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 March 31, 1999
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 Identification Number)
incorporation or organization)
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 May 7, 1999:
60,183,616.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998
(Dollars in thousands, except par value)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Assets
Investments:
Available for sale (aggregate cost of $1,216,132 and $1,555,789) $1,214,804 $1,553,126
Trading securities (aggregate cost of $129,542 and $132,907) 133,866 132,576
Held to maturity (aggregate fair value of $39,367 and $47,583) 39,208 47,256
Other investments, including accrued interest income 31,414 37,247
---------- ----------
Total investments 1,419,292 1,770,205
Cash and cash equivalents 930,276 459,690
Reinsurance receivables, net 49,102 48,070
Trade, notes and other receivables, net 877,841 833,301
Prepaids and other assets 462,790 490,242
Property, equipment and leasehold improvements, net 151,994 121,790
Deferred policy acquisition costs 17,899 18,255
Investments in associated companies 99,830 172,390
Net assets of discontinued operations 52,300 45,008
---------- ----------
Total $4,061,324 $3,958,951
========== ==========
Liabilities
Customer banking deposits $ 196,540 $ 189,782
Trade payables and expense accruals 262,545 233,485
Other liabilities 86,978 109,397
Income taxes payable 138,239 96,500
Deferred tax liability 22,139 7,709
Policy reserves 514,528 542,274
Unearned premiums 92,104 94,572
Debt, including current maturities 682,606 722,601
---------- ----------
Total liabilities 1,995,679 1,996,320
---------- ----------
Minority interest 11,098 11,272
---------- ----------
Company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely subordinated debt securities of the Company 98,200 98,200
---------- ----------
Shareholders' Equity
Common shares, par value $1 per share, authorized 150,000,000 shares; 60,225,116
and 61,984,686 shares issued and outstanding, after deducting
58,190,417 and 56,430,847 shares held in treasury 60,225 61,985
Additional paid-in capital 154,239 205,227
Accumulated other comprehensive income (1,150) (771)
Retained earnings 1,743,033 1,586,718
---------- ----------
Total shareholders' equity 1,956,347 1,853,159
---------- ----------
Total $4,061,324 $3,958,951
========== ==========
</TABLE>
See notes to interim consolidated financial statements.
-2-
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
For the three months ended March 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
(In thousands, except per share amounts)
<S> <C> <C>
Revenues:
Insurance revenues and commissions $ 46,744 $ 63,691
Manufacturing 13,850 11,643
Finance 9,790 9,311
Investment and other income 231,615 62,205
Equity in losses of associated companies (3,076) (3,557)
Net securities gains (losses) (338) 1,694
-------- --------
298,585 144,987
-------- --------
Expenses:
Provision for insurance losses and policy benefits 39,642 60,794
Amortization of deferred policy acquisition costs 10,233 12,377
Manufacturing cost of goods sold 9,037 7,303
Interest 13,689 10,126
Salaries 10,516 9,528
Selling, general and other expenses 36,028 24,342
-------- --------
119,145 124,470
-------- --------
Income from continuing operations before income taxes
and minority expense of trust preferred securities 179,440 20,517
-------- --------
Income taxes:
Current 19,870 4,680
Deferred 9,975 2,604
-------- --------
29,845 7,284
-------- --------
Income from continuing operations before minority
expense of trust preferred securities 149,595 13,233
Minority expense of trust preferred securities, net of taxes 1,381 2,109
-------- --------
Income from continuing operations 148,214 11,124
Income from discontinued operations, net of taxes 8,101 1,459
-------- --------
Net income $156,315 $ 12,583
======== ========
Basic earnings per common share:
Income from continuing operations $2.42 $.18
Income from discontinued operations .13 .02
----- ----
Net income $2.55 $.20
===== ====
Diluted earnings per common share:
Income from continuing operations $2.42 $.18
Income from discontinued operations .13 .02
----- ----
Net income $2.55 $.20
===== ====
</TABLE>
See notes to interim consolidated financial statements.
