SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-5721 LEUCADIA NATIONAL CORPORATION (Exact name of registrant as specified in its Charter) New York 13-2615557 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 315 Park Avenue South, New York, New York 10010-3607 (Address of principal executive offices) (Zip Code) (212) 460 -1900 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) ---------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES [ ] NO [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, at August 7, 1998: 63,954,720.
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 1998 and December 31, 1997 (Dollars in thousands, except par value) <TABLE> <CAPTION> June 30, December 31, 1998 1997 ---------- ---------- (Unaudited) <S> <C> <C> ASSETS Investments: Available for sale (aggregate cost of $1,701,458 and $1,713,653) $1,702,680 $1,721,640 Trading securities (aggregate cost of $62,287 and $108,479) 64,731 115,416 Held to maturity (aggregate fair value of $49,297 and $43,154) 49,037 43,036 Policyholder loans 5,075 5,050 Other investments, including accrued interest income 192,526 70,658 ---------- ---------- Total investments 2,014,049 1,955,800 Cash and cash equivalents 445,080 607,181 Reinsurance receivables, net 211,777 207,712 Trade, notes and other receivables, net 613,473 751,374 Prepaids and other assets 133,139 144,426 Property, equipment and leasehold improvements, net 67,690 60,522 Deferred policy acquisition costs 23,568 23,906 Separate and variable accounts 617,321 541,546 Investments in associated companies 246,197 207,902 ---------- --------- Total $4,372,294 $4,500,369 ========== ========== LIABILITIES Customer banking deposits $ 192,148 $ 198,582 Trade payables and expense accruals 134,844 216,818 Other liabilities 97,819 115,364 Income taxes payable 44,296 175,289 Deferred tax liability 10,799 11,874 Policy reserves 729,921 737,082 Unearned premiums 125,641 127,669 Separate and variable accounts 617,321 541,546 Debt, including current maturities 372,353 352,872 ---------- ---------- Total liabilities 2,325,142 2,477,096 ---------- ---------- Minority interest 9,749 9,742 ---------- ---------- Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debt securities of the Company 150,000 150,000 ---------- ---------- SHAREHOLDERS' EQUITY Common shares, par value $1 per share, authorized 150,000,000 shares; 63,943,710 and 63,879,155 shares issued and outstanding, after deducting 54,418,638 and 54,398,456 shares held in treasury 63,944 63,879 Additional paid-in capital 254,375 253,267 Accumulated other comprehensive income 904 5,630 Retained earnings 1,568,180 1,540,755 ---------- ---------- Total shareholders' equity 1,887,403 1,863,531 ---------- ---------- Total $4,372,294 $4,500,369 ========== ========== </TABLE> See notes to interim consolidated financial statements. -2-
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the periods ended June 30, 1998 and 1997 (In thousands, except per share amounts) (Unaudited) <TABLE> <CAPTION> For the Three Month For the Six Month Period Ended June 30, Period Ended June 30, ----------------------- ----------------------- 1998 1997 1998 1997 ---------- ---------- ---------- --------- <S> <C> <C> <C> <C> REVENUES: Insurance revenues and commissions $ 59,839 $ 72,172 $125,067 $149,142 Manufacturing 15,027 34,619 26,670 70,570 Finance 6,713 10,252 16,024 20,861 Investment and other income 65,753 83,769 129,888 131,853 Equity in income (losses) of associated companies 172 (9,382) (3,385) (20,393) Net securities gains (losses) 2,163 (902) 4,098 540 -------- -------- -------- -------- 149,667 190,528 298,362 352,573 -------- -------- -------- -------- EXPENSES: Provision for insurance losses and policy benefits 60,855 68,635 122,349 136,487 Amortization of deferred policy acquisition costs 11,169 12,548 23,546 26,071 Manufacturing cost of goods sold 9,112 24,251 16,415 49,253 Interest 10,196 11,756 20,322 24,638 Salaries 10,993 10,419 20,679 21,894 Selling, general and other expenses 24,906 29,103 49,904 65,955 -------- -------- -------- -------- 127,231 156,712 253,215 324,298 -------- -------- -------- -------- Income from continuing operations before income taxes, minority expense of trust preferred securities and extraordinary loss 22,436 33,816 45,147 28,275 -------- -------- -------- -------- Income taxes: Current 2,302 5,192 12,217 6,376 Deferred 3,183 7,833 1,287 5,415 -------- -------- -------- -------- 5,485 13,025 13,504 11,791 -------- -------- -------- -------- Income from continuing operations before minority expense of trust preferred securities and extraordinary loss 16,951 20,791 31,643 16,484 Minority expense of trust preferred securities, net