SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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
incorporation or organization) Identification Number)
315 Park Avenue South, New York, New York 10010-3607
(Address of principal executive offices) (Zip Code)
(212) 460-1900
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal
year, if changed since last report)
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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES [ ] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, at November 4, 1998:
62,201,174.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997
(Dollars in thousands, except par value)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- --------------
(Unaudited)
<S> <C> <C>
Assets
Investments:
Available for sale (aggregate cost of $1,255,620 and $1,713,653) $1,270,591 $1,721,640
Trading securities (aggregate cost of $1,000 and $108,479) 1,060 115,416
Held to maturity (aggregate fair value of $50,628 and $43,154) 49,876 43,036
Policyholder loans - 5,050
Other investments, including accrued interest income 201,333 70,658
---------- ----------
Total investments 1,522,860 1,955,800
Cash and cash equivalents 926,696 607,181
Reinsurance receivables, net 223,586 207,712
Trade, notes and other receivables, net 618,877 751,374
Prepaids and other assets 153,162 144,426
Property, equipment and leasehold improvements, net 73,023 60,522
Deferred policy acquisition costs 21,502 23,906
Deferred tax asset 8,629 -
Separate and variable accounts 549,779 541,546
Investments in associated companies 233,703 207,902
---------- ----------
Total $4,331,817 $4,500,369
========== ==========
Liabilities
Customer banking deposits $ 191,732 $ 198,582
Trade payables and expense accruals 97,043 216,818
Other liabilities 107,175 115,364
Income taxes payable 113,617 175,289
Deferred tax liability - 11,874
Policy reserves 713,753 737,082
Unearned premiums 111,419 127,669
Separate and variable accounts 549,779 541,546
Debt, including current maturities 433,611 352,872
---------- ----------
Total liabilities 2,318,129 2,477,096
---------- ----------
Minority interest 10,253 9,742
---------- ----------
Company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely subordinated debt securities of the Company 150,000 150,000
---------- ----------
Shareholders' Equity
Common shares, par value $1 per share, authorized 150,000,000 shares;
62,821,774 and 63,879,155 shares issued and outstanding, after deducting
55,577,534 and 54,398,456 shares held in treasury 62,822 63,879
Additional paid-in capital 222,430 253,267
Accumulated other comprehensive income 8,710 5,630
Retained earnings 1,559,473 1,540,755
---------- ----------
Total shareholders' equity 1,853,435 1,863,531
---------- ----------
Total $4,331,817 $4,500,369
========== ==========
</TABLE>
See notes to interim consolidated financial statements.
-2-
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
For the periods ended September 30, 1998 and 1997
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Month For the Nine Month
Period Ended September 30, Period Ended September 30,
-------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Insurance revenues and commissions $ 52,363 $ 70,654 $177,430 $219,796
Manufacturing 16,057 35,549 42,727 106,119
Finance 7,246 10,064 23,270 30,925
Investment and other income 59,892 41,828 189,780 173,681
Equity in income (losses) of associated companies 17,762 (13,950) 14,377 (34,343)
Net securities gains (losses) (74,212) 165 (70,114) 705
-------- -------- -------- --------
79,108 144,310 377,470 496,883
-------- -------- -------- --------
Expenses:
Provision for insurance losses and policy benefits 52,751 67,573 175,100 204,060
Amortization of deferred policy acquisition costs 11,445 12,930 34,991 39,001
Manufacturing cost of goods sold 9,410 24,305 25,825 73,558
Interest 10,351 10,995 30,673 35,633
Salaries 10,246 10,027 30,925 31,921
Selling, general and other expenses 19,318 36,451 69,222 102,406
-------- -------- -------- --------
113,521 162,281 366,736 486,579
-------- -------- -------- --------
Income (loss) from continuing operations before income
taxes, minority expense of trust preferred securities
