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, 1997 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 6, 1997: 63,801,297.
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 1997 and December 31, 1996 (Dollars in thousands, except par value) <TABLE> <CAPTION> June 30, December 31, 1997 1996 ----------- ------------ (Unaudited) <S> <C> <C> ASSETS Investments: Available for sale (aggregate cost of $2,190,162 and $1,926,201) $2,186,398 $1,928,938 Trading securities (aggregate cost of $45,142 and $32,317) 45,039 31,030 Held to maturity (aggregate fair value of $63,539 and $68,198) 63,626 68,202 Policyholder loans 4,898 4,955 Other investments, including accrued interest income 50,958 68,059 ---------- ---------- Total investments 2,350,919 2,101,184 Cash and cash equivalents 259,308 299,472 Reinsurance receivable, net 246,657 246,946 Trade, notes and other receivables, net 565,543 456,088 Prepaids and other assets 194,123 222,141 Property, equipment and leasehold improvements, net 89,392 89,640 Deferred policy acquisition costs 42,521 41,654 Deferred income taxes 72,117 81,102 Separate and variable accounts 507,603 436,992 Investments in associated companies 207,874 206,384 Net assets of discontinued operations 151,180 149,758 ---------- ---------- Total $4,687,237 $4,331,361 ========== ========== LIABILITIES Customer banking deposits $ 200,170 $ 209,261 Trade payables and expense accruals 165,552 187,561 Other liabilities 129,242 120,753 Income taxes payable 50,603 42,240 Policy reserves 1,251,119 1,253,445 Unearned premiums 455,677 431,323 Separate and variable accounts 507,603 435,937 Debt, including current maturities 579,384 523,366 ---------- ---------- Total liabilities 3,339,350 3,203,886 ---------- ---------- Minority interest 9,517 9,368 ---------- ---------- Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company securities 150,000 - ---------- ---------- SHAREHOLDERS' EQUITY Common shares, par value $1 per share, authorized 150,000,000 shares; 61,552,990 and 60,417,579 shares issued and outstanding, after deducting 54,360,980 and 54,353,691 shares held in treasury 61,553 60,418 Additional paid-in capital 190,674 161,026 Net unrealized gain (loss) on investments (5,030) 1,759 Retained earnings 941,173 894,904 ---------- ---------- Total shareholders' equity 1,188,370 1,118,107 ---------- ---------- Total $4,687,237 $4,331,361 ========== ========== </TABLE> See notes to interim consolidated financial statements. -2-
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the periods ended June 30, 1997 and 1996 (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, --------------------- --------------------- 1997 1996 1997 1996 ---- ---- ---- ---- <S> <C> <C> <C> <C> REVENUES: Insurance revenues and commissions $202,058 $211,480 $405,193 $423,668 Manufacturing 34,619 40,208 70,570 78,585 Finance 10,252 12,701 20,861 26,012 Investment and other income 106,418 57,349 176,120 116,723 Net securities gains (losses) (433) 3,259 1,739 10,320 Equity in losses of associated companies (9,382) (5,325) (20,393) (5,703) -------- -------- -------- -------- 343,532 319,672 654,090 649,605 -------- -------- -------- -------- EXPENSES: Provision for insurance losses and policy benefits 179,105 184,321 354,517 365,972 Amortization of deferred policy acquisition costs 20,434 24,066 41,918 49,633 Manufacturing cost of goods sold 24,251 29,583 49,253 57,947 Interest 11,822 13,368 24,780 27,247 Salaries 20,286 19,555 39,639 39,508 Selling, general and other expenses 41,466 45,507 85,528 95,507 -------- -------- -------- -------- 297,364 316,400 595,635 635,814 -------- -------- -------- -------- Income from continuing operations before income taxes, minority expense of trust preferred securities and extraordinary loss 46,168 3,272 58,455 13,791 -------- -------- -------- -------- Income taxes: Current 9,001 2,892 10,716 4,259 Deferred 7,833 (3,646) 10,897 (1,878) -------- -------- -------- -------- 16,834 (754) 21,613 2,381 -------- -------- -------- -------- Income from continuing operations before minority expense of trust preferred securities and extraordinary loss 29,334 4,026 36,842 11,410 Minority expense of trust preferred securities, net of taxes 2,109 - 3,866 - -------- -------- -------- -------- Income from continuing operations before extraordinary loss 27,225 4,026 32,976 11,410 Income from discontinued