-3-
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three months ended March 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Net cash flows from operating activities:
Net income $ 156,315 $ 12,583
Adjustments to reconcile net income to net cash provided by (used for) operations:
Provision for deferred income taxes 9,975 2,604
Depreciation and amortization of property, equipment and leasehold improvements 3,128 2,195
Other amortization 6,907 9,330
Provision for doubtful accounts 2,870 2,355
Net securities (gains) losses 338 (1,694)
Equity in losses of associated companies 3,076 3,557
(Gain) on disposal of real estate, property and equipment (7,346) (5,889)
(Gain) on sales of PIB, Caja and S&H in 1999 and loan portfolio in 1998 (169,063) (5,863)
Investments classified as trading, net (2,547) (23,663)
Deferred policy acquisition costs incurred and deferred (9,877) (13,487)
Net change in:
Reinsurance receivables (1,032) (1,487)
Trade, notes and other receivables 6,045 71,431
Prepaids and other assets 13,331 (5,726)
Net assets of discontinued operations (7,771) 9,756
Trade payables and expense accruals 39,088 2,780
Other liabilities 451 (2,749)
Income taxes payable 41,739 (115,941)
Policy reserves (27,746) (8,264)
Unearned premiums (2,468) 9,085
Other 1,687 1,791
--------- ---------
Net cash provided by (used for) operating activities 57,100 (57,296)
--------- ---------
Net cash flows from investing activities:
Acquisition of real estate, property, equipment and leasehold improvements (47,674) (9,160)
Proceeds from disposals of real estate, property and equipment 24,535 7,889
Proceeds from sales of PIB, Caja and S&H in 1999 and loan portfolio in 1998 165,851 73,525
Advances on loan receivables (33,377) (27,245)
Principal collections on loan receivables 21,997 29,205
Purchases of investments (other than short-term) (654,859) (382,345)
Proceeds from maturities of investments 637,289 224,052
Proceeds from sales of investments 368,983 420,879
--------- ---------
Net cash provided by investing activities 482,745 336,800
--------- ---------
Net cash flows from financing activities:
Net change in short-term borrowings (19,798) 417
Net change in customer banking deposits 6,755 (1,275)
Reduction of long-term debt (682) (98)
Purchase of common shares for treasury (52,119) (712)
--------- ---------
Net cash (used for) financing activities (65,844) (1,668)
--------- ---------
Effect of foreign exchange rate changes on cash (3,415) --
--------- ---------
Net increase in cash and cash equivalents 470,586 277,836
Cash and cash equivalents at January 1, 459,690 581,186
--------- ---------
Cash and cash equivalents at March 31, $ 930,276 $ 859,022
========= =========
</TABLE>
See notes to interim consolidated financial statements.
-4-
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
For the three months ended March 31, 1999 and 1998
(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, 1998 $63,879 $253,267 $ 5,630 $1,540,755 $1,863,531
----------
Comprehensive income:
Net change in unrealized gain (loss)
on investments (44) (44)
Net income 12,583 12,583
----------
Comprehensive income 12,539
----------
Exercise of options to purchase
common shares 77 1,698 1,775
Purchase of stock for treasury (18) (694) (712)
------- -------- ------- ---------- ----------
Balance, March 31, 1998 $63,938 $254,271 $ 5,586 $1,553,338 $1,877,133
======= ======== ======= ========== ==========
Balance, January 1, 1999 $61,985 $205,227 $ (771) $1,586,718 $1,853,159
----------
Comprehensive income:
Net change in unrealized gain (loss)
on investments 1,896 1,896
Net change in unrealized foreign
exchange gain (loss) (2,275) (2,275)
Net income 156,315 156,315
----------
Comprehensive income 155,936
----------
Purchase of stock for treasury (1,760) (50,988) (52,748)
------- -------- ------- ---------- ----------
Balance, March 31, 1999 $60,225 $154,239 $(1,150) $1,743,033 $1,956,347
======= ======== ======= ========== ==========
</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, 1998, which are included in the Company's Annual Report filed on Form 10-K
for such year (the "1998 10-K"). Results of operations for interim periods are
not necessarily indicative of annual results of operations. The consolidated
balance sheet at December 31, 1998 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 1998, the Company classified as discontinued operations its life
insurance subsidiaries, Charter National Life Insurance Company ("Charter") and
Intramerica Life Insurance Company ("Intramerica"). Prior period financial
statements have been restated to conform with this presentation.
Certain amounts for prior periods have been reclassified to be consistent
with the 1999 presentation.