and extraordinary loss (34,413) (17,971) 10,734 10,304
-------- -------- -------- --------
Income taxes:
Current (10,474) 4,406 1,743 10,782
Deferred (24,011) (12,909) (22,724) (7,494)
-------- -------- -------- --------
(34,485) (8,503) (20,981) 3,288
-------- -------- -------- --------
Income (loss) from continuing operations before minority
expense of trust preferred securities and extraordinary loss 72 (9,468) 31,715 7,016
Minority expense of trust preferred securities, net of taxes 2,109 1,967 6,327 5,833
-------- -------- -------- --------
Income (loss) from continuing operations before extraordinary loss (2,037) (11,435) 25,388 1,183
Income from discontinued operations, net of taxes - 15,318 - 51,013
Gain on disposal of discontinued operations, net of taxes of $68,799 - 200,337 - 200,337
-------- -------- -------- --------
Income (loss) before extraordinary loss (2,037) 204,220 25,388 252,533
Extraordinary loss from early extinguishment of debt, net of
income tax benefit of $8 and $1,108 - (13) - (2,057)
-------- -------- -------- --------
Net income (loss) $ (2,037) $204,207 $ 25,388 $250,476
======== ======== ======== ========
Basic earnings (loss) per common share:
Income (loss) from continuing operations before extraordinary loss $(.03) $(.18) $.40 $ .02
Income from discontinued operations - .24 - .82
Gain on disposal of discontinued operations - 3.17 - 3.25
Extraordinary loss - - - (.03)
----- ----- ---- -----
Net income (loss) $(.03) $3.23 $.40 $4.06
===== ===== ==== =====
Diluted earnings (loss) per common share:
Income (loss) from continuing operations before extraordinary loss $(.03) $(.18) $.40 $ .02
Income from discontinued operations - .24 - .82
Gain on disposal of discontinued operations - 3.17 - 3.24
Extraordinary loss - - - (.03)
----- ----- ---- -----
Net income (loss) $(.03) $3.23 $.40 $4.05
===== ===== ==== =====
</TABLE>
See notes to interim consolidated financial statements.
-3-
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine months ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Net cash flows from operating activities:
Net income $ 25,388 $ 250,476
Adjustments to reconcile net income to net cash (used for) operations:
Extraordinary loss, net of income tax benefit - 2,057
(Benefit) for deferred income taxes (22,724) (10,456)
Depreciation and amortization of property, equipment and leasehold improvements 6,739 8,472
Other amortization 22,984 43,423
Provision for doubtful accounts 6,054 8,739
Net securities (gains) losses 70,114 (705)
Equity in (income) losses of associated companies (14,377) 34,343
(Gain) on disposal of real estate, property and equipment (25,787) (60,719)
(Gain) on sale of loan portfolio (6,588) -
(Gain) on disposal of discontinued operations - (200,337)
Purchases of investments classified as trading (135,517) (1,000)
Proceeds from sales of investments classified as trading 96,902 248
Deferred policy acquisition costs incurred and deferred (32,587) (38,916)
Net change in:
Reinsurance receivables (15,874) (31,483)
Trade, notes and other receivables 90,021 (68,237)
Prepaids and other assets (30,644) (43,140)
Net assets of discontinued operations - (24,455)
Trade payables and expense accruals (77,192) 32,990
Other liabilities (6,129) (7,156)
Income taxes payable (61,590) 12,333
Policy reserves (23,329) 53,113
Unearned premiums (16,250) (7,482)
Other 2,587 2,260
---------- ----------
Net cash (used for) operating activities (147,799) (45,632)
---------- ----------
Net cash flows from investing activities:
Acquisition of real estate, property, equipment and leasehold improvements (52,459) (39,983)
Proceeds from disposals of real estate, property and equipment 43,988 160,042
Proceeds from disposal of discontinued operations - 60,000
Advances on loan receivables (89,203) (83,033)
Principal collections on loan receivables 58,518 96,902
Proceeds from sales of loan receivables 92,099 -
Purchases of investments (other than short-term) (1,967,013) (920,260)
Proceeds from maturities of investments 991,364 290,549
Proceeds from sales of investments 1,373,328 394,999
---------- ----------
Net cash provided by (used for) investing activities 450,622 (40,784)
---------- ----------
(continued)
See notes to interim consolidated financial statements.
