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, 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 (I.R.S. Employer
of 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 5, 1999: 59,390,766.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and December 31, 1998
(Dollars in thousands, except par value)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Investments:
Available for sale (aggregate cost of $945,939 and $1,555,789) $ 945,513 $1,553,126
Trading securities (aggregate cost of $139,749 and $132,907) 149,427 132,576
Held to maturity (aggregate fair value of $34,256 and $47,583) 34,341 47,256
Other investments, including accrued interest income 41,276 37,247
---------- ----------
Total investments 1,170,557 1,770,205
Cash and cash equivalents 373,063 459,690
Reinsurance receivables, net 47,746 48,070
Trade, notes and other receivables, net 872,124 833,301
Prepaids and other assets 411,519 490,242
Property, equipment and leasehold improvements, net 176,174 121,790
Deferred policy acquisition costs 15,319 18,255
Investments in associated companies 103,948 172,390
Net assets of discontinued operations 26,760 45,008
---------- ----------
Total $3,197,210 $3,958,951
========== ==========
LIABILITIES
Customer banking deposits $ 219,356 $ 189,782
Trade payables and expense accruals 243,619 233,485
Other liabilities 83,765 109,397
Income taxes payable 132,369 96,500
Deferred tax liability 33,547 7,709
Policy reserves 486,660 542,274
Unearned premiums 78,521 94,572
Debt, including current maturities 576,504 722,601
---------- ----------
Total liabilities 1,854,341 1,996,320
---------- ----------
Minority interest 7,504 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; 59,683,566
and 61,984,686 shares issued and outstanding, after deducting
58,731,967 and 56,430,847 shares held in treasury 59,684 61,985
Additional paid-in capital 143,065 205,227
Accumulated other comprehensive income (loss) 313 (771)
Retained earnings 1,034,103 1,586,718
---------- ----------
Total shareholders' equity 1,237,165 1,853,159
---------- ----------
Total $3,197,210 $3,958,951
========== ==========
</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, 1999 and 1998
(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,
--------------------- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Insurance revenues and commissions $ 38,658 $ 58,514 $ 85,402 $122,205
Manufacturing 16,487 15,027 30,337 26,670
Finance 10,663 6,713 20,453 16,024
Investment and other income 68,025 64,108 299,640 126,313
Equity in income (losses) of associated companies (514) 172 (3,590) (3,385)
Net securities gains 6,078 2,183 5,740 3,877
--------- --------- --------- --------
139,397 146,717 437,982 291,704
--------- --------- --------- --------
EXPENSES:
Provision for insurance losses and policy benefits 35,535 60,779 75,177 121,573
Amortization of deferred policy acquisition costs 8,301 11,169 18,534 23,546
Manufacturing cost of goods sold 10,030 9,112 19,067 16,415
Interest 14,217 10,196 27,906 20,322
Salaries 10,626 10,870 21,142 20,398
Selling, general and other expenses 34,827 24,439 70,855 48,781
--------- --------- --------- --------
113,536 126,565 232,681 251,035
--------- --------- --------- --------
Income from continuing operations before income taxes,
minority expense of trust preferred securities and
extraordinary loss 25,861 20,152 205,301 40,669
--------- --------- --------- --------
Income taxes:
Current 184 (845) 20,054 3,835
Deferred 8,979 5,549 18,954 8,153
--------- --------- --------- --------
9,163 4,704 39,008 11,988
--------- --------- --------- --------
Income from continuing operations before minority
expense of trust preferred securities and extraordinary loss 16,698 15,448 166,293 28,681
Minority expense of trust preferred securities, net of taxes 1,380 2,109 2,761 4,218
--------- --------- --------- --------
Income from continuing operations before extraordinary loss 15,318 13,339 163,532 24,463
Income from discontinued operations, net of taxes 518 1,503 8,619 2,962
--------- --------- --------- --------
Income before extraordinary loss 15,836 14,842 172,151 27,425
Extraordinary loss from early extinguishment of debt,
net of income tax benefit of $1,394 (2,588) - (2,588) -
--------- --------- --------- --------
Net income $ 13,248 $ 14,842 $ 169,563 $ 27,425
========= ========= ========= ========
Basic earnings (loss) per common share:
Income from continuing operations $ .25 $ .21 $ 2.69 $ .38
Income from discontinued operations .01 .02 .14 .05
Extraordinary loss (.04) - (.04) -
------ ------ ------- ------
Net income $ .22 $ .23 $ 2.79 $ .43
====== ====== ======= ======
Diluted earnings (loss) per common share:
Income from continuing operations $ .25 $ .21 $ 2.69 $ .38
Income from discontinued operations .01 .02 .14 .05
Extraordinary loss (.04) - (.04) -
------ ------ ------- ------
Net income $ .22 $ .23 $ 2.79 $ .43
====== ====== ======= ======
See notes to interim consolidated financial statements.
