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 June 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 August 7, 1998: 63,954,720.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and December 31, 1997
(Dollars in thousands, except par value)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
Investments:
Available for sale (aggregate cost of $1,701,458 and $1,713,653) $1,702,680 $1,721,640
Trading securities (aggregate cost of $62,287 and $108,479) 64,731 115,416
Held to maturity (aggregate fair value of $49,297 and $43,154) 49,037 43,036
Policyholder loans 5,075 5,050
Other investments, including accrued interest income 192,526 70,658
---------- ----------
Total investments 2,014,049 1,955,800
Cash and cash equivalents 445,080 607,181
Reinsurance receivables, net 211,777 207,712
Trade, notes and other receivables, net 613,473 751,374
Prepaids and other assets 133,139 144,426
Property, equipment and leasehold improvements, net 67,690 60,522
Deferred policy acquisition costs 23,568 23,906
Separate and variable accounts 617,321 541,546
Investments in associated companies 246,197 207,902
---------- ---------
Total $4,372,294 $4,500,369
========== ==========
LIABILITIES
Customer banking deposits $ 192,148 $ 198,582
Trade payables and expense accruals 134,844 216,818
Other liabilities 97,819 115,364
Income taxes payable 44,296 175,289
Deferred tax liability 10,799 11,874
Policy reserves 729,921 737,082
Unearned premiums 125,641 127,669
Separate and variable accounts 617,321 541,546
Debt, including current maturities 372,353 352,872
---------- ----------
Total liabilities 2,325,142 2,477,096
---------- ----------
Minority interest 9,749 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; 63,943,710
and 63,879,155 shares issued and outstanding, after deducting
54,418,638 and 54,398,456 shares held in treasury 63,944 63,879
Additional paid-in capital 254,375 253,267
Accumulated other comprehensive income 904 5,630
Retained earnings 1,568,180 1,540,755
---------- ----------
Total shareholders' equity 1,887,403 1,863,531
---------- ----------
Total $4,372,294 $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 June 30, 1998 and 1997
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Month For the Six Month
Period Ended June 30, Period Ended June 30,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Insurance revenues and commissions $ 59,839 $ 72,172 $125,067 $149,142
Manufacturing 15,027 34,619 26,670 70,570
Finance 6,713 10,252 16,024 20,861
Investment and other income 65,753 83,769 129,888 131,853
Equity in income (losses) of associated companies 172 (9,382) (3,385) (20,393)
Net securities gains (losses) 2,163 (902) 4,098 540
-------- -------- -------- --------
149,667 190,528 298,362 352,573
-------- -------- -------- --------
EXPENSES:
Provision for insurance losses and policy benefits 60,855 68,635 122,349 136,487
Amortization of deferred policy acquisition costs 11,169 12,548 23,546 26,071
Manufacturing cost of goods sold 9,112 24,251 16,415 49,253
Interest 10,196 11,756 20,322 24,638
Salaries 10,993 10,419 20,679 21,894
Selling, general and other expenses 24,906 29,103 49,904 65,955
-------- -------- -------- --------
127,231 156,712 253,215 324,298
-------- -------- -------- --------
Income from continuing operations before income taxes,
minority expense of trust preferred securities
and extraordinary loss 22,436 33,816 45,147 28,275
-------- -------- -------- --------
Income taxes:
Current 2,302 5,192 12,217 6,376
Deferred 3,183 7,833 1,287 5,415
-------- -------- -------- --------
5,485 13,025 13,504 11,791
-------- -------- -------- --------
Income from continuing operations before minority
expense of trust preferred securities and extraordinary loss 16,951 20,791 31,643 16,484
Minority expense of trust preferred securities, net of taxes 2,109 2,109 4,218 3,866
-------- -------- -------- --------
Income from continuing operations before extraordinary loss 14,842 18,682 27,425 12,618
Income from discontinued operations, net of taxes - 16,911 - 35,695
-------- -------- -------- --------
Income before extraordinary loss 14,842 35,593 27,425 48,313
Extraordinary loss from early extinguishment of debt, net of
income tax benefit of $1,100 - (2,044) - (2,044)
-------- -------- -------- --------
Net income $ 14,842 $ 33,549 $ 27,425 $ 46,269
======== ======== ======== ========
Basic earnings (loss) per common share:
Income from continuing operations before extraordinary loss $ .23 $ .30 $ .43 $ .21
Income from discontinued operations - .28 - .58
Extraordinary loss - (.03) - (.03)
----- ----- ----- -----
Net income $ .23 $ .55 $ .43 $ .76
===== ===== ===== =====
Diluted earnings (loss) per common share:
Income from continuing operations before extraordinary loss $ .23 $ .30 $ .43 $ .21
Income from discontinued operations - .26 - .58
Extraordinary loss - (.03) - (.03)
----- ----- ----- -----
Net income $ .23 $ .53 $ .43 $ .76
===== ===== ===== =====
</TABLE>
See notes to interim consolidated financial statements.