-4-
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
For the nine months ended September 30, 1998 and 1997
(Unaudited)
1998 1997
---- ----
(In thousands)
Net cash flows from financing activities:
Net change in short-term borrowings $ 65,113 $ (27,905)
Net change in customer banking deposits (6,728) (8,545)
Issuance of Company-obligated mandatorily redeemable
preferred securities of subsidiary trust - 147,465
Issuance of long-term debt, net of issuance costs - 9,567
Reduction of long-term debt (315) (30,843)
Purchase of common stock for treasury (34,708) (495)
Dividends paid (6,670) -
--------- ---------
Net cash provided by financing activities 16,692 89,244
--------- ---------
Net increase in cash and cash equivalents 319,515 2,828
Cash and cash equivalents at January 1, 607,181 184,029
--------- ---------
Cash and cash equivalents at September 30, $ 926,696 $ 186,857
========= =========
</TABLE>
See notes to interim consolidated financial statements.
-5-
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
For the nine months ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Common Accumulated
Shares Additional Other
$1 Par Paid-In Comprehensive Retained
Value Capital Income Earnings Total
----- ------- ------------- -------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $60,418 $161,026 $1,759 $ 894,904 $1,118,107
----------
Comprehensive income:
Net change in unrealized gain (loss)
on investments 7,948 7,948
Net income 250,476 250,476
----------
Total comprehensive income 258,424
----------
Exercise of options to purchase
common shares 181 1,781 1,962
Conversion of 5 1/4% Convertible
Subordinated Debentures 3,258 90,417 93,675
Purchase of stock for treasury (17) (478) (495)
------- -------- ------ ---------- ----------
Balance, September 30, 1997 $63,840 $252,746 $9,707 $1,145,380 $1,471,673
======= ======== ====== ========== ==========
Balance, January 1, 1998 $63,879 $253,267 $5,630 $1,540,755 $1,863,531
----------
Comprehensive income:
Net change in unrealized gain (loss)
on investments 3,080 3,080
Net income 25,388 25,388
----------
Total comprehensive income 28,468
----------
Exercise of options to purchase
common shares 121 2,693 2,814
Purchase of stock for treasury (1,178) (33,530) (34,708)
Dividends (6,670) (6,670)
------- -------- ------ ---------- ----------
Balance, September 30, 1998 $62,822 $222,430 $8,710 $1,559,473 $1,853,435
======= ======== ====== ========== ==========
</TABLE>
See notes to interim consolidated financial statements.
-6-
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
1. The unaudited interim consolidated financial statements, which reflect all
adjustments (consisting only of normal recurring items) that management
believes necessary to present fairly results of interim operations, should
be read in conjunction with the Notes to Consolidated Financial Statements
(including the Summary of Significant Accounting Policies) included in the
Company's audited consolidated financial statements for the year ended
December 31, 1997, which are included in the Company's Annual Report filed
on Form 10-K/A for such year (the "1997 10-K/A"). Results of operations for
interim periods are not necessarily indicative of annual results of
operations. The consolidated balance sheet at December 31, 1997 was
extracted from the audited annual financial statements and does not include
all disclosures required by generally accepted accounting principles for
annual financial statements.
In August and October 1998, the Company entered into contracts to increase
its interest in HomeFed Corporation to an aggregate of 89.6% in July 1999.
Of the aggregate purchase price of $8,380,000, $6,710,000 was advanced to
HomeFed pending the closing of the transaction. The balance of the purchase
price, together with the stock purchase agreements and the outstanding
shares of HomeFed owned by the Company, were transferred to a trust for the
benefit of the Company's shareholders as of August 25, 1998 (the "record
date"). Pursuant to a special dividend, beneficial interests in the trust
were distributed to shareholders of record on the record date. The
interests in the trust are not certificated, are not transferrable except
by will or under the laws of descent and distribution, do not represent any
equity interest in HomeFed common stock and do not entitle the beneficial
holders of trust interests to vote any HomeFed common stock or receive
dividends or interest. It is anticipated that the trust will be terminated
as promptly as practicable following the purchase of additional HomeFed
stock in July 1999.
In 1997, the Company classified as discontinued operations and sold the
property and casualty insurance operations of Colonial Penn Insurance
Company and its subsidiaries (the "Colonial Penn P&C Group") and the life
and health insurance operations of Colonial Penn Life Insurance Company and
Providential Life Insurance Company (the "Colonial Penn Life Group").
Certain amounts for prior periods have been reclassified to be consistent
with the 1998 presentation.
2. 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. After reflecting its share of losses since
inception, the book value of the Company's equity investment in PIB was
$9,645,000 at September 30, 1998.