</TABLE>
-3-
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
(In thousands)
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 169,563 $ 27,425
Adjustments to reconcile net income to net cash provided by (used for) operations:
Extraordinary loss, net of income tax benefit 2,588 -
Provision for deferred income taxes 18,954 8,153
Depreciation and amortization of property, equipment and leasehold improvements 7,186 4,441
Other amortization 15,599 18,431
Provision for doubtful accounts 5,730 4,038
Net securities (gains) (5,740) (3,877)
Equity in losses of associated companies 3,590 3,385
(Gain) on disposal of real estate, property and equipment (26,457) (17,960)
(Gain) on sales of PIB, Caja and S&H in 1999 and loan portfolio in 1998 (169,063) (6,487)
Investments classified as trading, net (11,925) (38,615)
Deferred policy acquisition costs incurred and deferred (15,598) (23,208)
Net change in:
Reinsurance receivables 324 (9,318)
Trade, notes and other receivables 14,734 72,949
Prepaids and other assets 7,421 (35,453)
Net assets of discontinued operations 20,399 9,186
Trade payables and expense accruals 17,616 (85,464)
Other liabilities (6,655) (15,450)
Income taxes payable 37,263 (130,281)
Policy reserves (55,614) (2,108)
Unearned premiums (16,051) (2,029)
Other 11,791 1,939
----------- ------------
Net cash provided by (used for) operating activities 25,655 (220,303)
----------- ------------
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of real estate, property, equipment and leasehold improvements (91,927) (27,058)
Proceeds from disposals of real estate, property and equipment 101,616 27,745
Proceeds from sales of PIB, Caja and S&H in 1999 and loan portfolio in 1998 165,851 88,583
Advances on loan receivables (77,650) (61,379)
Principal collections on loan receivables 45,264 45,359
Purchases of investments (other than short-term) (1,198,646) (1,651,099)
Proceeds from maturities of investments 848,508 513,591
Proceeds from sales of investments 979,704 1,123,886
---------- -----------
Net cash provided by investing activities 772,720 59,628
---------- -----------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in short-term borrowings 80,202 19,613
Net change in customer banking deposits 29,488 (6,320)
Reduction of long-term debt (200,247) (200)
Purchase of common shares for treasury (64,463) (779)
Dividends paid (722,178) -
---------- -----------
Net cash provided by (used for) financing activities (877,198) 12,314
---------- -----------
Effect of foreign exchange rate changes on cash (7,804) -
---------- -----------
Net (decrease) in cash and cash equivalents (86,627) (148,361)
Cash and cash equivalents at January 1, 459,690 581,186
---------- -----------
Cash and cash equivalents at June 30, $ 373,063 $ 432,825
========== ===========
See notes to interim consolidated financial statements.