-3-
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
(In thousands)
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 27,425 $ 46,269
Adjustments to reconcile net income to net cash (used for) operations:
Extraordinary loss, net of income tax benefit - 2,044
Provision for deferred income taxes 1,287 3,453
Depreciation and amortization of property, equipment and leasehold improvements 4,453 5,659
Other amortization 14,306 28,912
Provision for doubtful accounts 4,038 6,367
Net securities (gains) (4,098) (540)
Equity in losses of associated companies 3,385 20,393
(Gain) on disposal of real estate, property and equipment (17,960) (56,532)
(Gain) on sale of loan portfolio (6,487) -
Purchases of investments classified as trading (135,517) (23,035)
Proceeds from sales of investments classified as trading 96,902 2,256
Deferred policy acquisition costs incurred and deferred (23,208) (26,635)
Net change in:
Reinsurance receivables (4,065) (2,184)
Trade, notes and other receivables 72,886 (109,170)
Prepaids and other assets (35,452) (51,499)
Net assets of discontinued operations - (22,295)
Trade payables and expense accruals (87,086) (11,410)
Other liabilities (15,297) 584
Income taxes payable (130,993) 19,224
Policy reserves (7,161) (6,531)
Unearned premiums (2,028) 1,145
Other 1,160 1,189
----------- ---------
Net cash (used for) operating activities (243,510) (172,336)
----------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of real estate, property, equipment and leasehold improvements (27,058) (33,754)
Proceeds from disposals of real estate, property and equipment 27,745 139,168
Advances on loan receivables (61,379) (53,186)
Principal collections on loan receivables 45,359 61,771
Proceeds from sale of loan portfolio 88,583 -
Purchases of investments (other than short-term) (1,746,451) (685,220)
Proceeds from maturities of investments 558,192 200,402
Proceeds from sales of investments 1,183,325 299,325
----------- ---------
Net cash provided by (used for) investing activities 68,316 (71,494)
----------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in short-term borrowings 19,613 113,488
Net change in customer banking deposits (6,320) (9,039)
Issuance of Company-obligated mandatorily redeemable
preferred securities of subsidiary trust - 147,465
Reduction of long-term debt (200) (29,227)
----------- ---------
Net cash provided by financing activities 13,093 222,687
----------- ---------
Net (decrease) in cash and cash equivalents (162,101) (21,143)
Cash and cash equivalents at January 1, 607,181 184,029
----------- ---------
Cash and cash equivalents at June 30, $ 445,080 $ 162,886
=========== =========
</TABLE>
See notes to interim consolidated financial statements.