As more fully discussed in the Company's 1997 10-K/A, pursuant to its
agreement with PepsiCo effective as of January 30, 1998, the Company no
longer has any ability to influence PIB. As a result, the Company no longer
accounts for its investment in PIB under the equity method of accounting.
The agreement provides for a put option and a call option with respect to
the Company's equity interest, which are exercisable at certain times.
Although the exercise price exceeds the book value of the Company's equity
investment in PIB at September 30, 1998 by $27,355,000, the Company will
not recognize any gain in its results of operations until the put option or
call option is exercised.
3. In September 1998, the Company reinsured, retroactive to January 1, 1998,
substantially all of its remaining life insurance business to Allstate Life
Insurance Company and a subsidiary thereof in an indemnity reinsurance
transaction. The premium received on this transaction was approximately
$28,675,000. The gain on the reinsurance transaction has been deferred and
will be amortized into income based upon actuarial estimates of the premium
revenue of the underlying insurance contracts or will be recognized earlier
in income if converted to assumption reinsurance.
-7-
<PAGE>
Notes to Interim Consolidated Financial Statements, continued
4. 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 $6,600,000
for the nine month period ended September 30, 1998.
5. In July 1998, the Company entered into an agreement to sell a 25% interest
in the privately held Argentine insurance holding company, Caja de Ahorro y
Seguro S.A., ("Caja"), to a private Argentine company that is also an
investor in Caja for $140,000,000. Of the total purchase price,
$100,000,000 will be paid in cash and the balance will be a two-year
collateralized interest-bearing promissory note. The Company will retain a
5% interest in Caja. This transaction is subject to approval of the Central
Bank of Argentina. Upon consummation of the transaction, the Company
expects to record a pre-tax gain of approximately $100,000,000.
6. In the fourth quarter of 1998, the Company acquired approximately 95% of
Fidei S.A., a French company listed on the Paris Stock Exchange which is
engaged directly and through subsidiaries in real estate activities, for
approximately $60,000,000.
7. The Company's Board of Directors has increased to 6,000,000 the maximum
number of its Common Shares that the Company currently is authorized to
purchase. Such purchases may be made from time to time in the open market,
through block trades or otherwise. Depending on market conditions and other
factors, such purchases may be commenced or suspended at any time without
prior notice. From August 26, 1998 through November 4, 1998, the Company
repurchased 1,764,500 Common Shares for an aggregate cost of approximately
$51,300,000.
8. During the third quarter of 1998, due to declines in values that were
deemed other than temporary, the Company recorded a pre-tax writedown of
approximately $75,000,000 and a deferred tax benefit of $26,000,000 related
to its investments in Russian and Polish debt and equity securities. Such
writedowns are reflected in the caption "Net securities gains (losses)". At
September 30, 1998, the remaining book value of the Company's investments
in these debt and equity securities was approximately $19,000,000.
9. A summary of the results of discontinued operations is as follows for the
periods ended September 30, 1997 (in thousands):
<TABLE>
<CAPTION>
Colonial Penn Life Group Colonial Penn P&C Group
------------------------ -----------------------
For the three For the nine For the three For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
1997 1997 1997 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $46,097 $166,078 $153,614 $455,131
------- -------- -------- --------
Expenses:
Provision for insurance losses and policy benefits 26,162 100,964 113,652 331,682
Other operating expenses 6,843 28,437 27,595 80,902
------- -------- -------- --------
33,005 129,401 141,247 412,584
------- -------- -------- --------
Income before income taxes 13,092 36,677 12,367 42,547
Income taxes 5,171 13,419 4,970 14,792
------- -------- -------- --------
Income from discontinued operations, net of taxes $ 7,921 $ 23,258 $ 7,397 $ 27,755
======= ======== ======== ========
</TABLE>
-8-
<PAGE>
Notes to Interim Consolidated Financial Statements, continued
10. Income taxes for 1998 reflect a benefit (approximately $30,000,000 for the
nine months and $25,000,000 for the three months ended September 30, 1998,
respectively) for a change in the Company's estimated 1997 federal tax
liability and the favorable resolution of certain contingencies. Income
taxes for 1997 reflect reductions for the favorable resolution of certain
federal income tax contingencies.