2. As more fully discussed in the Company's 1998 10-K, 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. Pursuant to its
agreement with PepsiCo effective as of January 30, 1998, the Company no longer
had any ability to influence PIB. As a result, effective February 1, 1998, the
Company discontinued accounting for this investment under the equity method of
accounting. The agreement provided for a put option and a call option with
respect to the Company's equity interest, which were exercisable at certain
times. In February 1999, PepsiCo exercised the option for approximately
$39,190,000, including interest. The Company recognized a pre-tax gain of
approximately $29,545,000 in the first quarter of 1999. When combined with the
Company's share of PIB's losses since inception, the Company's net loss from
this investment was approximately $40,310,000.
3. In March 1999, the Company sold all of its interest in Caja de Ahorro y
Seguro S.A. to Assicurazioni Generali Group, an Italian insurance company, for
$126,000,000 in cash and a $40,000,000 collateralized note maturing April 2001
from its Argentine partner. The Company recorded a pre-tax gain of approximately
$120,800,000 in the first quarter of 1999.
4. In February 1999, the Company sold its wholly-owned subsidiary, The
Sperry and Hutchinson Company, Inc. ("S&H") and recognized a pre-tax gain of
approximately $18,700,000.
5. In April 1999, the Company declared a $12.00 per share cash dividend
payable on May 21, 1999 to shareholders of record at the close of business on
May 14, 1999 (the "Dividend"). The aggregate amount of the Dividend is
approximately $723,000,000. Pursuant to a ruling from the Internal Revenue
Service, the Company may pay dividends of up to $812,000,000 and have any gain
realized on the dividends treated as capital gain income for non-corporate
shareholders. It is the Board of Directors' intention to declare a second
dividend before the end of 1999 in the amount of approximately $89,000,000, less
amounts paid to repurchase Common Shares after April 1, 1999.
Payment of the Dividend and any subsequent dividend will require the
Company to make an offer to purchase all of its 8-1/4% Senior Subordinated
Debentures due 2005 and its 7-7/8% Senior Subordinated Debentures due 2006,
outstanding in the aggregate principal amount of $235,000,000, at a purchase
price of 101% of principal, plus accrued and unpaid interest thereon pursuant to
the terms of the indentures governing these Debentures. These offers are
required to be made within five business days after the payment of the Dividend
and any subsequent dividend, unless the terms of these Debentures can be
modified on terms that are acceptable to the Company.
-6-
<PAGE>
Notes to Interim Consolidated Financial Statements, continued
6. 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 January 1, 1999 through May 7, 1999, the Company repurchased
1,801,070 Common Shares for an aggregate cost of approximately $53,988,000.
7. Certain information concerning the Company's segments for the three
month periods ended March 31, 1999 and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Revenues:
Property and casualty insurance $ 59,874 $ 81,837
Banking and lending 10,953 16,317
Manufacturing 13,850 11,677
Other operations (a) 194,334 11,764
-------- --------
Total revenue for reportable segments 279,011 121,595
Equity in associated companies (3,076) (3,557)
Corporate 22,650 26,949
-------- --------
Total consolidated revenues $298,585 $144,987
======== ========
Income from continuing operations before income taxes and minority
expense of trust preferred securities:
Property and casualty insurance $ 1,712 $ 1,311
Banking and lending 2,737 7,828
Manufacturing 1,703 1,503
Other operations (a) 175,961 3,058
-------- --------
Total income from continuing operations before income taxes and
minority expense of trust preferred securities for reportable
segments 182,113 13,700
Equity in associated companies (3,076) (3,557)
Corporate 403 10,374
-------- --------
Total consolidated income from continuing
operations before income taxes and minority
expense of trust preferred securities $179,440 $ 20,517
======== ========
(a) Includes pre-tax gains on sale of Caja ($120,800,000), S&H ($18,700,000) and
PIB ($29,545,000) for the three month period ended March 31, 1999, as described
above.