-4-
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the six months ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Common Accumulated
Shares Additional Other
$1 Par Paid-In Comprehensive Retained
Value Capital Income (Loss) 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 (6,789) (6,789)
Net income 46,269 46,269
----------
Total comprehensive income 39,480
----------
Exercise of options to purchase
common shares 110 1,184 1,294
Conversion of 5 1/4% Convertible
Subordinated Debentures 1,033 28,669 29,702
Purchase of stock for treasury (8) (205) (213)
------- -------- ------- ---------- ----------
BALANCE, JUNE 30, 1997 $61,553 $190,674 $(5,030) $ 941,173 $1,188,370
======= ======== ======= ========== ==========
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 (4,726) (4,726)
Net income 27,425 27,425
----------
Total comprehensive income 22,699
----------
Exercise of options to purchase
common shares 85 1,867 1,952
Purchase of stock for treasury (20) (759) (779)
------- -------- ------- ---------- ----------
BALANCE, JUNE 30, 1998 $63,944 $254,375 $ 904 $1,568,180 $1,887,403
======= ======== ======= ========== ==========
</TABLE>
See notes to interim consolidated financial statements.
-5-
<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 May 1998, the Company announced that it is studying a possible
restructuring of its capitalization. The Company currently intends to
distribute to its shareholders cash in the maximum amount permissible under
the Company's outstanding senior subordinated debt agreements, which amount
currently is approximately $848,000,000 (the "Distribution"). In addition,
the Company is no longer considering a spin-off of the shares of the Empire
Insurance Company, its property and casualty insurance subsidiary. Although
the final structure and timing for the Distribution has not been
determined, it is likely that the Distribution would be in the form of a
cash dividend, a share repurchase or some combination thereof in January
1999, all of which would be taxed to the shareholders at capital gains
rates.
If implemented, the Distribution will obligate the Company to make an offer
to purchase all of the Company's outstanding 8 1/4% Senior Subordinated
Notes due 2005 and its outstanding 7 7/8% Senior Subordinated Notes due
2006 (collectively, the "Senior Subordinated Notes") at a purchase price of
101% of the outstanding principal amount pursuant to the terms of the
indentures governing the Senior Subordinated Notes. An aggregate of
approximately $235,000,000 of Senior Subordinated Notes is currently
outstanding.
Consummation of the Distribution is subject to the receipt by the Company
of a favorable ruling from the Internal Revenue Service that would permit
shareholders to receive capital gains treatment for the Distribution. No
assurances can be given that the Distribution will be approved by the
Company's Board of Directors or, if approved, will be implemented.
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"). Prior
period financial statements have been restated to conform with this
presentation.
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 June 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 June 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.
-6-
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued
3. In February 1998, the Company agreed to reinsure substantially all of its
remaining life insurance business to Allstate Life Insurance Company and a
subsidiary thereof in an indemnity reinsurance transaction. Consummation of
this transaction, which is expected to occur in the third quarter of 1998,
is subject to regulatory approval and the satisfaction of certain other
conditions. The premium to be received on this transaction is approximately
$28,675,000. The gain on the reinsurance transaction will be deferred and
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.
4. During 1998, the Company sold substantially all of its executive and
professional loan portfolio for aggregate proceeds of $89,544,000. The
Company reported pre-tax gains on the sales of approximately $6,500,000 and
$600,000, respectively, for the six and three month periods ended June 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. A summary of the results of discontinued operations is as follows for the
periods ended June 30, 1997 (in thousands):
<TABLE>
<CAPTION>
Colonial Penn Life Group Colonial Penn P&C Group
------------------------ -----------------------
For the three For the six For the three For the six
months ended months ended months ended months ended
June 30, 1997 June 30, 1997 June 30, 1997 June 30, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $58,724 $119,981 $153,004 $301,517
------- -------- -------- --------
Expenses:
Provision for insurance losses and policy benefits 34,847 74,802 110,470 218,030
Other operating expenses 11,013 21,594 30,182 53,307
------- -------- -------- --------
45,860 96,396 140,652 271,337
------- -------- -------- --------
Income before income taxes 12,864 23,585 12,352 30,180
Income taxes 4,496 8,248 3,809 9,822
------- -------- -------- --------
Income from discontinued operations, net of taxes $ 8,368 $ 15,337 $ 8,543 $ 20,358
======= ======== ======== ========
</TABLE>
7. 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. During the six month period ended June 30,
1997, the 5 1/4% Convertible Subordinated Debentures due 2003 (the "5 1/4%
Debentures"), which were convertible into 3,478,260 Common Shares, were
outstanding. For the three month period ended June 30, 1997, diluted
earnings (loss) per share also assumed the 5 1/4% Debentures had been
converted into Common Shares and earnings increased for the interest on the
Debentures, net of the income tax effect. Such debentures were not included
in the computation of diluted earnings (loss) per share for the six month
period ended June 30, 1997, as those debentures were antidilutive.