11. Earnings (loss) per share amounts were calculated by dividing net income by
the sum of the weighted average number of common shares outstanding and,
for diluted earnings (loss) per share, the incremental weighted average
number of shares issuable upon exercise of outstanding options for the
periods they were outstanding. The number of shares used to calculate basic
earnings (loss) per share amounts was 63,790,000 and 61,708,000 for the
nine month periods ended September 30, 1998 and 1997, respectively, and
63,600,000 and 63,259,000 for the three month periods ended September 30,
1998 and 1997, respectively. The number of shares used to calculate diluted
earnings (loss) per share amounts was 63,905,000 and 61,917,000 for the
nine month periods ended September 30, 1998 and 1997, respectively, and
63,600,000 and 63,259,000 for the three month periods ended September 30,
1998 and 1997, respectively.
During the nine month period ended September 30, 1997, the 5 1/4%
Convertible Subordinated Debentures due 2003, which were convertible into
3,478,260 Common Shares, were outstanding; no amounts were outstanding
during the three month period ended September 30, 1997. Such debentures
were not included in the computation of diluted earnings (loss) per share
for the nine month period ended September 30, 1997, as those debentures
were antidilutive.
12. Cash paid for interest and income taxes (net of refunds) was $28,162,000
and $59,940,000, respectively, for the nine month period ended September
30, 1998 and $35,420,000 and $7,606,000, respectively, for the nine month
period ended September 30, 1997.
-9-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Interim Operations.
The following should be read in conjunction with the Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the 1997
10-K/A.
Liquidity and Capital Resources
During each of the nine month periods ended September 30, 1998 and 1997, the
Company operated profitably. For the nine month period ended September 30, 1998,
net cash was used for operations, principally for the payment of income taxes
and to purchase investments classified as trading, partially offset by the
repayment of the Company's bridge financing to Pepsi International Bottlers
("PIB"), as described below. For the nine month period ended September 30, 1997,
net cash was used for operations, principally to fund its capital commitments
and bridge financing to PIB, as described below.
As more fully discussed in the Company's 1997 10-K/A, pursuant to its agreement
with PepsiCo, Inc. effective as of January 30, 1998, the Company's $77,705,000
bridge financing to PIB was fully repaid during the first quarter of 1998. In
addition, the agreement relieves the Company of any future funding obligation
with respect to PIB.
During 1998, the Company's subsidiaries, American Investment Bank, N.A. ("AIB")
and American Investment Financial ("AIF"), 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
$6,600,000 for the nine month period ended September 30, 1998.
In September 1998, the Company reinsured, retroactive to January 1, 1998,
substantially all of its remaining life insurance business to Allstate Life
Insurance Company and a subsidiary thereof in an indemnity reinsurance
transaction. The premium received on this transaction was approximately
$28,675,000. The gain on the reinsurance transaction was deferred and will be
amortized into income based upon actuarial estimates of the premium revenue of
the underlying insurance contracts or will be recognized earlier in income if
converted to assumption reinsurance.
The Company previously announced its intention to distribute to its shareholders
cash in the maximum amount permissible under the Company's senior subordinated
debt agreements (approximately $791,000,000 as of September 30, 1998, after
reduction for Common Shares purchased by the Company through November 4, 1998).
Any such distribution would be subject to the receipt of a favorable ruling from
the Internal Revenue Service that would permit shareholders to receive capital
gains treatment on the distribution. That ruling would require that a minimum of
$648,800,000 and a maximum of $811,000,000 be distributed by the Company to
shareholders (whether by stock buyback or a dividend distribution) for capital
gains treatment to be available in circumstances that would not otherwise result
in capital gains treatment.
In October 1998, the Company announced that, in view of recent market
developments, it was reviewing whether or not to make the cash distribution and,
if to be made, the amount of any such distribution. Although the final structure
and timing of any distribution has not been determined, if a cash distribution
is ultimately consummated, it is likely to be in the form of a cash dividend,
share repurchase or some combination thereof, but no distribution would occur
prior to 1999.
Under the Company's senior subordinated debt agreements, the Company would be
required to make an offer to purchase such debt at a price of 101% of the
aggregate outstanding principal amount of $235,000,000, plus accrued interest,
for a cash distribution in excess of approximately $578,000,000 (as of September
30, 1998, after reduction for Common Shares purchased by the Company through
November 4, 1998). The maximum amount distributable under these debt agreements,
as well as the amount that would obligate the Company to make an offer to
purchase such debt would be adjusted by the Company's earnings or losses after
September 30, 1998, and by the amount of any future share repurchases and
certain dividends.
