SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-5721 LEUCADIA NATIONAL CORPORATION (Exact name of registrant as specified in its Charter) New York 13-2615557 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 315 Park Avenue South, New York, New York 10010-3607 (Address of principal executive offices) (Zip Code) (212) 460-1900 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) ------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES /X/ NO / / APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES / / NO / / APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, at August 5, 1999: 59,390,766.
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 1999 and December 31, 1998 (Dollars in thousands, except par value) <TABLE> <CAPTION> June 30, December 31, 1999 1998 ----------- ------------ (Unaudited) <S> <C> <C> ASSETS Investments: Available for sale (aggregate cost of $945,939 and $1,555,789) $ 945,513 $1,553,126 Trading securities (aggregate cost of $139,749 and $132,907) 149,427 132,576 Held to maturity (aggregate fair value of $34,256 and $47,583) 34,341 47,256 Other investments, including accrued interest income 41,276 37,247 ---------- ---------- Total investments 1,170,557 1,770,205 Cash and cash equivalents 373,063 459,690 Reinsurance receivables, net 47,746 48,070 Trade, notes and other receivables, net 872,124 833,301 Prepaids and other assets 411,519 490,242 Property, equipment and leasehold improvements, net 176,174 121,790 Deferred policy acquisition costs 15,319 18,255 Investments in associated companies 103,948 172,390 Net assets of discontinued operations 26,760 45,008 ---------- ---------- Total $3,197,210 $3,958,951 ========== ========== LIABILITIES Customer banking deposits $ 219,356 $ 189,782 Trade payables and expense accruals 243,619 233,485 Other liabilities 83,765 109,397 Income taxes payable 132,369 96,500 Deferred tax liability 33,547 7,709 Policy reserves 486,660 542,274 Unearned premiums 78,521 94,572 Debt, including current maturities 576,504 722,601 ---------- ---------- Total liabilities 1,854,341 1,996,320 ---------- ---------- Minority interest 7,504 11,272 ---------- ---------- Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debt securities of the Company 98,200 98,200 ---------- ---------- SHAREHOLDERS' EQUITY Common shares, par value $1 per share, authorized 150,000,000 shares; 59,683,566 and 61,984,686 shares issued and outstanding, after deducting 58,731,967 and 56,430,847 shares held in treasury 59,684 61,985 Additional paid-in capital 143,065 205,227 Accumulated other comprehensive income (loss) 313 (771) Retained earnings 1,034,103 1,586,718 ---------- ---------- Total shareholders' equity 1,237,165 1,853,159 ---------- ---------- Total $3,197,210 $3,958,951 ========== ========== </TABLE> See notes to interim consolidated financial statements. -2-
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the periods ended June 30, 1999 and 1998 (In thousands, except per share amounts) (Unaudited) <TABLE> <CAPTION> For the Three Month For the Six Month Period Ended June 30, Period Ended June 30, --------------------- --------------------- 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> REVENUES: Insurance revenues and commissions $ 38,658 $ 58,514 $ 85,402 $122,205 Manufacturing 16,487 15,027 30,337 26,670 Finance 10,663 6,713 20,453 16,024 Investment and other income 68,025 64,108 299,640 126,313 Equity in income (losses) of associated companies (514) 172 (3,590) (3,385) Net securities gains 6,078 2,183 5,740 3,877 --------- --------- --------- -------- 139,397 146,717 437,982 291,704 --------- --------- --------- -------- EXPENSES: Provision for insurance losses and policy benefits 35,535 60,779 75,177 121,573 Amortization of deferred policy acquisition costs 8,301 11,169 18,534 23,546 Manufacturing cost of goods sold 10,030 9,112 19,067 16,415 Interest 14,217 10,196 27,906 20,322 Salaries 10,626 10,870 21,142 20,398 Selling, general and other expenses 34,827 24,439 70,855 48,781 --------- --------- --------- -------- 113,536 126,565 232,681 251,035 --------- --------- --------- -------- Income from continuing operations before income taxes, minority expense of trust preferred securities and extraordinary loss 25,861 20,152 205,301 40,669 --------- --------- --------- -------- Income taxes: Current 184 (845) 20,054 3,835 Deferred 8,979 5,549 18,954 8,153 --------- --------- --------- -------- 9,163 4,704 39,008 11,988 --------- --------- --------- -------- Income from continuing operations before minority expense of trust preferred securities and extraordinary loss 16,698 15,448 166,293 28,681 Minority expense of trust preferred securities, net of taxes 1,380 2,109 2,761 4,218 --------- --------- --------- -------- Income from continuing operations before extraordinary loss 15,318 13,339 163,532 24,463 Income from discontinued operations, net of taxes 518 1,503 8,619 2,962 --------- --------- --------- -------- Income