of taxes 2,109 2,109 4,218 3,866 -------- -------- -------- -------- Income from continuing operations before extraordinary loss 14,842 18,682 27,425 12,618 Income from discontinued operations, net of taxes - 16,911 - 35,695 -------- -------- -------- -------- Income before extraordinary loss 14,842 35,593 27,425 48,313 Extraordinary loss from early extinguishment of debt, net of income tax benefit of $1,100 - (2,044) - (2,044) -------- -------- -------- -------- Net income $ 14,842 $ 33,549 $ 27,425 $ 46,269 ======== ======== ======== ======== Basic earnings (loss) per common share: Income from continuing operations before extraordinary loss $ .23 $ .30 $ .43 $ .21 Income from discontinued operations - .28 - .58 Extraordinary loss - (.03) - (.03) ----- ----- ----- ----- Net income $ .23 $ .55 $ .43 $ .76 ===== ===== ===== ===== Diluted earnings (loss) per common share: Income from continuing operations before extraordinary loss $ .23 $ .30 $ .43 $ .21 Income from discontinued operations - .26 - .58 Extraordinary loss - (.03) - (.03) ----- ----- ----- ----- Net income $ .23 $ .53 $ .43 $ .76 ===== ===== ===== ===== </TABLE> See notes to interim consolidated financial statements. -3-
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the six months ended June 30, 1998 and 1997 (Unaudited) <TABLE> <CAPTION> 1998 1997 ---- ---- (In thousands) <S> <C> <C> NET CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 27,425 $ 46,269 Adjustments to reconcile net income to net cash (used for) operations: Extraordinary loss, net of income tax benefit - 2,044 Provision for deferred income taxes 1,287 3,453 Depreciation and amortization of property, equipment and leasehold improvements 4,453 5,659 Other amortization 14,306 28,912 Provision for doubtful accounts 4,038 6,367 Net securities (gains) (4,098) (540) Equity in losses of associated companies 3,385 20,393 (Gain) on disposal of real estate, property and equipment (17,960) (56,532) (Gain) on sale of loan portfolio (6,487) - Purchases of investments classified as trading (135,517) (23,035) Proceeds from sales of investments classified as trading 96,902 2,256 Deferred policy acquisition costs incurred and deferred (23,208) (26,635) Net change in: Reinsurance receivables (4,065) (2,184) Trade, notes and other receivables 72,886 (109,170) Prepaids and other assets (35,452) (51,499) Net assets of discontinued operations - (22,295) Trade payables and expense accruals (87,086) (11,410) Other liabilities (15,297) 584 Income taxes payable (130,993) 19,224 Policy reserves (7,161) (6,531) Unearned premiums (2,028) 1,145 Other 1,160 1,189 ----------- --------- Net cash (used for) operating activities (243,510) (172,336) ----------- --------- NET CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of real estate, property, equipment and leasehold improvements (27,058) (33,754) Proceeds from disposals of real estate, property and equipment 27,745 139,168 Advances on loan receivables (61,379) (53,186) Principal collections on loan receivables 45,359 61,771 Proceeds from sale of loan portfolio 88,583 - Purchases of investments (other than short-term) (1,746,451) (685,220) Proceeds from maturities of investments 558,192 200,402 Proceeds from sales of investments 1,183,325 299,325 ----------- --------- Net cash provided by (used for) investing activities 68,316 (71,494) ----------- --------- NET CASH FLOWS FROM FINANCING ACTIVITIES: Net change in short-term borrowings 19,613 113,488 Net change in customer banking deposits (6,320) (9,039) Issuance of Company-obligated mandatorily redeemable preferred securities of subsidiary trust - 147,465 Reduction of long-term debt (200) (29,227) ----------- --------- Net cash provided by financing activities 13,093 222,687 ----------- --------- Net (decrease) in cash and cash equivalents (162,101) (21,143) Cash and cash equivalents at January 1, 607,181 184,029 ----------- --------- Cash and cash equivalents at June 30, $ 445,080 $ 162,886 =========== ========= </TABLE> See notes to interim consolidated financial statements. -4-
