican Plans") are set forth in Section 2.9(h) of the
Seller Disclosure Schedule. The provisions of subsections (a) - (g) of this
Section 2.9 shall not apply to the Mexican Plans. All of the Mexican Plans
comply in all material respects with and are, and since inception have been,
operated in all material respects in accordance with their terms and the laws of
Mexico.
(i) All obligations under the Supplemental Retirement Account Agreement
between Colonial Penn Insurance Company and Henry H. Wulsin and all obligations
under the Colonial Penn Insurance Company Long Term Incentive Plan are fully
funded under the Colonial Penn Insurance Company Executive Benefits Trust except
for a contribution due on or about January 1, 1998, not in excess of $200,000,
that has been accrued on the books of CPI as of the date of the Purchase
Agreement. Attached hereto as Section 2.9(i) of the Seller Disclosure Schedule
is a list dated June 19, 1997 of the name of each individual who is entitled to
a benefit under the Colonial Penn Insurance Company Long Term Incentive Plan,
the number of units for each such individual and the fixed value of each such
individual's units determined without regard to the investment of Colonial Penn
Insurance Company Executive Benefits Trust occurring after the date each such
unit was fixed.
2.10 Compliance with Applicable Laws.
(a) Each of the Companies has in effect all federal, state, local and
foreign governmental approvals, authorizations, certificates, filings,
franchises, licenses, notices, permits and rights ("Permits") necessary for it
to own, lease or operate its assets and to carry on its business as now
conducted, and, to the knowledge of the Sellers, there has occurred no default
under any such Permit, except where the failure to have such Permits in effect
or the default under such Permits would not, individually or in the aggregate,
have a Company Material Adverse Effect. Except as disclosed in Section 2.10(a)
of the Seller Disclosure Schedule, each of the Companies is in compliance with
all applicable Laws, except where non-compliance with such Laws would
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not, individually or in the aggregate, have a Company Material Adverse Effect.
Except as disclosed in Section 2.10(a) of the Seller Disclosure Schedule and
except for routine examinations by Insurance Regulators, no investigation by any
Governmental Entity with respect to any of the Companies is pending or, to the
knowledge of the Sellers, threatened.
(b) Except as disclosed in Section 2.10(b) of the Seller Disclosure
Schedule or as otherwise disclosed to the Purchaser on June 21, 1997, (i) all
forms of insurance policies and riders thereto currently issued by any Company
are, to the extent required under applicable Laws, on forms approved by
applicable insurance regulatory authorities of the jurisdictions in which issued
or have been filed with and not objected to by such insurance regulatory
authorities within the period provided for such objection and any premium rates
with respect to such policies or riders required to be filed with or approved by
such applicable insurance regulatory authorities have been so filed or approved
and premiums charged conform thereto, (ii) each of the Companies (exclusive of
its independent agents) and, to the knowledge of the Sellers, its independent
agents have marketed, sold and issued products of such Company in compliance
with all Laws applicable to the business of such Company in the respective
jurisdictions in which such products have been sold, except where the failure to
do so, individually or in the aggregate, has not had or could not reasonably be
expected to have, a Company Material Adverse Effect, (iii) there are (A) to the
knowledge of the Sellers, no claims asserted, (B) no actions, suits,
investigations or proceedings by or before any court or other Governmental
Entity or (C) no investigations by or on behalf of any Company ((A), (B) and (C)
being collectively referred to as "Actions") pending or, to the knowledge of the
Sellers, threatened, against or involving any of the Companies, or, to the
knowledge of the Sellers, any of its independent agents that include allegations
that any of the Companies or any of its independent agents were in violation of
or failed to comply with such Laws, and, to the knowledge of the Sellers, no
facts exist which would reasonably be expected to result in the filing or
commencement of any such Action, which Actions, individually or in the
aggregate, could, if adversely decided reasonably be expected to have a Company
Material Adverse Effect, and (iv) each of the Companies is in compliance, in all
material respects, with and has performed, in all material respects, all
obligations required to be performed by such Company under any cease-and- desist
or other order issued by any Insurance Regulator or other Governmental Entity to
such Company or under any written agreement, consent agreement, memorandum of
understanding or commitment letter or similar undertaking entered into between
any Insurance Regulator or other Governmental Entity and such Company
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(a "Company Regulatory Agreement"), which Company Regulatory Agreement remains
in effect on the date hereof. Section 2.10(b) of the Seller Disclosure Schedule
lists all Company Regulatory Agreements, copies of which have previously been
provided to Purchaser.
(c) Section 2.10(c) of the Seller Disclosure Schedule lists the
jurisdictions in which each of the Companies hold licenses (including, without
limitation, licenses or certificates of authority from applicable insurance
departments), permits, or authorizations to transact insurance or reinsurance
business (collectively, the "Insurance Licenses"). Except as set forth in
Section 2.10(c) of the Seller Disclosure Schedule, all such Insurance Licenses
are valid, binding and in full force and effect. Except as set forth in Section
2.10(c) of the Seller Disclosure Schedule, each of the Companies is duly
licensed in each jurisdiction to write the lines of insurance offered by it in
such jurisdiction. Except as set forth in Section 2.10(c) of the Seller
Disclosure Schedule, no Insurance License is the subject of a proceeding for
suspension or revocation or any similar proceedings and, to the knowledge of the
Sellers, there is no pending threat of such suspension or revocation by any
licensing authority or any sustainable basis therefor.
(d) The Sellers have previously made available to the Purchaser, true and
complete copies of the reports (or the most recent draft thereof, to the extent
any final report is not available) reflecting the results of the most recent
financial examinations and market conduct examinations of any of the Companies
issued by any Insurance Regulator.
2.11 Litigation. Except as disclosed in Section 2.11 of the Seller
Disclosure Schedule, (i) there is no action, suit, investigation or proceeding
pending, or, to the knowledge of the Sellers, threatened, against any Seller or
any Company or affecting any of their assets or properties, at law or in equity,
in, before, or by any person that has had or could be reasonably expected to
have a Company Material Adverse Effect and (ii) there are no judgments, orders
or decrees of any Governmental Entity binding on any Seller or Company or any of
its properties and assets, which (x) have been issued by any insurance
regulatory authority, (y) would restrict the ability of any of the Companies to
conduct its business in the ordinary course of business consistent with past
practices or (z) that has had or could reasonably be expected to have a Company
Material Adverse Effect.
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2.12 Assets and Properties.
(a) Each of the Companies has good and marketable title to all debentures,
notes, stocks, securities, and other assets that are of a type required to be
disclosed in Schedules B through DB of an insurance company Annual Statement
that it purports to own, free and clear of all Liens, except (i) for Permitted
Liens, (ii) securities listed on the State Deposit Schedule of its Company
Annual Statement and (iii) as disclosed in Section 2.12(a) of the Seller
Disclosure Schedule. For purposes hereof, "Permitted Lien" shall mean any (i)
mechanic's, carrier's, workmen's, repairmen's, or other similar Lien arising or
incurred in the ordinary course of business, (ii) Lien for taxes, assessments,
and other governmental charges that are not due and payable or that may
hereafter be paid without penalty or that are being contested in good faith,
(iii) Lien on assets in a Company's investment portfolio that arise or have been
incurred in the ordinary course of such Company's investing activities
consistent with past practices, and (iv) other Liens that, on the Closing Date,
will not, individually or in the aggregate, materially detract from the values
of such properties or assets or materially interfere with the present uses
thereof.
(b) Section 2.12(b) of the Seller Disclosure Schedule contains a true and
complete list and description of all real property that any of the Companies
purports to own that are of the type that would be included on Schedule A of an
insurance company Annual Statement. The applicable Company has good and
marketable fee title to such real property, free and clear of all Liens, except
(i) for Permitted Liens and/or (ii) as disclosed in Section 2.12(b) of the
Seller Disclosure Schedule.
(c) Section 2.12(c) of the Seller Disclosure Schedule contains a true and
complete list and description of all real property leased by any of the
Companies. The Sellers shall have made available to the Purchaser true and
complete copies of each lease or sublease as amended to the date of this
Agreement. Each such lease or sublease is in full force and effect and none of
the Companies is in default thereunder or has received any notice of any default
thereunder of any other party thereto, except in each case where any such
unenforceability, ineffectiveness or default would not have a Company Material
Adverse Effect.
(d) Except as disclosed in Section 2.12(d) of the Seller Disclosure
Schedule, the applicable Company has good and marketable title to, or has a
valid leasehold interest in or a valid right to use, all tangible personal
property that is material to the conduct of the business, operations or affairs
of the Companies, taken as a whole.
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2.13 Contracts.
(a) Section 2.13(a) of the Seller Disclosure Schedule contains a true and
complete list of each contract, agreement, instrument or other arrangement,
written or oral that (i) is between any of the Companies and any of the Sellers
or any of their respective affiliates (excluding structured settlement annuity
contracts listed in any Company Annual Statement), (ii) is necessary or material
to the business, operation or affairs of the Companies, taken as a whole or
(iii) (excluding insurance/annuity contracts) involves payments in excess of
$250,000 in any one fiscal year or $500,000 in the aggregate in any five year
period (unless such contract is terminable on not more than one year's notice
without cause and payment of penalty) (a "Material Contract"), true and complete
copies of which have been made available to the Purchaser.
(b) Except as listed in Section 2.13(b) of the Seller Disclosure Schedule,
or as provided for in this Agreement or except for the Conseco Contract and the
Conseco Agreements, none of the Companies is a party to or owner of any:
(i) agreement for the sale or lease of any of the
assets and properties of the Companies other than
in the ordinary course of business consistent with
past practices;
(ii) material mortgage, pledge, conditional sales contract,
security agreement, factoring agreement, or other
similar material agreement with respect to any real or
personal property of any Company;
(iii) agreement with a labor union or labor association;
(iv) loan agreement, promissory note issued by it,
guarantee, subordination or similar type of
agreement;
(v) securities issued by any affiliate of any of the
Companies (other than capital stock listed on
Section 2.2 of the Seller Disclosure Schedule);
(vi) noncompetition or non-solicitation agreement;
(vii) support agreement, guarantee or other agreement
for the benefit of any affiliate of any of the
Companies (including any of the Sellers); or
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(viii) power of attorney or agreement with a managing
general agent or third party administrator.
(c) With respect to each Material Contract and each contract listed in
Section 2.13(b) of the Seller Disclosure Schedule (a "Section 2.13(b)
Contract"), (i) to the knowledge of Sellers, assuming the due authorization,
execution and delivery thereof by the other party or parties thereto, such
Material Contract or Section 2.13(b) Contract is valid and binding in all
material respects in accordance with its terms and is in full force and effect,
(ii) none of the Companies party thereto is, and to the knowledge of the
Sellers, no other party thereto is, in default in the performance, observance or
fulfillment of any obligation, covenant or condition contained therein except
where such defaults, individually or in the aggregate, have not had and could
not reasonably be expected to have a Company Material Adverse Effect and (iii)
to the knowledge of Sellers, no event has occurred which with or without the
giving of notice or lapse of time, or both, would constitute a default
thereunder except where such defaults could not, individually or in the
aggregate, reasonably be expected to have a Company Material Adverse Effect.
Except as disclosed in Section 2.13 of the Seller Disclosure Schedule, no
Material Contract or Section 2.13(b) Contract requires the consent of any party
in connection with the transactions contemplated hereby.
2.14 Insurance. Section 2.14 of the Seller Disclosure Schedule contains a
true and complete list of all material liability, property, workers
compensation, directors and officers liability, and other similar insurance
policies that insure the business, operations, or affairs of each of the
Companies or affect or relate to the ownership, use, or operations of any of its
assets. Excluding insurance policies that have expired and been replaced in the
ordinary course of business, no insurance policy has been cancelled within the
last year except as disclosed in Section 2.14 of the Seller Disclosure Schedule
and, to the knowledge of the Sellers, no threat has been made to cancel any
insurance policy of any Company during such period. Except as disclosed in
Section 2.14 of the Seller Disclosure Schedule, all such insurance will remain
in full force and effect with respect to periods before the Closing without the
payment of additional premiums other than under the terms of such policy or in
the ordinary course of business consistent with past practice. No event has
occurred, including, without limitation, the failure by any of the Companies to
give any notice or information or any of the Companies giving any inaccurate or
erroneous notice or information, which limits or impairs the rights of such
Company under any such insurance policies.
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2.15 Brokers and Advisors. All negotiations relative to this Agreement and
the transactions contemplated hereby have been carried out by the Sellers
directly with the Purchaser, without the intervention of anyone on behalf of the
Sellers in such manner as to give rise to any valid claim by any person against
the Purchaser or any of its subsidiaries for a finder's fee, brokerage
commission, transaction fee, investment banking fee, or similar payment, except
for Impala Partners LLC, whose fee will be paid by the Sellers and not the
Companies. The Sellers have retained Weil, Gotshal & Manges LLP as their legal
advisor whose fee will be paid by the Sellers and not the Companies.
2.16 Intellectual Property. Section 2.16 of the Seller Disclosure Schedule
contains a true and complete list and description of all intellectual property
in which any Company holds ownership, license, use or other proprietary
interest, including but not limited to names, tradenames, trademarks, service
marks currently in use or used within the past five years and all registrations
and applications for registration with respect thereto and all applications for
registration of any trademarks, service marks and tradenames based on an
intention to use, patents, patent applications, patent rights, assumed names,
logos, trade secrets, copyrights, all agreements with respect to the
intellectual property of third parties, identification of all continuation,
renewal, use, amendment and extension filings made or in the process of being
made with respect to any proprietary interest, identification of any recent
inventions of any Company and whether each such invention is, to the knowledge
of the Seller, susceptible of patent, copyright or trade secret protection
(collectively, the "Intellectual Property") that are material to the conduct of
the business, operations, or affairs of the Companies. Except as set forth in
Section 2.16 of the Seller Disclosure Schedule or as required pursuant to the
Conseco Contract or the license agreement to be entered into thereunder (the
"Conseco License Agreement"), the other Conseco Agreements, the Section 4.16
Agreements (as defined herein) or the CPL License Agreement (as defined herein),
the Companies have, and after the Closing will have, the right to use, free and
clear of any Liens or other encumbrances, such Intellectual Property and all
computer software object code, computer software databases, computer software
applications, programs, and similar systems (collectively "Computer Software")
used by, owned by or licensed to the Companies and material to the conduct of
the business, operations, or affairs of the Companies. To the actual knowledge
of the Sellers, without (solely for the purposes of this sentence) any inquiry,
following the Closing the Companies will have sole and exclusive ownership of
the Section 4.15(a) Marks (as defined herein) in accordance with the description
of services for the Section 4.15(a) Marks as set forth in Section
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2.16 of the Seller Disclosure Schedule, subject only to the CPL License
Agreement and the Conseco License Agreement. Except as set forth in Section 2.16
of the Seller Disclosure Schedule, to the knowledge of the Sellers, none of the
Companies is or, as a result of the transactions contemplated hereby will be, in
conflict with or in violation or infringement of, nor have the Sellers or the
Companies received any notice alleging any conflict with or violation or
infringement of or any claimed conflict with, any asserted rights of any other
person with respect to any such Intellectual Property or Computer Software.
Sellers have no knowledge that any such right which might so be violated or
infringed has been applied for by another or that any of the Intellectual
Property has been legally declared invalid or is the subject of a pending or
threatened action for opposition, cancellation or a declaration of invalidity or
is infringed by the activities of another. Other than the Conseco License
Agreement or the CPL License Agreement, except as set forth in Section 2.16 of
the Seller Disclosure Schedule, none of the Companies is bound by, or a party
to, any licenses or contracts of any kind with respect to any patents,
copyrights, trademarks, service marks, tradenames, trade secrets, licenses,
computer software, computer software databases and other proprietary rights of
any other person material to the conduct of the business, operations or affairs
of the Companies. Set forth in Section 2.16 of the Seller Disclosure Schedule is
the Companies' program for modification of all main frame computer software
programs reasonably necessary for the Companies' business, operations or affairs
as currently operated to permit them to operate properly using date data fields
for dates on and after January 1, 2000 as well as dates on and after January 1,
1900 through December 31, 1999.
2.17 Insurance and Reinsurance. Section 2.17(a) of the Seller Disclosure
Schedule is a true and complete description of insurance and reinsurance
coverages written by any of the Companies, other than personal lines coverages
(the "Commercial Lines Programs"). Section 2.17(b) of the Seller Disclosure
Schedule is a true and complete list of (i) all reinsurers reinsuring the
Commercial Lines Programs from which any balances are unpaid or for which any
reserves, "case" or "incurred but not reported," are held as of December 31,
1996 (the "Commercial Lines Reinsurers"), together with the amount of such
balances, (ii) all reinsurance agreements to which any of the Companies is a
party covering the Companies' personal lines insurance policies, which are
currently in effect or have been effect since January 1, 1992, copies of which
have been delivered or made available to Purchaser, and (iii) those reinsurance
agreements pursuant to which each of CPF and CPI will cede to CPL certain
insurance (the "A&H Reinsurance Agreements"). The Sellers
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previously have made available to the Purchaser all reinsurance agreements
covering Commercial Lines Programs with reinsurers from which no balances are
due as of January 1, 1997. Except for (a) the Commercial Lines Programs, (b)
agreements with the Commercial Lines Reinsurers, (c) reinsurance agreements
covering Commercial Lines Programs with reinsurers from which no balances are
due as of January 1, 1997, or (d) as otherwise disclosed in Section 2.17 of the
Seller Disclosure Schedule, none of the Companies is a party to any contract
providing for reinsurance (except for reinsurance agreements covering the
Companies' personal lines policies for periods prior to January 1, 1992),
coinsurance, excess insurance, ceding of insurance, assumption of insurance or
indemnification of insurance liabilities.
Except as required by Law or except as disclosed in Section 2.17 of
the Seller Disclosure Schedule:
(a) To the knowledge of Sellers, all amounts payable under any insurance,
reinsurance or annuity contract by the Companies and (to the knowledge of
Sellers) by any other person that is a party to or bound by any reinsurance,
coinsurance, or other similar contract with any of the Companies (each a
"Reinsurance Agreement") have been paid in accordance with the terms of the
contracts under which they arose, except for such amounts for which any of the
Companies reasonably believes there is a reasonable basis to contest payment or
where the failure to pay would not have a Company Material Adverse Effect.
Except as disclosed in Section 2.17 of the Seller Disclosure Schedule, to the
knowledge of the Sellers, no reinsurer that is a party to any of the Reinsurance
Agreements to which any Company is a party has a valid defense to payment of its
material obligations under such Reinsurance Agreements. The Companies have not
entered into any material transactions that are required to be recorded as
financial reinsurance pursuant to either GAAP or SAP.
(b) No outstanding insurance or annuity contract issued, reinsured, or
underwritten by any of the Companies entitles the holder thereof or any other
person to receive any dividends, distributions or other benefits based on the
revenues or earnings of any of the Companies or any other person.
(c) To the best of Sellers' knowledge, the Companies maintain policyholder
records and values that are true and correct in all material respects.
