SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 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 May 7, 1998: 63,941,153.
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, 1998 and December 31, 1997 (Dollars in thousands, except par value) <TABLE> <CAPTION> MARCH 31, December 31, 1998 1997 ------------ ------------ (Unaudited) <S> <C> <C> ASSETS Investments: Available for sale (aggregate cost of $1,445,932 and $1,713,653) $1,454,238 $1,721,640 Trading securities (aggregate cost of $135,750 and $108,479) 150,387 115,416 Held to maturity (aggregate fair value of $44,078 and $43,154) 43,915 43,036 Policyholder loans 4,990 5,050 Other investments, including accrued interest income 73,785 70,658 ---------- ---------- Total investments 1,727,315 1,955,800 Cash and cash equivalents 879,324 607,181 Reinsurance receivables, net 214,700 207,712 Trade, notes and other receivables, net 609,570 751,374 Prepaids and other assets 145,117 144,426 Property, equipment and leasehold improvements, net 63,092 60,522 Deferred policy acquisition costs 25,016 23,906 Separate and variable accounts 601,245 541,546 Investments in associated companies 209,251 207,902 ---------- ---------- Total $4,474,630 $4,500,369 ========== ========== LIABILITIES Customer banking deposits $ 197,235 $ 198,582 Trade payables and expense accruals 227,648 216,818 Other liabilities 112,941 115,364 Income taxes payable 64,825 175,289 Deferred tax liability 10,090 11,874 Policy reserves 733,753 737,082 Unearned premiums 136,754 127,669 Separate and variable accounts 601,245 541,546 Debt, including current maturities 353,224 352,872 ---------- ---------- Total liabilities 2,437,715 2,477,096 ---------- ---------- Minority interest 9,782 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; 63,938,187 and 63,879,155 shares issued and outstanding, after deducting 54,416,836 and 54,398,456 shares held in treasury 63,938 63,879 Additional paid-in capital 254,271 253,267 Accumulated other comprehensive income 5,586 5,630 Retained earnings 1,553,338 1,540,755 ---------- ---------- Total shareholders' equity 1,877,133 1,863,531 ---------- ---------- Total $4,474,630 $4,500,369 ========== ========== </TABLE> See notes to interim consolidated financial statements. -2-
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the three months ended March 31, 1998 and 1997 (Unaudited) <TABLE> <CAPTION> 1998 1997 ---- ---- (In thousands, except per share amounts) <S> <C> <C> REVENUES: Insurance revenues and commissions $ 65,228 $ 76,970 Manufacturing 11,643 35,951 Finance 9,311 10,609 Investment and other income 64,135 48,084 Equity in losses of associated companies (3,557) (11,011) Net securities gains 1,935 1,442 -------- -------- 148,695 162,045 -------- -------- EXPENSES: Provision for insurance losses and policy benefits 61,494 67,852 Amortization of deferred policy acquisition costs 12,377 13,523 Manufacturing cost of goods sold 7,303 25,002 Interest 10,126 12,882 Salaries 9,686 11,475 Selling, general and other expenses 24,998 36,852 -------- -------- 125,984 167,586 -------- -------- Income (loss) from continuing operations before income taxes and minority expense of trust preferred securities 22,711 (5,541) -------- -------- Income taxes: Current 9,915 1,184 Deferred (1,896) (2,418) -------- -------- 8,019 (1,234) -------- -------- Income (loss) from continuing operations before minority expense of trust preferred securities 14,692 (4,307) Minority expense of trust preferred securities, net of taxes 2,109 1,757 -------- -------- Income (loss) from continuing operations 12,583 (6,064) Income from discontinued operations, net of taxes - 18,784 -------- -------- Net income $ 12,583 $ 12,720 ======== ======== Basic earnings (loss) per common share: Income (loss) from continuing operations $.20 $(.10) Income from discontinued operations - .31 ---- ----- Net income $.20 $ .21 ==== ===== Diluted earnings (loss) per common share: Income (loss) from continuing operations $.20 $(.10) Income from discontinued operations - .31 ---- ----- Net income $.20 $ .21 ==== ===== </TABLE> See notes to interim consolidated financial statements. -3-
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the three months ended March 31, 1998 and 1997 (Unaudited) <TABLE> <CAPTION> 1998 1997 ---- ---- (In thousands) <S> <C> <C> NET CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 12,583 $ 12,720 Adjustments to reconcile net income to net cash (used for) operations: (Benefit) for deferred income taxes (1,896) (3,310) Depreciation and amortization of property, equipment and leasehold improvements 2,201 2,912 Other amortization 5,344 14,612 Provision for doubtful accounts 2,355 3,927 Net securities (gains) (1,935) (1,442) Equity in losses of associated companies 3,557 11,011 (Gain) on disposal of real estate, property and equipment (5,889) (9,323) (Gain) on sale of loan portfolio (5,863) - Purchases of investments classified as trading (97,148) (1,000) Proceeds from sales of investments classified as trading 73,485 248 Deferred policy acquisition costs