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the six months ended June 30, 1998 and 1997 (Unaudited) <TABLE> <CAPTION> Common Accumulated Shares Additional Other $1 Par Paid-In Comprehensive Retained Value Capital Income (Loss) Earnings Total ----- ------- ------------- -------- ----- (In thousands) <S> <C> <C> <C> <C> <C> BALANCE, JANUARY 1, 1997 $60,418 $161,026 $ 1,759 $ 894,904 $1,118,107 ---------- Comprehensive income: Net change in unrealized gain (loss) on investments (6,789) (6,789) Net income 46,269 46,269 ---------- Total comprehensive income 39,480 ---------- Exercise of options to purchase common shares 110 1,184 1,294 Conversion of 5 1/4% Convertible Subordinated Debentures 1,033 28,669 29,702 Purchase of stock for treasury (8) (205) (213) ------- -------- ------- ---------- ---------- BALANCE, JUNE 30, 1997 $61,553 $190,674 $(5,030) $ 941,173 $1,188,370 ======= ======== ======= ========== ========== BALANCE, JANUARY 1, 1998 $63,879 $253,267 $ 5,630 $1,540,755 $1,863,531 ---------- Comprehensive income: Net change in unrealized gain (loss) on investments (4,726) (4,726) Net income 27,425 27,425 ---------- Total comprehensive income 22,699 ---------- Exercise of options to purchase common shares 85 1,867 1,952 Purchase of stock for treasury (20) (759) (779) ------- -------- ------- ---------- ---------- BALANCE, JUNE 30, 1998 $63,944 $254,375 $ 904 $1,568,180 $1,887,403 ======= ======== ======= ========== ========== </TABLE> See notes to interim consolidated financial statements. -5-
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 1. The unaudited interim consolidated financial statements, which reflect all adjustments (consisting only of normal recurring items) that management believes necessary to present fairly results of interim operations, should be read in conjunction with the Notes to Consolidated Financial Statements (including the Summary of Significant Accounting Policies) included in the Company's audited consolidated financial statements for the year ended December 31, 1997, which are included in the Company's Annual Report filed on Form 10-K/A for such year (the "1997 10-K/A"). Results of operations for interim periods are not necessarily indicative of annual results of operations. The consolidated balance sheet at December 31, 1997 was extracted from the audited annual financial statements and does not include all disclosures required by generally accepted accounting principles for annual financial statements. In May 1998, the Company announced that it is studying a possible restructuring of its capitalization. The Company currently intends to distribute to its shareholders cash in the maximum amount permissible under the Company's outstanding senior subordinated debt agreements, which amount currently is approximately $848,000,000 (the "Distribution"). In addition, the Company is no longer considering a spin-off of the shares of the Empire Insurance Company, its property and casualty insurance subsidiary. Although the final structure and timing for the Distribution has not been determined, it is likely that the Distribution would be in the form of a cash dividend, a share repurchase or some combination thereof in January 1999, all of which would be taxed to the shareholders at capital gains rates. If implemented, the Distribution will obligate the Company to make an offer to purchase all of the Company's outstanding 8 1/4% Senior Subordinated Notes due 2005 and its outstanding 7 7/8% Senior Subordinated Notes due 2006 (collectively, the "Senior Subordinated Notes") at a purchase price of 101% of the outstanding principal amount pursuant to the terms of the indentures governing the Senior Subordinated Notes. An aggregate of approximately $235,000,000 of Senior Subordinated Notes is currently outstanding. Consummation of the Distribution is subject to the receipt by the Company of a favorable ruling from the Internal Revenue Service that would permit shareholders to receive capital gains treatment for the Distribution. No assurances can be given that the Distribution will be approved by the Company's Board of Directors or, if approved, will be implemented. In 1997, the Company classified as discontinued operations and sold the property and casualty insurance operations of Colonial Penn Insurance Company and its subsidiaries (the "Colonial Penn P&C Group") and the life and health insurance operations of Colonial Penn Life Insurance Company and Providential Life Insurance Company (the "Colonial Penn Life Group"). Prior period financial statements have been restated to conform with this presentation. Certain amounts for prior periods have been reclassified to be consistent with the 1998 presentation. 2. In 1996, the Company formed a joint venture, Pepsi International Bottlers ("PIB") with PepsiCo, Inc. to be the exclusive bottler and distributor of PepsiCo beverages in a large portion of central and eastern Russia, Kyrgyzstan and Kazakstan. After reflecting its share of losses since inception, the book value of the Company's equity investment in PIB was $9,645,000 at June 30, 1998. As more fully discussed in the Company's 1997 10-K/A, pursuant to its agreement with PepsiCo effective as of January 30, 1998, the Company no longer has any ability to influence PIB. As a result, the Company no longer accounts for its investment in PIB under the equity method of accounting. The agreement provides for a put option and a call option with respect to the Company's equity interest, which are exercisable at certain times. Although the exercise price exceeds the book value of the Company's equity investment in PIB at June 30, 1998 by $27,355,000, the Company will not recognize any gain in its results of operations until the put option or call option is exercised. -6-