before extraordinary loss 15,836 14,842 172,151 27,425 Extraordinary loss from early extinguishment of debt, net of income tax benefit of $1,394 (2,588) - (2,588) - --------- --------- --------- -------- Net income $ 13,248 $ 14,842 $ 169,563 $ 27,425 ========= ========= ========= ======== Basic earnings (loss) per common share: Income from continuing operations $ .25 $ .21 $ 2.69 $ .38 Income from discontinued operations .01 .02 .14 .05 Extraordinary loss (.04) - (.04) - ------ ------ ------- ------ Net income $ .22 $ .23 $ 2.79 $ .43 ====== ====== ======= ====== Diluted earnings (loss) per common share: Income from continuing operations $ .25 $ .21 $ 2.69 $ .38 Income from discontinued operations .01 .02 .14 .05 Extraordinary loss (.04) - (.04) - ------ ------ ------- ------ Net income $ .22 $ .23 $ 2.79 $ .43 ====== ====== ======= ====== See notes to interim consolidated financial statements. </TABLE> -3-
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the six months ended June 30, 1999 and 1998 (Unaudited) <TABLE> <CAPTION> 1999 1998 ---- ---- (In thousands) <S> <C> <C> NET CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 169,563 $ 27,425 Adjustments to reconcile net income to net cash provided by (used for) operations: Extraordinary loss, net of income tax benefit 2,588 - Provision for deferred income taxes 18,954 8,153 Depreciation and amortization of property, equipment and leasehold improvements 7,186 4,441 Other amortization 15,599 18,431 Provision for doubtful accounts 5,730 4,038 Net securities (gains) (5,740) (3,877) Equity in losses of associated companies 3,590 3,385 (Gain) on disposal of real estate, property and equipment (26,457) (17,960) (Gain) on sales of PIB, Caja and S&H in 1999 and loan portfolio in 1998 (169,063) (6,487) Investments classified as trading, net (11,925) (38,615) Deferred policy acquisition costs incurred and deferred (15,598) (23,208) Net change in: Reinsurance receivables 324 (9,318) Trade, notes and other receivables 14,734 72,949 Prepaids and other assets 7,421 (35,453) Net assets of discontinued operations 20,399 9,186 Trade payables and expense accruals 17,616 (85,464) Other liabilities (6,655) (15,450) Income taxes payable 37,263 (130,281) Policy reserves (55,614) (2,108) Unearned premiums (16,051) (2,029) Other 11,791 1,939 ----------- ------------ Net cash provided by (used for) operating activities 25,655 (220,303) ----------- ------------ NET CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of real estate, property, equipment and leasehold improvements (91,927) (27,058) Proceeds from disposals of real estate, property and equipment 101,616 27,745 Proceeds from sales of PIB, Caja and S&H in 1999 and loan portfolio in 1998 165,851 88,583 Advances on loan receivables (77,650) (61,379) Principal collections on loan receivables 45,264 45,359 Purchases of investments (other than short-term) (1,198,646) (1,651,099) Proceeds from maturities of investments 848,508 513,591 Proceeds from sales of investments 979,704 1,123,886 ---------- ----------- Net cash provided by investing activities 772,720 59,628 ---------- ----------- NET CASH FLOWS FROM FINANCING ACTIVITIES: Net change in short-term borrowings 80,202 19,613 Net change in customer banking deposits 29,488 (6,320) Reduction of long-term debt (200,247) (200) Purchase of common shares for treasury (64,463) (779) Dividends paid (722,178) - ---------- ----------- Net cash provided by (used for) financing activities (877,198) 12,314 ---------- ----------- Effect of foreign exchange rate changes on cash (7,804) - ---------- ----------- Net (decrease) in cash and cash equivalents (86,627) (148,361) Cash and cash equivalents at January 1, 459,690 581,186 ---------- ----------- Cash and cash equivalents at June 30, $ 373,063 $ 432,825 ========== =========== See notes to interim consolidated financial statements. </TABLE> -4-
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the six months ended June 30, 1999 and 1998 (Unaudited) <TABLE> <CAPTION> Common Accumulated Shares Additional Other $1 Par Paid-In Comprehensive Retained Value Capital Income (Loss) Earnings Total ----- ------- ------------- -------- ----- (In thousands) <S> <C> <C> <C> <C> <C> BALANCE, JANUARY 1, 1998 $63,879 $253,267 $5,630 $1,540,755 $1,863,531 ---------- Comprehensive income: Net change in unrealized gain (loss) on investments (4,726) (4,726) Net income 27,425 27,425 ---------- Comprehensive income 22,699 ---------- Exercise of options to purchase common shares 85 1,867 1,952 Purchase of stock for treasury (20) (759) (779) ------- -------- ------ ---------- ---------- BALANCE, JUNE 30, 1998 $63,944 $254,375 $ 904 $1,568,180 $1,887,403 ======= ======== ====== ========== ========== BALANCE, JANUARY 1, 1999 $61,985 $205,227 $ (771) $1,586,718 $1,853,159 ---------- Comprehensive income: Net change in unrealized gain (loss) on investments 3,345 3,345 Net change in unrealized foreign exchange gain (loss) (2,261) (2,261) Net income 169,563 169,563 ---------- Comprehensive income 170,647 ---------- Purchase of stock for treasury (2,301) (62,162) (64,463) Dividends (722,178) (722,178) ------- -------- ------ ---------- ---------- BALANCE, JUNE 30, 1999 $59,684 $143,065 $ 313 $1,034,103 $1,237,165 ======= ======== ====== ========== ========== </TABLE> See notes to interim consolidated financial statements. -5-