</TABLE>
-7-
<PAGE>
Notes to Interim Consolidated Financial Statements, continued
8. At March 31, 1999 and December 31, 1998 the components of net assets of
discontinued operations are as follows (in thousands):
March 31, December 31,
1999 1998
---- ----
Investments $ 62,325 $ 65,788
Cash and cash equivalents 4,110 3,032
Separate account assets 614,492 619,578
Notes and other receivables 203,289 179,580
Other 11,794 15,425
-------- --------
Total assets 896,010 883,403
-------- --------
Policy reserves 201,477 179,083
Separate account liabilities 614,492 619,578
Other 27,741 39,734
-------- --------
Total liabilities 843,710 838,395
-------- --------
Net assets of discontinued operations $ 52,300 $ 45,008
======== ========
Results of discontinued operations for the three month periods ended March
31, 1999 and 1998 include revenues of $12,466,000 and $3,708,000, respectively,
income before income taxes of $12,481,000 and $2,194,000, respectively, and net
income of $8,101,000 and $1,459,000, respectively. Results for 1999 include the
recognition of a pre-tax gain of approximately $10,300,000, as a result of the
partial conversion to assumption reinsurance of a prior reinsurance transaction
for which the gain was previously deferred.
9. Earnings 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 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 per share amounts was
61,338,000 for 1999 and 63,904,000 for 1998. The number of shares used to
calculate diluted earnings per share amounts was 61,393,000 for 1999 and
64,053,000 for 1998.
10. Cash paid for interest and income taxes (net of refunds) was
$12,314,000 and $(22,342,000), respectively, for the three month period ended
March 31, 1999 and $7,415,000 and $119,463,000, respectively, for the three
month period ended March 31, 1998.
-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 1998 10-K.
Liquidity and Capital Resources
During each of the three month periods ended March 31, 1999 and 1998, the
Company operated profitably. For the three month period ended March 31, 1999 net
cash was provided by operations. For the three month period ended March 31,
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 more fully discussed in the Company's 1998 10-K, pursuant to its
agreement with PepsiCo, Inc. effective as of January 30, 1998, the Company was
relieved of any future funding obligation with respect to PIB. Additionally, the
agreement provided for a put option and a call option with respect to the
Company's equity interest, which were exercisable at certain times. In February
1999, PepsiCo exercised the option for approximately $39,190,000, including
interest. The Company recognized a pre-tax gain of approximately $29,545,000 in
the first quarter of 1999.
In March 1999, the Company sold all of its interest in Caja de Ahorro y
Seguro S.A. ("Caja") to Assicurazioni Generali Group, an Italian insurance
company, for $126,000,000 in cash and a $40,000,000 collateralized note maturing
April 2001 from its Argentine partner. The Company recorded a pre-tax gain of
approximately $120,800,000 in the first quarter of 1999.
In April 1999, the Company declared a $12.00 per share cash dividend
payable on May 21, 1999 to shareholders of record at the close of business on
May 14, 1999 (the "Dividend"). The aggregate amount of the Dividend is
approximately $723,000,000. Pursuant to a ruling from the Internal Revenue
Service, the Company may pay dividends of up to $812,000,000 and have any gain
realized on the dividends treated as capital gain income for non-corporate
shareholders. It is the Board of Directors' intention to declare a second
dividend before the end of 1999 in the amount of approximately $89,000,000, less
amounts paid to repurchase Common Shares after April 1, 1999.
Payment of the Dividend and any subsequent dividend will require the
Company to make an offer to purchase all of its 8-1/4% Senior Subordinated
Debentures due 2005 and its 7-7/8% Senior Subordinated Debentures due 2006,
outstanding in the aggregate principal amount of $235,000,000, at a purchase
price of 101% of principal, plus accrued and unpaid interest thereon pursuant to
the terms of the indentures governing these Debentures. These offers are
required to be made within five business days after the payment of the Dividend
and any subsequent dividend, unless the terms of these Debentures can be
modified on terms that are acceptable to the Company.
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. During the first quarter of 1999, the Company repurchased 1,759,570
Common Shares for an aggregate cost of approximately $52,748,000. From April 1,
1999 through May 7, 1999, the Company repurchased 41,500 Common Shares for an
aggregate cost of approximately $1,240,000.
In December 1998, the Company signed an agreement to sell its life
insurance subsidiaries, Charter National Life Insurance Company and Intramerica
Life Insurance Company, to Allstate Life Insurance Company for statutory surplus
at the date of sale (approximately $62,719,000 at March 31, 1999), plus
$3,575,000. This transaction is expected to close in the second quarter of 1999
and result in a pre-tax gain of approximately $13,000,000.
