SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended September 30, 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 November 5, 1999:
56,804,266.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998
(Dollars in thousands, except par value)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Investments:
Available for sale (aggregate cost of $861,841 and $1,555,789) $ 866,826 $ 1,553,126
Trading securities (aggregate cost of $140,155 and $132,907) 131,103 132,576
Held to maturity (aggregate fair value of $28,102 and $47,583) 28,253 47,256
Other investments, including accrued interest income 39,927 37,247
----------- -----------
Total investments 1,066,109 1,770,205
Cash and cash equivalents 360,222 459,690
Reinsurance receivables, net 45,678 48,070
Trade, notes and other receivables, net 875,837 833,301
Prepaids and other assets 413,645 490,242
Property, equipment and leasehold improvements, net 176,929 121,790
Deferred policy acquisition costs 13,422 18,255
Investments in associated companies 100,950 172,390
Net assets of discontinued operations -- 45,008
----------- -----------
Total $ 3,052,792 $ 3,958,951
=========== ===========
LIABILITIES
Customer banking deposits $ 226,448 $ 189,782
Trade payables and expense accruals 248,457 233,485
Other liabilities 80,792 109,397
Income taxes payable 127,048 96,500
Deferred tax liability 26,847 7,709
Policy reserves 460,927 542,274
Unearned premiums 73,999 94,572
Debt, including current maturities 483,085 722,601
----------- -----------
Total liabilities 1,727,603 1,996,320
----------- -----------
Minority interest 7,246 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; 57,116,166
and 61,984,686 shares issued and outstanding, after deducting
61,299,367 and 56,430,847 shares held in treasury 57,116 61,985
Additional paid-in capital 91,182 205,227
Accumulated other comprehensive income (loss) 314 (771)
Retained earnings 1,071,131 1,586,718
----------- -----------
Total shareholders' equity 1,219,743 1,853,159
----------- -----------
Total $ 3,052,792 $ 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 September 30, 1999 and 1998
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Month For the Nine Month
Period Ended Period Ended
September 30, September 30,
--------------------- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Insurance revenues and commissions $ 32,411 $ 55,043 $ 117,813 $ 177,248
Manufacturing 18,183 16,057 48,520 42,727
Finance 12,611 7,246 33,064 23,270
Investment and other income 66,278 55,823 365,918 182,136
Equity in income (losses) of associated companies 1,160 17,762 (2,430) 14,377
Net securities gains (losses) 693 (74,226) 6,433 (70,349)
--------- --------- --------- ---------
131,336 77,705 569,318 369,409
--------- --------- --------- ---------
EXPENSES:
Provision for insurance losses and policy benefits 31,039 54,219 106,216 175,792
Amortization of deferred policy acquisition costs 7,076 11,445 25,610 34,991
Manufacturing cost of goods sold 10,493 9,410 29,560 25,825
Interest 10,743 10,351 38,649 30,673
Salaries 11,190 10,172 32,332 30,570
Selling, general and other expenses 30,141 21,658 100,996 70,439
--------- --------- --------- ---------
100,682 117,255 333,363 368,290
--------- --------- --------- ---------
Income (loss) from continuing operations before income taxes,
minority expense of trust preferred securities and
extraordinary loss 30,654 (39,550) 235,955 1,119
--------- --------- --------- ---------
Income taxes:
Current (2,121) (16,583) 17,933 (12,748)
Deferred 9,949 (19,628) 28,903 (11,475)
--------- --------- --------- ---------
7,828 (36,211) 46,836 (24,223)
--------- --------- --------- ---------
Income (loss) from continuing operations before minority
expense of trust preferred securities and extraordinary loss 22,826 (3,339) 189,119 25,342
Minority expense of trust preferred securities, net of taxes 1,380 2,109 4,141 6,327
--------- --------- --------- ---------
Income (loss) from continuing operations before extraordinary loss 21,446 (5,448) 184,978 19,015
Income from discontinued operations, net of taxes 15,582 3,411 24,201 6,373
--------- --------- --------- ---------
Income (loss) before extraordinary loss 37,028 (2,037) 209,179 25,388
Extraordinary loss from early extinguishment of debt,
net of income tax benefit of $1,394 -- -- (2,588) --
---------- --------- --------- ---------
Net income (loss) $ 37,028 $ (2,037) $ 206,591 $ 25,388
========= ========= ========= =========
Basic earnings (loss) per common share:
Income (loss) from continuing operations $ .36 $ (.08) $ 3.08 $ .30
Income from discontinued operations .27 .05 .40 .10
Extraordinary loss -- -- (.04) --
--------- --------- --------- ---------
Net income (loss) $ .63 $ (.03) $ 3.44 $ .40
========= ========= ========= =========
Diluted earnings (loss) per common share:
Income (loss) from continuing operations $ .36 $ (.08) $ 3.08 $ .30
Income from discontinued operations .27 .05 .40 .10
Extraordinary loss -- -- (.04) --
--------- --------- --------- ---------
Net income (loss) $ .63 $ (.03) $ 3.44 $ .40
========= ========= ========= =========
</TABLE>
See notes to interim consolidated financial statements.