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 1. The unaudited interim consolidated financial statements, which reflect all adjustments (consisting only of normal recurring items) that management believes necessary to present fairly results of interim operations, should be read in conjunction with the Notes to Consolidated Financial Statements (including the Summary of Significant Accounting Policies) included in the Company's audited consolidated financial statements for the year ended December 31, 1998, which are included in the Company's Annual Report filed on Form 10-K for such year (the "1998 10-K"). Results of operations for interim periods are not necessarily indicative of annual results of operations. The consolidated balance sheet at December 31, 1998 was extracted from the audited annual financial statements and does not include all disclosures required by generally accepted accounting principles for annual financial statements. In 1998, the Company classified as discontinued operations its life insurance subsidiaries, Charter National Life Insurance Company ("Charter") and Intramerica Life Insurance Company ("Intramerica"). Prior period financial statements have been restated to conform with this presentation. Certain amounts for prior periods have been reclassified to be consistent with the 1999 presentation. 2. As more fully discussed in the Company's 1998 10-K, in 1996, the Company formed a joint venture, Pepsi International Bottlers ("PIB") with PepsiCo, Inc. to be the exclusive bottler and distributor of PepsiCo beverages in a large portion of central and eastern Russia, Kyrgyzstan and Kazakstan. Pursuant to its agreement with PepsiCo effective as of January 30, 1998, the Company no longer had any ability to influence PIB. As a result, effective February 1, 1998, the Company discontinued accounting for this investment under the equity method of accounting. The agreement provided for a put option and a call option with respect to the Company's equity interest, which were exercisable at certain times. In February 1999, PepsiCo exercised the option for approximately $39,190,000, including interest. The Company recognized a pre-tax gain of approximately $29,545,000 in the six month period ended June 30, 1999. When combined with the Company's share of PIB's losses since inception, the Company's net loss from this investment was approximately $40,310,000. 3. In March 1999, the Company sold all of its interest in Caja de Ahorro y Seguro S.A. to Assicurazioni Generali Group, an Italian insurance company, for $126,000,000 in cash and a $40,000,000 collateralized note maturing April 2001 from its Argentine partner. The Company recorded a pre-tax gain of approximately $120,800,000 in the six month period ended June 30, 1999. 4. In February 1999, the Company sold its wholly-owned subsidiary, The Sperry and Hutchinson Company, Inc. ("S&H") and recognized a pre-tax gain of approximately $18,700,000 in the six month period ended June 30, 1999. 5. In May 1999, the Company paid a $12.00 per share cash dividend (the "Dividend"), aggregating approximately $722,178,000. Pursuant to a ruling from the Internal Revenue Service, the Company may pay dividends of up to $812,000,000 and have any gain realized on the dividends treated as capital gain income for non-corporate shareholders. It is the Board of Directors' intention to declare a second dividend before the end of 1999 in the amount of approximately $90,000,000, subject to reduction to comply with the Company's senior subordinated debt agreement covenants. While these covenants would currently allow an additional $90,000,000 dividend, the permissible amount would be increased for 50% of net income (as defined) and decreased for 100% of net losses (as defined), dividends and stock buybacks. Payment of the Dividend (and any subsequent dividend) required the Company to make an offer to purchase all of its 8-1/4% Senior Subordinated Debentures due 2005 (the "8-1/4% Debentures") and its 7-7/8% Senior Subordinated Debentures due 2006 (the "7-7/8% Debentures"), outstanding in the aggregate principal amount of $235,000,000, at a purchase price of 101% of principal, plus accrued and unpaid interest thereon pursuant to the terms of the indentures governing these Debentures. Pursuant to such offers, the Company reported an extraordinary loss on early extinguishment of such debentures of $3,982,000 ($2,588,000 after taxes) in the second quarter of 1999. -6-
