-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PCo/PHUI/0b+/+/B4IFQkInPaI33Ir03sPwBk2Wq+JJ/qkoGKlQqOvE07/VZnihh iBZtMNDgExGzDOAHfOzDbA== 0000096223-99-000005.txt : 19990513 0000096223-99-000005.hdr.sgml : 19990513 ACCESSION NUMBER: 0000096223-99-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEUCADIA NATIONAL CORP CENTRAL INDEX KEY: 0000096223 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 132615557 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05721 FILM NUMBER: 99618465 BUSINESS ADDRESS: STREET 1: 315 PARK AVE S CITY: NEW YORK STATE: NY ZIP: 10010 BUSINESS PHONE: 2124601900 MAIL ADDRESS: STREET 1: 315 PARK AVENUE SOUTH CITY: NEW YORK STATE: NY ZIP: 10010 FORMER COMPANY: FORMER CONFORMED NAME: TALCOTT NATIONAL CORP DATE OF NAME CHANGE: 19800603 10-Q 1 10-Q FOR PERIOD ENDED 03-31-1999 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, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-5721 LEUCADIA NATIONAL CORPORATION (Exact name of registrant as specified in its Charter) New York 13-2615557 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 315 Park Avenue South, New York, New York 10010-3607 (Address of principal executive offices) (Zip Code) (212) 460 -1900 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) ------------------------------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES [ ] NO [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, at May 7, 1999: 60,183,616. PART I - FINANCIAL INFORMATION Item 1. Financial Statements. LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets March 31, 1999 and December 31, 1998 (Dollars in thousands, except par value)
March 31, December 31, 1999 1998 ---- ---- (Unaudited) Assets Investments: Available for sale (aggregate cost of $1,216,132 and $1,555,789) $1,214,804 $1,553,126 Trading securities (aggregate cost of $129,542 and $132,907) 133,866 132,576 Held to maturity (aggregate fair value of $39,367 and $47,583) 39,208 47,256 Other investments, including accrued interest income 31,414 37,247 ---------- ---------- Total investments 1,419,292 1,770,205 Cash and cash equivalents 930,276 459,690 Reinsurance receivables, net 49,102 48,070 Trade, notes and other receivables, net 877,841 833,301 Prepaids and other assets 462,790 490,242 Property, equipment and leasehold improvements, net 151,994 121,790 Deferred policy acquisition costs 17,899 18,255 Investments in associated companies 99,830 172,390 Net assets of discontinued operations 52,300 45,008 ---------- ---------- Total $4,061,324 $3,958,951 ========== ========== Liabilities Customer banking deposits $ 196,540 $ 189,782 Trade payables and expense accruals 262,545 233,485 Other liabilities 86,978 109,397 Income taxes payable 138,239 96,500 Deferred tax liability 22,139 7,709 Policy reserves 514,528 542,274 Unearned premiums 92,104 94,572 Debt, including current maturities 682,606 722,601 ---------- ---------- Total liabilities 1,995,679 1,996,320 ---------- ---------- Minority interest 11,098 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; 60,225,116 and 61,984,686 shares issued and outstanding, after deducting 58,190,417 and 56,430,847 shares held in treasury 60,225 61,985 Additional paid-in capital 154,239 205,227 Accumulated other comprehensive income (1,150) (771) Retained earnings 1,743,033 1,586,718 ---------- ---------- Total shareholders' equity 1,956,347 1,853,159 ---------- ---------- Total $4,061,324 $3,958,951 ========== ==========
See notes to interim consolidated financial statements. -2- LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Income For the three months ended March 31, 1999 and 1998 (Unaudited)
1999 1998 ---- ---- (In thousands, except per share amounts) Revenues: Insurance revenues and commissions $ 46,744 $ 63,691 Manufacturing 13,850 11,643 Finance 9,790 9,311 Investment and other income 231,615 62,205 Equity in losses of associated companies (3,076) (3,557) Net securities gains (losses) (338) 1,694 -------- -------- 298,585 144,987 -------- -------- Expenses: Provision for insurance losses and policy benefits 39,642 60,794 Amortization of deferred policy acquisition costs 10,233 12,377 Manufacturing cost of goods sold 9,037 7,303 Interest 13,689 10,126 Salaries 10,516 9,528 Selling, general and other expenses 36,028 24,342 -------- -------- 119,145 124,470 -------- -------- Income from continuing operations before income taxes and minority expense of trust preferred securities 179,440 20,517 -------- -------- Income taxes: Current 19,870 4,680 Deferred 9,975 2,604 -------- -------- 29,845 7,284 -------- -------- Income from continuing operations before minority expense of trust preferred securities 149,595 13,233 Minority expense of trust preferred securities, net of taxes 1,381 2,109 -------- -------- Income from continuing operations 148,214 11,124 Income from discontinued operations, net of taxes 8,101 1,459 -------- -------- Net income $156,315 $ 12,583 ======== ======== Basic earnings per common share: Income from continuing operations $2.42 $.18 Income from discontinued operations .13 .02 ----- ---- Net income $2.55 $.20 ===== ==== Diluted earnings per common share: Income from continuing operations $2.42 $.18 Income from discontinued operations .13 .02 ----- ---- Net income $2.55 $.20 ===== ====