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued 3. In February 1998, the Company agreed to reinsure substantially all of its remaining life insurance business to Allstate Life Insurance Company and a subsidiary thereof in an indemnity reinsurance transaction. Consummation of this transaction, which is expected to occur in the third quarter of 1998, is subject to regulatory approval and the satisfaction of certain other conditions. The premium to be received on this transaction is approximately $28,675,000. The gain on the reinsurance transaction will be deferred and amortized into income based upon actuarial estimates of the premium revenue of the underlying insurance contracts or will be recognized earlier in income if converted to assumption reinsurance. 4. During 1998, the Company sold substantially all of its executive and professional loan portfolio for aggregate proceeds of $89,544,000. The Company reported pre-tax gains on the sales of approximately $6,500,000 and $600,000, respectively, for the six and three month periods ended June 30, 1998. 5. In July 1998, the Company entered into an agreement to sell a 25% interest in the privately held Argentine insurance holding company, Caja de Ahorro y Seguro S.A., ("Caja"), to a private Argentine company that is also an investor in Caja for $140,000,000. Of the total purchase price, $100,000,000 will be paid in cash and the balance will be a two-year collateralized interest-bearing promissory note. The Company will retain a 5% interest in Caja. This transaction is subject to approval of the Central Bank of Argentina. Upon consummation of the transaction, the Company expects to record a pre-tax gain of approximately $100,000,000. 6. A summary of the results of discontinued operations is as follows for the periods ended June 30, 1997 (in thousands): <TABLE> <CAPTION> Colonial Penn Life Group Colonial Penn P&C Group ------------------------ ----------------------- For the three For the six For the three For the six months ended months ended months ended months ended June 30, 1997 June 30, 1997 June 30, 1997 June 30, 1997 ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> Revenues $58,724 $119,981 $153,004 $301,517 ------- -------- -------- -------- Expenses: Provision for insurance losses and policy benefits 34,847 74,802 110,470 218,030 Other operating expenses 11,013 21,594 30,182 53,307 ------- -------- -------- -------- 45,860 96,396 140,652 271,337 ------- -------- -------- -------- Income before income taxes 12,864 23,585 12,352 30,180 Income taxes 4,496 8,248 3,809 9,822 ------- -------- -------- -------- Income from discontinued operations, net of taxes $ 8,368 $ 15,337 $ 8,543 $ 20,358 ======= ======== ======== ======== </TABLE> 7. Earnings (loss) per share amounts were calculated by dividing net income by the sum of the weighted average number of common shares outstanding and, for diluted earnings (loss) per share, the incremental weighted average number of shares issuable upon exercise of outstanding options for the periods they were outstanding. During the six month period ended June 30, 1997, the 5 1/4% Convertible Subordinated Debentures due 2003 (the "5 1/4% Debentures"), which were convertible into 3,478,260 Common Shares, were outstanding. For the three month period ended June 30, 1997, diluted earnings (loss) per share also assumed the 5 1/4% Debentures had been converted into Common Shares and earnings increased for the interest on the Debentures, net of the income tax effect. Such debentures were not included in the computation of diluted earnings (loss) per share for the six month period ended June 30, 1997, as those debentures were antidilutive. -7-