</TABLE>
-4-
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the six months ended June 30, 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 (4,726) (4,726)
Net income 27,425 27,425
----------
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
======= ======== ====== ========== ==========
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 3,345 3,345
Net change in unrealized foreign
exchange gain (loss) (2,261) (2,261)
Net income 169,563 169,563
----------
Comprehensive income 170,647
----------
Purchase of stock for treasury (2,301) (62,162) (64,463)
Dividends (722,178) (722,178)
------- -------- ------ ---------- ----------
BALANCE, JUNE 30, 1999 $59,684 $143,065 $ 313 $1,034,103 $1,237,165
======= ======== ====== ========== ==========
</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 six month period ended June 30, 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 six month period ended June 30, 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 in the six month period ended June 30, 1999.
5. In May 1999, the Company paid a $12.00 per share cash dividend (the
"Dividend"), aggregating approximately $722,178,000. 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 $90,000,000, subject to reduction to comply with the
Company's senior subordinated debt agreement covenants. While these
covenants would currently allow an additional $90,000,000 dividend, the
permissible amount would be increased for 50% of net income (as defined)
and decreased for 100% of net losses (as defined), dividends and stock
buybacks.
Payment of the Dividend (and any subsequent dividend) required the Company
to make an offer to purchase all of its 8-1/4% Senior Subordinated
Debentures due 2005 (the "8-1/4% Debentures") and its 7-7/8% Senior
Subordinated Debentures due 2006 (the "7-7/8% Debentures"), 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. Pursuant to such
offers, the Company reported an extraordinary loss on early
extinguishment of such debentures of $3,982,000 ($2,588,000 after taxes) in
the second quarter of 1999.
-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 August 5, 1999, the Company
repurchased 2,593,920 Common Shares for an aggregate cost of approximately
$70,769,000.
7. Certain information concerning the Company's segments for the six and three
month periods ended June 30, 1999 and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
For the Three Month For the Six Month
Period Ended June 30, Period Ended June 30,
--------------------- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Property and casualty insurance $ 47,675 $ 76,800 $107,549 $158,637
Banking and lending 11,860 9,789 22,813 26,106
Manufacturing 16,488 15,038 30,338 26,715
Foreign real estate (a) 22,946 - 35,694 -
Other operations (b) 11,822 17,302 193,408 29,066
-------- -------- -------- --------
Total revenue for reportable segments 110,791 118,929 389,802 240,524
Equity in associated companies (514) 172 (3,590) (3,385)
Corporate 29,120 27,616 51,770 54,565
-------- -------- -------- --------
Total consolidated revenues $139,397 $146,717 $437,982 $291,704
======== ======== ======== ========
Income (loss) from continuing operations before income,
taxes, minority expense of trust preferred securities
and extraordinary loss:
Property and casualty insurance $ (4,675) $ (2,126) $ (2,963) $ (815)
Banking and lending 3,108 1,757 5,845 9,585
Manufacturing 3,394 2,949 5,097 4,452
Foreign real estate (a) 15,084 - 18,158 -
Other operations (b) 4,368 8,848 177,255 11,906
-------- -------- -------- --------
Total income from continuing operations before
income taxes, minority expense of trust preferred
securities and extraordinary loss for reportable
segments 21,279 11,428 203,392 25,128
Equity in associated companies (514) 172 (3,590) (3,385)
Corporate 5,096 8,552 5,499 18,926
-------- -------- -------- --------
Total consolidated income from continuing operations
before income taxes, minority expense of trust
preferred securities and extraordinary loss $ 25,861 $ 20,152 $205,301 $ 40,669
======== ======== ======== ========
</TABLE>
(a) Foreign real estate consists of the operations of Fidei, S.A.,
which was acquired in the fourth quarter of 1998. These
operations were previously included in the other operations
segment. Assets related to the foreign real estate segment
were approximately $338,284,000 at June 30, 1999 and
approximately $365,137,000 at December 31, 1998.
(b) Includes pre-tax gains on sale of Caja ($120,800,000), S&H
($18,700,000) and PIB ($29,545,000) for the six month period
ended June 30, 1999, as described above.