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, 1999 and 1998 (Unaudited)
1999 1998 ---- ---- (In thousands) Net cash flows from operating activities: Net income $ 156,315 $ 12,583 Adjustments to reconcile net income to net cash provided by (used for) operations: Provision for deferred income taxes 9,975 2,604 Depreciation and amortization of property, equipment and leasehold improvements 3,128 2,195 Other amortization 6,907 9,330 Provision for doubtful accounts 2,870 2,355 Net securities (gains) losses 338 (1,694) Equity in losses of associated companies 3,076 3,557 (Gain) on disposal of real estate, property and equipment (7,346) (5,889) (Gain) on sales of PIB, Caja and S&H in 1999 and loan portfolio in 1998 (169,063) (5,863) Investments classified as trading, net (2,547) (23,663) Deferred policy acquisition costs incurred and deferred (9,877) (13,487) Net change in: Reinsurance receivables (1,032) (1,487) Trade, notes and other receivables 6,045 71,431 Prepaids and other assets 13,331 (5,726) Net assets of discontinued operations (7,771) 9,756 Trade payables and expense accruals 39,088 2,780 Other liabilities 451 (2,749) Income taxes payable 41,739 (115,941) Policy reserves (27,746) (8,264) Unearned premiums (2,468) 9,085 Other 1,687 1,791 --------- --------- Net cash provided by (used for) operating activities 57,100 (57,296) --------- --------- Net cash flows from investing activities: Acquisition of real estate, property, equipment and leasehold improvements (47,674) (9,160) Proceeds from disposals of real estate, property and equipment 24,535 7,889 Proceeds from sales of PIB, Caja and S&H in 1999 and loan portfolio in 1998 165,851 73,525 Advances on loan receivables (33,377) (27,245) Principal collections on loan receivables 21,997 29,205 Purchases of investments (other than short-term) (654,859) (382,345) Proceeds from maturities of investments 637,289 224,052 Proceeds from sales of investments 368,983 420,879 --------- --------- Net cash provided by investing activities 482,745 336,800 --------- --------- Net cash flows from financing activities: Net change in short-term borrowings (19,798) 417 Net change in customer banking deposits 6,755 (1,275) Reduction of long-term debt (682) (98) Purchase of common shares for treasury (52,119) (712) --------- --------- Net cash (used for) financing activities (65,844) (1,668) --------- --------- Effect of foreign exchange rate changes on cash (3,415) -- --------- --------- Net increase in cash and cash equivalents 470,586 277,836 Cash and cash equivalents at January 1, 459,690 581,186 --------- --------- Cash and cash equivalents at March 31, $ 930,276 $ 859,022 ========= =========
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, 1999 and 1998 (Unaudited)
Common Accumulated Shares Additional Other $1 Par Paid-In Comprehensive Retained Value Capital Income (Loss) Earnings Total ----- ------- ------------- -------- ----- (In thousands) 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 ---------- 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 ======= ======== ======= ========== ========== 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 1,896 1,896 Net change in unrealized foreign exchange gain (loss) (2,275) (2,275) Net income 156,315 156,315 ---------- Comprehensive income 155,936 ---------- Purchase of stock for treasury (1,760) (50,988) (52,748) ------- -------- ------- ---------- ---------- Balance, March 31, 1999 $60,225 $154,239 $(1,150) $1,743,033 $1,956,347 ======= ======== ======= ========== ==========