2.18 Actuarial Studies. Sellers have previously delivered to Purchaser
true and complete copies of all reports rendered by any consulting actuary (or
any other person advising Sellers as to the adequacy of the claims reserves),
undertaken by Sellers,
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or any of the Companies with respect to the insurance business conducted by any
of such companies during the past two years for the purpose of evaluating claims
reserves.
2.19 Threats of Cancellation. Except as disclosed in Section 2.19 of the
Seller Disclosure Schedule, since December 31, 1995, no policyholder, group of
policyholder affiliates, or persons writing, selling, or producing insurance
business, that individually or in the aggregate accounted for 5% or more of the
premium or annuity income of the Companies with which such policyholder or group
was insured, or for which such Persons wrote, sold or produced insurance
business, for the year ended December 31, 1996, has terminated or (to the best
knowledge of Seller) threatened to terminate its relationship with the
Companies, as the case may be.
2.20 Labor Matters. Except as set forth in Section 2.20 of the Seller
Disclosure Schedule the operation of the business of the Companies has not been
materially and adversely affected by labor problems. Sellers have no knowledge
of any facts which lead any of them to believe that such problems may in the
future have a Company Material Adverse Effect. To the best of Sellers'
knowledge, except as set forth in Section 2.20 of the Seller Disclosure
Schedule, the activities of the Companies have been in compliance in all
material respects with all applicable laws respecting employment and employment
practices, terms and conditions of employment and wages and hours. Section 2.20
of the Seller Disclosure Schedule also sets forth, to the best of Sellers'
knowledge, a description of all disputes or claims applicable to any Company,
pending or threatened, alleging employment discrimination, sexual harassment, or
any unfair employment practice.
2.21 Person Authorized to Act. Prior to Closing, Sellers shall deliver (a)
a true and complete list of the names and locations of all banks, trust
companies, securities brokers, and other financial institutions at which each of
the Companies have an account or safe deposit box or maintains a banking,
custodial, trading, or other similar relationship, (b) a true and complete list
and description of each such account, box, and relationship, indicating in each
case the account number and the names of the respective officers, employees,
agents, or other similar representatives of the Companies transacting business
with respect thereto, (c) a true and complete list of each person authorized to
draw on each such account, entitled to have access thereto or authorized to
borrow money (or furnish security for the same) therefrom, and (d) a true and
complete list of each power of attorney granted to any person or persons for any
purpose.
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2.22 Accuracy of Information. No representation or warranty by Sellers
contained in this Agreement (including the Seller Disclosure Schedule) contains
any untrue statement of a material fact, or omits to state a material fact
necessary to make the statements contained herein not misleading.
2.23 Environmental Matters.
(a) Except as set forth in Section 2.23 of the Seller Disclosure Schedule,
none of the Companies has received any notice from any governmental agency or
authority of any violation of, or any failure to comply with, any Environmental
Law, and, to the knowledge of the Sellers and the Companies, the Companies are
in compliance with and, until the Closing Date shall remain in compliance in all
material respects with all Environmental Laws, where such failure to comply
would have, individually or in the aggregate, a Company Material Adverse Effect.
(b) Each of the Companies has, to the knowledge of the Sellers, obtained
and will maintain through the Closing Date, all governmental approvals that are
required with respect to its operations under any Environmental Law where the
failure to obtain or maintain such governmental approvals would have,
individually or in the aggregate, a Company Material Adverse Effect.
(c) Except as set forth in Section 2.23 of the Seller Disclosure Schedule,
none of the Companies (A) has any liability for response costs or corrective
action pursuant to any Environmental Law with respect to any real property or
facility currently or previously owned or leased by any of the Companies or any
other real property or facility where such liability arises from or relates to
the offsite transport, treatment, storage or disposal of Hazardous Material by
or on behalf of any of the Companies or the offsite migration of any Hazardous
Material from any of the foregoing types of properties, (B) has received any
notice of any Environmental Claim involving any of the Companies or any real
property or facility owned or leased by any of the Companies, (C) has any
knowledge of any Environmental Claim at any real property or facility owned or
leased by any of the Companies, or (D) has received any written request for
information under Section 104 of the Comprehensive Environmental Response,
Compensation and Liability Act or any comparable state law.
(d) Notwithstanding the foregoing, this Section does not include any
representation or warranty with respect to any liability of any of the Companies
arising in its respective capacity as the issuer of insurance products.
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(e) Sellers have provided or otherwise made available to the Purchaser any
and all reports of investigations of the environmental conditions of real
property now or previously owned or leased by the Companies, which reports are,
to the knowledge of the Sellers, in the possession or control of the Sellers or
any affiliate.
For the purposes of this Agreement, "Environmental Claim" means any
investigation, notice, demand, allegation, action, suit, injunction, judgment,
order, consent decree, penalty, fine, Lien, proceeding or claim, whether
administrative, judicial or private in nature, arising: (A) pursuant to, or in
connection with, any actual or alleged violation of any Environmental Law; (B)
in connection with any Hazardous Material or actual or alleged activity
associated with any Hazardous Material; (C) from any abatement, removal,
cleanup, corrective or other response action in connection with any Hazardous
Material, Environmental Law or other order or directive of any federal, state or
local governmental authority; or (D) from any actual or alleged damage, loss,
injury, threat or harm to the environment; "Environmental Law" means, without
limitation, any existing local, state or federal statute, rule, regulation,
order or ordinance pertaining to: (A) the protection of the indoor or outdoor
environment; (B) the protection of surface water and ground water; (C) the
management, manufacture, possession, presence, use, generation, transportation,
treatment, storage, disposal, release, abatement, removal, remediation, handling
of, or exposure to, any Hazardous Material; and includes without limitation, the
following federal statutes (and their implementing regulations and the analogous
state statutes and regulations): the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended by the Superfund Amendments
and Reauthorization Act of 1986; the Solid Waste Disposal Act, as amended by the
Resource Conservation and Recovery Act of 1976, as amended by the Hazardous and
Solid Waste Amendments of 1984; the Federal Water Pollution Control Act of 1972,
as amended by the Clean Water Act of 1977; the Toxic Substances Control Act of
1976; the Emergency Planning and Community Right-to-Know Act of 1986; the Clean
Air Act of 1966, as amended by the Clean Air Act Amendments of 1990; the
Occupational Safety and Health Act of 1970, as amended; and the Safe Drinking
Water Act of 1974, as amended; and shall not include the Americans With
Disabilities Act of 1990; and "Hazardous Material" means any substance,
chemical, compound, product, solid, gas, liquid, waste, by-product, pollutant,
contaminant or material which is regulated as hazardous or toxic under any
federal, state or local statute, regulation, rule, order, or ordinance, and
includes, without limitation, asbestos
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or any substance containing asbestos, polychlorinated biphenyls or petroleum
(including crude oil or any fraction thereof).
2.24 Net Worth; Statutory Surplus; No Dividends. The consolidated net
worth of CPI as of December 31, 1996 determined in accordance with GAAP as
described in Section 2.4(b) of the Seller Disclosure Schedule, and the statutory
surplus of CPI determined in accordance with SAP, adjusted to exclude (i) the
assets and liabilities of the accident and health insurance business of CPI and
CPF and (ii) Intramerica, was $388.3 million and $316.3 million, respectively.
From January 1, 1997 through the date of this Agreement CPI has not paid any
dividend or made any other distribution in respect of its capital stock to any
Seller or any affiliates of the Sellers.
2.25 No Regulatory Disqualifiers. To the knowledge of the Sellers, no
event has occurred or condition exists or, to the extent it is within the
control of the Sellers or the Companies, will occur or exist with respect to the
Sellers or the Companies, that in connection with the transactions contemplated
by this Agreement would cause the Sellers or the Companies to fail to satisfy
any applicable Law of any Insurance Regulator or other Governmental Entity which
prevents or would reasonably be likely to prevent the Sellers or the Companies
from obtaining necessary approvals from any Governmental Entity to consummate
the transactions contemplated by this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser hereby represents and warrants to the Sellers as follows:
3.1 Organization, Good Standing and Corporate Power. The Purchaser is a
corporation duly organized, validly existing, and in good standing under the
Laws of the jurisdiction in which it is incorporated and has the requisite
corporate power and authority to own, lease or otherwise hold its properties and
assets and to carry on its business as now being conducted. The Purchaser is
duly qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or leasing of
its assets makes such qualification or licensing necessary, except where the
failure to be so qualified or licensed does not have and could not reasonably be
expected to have a material adverse effect on (i) the business, financial
condition or results of operations of Purchaser and its subsidiaries, taken as a
whole, (ii) the
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ability of the Purchaser to consummate the transactions contemplated by this
Agreement or (iii) the validity or enforceability of this Agreement (each a
"Purchaser Material Adverse Effect").
3.2 Authority; Noncontravention. The Purchaser has all requisite corporate
power and authority to enter into this Agreement and to consummate the other
transactions contemplated by this Agreement. The execution and delivery of this
Agreement by the Purchaser and the performance by the Purchaser of its
obligations under this Agreement have been duly authorized by all necessary
corporate action on the part of the Purchaser. This Agreement has been duly
executed and delivered by the Purchaser and assuming that this Agreement
constitutes a valid and binding agreement of the Sellers, constitutes a legal,
valid, and binding obligation of the Purchaser and is enforceable against the
Purchaser in accordance with its terms, except to the extent that the
enforcement hereof may be limited by (i) any bankruptcy, insolvency,
reorganization, moratorium, or similar Laws now or hereafter in effect relating
to or limiting creditors' rights generally and (ii) general principles of equity
(regardless of whether enforceability is considered in a proceeding at law or in
equity).
The execution and delivery of this Agreement do not, and the consummation
of the transactions contemplated by this Agreement and compliance with the
provisions of this Agreement will not, (i) conflict with any of the provisions
of the articles or certificate of incorporation or by-laws of the Purchaser,
(ii) subject to the governmental filings and other matters referred to in the
following sentence, conflict with, result in a breach of or default (with or
without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation or loss of a
material benefit under, or require the consent of any person under, or resulting
in the imposition of any Lien on any of the properties or assets of the
Purchaser under any indenture, or other agreement, permit, concession,
franchise, license or other instrument or undertaking to which the Purchaser is
a party or by which the Purchaser or any of its assets is bound, or (iii)
subject to the governmental filings and other matters referred to in the
following sentence, contravene any Law or any order, writ, judgment, injunction,
decree, determination or award currently in effect which, individually or in the
aggregate, would have a Purchaser Material Adverse Effect. No consent, approval
or authorization of, or declaration or filing with, or notice to, any
Governmental Entity which has not been received or made is required by or with
respect to the Purchaser in connection with the execution and delivery of this
Agreement by the Purchaser or the consummation
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by the Purchaser of any of the transactions contemplated by this Agreement,
except for (i) the filing of premerger notification and report forms under the
HSR Act, (ii) the filings and/or notices required under the insurance laws of
the jurisdictions set forth in Section 3.2 of the Purchaser Disclosure Schedule,
and (iii) such other consents, approvals, authorizations, filings or notices of
which the failure to obtain would not, individually or in the aggregate, have a
Purchaser Material Adverse Effect. The "Purchaser Disclosure Schedule" is the
disclosure schedule dated the date hereof and delivered concurrently herewith by
the Purchaser to the Sellers.
3.3 Litigation. Except as disclosed in Section 3.3 of the Purchaser
Disclosure Schedule, there is no action, suit, investigation or proceeding
pending, or, to the knowledge of the Purchaser, threatened, against the
Purchaser or any subsidiary of the Purchaser, or affecting any of their assets
or properties at law or in equity, in, before, or by any person or entity that
has had or could reasonably be expected to have a material adverse effect on the
validity or enforceability of this Agreement or on the ability of the Purchaser
to perform its obligations under this Agreement.
3.4 Brokers. All negotiations relative to this Agreement and the
transactions contemplated hereby have been carried out by the Purchaser directly
with the Sellers, without the intervention of any person on behalf of the
Purchaser in such manner as to give rise to any valid claim by any person
against the Sellers, the Companies or any of their respective subsidiaries for a
finder's fee, brokerage commission, transaction fee, investment banking fee, or
similar payment.
3.5 Purchase for Investment. The Shares will be acquired by the Purchaser
for its own account, for investment only and Purchaser has no present intention
of resale or other distribution thereof. The Purchaser will refrain from
transferring or otherwise disposing of any Shares, or any interest therein, in
such manner as to violate any registration provision of federal or state
securities Laws.
3.6 No Regulatory Disqualifiers. To the knowledge of the Purchaser, no
event has occurred or condition exists or, to the extent it is within the
control of the Purchaser, will occur or exist with respect to the Purchaser,
that in connection with the transactions contemplated by this Agreement would
cause the Purchaser to fail to satisfy any applicable Law of any Insurance
Regulator or other Governmental Entity which prevents or would reasonably be
likely to prevent the Purchaser from obtaining
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necessary approvals from any Governmental Entity to consummate the transactions
contemplated by this Agreement.
3.7 Accuracy of Information. No representation or warranty by the
Purchaser contained in this Agreement (including the Purchaser Disclosure
Schedule) contains any untrue statement of a material fact, or omits to state a
material fact necessary to make the statements contained herein not misleading.
3.8 Funding. The Purchaser will have sufficient funds to consummate the
purchase of the Shares at the Closing as contemplated in this Agreement.
ARTICLE IV
ADDITIONAL AGREEMENTS
4.1 Access to Information; Confidentiality. (a) Upon reasonable notice,
each of the Sellers shall afford to the Purchaser and to the officers,
employees, counsel, financial advisors and other representatives of the
Purchaser reasonable access during normal business hours during the period prior
to the Closing to all the properties, leased facilities, books, contracts,
commitments, personnel and records of the Companies and, during such period,
each of the Sellers and the Companies shall furnish as promptly as practicable
to the Purchaser such information concerning its business, properties, financial
condition, operations and personnel and such other information regarding
affiliates of the Sellers in connection with the Companies as the Purchaser may
from time to time reasonably request. Except as required by Law, the Purchaser
will hold, and will cause its respective directors, officers, partners,
employees, accountants, counsel, financial advisors and other representatives
and affiliates to hold, any nonpublic information obtained from the Sellers in
confidence to the extent required by, and in accordance with, the provisions of
the letter dated May 16, 1996 , between General Electric Equity Group Capital,
Inc. and Leucadia (the "Confidentiality Agreement"). The Confidentiality
Agreement is hereby reaffirmed by the Purchaser and Leucadia, and shall be
deemed to cover the business and operations of Charter and its subsidiaries. The
Confidentiality Agreement between Charter and GE Capital Assurance dated
February 28, 1997 is hereby terminated.
In addition, Purchaser agrees for itself and its affiliates to keep
confidential all non-public confidential or proprietary information concerning
Sellers and Sellers' affiliates for so
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long as Sellers or Purchaser have any obligations under this Agreement.
Notwithstanding the foregoing, following the Closing, the Purchaser shall have
no obligation to keep confidential any information concerning the Companies,
other than non-public confidential information relating to environmental issues.
The information required to be kept confidential under the preceding two
sentences shall be kept confidential unless and only to the extent that, in the
written opinion of counsel to Purchaser, such disclosure is required by law
provided that Purchaser shall give Sellers as much prior notice of such
disclosure requirement to Leucadia as is reasonable under the circumstances.
At the Closing, Sellers and the Purchaser shall enter into a
confidentiality agreement pursuant to which Sellers shall agree to keep
confidential and not to utilize, on terms customary for such agreements, any
non-public information in the possession of Sellers or their affiliates
concerning the Companies. From the date hereof, the Sellers agree that lists of
names used by the Companies in the conduct of their business or in the
possession or under the control of the Companies prior to the Closing Date shall
(subject to the requirements of Section 4.13 of the Conseco Contract) (i) be
kept confidential and (ii) not be provided to or used by Sellers or Sellers'
affiliates (other than the Companies); provided, however, that this restriction
shall not apply to customer lists that are or become public (other than as a
result of disclosure by Sellers or Sellers' affiliates) or that are for
involuntary automobile insurance, excluding involuntary automobile insurance
policyholder lists, which shall be covered by the confidentiality provisions of
this paragraph.
(b) Without limiting clause (a) above, during the period prior to Closing,
Purchaser, at its own expense, shall have the right to conduct an environmental
due diligence investigation pursuant to the terms of the letter agreement, dated
June 11, 1997 between the Purchaser and Leucadia (the "Environmental Letter
Agreement"), which shall be modified to permit Purchaser to perform such
environmental due diligence investigation on any real property or facility owned
or leased by any of the Companies and certain additional testing as set forth
therein.
(c) At the Closing, Sellers shall assign to Purchaser the non-exclusive
right to enforce the rights of any Seller and its affiliates under any
confidentiality agreements between any Seller and prospective acquirors of the
Companies entered into on or after January 1, 1996 copies of which will be
provided to Purchaser at Closing (with any redacting required to preserve
confidentiality).
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4.2 Commercially Reasonable Efforts; Structuring Cooperation. Upon the
terms and subject to the conditions and other agreements set forth in this
Agreement, each of the Sellers and the Purchaser agree to use commercially
reasonable efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, and to assist and cooperate with the other parties hereto in
doing, all things necessary, proper or advisable to consummate and make
effective, in the most expeditious manner practicable, the transactions
contemplated by this Agreement. Each of the Sellers and the Purchaser will
cooperate with the other in making any appropriate adjustments to the
structuring of the transactions effected pursuant to this Agreement in a fashion
that will maximize the benefits to the parties but will not adversely affect
either party.
4.3 Public Announcements. The Sellers and the Purchaser will consult and
make a good faith effort to agree with each other before issuing, and provide
each other the opportunity to review, comment upon and approve, any press
release or other public statements with respect to this Agreement or the
transactions contemplated by this Agreement, and shall not issue any such press
release or make any such public statement without the prior approval thereof by
the Sellers and the Purchaser (such approval not to be unreasonably withheld),
except as may be required by applicable Law, judicial or administrative process
or by obligations pursuant to any listing agreement with any national securities
exchange or the Nasdaq Stock Market.
4.4 Consents, Approvals and Filings. (a) The Sellers and the Purchaser
will make and the Purchaser and the Sellers will cause their respective
subsidiaries to make all necessary filings, as soon as practicable, but in no
event later than 20 business days after the date of this Agreement, including,
without limitation, those required under the HSR Act, and applicable state
insurance laws in order to facilitate prompt consummation of the transactions
contemplated by this Agreement. In addition, the Sellers and the Purchaser will
each use commercially reasonable efforts, and will cooperate fully with each
other to obtain as promptly as practicable all necessary Permits of Governmental
Entities and consents of all third parties necessary for the consummation of the
transactions contemplated in this Agreement. Each of the Sellers and the
Purchaser shall use its commercially reasonable efforts to promptly provide such
information and communications to Governmental Entities as such Governmental
Entities may request.