There can be no assurance that the Company will choose to make any cash
distribution or that it will make a cash distribution that would require the
making of an offer to purchase its outstanding senior subordinated debt.
-10-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Interim Operations, continued
In July 1998, the Company entered into an agreement to sell a 25% interest in
the privately held Argentine insurance holding company, Caja de Ahorro y Seguro
S.A., ("Caja"), to a private Argentine company that is also an investor in Caja
for $140,000,000. Of the total purchase price, $100,000,000 will be paid in cash
and the balance will be a two-year collateralized interest-bearing promissory
note. The Company will retain a 5% interest in Caja. This transaction is subject
to approval of the Central Bank of Argentina. Upon consummation of the
transaction, the Company expects to record a pre-tax gain of approximately
$100,000,000.
In the fourth quarter of 1998, the Company acquired approximately 95% of Fidei
S.A., a French company listed on the Paris Stock Exchange which is engaged
directly and through subsidiaries in real estate activities, for approximately
$60,000,000. In connection with this acquisition, the Company borrowed
approximately $65,500,000 under its bank credit facility and 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.
The Company's Board of Directors has increased to 6,000,000 the maximum number
of its Common Shares that the Company currently is authorized to purchase. Such
purchases may be made from time to time in the open market, through block trades
or otherwise. Depending on market conditions and other factors, such purchases
may be commenced or suspended at any time without prior notice. From August 26,
1998 through November 4, 1998, the Company repurchased 1,764,500 Common Shares
for an aggregate cost of approximately $51,300,000.
As of September 30, 1998, the Company's cash, cash equivalents and marketable
securities, excluding those amounts held by its regulated subsidiaries, totaled
approximately $1,432,000,000. 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 September 30, 1998.
Results of Operations
The 1998 Periods Compared to the 1997 Periods
Net earned premium revenues of the Empire Group were $177,248,000 and
$216,057,000 for the nine month periods ended September 30, 1998 and 1997,
respectively, and $55,043,000 and $69,237,000 for the three month periods ended
September 30, 1998 and 1997, respectively. The decrease in earned premiums for
these periods principally relates to a decline in the number of assigned risk
automobile pool contracts acquired due to competition, the depopulation of the
assigned risk automobile pools and a reduction in certain lines, principally
voluntary commercial automobile, workers' compensation, commercial package
policies and private passenger automobile (most significantly in the three
months ended September 30, 1998), due to tighter underwriting standards,
reunderwriting and increased competition.
The Empire Group's loss ratios were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
Loss Ratio:
GAAP 98.8% 97.1% 99.5% 94.1%
SAP 98.8% 97.1% 99.5% 94.1%
Expense Ratio:
GAAP 30.9% 20.6% 27.1% 21.1%
SAP 35.7% 22.3% 28.6% 20.1%
Combined Ratio:
GAAP 129.7% 117.7% 126.6% 115.2%
SAP 134.5% 119.4% 128.1% 114.2%
-11-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Interim Operations, continued
The Empire Group's expense ratios increased in 1998 due to the reduction in
premium volume at a rate greater than the reduction in net underwriting and
other costs. In addition, as more fully described in the 1997 10-K/A, effective
February 28, 1998, the Empire Group ceased being a servicing carrier for the New
York Public Automobile Pool. This reduction in servicing fees in 1998 negatively
affected the expense ratios. The loss ratio increased due to reserve
strengthening for prior accident years in the voluntary commercial automobile,
commercial assigned risk, workers' compensation and commercial package lines of
business, which resulted from continued unfavorable claims development. The
difference between the SAP and GAAP combined ratios principally reflects the
accounting for certain expenses which are treated differently under SAP and GAAP
and the use of premiums written for SAP as compared to premiums earned for GAAP
in the computation of the expense ratios.
The manufacturing segment, which since December 1997 has consisted of the
plastics division, reported operating profits in 1998 and 1997. Manufacturing
revenues and gross profit for the nine and three month periods ended September
30, 1998 decreased as compared to the similar periods in 1997 principally due to
the sale of certain divisions in 1997. Pre-tax results for the nine and three
month periods ended September 30, 1998 increased as compared to the similar
periods in 1997 principally due to the loss on sale of certain divisions during
1997.