-7-
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued
8. At June 30, 1999 and December 31, 1998 the components of net assets of
discontinued operations are as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------- -----------
<S> <C> <C>
Investments $ 36,479 $ 65,788
Cash and cash equivalents 2,072 3,032
Separate account assets 634,853 619,578
Notes and other receivables 168,551 179,580
Other 11,550 15,425
--------- ---------
Total assets 853,505 883,403
--------- ---------
Policy reserves 167,720 179,083
Separate account liabilities 634,853 619,578
Other 24,172 39,734
--------- ---------
Total liabilities 826,745 838,395
--------- ---------
Net assets of discontinued operations $ 26,760 $ 45,008
========= =========
</TABLE>
Results of discontinued operations include revenues of $13,561,000 and
$6,658,000 for the six month periods ended June 30, 1999 and 1998,
respectively, and $1,095,000 and $2,950,000 for the three month periods
ended June 30, 1999 and 1998, respectively, and income before income taxes
of $13,282,000 and $4,478,000 for the six month periods ended June 30, 1999
and 1998, respectively, and $801,000 and $2,284,000 for the three month
periods ended June 30, 1999 and 1998, respectively. Results for the six
month period ended June 30, 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.
In July 1999, the Company sold Charter and Intramerica to Allstate Life
Insurance Company for statutory surplus, as adjusted, at the date of sale
(approximately $37,590,000 at June 30, 1999) plus $3,575,000. The Company
will record a pre-tax gain of approximately $14,000,000 in the third
quarter, which includes recognition of deferred gains from prior
reinsurance transactions.
9. 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 60,744,000 and 63,920,000 for the six
month periods ended June 30, 1999 and 1998, respectively, and 60,020,000
and 63,941,000 for the three month periods ended June 30, 1999 and 1998,
respectively. The number of shares used to calculate diluted earnings
(loss) per share amounts was 60,771,000 and 64,056,000 for the six month
periods ended June 30, 1999 and 1998, respectively, and 60,020,000 and
64,063,000 for the three month periods ended June 30, 1999 and 1998,
respectively.
10. Cash paid for interest and income taxes (net of refunds) was $28,780,000
and $(15,682,000), respectively, for the six month period ended June 30,
1999 and $20,221,000 and $141,168,000, respectively, for the six month
period ended June 30, 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 six month periods ended June 30, 1999 and 1998, the Company
operated profitably. For the six month period ended June 30, 1999 net cash was
provided by operations. 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 of June 30, 1999, the Company's cash, cash equivalents and marketable
securities, excluding those amounts held by its regulated and foreign
subsidiaries, totaled approximately $601,000,000. In addition, the book value of
the principal amount of promissory notes received from Conseco, Inc. (the
"Conseco Notes") upon the 1997 sale of the Colonial Penn Life Group was
$400,000,000 at June 30, 1999.
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 six month
period ended June 30, 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 six month period ended June 30, 1999.
In May 1999, the Company paid a $12.00 per share cash dividend (the "Dividend"),
aggregating approximately $722,178,000. 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
$90,000,000, subject to reduction to comply with the Company's senior
subordinated debt agreement covenants. While these covenants would currently
allow an additional $90,000,000 dividend, the permissible amount would be
increased for 50% of net income (as defined) and decreased for 100% of net
losses (as defined), dividends and stock buybacks.
Payment of the Dividend (and any subsequent dividend) required the Company to
make an offer to purchase all of its 8-1/4% Senior Subordinated Debentures due
2005 (the "8-1/4% Debentures") and its 7-7/8% Senior Subordinated Debentures due
2006 (the "7-7/8% Debentures"), 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. Pursuant to such offers, in June 1999, the Company repurchased
$80,899,000 principal amount of the 8-1/4% Debentures and $113,324,000 principal
amount of the 7-7/8% Debentures for approximately $198,000,000, including
accrued interest. Of this amount, $100,000,000 was borrowed under a short-term
credit facility. Such amount was repaid in July 1999 with funds received in the
third quarter from the repayment of $150,000,000 of the Conseco Notes.