(b) Without limiting the generality of Section 4.4(a), Leucadia and
Purchaser will, as promptly as practicable, cooperate to prepare and file with
the Securities and Exchange
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Commission (the "SEC") a proxy statement in connection with the vote of
Leucadia's shareholders with respect to this Agreement and the transactions
contemplated hereby (such proxy statement, together with any amendments thereof
or supplements thereto, in each case in the form or forms mailed to Leucadia's
shareholders, is herein called the "Proxy Statement"). Leucadia will notify
Purchaser promptly of the receipt of any comments from the SEC or its staff and
of any request by the SEC or its staff for amendments or supplements to the
Proxy Statement or for additional information, will use its best efforts, in
consultation with Purchaser insofar as such comments specifically relate to the
Purchaser, to respond to any comments of the SEC or its staff and will supply
Purchaser with copies of all correspondence between Leucadia or any of its
representatives, on the one hand, and the SEC or its staff, on the other hand,
with respect to the Proxy Statement. Leucadia and Purchaser will use
commercially reasonable efforts to have or cause the Proxy Statement to become
definitive as promptly as practicable following the clearance of the Proxy
Statement by the SEC. Leucadia and Purchaser also will take any other related
action required to be taken under federal or state securities laws, and Leucadia
will use commercially reasonable efforts to cause the Proxy Statement to be
mailed to shareholders of Leucadia at the earliest practicable date.
4.5 Tax Matters.
(a) Subject to Sections 9.4(e) and the provisions of this Section 4.5
hereof, the Sellers will be responsible for, will pay or cause to be paid, and
will indemnify and hold harmless the Purchaser from and against, any and all
monetary damages, liabilities, loss suffered as a result of the imposition by
any taxing authority of an offset right against an amount otherwise recoverable
by the indemnitee, fines, fees, penalties, interest and expenses (including,
without limitation, reasonable fees and disbursements of counsel incident to the
enforcement of rights to indemnification under this Section 4.5, but excluding
any such expenses attributable to the Purchaser's pursuing (whether itself or
through its representatives) its rights to consult, defend, consent or otherwise
participate in any Tax Claim (defined below) under this Section 4.5)
("Indemnifiable Losses") for or in respect of each of the following:
(i) any Taxes imposed on or attributable to the income, assets or
operations of any of the Companies to the extent such Tax is imposed with
respect to any taxable period of any such Company ending on or prior to
December 31, 1996 (ignoring, for purposes of determining Taxes described
in this Section 4.5(a)(i), treatment of the
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Companies as "new corporations" as a result of the Section 338 Elections
(defined below)); provided, however, that any such Taxes shall be treated
as Indemnifiable Losses only to the extent the aggregate amount of any
such Taxes exceeds $15,366,042 ("Pre-1997 Taxes"); provided, however, that
no claim by the Purchaser under this Section 4.5(a)(i) for indemnification
may be made in respect of any such Pre-1997 Taxes by virtue of the fact
that such Taxes were paid by, or in respect of which a payment was made
by, any of the Companies prior to January 1, 1997;
(ii) any Taxes not described in clause (i) of this Section 4.5(a)
and imposed on any of the Companies and attributable to the income, assets
or operations of any member of a consolidated or combined group of which
any of the Companies is or was a member on or prior to the Closing Date
and so imposed pursuant to Treasury Regulation Section 1.1502-6(a) or any
analogous or similar state, local or foreign Law ("Pre-Closing Taxes");
and
(iii) any Taxes attributable to: (x) the deemed sale of assets
pursuant to the Section 338 Elections ("Section 338 Taxes"); (y)
effectuation of the A&H Reinsurance Agreements (as defined in Section 2.17
hereof); (z) the income or gain, if any, recognized by any of the
Companies, upon the transfer, distribution or other disposition of assets
by any of the Companies on or prior to the Closing Date if such transfer,
distribution or disposition is required or expressly permitted under this
Agreement, excluding any transfer taxes (or similar taxes) imposed in
respect of the transfer or distribution of the Monroe Property pursuant to
Section 4.17 hereof (collectively, the Taxes described in this Section
4.5(a)(iii) are referred to herein as the "Indemnifiable 1997 Taxes"). In
determining the amount of Indemnifiable 1997 Taxes, proper account shall
be made for losses, deductions, credits and any other tax benefits ("Tax
Items") to the extent that any such Tax Item (i) offsets or reduces the
income or gain, or the Taxes, attributable to the Section 338 Elections or
the transactions described in this Section 4.5(a)(iii) (the "1997
Elections/Transactions") and (ii) except with respect to any such Tax Item
arising from the 1997 Elections/Transactions, would not be treated as
offsetting or reducing any other income, gain or Tax in Sellers
Consolidated Returns (defined below) in the absence of the 1997
Elections/Transactions. Indemnifiable 1997 Taxes shall not include any
Taxes attributable to or resulting from any change in the bases of the
assets of any of the Companies as compared with their bases prior to and
as a result of the Section 338 Elections.
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Notwithstanding the foregoing, other than Taxes described in the preceding
clauses (i), (ii) or (iii) of this Section 4.5(a), neither Sellers nor any of
their affiliates will be responsible for any Taxes.
(b) The Purchaser will promptly notify the Sellers of the commencement of
any claim, audit, examination, or other proposed change or adjustment by any
taxing authority, as well as any notice of assessment and any notice and demand
for payment issued under Section 6303 of the Code (or similar provision),
concerning any Taxes or other Indemnifiable Losses covered by Section 4.5(a)
("Tax Claim"). The Sellers shall control the strategy, defense and settlement of
any Tax audit or administrative or court proceeding relating to Taxes, including
but not limited to extension of the applicable statute(s) of limitations, of
Sellers or any of the Companies that may be subject to indemnification under
Section 4.5(a), and the Purchaser agrees to fully cooperate with the Sellers and
to cause the Companies to fully cooperate with the Sellers, including, but not
limited to, providing powers of attorney authorizing the Sellers (or their
designees) to control and take action in connection with any such Taxes;
provided, however, that Sellers may not, without the prior written consent of
Purchaser, which consent shall not be unreasonably withheld, execute final
settlement agreements concerning any such Taxes if such settlement would have a
material adverse effect on the Companies taken as a whole or would result in
material Taxes for which Purchaser is responsible under Section 4.5(c) hereof.
The Sellers shall promptly notify the Purchaser if the Sellers decide not to
participate in the defense of any such Tax audit or administrative or court
proceeding and the Purchaser thereupon shall be permitted (at its own expense)
to defend such Tax audit or proceeding, in which event Sellers agree to fully
cooperate with Purchaser,including, but not limited to, providing any necessary
powers of attorney authorizing Purchaser (or its designee) to control and take
action in connection with such defense; provided, however, that no settlement
shall be made without the prior written consent of the Sellers, which consent
shall not be unreasonably withheld. In the event of a failure of the Purchaser
to provide notice to Sellers or to provide cooperation as required under this
Section 4.5(b), Sellers' obligation to indemnify Purchaser under this Section
4.5 shall be reduced to the extent of the Indemnifiable Losses with respect to
which Sellers' ability to defend against the claim underlying such indemnity
obligation has been prejudiced by such failure.
(c) The Purchaser and the Companies will be responsible for, will pay or
cause to be paid pursuant to clause (e) below or otherwise, and will indemnify
and hold harmless the Sellers from
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and against, any and all Indemnifiable Losses for or in respect of any Taxes
(excluding any Taxes described in clause (ii) or (iii) of Section 4.5(a) hereof)
with respect to any taxable period of any of the Companies beginning after
December 31, 1996. The Sellers agree to fully cooperate with the Purchaser in
preparing to defend against the imposition of such Taxes by any taxing
authority. In the event of a failure of Sellers to provide cooperation as
required under this Section 4.5(c), Purchaser's obligation to indemnify Sellers
under this Section 4.5 shall be reduced to the extent of the Indemnifiable
Losses with respect to which Purchaser's ability to defend against the claim
underlying such indemnity obligation has been prejudiced by such failure.
(d) Any claim for indemnity under this Section 4.5 may be made at any time
prior to the expiration of the applicable Tax statute of limitations with
respect to the relevant taxable period (including all periods of extension,
whether automatic or permissive). Any such claim shall be made by the indemnitee
by providing to the indemnifying party written notice thereof, provided,
however, that such provision of notice shall not be a condition to
indemnification under this Section 4.5 except to the extent of actual and
material prejudice to the indemnifying party.
(e) Except as provided in the succeeding sentences, as of the Closing Date
none of the Companies shall be a party to or have any further obligations or
rights under any tax sharing or tax allocation agreement with the Sellers and
its affiliates. The Companies currently are parties to a tax sharing agreement
with Leucadia, a copy of which has been made available to Purchaser (the "Tax
Sharing Agreement"). Within ninety days after the Closing Date, the Sellers
shall provide the Purchaser with a schedule setting forth the liability of the
Companies for Taxes for the Sellers' 1997 taxable year computed in accordance
with the Tax Sharing Agreement ("1997 Tax Sharing Payment"). The 1997 Tax
Sharing Payment shall be calculated using principles consistent with prior
practice; provided, however, that in calculating and determining the amount of
the 1997 Tax Sharing Payment, the tax consequences of the 1997
Elections/Transactions shall be disregarded so that the responsibility for Taxes
properly allocable to such 1997 Elections/Transactions shall be as provided in
Section 4.5(a)(iii) hereof. If the Purchaser disputes the 1997 Tax Sharing
Payment, the Purchaser shall advise the Sellers of its objections to the 1997
Tax Sharing Payment, and the reasons for such objections, in writing within 30
days of the receipt thereof. The Sellers and the Purchaser shall negotiate in
good faith to resolve any such written objections to the Sellers' computation of
the 1997 Tax Sharing Payment. If
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such disputes are not resolved within 30 days, any remaining disputes shall be
referred to a big six accounting firm (the "Auditor") which is mutually
acceptable to the Sellers and the Purchaser for resolution. The Auditor shall
issue a written report which sets forth the 1997 Tax Sharing Payment as finally
determined. Within five days of the 1997 Tax Sharing Payment being finally
determined (whether pursuant to agreement or through the Auditor's
determination), the Companies shall pay their respective allocable share of the
1997 Tax Sharing Payment to the Sellers. Fees and expenses of the Auditor shall
be shared equally by Sellers, on the one hand, and Purchaser. Notwithstanding
anything contained herein to the contrary, the rights and obligations of each
Company under the Tax Sharing Agreement in respect of all periods, including
portions thereof, through the Closing shall continue notwithstanding the
termination of such Tax Sharing Agreement.
(f) The Sellers shall prepare and file or cause to be prepared and filed
(i) all Tax Returns required to reflect the income, assets or operations of the
Companies and required to be filed (taking into account any extensions) on or
prior to the Closing Date and any Tax Returns required to be filed thereafter in
respect of any Taxes for which Sellers are responsible pursuant to Section
4.5(a), and (ii) all Seller Consolidated Returns (together with the Tax Returns
referred to in clause (i) above, the "Seller Returns"). In the Seller
Consolidated Returns for each of the taxable periods ended December 31, 1996 and
ending December 31, 1997, Sellers (i) shall make any statements necessary, in
Sellers' reasonable judgement, to avoid the imposition of penalties under
Section 6662 of the Code, and (ii) shall not make any election under Section
453(d) of the Code with respect to any disposition occurring in either of such
taxable periods, without the written consent of Purchaser, which may not be
unreasonably withheld. On or prior to August 1, 1998, Sellers shall provide to
Purchaser copies of the pro forma portions of Sellers' consolidated federal
income tax return for the period ending December 31, 1997 relating to the
Companies, and Sellers and Purchaser shall use all best efforts and cooperate in
good faith toward resolving any material disputes concerning such information
and tax return positions; provided, however, that said return shall in all
events be filed no later than September 15, 1998 notwithstanding any unresolved
dispute between Sellers and Purchaser.
The Purchaser shall be responsible for preparing or filing, or
causing the Companies to prepare and file, all other Tax Returns required to be
filed by any of the Companies after the Closing Date ("Other Returns"). Except
with respect to any Other Return filed with respect to a Company in a
jurisdiction
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giving effect to the Section 338 Elections and the preparation of which Other
Return is affected by the treatment in such jurisdiction of such Company as a
new taxpayer as a result of the Section 338 Elections, (i) Purchaser may not
take any position on an Other Return that Purchaser knows or should know
(without a duty to review Company Tax Returns for tax periods beginning prior to
Closing) is inconsistent with a position taken on a Tax Return prepared and
filed by the Sellers for any period prior to Closing, except with the consent of
Seller, which may not be unreasonably withheld, and (ii) Purchaser shall provide
the Sellers with the opportunity to review and comment upon all or a portion of
the Other Returns, as the context may require, to the extent Purchaser knows or
should know (without a duty to review Company Tax Returns for tax periods
beginning prior to Closing) that all or a portion of such Other Returns may give
rise to a material claim for indemnification against the Sellers hereunder or
could affect Pre-1997 Taxes, Pre-Closing Taxes, or Indemnifiable 1997 Taxes, or
Tax Returns relating thereto) at least 30 days prior to the filing thereof.
"Seller Consolidated Returns" shall mean all consolidated or combined Tax
Returns which include the taxable income or loss of any of the Companies and any
of the Sellers.
(g) Neither the Purchaser nor any of the Companies shall file any amended
Tax Return which may give rise to a claim for indemnification hereunder without
the prior written consent of the Sellers, which may not be unreasonably
withheld. The Sellers shall have exclusive authority to make all decisions with
respect to matters relating to any Seller Return, including, but not limited to,
decisions to amend a Seller Return, to extend the statutes of limitations with
respect to any periods covered by a Seller Return, and to concede, settle,
compromise or contest any adjustment asserted by a taxing authority with respect
to a Seller Return; provided, however, that Seller may not voluntarily file any
amended Tax Return, (except in connection with the resolution of any Tax Claim
described in Section 4.5(b), provided that any such resolution is reached in a
manner consistent with Section 4.5(b)), that would materially increase any
Indemnifiable Loss described in Section 4.5(a), except with the prior written
consent of Purchaser, which may not be unreasonably withheld.
(h) The Sellers and the Purchaser will cooperate with one another in
connection with the preparation and filing of Seller Returns and Other Returns
and will provide to each other access, at any reasonable time and from time to
time, at the business location at which the books and records are maintained,
after the Closing Date, to such Tax data relating to the Companies as Sellers or
Purchaser, as the case may be, may from time to time reasonably request
(including the relevant portions of Seller
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Consolidated Returns). Sellers agree that, on or prior to Closing, the Companies
shall have in their possession those documents listed in Section 4.5(h) of the
Seller Disclosure Schedule.
(i) Sellers shall be entitled to receive and to retain any and all refunds
of Taxes (i) relating to Seller Returns (including any refunds of Taxes arising
from a carryback of losses by any of the Companies) or (ii) in respect of any of
the Companies for any taxable period ending on or prior to December 31, 1996.
Purchaser shall be entitled to retain all other refunds relating to Taxes of the
Companies. In the event the Purchaser (Sellers) or any of the Companies receives
any refund (whether through payment, credit or reduction in Taxes) to which the
Sellers (Purchaser) are entitled hereunder, the Purchaser (Sellers) shall
promptly pay, or cause the payment of, such refund to the Sellers (Purchaser).
(j) Notwithstanding anything to the contrary contained herein, in
calculating the amount of any claim for indemnification pursuant to this
Agreement (including pursuant to this Section 4.5 and Article IX hereof),
Indemnifiable Losses and Damages (as defined in Section 9.1 hereof) shall be
reduced (but not below zero) by any Tax Benefit attributable to, realized (or to
be realized) in connection with or relating to such indemnifiable claim. The
term "Tax Benefit" means the amount by which any Taxes of the indemnified party
(the Purchaser or any of the Companies on the one hand, or the Sellers on the
other hand) or any affiliate thereof (the "Benefitted Party") are or would be
reduced by any loss, deduction, refund, credit or other Tax benefit and
includes, without limitation, the amount of any Tax Benefit realized or to be
realized by the Benefitted Party in a subsequent taxable period (including,
without limitation, a taxable period ending after the Closing Date) attributable
to, realized (or to be realized) in connection with or relating to an adjustment
with respect to Taxes in a prior taxable period. For purposes of the
determination of the amount of any Tax Benefit which is not currently realized,
(i) the Benefitted Party shall be assumed to have sufficient taxable income to
use any Tax Benefit in the taxable period or periods in which such Tax Benefit
will first arise; (ii) the Effective Tax Rate (as hereinafter defined) in the
most recent applicable taxable period shall be treated as applying to such Tax
Benefit to be realized in such future taxable period; (iii) the amount of Tax
Benefits shall be discounted to the present value of such Tax Benefits,
determined using a discount rate equal to the applicable federal rate under
Section 1274(d) of the Code for the period over which such Tax Benefits will be
realized under clause (i) above; (iv) appropriate adjustments shall be made
taking account of any
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income recognition (or other costs) resulting from such Tax Benefit for any of
the Companies in any period covered by the Other Returns, using the assumptions
and discounting convention provided in this Section 4.5(j); (v) no Tax Benefit
shall be ascribed to additional tax basis in an asset or other tax attribute of
a Benefitted Party if (X) the additional tax basis or other tax attribute is
neither depreciable nor amortizable (or otherwise recoverable by its nature over
a period of time), and (Y) the Benefitted Party is not otherwise likely to
realize any Tax Benefit from such additional tax basis or other tax attribute,
provided, however, that in the case of any such additional tax basis or other
tax attribute described in this clause (v), the amount of any Tax Benefit (to
the extent not in excess of the amount previously received by the Benefitted
Party in satisfaction of the underlying indemnity obligation) actually realized
by the Benefitted Party at a subsequent time shall be paid to the other
(indemnifying) party; and (vi) any dispute concerning the amount of a Tax
Benefit for purposes of this Section 4.5(j) shall be resolved in a manner
consistent with the dispute resolution mechanism set forth in Section 4.5(e)
hereof. For purposes of this Section 4.5(j), Tax Benefits shall not include the
amount of any benefit realized by a Benefitted Party attributable to the tax
basis of assets resulting from the Section 338 Elections except in the case of
an indemnification pursuant to this Agreement arising from an allocation of tax
basis inconsistent with the Section 338 Allocation Principles (defined below).
The term "Effective Tax Rate" means the sum of (i) the maximum federal income
tax rate imposed on corporations for the period in question plus (ii) the
product of (A) the state and local income tax rates imposed on the applicable
corporation for the immediately preceding taxable year times (B) one minus the
maximum federal income tax rate referred to in clause (i). For this purpose, the
state and local income tax rates shall equal the sum of the total amount of
income tax imposed in each jurisdiction divided by the sum of the total amount
of taxable income in each such jurisdiction.
(k) Section 338(h)(10) Election.
(i) Election. Purchaser and Sellers shall join in an election
pursuant to Section 338(h)(10) of the Code with respect to the purchase and sale
or the deemed purchase and sale of the Shares and the stock of each Section 338
Target, and in all comparable elections under state and local Tax law with
respect to the purchase and sale of any such shares (together with the election
under Section 338(h)(10) of the Code, the "Section 338 Elections"). Consistent
with the following provisions of this Section 4.5(k), each of Purchaser and
Sellers shall take all steps required to properly and timely effect the Section
338
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Elections. Allocation of the Purchase Price among the Companies and among the
assets of the Companies made in connection with the Section 338 Elections shall
be made pursuant to the principles (the "Section 338 Allocation Principles") set
forth in Section 4.5(k) of the Seller Disclosure Schedule.