-3-
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine months ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
(In thousands)
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 206,591 $ 25,388
Adjustments to reconcile net income to net cash provided by (used for) operations:
Extraordinary loss, net of income tax benefit 2,588 --
Provision (benefit) for deferred income taxes 28,903 (11,475)
Depreciation and amortization of property, equipment and leasehold improvements 11,044 6,739
Other amortization 25,096 27,179
Provision for doubtful accounts 8,652 6,054
Net securities (gains) losses (6,433) 70,349
Equity in (income) losses of associated companies 2,430 (14,377)
(Gain) on disposal of real estate, property and equipment (39,202) (25,860)
(Gain) on sales of PIB, Caja, S&H and Charter in 1999 and loan portfolio in 1998 (193,820) (6,588)
Investments classified as trading, net (12,689) (38,615)
Deferred policy acquisition costs incurred and deferred (20,777) (32,587)
Net change in:
Reinsurance receivables 2,392 (12,688)
Trade, notes and other receivables 105,432 83,182
Prepaids and other assets (8,574) (30,645)
Net assets of discontinued operations 17,616 20,289
Trade payables and expense accruals 19,892 (73,110)
Other liabilities (6,354) (27,662)
Income taxes payable 31,942 (72,824)
Policy reserves (81,347) (10,475)
Unearned premiums (20,573) (16,247)
Other 8,133 2,587
----------- -----------
Net cash provided by (used for) operating activities 80,942 (131,386)
----------- -----------
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of real estate, property, equipment and leasehold improvements (109,235) (52,459)
Proceeds from disposals of real estate, property and equipment 111,348 44,312
Proceeds from sales of PIB, Caja, S&H and Charter in 1999 and loan portfolio in 1998 226,539 92,099
Advances on loan receivables (181,613) (89,203)
Principal collections on loan receivables 73,494 58,518
Purchases of investments (other than short-term) (1,449,316) (1,862,339)
Proceeds from maturities of investments 967,209 946,132
Proceeds from sales of investments 1,205,972 1,308,247
----------- -----------
Net cash provided by investing activities 844,398 445,307
----------- -----------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in short-term borrowings (19,798) 65,113
Net change in customer banking deposits 36,852 (6,728)
Reduction of long-term debt (200,321) (315)
Purchase of common shares for treasury (115,965) (34,708)
Dividends paid (722,178) (6,670)
----------- -----------
Net cash provided by (used for) financing activities (1,021,410) 16,692
----------- -----------
Effect of foreign exchange rate changes on cash (3,398) --
----------- -----------
Net (decrease) increase in cash and cash equivalents (99,468) 330,613
Cash and cash equivalents at January 1, 459,690 581,186
----------- -----------
Cash and cash equivalents at September 30, $ 360,222 $ 911,799
=========== ===========
</TABLE>
See notes to interim consolidated financial statements.
-4-
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
For the nine months ended September 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 3,080 3,080
Net income 25,388 25,388
----------
Comprehensive income 28,468
Exercise of options to purchase ----------
common shares 121 2,693 2,814
Purchase of stock for treasury (1,178) (33,530) (34,708)
Dividends (6,670) (6,670)
---------- ---------- ---------- ---------- ----------
Balance, September 30, 1998 $ 62,822 $ 222,430 $ 8,710 $1,559,473 $1,853,435
========== ========== ========== ========== ==========
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 2,201 2,201
Net change in unrealized foreign
exchange gain (loss) (1,116) (1,116)
Net income 206,591 206,591
----------
Comprehensive income 207,676
----------
Purchase of stock for treasury (4,869) (114,045) (118,914)
Dividends (722,178) (722,178)
---------- --------- ---------- ---------- ----------
Balance, September 30, 1999 $ 57,116 $ 91,182 $ 314 $1,071,131 $1,219,743
========== ========== ========== ========== ==========
</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 nine month period ended September 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 nine month period ended September 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 nine month period ended September 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 and pay a second dividend before the end of 1999 in
the amount of approximately $90,000,000, subject to reduction, if
necessary, to comply with senior subordinated debt agreement covenants.
