================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee Required) For the fiscal year ended December 31, 1998
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from
___________ to ___________
Commission file number: 1-5721
LEUCADIA NATIONAL CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
NEW YORK 13-2615557
- -------------------------------------- ----------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
315 PARK AVENUE SOUTH
NEW YORK, NEW YORK 10010
(212) 460-1900
- --------------------------------------------------------------------------------
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
- -------------------------------------- ----------------------------------------
COMMON SHARES, PAR VALUE $1 PER SHARE NEW YORK STOCK EXCHANGE
PACIFIC STOCK EXCHANGE
7-3/4% SENIOR NOTES DUE AUGUST 15, 2013 NEW YORK STOCK EXCHANGE
8-1/4% SENIOR SUBORDINATED NOTES DUE
JUNE 15, 2005 NEW YORK STOCK EXCHANGE
7-7/8% SENIOR SUBORDINATED NOTES DUE
OCTOBER 15, 2006 NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
NONE.
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
Aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant at March 12, 1999 (computed by reference to the
last reported closing sale price of the Common Stock on the New York Stock
Exchange on such date): $1,220,637,876.
On March 12, 1999, the registrant had outstanding 60,246,116 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the registrant's definitive proxy statement pursuant to
Regulation 14A of the Securities Exchange Act of 1934 in connection with the
1999 annual meeting of shareholders of the registrant are incorporated by
reference into Part III of this Report.
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NYFS04...:\30\76830\0146\347\FRM1129V.19N
<PAGE>
PART I
Item 1. Business.
THE COMPANY
The Company is a diversified financial services holding company
principally engaged in personal and commercial lines of property and casualty
insurance, banking and lending, manufacturing and real estate activities. The
Company concentrates on return on investment and cash flow to build long-term
shareholder value, rather than emphasizing volume or market share. Additionally,
the Company continuously evaluates the retention and disposition of its existing
operations and investigates possible acquisitions of new businesses in order to
maximize shareholder value.
Shareholders' equity has grown from a deficit of $7,657,000 at December
31, 1978 (prior to the acquisition of a controlling interest in the Company by
the Company's Chairman and President), to a positive shareholders' equity of
$1,853,159,000 at December 31, 1998, equal to a book value per common share of
the Company (a "Common Share") of negative $.11 at December 31, 1978 and $29.90
at December 31, 1998.
In 1998, the Company announced that it was considering the payment of a
significant cash dividend. The Company has received a ruling from the Internal
Revenue Service providing that any gain realized on such a dividend (up to a
maximum of approximately $812,000,000) would be treated as a capital gain. The
Company anticipates that, prior to the date of its 1999 Annual Meeting scheduled
for May 5, 1999, its Board of Directors will declare a dividend in an aggregate
amount of approximately $812,000,000, minus amounts paid to repurchase Common
Shares from March 17, 1999 through the date of declaration. Payment of such
dividend would require the Company to make an offer to purchase all of its
outstanding 8-1/4% Senior Subordinated Debentures due 2005 and its 7-7/8% Senior
Subordinated Debentures due 2006, outstanding in the aggregate principal amount
of $235,000,000, at a purchase price of 101% of principal, plus accrued and
unpaid interest thereon pursuant to the terms of the indentures governing these
Debentures. These offers would be required to be made within five business days
after the payment of such dividend, unless the terms of the Debentures can be
modified on terms that are acceptable to the Company.
As of December 31, 1998, the Company owned a 30% interest in Caja de
Ahorro y Seguro S.A. ("Caja"), a holding company whose subsidiaries are engaged
in property and casualty insurance, life insurance, workers' compensation
insurance and banking in Argentina. During 1998, the Company's previously
announced agreement to sell substantially all of its interest in Caja to its
Argentine partner was restructured. In March 1999, the Company sold all of its
interest in Caja to Assicurazioni Generali Group, an Italian insurance company,
for $126,000,000 in cash and a $40,000,000 collateralized note maturing April
2001 from its Argentine partner. The Company will record a pre-tax gain of
approximately $120,000,000 in its first quarter 1999 results of operations in
connection with this transaction.
In February 1999, the Company sold its entire interest in its Russian
joint venture to its joint venture partner, PepsiCo, Inc. for consideration of
approximately $39,190,000. Although the Company will recognize a pre-tax gain of
approximately $29,545,000 in the first quarter 1999 results of operations, when
combined with the Company's share of the joint venture's losses since inception,
the Company's net loss from this investment is approximately $40,310,000. For
more information concerning this transaction, see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of
this Report.
In February 1999, the Company sold its wholly-owned subsidiary, The Sperry
and Hutchinson Company, Inc. (through which the Company had conducted a trading
stamps business) and will reflect a pre-tax gain of approximately $19,000,000 in
its first quarter 1999 results of operations.
<PAGE>
In the fourth quarter of 1998, the Company acquired a 95.4% interest in
Fidei S.A., a French company listed on the Paris Stock Exchange that is engaged
directly and through subsidiaries in real estate activities, for approximately
$62,300,000. In connection with this acquisition, the Company entered into
currency swap agreements to hedge approximately $55,000,000 of its foreign
currency exposure.
In September 1998, the Company reinsured substantially all of its life
insurance business to Allstate Life Insurance Company ("Allstate") and a
subsidiary thereof in an indemnity reinsurance transaction (the "Reinsurance
Transaction"). In December 1998, the Company agreed to sell its life insurance
subsidiaries, Charter National Life Insurance Company ("Charter") and
Intramerica Life Insurance Company ("Intramerica"), to Allstate. Consummation of
this transaction, which is expected to occur in the second quarter of 1999, is
subject to regulatory approval and the satisfaction of certain other conditions.
The transaction is expected to result in a pre-tax gain of approximately
$20,000,000, principally resulting from the recognition of deferred gains from
prior reinsurance transactions. The consolidated financial statements of the
Company included in this Report reflect the life insurance operations as
discontinued operations and the consolidated financial statements for prior
periods have been restated to be consistent with such presentation.
In 1998, the Company declared a special pro rata dividend to shareholders
of record on August 25, 1998 relating to the stock of HomeFed Corporation
("HomeFed"), a publicly held real estate development company. For additional
information concerning this dividend, see Item 5, "Market for Registrant's
Common Equity and Related Stockholder Matters" of this Report.
The Company's insurance operations consist of personal and commercial
property and casualty insurance primarily conducted through Empire Insurance
Company ("Empire") and Allcity Insurance Company ("Allcity"). For the year ended
December 31, 1998, these insurance operations accounted for 57% of the Company's
revenues from continuing operations and at December 31, 1998, 25% of the
Company's assets.
The Company's insurance operations have a diversified investment portfolio
of securities, of which approximately 84% are issued or guaranteed by the U.S.
Treasury or by U.S. governmental agencies or are rated "investment grade" by
Moody's Investors Service Inc. ("Moody's") and/or Standard & Poor's Corporation
("S&P").
The Company's banking and lending operations principally consist of making
instalment loans to niche markets primarily funded by customer banking deposits
insured by the Federal Deposit Insurance Corporation (the "FDIC"). The Company's
principal lending activities consist of providing collateralized personal
automobile loans to individuals with poor credit histories.
The Company's manufacturing operations manufacture and market plastic
netting used for a variety of purposes including, among other things,
construction, agriculture, packaging, carpet padding and filtration.
The Company and certain of its subsidiaries have tax loss carryforwards.
The amount and availability of the tax loss carryforwards are subject to certain
qualifications, limitations and uncertainties as more fully discussed in the
Notes to the Consolidated Financial Statements.
As used herein, the term "Company" refers to Leucadia National
Corporation, a New York corporation organized in 1968, and its subsidiaries,
except as the context otherwise may require.
2
<PAGE>
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), which requires a "management" approach for segment disclosure. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. SFAS 131 also requires disclosures
about products and services, geographic areas and major customers. The Company's
reportable segments consist of its operating units, which offer different
products and services and are managed separately. These reportable segments are:
property and casualty insurance, banking and lending, manufacturing and other
operations. The property and casualty insurance operations provide personal and
commercial lines of insurance primarily to niche markets in the New York
metropolitan area. The banking and lending operations principally make
collateralized personal automobile instalment loans to individuals who have
difficulty obtaining credit, at interest rates above those charged to
individuals with good credit histories. Such loans are primarily funded by
deposits insured by the FDIC. The manufacturing operations manufacture and
market proprietary plastic netting used for a variety of purposes. Other
operations primarily consist of real estate activities. Associated companies
consists of entities which the Company does not control but has the ability to
exercise significant influence over and which are accounted for on the equity
method of accounting. The information in the following tables for corporate
assets primarily consists of investments, notes receivable from the sale of
certain businesses and cash and cash equivalents. Corporate revenues primarily
consist of investment income on the above corporate assets. Corporate assets,
revenues, overhead expenses and interest expense are not allocated to the
operating units. The Company's business is conducted principally in the United
States; foreign operations and investments have not been material.
Certain information concerning the Company's segments for 1998, 1997 and
1996 is presented in the following table.
1998 1997 1996
---- ---- ----
(In millions)
Revenues:
- ---------
Property and Casualty Insurance $ 299.8 $ 363.2 $ 419.4
Banking and Lending 46.0 45.8 55.1
Manufacturing 56.6 133.7 148.4
Other Operations 69.9 102.0 55.8
------- ------- -------
Total revenue for reportable segments 472.3 644.7 678.7
Equity in Associated Companies 23.3 (56.5) (33.6)
Corporate (a) 34.9 42.5 25.3
------- ------- -------
Total consolidated revenues $ 530.5 $ 630.7 $ 670.4
======= ======= =======
3
<PAGE>
1998 1997 1996
---- ---- ----
(In millions)
Income (loss) from continuing operations
before income taxes, minority expense of
trust preferred securities and
extraordinary loss:
- ----------------------------------------
Property and Casualty Insurance $ (7.9) $ 4.1 $ 22.4
Banking and Lending 13.9 5.8 14.5
Manufacturing 10.1 .3 .4
Other Operations 22.8 57.3 (1.3)
------- ------- -------
Total income (loss) from continuing
operations before income taxes,
minority expense of trust preferred
securities and extraordinary loss
for reportable segments 38.9 67.5 36.0
Equity in Associated Companies 23.3 (56.5) (33.6)
Corporate (a) (32.8) (35.2) (50.6)
-------- -------- --------
Total consolidated income (loss) from
continuing operations before income
taxes, minority expense of trust
preferred securities and
extraordinary loss $ 29.4 $ (24.2) $ (48.2)
======= ======= =======
Identifiable assets employed:
- -----------------------------
Property and Casualty Insurance $ 990.1 $1,047.8 $1,082.5
Banking and Lending 269.3 265.1 291.3
Manufacturing 41.8 45.4 68.7
Other Operations 673.6 170.0 218.9
-------- -------- --------
Total assets of reportable
segments 1,974.8 1,528.3 1,661.4
Investments in Associated Companies 172.4 207.9 202.5
Net Assets of Discontinued
Operations 45.0 71.9 596.1
Corporate 1,766.8 1,937.2 315.6
-------- -------- --------
Total consolidated assets $3,959.0 $3,745.3 $2,775.6
======== ======== ========
- ------------------
(a) Includes securities losses relating to the writedown of investments in
Russian and Polish securities, as described in Item 7, "Management's
Discussion and Analysis of Financial Condition and Operations" of this
Report.
At December 31, 1998, the Company and its consolidated subsidiaries had
1,391 full-time employees.
4
<PAGE>
PROPERTY AND CASUALTY INSURANCE
General
The Company's principal property and casualty insurance operations are
conducted through the Empire Group, which consists of Empire and Allcity. The
Empire Group specializes in personal and commercial property and casualty
insurance business primarily in the New York metropolitan area. The Empire Group
provides personal automobile and homeowners insurance and commercial insurance
coverage for vehicles (including medallion and radio-controlled livery
vehicles), multi-family residential real estate, workers' compensation and
various other business classes. The Empire Group is rated "B+" (very good) by
A.M. Best Company ("Best") and rated "BBB+" (good) by S&P. As with all ratings,
Best and S&P ratings are subject to change at any time.
In 1998, a new president and chief executive officer was named at the
Empire Group and, effective in 1999, the business was reorganized into three
divisions: the Small Business Division, the Personal Lines and Residual Market
Division, and the Mid-Market Division. Each of these divisions has separate
management teams responsible for all marketing, sales and underwriting decisions
within their divisions. The reorganization is designed to provide a greater
degree of accountability for underwriting results and to create a closer
relationship with agents and customers of the Empire Group. The Small Business
Division will primarily focus on commercial package products for small
businesses; the Personal Lines and Residual Market Division will primarily
concentrate on personal automobile and homeowners insurance; and the Mid-Market
Division will focus on commercial auto, commercial package and workers'
compensation insurance for larger accounts.
For the years ended December 31, 1998, 1997 and 1996, net earned premiums
for the Empire Group were $228,600,000, $275,000,000 and $326,400,000,
respectively. The decline in the Empire Group's net earned premiums is primarily
due to the continuing reduction in the assigned risk business and reductions in
certain commercial lines. During the year ended December 31, 1998, approximately
56%, 30% and 14% of net earned premiums of the Empire Group were derived from
personal and commercial automobile lines, other commercial lines and other
personal lines, respectively. Substantially all of the Empire Group's policies
are written in New York for a one-year period. The Empire Group is licensed in
New York to write most lines of insurance that may be written by a property and
casualty insurer. The Empire Group is also licensed to write insurance in
Connecticut, Massachusetts, Missouri, New Hampshire and New Jersey.
The voluntary business of the Empire Group is produced through general
agents, local agents and insurance brokers, who are compensated for their
services by payment of commissions on the premiums they generate. There are
seven general agents, one of which is owned by Empire, and approximately 379
local agents and insurance brokers presently acting under agreements with the
Empire Group. These agents and brokers also represent other competing insurance
companies. The Empire Group's owned general agent is its largest producer and
generated approximately 12% of its total premium volume for the year ended
December 31, 1998.
The Empire Group has acquired blocks of assigned risk business from other
insurance companies (the "service business") relating to private passenger and
commercial automobile insurance. These contractual arrangements, which are
negotiated for one or two year periods, provide for fees paid to the Empire
Group within parameters established by the New York Insurance Department.
On a quarterly basis, the Empire Group reviews and adjusts its estimated
loss reserves for any changes in trends and actual loss experience. Included in
the Empire Group's results for 1998 was approximately $42,000,000 for reserve
strengthening related to losses from prior accident years. The Empire Group will
5
<PAGE>
continue to evaluate the adequacy of its loss reserves and record future
adjustments to its loss reserves as appropriate. Beginning in 1996, the Empire
Group has taken certain steps to improve its operations, including systems
enhancements and actions relating to pricing and improved underwriting and
claims handling; these efforts have continued into 1999. In addition, the Empire
Group may initiate additional changes in the future. The Company believes that
the results of these efforts taken to date will not be known for some time,
given the nature of the property and casualty insurance business and the
inherently long period of time involved in settling claims.
Set forth below is certain statistical information for the Empire Group
prepared in accordance with generally accepted accounting principles ("GAAP")
and statutory accounting principles ("SAP"). The Loss Ratio is the ratio of net
incurred losses and loss adjustment expenses to net premiums earned. The Expense
Ratio is the ratio of underwriting expenses (policy acquisition costs,
commissions, and a portion of administrative, general and other expenses
attributable to underwriting operations) to net premiums written, if determined
in accordance with SAP, or to net premiums earned, if determined in accordance
with GAAP. A Combined Ratio below 100% indicates an underwriting profit and a
Combined Ratio above 100% indicates an underwriting loss. The Combined Ratio
does not include the effect of investment income.
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
---- ---- ----
Loss Ratio:
GAAP 102.6% 100.3% 92.1%
SAP 102.6% 100.3% 89.5%
Industry (SAP) (a) N/A 72.8% 78.4%
Expense Ratio:
GAAP 26.7% 18.2% 22.6%
SAP 31.4% 17.5% 18.4%
Industry (SAP) (a) N/A 28.8% 27.4%
Combined Ratio (b):
GAAP 129.3% 118.5% 114.7%
SAP 134.0% 117.8% 107.9%
Industry (SAP) (a) N/A 101.6% 105.8%
- ---------------
(a) Source: Best's Aggregates & Averages, Property/Casualty, 1998 Edition.
Industry Combined Ratios may not be fully comparable as a result of, among
other things, differences in geographical concentration and in the mix of
property and casualty insurance products.
(b) For 1998, the difference in the accounting treatment for curtailment
gains relating to defined benefit pension plans was the principal reason
for the difference between the GAAP Combined Ratio and the SAP Combined
Ratio. For 1996, a change in the statutory accounting treatment for
retrospectively rated reinsurance agreements was the principal reason
for the difference between the GAAP Combined Ratio and the SAP Combined
Ratio. Additionally for all three years, the difference relates to the
accounting for certain costs which are treated differently under SAP and
GAAP. For further information about the Empire Group's Combined Ratios,
see Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations," of this Report.
6
<PAGE>
Losses and Loss Adjustment Expenses
Liabilities for unpaid losses, which are not discounted (except for
certain workers' compensation liabilities), and loss adjustment expenses ("LAE")
are determined using case-basis evaluations, statistical analyses and estimates
for salvage and subrogation recoverable and represent estimates of the ultimate
claim costs of all unpaid losses and LAE. Liabilities include a provision for
losses that have occurred but have not yet been reported. These estimates are
subject to the effect of trends in future claim severity and frequency
experience. Adjustments to such estimates are made from time to time due to
changes in such trends as well as changes in actual loss experience. These
adjustments are reflected in current earnings.
The Empire Group relies upon standard actuarial ultimate loss projection
techniques to obtain estimates of liabilities for losses and LAE. These
projections include the extrapolation of both losses paid and incurred by
business line and accident year and implicitly consider the impact of inflation
and claims settlement patterns upon ultimate claim costs based upon historical
patterns. In addition, methods based upon average loss costs, reported claim
counts and pure premiums are reviewed in order to obtain a range of estimates
for setting the reserve levels. For further input, changes in operations in
pertinent areas including underwriting standards, product mix, claims management
and legal climate are periodically reviewed.
In the following table, the liability for losses and LAE of the Empire
Group is reconciled for each of the three years ended December 31, 1998.
Included therein are current year data and prior year development.
7
<PAGE>
RECONCILIATION OF LIABILITY FOR LOSSES AND
LOSS ADJUSTMENT EXPENSES
1998 1997 1996
---- ---- ----
(In thousands)
Net SAP liability for losses
and LAE at beginning of year $487,116 $481,138 $476,692
-------- --------- --------
Provision for losses and
LAE for claims occurring
in the current year 191,482 248,408 271,633
Increase in estimated
losses and LAE for
claims occurring in
prior years 42,290 27,027 28,183
-------- --------- --------
Total incurred losses
and LAE 233,772 275,435 299,816
-------- --------- --------
Losses and LAE payments for claims
occurring during:
Current year 64,739 80,149 93,036
Prior years 186,831 189,308 202,334
-------- --------- --------
251,570 269,457 295,370
-------- --------- --------
Net SAP liability for losses and
LAE at end of year 469,318 487,116 481,138
Reinsurance
recoverable 72,956 58,592 51,181
-------- --------- --------
Liability for losses and
LAE at end of year as
reported in financial
statements (GAAP) $542,274 $545,708 $532,319
======== ========= ========
The following table presents the development of balance sheet liabilities
from 1988 through 1998 for the Empire Group. The liability line at the top of
the table indicates the estimated liability for unpaid losses and LAE recorded
as of the dates indicated. The middle section of the table shows the
re-estimated amount of the previously recorded liability based on experience as
of the end of each succeeding year. As more information becomes available and
claims are settled, the estimated liabilities are adjusted upward or downward
with the effect of decreasing or increasing net income at the time of
adjustment. The lower section of the table shows the cumulative amount paid with
respect to the previously recorded liability as of the end of each succeeding
year.
The "cumulative redundancy (deficiency)" represents the aggregate change
in the estimates over all prior years. For example, the initial 1988 liability
estimate indicated on the table of $222,814,000 has been
8
<PAGE>
re-estimated during the course of the succeeding ten years, resulting in a
re-estimated liability at December 31, 1998 of $210,837,000, or a redundancy of
$11,977,000. If the re-estimated liability exceeded the liability initially
established, a cumulative deficiency would be indicated.
In evaluating this information, it should be noted that each amount shown
for "cumulative redundancy (deficiency)" includes the effects of all changes in
amounts for prior periods. For example, the amount of the redundancy
(deficiency) related to losses settled in 1992, but incurred in 1988, will be
included in the cumulative redundancy (deficiency) amount for 1988, 1989, 1990
and 1991. This table is not intended to and does not present accident or policy
year loss and LAE development data. Conditions and trends that have affected
development of the liability in the past may not necessarily occur in the
future. Accordingly, it would not be appropriate to extrapolate future
redundancies or deficiencies based on these tables.
For further discussion of the Empire Group's loss development experience,
see Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of this Report.
9
<PAGE>
<TABLE>
<CAPTION>
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
Year Ended December 31,
--------------------------------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability
for Unpaid
Losses and Loss
Adjustment
Expenses $222,814 $235,223 $251,401 $280,679 $322,516 $353,917 $ 406,695 $ 476,692 $481,138 $487,116 $469,318
Liability
Re-estimated
as of:
One Year Later $213,671 $227,832 $249,492 $280,020 $321,954 $344,156 $ 441,165 $ 504,875 $508,165 $529,406 $ -
Two Years Later 206,088 217,432 245,141 277,866 324,262 374,158 467,659 537,372 546,724
Three Years Later 198,500 212,649 243,849 284,052 345,576 394,418 500,286 577,266
Four Years Later 194,324 211,859 247,314 296,484 361,903 415,251 534,014
Five Years Later 196,070 211,952 255,045 306,094 377,097 442,696
Six Years Later 196,646 216,545 260,031 316,887 395,291
Seven Years Later 199,502 219,786 265,525 330,866
Eight Years Later 201,600 222,556 277,626
Nine Years Later 202,989 231,152
Ten Years Later 210,837
Cumulative
Redundancy
(Deficiency) $ 11,977 $ 4,071 $(26,225) $(50,187) $(72,775) $(88,779) $(127,319)$(100,574) $(65,586) $(42,290) $ -
======== ======== ======== ======== ======== ======== ========= ========= ======== ======== ========
Cumulative
Amount of
Liability Paid
Through:
One Year Later $ 64,140 $ 65,822 $ 78,954 $ 89,559 $113,226 $116,986 $ 152,904 $ 202,334 $189,308 $186,831 $ -
Two Years Later 101,206 109,479 126,908 150,043 182,250 199,214 270,020 318,693 314,755
Three Years Later 131,705 140,916 167,330 197,848 239,092 272,513 353,649 407,833
Four Years Later 152,330 166,023 196,099 233,244 285,880 326,637 415,919
Five Years Later 168,117 182,001 216,749 259,946 320,044 363,873
Six Years Later 178,095 193,943 231,892 279,682 341,636
Seven Years Later 185,310 203,169 242,275 293,860
Eight Years Later 191,292 209,115 253,104
Nine Years Later 194,965 214,687
Ten Years Later 198,618
Gross Liability -
End of Year $ 391,829 $ 451,442 $ 517,422 $532,319 $545,708 $542,274
Reinsurance 37,912 44,747 40,730 51,181 58,592 72,956
--------- --------- --------- -------- -------- --------
Net Liability -
End of Year as
Shown Above $ 353,917 $ 406,695 $ 476,692 $481,138 $487,116 $469,318
========= ========= ========= ======== ======== ========
Gross Re-estimated
Liability - Latest $ 514,882 $ 605,549 $ 649,486 $623,588 $592,063
Re-estimated
Reinsurance - Latest 72,186 71,535 72,220 76,864 62,657
--------- --------- --------- -------- --------
Net Re-estimated
Liability - Latest $ 442,696 $ 534,014 $ 577,266 $546,724 $529,406
========= ========= ========= ======== ========
Gross Cumulative
(Deficiency) $(123,053) $(154,107) $(132,064) $(91,269) $(46,355)
========= ========= ========= ======== ========
</TABLE>
10
<PAGE>
Investments
Investment activities represent a significant part of the Company's
insurance related revenues and profitability. Investments are managed by the
Company's investment advisors under the direction of, and upon consultation
with, the Company's investment committees.
The Company's insurance subsidiaries have a diversified investment
portfolio of securities, substantially all of which are rated "investment grade"
by Moody's and/or S&P or issued or guaranteed by the U.S. Treasury or by
governmental agencies. The Company's insurance subsidiaries do not generally
invest in less than "investment grade" or "non-rated" securities, real estate or
mortgages, although from time to time they may make such investments in amounts
not expected to be material.
The composition of the Company's insurance subsidiaries' investment
portfolio as of December 31, 1998 and 1997 was as follows:
1998 1997
---- ----
(Dollars in thousands)
Bonds and notes:
U.S. Government and agencies 76% 87%
Rated investment grade 8 11
Non rated - other 4 1
Rated less than investment grade - -
Equity securities, primarily preferred 10 -
Other, principally accrued interest 2 1
--- ---
Total 100% 100%
=== ===
Estimated average yield to maturity
of bonds and notes (a) 5.3% 6.1%
Estimated average remaining
life of bonds and notes (a) 3.3 yrs. 3.5 yrs.
Carrying value of investment portfolio $748,818 $869,073
Market value of investment portfolio $749,147 $869,232
- -------------------------
(a) Excludes trading securities, which are not significant.
Reinsurance
The Empire Group's maximum retained limit was $500,000 for workers'
compensation; for other property and casualty lines, the Empire Group's maximum
retained limit was $300,000 for 1998, 1997 and 1996. Additionally, the Empire
Group has entered into certain excess of loss and catastrophe treaties to
protect against certain losses. The Empire Group's retention of lower level
losses in such treaties is $7,500,000 for 1999, and was $7,500,000 for 1998,
$5,000,000 for 1997 and $3,000,000 for 1996.
Although reinsurance does not legally discharge an insurer from its
primary liability for the full amount of the policy liability, it does make the
assuming reinsurer liable to the insurer to the extent of the reinsurance ceded.
The Company's reinsurance generally has been placed with certain of the largest
reinsurance companies, including (with their respective Best ratings) American
Re-Insurance Company (A++), General Reinsurance Corporation (A++) and Zurich
Reinsurance (North America), Inc. (A). The Company has reinsured substantially
all of its discontinued life insurance operations pursuant to the Reinsurance
Transaction with Allstate and certain other transactions. As mentioned above,
the Company has agreed to sell its remaining life insurance subsidiaries to
Allstate, and expects to close this sale in the second quarter of 1999. The
Company believes its reinsurers to be financially capable of meeting their
respective obligations. However, to the extent that any reinsuring company is
unable to meet its
11
<PAGE>
obligations, the Company's insurance subsidiaries would be liable for the
reinsured risks. The Company has established reserves, which the Company
believes are adequate, for any nonrecoverable reinsurance.
Competition
The insurance industry is a highly competitive industry, in which many of
the Company's competitors have substantially greater financial resources, larger
sales forces, more widespread agency and broker relationships, and more
diversified lines of insurance coverage. Additionally, certain competitors
market their products with endorsements from affinity groups, while the
Company's products are unendorsed, which may give these other companies a
competitive advantage. Federal administrative, legislative and judicial activity
may result in changes to federal banking laws that increase the ability of
national banks to offer insurance products in direct competition with the
Company. The Company is unable to determine what effect, if any, such changes
may have on the Company's operations.
The Company believes that property and casualty insurers generally compete
on the basis of price, customer service, consumer recognition, product design,
product mix and financial stability. The industry has historically been cyclical
in nature, with periods of less intense price competition generating significant
profits, followed by periods of increased price competition resulting in reduced
profitability or loss. The current cycle of intense price competition has
continued for a longer period than in the past, suggesting that the significant
infusion of capital into the industry in recent years, coupled with larger
investment returns has been, and may continue to be, a depressing influence on
policy rates. In addition, the Company is experiencing increased competition
from low cost insurance providers that write personal lines business on a direct
response basis through direct mail and telemarketing. The profitability of the
property and casualty insurance industry is affected by many factors, including
rate competition, severity and frequency of claims (including catastrophe
losses), interest rates, state regulation, court decisions and judicial climate,
all of which are outside the Company's control.
Government Regulation
Insurance companies are subject to detailed regulation and supervision in
the states in which they transact business. Such regulation pertains to matters
such as approving policy forms and various premium rates, minimum reserves and
loss ratio requirements, the type and amount of investments, minimum capital and
surplus requirements, granting and revoking licenses to transact business,
levels of operations and regulating trade practices. Insurance companies are
required to file detailed annual reports with the supervisory agencies in each
of the states in which they do business, and are subject to examination by such
agencies at any time. Increased regulation of insurance companies at the state
level and new regulation at the federal level is possible, although the Company
cannot predict the nature or extent of any such regulation or what impact it
would have on the Company's operations.
The National Association of Insurance Commissioners ("NAIC") has adopted
model laws incorporating the concept of a "risk based capital" ("RBC")
requirement for insurance companies. Generally, the RBC formula is designed to
measure the adequacy of an insurer's statutory capital in relation to the risks
inherent in its business. The RBC formula is used by the states as an early
warning tool to identify weakly capitalized companies for the purpose of
initiating regulatory action. The Company's continuing insurance operations' RBC
ratio as of December 31, 1998 exceeded minimum requirements. The NAIC also has
adopted various ratios for insurance companies which, in addition to the RBC
ratio, are designed to serve as a tool to assist state regulators in discovering
potential weakly capitalized companies or companies with unusual trends. While
the Company's continuing insurance operations had certain "other than normal"
NAIC ratios for the year ended December 31, 1998, the Company believes that
there are no material underlying problems or weaknesses in its insurance
operations and that it is unlikely that material adverse regulatory action will
be taken.
12
<PAGE>
The Company's insurance subsidiaries are members of state insurance funds
which provide certain protection to policyholders of insolvent insurers doing
business in those states. Due to insolvencies of certain insurers in recent
years, the Company's insurance subsidiaries have been assessed certain amounts
which have not been material and are likely to be assessed additional amounts by
state insurance funds. The Company believes that it has provided for all
anticipated assessments and that any additional assessments will not have a
material adverse effect on the Company's financial condition or results of
operations.
BANKING AND LENDING
The Company's banking and lending operations principally are conducted
through American Investment Bank, N.A. ("AIB"), a national bank subsidiary, and
American Investment Financial ("AIF"), an industrial loan corporation. AIB and
AIF take money market and other non-demand deposits that are eligible for
insurance provided by the FDIC. AIB and AIF had deposits of $189,782,000 and
$198,582,000 at December 31, 1998 and 1997, respectively. AIB and AIF currently
have several deposit-taking and lending facilities in the Salt Lake City area.
The funds generated by the deposits are primarily used to fund consumer
instalment loans.
The Company's consolidated banking and lending operations had outstanding
loans (net of unearned finance charges) of $185,183,000 and $202,938,000 at
December 31, 1998 and 1997, respectively. At December 31, 1998, 76% were loans
to individuals generally collateralized by automobiles; 12% were instalment
loans to consumers, substantially all of which were collateralized by real or
personal property; 5% were unsecured loans to individuals acquired from others
in connection with investments in limited partnerships; 4% were unsecured loans
to executives and professionals, generally with good credit histories; and 3%
were loans to small businesses.
It is the Company's policy to charge to income an allowance for losses
which, based upon management's analysis of numerous factors, including current
economic trends, aging of the loan portfolio and historical loss experience, is
deemed adequate to cover reasonably expected losses on outstanding loans. At
December 31, 1998, the allowance for loan losses for the Company's entire loan
portfolio was $9,398,000 or 5.1% of the net outstanding loans, compared to
$10,199,000 or 5% of net outstanding loans at December 31, 1997.
Collateralized personal automobile instalment loans are made to
individuals who have difficulty obtaining credit, at interest rates above those
charged to individuals with good credit histories. In determining which
individuals qualify for these loans, the Company takes into account a number of
highly selective criteria with respect to the individual as well as the
collateral to attempt to minimize the number of defaults. Additionally, the
Company closely monitors these loans and takes prompt possession of the
collateral in the event of a default. For the three year period ended December
31, 1998, the Company generated $146,085,000 of these loans ($72,848,000 during
1998). Due in part to the recent failures of some of the Company's competitors,
the Company has been able to increase its new loan volume at acceptable risk
levels. In addition, during 1998 the Company purchased a $36,900,000 portfolio
of such loans. The Company intends to continue to acquire additional portfolios
of such loans that meet the Company's underwriting standards if they can be
purchased on attractive terms. During 1998, AIB and AIF sold substantially all
of their executive and professional loan portfolios for aggregate proceeds of
$89,500,000.
The Company's banking and lending operations compete with banks, savings
and loan associations, credit unions, credit card issuers and consumer finance
companies, many of which are able to offer financial services on very
competitive terms. Additionally, substantial national financial services
networks have been formed by major brokerage firms, insurance companies,
retailers and bank holding companies. Some competitors have substantial local
market positions; others are part of large, diversified organizations.
13
<PAGE>
The Company's principal banking and lending operations are subject to
detailed supervision by state authorities, as well as federal regulation
pursuant to the Federal Consumer Credit Protection Act and regulations
promulgated by the Federal Trade Commission. The Company's banking operations
are subject to federal and state regulation and supervision by, among others,
the Office of the Comptroller of the Currency (the "OCC"), the FDIC and the
State of Utah. AIB's primary federal regulator is the OCC, while the primary
federal regulator for AIF is the FDIC.
The Competitive Equality Banking Act of 1987 ("CEBA") places certain
restrictions on the operations of AIB and restricts further acquisitions of
banks and savings institutions by the Company. CEBA does not restrict AIF as
currently operated.
MANUFACTURING
Through its plastics division, the Company manufactures and markets
proprietary plastic netting used for a variety of purposes including, among
other things, construction, agriculture, packaging, carpet padding and
filtration. The plastics division markets its products both domestically and
internationally, with approximately 13% of its 1998 sales exported to Europe,
Latin America, Japan and Australia. New product development focuses on niches
where the division's proprietary technology and expertise can lead to
sustainable competitive economic advantages. For the years ended December 31,
1998, 1997 and 1996, the plastics division's revenues were approximately
$56,600,000, $50,900,000 and $47,600,000, respectively.
The plastics division is subject to domestic and international
competition, generally on the basis of price, service and quality. Additionally,
certain products are dependent on cyclical industries, including the
construction industry. The Company holds patents on certain improvements to the
basic manufacturing processes and on applications thereof. The Company believes
that the expiration of these patents, individually or in the aggregate, is
unlikely to have a material effect on the plastics division.
OTHER OPERATIONS
The Company has a 90% interest in two operating wineries, Pine Ridge
Winery in Napa Valley, California and Archery Summit in the Willamette Valley of
Oregon. Pine Ridge, which was acquired in 1991, has been an operating winery
since 1981, while Archery Summit was started by the Company in 1993. These
wineries produce and sell super-ultra-premium wines. During 1998, the wineries
sold approximately 62,000 9-liter equivalent cases of wine generating revenues
of approximately $8,987,000. Since acquisition, the Company's investment in
winery operations has grown, principally to fund the Company's acquisition of
land for vineyard development and to increase production capacity and storage
facilities at both of the wineries. It can take up to five years for a new
vineyard property to reach full production and, depending upon the varietal
produced, up to an additional two years before the wine can be sold. At December
31, 1998, the Company's combined investment in these wineries was approximately
$49,000,000.
At December 31, 1998, the carrying value of the Company's real estate
investments totaled $397,404,000. Of such amount, approximately $245,870,000
consists of real estate assets held by the Company's 95.4% French subsidiary,
Fidei. These assets consisted of 150 buildings (primarily office buildings
located in Paris, France and its environs) totaling more than 3,500,000 square
feet of space. The Company acquired Fidei to maximize its value by marketing all
of its real estate holdings for sale. The remainder of the Company's real estate
investments consist of a variety of domestic projects, some of which are in the
process of development and all of which are available for sale. Included in the
Company's domestic real estate is an office complex located on Capitol Hill in
Washington, D.C. This complex consists of two office buildings with a total of
630,000 square feet of rentable office and retail space and two underground
garages. A comprehensive renovation upgrade to the building is in process. The
D.C. Government has signed a ten year lease for the
14
<PAGE>
space and full occupancy is anticipated in the second quarter of 1999. At
December 31, 1998, the Company's investment in this complex had a carrying value
of $60,200,000.
OTHER INVESTMENTS
The Company owns equity interests representing more than 5% of the
outstanding capital stock of each of the following domestic public companies at
December 31, 1998: Carmike Cinemas, Inc. ("Carmike") (approximately 6% of Class
A shares), GFSI Holdings, Inc. ("GFSI") (approximately 6%), Jordan Industries,
Inc. ("JII") (approximately 10%) , Jordan Telecommunications Products, Inc.
("JTP") (approximately 10%) and MK Gold Company ("MK Gold") (approximately 46%).
During 1998, the Company's previously announced agreement to sell
substantially all of its interest in Caja to its Argentine partner was
restructured, and in March 1999, the Company sold all of its interest in Caja to
Assicurazioni Generali Group for $126,000,000 in cash and a $40,000,000
collateralized note maturing April 2001 from its Argentine partner. The Company
will record a pre-tax gain of approximately $120,000,000 in its first quarter
1999 results of operations in connection with this transaction.
A subsidiary of the Company is an owner in The Jordan Company LLC and
Jordan/Zalaznick Capital Company. These entities each specialize in structuring
leveraged buyouts in which the owners are given the opportunity to become equity
participants. Since 1982, the Company has invested an aggregate of $68,021,000
in these entities and related companies and, through December 31, 1998, has
received $104,456,000 (including cash, interest bearing notes and other
receivables) relating to the disposition of investments and management and other
fees. At December 31, 1998, through these entities, the Company had interests in
JII, JTP, Carmike, GFSI and a total of 21 other companies, which in total are
carried in the Company's consolidated financial statements at $27,564,000.
For further information about the Company's business, reference is made to
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations," of this Report and Notes to Consolidated Financial Statements.
Item 2. Properties.
Through its various subsidiaries, the Company owns and utilizes in its
operations two offices in Salt Lake City, Utah used for corporate and banking
and lending activities (totaling approximately 77,000 sq. ft.). In addition, a
subsidiary of the Company owns a facility (totaling approximately 158,500 sq.
ft.) primarily used for manufacturing located in Georgia.
The Company and its subsidiaries lease numerous manufacturing,
warehousing, office and headquarters facilities. The facilities vary in size and
have leases expiring at various times, subject, in certain instances, to renewal
options. See Notes to Consolidated Financial Statements.
Item 3. Legal Proceedings.
On May 11, 1994, a shareholder of the Company filed a purported derivative
action entitled Pinnacle Consultants, Ltd. v. Leucadia National Corporation, et
al. (C.A. No. 94 Civ. 3496) against the Company's current Board of Directors and
two former directors, John W. Jordan II and Melvin Hirsch. The action, which was
filed in the United States District Court for the Southern District of New York,
alleged certain Racketeer Influence and Corrupt Organizations Act, securities
law, conversion and fraud claims. On December 10, 1996, the Second Circuit Court
of Appeals affirmed the judgment of the District Court dismissing these claims.
15
<PAGE>
On May 13, 1997, Pinnacle filed a purported derivative complaint in New
York State Supreme Court. The action, entitled Pinnacle Consultants, Ltd. v.
Leucadia National Corp., et al. (no. 602470/97), is substantially similar to the
federal court complaint that was dismissed in 1996. Pinnacle has alleged claims
for fraud, waste, breach of fiduciary duty and conversion against the same
current and former Leucadia directors who were named as defendants in the
federal court action. Defendants' motion to dismiss was granted in part and
denied in part. This decision is being appealed to the Appellate Division, First
Department, by Pinnacle and the defendants. The appeal remains sub judice.
In addition to the foregoing, the Company and its subsidiaries are parties
to legal proceedings that are considered to be either ordinary, routine
litigation incidental to their business or not material to the Company's
consolidated financial position.
The Company does not believe that any of the foregoing actions will have a
material adverse effect on its consolidated financial position or consolidated
results of operations.
16
<PAGE>
Item 10. Executive Officers of the Registrant.
All executive officers of the Company are elected at the organizational
meeting of the Board of Directors of the Company held annually and serve at the
pleasure of the Board of Directors. As of March 12, 1999, the executive officers
of the Company, their ages, the positions held by them and the periods during
which they have served in such positions were as follows:
NAME AGE POSITION WITH LEUCADIA OFFICE HELD SINCE
- ---- --- ---------------------- -----------------
Ian M. Cumming 58 Chairman of the Board June 1978
Joseph S. Steinberg 55 President January 1979
Thomas E. Mara 53 Executive Vice President May 1980;
and Treasurer January 1993
Joseph A. Orlando 43 Vice President and January 1994;
Chief Financial Officer April 1996
Barbara L. Lowenthal 44 Vice President and April 1996
Comptroller
Paul J. Borden 50 Vice President August 1988
Mark Hornstein 51 Vice President July 1983
Mr. Cumming has served as a director and Chairman of the Board of the
Company since June 1978. In addition, he has served as a director of Allcity
since February 1988 and MK Gold since June 1995. Mr. Cumming has also been a
director of Skywest, Inc., a Utah-based regional air carrier, since June 1986.
Mr. Steinberg has served as a director of the Company since December 1978
and as President of the Company since January 1979. In addition, he has served
as a director of Allcity since February 1988, as a director of MK Gold since
June 1995, as a director of JII since June 1988, and as a director of HomeFed, a
California real estate developer, since August 1998.
Mr. Mara joined the Company in April 1977 and was elected Vice President
of the Company in May 1977. He has served as Executive Vice President of the
Company since May 1980 and as Treasurer of the Company since January 1993. In
addition, he has served as a director of Allcity since October 1994.
Mr. Orlando, a certified public accountant, has served as Chief Financial
Officer of the Company since April 1996 and as Vice President of the Company
since January 1994. Mr. Orlando previously served in a variety of capacities
with the Company and its subsidiaries since 1987, including Comptroller of the
Company from March 1994 to April 1996. In addition, he served as a director of
Allcity since October 1998.
Ms. Lowenthal, a certified public accountant, has served as Vice President
and Comptroller of the Company since April 1996. For the prior four years, Ms.
Lowenthal served as Director of Policies, Systems and Procedures and Assistant
Controller of W.R. Grace & Co., a specialty chemicals company.
Mr. Borden joined the Company as Vice President in August 1988 and has
served in a variety of other capacities with the Company and its subsidiaries.
Mr. Borden has served as a director of HomeFed since May 1998.
Mr. Hornstein joined the Company as Vice President in July 1983 and has
served in a variety of other capacities with the Company and its subsidiaries.
17
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) Market Information.
The Common Shares of the Company are traded on the New York Stock Exchange
and Pacific Stock Exchange under the symbol LUK. The following table sets forth,
for the calendar periods indicated, the high and low sales price per Common
Share on the consolidated transaction reporting system, as reported by the Dow
Jones Historical Stock Quote Reporter Service.
COMMON SHARE
------------
HIGH LOW
---- ---
1997
----
First Quarter $29.00 $25.75
Second Quarter 31.88 27.38
Third Quarter 34.75 31.00
Fourth Quarter 36.63 33.00
1998
----
First Quarter $41.13 $33.56
Second Quarter 40.13 32.81
Third Quarter 34.75 27.63
Fourth Quarter 32.38 26.25
1999
----
First Quarter (through March 12, 1999) $33.06 $29.50
(b) Holders.
As of March 12, 1999, there were approximately 3,685 record holders of the
Common Shares.
(c) Dividends.
The Company paid a cash dividend of $.25 per Common Share on December 31,
1997. The payment of dividends in the future is subject to the discretion of the
Board of Directors and will depend upon general business conditions, legal and
contractual restrictions on the payment of dividends and other factors that the
Board of Directors may deem to be relevant.
The HomeFed Dividend. The Company acquired a 41.2% interest in HomeFed in
1995. HomeFed is a publicly traded real estate development company (OTC
(Non-NASDAQ): "HFDC") with its principal office at 1903 Wright Place, Suite 220,
Carlsbad, California 92008 (telephone number 706-918-8200).
In 1998, the Company distributed to its shareholders of record on August
25, 1998 (the "HomeFed Dividend Holders") a pro rata dividend of all of the
beneficial interests in a trust that holds 41.2% of the common stock of HomeFed
and contracts to increase that ownership to 89.6% of HomeFed. This dividend
resulted in 1998 dividend income to the HomeFed Dividend Holders of $.1426 for
each Common Share of the Company held on August 25, 1998, even though no
physical distribution was made because the trust interests are uncertificated. A
Form 1099-DIV was sent to HomeFed Dividend Holders reflecting this distribution.
18
<PAGE>
The Company anticipates that, following effectiveness of a registration
statement to be filed with respect to the HomeFed shares, the HomeFed Dividend
Holders will receive 1.0 share of HomeFed common stock for each 1.26 Common
Shares of the Company owned of record on August 25, 1998. The Company expects
that the distribution of HomeFed securities will be made in the third quarter of
1999.
In connection with the declaration of dividends or the making of
distributions on, or the purchase, redemption or other acquisition of Common
Shares, the Company is required to comply with certain restrictions contained in
certain of its debt instruments. The Company's regulated subsidiaries are
restricted in the amount of distributions that can be made to the Company
without regulatory approval. For further information see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in this Report.
19
<PAGE>
Item 6. Selected Financial Data.
The following selected financial data have been summarized from the
Company's consolidated financial statements and are qualified in their entirety
by reference to, and should be read in conjunction with, such consolidated
financial statements and Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," of this Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA:
Revenues $530,506 $630,737 $670,443 $753,999 $646,380
Net securities gains (losses) (60,871) 3,249 24,117 15,101 (7,239)
Interest expense (a) 45,139 46,007 53,599 52,538 43,751
Insurance losses, policy benefits and
amortization of deferred acquisition costs 279,110 327,468 355,148 364,957 292,872
Income (loss) from continuing operations
before income taxes, minority expense of
trust preferred securities and extraordinary loss 29,377 (24,238) (48,187) 10,286 (11,477)
Income (loss) from continuing operations
before minority expense of trust preferred
securities and extraordinary loss 54,450 (14,347) (28,861) 24,203 (3,731)
Minority expense of trust preferred securities,
net of taxes (8,248) (7,942) - - -
Income (loss) from continuing operations
before extraordinary loss 46,202 (22,289) (28,861) 24,203 (3,731)
Income from discontinued operations, including
gain on sale, net of taxes 8,141 686,161 84,376 83,300 74,567
Extraordinary loss from early
extinguishment of debt, net of taxes - (2,057) (6,838) - -
Net income 54,343 661,815 48,677 107,503 70,836
Per share:
Basic earnings (loss) per common share:
Income (loss) from continuing operations
before extraordinary loss $.73 $ (.36) $(.48) $ .42 $(.07)
Income from discontinued operations, including
gain on sale .13 11.03 1.40 1.45 1.33
Extraordinary loss - (.03) (.11) - -
---- ------ ----- ----- -----
Net income $.86 $10.64 $ .81 $1.87 $1.26
==== ====== ===== ===== =====
Diluted earnings (loss) per common share:
Income (loss) from continuing operations
before extraordinary loss $.73 $ (.36) $(.48) $ .41 $(.07)
Income from discontinued operations, including .13 11.03 1.40 1.40 1.33
gain on sale
Extraordinary loss - (.03) (.11) - -
---- ------ ----- ----- -----
Net income $.86 $10.64 $ .81 $1.81 $1.26
==== ====== ===== ===== =====
AT DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except per share amounts)
SELECTED BALANCE SHEET DATA:
Cash and investments $2,229,895 $2,453,555 $1,246,220 $1,250,746 $ 940,993
Total assets 3,958,951 3,745,336 2,776,591 2,766,501 2,343,295
Debt, including current maturities 722,601 352,872 520,263 513,810 422,166
Customer banking deposits 189,782 198,582 209,261 203,061 179,888
Common shareholders' equity 1,853,159 1,863,531 1,118,107 1,111,491 881,815
Book value per common share $29.90 $29.17 $18.51 $18.47 $15.72
Cash dividends per common share $ - $ .25 $ .25 $ .25 $ .13
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
SELECTED INFORMATION ON PROPERTY AND
CASUALTY INSURANCE OPERATIONS (Unaudited): (b)
<S> <C> <C> <C> <C> <C>
GAAP Combined Ratio 129.3% 118.5% 114.7% 113.0% 103.5%
SAP Combined Ratio 134.0% 117.8% 107.9% 107.4% 101.3%
Industry SAP Combined Ratio (c) N/A 101.6% 105.8% 106.4% 108.4%
Premium to Surplus Ratio (d) 1.2x 1.4x 1.8x 2.2x 2.3x
</TABLE>
- ---------------------
(a) Includes interest on customer banking deposits.
(b) The Combined Ratio does not reflect the effect of investment income. For
1998, the difference in the accounting treatment for curtailment gains
relating to the defined benefit pension plans was the principal reason for
the difference between the GAAP Combined Ratio and the SAP Combined Ratio.
For 1996 and 1995, a change in the statutory accounting treatment for
retrospectively rated reinsurance agreements was the principal reason for
the difference between the GAAP Combined Ratios and the SAP Combined
Ratios. Additionally in 1998, 1997 and 1996, the difference relates to the
accounting for certain costs which are treated differently under SAP and
GAAP.
(c) Source: Best's Aggregates & Averages, Property/Casualty, 1998 Edition.