(ii) Forms.
(x) Subject to clauses (y) and (z) below, Purchaser shall prepare
drafts and execution copies of all forms and schedules required to be filed to
effect (and otherwise in connection with) the Section 338 Elections ("Section
338 Forms"), including without limitation IRS Form 8023-A and all attachments
required to be filed therewith pursuant to applicable treasury regulations and
the instructions to such form, including without limitation the allocation of
deemed purchase price among the assets of the Companies, which allocation shall
be made pursuant to the Section 338 Allocation Principles ("Form 8023"). Sellers
shall provide Purchaser with such information and records, and shall make its
employees available for consultation under regular business hours, as Purchaser
reasonably requires to prepare such Section 338 Forms. Purchaser shall timely
execute and file the Section 338 Forms with the proper taxing authorities.
(y) [INTENTIONALLY LEFT BLANK]
(z) On or before the beginning of the sixth month after the month in
which the Closing occurs, Purchaser shall deliver to Sellers a revised Final
Form 8023 which reflects proposed modifications or attachments to the form and
content of the executed Final Form 8023, and any state or local reports or forms
that are necessary or appropriate for purposes of complying with the
requirements for making the Section 338 Elections (each an "Additional Section
338 Form"). Such proposed modifications or attachments shall take into account
appropriate adjustments to reflect information available at such time. Any
adjustments to the Additional Section 338 Form, prepared pursuant to the Section
338 Allocation Principles requested by Sellers within 20 days thereafter shall
be made by Purchaser, unless Purchaser objects to such request, in which case
any such dispute shall be resolved by an Auditor who shall resolve such dispute
applying the Section 338 Allocation Principles (such Additional Section 338
Form, as so adjusted, being referred to herein as the "Final Additional Section
338 Form"). Purchaser shall prepare three copies of the Final Form 8023 and
three copies of the Final Additional Section 338 Form, if any, as determined
according to such procedures, and Sellers and/or Purchaser, as the case may be,
shall promptly execute, or cause the proper party to execute, such forms.
Purchaser shall execute and timely file such forms.
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(iii) Modification; Revocation. Except as provided in this Section,
Purchaser and Sellers shall not take, and shall not permit any of their
affiliates to take, any action to modify the Final Form 8023, the Final
Additional Section 338 Forms, if any, or any other Section 338 Forms, following
the execution thereof by Seller, or to modify or revoke the Section 338
Elections following the filing of such Forms, without the written consent of
Sellers and Purchaser.
(iv) Consistent Treatment; Reporting. Purchaser and Sellers shall
file, and shall cause their respective affiliates to file, all Tax Returns in a
manner consistent with the information contained in the Section 338 Forms.
Purchaser and Sellers shall not take, and shall not permit any of their
affiliates to take, any position contrary to the allocations reflected in such
Section 338 Forms with any government agency or taxing authority without the
express written consent of the other party. For purposes of this Section
4.5(k)(iv), any GAAP reports or filings prepared and filed in a manner
consistent with GAAP, as determined by the party preparing and filing such
report or filing, shall be treated as consistent with the information contained
in the Section 338 Forms.
(v) Purchaser Representation. Purchaser represents that it is a
domestic corporation, and, other than pursuant to this Agreement, owns no stock
or rights to acquire stock, either directly or indirectly, in any of Sellers.
(vi) Sellers Representation. The Sellers will convey, directly or
indirectly, to the Purchaser all of the shares of the outstanding stock of each
of the Section 338 Targets, including CP Mexico, which shares possess 100
percent of the total voting power of all the shares of stock in each such
Section 338 Target and have a value equal to 100 percent of the total value of
all the shares of stock in each such Section 338 Target.
4.6 Employee Benefit Matters.
(a) Prior to the Closing Date, the Sellers shall take all necessary or
desirable actions to cause CPI to assume liability for the retiree life
insurance benefits and retiree medical benefits grandfathered under CPI's
medical plan solely for five active employees of CPI and disability death
benefits, all as set forth and described in Section 4.6(a) of the Seller
Disclosure Schedule.
(b) Prior to the Closing Date, the Sellers shall take all necessary or
desirable actions to cause CPG to assume liability for the retiree life
insurance benefits and retiree medical
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benefits all as set forth in Section 4.6(b) of the Seller Disclosure Schedule.
(c) Prior to the Closing Date, the Sellers shall take all necessary or
desirable actions to cause CPG to assume liability for, and become plan sponsor
of, the Colonial Penn Insurance Company Salary Cap Restoration Plan.
(d) Prior to the Closing Date, the Sellers shall cause CPI to assume the
obligations of CPG under those certain executive severance pay agreements set
forth in Section 4.6(d) of the Seller Disclosure Schedule.
(e) Prior to the Closing Date, the Sellers shall take all necessary or
desirable actions to cause CPG to become plan sponsor of the Colonial Penn
Insurance Company Long Term Disability Plan and the Colonial Penn Insurance
Company Employee Life Insurance Plan, with CPI becoming a participating employer
therein. Effective on the Closing Date, CPI shall terminate its participation in
the above plans, so that CPG will be responsible for claims incurred prior to
the Closing Date.
(f) Prior to the Closing Date, the Sellers shall take all necessary or
desirable actions to cause CPG to become plan sponsor of the Colonial Penn
Insurance Company Employee Health and Dental Plan, with CPI becoming a
participating employer therein. Effective on the Closing Date, CPI shall
terminate its participation in the above plan and CPG shall assume
responsibility for health and dental claims incurred on or before the Closing
Date by: (i) all active CPI employees and their beneficiaries, (ii) all former
CPI employees and their beneficiaries who are entitled to and/or are receiving
health care continuation coverage under applicable provisions of Part 6 of
Subtitle B of Title I of ERISA, and (iii) all disabled employees or former
employees and their beneficiaries who are entitled to health and dental benefits
under the terms of the Colonial Penn Insurance Company Long Term Disability Plan
and short term disability policy (collectively referred to as "CPI Employees").
Following the Closing Date, health and dental benefits, and life insurance
benefits, of CPI Employees shall be the responsibility of CPI, and the CPI
Employees shall commence participation, effective immediately following the
Closing Date, in life insurance, health and dental plans in which CPI is then
participating. Such plans will (i) waive all limitations as to pre-existing
condition exclusions and waiting periods with respect to participation and
coverage requirements applicable to the CPI Employees, other than limitations or
waiting periods that were in effect with respect to the CPI Employees under the
Colonial Penn Insurance Company Employee Life Insurance Plan, and
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the Colonial Penn Insurance Company Employee Health and Dental Plan,
respectively, that were not satisfied as of the close of business on the Closing
Date and, (ii) provide each CPI Employee with credit for any premiums,
co-payments and deductibles paid prior to the close of business on the Closing
Date in satisfying any deductible and out-of-pocket requirements under such
plans.
(g) Purchaser shall cause its employees to provide all reasonable
assistance to Sellers and will provide Sellers with access to such information,
in their possession or in the possession of CPI, as is reasonably necessary or
desirable to enable Sellers to prepare annual reports for each Plan and Benefit
Plan of which Leucadia, CPG or a Leucadia Subsidiary is plan sponsor for the
plan year of each such Plan and Benefit Plan during which the Closing Date
occurs. Sellers shall provide Purchaser with reasonable access to the CPI
Employees for purposes of CPI Employees making benefit plan elections and for
related administrative matters.
(h) Purchaser shall pay to Sellers on the Closing Date the Amount of
$15,307,121 in consideration of Sellers' retention of certain Plan and Benefit
Plan liabilities to CPI Employees, as detailed on Schedule 4.6 to the Seller
Disclosure Schedule.
(i) Effective as of the Closing Date, CPI shall cease to be a
participating employer in the Colonial Penn Group, Inc. Retirement Plan
("Retirement Plan") and the Colonial Penn Group Savings Plan ("Savings Plan"),
and CPG shall cause the Retirement Plan and the Savings Plan to be amended to
provide that notwithstanding such Plan's regular vesting rules, the accrued
benefits under the Retirement Plan and the account balances in the Savings Plan
of all participants therein who were actively employed by CPI immediately prior
to the Closing Date shall become fully vested as of the Closing Date. Purchaser
shall reimburse Sellers for any amounts paid by Sellers to the issuers of any
group annuity contracts held as investments under the Savings Plan to ensure
that such issuers do not impose a market value adjustment on the accounts of the
Savings Plan under such group annuity contracts due to the termination of
participation of CPI and its employees in the Savings Plan and/or the
distribution of Savings Plan account balances to CPI employees following the
Closing Date. In the event a market value adjustment is imposed on any group
annuity contract due to the termination of participation of CPI and its
employees in the Savings Plan and/or the distribution of Savings Plan account
balances to CPI employees following the Closing Date, Purchaser shall reimburse
Sellers for an amount equal to any amounts either contributed by Sellers to the
Savings Plan or distributed by
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Sellers to Savings Plan participants to reimburse Savings Plan participants for
any such market value adjustment.
4.7 Intercompany Agreements. Except for the agreements listed in Section
4.7 of the Seller Disclosure Schedule and agreements pursuant to Section 4.16
hereof, and except as expressly otherwise provided in Section 4.5(e) hereof, all
intercompany agreements between either Seller or any of their affiliates (other
than the Companies), on the one hand, and any of the Companies, on the other
hand, including without limitation, any allocation, indemnification or similar
agreement or arrangement by Seller for the benefit of any of the Companies (the
"Intercompany Agreements"), all of which are listed in Schedule 2.13(a), will
terminate on or prior to the Closing Date. All balances owed to or due from
Sellers or any of their affiliates (other than the Companies) from or to any of
the Companies pursuant to any intercompany agreement to be so terminated shall
be settled as of the Closing Date and paid within 30 days thereafter; provided,
that with respect to Intercompany Agreements for management services or
investment advisory services, fees therefor shall cease to accrue at the end of
the fiscal quarter immediately preceding the fiscal quarter in which this
Agreement is entered into. All sums that would otherwise be payable under the
Intercompany Agreement(s) noted with an asterisk in Section 2.13(a)(i) of the
Seller Disclosure Schedule have been waived. Sellers agree that from the date
hereof to the Closing Date such waiver will remain in effect and will not be
modified or terminated. Notwithstanding the foregoing, termination of the Tax
Sharing Agreement and payment of balances owing thereunder shall be governed by
Section 4.5 hereof.
4.8 Closing Date Cash Distributions.
(a) The Companies shall declare and to the extent permitted by applicable
law pay the following cash dividends (individually, an "Authorized Dividend" and
collectively, the "Authorized Dividends"):
(i) a $3,000,000 cash dividend from CPF (representing consideration
received in respect of the A&H Reinsurance Agreements (as defined herein))
(the "CPF Dividend"); and
(ii) a cash dividend from CPI, which shall consist of the CPF
Dividend, together with a $20,000,000 cash dividend from CPI the sources
of which may include dividends from the Subsidiaries (the "CPI Dividend").
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The Authorized Dividend shall be paid on the Closing Date. To the extent that
any Authorized Dividend shall not have been paid in full on the Closing Date (an
"Unpaid Dividend"), such Unpaid Dividend shall remain an obligation of the
Subsidiary declaring such Unpaid Dividend until paid in full. If CPI does not
pay the CPI Dividend to CP Holdings on the Closing, Purchaser shall purchase
from CP Holdings the right to receive the CPI Dividend for $20,000,000 plus the
amount of the CPF Dividend (the "Dividend Amount") in cash. If for any reason
CPI is unable to declare and pay to CP Holdings the full amount of the CPI
Dividend on the Closing Date, then Purchaser shall pay to CP Holdings at the
Closing the difference between the amount of the CPI Dividend paid to CP
Holdings and the Dividend Amount.
(b) The Sellers and the Purchaser shall cooperate and use commercially
reasonable efforts to obtain all regulatory approvals necessary to implement the
CPI Dividend and the CPF Dividend.
4.9 Hiring of Employees. Except for persons noticed for termination or
pursuant to a generally advertised solicitation, for a four-year period
following the Closing Date, the Sellers and their affiliates shall not directly
or indirectly solicit for employment or, to the knowledge of Sellers, hire any
employees of the Companies. Sellers shall be responsible for all obligations to
the employees named in Section 4.9 (a) of the Seller Disclosure Schedule under
the letters from CPI to such employees dated May 5, 1997. Purchaser shall be
responsible for all obligations to the employees named in Section 4.9(b) of the
Seller Disclosure Schedule under the letters from CPI to such employees dated
May 5, 1997.
4.10 Leucadia Stock Options. The treatment at the Closing Date of options
to purchase capital stock of Leucadia held by employees of the Companies shall
be determined by Leucadia prior to the Closing Date. All obligations with
respect to such options shall be the responsibility of Leucadia.
4.11 Resignations of Directors. Sellers will cause such members of the
Board of Directors of the Companies as are designated by Purchaser to tender,
effective at the Closing Date, their resignations from such Boards of Directors
and, if requested by Purchaser, will cause the election of Purchaser's nominees
to such Boards of Directors.
4.12 Non-Competition Agreement. For a period of three years following the
Closing Date (the "Restricted Period"), without the prior written consent of the
Purchaser, (a) Leucadia will not and will not permit any of its affiliates to
start (de novo) a
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personal lines automobile insurance business in the United States; (b) the
personal lines automobile business of Empire and its subsidiaries (collectively,
the "Empire Group"), will not expand beyond the states in which any member of
the Empire Group is licensed as of the date of this Agreement; (c) the voluntary
personal lines automobile insurance business of the Empire Group will not have
more than $250 million of gross written premium in any one statutory year; (d)
if, during the Restricted Period, Leucadia or any of its affiliates acquires any
insurance company with gross written personal lines automobile insurance premium
in excess of $300 million in the last completed statutory year of such acquired
insurance company immediately preceding the date of such acquisition by Leucadia
(the "Acquired Company"), Leucadia or such affiliate shall promptly, but in no
event later than nine months after the date of such acquisition, divest itself
of the personal lines automobile insurance operations of such Acquired Company;
provided, that, if the Acquired Company has gross written personal lines
automobile insurance premium in excess of $300 million, but less than $315
million in such Acquired Company's last completed statutory year immediately
preceding the date of such acquisition by Leucadia, Leucadia or such affiliate
shall not be required to divest itself of such personal lines automobile
insurance operations if at the end of the fiscal quarter immediately preceding
the date that is nine months after the date of acquisition of the Acquired
Company, Leucadia is able to reduce the gross written personal lines automobile
insurance premium for such three month period to $75 million or below. If such
gross written premiums are not so reduced within such time, Leucadia or such
affiliate shall promptly divest itself of such personal lines automobile
insurance operations. In no event shall gross written personal lines automobile
premium of Leucadia and its affiliates (including as a result of activities and
acquisitions permitted under clauses (b), (c) and (d) above) exceed $500 million
in any 12 month period during the Restricted Period. In addition, for a period
of four years following the Closing Date, Leucadia will not directly or
indirectly acquire any company the primary business of which is the direct
marketing of personal lines automobile insurance.
Leucadia acknowledges and agrees that this Section 4.12 is reasonable in
duration and scope and geographic area and is reasonably necessary for the
protection of Purchaser's interests under this Agreement. The parties agree and
intend that the foregoing agreements within this Section 4.12 shall be deemed to
be a series of separate covenants and agreements. In the event that in any
judicial proceeding any court determines that the duration or scope or
geographic area of any of the foregoing agreements are unreasonable and to that
extent unenforceable, the parties intend and agree that the foregoing agreements
shall
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remain in full force and effect for the greatest time period, the greatest scope
and the greatest geographic area that would not render them unenforceable.
4.13 Conseco Contract. The Purchaser acknowledges that it has read the
Conseco Contract and agrees, if the Conseco Transaction is consummated, to cause
each Company that is a party to the Conseco Contract and/or is (or is to be) a
party to any Conseco Agreement to honor and abide by all of the terms and
conditions of the Conseco Contract and the Conseco Agreements to which it is (or
is to be) a party. Without in any way limiting the foregoing, the Purchaser
expressly agrees, if the Conseco Transaction is consummated, to be bound (a) by
the restrictions set forth in Section 4.10 of the Conseco Contract and in the
Conseco License Agreement under which the Purchaser agrees that (i) following
the Closing Date, any life insurance products marketed or sold by the Purchaser
or any affiliate of the Purchaser shall be issued by an entity that does not
have the words "Colonial," "Penn" or "Colonial Penn" in its corporate name and
does not use such words in any life insurance product name and (ii) from the
Closing Date, Purchaser will not sell, assign or transfer any rights to use the
words "Colonial," "Penn" or "Colonial Penn" in connection with the insurance
business without obtaining from the purchaser, assignee or transferee of such
rights an agreement to be bound by the provisions of clause (i) above. Sellers
have previously made available to the Purchaser copies of the Conseco License
Agreement and the A&H Reinsurance Agreements in the form agreed to on the date
of this Agreement. Sellers agree to provide to Purchaser copies of all other
Conseco Agreements (the "Other Agreements") and to consult with the Purchaser as
to the terms of such Conseco Agreements as they affect any of the Companies. The
Sellers agree that neither they nor any of the Companies shall amend the Conseco
License Agreement or the A&H Reinsurance Agreements or approve or enter into or
amend any of the Other Agreements that affect any of the Companies without the
consent of the Purchaser, which consent shall not be unreasonably withheld. The
Sellers agree that they shall not take any action to terminate prior to the
Closing Date, any Conseco Agreements to which any of the Companies is a party
that has become effective prior to the Closing Date.
Sellers expressly agree that, prior to January 1, 1998 Sellers shall not
sell, convey, transfer, distribute or otherwise dispose of, permit the
satisfaction of, in whole or in part, or pledge or otherwise use (directly or
indirectly) as security for the payment of principal or interest on any
indebtedness the Conseco Notes. Sellers further agree that upon receipt of the
Conseco Notes from Conseco they shall deliver the Conseco Notes to Weil, Gotshal
& Manges as Escrow Agent pursuant to the Escrow
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Agreement between Purchaser and Weil, Gotshal & Manges, as escrow agent,
attached hereto as Exhibit A.
4.14 Intramerica. Purchaser agrees that prior to the Closing, Sellers
shall have the right to cause CPI to distribute or otherwise transfer its 98%
interest in the common stock of Intramerica to CP Holdings (the "Intramerica
Distribution") and, notwithstanding anything else to the contrary set forth in
this Agreement, to take all steps necessary or convenient in connection
therewith. The Sellers and the Purchaser shall cooperate and use commercially
reasonable efforts to consummate the Intramerica Distribution, including
obtaining regulatory approvals necessary to implement the Intramerica
Distribution.
4.15 Trademark Assignment or Limited License.
(a) Effective upon the Closing Date, and provided that the Conseco
Transaction shall have been consummated prior thereto, CPG shall assign to
Purchaser all of its right, title and interest, including all goodwill
associated therewith, in and to the trademarks, service marks and/or tradenames
(collectively, "Trademarks") listed in Section 4.15(a) of the Seller Disclosure
Schedule (the "Section 4.15(a) Marks"), free and clear of all Liens other than
the Conseco License Agreement and Purchaser covenants that it agrees to be bound
by the terms of the Conseco License Agreement.