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 six
month period ended June 30, 1999, the Company repurchased 2,301,120 Common
Shares for an aggregate cost of approximately $64,463,000. From
-9-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF INTERIM OPERATIONS, continued
July 1, 1999 through August 5, 1999, the Company repurchased 292,800 Common
Shares for an aggregate cost of approximately $6,306,000.
In July 1999, the Company sold its life insurance subsidiaries, Charter National
Life Insurance Company and Intramerica Life Insurance Company to Allstate Life
Insurance Company for statutory surplus, as adjusted, at the date of sale
(approximately $37,590,000 at June 30, 1999), plus $3,575,000. The Company will
record a pre-tax gain of approximately $14,000,000 in the third quarter, which
includes recognition of deferred gains from prior reinsurance transactions.
The Company has determined to replace its two corporate owned aircraft it has
used for ten years with two newer models of used aircraft. During the six month
period ended June 30, 1999, the Company expended approximately $52,400,000 of
generally available corporate funds to acquire these aircraft. The Company
expects to receive approximately $16,000,000 for its existing aircraft.
RESULTS OF OPERATIONS
THE 1999 PERIODS COMPARED TO THE 1998 PERIODS
Net earned premium revenues of the Empire Group were $85,402,000 and
$122,205,000 for the six month periods ended June 30, 1999 and 1998,
respectively, and $38,658,000 and $58,514,000 for the three month periods ended
June 30, 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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Loss Ratio:
GAAP 92.4% 104.1% 88.4% 99.8%
SAP 92.4% 104.1% 88.4% 99.8%
Expense Ratio:
GAAP 37.8% 25.4% 36.4% 25.4%
SAP 45.3% 28.5% 38.2% 26.1%
Combined Ratio:
GAAP 130.2% 129.5% 124.8% 125.2%
SAP 137.7% 132.6% 126.6% 125.9%
</TABLE>
The decline in the loss ratios in 1999 was due to reserve strengthening recorded
in 1998 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 the 1999 periods principally due to greater sales and lower raw
material costs, partially 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 pre-tax gains of approximately $6,500,000 and
$600,000, respectively, for the six and three month periods ended June 30, 1998.
Operating profits increased as a result of greater loans outstanding and higher
yielding loans offset by slightly higher expenses and
-10-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF INTERIM OPERATIONS, continued
lower investment income. Average loans outstanding during the six and three
month periods ended June 30, 1999 were higher than average loans outstanding
during the comparable periods of 1998 by approximately $37,600,000 and
$80,100,000, respectively, primarily due to the purchase of a subprime
automobile portfolio in December 1998 and increased new loan originations,
partially offset by the sale of substantially all of the executive and
professional loan portfolio, described above. 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.
Investment and other income for the six month period ended June 30, 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 the
1999 periods as compared to the 1998 periods due to increased rent income and
gains from sales of real estate properties (of which approximately $33,600,000
and $22,200,000, respectively, for the six and three month periods ended June
30, 1999 related to Fidei S.A. ("Fidei"), the Company's French subsidiary which
was acquired in the fourth quarter of 1998), partially offset by a reduction in
investment income and the aforementioned gain in 1998 on the sale of the
executive and professional loan portfolio. During the six month period ended
June 30, 1999, Fidei sold 39 real estate properties; 112 properties remained at
June 30, 1999.
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 the 1999 periods as
compared to the 1998 periods principally reflect expenses incurred by Fidei,
expenses incurred in connection with the Dividend, described above, and for the
six month period ended June 30, 1999, increased professional fees.