operations, net of taxes 8,368 9,147 15,337 17,364 -------- -------- -------- -------- Income before extraordinary loss 35,593 13,173 48,313 28,774 Extraordinary loss from early extinguishment of debt, net of income tax benefit of $1,100 (2,044) - (2,044) - -------- -------- -------- -------- Net income $ 33,549 $ 13,173 $ 46,269 $ 28,774 ======== ======== ======== ======== Earnings (loss) per common and dilutive common equivalent share: Income from continuing operations before extraordinary loss $ .44 $ .07 $ .54 $ .19 Income from discontinued operations .14 .15 .25 .29 Extraordinary loss (.03) - (.03) - ----- ----- ----- ----- Net income $ .55 $ .22 $ .76 $.48 ===== ===== ===== ===== Fully diluted earnings (loss) per common share: Income from continuing operations before extraordinary loss $ .43 $ .07 $ .54 $ .19 Income from discontinued operations .13 .15 .24 .29 Extraordinary loss (.03) - (.03) - ----- ----- ----- ----- Net income $ .53 $ .22 $ .75 $ .48 ===== ===== ===== ===== </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, 1997 and 1996 (Unaudited) <TABLE> <CAPTION> 1997 1996 ---- ---- (Thousands of dollars) <S> <C> <C> NET CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 46,269 $ 28,774 Adjustments to reconcile net income to net cash (used for) operations: Extraordinary loss, net of income tax benefit 2,044 - Provision (benefit) for deferred income taxes 10,897 (1,878) Depreciation and amortization of property, equipment and leasehold improvements 7,959 8,794 Other amortization 44,337 53,709 Provision for doubtful accounts 6,367 7,895 Net securities (gains) (1,739) (10,320) (Gain) on disposal of real estate, property and equipment (56,532) (2,436) Equity in losses of associated companies 20,393 5,703 Minority expense of trust preferred securities, net of taxes 3,866 - Purchases of investments classified as trading (94,341) (83,279) Proceeds from sales of investments classified as trading 76,520 83,176 Deferred policy acquisition costs incurred and deferred (42,785) (51,829) Net change in: Reinsurance receivables 289 19,255 Trade, notes and other receivables (131,467) (53,839) Prepaids and other assets (51,515) (32,961) Net assets of discontinued operations (196) 1,050 Trade payables and expense accruals (20,917) (6,799) Other liabilities 7,930 21,773 Income taxes payable 8,337 440 Policy reserves (2,326) (29,269) Unearned premiums 24,354 39,834 Other 1,189 (630) ----------- --------- Net cash (used for) operating activities (141,067) (2,837) ----------- --------- NET CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of real estate, property, equipment and leasehold improvements (36,848) (14,516) Proceeds from disposals of real estate, property and equipment 139,168 15,879 Advances on loan receivables (53,186) (68,581) Principal collections on loan receivables 61,771 71,382 Purchases of investments (other than short-term) (1,049,024) (832,062) Proceeds from maturities of investments 281,825 302,238 Proceeds from sales of investments 535,202 625,525 ----------- --------- Net cash provided by (used for) investing activities (121,092) 99,865 ----------- --------- NET CASH FLOWS FROM FINANCING ACTIVITIES: Net change in short-term borrowings 113,488 322 Net change in customer banking deposits (9,039) 7,983 Issuance of Company-obligated mandatorily redeemable preferred securities of subsidiary trust 147,465 - Issuance of long-term debt, net of issuance costs - 8,799 Reduction of long-term debt (29,919) (29,377) ----------- --------- Net cash provided by (used for) financing activities 221,995 (12,273) ----------- --------- Net (decrease) increase in cash and cash equivalents (40,164) 84,755 Cash and cash equivalents at January 1, 299,472 206,729 ----------- --------- Cash and cash equivalents at June 30, $ 259,308 $ 291,484 =========== ========= </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, 1997 and 1996 (Unaudited) <TABLE> <CAPTION> Net Common Unrealized Shares Additional Gain $1 Par Paid-In (Loss) on Retained Value Capital Investments Earnings Total ---------- ----------- ----------- ----------- ---------- (Thousands of dollars) <S> <C> <C> <C> <C> <C> BALANCE, JANUARY 1, 1996 $60,164 $159,914 $ 30,086 $861,327 $1,111,491 Exercise of options to purchase common shares 177 1,144 1,321 Purchase of stock for treasury (24) (552) (576) Net change in unrealized gain (loss) on investments (38,608) (38,608) Net income 28,774 28,774 ------- -------- -------- -------- ---------- BALANCE, JUNE 30, 1996 $60,317 $160,506 $ (8,522) $890,101 $1,102,402 ======= ======== ======== ======== ========== BALANCE, JANUARY 1, 1997 $60,418 $161,026 $ 1,759 $894,904 $1,118,107 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) Net change in unrealized gain (loss) on investments (6,789) (6,789) Net income 46,269 46,269 ------- -------- -------- -------- ---------- BALANCE, JUNE 30, 1997 $61,553 $190,674 $ (5,030) $941,173 $1,188,370 ======= ======== ======== ======== ========== </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, 1996, which are included in the Company's Annual Report filed on Form 10-K for such year (the "1996 10-K"). Results of operations for interim periods are not necessarily indicative of annual results of operations. The consolidated balance sheet at December 31, 1996 was extracted from the audited annual financial statements and does not include all disclosures required by generally accepted accounting principles for annual financial statements. On April 30, 1997, the Company signed an agreement to sell its subsidiaries, Colonial Penn Life Insurance Company and Providential Life Insurance Company and certain related assets, including its health insurance operations, to Conseco, Inc. for $460,000,000, including $400,000,000 in notes secured by non-cancelable letters of credit and $60,000,000 in cash. These companies are principally engaged in the sale of graded benefit life insurance policies through direct marketing and agent-sold Medicare supplement insurance. The sale is subject to customary terms and conditions, including the receipt of regulatory approvals, and is expected to close in the third quarter of 1997. The Company expects to report a pre-tax gain of approximately $300,000,000 upon consummation of the transaction. The operations of these companies have been classified as discontinued operations and prior periods' financial statements have been restated to conform with this presentation. See Note 6 below for additional information. Certain amounts for prior periods have been reclassified to be consistent with the 1997 presentation. 2. On June 30, 1997, the Company signed an agreement to sell the property and casualty insurance business of the Colonial Penn P&C Group to General Electric Capital Corporation for $950,000,000 in cash, plus an aggregate of $156,164 per day from and including January 1, 1997 through and including the closing date. The Group's primary business is providing private passenger automobile insurance to the mature adult population through direct response marketing. The transaction is subject to the Company's shareholder approval, regulatory approvals and customary closing conditions and is expected to close in the fourth quarter of 1997. The Company expects to report a pre-tax gain of approximately $600,000,000 upon consummation of the transaction. Upon shareholder approval of the transaction, the operations of the Group will be classified as discontinued operations. The Colonial Penn P&C Group had revenues of $303,100,000 and $301,100,000 for the six month periods ended June 30, 1997 and 1996, respectively, and $153,100,000 and $147,600,000 for the three month periods ended June 30, 1997 and 1996, respectively. Pre-tax income for the Group was $31,800,000 and $36,800,000 for the six month periods ended June 30, 1997 and 1996, respectively, and $12,500,000 and $14,900,000 for the three month periods ended June 30, 1997 and 1996, respectively. At June 30, 1997 and December 31, 1996, the Colonial Penn P&C Group had total assets of $1,410,000,000 and $1,370,000,000, respectively. 3. In January 1997, the Company sold $150,000,000 aggregate liquidation amount of 8.65% trust issued preferred securities of its wholly-owned subsidiary, Leucadia Capital Trust I, (the "Trust"). These Company-obligated mandatorily redeemable preferred securities have an effective maturity date of January 15, 2027 and represent undivided beneficial interests in the Trust's assets, which consist solely of $154,640,000 principal amount of 8.65% Junior Subordinated Deferrable Interest Debentures due 2027 of the Company. Considered together, the "back-up undertakings" of the Company related to the Trust's preferred securities constitute a full and unconditional guarantee by the Company of the Trust's obligations under the preferred securities. -6-