incurred and deferred (13,487) (14,615) Net change in: Reinsurance receivables (6,988) (2,229) Trade, notes and other receivables 71,158 (18,946) Prepaids and other assets (5,726) (30,591) Net assets of discontinued operations - (11,718) Trade payables and expense accruals 338 (8,013) Other liabilities (2,546) 2,838 Income taxes payable (110,464) 1,161 Policy reserves (3,329) (3,040) Unearned premiums 9,085 8,260 Other 1,079 552 --------- --------- Net cash (used for) operating activities (74,086) (45,986) --------- --------- NET CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of real estate, property, equipment and leasehold improvements (9,160) (5,977) Proceeds from disposals of real estate, property and equipment 7,889 14,995 Advances on loan receivables (27,245) (20,066) Principal collections on loan receivables 29,205 28,070 Proceeds from sale of loan portfolio 73,525 - Purchases of investments (other than short-term) (384,924) (405,780) Proceeds from maturities of investments 262,831 105,947 Proceeds from sales of investments 395,064 177,054 --------- --------- Net cash provided by (used for) investing activities 347,185 (105,757) --------- --------- NET CASH FLOWS FROM FINANCING ACTIVITIES: Net change in short-term borrowings 417 327 Net change in customer banking deposits (1,275) (2,912) Issuance of Company-obligated mandatorily redeemable preferred securities of subsidiary trust - 147,636 Reduction of long-term debt (98) (395) --------- --------- Net cash provided by (used for) financing activities (956) 144,656 --------- --------- Net increase (decrease) in cash and cash equivalents 272,143 (7,087) Cash and cash equivalents at January 1, 607,181 184,029 --------- --------- Cash and cash equivalents at March 31, $ 879,324 $ 176,942 ========= ========= </TABLE> See notes to interim consolidated financial statements. -4-
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the three months ended March 31, 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 (24,869) (24,869) Net income 12,720 12,720 ---------- Total comprehensive income (12,149) ---------- Exercise of options to purchase common shares 44 411 455 Purchase of stock for treasury (2) (35) (37) ------- -------- -------- ---------- ---------- BALANCE, MARCH 31, 1997 $60,460 $161,402 $(23,110) $ 907,624 $1,106,376 ======= ======== ======== ========== ========== BALANCE, JANUARY 1, 1998 $63,879 $253,267 $ 5,630 $1,540,755 $1,863,531 ---------- Comprehensive income: Net change in unrealized gain (loss) on investments (44) (44) Net income 12,583 12,583 ---------- Total comprehensive income 12,539 ---------- Exercise of options to purchase common shares 77 1,698 1,775 Purchase of stock for treasury (18) (694) (712) ------- -------- -------- ---------- ---------- BALANCE, MARCH 31, 1998 $63,938 $254,271 $ 5,586 $1,553,338 $1,877,133 ======= ======== ======== ========== ========== </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 1997, the Company classified as discontinued operations 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 March 31, 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 March 31, 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. 3. In February 1998, the Company agreed to reinsure 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 second 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 $30,000,000. 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. On March 30, 1998, the Company sold substantially all of its executive and professional loan portfolio for proceeds of $78,400,000. The Company reported a pre-tax gain of approximately $5,900,000 on the sale. -6-
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued 5. A summary of the results of discontinued operations is as follows for the three month periods ended March 31, 1997 (in thousands): <TABLE> <CAPTION> Colonial Penn Colonial Penn Life Group P&C Group ---------- --------- <S> <C> <C> Revenues $61,257 $148,513 ------- -------- Expenses: Provision for insurance losses and policy benefits 39,955 107,560 Other operating expenses 10,581 23,125 ------- -------- 50,536 130,685 ------- -------- Income before income taxes 10,721 17,828 Income taxes 3,752 6,013 ------- -------- Income from discontinued operations, net of taxes $ 6,969 $ 11,815 ======= ======== </TABLE> 6. 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 1998, 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 63,904,000 for 1998 and 60,441,000 for 1997. The number of shares used to calculate diluted earnings (loss) per share amounts was 64,053,000 for 1998 and 60,441,000 for 1997. Options to purchase 1,069,976 weighted average shares of common stock were outstanding during the three month period ended March 31, 1997, but were not included in the computation of diluted earnings (loss) per share, as those options were antidilutive. Additionally, during the three month period ended March 31, 1997, the 5 1/4% Convertible Subordinated Debentures due 2003, which were convertible into 3,478,260 Common Shares, were outstanding. Such debentures were not included in the computation of diluted earnings (loss) per share, as those debentures were antidilutive. 7. Cash paid for interest and income taxes (net of refunds) was $7,415,000 and $119,243,000, respectively, for the three month period ended March 31, 1998 and $11,081,000 and $324,000, respectively, for the three month period ended March 31, 1997. -7-