While these covenants would currently allow such dividend, the Company is
required to maintain total shareholders' equity of $1 billion after the
dividend is paid.
Payment of the 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") then 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 repurchased
$194,223,000 aggregate principal amount of these Debentures and reported an
extraordinary loss on early extinguishment of $3,982,000 ($2,588,000 after
taxes) in the nine month period ended September 30, 1999.
-6-
<PAGE>
Notes to Interim Consolidated Financial Statements, continued
6. The Company repurchased 5,180,420 Common Shares for an aggregate cost of
approximately $125,481,000 from January 1, 1999 though November 5, 1999.
The Company is currently authorized to repurchase an additional 2,579,150
Common Shares, after considering all repurchases through November 5, 1999.
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.
7. Certain information concerning the Company's segments for the nine and
three month periods ended September 30, 1999 and 1998 is as follows (in
thousands):
<TABLE>
<CAPTION>
For the Three Month For the Nine Month
Period Ended Period Ended
September 30, September 30,
------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Property and casualty insurance $ 41,622 $ 71,876 $ 149,171 $ 230,513
Banking and lending 14,320 9,979 37,133 36,085
Manufacturing 18,184 16,058 48,522 42,773
Foreign real estate (a) 6,065 -- 41,759 --
Other operations (b) 24,861 12,385 218,269 41,451
--------- --------- --------- ---------
Total revenue for reportable segments 105,052 110,298 494,854 350,822
Equity in associated companies 1,160 17,762 (2,430) 14,377
Corporate 25,124 (50,355) 76,894 4,210
--------- --------- --------- ---------
Total consolidated revenues $ 131,336 $ 77,705 $ 569,318 $ 369,409
========= ========= ========= =========
Income (loss) from continuing operations before income taxes,
minority expense of trust preferred securities and extraordinary
loss:
Property and casualty insurance $ (4,092) $ (2,526) $ (7,055) $ (3,341)
Banking and lending 4,834 2,380 10,679 11,965
Manufacturing 4,549 3,945 9,646 8,397
Foreign real estate (a) (466) -- 17,159 --
Other operations (b) 16,103 (1,968) 193,891 9,938
--------- --------- --------- ---------
Total income from continuing operations before income taxes,
minority expense of trust preferred securities and
extraordinary loss for reportable segments 20,928 1,831 224,320 26,959
Equity in associated companies 1,160 17,762 (2,430) 14,377
Corporate 8,566 (59,143) 14,065 (40,217)
--------- --------- --------- ---------
Total consolidated income (loss) from continuing operations
before income taxes, minority expense of trust preferred
securities and extraordinary loss $ 30,654 $ (39,550) $ 235,955 $ 1,119
========= ========= ========= =========
</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 $287,692,000 at September 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 nine month period ended September 30, 1999,
as described above.
-7-
<PAGE>
Notes to Interim Consolidated Financial Statements, continued
8. At December 31, 1998 the components of net assets of discontinued
operations are as follows (in thousands):
Investments $ 65,788
Cash and cash equivalents 3,032
Separate account assets 619,578
Notes and other receivables 179,580
Other 15,425
---------
Total assets 883,403
---------
Policy reserves 179,083
Separate account liabilities 619,578
Other 39,734
---------
Total liabilities 838,395
---------
Net assets of discontinued operations $ 45,008
=========
Results of discontinued operations include revenues of $13,561,000 and
$8,061,000 for the nine month periods ended September 30, 1999 and 1998,
respectively, and $1,403,000 for the three month period ended September 30,
1998 and income before income taxes of $13,282,000 and $9,615,000 for the
nine month periods ended September 30, 1999 and 1998, respectively, and
$5,137,000 for the three month period ended September 30, 1998. Results for
the nine month period ended September 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 $39,560,000) plus $3,575,000. The Company recorded a net
gain of $15,582,000 in the third quarter of 1999, which includes
recognition of deferred gains from prior reinsurance transactions.
9. Earnings (loss) per share amounts were calculated by dividing net income
(loss) 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 60,098,000 and
63,790,000 for the nine month periods ended September 30, 1999 and 1998,
respectively, and 58,865,000 and 63,600,000 for the three month periods
ended September 30, 1999 and 1998, respectively. The number of shares used
to calculate diluted earnings (loss) per share amounts was 60,117,000 and
63,905,000 for the nine month periods ended September 30, 1999 and 1998,
respectively, and 58,865,000 and 63,600,000 for the three month periods
ended September 30, 1999 and 1998, respectively.