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued 6. The Company's Board of Directors has increased to 6,000,000 the maximum number of its Common Shares that the Company currently is authorized to purchase. Such purchases may be made from time to time in the open market, through block trades or otherwise. Depending on market conditions and other factors, such purchases may be commenced or suspended at any time without prior notice. From January 1, 1999 through August 5, 1999, the Company repurchased 2,593,920 Common Shares for an aggregate cost of approximately $70,769,000. 7. Certain information concerning the Company's segments for the six and three month periods ended June 30, 1999 and 1998 is as follows (in thousands): <TABLE> <CAPTION> For the Three Month For the Six Month Period Ended June 30, Period Ended June 30, --------------------- --------------------- 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Revenues: Property and casualty insurance $ 47,675 $ 76,800 $107,549 $158,637 Banking and lending 11,860 9,789 22,813 26,106 Manufacturing 16,488 15,038 30,338 26,715 Foreign real estate (a) 22,946 - 35,694 - Other operations (b) 11,822 17,302 193,408 29,066 -------- -------- -------- -------- Total revenue for reportable segments 110,791 118,929 389,802 240,524 Equity in associated companies (514) 172 (3,590) (3,385) Corporate 29,120 27,616 51,770 54,565 -------- -------- -------- -------- Total consolidated revenues $139,397 $146,717 $437,982 $291,704 ======== ======== ======== ======== Income (loss) from continuing operations before income, taxes, minority expense of trust preferred securities and extraordinary loss: Property and casualty insurance $ (4,675) $ (2,126) $ (2,963) $ (815) Banking and lending 3,108 1,757 5,845 9,585 Manufacturing 3,394 2,949 5,097 4,452 Foreign real estate (a) 15,084 - 18,158 - Other operations (b) 4,368 8,848 177,255 11,906 -------- -------- -------- -------- Total income from continuing operations before income taxes, minority expense of trust preferred securities and extraordinary loss for reportable segments 21,279 11,428 203,392 25,128 Equity in associated companies (514) 172 (3,590) (3,385) Corporate 5,096 8,552 5,499 18,926 -------- -------- -------- -------- Total consolidated income from continuing operations before income taxes, minority expense of trust preferred securities and extraordinary loss $ 25,861 $ 20,152 $205,301 $ 40,669 ======== ======== ======== ======== </TABLE> (a) Foreign real estate consists of the operations of Fidei, S.A., which was acquired in the fourth quarter of 1998. These operations were previously included in the other operations segment. Assets related to the foreign real estate segment were approximately $338,284,000 at June 30, 1999 and approximately $365,137,000 at December 31, 1998. (b) Includes pre-tax gains on sale of Caja ($120,800,000), S&H ($18,700,000) and PIB ($29,545,000) for the six month period ended June 30, 1999, as described above. -7-
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued 8. At June 30, 1999 and December 31, 1998 the components of net assets of discontinued operations are as follows (in thousands): <TABLE> <CAPTION> June 30, December 31, 1999 1998 ------- ----------- <S> <C> <C> Investments $ 36,479 $ 65,788 Cash and cash equivalents 2,072 3,032 Separate account assets 634,853 619,578 Notes and other receivables 168,551 179,580 Other 11,550 15,425 --------- --------- Total assets 853,505 883,403 --------- --------- Policy reserves 167,720 179,083 Separate account liabilities 634,853 619,578 Other 24,172 39,734 --------- --------- Total liabilities 826,745 838,395 --------- --------- Net assets of discontinued operations $ 26,760 $ 45,008 ========= ========= </TABLE> Results of discontinued operations include revenues of $13,561,000 and $6,658,000 for the six month periods ended June 30, 1999 and 1998, respectively, and $1,095,000 and $2,950,000 for the three month periods ended June 30, 1999 and 1998, respectively, and income before income taxes of $13,282,000 and $4,478,000 for the six month periods ended June 30, 1999 and 1998, respectively, and $801,000 and $2,284,000 for the three month periods ended June 30, 1999 and 1998, respectively. Results for the six month period ended June 30, 1999 include the recognition of a pre-tax gain of approximately $10,300,000, as a result of the partial conversion to assumption reinsurance of a prior reinsurance transaction for which the gain was previously deferred. In July 1999, the Company sold Charter and Intramerica to Allstate Life Insurance Company for statutory surplus, as adjusted, at the date of sale (approximately $37,590,000 at June 30, 1999) plus $3,575,000. The Company will record a pre-tax gain of approximately $14,000,000 in the third quarter, which includes recognition of deferred gains from prior reinsurance transactions. 