Industry Combined Ratios may not be fully comparable as a result of, among
other things, differences in geographical concentration and in the mix of
property and casualty insurance products.
(d) Premium to Surplus Ratio was calculated by dividing statutory property and
casualty insurance premiums written by statutory capital at the end of the
year.
21
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The purpose of this section is to discuss and analyze the Company's
consolidated financial condition, liquidity and capital resources and results of
operations. This analysis should be read in conjunction with the consolidated
financial statements and related notes which appear elsewhere in this Report.
LIQUIDITY AND CAPITAL RESOURCES
Parent Company Liquidity
Leucadia National Corporation (the "Parent") is a holding company whose
assets principally consist of the stock of its several direct subsidiaries and
cash and liquid investments. The Parent continuously evaluates the retention and
disposition of its existing operations and investigates possible acquisitions of
new businesses in order to maximize shareholder value. Accordingly, while the
Parent does not have any material arrangement, commitment or understanding with
respect thereto (except as disclosed in this Report), further acquisitions,
divestitures, investments and changes in capital structure are possible. Its
principal sources of funds are its available cash resources, bank borrowings,
public financings, repayment of subsidiary advances, funds distributed from its
subsidiaries as tax sharing payments, management and other fees, and borrowings
and dividends from its regulated and non-regulated subsidiaries. It has no
substantial recurring cash requirements other than payment of interest and
principal on its debt, tax payments and corporate overhead expenses. As of
December 31, 1998, the Company's cash, cash equivalents and marketable
securities, excluding those amounts held by its regulated subsidiaries and
collateralizing letters of credit, totaled approximately $1,219,000,000. In
addition, the book value of the principal amount of promissory notes received
from Conseco, Inc. upon the 1997 sale of the Colonial Penn Life Group was
$400,000,000 at December 31, 1998.
In 1998, the Company announced that it was considering the payment of a
significant cash dividend. The Company has received a ruling from the Internal
Revenue Service providing that any gain realized on such a dividend (up to a
maximum of approximately $812,000,000) would be treated as a capital gain. The
Company anticipates that, prior to the date of its 1999 Annual Meeting scheduled
for May 5, 1999, its Board of Directors will declare a dividend in an aggregate
amount of approximately $812,000,000, minus amounts paid to repurchase Common
Shares from March 17, 1999 through the date of declaration. Payment of such
dividend would require the Company to make an offer to purchase all of its
outstanding 8-1/4% Senior Subordinated Debentures due 2005 and its 7-7/8% Senior
Subordinated Debentures due 2006, outstanding in the aggregate principal amount
of $235,000,000, at a purchase price of 101% of principal, plus accrued and
unpaid interest thereon pursuant to the terms of the indentures governing these
Debentures. These offers would be required to be made within five business days
after the payment of such dividend, unless the terms of the Debentures can be
modified on terms that are acceptable to the Company.
Except for the Euro denominated debt of Fidei, which is described below,
the Parent maintains the principal borrowings for the Company and its
non-banking subsidiaries and has provided working capital to certain of its
subsidiaries. These borrowings have primarily been made from banks through
various credit agreement facilities and through public financings. The Company
borrowed $62,300,000 under its $100,000,000 bank credit facility to fund the
purchase price of Fidei, including expenses. In addition, the Company entered
into currency swap agreements to hedge approximately $55,000,000 of its foreign
currency exposure. The counterparties to these currency swap agreements are
major financial institutions, which management believes are able to fulfill
their obligations. The swap agreements mature in tranches in March 2000 and
September 2001. At December 31, 1998, $65,500,000 was outstanding under the bank
credit facility.
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During 1998, the Company's Board of Directors increased to 6,000,000 the
maximum number of its Common Shares that the Company is authorized to purchase.
Through December 31, 1998, the Company repurchased in the open market 1,996,400
Common Shares for an aggregate cost of approximately $58,071,000. From January
1, 1999 through March 12, 1999, the Company acquired 1,738,570 Common Shares for
an aggregate cost of approximately $52,119,000. As a result, as of March 13,
1999, the Company is authorized to repurchase 3,788,717 Common Shares.
At December 31, 1998, a maximum of approximately $25,200,000 was available
to the Parent as dividends from its regulated subsidiaries without regulatory
approval. Additional amounts may be available to the Parent in the form of loans
or cash advances from regulated subsidiaries, although no amounts were
outstanding at December 31, 1998 or borrowed to date in 1999. There are no
restrictions on distributions from the non-regulated subsidiaries. The Parent
also receives tax sharing payments from subsidiaries included in its
consolidated income tax return, including certain regulated subsidiaries.
Because of the tax loss carryforwards available to the Parent and certain
subsidiaries, together with current interest deductions and corporate expenses,
the amount paid by the Parent for income taxes has been substantially less than
tax sharing payments received from its subsidiaries. Payments from regulated
subsidiaries for dividends, tax sharing payments and other services totaled
approximately $1,295,600,000 (including $1,230,000,000 relating to the sales of
the Colonial Penn companies in 1997) for the year ended December 31, 1998.
Based on discussions with commercial and investment bankers, the Company
believes that it has the ability to raise additional funds under acceptable
conditions for use in its existing businesses or for appropriate investment
opportunities. Since 1993, the Company's senior debt obligations have been rated
as investment grade by S&P and Duff & Phelps Inc. Ratings issued by bond rating
agencies are subject to change at any time.
Consolidated Liquidity
In 1998, net cash was used for operations, principally to purchase
investments classified as trading and for the payment of income taxes, partially
offset by the repayment of the Company's bridge financing to PIB, its Russian
joint venture described below. In 1997, net cash was used for operations
principally to fund the Company's capital commitments and bridge financing to
PIB, and for the purchase of investments classified as trading.
In December 1998, a subsidiary of the Company repurchased for $42,200,000
plus accrued interest, $51,800,000 liquidation amount of 8.65% trust issued
preferred securities of Leucadia Capital Trust I, a wholly-owned subsidiary of
the Company. The difference between the book value and the amount paid was
credited directly to shareholders' equity.
During 1998, the Company's previously announced agreement to sell
substantially all of its interest in Caja to its Argentine partner was
restructured and, in March 1999, the Company sold all of its interest in Caja to
Assicurazioni Generali Group, an Italian insurance company, for $126,000,000 in
cash and a $40,000,000 collateralized note maturing April 2001 from its
Argentine partner. The Company will record a pre-tax gain of approximately
$120,000,000 in its first quarter 1999 results of operations in connection with
this transaction.
In September 1998, the Company reinsured, retroactive to January 1, 1998,
substantially all of its remaining life insurance business to Allstate and a
subsidiary thereof in an indemnity reinsurance transaction. While the premium
received on this transaction was approximately $28,675,000, the gain on the
reinsurance transaction was deferred and is being amortized into income based
upon actuarial estimates of the premium revenue of the underlying insurance
contracts. In December 1998, the Company signed an agreement to sell its
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remaining life insurance subsidiaries, Charter and Intramerica, to Allstate for
statutory surplus at the date of sale (approximately $62,200,000 at December 31,
1998), plus $3,575,000. The transaction is expected to result in a pre-tax gain
of approximately $20,000,000, principally resulting from recognition of deferred
gains from prior reinsurance transactions (including the September 1998 Allstate
transaction described above). The transaction is subject to regulatory approvals
and customary closing conditions and is expected to close in the second quarter
of 1999.
As of December 31, 1998, the Company's consolidated debt was $722,601,000
as compared to $352,872,000 as of December 31, 1997. This increase is primarily
related to the Company's acquisition of 95.4% of Fidei in 1998. At December 31,
1998, the principal amount of Fidei's Euro denominated outstanding debt, all of
which is non-recourse to the Company, was approximately $249,400,000
(approximately 213,656,000 Euros). Inasmuch as Fidei's Euro demoninated assets
will be sold over time and such assets are presently funded with Fidei's Euro
demoninated debt, the Company has determined not to acquire a currency hedge for
Fidei's Euro denominated debt.
In 1996, the Company formed PIB, a joint venture with PepsiCo, Inc., to be
the exclusive bottler and distributor of PepsiCo beverages in a large portion of
central and eastern Russia, Kyrgyzstan and Kazakstan. The Company contributed
$79,500,000 to PIB for a 75% equity interest. Effective as of January 30, 1998,
the Company entered into an agreement with PepsiCo, pursuant to which, among
other things, PIB repaid in full the Company's $77,705,000 bridge financing
(which was funded in 1997) and the Company's equity interest in PIB was reduced
to 37.9%. The agreement relieved the Company of any future funding obligation
with respect to PIB and created an option, exercisable by either the Company or
PepsiCo, pursuant to which PepsiCo was obligated to purchase all of the
Company's interest in PIB (the "Option") for $37,000,000, plus interest. In
February 1999, PepsiCo exercised the Option for approximately $39,190,000,
including interest, and the Company recognized a pre-tax gain of approximately
$29,545,000. However, when combined with the Company's share of the joint
venture losses since inception, the Company's net loss from this investment was
approximately $40,310,000.
The investment portfolios of the Company's insurance subsidiaries are
principally fixed maturity investments; the balance of their portfolio consists
largely of preferred securities. Of the fixed maturity securities, the majority
consists of those rated "investment grade" or U.S. governmental agency issued or
guaranteed obligations, although limited investments in "non-rated" or rated
less than investment grade securities have been made from time to time.
Principally as a result of changes in market interest rates during 1998,
the unrealized gain on investments at the end of 1997 of approximately
$5,630,000 (net of taxes) decreased to an unrealized loss of approximately
$982,000 (net of taxes) as of December 31, 1998. While this has resulted in a
decrease in shareholders' equity, it had no effect on results of operations or
cash flows.
The Company provides collateralized automobile loans to individuals with
poor credit histories. Prior to 1998, the Company's loan volume was in decline
primarily as a result of heavy competition in this line of business. However, in
1998, the Company began to see growth in its automobile lending business as it
expanded into new locations and developed new programs. The Company also
benefited from the decline in competition due to the failure of certain
competitors and a reduction in capital available for securitizations. In
addition, in December 1998, the Company purchased a $36,900,000 sub-prime
automobile portfolio. The Company's investment in automobile loans was
$140,400,000, $77,607,000 and $96,338,000 at December 31, 1998, 1997 and 1996,
respectively. During 1998, the Company's banking and lending subsidiaries sold
substantially all of their executive and professional loan portfolios for
aggregate proceeds of $89,500,000 and reported a pre-tax gain on these sales of
approximately $6,500,000.
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The Company and certain of its subsidiaries have loss carryforwards and
other tax attributes. The amount and availability of tax loss carryforwards are
subject to certain qualifications, limitations and uncertainties. As described
in the Notes to the Consolidated Financial Statements, significant additional
amounts of loss carryforwards may be available under certain circumstances. In
order to reduce the possibility that certain changes in ownership could impose
limitations on the use of these carryforwards, the Company's certificate of
incorporation contains provisions which generally restrict the ability of a
person or entity from accumulating at least five percent of the Common Shares
and the ability of persons or entities now owning at least five percent of the
Common Shares from acquiring additional Common Shares.
RESULTS OF OPERATIONS
Property and Casualty Insurance
The Company's most significant operation is its insurance business, where
it is a provider of property and casualty insurance primarily in the New York
metropolitan area. For the year ended December 31, 1998, the Company's insurance
segment contributed 57% of total revenues from continuing operations and, at
December 31, 1998, constituted 25% of total assets.
Net earned premium revenues of the Empire Group were $228,600,000,
$275,000,000 and $326,400,000 for the years ended December 31, 1998, 1997 and
1996, respectively. In 1998, the decrease in earned premium revenues was
primarily due to a decline in the number of assigned risk automobile pool
contracts acquired due to competition and the depopulation of the assigned risk
automobile pools ($24,600,000) and a reduction in certain lines, principally
voluntary commercial automobile ($8,500,000), private passenger automobile
($6,000,000), commercial package policies ($4,300,000) and workers' compensation
($3,700,000), due to tighter underwriting standards, reunderwriting and
increased competition. In 1997, the decline in earned premium revenues was
primarily due to the depopulation of the assigned risk pools ($31,700,000) and a
reduction in certain commercial lines, principally voluntary commercial
automobile ($10,200,000) and workers' compensation ($8,800,000) due to
competition, reunderwriting and repricing. In addition, earned premium revenues
were reduced in 1997 by $5,500,000 to record premiums due under retrospectively
rated reinsurance contracts written for 1995 and prior accident years. The
Empire Group re-estimated the premium due based upon its then current estimate
of loss ratios for 1995 and prior accident years. Partially offsetting these
reductions was an increase in certain voluntary personal lines, principally
private passenger automobile and homeowners.
The Empire Group's combined ratios as determined under GAAP and SAP were
as follows:
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
GAAP 129.3% 118.5% 114.7%
SAP 134.0% 117.8% 107.9%
The Empire Group's combined ratios increased in 1998 primarily due to the
reduction in premium volume at a rate greater than the reduction in net
underwriting and other costs. In addition, the reduction in servicing fees in
1998 negatively affected the expense ratios. Included in the Empire Group's
results for 1998, 1997 and 1996 were approximately $42,000,000, $27,000,000 and
$28,000,000, respectively, for reserve strengthening related to losses from
prior accident years.
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During 1998, the Empire Group reviewed the adequacy of the reserves
carried for its open claims' files, focusing on workers' compensation,
commercial auto and other commercial liability lines of business. Such reviews
are part of the Empire Group's normal ongoing practice. Particular emphasis
during this review was placed on reserves carried for the workers' compensation
line of business. As part of the review, substantially all open workers'
compensation claim files were reviewed for every accident year up to and
including 1998. The Empire Group also conducted a comprehensive review of
reserves carried for other commercial liability lines of business in which
approximately 28% of the open claim files were reviewed, with a primary focus on
accident years 1995 to 1997. As a result of these reviews, the Empire Group
revised its assumptions regarding average claims costs and probable ultimate
losses and, accordingly, reserves were strengthened by $13,000,000 for workers'
compensation and $14,000,000 for other commercial liability lines of business.
Additionally, during 1998, the Empire Group reorganized the commercial auto
claims department. As part of this realignment, more complex claims files were
reviewed by the most experienced claims examiners and assumptions regarding
average claims severity and probable ultimate losses were revised and reserves
were strengthened by $14,000,000 for commercial automobile lines of business.
The 1997 reserve strengthening included approximately $11,000,000 for
commercial package lines of business and approximately $7,000,000 for voluntary
commercial automobile lines of business. During 1997, the Empire Group reviewed
the adequacy of the reserves carried for its open claims' files, as part of its
normal ongoing practice, focusing on the commercial package, general liability
and commercial automobile lines of business. As a result of this review and the
continued unfavorable development of prior accident years losses, particularly
the 1992 through 1994 accident years, the Empire Group revised its assumptions
regarding future increases in average claims severity and reserves were
strengthened.
The 1996 reserve strengthening included approximately $20,000,000, for
voluntary commercial automobile lines of business and approximately $8,000,000
for commercial package lines of business. Beginning in 1992, the Empire Group
entered into new market segments of the voluntary commercial business, including
specialty programs for sanitation trucks, gas stations, fuel oil deliveries and
limousines. Initially, the Empire Group based its loss ratio estimate upon its
experience with similar lines of business, industry statistics and standard
actuarial ultimate loss projection techniques, which consider expected loss
ratios. During 1996, claims began to develop unfavorably and the Empire Group
used such claim development to revise the assumptions that formed the basis of
actuarial studies and reserves were increased. With respect to commercial
package lines, general liability claims for business written in 1992 through
1994 also developed unfavorably. These claims showed an increased frequency of
losses as well as an increase in the time between the date the loss occurred and
when the loss was reported compared to prior experience. General liability
claims are susceptible to the emergence of losses over an extended period of
time.
For the lines of business discussed above, as well as all other property
and casualty lines of business, the Company employs a variety of standard
actuarial ultimate loss projection techniques, statistical analyses and
case-basis evaluations to estimate its liability for unpaid losses. The
actuarial projections include an extrapolation of both losses paid and incurred
by business line and accident year and implicitly consider the impact of
inflation and claims settlement patterns upon ultimate claim costs based upon
historical patterns. These estimates are performed quarterly and consider any
changes in trends and actual loss experience. Any resulting change in the
estimate of the liability for unpaid losses, including those discussed above, is
reflected in current year earnings during the quarter the change in estimate is
identified.
The reserving process relies on the basic assumption that past experience
is an appropriate basis for predicting future events. The probable effects of
current developments, trends and other relevant matters are also considered.
Since the establishment of loss reserves is affected by many factors, some of
which are outside the Company's control or affected by future conditions,
reserving for property and casualty claims is a complex and uncertain process
requiring the use of informed estimates and judgements. As additional experience
and
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other data become available and are reviewed, the Company's estimates and
judgements may be revised. While the effect of any such changes in estimates
could be material to future results of operations, the Company does not expect
such changes to have a material effect on its liquidity or financial condition.
In management's judgment, information currently available has been
appropriately considered in estimating the Company's loss reserves. The Company
will continue to evaluate the adequacy of its loss reserves on a quarterly
basis, incorporating any future changes in trends and actual loss experience,
and record adjustments to its loss reserves as appropriate.
Manufacturing
In December 1997, the Company completed the disposition of certain of its
manufacturing operations. As a result, since December 1997, the Company's
manufacturing operations solely have consisted of its plastics division. In
1998, the gross profit for the plastics division increased by 14% to
approximately $21,400,000. This increase was primarily due to greater sales in
most of the division's product lines and lower raw material costs. The decline
in manufacturing revenues during the last three years was due to the sale of
certain divisions and the discontinuance of certain non-performing product lines
in 1997 and prior years. The Company recorded charges of $4,300,000 in 1997 and
$3,700,000 in 1996 for losses on sales and shutdown expenses, which are
primarily reflected in the caption "Selling, general and other expenses."
Banking and Lending
Finance revenues and operating profits reflect the level of consumer
instalment loans, and for 1998, the sale of substantially all of the Company's
executive and professional loan portfolio which resulted in a pre-tax gain of
approximately $6,500,000, as discussed above. In addition, automobile loan
losses declined in 1998 and 1997. In 1997, operating profit was also adversely
affected by $3,500,000 in costs to settle litigation related to a lending
program that is in liquidation. In 1996, operating profit was also affected by
increased interest expense on customer banking deposits.
Other
In 1998, investment and other income increased by approximately
$16,300,000 primarily due to increased interest income ($63,700,000), the sale
of the Company's executive and professional loan portfolio referred to above
($6,500,000) and increased income from real estate activities ($8,800,000),
partially offset by reduced gains from sales of real estate and other assets
($40,700,000) and reduced income relating to the service business ($19,100,000).
In 1997, investment and other income increased by approximately $81,800,000,
primarily due to increased gains from sales of real estate properties
($63,500,000) including the sale of a New York City office building and
increased interest income ($28,100,000) including earnings on the proceeds from
the sales of the Colonial Penn Life Group and Colonial Penn P&C Group. Such
increases were partially offset by reduced trading stamp and miscellaneous other
revenues in 1997 and a litigation settlement gain recorded in 1996.
During 1998, due to declines in values that were deemed other than
temporary, the Company recorded a pre-tax writedown of approximately $75,000,000
related to its investments in Russian and Polish debt and equity securities.
Such writedowns are reflected in the caption "Net securities gains (losses)." At
December 31, 1998, the remaining book value of the Company's investments in
these debt and equity securities was approximately $19,000,000.
Equity in income (losses) of associated companies improved in 1998 as
compared to 1997 primarily due to a reduction of approximately $48,400,000 in
the Company's equity losses related to PIB resulting from
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<PAGE>
discontinuance of the equity method of accounting in early 1998 and income from
an investment partnership of approximately $30,800,000. In December 1997, the
Company invested $20,000,000 to acquire a limited partnership interest in this
partnership. The partnership currently is in the process of liquidating and
making final distributions. The Company does not anticipate that the amount of
income to be realized from this investment will be significant in 1999. Equity
in losses of associated companies increased in 1997 as compared to 1996
primarily due to start-up losses from the Company's equity investment in PIB of
$50,481,000 in 1997 as compared to $17,104,000 in 1996. The equity in losses of
associated companies included losses from the Company's investment in MK Gold of
$4,251,000 in 1997 and $6,478,000 in 1996 and a write-off of $6,540,000 in 1996,
representing the Company's investment in an unsuccessful well drilled by its
Siberian oil exploration joint venture.
Interest expense primarily reflects the level of external borrowings
outstanding throughout the periods. The reduction in interest expense in 1997
was primarily due to the decline in such borrowings.
The decrease in selling, general and other expenses in 1998 as compared to
1997 principally reflects decreased expenses of the manufacturing segment
principally as a result of the sale of certain divisions in 1997, decreased
pension expense due to the recognition of net curtailment gains of $6,500,000, a
1997 charge for estimated costs to settle litigation relating to a lending
program that is in liquidation and lower provisions for bad debts. The decrease
in selling, general and other expenses in 1997 as compared to 1996 principally
reflects the Empire Group's decreased expenses related to reduced premium
volume, decreased operating expenses of real estate properties, decreased
expenses relating to certain investment activities and lower provisions for bad
debts. This decrease was partially offset by the losses recorded by the
manufacturing segment related to sold divisions and the charge for estimated
costs to settle litigation relating to a lending program that is in liquidation.
Income taxes for 1998 reflect a benefit of approximately $39,000,000 for a
change in the Company's estimated 1997 federal tax liability and the favorable
resolution of certain contingencies. The 1997 and 1996 income tax benefits were
greater than the expected normal corporate tax rate primarily due to the
favorable resolution of certain contingencies.
As discussed above, in December 1998, the Company signed an agreement to
sell its remaining life insurance subsidiaries, Charter and Intramerica, to
Allstate. The transaction is subject to regulatory approvals and customary
closing conditions and is expected to close in the second quarter of 1999. In
1998, the Company classified these life insurance operations as discontinued
operations and the consolidated financial statements for prior periods have been
restated to be consistent with such presentation.
The number of shares used to calculate basic earnings (loss) per share was
63,409,000, 62,205,000 and 60,301,000 for 1998, 1997 and 1996, respectively. The
number of shares used to calculate diluted earnings (loss) per share was
63,510,000, 62,205,000 and 60,301,000 for 1998, 1997 and 1996, respectively. For
diluted per share amounts, the Company's 5-1/4% Convertible Subordinated
Debentures due 2003 (which were redeemed in 1997) were not assumed to have been
converted since the effect of such assumed conversion would have been to
increase earnings per share.
Year 2000 and Information Technology Systems
The Company is in the process of evaluating its information technology
systems to determine the potential impact of the Year 2000. The Year 2000 issue
is the result of computer programs being written using two digits (rather than
four) to define the applicable year. Any programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or
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<PAGE>
system failures. As a result, before the end of 1999, computer hardware and
software may need to be upgraded with new hardware and software which can
distinguish 21st century dates from 20th century dates.
Since 1996, the Company has been evaluating its Year 2000 readiness. Its
program to address its Year 2000 readiness consists of (i) the preparation of an
inventory of all computer related hardware and software, all non-computer
related hardware that may have embedded technology and all third parties that
are material to the Company's business operations, (ii) the identification of a
senior officer at each of the Company's operating subsidiaries and significant
investments to be responsible for overseeing the implementation of the Year 2000
program and reporting on compliance therewith to the Company's senior
management, (iii) the identification of mission critical aspects of the
Company's business, and assessment of the Year 2000 readiness of such mission
critical systems and components, (iv) the development of a plan to upgrade,
repair or replace systems as required for Year 2000 compliance, (v) the
development of a plan to test the readiness of all critical systems, (vi) making
inquiry of material third parties as to the state of their Year 2000 compliance,
and (vii) as appropriate, the development of a contingency plan for either
non-compliant internal systems or non-compliant material third parties. Where
appropriate, outside consultants have been engaged to advise the Company on its
Year 2000 readiness. Substantially all of the Company's operations have
completed the inventory and identification process and are in the process of
upgrading and testing critical systems. The Company's primary focus during the
balance of 1999 will be on continued testing of mission critical systems and
software provider upgrades, as well as monitoring the readiness of material
third parties.
In 1996, the Empire Group began to evaluate its information technology
systems and their ability to support future business needs. This led to a
decision to acquire new policy management and accounting systems. These systems
provide enhanced functionality and improved processing for underwriting, claims,
billing, collection, reinsurance, reporting and accounting and are designed to
be Year 2000 compliant. The Empire Group anticipates that these new systems will
be fully implemented in 1999 and that any non-compliant programs will become
compliant during 1999. All but one of the manufacturing operation's material
systems (involving the storage of historical information) have tested as being
Year 2000 compliant. The Company is exploring alternative systems to maintain
this information. Until an acceptable replacement for this system can be found,
the Company can maintain these records in hard copy. The banking and lending
operations have successfully completed testing of mission critical systems and
testing of non-mission critical systems is currently underway. In addition,
deposit customers have been sent letters to inform them about the Year 2000
issue and to educate them about the progress made in addressing this issue.
The Year 2000 issue may affect other entities with which the Company
transacts business. The Company has made inquiry of third parties with whom it
has material relationships as to the Year 2000 compliance of such third parties.
Many of such parties have reported plans to be fully compliant by the end of
1999 and most have reported substantial progress at the end of 1998. However, at
this time the Company cannot predict the effect of the Year 2000 on its material
third parties or the impact any deficiency in the Year 2000 readiness of such
parties could have on the Company.
Through December 31, 1998, expenses incurred by the Company in connection
with the Year 2000 issue (excluding expenses related to the Empire Group's
acquisition of new systems, which was not motivated by Year 2000 concerns) did
not exceed $500,000. Based upon current information, the Company does not expect
that the Year 2000 issue will have a material effect on its consolidated
financial position or consolidated results of operations.
Cautionary Statement for Forward-Looking Information
Statements included in this Report may contain forward-looking statements.
Such forward-looking statements are made pursuant to the safe-harbor provisions
of the Private Securities Litigation Reform Act of
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1995. Such statements may relate, but are not limited, to projections of
revenues, income or loss, capital expenditures, fluctuations in insurance
reserves, plans for growth and future operations (including Year 2000
compatibility), competition and regulation as well as assumptions relating to
the foregoing. Forward-looking statements are inherently subject to risks and
uncertainties, many of which cannot be predicted or quantified. When used in
this Report, the words "estimates", "expects", "anticipates", "believes",
"plans", "intends" and variations of such words and similar expressions are
intended to identify forward-looking statements that involve risks and
uncertainties. Future events and actual results could differ materially from
those set forth in, contemplated by or underlying the forward-looking
statements. The factors that could cause actual results to differ materially
from those suggested by any such statements include, but are not limited to,
those discussed or identified from time to time in the Company's public filings,
including general economic and market conditions, changes in foreign and
domestic laws, regulations and taxes, changes in competition and pricing
environments, regional or general changes in asset valuation, the occurrence of
significant natural disasters, the inability to reinsure certain risks
economically, the adequacy of loss reserves, prevailing interest rate levels,
weather related conditions that may affect the Company's operations, the
difficulty in identifying hardware and software that may not be Year 2000
compliant, the lack of success of third parties to adequately address the Year
2000 issue, vendor delays and technical difficulties affecting the Company's
ability to upgrade or replace its hardware and/or software for Year 2000
compliance, and changes in the composition of the Company's assets and
liabilities through acquisitions or divestitures. Undue reliance should not be
placed on these forward-looking statements, which are applicable only as of the
date hereof. The Company undertakes no obligation to revise or update these
forward-looking statements to reflect events or circumstances that arise after
the date of this Report or to reflect the occurrence of unanticipated events.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The following includes "forward-looking statements" that involve risk and
uncertainties. Actual results could differ materially from those projected in
the forward-looking statements.
The Company's market risk arises principally from interest rate risk
related to its investment portfolio, its borrowing activities and the banking
and lending activities of certain subsidiaries. The Company does not enter into
material derivative financial instrument transactions.
The Company's investment portfolio is primarily classified as available
for sale, and consequently, is recorded on the balance sheet at fair value with
unrealized gains and losses reflected in shareholders' equity. Included in the
Company's investment portfolio are fixed income securities, which comprised
approximately 90% of the Company's total investment portfolio at December 31,
1998. These fixed income securities are primarily rated "investment grade" or
are U.S. governmental agency issued or guaranteed obligations, although limited
investments in "non-rated" or rated less than investment grade securities have
been made from time to time. The estimated weighted average remaining life of
these fixed income securities was approximately 2.5 years at December 31, 1998.
The Company's fixed income securities, like all fixed income instruments, are
subject to interest rate risk and will fall in value if market interest rates
increase. At December 31, 1998, the Company's portfolio of trading securities
was not material. The Company manages the investment portfolio of its insurance
subsidiaries to preserve principal, maintain a high level of quality, comply
with applicable insurance industry regulations and achieve an acceptable rate of
return. In addition, the Company considers the duration of its insurance
reserves in comparison with that of its investments.
The Company is subject to interest rate risk on its long-term fixed
interest rate debt and the Company-obligated mandatorily redeemable preferred
securities of its subsidiary trust holding solely subordinated debt securities
of the Company. Generally, the fair market value of debt and preferred
securities with a fixed interest rate will increase as interest rates fall, and
the fair market value will decrease as interest rates rise.
The Company's banking and lending operations are subject to risk resulting
from interest rate fluctuations to the extent that there is a difference between
the amount of the interest-earning assets and the amount of interest-bearing
liabilities that are prepaid/withdrawn, mature or reprice in specified periods.
The principal objectives of the Company's banking and lending asset/liability
management activities are to provide maximum levels of net interest income while
maintaining acceptable levels of interest rate and liquidity risk and to
facilitate funding needs. The Company utilizes an interest rate sensitivity
model as the primary quantitative tool in measuring the amount of interest rate
risk that is present. The model quantifies the effects of various interest rate
scenarios on the projected net interest margin over the ensuing twelve-month
period. Derivative financial instruments, including interest rate swaps, may be
used to modify the Company's indicated net interest sensitivity to levels deemed
to be appropriate based on risk management policies and the Company's current
economic outlook. Counterparties to such agreements are major financial
institutions, which the Company believes are able to fulfill their obligations;
however, if they are not, the Company believes that any losses are unlikely to
be material.
The following table provides information about the Company's financial
instruments used for purposes other than trading that are sensitive to changes
in interest rates. For investment securities and debt obligations, the table
presents principal cash flows by expected maturity dates. For the variable rate
notes receivable and variable rate borrowings, the weighted average interest
rates are based on implied forward rates in the yield curve at the reporting
date. For loans, securities and liabilities with contractual maturities, the
table presents contractual principal cash flows adjusted for the Company's
historical experience of loan prepayments and prepayments of mortgage-backed
securities. For banking and lending's variable rate products, the weighted
average variable rates are based upon the respective pricing index at the
reporting date. For money market
31
<PAGE>
deposits that have no contractual maturity, the table presents principal cash
flows based on the Company's historical experience and management's judgment
concerning their most likely withdrawal behaviors. For interest rate swaps, the
table presents notional amounts by contractual maturity date.
32
<PAGE>
<TABLE>
<CAPTION>
Expected Maturity Date
----------------------
1999 2000 2001 2002 2003 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
THE COMPANY, EXCLUDING
BANKING AND LENDING:
RATE SENSITIVE ASSETS:
Available for Sale Fixed
Income Securities:
U.S. Government $783,303 $146,339 $9,306 $198,045 $12,784 $160,629 $1,310,406 $1,310,406
Weighted Average
Interest Rate 5.08% 5.91% 7.17% 6.38% 5.86% 6.22%
Other Fixed Maturities:
Rated Investment Grade $7,555 $3,808 $15,020 $2,832 $18,112 $46,063 $93,390 $93,390
Weighted Average
Interest Rate 6.84% 8.03% 9.35% 12.15% 7.29% 7.99%
Rated Less Than
Investment Grade/Not
Rated $20,440 $25,727 $18,040 $33,598 $10,248 $11,575 $119,628 $119,628
Weighted Average
Interest Rate 9.26% 1.84% 2.04% 5.12% 6.80% 8.05%
Held to Maturity Fixed
Income Securities:
U.S. Government $774 $- $- $5,230 $- $2,148 $8,152 $8,481
Weighted Average
Interest Rate 6.75% - - 6.47% - 6.88%
Variable Rate Notes
Receivable $- $- $- $- $400,000 $- $400,000 $400,000
Weighted Average
Interest Rate 5.66% 5.64% 5.71% 5.75% 5.79% -
RATE SENSITIVE LIABILITIES:
Fixed Interest Rate
Borrowings $865 $870 $71,170 $8,006 $97,803 $435,795 $614,509 $621,435
Weighted Average
Interest Rate 6.83% 6.83% 6.83% 7.10% 7.11% 7.44%
Variable Rate Borrowings $78,479 $- $- $- $- $9,815 $88,294 $88,294
Weighted Average
Interest Rate 7.25% 5.14% 5.21% 5.25% 5.29% 5.44%
OTHER RATE SENSITIVE
FINANCIAL INSTRUMENTS:
Company-obligated
Mandatorily Redeemable
Preferred Securities of
Subsidiary Trust Holding
Solely Subordinated
Debt Securities of the
Company $- $- $- $- $- $98,200 $98,200 $99,182
Weighted Average
Interest Rate 8.65% 8.65% 8.65% 8.65% 8.65% 8.65%
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Expected Maturity Date
----------------------
1999 2000 2001 2002 2003 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BANKING AND LENDING:
RATE SENSITIVE ASSETS:
Certificates of Deposit $15,030 $1,090 $- $- $- $- $16,120 $16,121
Weighted Average Interest
Rate 5.622% 5.821% - - - - 5.635%
Fixed Interest Rate Securities $9,971 $1,582 $1,354 $931 $5,824 $12,839 $32,501 $32,499
Weighted Average Interest
Rate 6.136% 5.988% 6.028% 6.084% 6.074% 6.382% 6.206%
Variable Interest Rate
Securities $5 $5 $5 $5 $2 $- $22 $21
Weighted Average Interest
Rate 8.125% 8.125% 8.125% 8.125% 8.125% - 8.125%
Fixed Interest Rate Loans $65,464 $45,222 $29,560 $11,898 $7,540 $17,623 $177,307 $178,148
Weighted Average Interest
Rate 21.067% 20.709% 20.640% 22.187% 19.590% 16.900% 20.489%
Variable Interest Rate Loans $1,022 $564 $427 $335 $269 $5,259 $7,876 $7,951
Weighted Average Interest
Rate 13.097% 14.514% 14.583% 14.492% 14.644% 10.651% 11.759%
RATE SENSITIVE LIABILITIES:
Money Market Deposits $5,803 $3,669 $3,261 $2,854 $2,446 $4,076 $22,109 $21,986
Weighted Average Interest
Rate 3.792% 4.000% 4.000% 4.000% 4.000% 4.000% 3.945%
Time Deposits $121,437 $23,264 $10,771 $7,534 $4,667 $- $167,673 $170,836
Weighted Average Interest
Rate 5.455% 6.174% 5.787% 5.777% 5.731% - 5.610%
Fixed Interest Rate
Borrowings $19,798 $- $- $- $- $- $19,798 $19,798
Weighted Average Interest
Rate 4.875% - - - - - 4.875%
RATE SENSITIVE DERIVATIVE
FINANCIAL INSTRUMENTS:
Pay Fixed/Receive Variable
Interest Rate Swap $- $- $- $- $60,000 $- $60,000 $292
Average Pay Rate 5.067% 5.067% 5.067% 5.067% 5.067% - 5.067%
Average Receive Rate 5.313% 5.313% 5.313% 5.313% 5.313% - 5.313%
OFF-BALANCE SHEET ITEMS:
Commitments to Extend
Credit $31 $31 $31
Weighted Average Interest
Rate 14.650% 14.650%
Unused Lines of Credit $3,000 $- $- $- $- $5,202 $8,202 $8,202
Weighted Average Interest
Rate 7.75% - - - - 4.875% 5.927%
</TABLE>
34
<PAGE>
Item 8. Financial Statements and Supplementary Data.
Financial Statements and supplementary data required by this Item 8 are set
forth at the pages indicated in Item 14(a) below.
Item 9. Disagreements on Accounting and Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information to be included under the caption "Nominees for Election as
Directors" in the Company's definitive proxy statement to be filed with the
Commission pursuant to Regulation 14A of the 1934 Act in connection with the
1999 annual meeting of shareholders of the Company (the "Proxy Statement") is
incorporated herein by reference. In addition, reference is made to Item 10 in
Part I of this Report.
Item 11. Executive Compensation.
The information to be included under the caption "Executive Compensation" in
the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information to be included under the caption "Present Beneficial Ownership
of Common Shares" in the Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information to be included under the caption "Executive Compensation -
Certain Relationships and Related Transactions" in the Proxy Statement is
incorporated herein by reference.
35
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1)(2) Financial Statements and Schedules.
Report of Independent Accountants............................. F-1
Financial Statements:
Consolidated Balance Sheets at December 31, 1998 and 1997... F-2
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996.......................... F-3
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................... F-4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1998, 1997 and 1996...... F-6
Notes to Consolidated Financial Statements.................. F-7
Financial Statement Schedules:
Schedule III - Supplementary Insurance Information.......... F-33
Schedule V - Valuation and Qualifying Accounts.............. F-34
Schedule VI - Schedule of Supplemental Information for
Property and Casualty Insurance Underwriters.............. F-35
36
<PAGE>
(3) Executive Compensation Plans and Arrangements.
1992 Stock Option Plan (filed as Annex C to the Company's Proxy
Statement dated July 21, 1992).
Amended and Restated Shareholders Agreement dated as of December 16,
1997 among the Company, Ian M. Cumming and Joseph S. Steinberg.
Leucadia National Corporation Senior Executive Annual Incentive Bonus
Plan (filed as Annex D to the Company's Proxy Statement dated October
3, 1997 (the "1997 Proxy Statement")).
Deferred Compensation Agreement between the Company and Joseph S.
Steinberg dated December 8, 1998.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
3.1 Restated Certificate of Incorporation (filed as Exhibit 5.1 to
the Company's Current Report on Form 8-K dated July 14, 1993).*
3.2 Amended and Restated By-laws as amended through February 23,
1999.
4.1 The Company undertakes to furnish the Securities and Exchange
Commission, upon request, a copy of all instruments with respect
to long-term debt not filed herewith.
10.1 1992 Stock Option Plan (filed as Annex C to the Company's Proxy
Statement dated July 21, 1992).*
10.2 Articles and Agreement of General Partnership, effective as of
April 15, 1985, of Jordan/Zalaznick Capital Company (filed as
Exhibit 10.20 to the Company's Registration Statement No.
33-00606).*
10.3 Operating Agreement of The Jordan Company LLC, dated as of July
23, 1998.
10.4 Stock Purchase and Sale Agreement dated as of April 5, 1991, by
and between FPL Group Capital Inc and the Company (filed as
Exhibit B to the Company's Current Report on Form 8-K dated
August 23, 1991).*
10.5 Amended and Restated Shareholders Agreement dated as of December
16, 1997 among the Company, Ian M. Cumming and Joseph S.
Steinberg (filed as Exhibit 10.4 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997 (the
"1997 10-K")).*
- -------------------------
*Incorporated by reference.
37
<PAGE>
10.6 Deferred Compensation Agreement between the Company and Joseph S.
Steinberg dated December 8, 1998.
10.7 Settlement Agreement between Baldwin-United Corporation and the
United States dated August 27, 1985 concerning tax issues (filed
as Exhibit 10.14 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992 (the "1992 10-K")).*
10.8 Acquisition Agreement, dated as of December 18, 1992, by and
between Provident Mutual Life and Annuity Company of America and
Colonial Penn Annuity and Life Insurance Company (filed as
Exhibit 10.15 to the 1992 10-K).*
10.9 Amended and Restated Revolving Credit Agreement dated as of
November 3, 1997 between the Company, BankBoston, N.A. as
Administrative Agent, The Chase Manhattan Bank, as Syndication
Agent, Bank of America National Trust and Savings Association, as
Documentation Agent and the Banks signatory thereto (filed as
Exhibit 10.13 to the 1997 10-K).*
10.10 Purchase Agreement among Conseco, the Company, Charter, Colonial
Penn Group, Inc., Colonial Penn Holdings, Inc., Leucadia
Financial Corporation, Intramerica, Colonial Penn Franklin
Insurance Company and Colonial Penn Insurance Company dated as of
April 30, 1997 (filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1997).*
10.11 Purchase Agreement among GECC, the Company, Charter, Colonial
Penn Group Inc. and Colonial Penn Holdings, Inc. dated as of June
30, 1997 (filed as Annex A to the 1997 Proxy Statement).*
10.12 Purchase Agreement by and among Allstate Life Insurance Company,
Allstate Life Insurance Company of New York, Charter, Intramerica
and the Company, dated February 11, 1998 (filed as Exhibit 10.16
to the 1997 10-K).*
10.13 Leucadia National Corporation Senior Executive Annual Incentive
Bonus Plan (filed as Annex D to the 1997 Proxy Statement.)*
10.14 Stock Purchase Agreement by and between the Company and Allstate
Life Insurance Company dated as of December 18, 1998.
10.15 Trust Agreement dated August 14, 1998 between the Company for the
benefit of its shareholders as of August 25, 1998 and Joseph A.
Orlando, as Trustee.
21 Subsidiaries of the registrant.
- -------------------------
*Incorporated by reference.
38
<PAGE>
23 Consents of independent accountants with respect to the
incorporation by reference into the Company's Registration
Statements on Form S-8 (File No. 2-84303), Form S-8 and S-3 (File
No. 33-6054), Form S-8 and S-3 (File No. 33-26434), Form S-8 and
S-3 (File No. 33-30277), Form S-8 (File No. 33-61682) and Form
S-8 (File No. 33-61718).
27 Financial Data Schedule.
(d) Financial Statements of 50%-or-Less-Owned Entity
Gotham Partners Acquisition I, L.P. financial statements as of
December 31, 1998 and for the year ended December 31, 1998.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LEUCADIA NATIONAL CORPORATION
March 18, 1999 By: /s/ Barbara L. Lowenthal
---------------------------------------
Barbara L. Lowenthal
Vice President and Comptroller
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, on the date set forth above.
Signature Title
--------- -----
/s/ Ian M. Cumming Chairman of the Board
- ------------------------------- (Principal Executive Officer)
Ian M. Cumming
/s/ Joseph S. Steinberg President and Director
- ------------------------------- (Principal Executive Officer)
Joseph S. Steinberg
/s/ Joseph A. Orlando Vice President and Chief Financial Officer
- ------------------------------- (Principal Financial Officer)
Joseph A. Orlando
/s/ Barbara L. Lowenthal Vice President and Comptroller
- ------------------------------- (Principal Accounting Officer)
Barbara L. Lowenthal
/s/ Paul M. Dougan Director
- -------------------------------
Paul M. Dougan
/s/ Lawrence D. Glaubinger Director
- -------------------------------
Lawrence D. Glaubinger
/s/ James E. Jordan Director
- -------------------------------
James E. Jordan
/s/ Jesse Clyde Nichols, III Director
- -------------------------------
Jesse Clyde Nichols, III
40
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
March 8, 1999
To the Board of Directors and
Shareholders of Leucadia National Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under item 14(a) (1) (2) of this Form 10-K, present fairly, in all
material respects, the financial position of Leucadia National Corporation and
Subsidiaries at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedules listed in the index
appearing under item 14(a) (1) (2) of this Form 10-K, present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedules are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
F-1
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(Dollars in thousands, except par value)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Investments:
Available for sale (aggregate cost of $1,555,789
and $1,643,679) $1,553,126 $1,651,389
Trading securities (aggregate cost of $132,907
and $108,479) 132,576 115,416
Held to maturity (aggregate fair value of $47,583
and $36,316) 47,256 36,198
Other investments, including accrued interest income 37,247 69,366
---------- ----------
Total investments 1,770,205 1,872,369
Cash and cash equivalents 459,690 581,186
Reinsurance receivables, net 48,070 31,972
Trade, notes and other receivables, net 833,301 751,337
Prepaids and other assets 490,242 144,314
Property, equipment and leasehold improvements, net 121,790 60,433
Deferred policy acquisition costs 18,255 23,906
Investments in associated companies 172,390 207,902
Net assets of discontinued operations 45,008 71,917
---------- ----------
Total $3,958,951 $3,745,336
========== ==========
LIABILITIES
Customer banking deposits $ 189,782 $ 198,582
Trade payables and expense accruals 233,485 208,762
Other liabilities 109,397 93,141
Income taxes payable 96,500 172,593
Deferred tax liability 7,709 22,739
Policy reserves 542,274 545,708
Unearned premiums 94,572 127,666
Debt, including current maturities 722,601 352,872
---------- ----------
Total liabilities 1,996,320 1,722,063
---------- ----------
Minority interest 11,272 9,742
---------- ----------
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
subordinated debt securities of the Company 98,200 150,000
---------- ----------
SHAREHOLDERS' EQUITY
Common shares, par value $1 per share, authorized
150,000,000 shares; 61,984,686 and 63,879,155
shares issued and outstanding, after deducting
56,430,847 and 54,398,456 shares held in treasury 61,985 63,879
Additional paid-in capital 205,227 253,267
Accumulated other comprehensive income (771) 5,630
Retained earnings 1,586,718 1,540,755
---------- ----------
Total shareholders' equity 1,853,159 1,863,531
---------- ----------
Total $3,958,951 $3,745,336
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1998, 1997 and 1996
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Insurance revenues and commissions $228,576 $275,015 $326,433
Manufacturing 56,572 133,406 148,284
Finance 31,560 40,529 49,150
Investment and other income 251,379 235,053 156,090
Equity in income (losses) of associated
companies 23,290 (56,515) (33,631)
Net securities gains (losses) (60,871) 3,249 24,117
-------- -------- --------
530,506 630,737 670,443
-------- -------- --------
Expenses:
Provision for insurance losses and policy
benefits 233,772 275,435 299,816
Amortization of deferred policy acquisition
costs 45,338 52,033 55,332
Manufacturing cost of goods sold 35,201 94,077 107,667
Interest 45,139 46,007 53,599
Salaries 41,413 52,987 43,183
Selling, general and other expenses 100,266 134,436 159,033
-------- -------- --------
501,129 654,975 718,630
-------- -------- --------
Income (loss) from continuing operations
before income taxes, minority expense of trust
preferred securities and extraordinary loss 29,377 (24,238) (48,187)
-------- -------- --------
Income taxes:
Current (32,649) (6,138) 1,303
Deferred 7,576 (3,753) (20,629)
-------- -------- --------
(25,073) (9,891) (19,326)
-------- -------- --------
Income (loss) from continuing operations
before minority expense of trust preferred
securities and extraordinary loss 54,450 (14,347) (28,861)
Minority expense of trust preferred securities,
net of taxes 8,248 7,942 -
-------- -------- --------
Income (loss) from continuing operations before
extraordinary loss 46,202 (22,289) (28,861)
Income from discontinued operations,
net of taxes 8,141 58,516 84,376
Gain on disposal of discontinued operations,
net of taxes of $234,059 - 627,645 -
-------- -------- --------
Income before extraordinary loss 54,343 663,872 55,515
Extraordinary loss from early extinguishment
of debt, net of income tax benefit of $1,108
and $3,682 - (2,057) (6,838)
-------- -------- --------
Net income $ 54,343 $661,815 $ 48,677
======== ======== ========
Basic earnings (loss) per common share:
Income (loss) from continuing operations
before extraordinary loss $.73 $ (.36) $(.48)
Income from discontinued operations .13 .94 1.40
Gain on disposal of discontinued operations - 10.09 -
Extraordinary loss - (.03) (.11)
---- ------ -----
Net income $.86 $10.64 $ .81
==== ====== =====
Diluted earnings (loss) per common share:
Income (loss) from continuing operations
before extraordinary loss $.73 $ (.36) $(.48)
Income from discontinued operations .13 .94 1.40
Gain on disposal of discontinued operations - 10.09 -
Extraordinary loss - (.03) (.11)
---- ------ -----
Net income $.86 $10.64 $ .81
==== ====== =====
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Net cash flows from operating activities:
- -----------------------------------------
Net income $ 54,343 $ 661,815 $ 48,677
Adjustments to reconcile net income to net
cash (used for) operations:
Extraordinary loss, net of income tax benefit - 2,057 6,838
Provision (benefit) for deferred income taxes 7,576 (3,753) (20,629)
Depreciation and amortization of property,
equipment and leasehold improvements 10,250 10,913 12,889
Other amortization 38,098 59,253 65,418
Provision for doubtful accounts 9,473 11,135 18,412
Net securities (gains) losses 60,871 (3,249) (24,117)
Equity in (income) losses of associated companies (23,290) 56,515 33,631
(Gain) on disposal of real estate, property
and equipment (33,802) (66,940) (7,485)
(Gain) on sale of loan portfolio (6,535) - -
(Gain) on disposal of discontinued operations - (627,645) -
Investments classified as trading, net (139,715) (108,254) 6,724
Deferred policy acquisition costs incurred and deferred (39,687) (49,354) (52,763)
Net change in:
Reinsurance receivables (16,098) 24,459 (14,186)
Trade, notes and other receivables 79,960 (65,374) 1,999
Prepaids and other assets (11,054) (80,002) (64,246)
Net assets of discontinued operations 26,909 (37,746) (55,036)
Trade payables and expense accruals 24,816 60,306 14,889
Other liabilities (43,980) (6,024) (7,427)
Income taxes payable (79,191) (9,638) 17,753
Policy reserves (3,434) 13,389 14,897
Unearned premiums (33,094) (22,753) (14,372)
Other 1,321 3,470 734
---------- --------- --------
Net cash (used for) operating activities (116,263) (177,420) (17,400)
---------- --------- --------
Net cash flows from investing activities:
- -----------------------------------------
Acquisition of real estate, property, equipment
and leasehold improvements (79,296) (57,130) (19,932)
Proceeds from disposals of real estate, property
and equipment 59,814 198,287 46,043
Proceeds from disposal of discontinued operations,
net of expenses - 1,042,067 -
Investment in Providential Life in 1996 and Fidei
in 1998 (62,264) - (11,196)
Advances on loan receivables (153,920) (97,898) (113,787)
Principal collections on loan receivables 79,258 114,411 128,756
Proceeds from sales of loan receivables 89,516 - -
Purchases of investments (other than short-term) (2,897,174) (1,716,242) (877,542)
Proceeds from maturities of investments 844,384 324,415 329,440
Proceeds from sales of investments 2,134,113 732,361 604,259
---------- ---------- ---------
Net cash provided by investing activities 14,431 540,271 86,041
---------- ---------- ---------
(continued)
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
For the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
(In thousands)
Net cash flows from financing activities:
- -----------------------------------------
Net change in short-term borrowings $ 84,911 $ (50,000) $ 207
Net change in customer banking deposits (8,670) (10,646) 6,199
Issuance of Company-obligated mandatorily redeemable
preferred securities of subsidiary trust - 147,465 -
Reduction of Company-obligated mandatorily redeemable
preferred securities of subsidiary trust (42,217) - -
Issuance of long-term debt, net of issuance
costs 14,428 9,566 141,581
Reduction of long-term debt (388) (30,944) (139,861)
Purchase of common shares for treasury (59,348) (1,484) (837)
Dividends paid (8,380) (15,964) (15,100)
--------- --------- ---------
Net cash provided by (used for)
financing activities (19,664) 47,993 (7,811)
--------- --------- ---------
Net (decrease) increase in cash and
cash equivalents (121,496) 410,844 60,830
Cash and cash equivalents at January 1, 581,186 170,342 109,512
--------- --------- ---------
Cash and cash equivalents at December 31, $ 459,690 $ 581,186 $ 170,342
========= ========= =========
Supplemental disclosures of cash flow information:
- --------------------------------------------------
Cash paid during the year for:
Interest $46,469 $48,456 $53,854
Income tax payments, net of refunds $60,266 $28,100 $ 6,682
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 1998, 1997 and 1996
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Common Accumulated
Shares Additional Other
$1 Par Paid-in Comprehensive Retained
Value Capital Income Earnings Total
----- ------- ------------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $60,164 $159,914 $ 30,086 $ 861,327 $1,111,491
----------
Comprehensive income:
Net changes in unrealized gain
(loss) on investments, net of
tax benefit of $15,670 (28,327) (28,327)
Net income 48,677 48,677
----------
Comprehensive income 20,350
----------
Exercise of options to purchase
common shares 288 1,915 2,203
Purchase of stock for treasury (34) (803) (837)
Dividends ($.25 per common share) (15,100) (15,100)
------- -------- -------- --------- ----------
Balance, December 31, 1996 60,418 161,026 1,759 894,904 1,118,107
----------
Comprehensive income:
Net changes in unrealized gain
(loss) on investments, net of
taxes of $2,291 3,871 3,871
Net income 661,815 661,815
----------
Comprehensive income 665,686
----------
Exercise of options to purchase
common shares 248 3,263 3,511
Conversion of 5 1/4% Convertible
Subordinated Debentures 3,258 90,417 93,675
Purchase of stock for treasury (45) (1,439) (1,484)
Dividends ($.25 per common share) (15,964) (15,964)
------- -------- ------- ---------- ----------
Balance, December 31, 1997 63,879 253,267 5,630 1,540,755 1,863,531
----------
Comprehensive income:
Net changes in unrealized gain
(loss) on investments, net of
tax benefit of $3,596 (6,612) (6,612)
Net change in unrealized foreign
exchange gain (loss), net of tax
benefit of $61 211 211
Net income 54,343 54,343
----------
Comprehensive income 47,942
----------
Buyback of trust preferred securities,
net of taxes of $3,354 6,229 6,229
Exercise of options to purchase
common shares 137 3,048 3,185
Purchase of stock for treasury (2,031) (57,317) (59,348)
Dividends (8,380) (8,380)
------- -------- ------- ---------- ----------
Balance, December 31, 1998 $61,985 $205,227 $ (771) $1,586,718 $1,853,159
======= ======== ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations:
The Company is a diversified financial services holding company engaged in
personal and commercial lines of property and casualty insurance, principally in
the New York metropolitan area, banking and lending and manufacturing,
principally in markets in the United States, and real estate activities. The
Company's principal operations are its insurance businesses, of which its
principal personal lines insurance products are automobile insurance and
homeowners insurance. The Company's principal commercial lines are property and
casualty products provided for vehicles (including medallion and
radio-controlled livery vehicles), multi-family residential real estate,
workers' compensation and various other business classes.