(b) If the Conseco Transaction shall not have been
consummated prior to the Closing Date, at the Closing,
(i) CPG shall assign to Purchaser all of its right, title and
interest, including all goodwill associated therewith, in and to the
Section 4.15(a) Marks, free and clear of all Liens other than the CPL
License Agreement (as defined herein) and the Conseco License Agreement;
(ii) the Purchaser and Colonial Penn Life Insurance Company ("CPL")
shall enter into a license agreement in the form attached hereto as
Exhibit B (the "CPL License Agreement"); and
(iii) unless the Conseco Agreement shall have been terminated,
Purchaser agrees that it will enter into and deliver the Conseco License
Agreement at the closing of the Conseco Agreement, if such Closing of the
Conseco Agreement occurs within six (6) months of the Closing hereunder.
This provision shall be for the benefit of the parties to the Conseco
License Agreement.
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(c) The Sellers acknowledge that, except as provided in the CPL License
Agreement, none of the Sellers has the right to use the Section 4.15(a) Marks or
the Section 4.15(b) Marks and except as provided in clause (b)(i) above none of
the Sellers has the right to limit or restrict the Purchaser (or any affiliate
or any assignee or transferee of any of them) from using the same or the words
"Colonial" or "Penn" or "Colonial Penn".
(d) Within 30 days from the Closing Date, CPG and CP Holdings (and any
other affiliate of the Sellers having the words "Colonial Penn" in their
corporate names, other than Colonial Penn Life Insurance Company) shall amend
their respective certificates of incorporation to change their corporate names
to delete therefrom the words "Colonial Penn".
(e) Prior to the Closing Date, the Companies will waive any ownership
interest in the computer software indicated with an asterisk in Section 2.16(ii)
of the Seller Disclosure Schedule and the Sellers and Sellers' affiliates
including the Companies will enter into a license agreement licensing the
Companies' ability to use such computer software for an indefinite term, without
any software maintenance responsibility by Licensor.
4.16 Closing Prior to Conseco Transaction. If the Closing Date occurs
prior to the consummation of the Conseco Transaction, the agreements set forth
in Section 4.16 of the Seller Disclosure Schedule (the "Section 4.16
Agreements"), shall be entered into (including the A&H Reinsurance Agreements
for consideration of $3,000,000 paid by or on behalf of CPL to CPF in cash on or
prior to the Closing Date), after consultation with and consent of the Purchaser
(which consent shall not be unreasonably withheld) as to the terms of any such
agreements (other than the A&H Reinsurance Agreements) as they affect any of the
Companies and each such agreement shall be in full force and effect, on the
Closing Date (with all regulatory approvals therefor as shall be necessary
having been obtained). The Purchaser agrees that it shall cause each Company
that is a party to a Section 4.16 Agreement to honor and abide by all of the
terms and conditions of each of the Section 4.16 Agreements to which such
Company is a party.
4.17 Monroe Property. Purchaser and Sellers agree that prior to the
Closing, title to the real estate and building located at 2750 Monroe Boulevard,
Valley Forge, Pennsylvania (the "Monroe Property") will be transferred to an
affiliate of CPG (the "Monroe Affiliate") at a cash price equal to $5,882,484,
which is the statutory book value of the Monroe Property at December 31, 1996.
Purchaser shall be responsible for the payment of all transfer Taxes payable in
connection with such
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transfer. At the Closing, an affiliate of the Purchaser to be designated by
Purchaser and reasonably acceptable to Leucadia (the "Purchaser Affiliate") and
the Monroe Affiliate shall enter into a rental agreement (the "Monroe Rental
Agreement") in the form of Exhibit C hereto, pursuant to which the Monroe
Property will be rented to the Purchaser Affiliate for a rental term of 2 years.
Purchaser shall guarantee the obligations of the Purchaser Affiliate under the
Monroe Rental Agreement.
4.18 Commercial Lines Reinsurance. Sellers agree that prior to the Closing
Date they shall consult with Purchaser regarding the reinsurance of the
Companies' Commercial Lines Programs. If Purchaser requests, Sellers shall cause
the Companies (as appropriate) to enter into reinsurance agreements requested by
Purchaser, the effectiveness of each being subject to consummation of the
Closing hereunder.
4.19 Closing Date Audit. Leucadia will cooperate with the Purchaser in
engaging Coopers & Lybrand L.L.P., or another firm selected by Purchaser and
reasonably acceptable to Sellers, to conduct an audit of the Companies in
accordance with GAAP as of the Closing Date, which audit will be at the complete
expense of the Purchaser.
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS PRIOR TO CLOSING
5.1 Conduct of Business by the Companies. Except as contemplated by this
Agreement or as set forth in Section 5.1 of the Seller Disclosure Schedule
(which specifies, among other things, any exceptions required to comply with the
terms of the Conseco Contract or any Conseco Agreement), during the period from
the date of this Agreement to the Closing, the Sellers shall cause the Companies
to act and carry on their respective businesses in the ordinary course
consistent with past practice and, to the extent consistent therewith, use
reasonable efforts to preserve intact their current business organizations, keep
available the services of their current key officers and employees and preserve
the goodwill of those engaged in material business relationships with them.
Without limiting the generality of the foregoing, during the period from the
date of this Agreement to the Closing Date, except (i) as set forth in Section
5.1 of the Seller Disclosure Schedule or (ii) as otherwise contemplated under
this Agreement, the Sellers shall not permit the Companies to, without the prior
consent of the Purchaser:
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(a) (i) declare, set aside or pay any dividends on, or make any other
distributions (whether in cash, stock or property) in respect of, any of such
Company's outstanding capital stock, (ii) split, combine or reclassify any of
its outstanding capital stock or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
outstanding capital stock, or (iii) purchase, redeem or otherwise acquire any
shares of outstanding capital stock or any rights, warrants or options to
acquire any such shares;
(b) issue, sell, grant, pledge or otherwise encumber any shares of its
capital stock, any other voting securities or any securities convertible into,
or any rights, warrants or options to acquire, any such shares, voting
securities or convertible securities;
(c) amend its articles or certificate of organization, by-
laws or other comparable charter or organizational documents;
(d) (i) acquire, form or commence the operations of any business or any
corporation, partnership, joint venture, association or other business
organization or division thereof or (ii) acquire any assets having an aggregate
purchase price in excess of $250,000, except purchases of investments in
accordance with Section 5.1(g) hereof;
(e) (i) incur any indebtedness for borrowed money or guarantee or
otherwise become responsible for any such indebtedness of another person, other
than indebtedness owing to or guarantees of indebtedness owing to any other
Company; or (ii) make any loans or advances or capital contributions to any
other person, other than to any of the Companies;
(f) except with respect to Taxes, which shall be governed under Article IV
hereof, discharge, settle or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction, in the ordinary course of business
consistent with past practice or in accordance with their terms, of liabilities
reflected or reserved against in, or contemplated by, the most recent Company
Annual Statements (or the notes thereto) of such Company or incurred since the
date of such Company Annual Statements in the ordinary course of business
consistent with past practice;
(g) invest their future cash flow, any cash from matured and maturing
investments, any cash proceeds from the sale of their assets and properties, and
any cash funds currently held by them, unless in accordance with the terms of
the investment
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guidelines attached as Section 5.1 of the Purchaser Disclosure Schedule or
except as set forth in Section 5.1 of the Seller Disclosure Schedule;
(h) make any change in accounting methods, principles or practices,
including but not limited to any change with respect to establishment of
reserves for unearned premiums, losses and loss adjustment expenses, except
insofar as may be required by a change in SAP;
(i) except as may be required by Law or as otherwise
provided in this Agreement:
(i) make any representation or promise, oral or written, to any
director, officer or employee or former director, officer or employee of
such Company which is inconsistent with the terms of any Benefit Plan;
(ii) except for salary and wage increases in the ordinary course of
business and consistent with past practices, make any change to, or amend
in any way, the contracts, salaries, wages, or other compensation of any
director, officer or employee or any agent or consultant of such Company
other than changes or amendments that are required under existing
contracts as disclosed in the Seller Disclosure Schedule;
(iii) enter into any employment, severance or termination agreement
(other than pursuant to existing policies of any of the Companies
consistent with past practices, which practices shall not include the
agreements contemplated in Section 4.9 of the Seller Disclosure Schedule)
with any officer or employee, or grant any officer or employee any
increase in severance or termination pay (other than pursuant to existing
policies of any of the Companies consistent with past practices, which
practices shall not include the agreements contemplated in Section 4.9 of
the Seller Disclosure Schedule);
(iv) adopt, enter into, amend, alter or terminate, partially or
completely, any Benefit Plan or any election made pursuant to the
provisions of any Benefit Plan to accelerate any payments, obligations or
vesting schedules under any Benefit Plan; or
(v) approve any general or company-wide pay increases for employees;
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(j) except in the ordinary course of business consistent with past
practices, modify, amend or terminate any material agreement (including any
confidentiality agreement), Permit, concession, franchise, license or similar
instrument to which such Company is a party or waive, release or assign any
material rights or claims thereunder;
(k) sell, lease, license, mortgage or otherwise encumber or subject to any
Lien or transfer or dispose of assets having an aggregate book value in excess
of $200,000 other than (i) in the ordinary course of business or (ii) as set
forth in Section 5.1 of the Seller Disclosure Schedule or (iii) as otherwise
permitted hereunder;
(l) enter into any contract that would be required to be disclosed in
Section 2.13(a) or Section 2.13(b) of the Seller Disclosure Schedule;
(m) make any expenditure or commitment for additions to property, plant,
equipment or other tangible or intangible asset of the Companies, except any
expenditure or commitment that does not exceed $250,000 in the aggregate;
(n) settle or compromise (i) the Lawsuits (as defined in Section 9.3),
(ii) any litigation or claim arising out of the transactions contemplated
hereby, or (iii) any other litigation or claim if the settlement thereof
involves payment of in excess of $250,000 (other than claims for contractual
benefits under any insurance or reinsurance contract under which any Company is
the insurer or reinsurer in the ordinary course of business and consistent with
past practices); provided, that Purchaser will not unreasonably withhold its
consent to any such settlement or compromise;
(o) move the operations of any business or division to any
location other than where it is located on the date hereof; or
(p) authorize any of, or commit or agree to take any of,
the foregoing actions.
5.2 Leucadia Shareholder Meeting. As soon as practicable following the
date of this Agreement, Leucadia will duly call, give notice of, convene and
hold a meeting of its shareholders (the "Leucadia Shareholders Meeting") for the
purpose, among other things, of obtaining approval of and adoption of this
Agreement and the transactions contemplated hereby by not less than two-thirds
of the outstanding shares entitled to vote thereon "Leucadia Shareholder
Approval"). Leucadia will, through its Board of Directors, recommend to its
shareholders the
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approval and adoption of this Agreement and the transactions contemplated hereby
and, subject to Section 5.4(d) hereof, Leucadia (i) shall not modify or revoke
such recommendation and (ii) shall take all lawful action to solicit, and use
all commercially reasonable efforts to obtain, such approval.
5.3 Other Actions.
(a) The Sellers and the Purchaser shall not, and shall not permit any of
their respective subsidiaries to, take any action that would, or that could
reasonably be expected to, result in (i) any of the representations and
warranties of such party set forth in this Agreement that are qualified as to
materiality becoming untrue or that are not so qualified becoming untrue in any
material respect except as permitted by Section 5.1 above or (ii) any of the
conditions to the transactions contemplated hereby set forth in Article VI not
being satisfied.
(b) The Sellers shall not, to the extent practicable, permit any of the
Companies to, without the prior consent of Purchaser, hold any meeting of the
board of directors of the Companies or any subsidiary or any committee of any
such board, or take any action by written consent of any such board or
committee, without providing (i) notice of any such meeting no later than the
date notice is given to the board of directors or in advance of the date of any
proposed action by written consent and (ii) with such notice, an agenda of the
specific matters intended to be considered at such meeting or a copy of the
proposed written consent, unless, in the reasonable good faith judgment of the
Sellers, providing prior notice of any agenda item or any item of such written
consent will prejudice the ability of the board of directors or any committee of
the board of directors to discharge its duties, in which case such item may be
omitted from the agenda or written consent provided to the Purchaser; provided,
that such item does not relate to a matter that is or would be a violation of
this Agreement.
5.4 No Solicitation. (a) Leucadia shall not, nor shall it knowingly permit
any of its subsidiaries or any of their respective officers, directors,
employees, agents, investment bankers, attorneys, financial advisors or other
representatives (collectively, "Leucadia Representatives") to (i) solicit,
initiate or knowingly encourage the submission of, any Acquisition Proposal (as
defined below), (ii) enter into any agreement with respect to any Acquisition
Proposal, or (iii) participate in any discussions or negotiations regarding, or
furnish to any person any non-public information with respect to, or take any
other action to knowingly facilitate any inquiries or the making of any proposal
that constitutes or would reasonably
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be expected to lead to, an Acquisition Proposal; provided, however, that,
notwithstanding anything to the contrary in this Agreement, (x) Leucadia may
advise any third party of the existence of this restriction contained in this
Section 5.4, (y) at any time prior to shareholder approval of this Agreement and
the transactions contemplated hereby, Leucadia may participate in discussions or
negotiations with, and may furnish information (pursuant to a confidentiality
agreement in customary form) concerning the Sellers and/or the Companies and
their business, properties and assets to, a third party who, without any
solicitation by Leucadia or any Leucadia Representatives after the date of this
Agreement, submits an Acquisition Proposal, if the Board of Directors of
Leucadia in good faith determines, based on advice of outside counsel, that it
is necessary to do so to comply with its fiduciary duties to shareholders under
applicable law and (z) the Board of Directors of Leucadia may take and disclose
to the Leucadia stockholders a position with regard to a tender offer or
exchange offer contemplated by Rules 14d-9 and 14e-2(a) promulgated under the
Exchange Act and may make such disclosure to the stockholders of Leucadia as may
be required under applicable law; provided, that the Board of Directors of
Leucadia shall not recommend that the stockholders of Leucadia tender their
shares of Leucadia common stock unless such recommendation is permitted by
Section 5.4(d).
(b) Leucadia shall promptly notify the Purchaser of any Acquisition
Proposal, the person making such Acquisition Proposal, and all material terms
and conditions of such Acquisition Proposal and thereafter shall keep Purchaser
informed of the material terms and status of such Acquisition Proposal.
(c) For purposes of this Agreement, "Acquisition Proposal" means a
proposal or offer for a tender or exchange offer, merger, consolidation or other
business combination (i) involving all or substantially all of Leucadia and its
subsidiaries, taken as a whole, or any Company or (ii) to acquire or cause to be
acquired in any manner, directly or indirectly, including without limitation
through any reinsurance transaction not in the ordinary course of business, all
or substantially all of the business or assets of Leucadia and its subsidiaries,
taken as a whole, or of any Company, or all or a substantial percentage of the
capital stock or other ownership interests in Leucadia or any Company, or any
similar transaction.
(d) Notwithstanding anything to the contrary in this Agreement, the
Board of Directors of Leucadia shall be permitted from time to time to take the
following actions in the circumstances described below: (i) to withdraw or
modify its approval or recommendation of this Agreement and the transactions
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contemplated hereby; or (ii) to approve, recommend or enter into an agreement
with respect to an Acquisition Proposal; if, in each such case, prior to
shareholder approval (A) an unsolicited Acquisition Proposal is communicated to
the Sellers, publicly proposed or publicly disclosed and (B) the Board of
Directors of Leucadia determines in good faith, based on advice of outside
counsel, that it is necessary to do so to comply with its fiduciary duties under
applicable law. No action by the Board of Directors of Leucadia permitted by the
preceding sentence (each a "Permitted Action") shall constitute a breach of this
Agreement by Leucadia; provided, however, that Sellers shall be obligated to pay
fees as required by Section 7.3.
ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions to Each Party's Obligation To Consummate Transactions. The
respective obligation of each party to this Agreement to consummate the
transactions contemplated by this Agreement is subject to the satisfaction or
waiver on or prior to the Closing Date of the following conditions:
(a) Governmental and Regulatory Consents. All filings required to be made
prior to the Closing Date with, and all consents, approvals, permits and
authorizations required to be obtained prior to the Closing Date from, any
Governmental Entity, in connection with the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby, shall
have been made or obtained, including without limitation, from the Insurance
Regulators in the jurisdictions set forth in Section 6.1 of the Seller
Disclosure Schedule hereto, and such consents, approvals, permits and
authorizations shall be in full force and effect and shall be subject to no
conditions other than conditions customarily imposed by insurance regulatory
authorities in connection with similar acquisitions.
(b) HSR Act. The waiting period (and any extension thereof) applicable to
the transactions contemplated hereby under the HSR Act shall have been
terminated or shall have otherwise expired.
(c) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the transactions contemplated hereby shall be in effect or
threatened; provided,
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however, that any party invoking this condition shall use commercially
reasonable efforts to have any such order or injunction vacated.
(d) Monroe Rental Agreement. The Monroe Rental Agreement and the
Purchaser's guarantee thereof each shall have been fully executed by all
necessary parties and shall be in full force and effect.
(e) Leucadia Shareholder Approval. The Leucadia Shareholder Approval shall
have been obtained.
(f) Conseco Transaction. If the Conseco Transaction shall not have been
consummated, the agreements set forth in Section 4.16 of the Seller Disclosure
Schedule shall be in full force and effect in accordance with such schedule.
6.2 Conditions to Obligations of the Purchaser. The obligation of the
Purchaser to consummate the transactions contemplated hereby is further subject
to the following conditions:
(a) Representations and Warranties. The representations and warranties of
the Sellers contained in this Agreement that are qualified as to materiality
shall be true and correct and the representations and warranties of the Sellers
contained in this Agreement that are not so qualified shall be true and correct
in all respects that reasonably are material, in each case as of the date of
this Agreement and as of the Closing Date as though made on and as of the
Closing Date, except as a result of any actions contemplated or permitted by
this Agreement and except to the extent any such representation and warranty
speaks as of an earlier date, in which event such representation and warranty
shall be true and correct, or true and correct in all respects that reasonably
are material, as applicable, as of such date. The Sellers shall have delivered
to the Purchaser a certificate, dated the Closing Date and signed on behalf of
each Seller by an authorized officer of such Seller to the foregoing effect with
respect to the representations and warranties of the Sellers.
(b) Performance of Obligations of the Sellers. The Sellers shall have
performed in all material respects all obligations required to be performed by
them under this Agreement on or prior to the Closing Date and the Purchaser
shall have received a certificate dated as of the Closing Date signed on behalf
of each Seller by an authorized officer of such Seller to such effect.
(c) Opinion of General Counsel and Counsel of the Sellers. Purchaser shall
have received an opinion of the Vice President
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and General Counsel of the Companies, and an opinion of Weil, Gotshal & Manges
LLP, counsel to the Sellers, dated the Closing Date in the forms attached hereto
as Exhibits D and E.