10. Cash paid for interest and income taxes (net of refunds) was $44,134,000
and $(15,280,000), respectively, for the nine month period ended September
30, 1999 and $28,162,000 and $60,150,000, respectively, for the nine month
period ended September 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 nine month periods ended September 30, 1999 and 1998, the
Company operated profitably. For the nine month period ended September 30, 1999
net cash was provided by operations. For the nine month period ended September
30, 1998, net cash was used for operations, principally for the payment of
income taxes and to purchase investments classified as trading, partially offset
by the repayment of the Company's bridge financing to Pepsi International
Bottlers ("PIB").
As of September 30, 1999, the Company's cash, cash equivalents and marketable
securities, excluding those amounts held by its regulated and foreign
subsidiaries, totaled approximately $600,000,000. In addition, the outstanding
principal amount of promissory notes received from Conseco, Inc. (the "Conseco
Notes") upon the 1997 sale of the Colonial Penn Life Group was $250,000,000 at
September 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 nine month
period ended September 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 nine month period ended September 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
and pay a second dividend before the end of 1999 in the amount of approximately
$90,000,000, subject to reduction, if necessary, to comply with senior
subordinated debt agreement covenants. While these covenants would currently
allow such dividend, the Company is required to maintain total shareholders'
equity of $1 billion after the dividend is paid.
Payment of the 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.
During the nine month period ended September 30, 1999, the Company repurchased
4,868,520 Common Shares for an aggregate cost of approximately $118,914,000.
From October 1, 1999 through November 5, 1999, the Company repurchased 311,900
Common Shares for an aggregate cost of approximately $6,567,000. The Company is
currently authorized to repurchase an additional 2,579,150 Common Shares, after
considering all repurchases through November 5, 1999. 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.
-9-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued
In July 1999, the Company sold its life insurance subsidiaries, Charter National
Life Insurance Company and Intramerica Life Insurance Company, which were
classified as discontinued operations as of December 31, 1998, to Allstate Life
Insurance Company for statutory surplus, as adjusted, at the date of sale
(approximately $39,560,000), plus $3,575,000. Income from these discontinued
operations, net of taxes, was $24,201,000 for the nine month period ended
September 30, 1999, of which $15,582,000 resulted from the sale in the third
quarter, including the recognition of deferred gains from prior reinsurance
transactions.
In two separate transactions, the Company acquired substantially all of the
assets of Tranex Credit Corp. ("Tranex"), a subprime automobile lender, for
approximately $116,000,000. In September 1999, the Company's banking and lending
subsidiary purchased Tranex's subprime automobile portfolio for $52,400,000. In
October 1999, another subsidiary of the Company acquired from Tranex
approximately $44,200,000 of excess servicing assets, and the Company's banking
and lending subsidiary acquired the remaining $15,500,000 of subprime automobile
receivables and approximately $4,000,000 of certain other assets. The Company's
banking and lending subsidiary has begun the process of integrating Tranex's
operations with its own automobile lending operations. The Company expects to
achieve some expense savings as a result of combining certain aspects of these
operations.
In September 1999, the Company lent to MK Gold Company approximately $35,800,000
and entered into a purchase agreement to increase its equity interest to
approximately 72.5%. In October 1999, the stock purchase was consummated for
$15,800,000 and the loan was reduced by such amount. MK Gold Company used the
funds received from the Company and approximately $6,200,000 of its own working
capital to acquire the entire share capital and subordinated debt of a company
that holds the exploration and mining rights to the Las Cruces copper deposit in
Spain.
The Company has replaced its two corporate owned aircraft it has used for ten
years with two newer models of used aircraft. During the nine month period ended
September 30, 1999, the Company paid approximately $43,900,000 of generally
available corporate funds to acquire these aircraft, net of $8,500,000 received
upon the sale of one of its older aircraft. The Company expects to receive
approximately $8,000,000 for its remaining aircraft.