-9-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Interim Operations, continued
The Company has determined to replace its two corporate owned aircraft it
has used for ten years with two newer models of used aircraft. Net of the
estimated $16,000,000 that the Company expects to receive for its existing
aircraft, the Company will expend approximately $36,000,000 (of which
$26,000,000 was paid as of March 31, 1999) of generally available corporate
funds to replace its existing corporate aircraft.
Results of Operations
Three Months Ended March 31, 1999 Compared to the
Three Months Ended March 31, 1998
Net earned premium revenues of the Empire Group were $46,744,000 and
$63,691,000 for the three month periods ended March 31, 1999 and 1998,
respectively. The decrease in earned premiums principally relates to a decline
in the number of assigned risk automobile pool contracts acquired due to
competition and the depopulation of the assigned risk automobile pools, as well
as a reduction in certain personal and commercial lines, principally voluntary
private passenger, commercial automobile and commercial package policies, due to
tighter underwriting standards, reunderwriting and increased competition.
The Empire Group's loss ratios were as follows:
1999 1998
----- -----
Loss Ratio:
GAAP 85.1% 95.8%
SAP 85.1% 95.8%
Expense Ratio:
GAAP 35.3% 25.3%
SAP 34.1% 24.6%
Combined Ratio:
GAAP 120.4% 121.1%
SAP 119.2% 120.4%
The decline in the loss ratios in 1999 was due to reduced reserve
strengthening required for prior accident years and lower current accident year
loss ratios resulting from product mix and improved underwriting. The Empire
Group's expense ratios increased in 1999 due to the reduction in premium volume
at a rate greater than the reduction in net underwriting and other costs.
The manufacturing segment reported operating profits in 1999 and 1998.
Manufacturing revenues, gross profit and pre-tax results for this segment
increased in 1999 principally due to greater sales and lower raw material costs,
offset by slightly higher expenses.
Finance revenues reflect the level and mix of consumer instalment loans,
and for 1998, the sale of substantially all of the Company's executive and
professional loan portfolio which resulted in a pre-tax gain of approximately
$5,900,000. Average loans outstanding during the first quarter of 1999 were
approximately $7,500,000 lower than loans outstanding during the first quarter
of 1998 primarily due to the sale of substantially all of the executive and
professional loan portfolio, described above, offset by the purchase of a
subprime automobile portfolio in December 1998. Operating profits increased as a
result of higher yielding loans and lower losses on automobile loans. Due in
part to recent failures of some of the Company's competitors, as well as the
continued strength of the economy, the Company has been able to increase its new
loan volume within the Company's existing underwriting standards. In addition,
the Company intends to continue to explore the acquisition of additional
portfolios of such loans that meet the Company's underwriting standards if they
can be purchased on attractive terms.
-10-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Interim Operations, continued
Investment and other income in 1999 included the gains on sale of Caja
($120,800,000), The Sperry and Hutchinson Company, Inc. ($18,700,000) and PIB
($29,545,000), as described above. Although the Company recognized a gain on the
sale of PIB, when combined with its share of PIB's losses since inception, the
Company's net loss from this investment was approximately $40,310,000.
Investment and other income also increased in 1999 as compared to 1998 due to
increased rent income and gains from sales of real estate properties
(principally related to Fidei S.A. ("Fidei"), which was acquired in the fourth
quarter of 1998), partially offset by the aforementioned gain in 1998 on the
sale of the executive and professional loan portfolio.
Interest expense primarily reflects the level of external borrowings
outstanding during the period, which increased primarily due to Fidei's
borrowing.
The increase in selling, general and other expenses in 1999 as compared to
1998 principally reflects increased professional fees and expenses incurred by
Fidei.
Income taxes for 1999 reflect the utilization of capital loss
carryforwards.
The number of shares used to calculate basic earnings per share amounts was
61,338,000 for 1999 and 63,904,000 for 1998. The number of shares used to
calculate diluted earnings per share was 61,393,000 for 1999 and 64,053,000 for
1998.
Year 2000 and Information Technology Systems
The Company is in the process of evaluating its information technology
systems to determine the potential impact of the Year 2000. The Year 2000 issue
is the result of computer programs being written using two digits (rather than
four) to define the applicable year. Any programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures. As a result,
before the end of 1999, computer hardware and software may need to be upgraded
with new hardware and software which can distinguish 21st century dates from
20th century dates.