6.3 Conditions to Obligations of the Sellers. The obligations of the
Sellers to consummate the transactions contemplated hereby is further subject to
the following conditions:
(a) Representations and Warranties. The representations and warranties of
the Purchaser contained in this Agreement that are qualified as to materiality
shall be true and correct and the representations and warranties of the
Purchaser contained in this Agreement that are not so qualified shall be true
and correct in all respects that reasonably are material, in each case as of the
date of this Agreement and as of the Closing Date as though made on and as of
the Closing Date, except as a result of any actions contemplated by this
Agreement and except to the extent any such representation and warranty speaks
as of an earlier date, in which event such representation and warranty shall be
true and correct, or true and correct in all respects that reasonably are
material, as applicable, as of such date. The Purchaser shall have delivered to
the Sellers a certificate, dated the Closing Date and signed on behalf of the
Purchaser by an authorized officer of the Purchaser to the foregoing effect with
respect to the representations and warranties of the Purchaser.
(b) Performance of Obligations of the Purchaser. The Purchaser shall have
performed in all material respects all obligations required to be performed by
it under this Agreement on or prior to the Closing Date and the Company shall
have received a certificate dated as of the Closing Date signed on behalf of the
Purchaser by an authorized officer of the Purchaser.
(c) Opinion of Counsel of the Purchaser. Seller shall have received an
opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P., special counsel to the
Purchaser, dated the Closing Date in the form attached hereto as Exhibit F.
(d) CPI Dividend. The CPI Dividend shall have been paid to Leucadia and/or
the Purchaser shall have purchased the right to receive the CPI Dividend (or any
unpaid part thereof) in accordance with Section 4.8 of this Agreement.
(e) Intramerica Distribution. The Intramerica Distribution shall have
been effected.
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ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated and abandoned at any
time prior to the Closing Date, whether before or after Leucadia Shareholder
Approval:
(a) by mutual written consent of the Purchaser and the
Sellers; or
(b) by either the Purchaser or the Sellers:
(i) at any time after December 31, 1997, if the transactions
contemplated hereby shall not have been consummated by such date, unless
the failure to consummate such transactions is the result of a willful and
material breach of this Agreement by the party seeking to terminate this
Agreement; or
(ii) if any Governmental Entity shall have issued an order, decree
or ruling or taken any other action permanently enjoining, restraining or
otherwise prohibiting the transactions contemplated by this Agreement and
such order, decree, ruling or other action shall have become final and
nonappealable; or
(iii) if, upon a vote at a duly held Leucadia Shareholders Meeting
or any adjournment thereof at which the Leucadia Shareholder Approval
shall have been voted upon, the Leucadia Shareholder Approval shall not
have been obtained.
(c) by the Purchaser, if the Board of Directors of Leucadia shall have
taken any Permitted Action in accordance with the provisions of Section 5.4(d);
or
(d) by the Sellers, if Leucadia enters into a definitive agreement
providing for the implementation of a Acquisition Proposal in accordance with
the provisions of Section 5.4(d).
7.2 Effect of Termination. In the event of termination of this Agreement
by either the Sellers or the Purchaser as provided in Section 7.1, this
Agreement shall forthwith become void and have no effect, without any liability
or obligation on the part of the Purchaser or the Sellers, other than with
respect to the last sentence of Section 4.1 and Sections 2.15, 3.6 and 7.2 and
7.3 of this Agreement. Nothing contained in this Section shall relieve any
party from any liability resulting from any material
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breach of the representations, warranties, covenants or agreements set forth in
this Agreement.
7.3 Termination Fee. If (i) this Agreement is terminated by any party
pursuant to Section 7.1(b)(iii) hereof, and (ii) at or prior to the Leucadia
Shareholders' Meeting there shall have been an Acquisition Proposal, whether or
not such Acquisition Proposal shall have been rejected or shall have been
withdrawn prior to the time of such termination or of the meeting, Sellers shall
pay the Purchaser a termination fee of $10 million in cash within five business
days of the termination of this Agreement; if, within one (1) year of any such
termination described in clause (i) above, a transaction implementing any
Acquisition Proposal shall have been consummated, Sellers shall pay to Purchaser
an additional termination fee equal to $20 million in cash within five business
days of the consummation of such transaction. Alternatively, if this Agreement
is terminated by the Purchaser pursuant to Section 7.1(c) or the Sellers
pursuant to Section 7.1(d), Sellers shall pay to Purchaser a termination fee
equal to $30 million in cash within five business days of the termination of
this Agreement. In no event shall Sellers be obligated to pay more than $30
million to Purchaser under this paragraph.
ARTICLE VIII
SURVIVAL OF PROVISIONS
8.1 Survival. The representations and warranties required to be made by
the Sellers and the Purchaser in this Agreement or in any certificate delivered
pursuant hereto will survive the Closing:
(a) in the case of the representations and warranties of Sellers set forth
in Section 2.7 and Section 2.9 hereof, until 30 days after the expiration of
statutes of limitation applicable in each such section;
(b) in the case of representations and warranties referred to in Sections
2.2 and 2.23 hereof, indefinitely; and
(c) in the case of all other representations and warranties, until March
31, 1999.
Notwithstanding the foregoing, any representation or warranty shall
survive the time it would otherwise terminate pursuant to this Section 8.1 to
the extent that notice of a
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breach thereof giving rise to a right of indemnification shall have been given
by a party hereto prior to the expiration of the relevant period in accordance
with Article IX or Section 4.5 of this Agreement.
ARTICLE IX
INDEMNIFICATION
9.1 Indemnification by Sellers. Subject to the provisions of Sections 8.1,
9.4, 9.5 and 9.6 hereof, the Sellers will indemnify and hold harmless the
Purchaser and the Companies (collectively, the "Purchaser Indemnitees") for any
and all monetary damages, charges, losses, deficiencies, liabilities,
obligations, costs, fees, and expenses (including, without limitation,
reasonable fees and disbursements of counsel including but not limited to those
incident to the enforcement of rights under Article IX hereof) (collectively,
"Damages") resulting from or relating to any breach by the Sellers of any
representation, warranty, covenant, or agreement made by the Sellers in this
Agreement. Notwithstanding the foregoing, indemnification for Taxes shall be
governed by Section 4.5 hereof and not by Article IX and indemnification for
Certain Damages (as defined in Section 9.3 hereof) shall be governed by Section
9.3 hereof.
9.2 Indemnification by the Purchaser. Subject to the provisions of
Sections 8.1, 9.4, and 9.5 hereof, the Purchaser will indemnify and hold
harmless each Seller in respect of any and all Damages resulting from or
relating to any breach by the Purchaser of any representation, warranty,
covenant, or agreement made by the Purchaser in this Agreement. Notwithstanding
the foregoing, indemnification for Taxes shall be governed by Section 4.5 hereof
and not by Article IX.
9.3 Special Indemnification by Sellers. Subject to the provisions of
Section 8.1 (to the extent applicable), Section 9.4 (but not Section 9.4(d)),
Section 9.5 and Section 9.6 hereof, the Sellers shall indemnify and hold
harmless the Purchaser Indemnitees for any and all Damages hereunder (i) arising
under ERISA and the Colonial Penn Insurance Company Long Term Incentive Plan for
periods ending on or before the Closing Date; (ii) arising out of or relating to
the lawsuits set forth in Section 9.3 of the Seller Disclosure Schedule (the
"Lawsuits") (provided, that Sellers shall not indemnify the Purchaser
Indemnitees for costs, fees and expenses incurred prior to the execution date of
this Agreement); (iii) (x) arising from a breach of the
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representations and warranties contained in Section 2.23 or (y) arising out of
or relating to any Environmental Claim which arises out of or relates to the
conduct of the business of the Companies or the ownership or lease of real
property or facilities prior to the Closing Date or any Environmental Claim
which arises out of or relates to the Monroe Property (including but not limited
to, Purchaser Affiliate's tenancy at the Monroe Property) before and after the
Closing Date; provided, however, that Sellers shall not have any indemnification
obligation under this clause (y) with respect to Damages attributable to actions
of Purchaser or Purchaser's affiliates (excluding the Companies for periods
prior to the Closing Date) or actions of third parties caused by Purchaser or
Purchaser's affiliates (excluding the Companies for periods prior to the Closing
Date) or (iv) arising from a breach by any Company of any representation or
warranty made by it in the Conseco Agreements or the Section 4.16 Agreements or
otherwise arising under or in connection with the Conseco Agreements or the
Section 4.16 Agreements to the extent related to periods, or to circumstances
existing, on or prior to the Closing Date. Sellers' liability under this Section
9.3 shall survive the Closing indefinitely. Damages that are indemnifiable under
this Section 9.3 are sometimes referred to herein as "Certain Damages."
9.4 Limitations on Indemnification.
(a) No claim by any person for indemnification under this Article IX (an
"Indemnitee") against any person (an "Indemnifying Party"), which claim relates
to a breach of a representation or warranty made in this Agreement may be made
unless notice of such breach is given in accordance with this Article IX prior
to the expiration of the 30th day after the end of the survival period for such
representation or warranty.
(b) No claim by the Purchaser Indemnitees under Section 9.1 hereof or by
the Sellers under Section 9.2 hereof for indemnification may be made unless and
until the Purchaser Indemnitees or the Sellers, as the case may be, have
incurred Damages which would otherwise be indemnifiable under such Section in
excess of $2,500,000 in the aggregate for the Purchaser Indemnitees or the
Sellers, respectively, at which time, all Damages incurred by the Purchaser
Indemnitees or the Sellers, as the case may be, in excess of $2,500,000 may be
claimed and recovered by the Purchaser Indemnitees or the Sellers as provided in
this Agreement; provided, however, that the foregoing limitation shall not apply
to (i) any breach of Sections 2.2 or 2.23 and (ii) intentional breaches of any
covenant or agreement set forth in Article IV (other than Section 4.5, as to
which this Section 9.4(b) does not apply) and Article V. In determining
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whether a representation or warranty made under Article II or Article III hereof
has been breached and Damages suffered as a result, for purposes of this Article
IX, such representation or warranty shall be deemed to exclude any materiality
qualification or exception and any exception thereto which refers to Company
Material Adverse Effect (with respect to Article II) and Purchaser Material
Adverse Effect (with respect to Article III).
(c) No claim by the Purchaser Indemnitees under Section 9.3(ii) hereof for
indemnification may be made unless and until the Purchaser Indemnitees have
incurred Damages which would otherwise be indemnifiable under such Section in
excess of $3,500,000 in the aggregate, at which time all Damages (other than
expenses, cost and fees incurred prior to the date of execution of this
Agreement, which shall not be indemnifiable by the Sellers) in excess of
$3,500,000 may be claimed and recovered as provided in this Agreement. No claim
by the Purchaser Indemnitees under Section 9.3(iii) hereof for indemnification
may be made unless and until the Purchaser Indemnitees have incurred Damages
which would otherwise be indemnifiable under such Section in excess of
$1,500,000 in the aggregate, at which time, all Damages under Section 9.3(iii)
in excess of $1,500,000 may be claimed and recovered as provided in this
Agreement. No deductible shall apply to claims by Purchaser Indemnitees under
Section 9.3(i) or (iv) hereof. In determining whether a representation or
warranty covered under Section 9.3 hereof has been breached and Certain Damages
suffered as a result, for purposes of this Section 9.4, such representation or
warranty shall be deemed to exclude any materiality qualification or exception
and any exception thereto which refers to Company Material Adverse Effect).
(d) Notwithstanding anything to the contrary contained in this Agreement,
neither the Purchaser, on the one hand, nor the Sellers, on the other hand, will
be liable under any circumstances for indemnification under Section 9.1 or
Section 9.2 hereof, respectively, in an aggregate amount in excess of
$200,000,000; provided, however, that the foregoing limitation shall not apply
to (i) Damages attributable to a breach by any Seller of any representation or
warranty in Sections 2.2 or 2.23 or (ii) intentional breaches of any covenant or
agreement set forth in Article IV (other than Section 4.5, as to which this
Section 9.4(d) does not apply) and Article V.
(e) If an Indemnitee recovers from any third party (including insurers)
all or any part of any amount paid to it by an Indemnifying Party pursuant to
Sections 9.1, 9.2, 9.3 or Section 4.5 hereof, such Indemnitee will promptly pay
over to the Indemnifying Party the amount so recovered (after deducting
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therefrom the full amount of the expenses incurred by it in procuring such
recovery, including any Taxes and net of any Tax Benefit resulting from such
recovery and payment), but not in excess of any amount previously so paid by the
Indemnifying Party. In the event an Indemnitee makes such a payment and the
recovery from which such payment is made is subsequently invalidated, set aside
or required to be repaid for any reason, then the Indemnifying Party will return
such amount to the Indemnitee, without offset for any amount previously paid or
otherwise. If an Indemnitee recovers from any third party (including insurers)
any amount as to which indemnification may be claimed pursuant to Sections 9.1,
9.2, 9.3 or Section 4.5 hereof, such Indemnitee will have no right to claim
indemnification for such amount from the Indemnifying Party.
(f) If an Indemnitee has any claims or rights (collectively "Rights")
against any person (other than the Sellers) for acts or omissions which give
rise to a loss against which an Indemnifying Party has indemnified in accordance
with the terms of this Agreement, the Indemnifying Party shall be subrogated to
such Rights to the extent of such indemnification payments.
9.5 Notice of Defense of Claims. Promptly after receipt of notice of any
claim or Damages for which an Indemnitee may seek indemnification under this
Article IX, such Indemnitee shall give written notice thereof to the
Indemnifying Party, but such notification (i) shall not be required with respect
to the Lawsuits and (ii) shall not be a condition to indemnification hereunder
except to the extent of actual and material prejudice to the Indemnifying Party.
The notice shall state the information then available regarding the amount and
nature of such claim or Damages and shall specify the provision or provisions of
this Agreement under which the right to indemnification is asserted. If within
30 days after receiving such notice the Indemnifying Party gives written notice
to the Indemnitee stating that it intends to defend against such claim or
Damages at its own cost and expense, then defense (including the right to settle
or compromise such action) of such matter, including selection of counsel
(subject to the consent of the Indemnitee which consent shall not be
unreasonably withheld) and the sole power to direct and control such defense,
shall be by the Indemnifying Party and the Indemnitee shall make no payment in
respect of such claim or Damages to any third party as long as the Indemnifying
Party is conducting a good faith and diligent defense. If the liability of the
Indemnifying Party with respect to such claim or Damages is subject to a
deductible pursuant to Sections 9.4(b)or 9.4(c) hereof that has not yet been
fully satisfied, the Indemnified Party shall reimburse the Indemnifying
Party for any amount actually incurred by the Indemnifying Party
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up to the amount of the remaining applicable deductible. Notwithstanding the
foregoing, the Indemnitee shall at all times have the right to fully participate
in such defense at its own cost and expense directly or through counsel;
provided, however, if the named parties to the action or proceeding include both
the Indemnifying Party and the Indemnitee and representation of both parties by
the same counsel would be inappropriate under applicable standards of
professional conduct, the expenses of one separate counsel for the Indemnitee
shall be paid by the Indemnifying Party. If no such notice of intent to dispute
and defend is given by the Indemnifying Party, or if such diligent good faith
defense is not being or ceases to be conducted, the Indemnitee shall, at the
expense of the Indemnifying Party, undertake the defense of such claim or
Damages with counsel selected by the Indemnitee, and shall have the right to
compromise or settle the same exercising reasonable business judgment with the
consent of the Indemnifying Party, which consent shall not be unreasonably
withheld. The Indemnitee shall make available all information and assistance
that the Indemnifying Party may reasonably request and shall cooperate with the
Indemnifying Party in such defense. Notwithstanding anything herein to the
contrary, the Indemnifying Party shall have the right to settle all claims of
third parties for which indemnification is payable hereunder without the consent
of the Indemnitee so long as such settlement releases the Indemnitee from all
liability for or in connection with such action and does not materially and
adversely impair the ability of the Indemnitee to carry on its business and does
not contain any admission of wrong doing on the part of the Indemnitee.
Notwithstanding the preceding paragraph, the Purchaser shall have the
right, at any time after the Closing, to assume and control the defense of any
Lawsuit. If the Purchaser exercises such right, then all Damages in connection
therewith shall be paid by Sellers in accordance with the provisions of this
Article IX; provided, that the Purchaser shall not settle any Lawsuit without
the consent of the Sellers, which consent shall not be unreasonably withheld.
The Indemnifying Party shall be permitted to have full access to information
relevant to the defense of any such Lawsuit and to employ counsel in such
connection.
9.6 FPL Agreement. The Purchaser expressly acknowledges that Leucadia
(and/or its affiliate(s)) are party to, and have certain rights and obligations
under that certain Stock Purchase and Sale Agreement by and between FPL Group
Capital Inc. (as seller) and Leucadia (as buyer) dated as of April 5, 1991 (the
"FPL Agreement"), and that, pursuant to the FPL Agreement, Leucadia (and/or its
affiliate(s)) have the right to be indemnified against certain losses. If the
Purchaser Indemnitees
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suffer Damages that may be indemnifiable pursuant to the FPL Agreement, the
Purchaser agrees that it will take, and that it will cause each of the Companies
to take, any and all commercially reasonable steps in connection with pursuing
such indemnification under the FPL Agreement and that it/they will cooperate
fully to assure that the Companies, under the control and direction of Leucadia,
and at the expense of Leucadia, fully comply with its/their obligations (if
commercially reasonable) in order to fully secure its/their rights to
indemnification under the FPL Agreement. Notwithstanding anything to the
contrary contained herein, any and all steps taken in connection with pursuing
such indemnity or otherwise securing rights and satisfying obligations under the
FPL Agreement shall be under the control and discretion of, and at the expense
of Leucadia. If the Purchaser and/or any (or all) of the Companies fail to take
commercially reasonable steps or to fully cooperate with the Sellers in
accordance with this Section 9.6, then the Sellers shall not be obligated to
indemnify the Purchaser under Sections 9.1 or 9.3 hereof for any Damages
attributable to such failure. Subject to the foregoing, Damages for which
Sellers are required to indemnify the Purchaser Indemnitees pursuant to Sections
9.1 or 9.3 shall be so indemnified and paid when due under this Agreement
without regard to whether the underlying amount is recovered by the Sellers
under the FPL Agreement.
9.7 Purchase Price Adjustment. Except for any portion properly treated as
interest under Section 1274 of the Code (or otherwise), any payment by any
Indemnifying Party in indemnification hereunder shall be treated as an
adjustment to the Purchase Price.
ARTICLE X
NOTICES
10.1 Notices. All notices and other communications under this Agreement
must be in writing and will be deemed to have been duly given if delivered,
telecopied or mailed, by certified mail, return receipt requested, first-class
postage prepaid, to the parties at the following addresses:
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If to the Sellers, to:
c/o Leucadia National Corporation
315 Park Avenue South
New York, New York 10010
Attention: Joseph S. Steinberg, President
Telephone: (212) 460-1900
Facsimile: (212) 598-3245
with a copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Stephen E. Jacobs, Esq.
Telephone: (212) 310-8000
Facsimile: (212) 310-8007
If to the Purchaser, to:
General Electric Capital Corporation/
Consumer Savings Insurance Group
6610 West Broad Street
Richmond, Virginia 23230
Attention: General Counsel
Telephone: (804) 281-6000
Facsimile: (804) 281-6165
with a copy to:
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street
New York, New York 10019-5389
Attention: Alexander M. Dye, Esq.