-7-
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued
The number of shares used to calculate basic earnings (loss) per share
amounts was 63,920,000 and 60,799,000 for the six month periods ended June
30, 1998 and 1997, respectively, and 63,941,000 and 61,072,000 for the
three month periods ended June 30, 1998 and 1997, respectively. The number
of shares used to calculate diluted earnings (loss) per share amounts was
64,056,000 and 61,001,000 for the six month periods ended June 30, 1998 and
1997, respectively, and 64,063,000 and 64,113,000 for the three month
periods ended June 30, 1998 and 1997, respectively.
8. Cash paid for interest and income taxes (net of refunds) was $20,221,000
and $140,950,000, respectively, for the six month period ended June 30,
1998 and $26,661,000 and $5,210,000 respectively, for the six month period
ended June 30, 1997.
-8-
<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 six month periods ended June 30, 1998 and 1997, the Company
operated profitably. For the six month period ended June 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 six month period ended June 30, 1997, net cash was used for
operations, principally to fund its capital commitments in PIB, as described
below, and to advance amounts to the trustee to fund the maximum redemption of
the 5 1/4% Convertible Subordinated Debentures due 2003 (the "5 1/4%
Debentures").
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 sold substantially all of its executive and
professional loan portfolio for aggregate proceeds of $89,544,000. The Company
reported pre-tax gains on the sales of approximately $6,500,000 and $600,000,
respectively, for the six and three month periods ended June 30, 1998.
In February 1998, the Company agreed to reinsure substantially all of its
remaining life insurance business to Allstate Life Insurance Company and a
subsidiary thereof in an indemnity reinsurance transaction. Consummation of this
transaction, which is expected to occur in the third quarter of 1998, is subject
to regulatory approval and the satisfaction of certain other conditions. The
premium to be received on this transaction is approximately $28,675,000. The
gain on the reinsurance transaction will be deferred and 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.
In May 1998, the Company announced that it is studying a possible restructuring
of its capitalization. The Company currently intends to distribute to its
shareholders cash in the maximum amount permissible under the Company's
outstanding senior subordinated debt agreements, which amount currently is
approximately $848,000,000 (the "Distribution"). In addition, the Company is no
longer considering a spin-off of the shares of the Empire Insurance Company, its
property and casualty insurance subsidiary. Although the final structure and
timing for the Distribution has not been determined, it is likely that the
Distribution would be in the form of a cash dividend, a share repurchase or some
combination thereof in January 1999, all of which would be taxed to the
shareholders at capital gains rates.
If implemented, the Distribution will obligate the Company to make an offer to
purchase all of the Company's outstanding 8 1/4% Senior Subordinated Notes due
2005 and its outstanding 7 7/8% Senior Subordinated Notes due 2006
(collectively, the "Senior Subordinated Notes") at a purchase price of 101% of
the outstanding principal amount pursuant to the terms of the indentures
governing the Senior Subordinated Notes. An aggregate of approximately
$235,000,000 of Senior Subordinated Notes is currently outstanding.
Consummation of the Distribution is subject to the receipt by the Company of a
favorable ruling from the Internal Revenue Service that would permit
shareholders to receive capital gains treatment for the Distribution. No
assurances can be given that the Distribution will be approved by the Company's
Board of Directors or, if approved, will be implemented.
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.