Finance revenues and operating profits reflect the level of consumer instalment
loans. Average loans outstanding during the nine and three month periods ended
September 30, 1998 were lower than loans outstanding during the comparable
periods of 1997 by approximately $67,500,000 and $78,300,000, respectively,
primarily due to the sale of the executive and professional loan portfolio. AIB
and AIF received proceeds of $89,500,000 from the sale of this portfolio and
reported a pre-tax gain approximately $6,600,000 for the nine month period ended
September 30, 1998. The decrease in finance revenues was partially offset by
reduced expenses and lower losses on automobile loans. Additionally, in the
third quarter of 1997, the Company recorded a $3,500,000 reserve for unexpected
costs to settle litigation related to a lending program that is in liquidation.
The Company has begun to see growth in its automobile lending business as it has
expanded into new locations, entered into new programs and benefited from the
decline in competition due to the failure of certain competitors and a reduction
in capital available for securitization transactions. However, the Company's
ability to grow the portfolio in the future will continue to be subject to
various factors, including general economic conditions and the level of
competition.
Investment and other income increased in the nine month period ended September
30, 1998 as compared to the nine month period ended September 30, 1997
principally due to an increase in investment income of $60,100,000, including
earnings on proceeds from the sales of the Colonial Penn Life Group and the
Colonial Penn P&C Group, and the gain on the sale of the executive and
professional loan portfolio, partially offset by a reduction of $41,100,000 in
gains from sales of real estate properties and reduced fee income related to
service business. The increase in investment and other income in the three month
period ended September 30, 1998 as compared to the similar period in 1997 is
principally due to increased investment income.
Equity in income (losses) of associated companies improved in the 1998 periods
as compared to the 1997 periods primarily due to a reduction of approximately
$30,100,000 for the nine month period and $14,600,000 for the three month period
in the Company's equity losses related to PIB and income from an investment
partnership of approximately $22,600,000 for the nine month period and
$20,700,000 for the three month period. As discussed above, effective February
1, 1998, the Company no longer accounts for its investment in PIB under the
equity method of accounting.
During the third quarter of 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 September 30, 1998, the remaining book value of the Company's
investments in these debt and equity securities was approximately $19,000,000.
Interest expense primarily reflects the level of external borrowings outstanding
during the period.
-12-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Interim Operations, continued
The decrease in selling, general and other expenses in the 1998 periods as
compared to the 1997 periods principally reflects decreased expenses of the
manufacturing segment primarily as a result of the sale of certain divisions in
1997, decreased operating expenses of real estate properties, lower provisions
for bad debts and the charge in 1997 related to a legal settlement as discussed
above.
Income taxes for 1998 reflect a benefit (approximately $30,000,000 for the nine
months and $25,000,000 for the three months ended September 30, 1998,
respectively) for a change in the Company's estimated 1997 federal tax liability
and the favorable resolution of certain contingencies. Income taxes for 1997
reflect reductions for the favorable resolution of certain federal income tax
contingencies.
The number of shares used to calculate basic earnings (loss) per share amounts
was 63,790,000 and 61,708,000 for the nine month periods ended September 30,
1998 and 1997, respectively, and 63,600,000 and 63,259,000 for the three month
periods ended September 30, 1998 and 1997, respectively. The number of shares
used to calculate diluted earnings (loss) per share amounts was 63,905,000 and
61,917,000 for the nine month periods ended September 30, 1998 and 1997,
respectively, and 63,600,000 and 63,259,000 for the three month periods ended
September 30, 1998 and 1997, respectively. During the nine month period ended
September 30, 1997, the 5 1/4% Convertible Subordinated Debentures due 2003,
which were convertible into 3,478,260 Common Shares, were outstanding; no
amounts were outstanding during the three month period ended September 30, 1997.
Such debentures were not included in the computation of diluted earnings (loss)
per share for the nine month period ended September 30, 1997, as those
debentures were antidilutive.