As more fully described in the 1998 10-K, since 1996, the Company has been
evaluating its Year 2000 readiness. Substantially all of the Company's
operations have completed the computer inventory and identification process and
are in the process of upgrading and testing critical systems. The Company's
primary focus during 1999 will be on continued testing of mission critical
systems and software provider upgrades, as well as monitoring the readiness of
material third parties.
In 1996, the Empire Group began to evaluate its information technology
systems and their ability to support future business needs. This led to a
decision to acquire new policy management and accounting systems. These systems
provide enhanced functionality and improved processing for underwriting, claims,
billing, collection, reinsurance, reporting and accounting and are designed to
be Year 2000 compliant. The Empire Group anticipates that these new systems will
be fully implemented in 1999 and that any non-compliant programs will become
compliant during 1999. All but one of the manufacturing operation's material
systems (involving the storage of historical information) have tested as being
Year 2000 compliant. The Company is exploring alternative systems to maintain
this information. Until an acceptable replacement for this system can be found,
the Company can maintain these records in hard copy. The banking and lending
operations have successfully completed testing of mission critical systems and
testing of non-mission critical systems is currently underway. In addition,
deposit customers have been sent letters to inform them about the Year 2000
issue and to educate them about the progress made in addressing this issue.
The Year 2000 issue may affect other entities with which the Company
transacts business. The Company has made inquiry of third parties with whom it
has material relationships as to the Year 2000 compliance of such third parties.
Many of such parties have reported plans to be fully compliant by the end of
1999 and most have reported substantial progress at the end of 1998. However, at
this time the Company cannot predict the effect of the Year 2000 on its material
third parties or the impact any deficiency in the Year 2000 readiness of such
parties could have on the Company.
-11-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Interim Operations, continued
Through March 31, 1999, expenses incurred by the Company in connection with
the Year 2000 issue (excluding expenses related to the Empire Group's
acquisition of new systems, which was not motivated by Year 2000 concerns) did
not exceed $500,000. Based upon current information, the Company does not expect
that the Year 2000 issue will have a material effect on its consolidated
financial position or consolidated results of operations.
Cautionary Statement for Forward-Looking Information
Statements included in this 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 (including Year 2000
compatibility), competition and regulation as well as assumptions relating to
the foregoing. Forward-looking statements are inherently subject to risks and
uncertainties, many of which cannot be predicted or quantified. When used in
this 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 in foreign and
domestic laws, regulations and taxes, changes in competition and pricing
environments, regional or general changes in asset valuation, the occurrence of
significant natural disasters, the inability to reinsure certain risks
economically, the adequacy of loss reserves, weather related conditions that may
affect the Company's operations, the difficulty in identifying hardware and
software that may not be Year 2000 compliant, the lack of success of third
parties to adequately address the Year 2000 issue, vendor delays and technical
difficulties affecting the Company's ability to upgrade or replace its hardware
and/or software for Year 2000 compliance, 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.
-12-
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits.
27 Financial Data Schedule.
b) Reports on Form 8-K.
The Company filed current reports on Form 8-K dated February 17,
1999 and March 1, 1999 each of which sets forth information under
Item 5. Other Events and Item 7. Financial Statements, Pro Forma
Financial Statements and Exhibits.
-13-
<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: May 12, 1999 By /s/ Barbara L. Lowenthal
---------------------------
Barbara L. Lowenthal
Vice President and Comptroller
(Chief Accounting Officer)
-14-
<PAGE>
EXHIBIT INDEX
Exhibit Exemption
Number Description Indication
------ ----------- ----------
27 Financial Data Schedule.
-15-
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 930,276
<SECURITIES> 1,419,292
<RECEIVABLES> 926,943
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 151,994
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,061,324
<CURRENT-LIABILITIES> 0
<BONDS> 682,606
0
0
<COMMON> 60,225
<OTHER-SE> 1,896,122
<TOTAL-LIABILITY-AND-EQUITY> 4,061,324
<SALES> 13,850
<TOTAL-REVENUES> 298,585
<CGS> 9,037
<TOTAL-COSTS> 58,912
<OTHER-EXPENSES> 46,544
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,689
<INCOME-PRETAX> 179,440
<INCOME-TAX> 29,845
<INCOME-CONTINUING> 148,214
<DISCONTINUED> 8,101
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 156,315
<EPS-PRIMARY> 2.55
<EPS-DILUTED> 2.55
</TABLE>