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED: 4. On March 12, 1997, the Company called for redemption on April 11, 1997 all of its outstanding $100,000,000 5 1/4% Convertible Subordinated Debentures due 2003 (the "5 1/4% Debentures"), at a redemption price of 102.625% of the principal amount of the Debentures, plus accrued interest through April 11, 1997. The redemption date, but not the interest accrual period, was subsequently extended through July 11, 1997. As of June 30, 1997, $29,702,000 par value of the 5 1/4% Debentures was converted into 1,033,038 Common Shares and $5,528,000 par value of the 5 1/4% Debentures was redeemed. From July 1, 1997 through the redemption date, an additional $63,973,000 par value of the 5 1/4% Debentures was converted into 2,225,107 Common Shares and an additional $797,000 par value of the 5 1/4% Debentures was redeemed. The funds used for these redemptions were primarily derived from borrowings under the Company's credit facility. Had all of the shares which were issued upon conversion of the 5 1/4% Debentures been issued as of January 1, 1997, primary earnings per share from continuing operations would have been $.52 and primary earnings per share from discontinued operations would have been $.24 for the six month period ended June 30, 1997. 5. On June 30, 1997, the Company sold its investment in a New York City office building for $100,000,000 in cash. The Company reported a pre-tax gain of approximately $35,600,000 on the sale. 6. The components of net assets of discontinued operations included in the consolidated balance sheets are as follows (in thousands): June 30, December 31, 1997 1996 ---------- ---------- Investments $ 660,568 $ 688,936 Cash and cash equivalents 101,798 87,335 Separate account assets 114,419 109,082 Deferred policy acquisition costs 69,591 64,013 Other 60,564 62,967 ---------- ---------- Total assets 1,006,940 1,012,333 ---------- ---------- Policy reserves 683,473 687,200 Separate account liabilities 114,419 109,082 Other 57,868 66,293 ---------- ---------- Total liabilities 855,760 862,575 ---------- ---------- Net assets of discontinued operations $ 151,180 $ 149,758 ========== ========== A summary of the results of discontinued operations is as follows for the six and three month periods ended June 30, 1997 and 1996 (in thousands): <TABLE> <CAPTION> For the Three Month For the Six Month Period Ended June 30, Period Ended June 30, --------------------- --------------------- 1997 1996 1997 1996 ---- ---- ---- ---- <S> <C> <C> <C> <C> Revenues $58,724 $58,961 $119,981 $113,534 ------- ------- -------- -------- Expenses: Provision for insurance losses and policy benefits 34,847 34,559 74,802 66,883 Other operating expenses 11,013 10,330 21,594 20,020 ------- ------- -------- -------- 45,860 44,889 96,396 86,903 ------- ------- -------- -------- Income before income taxes 12,864 14,072 23,585 26,631 Income taxes 4,496 4,925 8,248 9,267 ------- ------- -------- -------- Income from discontinued operations, net of taxes $ 8,368 $ 9,147 $ 15,337 $ 17,364 ======= ======= ======== ======== </TABLE> -7-
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED: 7. Earnings (loss) per common and dilutive common equivalent share were calculated by dividing net income by the sum of the weighted average number of common shares outstanding and 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 primary earnings (loss) per share amounts was 61,001,000 and 60,569,000 for the six months periods ended June 30, 1997 and 1996, respectively, and 61,303,000 and 60,552,000 for the three month periods ended June 30, 1997 and 1996, respectively. Fully diluted earnings (loss) per share were calculated as described above and, for 1997 also assumes the outstanding 5 1/4% Debentures had been converted into Common Shares and earnings increased for the interest on such debentures, net of the income tax effect. Conversion was not assumed for the 1996 periods since the effect of such assumed conversion would have been to increase earnings per share. The number of shares used to calculate fully diluted earnings (loss) per share was 64,124,000 and 60,569,000 for the six month periods ended June 30, 1997 and 1996, respectively, and 64,140,000 and 60,552,000 for the three month periods ended June 30, 1997 and 1996, respectively. 