Results of Operations
The 1999 Periods Compared to the 1998 Periods
Net earned premium revenues of the Empire Group were $117,813,000 and
$177,248,000 for the nine month periods ended September 30, 1999 and 1998,
respectively, and $32,411,000 and $55,043,000 for the three month periods ended
September 30, 1999 and 1998, respectively. While earned premiums declined in all
lines of business, the most significant reductions were in assigned risk
automobile and voluntary private passenger automobile lines. Starting in 1998,
the Empire Group began to issue fewer assigned risk automobile policies, both as
a result of losing contracts for this business to competitors and, with respect
to those contracts entered into with other insurance companies, as a result of a
general depopulation of the underlying assigned risk automobile pools. The
Empire Group's underwriting results in this line of business have also been poor
in recent years. As a result of its reduced volume in this line of business and
poor operating results, the Empire Group will no longer seek to enter into new
assigned risk contracts with other insurance companies. The Empire Group is
currently evaluating the possible disposition of its remaining assigned risk
premium obligations. Net written and earned premiums for the assigned risk
automobile business were approximately $7,300,000 and $15,200,000, respectively,
for the nine month period ended September 30, 1999 and approximately $1,675,000
and $3,769,000, respectively, for the three month period ended September 30,
1999.
-10-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued
The decline in voluntary private passenger automobile premiums results from the
Empire Group's tighter underwriting standards and increased competition. The
Empire Group expects that this trend will continue as it reunderwrites private
passenger automobile policies at their renewal date, which in many cases may
result in the insured not renewing the policy to avoid premium increases.
Additionally, the Empire Group discontinued accepting new voluntary private
passenger automobile policies from certain agents who have historically had poor
underwriting results. Net earned premiums for the voluntary private passenger
business were approximately $25,968,000 and $46,251,000 for the nine month
periods ended September 30, 1999 and 1998, respectively, and approximately
$7,029,000 and $14,773,000 for the three month periods ended September 30, 1999
and 1998, respectively.
The Empire Group has experienced declines in written and earned premiums in all
other lines of business, due to reunderwriting its book of business in selected
lines, the termination of a number of agency relationships due to poor
underwriting results and competition. Over the past year the Empire Group has
invested its resources to enhance and market its products, to upgrade the
quality of customer service and to provide its agents with the ability to
process applications, receive price quotes and obtain other policy and claim
information via the Internet. While the Empire Group expects these efforts will
continue and be successful, no assurances can be given that the Empire Group
will be able to profitably grow its premium volume in the future.
The Empire Group's loss ratios were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
Loss Ratio:
GAAP 95.9% 98.8% 90.4% 99.5%
SAP 95.9% 98.8% 90.4% 99.5%
Expense Ratio:
GAAP 40.2% 30.9% 37.5% 27.1%
SAP 48.3% 35.7% 40.7% 28.6%
Combined Ratio:
GAAP 136.1% 129.7% 127.9% 126.6%
SAP 144.2% 134.5% 131.1% 128.1%
The decline in the loss ratios in 1999 was due to reserve strengthening recorded
in 1998 for prior accident years and lower overall current year loss ratios
resulting from changes in the product mix and improved underwriting. While the
Empire Group has reduced expenses during the current year, they have not been
reduced at the same rate as the decline in premium volume, due in part to
expenditures related to the installation of new information systems and
providing Internet access to agents. During the fourth quarter, the Empire Group
will implement further expense reductions in all areas in order to improve its
underwriting results. However, the expense reductions alone are not expected to
result in underwriting profits, and any further erosion in premium volume would
necessitate further expense reductions in the future.
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, for the nine
month period ended September 30, 1999, lower raw material costs, partially
offset by higher expenses.
Finance revenues reflect the level and mix of consumer instalment loans, and for
the nine month period ended September 30, 1998, the sale of substantially all of
the Company's executive and professional loan portfolio, which resulted in a
pre-tax gain of approximately $6,600,000. Operating profits increased as a
result of greater loans outstanding, partially offset by increased provisions
for loan losses, higher expenses and lower investment income. Average loans
outstanding during the nine and three month periods ended September 30, 1999
were higher than average loans outstanding during the comparable periods of 1998
by approximately $60,566,000 and $129,323,000,
-11-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued
respectively, primarily due to the purchase of a subprime automobile portfolio
in December 1998, the Tranex transaction in September 1999 and increased new
loan originations, partially offset by the sale of substantially all of the
executive and professional loan portfolio, described above.
As mentioned above, the Company is currently integrating Tranex with its own
automobile lending operations. Prior to acquisition, Tranex's monthly new loan
volume was at least equal to the Company's volume. While the Company expects
that its stricter underwriting standards will result in a reduction in Tranex's
new loan volume, consolidated new loan volumes should increase significantly.