9. Earnings (loss) per share amounts were calculated by dividing net income by the sum of the weighted average number of common shares outstanding and, for diluted earnings (loss) per share, the incremental weighted average number of shares issuable upon exercise of outstanding options for the periods they were outstanding. The number of shares used to calculate basic earnings (loss) per share amounts was 60,744,000 and 63,920,000 for the six month periods ended June 30, 1999 and 1998, respectively, and 60,020,000 and 63,941,000 for the three month periods ended June 30, 1999 and 1998, respectively. The number of shares used to calculate diluted earnings (loss) per share amounts was 60,771,000 and 64,056,000 for the six month periods ended June 30, 1999 and 1998, respectively, and 60,020,000 and 64,063,000 for the three month periods ended June 30, 1999 and 1998, respectively. 10. Cash paid for interest and income taxes (net of refunds) was $28,780,000 and $(15,682,000), respectively, for the six month period ended June 30, 1999 and $20,221,000 and $141,168,000, respectively, for the six month period ended June 30, 1998. -8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF INTERIM OPERATIONS. The following should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 1998 10-K. LIQUIDITY AND CAPITAL RESOURCES During each of the six month periods ended June 30, 1999 and 1998, the Company operated profitably. For the six month period ended June 30, 1999 net cash was provided by operations. For the six month period ended June 30, 1998, net cash was used for operations, principally for the payment of income taxes and to purchase investments classified as trading, partially offset by the repayment of the Company's bridge financing to Pepsi International Bottlers ("PIB"). As of June 30, 1999, the Company's cash, cash equivalents and marketable securities, excluding those amounts held by its regulated and foreign subsidiaries, totaled approximately $601,000,000. In addition, the book value of the principal amount of promissory notes received from Conseco, Inc. (the "Conseco Notes") upon the 1997 sale of the Colonial Penn Life Group was $400,000,000 at June 30, 1999. As more fully discussed in the Company's 1998 10-K, pursuant to its agreement with PepsiCo, Inc. effective as of January 30, 1998, the Company was relieved of any future funding obligation with respect to PIB. Additionally, the agreement provided for a put option and a call option with respect to the Company's equity interest, which were exercisable at certain times. In February 1999, PepsiCo exercised the option for approximately $39,190,000, including interest. The Company recognized a pre-tax gain of approximately $29,545,000 in the six month period ended June 30, 1999. In March 1999, the Company sold all of its interest in Caja de Ahorro y Seguro S.A. ("Caja") to Assicurazioni Generali Group, an Italian insurance company, for $126,000,000 in cash and a $40,000,000 collateralized note maturing April 2001 from its Argentine partner. The Company recorded a pre-tax gain of approximately $120,800,000 in the six month period ended June 30, 1999. In May 1999, the Company paid a $12.00 per share cash dividend (the "Dividend"), aggregating approximately $722,178,000. Pursuant to a ruling from the Internal Revenue Service, the Company may pay dividends of up to $812,000,000 and have any gain realized on the dividends treated as capital gain income for non-corporate shareholders. It is the Board of Directors' intention to declare a second dividend before the end of 1999 in the amount of approximately $90,000,000, subject to reduction to comply with the Company's senior subordinated debt agreement covenants. While these covenants would currently allow an additional $90,000,000 dividend, the permissible amount would be increased for 50% of net income (as defined) and decreased for 100% of net losses (as defined), dividends and stock buybacks. Payment of the Dividend (and any subsequent dividend) required the Company to make an offer to purchase all of its 8-1/4% Senior Subordinated Debentures due 2005 (the "8-1/4% Debentures") and its 7-7/8% Senior Subordinated Debentures due 2006 (the "7-7/8% Debentures"), outstanding in the aggregate principal amount of $235,000,000, at a purchase price of 101% of principal, plus accrued and unpaid interest thereon pursuant to the terms of the indentures governing these Debentures. Pursuant to such offers, in June 1999, the Company repurchased $80,899,000 principal amount of the 8-1/4% Debentures and $113,324,000 principal amount of the 7-7/8% Debentures for approximately $198,000,000, including accrued interest. Of this amount, $100,000,000 was borrowed under a short-term credit facility. Such amount was repaid in July 1999 with funds received in the third quarter from the repayment of $150,000,000 of the Conseco Notes. The Company's Board of Directors has increased to 6,000,000 the maximum number of its Common Shares that the Company currently is authorized to purchase. Such purchases may be made from time to time in the open market, through block