The Company's banking and lending operations principally consist of making
instalment loans to niche markets primarily funded by deposits insured by the
Federal Deposit Insurance Corporation. The Company's manufacturing operations
manufacture and market proprietary plastic netting used for a variety of
purposes.
In 1998, the Company classified as discontinued operations its life insurance
subsidiaries, Charter National Life Insurance Company ("Charter") and
Intramerica Life Insurance Company ("Intramerica"). Prior period financial
statements have been restated to conform with this presentation.
2. Significant Accounting Policies:
(a) Use of Estimates in Preparing Financial Statements: The preparation of
financial statements in conformity with generally accepted accounting principles
("GAAP") requires management to make estimates and assumptions that affect the
reported amounts in the financial statements and disclosures of contingent
assets and liabilities at the date of the financial statements. Actual results
could differ from those estimates.
(b) Consolidation Policy: The consolidated financial statements include the
accounts of the Company and all majority-owned and controlled entities. All
significant intercompany transactions and balances are eliminated in
consolidation.
Investments in entities which the Company does not control but has the ability
to exercise significant influence are accounted for on the equity method of
accounting.
Certain amounts for prior periods have been reclassified to be consistent with
the 1998 presentation and for discontinued operations.
(c) Statements of Cash Flows: The Company considers short-term investments,
which have maturities of less than three months at the time of acquisition, to
be cash equivalents. Cash and cash equivalents include short-term investments of
$323,305,000 and $414,833,000 at December 31, 1998 and 1997, respectively.
(d) Investments: At acquisition, marketable debt and equity securities are
designated as either i) held to maturity, which are carried at amortized cost,
ii) trading, which are carried at estimated fair value with unrealized gains and
losses reflected in results of operations, or iii) available for sale, which are
carried at estimated fair value with unrealized gains and losses reflected as a
separate component of shareholders' equity, net of taxes. Held to maturity
investments are made with the intention of holding such securities to maturity,
which the Company has the ability to do. Estimated fair values are principally
based on quoted market prices.
F-7
<PAGE>
2. Significant Accounting Policies, continued:
Investments with an impairment in value considered to be other than temporary
are written down to estimated net realizable values. The writedowns are included
in "Net securities gains (losses)" in the Consolidated Statements of Income. The
cost of securities sold is based on average cost.
The Company's investments in Russian and Polish equity securities ($18,992,000
and $51,025,000 as of December 31, 1998 and 1997, respectively), none of which
is held by the insurance or banking subsidiaries, do not have readily
determinable fair values. Given the uncertainties inherent in investing in the
emerging markets of Russia and Poland, the Company is accounting for these
investments under the cost recovery method, whereby all receipts are applied to
reduce the investment. Quarterly, the Company reviews its investment in Russian
and Polish equity securities to determine that the carrying amount is
realizable. In performing such reviews, the Company considers current market
prices, prior sale transactions, the current political and economic environment
and other factors. These investments are included in "Other investments" in the
Consolidated Balance Sheets. During 1998, due to declines in values that were
deemed other than temporary, the Company recorded a pre-tax writedown of
approximately $75,000,000 related to its investments in Russian and Polish debt
and equity securities. Such writedowns are reflected in the caption "Net
securities gains (losses)."
(e) Property, Equipment and Leasehold Improvements: Property, equipment and
leasehold improvements are stated at cost, net of accumulated depreciation and
amortization ($76,397,000 and $67,116,000 at December 31, 1998 and 1997,
respectively). Depreciation and amortization are provided principally on the
straight-line method over the estimated useful lives of the assets or, if less,
the term of the underlying lease.
(f) Income Recognition from Insurance Operations: Premiums on property and
casualty insurance products are recognized as revenues over the term of the
policy using the monthly pro rata basis.
(g) Policy Acquisition Costs: Policy acquisition costs principally consist of
commissions, premium taxes and other underwriting expenses (net of reinsurance
allowances). If recoverability of such costs from future premiums and related
investment income is not anticipated, the amounts not considered recoverable are
charged to operations.
Policy acquisition costs are deferred and amortized ratably over the terms of
the related policies.
(h) Reinsurance: In the normal course of business, the Company seeks to reduce
the loss that may arise from catastrophes and to limit losses from large
exposures by reinsuring certain levels of risk with other insurance enterprises.
Catastrophe reinsurance treaties serve to reduce property and casualty insurance
risk in geographic areas where the Company is exposed to natural disasters,
primarily the New York metropolitan area. Reinsurance contracts do not
necessarily legally relieve the Company from its obligations to policyholders.
Reinsurance recoverables are reported as assets net of provisions for
uncollectible amounts. Premiums earned and other underwriting expenses are
stated net of reinsurance.
(i) Policy Reserves and Unearned Premiums: Liabilities for unpaid losses and
loss adjustment expenses ("LAE") applicable to the property and casualty
insurance operations are determined using case basis evaluations, statistical
analyses for losses incurred but not reported and estimates for salvage and
subrogation recoverable and represent estimates of ultimate claim costs and loss
adjustment expenses. As more information becomes available and claims are
settled, the
F-8
<PAGE>
2. Significant Accounting Policies, continued:
estimated liabilities are adjusted upward or downward with the effect of
decreasing or increasing net income at the time of adjustment.
(j) Income Taxes: The Company provides for income taxes using the liability
method. The future benefit of certain tax loss carryforwards and future
deductions is recorded as an asset and the provisions for income taxes are not
reduced for the benefit from utilization of tax loss carryforwards. A valuation
allowance is provided if deferred tax assets are not considered more likely than
not to be realized.
(k) Derivative Financial Instruments: The Company enters into interest rate
agreements to manage the impact of changes in interest rates on its customer
banking deposits. The difference between the amounts paid and received is
accrued and recognized as an adjustment to interest expense (the accrual
accounting method). Cash flows related to the agreements are classified as
operating activities in the Consolidated Statements of Cash Flows, consistent
with the interest payments on the underlying debt. The Company also enters into
currency rate swap agreements to hedge net investments in foreign subsidiaries.
Gains and losses on such hedges are reported as a component of shareholders'
equity. The Company does not have material derivative financial instruments.
(l) Translation of Foreign Currency: Foreign currency denominated investments
and financial statements are translated into U.S. dollars at current exchange
rates, except that revenues and expenses are translated at average exchange
rates during each reporting period; resulting translation adjustments are
reported as a component of shareholders' equity. Net foreign exchange gains
(losses) were not material.
(m) Recently Issued Accounting Standard: In June 1998, the Financial Accounting
Standards Board issued Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), which will be
effective for fiscal years beginning after June 15, 1999. The Company is
reviewing the impact of the implementation of SFAS 133 on the Company's
financial position and results of operations.
3. Acquisitions:
In 1996, the Company formed a joint venture, Pepsi International Bottlers
("PIB") with PepsiCo, Inc. to be the exclusive bottler and distributor of
PepsiCo beverages in a large portion of central and eastern Russia, Kyrgyzstan
and Kazakstan. The Company contributed $79,500,000 to PIB for a 75% equity
interest. Effective as of January 30, 1998, the Company entered into an
agreement with PepsiCo, pursuant to which, among other things, PIB repaid in
full the Company's $77,705,000 bridge financing and the Company's equity
interest in PIB was reduced to 37.9%. Pursuant to this agreement, the Company no
longer had any ability to influence PIB; effective February 1, 1998, the Company
discontinued accounting for this investment under the equity method of
accounting. The agreement relieved the Company of any future funding obligation
with respect to PIB and created an option exercisable by either the Company or
PepsiCo, pursuant to which PepsiCo was obligated to purchase all of the
Company's interest in PIB (the "Option") for $37,000,000, plus interest. In
February 1999, PepsiCo exercised the Option for approximately $39,190,000,
including interest. The Company will recognize a pre-tax gain of approximately
$29,545,000 in the first quarter of 1999. However, when combined with the
Company's share of the joint venture losses since inception, the Company's net
loss from this investment was approximately $40,310,000.
The Company's investment in PIB is included in the caption "Investments in
associated companies."
F-9
<PAGE>
3. Acquisitions, continued:
In the fourth quarter of 1998, the Company acquired a 95.4% interest in Fidei
S.A., a French company listed on the Paris Stock Exchange that is engaged
directly and through subsidiaries in real estate activities, for approximately
$62,300,000, including expenses. In connection with this acquisition, the
Company entered into currency swap agreements to hedge approximately $55,000,000
of its foreign currency exposure. The counterparties to these currency swap
agreements are major financial institutions, which management believes are able
to fulfill their obligations. The swap agreements mature in tranches in March
2000 and September 2001.
4. Investments in Associated Companies:
The Company has investments in several Associated Companies that have adopted
various fiscal year-ends. The Company records its portion of the earnings of
such companies based on fiscal periods ended up to three months prior to the end
of the Company's reporting period.
The following table provides certain summarized data with respect to the
Associated Companies accounted for on the equity method of accounting included
in 1998, 1997 and 1996 results of operations. (Amounts are in thousands.)
1998 1997
---- ----
Assets $2,058,222 $1,162,394
---------- ----------
Liabilities 1,903,463 1,104,100
--------- ----------
Minority interest - 6,446
---------- ----------
Net assets $ 154,759 $ 51,848
========== ==========
The Company's portion of the
reported net assets $ 47,788 $ 13,160
========== ==========
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Total revenues $790,778 $716,320 $627,568
Income (loss) from continuing
operations before extraordinary items $ 79,641 $(66,525) $(90,607)
Net income (loss) $ 79,641 $(66,525) $(90,607)
The Company's equity in net
income (loss) $ 23,290 $(56,515) $(33,631)
</TABLE>
In December 1997, the Company invested $20,000,000 to acquire a limited
partnership interest in an investment partnership. During 1998, the Company
recognized income from this partnership of approximately $30,800,000. The
partnership currently is in the process of liquidating and making final
distributions. The Company does not anticipate that the amount of income to be
realized from this investment will be significant in 1999.
As of December 31, 1998, the Company owned a 30% interest in Caja de Ahorro y
Seguro S.A. ("Caja"), a holding company whose subsidiaries are engaged in
property and casualty insurance, life insurance, workers' compensation insurance
and banking in Argentina. During 1998, the Company's previously announced
agreement to sell substantially all of its interest in Caja to its Argentine
partner was restructured, and in March 1999, the Company sold all of its
interest in Caja to Assicurazioni Generali Group, an Italian insurance company,
for $126,000,000 in cash and a $40,000,000 collateralized note
F-10
<PAGE>
4. Investments in Associated Companies, continued:
maturing April 2001 from its Argentine partner. The Company will record a
pre-tax gain of approximately $120,000,000 in its first quarter 1999 results of
operations.
At December 31, 1998, investments in associated companies included publicly
traded common stock equity interests of 5% or more in the following
non-consolidated companies: Carmike Cinemas, Inc. (6% of Class A shares) and MK
Gold Company (46%).
5. Insurance Operations:
The changes in deferred policy acquisition costs were as follows (in thousands):
1998 1997 1996
---- ---- ----
Balance, January 1, $ 23,906 $ 26,585 $ 29,154
Policy acquisition costs incurred
and deferred 39,687 49,354 52,763
Amortization of deferred
acquisition costs (45,338) (52,033) (55,332)
-------- -------- --------
Balance, December 31, $ 18,255 $ 23,906 $ 26,585
======== ======== ========
The effect of reinsurance on premiums written and earned for the years ended
December 31, 1998, 1997 and 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Premiums Premiums Premiums Premiums Premiums Premiums
Written Earned Written Earned Written Earned
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Direct $214,878 $247,913 $282,217 $304,891 $338,648 $353,902
Assumed 93 148 200 280 1,030 1,115
Ceded (17,528) (19,485) (29,184) (30,156) (29,898) (28,584)
-------- -------- -------- -------- -------- --------
Net $197,443 $228,576 $253,233 $275,015 $309,780 $326,433
======== ======== ======== ======== ======== ========
Percentage
of amount
assumed
to net .05% .06% .08% .10% .33% .34%
=== === === === === ===
</TABLE>
Recoveries recognized on reinsurance contracts were $38,958,000 in 1998,
$29,786,000 in 1997 and $25,473,000 in 1996.
Net income (loss) as determined in accordance with statutory accounting
principles ("SAP") as reported to the domiciliary state of the Company's
property and casualty insurance subsidiaries were $(9,410,000), $3,405,000 and
$26,905,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
The related statutory surplus was $199,772,000, $217,925,000 and $220,317,000 at
December 31, 1998, 1997 and 1996, respectively. As of December 31, 1998, the
statutory surplus of the Empire Insurance Group was $160,603,000.
The insurance subsidiaries are subject to regulatory restrictions which limit
the amount of cash and other distributions available to the Company without
F-11
<PAGE>
5. Insurance Operations, continued:
regulatory approval. As of December 31, 1998, $15,079,000 could be distributed
to the Company without regulatory approval.
The Company's insurance subsidiaries are contingently liable for possible
assessments under state regulatory requirements pertaining to potential
insolvencies of unaffiliated insurance companies. Liabilities, which are
established based upon regulatory guidance, have not been material.
In the following table, the liabilities for unpaid losses and LAE, of the Empire
Insurance Group is reconciled for each of the three years in the period ended
December 31, 1998. The changes in the liabilities include adjustments for the
current year's business and changes in estimates of prior years' liabilities.
1998 1997 1996
---- ---- ----
(In thousands)
Net SAP liability for losses
and LAE at beginning of year $487,116 $481,138 $476,692
-------- -------- --------
Provision for losses and
LAE for claims occurring
in the current year 191,482 248,408 271,633
Increase in estimated losses
and LAE for claims
occurring in prior years 42,290 27,027 28,183
-------- -------- --------
Total incurred losses
and LAE 233,772 275,435 299,816
-------- -------- --------
Losses and LAE payments for
claims occurring during:
Current year 64,739 80,149 93,036
Prior years 186,831 189,308 202,334
-------- -------- --------
251,570 269,457 295,370
-------- -------- --------
Net SAP liability for losses
and LAE at end of year 469,318 487,116 481,138
Reinsurance recoverable 72,956 58,592 51,181
-------- -------- --------
Liability for losses and LAE
at end of year as reported
in financial statements (GAAP) $542,274 $545,708 $532,319
======== ======== ========
6. Discontinued Operations:
In September 1998, the Company reinsured, retroactive to January 1, 1998,
substantially all of its life insurance business to Allstate Life Insurance
Company ("Allstate") and a subsidiary thereof in an indemnity reinsurance
transaction. While the premium received on this transaction was approximately
$28,675,000, the gain on the reinsurance transaction was deferred and is being
amortized into income based upon actuarial estimates of the premium revenue of
the underlying insurance contracts. In December 1998, the Company signed an
agreement to sell its life insurance subsidiaries, Charter and Intramerica, to
Allstate for statutory surplus at the date of sale (approximately $62,200,000 at
December 31, 1998), plus $3,575,000. This transaction is expected to result
F-12
<PAGE>
6. Discontinued Operations, continued:
in a pre-tax gain of approximately $20,000,000, principally resulting from
recognition of deferred gains from prior reinsurance transactions, including the
reinsurance transaction described above. The transaction is subject to
regulatory approvals and customary closing conditions and is expected to close
in the second quarter of 1999.
In September 1997, the Company completed the sale of the Colonial Penn Life
Group to Conseco, Inc. for $460,000,000, including $400,000,000 in notes
maturing on January 2, 2003 collateralized by non-cancelable letters of credit
and $60,000,000 in cash. These companies were principally engaged in the sale of
graded benefit life insurance policies through direct marketing and agent-sold
Medicare supplement insurance. The Company reported a pre-tax gain of
approximately $271,750,000 on the sale. In connection with the sale of the
Colonial Penn Life Group, the Company reinsured certain life insurance policies
for a premium of $25,000,000. The gain on this reinsurance transaction was
deferred and is being amortized into income based on actuarial estimates of the
premium revenue of the underlying insurance contracts. Upon the closing of the
sale to Allstate described above, the remaining deferred gain will be recognized
in income.
In November 1997, the Company completed the sale of the property and casualty
insurance business of the Colonial Penn P&C Group to General Electric Capital
Corporation for total cash consideration of $1,018,100,000, plus $14,300,000 for
retention of certain employee benefit liabilities. The Group's primary business
was providing private passenger automobile insurance to the mature adult
population through direct response marketing. The Company reported a pre-tax
gain of approximately $589,950,000 on the sale.
At December 31, 1998 and 1997 the components of net assets of discontinued
operations are as follows (in thousands):
1998 1997
---- ----
Investments $ 65,788 $ 83,431
Cash and cash equivalents 3,032 25,995
Separate account assets 619,578 541,546
Notes and other receivables 179,580 175,777
Other 15,425 201
-------- --------
Total assets 883,403 826,950
-------- --------
Policy reserves 179,083 191,374
Separate account liabilities 619,578 541,546
Other 39,734 22,113
-------- --------
Total liabilities 838,395 755,033
-------- --------
Net assets of discontinued operations $ 45,008 $ 71,917
======== ========
F-13
<PAGE>
6. Discontinued Operations, continued:
A summary of the results of discontinued operations (through the dates of sale)
is as follows for each of the three years in the period ended December 31, 1998
(in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Charter and Intramerica:
Revenues $10,799 $12,739 $13,881
------- ------- -------
Expenses:
Provision for insurance losses
and policy benefits (646) 1,898 1,846
Other operating expenses (1,079) 11,537 3,187
------- ------- -------
(1,725) 13,435 5,033
------- ------- -------
Income (loss) before income taxes 12,524 (696) 8,848
Income taxes 4,383 (360) 3,047
------- ------- -------
Income (loss) from discontinued
operations, net of taxes $ 8,141 $ (336) $ 5,801
======= ======= =======
Colonial Penn P&C Group:
Revenues $512,811 $592,005
-------- --------
Expenses:
Provision for insurance losses
and policy benefits 373,602 421,823
Other operating expenses 86,519 100,660
-------- --------
460,121 522,483
-------- --------
Income before income taxes 52,690 69,522
Income taxes 18,329 22,288
-------- --------
Income from discontinued
operations, net of taxes $ 34,361 $ 47,234
======== ========
Colonial Penn Life Group:
Revenues $166,078 $230,228
-------- --------
Expenses:
Provision for insurance losses
and policy benefits 100,964 139,135
Other operating expenses 28,341 42,764
-------- --------
129,305 181,899
-------- --------
Income before income taxes 36,773 48,329
Income taxes 12,282 16,988
-------- --------
Income from discontinued
operations, net of taxes $ 24,491 $ 31,341
======== ========
</TABLE>
F-14
<PAGE>
7. Investments:
The amortized cost, gross unrealized gains and losses and estimated fair value
of investments classified as held to maturity and as available for sale at
December 31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Held to maturity:
1998
- ----
Bonds and notes:
United States Government
agencies and authorities $23,743 $348 $22 $24,069
States, municipalities
and political subdivisions 6,818 3 - 6,821
All other corporates 349 - 2 347
Other fixed maturities 16,346 - - 16,346
------- ---- --- -------
$47,256 $351 $24 $47,583
======= ==== === =======
1997
- ----
Bonds and notes:
United States Government
agencies and authorities $22,161 $166 $46 $22,281
States, municipalities
and political subdivisions 3,002 3 - 3,005
All other corporates 141 - 5 136
Other fixed maturities 10,894 - - 10,894
------- ---- --- -------
$36,198 $169 $51 $36,316
======= ==== === =======
Available for sale:
1998
- ----
Bonds and notes:
United States Government
agencies and authorities $1,313,764 $ 5,736 $ 1,290 $1,318,210
States, municipalities
and political subdivisions 126 - - 126
Foreign governments 2,955 3,131 - 6,086
Public utilities 2,166 - 1 2,165
All other corporates 204,288 8,241 7,762 204,767
---------- ------- ------- ----------
Total fixed maturities 1,523,299 17,108 9,053 1,531,354
---------- ------- ------- ----------
Equity securities:
Preferred stocks 5,571 281 16 5,836
Common stocks:
Banks, trusts and insurance
companies 20,036 - 6,312 13,724
Industrial, miscellaneous and
all other 6,833 276 4,914 2,195
---------- ------- ------- ----------
Total equity securities 32,440 557 11,242 21,755
---------- ------- ------- ----------
Other 50 - 33 17
---------- ------- ------- ----------
$1,555,789 $17,665 $20,328 $1,553,126
========== ======= ======= ==========
F-15
<PAGE>
7. Investments, continued:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
1997
- ----
Bonds and notes:
United States Government
agencies and authorities $1,361,597 $ 5,778 $2,241 $1,365,134
Foreign governments 34,364 3,511 175 37,700
All other corporates 239,254 3,054 2,207 240,101
---------- ------- ------ ----------
Total fixed maturities 1,635,215 12,343 4,623 1,642,935
Equity securities:
Common stocks - industrial,
miscellaneous and all other 3,464 998 945 3,517
Other 5,000 - 63 4,937
---------- ------- ------ ----------
$1,643,679 $13,341 $5,631 $1,651,389
========== ======= ====== ==========
</TABLE>
Reclassification amounts included in comprehensive income for the year ended
December 31, 1998 are as follows (in thousands):
Unrealized holding (losses) arising during
the period, net of taxes of $1,366 $(2,467)
Less: reclassification adjustment for gains
included in net income, net of taxes of $2,230 (4,145)
-------
Net change in unrealized gain (loss) on investments,
net of taxes of $3,596 $(6,612)
=======
The amortized cost and estimated fair value of investments classified as held to
maturity and as available for sale at December 31, 1998, by contractual maturity
are shown below. Expected maturities are likely to differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
---------------- ------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Due in one year or less $18,320 $18,327 $ 803,748 $ 811,298
Due after one year
through five years 15,631 15,712 495,065 492,083
Due after five years
through ten years 6,431 6,680 141,124 142,781
Due after ten years 4,554 4,544 4,943 4,951
------- ------- ---------- ----------
44,936 45,263 1,444,880 1,451,113
Mortgage-backed securities 2,320 2,320 78,419 80,241
------- ------- ---------- ----------
$47,256 $47,583 $1,523,299 $1,531,354
======= ======= ========== ==========
</TABLE>
At December 31, 1998 and 1997 securities with book values aggregating $8,119,000
and $8,003,000, respectively, were on deposit with various regulatory
authorities. Additionally, at December 31, 1998 and 1997, securities with book
values of approximately $105,000,000 collateralized a letter of credit issued in
connection with the sale of the Colonial Penn P&C Group.
F-16
<PAGE>
7. Investments, continued:
Certain information with respect to trading securities at December 31, 1998 and
1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Amortized Estimated Carrying
Cost Fair Value Value
---- ---------- -----
<S> <C> <C> <C>
1998
- ----
Fixed maturities - corporate bonds
and notes $ 16,782 $ 17,477 $ 17,477
Equity securities:
Preferred stocks 105,775 101,964 101,964
Common stocks - industrial,
miscellaneous and all other 72 105 105
Options and warrants 1,119 431 431
Other investments 9,159 12,599 12,599
-------- -------- --------
Total trading securities $132,907 $132,576 $132,576
======== ======== ========
1997
- ----
Fixed maturities - corporate bonds
and notes $ 5,360 $ 5,419 $ 5,419
Equity securities:
Preferred stocks 100,483 107,567 107,567
Common stocks - industrial,
miscellaneous and all other 1,600 1,600 1,600
Options and warrants 1,036 830 830
-------- -------- -------
Total trading securities $108,479 $115,416 $115,416
======== ======== ========
</TABLE>
8. Trade, Notes and Other Receivables, Net:
A summary of trade, notes and other receivables, net at December 31, 1998 and
1997 is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Note receivable from Conseco, Inc. from sale
of the Colonial Penn Life Group (including
accrued interest) (see Note 6) $405,854 $406,223
Instalment loan receivables, net of unearned
finance charges of $3,026 and $919(a) 185,183 202,938
Receivables related to securities 112,684 343
Receivables relating to real estate activities 68,863 8,552
Tenant receivables of Fidei 53,775 -
Premiums receivable 40,374 49,451
Bridge financing to PIB - 77,705
Other 23,590 22,455
-------- --------
890,323 767,667
Allowance for doubtful accounts (including $9,398
and $10,199 applicable to loan receivables of
banking and lending subsidiaries and, in 1998,
$40,955 relating to Fidei) (57,022) (16,330)
-------- --------
$833,301 $751,337
======== ========
</TABLE>
(a) Contractual maturities of instalment loan receivables at December 31, 1998
were as follows (in thousands): 1999 - $44,017; 2000 - $37,474; 2001 - $33,236;
2002 - $30,362 and 2003 and thereafter - $40,094. Experience shows that a
substantial portion of such notes will be repaid or renewed prior to contractual
maturity. Accordingly, the foregoing is not to be regarded as a forecast of
future cash collections.
F-17
<PAGE>
9. Prepaids and Other Assets:
At December 31, 1998 and 1997, prepaids and other assets included real estate
assets, net, of $397,404,000 and $93,264,000, respectively. Approximately
$245,870,000 of the 1998 real estate investment consists of real estate assets
held by Fidei. These assets are primarily office buildings located in Paris,
France and its environs which Fidei is currently marketing for sale.
10. Trade Payables, Expense Accruals and Other Liabilities:
A summary of trade payables and expense accruals and other liabilities at
December 31, 1998 and 1997 is as follows (in thousands):
1998 1997
---- ----
Trade Payables and Expense Accruals:
Payables related to securities $144,088 $ 97,844
Trade and drafts payable 27,629 20,512
Accrued compensation, severance and other
employee benefits 18,695 33,269
Accrued interest payable 14,420 5,709
Taxes, other than income 8,441 2,817
Provision for servicing carrier claims 5,768 12,337
Amount due on reinsurance 3,017 16,160
Other 11,427 20,114
-------- --------
$233,485 $208,762
======== ========
Other Liabilities:
Liability for unredeemed trading stamps $ 19,517 $ 22,227
Postretirement and postemployment benefits 18,855 21,584
Liabilities related to real estate activities 13,446 19
Unearned service fees 7,465 15,129
Other 50,114 34,182
-------- --------
$109,397 $ 93,141
======== ========
F-18
<PAGE>
11. Indebtedness:
The principal amount, stated interest rate and maturity of debt outstanding at
December 31, 1998 and 1997 are as follows (dollars in thousands):
1998 1997
---- ----
Payable in U.S. dollars:
Senior Notes:
Bank credit facility $ 65,500 $ -
7 3/4% Senior Notes due 2013, less debt
discount of $731 and $781 99,269 99,219
Industrial Revenue Bonds (with variable interest) 9,815 9,815
Other due 1999 through 2016 with a weighted average
interest rate of 8.3% 64,182 9,447
-------- --------
238,766 118,481
-------- --------
Subordinated Notes:
8 1/4% Senior Subordinated Notes due 2005 100,000 100,000
7 7/8% Senior Subordinated Notes due 2006,
less debt discount of $540 and $609 134,460 134,391
-------- --------
234,460 234,391
-------- --------
Payable in other currencies:
Euro denominated debt due 2001
through 2009 with a weighted average effective
interest rate of 5.1% 249,375 -
-------- --------
$722,601 $352,872
======== ========
At December 31, 1998 the Company had an unsecured bank credit facility of
$100,000,000 which bears interest based on the prime rate or LIBOR and matures
in November 2002. $65,500,000 was borrowed under this bank credit facility as of
December 31, 1998.
The Euro denominated debt, which is non-recourse to the Company, is entirely
related to the acquisition of Fidei.
The most restrictive of the Company's debt instruments require maintenance of
minimum Tangible Net Worth and limit Indebtedness, as defined in the agreements.
In addition, the debt instruments contain limitations on dividends, investments,
liens, contingent obligations and certain other matters. As of December 31,
1998, cash dividends of approximately $579,000,000 would be eligible to be paid
under the most restrictive covenants.
The Company reported extraordinary losses on early extinguishment of its 5 1/4%
Convertible Subordinated Debentures due 2003 (the "5 1/4% Debentures") and its
10 3/8% Senior Subordinated Notes due 2002 of $3,165,000 ($2,057,000 after taxes
or $.03 per share) in 1997 and $10,520,000 ($6,838,000 after taxes or $.11 per
share) in 1996.
Approximately $10,470,000 of the manufacturing division's net property,
equipment and leasehold improvements are pledged as collateral for the
Industrial Revenue Bonds; and approximately $94,030,000 of other assets
(primarily investments and property) are pledged for other indebtedness
aggregating approximately $49,182,000.
Interest rate agreements are used to manage the potential impact of changes in
interest rates on customer banking deposits. Under interest rate swap
agreements, the Company has agreed with other parties to pay fixed rate interest
amounts and receive variable rate interest amounts calculated by reference to an
agreed notional amount. The variable interest rate portion of the swaps is a
specified LIBOR interest rate. At December 31, 1998 and 1997, the notional
amounts of the Company's interest rate swaps were $60,000,000 and $25,000,000,
respectively. These interest rate swaps expire in 2003 and require fixed rate
payments of 5.07%. The Company would have been required to pay $292,000 at
December 31, 1998 and $636,000 at December 31, 1997 to retire these agreements.
The LIBOR rate at December 31, 1998 was 5.07%. Changes in LIBOR interest rates
in the future will change the amounts to be received under the agreements as
well as interest to be paid under the related variable debt obligations. In
connection with
F-19
<PAGE>
11. Indebtedness, continued:
the acquisition of Fidei, the Company borrowed $62,300,000 under its bank credit
facility and entered into currency swap agreements to hedge approximately
$55,000,000 of its foreign currency exposure. The swap agreements mature in
tranches in March 2000 and September 2001.
Counterparties to interest rate and currency swap agreements are major financial
institutions, which management believes are able to fulfill their obligations.
Any losses due to default by the counterparties are likely to be immaterial.
The aggregate annual mandatory redemptions of debt during the five year period
ending December 31, 2003 are as follows (in thousands): 1999 - $99,142; 2000 -
$870; 2001 - $71,170; 2002 - $8,006; and, 2003 - $97,803.
The weighted average interest rate on short-term borrowings (primarily customer
banking deposits) was 5.8% and 5.9% at December 31, 1998 and 1997, respectively.
12. Preferred Securities of Subsidiary Trust:
In January 1997, the Company sold $150,000,000 aggregate liquidation amount of
8.65% trust issued preferred securities of its wholly-owned subsidiary, Leucadia
Capital Trust I (the "Trust"). These Company-obligated mandatorily redeemable
preferred securities have an effective maturity date of January 15, 2027 and
represent undivided beneficial interests in the Trust's assets, which consist
solely of $154,640,000 principal amount of 8.65% Junior Subordinated Deferrable
Interest Debentures due 2027 of the Company. Considered together, the "back-up
undertakings" of the Company related to the Trust's preferred securities
constitute a full and unconditional guarantee by the Company of the Trust's
obligations under the preferred securities. During 1998, a subsidiary of the
Company repurchased $51,800,000 aggregate liquidation amount of the 8.65% trust
issued preferred securities for $42,200,000, plus accrued interest. The
difference between the purchase price and the book value was credited directly
to shareholders' equity, net of taxes.
13. Common Shares, Stock Options and Preferred Shares:
The Board of Directors from time to time has authorized acquisitions of the
Company's Common Shares. In October 1998, the Company's Board of Directors
increased to 6,000,000 the maximum number of shares that the Company is
authorized to purchase. During the three year period ended December 31, 1998,
the Company acquired 2,111,193 Common Shares at an average price of $29.23 per
Common Share. From January 1, 1999 through March 12, 1999, the Company acquired
1,738,570 Common Shares at an average price of $29.98 per Common Share. As a
result, as of March 13, 1999, the Company is authorized to repurchase 3,788,717
Common Shares.
The Company has a fixed stock option plan which provides for grants of options
or rights to non-employee directors and certain employees up to a maximum grant
of three hundred thousand shares to any individual in a given taxable year. The
plan provides for the issuance of stock options and stock appreciation rights at
not less than the fair market value of the underlying stock at the date of
grant. Options generally become exercisable in five equal annual instalments
starting one year from date of grant. No stock appreciation rights have been
granted.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", ("SFAS 123"), establishes a fair value method for accounting for
stock-based compensation plans, either through recognition in the statements of
income or disclosure. As permitted, the Company applies APB Opinion No. 25 and
related Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized in the statements of income for its
stock-based compensation plans. Had compensation cost for the Company's stock
option plans been recorded in the statements of income consistent with the
provisions of SFAS 123, the Company's net income and earnings per share for
1998, 1997 and 1996 would not have been materially different from those
reported.
F-20
<PAGE>
13. Common Shares, Stock Options and Preferred Shares, continued:
A summary of activity with respect to the Company's stock options for the three
years ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Available
Common Weighted for
Shares Average Options Future
Subject Exercise Exercisable Option
to Option Prices at Year-End Grants
--------- ------ ----------- ------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 772,618 $12.79 443,018 1,583,100
======= =========
Granted 630,200 $26.54
Exercised (287,792) $ 7.66
Cancelled (41,100) $16.54
---------
Balance at December 31, 1996 1,073,926 $22.09 317,826 974,400
======= =========
Granted 77,500 $26.67
Exercised (248,196) $14.15
Cancelled (393,470) $24.69
---------
Balance at December 31, 1997 509,760 $24.64 171,980 1,278,770
======= =========
Granted 4,000 $35.38
Exercised (137,922) $23.10
Cancelled (53,800) $25.02
---------
Balance at December 31, 1998 322,038 $25.37 147,378 1,328,570
========= ======= =========
</TABLE>
The weighted-average fair value of the options granted was $8.50 per share for
1998, $6.39 per share for 1997 and $7.04 per share for 1996 as estimated on the
date of grant using the Black-Scholes option-pricing model with the following
assumptions: (1) expected volatility of 20.0% for 1998, 20.3% for 1997 and 25.3%
for 1996 (2) risk-free interest rates of 5.6% for 1998, 6.1% for 1997 and 6.0%
for 1996; (3) expected lives of 4.0 years for 1998 and 3.7 years for 1997 and
1996; and (4) dividend yields of .7% for 1998 and .9% for 1997 and 1996.
The following table summarizes information about fixed stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- ----------------------------
Weighted
Common Average Weighted Common Weighted
Shares Remaining Average Shares Average
Range of Subject to Contractual Exercise Subject to Exercise
Exercise Prices Option Life Price Option Price
- --------------- ------ ---- ----- ------ -----
<S> <C> <C> <C> <C> <C>
$17.88 - $20.44 68,238 .9 years $20.25 67,038 $20.29
$23.25 - $26.63 241,800 3.2 years $26.37 78,540 $26.33
$31.50 - $35.63 12,000 4.2 years $34.17 1,800 $33.79
------- -------
$17.88 - $35.63 322,038 2.8 years $25.37 147,378 $23.68
======= =======
</TABLE>
At December 31, 1998 and 1997, 1,650,608 and 1,788,530, respectively, of the
Company's Common Shares were reserved for stock options.
At December 31, 1998 and 1997, 6,000,000 preferred shares (redeemable and
non-redeemable), par value $1 per share, were authorized.
F-21
<PAGE>
14. Net Securities Gains (Losses):
The following summarizes net securities gains (losses) for each of the three
years in the period ended December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net realized gains on fixed maturities $ 13,021 $ 1,340 $ 6,990
Writedown related to investments in Russian
and Polish debt and equity securities (75,371) - -
Net unrealized gains (losses) on trading
securities (1,456) 2,932 (3,834)
Net realized gains (losses) on equity and other
securities 2,935 (1,023) 20,961
-------- ------- -------
$(60,871) $ 3,249 $24,117
======== ======= =======
</TABLE>
Proceeds from sales of investments classified as available for sale were
$1,687,385,000, $734,443,000 and $594,286,000 during 1998, 1997 and 1996,
respectively. Gross gains of $24,964,000, $6,054,000 and $24,351,000 and gross
losses of $33,784,000, $2,403,000 and $5,123,000 were realized on these sales
during 1998, 1997 and 1996, respectively.
15. Other Results of Operations Information:
Investment and other income for each of the three years in the period ended
December 31, 1998 consist of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest on short-term investments $ 24,246 $ 14,301 $ 8,532
Interest on fixed maturities 94,547 72,084 58,609
Interest on notes receivable 26,717 6,789 615
Other investment income 15,592 4,191 4,337
Service fee income 13,169 32,257 25,084
Trading stamp revenues 4,032 8,194 12,017
Rental income 16,864 8,082 10,560
Gains on sale of real estate and other assets,
net of costs 34,629 75,298 11,078
Gain on sale of loan portfolio 6,535 - -
Litigation settlements - 579 5,434
Other 15,048 13,278 19,824
-------- -------- --------
$251,379 $235,053 $156,090
======== ======== ========
</TABLE>
During 1998, the Company's subsidiaries, American Investment Bank, N.A. and
American Investment Financial, sold substantially all of their executive and
professional loan portfolios for aggregate proceeds of $89,500,000. The Company
reported a pre-tax gain on the sales of approximately $6,535,000 for the year
ended December 31, 1998.
In June 1997 the Company sold its investment in a New York City office building
for $100,000,000 in cash. The Company reported a pre-tax gain of approximately
$35,600,000 on the sale.
Taxes, other than income or payroll, included in operations amounted to
$10,563,000 (including $3,131,000 of premium taxes) for the year ended December
31, 1998, $10,707,000 (including $4,137,000 of premium taxes) for the year ended
December 31, 1997 and $16,150,000 (including $5,099,000 of premium taxes) for
the year ended December 31, 1996.
Advertising costs amounted to $2,150,000, $4,026,000 and $5,138,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
F-22
<PAGE>
16. Income Taxes:
The principal components of the deferred tax liability at December 31, 1998 and
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred Tax Asset:
Insurance reserves and unearned premiums $ 30,868 $ 33,831
Securities valuation reserves 47,112 20,129
Other accrued liabilities 1,556 7,890
Unrealized losses on investments 1,106 -
Tax loss carryforwards, net of tax sharing payments 63,228 39,047
-------- --------
143,870 100,897
Valuation allowance (102,403) (71,776)
-------- --------
41,467 29,121
-------- --------
Deferred Tax Liability:
Instalment sale (12,000) (12,000)
Unrealized (gains) on investments - (2,613)
Depreciation (6,098) (5,864)
Policy acquisition costs (6,389) (8,367)
Other, net (24,689) (23,016)
-------- --------
(49,176) (51,860)
-------- --------
Net deferred tax liability $ (7,709) $(22,739)
======== ========
</TABLE>
The valuation allowance principally relates to capital loss carryforwards,
certain acquired tax loss carryforwards, the usage of which is subject to
certain limitations and certain other matters which may restrict their
utilization, and unrealized capital losses. Upon the closing of the sale of the
Company's interest in Caja (see Note 4), the valuation allowance will be reduced
by approximately $30,000,000 due to the availability of capital loss
carryforwards to offset a portion of the capital gain.
The (benefit) for income taxes for each of the three years in the period ended
December 31, 1998 was as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
State income taxes (principally
currently payable) $ (1,500) $ 3,729 $ 1,200
Federal income taxes:
Current (31,249) (10,375) (397)
Deferred 7,576 (3,753) (20,629)
Foreign income taxes (principally
currently payable) 100 508 500
-------- -------- --------
$(25,073) $ (9,891) $(19,326)
======== ======== ========
</TABLE>
The table below reconciles expected statutory federal income tax to actual
income tax (benefit) (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected federal income tax $ 10,282 $(8,483) $(16,865)
State income taxes, net of federal
income tax benefit (975) 2,424 780
Reduction in valuation allowance (8,065) (1,890) (1,693)
Recognition of additional tax benefits (30,870) (2,719) (2,500)
Tax on policyholder surplus account 5,406 - -
Other (851) 777 952
-------- ------- --------
Actual income tax (benefit) $(25,073) $(9,891) $(19,326)
======== ======= ========
</TABLE>
F-23
<PAGE>
16. Income Taxes, continued:
Reflected above as recognition of additional tax benefits, are reductions to the
Company's income tax provision for the favorable resolution of certain
contingencies and, in 1998, for a change in the Company's 1997 estimated federal
income tax liability. The valuation allowance applicable to the deferred income
tax asset gives effect to the possible unavailability of certain income tax
deductions. During 1998, 1997 and 1996 certain matters were favorably resolved
and the Company reduced the valuation allowance as reflected in the above
reconciliation. However, during 1998, the valuation allowance was also increased
by approximately $38,000,000 for capital losses.
At December 31, 1998, the Company had tax loss carryforwards of $15,000,000,
which are available to reduce federal income tax payments for the entire
consolidated group, and certain of the Company's subsidiaries had tax loss
carryforwards of $47,000,000, which can only be used to reduce federal income
tax payments for the group that generated the carryforward. The tax loss
carryforwards of the Company and its subsidiaries have been reflected in the
deferred tax liability after applying the statutory federal income tax rate less
any applicable tax sharing payments to the Internal Revenue Service. The tax
loss carryforwards of the Company expire primarily in 2010. The tax loss
carryforwards of the Company's subsidiaries expire in 2002 and 2003. In
addition, at December 31, 1998 the Company had capital loss carryforwards of
$110,000,000 which expire in 2002 and 2003.
Limitations exist under the tax law which may restrict the utilization of the
tax loss carryforwards. In addition, the capital loss carryforwards can only be
used to offset capital gains. These limitations are considered in the
determination of the valuation allowance.
Under certain circumstances, the value of the carryforwards available could be
substantially reduced if certain changes in ownership were to occur. In order to
reduce this possibility, the Company's certificate of incorporation includes
restrictions which prohibit transfers of the Company's Common Stock under
certain circumstances.
In connection with the sale of certain of the Company's operations in recent
years, the Company had indemnified the purchasers for certain tax matters. The
Company does not believe that such indemnification obligation will result in any
additional material liability to the Company.
F-24
<PAGE>
17. Pension Plans and Postretirement Benefits:
The Company maintains defined benefit pension plans covering employees of
certain units who meet age and service requirements. Benefits are generally
based on final average salary and years of service. The Company funds its
pension plans in amounts sufficient to satisfy minimum ERISA funding
requirements. Effective December 31, 1998, the Company froze its defined benefit
pension plans which resulted in the recognition of approximately $6,500,000 of
net curtailment gains.
A summary of activity with respect to the Company's pension plans for 1998 and
1997 is as follows (in thousands):
1998 1997
---- ----
Projected Benefit Obligation:
Projected benefit obligation
at January 1, $100,314 $ 98,733
Service cost (a) 2,590 4,234
Interest cost (a) 5,536 7,411
Actuarial loss 561 10,016
Benefits paid (5,055) (10,111)
Settlements (31,060) (2,021)
Curtailment (9,491) (7,948)
-------- --------
Projected benefit obligation
at December 31, $ 63,395 $100,314
======== ========
Change in Plan Assets:
Fair value of plan assets
at January 1, $ 93,088 $ 90,902
Actual return of plan assets 5,186 8,967
Employer contributions 1,076 6,059
Benefits paid (5,012) (10,111)
Administrative expenses (626) (74)
Settlements (31,230) (2,655)
-------- --------
Fair value of plan assets
at December 31, $ 62,482 $ 93,088
======== ========
Funded Status $ (913) $ (7,226)
Unrecognized prior service cost 66 84
Unrecognized net loss at January 1, 1987 - 378
Unrecognized net loss from experience
differences and assumption changes 2,356 4,341
-------- --------
Accrued pension asset (liability) $ 1,509 $ (2,423)
======== ========
(a) Includes $369 and $5,760 for 1998 and 1997, respectively, relating to
discontinued operations' obligations which were retained.
Pension expense charged to operations included the following components (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost $ 2,542 $ 2,240 $ 2,496
Interest cost 5,215 3,645 3,606
Expected return on plan assets (5,108) (3,330) (2,989)
Amortization of prior service cost (89) (72) 1,001
Amortization of transition obligation 121 95 90
Recognized net actuarial loss 171 152 502
------- ------- -------
Net pension expense $ 2,852 $ 2,730 $ 4,706
======= ======= =======
</TABLE>
F-25
<PAGE>
17. Pension Plans and Postretirement Benefits, continued:
The projected benefit obligation at December 31, 1998 and 1997 was determined
using an assumed discount rate of 6.75% and 7.0%, respectively, and, for 1997,
an assumed compensation increase rate of 4.3%. The assumed long-term rate of
return on plan assets was 7.5% and 7.4% at December 31, 1998 and 1997,
respectively.
The Company also has defined contribution pension plans covering certain
employees. Contributions and costs are a percent of each covered employee's
salary. Amounts charged to expense related to such plans were $1,057,000,
$1,202,000 and $1,340,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Several subsidiaries provide certain health care and other benefits to certain
retired employees under plans which are currently unfunded. The Company pays the
cost of postretirement benefits as they are incurred. Amounts charged (credited)
to expense (principally amortization of a curtailment gain in 1998 and 1997 and
interest in 1996) related to such benefits were $(1,990,000) in 1998,
$(2,851,000) in 1997 and $1,355,000 in 1996.
