Through its various subsidiaries, the Company owns and utilizes in its operations two offices in Salt Lake City, Utah used for corporate and banking and lending activities (totaling approximately 77,000 sq. ft.). In addition, a subsidiary of the Company owns a facility (totaling approximately 158,500 sq. ft.) primarily used for manufacturing and storage located in Georgia.
Leucadia National Corporation (the "Parent") is a holding company whose assets principally consist of the stock of its several direct subsidiaries. The Parent continuously evaluates the retention and disposition of its existing operations and investigates possible acquisitions of new businesses in order to maximize shareholder value. Accordingly, while the Parent does not have any material arrangement, commitment or understanding with respect thereto (except as disclosed in this Report), further acquisitions, divestitures, investments and changes in capital structure are possible. Its principal sources of funds are its available cash resources, bank borrowings, public financings, repayment of subsidiary advances, funds distributed from its subsidiaries as tax sharing payments, management and other fees, and borrowings and dividends from its regulated and non-regulated subsidiaries. It has no substantial recurring cash requirements other than payment of interest and principal on its debt, tax payments and corporate overhead expenses.
In September 1997, the Company completed the sale of the Colonial Penn Life Group to Conseco for $460,000,000, consisting of $400,000,000 in notes due January 2, 2003 collateralized by non-cancelable letters of credit (the "Conseco Notes") and $60,000,000 in cash. In November 1997, the Company completed the sale of the Colonial Penn P&C Group to GECC for total cash consideration of $1,018,100,000, plus $14,300,000 for retention of certain employee benefit liabilities. Approximately $32,000,000 of the cash proceeds from the Colonial Penn sales were paid to the Parent. Subsequent to the completion of the sales, $189,000,000 of the cash proceeds was transferred to the Parent pursuant to tax sharing agreements. The balance of the cash proceeds and the notes was held by Charter as of December 31, 1997. During the first quarter of 1998, having made the required regulatory notification, $1,230,000,000 (consisting of $830,000,000 in cash and the Conseco Notes) was distributed to the Parent.
In June 1997, the Company also redeemed all of the aggregate principal amount outstanding of its 10-3/8% Notes for a total redemption price of $23,112,000.
At December 31, 1997, a maximum of approximately $23,400,000 was available to the Parent as dividends from its regulated subsidiaries without regulatory approval. This amount does not include the $1,230,000,000 dividended to the Parent in March 1998. Additional amounts may be available to the Parent in the form of loans or cash advances from regulated subsidiaries, although no amounts were outstanding at December 31, 1997 or borrowed to date in 1998. There are no restrictions on distributions from the non-regulated subsidiaries; the Parent and its non-regulated subsidiaries had aggregate cash and temporary investments of approximately $426,000,000 at December 31, 1997. The Parent also receives tax sharing payments from subsidiaries included in its consolidated income tax return, including certain regulated subsidiaries. Because of the tax loss carryforwards available to the Parent and certain subsidiaries, together with current interest deductions and corporate expenses, the amount paid by the Parent for income taxes is substantially less than tax sharing payments received from its subsidiaries. In addition, the Parent receives payments from the regulated and non-regulated entities for services provided by the Parent. Payments from regulated subsidiaries for dividends, tax sharing payments and other services totaled approximately $281,571,000 for the year ended December 31, 1997, of which $226,098,000 was received from the Colonial Penn Life Group and the Colonial Penn P&C Group.
Based on discussions with commercial and investment bankers, the Company believes that it has the ability to raise additional funds under acceptable conditions for use in its existing businesses or for appropriate investment opportunities. Since 1993, the Company's senior debt obligations have been rated as investment grade by Moody's, S&P and Duff & Phelps Inc. Ratings issued by bond rating agencies are subject to change at any time.
In 1997 and 1996, net cash was used for operations principally to fund its capital commitments and bridge financing to PIB, and, in 1997, for the purchase of investments classified as trading.
additional funding. As a result, the Company's equity interest in PIB at December 31, 1997 was reduced to 71%.