8. Cash paid for interest and income taxes (net of refunds) was $26,803,000 and $5,210,000 respectively, for the six month period ended June 30, 1997 and $29,281,000 and $3,756,000, respectively, for the six month period ended June 30, 1996. -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 1996 10-K. LIQUIDITY AND CAPITAL RESOURCES For the six month period ended June 30, 1997, net cash was used for operations, principally to fund its capital commitments and bridge financing to Pepsi International Bottlers ("PIB") 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"). For the six month period ended June 30, 1996, net cash was used for operations, principally to settle the Proposition 103 liability and to reinsure a block of single premium deferred annuity business. In April 1996, the Company formed a joint venture, 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. The Company and PepsiCo have committed to make capital contributions to PIB of $79,500,000 and $26,500,000, respectively. As of December 31, 1996, the Company contributed $51,000,000; the balance was funded in January 1997. After reflecting its share of losses since inception, the book value of the Company's investment was $44,653,000 at June 30, 1997. In July 1997, the Company, PepsiCo and PIB entered into loan agreements with third party lenders to provide $90,000,000 of additional financing to PIB. Actual funding will require, among other things, a license from the Russian Central Bank. Pending satisfaction of such requirements, bridge financing to PIB to cover operating costs and capital expenditures will be necessary. The Company estimates that its share of the bridge financing should not exceed $52,500,000, of which $37,500,000 was provided as of June 30, 1997. Although the Company expects the financing from third party lenders will replace the Company's bridge financing, PIB may need additional funds from its joint venture partners while it is developing its business. Such amounts, if necessary, are not determinable at this time. In January 1997, the Company sold $150,000,000 aggregate liquidation amount of 8.65% trust issued preferred securities of its wholly-owned subsidiary, Leucadia Capital Trust I (the "Trust"). These Company-obligated mandatorily redeemable preferred securities have an effective maturity date of January 15, 2027 and represent undivided beneficial interests in the Trust's assets, which consist solely of $154,640,000 principal amount of 8.65% Junior Subordinated Deferrable Interest Debentures due 2027 of the Company. Considered together, the "back-up undertakings" of the Company related to the Trust's preferred securities constitute a full and unconditional guarantee by the Company of the Trust's obligations under the preferred securities. On March 12, 1997, the Company called for redemption on April 11, 1997 all of its outstanding $100,000,000 5 1/4% Debentures, at a redemption price of 102.625% of the principal amount of the Debentures, plus accrued interest through April 11, 1997. The redemption date, but not the interest accrual period, was subsequently extended through July 11, 1997. As of June 30, 1997, $29,702,000 par value of the 5 1/4% Debentures was converted into 1,033,038 Common Shares and $5,528,000 par value of the 5 1/4% Debentures was redeemed. From July 1, 1997 through the redemption date, an additional $63,973,000 par value of the 5 1/4% Debentures was converted into 2,225,107 Common Shares and an additional $797,000 par value of the 5 1/4% Debentures was redeemed. The funds used for these redemptions were primarily derived from borrowings under the Company's credit facility. In June 1997, the Company also redeemed all of the aggregate principal amount outstanding of its 10 3/8% Senior Subordinated Notes due June 15, 2002 for a total redemption price of $23,112,000. The Company utilized $163,300,000 of its bank credit agreement facility as of June 30, 1997, principally to fund the maximum redemption of the 5 1/4% Debentures. Of this amount, $128,300,000 was repaid through August 6, 1997 primarily from proceeds from the sale of the real estate investment described below. -9-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF INTERIM OPERATIONS, CONTINUED. On April 30, 1997, the Company signed an agreement to sell its subsidiaries, Colonial Penn Life Insurance Company and Providential Life Insurance