Telephone: (212) 424-8000
Facsimile: (212) 424-8500
All notices and other communications required or permitted under this Agreement
that are addressed as provided in this Article X will, if delivered personally,
be deemed given upon delivery, will, if delivered by telecopy, be deemed
delivered when confirmed and will, if delivered by mail in the manner described
above, be deemed given on the third business day after the day it is deposited
in a regular depository of the United States mail. Any party from time to time
may change its address for the purpose of notices to that party by giving a
similar notice specifying a new address, but no such notice will be deemed to
have been given until it is actually received by the party sought to be charged
with the contents thereof.
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ARTICLE XI
MISCELLANEOUS
11.1 Entire Agreement. Except for documents executed by the Seller and the
Purchaser pursuant hereto and the Confidentiality Agreement, this Agreement
supersedes all prior discussions and agreements between the parties with respect
to the subject matter of this Agreement, and this Agreement (including the
exhibits hereto, the Seller Disclosure Schedule, the Purchaser Disclosure
Schedule and other documents delivered in connection herewith) and the
Confidentiality Agreement contain the sole and entire agreement between the
parties hereto with respect to the subject matter hereof. The parties agree that
any item disclosed in any section of the Seller Disclosure Schedule or the
Purchaser Disclosure Schedule, as the case may be, shall be deemed to be
disclosed for all purposes of this Agreement, notwithstanding the fact that such
item was not disclosed in any other section of the Seller Disclosure Schedule or
the Purchaser Disclosure Schedule, as the case may be.
11.2 Expenses. Except as otherwise provided herein, regardless of whether
or not the transactions contemplated hereby are consummated, each of the Sellers
and the Purchaser will pay its own costs and expenses incident to preparing for,
entering into and carrying out this Agreement and the consummation of the
transactions contemplated hereby.
11.3 Counterparts. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original, but all of which will
constitute one and the same instrument and shall become effective when two or
more counterparts have been signed by each of the parties and delivered to the
other parties.
11.4 No Third Party Beneficiary. Except as otherwise provided herein, the
terms and provisions of this Agreement are intended solely for the benefit of
the parties hereto, and their respective successors or assigns, and it is not
the intention of the parties to confer third-party beneficiary rights upon any
other person.
11.5 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
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11.6 Amendments and Supplements. This Agreement may be amended or
supplemented at any time by additional written agreements signed by the parties
hereto.
11.7 Assignment; Binding Effect. Neither this Agreement nor any of the
rights, interests or obligations under this Agreement shall be assigned, in
whole or in part, by operation of Law or otherwise by any of the parties without
the prior written consent of the other parties, and any such assignment that is
not consented to shall be null and void, except that before or after the Closing
the Purchaser shall have the right, without such consent, to assign to a
wholly-owned subsidiary of the Purchaser its rights and obligations hereunder,
provided that no such assignment shall relieve Purchaser of its obligations
hereunder if such assignee does not perform such obligations. In the event of
such assignment, the Purchaser shall guarantee the performance by such
subsidiary of such obligations hereunder, which guarantee shall at all times
remain in full force and effect. This Agreement will be binding upon, inure to
the benefit of and be enforceable by, the parties and their respective
successors and assigns.
11.8 Enforcement. The parties agree that irreparable damage would occur in
the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement, this being in addition to any other
remedy to which they are entitled at law or in equity.
11.9 Headings, Gender, etc. The headings used in this Agreement have been
inserted for convenience and do not constitute matter to be construed or
interpreted in connection with this Agreement. Unless the context of this
Agreement otherwise requires, (a) words of any gender are deemed to include each
other gender; (b) words using the singular or plural number also include the
plural or singular number, respectively; (c) the terms "hereof," "herein,"
"hereby," "hereto," and derivative or similar words refer to this entire
Agreement; (d) the terms "ARTICLE" or "Section" refer to the specified ARTICLE
or Section of this Agreement; (e) the term "party" means, on the one hand, the
Purchaser, and on the other hand, the Sellers; (f) the phrase "in the ordinary
course of business and consistent with past practice" refers to the business,
operations, affairs, and practice of the Companies or the Subsidiaries, as the
case may be, in each case consistent with past practices of such business,
operations, and affairs; (g) the phrase "to the knowledge of the
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Sellers" and similar phrases mean the actual knowledge, after due inquiry, of
the Directors of Leucadia, the Chairman, the President, any Executive Vice
President, the Treasurer or any Vice President of Leucadia, or the Chairman, the
President, any Executive or Senior Vice President, any Vice President, the
General Counsel, the Treasurer, or any legal compliance officer of any Company;
(h) the phrase "to the knowledge of Purchaser" and similar phrases mean the
actual knowledge, after due inquiry, of the executive officers of the Purchaser,
(i) the term "person" shall include any natural person, corporation, limited
liability company, general partnership, limited partnership, or other entity,
enterprise, authority or business organization; and (j) all references to
"dollars" or "$" refer to currency of the United States of America.
11.10 Invalid Provisions. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under any present or future law, and if the
rights or obligations of the Company or the Purchaser under this Agreement will
not be materially and adversely affected thereby, (a) such provision will be
fully severable; (b) this Agreement will be construed and enforced as if such
illegal, invalid, or unenforceable provision had never comprised a part hereof;
and (c) the remaining provisions of this Agreement will remain in full force and
effect and will not be affected by the illegal, invalid, or unenforceable
provision or by its severance herefrom.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officers of the Purchaser and the Sellers, effective as of
the date first written above.
GENERAL ELECTRIC CAPITAL CORPORATION
By: /s/ Michael D. Frazier
------------------------------------------
Name: Michael D. Frazier
Title: Senior Vice President
LEUCADIA NATIONAL CORPORATION
By: /s/ Joseph S. Steinberg
------------------------------------------
Name: Joseph S. Steinberg
Title: President
CHARTER NATIONAL LIFE INSURANCE COMPANY
By: /s/ Gregory R. Barstead
------------------------------------------
Name: Gregory R. Barstead
Title: President
COLONIAL PENN GROUP, INC.
By: /s/ Linda M. Delaney
------------------------------------------
Name: Linda M. Delaney
Title: President
COLONIAL PENN HOLDINGS INC.
By: /s/ Linda M. Delaney
------------------------------------------
Name: Linda M. Delaney
Title: President
S-1
<PAGE>
ANNEX B
-------
Jeffries & Company, Inc.
Corporate Finance
1100 Santa Monica Boulevard, 10th Floor
Los Angeles, California 90025
Telephone: (310) 575-5200 (800) 933-6656
Fax: (310) 375-5165
June 27, 1997
The Board of Directors
LEUCADIA NATIONAL CORPORATION
315 Park Avenue South
20th Floor
New York, New York 10010
RE: THE PROPOSED ACQUISITION (THE "ACQUISITION") OF COLONIAL PENN INSURANCE
COMPANY, AND CP GENERAL AGENCY, INC. AND THEIR SUBSIDIARIES (OTHER THAN
INTRAMERICA LIFE INSURANCE COMPANY) (COLLECTIVELY, "COLONIAL PENN"),
INDIRECT WHOLLY-OWNED SUBSIDIARIES OF LEUCADIA NATIONAL CORPORATION
(THE "COMPANY") BY GENERAL ELECTRIC CAPITAL CORPORATION ("GECC").
TO THE BOARD OF DIRECTORS:
YOU HAVE ASKED US TO ADVISE YOU ON THE FAIRNESS, FROM A FINANCIAL POINT
OF VIEW, TO THE COMPANY OF THE CONSIDERATION TO BE RECEIVED BY THE COMPANY IN
CONNECTION WITH THE ACQUISITION. THE TERMS OF THE ACQUISITION ARE PRESENTLY SET
FORTH IN A DRAFT, DATED AS OF JUNE 20, 1997, OF A PURCHASE AGREEMENT BY AND
AMONG THE COMPANY, CERTAIN SUBSIDIARIES OF THE COMPANY AND GECC (THE
"ACQUISITION AGREEMENT").
YOU HAVE INFORMED US THAT PURSUANT TO THE ACQUISITION AGREEMENT,
LEUCADIA WILL RECEIVE (I) $950 MILLION PLUS (II) A PAYMENT OF $156,164 PER DAY
FROM JANUARY 1, 1997 UP TO AND INCLUDING THE CLOSING DATE OF THE TRANSACTION
PLUS (III) OTHER ADJUSTMENTS AS DESCRIBED IN ARTICLE IV OF THE ACQUISITION
AGREEMENT PLUS (IV) A DIVIDEND OF $20.0 MILLION FROM COLONIAL PENN TO LEUCADIA
PRIOR TO THE CLOSING DATE OF THE TRANSACTION (IN AGGREGATE, THE "CONSIDERATION")
IN EXCHANGE FOR ALL OF THE CAPITAL STOCK OF COLONIAL PENN INSURANCE COMPANY AND
CP GENERAL AGENCY, INC. THE TERMS AND CONDITIONS OF THE ACQUISITION AGREEMENT,
INCLUDING THE ADJUSTMENTS, ARE MORE FULLY SET FORTH IN THE ACQUISITION
AGREEMENT. WE NOTE THAT THE ACQUISITION HAS NOT YET BEEN CONSUMMATED. ANY CHANGE
IN THE CONSIDERATION OR IN THE FINAL FORM OF THE ACQUISITION AGREEMENT COULD
CHANGE THE CONCLUSIONS EXPRESSED HEREIN.
JEFFERIES & COMPANY, INC. ("JEFFERIES"), AS PART OF ITS INVESTMENT
BANKING ACTIVITIES, IS REGULARLY ENGAGED IN THE EVALUATION OF CAPITAL
STRUCTURES. IN ADDITION, JEFFERIES PERFORMS VALUATIONS OF BUSINESSES AND THEIR
SECURITIES IN CONNECTION WITH MERGERS AND ACQUISITIONS, NEGOTIATED
UNDERWRITINGS, SECONDARY DISTRIBUTIONS OF LISTED AND UNLISTED SECURITIES,
PRIVATE PLACEMENTS, AND OTHER FINANCIAL SERVICES. AS YOU ARE AWARE, JEFFERIES
HAS BEEN ENGAGED BY THE COMPANY TO RENDER, AND HAS RECEIVED A FEE FOR RENDERING,
THIS OPINION.
<PAGE>
IN CONNECTION WITH OUR OPINION, WE HAVE, REVIEWED, AMONG OTHER THINGS,
THE DRAFT OF THE ACQUISITION AGREEMENT AND CERTAIN FINANCIAL AND OTHER
INFORMATION ABOUT COLONIAL PENN AND THE COMPANY, THAT WAS, IN EACH CASE,
PUBLICLY AVAILABLE OR FURNISHED TO US BY COLONIAL PENN OR THE COMPANY, AS THE
CASE MAY BE, INCLUDING CERTAIN INTERNAL FINANCIAL ANALYSES, FINANCIAL FORECASTS,
REPORTS AND OTHER INFORMATION PREPARED BY COMPANY AND COLONIAL PENN MANAGEMENT.
WE HAVE HELD DISCUSSIONS WITH MEMBERS OF SENIOR MANAGEMENT OF THE COMPANY AND
COLONIAL PENN CONCERNING COLONIAL PENN'S HISTORICAL AND CURRENT OPERATIONS, AND
FINANCIAL CONDITION AND PROSPECTS. IN ADDITION, WE HAVE REVIEWED THE FINANCIAL
TERMS OF CERTAIN RECENT TRANSACTIONS, INCLUDING BUSINESS COMBINATIONS, IN THE
INSURANCE INDUSTRY SPECIFICALLY AND IN OTHER INDUSTRIES GENERALLY AND PERFORMED
SUCH OTHER FINANCIAL STUDIES, ANALYSES AND INVESTIGATIONS AS WE DEEMED
APPROPRIATE FOR PURPOSES OF THIS OPINION.
IN RENDERING THIS OPINION, WE HAVE RELIED, WITHOUT INDEPENDENT
INVESTIGATION OR VERIFICATION, ON THE ACCURACY, COMPLETENESS AND FAIRNESS OF ALL
FINANCIAL AND OTHER INFORMATION REVIEWED BY US AND THIS OPINION IS CONDITIONED
UPON SUCH INFORMATION (WHETHER WRITTEN OR ORAL), INCLUDING, WITHOUT LIMITATION,
THE INFORMATION REFERRED TO IN THE PRECEDING PARAGRAPH, BEING ACCURATE, COMPLETE
AND FAIR IN ALL RESPECTS. YOU HAVE INFORMED US, AND WE HAVE ASSUMED, WITH YOUR
PERMISSION, THAT ALL PROJECTIONS EXAMINED BY US WERE REASONABLY PREPARED ON
BASES REFLECTING THE BEST CURRENTLY AVAILABLE ESTIMATES AND GOOD FAITH JUDGMENTS
OF THE RESPECTIVE MANAGEMENT OF THE COMPANY AND COLONIAL PENN AS TO THE FUTURE
PERFORMANCE OF COLONIAL PENN. ALTHOUGH SUCH PROJECTIONS DID NOT FORM THE
PRINCIPAL BASIS FOR OUR OPINION, BUT RATHER WAS ONE AMONG MANY ITEMS EMPLOYED,
CHANGES THERETO COULD AFFECT THE OPINION RENDERED HEREIN.
WE HAVE NOT BEEN REQUESTED TO, AND DID NOT: (A) PARTICIPATE IN THE
STRUCTURING OR NEGOTIATING OF THE ACQUISITION AND THE ACQUISITION AGREEMENT; (B)
SOLICIT THIRD PARTY INDICATIONS OF INTEREST IN ACQUIRING ALL OR ANY PART OF
COLONIAL PENN; OR (C) MAKE ANY INDEPENDENT EVALUATION OR APPRAISAL OF THE ASSETS
OR LIABILITIES, CONTINGENT OR OTHERWISE, OF COLONIAL PENN, NOR HAVE WE BEEN
FURNISHED WITH ANY SUCH EVALUATIONS OR APPRAISALS.
WE HAVE ASSUMED, WITH YOUR PERMISSION, THAT ALL CONSENTS AND
AUTHORIZATIONS NECESSARY TO CONSUMMATE THE ACQUISITION HAVE BEEN, OR WILL BE
OBTAINED, WITHOUT MATERIAL EXPENSE. OUR OPINION IS ADDRESSED SOLELY TO THE
FAIRNESS, FROM A FINANCIAL POINT OF VIEW, TO THE COMPANY OF THE CONSIDERATION ON
THE ASSUMPTION THAT THE COMPANY AND ITS BOARD OF DIRECTORS HAVE DETERMINED THAT,
FROM THE STANDPOINT OF ITS BUSINESS AND PROSPECTS, IT IS APPROPRIATE AND
DESIRABLE TO CONSUMMATE THE ACQUISITION. OUR OPINION IS BASED ON ECONOMIC AND
MARKET CONDITIONS PREVAILING, AND STOCK PRICES AND OTHER CIRCUMSTANCES AND
CONDITIONS EXISTING, ON THE DATE OF THIS LETTER, AND WE DO NOT EXPRESS ANY
OPINION AS TO THE MARKET VALUE OF THE COMPANY'S COMMON SHARES, $1 PAR VALUE PER
SHARE (THE "COMMON STOCK"), OR THE PRICE OR TRADING RANGE AT WHICH SHARES OF THE
COMPANY'S COMMON STOCK WILL TRADE FOLLOWING CONSUMMATION OF THE ACQUISITION.
WITHOUT LIMITING THE FOREGOING, WE EXPRESSLY DISCLAIM ANY UNDERTAKING OR
OBLIGATION TO ADVISE ANY PERSON OF ANY CHANGE IN ANY FACT OR MATTER AFFECTING
OUR OPINION OF WHICH WE BECOME AWARE AFTER THE DATE HEREOF.
IN THE ORDINARY COURSE OF JEFFERIES' BUSINESS, WE MAY ACTIVELY TRADE
SECURITIES OF THE COMPANY AND GECC FOR OUR OWN ACCOUNT AND FOR THE ACCOUNTS OF
OUR CUSTOMERS AND, ACCORDINGLY, MAY AT ANY TIME HOLD A LONG OR SHORT POSITION IN
SUCH SECURITIES.
IT IS UNDERSTOOD THAT THIS LETTER IS FOR THE USE OF THE BOARD OF
DIRECTORS OF THE COMPANY ONLY AND MAY NOT BE USED FOR ANY OTHER PURPOSE WITHOUT
JEFFERIES' PRIOR WRITTEN CONSENT, EXCEPT THAT THE COMPANY MAY INCLUDE THIS
LETTER, AND A DESCRIPTION THEREOF, IN ANY PROXY STATEMENT DISTRIBUTED TO THE
SHAREHOLDERS OF THE COMPANY IN CONNECTION WITH THE ACQUISITION. WITHOUT LIMITING
THE FOREGOING, THIS LETTER DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
SHAREHOLDER OF THE COMPANY AS TO HOW SUCH SHAREHOLDER SHOULD VOTE WITH RESPECT
TO THE ACQUISITION, IF ANY SUCH VOTE IS REQUIRED.
B-2
<PAGE>
BASED UPON AND SUBJECT TO THE FOREGOING, INCLUDING THE VARIOUS
ASSUMPTIONS AND LIMITATIONS SET FORTH HEREIN, IT IS OUR OPINION THAT THE
CONSIDERATION IS FAIR, FROM A FINANCIAL POINT OF VIEW, TO THE COMPANY.
VERY TRULY YOURS,
JEFFERIES & COMPANY, INC.
B-3
NYFS04...:\30\76830\0227\1980\EXH6287Z.480
<PAGE>
ANNEX C
-------
NEW YORK BUSINESS CORPORATION LAW
SS. 623. PROCEDURE TO ENFORCE SHAREHOLDER'S RIGHT TO RECEIVE PAYMENT
FOR SHARES.-(a) A shareholder intending to enforce his right under a section of
this chapter to receive payment for his shares if the proposed corporate action
referred to therein is taken shall file with the corporation, before the meeting
of shareholders at which the action is submitted to a vote, or at such meeting
but before the vote, written objection to the action. The objection shall
include a notice of his election to dissent, his name and residence address, the
number and classes of shares as to which he dissents and a demand for payment of
the fair value of his shares if the action is taken. Such objection is not
required from any shareholder to whom the corporation did not give notice of
such meeting in accordance with this chapter or where the proposed action is
authorized by written consent of shareholders without a meeting.
(b) Within ten days after the shareholders' authorization date, which
term as used in this section means the date on which the shareholders' vote
authorizing such action was taken, or the date on which such consent without a
meeting was obtained from the requisite shareholders, the corporation shall give
written notice of such authorization or consent by registered mail to each
shareholder who filed written objection or from whom written objection was not
required, excepting any shareholder who voted for or consented in writing to the
proposed action and who thereby is deemed to have elected not to enforce his
right to receive payment for his shares.