Effective as of January 30, 1998, the Company entered into an agreement with PepsiCo, pursuant to which, among other things, PIB repaid in full the Company's $77,705,000 bridge financing and the Company's equity interest in PIB was reduced to 37.9%. The agreement relieves the Company of any future funding obligation with respect to PIB and gives the Company the right to require that PepsiCo purchase all of the Company's interest in PIB (the "Put Option") for $37,000,000, plus interest (the "Exercise Price"), and gives PepsiCo the right (the "Call Option") to require that the Company sell to PepsiCo all of the Company's interest in PIB for the Exercise Price. The Call Option is exercisable for the five year period beginning on January 30, 1998 and the Put Option is exercisable for the three year period beginning January 30, 2000 (although, in certain limited circumstances it can be exercised earlier). During the period that the Call Option is exercisable, PepsiCo will have sole voting rights and the unilateral ability to make all capital, operational and managerial decisions of PIB, including future funding needs.
As a result of this agreement with PepsiCo, the Company no longer has any ability to influence PIB. Effective February 1, 1998, the Company will no longer account for its investment in PIB under the equity method of accounting. Although the Exercise Price exceeds the book value of the Company's equity investment in PIB at December 31, 1997 by $25,256,000, the Company will not recognize any gain in its results of operations until the Put Option or Call Option is exercised.
The Company retains a portfolio of Russian debt and equity securities with a book value of approximately $36,000,000 at December 31, 1997. In addition, the Company continues to explore other investment opportunities in Russia and the Commonwealth of Independent States. The Company's investments in Russia and Argentina are subject to foreign exchange and other risks. Investing in the emerging markets of Russia is subject to political risk and uncertainty concerning the government's ability to succeed in converting to a market economy, both of which are beyond the Company's control. The Company's investments in Argentina and Russia are subject to foreign currency exchange risks, the volatility of the banking systems and securities markets in these countries, the overall health of their respective economies and the usual competitive factors experienced by businesses.
In January 1997, the Company sold $150,000,000 aggregate liquidation amount of 8.65% trust issued preferred securities of its wholly-owned subsidiary, Leucadia Capital Trust I (the "Trust"). These Company-obligated mandatorily redeemable preferred securities have an effective maturity date of January 15, 2027 and represent undivided beneficial interests in the Trust's assets, which consist solely of $154,640,000 principal amount of 8.65% Junior Subordinated Deferrable Interest Debentures due 2027 of the Company. Considered together, the "back-up undertakings" of the Company related to the Trust's preferred securities constitute a full and unconditional guarantee by the Company of the Trust's obligations under the preferred securities.
In June 1997, the Company sold its investment in a New York City office building for $100,000,000 in cash. The Company reported a pre-tax gain of approximately $35,600,000 on the sale.
Net earned premium revenues of the Empire Group were $275,000,000, $326,400,000 and $326,100,000 for the years ended December 31, 1997, 1996 and 1995, respectively. In 1997, the decline in earned premium revenues was primarily due to the depopulation of the assigned risk pools ($31,700,000) and a reduction in certain commercial lines, principally voluntary commercial automobile ($10,200,000) and workers' compensation ($8,800,000) due to competition, reunderwriting and repricing. In addition, earned premium revenues were reduced in 1997 by $5,500,000 to record premiums due under retrospectively rated reinsurance contracts written for 1995 and prior accident years. The Empire Group re-estimated the premium due based upon its current estimate of loss ratios for 1995 and prior accident years. Partially offsetting these reductions was an increase in certain voluntary personal lines, principally private passenger automobile and homeowners. In 1996, although higher premium rates were charged on certain lines of business than in 1995, including amounts related to increased minimum automobile liability coverage required by New York State, such rate increases were largely offset by a decrease in the number of policies in force. This decrease primarily resulted from the depopulation of the assigned risk pools and reduced volume in other lines of business that were not profitable, primarily certain specialty programs within voluntary commercial automobile lines. In addition, in 1996 the Empire Group experienced increased competition, primarily in workers' compensation and commercial package policies, which reduced volume.