A summary of activity with respect to the Company's postretirement plans for
1998 and 1997 is as follows:
1998 1997
---- ----
Accumulated postretirement
benefit obligation at January 1, $11,090 $15,892
Service cost 30 23
Interest cost 805 776
Contributions by plan participants 401 68
Actuarial loss (gain) 906 (4,770)
Benefits paid (1,341) (899)
------- -------
Accumulated postretirement benefit
obligation at December 31, 11,891 11,090
Unrecognized prior service cost 2,259 4,847
Unrecognized net actuarial gain 2,482 3,622
------- -------
Accrued postretirement benefit obligation $16,632 $19,559
======= =======
The discount rate used in determining the accumulated postretirement benefit
obligation was 6.75% and 7.0% at December 31, 1998 and 1997, respectively. The
assumed health care cost trend rates used in measuring the accumulated
postretirement benefit obligation were between 6.0% and 9.5% for 1998 and 6.9%
and 10.5% for 1997, declining to an ultimate rate of between 5.0% and 6.0% by
2006.
If the health care cost trend rates were increased or decreased by 1%, the
accumulated postretirement obligation as of December 31, 1998 would have
increased or decreased by $823,000 and $729,000, respectively. The effect of
these changes on the aggregate of service and interest cost for 1998 would be
immaterial.
18. Commitments:
The Company and its subsidiaries rent office space and office equipment under
non-cancelable operating leases with terms generally varying from one to twenty
years. Rental expense (net of sublease rental income) charged to operations was
$7,680,000 in 1998, $7,307,000 in 1997 and $8,583,000 in 1996. Aggregate minimum
annual rentals (exclusive of real estate taxes, maintenance and certain other
F-26
<PAGE>
18. Commitments, continued:
charges) relating to facilities under lease in effect at December 31, 1998 are
as follows (in thousands): 1999 - $7,144; 2000 - $6,982; 2001 - $6,912; 2002 -
$6,772; 2003 - $6,495; and thereafter - $103,802. Future minimum sublease rental
income relating to facilities under lease in effect at December 31, 1998 are as
follows (in thousands): 1999 - $848; 2000 - $863; 2001 - $868; 2002 - $876; 2003
- - $883; and thereafter - $4,049.
Included in the amounts shown above are the gross future minimum annual rental
payments relating to a twenty year lease which the Empire Group entered into
beginning November 1998 for its executive and administrative offices. These
offices are in an office building in which the Company has an equity interest.
The above amounts have not been reduced for the Company's share of rental income
due to its equity participation in this office building. In connection with this
equity investment, the Company has committed to invest up to $25,000,000, of
which $5,000,000 is currently invested.
In connection with the sale of certain subsidiaries, the Company has made or
guaranteed the accuracy of certain representations given to the acquiror. No
material loss is expected in connection with such matters.
In connection with the sale of the Colonial Penn P&C Group, the Company provided
the purchaser with a $100,000,000 non-cancelable letter of credit to
collateralize certain indemnification obligations. This letter of credit is
collateralized by certain deposits of the Company aggregating approximately
$105,000,000.
The insurance and the banking and lending subsidiaries are limited by regulatory
requirements and agreements in the amount of dividends and other transfers of
funds that are available to the Company. Principally as a result of such
restrictions, the net assets of subsidiaries which are subject to limitations on
transfer of funds to the Company were approximately $293,888,000 at December 31,
1998.
19. Litigation:
The Company is subject to various litigation which arises in the course of its
business. Based on discussions with counsel, management is of the opinion that
such litigation will have no material adverse effect on the consolidated
financial position of the Company or its consolidated results of operations.
F-27
<PAGE>
20. Earnings (Loss) Per Common Share:
A reconciliation of the numerators and denominators of the basic and diluted
earnings (loss) per share calculations for income (loss) from continuing
operations before extraordinary loss for each of the three years in the period
ended December 31, 1998 is as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
1998:
- -----
Basic Earnings Per Share:
Income from continuing operations
before extraordinary loss $ 46,202 63,409 $ .73
=====
Effect of Dilutive Securities:
Options - 101
-------- ------
Diluted earnings per share $ 46,202 63,510 $ .73
======== ====== =====
1997:
- -----
Basic (Loss) Per Share:
(Loss) from continuing operations
before extraordinary loss $(22,289) 62,205 $(.36)
=====
Effect of Dilutive Securities:
Options - -
5 1/4% Debentures - -
-------- ------
Diluted (loss) per share $(22,289) 62,205 $(.36)
======== ====== =====
1996:
- -----
Basic (Loss) Per Share:
(Loss) from continuing operations
before extraordinary loss $(28,861) 60,301 $(.48)
=====
Effect of Dilutive Securities:
Options - -
5 1/4% Debentures - -
-------- ------
Diluted (loss) per share $(28,861) 60,301 $(.48)
======== ====== =====
</TABLE>
Options to purchase 886,730 and 1,144,431 weighted average shares of common
stock were outstanding during the years ended December 31, 1997 and 1996,
respectively, but were not included in the computation of diluted (loss) per
share, as those options were antidilutive.
Additionally, during the year ended December 31, 1996, and for the period
January 1, 1997 through April 11, 1997, the 5 1/4% Debentures, which were
convertible into 3,478,260 Common Shares, were outstanding. Such debentures were
not included in the computation of diluted (loss) per share, as those debentures
were antidilutive.
21. Fair Value of Financial Instruments:
The following table presents fair value information about certain financial
instruments, whether or not recognized on the balance sheet. Where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. The fair value amounts presented do not purport to represent and should
not be considered representative of the underlying "market" or franchise value
of the Company. The methods and assumptions used to estimate the fair values of
each class of the financial instruments described below are as follows:
F-28
<PAGE>
21. Fair Value of Financial Instruments, continued:
(a) Investments: The fair values of marketable equity securities, fixed maturity
securities and investments held for trading purposes (which include securities
sold not owned) are substantially based on quoted market prices, as disclosed in
Note 7.
(b) Cash and cash equivalents: For cash equivalents, the carrying amount
approximates fair value.
(c) Notes receivable on the sale of the Colonial Penn Life Group: The fair value
of variable rate note receivable is estimated to be the carrying amount.
(d) Loan receivables of banking and lending subsidiaries: The fair value of
loan receivables of the banking and lending subsidiaries is estimated by
discounting the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings for the same remaining
maturities.
(e) Investments in associated companies: For 1998, the fair value of Caja is
based upon the sales price as discussed in Note 4. For 1997, the fair value of
Caja was estimated to be the carrying amount. The fair values of a foreign power
company are principally estimated based upon quoted market prices. The carrying
value of the remaining investments in associated companies approximates fair
value.
(f) Customer banking deposits: The fair value of customer banking deposits is
estimated using rates currently offered for deposits of similar remaining
maturities.
(g) Long-term and other indebtedness: The fair values of non-variable rate debt
are estimated using quoted market prices and estimated rates which would be
available to the Company for debt with similar terms. The fair value of variable
rate debt is estimated to be the carrying amount.
F-29
<PAGE>
21. Fair Value of Financial Instruments, continued:
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial Assets:
Investments $1,770,205 $1,770,532 $1,872,369 $1,872,487
Cash and cash equivalents 459,690 459,690 581,186 581,186
Note receivable on sale of the
Colonial Penn Life Group (including
accrued interest) 405,854 405,854 406,223 406,223
Loan receivables of banking and
lending subsidiaries, net of
allowance 175,785 186,099 192,739 203,963
Investments in associated
companies 172,390 306,071 207,902 217,499
Financial Liabilities:
Customer banking deposits 189,782 192,822 198,582 199,414
Debt 722,601 729,527 352,872 371,757
Securities sold not owned 144,088 144,088 97,708 97,708
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely subordinated debt
securities of the Company 98,200 99,182 150,000 159,000
</TABLE>
22. Segment Information:
In 1998, the Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), which requires a "management" approach for segment disclosure. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. SFAS 131 also requires disclosures
about products and services, geographic areas and major customers.
For information with respect to the Company's segments, see "Financial
Information about Industry Segments" in Item 1 of the Report, which is
incorporated by reference into these consolidated financial statements.
23. Events Subsequent to the Balance Sheet Date:
In February 1999, the Company sold its wholly-owned subsidiary, The Sperry and
Hutchinson Company, Inc. and will recognize a pre-tax gain of approximately
$19,000,000 in the first quarter of 1999.
F-30
<PAGE>
24. Selected Quarterly Financial Data (Unaudited):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
1998:
- -----
Revenues $144,987 $146,717 $ 77,705 $161,097
======== ======== ======== ========
Income (loss) from continuing operations $ 11,124 $ 13,339 $ (5,448) $ 27,187
======== ======== ======== ========
Income from discontinued operations,
net of taxes $ 1,459 $ 1,503 $ 3,411 $ 1,768
======== ======== ======== ========
Net income (loss) $ 12,583 $ 14,842 $ (2,037) $ 28,955
======== ======== ======== ========
Basic earnings (loss) per common share:
Income (loss) from continuing operations $.18 $.21 $(.08) $.43
Income from discontinued operations .02 .02 .05 .03
---- ---- ----- ----
Net income (loss) $.20 $.23 $(.03) $.46
==== ==== ===== ====
Number of shares used in calculation 63,904 63,941 63,600 62,310
====== ====== ====== ======
Diluted earnings (loss) per common share:
Income (loss) from continuing operations $.18 $.21 $(.08) $.43
Income from discontinued operations .02 .02 .05 .03
---- ---- ----- ----
Net income (loss) $.20 $.23 $(.03) $.46
==== ==== ===== ====
Number of shares used in calculation 64,053 64,063 63,600 62,367
====== ====== ====== ======
</TABLE>
F-31
<PAGE>
24. Selected Quarterly Financial Data (Unaudited), continued:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
1997:
- -----
Revenues $159,607 $188,397 $138,675 $144,058
======== ======== ======== ========
Income (loss) from continuing operations
before extraordinary loss $ (6,796) $ 18,859 $(13,983) $(20,369)
======== ======== ======== ========
Income from discontinued operations,
net of taxes $ 19,516 $ 16,734 $ 17,866 $ 4,400
======== ======== ======== ========
Gain on disposal of discontinued
operations, net of taxes $ - $ - $200,337 $427,308
======== ======== ======== ========
Extraordinary loss from early extinguishment
of debt, net of income tax benefit $ - $ (2,044) $ (13) $ -
======== ======== ======== ========
Net income $ 12,720 $ 33,549 $204,207 $411,339
======== ======== ======== ========
Basic earnings (loss) per common share:
Income (loss) from continuing operations $(.11) $ .31 $(.22) $(.32)
Income from discontinued operations .32 .27 .28 .07
Gain on disposal of discontinued operations - - 3.17 6.69
Extraordinary loss - (.03) - -
----- ----- ----- -----
Net income $ .21 $ .55 $3.23 $6.44
===== ===== ===== =====
Number of shares used in calculation 60,441 61,072 63,259 63,856
====== ====== ====== ======
Diluted earnings (loss) per common share:
Income (loss) from continuing operations $(.11) $ .30 $(.22) $(.32)
Income from discontinued operations .32 .26 .28 .07
Gain on disposal of discontinued operations - - 3.17 6.69
Extraordinary loss - (.03) - -
----- ----- ----- -----
Net income $ .21 $ .53 $3.23 $6.44
===== ===== ===== =====
Number of shares used in calculation 60,441 64,113 63,259 63,856
====== ====== ====== ======
</TABLE>
In 1998 and 1997, the totals of quarterly per share amounts do not necessarily
equal annual per share amounts.
F-32
<PAGE>
SCHEDULE III - Supplementary Insurance Information
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Insurance
Losses,
Policy
Benefits
and
Amortization
Deferred Policy of
Policy and Net Deferred Other Non-Life
Acquisition Unearned Contract Premium Investment Acquisition Operating Premiums
Costs Premiums Claims Revenue Income Costs Expenses Written
----- -------- ------ ------- ------ ----- -------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998
- ----
Property and casualty insurance:
Automobile $ 7,407 $47,734 $252,348 $128,855 $24,686 $141,011 $ 4,644 $105,341
Commercial 7,245 31,533 266,423 68,655 19,738 111,626 5,460 61,681
Miscellaneous and personal 3,603 15,305 23,503 31,066 2,668 26,473 2,334 30,421
------- ------- -------- -------- ------- -------- ------- --------
$18,255 $94,572 $542,274 $228,576 $47,092 $279,110 $12,438 $197,443
======= ======= ======== ======== ======= ======== ======= ========
1997
- ----
Property and casualty insurance:
Automobile $11,130 $ 72,614 $297,810 $169,586 $28,415 $208,521 $(15,649) $148,944
Commercial 8,594 39,119 232,057 77,657 19,427 95,024 9,693 73,716
Miscellaneous and personal 4,182 15,933 15,841 27,772 2,372 23,923 2,079 30,573
------- -------- -------- -------- ------- -------- -------- --------
$23,906 $127,666 $545,708 $275,015 $50,214 $327,468 $ (3,877) $253,233
======= ======== ======== ======== ======= ======== ======== ========
1996
- ----
Property and casualty insurance:
Automobile $14,392 $ 93,957 $295,634 $212,821 $30,890 $248,506 $ (5,160) $200,541
Commercial 8,847 43,336 225,705 92,414 20,564 86,593 16,627 84,187
Miscellaneous and personal 3,346 13,126 10,980 21,198 1,767 20,049 1,997 25,052
------- -------- -------- -------- ------- -------- -------- --------
$26,585 $150,419 $532,319 $326,433 $53,221 $355,148 $ 13,464 $309,780
======= ======== ======== ======== ======= ======== ======== ========
</TABLE>
F-33
<PAGE>
SCHEDULE V - Valuation and Qualifying Accounts
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Additions Deductions
-------------------------------- ------------------
Charged
Balance at to Costs Balance
Beginning and Write- Sale of at End of
Description of Period Expenses Recoveries Acquisitions Offs Receivables Period
----------- --------- -------- ---------- ------------ ---- ----------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
1998
- ----
Loan receivables of
banking and lending
subsidiaries $10,199 $ 4,900 $4,915 $ - $ 8,996 $1,620 $ 9,398
Trade, notes and other
receivables 6,131 4,573 876 48,307 12,138 125 47,624
------- ------- ------ ------- ------- ------ -------
Total allowance for
doubtful accounts $16,330 $ 9,473 $5,791 $48,307 $21,134 $1,745 $57,022
======= ======= ====== ======= ======= ====== =======
1997
- ----
Loan receivables of
banking and lending
subsidiaries $12,177 $ 6,140 $5,021 $ - $13,139 $ - $10,199
Trade, notes and other
receivables 7,206 4,995 1,412 - 7,054 428 6,131
------- ------- ------ ------- ------- ------ -------
Total allowance for
doubtful accounts $19,383 $11,135 $6,433 $ - $20,193 $ 428 $16,330
======= ======= ====== ======= ======= ====== =======
1996
- ----
Loan receivables of
banking and lending
subsidiaries $13,893 $ 9,966 $5,104 $ - $16,174 $ 612 $12,177
Trade, notes and other
receivables 6,609 8,446 1,269 - 9,040 78 7,206
------- ------- ------ ------- ------- ------ -------
Total allowance for
doubtful accounts $20,502 $18,412 $6,373 $ - $25,214 $ 690 $19,383
======= ======= ====== ======= ======= ====== =======
</TABLE>
F-34
<PAGE>
SCHEDULE VI - Schedule of Supplemental Information for Property and
Casualty Insurance Underwriters
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Discount, if any, Claims and Claim
Deducted in Reserves Adjustment Expenses Paid Claims
for Unpaid Claims and Incurred Related to: and Claim
Claim Adjustment ------------------------ Adjustment
Expenses Current Year Prior Year Expenses
--------------------- ------------ ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
1998
- ----
Automobile $ - $125,675 $(6,782) $169,224
Commercial 1,122 47,343 48,814 71,396
Miscellaneous and personal - 18,464 258 10,950
------ -------- ------- --------
Total property and casualty $1,122 $191,482 $42,290 $251,570
====== ======== ======= ========
1997
- ----
Automobile $ - $179,984 $ 635 $181,161
Commercial 409 53,022 24,939 76,259
Miscellaneous and personal - 15,402 1,453 12,037
------ -------- ------- --------
Total property and casualty $ 409 $248,408 $27,027 $269,457
====== ======== ======= ========
1996
- ----
Automobile $ - $194,183 $21,478 $209,179
Commercial 347 64,171 4,779 73,916
Miscellaneous and personal - 13,279 1,926 12,275
------ -------- ------- --------
Total property and casualty $ 347 $271,633 $28,183 $295,370
====== ======== ======= ========
</TABLE>
F-35
<PAGE>
Financial Statements
Gotham Partners Acquisition I, L.P.
Year ended December 31, 1998
with Report of Independent Auditors
<PAGE>
Gotham Partners Acquisition I, L.P.
Financial Statements
Year ended December 31, 1998
CONTENTS
Report of Independent Auditors................................ 1
Statement of Financial Condition.............................. 2
Condensed Schedule of Investments............................. 3
Statement of Income........................................... 4
Statement of Changes in Partners' Capital..................... 5
Statement of Cash Flows....................................... 6
Notes to Financial Statements................................. 7
<PAGE>
Report of Independent Auditors
To the Partners of
Gotham Partners Acquisition I, L.P.
We have audited the accompanying statement of financial condition of Gotham
Partners Acquisition I, L.P. (the "Partnership"), including the condensed
schedule of investments, as of December 31, 1998, and the related statements of
income, changes in partners' capital and cash flows for the year then ended.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gotham Partners Acquisition I,
L.P. at December 31, 1998, and the results of its operations and its cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
New York, New York
January 27, 1999
1
<PAGE>
Gotham Partners Acquisition I, L.P.
Statement of Financial Condition
December 31, 1998
ASSETS
Cash $ 1,800
Due from broker 49,338,354
Investments in securities--at value (cost $7,230,744) 10,056,002
Other assets 8,179
----------------
Total assets $ 59,404,335
================
LIABILITIES AND PARTNERS' CAPITAL
Accrued expenses $ 10,000
Partners' capital 59,394,335
----------------
Total liabilities and partners' capital $ 59,404,335
================
See notes to financial statements.
2
<PAGE>
Gotham Partners Acquisition I, L.P.
Condensed Schedule of Investments
December 31, 1998
<TABLE>
<CAPTION>
PERCENTAGE
OF PARTNERS'
CAPITAL VALUE
----------------- ---------------------
<S> <C> <C>
INVESTMENTS IN SECURITIES
Options-Food and Beverages:
McDonald's Corp. (cost $7,223,816) 16.91% $ 10,044,480
Equity securities-Food and Beverages:
McDonald's Corp.-150 shares (cost $6,928) 0.02 11,522
----------------- ---------------------
Total investments in securities (cost $7,230,744) 16.93% $ 10,056,002
================= =====================
</TABLE>
See notes to financial statements.
3
<PAGE>
Gotham Partners Acquisition I, L.P.
Statement of Income
Year ended December 31, 1998
<TABLE>
<S> <C>
GAIN FROM SECURITIES TRANSACTIONS
Net realized gain from securities transactions $ 87,483,920
Net change in unrealized appreciation on securities positions 2,953,731
--------------------
Net gain from securities transactions $ 90,437,651
INVESTMENT INCOME AND EXPENSE
Income:
Interest 1,197,861
Dividends 5,417
--------------------
1,203,278
Dividend expense 12,600
--------------------
Net investment income 1,190,678
OPERATING EXPENSES
Professional fees 19,343
Other expenses 9,349
--------------------
Total operating expenses 28,692
--------------------
Net income $ 91,599,637
====================
</TABLE>
See notes to financial statements.
4
<PAGE>
Gotham Partners Acquisition I, L.P.
Statement of Changes in Partners' Capital
Year ended December 31, 1998
<TABLE>
<CAPTION>
GENERAL LIMITED
TOTAL PARTNER PARTNERS
----------------------------------------------------------
<S> <C> <C> <C>
Partners' capital at beginning of year $ 49,489,013 $ - $ 49,489,013
Capital contributions 15,800,000 - 15,800,000
Capital distributions (97,494,315) (6,448,938) (91,045,377)
Allocation of net income:
Pro-rata allocation 86,909,122 1,758,423 85,150,699
Special allocation 4,690,515 4,690,515 -
----------------------------------------------------------
Net income 91,599,637 6,448,938 85,150,699
----------------------------------------------------------
Partners' capital at end of year $ 59,394,335 $ - $ 59,394,335
==========================================================
</TABLE>
See notes to financial statements.
5
<PAGE>
Gotham Partners Acquisition I, L.P.
Statement of Cash Flows
Year ended December 31, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 91,599,637
Adjustments to reconcile net income to net cash provided by
operating activities:
Net change in unrealized appreciation on securities positions (2,953,731)
Changes in assets and liabilities:
Increase in due from broker (30,736,434)
Decrease in investments in securities--cost 23,776,146
Decrease in other assets 4,677
Decrease in accrued expenses (11,064)
----------------------
Total adjustments (9,920,406)
----------------------
Net cash provided by operating activities 81,679,231
----------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions 15,800,000
Capital distributions (97,494,315)
----------------------
Net cash used in financing activities (81,694,315)
----------------------
Net decrease in cash (15,084)
Cash at beginning of year 16,884
----------------------
Cash at end of year $ 1,800
======================
</TABLE>
See notes to financial statements.
6
<PAGE>
Gotham Partners Acquisition I, L.P.
Notes to Financial Statements
December 31, 1998
1. ORGANIZATION
Gotham Partners Acquisition I, L.P. (the "Partnership") was organized as a
limited partnership under the laws of the state of Delaware and commenced
operations on October 22, 1997. The Partnership's investment objective is to
achieve maximum capital appreciation through investments in securities of
McDonald's Corp. (the "Company"). In order to achieve its objective, the
Partnership may invest in the shares of the capital stock of the Company and any
options, warrants, convertible securities or derivative instruments related to
the Company and in the securities resulting from any spin-off, reorganization,
merger or recapitalization of the Company.
GPA I, L.L.C. (the "General Partner") makes all investment decisions on behalf
of the Partnership and is solely responsible for the development and
implementation of the Partnership's investment policy and strategy.
The Partnership is in the process of liquidating its investments and
distributing the capital to the partners. Once all of the capital has been
distributed, the Partnership will be terminated.
2. SIGNIFICANT ACCOUNTING POLICIES
The Partnership records its securities transactions on a trade date basis.
Securities listed on a national securities exchange are valued at their last
reported sales price. Securities for which no such market prices are available
are valued at fair value by the General Partner on a reasonable basis and in
good faith. At December 31, 1998, over-the-counter options totaling $10,044,480
were valued at their estimated fair values using prices furnished by the
counterparty to the respective contracts.
Net income was allocated in accordance with the terms of the Partnership
Agreement.
No Federal, state or local income taxes have been provided since the partners
are individually liable for the taxes on their share of the Partnership's
income.
7
<PAGE>
Gotham Partners Acquisition I, L.P.
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The fair value of the Partnership's assets and liabilities which qualify as
financial instruments under Statement of Financial Accounting Standards No. 107,
"Disclosure About Fair Value of Financial Instruments," approximates the
carrying amounts presented in the statement of financial condition.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
3. DUE FROM BROKER
Due from broker represents cash balances with the clearing broker.
4. CONCENTRATIONS OF CREDIT RISK
The Partnership is engaged in trading over-the-counter stock options with
certain counterparties. These financial instruments expose the Partnership to
credit risk arising from the potential inability of counterparties to perform
under the terms of the contracts.
All securities transactions of the Partnership listed on a national securities
exchange are cleared by a major U.S. securities firm pursuant to a customer
agreement. At December 31, 1998, all of the investments in equity securities and
due from broker are positions with and amounts due from this broker.
5. DERIVATIVE FINANCIAL INSTRUMENTS
All options are reported at fair value and changes in fair values are reflected
in the statement of income. The average monthly fair value of options held
during the year was $67,672,760. The fair value of options held at December 31,
1998 was $10,044,480. Net realized and unrealized gains on options held during
the year was $91,714,634.
8
<PAGE>
Gotham Partners Acquisition I, L.P.
Notes to Financial Statements (continued)
6. INCENTIVE ALLOCATION AND DISTRIBUTIONS
The General Partner is entitled to an incentive allocation of 20% of the net
capital appreciation attributable to a limited partner's capital account at the
end of each measuring period, defined in the Partnership Agreement, in part, to
be the period beginning on the date of admission and ending on the date
designated as the record date as of which a distribution is to be made to such
limited partner. Each limited partner is entitled to a 15% compounded annual
preferred return, as defined in the Partnership Agreement, on its capital
investment during the measuring period before the General Partner is allocated
an incentive allocation. Upon satisfaction of the preferred return, the General
Partner receives priority allocations to "catch up" to a 20% share of net
capital appreciation during the measuring period. After the preferred return and
the "catch up" allocations, any remaining net capital appreciation is allocated,
at the end of each measuring period, 80% to the limited partner and 20% to the
General Partner. In the event of a partial distribution being made to all
limited partners on a pro rata basis, the General Partner is not entitled to its
full incentive allocation, but rather a partial incentive allocation based on
the amount being distributed. The General Partner, in its sole discretion, may
elect to waive all or any portion of the incentive allocation with respect to
any one or more limited partners.
August 31, 1998 was designated as the end of the first measuring period.
Accordingly, the Partnership distributed $91,045,377 to the limited partners on
September 14, 1998. In connection with the pro rata distribution, the General
Partner received an incentive allocation of $4,690,515, of which $2,954,623 was
paid to the General Partner on September 14, 1998. The remaining $1,735,892 of
the General Partner's incentive allocation was distributed to the General
Partner on October 22, 1998, along with $1,758,423, the General Partner's pro
rata share of the Partnership's earnings from September 1, 1998 to October 21,
1998.
Because the Partnership Agreement provides that incentive allocations can only
be made at the end of a measuring period, no incentive allocation of the net
capital appreciation from September 1, 1998 through December 31, 1998 is
reflected in the financial statements.
January 21, 1999 was designated as the end of the second measuring period.
Accordingly, the Partnership distributed $37,263,233 to the limited partners on
January 22, 1999. In connection with the pro rata distribution, the General
Partner received an incentive allocation of $5,247,250, which was paid to the
General Partner on January 22, 1999.
9
<PAGE>
Gotham Partners Acquisition I, L.P.
Notes to Financial Statements (continued)
The Partnership intends to make final distributions to all partners once all
investments have been liquidated and the Partnership's final audit has been
completed.
10
<PAGE>
EXHIBIT INDEX
Exhibit Exemption
Number Description Indication
- ------ ----------- ----------
3.1 Restated Certificate of Incorporation (filed as Exhibit
5.1 to the Company's Current Report on Form 8-K dated
July 14, 1993).*
3.2 Amended and Restated By-laws as amended through
February 23, 1999.
4.1 The Company undertakes to furnish the Securities and
Exchange Commission, upon request, a copy of all
instruments with respect to long-term debt not filed
herewith.
10.1 1992 Stock Option Plan (filed as Annex C to the
Company's Proxy Statement dated July 21, 1992).*
10.2 Articles and Agreement of General Partnership,
effective as of April 15, 1985, of Jordan/Zalaznick
Capital Company (filed as Exhibit 10.20 to the
Company's Registration Statement No. 33-00606).*
10.3 Operating Agreement of The Jordan Company LLC, dated as
of July 23, 1998.
10.4 Stock Purchase and Sale Agreement dated as of April 5,
1991, by and between FPL Group Capital Inc and the
Company (filed as Exhibit B to the Company's Current
Report on Form 8-K dated August 23, 1991).*
10.5 Amended and Restated Shareholders Agreement dated as of
December 16, 1997 among the Company, Ian M. Cumming and
Joseph S. Steinberg (filed as Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 (the "1997 10-K")).*
10.6 Deferred Compensation Agreement between the Company and
Joseph S. Steinberg dated December 8, 1998.
10.7 Settlement Agreement between Baldwin-United Corporation
and the United States dated August 27, 1985 concerning
tax issues (filed as Exhibit 10.14 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1992 (the "1992 10-K")).*
10.8 Acquisition Agreement, dated as of December 18, 1992,
by and between Provident Mutual Life and Annuity
Company of America and Colonial Penn Annuity and Life
Insurance Company (filed as Exhibit 10.15 to the 1992
10-K).*
- ----------------------------------
*Incorporated by reference.
<PAGE>
Exhibit Exemption
Number Description Indication
- ------ ----------- ----------
10.9 Amended and Restated Revolving Credit Agreement dated
as of November 3, 1997 between the Company, BankBoston,
N.A. as Administrative Agent, The Chase Manhattan Bank,
as Syndication Agent, Bank of America National Trust
and Savings Association, as Documentation Agent and the
Banks signatory thereto (filed as Exhibit 10.13 to the
1997 10-K).*
10.10 Purchase Agreement among Conseco, the Company, Charter,
Colonial Penn Group, Inc., Colonial Penn Holdings,
Inc., Leucadia Financial Corporation, Intramerica,
Colonial Penn Franklin Insurance Company and Colonial
Penn Insurance Company dated as of April 30, 1997
(filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June
30, 1997).*
10.11 Purchase Agreement among GECC, the Company, Charter,
Colonial Penn Group Inc. and Colonial Penn Holdings,
Inc. dated as of June 30, 1997 (filed as Annex A to the
1997 Proxy Statement).*
10.12 Purchase Agreement by and among Allstate Life Insurance
Company, Allstate Life Insurance Company of New York,
Charter, Intramerica and the Company, dated February
11, 1998 (filed as Exhibit 10.16 to the 1997 10-K).*
10.13 Leucadia National Corporation Senior Executive Annual
Incentive Bonus Plan (filed as Annex D to the 1997
Proxy Statement.)*
10.14 Stock Purchase Agreement by and between the Company and
Allstate Life Insurance Company dated as of December
18, 1998.
10.15 Trust Agreement dated August 14, 1998 between the
Company for the benefit of its shareholders as of
August 25, 1998 and Joseph A. Orlando, as Trustee.
21 Subsidiaries of the registrant.
23 Consents of independent accountants with respect to the
incorporation by reference into the Company's
Registration Statements on Form S-8 (File No. 2-84303),
Form S-8 and S-3 (File No. 33-6054), Form S-8 and S-3
(File No. 33-26434), Form S-8 and S-3 (File No.
33-30277), Form S-8 (File No. 33-61682) and Form S-8
(File No. 33-61718).
27 Financial Data Schedule.
- ---------------------------------
*Incorporated by reference.
Exhibit 3.2
AMENDED AND RESTATED
BY - LAWS
of
LEUCADIA NATIONAL CORPORATION
Incorporated under the laws of the State of New York - May 24, 1968
As amended through February 23, 1999
<PAGE>
AMENDED AND RESTATED
BY - LAWS
of
LEUCADIA NATIONAL CORPORATION
ARTICLE I. SHAREHOLDERS MEETING
Section 1. The annual meeting of shareholders of the Corporation shall
be held at the principal office of the Corporation, or at such other place
within or without the State of New York, on such date and at such time as shall
be determined by the Board of Directors in each year for the purpose of electing
Directors, and for the transaction of such other business as may be brought
before the meeting.
Section 2. Special meetings of shareholders may be called at any time
by the Board of Directors.
Section 3. Written notice of meetings of shareholders shall be given
whenever shareholders are to take any action at a meeting. Such notice shall
state the place, date and hour of the meeting and, unless it is the annual
meeting, indicate that it is being issued by or at the direction of the person
or persons calling the meeting. Notice of a special meeting shall, in addition,
state the purpose or purposes for which the meeting was called.
<PAGE>
A copy of the notice of any meeting shall be given, personally or by
mail, not less than ten nor more than fifty days before the date of the meeting,
to each shareholder entitled to vote at such meeting. If mailed, such notice is
given when deposited in the United States mail, with postage thereon prepaid,
directed to the shareholder at his address as it appears on the record of
shareholders, or, if he shall have filed with the Secretary of the Corporation a
written request that such notices to him be mailed to some other address, then
directed to him at such other address.
Section 4. For the purpose of determining the shareholders entitled to
notice of or to vote at any meeting of shareholders or any adjournment thereof,
or to express consent to or dissent from any proposal without a meeting, or for
the purpose of determining shareholders entitled to receive payment of any
dividend or the allotment of any rights, or for the purpose of any other action,
the Board shall fix, in advance, a date as the record date for any such
determination of shareholders. Such date shall not be more than sixty nor less
than ten days before the date of such meeting, nor more than sixty days prior to
any other action.
2
<PAGE>
Section 5. Except as may be otherwise required by laws of the State of
New York, the Certificate of Incorporation or these By-Laws, the holders of a
majority of the shares entitled to vote thereat present in person or by proxy
shall constitute a quorum at a meeting of shareholders for the transaction of
any business, provided that when a specified item of business is required to be
voted on by a class or a series, voting as a class, the holders of a majority of
shares of such class or series present in person or by proxy shall constitute a
quorum for the transaction of such specified item of business.
Section 6. In order to properly submit any business to an annual
meeting of shareholders, a shareholder must give timely notice in writing to the
Secretary of the Corporation of such shareholder's intention to present such
business. To be considered timely, a shareholder's notice must be delivered,
either in person or by United States certified mail, postage prepaid, and
received at the principal executive office of the Corporation, not less than one
hundred twenty (120) days prior to the first anniversary date of the
Corporation's proxy statement in connection with the last Annual Meeting or if
no Annual Meeting was held in the previous year, not less than a reasonable
time, as determined by the Board of Directors, prior to the date of the
applicable Annual Meeting.
3
<PAGE>
Each notice to the Secretary shall set forth (i) the name and address
of the shareholder and his or her nominees, (ii) a representation that the
shareholder is entitled to vote at such meeting, indicating the number of shares
owned of record and beneficially by such shareholder, together with a statement
that such shareholder intends to appear in person or by proxy at the meeting to
present such proposal or proposals, (iii) a description of the proposal or
proposals to be presented, including the complete text of any resolutions to be
presented at the meeting and the reasons for conducting such business at the
meeting and (iv) any material interest of the shareholder in the business to be
submitted at the meeting. In addition, the shareholder shall promptly provide
any other information reasonably requested by the Corporation.
The presiding officer of the meeting may, if the facts warrant,
determine that a proposal was not made in accordance with the foregoing
procedure, and if he should so determine, he shall so declare to the meeting and
the defective proposal shall be disregarded.
4
<PAGE>
Notwithstanding the foregoing provisions of this Section 6, a
shareholder who seeks to have any proposal included in the Corporation's proxy
statement shall comply with applicable state law and the requirements of the
rules and regulations promulgated by the Securities and Exchange Commission.
ARTICLE II. DIRECTORS
Section 1. The number of the Directors of the Corporation shall be such
number not less than three, as is designated from time to time by resolution
adopted by a majority of the members of the Board of Directors, plus the number
of Directors, if any, elected by the holders of the Preferred Stock, voting as a
class, pursuant to Section 5 of the General Provisions Relating to All Series of
the Preferred Stock in Article FOURTH of the Certificate of Incorporation of the
Corporation. The terms of the Directors, if any, elected by the holders of the
Preferred Stock, voting as a class, pursuant to Section 5 of the General
Provisions Relating to All Series of the Preferred Stock in Article FOURTH of
the Certificate of Incorporation of the Corporation shall be as set forth in
such Section 5. The Directors other than those, if any, elected by the holders
of the Preferred Stock, voting as a class, shall, except as otherwise set forth
5
<PAGE>
herein, be elected for one year terms which shall expire at each annual meeting
of shareholders and when their successors shall have been elected and qualified.
Such election shall be by ballot by the shareholders entitled to vote and
present in person or by proxy at such meeting. In case of any vacancy in the
Board of Directors (including any vacancy due to an increase in the size of the
Board of Directors), the remaining Directors, although less than a quorum, by
affirmative vote of a majority thereof, may elect a successor to fill such
vacancy to serve until the next annual meeting of shareholders and when such
Director's successor shall have been elected and qualified. Any Director or
Directors (other than a Director or Directors elected by the holders of the
Preferred Stock pursuant to Section 5 of the General Provisions Relating to All
Series of the Preferred Stock in Article FOURTH of the Certificate of
Incorporation of the Corporation) may be removed for cause by the affirmative
vote of a majority of the Directors present (including by means of a conference
telephone or similar communications equipment) at a meeting at which such action
is considered, provided a quorum is present.
Section 2. Nominations for the election of Directors may be made by a
committee appointed by the Board of Directors (or, in the absence of such
committee, by the Board of Directors) or by any shareholder entitled to vote
6
<PAGE>
generally in the election of Directors. However, any shareholder entitled to
vote generally in the election of Directors may nominate one or more persons for
election as Directors at a meeting only if written notice of such shareholder's
intention to make such nomination or nominations has been given, to the
Secretary of the Corporation, either by personal delivery or by-United States
certified mail, postage prepaid, and received at the principal executive office
of the Corporation (1) with respect to an election to be held at an Annual
Meeting of Shareholders, (a) not less than one hundred twenty (120) days prior
to the first anniversary date of the Corporation's proxy statement in connection
with the last Annual Meeting or (b) if no Annual Meeting was held in the
previous year, not less than a reasonable time, as determined by the Board of
Directors, prior to the date of the applicable Annual Meeting and (2) with
respect to an election to be held at a Special Meeting of Shareholders, the
close of business on the tenth (10th) day following the date on which notice of
such meeting is first given to shareholders.
Each such notice to the Secretary shall set forth (i) the
name and address of the shareholder and his or her nominees; (ii) a
representation that the shareholder is entitled to vote at such meeting and
7
<PAGE>
intends to appear in person or by proxy at the meeting to nominate the person or
persons specified in the notice; (iii) a description of all arrangements or
understandings between the shareholder and each such nominee; (iv) such other
information as would be required to be included in a proxy statement soliciting
proxies for the election of the nominees of such shareholder; and (v) the
consent of each nominee to serve as a Director of the Corporation if so elected.
The Corporation may require any proposed nominee to furnish such other
information as may reasonably be required by the Corporation to determine the
eligibility of such proposed nominee to serve as a Director of the Corporation.
The presiding officer of the meeting may, if the facts warrant, determine that a
nomination was not made in accordance with the foregoing procedure, and if he
should so determine, he shall so declare to the meeting and the defective
nomination shall be disregarded.
Section 3. The Board of Directors may adopt such rules and regulations
for the conduct of their meetings and management of the affairs of the
Corporation, as they may deem proper, not inconsistent with the laws of the
State of New York, the Certificate of Incorporation or these By-Laws.
8
<PAGE>
Section 4. The regular meetings of the Board of Directors shall be held
as determined by the Board of Directors. Special meetings shall be held whenever
called by direction of the Chairman of the Board or any Vice Chairman, or the
President or of any two of the Directors, on at least three days previous notice
by mail or two days previous notice by telegraph to each Director. Notice of
such meeting shall be effective as of the sending of the notice by mail or
telegram. Unless otherwise indicated in the notice thereof or otherwise provided
by the laws of the State of New York, the Certificate of Incorporation or these
By-Laws, any and all business may be transacted at a special meeting. One-third
of the Directors shall constitute a quorum at any meeting of the Board of
Directors. At the first meeting of the Board of Directors held after the annual
meeting of shareholders, the Board shall proceed to the election of the officers
of the Corporation.
Section 5. Any action required or permitted to be taken by the Board of
Directors may be taken without a meeting if all members of the Board of
Directors consent in writing to the adoption of a resolution authorizing such
action.
Section 6. Any one or more members of the Board of Directors may
participate in a meeting of the Board of Directors by means of a conference
9
<PAGE>
telephone or similar communications equipment allowing all persons participating
in such meeting to hear each other at the same time. Participation by such means
shall constitute presence in person at such meeting.
ARTICLE III. COMMITTEES OF THE BOARD
Section 1. The Board of Directors may, by resolution or resolutions
adopted by a majority of the members of the Board of Directors designate a
committee of the board to be known as the Finance Committee of the Board
("Finance Committee") and to consist of the Chairman of the Board and such
number of other Directors as shall be designated from time to time by resolution
adopted by a majority of the members of the Board of Directors. The Board of
Directors may designate one or more Directors as alternate members of the
Finance Committee, who may replace any absent member or members of the Committee
at any meeting of the Finance Committee. The Board shall have the power at any
time to fill vacancies in, to change the membership of, or to dissolve the
Finance Committee. The Finance Committee shall have and may exercise, when the
Board is not in session, all authority of the Board of Directors with respect to
designating as a depository any bank, banker or trust company, opening lines of
10
<PAGE>
credit with any bank, banker or trust company and all matters appertaining
thereto, including, but not limited to, the authorization of all resolutions and
agreements and the execution of all instruments required by any bank, banker or
trust company in connection therewith, including the certification thereof by
the Secretary of the Corporation, the designation of officers and employees of
the Corporation authorized to withdraw or charge any of the funds of the
Corporation so deposited upon checks, notes, drafts, bills of exchange,
acceptances, undertakings or other instruments or orders for the payment of
money drawn against the account of the Corporation, the designation of officers
authorized to borrow or obtain credit for the Corporation from any bank, banker
or trust company or to endorse for discount or otherwise, negotiable or
non-negotiable instruments held by the Corporation, the authorization of leases
of safe deposit boxes, the designation of officers and employees authorized to
have access to said boxes, and the authorization of guarantees required by
symbol endorsement.
Section 2. The Board of Directors may, by resolution or resolutions,
passed by a majority of the members of the Board of Directors designate a
committee of the Board to be known as the Executive Committee of the Board
("Executive Committee") and to consist of the Chairman of the Board of
Directors, who shall be Chairman of the Executive Committee, and such number of
11
<PAGE>
other Directors as shall be designated from time to time by resolution adopted
by a majority of the members of the Board of Directors. The Executive Committee
shall have and may exercise when the Board of Directors is not in session, all
authority of the Board of Directors, except as may be limited by Section 712 of
the Business Corporation Law of New York State. The Board of Directors may
designate one or more Directors as alternate members of such committee who may
replace any absent member or members at any meeting of the Executive Committee.
Section 3. The Board of Directors shall, by resolution or resolutions,
designate three of its members, none of whom are members of management, as the
Audit Committee of the Board ("Audit Committee"), and will further designate one
member as Chairman of the Audit Committee. The Audit Committee shall have
responsibility for recommending to the Board the retention or replacement of the
independent auditors of the company; for administration of the internal audit
function of the corporation; and for such other matters pertaining to the
internal control, audit, or reporting of the financial affairs of the company as
the Audit Committee, in its sole discretion, deems advisable and necessary. A
full report of the activities of the Audit Committee will be made by the
Chairman or his designee to each meeting of the Board of Directors.
12
<PAGE>
Section 4. The Board of Directors may, by resolution or resolutions,
passed by a majority of the members of the Board of Directors designate three of
its members as the Nominating Committee of the Board ("Nominating Committee"),
and will further designate one member as Chairman of the Nominating Committee.
The Nominating Committee shall meet annually for the purpose of considering and
presenting to the Board its nominations for officers and directors.
Section 5. The Board of Directors may, by resolution or resolutions
adopted by a majority of the members of the Board of Directors designate such
other committees of the Board as shall be designated from time to time. Such
committees shall have such number of Directors as are designated by the Board
and shall have such powers designated by the Board as are consistent with the
provisions of the Business Corporation Law of New York State. The Board of
Directors may designate one or more Directors as alternate members of such
committee who may replace any absent member or members at any meeting of any
such committee. Any such committee shall have and exercise the authority of the
Board of Directors.
13
<PAGE>
Section 6. Such committees may meet either regularly at stated times or
specially on notice given twenty-four hours in advance by any member thereof by
mail, telegraph or telephone to all the other members thereof provided such
notice is received before the meeting takes place; but no notice of any regular
meeting need be given; and no notice need be given of any special meeting at
which all the members shall be present or notice of which shall be waived by all
the absent members before or after such meeting. Such committees may make rules
for the holding and conduct of their meetings and may appoint such subcommittees
and assistants, as they shall from time to time deem necessary. A number of
regular members or alternate members or both equal to a majority of the number
of regular members of a committee shall constitute a quorum and the act of a
majority of those present at a meeting at which a quorum is present and action
shall be the act of a committee. All action taken by a committee shall be
reported to the Board of Directors at its meeting next succeeding such action.
The Secretary or an Assistant Secretary shall attend and act as secretary of all
meetings of a committee and keep the minutes thereof.
Section 7. Any action required or permitted to be taken by any
committee of the Board may be taken without a meeting if all members of the
14
<PAGE>
committee consent in writing to the adoption of a resolution authorizing such
action.
Section 8. Any one or more members of any committee of the Board may
participate in a meeting of such committee by means of a conference telephone or
similar communications equipment allowing all persons participating in such
meeting to hear each other at the same time. Participation by such means shall
constitute presence in person at such meeting.
ARTICLE IV. OFFICERS
Section 1. The officers of the Corporation shall be a Chairman of the
Board of Directors, a President, one or more Vice Presidents, one or more of
whom may be designated Executive Vice President and one or more of whom may be
designated Senior Vice President, a Treasurer, a Secretary and a Comptroller,
all of whom may be appointed by the Board of Directors, and such other officers
as the Board of Directors, from time to time may appoint and each officer shall
serve at the discretion of the Board of Directors until the next annual election
of officers. One person may serve as more than one of such officers, except that
the same person shall not serve both as President and Secretary.
15
<PAGE>
Section 2. The Board of Directors shall appoint from their number a
Chairman of the Board of Directors who shall be the chief executive officer of
the Corporation and, subject to the control of the Board of Directors, shall
have general charge of the management of the affairs of the Corporation. He
shall preside at meetings of the Board of Directors and of the shareholders of
the Corporation.
Section 3. The Board of Directors may appoint from their number one or
more Vice Chairmen of the Board of Directors who shall perform such duties as
may be assigned to them by the Board of Directors or the Chairman of the Board
of Directors. In the absence or incapacity of the Chairman of the Board of
Directors, the Vice Chairmen, in order of seniority determined by time of
appointment to office, shall preside over meetings of the Board of Directors.
The Board of Directors may appoint from their number a Chairman of the Executive
Committee who shall preside at meetings of the Executive Committee and perform
such other duties as may be assigned to him by the Board of Directors.
Section 4. The Board of Directors shall appoint from their number a
President who shall be the chief operating officer of the Corporation and,
subject to the direction of the Board of Directors and of the Chairman of the
16
<PAGE>
Board of Directors, shall direct and supervise the administration of the
business and affairs of the Corporation. In the absence or incapacity of the
Chairman of the Board of Directors, the President shall exercise all of the
powers and duties of the Chairman of the Board of Directors, provided that he
shall preside at meetings of the Board of Directors only in the absence or
incapacity of all the Vice Chairmen, if any, of the Board of Directors.
Section 5. The Board of Directors shall appoint one or more Vice
Presidents, one or more of whom may be designated Executive Vice President or
Senior Vice President, and one of whom may be designated Vice President-Finance,
who shall have such powers and shall perform such duties as may be assigned by
the Board of Directors. In the absence or incapacity of the President, the
Executive Vice Presidents, in order of seniority determined by time of
appointment to office, shall exercise all of the powers and duties of the
President.
Section 6. The Board of Directors shall elect a Treasurer who shall
have such powers and shall perform such duties as may be assigned to him by the
Board of Directors.
17
<PAGE>
Section 7. The Board of Directors shall appoint a Secretary who shall
keep the minutes of all meetings of the Board of Directors and of the
shareholders of the Corporation. He shall give or cause to be given notice of
all meetings of the shareholders and of such meetings of the Board of Directors
as may require notice. He shall keep in safe custody the seal of the Corporation
and shall affix the same to all instruments requiring it when authorized by the
Board of Directors, the Chairman of the Board of Directors or the President. He
shall have such further powers and shall perform such further duties as may be
assigned to him by the Board of Directors. The Secretary shall enforce the
restrictions on the transfer of the capital stock of the Corporation set forth
in Part III of Article FOURTH of the Certificate of Incorporation. In connection
therewith, the Secretary shall supervise the Corporation's transfer agent and/or
registrar for the capital stock.
Section 8. The Board of Directors shall elect a Comptroller who shall
be the chief accounting officer of the Corporation and shall be in charge of its
books of account and accounting records and of its accounting procedures. He
shall have such further powers and shall perform such further duties as may be
assigned to him by the Board of Directors.
18
<PAGE>
Section 9. The Board of Directors shall from time to time appoint such
other officers to have such powers and to perform such duties as may be assigned
to them by the Board of Directors.
ARTICLE V. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Corporation, to the full extent permitted and in the manner
required by the laws of the State of New York as in effect at the time of the
adoption of this Article V or as the law may be amended from time to time, shall
(i) indemnify any person (and the heirs and legal representatives of such
person) made, or threatened to be made, a party in an action or proceeding
(including, without limitation, one by or in the right of the Corporation to
procure a judgement in its favor), whether civil, criminal, administrative or
investigative, including an action by or in the right of any other corporation
of any type or kind, domestic or foreign, or any partnership, joint venture,
trust, employee benefit plan or other enterprise, which any director or officer
19
<PAGE>
of the Corporation served in any capacity at the request the Corporation, by
reason of the fact that he, his testator or intestate, was a director or officer
of the Corporation or served such other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise in any capacity and (ii)
provide to any such person (and their heirs and legal representatives of such
person) advances for expenses incurred in pursuing such action or proceeding,
upon receipt of an undertaking by or on behalf of such director or officer to
repay such amount as, and to the extent, required by Section 725(a) of the
Business Corporation Law.