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued The number of shares used to calculate basic earnings (loss) per share amounts was 63,920,000 and 60,799,000 for the six month periods ended June 30, 1998 and 1997, respectively, and 63,941,000 and 61,072,000 for the three month periods ended June 30, 1998 and 1997, respectively. The number of shares used to calculate diluted earnings (loss) per share amounts was 64,056,000 and 61,001,000 for the six month periods ended June 30, 1998 and 1997, respectively, and 64,063,000 and 64,113,000 for the three month periods ended June 30, 1998 and 1997, respectively. 8. Cash paid for interest and income taxes (net of refunds) was $20,221,000 and $140,950,000, respectively, for the six month period ended June 30, 1998 and $26,661,000 and $5,210,000 respectively, for the six month period ended June 30, 1997. -8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF INTERIM OPERATIONS. The following should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 1997 10-K/A. LIQUIDITY AND CAPITAL RESOURCES During each of the six month periods ended June 30, 1998 and 1997, the Company operated profitably. For the six month period ended June 30, 1998, net cash was used for operations, principally for the payment of income taxes and to purchase investments classified as trading, partially offset by the repayment of the Company's bridge financing to Pepsi International Bottlers ("PIB"), as described below. For the six month period ended June 30, 1997, net cash was used for operations, principally to fund its capital commitments in PIB, as described below, and to advance amounts to the trustee to fund the maximum redemption of the 5 1/4% Convertible Subordinated Debentures due 2003 (the "5 1/4% Debentures"). As more fully discussed in the Company's 1997 10-K/A, pursuant to its agreement with PepsiCo, Inc. effective as of January 30, 1998, the Company's $77,705,000 bridge financing to PIB was fully repaid during the first quarter of 1998. In addition, the agreement relieves the Company of any future funding obligation with respect to PIB. During 1998, the Company sold substantially all of its executive and professional loan portfolio for aggregate proceeds of $89,544,000. The Company reported pre-tax gains on the sales of approximately $6,500,000 and $600,000, respectively, for the six and three month periods ended June 30, 1998. In February 1998, the Company agreed to reinsure substantially all of its remaining life insurance business to Allstate Life Insurance Company and a subsidiary thereof in an indemnity reinsurance transaction. Consummation of this transaction, which is expected to occur in the third quarter of 1998, is subject to regulatory approval and the satisfaction of certain other conditions. The premium to be received on this transaction is approximately $28,675,000. The gain on the reinsurance transaction will be deferred and amortized into income based upon actuarial estimates of the premium revenue of the underlying insurance contracts or will be recognized earlier in income if converted to assumption reinsurance. In May 1998, the Company announced that it is studying a possible restructuring of its capitalization. The Company currently intends to distribute to its shareholders cash in the maximum amount permissible under the Company's outstanding senior subordinated debt agreements, which amount currently is approximately $848,000,000 (the "Distribution"). In addition, the Company is no longer considering a spin-off of the shares of the Empire Insurance Company, its property and casualty insurance subsidiary. Although the final structure and timing for the Distribution has not been determined, it is likely that the Distribution would be in the form of a cash dividend, a share repurchase or some combination thereof in January 1999, all of which would be taxed to the shareholders at capital gains rates. If implemented, the Distribution will obligate the Company to make an offer to purchase all of the Company's outstanding 8 1/4% Senior Subordinated Notes due 2005 and its outstanding 7 7/8% Senior Subordinated Notes due 2006 (collectively, the "Senior Subordinated Notes") at a purchase price of 101% of the outstanding principal amount pursuant to the terms of the indentures governing the Senior Subordinated Notes. An aggregate of approximately $235,000,000 of Senior Subordinated Notes is currently outstanding. Consummation of the Distribution is subject to the receipt by the Company of a favorable ruling from the Internal Revenue Service that would permit shareholders to receive capital gains treatment for the Distribution. No assurances can be given that the Distribution will be approved by the Company's Board of Directors or, if approved, will be implemented. In July 1998, the Company entered into an agreement to sell a 25% interest in the privately held Argentine insurance holding company, Caja de Ahorro y Seguro S.A., ("Caja"), to a private Argentine company that is also an investor in Caja for $140,000,000. Of the total purchase price, $100,000,000 will be paid in cash and the balance will be a two-year collateralized interest-bearing promissory note. The Company will retain a 5% interest in Caja. This transaction is subject to