-9-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF INTERIM OPERATIONS, continued
As more fully described in the 1997 10-K/A, securities classified as "available
for sale" are carried at fair value with unrealized gains and losses reflected
as a separate component of shareholders' equity, net of taxes. Principally as a
result of the decline in value of the Company's investment in Russian debt
securities during 1998, the unrealized gain on investments at the end of 1997 of
approximately $5,630,000 (net of taxes) decreased to an unrealized gain of
$904,000 (net of taxes) as of June 30, 1998. While this has resulted in a
decrease in shareholders' equity and book value per share, it had no effect on
net income or cash flows.
RESULTS OF OPERATIONS
THE 1998 PERIODS COMPARED TO THE 1997 PERIODS
Net earned premium revenues of the Empire Group were $122,205,000 and
$146,820,000 for the six month periods ended June 30, 1998 and 1997,
respectively, and $58,514,000 and $71,024,000 for the three month periods ended
June 30, 1998 and 1997, respectively. The decrease in earned premiums
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 and commercial package policies,
due to tighter underwriting standards, reunderwriting and increased competition.
The Empire Group's loss ratios were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
Loss Ratio:
GAAP 104.1% 96.7% 99.8% 92.7%
SAP 104.1% 96.7% 99.8% 92.7%
Expense Ratio:
GAAP 25.4% 20.5% 25.4% 21.4%
SAP 28.5% 20.8% 26.1% 19.3%
Combined Ratio:
GAAP 129.5% 117.2% 125.2% 114.1%
SAP 132.6% 117.5% 125.9% 112.0%
The combined ratios of the Empire Group increased primarily due to reserve
strengthening for prior accident years in the private passenger automobile,
commercial assigned risk, workers' compensation and commercial package lines of
business, which resulted from continued unfavorable claims development. In
addition, higher estimated loss ratios have been used for the current accident
year, primarily in the private passenger automobile line, due to increased claim
frequency. As more fully described in the 1997 10-K/A, beginning in 1997, the
Empire Group received diminishing amounts of servicing fees for providing
administrative and claims services for the New York Public Automobile Pool
("NYPAP"). Effective February 28, 1998, the Empire Group ceased serving as a
servicing carrier for the NYPAP. The combined ratios were negatively affected by
this reduction in servicing fees in 1998. The Empire Group's expense ratios also
increased in 1998 due to the reduction in premium volume at a rate greater than
the reduction in net underwriting and other costs. The difference between the
SAP and GAAP combined ratios principally reflects the accounting for certain
expenses which are treated differently under SAP and GAAP.
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 six and three month periods ended June 30,
1998, and pre-tax results for the six month period ended June 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 three month period ended June
30, 1998 increased as compared to the similar period in 1997 principally due to
a loss on the sale of a division during 1997.
-10-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF INTERIM OPERATIONS, continued
Finance revenues and operating profits reflect the level of consumer instalment
loans. Average loans outstanding during the six and three months periods ended
June 30, 1998 were lower than loans outstanding during the comparable periods of
1997 by approximately $60,800,000 and $93,400,000, respectively, primarily due
to the sale of the executive and professional loan portfolio, described below.
The decrease in finance revenues was partially offset by reduced expenses and
lower losses on automobile loans. The Company has begun to see growth in its
automobile lending business as it has expanded into new locations and benefited
from the failure of certain competitors. Nevertheless, the Company expects that
competition in its automobile lending business will continue to be a significant
factor which may inhibit its ability and desire to grow the portfolio in the
future. During 1998, the Company sold substantially all of its executive and
professional loan portfolio for aggregate proceeds of $89,544,000. The Company
reported pre-tax gains on the sales of approximately $6,500,000 and $600,000,
respectively, for the six and three month periods ended June 30, 1998.
Investment and other income decreased in the 1998 periods as compared to the
1997 periods principally due to a reduction of $42,200,000 for the six month
period and $38,300,000 for the three month period in gains from sales of real
estate properties and reduced fee income related to service business, partially
offset by an increase in investment income of $43,100,000 for the six month
period and $21,600,000 for the three month period, including earnings on
proceeds from the sales of the Colonial Penn Life Group and the Colonial Penn
P&C Group, and the aforementioned gains on the sale of the executive and
professional loan portfolio.