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 first quarter of 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 first quarter of 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. 5. In April 1999, the Company declared a $12.00 per share cash dividend payable on May 21, 1999 to shareholders of record at the close of business on May 14, 1999 (the "Dividend"). The aggregate amount of the Dividend is approximately $723,000,000. 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 $89,000,000, less amounts paid to repurchase Common Shares after April 1, 1999. Payment of the Dividend and any subsequent dividend will require the Company to make an offer to purchase all of its 8-1/4% Senior Subordinated Debentures due 2005 and its 7-7/8% Senior Subordinated Debentures due 2006, 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. These offers are required to be made within five business days after the payment of the Dividend and any subsequent dividend, unless the terms of these Debentures can be modified on terms that are acceptable to the Company. -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 May 7, 1999, the Company repurchased 1,801,070 Common Shares for an aggregate cost of approximately $53,988,000. 7. Certain information concerning the Company's segments for the three month periods ended March 31, 1999 and 1998 is as follows (in thousands):
1999 1998 ---- ---- Revenues: Property and casualty insurance $ 59,874 $ 81,837 Banking and lending 10,953 16,317 Manufacturing 13,850 11,677 Other operations (a) 194,334 11,764 -------- -------- Total revenue for reportable segments 279,011 121,595 Equity in associated companies (3,076) (3,557) Corporate 22,650 26,949 -------- -------- Total consolidated revenues $298,585 $144,987 ======== ======== Income from continuing operations before income taxes and minority expense of trust preferred securities: Property and casualty insurance $ 1,712 $ 1,311 Banking and lending 2,737 7,828 Manufacturing 1,703 1,503 Other operations (a) 175,961 3,058 -------- -------- Total income from continuing operations before income taxes and minority expense of trust preferred securities for reportable segments 182,113 13,700 Equity in associated companies (3,076) (3,557) Corporate 403 10,374 -------- -------- Total consolidated income from continuing operations before income taxes and minority expense of trust preferred securities $179,440 $ 20,517 ======== ======== (a) Includes pre-tax gains on sale of Caja ($120,800,000), S&H ($18,700,000) and PIB ($29,545,000) for the three month period ended March 31, 1999, as described above.
-7- Notes to Interim Consolidated Financial Statements, continued 8. At March 31, 1999 and December 31, 1998 the components of net assets of discontinued operations are as follows (in thousands): March 31, December 31, 1999 1998 ---- ---- Investments $ 62,325 $ 65,788 Cash and cash equivalents 4,110 3,032 Separate account assets 614,492 619,578 Notes and other receivables 203,289 179,580 Other 11,794 15,425 -------- -------- Total assets 896,010 883,403 -------- -------- Policy reserves 201,477 179,083 Separate account liabilities 614,492 619,578 Other 27,741 39,734 -------- -------- Total liabilities 843,710 838,395 -------- -------- Net assets of discontinued operations $ 52,300 $ 45,008 ======== ======== Results of discontinued operations for the three month periods ended March 31, 1999 and 1998 include revenues of $12,466,000 and $3,708,000, respectively, income before income taxes of $12,481,000 and $2,194,000, respectively, and net income of $8,101,000 and $1,459,000, respectively. Results for 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. 9. Earnings 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 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 per share amounts was 61,338,000 for 1999 and 63,904,000 for 1998. The number of shares used to calculate diluted earnings per share amounts was 61,393,000 for 1999 and 64,053,000 for 1998. 10. Cash paid for interest and income taxes (net of refunds) was $12,314,000 and $(22,342,000), respectively, for the three month period ended March 31, 1999 and $7,415,000 and $119,463,000, respectively, for the three month period ended March 31, 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 three month periods ended March 31, 1999 and 1998, the Company operated profitably. For the three month period ended March 31, 1999 net cash was provided by operations. 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 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 first quarter of 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 first quarter of 1999. In April 1999, the Company declared a $12.00 per share cash dividend payable on May 21, 1999 to shareholders of record at the close of business on May 14, 1999 (the "Dividend"). The aggregate amount of the Dividend is approximately $723,000,000. 