approval of the Central Bank of Argentina. Upon consummation of the transaction, the Company expects to record a pre-tax gain of approximately $100,000,000. -9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF INTERIM OPERATIONS, continued As more fully described in the 1997 10-K/A, securities classified as "available for sale" are carried at fair value with unrealized gains and losses reflected as a separate component of shareholders' equity, net of taxes. Principally as a result of the decline in value of the Company's investment in Russian debt securities during 1998, the unrealized gain on investments at the end of 1997 of approximately $5,630,000 (net of taxes) decreased to an unrealized gain of $904,000 (net of taxes) as of June 30, 1998. While this has resulted in a decrease in shareholders' equity and book value per share, it had no effect on net income or cash flows. RESULTS OF OPERATIONS THE 1998 PERIODS COMPARED TO THE 1997 PERIODS Net earned premium revenues of the Empire Group were $122,205,000 and $146,820,000 for the six month periods ended June 30, 1998 and 1997, respectively, and $58,514,000 and $71,024,000 for the three month periods ended June 30, 1998 and 1997, respectively. The decrease in earned premiums principally relates to a decline in the number of assigned risk automobile pool contracts acquired due to competition, the depopulation of the assigned risk automobile pools and a reduction in certain lines, principally voluntary commercial automobile, workers' compensation and commercial package policies, due to tighter underwriting standards, reunderwriting and increased competition. The Empire Group's loss ratios were as follows: Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 1998 1997 1998 1997 ---- ---- ---- ---- Loss Ratio: GAAP 104.1% 96.7% 99.8% 92.7% SAP 104.1% 96.7% 99.8% 92.7% Expense Ratio: GAAP 25.4% 20.5% 25.4% 21.4% SAP 28.5% 20.8% 26.1% 19.3% Combined Ratio: GAAP 129.5% 117.2% 125.2% 114.1% SAP 132.6% 117.5% 125.9% 112.0% The combined ratios of the Empire Group increased primarily due to reserve strengthening for prior accident years in the private passenger automobile, commercial assigned risk, workers' compensation and commercial package lines of business, which resulted from continued unfavorable claims development. In addition, higher estimated loss ratios have been used for the current accident year, primarily in the private passenger automobile line, due to increased claim frequency. As more fully described in the 1997 10-K/A, beginning in 1997, the Empire Group received diminishing amounts of servicing fees for providing administrative and claims services for the New York Public Automobile Pool ("NYPAP"). Effective February 28, 1998, the Empire Group ceased serving as a servicing carrier for the NYPAP. The combined ratios were negatively affected by this reduction in servicing fees in 1998. The Empire Group's expense ratios also increased in 1998 due to the reduction in premium volume at a rate greater than the reduction in net underwriting and other costs. The difference between the SAP and GAAP combined ratios principally reflects the accounting for certain expenses which are treated differently under SAP and GAAP. The manufacturing segment, which since December 1997 has consisted of the plastics division, reported operating profits in 1998 and 1997. Manufacturing revenues and gross profit for the six and three month periods ended June 30, 1998, and pre-tax results for the six month period ended June 30, 1998 decreased as compared to the similar periods in 1997 principally due to the sale of certain divisions in 1997. Pre-tax results for the three month period ended June 30, 1998 increased as compared to the similar period in 1997 principally due to a loss on the sale of a division during 1997. -10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF INTERIM OPERATIONS, continued Finance revenues and operating profits reflect the level of consumer instalment loans. Average loans outstanding during the six and three months periods ended June 30, 1998 were lower than loans outstanding during the comparable periods of 1997 by approximately $60,800,000 and $93,400,000, respectively, primarily due to the sale of the executive and professional loan portfolio, described below. The decrease in finance revenues was partially offset by reduced expenses and lower losses on automobile loans. The Company has begun to see growth in its automobile lending business as it has expanded into new locations and benefited from the failure of certain competitors. Nevertheless, the Company expects that competition in its automobile lending business will continue to be a significant factor which