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 three month periods ended March 31, 1998 and 1997, the Company operated profitably. For the three month period ended March 31, 1998, net cash was used for operations, principally for the payment of income taxes and to purchase investments classified as trading, partially offset by the repayment of the Company's bridge financing to Pepsi International Bottlers ("PIB"), as described below. For the three month period ended March 31, 1997, net cash was used for operations, principally to fund its capital commitments in PIB, as described below. 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. In addition, the agreement relieves the Company of any future funding obligation with respect to PIB. On March 30, 1998, the Company sold substantially all of its executive and professional loan portfolio for proceeds of $78,400,000. The Company reported a pre-tax gain of approximately $5,900,000 on the sale. In February 1998, the Company agreed to reinsure 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 second 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 $30,000,000. 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. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1997 Net earned premium revenues of the Empire Group were $63,691,000 and $75,796,000 for the three month periods ended March 31, 1998 and 1997, respectively. The decrease in earned premiums principally relates to the depopulation of the assigned risk automobile pools and a reduction in certain commercial lines, principally voluntary commercial automobile and workers' compensation, due to tighter underwriting standards, reunderwriting and increased competition. The Empire Group's loss ratios were as follows: 1998 1997 ---- ---- Loss Ratio: GAAP 95.8% 89.1% SAP 95.8% 89.1% Expense Ratio: GAAP 25.3% 22.2% SAP 24.6% 18.1% Combined Ratio: GAAP 121.1% 111.3% SAP 120.4% 107.2% -8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF INTERIM OPERATIONS, continued 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, gross profit and pre-tax results for this segment decreased in 1998 principally due to the sale of certain divisions in 1997. Finance revenues and operating profits reflect the level of consumer instalment loans. Average loans outstanding during the first quarter of 1998 were approximately $26,500,000 lower than loans outstanding during the first quarter of 1997. The decrease in finance revenues was partially offset by reduced expenses and slightly lower losses on automobile loans. The Company expects that competition in its automobile lending business, along with declining credit quality, will continue to be significant factors which may inhibit its ability and desire to grow the portfolio in the future. On March 30, 1998, the Company sold substantially all of its executive and professional loan portfolio for proceeds of $78,400,000. The Company reported a pre-tax gain of approximately $5,900,000 on the sale. Investment and other income increased in 1998 as compared to 1997 principally due to increased investment income ($21,600,000), including earnings on proceeds from the sales of the Colonial Penn Life Group and the Colonial Penn P&C Group, and the aforementioned gain on the sale of the executive and professional loan portfolio, partially offset by decreased gains from sales of real estate properties and reduced fee income related to service business. Equity in losses of associated companies decreased in 1998 as compared to 1997 primarily due to the Company's equity losses related to PIB of $2,100,000 in 1998 as compared to $8,510,000 in 1997. 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 1998 as compared to 1997 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 1997 income tax benefit is less 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 63,904,000 for 1998 and 60,441,000 for 1997. The number of shares used to calculate diluted earnings (loss) per share was 64,053,000 for 1998 and 60,441,000 for 1997. The 5 1/4% Convertible Subordinated Debentures due 2003, which were outstanding during the three month period ended March 31, 1997, were not assumed to have been converted for diluted per share amounts, as those debentures were antidilutive. -9-
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. None. -10-
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LEUCADIA NATIONAL CORPORATION (Registrant) Date: May 12, 1998 By: /s/ Barbara L. Lowenthal ------------------------------------ Barbara L. Lowenthal Vice President and Comptroller (Chief Accounting Officer) -11-
EXHIBIT INDEX Exhibit Exemption Number Description Indication ------ ----------- ---------- 27 Financial Data Schedule. -12-