The indemnification and advancement of expenses provided herein shall
not be deemed exclusive of any other rights to which the person seeking
indemnification or advancement of expenses may be entitled (i) under the
Certificate of Incorporation or By-Laws of this or any other corporation, or
(ii) by any resolution of shareholders, resolution of directors or agreement
providing for such indemnification or advancement, all of which are authorized
by these By-Laws (except with respect to matters which at the time of
indemnification is sought are prohibited by applicable law), or (iii) otherwise.
20
<PAGE>
ARTICLE VI. CAPITAL STOCK
Section 1. Subject to Part III of Article FOURTH of the Certificate of
Incorporation, certificates for each class and series of stock shall be in such
form as shall be adopted by the Board of Directors, shall be duly numbered and
registered in the order issued and shall be signed by the Chairman or Vice
Chairman of the Board or the President or a Vice President and the Secretary or
an Assistant Secretary or the Treasurer or an Assistant Treasurer of the
Corporation, and may be sealed with the seal of the Corporation or facsimile
thereof. The signatures of the officers upon a certificate may be facsimiles if
the certificate is countersigned by a transfer agent or registered by a
registrar other than the Corporation itself or its employee. In case any officer
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer before such certificate is issued, it may
be issued by the Corporation with the same effect as if he were such officer at
the date of issue.
Section 2. Subject to Part III of Article FOURTH of the Certificate of
Incorporation, transfers of shares shall only be made upon the books of the
Corporation by the registered holder in person or by attorney, duly authorized,
and upon surrender of the certificate or certificates for such shares, properly
signed for transfer.
21
<PAGE>
Section 3. A new certificate of stock may in the discretion of the
Board of Directors, and under such regulations with respect to indemnification
and otherwise as they may prescribe, be issued in place of the certificate
claimed to have been lost, stolen or destroyed.
Section 4. So long as the restrictions set forth in Part III of Article
FOURTH of the Certificate of Incorporation shall not have lapsed, all share
certificates representing shares of capital stock shall bear a conspicuous
legend as follows:
"THE SHARES OF STOCK REPRESENTED HEREBY ARE SUBJECT TO RESTRICTIONS PURSUANT TO
PART III OF ARTICLE FOURTH OF THE CERTIFICATE OF INCORPORATION OF THE
CORPORATION REPRINTED IN ITS ENTIRETY ON THE BACK OF THE CERTIFICATE."
Section 5. Subject to Part III of Article FOURTH of the Certificate of
Incorporation, the Corporation shall be entitled to treat the registered holder
of any share or shares as the holder thereof in fact and law and shall not be
bound to recognize any equitable or other claim to, or interest in, such share
or shares on the part of any other person, whether or not it shall have express
or other notice thereof, save as otherwise expressly provided by statute.
22
<PAGE>
ARTICLE VII. DIVIDENDS
Dividends shall be declared and paid out of the surplus of
the Corporation as often and at such times as the Board of Directors may
determine, and in accordance with the New York Business Corporation Law.
ARTICLE VIII. INSPECTORS OF ELECTION
The Board of Directors, in advance of any shareholders'
meeting, shall appoint two inspectors to act at the meeting or any adjournment
thereof. If inspectors are not so appointed, the person presiding at a
shareholders' meeting shall appoint two inspectors. In case any person appointed
fails to appear or act, the vacancy may be filled by appointment made by the
Board of Directors in advance of the meeting or at the meeting by the person
presiding thereat.
23
<PAGE>
ARTICLE IX. SEAL
The seal of the Corporation shall be in the form of a circle
and shall bear the name of the Corporation and the year of its incorporation.
ARTICLE X. AMENDMENTS
By-Laws of the Corporation may be adopted, amended or
repealed by vote of the holders of the shares at the time entitled to vote in
the election of any Directors. By-Laws may also be adopted, amended or repealed
by the Board of Directors by vote of a majority of the Directors present at the
time of the vote if a quorum is then present. If any By-Law regulating an
impending election of directors is adopted, amended or repealed by the Board of
Directors, there shall be set forth in the notice of the next meeting of
shareholders for the election of Directors the By-Law so adopted, amended or
repealed, together with a concise statement of the changes made.
24
<PAGE>
ARTICLE XI. WAIVERS OF NOTICE
Whenever the Corporation or the Board of Directors or any committee of
the Board is authorized to take any action after notice to any person or persons
or after the lapse of a prescribed period of time, such action may be taken
without notice and without the lapse of such period of time, if at any time
before or after such action is completed the person or persons entitled to such
notice or entitled to participate in the action to be taken or, in the case of a
shareholder, his attorney-in-fact or proxy, submits a signed waiver of notice of
such requirement.
25
Exhibit 10.3
OPERATING AGREEMENT
OF
THE JORDAN COMPANY LLC
OPERATING AGREEMENT of The Jordan Company LLC, a New York limited
liability company (the "LLC"), dated as of July 23, 1998, among THE JOHN W.
JORDAN II REVOCABLE TRUST, DAVID W. ZALAZNICK and LEUCADIA, INC., a New York
corporation (hereinafter referred to collectively as the "Members" and
individually as a "Member").
WHEREAS, effective as of February 1, 1982, The Jordan Company, a New
York general partnership (the "Partnership"), was formed pursuant to the
Articles and Agreement of General Partnership, as amended and restated by the
Fourth Restatement, dated as of December 31, 1996, of the Articles and Agreement
of General Partnership, as further amended to date (the "Partnership
Agreement"); and
WHEREAS, the partners of the Partnership are The John W. Jordan II
Revocable Trust, David W. Zalaznick and Leucadia, Inc., a New York corporation
(in such capacity, the "Partners"); and
WHEREAS, pursuant to that certain Agreement of Conversion, dated as
of July 22, 1998 among the Partners, the Partners have agreed to convert the
Partnership into a limited liability company pursuant to Section 1006 of the
NYFS04...:\30\76830\0001\1197\AGR0247V.40D
<PAGE>
Limited Liability Company Law of the State of New York (the
"NYLLC Law") (the "Conversion"); and
WHEREAS, a Certificate of Conversion of Partnership to a Limited
Liability Company was filed with the Department of State of the State of New
York by the Partnership on July 23, 1998; and
WHEREAS, in accordance with the Conversion, the Partners desire to
amend the Partnership Agreement for the purpose of converting the Partnership
Agreement into an Operating Agreement and to make such other changes to the
Partnership Agreement in accordance with the NYLLC Law.
WHEREAS, all references to the LLC contained herein are deemed to be
references to the Partnership for periods prior to the effective time of this
Operating Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
ORGANIZATION
Section 1.1. Formation and Name of LLC
The parties do hereby convert the Partnership into a limited
liability company pursuant to the provisions of the NYLLC Law to engage, for the
period and upon the terms and conditions hereinafter set forth, in the business
of
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generating fees by seeking out attractive businesses for acquisition; arranging
the terms of acquisition and the financing thereof and assisting the management
of such businesses after acquisition (the companies acquiring such businesses
are hereinafter collectively called the "Clients" and individually as a
"Client"). The business of the LLC shall be conducted under the name "The Jordan
Company LLC."
Section 1.2. Purposes and Powers
The purposes for which the LLC is formed are as follows:
(a) to seek out attractive businesses (other than in the financial
services area) for acquisition (herein referred to as "Buy-Outs") for Clients,
to arrange the terms of the Buy-Outs, to arrange financing to effect the
Buy-Outs for Clients, to negotiate opportunities to invest in Clients in
connection with the Buy-Outs, to assist Clients in the management and financing
of their businesses after Buy-Outs, and to perform investment banking services
generally;
(b) to hold, maintain and/or invest all or any part of the assets,
properties or funds of the LLC in cash or in cash equivalents, including,
without limitation, interest-bearing securities of the United States of America
or any agency or instrumentality thereof, or other
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governmental securities, high-rated state and municipal bonds and debt
obligations of U.S. national banks;
(c) to lend (for any term or period, whether or not beyond the term
of the LLC hereunder) any of its assets, properties or funds, either with or
without security;
(d) to open, maintain and close accounts, including margin accounts,
with brokers;
(e) to open, maintain and close bank accounts and draw checks and
other orders for the payment of monies;
(f) to engage appraisers, accountants, custodians, investment
advisors, attorneys and all other agents and assistants, both professional and
nonprofessional, and to compensate them in such amounts as may be necessary or
advisable;
(g) to enter into, make and perform all contracts, agreements and
other undertakings as may be reasonably necessary or advisable or incident to
carrying out its purposes; and
(h) to sue, prosecute, settle or compromise claims against third
parties, to compromise, settle or accept judgment or claims against the LLC and
to execute all documents and to make all representations and waivers in
connection therewith.
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In furtherance of the aforesaid purposes, the LLC shall have all
powers necessary, suitable or convenient for the accomplishment thereof, alone
or with others, as principal or agent.
Section 1.3. Principal Office
The principal place of business of the LLC shall be at 767 Fifth
Avenue, New York, New York 10153, or at such place as may be designated by a
Managing Director (hereinafter defined).
Section 1.4. Term
The LLC shall commence as of the date of filing of the Certificate
of Conversion of Partnership to a Limited Liability Company with the Department
of State of the State of New York and shall continue until dissolved as provided
in Section 5.4 hereof.
Section 1.5. Definitions
(a) For purposes of this Agreement, the following terms (in addition
to other terms defined herein) shall have the following meanings:
"Additional Capital Contributions" shall have the meaning set forth
in Section 3.3 hereof.
"Affiliate" shall mean a natural person, partnership, corporation or
other entity that, directly or indirectly, through one or more intermediaries,
controls or
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is controlled by or is under common control with another person, partnership,
corporation or other entity.
"Bankruptcy" with respect to any Member shall mean an adjudication
that the Member is bankrupt or insolvent, the admission by the Member of
inability to pay debts as they mature, the making by the Member of an assignment
for the benefit of creditors, the filing by the Member of a petition in
bankruptcy or a petition for relief under any section of the United States
Federal Bankruptcy Act or any other applicable state insolvency statute or an
answer admitting or failing to deny the allegations of such petition, the filing
against the Member of any such petition unless such petition is discharged,
vacated or stayed within 60 days from the date of filing thereof, the
appointment of a trustee, conservator or receiver for all or a substantial part
of the Member's assets unless such appointment is discharged, vacated or stayed
within 60 days from its effective date, or the imposition of a judicial or
statutory lien on all or a substantial part of the Member's assets unless such
lien is discharged or vacated or the enforcement thereof stayed within 60 days
from its effective date.
"Capital Accounts" shall have the meaning set forth in Section 3.1
hereof.
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"Capital Contributions" shall mean, with respect to any Capital
Account, the sum of the Initial Capital Contribution and any Additional Capital
Contributions made with respect to such Capital Account.
"Committee" shall mean the four individuals then serving, one of
whom shall be appointed by each Managing Director so long as there are two
Managing Directors (initially John W. Jordan II as appointee of The John W.
Jordan II Revocable Trust and David W. Zalaznick as appointee of David W.
Zalaznick) and two of whom shall be appointed by Leucadia, Inc. (initially Ian
M. Cumming and Joseph S. Steinberg). If, at any time, there shall only be one
Managing Director, he shall have the right to appoint two members of the
Committee.
"Initial Capital Contribution" shall have the meaning set forth in
Section 3.2 hereof.
"Legal Representative" shall mean any and all executors,
administrators, personal representatives, committees, guardians, receivers,
fiduciaries, conservators or trustees, in Bankruptcy or otherwise, of a Member.
"Leucadia Committee Members" shall mean Ian M. Cumming and Joseph S.
Steinberg, or such other members of the Committee as shall be appointed by
Leucadia, Inc.
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"Liquidating Agent" shall have the meaning set forth in subsection
(b) of Section 5.4 hereof.
"Manager" shall mean the Managing Directors and any member of the
Committee, in each case acting in such capacity.
"Managing Director" shall mean each of The John W. Jordan II
Revocable Trust and David W. Zalaznick and, unless the context indicates
otherwise, shall include any successor Managing Director. Where action is
required to be taken under this Agreement by a Managing Director, the Managing
Directors shall mutually agree on which Managing Director shall so act. If the
Managing Directors are unable to so agree, the Managing Director to take action
shall be determined by the Leucadia Committee Members.
"Permanent Disability" shall mean, with respect to any natural
person, (i) his inability, by reason of illness, insanity or incompetence
(whether or not adjudicated) or otherwise to perform his principal duties and
functions hereunder for a period of four consecutive months or (ii) the earlier
adjudication of his insanity or incompetency.
"Termination" shall mean, with respect to The John W. Jordan II
Revocable Trust, (i) the revocation or other termination of such trust, (ii) the
failure of John W. Jordan II to be sole trustee or (iii) the death or Permanent
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Disability of John W. Jordan II, unless in the case of (ii) and (iii) the
Members, each in the exercise of its sole discretion, shall have unanimously
approved a substitute therefor.
(b) The words "herein", "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole as the same may from time to
time be amended or supplemented, and not to any particular Article, Section or
subsection contained in this Agreement.
Section 1.6. Fiscal Year
The fiscal year of the LLC for financial, accounting and tax
purposes shall end upon each December 31.
ARTICLE II
MANAGEMENT OF BUSINESS
Section 2.1. Services of Messrs. Jordan and Zalaznick
Throughout the term of the LLC:
(a) Leucadia, Inc. shall include Messrs. Jordan and Zalaznick and
the LLC's other employees under its medical and other employee benefit plans
(other than pension, stock option, retirement, bonus and similar plans) if
arrangements toward that end can be effected with the carriers and the LLC shall
reimburse Leucadia, Inc. for the incremental costs thereof;
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(b) The John W. Jordan II Revocable Trust agrees to use its best
efforts to cause John W. Jordan II (or, in the event of his death or Permanent
Disability, such substitute, if any, as the Members shall unanimously approve)
to fulfill the obligations set forth in Section 2.1(c) hereof; and
(c) Each of Messrs. Jordan (or his substitute, if any) and
Zalaznick, and any other individual retained pursuant to Section 2.2 hereof
shall, for the term of the LLC, not be obligated to devote full time to the
conduct of the LLC's affairs but shall devote so much of his business time as
shall be necessary for the proper conduct of the LLC's affairs, to implement the
purposes set forth in Section 1.2 hereof and to perform services for The
Jordan/Zalaznick Capital Company ("JZCC"), JZ Equity Partners PLC,
Jordan/Zalaznick Advisers, Inc., Jordan Industries, Inc. ("JII") and any other
partnerships or entities of which The John W. Jordan II Revocable Trust, David
W. Zalaznick and Leucadia, Inc. are the sole general partners or controlling
shareholders.
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Section 2.2. Managing Directors
Third parties dealing with the LLC may rely conclusively upon the
power and authority of a Managing Director as herein set forth.
A Managing Director shall have the right to manage the LLC's
business including the right to (i) sign, endorse, negotiate, and transfer any
check, draft or other instrument of the LLC; and (ii) take all other action on
behalf of the LLC authorized by this Agreement to be taken by a Managing
Director. A Managing Director shall have the right to select an individual to be
retained by the LLC to perform services in implementation of the purposes set
forth in Section 1.2 hereof, subject to the terms set forth in Section 2.1
hereof.
A Managing Director shall not, without the written consent of three
other members of the Committee, have the authority to do any of the following:
(i) to pledge, hypothecate, assign, encumber or otherwise so act with respect to
LLC assets; (ii) to borrow on behalf of the LLC; (iii) to take any action in
contravention of this Agreement; (iv) to taken any action which would make it
impossible to carry on the LLC's business; (v) to sell or exchange all or
substantially all of the LLC's assets; (vi) to admit any additional Members;
(vii) to amend this Agreement or to
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change or reorganize the LLC into any other legal form; or (viii) modify the
terms under which Messrs. Jordan and Zalaznick are retained by the LLC.
Section 2.3. Delegation of Authority
Each of the Managing Directors is delegated the authority to cause
or permit the LLC to do any and all other things not specifically permitted in
Section 2.2 as in his judgment shall be necessary or desirable for the benefit
of the LLC, with the prior written consent of at least three members of the
Committee; provided the LLC shall not without the unanimous prior written
consent of the Members engage in any business activity other than as set forth
in Section 1.2.
Section 2.4. Permitted Transactions
(a) Each of the Members consents that any Member and any Affiliate
of any Member may, directly or indirectly, engage in or possess an interest in
any other present or future business venture of any nature or description for
his or its own account, independently or with others, including, without
limitation, any aspect of the securities or financing business; and neither the
LLC nor any Member shall have any rights in or to such independent venture or
the outcome or profit derived therefrom. Notwithstanding the foregoing, neither
the John W. Jordan II Revocable Trust,
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John W. Jordan II nor David W. Zalaznick shall, during the term hereof, engage
in any activities of the nature set forth in Section 1.2 except (i) for the
account of and on behalf of the LLC, the Jordan/Zalaznick Capital Company or any
other partnership of which The John W. Jordan II Revocable Trust, David W.
Zalaznick and Leucadia, Inc. are the sole general partners or (ii) as set forth
in Exhibit A hereto.
(b) The fact that any employee, partner, officer or director of
either a Member or an Affiliate of a Member, or that any Member, Affiliate of a
Member or member of any individual Member's family, is employed by, or is
directly or indirectly interested in or connected with, or is, any person, firm
or corporation employed by the LLC to render or perform a service, or from or
through whom the LLC may make any sale or purchase, shall not prohibit the LLC
from engaging in any transaction with such person, firm or corporation, or
create any duty of legal justification additional to that which would exist if
such person, firm or corporation was not so related to the LLC, and neither the
LLC nor any other Member shall have any rights in or to any income or profit
derived from such transaction by such Member, person, firm or corporation.
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(c) The LLC is specifically authorized to utilize any Affiliate of
an LLC, or any of the legal counsel, accountants and/or other experts or
advisers heretofore or hereafter utilized by a Member or any of his or its
Affiliates, to provide services to the LLC. Each Managing Director is
specifically authorized to cause the LLC to pay any such Affiliate, legal
counsel, accountant and/or other expert or adviser a fee for any such services
to the LLC, provided that the Managing Director, in good faith, determines that
such fee is comparable to that which would be charged to customers not
affiliated with a Member for similar services.
(d) The retention by the LLC of the services of any Affiliates of a
Member shall not constitute any such Affiliate a co-partner or joint venturer
with the LLC, and the relationship of the LLC to each such Affiliate shall at
all times remain that of principal and independent contractor, respectively.
Section 2.5. Loans
Any Member may, but shall not be required to, make loans to the LLC
and in respect of such loans shall, to the extent permitted by applicable law,
be treated as a creditor of the LLC. Such loans and interest thereon (at terms
agreed upon by the lending Member and at least three members
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of the Committee) shall constitute obligations of the LLC. Any such loans shall
not increase such Member's capital contribution or entitle him or it to any
increase in his or its share of the profits of the LLC nor subject him or it to
any greater allocated portion of losses which he or it may sustain as provided
herein.
Section 2.6. Liability of Members; Exculpation of Manager;
Indemnification
(a) The Members shall not have any liability for the obligations or
liabilities of the LLC except to the extent provided in the NYLLCL.
(b) No Manager (which shall include a Member in his or its capacity
as a Manager) shall be liable, in damages or otherwise, to the LLC or to any of
the Members, for any act or omission on his or its part, or any act or omission
of any employee, agent or attorney-in-fact of the LLC, except for the results of
his or its own gross negligence, willful misconduct or bad faith. The LLC shall
indemnify, defend and hold harmless each Member or Manager (including a Managing
Director) from and against any costs, expenses, damages, claims, and personal
liability including judgments, fines, amounts paid in settlement (with the
consent of three members of the Committee) and related expenses (including fees
and expenses of counsel) arising
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out of any claim or liability of any nature whatsoever in respect of the assets
or business of the LLC, except where attributable to the gross negligence,
willful misconduct or bad faith of the Member or the Manager (including a
Managing Director).
(c) The indemnification permitted under Section 420 of the NYLLC Law
shall be in addition to any other rights to which each Member and Manager (an
"Indemnitee") may be entitled under any agreement or vote of the Members, as a
matter of law or otherwise, both (i) as to action in the Indemnitee's capacity
as a Member, Manager or as an officer, director, shareholder, member or partner
of a Member, Manager or of an Affiliate, and (ii) as to action in another
capacity, and shall continue as to an Indemnitee who has ceased to serve in such
capacity and shall inure to the benefit of the heirs, successors, assigns,
administrators and personal representatives of the Indemnitee.
(d) The LLC may purchase and maintain insurance on behalf of one or
more Indemnitees and other persons against any liability which may be asserted
against, or expense which may be incurred by, any such person in connection with
the LLC's activities, whether or not the LLC would have the power to indemnify
such person against such liability under the provisions of this Agreement.
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(e) Any indemnification hereunder shall be satisfied only out of the
assets of the LLC, and the Members and the Manager shall not be subject to
personal liability by reason of these indemnification provisions.
(f) An Indemnitee shall not be denied indemnification in whole or in
part under this Section 2.6 because the Indemnitee had an interest in the
transaction with respect to which the indemnification applies if the transaction
was otherwise permitted or not prohibited by the terms of this Agreement.
(g) The provisions of this Section 2.6 are for the benefit of each
Indemnitee and his heirs, successors, assigns, administrators and personal
representatives as provided herein, and shall not be deemed to create any rights
for the benefit of any other persons.
Section 2.7. Other Matters Concerning the Members
(a) Each Member or Manager may rely on, and shall be protected in
acting or refraining from acting upon, any resolution, certificate, statement,
instrument, opinion, report, notice, request, consent, order, bond, debenture,
or other paper or document reasonably believed by him to be genuine and to have
been signed or presented by the proper party or parties.
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(b) For purposes of this Agreement, each Member or Manager may
consult with legal counsel, accountants, appraisers, management consultants,
investment bankers, other consultants and advisers selected by it, any one or
more agents or employees of the LLC and any advice or opinion of any such person
as to matters which such Member reasonably believes to be within such person's
professional or expert competence, and any act or omission, if done or omitted
to be done in reliance upon any such advice or opinion, will be conclusively
presumed to have been done or omitted to be done in good faith and not to
constitute fraud, gross negligence or willful or wanton misconduct.
ARTICLE III
CAPITAL ACCOUNTS; CAPITAL CONTRIBUTIONS
Section 3.1. Capital Accounts
There shall be one class of capital account ("Capital Accounts")
maintained on the books of the LLC. Separate Capital Accounts shall be
maintained for each Member for the Member's respective capital contributions to
the LLC. Each Capital Account for a Member shall consist of (i) the Initial
Capital Contribution with respect to such Capital Account, (ii) increased by (a)
any Additional Capital Contributions to such Capital Account made by the Member
and (b) the Member's share of income and gains
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allocated to such Capital Account and (iii) decreased by (a) any distributions
made to the Member with respect to such Capital Account and (b) the Member's
share of losses and deductions with respect to such Capital Account.
Section 3.2. Initial Capital Contributions
The initial Capital Contributed in cash on behalf of each Member
with respect to each Capital Account (the "Initial Capital Contribution") was as
follows: The John W. Jordan II Revocable Trust - $1; David W. Zalaznick - $1;
and Leucadia, Inc. - $75,000.
Section 3.3. Additional Capital Contributions
During the time of the LLC, Leucadia, Inc. shall make additional
cash contributions to the LLC with respect to its Capital Account as follows:
(i) on each of January 2, 1990, April 1, 1990, July 1, 1990 and October 1, 1990
- - $625,000; (ii) on each of January 2, 1991, April 1, 1991, July 1, 1991 and
October 1, 1991 - $687,500 and (iii) on each of January 2, 1992, 1993, 1994,
1995 and 1996, April 1, 1992, 1993, 1994, 1995 and 1996, July 1, 1992, 1993,
1994, 1995 and 1996 and October 1, 1992, 1993, 1994, 1995 and 1996, - $750,000;
on each of January 2, 1997, 1998 and 1999, April 1, 1997, 1998 and 1999, July 1,
1997, 1998, and 1999 and October 1, 1997, 1998 and 1999 - $1,000,000.
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Section 3.4. No Interest on or Withdrawal of Capital Contributions
No interest shall be paid to any Member on his or its Capital
Contributions to the LLC. No Member shall be entitled to withdraw any of his or
its Capital contributions to the LLC, nor shall any Member have any right to
receive any funds or property of the LLC, except as provided in this Agreement.
ARTICLE IV
ADMISSION AND WITHDRAWAL OF MEMBERS
Section 4.1. Withdrawal by Member
Without the written consent of at least three members of the
Committee, no Member shall withdraw from the LLC prior to its dissolution
pursuant to subsection (a) of Section 5.4 hereof.
Section 4.2. Admission of Additional Members
Except as provided in Section 4.3 hereof or as otherwise agreed to
in writing by all Members, no additional Member shall be admitted to the LLC.
Section 4.3. Sale of LLC Interest; Substituted Member
Without the written consent of all members of the Committee, no
Member may sell, assign, transfer, pledge, hypothecate or encumber all or any
part of his interest (including a beneficial interest in the right to receive
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distributions and allocations of profit and loss) in the LLC.
Section 4.4. Resignation, Removal, Termination, Bankruptcy, Death or
Permanent Disability of a Managing Director
(a) A Managing Director shall be removed as Managing Director by a
writing signed by at least three members of the Committee.
(b) In the event of the resignation, removal, Bankruptcy,
Termination, death or Permanent Disability of all Managing Directors, if at such
time there is more than one Managing Director, or, if there is only one Managing
Director at such time, in the event of such sole Managing Director's
resignation, removal, Bankruptcy, Termination, death or Permanent Disability,
the LLC shall dissolve; provided, however, that the Members acting unanimously
may appoint a successor Managing Director(s) within 60 days of the resignation,
removal, Bankruptcy, Termination, death or Permanent Disability of the Managing
Director(s) to continue the business of the LLC. For purposes of the appointment
of a successor Managing Director, a Managing Director who has been removed or
otherwise is no longer serving as such pursuant to (a) above shall be deemed to
have appointed such successor as shall have been designated by the other
Members.
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(c) Notwithstanding anything to the contrary contained herein, a
Managing Director who has resigned or been removed shall have the right to
retain his interest in the LLC, and the Legal Representative of such a Managing
Director shall succeed to the rights of the Managing Director to receive
allocations and distributions hereunder. In the event that the Members elect to
continue the business of the LLC in accordance with subsection (b) above
following the Termination, death or Permanent Disability of the Managing
Director, the right of the Managing Director (or his Legal Representative) to
receive distributions pursuant to Section 5.1(a) shall be limited to, and shall
terminate in full upon payment of, (i) Net Buy-Out Fees and Net Investment
Banking Fees in respect of Buy-Outs completed on or before the date of
Termination, death or Permanent Disability or for which a definitive agreement
had been executed on or before such date and (ii) Net Consulting Fees (and
directors fees) accrued to the date of Termination, death or Permanent
Disability.
Section 4.5. Bankruptcy, Dissolution, Liquidation, Termination, Death or
Permanent Disability of a Member
(a) In the event of the Bankruptcy, dissolution, liquidation,
Termination, death or Permanent Disability of a Member (other than an event
dealt with under Section 4.4
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hereof) (the "Withdrawing Member"), the LLC shall dissolve; provided, however,
that the remaining Members acting unanimously shall have the right, but not the
obligation, to continue the business of the LLC by notifying a Managing Director
within 60 days after the Bankruptcy, dissolution, liquidation, Termination,
death or Permanent Disability of the Withdrawing Member. In the event that the
Members so elect to continue the business of the LLC, the Legal Representative
of the Withdrawing Member shall succeed to the rights of such Withdrawing Member
hereunder.
(b) In the event that the Members elect to continue the business of
the LLC in accordance with subsection (a) above following the Termination, death
or Permanent Disability of a Member other than the Managing Director, the right
of the Withdrawing Member to receive distributions pursuant to Section 5.1(a)
shall be limited to, and shall terminate in full upon payment of, (i) Net
Buy-Out Fees and Net Investment Banking Fees in respect of Buy-Outs completed on
or before the date of Termination, death or Permanent Disability or for which a
definitive agreement had been executed on or before such date and (ii) Net
Consulting Fees (and directors fees) accrued to the date of Termination, death
or Permanent Disability.
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ARTICLE V
DISTRIBUTIONS AND EXPENSES;
ALLOCATION OF PROFIT AND LOSS; OPPORTUNITIES;
DISSOLUTION AND LIQUIDATION; RESERVES
Section 5.1. Distributions
(a) A Managing Director, upon the written consent of at least three
members of the Committee, may cause the LLC to make distributions to the
Members. The amount of distributions to which each Member shall be entitled
shall be calculated by the Managing Director based on fees received to date.
Specifically, the Managing Director shall allocate fees to the Members as
follows:
(i) Fees received by the LLC in connection with effecting
Buy-Outs ("Net Buy-Out Fees") shall be allocated as follows:
(A) Fees earned prior to December 31, 1983 (plus the
David B. Lilly transaction) The John W. Jordan II Revocable
Trust - 30%; David W. Zalaznick - 20%; and Leucadia, Inc.
- 50%.
(B) Fees earned in calendar 1984 - The John W. Jordan II
Revocable Trust - 39%; David W. Zalaznick - 26%; and Leucadia,
Inc. - 35%.
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(C) Fees earned in calendar 1985 - The John W. Jordan II
Revocable Trust - 35%; David W. Zalaznick - 35%; and Leucadia,
Inc. - 30%.
(D) Fees earned in calendar 1986 - The John W. Jordan II
Revocable Trust - 37.5%; David W. Zalaznick - 37.5%; and
Leucadia, Inc. - 25%.
(E) Fees earned in calendar 1987 and thereafter - The
John W. Jordan II Revocable Trust - 37.5%; David W. Zalaznick
- 37.5%; and Leucadia, Inc. - 25%.
(ii) Fees received from other investment banking services
("Net Investment Banking Fees") shall be allocated in the same
manner as the Net Buy-Out Fees.
(iii) Fees received by the LLC for consulting, management or
financing services after Buy-Outs ("Net Consulting Fees") shall be
allocated as follows:
(A) Fees earned from companies involved in Buy-Outs
which closed prior to December 31, 1983 (plus the David B.
Lilly transaction) - The John W. Jordan II
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Revocable Trust - 25%; David W. Zalaznick - 25%; and
Leucadia, Inc. - 50%.
(B) Fees earned from companies involved in Buy-Outs
which closed in calendar 1984 (except David B. Lilly) - The
John W. Jordan II Revocable Trust - 32-1/2%; David W.
Zalaznick - 32-1/2%; and Leucadia, Inc. - 35%.
(C) Fees earned from companies involved in Buy-Outs
which closed in calendar 1985 The John W. Jordan II Revocable
Trust - 35%; David W. Zalaznick - 35%; and Leucadia, Inc. -
30%.
(D) Fees earned from companies involved in Buy-Outs
which closed in calendar 1986 The John W. Jordan II Revocable
Trust - 37- 1/2%; David W. Zalaznick - 37-1/2%; and
Leucadia, Inc. - 25%.
(E) Fees earned from companies involved in Buy-Outs
which closed in calendar 1987 and thereafter - The John W.
Jordan II Revocable Trust - 37-1/2%; David W. Zalaznick -
37-1/2%; and Leucadia, Inc. - 25%.
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(iv) Any directors fees earned from Clients shall belong to
the individual directors and shall not be LLC property.
(b) Any distributions pursuant to Section 5.1 shall be made in cash,
unless a Managing Director, with the written consent of at least three members
of the Committee, shall determine to make all or any portion of such
determinations in kind.
Section 5.2. Allocation of Net Profit and Net Loss
For federal, state and local income tax purposes, the LLC's income,
gains, deductions and losses shall be allocated among the Members as follows:
(a) For each fiscal year of the LLC, the income and gains of the LLC
(other than Client reimbursement) shall be allocated among the parties in the
same ratio as cash was distributed or would be distributable pursuant to Section
5.1(a) for the fiscal year.
(b) For each fiscal year of the LLC, the deductions and losses
(other than the expenses reimbursed by Clients) of the LLC shall be allocated as
follows:
(i) first, to Leucadia, Inc. an amount of deductions and
losses equal to, in respect of the LLC's initial fiscal year, the
sum of Leucadia, Inc.'s Initial Capital Contribution and Additional
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Capital Contributions pursuant to subsection (a) of Section 3.3
hereof to the LLC for such fiscal year and, in respect of each
fiscal year of the LLC thereafter, the amount of Leucadia, Inc.'s
Additional Capital Contributions pursuant to subsection (a) of
Section 3.3 hereof to the LLC for such fiscal year; and
(ii) then, to the Members to the extent of income and gains of
the LLC for such fiscal year, in the same manner as income and gains
are allocated for such fiscal year.
Section 5.3. Client Opportunities
To the extent that the LLC, in arranging Buy-Outs, becomes aware of
opportunities to invest in Clients in connection with Buy-Outs, the LLC shall
make available such opportunities to the Members in the percentages set forth in
Section 5.01(a)(i). If any Member chooses not to so invest after being given 10
days to decide, the LLC shall make the opportunity available to the Members who
choose to invest in the Client, each such opportunity to be made available to
the Members pro rata in accordance with the percentages set forth in Section
5.1(a)(i). It is contemplated that the LLC, in each case subject to the written
approval of each of the Members, shall make a portion of the opportunities of
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which it becomes aware available to persons other than Members, and that the
opportunities made available to the Members in accordance with the two preceding
sentences of this paragraph shall be net of the opportunities accepted by such
other persons.
It is acknowledged and agreed that Jordan/Zalaznick Advisers,
Inc./JZ Equity Partners PLC constituted the "Vehicle" referred to in the Second
Restatement of the Articles and Agreement of General Partnership of the
Partnership in which the opportunity was made available to the Members in the
following percentages: The John W. Jordan II Revocable Trust - 45; David W.
Zalaznick - 45%; and Leucadia, Inc. - 10%.
Leucadia, Inc. shall be given the opportunity to name a director of
each Client to the extent that such naming is within the control of the Members
or the Managing Directors. The Committee shall meet at least once every twelve
months to review the activities of the Managing Director.
Sections 5.4. Dissolution and Liquidation
(a) The LLC shall be dissolved on the earliest to occur of the
following:
(i) the sale, transfer or other disposition
of all or substantially all of the assets held by the LLC;
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<PAGE>
(ii) the removal, resignation, Bankruptcy, expulsion, Termination,
death or Permanent Disability of both of the Managing Directors, unless the
Members unanimously elect to continue the business of the LLC, as provided for
in Section 4.4(b) hereof;
(iii) Upon the consent in writing of at least three members of the
Committee;
(iv) Upon the unanimous written consent of all the Members;
(v) Upon the entry of a decree of judicial dissolution under Section
702 of the NYLLC Law;
(vi) The Bankruptcy, dissolution, expulsion liquidation,
Termination, death or Permanent Disability of a Member (other than that of both
of the Managing Directors), unless, within 60 days after such event, the
Members unanimously elect to continue the business of the LLC as provided for in
Section 4.5 hereof;
(vii) On the last day of a calendar quarter upon at least 30 days'
prior written notice to that effect given by The John W. Jordan II Revocable
Trust or David Zalaznick, as a Managing Director, which notice may only be given
if such Managing Director has raised a "Fund." For this purpose, a "Fund" shall
be an arrangement or arrangements pursuant to which such Managing Director or
his
30
<PAGE>
Affiliate shall have the right to direct the investment of at least $100 million
of capital;
(viii) On the last day of any calendar year upon at least 90 days
prior written notice to that effect is given by any Member; or
(ix) December 31, 1999.
(b) Upon dissolution of the LLC for any reason,
the LLC shall continue in existence for the purpose of winding up its affairs,
and the property and business of the LLC shall be liquidated (except as
otherwise provided in subsection (d) of this Section 5.4) by a Managing
Director, or in the event of the unavailability of either of the Managing
Directors, by such Member or other person (the "Liquidating Agent") as shall be
designated by Leucadia, Inc.
(c) As soon as practicable after the effective date of dissolution
of the LLC, the LLC's assets shall be distributed in the following manner and
order of priority:
(i) claims of all creditors of the LLP who
are not Members shall be paid and discharged;
(ii) claims of all creditors of the LLC who
are Members shall be paid and discharged;
(iii) the remaining assets shall be distributed to the
Members in accordance with Section 5.1(a)(i).
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(d) Whether any assets of the LLC shall be liquidated through sale
or shall be distributed in kind, shall be a matter for the discretion of the
Managing Director (or the Liquidating Agent) acting with the written consent of
three members of the Committee; provided, however, that if distribution is made
in kind, in whole or in part, to the extent practicable, the amount of
particular securities held by the LLC shall be distributed pro rata in
accordance with the applicable priorities set forth in subsections (c)(ii) and
(iii) of this Section 5.4. Upon dissolution of the LLC the name "The Jordan
Company LLC" shall belong to The John W. Jordan II Revocable Trust; provided,
however, that in the event of the death or Permanent Disability of John W.
Jordan II, such name shall belong to David W. Zalaznick (if he shall be alive).
(e) Each of the Members shall be furnished with a statement prepared
by the LLC's accountants which shall set forth the assets and liabilities of the
LLC as at the date of complete liquidation. Upon compliance by a Managing
Director with the foregoing distribution plan, the Members shall cease to be
such, and a Managing Director shall execute, acknowledge and cause to be filed
articles of dissolution of the LLC; however, a Managing Director shall retain
full authority to direct the disbursement and/or the
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distribution of the funds, if any, held pursuant to the provisions of this
Agreement (including subsection (a) of Section 5.5), which funds shall be
distributed in accordance with the priorities set forth in subsection (c) of
this Section 5.4.
(f) No Member shall be personally liable to any other Member for the
return of his or its Capital Contributions or any portion thereof; any such
return shall be made solely from LLC assets in accordance with the priorities
established by this Agreement.
Section 5.5. Amounts Reserved
(a) If there is any pending transaction or claim by or against the
LLC as to which the interest or obligation of the LLC therein cannot, in the
judgment of a Managing Director (or the Liquidating Agent), be then ascertained,
then, notwithstanding any other provision of this Agreement to the contrary, (i)
if such transaction or claim shall constitute an asset or potential asset of the
LLC, the value or potential value thereof as specified by a Managing Director
with the written consent of three members of the Committee, shall be added to
the valuation of the assets of the LLC for purposes of computing the
distributions to be made pursuant to Section 5.1 and/or Section 5.4 hereof, or
(ii) if such transaction or claim shall constitute a
33
<PAGE>
liability or potential liability of the LLC, then an amount specified by a
Managing Director acting with the written consent of three members of the
Committee as a reserve for any loss or probable loss therefrom shall be deducted
from the valuation of assets of the LLC for purposes of computing the
distributions to be made pursuant to Section 5.1 and/or Section 5.4 hereof,
whether or not such reserve is required to be established therefor for financial
accounting purposes.
(b) Upon determination by a Managing Director (or the Liquidating
Agent) with the written consent of three members of the Committee that
circumstances no longer require the retention of any sum or assets as provided
in this Section 5.5, a Managing Director (or the Liquidating Agent) shall, at
the earliest practical time pay such sum or deliver such assets, without
interest, in accordance with applicable priorities set forth in this Agreement.
Section 5.6. Special Arrangements
(a) If the John W. Jordan II Revocable Trust or David W. Zalaznick,
as a Managing Director or any of their respective Affiliates raises a "Fund,"
then Leucadia, Inc. shall have a 10% interest in all profit participations
received by such Managing Director or his Affiliates from such Fund and a 10%
interest in all Net Consulting Fees and
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Net Investment Banking Fees (collectively, "Net Fees") received by such Managing
Director or his Affiliates from transactions and/or investee companies of the
Fund, but Leucadia, Inc. shall have no interest in any Management Fees received
by such Managing Director or his Affiliates from such Fund or in any profit
participations, Net Fees or Management Fees received by such Managing Director
or his Affiliates from or in respect of any other fund raised by the Managing
Director or his Affiliates. For example, if such Managing Director or his
Affiliates receives from such Fund a $500,000 asset management fee, $500,000 in
Net Fees and $2,000,000 in profit participation, Leucadia, Inc. shall be
entitled to no part of the asset management fee, $50,000 of the Net Fees
($500,000 x 10% = $50,000) and $200,000 of the profit participation ($2,000,000
x 10% = $200,000) received by the Managing Director or his Affiliates from or in
respect of the Fund. Payments in respect of Leucadia, Inc.'s interest in such
sums shall be made promptly upon receipt thereof by the Managing Director or his
Affiliates from or in respect of the Fund.
(b) If the LLC is dissolved pursuant to Section 5.04(a) because of
any of the events enumerated therein, then,
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(i) in addition to all other sums to which Leucadia, Inc.
shall be entitled under this Agreement, Leucadia, Inc. shall be
entitled to receive its pro rata interest in all Net Buyout Fees and
Net Investment Banking Fees received from Clients pursuant to
definitive agreements entered into prior to the dissolution of the
LLC; and
(ii) for so long as either or both of The John W. Jordan II
Revocable Trust and David W. Zalaznick or any Affiliate receive Net
Consulting Fees from Clients (including Clients of the affiliated
entities referred to in subparagraph (d) below) existing at the time
of dissolution of the LLC, Leucadia, Inc. shall be entitled to
promptly receive from The John W. Jordan II Revocable Trust and
David W. Zalaznick a percentage of Net Consulting Fees received from
Clients. The percentages to be received by Leucadia, Inc. are as
follows:
(A) Fees earned from companies involved in Buy-Outs
which closed prior to December 3, 1983 (plus the David B.
Lilly transaction) - 50% (See Exhibit I, Schedule A);
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<PAGE>
(B) Fees earned from companies involved in Buy-Outs
which closed in calendar year 1984 (except David B. Lilly) -
35% (See Exhibit I, Schedule B);
(C) Fees earned from companies involved in Buy-Outs
which closed in calendar year 1985 - 30% (See Exhibit I -
Schedule C);
(D) Fees earned from companies involved in Buy-Outs
which closed in calendar year 1986 and all years thereafter -
25% (See Exhibit I, Schedule D).
The foregoing percentages shall only be payable with respect
to that portion of Net Consulting Fees received from each
Client that exceeds $50,000 in any calendar year. A Managing
Director shall cause Exhibit I, Schedule D to be updated
annually as of December 31 of each year and each such updated
Exhibit I shall be incorporated automatically as an exhibit to
this Agreement.
Notwithstanding anything to the contrary contained
herein, with respect to Net Consulting Fees paid by JII, Leucadia, Inc.
shall be entitled to receive (x)
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<PAGE>
16.975% of the first $1 million of Net Consulting Fees paid in any
calendar year, and (y) for so long as Leucadia remains a shareholder of
JII, 10% of all Net Consulting Fees paid in excess of $1 million in any
calendar year. The foregoing fees shall not be reduced by the $50,000
amount referenced above.
With respect to Jordan/Zalaznick Advisors, Inc. ("JZAI"), no
provision of this Agreement shall affect Leucadia, Inc.'s right to receive
10% of the net income of JZAI for so long as JZAI remains in existence.
The foregoing payments shall not be reduced by the $50,000 amount
referenced.
(c) It is expressly agreed by the Members that all consulting fees
paid to the LLC by the companies listed on Exhibit I, Schedule E, shall be the
exclusive property of The John W. Jordan II Revocable Trust and David W.
Zalaznick.
(d) It is expressly acknowledged that all companies listed on
Exhibit I, Schedules A,B,C & D are Clients of either the LLC, JZCC or TJC
Management Corp. ("TJM"). For purposes of this Agreement, JZCC and TJM shall
each be deemed an Affiliated Entity. In the event that the LLC is dissolved
pursuant to Section 5(a) hereof, all of The John W. Jordan II Revocable Trust's
and David W. Zalaznick's
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<PAGE>
obligations to make payments to Leucadia, Inc. pursuant to Section 5.06(b)
hereof may be satisfied by any Affiliated Entity.
ARTICLE VI
LLC COSTS AND EXPENSES
Section 6.1. Compensation to Managing Directors
(a) The LLC shall pay, as a fee (the "Management
Fee") for the services set forth in Section 2.1(a)(iii), the excess of the
Additional Capital Contributions made by Leucadia, Inc. over the expenses of the
LLC (to the extent not reimbursed by Clients) to John W. Jordan II and David W.
Zalaznick in such proportions as they may agree but not in excess of $625,000
per calendar quarter of 1990, $687,500 per calendar quarter of 1991 and $750,000
per calendar quarter of 1992 and thereafter. The Management Fee will be treated
by the LLC as a deduction. Any Managing Director is authorized to make the
payments set forth in this paragraph.
The Managing Directors shall not receive any other compensation or
fee for services hereunder, except as provided for in this Agreement.
(b) In 1991, the LLC acquired a controlling interest in Fannie May
Candy Company, a Chicago based candy manufacturer. The LLC will open a Chicago
office to allow the John W. Jordan II Revocable Trust, as a Managing
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<PAGE>
Director, to monitor the LLC's investment in Fannie May Candy Company as well as
to more closely monitor its continuing investment in Jordan Industries, Inc.,
which is headquartered in Deerfield, Illinois, a Chicago suburb. In order to
manage the LLC's increasing Chicago area business investments better, in 1991
Mr. Jordan relocated his permanent residence from New York to Illinois. The
LLC's continued New York business interests, however, requires Mr. Jordan
periodically to return to New York. In recognition of the additional expenses
incurred by Mr. Jordan on behalf of the LLC in maintaining a New York place of
abode for this purpose, and in order to facilitate Mr. Jordan's New York
business trips, as compensation for the expenses Mr. Jordan incurs in continuing
to maintain a New York place of abode for LLC business purposes, it is hereby
agreed that for purposes of Section 6.1(a) hereof, Messrs. Jordan and Zalaznick
agree that the LLC shall pay to Mr. Jordan the first $250,000 of the Management
Fee per calendar year commencing in calendar 1992, with the balance of the
Management Fee to be allocated as agreed upon by Messrs. Jordan and Zalaznick
pursuant to Section 6.1(a). The allocation of $250,000 of the Management Fee
pursuant to this subsection 6.1(b) will be reviewed annually.
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<PAGE>
Section 6.2. Organizational Expenses
The LLC shall pay all expenses, including any legal and accounting
fees and disbursements, incurred in connection with the organization of the LLC.
Section 6.3. Operating Expenses
(a) A Managing Director may, in his sole discretion, as needed for
the proper conduct of the LLC business, incur telephone, telegraph, secretarial,
bookkeeping, publication, consulting, accounting and legal expenses, and such
other ordinary operating costs and expenses.
(b) Messrs. Jordan and Zalaznick shall be reimbursed for their
reasonable out-of-pocket expenses incurred by them in discharging their
functions and responsibilities hereunder.
(c) The expenses of the LLC, including the management fee, shall be
paid from the Additional Capital Contributions, to the extent thereof.
ARTICLE VII
REPORT TO MEMBERS
Section 7.1. Books of Account
Appropriate books of account shall be kept at the principal place of
business of the LLC, and each Member and its representatives shall have access
to all books, records
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and accounts and the right to make copies thereof during regular business hours.
Section 7.2. Audit and Reports
(a) If requested by at least two members of the Committee, the books
and records of the LLC shall be audited as of the end of each fiscal year of the
LLC by a firm of independent accountants selected by three members of the
Committee. Within 90 days after the end of each fiscal year, the LLC shall
furnish to each Director a report setting forth as at the end of such fiscal
year:
(i) a balance sheet and income statement (for each such
fiscal year) of the LLC reported on by such accounting firm, if
applicable;
(ii) such Member's Capital Account;
(iii) the amount of such Member's share in the
LLC's taxable income or loss for such year, in sufficient detail to
enable him or it to prepare his or its applicable federal, state and
other tax returns; and
(iv) any other additional information which a
Managing Director shall deem necessary or appropriate.
(b) A Managing Director shall prepare or cause to
be prepared all applicable federal, state and local tax
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<PAGE>
returns ("Returns") for each year for which such Returns are required to be
filed. With the approval of at least three members of the Committee, a Managing
Director shall also determine whether to make any applicable election, claim any
available credit or adopt any other method or procedure relating to the
preparation of the Returns, and shall have the power to take any and all action
necessary or appropriate under applicable or relevant laws or regulations
thereunder. All tax elections and determinations so made by the Managing
Director shall be final and binding upon all Members and their respective
successors, assigns, heirs and Legal Representatives.
ARTICLE VIII
MISCELLANEOUS
Section 8.1. Binding Effect
This Agreement shall be binding upon and inure to the benefit of the
successors, assigns, heirs and Legal Representatives of the respective Members.
Section 8.2. Notices
All notices hereunder shall be in writing and shall be deemed to
have been duly given if personally delivered or mailed by registered or
certified mail, postage prepaid, return receipt requested, to the LLC, 767 Fifth
Avenue, New York, New York 10153, and to Leucadia at 315
43
<PAGE>
Park Avenue South, New York, New York 10010, or such other address of the LLC as
to which the Members shall have been given notice, and to the Members, at the
respective addresses last made known to the LLC. A Member may designate a new
address by notice to that effect given to the LLC.
Section 8.3. Counterparts
This Agreement may be executed in any number of counterparts, each
of which shall be an original instrument and all of which, when taken together,
shall constitute one and the same Agreement.
Section 8.4. Completeness; Amendment
This Agreement sets forth the entire understanding of the parties
hereto, and no provision hereof may be amended, waived or modified at any time
except with the written consent of all Members.