trades or otherwise. Depending on market conditions and other factors, such purchases may be commenced or suspended at any time without prior notice. During the six month period ended June 30, 1999, the Company repurchased 2,301,120 Common Shares for an aggregate cost of approximately $64,463,000. From -9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF INTERIM OPERATIONS, continued July 1, 1999 through August 5, 1999, the Company repurchased 292,800 Common Shares for an aggregate cost of approximately $6,306,000. In July 1999, the Company sold its life insurance subsidiaries, Charter National Life Insurance Company and Intramerica Life Insurance Company to Allstate Life Insurance Company for statutory surplus, as adjusted, at the date of sale (approximately $37,590,000 at June 30, 1999), plus $3,575,000. The Company will record a pre-tax gain of approximately $14,000,000 in the third quarter, which includes recognition of deferred gains from prior reinsurance transactions. The Company has determined to replace its two corporate owned aircraft it has used for ten years with two newer models of used aircraft. During the six month period ended June 30, 1999, the Company expended approximately $52,400,000 of generally available corporate funds to acquire these aircraft. The Company expects to receive approximately $16,000,000 for its existing aircraft. RESULTS OF OPERATIONS THE 1999 PERIODS COMPARED TO THE 1998 PERIODS Net earned premium revenues of the Empire Group were $85,402,000 and $122,205,000 for the six month periods ended June 30, 1999 and 1998, respectively, and $38,658,000 and $58,514,000 for the three month periods ended June 30, 1999 and 1998, respectively. The decrease in earned premiums principally relates to a decline in the number of assigned risk automobile pool contracts acquired due to competition and the depopulation of the assigned risk automobile pools, as well as a reduction in certain personal and commercial lines, principally voluntary private passenger, commercial automobile and commercial package policies, due to tighter underwriting standards, reunderwriting and increased competition. The Empire Group's loss ratios were as follows: <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Loss Ratio: GAAP 92.4% 104.1% 88.4% 99.8% SAP 92.4% 104.1% 88.4% 99.8% Expense Ratio: GAAP 37.8% 25.4% 36.4% 25.4% SAP 45.3% 28.5% 38.2% 26.1% Combined Ratio: GAAP 130.2% 129.5% 124.8% 125.2% SAP 137.7% 132.6% 126.6% 125.9% </TABLE> The decline in the loss ratios in 1999 was due to reserve strengthening recorded in 1998 for prior accident years and lower current accident year loss ratios resulting from product mix and improved underwriting. The Empire Group's expense ratios increased in 1999 due to the reduction in premium volume at a rate greater than the reduction in net underwriting and other costs. The manufacturing segment reported operating profits in 1999 and 1998. Manufacturing revenues, gross profit and pre-tax results for this segment increased in the 1999 periods principally due to greater sales and lower raw material costs, partially offset by slightly higher expenses. Finance revenues reflect the level and mix of consumer instalment loans, and for 1998, the sale of substantially all of the Company's executive and professional loan portfolio which resulted in pre-tax gains of approximately $6,500,000 and $600,000, respectively, for the six and three month periods ended June 30, 1998. Operating profits increased as a result of greater loans outstanding and higher yielding loans offset by slightly higher expenses and -10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF INTERIM OPERATIONS, continued lower investment income. Average loans outstanding during the six and three month periods ended June 30, 1999 were higher than average loans outstanding during the comparable periods of 1998 by approximately $37,600,000 and $80,100,000, respectively, primarily due to the purchase of a subprime automobile portfolio in December 1998 and increased new loan originations, partially offset by the sale of substantially all of the executive and professional loan portfolio, described above. Due in part to recent failures of some of the Company's competitors, as well as the continued strength of the economy, the Company has been able to increase its new loan volume within the Company's existing underwriting standards. In addition, the Company intends to continue to explore the acquisition of additional portfolios of such loans that meet the Company's underwriting standards if they can be purchased on attractive terms. Investment and other income for the six month period ended June 30, 1999 included the gains on sale of Caja ($120,800,000), The Sperry and Hutchinson Company, Inc. ($18,700,000) and PIB ($29,545,000), as described above. Although the Company recognized a gain on the sale of PIB, when combined with its share of PIB's losses since inception, the Company's