Income taxes for the six month period ended June 30, 1999 reflect the
utilization of capital loss carryforwards. The 1998 provisions for income taxes
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 60,744,000 and 63,920,000 for the six month periods ended June 30, 1999 and
1998, respectively, and 60,020,000 and 63,941,000 for the three month periods
ended June 30, 1999 and 1998, respectively. The number of shares used to
calculate diluted earnings (loss) per share was 60,771,000 and 64,056,000 for
the six month periods ended June 30, 1999 and 1998, respectively, and 60,020,000
and 64,063,000 for the three month periods ended June 30, 1999 and 1998,
respectively.
YEAR 2000 AND INFORMATION TECHNOLOGY SYSTEMS
The Company is continuing to evaluate 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.
-11-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF INTERIM OPERATIONS, continued
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 has one non-compliant system that
maintains historical claims information. The Empire Group anticipates that it
will transfer this information to a Year 2000 compliant system during the fourth
quarter of 1999, while maintaining the existing system until the conversion is
successfully completed. If the conversion is not successful, the Empire Group
will maintain this information in a simplified database file and in hard copy.
All but one of the manufacturing operation's material systems (involving the
storage of historical information) have tested as being Year 2000 compliant. The
Company is exploring alternative systems to maintain this information. Until an
acceptable replacement for this system can be found, the Company can maintain
these records in hard copy. The banking and lending operations have successfully
completed testing of mission critical systems and testing of non-mission
critical systems is currently underway. In addition, deposit customers have been
sent letters to inform them about the Year 2000 issue and to educate them about
the progress made in addressing this issue.
The Year 2000 issue may affect other entities with which the Company transacts
business. The Company has made inquiry of third parties with whom it has
material relationships as to the Year 2000 compliance of such third parties.
Many of such parties have reported plans to be fully compliant by the end of
1999 and most have reported substantial progress at the end of 1998. However, at
this time the Company cannot predict the effect of the Year 2000 on its material
third parties or the impact any deficiency in the Year 2000 readiness of such
parties could have on the Company.
Through June 30, 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
-12-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF INTERIM OPERATIONS, continued
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.
-13-
<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 1999 Annual Meeting of Shareholders held on May
5, 1999.
<TABLE>
a) Election of directors.
<CAPTION>
Number of Shares
------------------------
For Withheld
--- --------
<S> <C> <C>
Ian M. Cumming 50,669,001 125,030
Paul M. Dougan 50,668,447 125,584
Lawrence D. Glaubinger 50,656,837 137,194
James E. Jordan 50,669,021 125,010
Jesse Clyde Nichols, III 50,669,021 125,010
Joseph S. Steinberg 50,669,021 125,010
b) Approval of the Company's 1999 Stock Option Plan.
For 44,828,638
Against 4,629,433
Abstentions 1,335,960
Broker non-votes -
c) Approval of the Company's Senior Executive Warrant Plan.
For 47,549,354
Against 1,888,044
Abstentions 1,356,633
Broker non-votes -
d) Ratification of PricewaterhouseCoopers LLP, as independent
auditors for the year ended December 31, 1999.
For 50,684,860
Against 43,768
Abstentions 65,403
Broker non-votes -
</TABLE>
-14-
<PAGE>
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 April 6,
1999 and June 24, 1999, which set 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: August 12, 1999 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 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-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 373,063
<SECURITIES> 1,170,557
<RECEIVABLES> 919,870
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 176,174
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,197,210
<CURRENT-LIABILITIES> 0
<BONDS> 576,504
0
0
<COMMON> 59,684
<OTHER-SE> 1,177,481
<TOTAL-LIABILITY-AND-EQUITY> 3,197,210
<SALES> 30,337
<TOTAL-REVENUES> 437,982
<CGS> 19,067
<TOTAL-COSTS> 112,778
<OTHER-EXPENSES> 91,997
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,906
<INCOME-PRETAX> 205,301
<INCOME-TAX> 39,008
<INCOME-CONTINUING> 163,532
<DISCONTINUED> 8,619
<EXTRAORDINARY> (2,588)
<CHANGES> 0
<NET-INCOME> 169,563
<EPS-BASIC> 2.79
<EPS-DILUTED> 2.79
</TABLE>