Section 8.5. Power of Attorney
Each of the Members hereby irrevocably constitutes and appoints each
of the Managing Directors his or its true and lawful representative and attorney
in fact, in his or its name, place and stead, to make, execute, acknowledge and
file with the appropriate authority:
(i) any certificate and other instruments
which may be required to be filed by the LLC under
44
<PAGE>
the laws of any jurisdiction or which such
Managing Director shall deem advisable, in his
sole discretion, to file; and
(ii) any certificate or other instruments which may be
required to effectuate the dissolution and termination of the LLC as
provided for hereunder; it being expressly understood and intended
by each of the Members that such power of attorney shall be
irrevocable and shall survive any assignment or attempted assignment
of the whole or any part of the interest in the LLC of a Member and,
in the event of a permitted assignment hereunder, shall be binding
upon the assignee thereof.
Section 8.6. Section Headings
The section headings contained in this Agreement are for convenience
of reference only and shall not limit or define the text hereof.
Section 8.7. Governing Law
This Agreement shall be governed by and construed in accordance with
the laws of New York.
45
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first above written.
THE JOHN W. JORDAN II REVOCABLE TRUST
By: /s/ John W. Jordan II
------------------------------------------
John W. Jordan II, Trustee
/s/ David W. Zalaznick
------------------------------------------
DAVID W. ZALAZNICK
LEUCADIA, INC.
By: /s/ Joseph A. Orlando
------------------------------------------
Joseph A. Orlando,
Vice President
46
<PAGE>
EXHIBIT I
Acquisition Date
----------------
Schedule A
- ----------
Cape Craftsmen, Inc. 11/23/83
David B. Lilly Co., Inc. 01/31/84
Schedule B
- ----------
Jones Plumbing Systems, Inc. 07/12/84
Schedule C
- ----------
Coronet Manufacturing Company, Inc. 04/02/85
Schedule D
- ----------
Eastern Home Products, Inc. 08/07/86
Allied International Holdings, Inc. 11/26/86
Gator Industries, Inc. 12/29/86
Wintermute Industries, Inc. 04/07/88
Rally Manufacturing, Inc. 04/18/88
Rockwood Industries Inc. 06/23/88
Sea Gull Lighting, Inc. 11/18/88
Polaris Pool Systems, Inc. 03/08/89
American Safety Razor, Inc. 04/14/89
Custom Chrome, Inc. 08/25/89
Newpac Industries Inc. 03/23/90
Schedule E
- ----------
House of Ronnie, Inc.
Marisa Christina, Inc.
Roanna Togs, Inc.
47
Exhibit 10.6
DEFERRED COMPENSATION AGREEMENT
THIS DEFERRED COMPENSATION AGREEMENT (the "Agreement") is made and
entered into on December 8, 1998 by and between LEUCADIA NATIONAL CORPORATION, a
New York corporation (the "Company"), and Joseph S. Steinberg (the "Executive"),
collectively the parties ("Parties").
WITNESSETH:
WHEREAS, Executive is employed by the Company as President; and
WHEREAS, in connection with the provision of services to the Company
in his capacity as President the Executive desires to defer the receipt of
certain compensation from the Company to which in the future he may become
entitled, and the Company agrees to do so, in accordance with the terms and
provisions herein contained;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained, the Parties hereby agree as follows:
1. Deferral of Payments.
The Company, commencing January 1, 1999 for the calendar year
ending December 31, 1999, shall defer the payment of all compensation to be paid
to the Executive by the Company attributable to services performed or to be
performed by the Executive for the Company at any time. Each deferred payment
shall accrue simple interest (on the basis of a 360-day year), from the first
day of the month immediately following the date on which payment otherwise would
have been made if no deferral had existed (the "First New Month Date") until the
date of actual payment, at a rate of interest equal to the 1-year Treasury bill
rate in effect at each First New Month Date, and the rate of interest shall be
reset on the first day of each subsequent quarter. For purposes hereof, the
quarters for calendar year 1999 shall begin January 1, April 1, July 1, and
October 1.
All amounts deferred pursuant to this Agreement, including interest, shall
be payable to the Executive in calendar year 2000 by no later than March 15th of
that year. Notwithstanding the preceding sentence, to the extent that the
aggregate deferred payments hereunder (including interest) exceed the maximum
annual amount deductible as compensation by the Company under applicable U.S.
federal
NYFS04...:\30\76830\0198\1651\AGRD018J.41B
<PAGE>
tax laws, the Company may make such payments in two or more installments in
different taxable years to permit the Company to obtain the maximum annual
deduction available.
The Executive shall fully reimburse the Company for the dollar value
of any benefits provided by the Company to the Executive during calendar year
1999 which, in the absence of such reimbursement obligation, would be taxable as
compensation to the Executive if made available to him by the Company without
such obligation. Such benefits would include, without limitation, the personal
use by the Executive of a Company car, Company airplane, life insurance
premiums, etc. This reimbursement shall include an interest component equal to
the minimum rate permitted to avoid the imposition of any interest under Section
7872 of the Internal Revenue Code of 1986, as amended. Amounts to be reimbursed
to the Company under this paragraph shall be paid by Executive upon demand
therefor by the Company, which shall be made in 2000 as promptly as practicable
following availability of the Company's audited financial statements for the
fiscal year ended December 31, 1999.
The rights of the Executive to the payment of the amounts pursuant
to this Agreement shall be no greater than the rights of an unsecured general
creditor of the Company and may not be assigned, pledged or otherwise
transferred by him during his lifetime to any person, whether by operation of
law or otherwise, and shall not be subject to execution, attachment or similar
proceeding. By written notice delivered to the Company, the Executive may
designate (or change a prior designation of) one or more beneficiaries (or his
estate) to receive payment hereunder in the event of his death.
2. Withholding.
The Executive acknowledges and agrees that the Company shall
be entitled to withhold from his compensation all federal, state, local or other
taxes which the Company determines are required to be withheld on amounts
payable to the Executive pursuant to this Agreement or otherwise. The Executive
further agrees to indemnify the Company and hold it harmless from and against
any and all taxes (and penalties thereon) and interest with respect thereto
arising out of the Executive's failure to pay fully his tax liability pursuant
to any present or future law, regulation or ordinance of the United States of
America or any state, city or municipality therein.
2
<PAGE>
3. Governing Law.
This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
4. Entire Agreement.
This Agreement constitutes the entire agreement between the
Parties hereto with respect to the subject matter hereof and supersedes all
prior agreements, understandings and arrangements, both oral and written,
between the Parties hereto with respect to such subject matter. This Agreement
may not be modified in any manner, except by a written instrument signed by both
the Company and the Executive.
5. Notices.
Any notice required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been duly given when
delivered by hand or facsimile transmission or when deposited in the United
States mail by registered or certified mail, return receipt requested, postage
prepaid, as follows:
If to the Company: Leucadia National Corporation
315 Park Avenue South
New York, NY 10010
with a copy to: Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Stephen E. Jacobs
3
<PAGE>
If to Executive: Joseph S. Steinberg
c/o Leucadia National
Corporation
315 Park Avenue South
New York, New York 10010
or to such other addresses as either the Company or the Executive may from time
to time specify to the other.
6. Notice of Termination; Applicability of Agreement.
Amounts deferred pursuant to this Agreement shall be paid to the
Executive only as provided herein. At any time, by notice in writing from the
Executive to the Company, the Executive may terminate this Agreement whereupon
any compensation earned by the Executive subsequent to such notification shall
not be subject to the provisions hereof. Amounts earned prior to any such
notification shall remain subject to the terms hereof even after such
termination.
7. Benefit; Binding Effect.
This Agreement shall be for the benefit of and binding upon the
Parties hereto and their respective heirs, personal representatives, legal
representatives, successors and, where applicable, assigns.
IN WITNESS WHEREOF, the Parties hereto have executed and delivered
this Agreement as of the day and year first above written.
LEUCADIA NATIONAL CORPORATION
By: /s/ Joseph A. Orlando
-----------------------------------
JOSEPH A. ORLANDO
/s/ Joseph S. Steinberg
-----------------------------------
JOSEPH S. STEINBERG
4
Exhibit 10.14
================================================================================
STOCK PURCHASE AGREEMENT
by and between
LEUCADIA NATIONAL CORPORATION
and
ALLSTATE LIFE INSURANCE COMPANY
Dated as of
December 18, 1998
================================================================================
B3 359475.9 03340 00721
1/5/99 6:48 pm
<PAGE>
TABLE OF CONTENTS
Page
1. DEFINITIONS; INTERPRETATION...........................................1
1.1. Definitions.....................................................1
1.2. Interpretation..................................................8
2. PURCHASE AND SALE OF SHARES...........................................8
2.1. Purchase and Sale of Shares.....................................8
2.2. Consideration...................................................8
2.3. Closing.........................................................8
2.4. Payment of Purchase Price; Delivery of Shares...................9
2.5. Balance Sheets..................................................9
3. CONDITIONS TO CLOSING................................................11
3.1. Conditions Precedent to Obligation of Buyer.....................11
3.1.1. Compliance by Seller...................................11
3.1.2. Compliance Certificate.................................11
3.1.3. No Injunctions or Restraints...........................11
3.1.4. Consents and Approvals.................................11
3.1.5. Opinion of Counsel to Seller...........................12
3.1.6. HSR Act................................................12
3.1.7. Termination of Agreements..............................12
3.1.8. Investment Assets......................................12
3.1.9. Resignation of Officers and Directors..................12
3.1.10. Corporate Action.......................................12
3.1.11. Surplus Debenture......................................12
3.2. Conditions Precedent to Obligation of Seller....................12
3.2.1. Compliance by Buyer....................................12
3.2.2. Compliance Certificate.................................13
3.2.3. No Injunctions or Restraints...........................13
3.2.4. Consents and Approvals.................................13
3.2.5. Opinion of Counsel to Buyer............................13
3.2.6. HSR Act................................................13
3.2.7. Corporate Action.......................................13
4. REPRESENTATIONS AND WARRANTIES OF SELLER.............................14
4.1. Corporate Existence............................................14
4.2. Authorization; Enforcement.....................................14
4.3. Capital Stock of the Company; Ownership of the
Company Shares...............................................14
4.4. Subsidiaries; Capital Stock of ILIC; Ownership
of ILIC Shares................................................15
4.5. No Conflict....................................................16
4.6. Certificate of Incorporation and By-laws.......................16
4.7. Consents.......................................................17
4.8. Compliance with Law............................................17
4.9. Products.......................................................17
4.10. Litigation....................................................18
4.11. Insurance Licenses............................................18
4.12. Regulatory Filings............................................19
4.13. Contracts.....................................................19
4.14. Finder's Fees.................................................20
4.15. Statutory Statements..........................................20
i
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4.16. Assets and Properties.........................................21
4.17. Employee Benefits.............................................21
4.18. No Material Adverse Change....................................21
4.19. Intangible Property...........................................21
4.20. Insurance.....................................................21
4.21. Employees.....................................................22
4.22. Security Deposits.............................................22
4.23. Powers of Attorney; Guarantees; Required
Insurance; Agents...........................................22
4.24. Bank Accounts.................................................22
4.25. Disclosure ...................................................22
4.26. Environmental Protection .....................................22
4.27. Guaranty Fund Assessments.....................................23
5. REPRESENTATIONS AND WARRANTIES OF BUYER..............................23
5.1. Corporate Existence............................................23
5.2. Authorization; Enforcement.....................................23
5.3. No Conflict ...................................................23
5.4. Consents.......................................................24
5.5. Litigation.....................................................24
5.6. Finder's Fees .................................................24
5.7. Investment Purpose.............................................25
6. COVENANTS AND AGREEMENTS.............................................25
6.1. Conduct of Business of the Companies...........................25
6.2. Restrictions...................................................25
6.3. Access to Information; Due Diligence;
Confidentiality..............................................26
6.4. Acquisition Proposals..........................................27
6.5. Approvals of Governmental Authorities..........................28
6.6. Further Assurances.............................................28
6.7. Notification of Changes........................................28
6.8. Performance of Conditions......................................29
6.9. Publicity......................................................29
6.10. Authority, Bank Accounts, Etc. ...............................29
6.11. Pre-Closing Dividends; Subsidiaries...........................30
6.12. Employee Benefits.............................................30
6.13. Administrative Services.......................................30
7. TAXES................................................................30
7.1. Tax Returns Filed and Taxes Paid by Seller.....................30
7.2. Seller's Non-Foreign Status....................................31
7.3. Post-Closing Access to Books and Records and
Cooperation....................................................31
7.4. Liability for Taxes and Related Matters........................32
7.4.1. Seller's Liability for Taxes...........................32
7.4.2. Buyer's Liability for Taxes............................33
7.4.3. Taxes for Short Taxable Year...........................33
7.4.4. Adjustment to Purchase Price...........................34
7.4.5. Pre-Closing Taxes......................................34
7.4.6. Post-Closing Taxes.....................................34
7.4.7. Contest Provisions.....................................35
7.5. Termination of Existing Tax Sharing Agreements.................36
7.6. Section 338(h)(10) Election....................................36
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7.7. Survival of Representations, Warranties and
Obligations..................................................37
7.8. Transfer Taxes.................................................37
7.9. Continuation of Reinsurance Agreements.........................38
7.10. Indemnification Payments Net of any
Tax Benefit..................................................38
8. INDEMNIFICATION......................................................38
8.1. Indemnification by Seller......................................38
8.2. Buyer's Obligation to Indemnify................................40
8.3. Right to Contest Third Party Claims............................41
8.4. Indemnification for Taxes......................................42
8.5. Limitations on Indemnification.................................42
9. TERMINATION..........................................................43
9.1. Termination....................................................43
9.2. Effect of Termination..........................................43
10. SURVIVAL OF REPRESENTATIONS AND WARRANTIES...........................43
11. MISCELLANEOUS........................................................44
11.1. Amendments and Waivers........................................44
11.2. Assignment....................................................44
11.3. Entire Agreement..............................................44
11.4. Governing Law.................................................44
11.5. Enforcement; Jurisdiction.....................................44
11.6. Notices.......................................................45
11.7. Counterparts..................................................45
11.8. Certain Fees and Expenses.....................................45
11.9. No Joint Venture or Partnership Intended......................46
11.10. Severability.................................................46
11.11. No Third Party Beneficiaries.................................46
EXHIBITS
Exhibit A - Form of Opinion of Weil, Gotshal & Manges LLP,
counsel to Seller
Exhibit B - Form of Opinion of Susan L. Lees, counsel to Buyer
Exhibit C - Services
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SCHEDULES
Schedule 2.2 Allocation of Purchase Price
Schedule 4.1 Jurisdictions
Schedule 4.9(a) Products
Schedule 4.10 Litigation
Schedule 4.11(a) Restricted Insurance Licenses
Schedule 4.11(b) Lines of Authority
Schedule 4.13(a) Scheduled Contracts
Schedule 4.13(b) Prior Transactions
Schedule 4.13(c) Terminated Contracts
Schedule 4.18 Exceptions To No Material Adverse Change
Schedule 4.20 Insurance
Schedule 4.22 Security Deposits
Schedule 4.23 Powers of Attorney; Guarantees
Schedule 4.24 Bank Accounts
Schedule 6.2 Restrictions
Schedule 6.11 Asset Dividend
Schedule 7.1 Taxes
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STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT, dated as of December 18, 1998 (this
"Agreement"), by and between ALLSTATE LIFE INSURANCE COMPANY, an Illinois
insurance company ("Buyer"), and LEUCADIA NATIONAL CORPORATION, a New York
corporation ("Seller").
WHEREAS, Seller owns beneficially and of record 110,000 shares of
the common stock, par value $31.00 per share (the "Company Shares"), of Charter
National Life Insurance Company, a Missouri stock insurance company (the
"Company"), constituting all of the issued and outstanding shares of the capital
stock of the Company; and
WHEREAS, on or prior to the Closing Date (as defined below), the
Company will, in turn, own beneficially and of record 6,000 shares of the common
stock, par value $7.00 per share (the "Company-Owned ILIC Shares"), of
Intramerica Life Insurance Company, a New York stock insurance company ("ILIC";
and together with the Company, the "Companies"), and Seller will, in turn, own
beneficially and of record 294,000 shares (the "Seller-Owned ILIC Shares") of
the common stock, par value $7.00 per share, of ILIC, which, together with the
Company-Owned ILIC Shares, constitute all of the issued and outstanding shares
of the capital stock of ILIC (the "ILIC Shares"); and
WHEREAS, Buyer desires to purchase from Seller, and Seller desires
to sell to Buyer, the Company Shares and the Seller-Owned ILIC Shares
(collectively, the "Shares"), on the terms and subject to the conditions set
forth herein;
NOW, THEREFORE, in consideration of the premises and of the
respective representations, warranties, covenants, agreements and conditions
contained herein, each of the parties hereto agrees as follows:
1. DEFINITIONS; INTERPRETATION.
1.1. Definitions. The terms defined in this Section 1.1,
whenever used in this Agreement, shall have the following meanings for all
purposes of this Agreement:
"Acquisition Proposal" has the meaning set forth
in Section 6.4.
"Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Affiliate" of a specified Person means a Person that (at the
time when the determination is to be made) directly, or indirectly through one
or more intermediaries, controls, or is controlled by, or is under common
control with, the specified Person. As used in the foregoing sentence, the term
"control" (including, with correlative meaning, the terms "controlling",
"controlled by" and "under common control with") means the possession, directly
or indirectly, of the power to direct or
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cause the direction of the management and policies of a Person, whether through
the ownership of voting securities, by contract or otherwise.
"Allstate NY" means Allstate Life Insurance Company of New
York, a New York stock insurance company.
"Annual Statement" means, with respect to any Person, the
annual statement of such Person prepared in accordance with SAP, as filed with
or submitted to the appropriate insurance Governmental Authority in the Person's
jurisdiction of domicile on the forms prescribed or permitted by such
Governmental Authority.
"Asserted Liability" has the meaning set forth in Section
8.1(c).
"Asset Dividend" has the meaning set forth in Section 6.11.
"Books and Records" means all of the Companies' books and
records (including all data and other information stored on discs, tapes or
other media) relating to the assets, Properties, business and operations of the
Companies' business, including the Insurance Licenses and all such items
relating to the Companies' legal existence, stock ownership, corporate
management or other such corporate records.
"Business Day" means any day that is not a Saturday or a
Sunday or a day on which banks in the State of New York are authorized or
required by law to close.
"Buyer" has the meaning set forth in the first paragraph of
this Agreement.
"Buyer Indemnitees" has the meaning set forth in Section
8.1(a).
"Closing" has the meaning set forth in Section 2.3.
"Charter Coinsurance Agreement" means that certain Coinsurance
Agreement by and between the Company and Buyer dated as of September 2, 1998.
"Charter Reinsurance Agreement" means that certain Reinsurance
Agreement by and between the Company and Buyer dated as of September 2, 1998.
"Closing Balance Sheets" has the meaning set forth in Section
2.5(a).
"Closing Date" has the meaning set forth in Section 2.3.
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"Code" means the Internal Revenue Code of 1986, as amended,
and the Treasury Regulations promulgated thereunder.
"Companies" has the meaning set forth in the second recital of
this Agreement.
"Company" has the meaning set forth in the first recital of
this Agreement.
"Company-Owned ILIC Shares" has the meaning set forth in the
second recital of this Agreement.
"Contract" means any written or oral agreement, instrument,
commitment or other contract.
"Election" has the meaning set forth in Section 7.6(a).
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and the regulations promulgated thereunder.
"Fair Market Value" means (i) in the case of securities (other
than Short Term Treasuries) listed on an exchange or in an over-the-counter
market, the closing price on such exchange or market (or the average of the
closing bid and asked prices if there is no closing price) plus all accrued but
unpaid interest on such securities through the last Business Day preceding the
Closing Date if such amount is not already reflected in such closing price (or
such bid and asked prices) and (ii) in the case of cash, cash equivalents and
Short Term Treasuries, the face amount thereof.
"Final Balance Sheets" has the meaning set forth
in Section 2.5(b).
"General Services Agreement" means that certain General
Services and Expense Reimbursement Agreement, effective January 1, 1990, between
Seller and the Company.
"Governmental Authority" means any foreign, federal, state,
local or other court, arbitration, administrative agency or commission,
insurance or securities regulatory or self-regulatory body or securities or
commodities exchange.
"HSR Act" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
"ILIC Coinsurance Agreement" means that certain Coinsurance
Agreement by and between ILIC and Allstate NY dated as of September 2, 1998.
"ILIC Dividends" has the meaning set forth in Section 6.11.
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<PAGE>
"ILIC Shares" has the meaning set forth in the second recital
of this Agreement.
"Insurance Licenses" has the meaning set forth in Section
4.11.
"Investment Advisory Agreement" means that certain Investment
Advisory Services Agreement, dated as of January 1, 1990, between Seller and the
Company.
"Knowledge" or "Known" means, with respect to any
representation or warranty in which such term is contained, to the best
knowledge of any officer of the applicable person, after a due and diligent
inquiry.
"Laws" has the meaning set forth in Section 4.8(a).
"Liability" means, with respect to any Person, any direct or
indirect indebtedness, liability, claim, loss, damage, deficiency, obligation or
responsibility (whether known, unknown, accrued, absolute, contingent,
unliquidated or otherwise) and regardless of when such liability or obligation
was or is asserted.
"Liable Party" has the meaning set forth in Section 7.4.6(d).
"Lien" means any lien, encumbrance, pledge, mortgage, security
interest, claim, charge, lease, option, right of first refusal, easement,
servitude, encumbrance, equity, claim or other third party right (including a
right of preemption), restriction or other limitation, in each case of any
nature whatsoever.
"Losses" has the meaning set forth in Section 8.1(b).
"Market Conduct Activities" means the marketing, solicitation,
application, underwriting, acceptance, sale, purchase, operation, retention,
administration, or replacement by means of surrender, partial surrender, loans
respecting, withdrawal and/or termination of any insurance policy or annuity
(each, a "policy"), including any or all of the acts, omissions, facts, matters,
transactions, occurrences, or any oral or written statements or representations
made or allegedly made in connection with or directly or indirectly relating to
Market Conduct Activities, including those relating to: (A) the vanishing
premium concept; (B) the nature, characteristics, terms, appropriateness,
suitability, descriptions and operation of any policy; (C) whether any policy
was, would operate or could function as a pension or retirement plan, investment
or savings account, tuition-funding or mortgage-protection plan or other type of
investment, savings or thrift vehicle; (D) the fact that a part of the premiums
paid would not be credited toward an
4
<PAGE>
investment or savings account or the policy's cash value, but would be used to
offset the insurer's commission, sales, administration or mortality expenses;
(E) the use of an existing policy's cash value or cash-surrender value by means
of a surrender, withdrawal/partial surrender or loan to purchase or maintain a
policy; and (F) the insurer's dividend, interest, crediting and cost of
insurance and administrative charge policies; dividend scales, illustrations of
dividend values, cash values or death benefits; or any other matters relating to
dividends, interest crediting rates or cost of insurance and administrative
charges.
"Material Adverse Effect" means a material adverse effect on
the assets, results of operations, business or condition (financial or
otherwise) of the Company or of ILIC.
"New York Court" has the meaning set forth in Section 11.5.
"1940 Act" has the meaning set forth in Section 4.8(c).
"Owned Property" has the meaning set forth in Section 4.26.
"Person" means any individual, corporation, limited liability
company, partnership, firm, joint venture, association, trust, unincorporated
organization, Governmental Authority or other entity.
"Plan" means any "employee benefit plan" (as that term is
defined in Section 3(3) of ERISA), as well as any other written or unwritten
plan or Contract involving direct or indirect compensation, established,
maintained or contributed to by the Company or ILIC, or under which the Company
or ILIC has any present or future Liability on behalf of its employees or former
employees or their dependents or beneficiaries, including each retirement,
pension, profit-sharing, thrift, savings, target benefit or employee stock
ownership plan, cash or deferred, each other deferred or incentive compensation,
bonus, stock option, employee stock purchase, "phantom stock" or stock
appreciation right plan, each other program providing payment or reimbursement
for or of medical, dental or visual care, psychiatric counseling, or vacation,
sick or disability pay and each other "fringe benefit" plan or arrangement.
"Preparer" has the meaning set forth in Section
7.4.6(d).
"Prior Transactions" has the meaning set forth in
Section 4.13(a).
"Property" means real, personal or mixed property,
tangible or intangible.
5
<PAGE>
"Proposed Balance Sheets" has the meaning set forth in Section
2.5(b).
"Purchase Agreement" means that certain Purchase Agreement,
dated as of February 11, 1998 by and among Buyer, Allstate NY, the Company, ILIC
and Seller, as amended by Amendment To Purchase Agreement, dated August 5, 1998,
and Second Amendment To Purchase Agreement, dated September 2, 1998.
"Purchase Price" has the meaning set forth in Section 2.2.
"Quarterly Statement" means, with respect to any Person, the
quarterly statement of such Person prepared in accordance with SAP, as filed
with or submitted to the appropriate insurance Governmental Authority in such
Person's jurisdiction of domicile on the forms prescribed or permitted by such
Governmental Authority.
"SAP" means, with respect to any Person, the statutory
accounting practices prescribed or permitted by the insurance commissioner (or
similar authority) of such Person's jurisdiction of domicile, applied on a basis
consistent with that of prior years (other than where a lack of consistency
results from changes in the statutory accounting practices so prescribed or
permitted).
"Scheduled Contracts" has the meaning set forth in Section
4.13(a).
"Seller" has the meaning set forth in the first paragraph of
this Agreement.
"Seller Indemnitees" has the meaning set forth in Section
8.2(a).
"Seller-Owned ILIC Shares" has the meaning set forth in the
second recital of this Agreement.
"Seller's Group" shall mean any "affiliated group" (as defined
in Section 1504(a) of the Code, without regard to the limitations contained in
Section 1504(b) of the Code) that includes Seller or any predecessor of or
successor to Seller.
"Separate Accounts" means the investment accounts maintained
by the Company or ILIC to which funds have been allocated for certain life
insurance policies and annuity contracts issued by the Company or ILIC under
provisions of applicable state insurance law.
"Shares" has the meaning set forth in the third recital of
this Agreement.
6
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"Short Term Treasuries" means U.S. Treasury obligations having
a remaining term to maturity as of the last Business Day preceding the Closing
Date of less than 90 days.
"Statutory Capital" means (i) capital and surplus determined
in accordance with SAP (as reflected in line 38 of the "Liabilities, Surplus and
Other Funds" page of the 1997 NAIC Annual Statement Blank) plus (ii) asset
valuation reserve (as reflected in line 24.1 of such Annual Statement Blank)
plus (iii) interest maintenance reserve (as reflected in line 11.4 of such
Annual Statement Blank), in each case adjusted to reflect investment assets held
in the general account at their Fair Market Value. Statutory Capital with
respect to the Company shall be determined without regard to its ownership of
shares of common stock of ILIC.
"Statutory Statements" has the meaning set forth
in Section 4.15(a).
"Subsidiary" means, with respect to any Person, any
corporation, limited liability company, limited or general partnership, joint
venture, association, joint stock company, trust, unincorporated organization,
or other entity analogous to any of the foregoing of which a majority of the
equity ownership (whether voting stock or comparable interest) is, at the time,
owned, directly or indirectly, by such Person.
"Subsidiary Dividend" has the meaning set forth in
Section 6.11.
"Surplus Debenture" means the surplus debenture, dated July
31, 1992, issued by the Company to Seller in the original principal amount of
$25 million, together with all interest accrued thereon.
"Tax Allocation Agreements" means (i) that certain Tax
Allocation Agreement, dated as of August 16, 1991, among Seller, ILIC and the
other parties thereto and (ii) that certain Federal Income Tax Allocation
Agreement, dated September 15, 1986, between Seller and the Company.
"Tax Returns" shall mean all reports, returns, statements,
forms or other documents or information required to be filed with a taxing
authority with respect to the Taxes of the Company, ILIC or the Seller's Group
including consolidated federal income tax returns of the Seller's Group.
"Taxes" means all United States federal, state, county, local,
foreign and other taxes (including income taxes, premium taxes, excise taxes,
sales taxes, use taxes, gross receipts taxes, franchise taxes, ad valorem taxes,
severance taxes, capital levy taxes, transfer taxes, employment and
payroll-related taxes, property taxes, import duties and other governmental
charges and assessments (other than state guaranty fund assessments)), and
includes interest, additions to tax,
7
<PAGE>
penalties and reasonable attorneys' fees and accountants' fees and disbursements
with respect thereto.
"Third Party Accountant" has the meaning set forth
in Section 2.5(b).
1.2. Interpretation. When a reference is made in this
Agreement to a Section, Article, Schedule or Exhibit, such reference shall be to
a Section, Article, Schedule or Exhibit of this Agreement unless otherwise
indicated or unless the context shall otherwise require. The table of contents
and headings contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Agreement. The
definitions of terms in this Agreement shall be applicable to both the plural
and the singular forms of the terms defined when either such form is used in
this Agreement. Whenever the words "include", "includes" or "including" are used
in this Agreement, they shall be deemed to be followed by the words "without
limitation". The words "hereof", "herein" and "hereunder", and other words of
similar import, refer to this Agreement as a whole and not to any particular
Article, Section, subsection, paragraph or clause.
2. PURCHASE AND SALE OF SHARES.
2.1. Purchase and Sale of Shares. On the terms and subject to
the conditions set forth herein, Seller agrees to sell, transfer and deliver to
Buyer, free and clear of all Liens, and Buyer agrees to purchase from Seller,
the Shares for the consideration specified in Section 2.2.
2.2. Consideration. As consideration for the purchase of the
Shares, Buyer shall pay to Seller an aggregate amount (the "Purchase Price")
equal to the sum of (a) $3.575 million plus (b) an amount equal to the aggregate
Statutory Capital of the Company and ILIC as of the Business Day immediately
preceding the Closing Date. The Purchase Price shall be determined and paid in
accordance with the provisions of Sections 2.4 and 2.5. The Purchase Price shall
be allocated between the Company Shares and the ILIC Shares in the manner set
forth in Schedule 2.2 hereto.
2.3. Closing. The closing of the purchase and sale of the
Shares (the "Closing") shall take place at the offices of LeBoeuf, Lamb, Greene
& MacRae, L.L.P., 125 West 55th Street, New York, New York, 10019-5389 at 10:00
a.m., New York City time, on the later of (i) April 1, 1999, (ii) if elected by
Buyer, April 5, 1999 or (iii) the last day of the month in which the last
remaining condition set forth in Article 3 has been satisfied or waived, or at
such other place, time or date as the parties may mutually determine in writing.
(The actual date the Closing occurs is referred to herein as the "Closing
Date".)
8
<PAGE>
2.4. Payment of Purchase Price; Delivery of Shares. At the
Closing:
(a) Buyer shall deliver to Seller, by wire transfer to a bank
account designated by Seller, immediately available funds in an amount equal to
the Purchase Price; and
(b) Seller shall deliver to Buyer (i) a certificate or
certificates representing all of the Shares, duly endorsed in blank or
accompanied by duly executed instruments of transfer acceptable to Buyer and
accompanied by all requisite stock transfer tax stamps, and (ii) the Books and
Records.
2.5. Balance Sheets. (a) On the Closing Date, Seller will
deliver to Buyer estimated balance sheets of the Company and ILIC as of the
Business Day immediately preceding the Closing Date (the "Closing Balance
Sheets"), together with a calculation in reasonable detail of the Statutory
Capital of the Company and ILIC as of the date of the Closing Balance Sheets and
a certification of the chief financial officer of Seller that (i) the Closing
Balance Sheets were prepared from and in accordance with the Books and Records
and in accordance with SAP and (ii) the general account reserves and separate
account liabilities set forth therein (A) were determined in accordance with
generally accepted actuarial standards consistently applied, (B) were fairly
stated in accordance with sound actuarial principles, (C) were based on
actuarial assumptions that were appropriate for obligations of the Company and
ILIC, respectively, and (D) met the requirements of SAP. Such certification
shall also set forth Seller's calculation of the Statutory Capital of the
Company and ILIC as of the date of the Closing Balance Sheets and shall certify
that such calculation was made in accordance with the definition of Statutory
Capital set forth in Section 1.1.
(b) Seller shall, on or before the date that is 45 days after
the Closing Date, prepare proposed balance sheets of the Company and ILIC as of
the Business Day immediately preceding the Closing Date (the "Proposed Balance
Sheets"), in the same format as the Closing Balance Sheets, together with a
calculation in reasonable detail of the Statutory Capital of the Company and
ILIC as of the date of the Proposed Balance Sheets and a certification of the
chief financial officer of Seller to the same effect with respect to the
Proposed Balance Sheets and the Statutory Capital of the Company and ILIC as the
certification provided by such officer with respect to the Closing Balance
Sheets and the Statutory Capital of the Company and ILIC pursuant to Section
2.5(a). Buyer agrees that Seller and its accountants may have access to the
Books and Records (including accounting records) for purposes of preparing the
Proposed Balance Sheets and calculating the Statutory Capital of the Company and
ILIC as of the Business Day immediately preceding the Closing Date. Promptly
after their preparation, Seller shall deliver copies of the Proposed Balance
Sheets and calculation of the Statutory Capital of the Company and ILIC to
Buyer. Buyer
9
<PAGE>
shall have the right to review such balance sheets and calculation of the
Statutory Capital of the Company and ILIC and comment thereon for a period of 45
days after receipt thereof. Seller agrees that Buyer and its accountants may
have access to the accounting records of Seller relating to its preparation of
the Proposed Balance Sheets and calculation of the Statutory Capital of the
Company and ILIC for the purpose of conducting their review. Any changes in the
Proposed Balance Sheets or calculation of the Statutory Capital of the Company
and ILIC that are agreed to by Buyer and Seller within 45 days of the
aforementioned delivery of such balance sheets by Seller shall be incorporated
into final balance sheets of the Companies as of the Business Day immediately
preceding the Closing Date (the "Final Balance Sheets") and a final calculation
of the Statutory Capital of the Company and ILIC as of the date of the Final
Balance Sheets. In the event that Buyer and Seller are unable to agree on the
manner in which any item or items should be treated in the preparation of the
Final Balance Sheets or calculation of the Statutory Capital of the Company and
ILIC within such 45-day period, separate written reports of such item or items
shall be made in concise form and shall be referred to Arthur Anderson LLP (the
"Third Party Accountant"). The Third Party Accountant shall determine within 14
days the manner in which such item or items shall be treated on the Final
Balance Sheets or calculation of the Statutory Capital of the Company and ILIC,
as the case may be; provided, however, that the dollar amount of each item in
dispute shall be determined between the range of dollar amounts proposed by
Seller and Buyer, respectively. The determinations by the Third Party Accountant
as to the items in dispute shall be in writing and shall be binding and
conclusive on Seller and Buyer and shall be so reflected in the Final Balance
Sheets and the calculation of the Statutory Capital of the Company and ILIC. The
fees, costs and expenses of retaining the Third Party Accountant shall be
allocated by the Third Party Accountant between Seller and Buyer, in accordance
with the Third Party Accountant's judgment as to the relative merits of Seller's
and Buyer's proposals in respect of the disputed items. Such determination shall
be binding and conclusive on Seller and Buyer. Following the resolution of all
disputed items, Seller shall prepare the Final Balance Sheets and calculation of
the Statutory Capital of the Company and ILIC and shall deliver copies of such
balance sheets and such calculation to Buyer.
(c) In the event the aggregate amount of the Statutory Capital
of the Company and ILIC reflected on the Closing Balance Sheets is less than the
amount of the Statutory Capital of the Company and ILIC reflected on the Final
Balance Sheets, Buyer shall transfer to Seller additional cash in the amount of
such difference, together with interest thereon from and including the Closing
Date to but not including the date of such transfer computed at an annual rate
equal to the 90-day Treasury rate in effect on the Closing Date. In the event
the aggregate amount of the Statutory Capital of the Company and ILIC reflected
on the Closing Balance Sheets is more than the amount of the Statutory Capital
of the Company and ILIC reflected on the
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<PAGE>
Final Balance Sheets, Seller shall transfer to Buyer cash in the amount of such
difference, together with interest thereon computed at the annual rate as
specified above from and including the Closing Date to but not including the
date of such transfer. Any transfer of cash required under this Section 2.5(c)
shall be made within ten Business Days of the date of the delivery of the Final
Balance Sheets and calculation of the Statutory Capital of the Company and ILIC
to Buyer.
3. CONDITIONS TO CLOSING.
3.1. Conditions Precedent to Obligation of Buyer. The
obligation of Buyer to consummate the Closing is subject to satisfaction of the
following conditions on or prior to the Closing Date (unless expressly waived in
writing by Buyer on or prior to the Closing Date):
3.1.1. Compliance by Seller. All of the
terms, covenants and conditions of this Agreement to be complied with and
performed by Seller on or prior to the Closing Date shall have been complied
with and performed by it in all material respects, and the representations and
warranties made by Seller in this Agreement shall be true and correct in all
material respects on and as of the Closing Date (except that representations and
warranties qualified by the terms "material" or "Material Adverse Effect" shall
be true and correct in all respects) with the same force and effect as though
such representations and warranties had been made on and as of the Closing Date,
except as a result of actions contemplated or permitted by this Agreement and
except that any such representations and warranties that are given as of a
particular date and relate solely to a particular date or period shall be true
and correct as of such date or period.
3.1.2. Compliance Certificate. Seller shall
deliver to Buyer a certificate dated as of the Closing Date and signed by an
executive officer of Seller certifying that the conditions specified in this
Section 3.1 have been fulfilled.
3.1.3. No Injunctions or Restraints. No
temporary restraining order, preliminary or permanent injunction or other order
issued by any Governmental Authority or other legal restraint or prohibition
preventing the consummation of the Closing shall be in effect.
3.1.4. Consents and Approvals. All
consents, approvals, authorizations, licenses, permits and orders of, and
registrations and filings with, and notices to, any Governmental Authority
required to be obtained, made or given prior to the Closing Date in connection
with the consummation of the transactions contemplated hereby shall have been
duly obtained, made or given and shall be in full force and effect at the
Closing, without the imposition of any conditions or limitations other than
conditions customarily imposed by
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insurance regulatory authorities in connection with similar transactions.
3.1.5. Opinion of Counsel to Seller. Buyer
shall have received an opinion, dated as of the Closing Date, of Weil, Gotshal &
Manges LLP, counsel to Seller, in the form attached hereto as Exhibit A.
3.1.6. HSR Act. The waiting period (and any
extensions thereof) applicable to the transactions contemplated hereby under the
HSR Act shall have been terminated or shall have otherwise expired.
3.1.7. Termination of Agreements. Seller
shall have delivered to Buyer evidence, satisfactory in form and substance to
Buyer, that all Contracts listed on Schedule 4.13(c) shall have been terminated
as to the Company and/or ILIC, as applicable, and Seller will have caused the
Company and ILIC to be fully released from all Liabilities with respect to such
Contracts.
3.1.8. Investment Assets. Buyer shall have
received the certificate of the chief financial officer of Seller
as set forth in Section 2.5(a).
3.1.9. Resignation of Officers and
Directors. Buyer shall have received the written resignation of
each officer and director of each of the Company and ILIC,
effective as of the Closing Date.
3.1.10. Corporate Action. Buyer will have
received from Seller a certificate of its Secretary or Assistant Secretary
certifying as to (i) the resolutions of the Board of Directors of Seller
approving this Agreement and authorizing the consummation of the transactions
contemplated hereby and (ii) the incumbency and signatures of the officers of
Seller executing this Agreement.
3.1.11. Surplus Debenture. Seller shall have
used all commercially reasonable efforts to (i) cause the Company to pay in full
to Seller the principal amount of the Surplus Debenture, plus any interest, fees
or expenses due or accrued thereon or arising out of such payment or (ii)
contribute the Surplus Debenture to the capital of the Company and caused the
Company to cancel the Surplus Debenture.
3.2. Conditions Precedent to Obligation of Seller. The
obligation of Seller to consummate the Closing is subject to satisfaction of the
following conditions on or prior to the Closing Date (unless expressly waived in
writing by Seller on or prior to the Closing Date):
3.2.1. Compliance by Buyer. All of the
terms, covenants and conditions of this Agreement to be complied
with and performed by Buyer on or prior to the Closing Date shall
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have been complied with and performed by it in all material respects, and the
representations and warranties made by Buyer in this Agreement shall be true and
correct in all material respects on and as of the Closing Date (except that
representations and warranties qualified by the terms "material" or "material
adverse effect" shall be true and correct in all respects) with the same force
and effect as though such representations and warranties had been made on and as
of the Closing Date, except as a result of actions contemplated or permitted by
this Agreement and except that any such representations and warranties that are
given as of a particular date and relate solely to a particular date or period
shall be true and correct as of such date or period.
3.2.2. Compliance Certificate. Buyer shall
deliver to Seller a certificate dated as of the Closing Date and signed by an
executive officer of Buyer certifying that the conditions specified in this
Section 3.2 have been fulfilled.
3.2.3. No Injunctions or Restraints. No
temporary restraining order, preliminary or permanent injunction or other order
issued by any Governmental Authority or other legal restraint or prohibition
preventing the consummation of the Closing shall be in effect.
3.2.4. Consents and Approvals. All
consents, approvals, authorizations, licenses, permits and orders of, and
registrations and filings with, and notices to, any Governmental Authority
required to be obtained, made or given prior to the Closing Date in connection
with the consummation of the transactions contemplated hereby shall have been
duly obtained, made or given and shall be in full force and effect at the
Closing, without the imposition of any conditions or limitations other than
conditions customarily imposed by insurance regulatory authorities in connection
with similar transactions.
3.2.5. Opinion of Counsel to Buyer. Seller
shall have received the opinion, dated as of the Closing Date, of Susan L. Lees,
counsel to Buyer, in the form attached hereto as Exhibit B.
3.2.6. HSR Act. The waiting period (and any
extension thereof) applicable to the transactions contemplated hereby under the
HSR Act shall have been terminated or shall have otherwise expired.
3.2.7. Corporate Action. Seller will have
received from Buyer a certificate of its Secretary or Assistant Secretary
certifying as to (i) the resolutions of the Board of Directors of Buyer
approving this Agreement and authorizing the consummation of the transactions
contemplated hereby and (ii) the incumbency and signatures of the officers of
Buyer executing this Agreement.
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4. REPRESENTATIONS AND WARRANTIES OF SELLER.
Seller hereby represents and warrants to Buyer as follows:
4.1. Corporate Existence. Each of Seller, the Company and ILIC
is a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction in which it is organized. Each of the Company and ILIC
has full power and authority to own, lease and operate its assets and Properties
and to conduct its business as now being conducted. Except as otherwise
disclosed on Schedule 4.1, each of the Company and ILIC is licensed to transact
business and is in good standing in each of the respective jurisdictions listed
on Schedule 4.1.
4.2. Authorization; Enforcement. Seller has the full corporate
power and authority to execute and deliver this Agreement and to perform its
obligations hereunder. Seller has taken all necessary corporate action to duly
and validly authorize its execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby. This Agreement has been
duly executed and delivered by Seller. This Agreement, assuming due execution
and delivery by Buyer, constitutes a valid and binding obligation of Seller,
enforceable against Seller in accordance with its terms, except to the extent
enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium
or other similar Laws affecting creditors' rights in general and subject to
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
4.3. Capital Stock of the Company; Ownership of the Company
Shares. (a) The authorized capital stock of the Company consists of 110,000
shares of common stock, par value $31.00 per share, of which 110,000 are issued
and outstanding and constitute the Company Shares. All of the Company Shares
have been duly authorized and validly issued, are fully paid and non-assessable.
The Company Shares have not been issued in violation of, and none of the Company
Shares is subject to, any preemptive or subscription rights, right of first
refusal or any other right of any Person. Except as set forth above and except
for the Surplus Debenture, there are no shares of capital stock or other
securities of the Company outstanding. There are no outstanding warrants,
options, Contracts, convertible or exchangeable securities or other commitments
(other than this Agreement) pursuant to which Seller or the Company is or may be
obligated to issue, sell, purchase, return or redeem any shares of capital stock
or other securities of the Company, and there are no equity securities of the
Company reserved for issuance for any purpose.
(b) Seller is the record and beneficial owner of the Company
Shares, free and clear of any Liens (other than restrictions imposed by
applicable Laws with respect to the offering, distribution, acquisition and
disposition of securities
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generally and of securities of insurance companies in particular). Upon
consummation of the transactions contemplated by this Agreement, Buyer will
acquire record and beneficial ownership of the Company Shares, free and clear of
any Liens (other than Liens created by, or permitted to be created by, Buyer,
and other than restrictions imposed by applicable Laws with respect to the
offering, distribution, acquisition and disposition of securities generally and
of securities of insurance companies in particular). Other than this Agreement,
the Company Shares are not subject to any voting trust agreement or other
contract, agreement, arrangement, commitment or understanding, including any
such agreement, arrangement, commitment or understanding restricting or
otherwise relating to the voting, dividend rights or disposition of the Company
Shares.
4.4. Subsidiaries; Capital Stock of ILIC; Ownership of ILIC
Shares. (a) As of the Closing Date, the Company will not directly or indirectly
own of record or beneficially any capital stock of or other equity interest in
any Person, other than the Company-Owned ILIC Shares. ILIC does not have any
Subsidiaries and, as of the Closing Date, will not directly or indirectly own of
record or beneficially any capital stock of or other equity interest in any
Person.
(b) The authorized capital stock of ILIC consists of 300,000
shares of common stock, par value $7.00 per share, of which 300,000 are issued
and outstanding and constitute the ILIC Shares. All outstanding shares of
capital stock of ILIC have been duly authorized and validly issued, are fully
paid and non-assessable. The ILIC Shares have not been issued in violation of,
and none of the ILIC Shares is subject to, any preemptive or subscription
rights, right of first refusal or any other right of any Person. Except as set
forth above, there are no shares of capital stock or other securities of ILIC
outstanding. There are no outstanding warrants, options, Contracts, convertible
or exchangeable securities or other commitments (other than this Agreement)
pursuant to which Seller, the Company or ILIC is or may be obligated to issue,
sell, purchase, return or redeem any shares of capital stock or other securities
of ILIC, and there are no equity securities of ILIC reserved for issuance for
any Person.
(c) Seller is the record and beneficial owner of the
Seller-Owned ILIC Shares, and Seller is the beneficial owner (by virtue of its
ownership of the Company) of the Company-Owned ILIC Shares, in each case free
and clear of any Liens (other than restrictions imposed by applicable Laws with
respect to the offering, distribution, acquisition and disposition of securities
generally and voting or equity securities of insurance companies in particular).
The Company is the record owner of the Company-Owned ILIC Shares, free and clear
of any Liens (other than restrictions imposed by applicable Laws with respect to
the offering, distribution, acquisition and disposition or securities generally
and voting or equity securities of insurance companies in particular). Upon
consummation of the transactions
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contemplated by this Agreement, Buyer will acquire record and beneficial
ownership of the Seller-Owned ILIC Shares, and beneficial ownership (by virtue
of its ownership of the Company) of the Company-Owned ILIC Shares, free and
clear of any Liens (other than Liens created by, or permitted to be created by,
Buyer, and other than restrictions imposed by applicable Laws with respect to
the offering, distribution, acquisition and disposition of securities generally
and of securities of insurance companies in particular). Other than this
Agreement, the ILIC Shares are not subject to any voting trust agreement or
other contract, agreement, arrangement, commitment or understanding restricting
or otherwise relating to the voting, dividend rights or disposition of the ILIC
Shares.
4.5. No Conflict. Neither the execution, delivery and
performance by Seller of this Agreement nor the consummation of the transactions
contemplated hereby will: (i) violate any provision of the certificate of
incorporation, by-laws or other charter or organizational document of Seller,
the Company or ILIC; (ii) violate, conflict with or result in the breach of any
of the terms of, result in any modification of the effect of, otherwise give any
other contracting party the right to terminate, or constitute (or with notice or
lapse of time or both constitute) a default under, any Contract to which Seller,
the Company or ILIC is a party or by or to which either of them or their assets
or Properties may be bound or subject, except for such violations, conflicts or
breaches that individually or in the aggregate do not have and could not
reasonably be expected to have a Material Adverse Effect; (iii) violate any
order, judgment, injunction, award or decree of any Governmental Authority
against, or binding upon, or any Contract with, or condition imposed by, any
Governmental Authority binding upon, Seller, the Company or ILIC, or upon the
business, Properties or assets of Seller, the Company or ILIC, except for such
violations that individually or in the aggregate do not have and could not
reasonably be expected to have a Material Adverse Effect; (iv) subject to making
the filings and obtaining the consents contemplated by Section 4.7, violate any
statute, law or regulation of any jurisdiction as such statute, law or
regulation relates to Seller, the Company or ILIC, or to the business,
Properties or assets of Seller, the Company or ILIC, except for such violations
that individually or in the aggregate do not have and could not reasonably be
expected to have a Material Adverse Effect; or (v) except for this Agreement,
result in the creation or imposition of any Lien on any of the Properties or
assets of Seller, the Company or ILIC.
4.6. Certificate of Incorporation and By-laws. Seller has
delivered to Buyer true, complete and correct copies of the certificate of
incorporation or charter, as applicable, and the by-laws of each of the Company
and ILIC and all amendments thereof. The minute books of each of the Company and
ILIC accurately reflect in all material respects all resolutions adopted at all
meetings (and consents in lieu of meetings) of its shareholders and all
resolutions adopted at all meetings (and
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consents in lieu of meetings) of its Board of Directors and all committees of
its Board of Directors.