Company and certain related assets, including its health insurance operations, to Conseco, Inc. for $460,000,000, including $400,000,000 in notes secured by non-cancelable letters of credit and $60,000,000 in cash. These companies are principally engaged in the sale of graded benefit life insurance policies through direct marketing and agent-sold Medicare supplement insurance. The sale is subject to customary terms and conditions, including the receipt of regulatory approvals, and is expected to close in the third quarter of 1997. The Company expects to report a pre-tax gain of approximately $300,000,000 upon consummation of the transaction. On June 30, 1997, the Company signed an agreement to sell the property and casualty insurance business of the Colonial Penn P&C Group to General Electric Capital Corporation for $950,000,000 in cash, plus an aggregate of $156,164 per day from and including January 1, 1997 through and including the closing date. The Group's primary business is providing private passenger automobile insurance to the mature adult population through direct response marketing. The transaction is subject to the Company's shareholder approval, regulatory approvals and customary closing conditions and is expected to close in the fourth quarter of 1997. The Company expects to report a pre-tax gain of approximately $600,000,000 upon consummation of the transaction. The Colonial Penn P&C Group had revenues of $303,100,000 and $301,100,000 for the six month periods ended June 30, 1997 and 1996, respectively, and $153,100,000 and $147,600,000 for the three month periods ended June 30, 1997 and 1996, respectively. Pre-tax income for the Group was $31,800,000 and $36,800,000 for the six month periods ended June 30, 1997 and 1996, respectively, and $12,500,000 and $14,900,000 for the three month periods ended June 30, 1997 and 1996, respectively. At June 30, 1997 and December 31, 1996, the Colonial Penn P&C Group had total assets of $1,410,000,000 and $1,370,000,000, respectively. On June 30, 1997, the Company sold its investment in a New York City office building for $100,000,000 in cash. The Company reported a pre-tax gain of approximately $35,600,000 on the sale. As more fully described in the 1996 10-K, 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 changes in market interest rates during 1997, the unrealized gain on investments at the end of 1996 decreased to an unrealized loss of $5,030,000 as of June 30, 1997. While this has resulted in a decrease in shareholders' equity and book value per share, it had no effect on results of operations or cash flows. RESULTS OF OPERATIONS THE 1997 PERIODS COMPARED TO THE 1996 PERIODS Earned premium revenues of the Colonial Penn P&C Group were $256,051,000 and $252,708,000 for the six month periods ended June 30, 1997 and 1996, respectively, and $129,886,000 and $126,011,000 for the three month periods ended June 30, 1997 and 1996, respectively. Earned premiums from voluntary automobile policies were 17.9% higher during the six month period ended June 30, 1997 as compared to the six month period ended June 30, 1996, and voluntary automobile policies in force at June 30, 1997 increased 4.9% from December 31, 1996. This growth in voluntary automobile business was partially offset by the continued depopulation of state assigned risk automobile pools and reduced service fee business. Earned premium revenues and commissions of the Empire Group were $146,820,000 and $168,913,000 for the six month periods ended June 30, 1997 and 1996, respectively, and $71,024,000 and $84,376,000 for the three month periods ended June 30, 1997 and 1996, respectively. The decrease in earned premiums principally relates to the depopulation of the assigned risk automobile pools and reduced volume in certain commercial lines resulting from tighter underwriting standards and increased competition. -10-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF INTERIM OPERATIONS, CONTINUED. The Company's loss ratios for its property and casualty operations were as follows: <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 1997 1996 1997 1996 ---- ---- ---- ---- <S> <C> <C> <C> <C> Loss Ratio: GAAP 89.1% 87.5% 87.9% 86.7% SAP 88.3% 86.1% 86.9% 84.5% Expense Ratio: GAAP 18.7% 17.2% 17.4% 17.8% SAP 17.3% 15.7% 16.4% 16.0% Combined Ratio: GAAP 107.8% 104.7% 105.3% 104.5% SAP 105.6% 101.8% 