During the three years ended December 31, 1997, the Empire Group received servicing fees for providing administrative and claims services for the NYPAP. During 1997, the premium volume that the Empire Group managed under this program significantly declined primarily due to the ongoing depopulation of the NYPAP, which is expected to continue, and increased competition. During 1997, the Empire Group's agreement with the NYPAP contributed approximately $3,000,000 to pre-tax income, net of servicing expenses. Effective February 28, 1998, the Empire Group ceased serving as a servicing carrier for the NYPAP, thereby
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.
Manufacturing revenues declined during the last three years due to the sale of certain divisions and the discontinuance of certain non-performing product lines. The Company recorded charges of $4,300,000 in 1997, $3,700,000 in 1996 and $7,300,000 in 1995 for losses on sales and shutdown expenses, which are primarily reflected in the caption "Selling, general and other expenses." As of December 31, 1997, the Company's remaining manufacturing operation is its plastics division. For the year ended December 31, 1997, the plastics division reported gross profits of approximately $18,800,000. The pre-tax results for this segment improved in 1996 as compared to 1995, primarily due to manufacturing and operating efficiencies at the plastics division and the former bathroom vanities division, as well as the disposal of non-performing businesses.
The equity in losses of associated companies included losses from the Company's investment in MK Gold of $4,251,000 in 1997 and $6,478,000 in 1996 and a write-off of $6,540,000 in 1996, representing the Company's investment in an unsuccessful well drilled by its Siberian oil exploration joint venture. The Company's equity in losses of associated companies increased in 1996 compared to 1995 as a result of its investment in PIB, MK Gold and the Siberian oil joint venture.
The 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
The 1997 and 1996 income tax benefits were greater than the expected normal corporate tax rate primarily due to the favorable resolution of certain contingencies. The income tax benefit for 1995 was different than the expected normal corporate tax rate principally due to the gain related to the return of the WMAC Companies, which was not taxable, and the favorable resolution of certain contingencies.
The Company has evaluated its information technology systems to determine the potential impact of the year 2000. The year 2000 issue is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. In 1996, the Empire Group began to evaluate its information technology systems and their ability to support future business needs. This led to a decision to acquire new policy management and accounting systems. These systems provide enhanced functionality and improved processing for underwriting, claims, billing, collection, reinsurance, reporting and accounting and are designed to be year 2000 compliant. The Empire Group anticipates that these new systems will be fully implemented in 1999. The Company does not expect that the year 2000 will have a material effect on its consolidated financial position or consolidated results of operations. However, the year 2000 issue may affect other entities with which the Company transacts business, and the Company cannot predict the effect of the year 2000 issue on such entities.
Statements included in this Report may contain forward-looking statements. Such forward-looking statements are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements may relate, but are not limited, to projections of revenues, income or loss, capital expenditures, fluctuations in insurance reserves, plans for growth and future operations, competition and regulation as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted or quantified. When used in this Report, the words "estimates", "expects", "anticipates", "believes", "plans", "intends" and variations of such words and similar expressions are intended to identify forward-looking statements that involve risks and uncertainties. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. The factors that could cause actual results to differ materially from those suggested by any such statements include, but are not limited to, those discussed or identified from time to time in the Company's public filings, including general economic and market conditions, changes in domestic laws, regulations and taxes, changes in competition and pricing environments, regional or general changes in asset valuation, the occurrence of significant natural disasters, the inability to reinsure certain risks economically, the adequacy of loss reserves, prevailing interest rate levels and changes in the composition of the Company's assets and liabilities through acquisitions or divestitures. Undue reliance should not be placed on these forward-looking statements, which are applicable only as of the date hereof. The Company undertakes no obligation to