(c) Within twenty days after the giving of notice to him, any
shareholder from whom written objection was not required and who elects to
dissent shall file with the corporation a written notice of such election,
stating his name and residence address, the number and classes of shares as to
which he dissents and a demand for payment of the fair value of his shares. Any
shareholder who elects to dissent from a merger under section 905 (Merger of
subsidiary corporation) or paragraph (c) of section 907 (Merger or consolidation
of domestic and foreign corporations) or from a share exchange under paragraph
(g) of Section 913 (Share exchanges) shall file a written notice of such
election to dissent within twenty days after the giving to him of a copy of the
plan of merger or exchange or an outline of the material features thereof under
section 905 or 913.
(d) A shareholder may not dissent as to less than all of the shares, as
to which he has a right to dissent, held by him of record, that he owns
beneficially. A nominee or fiduciary may not dissent on behalf of any beneficial
owner as to less than all of the shares of such owner, as to which such nominee
or fiduciary has a right to dissent, held of record by such nominee or
fiduciary.
(e) Upon consummation of the corporate action, the shareholder shall
cease to have any of the rights of a shareholder except the right to be paid the
fair value of his shares and any other rights under this section. A notice of
election may be withdrawn by the shareholder at any time prior to his acceptance
in writing of an offer made by the corporation, as provided in paragraph (g),
but in no case later than sixty days from the date of consummation of the
corporate action except that if the corporation fails to make a timely offer, as
provided in paragraph (g), the time for withdrawing a notice of election shall
be extended until sixty days from the date an offer is made. Upon expiration of
such time, withdrawal of a notice of election shall require the written consent
of the corporation. In order to be effective, withdrawal of a notice of election
must be accompanied by the return to the corporation of any advance payment made
to the shareholder as provided in paragraph (g). If a notice of election is
withdrawn, or the corporate action is rescinded, or a court shall determine that
the shareholder is not entitled to receive payment for his shares, or the
shareholder shall otherwise lose his dissenters' rights, he shall not have the
right to receive payment for his shares and he shall be reinstated to all his
rights as a shareholder as of the consummation of the corporate action,
including any intervening preemptive
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<PAGE>
rights and the right to payment of any intervening dividend or other
distribution or, if any such rights have expired or any such dividend or
distribution other than in cash has been completed, in lieu thereof, at the
election of the corporation, the fair value thereof in cash as determined by the
board as of the time of such expiration or completion, but without prejudice
otherwise to any corporate proceedings that may have been taken in the interim.
(f) At the time of filing the notice of election to dissent or within
one month thereafter the shareholder of shares represented by certificates shall
submit the certificates representing his shares to the corporation, or to its
transfer agent, which shall forthwith note conspicuously thereon that a notice
of election has been filed and shall return the certificates to the shareholder
or other person who submitted them on his behalf. Any shareholder of shares
represented by certificates who fails to submit his certificates for such
notation as herein specified shall, at the option of the corporation exercised
by written notice to him within forty-five days from the date of filing of such
notice of election to dissent, lose his dissenter's rights unless a court, for
good cause shown, shall otherwise direct. Upon transfer of a certificate bearing
such notation, each new certificate issued therefor shall bear a similar
notation together with the name of the original dissenting holder of the shares
and a transferee shall acquire no rights in the corporation except those which
the original dissenting shareholder had at the time of transfer.
(g) Within fifteen days after the expiration of the period within which
shareholders may file their notices of election to dissent, or within fifteen
days after the proposed corporate action is consummated, whichever is later (but
in no case later than ninety days from the shareholders' authorization date),
the corporation or, in the case of a merger or consolidation, the surviving or
new corporation, shall make a written offer by registered mail to each
shareholder who has filed such notice of election to pay for his shares at a
specified price which the corporation considers to be their fair value. Such
offer shall be accompanied by a statement setting forth the aggregate number of
shares with respect to which notices of election to dissent have been received
and the aggregate number of holders of such shares. If the corporate action has
been consummated, such offer shall also be accompanied by (1) advance payment to
each such shareholder who has submitted the certificates representing his shares
to the corporation, as provided in paragraph (f), of an amount equal to eighty
percent of the amount of such offer, or (2) as to each shareholder who has not
yet submitted his certificates a statement that advance payment to him of an
amount equal to eighty percent of the amount of such offer will be made by the
corporation promptly upon submission of his certificates. If the corporate
action has not been consummated at the time of the making of the offer, such
advance payment or statement as to advance payment shall be sent to each
shareholder entitled thereto forthwith upon consummation of the corporate
action. Every advance payment or statement as to advance payment shall include
advice to the shareholder to the effect that acceptance of such payment does not
constitute a waiver of any dissenters' rights. If the corporate action has not
been consummated upon the expiration of the ninety day period after the
shareholders' authorization date, the offer may be conditioned upon the
consummation of such action. Such offer shall be made at the same price per
share to all dissenting shareholders of the same class, or if divided into
series, of the same series and shall be accompanied by a balance sheet of the
corporation whose shares the dissenting shareholder holds as of the latest
available date, which shall not be earlier than twelve months before the making
of such offer, and a profit and loss statement or statements for not less than a
twelve-month period ended on the date of such balance sheet or, if the
corporation was not in existence throughout such twelve month period, for the
portion thereof during which it was in existence. Notwithstanding the foregoing,
the corporation shall not be required to furnish a balance sheet or profit and
loss statement or statements to any shareholder to whom such balance sheet or
profit and loss statement or statements were previously furnished, nor if in
connection with obtaining the shareholders' authorization for or consent to the
proposed corporate action the shareholders were furnished with a proxy or
information statement, which included financial statements, pursuant to
Regulation 14A or Regulation 14C of the United States Securities and Exchange
Commission. If within thirty days after the making of such
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offer, the corporation making the offer and any shareholder agree upon the price
to be paid for his shares, payment therefor shall be made within sixty days
after the making of such offer or the consummation of the proposed corporate
action, whichever is later, upon the surrender of the certificates for any such
shares represented by certificates.
(h) The following procedure shall apply if the corporation fails to
make such offer within such period of fifteen days, or if it makes the offer and
any dissenting shareholder or shareholders fail to agree with it within the
period of thirty days thereafter upon the price to be paid for their shares:
(1) The corporation shall, within twenty days after the
expiration of whichever is applicable of the two periods last
mentioned, institute a special proceeding in the supreme court in the
judicial district in which the office of the corporation is located to
determine the rights of dissenting shareholders and to fix the fair
value of their shares. If, in the case of merger or consolidation, the
surviving or new corporation is a foreign corporation without an office
in this state, such proceeding shall be brought in the county where the
office of the domestic corporation, whose shares are to be valued, was
located.
(2) If the corporation fails to institute such proceeding
within such period of twenty days, any dissenting shareholder may
institute such proceeding for the same purpose not later than thirty
days after the expiration of such twenty day period. If such proceeding
is not instituted within such thirty day period, all dissenter's rights
shall be lost unless the supreme court, for good cause shown, shall
otherwise direct.
(3) All dissenting shareholders, excepting those who, as
provided in paragraph (g), have agreed with the corporation upon the
price to be paid for their shares, shall be made parties to such
proceeding, which shall have the effect of an action quasi in rem
against their shares. The corporation shall serve a copy of the
petition in such proceeding upon each dissenting shareholder who is a
resident of this state in the manner provided by law for the service of
a summons, and upon each nonresident dissenting shareholder either by
registered mail and publication, or in such other manner as is
permitted by law. The jurisdiction of the court shall be plenary and
exclusive.
(4) The court shall determine whether each dissenting
shareholder, as to whom the corporation requests the court to make such
determination, is entitled to receive payment for his shares. If the
corporation does not request any such determination or if the court
finds that any dissenting shareholder is so entitled, it shall proceed
to fix the value of the shares, which, for the purposes of this
section, shall be the fair value as of the close of business on the day
prior to the shareholders' authorization date. In fixing the fair value
of the shares, the court shall consider the nature of the transaction
giving rise to the shareholder's right to receive payment for shares
and its effects on the corporation and its shareholders, the concepts
and methods then customary in the relevant securities and financial
markets for determining fair value of shares of a corporation engaging
in a similar transaction under comparable circumstances and all other
relevant factors. The court shall determine the fair value of the
shares without a jury and without referral to an appraiser or referee.
Upon application by the corporation or by any shareholder who is a
party to the proceeding, the court may, in its discretion, permit
pretrial disclosure, including, but not limited to, disclosure of any
expert's reports relating to the fair value of the shares whether or
not intended for use at the trial in the proceeding and notwithstanding
subdivision (d) of section 3101 of the civil practice laws and rules.
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(5) The final order in the proceeding shall be entered against
the corporation in favor of each dissenting shareholder who is a party
to the proceeding and is entitled thereto for the value of his shares
so determined.
(6) The final order shall include an allowance for interest at
such rate as the court finds to be equitable, from the date the
corporate action was consummated to the date of payment. In determining
the rate of interest, the court shall consider all relevant factors,
including the rate of interest which the corporation would have had to
pay to borrow money during the pendency of the proceeding. If the court
finds that the refusal of any shareholder to accept the corporate offer
of payment for his shares was arbitrary, vexatious or otherwise not in
good faith, no interest shall be allowed to him.
(7) Each party to such proceeding shall bear its own costs and
expenses, including the fees and expenses of its counsel and of any
experts employed by it. Notwithstanding the foregoing, the court may,
in its discretion, apportion and assess all or any part of the costs,
expenses and fees incurred by the corporation against any or all of the
dissenting shareholders who are parties to the proceeding, including
any who have withdrawn their notices of election as provided in
paragraph (e), if the court finds that their refusal to accept the
corporate offer was arbitrary, vexatious or otherwise not in good
faith. The court may, in its discretion, apportion and assess all or
any part of the costs, expenses and fees incurred by any or all of the
dissenting shareholders who are parties to the proceeding against the
corporation if the court finds any of the following: (A) that the fair
value of the shares as determined materially exceeds the amount which
the corporation offered to pay; (B) that no offer or required advance
payment was made by the corporation; (C) that the corporation failed to
institute the special proceeding within the period specified therefor;
or (D) that the action of the corporation in complying with its
obligations as provided in this section was arbitrary, vexatious or
otherwise not in good faith. In making any determination as provided in
clause (A), the court may consider the dollar amount or the percentage,
or both, by which the fair value of the shares as determined exceeds
the corporate offer.
(8) Within sixty days after final determination of the
proceeding, the corporation shall pay to each dissenting shareholder
the amount found to be due him, upon surrender of the certificates for
any such shares represented by certificates.
(i) Shares acquired by the corporation upon the payment of the agreed
value therefor or of the amount due under the final order, as provided in this
section, shall become treasury shares or be cancelled as provided in section 515
(Reacquired Shares), except that, in the case of a merger or consolidation, they
may be held and disposed of as the plan of merger or consolidation may otherwise
provide.
(j) No payment shall be made to a dissenting shareholder under this
section at a time when the corporation is insolvent or when such payment would
make it insolvent. In such event, the dissenting shareholder shall, at his
option:
(1) Withdraw his notice of election, which shall in such event
be deemed withdrawn with the written consent of the corporation; or
(2) Retain his status as a claimant against the corporation
and, if it is liquidated, be subordinated to the rights of creditors of
the corporation, but have rights superior to the non-dissenting
shareholders, and if it is not liquidated, retain his right to be paid
for his shares, which right the corporation shall be obliged to satisfy
when the restrictions of this paragraph do not apply.
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(3) The dissenting shareholder shall exercise such option
under subparagraph (1) or (2) by written notice filed with the
corporation within thirty days after the corporation has given him
written notice that payment for his shares cannot be made because of
the restrictions of this paragraph. If the dissenting shareholder fails
to exercise such option as provided, the corporation shall exercise the
option by written notice given to him within twenty days after the
expiration of such period of thirty days.
(k) The enforcement by a shareholder of his right to receive payment
for his shares in the manner provided herein shall exclude the enforcement by
such shareholder of any other right to which he might otherwise be entitled by
virtue of share ownership, except as provided in paragraph (e), and except that
this section shall not exclude the right of such shareholder to bring or
maintain an appropriate action to obtain relief on the ground that such
corporate action will be or is unlawful or fraudulent as to him.
(l) Except as otherwise expressly provided in this section, any notice
to be given by a corporation to a shareholder under this section shall be given
in the manner provided in section 605 (Notice of meetings of shareholders).
(m) This section shall not apply to foreign corporations except as
provided in subparagraph (e)(2) of section 907 (Merger or consolidation of
domestic and foreign corporations). (Amended by L. 1962, Ch. 834, ss. 40; L.
1963, Ch. 746, ss. 15; L. 1965, Ch. 803, ss.ss. 20-22; L. 1982, Ch. 202, ss.ss.
3-9; L. 1982, Ch. 928, ss.ss. 38-40; L. 1986, Ch. 117, ss.3.)
SS. 910. RIGHT OF SHAREHOLDER TO RECEIVE PAYMENT FOR SHARES UPON MERGER
OR CONSOLIDATION, OR SALE, LEASE, EXCHANGE OR OTHER DISPOSITION OF ASSETS, OR
SHARE EXCHANGE.-(a) A shareholder of a domestic corporation shall, subject to
and by complying with section 623 (Procedure to enforce shareholder's right to
receive payment for shares), have the right to receive payment of the fair value
of his shares and the other rights and benefits provided by such section, in the
following cases:
(1) Any shareholder entitled to vote who does not assent to
the taking of an action specified in subparagraphs (A), (B) and (C).
(A) Any plan of merger or consolidation to which the
corporation is a party; except that the right to receive payment of the
fair value of his shares shall not be available:
(i) To a shareholder of the parent corporation in a
merger authorized by section 905 (Merger of parent and
subsidiary corporations), or paragraph (c) of section 907
(Merger or consolidation of domestic and foreign
corporations); and
(ii) To a shareholder of the surviving corporation in
a merger authorized by this article, other than a merger
specified in subparagraph (i), unless such merger effects one
or more of the changes specified in subparagraph (b)(6) of
section 806 (Provisions as to certain proceedings) in the
rights of the shares held by such shareholder.
(B) Any sale, lease, exchange or other disposition of all or
substantially all of the assets of a corporation which requires
shareholder approval under section 909 (Sale, lease, exchange or other
disposition of assets) other than a transaction wholly for cash where
the shareholders' approval thereof is conditioned upon the dissolution
of the corporation and the distribution of substantially all of its net
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assets to the shareholders in accordance with their respective
interests within one year after the date of such transaction.
(C) Any share exchange authorized by section 913 in which the
corporation is participating as a subject corporation; except that the
right to receive payment of the fair value of his shares shall not be
available to a shareholder whose shares have not been acquired in the
exchange.
(2) Any shareholder of the subsidiary corporation in a merger
authorized by section 905 or paragraph (c) of section 907, or in a
share exchange authorized by paragraph (g) of section 913, who files
with the corporation a written notice of election to dissent as
provided in paragraph (c) of section 623. (Amended by L. 1962, Ch. 834,
ss. 69; L. 1963, Ch. 689, ss. 18; L. 1965, Ch. 803, ss. 47; L. 1986,
Ch. 117, ss.4; L. 1991. Ch. 390 ss. 3.)
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NYFS04...:\30\76830\0146\1980\ANN6257K.030
<PAGE>
ANNEX D
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LEUCADIA NATIONAL CORPORATION
SENIOR EXECUTIVE ANNUAL INCENTIVE BONUS PLAN
1. PURPOSE
The purpose of the Senior Executive Annual Incentive Bonus
Plan (the "Plan") is to provide key senior executives of Leucadia National
Corporation (the "Company") with incentive based compensation upon the
achievement of established performance goals.
2. ELIGIBILITY
Eligibility for the Plan is limited to Ian M. Cumming,
Chairman of the Board of the Company, and Joseph S. Steinberg, President of the
Company. Individuals eligible to participate in the Plan are herein called
"Participants."
3. AWARDS
Each Participant will be eligible to receive an annual
incentive cash bonus (the "Annual Bonus"), as described in Section 6 below,
provided that the Committee shall have the authority to reduce the Annual Bonus
of any Participant to the extent it deems appropriate. Any reduction of a
Participant's Annual Bonus will not result in an increase of another
Participant's Annual Bonus.
4. TERM OF THE PLAN
The Plan shall become effective on the date on which it is
approved by shareholders of the Company and shall terminate immediately
following the payment of the Annual Bonus for the Period (as defined below)
commencing five years after the Plan first becomes effective.
5. PERFORMANCE PERIODS
Each performance period ("Period") shall have a duration of
one calendar year, commencing on January 1, and terminating on December 31.
6. PERFORMANCE FORMULA
6.1 Following each Period the Committee will certify the amount of the
Annual Bonus for each Participant pursuant to Section 6.2.
6.2 The Annual Bonus for each Participant for any Period will be 1.00%
of the pre-tax earnings of the Company and its consolidated subsidiaries as
reported on the Company's audited consolidated financial statements, less any
amount that the Committee, in its sole discretion, deems appropriate.
6.3 As soon as reasonably practical following the completion of each
Period, the Committee shall ascertain and certify in writing the amount of the
Annual Bonus for each Participant. No Annual Bonus will be paid for any Period
until such written certification is made by the Committee. The Annual Bonus
shall be paid to each Participant within 20 days following the certification
of the Annual Bonus.
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<PAGE>
6.4 The provisions of this Section 6 shall be administered and
interpreted in accordance with Section 162(m) of the Internal Revenue Code of
1986, as amended (the "Code"), to ensure the deductibility by the Company or its
subsidiaries of the payment of the Annual Bonuses.
7. PLAN ADMINISTRATION
8.1 The Plan shall be administered by the Employee Benefits Committee
of the Company which shall consist solely of at least two (2) "outside
directors" within the meaning of Section 162(m) of the Code (the "Committee").
The Committee may delegate any of its duties and powers, in whole or in part, to
any subcommittee thereof, provided such subcommittee consists solely of at least
two (2) "outside directors" within the meaning of Section 162(m) of the Code.
8.2 The Committee shall have full power to administer and interpret the
Plan and to establish rules for its administration. The Committee may administer
the Plan in all respects including the proration or adjustment of awards in the
case of retirements, terminations, dismissal or death and other conditions as
appropriate.
8.3 The Committee, in making any determination under or referred to in
the Plan shall be entitled to rely on opinions, reports or statements of
officers or employees of the Company and other entities and of counsel, public
accountants and other professional expert persons.
8. AMENDMENT AND TERMINATION OF THE PLAN
The Company's Board of Directors may at any time, or from time
to time, suspend or terminate the Plan, in whole or in part, or amend it in such
respects as the Board of Directors may determine.
9. MISCELLANEOUS PROVISIONS
10.1 Neither the Plan nor any action taken hereunder shall be construed
as giving any Participant any right to continue to be employed by or perform
services for the Company or any subsidiary.
10.2 Except as may be approved by the Committee, a Participant's rights
and interests under the Plan may not be assigned or transferred, hypothecated or
encumbered, in whole or in part, either directly or by operation of law or
otherwise (except in the event of the Participant's death).
10.3 The Company and its subsidiaries shall have the right to deduct
from any payment made under the Plan any federal, state, local or foreign income
or other taxes required to be withheld with respect to such payment.
10.4 The Plan shall be governed by, and construed and enforced in
accordance with, the laws of the State of New York from time to time obtaining.
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