net loss from this investment was approximately $40,310,000. Investment and other income also increased in the 1999 periods as compared to the 1998 periods due to increased rent income and gains from sales of real estate properties (of which approximately $33,600,000 and $22,200,000, respectively, for the six and three month periods ended June 30, 1999 related to Fidei S.A. ("Fidei"), the Company's French subsidiary which was acquired in the fourth quarter of 1998), partially offset by a reduction in investment income and the aforementioned gain in 1998 on the sale of the executive and professional loan portfolio. During the six month period ended June 30, 1999, Fidei sold 39 real estate properties; 112 properties remained at June 30, 1999. Interest expense primarily reflects the level of external borrowings outstanding during the period, which increased primarily due to Fidei's borrowing. The increase in selling, general and other expenses in the 1999 periods as compared to the 1998 periods principally reflect expenses incurred by Fidei, expenses incurred in connection with the Dividend, described above, and for the six month period ended June 30, 1999, increased professional fees. Income taxes for the six month period ended June 30, 1999 reflect the utilization of capital loss carryforwards. The 1998 provisions for income taxes reflect reductions for the favorable resolution of certain federal income tax contingencies. The number of shares used to calculate basic earnings (loss) per share amounts was 60,744,000 and 63,920,000 for the six month periods ended June 30, 1999 and 1998, respectively, and 60,020,000 and 63,941,000 for the three month periods ended June 30, 1999 and 1998, respectively. The number of shares used to calculate diluted earnings (loss) per share was 60,771,000 and 64,056,000 for the six month periods ended June 30, 1999 and 1998, respectively, and 60,020,000 and 64,063,000 for the three month periods ended June 30, 1999 and 1998, respectively. YEAR 2000 AND INFORMATION TECHNOLOGY SYSTEMS The Company is continuing to evaluate its information technology systems to determine the potential impact of the Year 2000. The Year 2000 issue is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. As a result, before the end of 1999, computer hardware and software may need to be upgraded with new hardware and software which can distinguish 21st century dates from 20th century dates. As more fully described in the 1998 10-K, since 1996, the Company has been evaluating its Year 2000 readiness. Substantially all of the Company's operations have completed the computer inventory and identification process and are in the process of upgrading and testing critical systems. The Company's primary focus during 1999 will be on continued testing of mission critical systems and software provider upgrades, as well as monitoring the readiness of material third parties. -11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF INTERIM OPERATIONS, continued In 1996, the Empire Group began to evaluate its information technology systems and their ability to support future business needs. This led to a decision to acquire new policy management and accounting systems. These systems provide enhanced functionality and improved processing for underwriting, claims, billing, collection, reinsurance, reporting and accounting and are designed to be Year 2000 compliant. The Empire Group has one non-compliant system that maintains historical claims information. The Empire Group anticipates that it will transfer this information to a Year 2000 compliant system during the fourth quarter of 1999, while maintaining the existing system until the conversion is successfully completed. If the conversion is not successful, the Empire Group will maintain this information in a simplified database file and in hard copy. All but one of the manufacturing operation's material systems (involving the storage of historical information) have tested as being Year 2000 compliant. The Company is exploring alternative systems to maintain this information. Until an acceptable replacement for this system can be found, the Company can maintain these records in hard copy. The banking and lending operations have successfully completed testing of mission critical systems and testing of non-mission critical systems is currently underway. In addition, deposit customers have been sent letters to inform them about the Year 2000 issue and to educate them about the progress made in addressing this issue. The Year 2000 issue may affect other entities with which the Company transacts business. The Company has made inquiry of third parties with whom it has material relationships as to the Year 2000 compliance of such third parties. Many of such parties have reported plans to be fully compliant by the end of 1999 and most have reported substantial progress at the end of 1998. However, at this time the Company cannot predict the effect of