Equity in income (losses) of associated companies improved in the 1998 periods
as compared to the 1997 periods primarily due to a reduction of $15,470,000 for
the six month period and $9,060,000 for the three month period in the Company's
equity losses related to PIB. As discussed above, effective February 1, 1998,
the Company no longer accounts for its investment in PIB under the equity method
of accounting.
Interest expense primarily reflects the level of external borrowings outstanding
during the period.
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 as a result of the sale of certain divisions in 1997,
decreased operating expenses of real estate properties and lower provisions for
bad debts.
The 1998 provisions for income taxes reflect reductions for the favorable
resolution of certain federal income tax contingencies. The 1997 provisions for
income taxes are greater than the expected statutory federal income tax amount
as a result of a provision for state taxes.
The number of shares used to calculate basic earnings (loss) per share amounts
was 63,920,000 and 60,799,000 for the six month periods ended June 30, 1998 and
1997, respectively, and 63,941,000 and 61,072,000 for the three month periods
ended June 30, 1998 and 1997, respectively. The number of shares used to
calculate diluted earnings (loss) per share amounts was 64,056,000 and
61,001,000 for the six month periods ended June 30, 1998 and 1997, respectively,
and 64,063,000 and 64,113,000 for the three month periods ended June 30, 1998
and 1997, respectively. For diluted per share amounts, the 5 1/4% Debentures
were not assumed to have been converted in the six month period ended June 30,
1997 since the effect of such assumed conversion would have been to increase
earnings per share.
-11-
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The following matters were submitted to a vote of shareholders at the
Company's 1998 Annual Meeting of Shareholders held on May 19, 1998.
a) Election of directors.
Number of Shares
-------------------------
For Withheld
--- --------
Ian M. Cumming 53,135,370 84,101
Paul M. Dougan 53,127,280 92,191
Lawrence D. Glaubinger 53,130,603 88,868
James E. Jordan 53,142,599 76,872
Jesse Clyde Nichols, III 53,130,603 88,868
Joseph S. Steinberg 53,142,413 77,058
b) Ratification of Coopers & Lybrand L.L.P., now known as
PricewaterhouseCoopers LLP, as independent auditors for the
year ended December 31, 1998.
For 52,998,171
Against 25,282
Abstentions 196,018
Broker non-votes -
ITEM 5. OTHER INFORMATION.
If the Company does not receive notice at its principal office on or
before March 10, 1999 of a shareholder proposal for consideration at
the 1999 Annual Meeting of Shareholders, the proxies named by the
Company's Board of Directors with respect to that meeting shall have
discretionary voting authority with respect to such proposal.
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 May 18, 1998
which sets forth information under Item 5. Other events and Item 7.
Financial Statements, Pro Forma Financial Statements and Exhibits.
-12-
<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: August 14, 1998 By /s/ Barbara L. Lowenthal
--------------------------------
Barbara L. Lowenthal
Vice President and Comptroller
(Chief Accounting Officer)
-13-
<PAGE>
EXHIBIT INDEX
Exhibit Exemption
Number Description Indication
------ ----------- ----------
27 Financial Data Schedule.
-14-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE BODY OF 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 445,080
<SECURITIES> 2,014,049
<RECEIVABLES> 825,250
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 67,690
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,372,294
<CURRENT-LIABILITIES> 0
<BONDS> 372,353
0
0
<COMMON> 63,944
<OTHER-SE> 1,823,459
<TOTAL-LIABILITY-AND-EQUITY> 4,372,294
<SALES> 26,670
<TOTAL-REVENUES> 298,362
<CGS> 16,415
<TOTAL-COSTS> 162,310
<OTHER-EXPENSES> 70,583
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,322
<INCOME-PRETAX> 45,147
<INCOME-TAX> 13,504
<INCOME-CONTINUING> 27,425
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 27,425
<EPS-PRIMARY> .43
<EPS-DILUTED> .43
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