Year 2000 and Information Technology Systems
The Company has evaluated its information technology systems to determine the
potential impact of the year 2000. The year 2000 issue is the result of computer
programs being written using two digits (rather than four) to define the
applicable year. Any programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000, which could result
in miscalculations or system failures. In 1996, the Empire Group began to
evaluate its information technology systems and their ability to support future
business needs. This led to a decision to acquire new policy management and
accounting systems. These systems provide enhanced functionality and improved
processing for underwriting, claims, billing, collection, reinsurance, reporting
and accounting and are designed to be year 2000 compliant. The Empire Group
anticipates that these new systems will be fully implemented in 1999. The
Company does not expect that the year 2000 will have a material effect on its
consolidated financial position or consolidated results of operations. However,
the year 2000 issue may affect other entities with which the Company transacts
business. The Company is in the process of assessing whether third parties with
whom it has material relationships are year 2000 compliant. At this time the
Company cannot predict the effect of the year 2000 issue on such entities.
Cautionary Statement for Forward-Looking Information
Statements included in this Management's Discussion and Analysis of Financial
Condition and Results of Interim Operations 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 Management's Discussion and Analysis of Financial Condition and
Results of Interim Operations, 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
-13-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Interim Operations, continued
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, continued credit worthiness and
financial stability of counterparties to the Company's financial agreements,
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 revise or
update these forward-looking statements to reflect events or circumstances that
arise after the date of this Management's Discussion and Analysis of Financial
Condition and Results of Interim Operations or to reflect the occurrence of
unanticipated events.
-14-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
As previously disclosed in the 1997 10-K/A, a purported derivative
complaint entitled Pinnacle Consultants, Ltd. v. Leucadia National
Corp., et al (no. 602470/97) is pending in New York State Supreme
Court. The complaint alleges claims for fraud, waste, breach of
fiduciary duty and conversion against current and two former
directors of the Company. In August 1998, defendants' motion to
dismiss the complaint was granted in part and denied in part.
Plaintiff and defendants are appealing the decision.
Item 5. Other Information.
In August and October 1998, the Company entered into contracts to
increase its interest in HomeFed Corporation to an aggregate of 89.6%
in July 1999. Of the aggregate purchase price of $8,380,000,
$6,710,000 was advanced to HomeFed pending the closing of the
transaction. The balance of the purchase price, together with the
stock purchase agreements and the outstanding shares of HomeFed owned
by the Company, were transferred to a trust for the benefit of the
Company's shareholders as of August 25, 1998 (the "record date").
Pursuant to a special dividend, beneficial interests in the trust
were distributed to shareholders of record on the record date. The
interests in the trust are not certificated, are not transferrable
except by will or under the laws of descent and distribution, do not
represent any equity interest in HomeFed common stock and do not
entitle the beneficial holders of trust interests to vote any HomeFed
common stock or receive dividends or interest. It is anticipated that
the trust will be terminated as promptly as practicable following the
purchase of additional HomeFed stock in July 1999.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits.
27 Financial Data Schedule.
b) Reports on Form 8-K.
The Company filed a current report on Form 8-K dated July 2, 1998
which sets forth information under Item 5. Other events and Item 7.
Financial Statements, Pro Forma Financial Statements and Exhibits.
-15-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEUCADIA NATIONAL CORPORATION
(Registrant)
Date: November 13, 1998 By /s/ Barbara L. Lowenthal
------------------------------------
Barbara L. Lowenthal
Vice President and Comptroller
(Chief Accounting Officer)
-16-
<PAGE>
EXHIBIT INDEX
Exhibit Exemption
Number Description Indication
------ ----------- ----------
27 Financial Data Schedule.
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THE ACCOMPANYING FORM 10-Q AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 926,696
<SECURITIES> 1,522,860
<RECEIVABLES> 842,463
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 73,023
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,331,817
<CURRENT-LIABILITIES> 0
<BONDS> 433,611
0
0
<COMMON> 62,822
<OTHER-SE> 1,790,613
<TOTAL-LIABILITY-AND-EQUITY> 4,331,817
<SALES> 42,727
<TOTAL-REVENUES> 377,470
<CGS> 25,825
<TOTAL-COSTS> 235,916
<OTHER-EXPENSES> 100,147
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,673
<INCOME-PRETAX> 10,734
<INCOME-TAX> (20,981)
<INCOME-CONTINUING> 25,388
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,388
<EPS-PRIMARY> .40
<EPS-DILUTED> .40
</TABLE>