the Year 2000 on its material third parties or the impact any deficiency in the Year 2000 readiness of such parties could have on the Company. Through June 30, 1999, expenses incurred by the Company in connection with the Year 2000 issue (excluding expenses related to the Empire Group's acquisition of new systems, which was not motivated by Year 2000 concerns) did not exceed $500,000. Based upon current information, the Company does not expect that the Year 2000 issue will have a material effect on its consolidated financial position or consolidated results of operations. CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION Statements included in this Management's Discussion and Analysis of Financial Condition and Results of Interim Operations may contain forward-looking statements. Such forward-looking statements are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements may relate, but are not limited, to projections of revenues, income or loss, capital expenditures, fluctuations in insurance reserves, plans for growth and future operations (including Year 2000 compatibility), competition and regulation as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted or quantified. When used in this Management's Discussion and Analysis of Financial Condition and Results of Interim Operations, the words "estimates", "expects", "anticipates", "believes", "plans", "intends" and variations of such words and similar expressions are intended to identify forward-looking statements that involve risks and uncertainties. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. The factors that could cause actual results to differ materially from those suggested by any such statements include, but are not limited to, those discussed or identified from time to time in the Company's public filings, including general economic and market conditions, changes in foreign and domestic laws, regulations and taxes, changes in competition and pricing environments, regional or general changes in asset valuation, the occurrence of significant natural disasters, the inability to reinsure certain risks economically, the adequacy of loss reserves, weather related conditions that may affect the Company's operations, the difficulty in identifying hardware and software that may not be Year 2000 compliant, the lack of success of third parties to adequately address the Year 2000 issue, vendor delays and technical difficulties affecting the Company's ability to upgrade or replace its hardware and/or software for Year 2000 compliance, continued credit worthiness and financial stability of counterparties to the Company's financial agreements, prevailing interest rate levels and changes in the composition of the Company's assets and liabilities through acquisitions or divestitures. Undue reliance should not be placed on these forward-looking statements, which -12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF INTERIM OPERATIONS, continued are applicable only as of the date hereof. The Company undertakes no obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this Management's Discussion and Analysis of Financial Condition and Results of Interim Operations or to reflect the occurrence of unanticipated events. -13-
PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The following matters were submitted to a vote of shareholders at the Company's 1999 Annual Meeting of Shareholders held on May 5, 1999. <TABLE> a) Election of directors. <CAPTION> Number of Shares ------------------------ For Withheld --- -------- <S> <C> <C> Ian M. Cumming 50,669,001 125,030 Paul M. Dougan 50,668,447 125,584 Lawrence D. Glaubinger 50,656,837 137,194 James E. Jordan 50,669,021 125,010 Jesse Clyde Nichols, III 50,669,021 125,010 Joseph S. Steinberg 50,669,021 125,010 b) Approval of the Company's 1999 Stock Option Plan. For 44,828,638 Against 4,629,433 Abstentions 1,335,960 Broker non-votes - c) Approval of the Company's Senior Executive Warrant Plan. For 47,549,354 Against 1,888,044 Abstentions 1,356,633 Broker non-votes - d) Ratification of PricewaterhouseCoopers LLP, as independent auditors for the year ended December 31, 1999. For 50,684,860 Against 43,768 Abstentions 65,403 Broker non-votes - </TABLE> -14-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a) EXHIBITS. 27 Financial Data Schedule. b) REPORTS ON FORM 8-K. The Company filed current reports on Form 8-K dated April 6, 1999 and June 24, 1999, which set forth information under Item 5. Other Events and Item 7. Financial Statements, Pro Forma Financial Statements and Exhibits. -15-
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LEUCADIA NATIONAL CORPORATION (Registrant) Date: August 12, 1999 By /s/ Barbara L. Lowenthal ---------------------------------- Barbara L. Lowenthal Vice President and Comptroller (Chief Accounting Officer) -16-
EXHIBIT INDEX Exhibit Exemption Number Description Indication ------ ----------- ---------- 27 Financial Data Schedule. -17-