4.7. Consents. No consent, license, approval, order or
authorization of, or registration, declaration or filing with, any third party,
including any Governmental Authority, is required to be obtained, made or given
by or with respect to Seller, the Company or ILIC in connection with the
execution, delivery and performance of this Agreement or the consummation of the
transactions contemplated hereby other than (i) those required under the
insurance laws of the States of New York and Missouri and under the HSR Act,
(ii) placement of appropriate disclosure stickers on product prospectuses
relating to this Agreement and the transactions contemplated hereby, (iii)
compliance with the relicensing requirements of various jurisdictions in which
the Company and ILIC are licensed to transact business, and (iv) those required
or appropriate in connection with the election contemplated under Section 7.6.
4.8. Compliance with Law. (a) Each of the Company and ILIC has
complied in all material respects with, and is now complying in all material
respects with, all foreign, federal, state and local statutes, laws,
regulations, ordinances, judgments, injunctions, orders, licenses, approvals,
permits and other requirements (collectively, "Laws") applicable to the Company
or ILIC, as the case may be, or its business, Properties or assets, except for
such failures to so comply that individually or in the aggregate do not have and
could not reasonably be expected to have a Material Adverse Effect.
(b) The Separate Accounts have been duly established by all
necessary corporate action of the Company and ILIC, as applicable, under the
laws of the respective state of domicile of the Company and ILIC.
(c) Each of the Separate Accounts is registered as an
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"), or is exempt from the registration requirements of the 1940 Act.
The operations of the registered Separate Accounts are in material compliance
with the 1940 Act and all applicable regulations, rules, releases and orders of
the SEC. All registration forms, amendments, reports and filings required to be
made by the Separate Accounts have been timely filed and are accurate in all
material respects.
4.9. Products. (a) Except for those contracts listed on
Schedule 4.9(a), all life insurance contracts issued or assumed by the Company
or ILIC which are subject to Sections 101 or 7702 of the Code qualify (and have
qualified since issuance) as "life insurance contracts" within the meaning of
Section 101 or 7702 of the Code and have been administered in accordance with
Sections 101 and 7702 of the Code, as applicable, except for any failures to so
qualify or administer that individually or in the aggregate do not have and
could not reasonably be expected to have a Material Adverse Effect. Except for
those contracts
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listed on Schedule 4.9(a), no life insurance contract issued or assumed by any
of the Company or ILIC is a "modified endowment contract" within the meaning of
Section 7702A of the Code, except for those life insurance contracts that
qualify and are administered as modified endowment contracts and with respect to
which the policyholder acknowledged and agreed, before the date of issuance of
such contract (or if any such contract became a modified endowment contract upon
conversion subsequent to the date of issuance, before the date of such
conversion), to such qualification and administration, and except for any such
characterizations as a "modified endowment contract" that individually or in the
aggregate do not have and could not reasonably be expected to have a Material
Adverse Effect.
(b) All annuity contracts issued or assumed by the Company or
ILIC that are subject to Section 72 of the Code contain all of the necessary
provisions of Section 72 of the Code, and all annuity contracts that are
represented as qualifying under Sections 130, 401, 403, 408 or 457 of the Code
contain (and have contained since issuance) all provisions required for
qualification under such sections of the Code, except, in either such case, for
any failures to contain all such provisions that individually or in the
aggregate do not have and could not reasonably be expected to have a Material
Adverse Effect.
(c) All contracts issued or assumed by the Company or ILIC
that are subject to Section 817 of the Code have met the diversification
requirements applicable thereto since issuance. The issuer of each such contract
is treated, for federal Tax purposes, as the owner of the assets underlying such
contract.
(d) The Company and ILIC have each complied with all of the
reporting and withholding requirements provided in Sections 3405 and 6047 of the
Code.
4.10. Litigation. Except as disclosed on Schedule 4.10, there
are no actions, suits, proceedings, claims or legal, administrative or
arbitration proceedings or investigations pending or, to the Knowledge of
Seller, threatened (i) against or involving the Company or ILIC or its business,
Properties or assets (other than insurance claims arising in the ordinary course
of business with respect to policies and annuity contracts issued by the Company
or ILIC) or (ii) which question the validity of this Agreement or any action
taken by Seller, the Company or ILIC pursuant to this Agreement or the
transactions contemplated hereby.
4.11. Insurance Licenses. Seller has made available to Buyer
true, complete and correct copies of all insurance licenses issued to the
Company or ILIC from each jurisdiction set forth on Schedule 4.1 in which each
of the Company and ILIC is licensed (collectively, the "Insurance Licenses").
Except as set forth on Schedule 4.11(a), to the
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Knowledge of Seller, no event has occurred that, with or without notice or lapse
of time or both, could reasonably be expected to result in the revocation,
suspension, lapse or limitation of any of such Insurance Licenses. Neither the
Company nor ILIC has transacted any insurance business in any jurisdiction
requiring an insurance license therefor in which it did not possess such an
insurance license, other than those that the failure to own or hold individually
or in the aggregate with other such failures do not have and cannot reasonably
be expected to have a Material Adverse Effect. Schedule 4.11(b) sets forth a
true, correct and complete list of the lines of insurance which each of the
Company and ILIC is authorized to write in each of the respective jurisdictions
set forth on Schedule 4.1.
4.12. Regulatory Filings. Each of the Company and ILIC has
filed all reports, data, registrations, filings, other information and
applications required to be filed with or otherwise provided to Governmental
Authorities with jurisdiction over the Company or ILIC, as the case may be, or
its business, Properties or assets, in each case except such failures to file
that individually or in the aggregate do not have and could not reasonably be
expected to have a Material Adverse Effect, and all required regulatory
approvals in respect thereof are in full force and effect in all material
respects. All such regulatory filings were in compliance in all material
respects with applicable Laws, and no material deficiencies have been asserted
by any such Governmental Authority with respect to such regulatory filings that
have not been satisfied.
4.13. Contracts. (a) Schedule 4.13(a) sets forth a true,
complete and correct list of each Contract (collectively, the "Scheduled
Contracts") to which the Company or ILIC is a party or by which either is bound
that is currently in effect or is not otherwise terminable without penalty or
payment on not more than 30 days notice (other than direct insurance policies
written by the Company or ILIC in the ordinary course of business), including
all Contracts relating to: reinsurance or loss portfolio transfers; transactions
between Affiliates; managing general agents; agents and brokers; borrowing of
money; purchase of materials; supplies, equipment, products or services; the use
of trademarks, trade names or copyrights; distribution of insurance products; or
leases (capital or otherwise). The Scheduled Contracts which consist of
transactions under which the Company or ILIC previously sold Subsidiaries or
blocks of its business and under which the Company or ILIC retains
responsibilities, obligations and/or potential liability are set forth on
Schedule 4.13(b) (the "Prior Transactions"). The Scheduled Contracts which
Seller and Buyer have agreed will be terminated as to the Company and/or ILIC,
as applicable, as of the Closing Date are set forth on Schedule 4.13(c).
(b) With respect to either the Company's or ILIC's performance
of its obligations under the Scheduled Contracts, no event of default or
non-compliance, or event which with the passage of time, giving of notice or
both, would
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constitute such an event of default or non-compliance, has occurred or is
continuing under any such Scheduled Contract. With respect to the performance by
any other party of its obligations under the Scheduled Contracts, to the
Knowledge of Seller, no event of default or non-compliance, or event which with
the passage of time, giving of notice or both, would constitute such an event of
default or non-compliance, has occurred or is continuing under any such
Scheduled Contract.
4.14. Finder's Fees. No broker or finder has acted directly or
indirectly for Seller or any of its Affiliates in connection with this Agreement
or the transactions contemplated hereby, nor has Seller or any of its Affiliates
taken any action in connection with this Agreement or the transactions
contemplated hereby so as to give rise to any valid claim against Buyer, the
Company or ILIC for any broker's or finder's fee or other commission or
compensation.
4.15. Statutory Statements. (a) Seller has delivered to Buyer
true, correct and complete copies of (i) the Annual Statements of the Company as
filed with the Missouri Insurance Department for the years ended December 31,
1995, 1996 and 1997, (ii) the Quarterly Statement of the Company as filed with
the Missouri Insurance Department for the quarterly period ended September 30,
1998, (iii) the Annual Statements of ILIC as filed with the New York Insurance
Department for the years ended December 31, 1995, 1996 and 1997, and (iv) the
Quarterly Statement of ILIC as filed with the New York Insurance Department for
the quarterly period ended September 30, 1998, in each case including all
exhibits, interrogatories, schedules and any actuarial opinions, affirmations or
certifications or other supporting documents filed in connection therewith
(collectively, the "Statutory Statements"). The Statutory Statements were
prepared in conformity with SAP prescribed or permitted by the Missouri
Insurance Department with respect to the Statutory Statements of the Company and
the New York Insurance Department with respect to the Statutory Statements of
ILIC, and present fairly the respective statutory financial positions of the
Company and ILIC as at the respective dates thereof and the respective results
of operations of the Company and ILIC for the respective periods then ended. The
Statutory Statements complied in all material respects with all applicable laws,
rules and regulations when filed, and no material deficiency has been asserted
with respect to any Statutory Statements by any Governmental Authority.
(b) The amounts shown in the Statutory Statements as reserves
and liabilities for past and future insurance policy and annuity benefits,
losses, claims and expenses under insurance policies and annuities as of the end
of each such year were determined in accordance with generally accepted
actuarial standards consistently applied, were fairly stated in accordance with
sound actuarial principles, were based on actuarial assumptions that were
appropriate for obligations of the Company and ILIC, respectively, and met the
requirements of SAP.
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4.16. Assets and Properties. Except for securities deposited
by the Company or ILIC with Governmental Authorities as set forth on Schedule
4.22, each of the Company and ILIC has good and marketable title to all assets
and Properties that it purports to own, free of any Liens, other than
restrictions imposed by applicable Laws with respect to the offering,
distribution, acquisition and disposition of securities generally and of
securities of insurance companies in particular.
4.17. Employee Benefits. As of the Closing Date, to the
Knowledge of Seller, neither the Company nor ILIC will have any Liabilities
under any Plan, ERISA or the minimum funding requirements of the Code which have
not been assumed by Seller.
4.18. No Material Adverse Change. Except as set forth on
Schedule 4.18, except as the result of transactions with Buyer and its
Subsidiaries and except for changes in general economic conditions, changes in
prevailing interest rates and changes in applicable law, since June 30, 1998,
there has been (a) no change, or development involving a prospective change, in
the general affairs, management, shareholders' equity, assets, Liabilities Known
to Seller, Properties, business, operations, condition (financial or otherwise)
or results of operations of either the Company or ILIC, that has resulted in or
may reasonably be expected to result in, either alone or in conjunction with all
other such changes and developments, a Material Adverse Effect, other than those
resulting from matters relating to or contemplated under this Agreement, (b) no
material change in the manner in which the business of the Company or ILIC is
conducted other than those resulting from matters relating to or contemplated
under this Agreement and (c) no event of the type prohibited by Section 6.2.
4.19. Intangible Property. Neither the Company nor ILIC has
received written notice that it is infringing (or is alleged to be infringing)
on any trademark, trade name registration, copyright or any application pending
therefor.
4.20. Insurance. Schedule 4.20 sets forth a true, correct and
complete list and brief description (specifying the insurer, describing each
pending claim thereunder affecting or involving the Company or ILIC as the
insured party, setting forth the aggregate amounts paid out with respect to such
claims under each such policy through the date hereof, and the aggregate limit,
if any, of the insurer's liability thereunder) of all policies or binders of
errors and omissions, theft, life, fidelity, fire, liability, products
liability, workers' compensation, vehicular and other insurance held by or on
behalf of, or issued to, the Company or ILIC. All of such policies and binders
are, to Seller's Knowledge, in full force and effect; there are no overdue
premiums thereon; and neither the Company nor ILIC has received any notice of
any proposed cancellation or non-renewal of any such policy or binder; provided,
however, that, effective as of the Closing Date, Seller intends to remove
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the Companies from future coverage under all insurance policies issued to
Seller.
4.21. Employees. As of the Closing Date, to the Knowledge of
Seller, neither the Company nor ILIC will have any employees or any Liabilities
with respect to any former employees which have not been assumed by Seller.
4.22. Security Deposits. Schedule 4.22 sets forth a true,
correct and complete list of all securities deposited by each of the Company and
ILIC with Governmental Authorities as of the date hereof.
4.23. Powers of Attorney; Guarantees; Required Insurance;
Agents. Except as set forth on Schedule 4.23, neither the Company nor ILIC has
any outstanding powers of attorney or any Liability Known to Seller as
guarantor, surety, cosigner or endorser (other than for purposes of collection
in the ordinary course of business of the Company or ILIC). Neither the Company
nor ILIC is obligated to maintain insurance for the benefit of any Person,
including its customers, other than in the ordinary course of its insurance
business. Except with respect to CNL, Inc., Scudder Fund Distributors, Inc. and
Scudder Variable Life Investment Fund and authorized agents of such entities, as
of the Closing Date, the Company and ILIC will have each cancelled all Contracts
with, and otherwise withdrawn the authority of, all brokers or agents previously
appointed by it.
4.24. Bank Accounts. Schedule 4.24 sets forth a true, correct
and complete list of bank accounts and investment accounts maintained by each of
the Company and ILIC, including the name of each bank or other institution,
account numbers and a list of signatories to such account.
4.25. Disclosure. Neither the representations or warranties
made by Seller in this Agreement nor any certificate or other document furnished
by or on behalf of Seller to Buyer pursuant hereto contains any untrue statement
of a material fact or omits to state a material fact necessary in order to make
the statements contained herein or therein not misleading in light of the
circumstances in which they were made.
4.26. Environmental Protection. To the Knowledge of Seller,
the Company or ILIC, neither Seller, the Company or ILIC, nor any prior owners
or occupants, has disposed of hazardous waste (as that term is defined under the
environmental protection laws and regulations of all applicable federal, state
and local authorities) on, or failed to remove hazardous waste from, nor is
there any hazardous waste of any kind present on or under the surface of, any
real property currently or previously owned by the Company or ILIC (the "Owned
Property") in violation of any applicable environmental law. To the Knowledge of
Seller, the Company or ILIC, the Owned Property and its use complies in all
material respects and has complied in all material respects with all applicable
Environmental Protection Agency, Occupational
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Safety and Health Administration and all other federal, state and local laws and
administrative rules and regulations governing the soil, water and air in or
around the Owned Property. To the Knowledge of Seller, the Company or ILIC,
there is no pending or threatened enforcement action, administrative order or
proceeding, nor is there any notice, violation or investigation, relating to
such laws, ordinances, rules or regulations concerning the Company, ILIC or the
Owned Property, or any portion thereof, or concerning the Owned Property and any
previous owner of any portions thereof, nor has any event occurred or is any
event occurring which could give rise to any such action, order, proceeding,
violation or investigation.
4.27. Guaranty Fund Assessments. The Company and ILIC have
each (i) timely paid all guaranty fund assessments that are due, or claimed or
asserted by any insurance regulatory authority to be due from it, or (ii)
provided for all such assessments in its financial statements to the extent
necessary to be in conformity with SAP.
5. REPRESENTATIONS AND WARRANTIES OF BUYER.
Buyer hereby represents and warrants to Seller as follows:
5.1. Corporate Existence. Buyer is a corporation
duly organized, validly existing and in good standing under the
laws of the State of Illinois.
5.2. Authorization; Enforcement. Buyer has the full corporate
power and authority to execute and deliver this Agreement and to perform its
obligations hereunder. Buyer has taken all necessary corporate action to duly
and validly authorize its execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby. This Agreement has been
duly executed and delivered by Buyer. This Agreement, assuming due execution and
delivery by Seller, constitutes a valid and binding obligation of Buyer,
enforceable against Buyer in accordance with its terms, except to the extent
enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium
or other similar Laws affecting creditors' rights in general and subject to
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
5.3. No Conflict. Neither the execution, delivery and
performance by Buyer of this Agreement nor the consummation of the transactions
contemplated hereby will: (i) violate any provision of the charter or by-laws of
Buyer; (ii) violate, conflict with or result in the breach of any of the terms
of, result in any modification of the effect of, otherwise give any other
contracting party the right to terminate, or constitute (or with notice or lapse
of time or both constitute) a default under, any Contract to which Buyer is a
party or by or to which it or its assets or Properties may be bound or subject
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except for such violations, conflicts or breaches that individually or in the
aggregate do not have and could not reasonably be expected to have a material
adverse effect on the validity or enforceability of this Agreement or on the
ability of Buyer to perform its obligations under this Agreement in a timely
manner; (iii) violate any order, judgment, injunction, award or decree of any
Governmental Authority against, or binding upon, or any Contract with, or
condition imposed by, any Governmental Authority binding upon, Buyer, or upon
the business, Properties or assets of Buyer except for such violations that
individually or in the aggregate do not have and could not reasonably be
expected to have a material adverse effect on the validity or enforceability of
this Agreement or on the ability of Buyer to perform its obligations under this
Agreement in a timely manner; or (iv) subject to making the filings and
obtaining the consents contemplated by Section 4.7, violate any statute, law or
regulation of any jurisdiction as such statute, law or regulation relates to
Buyer, or to the business, Properties or assets of Buyer except for such
violations that individually or in the aggregate do not have and could not
reasonably be expected to have a material adverse effect on the validity or
enforceability of this Agreement or on the ability of Buyer to perform its
obligations under this Agreement in a timely manner.
5.4. Consents. No consent, license, approval, order or
authorization of, or registration, declaration or filing with, any third party,
including any Governmental Authority, is required to be obtained, made or given
by or with respect to Buyer in connection with the execution, delivery and
performance of this Agreement or the consummation of the transactions
contemplated hereby other than (i) those required under the insurance laws of
the States of New York and Missouri and under the HSR Act, (ii) placement of
appropriate disclosure stickers on product prospectuses relating to this
Agreement and the transactions contemplated hereby, (iii) compliance with the
relicensing requirements of various jurisdictions in which the Company and ILIC
are licensed to transact business, and (iv) those required or appropriate in
connection with the election contemplated under Section 7.6.
5.5. Litigation. There are no actions, suits, proceedings,
claims or legal, administrative or arbitration proceedings or investigations
pending or, to the Knowledge of Buyer, threatened which question the validity of
this Agreement or any action taken by Buyer pursuant to this Agreement or the
transactions contemplated hereby.
5.6. Finder's Fees. No broker or finder has acted directly or
indirectly for Buyer or any of its Affiliates in connection with this Agreement
or the transactions contemplated hereby, nor has Buyer or any of its Affiliates
taken any action in connection with this Agreement or the transactions
contemplated hereby so as to give rise to any valid claim against Seller for any
broker's or finder's fee or other commission or compensation.
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5.7. Investment Purpose. Buyer is buying the Shares for
investment only and not with a view to resale in connection with any
distribution of any of the Shares except in compliance with the Act and all
other applicable securities laws. Buyer understands that the Shares have not
been registered under the Act or under the securities laws of any state and that
the Shares may not be sold, transferred, offered for sale, pledged, hypothecated
or otherwise disposed of in the absence of an effective registration under the
Act except pursuant to a valid exemption from such registration.
6. COVENANTS AND AGREEMENTS.
6.1. Conduct of Business of the Companies. Except as otherwise
contemplated by this Agreement or specifically consented to in writing by Buyer,
from the date of this Agreement through the Closing Date, Seller shall cause the
Companies to (i) conduct their business only in the ordinary course consistent
with past practices, (ii) maintain insurance coverages, (iii) comply in all
material respects with all applicable Laws, (iv) preserve and maintain in full
force and effect the Insurance Licenses and (v) perform in all material respects
their obligations under all Contracts to which either is a party or by which
either is bound.
6.2. Restrictions. (a) Except as otherwise contemplated by
this Agreement, set forth on Schedule 6.2 or specifically consented to in
writing by Buyer, from the date of this Agreement through the Closing Date,
Seller shall not permit either the Company or ILIC to:
(i) amend its certificate of incorporation or
charter, as applicable, or by-laws;
(ii) declare or pay any dividend, make any other distributions
to its shareholder(s) whether or not upon or in respect of any shares of
its capital stock or make any expenditure, unless such declaration,
payment or making would be permitted under applicable insurance Laws to be
declared, paid or made without the approval of the Insurance Department of
the State of Missouri (with respect to the Company) or New York (with
respect to ILIC) (in either case, a "State Regulator") as the case may be,
or, if such approval of such State Regulator is required by applicable
insurance Laws, unless such approval is obtained, provided, however, that
no such declaration, payment or making that would individually or in the
aggregate reduce the statutory capital and surplus of the Company below
$10,000,000 or of ILIC below $10,000,000 is permitted irrespective of any
approval of such State Regulator.
(iii) redeem or otherwise acquire any shares of its capital
stock or issue any capital stock or any option, warrant or right relating
thereto or any securities
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convertible into or exchangeable for any shares of capital
stock;
(iv) incur or assume any Liability for borrowed money or
guarantee any such Liability;
(v) subject to any Lien any of its Properties or
assets;
(vi) except for dividends and distributions permitted by
Sections 6.2(a)(ii) and 6.11 and normal intercompany payments relating to
Taxes and other operating expenses paid by Seller on either the Company's
or ILIC's behalf (including pursuant to the General Services Agreement,
the Investment Advisory Agreement and the Tax Allocation Agreements), pay,
lend or advance any amount to, or sell, transfer or lease any of its
Properties or assets to, or enter into any agreement or arrangement with,
Seller or any of its Affiliates;
(vii) make any change in any method of accounting or accounting
practice or policy other than those required by SAP;
(viii) acquire or agree to acquire by merging or consolidating
with, or by purchasing a substantial portion of the assets of, or by any
other manner, any Person or division thereof or otherwise acquire or agree
to acquire any assets that are material individually or in the aggregate
to the Company or ILIC;
(ix) except for dividends and distributions permitted by
Sections 6.2(a)(ii) and 6.11, sell, lease or otherwise dispose of, or
agree to sell, lease or otherwise dispose of, any of its Properties or
assets that are material, individually or in the aggregate, to the Company
or ILIC, except in the ordinary course of business consistent with past
practice;
(x) enter into any lease of Property;
(xi) issue any new insurance policies or appoint any insurance
agents or managing general agents; or
(xii) agree, whether in writing or otherwise, to do any of the
foregoing.
(b) Except as specifically consented to in writing by Buyer,
Seller shall not, and shall not permit the Company or ILIC to, take any action
or omit to take any action that would result in a breach of any representation
or warranty of Seller contained in this Agreement.
6.3. Access to Information; Due Diligence; Confidentiality.
Prior to the Closing Date, Buyer shall be
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entitled, through its employees, agents and representatives, to make such
reasonable investigation of the assets, liabilities, financial condition,
Properties, business and operations of the Company and ILIC as Buyer may
reasonably deem necessary or appropriate, and for such purposes to have access
to the Books and Records and Contracts and facilities of the Company and ILIC,
and access to the personnel of the Company, ILIC and Seller with respect to the
Company and ILIC, including an examination of the corporate records and minute
books, financial statements and projections, insurance department filings,
reports and examinations, summaries of pending litigation, tax returns,
accounting and actuarial methods, business plans and prospects, in each case
wherever located, of the Company and ILIC. Any such investigation, access and
examination shall be conducted during regular business hours upon reasonable
prior notice and under other reasonable circumstances, and Seller, the Company
and ILIC and their respective employees, agents and representatives, including
their respective counsel and independent public accountants, shall cooperate
fully with such employees and representatives in connection with such
investigation, access and examination. Buyer shall hold such documents and other
material, including information concerning Seller, in confidence in accordance
with the terms and conditions of the Confidentiality Agreement by and between
the Company and Buyer dated November 12, 1997, as amended as of November 12,
1998 (the "Confidentiality Agreement"). Buyer shall hold all documents and other
material and information described in this Section 6.3 relating to Seller's tax
positions, information, analyses, returns, filings, and similar matters in
confidence in accordance with the terms and conditions of the Confidentiality
Agreement without regard to the term of such agreement.
6.4. Acquisition Proposals. From the date hereof through the
Closing Date, Seller shall not and shall not permit any of its Affiliates or any
of the officers, directors, employees, representatives or agents of Seller or
such Affiliates, directly or indirectly, to solicit, initiate or participate in
any way in discussions or negotiations with, or provide any information or
assistance to, or enter into any agreement with, any Person or group of Persons
(other than Buyer) concerning any acquisition of a substantial equity interest
in, or in a merger, consolidation, liquidation, dissolution, disposition of
assets (other than in the ordinary course of business) of the Company or ILIC,
or any disposition of any of the securities of the Company or ILIC (other than
sales of investment securities in its investment portfolio and other than the
dividend by the Company of stock of LUK-CPG, Inc. and its Subsidiaries to Seller
to be consummated on or prior to the Closing Date) (each, an "Acquisition
Proposal"), or assist or participate in, facilitate or encourage any effort or
attempt by any other Person to do or seek to do any of the foregoing.
Notwithstanding the foregoing, an "Acquisition Proposal" shall not include the
direct or indirect solicitation, initiation or participation by Seller, its
Affiliates, or any of the officers, directors, employees, representatives or
agents of Seller or such
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Affiliates, in any way in discussions or negotiations with, or providing any
information or assistance to, or entering into any agreement with, any Person or
group of Persons concerning any acquisition of a substantial equity interest in,
or in a merger, consolidation, liquidation, dissolution, disposition of assets
of Seller or any of Seller's Affiliates (other than the Company or ILIC), or any
disposition of any of the securities of Seller or any of Seller's Affiliates
(other than the Company or ILIC). Seller shall promptly communicate to Buyer the
terms of any Acquisition Proposal which it or any such other Person may receive.
6.5. Approvals of Governmental Authorities. (a) Buyer shall
take, and shall cause its Affiliates to take, all reasonable steps necessary or
appropriate, and shall use, and shall cause its Affiliates to use, all
commercially reasonable efforts, to obtain as promptly as practicable all
consents, approvals, authorizations, licenses and orders of Governmental
Authorities (including termination of the waiting period under the HSR Act and
any extension thereof) required to be obtained by Buyer or any of its Affiliates
in connection with the consummation of the transactions contemplated by this
Agreement. Without limiting the generality of the foregoing, Buyer shall use all
commercially reasonable efforts to promptly (but in no event later than January
31, 1999) make all insurance regulatory filings necessary to obtain approval of
the transactions contemplated by this Agreement.
(b) Seller shall cooperate with Buyer and its Affiliates in
seeking to obtain all such consents, approvals, authorizations, licenses and
orders (including termination of the waiting period under the HSR Act and any
extension thereof), and shall provide and shall cause their respective
Affiliates to provide, such information and communications to Governmental
Authorities as such Governmental Authorities may reasonably request in
connection therewith. Without limiting the generality of the foregoing, Seller
shall cooperate with Buyer in promptly (but in no event later than January 31,
1999) making all insurance regulatory filings necessary to obtain approval of
the transactions contemplated by this Agreement.
6.6. Further Assurances. On and after the Closing Date, each
of the parties shall execute, and shall cause their respective Affiliates to
execute, such reasonable documents, instruments and conveyances and take, and
cause their respective Affiliates to take, such further reasonable actions as
may be reasonably required or desirable to carry out the transactions
contemplated by this Agreement. From and after the Closing Date, any notice or
inquiries received by Seller on behalf of the Company or ILIC will be promptly
forwarded or referred to Buyer.
6.7. Notification of Changes. (a) Seller shall promptly notify
Buyer in writing of any event or the existence of any state of facts that Seller
becomes aware of prior to the
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Closing Date that would (i) make any of the representations and warranties of
Buyer or Seller contained in this Agreement untrue or inaccurate in any material
respect or (ii) otherwise constitute a Material Adverse Effect. Seller shall
also promptly notify Buyer in writing of any breach by Buyer of any
representation, warranty or covenant of Buyer contained in this Agreement that
Seller becomes aware of prior to the Closing Date.
(b) Buyer shall promptly notify Seller in writing of any event
or the existence of any state of facts that Buyer becomes aware of prior to the
Closing Date that would (i) make any of the representations and warranties of
Buyer or Seller contained in this Agreement untrue or inaccurate in any material
respect or (ii) otherwise constitute a material adverse effect on the validity
or enforceability of this Agreement or on the ability of Buyer to perform its
obligations under this Agreement in a timely manner. Buyer shall also promptly
notify Seller in writing of any breach by Seller of any representation, warranty
or covenant of Seller contained in this Agreement that Buyer becomes aware of
prior to the Closing Date.
6.8. Performance of Conditions. Seller shall, and shall cause
the Company and ILIC to, take all reasonable steps necessary or appropriate, and
shall use all commercially reasonable efforts, to effect as promptly as
practicable the satisfaction of the conditions required to be satisfied in order
for Buyer and Seller to consummate the transactions contemplated by this
Agreement, including all conditions set forth in Section 3.1. Buyer shall take
all reasonable steps necessary or appropriate, and shall use all commercially
reasonable efforts, to effect as promptly as practicable the satisfaction of the
conditions required to be satisfied in order for Buyer and Seller to consummate
the transactions contemplated by this Agreement, including all conditions set
forth in Section 3.2.
6.9. Publicity. Seller and Buyer agree that, from the date
hereof through the Closing Date, no public release or announcement concerning
the transactions contemplated hereby shall be issued by either party without the
prior written consent of the other party (which consent shall not be
unreasonably withheld), except such release or announcement as may be required
by law, in which case the party required to make the release or announcement
shall allow the other party three Business Days or such shorter amount of time
as is practicable under the circumstances to comment on such release or
announcement in advance of such issuance.
6.10. Authority, Bank Accounts, Etc. Resignations,
appropriately executed signature cards, and all other documentation needed in
preparation for closing bank and other investment accounts of the Companies and
deposits maintained by the Companies with any Governmental Authority, or
transferring signature authority therefor, will be provided to Buyer by Seller
upon Closing. Seller will cooperate with and assist Buyer in obtaining,
subsequent to Closing, any statutory
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or regulatory approvals required to enable the Companies to make the appropriate
closings or transfers, including transfers of signature authorization, and in
providing all notices thereof as may be required by appropriate Governmental
Authorities. From and after the Closing, no agent or officer of Seller shall
take any action with respect to any such accounts or deposits other than as may
be expressly authorized in writing by Buyer.
6.11. Pre-Closing Dividends; Subsidiaries. On or prior to the
Closing Date, (i) Seller shall cause the Company to distribute to Seller,
directly or indirectly, whether through liquidating or dividend distributions
(the "Subsidiary Dividend"), all of the issued and outstanding shares of the
capital stock of LUK-CPG, Inc. and its Subsidiaries (including all of the
294,000 shares of ILIC currently indirectly owned by LUK-CPG, Inc.), (ii) Seller
shall cause the Company to distribute to Seller, whether through liquidating or
dividend distributions (the "Asset Dividend"), the assets of the Company listed
on Schedule 6.11 and (iii) Seller shall cause the Companies to repay any and all
amounts then owed to Affiliates of Seller and the Company (including under the
Tax Allocation Agreements).
6.12. Employee Benefits. Prior to the Closing Date, Seller
shall take any and all necessary actions to assume any and all Liabilities of
the Company and ILIC which otherwise would have existed as of the Closing Date,
regardless of when such Liabilities arise or are asserted: (i) with respect to
any former employees, (ii) under ERISA and/or the minimum funding requirements
of the Code and (iii) under all Plans sponsored by the Company or ILIC at any
time prior to the Closing Date.
6.13. Administrative Services. From and after April 1, 1999,
Buyer shall provide to the Company and ILIC all administrative and accounting
services ("Services") necessary to enable the Company and ILIC to continue to
operate in the manner that such entities operate as of the date hereof. The
Services shall include, without limitation, the services described on Exhibit C
hereto. If this Agreement is terminated in accordance with its terms, (i) Buyer
shall continue to provide the Services until the earlier of April 1, 2000 or 30
days after receipt of notice from the Company and ILIC requesting that Buyer
discontinue providing the Services and (ii) Seller shall pay Buyer an amount of
cash equal to 110% of the sum of all expenses (including, without limitation,
the following expense categories: employee benefits, payroll, taxes, rent,
supplies and other overhead expenses) incurred by Buyer for costs relating to
Buyer's provision of the Services from April 1, 1999 through the date on which
such Services are discontinued pursuant to clause (i) above.
7. TAXES.
7.1. Tax Returns Filed and Taxes Paid by Seller. Seller
represents and warrants to Buyer that: (i) all Tax Returns required to be filed
by Seller, the Company or ILIC on or
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before the Closing Date with respect to the Company or ILIC have been or will be
filed in a timely manner (taking into account all extensions of due dates) and
all such Tax Returns are true, complete and correct in all material respects;
(ii) all Taxes payable by Seller, the Company or ILIC attributable to the
Company or ILIC that are or were due and payable on or before the Closing Date
(without regard to whether such Taxes have been assessed) have been or will be
timely paid, or properly accrued or adequately reserved on the books of the
Company and ILIC in accordance with applicable accounting practices consistently
applied; (iii) except as set forth on Schedule 7.1, no deficiencies for any
material Taxes for which the Company or ILIC may be liable have been asserted by
a taxing authority in a writing received by Seller, the Company or ILIC or
assessed by a taxing authority against the Company, ILIC or any member of
Seller's Group which remain unpaid; (iv) except as set forth on Schedule 7.1,
neither the Company, ILIC nor any member of Seller's Group has been notified in
writing by any taxing authority of any audit or investigation with respect to
any liability for Taxes imposed on the income, operations or assets of the
Company or ILIC and with respect to which the applicable statute of limitations
has not expired; (v) except as set forth on Schedule 7.1, there are no
agreements in effect to extend the period of limitations for the assessment or
collection of any Tax imposed on the income, operations or assets of the Company
or ILIC; and (vi) Seller is currently the common parent of an affiliated group
of which the Company and ILIC are members and will file a federal consolidated
income tax return on behalf of that affiliated group which will include the
operations of the Company and ILIC through the Closing Date.
7.2. Seller's Non-Foreign Status. Seller is not a foreign
person within the meaning of Section 1445(f)(3) of the Code.
7.3. Post-Closing Access to Books and Records and Cooperation.
Buyer will cause the Company and ILIC after the Closing to afford, or will
itself afford, to Seller and its representatives and agents reasonable access
during normal business hours (on terms not unreasonably disruptive to the
business, operations or employees of Buyer, the Company or ILIC) to the Books
and Records pertaining to periods ending on or prior to the Closing Date and to
the Company's and ILIC's employees and auditors for the purpose of obtaining
information relating to periods ending on or prior to the Closing Date, to the
extent such access is reasonably necessary as determined by Seller: (i) to
prepare and complete any Tax or other regulatory filings required to be made by
Seller after the Closing Date; (ii) to prosecute or defend on behalf of the
Company or ILIC any inquiry, assessment, contest, proceeding or litigation
("Contest") controlled by Seller under Section 7.4.7 of this Agreement; (iii) to
comply with requests made of Seller by any Tax or other regulatory authority in
the conduct of any Contest relating to the Company's or ILIC's activities during
periods ending on or prior to the Closing Date; and (iv) to satisfy any other
request
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of Seller which is reasonable under the circumstances. Seller will hold all
information provided to it pursuant to this Section 7.3 (and any information
derived therefrom) in confidence (except to the extent it otherwise becomes
public other than through actions of Seller) and will not disclose any such
information other than (i) as is reasonably necessary in connection with the
Contest or (ii) as required by applicable law or regulation. Buyer will hold
Seller's requests for information, and the contents of Buyer's responses
thereto, in confidence (except to the extent such information otherwise becomes
public other than through the actions of Buyer) and will not disclose any such
information other than (i) to directors, officers, employees, and agents of
Buyer who need to know such information for the purposes for which it was
requested or provided and (ii) as required by applicable law or regulation.
7.4. Liability for Taxes and Related Matters.
7.4.1. Seller's Liability for Taxes. Except
as provided otherwise in the last sentence of this Section 7.4.1., and except as
otherwise provided in Section 7.5, Seller shall be liable for and shall
indemnify Buyer for all Taxes, (including any obligation imposed on Buyer, the
Company or ILIC to contribute to the payment of a Tax determined on a
consolidated, combined or unitary basis with respect to a group of corporations
that includes or included the Company or ILIC, and Taxes resulting from the
Company or ILIC ceasing to be members of Seller's Group) to the extent, and only
to the extent, any such Tax is (A) imposed on Seller's Group for any taxable
year and (B) imposed on the Company or ILIC or for which the Company or ILIC may
otherwise be liable (1) for any taxable year or period that ends on or before
the Closing Date, (2) with respect to any taxable year or period beginning
before and ending after the Closing Date, for the portion of such taxable year
or period ending on the Closing Date as determined in accordance with the
principles set forth in Section 7.4.3, (3) arising out of a breach or inaccuracy
of any representation or warranty contained in Section 7.1 (assuming that each
representation and warranty qualified by the terms "material" or "Material
Adverse Effect" were not so qualified), or (4) arising out of a breach of any
covenant contained in this Article 7, in each case, only to the extent in excess
of the aggregate amounts reserved for Taxes on the Final Balance Sheets. Buyer
may not, without Seller's consent, amend any Tax Return of the Company or ILIC
for any taxable period including any portion of time on or prior to the Closing
Date. Seller shall be entitled to a refund of Taxes of the Company or ILIC
received for any taxable year or period ending on or before the Closing Date;
provided, however, that any refund for such periods that results from a
carryback of any loss, deduction or other tax benefit attributable to the
Company or ILIC with respect to a period subsequent to the Closing Date shall be
paid to or retained by the Company, ILIC or Buyer, as the case may be; provided,
further, that if, and only if, any such refund that results from such carryback
affects Seller's ability to obtain a refund for any pre-Closing taxable year or
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period, the Company, ILIC or Buyer, as the case may be, shall be entitled to
only fifty percent (50%) of such refund and Seller shall be entitled to the
balance of such refund. Notwithstanding anything contained in this Section
7.4.1. or anywhere else in this Agreement to the contrary, nothing in this
Agreement shall in any way alter or affect Buyer's (and its Affiliate's,
excluding the Company or ILIC) obligation and ultimate responsibility to pay or
reimburse the Company (and, thereby, indirectly Seller) any and all amounts of
DAC Taxes and premium Taxes as provided in (A) the Charter Coinsurance
Agreement, (B) the Charter Reinsurance Agreement and (C) the ILIC Coinsurance
Agreement, and all provisions of this Agreement shall be construed so as not to
subvert or alter such obligations or responsibilities of Buyer and its
Affiliates; provided, however, that no payment to Seller or Seller's Affiliates
shall be required for any Tax attributable to a period after the Closing unless
Seller or its Affiliates is required to make a payment of any such Tax;
provided, further, that no payment to Seller or Seller's Affiliates shall be
required for any amounts of such DAC Taxes or premium Taxes reflected as an
asset or a reduction of a liability (net of any offset) on the Final Balance
Sheets, and only to the extent such amounts, as so reflected on the Final
Balance Sheets, are taken into account in determining Statutory Capital.
7.4.2. Buyer's Liability for Taxes. Buyer
shall be liable for and shall indemnify Seller for the Taxes of the Company and
ILIC (i) for any taxable year or period that begins after the Closing Date, (ii)
with respect to any taxable year or period beginning before and ending after the
Closing Date, for the portion of such taxable year beginning after the Closing
Date as determined in accordance with the principles set forth in Section 7.4.3,
(iii) for any amount for which the Company, ILIC, Buyer or any successor of any
of them remains responsible under Section 7.5, (iv) for amounts that are the
responsibility of Buyer or its Affiliates (or successors) under the Charter
Coinsurance Agreement, the Charter Reinsurance Agreement and the ILIC
Coinsurance Agreement, to the extent such amounts are not reflected as an asset
or a reduction of a liability on the Final Balance Sheets, and only to the
extent such amounts, as so reflected on the Final Balance Sheets, are taken into
account in determining Statutory Capital, and (v) arising out of a breach of any
covenant contained in this Article 7. Buyer shall be entitled to any refund of
Taxes of the Company or ILIC for the periods referred to in clauses (i) and (ii)
of the preceding sentence.
7.4.3. Taxes for Short Taxable Year. Seller
and Buyer shall close the taxable period of the Company and ILIC as of the close
of business on the Closing Date, unless such action is prohibited by Law. In any
case where applicable law prohibits the Company or ILIC from closing its taxable
year on the Closing Date then, for purposes of Sections 7.4.1, 7.4.2 and 7.4.6,
the determination of the Taxes of the Company and ILIC for the portion of the
year or period ending on, and the portion of
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the year or period beginning after, the Closing Date shall be determined on the
basis of an interim closing of the books as of the close of business on the
Closing Date, except that exemptions, allowances or deductions that are
calculated on an annual basis, such as the deduction for depreciation, shall be
ratably apportioned on a time basis. The parties hereto expressly recognize that
the allocation of Taxes in the preceding sentence will be determined by
allocating any provision of reserves on the basis of an interim closing of the
books. Seller shall be responsible for Taxes allocable according to this
paragraph to the portion of such year ending on the Closing Date only to the
extent such Taxes exceed the aggregate amount reserved for Taxes on the Final
Balance Sheets.
7.4.4. Adjustment to Purchase Price. Any
payment by Buyer or Seller under Section 7.4 will be an adjustment to the
Purchase Price unless a determination (as defined in Section 1313 of the Code,
except that no appeal to the U.S. Supreme Court shall be required) with respect
to such payment causes any such payment not to constitute an adjustment to the
Purchase Price for income tax purposes.
7.4.5. Pre-Closing Taxes. Seller shall
(i) timely prepare and file all Tax Returns of the Company and ILIC required to
be filed for any taxable period ending on or prior to the Closing Date and (ii)
timely pay or cause to be paid any Tax due thereon. Seller shall prepare such
Tax Returns on a basis consistent with past practices. In the case of any such
Tax Return required to be signed by the Company or ILIC, Seller shall provide
such Tax Returns to Buyer at least 5 Business Days prior to the due date,
including any extensions for the filing thereof, together with such tax
information reasonably relevant to such Tax Returns (including any supporting
schedules, workpapers and information as to the method of computing separate
taxable income or other relevant measure of income of the Company and ILIC), and
Buyer shall cause the Company or ILIC, as the case may be, duly to execute such
Return and return it to Seller at least three Business Days prior to the due
date thereof. Notwithstanding this Section 7.4.5, liability for the Taxes due on
such Tax Returns shall be determined in accordance with the other provisions of
this Article 7.
7.4.6. Post-Closing Taxes. (a) Buyer shall
(i) timely prepare and file all Tax Returns of the Company and ILIC required to
be filed for any taxable period beginning after the Closing Date and (ii) timely
pay or cause to be paid any Tax due thereon.
(b) Buyer shall timely prepare and file all Tax Returns of the
Company and ILIC required to be filed for any taxable period beginning prior to
the Closing Date and ending after the Closing Date. Liability for the Taxes due
on such Tax Returns shall be determined in accordance with the principles set
forth in Section 7.4.3.
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(c) The provisions of this Section 7.4.6(c) shall apply to all
Taxes and Tax Returns covered by this Article 7. Buyer and Seller shall share
information and cooperate in all matters (including securing proper signatures)
related to the filing of Tax Returns. In cases where one party prepares a Tax
Return (the "Preparer") but another party is liable for part of the Tax on such
Tax Return (the "Liable Party"), the Preparer shall pay the appropriate amount
of Tax to the taxing authority and provide written notice requesting payment of
the portion of Tax due from the Liable Party. Such notice shall be provided at
least 10 Business Days prior to the due date of the Tax Return (including any
extensions for the filing thereof) and shall include the Tax Return together
with such Tax information reasonably relevant to such Tax Return, including
supporting schedules, workpapers and information as to the method of computing
separate taxable income or other relevant measure of income of the Company and
ILIC. Payment from the Liable Party to the Preparer shall be made within 7
Business Days of the receipt of such written notice, provided, however, that
payment shall not be due prior to three Business Days before the time the Tax
payment is due to the taxing authority. If the parties do not agree on the
amount of the payment, the dispute resolution mechanism set forth in Section
2.5(b) shall be utilized. Any late payment of Tax from the Liable Party to the
Preparer shall bear interest at the overpayment rate set forth in Section
6621(a)(1) of the Code.
7.4.7. Contest Provisions. Buyer shall promptly notify Seller
in writing upon receipt by Buyer, any of Buyer's Affiliates or Subsidiaries, the
Company or ILIC of notice of any pending or threatened federal, state, local or
foreign Tax audits or assessments which may affect the Tax liabilities of the
Company or ILIC for which Seller could be required to indemnify Buyer pursuant
to Section 7.4.1 (assuming, for this purpose, no exception to or limitation on
such indemnity obligation attributable to the existence of any reserve for Taxes
on the Final Balance Sheet), provided that failure to comply with this provision
shall not affect Buyer's right to indemnification hereunder except to the extent
such failure results in an increase in the amount for which Seller is liable
under Section 7.4.1 or otherwise results in a Loss to Seller or a Seller
Affiliate. Seller shall have the sole right to represent and control the
Company's and ILIC's interests in any Contest relating to taxable periods ending
on or before the Closing Date, or relating to any claim for Taxes which could be
subject to indemnification by Seller pursuant to Section 7.4.1. other than Taxes
described in the next paragraph, and to employ counsel of its choice at its
expense. Notwithstanding the foregoing, Seller shall not be entitled to settle
after the Closing Date, either administratively or after the commencement of
litigation, any claim for Taxes which would materially adversely affect the
liability for Taxes of Buyer, the Company or ILIC for any period (including, but
not limited to, the imposition of income tax deficiencies, the reduction of
asset basis or cost adjustments, the lengthening of any amortization or
depreciation periods, the
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denial of amortization or depreciation deductions or the reduction of loss or
credit carryforwards) without the prior written consent of Buyer, which consent
shall not be unreasonably withheld, and shall not be necessary to the extent
that Seller has indemnified Buyer against the effects of any such settlement.
Seller shall be entitled to participate at its expense in the
defense of any claim for Taxes for a year or period ending after the Closing
Date which may be subject to indemnification by Seller pursuant to Section 7.4.1
and, with the written consent of Buyer and at its sole expense, may assume the
entire defense of such Tax claim if assumption of such defense is permitted by
law. Neither Buyer, the Company, nor ILIC may agree to settle any Tax claim for
the portion of the year or period ending on the Closing Date which may be the
subject of indemnification by Seller under Section 7.4.1 without the prior
written consent of Seller, which consent shall not be unreasonably withheld.
Buyer shall have the sole right to represent the Company's or ILIC's interests
in the defense of any claim for Taxes relating to taxable periods beginning on
or after the Closing Date. Notwithstanding the foregoing, Buyer shall not be
entitled to settle after the Closing Date, either administratively or after the
commencement of litigation, any claim for Taxes which would materially adversely
affect the liability for Taxes of Seller, the Company or ILIC for any period for
which Seller must indemnify Buyer pursuant to Section 7.4.1 (including, but not
limited to, the imposition of income tax deficiencies, the reduction of asset
basis or cost adjustments, the lengthening of any amortization or depreciation
periods, the denial of amortization or depreciation deductions or the reduction
of loss or credit carryforwards) without the prior written consent of Seller,
which consent shall not be unreasonably withheld, and shall not be necessary to
the extent that Buyer has indemnified Seller against the effects of any such
settlement.
7.5. Termination of Existing Tax Sharing Agreements. All Tax
sharing agreements or similar arrangements with respect to or involving the
Company or ILIC shall be terminated as of the Closing Date. Notwithstanding the
preceding sentence or anything contained herein to the contrary, the Company,
ILIC and Buyer (and any successor thereto) shall continue to be obligated, even
after the Closing Date, to pay Seller any amounts owing under the Tax Allocation
Agreements for any amount of Taxes for which a reserve or accrual has been
established and reflected on the Final Balance Sheets.
7.6. Section 338(h)(10) Election. (a) Buyer and Seller shall
make a joint election under Section 338(h)(10) of the Code and under any
comparable or equivalent provisions of state or local law with respect to the
purchase of the Shares by Buyer (the "Election"). Seller and Buyer shall report,
in connection with the determination of Taxes, the transactions contemplated by
this Agreement in a manner consistent with the Election, including the
reasonable determination of the fair market value of the assets of the Company
and ILIC and the
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allocation of the deemed purchase price among the assets of the Company and ILIC
within the meaning of Section 338(h)(10) of the Code.
(b) Buyer shall be responsible for the preparation and filing
of all forms and documents required in connection with the Election. In
connection with the Election, not later than 20 Business Days prior to the
required due date thereof, Buyer shall provide Seller with copies of (i) a
properly executed Form 8023 (or any successor form), (ii) all attachments
required to be filed therewith pursuant to the Code and (iii) any comparable
forms and attachments with respect to any applicable state or local elections
being made pursuant to the Election. Seller shall execute and deliver to Buyer
within 120 days of the required due date therefor, such documents or forms as
are required by any Tax laws to properly complete the Election. Seller and Buyer
shall cooperate fully with each other and make available to each other such Tax
data and other information as may be reasonably required by Seller or Buyer in
order to prepare any documents, forms, or information, or to timely file the
Election and any other required statements or schedules. Buyer shall promptly
execute and deliver to Seller any amendments made to Form 8023 (or any successor
form) (and any comparable state and local forms) subsequent to the filing of the
Election and any attachments which are required to be filed under applicable
law, including any amendments to Form 8023 (or any successor form) necessitated
by any indemnification payments made pursuant to Section 8.1 or 7.4.1.