Since the Company records a full allowance for uncollectible loans at the time a
new loan is made, profits will be reduced while the portfolio grows. The Company
intends to continue to explore the acquisition of additional portfolios of loans
that meet the Company's underwriting standards if they can be purchased on
attractive terms.
Investment and other income for the nine month period ended September 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, and for
the nine and three month periods ended September 30, 1999, the gain on sale of
an equity interest in an associated company ($8,700,000). 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 $40,200,000 and $5,900,000 for the nine and three month periods
ended September 30, 1999, respectively, related to Fidei, the Company's French
real estate subsidiary. During the nine month period ended September 30, 1999,
Fidei sold 46 real estate properties; 105 properties remain at September 30,
1999, substantially all of which are currently being marketed for sale. Such
increases were partially offset by a reduction in investment income resulting
primarily from payment of the Dividend and debt repurchases described above and,
for the nine month period, the gain in 1998 on the sale of the executive and
professional loan portfolio.
Net securities gains (losses) for the nine and three month periods ended
September 30, 1998 included a pre-tax writedown of approximately $75,000,000
related to investments in Russian and Polish debt and equity securities due to
declines in values that were deemed other than temporary.
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, and
for the nine month period ended September 30, 1999, expenses incurred in
connection with the Dividend and increased professional fees.
Income taxes for the nine month period ended September 30, 1999 reflect a
benefit of approximately $33,300,000 from the utilization of capital loss
carryforwards which had previously been fully reserved. Income taxes for the
1999 periods reflect a benefit of approximately $3,400,000 for a change in the
Company's estimated 1998 federal income tax liability and the favorable
resolution of certain federal income tax contingencies. Income taxes for 1998
reflect a benefit (approximately $30,000,000 for the nine months and $25,000,000
for the three months ended September 30, 1998, respectively) for a change in the
Company's estimated 1997 federal tax liability and the favorable resolution of
certain federal income tax contingencies.
The number of shares used to calculate basic earnings (loss) per share amounts
was 60,098,000 and 63,790,000 for the nine month periods ended September 30,
1999 and 1998, respectively, and 58,865,000 and 63,600,000 for the three month
periods ended September 30, 1999 and 1998, respectively. The number of shares
used to calculate diluted earnings (loss) per share was 60,117,000 and
63,905,000 for the nine month periods ended September 30, 1999 and 1998,
respectively, and 58,865,000 and 63,600,000 for the three month periods ended
September 30, 1999 and 1998, respectively.
-12-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued
Year 2000 and Information Technology Systems
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. All of the Company's operations have
completed the computer inventory and identification process and substantially
all have completed testing critical systems. The Company's primary focus during
the remainder of 1999 will continue to be on 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. During the third quarter of 1999, the Empire Group
completed the transfer of its historical claims database from its last remaining
non-compliant system to a fully compliant Year 2000 system. All of the
manufacturing operation's material systems have tested as being Year 2000
compliant. All of the systems of the banking and lending operations have
successfully completed testing. 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. Tranex's mission critical systems have
tested as being Year 2000 compliant and business contingency plans are being
finalized.
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 had 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 September 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
-13-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued
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.
-14-
<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 a current report on Form 8-K dated July 6, 1999
which sets forth information under Item 5. Other Events and Item
7. Financial Statements, Pro Forma Financial Statements and
Exhibits.
-15-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEUCADIA NATIONAL CORPORATION
(Registrant)
Date: November 12, 1999 By /s/ Barbara L. Lowenthal
---------------------------
Barbara L. Lowenthal
Vice President and Comptroller
(Chief Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibit Description Exemption
Number Indication
- ------- ------------ ----------
27 Financial Data Schedule
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 360,222
<SECURITIES> 1,066,109
<RECEIVABLES> 921,515
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 176,929
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,052,792
<CURRENT-LIABILITIES> 0
<BONDS> 483,085
0
0
<COMMON> 57,116
<OTHER-SE> 1,162,627
<TOTAL-LIABILITY-AND-EQUITY> 3,052,792
<SALES> 48,520
<TOTAL-REVENUES> 569,318
<CGS> 29,560
<TOTAL-COSTS> 161,386
<OTHER-EXPENSES> 133,328
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,649
<INCOME-PRETAX> 235,955
<INCOME-TAX> 46,836
<INCOME-CONTINUING> 184,978
<DISCONTINUED> 24,201
<EXTRAORDINARY> (2,588)
<CHANGES> 0
<NET-INCOME> 206,591
<EPS-BASIC> 3.44
<EPS-DILUTED> 3.44
</TABLE>