103.3% 100.5% </TABLE> The combined ratios of the Colonial Penn P&C Group increased primarily due to increased levels of new voluntary automobile business for which higher loss reserves are provided than on renewal business and an unusually high guarantee association assessment. The combined ratios of the Empire Group increased primarily due to reserve strengthening for prior accident years in the commercial multiple peril and commercial automobile lines of business, higher loss reserves provided on assigned risk business and increased levels of new voluntary automobile business. This increase in the combined ratios was partially offset by reduced expenses reflecting certain unusual expense charges which were recorded during the six month period ended June 30, 1996. The difference between the SAP and GAAP combined ratios principally reflects accounting for certain expenses that are treated differently under SAP and GAAP and, in the 1996 periods, an adjustment to SAP reinsurance reserves. Although manufacturing revenues decreased in the 1997 periods principally due to the disposal of certain non-performing businesses in 1996, the manufacturing segment reported operating profits in 1997 as compared to operating losses in 1996, primarily due to these dispositions. Finance revenues and operating profits reflect the level of consumer instalment loans. Such loans approximated $216,752,000 at June 30, 1997 and $233,351,000 at December 31, 1996. The decrease in finance revenues was partially offset by decreased losses on automobile loans. The Company expects that the increased level of competition in its automobile lending business will continue and, together with the Company's tightened underwriting standards and the generally lower rates being offered by competitors, is likely to result in a further contraction in the size of this portfolio. Investment and other income increased in 1997 as compared to 1996 principally due to gains from sales of real estate properties of approximately $55,420,000 and $4,282,000 for the six month periods ended June 30, 1997 and 1996, respectively, and $47,439,000 and $1,515,000 for the three month periods ended June 30, 1997 and 1996, respectively, and higher investment yields on a larger portfolio. Equity in losses of associated companies increased in 1997 primarily due to start-up losses from the Company's equity investment in PIB of $17,570,000 and $2,780,000 for the six month periods ended June 30, 1997 and 1996, respectively, and $9,060,000 and $2,780,000 for the three month periods ended June 30, 1997 and 1996, respectively. The Company anticipates that PIB will continue to experience operating losses during the period that PIB is building production, distribution capacity and market share. This loss was offset by decreased losses from the Company's investment in MK Gold Company of $200,000 and $3,900,000 for the six month periods ended June 30, 1997 and 1996, respectively and $100,000 and $3,700,000, for the three month periods ended June 30, 1997 and 1996, respectively. -11-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF INTERIM OPERATIONS, CONTINUED. Interest expense primarily reflects the level of external borrowings outstanding during the period. The decrease in selling, general and other expenses in the 1997 periods as compared to the 1996 periods principally reflects decreased expenses from the disposition of certain manufacturing businesses, decreased operating expenses of real estate properties, decreased expenses relating to certain investment activities, including exploring investment opportunities in Russia, and lower provisions for bad debts in the banking and lending segment. The 1996 provision for income taxes reflects reductions for the favorable resolution of certain federal income tax contingencies and the recognition of additional deferred tax benefits. The number of shares used to calculate primary earnings (loss) per share amounts was 61,001,000 and 60,569,000 for the six month periods ended June 30, 1997 and 1996, respectively, and 61,303,000 and 60,552,000 for the three month periods ended June 30, 1997 and 1996, respectively. The number of shares used to calculate fully diluted earnings (loss) per share amounts was 64,124,000 and 60,569,000 for the six month periods ended June 30, 1997 and 1996, respectively, and 64,140,000 and 60,552,000 for the three month periods ended June 30, 1997 and 1996, respectively. For fully diluted per share amounts, the 5 1/4% Debentures were not assumed to have been converted in 1996 since the effect of such assumed conversion would have been to increase earnings per share. The increase in the number of shares utilized in calculating per share amounts principally related to the conversion of the 5 1/4% Debentures, as more fully described above. -12-
PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS. On May 11, 1994, a shareholder of the Company filed a purported derivative action entitled Pinnacle Consultants, Ltd. v. Leucadia National Corporation, et al. (C.A. No. 94 Civ. 3496) against the Company's current Board of Directors and two former directors, John W. Jordan II and Melvin Hirsch. The action, which was filed in the United States District Court for the Southern District of New York, alleged certain Racketeer Influence and Corrupt Organizations Act, securities law, conversion and fraud claims that were dismissed with prejudice by the Court and two state law claims of waste and breach of fiduciary duty that were dismissed by the Court for lack of jurisdiction. On December 10, 1996, the Second Circuit Court of Appeals affirmed the order of the District Court dismissing plaintiff's complaint. On May 13, 1997, Pinnacle filed a purported derivative complaint in New York State Supreme Court. The action, entitled Pinnacle Consultants, Ltd. v. Leucadia National Corporation, et al. (No. 602470/97), is substantially similar to the federal court complaint that was dismissed in 1996. Pinnacle has alleged claims for fraud, waste, breach of fiduciary duty and conversion against the same current and former Leucadia directors who were named as defendants in the federal court action. On August 1, 1997, defendants moved to dismiss the complaint. Item 6. EXHIBITS AND REPORTS ON FORM 8-K. A) EXHIBITS. 10.1 Purchase Agreement among Conseco, Inc., Leucadia National Corporation, Charter National Life Insurance Company, Colonial Penn Group, Inc., Colonial Penn Holdings Inc., Leucadia Financial Corporation, Intramerica Life Insurance Company, Colonial Penn Franklin Insurance Company and Colonial Penn Insurance Company dated as of April 30, 1997. 10.2 Purchase Agreement among General Electric Capital Corporation, Leucadia National Corporation, Charter National Life Insurance Company, Colonial Penn Group, Inc. and Colonial Penn Holdings Inc. dated as of June 30, 1997 (filed as Annex A to the Preliminary Proxy Statement for the Company's 1997 Annual Meeting of Shareholders).* 27 Financial Data Schedule. B) REPORTS ON FORM 8-K. The Company filed a current report on Form 8-K dated April 7, 1997 which sets forth information under Item 5. Other Events and Item 7. Financial Statements, Pro Forma Financial Statements and Exhibits. The Company filed a current report on Form 8-K dated April 30, 1997 which sets forth information under Item 5. Other Events and Item 7. Financial Statements, Pro Forma Financial Statements and Exhibits. The Company filed a current report on Form 8-K dated June 30, 1997 which sets forth information under Item 5. Other Events and Item 7. Financial Statements, Pro Forma Financial Statements and Exhibits. - ---------------------------------- *Incorporated by reference -13-
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 13, 1997 By /s/ Barbara L. Lowenthal --------------------------------------- Barbara L. Lowenthal Vice President and Comptroller (Chief Accounting Officer) -14-
EXHIBIT INDEX Exhibit Exemption Number Description Indication ------ ----------- ---------- 10.1 Purchase Agreement among Conseco, Inc., Leucadia National Corporation, Charter National Life Insurance Company, Colonial Penn Group, Inc., Colonial Penn Holdings Inc., Leucadia Financial Corporation, Intramerica Life Insurance Company, Colonial Penn Franklin Insurance Company and Colonial Penn Insurance Company dated as of April 30, 1997. 10.2 Purchase Agreement among General Electric Capital Corporation, Leucadia National Corporation, Charter National Life Insurance Company, Colonial Penn Group, Inc. and Colonial Penn Holdings Inc. dated as of June 30, 1997 (filed as Annex A to the Preliminary Proxy Statement for the Company's 1997 Annual Meeting of Shareholders).* 27 Financial Data Schedule. - ------------------------------------- * Incorporated by reference -15-