(c) Buyer shall comply with all of the requirements of Section
338(h)(10) of the Code. Seller shall take no action which is inconsistent with
the requirements for filing the Election under the Code.
(d) To the extent permitted by state or local laws, the
principles and procedures of this Section 7.6 shall also apply with respect to a
Section 338(h)(10) election or equivalent or comparable provision under state or
local law.
(e) Buyer shall have no liability to Seller for, and shall not
be deemed to have indemnified, under any provision of this Agreement or
otherwise, Seller from and against, for or in respect of, any Taxes which may be
imposed upon or assessed against Seller as a result of the Election.
7.7. Survival of Representations, Warranties and Obligations.
The representations, warranties and obligations of the parties set forth in this
Article 7 shall survive the Closing, shall be unconditional and absolute and
shall remain in effect, in each case, until termination of the applicable period
of limitations with respect to Taxes, plus 90 days.
7.8. Transfer Taxes. Buyer shall be liable for and shall pay
all excise, sales, use, transfer (including real property transfer or gains),
stamp, documentary, filing,
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recordation and other similar taxes which may be imposed in connection with the
transactions contemplated by this Agreement (including any transfer taxes
imposed by reason of the Section 338(h)(10) election), together with any
interest, additions or penalties with respect thereto. Each party hereto hereby
agrees to file all necessary documentation (including, but not limited to, all
Tax Returns) with respect to all such amounts in a timely manner.
7.9. Continuation of Reinsurance Agreements. Buyer expressly
covenants that the Charter Coinsurance Agreement, the Charter Reinsurance
Agreement and the ILIC Coinsurance Agreement will continue in full force and
effect until at least the day after the Closing Date.
7.10. Indemnification Payments Net of any Tax Benefit.
Notwithstanding anything contained herein to the contrary, if any payment by one
party to the other party with respect to a single item under this Article 7 or
under Article 8 hereof exceeds (or would exceed but for this Section 7.10)
$25,000, the amount of such payment shall be reduced by the amount of any tax
benefit actually realized or reasonably expected to be realized by the payee as
a result of either the payment or the circumstances underlying or giving rise to
the payment, provided, however, any such tax benefit shall be reduced by any tax
cost resulting to the payee as a result of the receipt of such indemnity
payment.
8. INDEMNIFICATION.
8.1. Indemnification by Seller. (a) Subject to the provisions
of Sections 8.3 and 8.5 and Article 10 of this Agreement, Seller hereby agrees
to indemnify, defend and hold harmless Buyer, the Company and ILIC and their
respective officers, directors, employees, Affiliates, agents, successors and
assigns (collectively, the "Buyer Indemnitees") from and against, for and in
respect of any and all Losses which any of them may sustain based upon, arising
out of or otherwise in respect of (i) any inaccuracy in or breach of any
representation or warranty of Seller contained in this Agreement (other than the
representations and warranties of Seller contained in Article 7, the
indemnification obligations of which are governed by Article 7) or in any
schedule, certificate, instrument or other document delivered pursuant hereto
(assuming that each representation and warranty qualified by the terms
"material" or "Material Adverse Effect" were not so qualified and without regard
to the Knowledge of Seller), (ii) any breach of any covenant or agreement of
Seller contained in this Agreement (other than the covenants of Seller contained
in Article 7, the indemnification obligations of which are governed by Article
7), (iii) any matter relating to or arising out of the Prior Transactions
(including any indemnification obligations (including product tax compliance
indemnification obligations and indemnification obligations for any liability
arising from the Teter lawsuit set forth on Schedule 4.10) of the Company or
ILIC
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with respect thereto), (iv) any matter relating to or arising out of Market
Conduct Activities arising as a result of any acts, errors or omissions prior to
the Closing Date by the Company or ILIC, any of their respective Affiliates or
any of their respective officers, employees, agents or representatives, (v) any
guaranty fund assessments for insolvencies occurring prior to the Closing Date
to the extent such assessments are not reflected on the Final Balance Sheets,
(vi) any liability of the Company or ILIC incurred on or before the Closing
Date, not paid as of such date and not reflected on the Final Balance Sheets or
(vii) the failure of any policies listed on Schedule 4.9(a) to qualify as "life
insurance contracts" under, and to be administered in accordance with, Section
101 or Section 7702 of the Code, or the characterization of any such contract as
a "modified endowment contract" within the meaning of Section 7702A of the Code,
except for any such contract that qualifies and is administrated as a modified
endowment contract, and with respect to which the policyholder acknowledged and
agreed, before the date of issuance of such contract (or if any such contract
became a modified endowment contract upon conversion subsequent to the date of
issuance, before the date of conversion), to such qualification and
administration. Notwithstanding anything in Article 7 or this Article 8 to the
contrary, in no event shall Seller be obligated to indemnify, defend or hold
harmless any Buyer Indemnitee with respect to (i) any Losses arising as a result
of any acts, errors or omissions by Buyer or Allstate NY, or any inaccuracy in
or breach of any representation or warranty of Buyer or Allstate NY and any
breach of any covenant or agreement of Buyer or Allstate NY contained in (A) the
Charter Coinsurance Agreement, (B) the Charter Reinsurance Agreement, (C) the
Administrative Service Agreement, dated as of September 2, 1998, between Buyer
and the Company, (D) the ILIC Coinsurance Agreement, (E) the Administrative
Services Agreement, dated as of September 2, 1998, between Allstate NY and ILIC,
and (F) the Purchase Agreement or (ii) any Policy Liabilities (as such term is
used in the Charter Coinsurance Agreement, the Charter Reinsurance Agreement and
the ILIC Coinsurance Agreement); provided, however, that all obligations and
responsibilities of Seller under the Purchase Agreement shall remain in full
force and effect without regard to this Agreement.
(b) For purposes hereof, "Loss" and/or "Losses" shall mean any
and all losses, liabilities, damages, deficiencies, costs or expenses, including
interest, penalties and reasonable attorneys' and accountants' fees and
disbursements, after deducting all amounts received by the indemnified party as
a recovery under any insurance policy or bond. Without limiting the generality
thereof, Losses arising out of or related to Market Conduct Activities include:
the cost to the Indemnified Party of any obligation (whether arising out of a
judgment or a settlement) to increase crediting rates, to credit cash or other
account values, to provide one or more additional coverages, to forgive future
premium payments, to make a policy loan at a discount from contractual rates, or
to provide any other benefits to current or former policyholders; the costs
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of administering a global settlement, including costs of communicating with
policyholders; the costs of any individualized arbitration process provided for
as part of a settlement or judgment, including all costs of administering such a
process and of awards granted therein; the costs of any employees or facilities
to the extent dedicated to devising or facilitating a settlement; and the fees
and expenses of counsel for third parties agreed or required to be paid by the
Indemnified Party.
(c) Promptly after receipt by Buyer of notice of (i) any
demand, claim or circumstances which, with the lapse of time, would give rise to
a Loss with respect to which a Buyer Indemnitee would be entitled to
indemnification pursuant to this Section 8.1 or (ii) any claim or the
commencement (or threatened commencement) of any action, proceeding or
investigation (an "Asserted Liability") that may result in a Loss with respect
to which a Buyer Indemnitee would be entitled to indemnification pursuant to
this Section 8.1, Buyer shall give notice thereof to Seller, describing in
reasonable detail such demand, claim, circumstances or Asserted Liability, the
provision or provisions under this Agreement under which the right to
indemnification is asserted and the specific circumstances thereof, and
indicating the amount (estimated, if necessary) of the Loss that has been or may
be suffered by such Buyer Indemnitee in connection therewith. Buyer's failure to
give notice of any such demand, claim, circumstances or Asserted Liability to
Seller in a prompt manner will not be deemed a waiver of the Buyer Indemnitee's
right to indemnification hereunder for Losses in connection herewith, but the
amount of indemnification to which the Buyer Indemnitee is entitled shall be
reduced by the amount, if any, by which the Buyer Indemnitee's Losses would have
been less had such notice been given promptly.
8.2. Buyer's Obligation to Indemnify. (a) Subject to the
provisions of Section 8.3 and 8.5 and Article 10 of this Agreement, Buyer hereby
agrees to indemnify, defend and hold harmless Seller and Seller's officers,
directors, employees, Affiliates, agents, successors and assigns (collectively,
the "Seller Indemnitees") from and against, for and in respect of any and all
Losses which any of them may sustain based upon, arising out of or otherwise in
respect of (i) any inaccuracy in or breach of any representation or warranty of
Buyer contained in this Agreement or in any schedule, certificate, instrument or
other document delivered pursuant hereto (assuming that each representation and
warranty qualified by the terms "material" or "material adverse effect" were not
so qualified and without regard to the Knowledge of Buyer), or (ii) any breach
of any covenant or agreement of Buyer contained in this Agreement (other than
the covenant of Buyer contained in Article 7, the indemnification obligations of
which are governed by Article 7).
(b) Promptly after receipt by Seller of notice of (i) any
demand, claim or circumstances which, with the lapse of time, would give rise to
a Loss with respect to which a Seller Indemnitee would be entitled to
indemnification pursuant to this
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Section 8.2 or (ii) an Asserted Liability that may result in a Loss with respect
to which a Seller Indemnitee would be entitled to indemnification pursuant to
this Section 8.2, Seller shall give notice thereof to Buyer, describing in
reasonable detail such demand, claim, circumstances or Asserted Liability, the
provision or provisions under this Agreement under which the right to
indemnification is asserted and the specific circumstances thereof, and
indicating the amount (estimated, if necessary) of the Loss that has been or may
be suffered by such Seller Indemnitee in connection therewith. Seller's failure
to give notice of any such demand, claim, circumstances or Asserted Liability to
Buyer in a prompt manner will not be deemed a waiver of the Seller Indemnitee's
right to indemnification hereunder for Losses in connection herewith, but the
amount of indemnification to which the Seller Indemnitee is entitled shall be
reduced by the amount, if any, by which the Seller Indemnitee's Losses would
have been less had such notice been given promptly.
8.3. Right to Contest Third Party Claims. (a) Defense
(including the right to settle or compromise) of any Asserted Liability,
including selection of counsel (subject to the consent of Buyer, for all Buyer
Indemnities or of Seller, for all Seller Indemnitees, as applicable, which
consent shall not be unreasonably withheld) and the sole power to direct,
investigate and control such defense, shall be by the indemnifying party, if
within 30 days after receiving the notice required under Section 8.1(c) or
Section 8.2(b), as the case may be, the indemnifying party gives written notice
to Buyer on behalf of all Buyer Indemnities, or Seller on behalf of all Seller
Indemnitees, as the case may be, stating that the indemnifying party intends to
dispute and defend against such Asserted Liability at its own cost and expense.
The indemnified party shall make no payment in respect of such Asserted
Liability to any third party as long as the indemnifying party is conducting a
good faith and diligent defense.
(b) Notwithstanding the foregoing, the indemnified party shall at
all times have the right to fully participate in such defense at its own cost
and expense directly or through counsel. If no such notice of intent to dispute
and defend is given by the indemnifying party, or if such diligent good faith
defense is not being or ceases to be conducted, the Buyer on behalf of all Buyer
Indemnitees, or Seller on behalf of all Seller Indemnitees, as applicable, (x)
shall, at the expense of the indemnifying party, undertake the defense of such
Asserted Liability with one counsel selected by Buyer on behalf of all Buyer
Indemnities, or Seller on behalf of all Seller Indemnities, as applicable, and
(y) shall have the right to compromise or settle the same exercising reasonable
business judgment with the consent of the indemnifying party, which consent
shall not be unreasonably withheld.
(c) Except as provided herein, Buyer on behalf of all Buyer
Indemnitees, and Seller on behalf of all Seller Indemnitees, as applicable,
shall have the right to consent to
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any settlement or compromise of any Asserted Liability, which consent shall not
be withheld unreasonably. If the indemnified party refuses to consent to a bona
fide compromise or settlement that the indemnifying party desires to agree to
(the "Bona Fide Settlement"), the indemnified party may continue to pursue the
defense of such Asserted Liability, free of any participation by the
indemnifying party and at the sole expense of the indemnified party; provided
that in such event, the obligation of the indemnifying party to the indemnified
paty will equal the lesser of (i) the amount of such Bona Fide Settlement or
(ii) the actual out-of-pocket amount that the indemnified party is obligated to
pay as a result of the indemnified party's continued defense of such Asserted
Liability, plus the reasonable out-of-pocket expenses incurred by the
indemnified party after the date of notice from the indemnified party of its
refusal to consent to a Bona Fide Settlement (the "Refusal Date") in connection
with such Asserted Liability, minus the reasonable out-of-pocket expenses of the
indemnifying party incurred after the Refusal Date by the indemnifying party in
connection with such Asserted Liability. The indemnifying party shall give the
indemnified party such notice of the Bona Fide Settlement as is reasonable under
then existing circumstances and the indemnified party shall notify the
indemnifying party of its consent or lack of consent to such Bona Fide
Settlement within a reasonable period of time under then existing circumstances.
Notwithstanding anything herein to the contrary, the indemnifying party shall
have the right to settle all claims of third parties for which indemnification
is payable hereunder without the consent of the indemnified party so long as
such settlement releases the indemnified party from all liability for or in
connection with such action, is exclusively on monetary terms, does not
materially and adversely impair the ability of the indemnified party to carry on
its business and does not contain any admission of wrongdoing on the part of the
indemnified party.
(d) The indemnified party shall make available all information and
assistance that the indemnifying party may reasonably request and shall
cooperate with the indemnifying party in such defense. Any failure to make
available such information and/or to cooperate shall reduce the amount, if any,
by which the indemnified party's Losses would have been reduced had such
information been made available or such cooperation been provided.
8.4. Indemnification for Taxes. Notwithstanding anything in
this Article 8 to the contrary, any indemnifiable Loss or third party claims
based on, attributable to or resulting from any misrepresentation or the breach
or inaccuracy of any representation or warranty made by Seller in Article 7, or
the failure to comply with any covenant or agreement on the part of the parties
hereto contained in Article 7, will be governed exclusively by Article 7.
8.5. Limitations on Indemnification. (a) If any party seeking
indemnification under this Article 8 (an
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"indemnified party") recovers from any third party (including insurers) all or
any part of any amount paid to it by an indemnifying party (herein so called)
pursuant to Section 8.1 or 8.2, such indemnified party shall promptly pay over
to the indemnifying party the amount so recovered (after deducting therefrom the
full amount of the expenses incurred by it in procuring such recovery, including
any taxes and net of any tax benefit resulting from such recovery and payment),
but not in excess of any amount previously so paid by the indemnifying party. If
an indemnified party recovers from any third party (including insurers) any
amount as to which indemnification may be claimed pursuant to Section 8.1 or
8.2, such indemnified party shall have no right to claim indemnification for
such amount from the indemnifying party.
(b) The indemnified party shall prosecute diligently and in good
faith any claim for indemnification with any applicable third party (including
insurers), but such attempt shall not be a condition precedent to the
indemnified party seeking to collect any indemnification payment pursuant to
Section 8.1 or 8.2.
9. TERMINATION.
9.1. Termination. This Agreement may be terminated at any time
prior to the Closing: (i) by mutual written consent of Seller and Buyer or (ii)
by either Buyer or Seller if the Closing shall not have occurred on or before
June 30, 1999; provided, however, that the right to terminate this Agreement
under Section 9.1(ii) will not be available to any party whose failure to
fulfill any obligation under this Agreement has been the cause of, or resulted
in, the failure of the Closing to occur on or before such date.
9.2. Effect of Termination. If this Agreement is terminated
pursuant to Section 9.1, this Agreement shall become void and of no effect with
no liability on the part of any party hereto, except with respect to Section
11.8 and the confidentiality provisions set forth in Section 6.3 and except that
nothing herein will relieve any party from liability for any prior breach of
this Agreement.
10. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
Notwithstanding any right of Buyer fully to investigate the affairs
of the Companies, Buyer has the right to rely fully upon the representations and
warranties of Seller contained in this Agreement or in any other certificate or
instrument delivered at Closing. Each of the representations and warranties of
Seller and Buyer under this Agreement will survive the execution and delivery of
this Agreement and the Closing and remain in effect until the expiration of the
twenty-four month period immediately following the Closing Date, except that the
representations and warranties of Seller contained in Sections 4.1, 4.2, 4.3,
4.4, 4.9, 4.13, 4.17 and 4.26 shall
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survive the Closing and remain in effect indefinitely and the representations
and warranties of Seller contained in Article 7 shall survive the Closing and
remain in effect for the period set forth in Article 7.
11. MISCELLANEOUS.
11.1. Amendments and Waivers. This Agreement may not be
amended, and none of its provisions may be modified, except expressly by an
instrument signed by the parties hereto. No failure or delay of a party in
exercising any power or right hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. No waiver by a party of any provision of this Agreement or
consent to any departure therefrom shall in any event be effective unless the
same shall be in writing and signed by such party, and then such waiver or
consent shall be effective only in the specific instance and for the purpose for
which given.
11.2. Assignment. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by either of the
parties hereto without the prior written consent of the other party. This
Agreement shall be binding upon and shall inure to the benefit of each of the
parties hereto and its respective successors and permitted assigns.
11.3. Entire Agreement. This Agreement (including the
Schedules hereto) constitutes the entire agreement between the parties with
respect to the subject matter hereof and supersedes all other prior
negotiations, commitments, agreements and understandings, both written and oral,
between the parties or any of them with respect to the subject matter hereof.
11.4. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York (regardless of
the laws that might otherwise govern under applicable principles of conflicts
law).
11.5. Enforcement; Jurisdiction. The parties agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions of this Agreement in any court of
the United States located in the State of New York or any state court sitting in
The City of New York, New York (any such federal or state court, a "New York
Court"), this being in addition to any other remedy to which they are entitled
to in law or in equity. Each of the parties hereto (i) consents to submit itself
to the personal jurisdiction of any
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such New York Court, in the event any dispute arises out of this Agreement or
any of the transactions contemplated by this Agreement, (ii) agrees that it will
not attempt to deny or defeat such personal jurisdiction or venue by motion or
other request for leave from any such New York Court and (iii) agrees that it
will not bring any action relating to this Agreement or any of the transactions
contemplated by this Agreement in any court other than a New York Court.
11.6. Notices. All written notices required under this
Agreement shall be given in writing and shall be deemed to have been given upon
(i) transmitter's confirmation of a receipt of a facsimile transmission, (ii)
confirmed delivery by a standard overnight carrier or when delivered by hand or
(iii) the expiration of five Business Days after the day when mailed by
certified or registered mail, postage prepaid, addressed at the following
addresses (or at such other address for a party as shall be specified by like
notice):
(a) if to Seller, to:
Leucadia National Corporation
315 Park Avenue South
20th Floor
New York, NY 10010
Attention: President
Facsimile: (212) 598-3245
Telephone: (212) 460-1900
(b) if to Buyer, to:
Allstate Life Insurance Company
3075 Sanders Road, Suite G2H
Northbrook, IL 60062
Attention: Treasurer
Facsimile: (847) 402-9116
Telephone: (847) 402-3073
11.7. Counterparts. This Agreement may be executed by the
parties hereto in separate counterparts, each of which shall be deemed to be an
original, but all of which shall constitute one and the same instrument.
11.8. Certain Fees and Expenses. Whether or not the
transactions contemplated hereby are consummated, all costs and expenses
incurred in connection with this Agreement and transactions contemplated hereby,
including all fees and expenses of agents, representatives, counsel, actuaries
and accountants, shall be paid by the party incurring such costs or expenses;
provided, however, that Buyer shall pay any filing fees required in connection
with the filing with the New York or Missouri Insurance Departments of an
application to acquire control of the Company and ILIC and the filing of any
notification required under the HSR Act.
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11.9. No Joint Venture or Partnership Intended.
Notwithstanding anything herein to the contrary, the parties hereby acknowledge
and agree that it is their intention and understanding that the transactions
contemplated hereby do not in any way constitute or imply the formation of a
joint venture or partnership between Buyer, on the one hand, and Seller, on the
other hand.
11.10. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, void or unenforceable, each of Seller and Buyer direct that such court
interpret and apply the remainder of this Agreement in the manner that it
determines most closely effectuates their intent in entering into this
Agreement, and in doing so particularly take into account the relative
importance of the term, provision, covenant or restriction being held invalid,
void or unenforceable.
11.11. No Third Party Beneficiaries. Except as otherwise
specifically provided in Article 8, nothing in this Agreement is intended or
shall be construed to give any Person, other than the parties hereto, their
successors and permitted assigns, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision contained herein.
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IN WITNESS WHEREOF, each of the parties has caused this Agreement to
be executed on its behalf by its officers thereunto duly authorized, all as of
the day and year first above written.
LEUCADIA NATIONAL CORPORATION
By
---------------------------------------
Name:
Title:
ALLSTATE LIFE INSURANCE COMPANY
By
---------------------------------------
Name:
Title:
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Schedule 2.2
ALLOCATION OF PURCHASE PRICE
Company Shares $2,000,000 plus Statutory Capital of the Company as of
the Business Day immediately preceding the Closing Date
ILIC Shares $1,575,000 plus Statutory Capital of ILIC as of the Business
Day immediately preceding the Closing Date
<PAGE>
Exhibit C
SERVICES
I. GENERAL FINANCIAL SERVICES
Buyer shall perform all accounting and reporting of direct and ceded
premiums, claims and other policyholder disbursements, reserves, policy
loans, commissions and other policy related transactions. Any audits
conducted by external auditors shall be conducted at the Companies' sole
expense. Additionally, Buyer shall provide accounting services of a
general corporate nature to the Companies including, but not limited to,
the following:
1. All required GAAP financial filings; and
2. All required statutory financial filings.
II. COMPLIANCE SERVICES
Buyer shall provide the Companies with the following services:
1. State regulatory review and compliance; development, filing and
maintenance of policy and variable contract forms, riders,
endorsements, disclosure statements and similar materials; review
and approval of advertising materials and other customer
communications;
2. SEC and NASD compliance for variable contracts, prospectuses, and
registration statements including (i) the submission of any required
information and conducting annual compliance audits and (ii)
preparation and filing of Forms N-4 as necessary; and
3. Coordination of mailings for statements, reports, and prospectuses
for variable contracts.
Exhibit 10.15
TRUST AGREEMENT
THIS TRUST AGREEMENT (the "Agreement") is made this 14th day of
August, 1998, between Leucadia National Corporation ("Leucadia") for the benefit
of its shareholders, and Joseph A.
Orlando (the "Trustee").
WHEREAS, Leucadia is the beneficial owner of 4,117,986 shares of
common stock of HomeFed Corporation (the "Owned HomeFed Common Stock") which
represents approximately 41% of the outstanding shares of common stock of
HomeFed Corporation ("HomeFed Stock"); and
WHEREAS, Leucadia has entered into a Stock Purchase Agreement, dated
as of August 14, 1998 (the "Purchase Agreement"), among Leucadia and HomeFed
Corporation, pursuant to which Leucadia is entitled and obligated to purchase
for an aggregate purchase price of $6,670,100, a portion of which has already
been paid (the "Purchase Price") a number of additional shares of common stock
of HomeFed Corporation (the "Additional HomeFed Stock" and together with the
Owned HomeFed Stock, the "HomeFed Stock Interest") such that Leucadia would
beneficially own 87.5% of the outstanding shares of HomeFed Stock, ; and
WHEREAS, Leucadia wishes to convey all of its right, title and
interest in and to the HomeFed Stock Interest and all of its right, title and
interest in and to the Purchase Agreement and the remainder of the Purchase
Price, together with any right, title and interest that Leucadia may acquire on
or before November 10, 1998 in and to additional shares of HomeFed Stock or any
contract to acquire shares of HomeFed Stock, together with the purchase price
for such shares (collectively, the "Trust Property"), to and for the benefit of
and account of the holders of common shares, par value $1.00 per share, of
Leucadia as of August 25, 1998 (the "Beneficiaries"); and
WHEREAS, the Trustee has agreed to act as the Trustee under this
Agreement for the purposes herein provided;
NOW, THEREFORE, in consideration of the premises and of the
acceptance by the Trustee of the Trust hereby created and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged by the parties hereto, the parties hereby agree as follows:
NYFS04...:\30\76830\0194\2037\AGR8068V.43J
<PAGE>
ARTICLE 1
THE TRUST
Section 1.1 All of Leucadia's right, title and interest in and to
the Trust Property is hereby vested in the Trust. Any property that may in the
future be vested in the Trust pursuant to the provisions of this Agreement shall
thereafter also be considered Trust Property. To the extent any law or
regulation prohibits the transfer of ownership of any of the Trust Property from
Leucadia to the Trustee, the Trustee's interest shall be a lien upon and
security interest in such Trust Property, in trust, nevertheless, for the sole
use and purposes set forth in Section 2.1, and this Agreement shall be deemed a
security agreement granting such interest thereon.
Section 1.2 Leucadia shall, upon reasonable request of the Trustee,
execute, acknowledge and deliver such further instruments and do such further
acts as may be necessary or appropriate to more effectively vest in the Trust
any portion of the Trust Property intended to be vested herein.
ARTICLE 2
PURPOSES OF THE TRUST
Section 2.1 The purposes of this Trust are (i) to hold the assets
transferred to it by Leucadia on behalf of the Beneficiaries and collect income
derived from such assets, (ii) to close the transaction contemplated by the
Purchase Agreement, (iii) to take such other action as is necessary to conserve
and protect the Trust Property, and (iv) to liquidate and distribute the Trust
Property.
ARTICLE 3
POWERS OF TRUSTEE
Section 3.1 The Trustee accepts and undertakes to discharge the
Trust created by this Agreement upon the terms and conditions hereof and agrees,
for the benefit of the Beneficiaries, to exercise such of the rights and powers
vested in it by this Agreement in the same manner, and use the same degree of
care and skill in its exercise, as a prudent person would exercise and use under
the circumstances in the conduct of
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his own affairs, having due regard to the purposes of the Trust set forth in
Article 2 hereof.
Section 3.2 In accepting the Trust hereby created, the Trustee acts
solely as Trustee hereunder, and all persons having any claim against the
Trustee in connection with its performance of its rights, powers and duties as
such Trustee shall only look to the Trust Property for payment or satisfaction
thereof.
Section 3.3 The Trustee shall not commingle any of the Trust
Property with its own property or the property of any other person.
Section 3.4 The Trustee is hereby empowered to:
(a) perform all of the obligations and agreements of the Trust
provided for in this Agreement;
(b) make payment under the Purchase Agreement and perform any other
obligations and agreements under the Purchase Agreement necessary for the
issuance by HomeFed Corporation of the Additional HomeFed Stock;
(c) keep and maintain an account in the name of the Trustee for the
benefit of the Beneficiaries into which the Trustee shall deposit all
Trust Property consisting of cash or cash equivalents (the "Trust
Account"); the Trustee shall not permit any person other than the Trustee
to have authority to make withdrawals from, or to issue drafts against,
the Trust Account and no Trust Account may be maintained with any bank
unless such bank has been furnished a copy of this Agreement;
(d) collect and receive all sums of money or other property due to
the Trust;
(e) engage professionals, including attorneys, accountants, experts
and others, to assist the Trustee in carrying out its duties hereunder;
(f) receive additional Trust Property and take all appropriate
action necessary to preserve the value of Trust Property as the Trustee in
the reasonable exercise of its discretion shall determine, subject to
Article 4 hereof;
(g) vote and/or act with respect to the disposition of the Owned
HomeFed Common Stock and, upon issuance, the
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<PAGE>
Additional HomeFed Stock and any other shares of common stock of HomeFed
Corporation that may then be Trust Property as directed in a written
notice jointly signed by mutual agreement of Ian M. Cumming and Joseph S.
Steinberg, each of whom is a Beneficiary of the Trust and, accordingly,
are together thereby acting on behalf of all of the Beneficiaries;
(h) pay all reasonable and necessary Trust expenses incurred in the
administration of the Trust, including without limitation, attorneys' fees
and disbursements, accounting fees, expert fees and other costs and
expenses arising out of the consummation of the transactions contemplated
by the Purchase Agreement;
(i) prepare and deliver written statements or notices, annually or
otherwise, required by law to be delivered to Beneficiaries; provided that
the Trustee shall have no obligation to deliver any statements or notices
to a permitted transferee of a beneficial trust interest unless, prior to
the date on which the statement or notice is required to be delivered, the
Trustee receives (1) written notice adequately identifying the permitted
transferee (including the transferee's name, address and tax
identification number), and (2) reasonable evidence that the transfer was
authorized by this Agreement;
(j) to file and execute, on behalf of the Trust such applications,
surety bonds, irrevocable consents, appointments of attorney for service
of process and other papers and documents that shall be necessary or
desirable to register or establish the exemption from registration of the
HomeFed Stock Interest, and/or any additional shares of common stock of
HomeFed Corporation that may become Trust Property, under the Securities
Act of 1933, as amended (the "Securities Act"), and under state securities
or blue sky laws and to otherwise assist in the registration of such
shares of common stock of HomeFed Corporation;
(k) maintain and preserve the originals of any and all instruments
and documents pertaining to Trust Property; and
(l) take any of the foregoing action, and execute any documents
relating thereto, in the Trustee's own name, on behalf of the Trust.
Notwithstanding any other provision of this Agreement, the Trustee
shall not, and is not empowered to, acquire any
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<PAGE>
property after the date hereof other than the Trust Property (and any proceeds
arising therefrom) or vary the investment of the Trust within the meaning of
Treasury Regulation Section 301.7701-4(c)(i).
Section 3.5 The Trustee shall prepare or have prepared, and file on
behalf of the Trust all United States, federal, state and local income tax
returns and information returns required to be filed by the Trust, and shall
prepare and distribute to the Beneficiaries any reports regarding any income,
gain, deduction, credit or loss of the Trust as are required by applicable law
and, in addition thereto, as the Trustee in its sole discretion may from time to
time determine is appropriate or necessary to enable the Beneficiaries to
determine their respective tax obligations arising out of operations of the
Trust.
Section 3.6 The Trustee may withhold from the amount distributable
from the Trust at any time to any person such sum or sums as may be sufficient
to pay any taxes which have been or may be imposed on such person or upon the
Trust with respect to the amount distributable or to be distributed under the
income tax laws of the United States or of any state or political subdivision or
entity by reason of any distribution provided for hereunder, wherever such
withholding is determined by the Trustee in its reasonable sole discretion to be
required.
Section 3.7 The Trustee shall maintain records and books of account
relating to the Trust Property, in accordance with generally accepted accounting
principles consistently applied and shall, at all reasonable times, permit any
authorized representative designated by a Beneficiary to have access, during
normal business hours and upon reasonable notice, to inspect and/or copy (at
Beneficiary's expense payable at the time of copying), the financial records
relating to the Trust Property. The Trustee shall provide to each Beneficiary,
as soon as practicable after each anniversary of its creation and, in addition,
after termination of the Trust, an unaudited financial statement and a report
showing all transactions and the amounts thereof (including all sales or other
dispositions of Trust Property and expenses relating to the operation of the
Trust) consummated during the reporting period.
Section 3.8 The Trustee may rely upon and shall be protected in
acting or refraining from acting upon any certificates, opinions, statements,
instruments or reports believed by it to be genuine and to have been signed or
presented by the proper person or persons; provided, however, that the
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<PAGE>
Trustee shall be under a duty to have examined the same to determine whether or
not such writings conform to the requirements of this Agreement.
Section 3.9 The Trustee and its agents shall not be liable for any
error of business judgment or with respect to any action taken or omitted to be
taken by them in their capacity as Trustee or agent, unless it shall be proved
that the Trustee or its agents shall have been grossly negligent or shall have
acted with willful misconduct in ascertaining the pertinent facts or in
performing any of their rights, powers or duties hereunder. In the event such
liability is proven, the Beneficiaries shall be entitled to reimbursement of
their reasonable costs, including attorneys' fees and disbursements. The Trustee
makes no representations as to the value or condition of the Trust Property or
any part thereof, or as to the security afforded by this Agreement, or as to the
validity, execution (except its own execution), enforceability, legality or
sufficiency of this Agreement, and the Trustee shall incur no liability or
responsibility in respect of such matters.
Section 3.10 The Trustee shall have no duty to accomplish any
recording, filing or registration of any instrument (including any financing or
continuation statement or any filing under tax or securities law) or any
rerecording, refiling or reregistration thereof.
Section 3.11 The Trustee shall be indemnified by and receive
reimbursement from the Trust against and from any and all loss, liability, cost,
damage or expense, including reasonable attorneys' fees and disbursements, which
it may incur or sustain in the exercise and performance of any of its powers and
duties as such Trustee under this Agreement, unless such loss, liability, cost,
damage or expense shall be incurred or sustained as a result of the Trustee's
gross negligence or willful misconduct.
ARTICLE 4
PERMITTED INVESTMENTS OF TRUST PROPERTY
Section 4.1 The cash constituting the remainder of the Purchase
Price shall, to the extent permitted by applicable law and to the extent
provided in Section 4.2, be invested by the Trustee as soon as practicable after
establishment of the Trust in state or local government securities with a
maturity date on or about June 15, 1999 and the income from which will not
result
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<PAGE>
in any federal tax liabilities to the Beneficiaries. All investments of Trust
Property shall be made in a manner such that the Trust will at all times be
classified as a grantor trust of which the Beneficiaries are the grantors for
United States federal income tax purposes (each such investment, a "Permitted
Investment"); provided, however, that (i) each Permitted Investment shall be
held solely in the name of the Trustee as Trustee, (ii) to the extent
practicable, the Trustee shall take physical possession of all such securities
and secure them in a safe deposit box registered solely in the name of the
Trustee as Trustee, and (iii) no Permitted Investment may be made unless the
Trustee shall furnish the bank or brokerage firm through which such Permitted
Investment is made with a copy of this Agreement, and such bank shall have
acknowledged to the Trustee in writing that upon the maturity of such Permitted
Investment the proceeds thereof, if not reinvested in a Permitted Investment in
accordance with the instructions of the Trustee, shall be deposited solely in a
Trust Account in accordance with Section 3.4(c).
Section 4.2 The Trustee may pay litigation and administrative
expenses, deposit money from the Trust Account in one or more FDIC insured
demand deposit accounts at any bank or trust company, excluding that of the
Trustee, which has a capital stock and surplus aggregating at least
$100,000,000; provided that total deposits in each account and with each
institution do not exceed the FDIC insurance limits for such account or
accounts.
Section 4.3 All Permitted Investments shall be on terms consistent
with the distribution requirements of Article 7 of this Agreement and the other
obligations of the Trust.
Section 4.4 Any of the foregoing investments purchased with any of
the Trust Property shall be deemed a part of the Trust Property. Any earned
interest, dividends, distributions or gains from Permitted Investments shall be
included in the Trust Property.
ARTICLE 5
CONCERNING THE TRUSTEE
Section 5.1 The Trustee may resign as Trustee at any time by giving
prior written notice to Leucadia; provided, however, that such resignation shall
not be effective earlier than sixty (60) days after the date of such notice
unless an
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<PAGE>
earlier effective date is agreed to by Leucadia and a new Trustee shall have
been appointed.
Section 5.2 Upon resignation, death, or removal of a Trustee, a
successor trustee (a "Successor Trustee") shall be appointed by Leucadia on
behalf of the Beneficiaries, and the appointment of the Successor Trustee shall
be binding upon all Beneficiaries then holding beneficial interests in the
Trust.
Section 5.3 Any Successor Trustee shall execute and deliver to the
Beneficiaries and to the predecessor Trustee an instrument accepting such
appointment, the terms and conditions of which shall be the same as those
contained in this Agreement, and thereupon such Successor Trustee, without
further act, shall be vested with all the estates, properties, rights, powers,
duties and trusts of the predecessor Trustee in the Trust with like effect as if
originally named as Trustee herein; but nevertheless, upon the written request
of such Successor Trustee, the predecessor Trustee shall (i) execute,
acknowledge and deliver such instruments of conveyance and further assurances
and do such other things as may reasonably be required for more fully and
certainly vesting and confirming unto said Successor Trustee all the right,
title and interest of the predecessor Trustee in and to the Trust Property; (ii)
duly assign, transfer, deliver, account for and pay over to such Successor
Trustee any property or money then held by such predecessor Trustee upon the
trusts herein expressed; and (iii) deliver to such Successor Trustee any and all
records, or copies thereof, in respect of the Trust which it may have.
ARTICLE 6
TRUSTEE'S COMPENSATION
Section 6.1 The Trustee hereby waives any commission or fees for the
performance of its obligations as Trustee under this Agreement.
ARTICLE 7
DISTRIBUTIONS TO BENEFICIARIES
Section 7.1 All Trust Property shall be distributed by the Trustee
to the Beneficiaries, as beneficiaries under the Trust solely in accordance with
Section 7.2, on one or more distribution dates as determined by the Trustee.
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Section 7.2 The Trustee shall not be obligated to make any
distributions of Trust Property prior to July 5, 1999. As promptly as
practicable following the acquisition by the Trust of the Additional HomeFed
Stock under the Purchase Agreement, the Trust shall distribute the HomeFed Stock
Interest (and any other shares of HomeFed Stock that may then be Trust Property)
and any cash then held as Trust Property to the Beneficiaries; provided,
however, that the distribution of such shares of HomeFed Stock from the Trust to
the Beneficiaries shall be pursuant to an effective registration statement under
the Securities Act, unless the Trustee shall have received an opinion of counsel
to the effect that no such registration statement is required for such
distribution. In the event that the shares of Additional HomeFed Stock are not
purchased by July 31, 1999 and the Purchase Agreement is then terminated, the
Trustee as promptly as practicable shall distribute to the Beneficiaries the
Trust Property then owned by the Trust; provided, however, that the distribution
of shares of the Owned HomeFed Stock from the Trust to the Beneficiaries shall
be pursuant to an effective registration statement under the Securities Act,
unless the Trustee shall have received an opinion of counsel to the effect that
no such registration statement is required for such distribution. No
certificates representing fractional shares of HomeFed Stock will be distributed
by the Trustee to the Beneficiaries. In lieu of any fractional shares of HomeFed
Stock, (the "Fractional Shares"), the Trustee shall, on behalf of all holders of
such Fractional Shares, (i) determine the number of shares of HomeFed Stock that
would otherwise have been distributed as Fractional Shares, (ii) sell such
shares at the then prevailing market price, and (iii) determine the portion, if
any, of the net proceeds of such sale to which each holder of a Fractional Share
interest is entitled, by multiplying the amount of the aggregate net proceeds of
the sale of the Factional Shares, by a fraction, the numerator of which is the
amount of the Fractional Share to which such holder of a Fractional Share is
entitled, and the denominator of which is the aggregate amount of Fractional
Shares to which all holders of Fractional Shares are entitled. As soon as
practicable after the determination of the amount of cash, if any, to be paid to
holders of Fractional Shares in lieu of such Fractional Shares, the Trustee
shall distribute such amounts, without interest, to such holders. Any cash
received on distribution in respect of, or proceeds from the sale of, the
HomeFed Stock Interest (or any other shares of HomeFed Stock that may then be
Trust Property) shall be distributed by the Trustee as promptly as practicable.
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ARTICLE 8
LIMITATION ON BENEFICIARY'S ASSIGNMENT
OF RIGHT TO DISTRIBUTION
Section 8.1 Beneficial interests in the Trust, and any other
interests therein, (i) cannot be assigned, conveyed, hypothecated, pledged or
otherwise transferred, voluntarily or involuntarily, directly or indirectly,
except by will or under the laws of descent and distribution; (ii) shall not be
evidenced by a certificate or other instrument; (iii) shall not possess any
voting rights; (iv) shall not be entitled to receive any distributions, except
pursuant to Article 7; and (v) shall not represent any equity interest in
HomeFed Corporation.
ARTICLE 9
TERMINATION OF THE TRUST
Section 9.1 Other than the obligations of the Trustee under Section
3.5 hereof, this Agreement and the Trust created hereby shall terminate and this
Agreement shall be of no further force or effect on the earlier to occur of (i)
the date on which all of the Trust Property has been distributed to the
Beneficiaries in accordance with Article 7 or (ii) December 31, 2001.
Section 9.2 No transfer, by operation of law or death, of the right,
title and interest of any Beneficiary in and to the Trust Property or hereunder
shall operate to terminate this Agreement or the Trust hereunder or entitle any
successor or transferee of such Beneficiary to an accounting (except to the
extent generally required under Section 3.7) or to the transfer to it of legal
title to any part of the Trust Property.
ARTICLE 10
JURISDICTION
Section 10.1 Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
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ARTICLE 11
MISCELLANEOUS
Section 11.1 As used in this Agreement (including the recitals
herein), capitalized terms shall have the meanings assigned to them (such
meanings to be equally applicable to both the singular and plural forms of the
terms defined or to the feminine, masculine or neuter gender, as the case may
be), unless the context otherwise requires.
Section 11.2 This Agreement is not intended to create and shall not
be interpreted as creating an association, corporation, partnership or joint
venture of any kind; it is intended to create an investment trust within the
meaning of Treasury Regulation Section 301.7701-4(c)(i), to be governed and
construed in all respects as a trust without transferable interests; any
ambiguities in this Agreement shall be resolved, and any income tax reporting
obligations of the Trust and the Beneficiaries shall be fulfilled, in a manner
consistent with such treatment.
Section 11.3 Leucadia shall not have or incur any obligation or
liability to any other person on account of any act or failure to act by the
Trustee or any other person.
Section 11.4 The Trustee shall not assume any liability or incur any
obligation or liability to any other person in connection with the transfer by
Leucadia to the Trustee of the Trust Property, and no delegation of duty of
performance to the Trustee or assumption of liabilities of Leucadia by the
Trustee is intended hereby except as expressly set forth in Section 1.1 of this
Trust Agreement.
Section 11.5 As promptly as practicable after the date hereof,
Leucadia shall certify to the Trustee the names of the Beneficiaries and the
amount of beneficial interests in the Trust held by each such Beneficiary.
Leucadia shall indemnify, defend and hold the Trustee harmless against claims of
any nature whatsoever with respect to Leucadia's determination of a
Beneficiary's share of beneficial interests in the Trust.
Section 11.6 This Trust Agreement may be amended from time to time
by the Trustee and Leucadia, without the consent of any holders of beneficial
interests in the Trust, but only (i) to cure any ambiguity, correct or
supplement any provision herein which may be inconsistent with any other
provision herein, or to
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make any other provisions with respect to matters or questions arising under
this Trust Agreement not inconsistent with the other provisions of this Trust
Agreement, or (ii) to modify, eliminate or add to any provisions of this Trust
Agreement to such extent as shall be necessary to ensure that the Trust will be
classified for United States federal income tax purposes as a grantor trust at
all times or to ensure that the Trust will not be required to register as an
"investment company" under the 1940 Act, or be classified as other than a
grantor trust for United States federal income tax purposes; provided, however,
that in the case of clause (i), such action shall not adversely affect in any
material respect the interests of any holder of a beneficial interest in the
Trust. In all other cases, this Trust Agreement may be amended with the approval
of holders of a majority of beneficial interests in the Trust, except with
respect to changes to the definition of Trust Property, which shall require a
favorable vote of all Beneficiaries. Any amendments to this Trust Agreement
shall become effective upon execution by the Trustee and Leucadia and notice
thereof shall be given to the Beneficiaries.
Section 11.7 Except as provided herein, the obligations, duties
and/or rights of the Trustee under this Agreement shall not be assignable,
voluntarily, involuntarily or by operation of law, and any such assignment shall
be void. All covenants and agreements contained herein shall be binding upon and
are personal to the Trustee and shall inure to the benefit of the Trustee and
any Successor Trustee in the same manner.
Section 11.8 This Agreement, together with the related instruments
expressly referred to herein, constitutes the entire agreement of the parties,
and all such agreements shall be construed as integrated and complimentary of
each other.
Section 11.9 Article headings in this Agreement are included for
convenience of reference only and shall not constitute a part of this Agreement
for any other purpose.
SECTION 11.10 This Agreement, shall be construed in accordance with
and governed by the laws of the State of New York.
SECTION 11.11 This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
together shall constitute one and the same instrument. This Agreement shall
become effective immediately upon the exchange of executed signature pages,
which may be by facsimile.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed and delivered as of the first date hereinabove written.
Leucadia National Corporation
By: /s/ Barbara L. Lowenthal
------------------------------------
Title: Vice President
Trustee:
/s/ Joseph A. Orlando
-----------------------------------
Joseph A. Orlando
Exhibit 21
LEUCADIA NATIONAL CORPORATION
Subsidiaries as of December 31, 1998
STATE/COUNTRY OF
NAME INCORPORATION
- ---- -------------
CDS Devco, Inc. California
HSD Venture California
San Elijo Ranch, Inc. California
Baldwin Enterprises, Inc. Colorado
NSAC, Inc. Colorado
RRP, Inc. Colorado
330 Mad. Parent Corp. Delaware
AIC Financial Corporation Delaware
American Investment Company Delaware
Baldwin-CIS L.L.C. Delaware
Bellpet, Inc. Delaware
CDS Holding Corporation Delaware
Conwed Corporation Delaware
Leucadia Aviation, Inc. Delaware
Leucadia Cellars, Ltd. Delaware
LNC Investments, Inc. Delaware
LUK-Asia LLC Delaware
LUK-CPG, Inc. Delaware
LUK-CPH, Inc. Delaware
LUK-Fidei LLC Delaware
LUK-Flats LLC Delaware
LUK-Israel LLC Delaware
Neward Corporation Delaware
Rastin Investing Corp. Delaware
RERCO, Inc. Delaware
San Elijo Hills Development Company, LLC Delaware
Wedgewood Investments L.L.C. Delaware
Rosemary Beach Cottage Rental Company Florida
Rosemary Beach Land Company Florida
College Life Development Corporation Indiana
Professional Data Management, Inc. Indiana
Charter National Life Insurance Company Missouri
The Sperry and Hutchinson Company, Inc. New Jersey
Allcity Insurance Company New York
Empire Insurance Company New York
Centurion Insurance Company New York
Intramerica Life Insurance Company New York
Leucadia, Inc. New York
Leucadia Investors, Inc. New York
LUK-REN, Inc. New York
Phlcorp, Inc. Pennsylvania
Pine Ridge Associates, L.P. Texas
American Investment Bank, N.A. United States
American Investment Financial Utah
Leucadia Bottling L.L.C. Utah
Leucadia Film Corporation Utah
Leucadia Financial Corporation Utah
Leucadia Power Holdings, Inc. Utah
Leucadia Properties, Inc. Utah
Silver Mountain Industries, Inc. Utah
Telluride Properties Acquisition, Inc. Utah
Terracor II Utah
<PAGE>
Exhibit 21
LEUCADIA NATIONAL CORPORATION
SUBSIDIARIES AS OF DECEMBER 31, 1998, CONTINUED
STATE/COUNTRY OF
NAME INCORPORATION
- ---- -------------
Commercial Loan Insurance Corporation Wisconsin
WMAC Credit Insurance Corporation Wisconsin
WMAC Investment Corporation Wisconsin
LUK-Japan Ltd. British Virgin Islands
Fidei S.A. France
- --------------------------------
Subsidiaries not included on this list, considered in the aggregate as a single
subsidiary, would not constitute a significant subsidiary as of December 31,
1998.
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Leucadia National Corporation on (i) Form S-8 (File No. 2-84303), (ii) Form S-8
and S-3 (File No. 33-6054), (iii) Form S-8 and S-3 (File No. 33-26434), (iv)
Form S-8 and Form S-3 (File No. 33-30277), (v) Form S-8 (File No. 33-61682) and
(vi) Form S-8 (File No. 33-61718) of our report dated March 8, 1999, on our
audits of the consolidated financial statements and financial statement
schedules of Leucadia National Corporation and Subsidiaries as of December 31,
1998 and 1997, and for the years ended December 31, 1998, 1997, and 1996, which
report is included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
New York, New York
March 16, 1999
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Leucadia National Corporation on (i) Form S-8 (File No. 2-84303), (ii) Form S-8
and S-3 (File No. 33-6054), (iii) Form S-8 and S-3 (File No. 33-26434), (iv)
Form S-8 and Form S-3 (File No. 33-30277), (v) Form S-8 (File No. 33-61682) and
(vi) Form S-8 (File No. 33-61718) of our report dated January 27, 1999, with
respect to our audit of the financial statements of Gotham Partners Acquisition
I, L.P. as of December 31, 1998 and for the year then ended, included in this
Annual Report on Form 10-K for the year ended December 31, 1998.
ERNST & YOUNG LLP
New York, New York
March 16, 1999
NYFS04...:\30\76830\0146\347\CON3059L.380
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS INCLUDED IN THE ACCOMPANYING
FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
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<SECURITIES> 1,770,205
<RECEIVABLES> 881,371
<ALLOWANCES> 57,022
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 121,790
<DEPRECIATION> 76,397
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<BONDS> 722,601
0
0
<COMMON> 61,985
<OTHER-SE> 1,791,174
<TOTAL-LIABILITY-AND-EQUITY> 3,958,951
<SALES> 56,572
<TOTAL-REVENUES> 530,506
<CGS> 35,201
<TOTAL-COSTS> 314,311
<OTHER-EXPENSES> 132,206
<LOSS-PROVISION> 9,473
<INTEREST-EXPENSE> 45,139
<INCOME-PRETAX> 29,377
<INCOME-TAX> (25,073)
<INCOME-CONTINUING> 46,202
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<EXTRAORDINARY> 0
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<NET-INCOME> 54,343
<EPS-PRIMARY> .86
<EPS-DILUTED> .86
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