may inhibit its ability and desire to grow the portfolio in the future. During 1998, the Company sold substantially all of its executive and professional loan portfolio for aggregate proceeds of $89,544,000. The Company reported pre-tax gains on the sales of approximately $6,500,000 and $600,000, respectively, for the six and three month periods ended June 30, 1998. Investment and other income decreased in the 1998 periods as compared to the 1997 periods principally due to a reduction of $42,200,000 for the six month period and $38,300,000 for the three month period in gains from sales of real estate properties and reduced fee income related to service business, partially offset by an increase in investment income of $43,100,000 for the six month period and $21,600,000 for the three month period, including earnings on proceeds from the sales of the Colonial Penn Life Group and the Colonial Penn P&C Group, and the aforementioned gains on the sale of the executive and professional loan portfolio. Equity in income (losses) of associated companies improved in the 1998 periods as compared to the 1997 periods primarily due to a reduction of $15,470,000 for the six month period and $9,060,000 for the three month period in the Company's equity losses related to PIB. As discussed above, effective February 1, 1998, the Company no longer accounts for its investment in PIB under the equity method of accounting. Interest expense primarily reflects the level of external borrowings outstanding during the period. The decrease in selling, general and other expenses in the 1998 periods as compared to the 1997 periods principally reflects decreased expenses of the manufacturing segment as a result of the sale of certain divisions in 1997, decreased operating expenses of real estate properties and lower provisions for bad debts. The 1998 provisions for income taxes reflect reductions for the favorable resolution of certain federal income tax contingencies. The 1997 provisions for income taxes are greater than the expected statutory federal income tax amount as a result of a provision for state taxes. The number of shares used to calculate basic earnings (loss) per share amounts was 63,920,000 and 60,799,000 for the six month periods ended June 30, 1998 and 1997, respectively, and 63,941,000 and 61,072,000 for the three month periods ended June 30, 1998 and 1997, respectively. The number of shares used to calculate diluted earnings (loss) per share amounts was 64,056,000 and 61,001,000 for the six month periods ended June 30, 1998 and 1997, respectively, and 64,063,000 and 64,113,000 for the three month periods ended June 30, 1998 and 1997, respectively. For diluted per share amounts, the 5 1/4% Debentures were not assumed to have been converted in the six month period ended June 30, 1997 since the effect of such assumed conversion would have been to increase earnings per share. -11-
PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The following matters were submitted to a vote of shareholders at the Company's 1998 Annual Meeting of Shareholders held on May 19, 1998. a) Election of directors. Number of Shares ------------------------- For Withheld --- -------- Ian M. Cumming 53,135,370 84,101 Paul M. Dougan 53,127,280 92,191 Lawrence D. Glaubinger 53,130,603 88,868 James E. Jordan 53,142,599 76,872 Jesse Clyde Nichols, III 53,130,603 88,868 Joseph S. Steinberg 53,142,413 77,058 b) Ratification of Coopers & Lybrand L.L.P., now known as PricewaterhouseCoopers LLP, as independent auditors for the year ended December 31, 1998. For 52,998,171 Against 25,282 Abstentions 196,018 Broker non-votes - ITEM 5. OTHER INFORMATION. If the Company does not receive notice at its principal office on or before March 10, 1999 of a shareholder proposal for consideration at the 1999 Annual Meeting of Shareholders, the proxies named by the Company's Board of Directors with respect to that meeting shall have discretionary voting authority with respect to such proposal. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a) EXHIBITS. 27 Financial Data Schedule. b) REPORTS ON FORM 8-K. The Company filed a current report on Form 8-K dated May 18, 1998 which sets forth information under Item 5. Other events and Item 7. Financial Statements, Pro Forma Financial Statements and Exhibits. -12-
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LEUCADIA NATIONAL CORPORATION (Registrant) Date: August 14, 1998 By /s/ Barbara L. Lowenthal -------------------------------- Barbara L. Lowenthal Vice President and Comptroller (Chief Accounting Officer) -13-
EXHIBIT INDEX Exhibit Exemption Number Description Indication ------ ----------- ---------- 27 Financial Data Schedule. -14-