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 $89,000,000, less amounts paid to repurchase Common Shares after April 1, 1999. Payment of the Dividend and any subsequent dividend will require the Company to make an offer to purchase all of its 8-1/4% Senior Subordinated Debentures due 2005 and its 7-7/8% Senior Subordinated Debentures due 2006, 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. These offers are required to be made within five business days after the payment of the Dividend and any subsequent dividend, unless the terms of these Debentures can be modified on terms that are acceptable to the Company. 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 first quarter of 1999, the Company repurchased 1,759,570 Common Shares for an aggregate cost of approximately $52,748,000. From April 1, 1999 through May 7, 1999, the Company repurchased 41,500 Common Shares for an aggregate cost of approximately $1,240,000. In December 1998, the Company signed an agreement to sell its life insurance subsidiaries, Charter National Life Insurance Company and Intramerica Life Insurance Company, to Allstate Life Insurance Company for statutory surplus at the date of sale (approximately $62,719,000 at March 31, 1999), plus $3,575,000. This transaction is expected to close in the second quarter of 1999 and result in a pre-tax gain of approximately $13,000,000. -9- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Interim Operations, continued The Company has determined to replace its two corporate owned aircraft it has used for ten years with two newer models of used aircraft. Net of the estimated $16,000,000 that the Company expects to receive for its existing aircraft, the Company will expend approximately $36,000,000 (of which $26,000,000 was paid as of March 31, 1999) of generally available corporate funds to replace its existing corporate aircraft. Results of Operations Three Months Ended March 31, 1999 Compared to the Three Months Ended March 31, 1998 Net earned premium revenues of the Empire Group were $46,744,000 and $63,691,000 for the three month periods ended March 31, 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: 1999 1998 ----- ----- Loss Ratio: GAAP 85.1% 95.8% SAP 85.1% 95.8% Expense Ratio: GAAP 35.3% 25.3% SAP 34.1% 24.6% Combined Ratio: GAAP 120.4% 121.1% SAP 119.2% 120.4% The decline in the loss ratios in 1999 was due to reduced reserve strengthening required 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 1999 principally due to greater sales and lower raw material costs, 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 a pre-tax gain of approximately $5,900,000. Average loans outstanding during the first quarter of 1999 were approximately $7,500,000 lower than loans outstanding during the first quarter of 1998 primarily due to the sale of substantially all of the executive and professional loan portfolio, described above, offset by the purchase of a subprime automobile portfolio in December 1998. Operating profits increased as a result of higher yielding loans and lower losses on automobile loans. 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. -10- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Interim Operations, continued Investment and other income in 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 1999 as compared to 1998 due to increased rent income and gains from sales of real estate properties (principally related to Fidei S.A. ("Fidei"), which was acquired in the fourth quarter of 1998), partially offset by the aforementioned gain in 1998 on the sale of the executive and professional loan portfolio. 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 1999 as compared to 1998 principally reflects increased professional fees and expenses incurred by Fidei. Income taxes for 1999 reflect the utilization of capital loss carryforwards. The number of shares used to calculate basic earnings per share amounts was 61,338,000 for 1999 and 63,904,000 for 1998. The number of shares used to calculate diluted earnings per share was 61,393,000 for 1999 and 64,053,000 for 1998. Year 2000 and Information Technology Systems The Company is in the process of evaluating 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. 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 anticipates that these new systems will be fully implemented in 1999 and that any non-compliant programs will become compliant during 1999. 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. -11- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Interim Operations, continued Through March 31, 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 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. -12- PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. a) Exhibits. 27 Financial Data Schedule. b) Reports on Form 8-K. The Company filed current reports on Form 8-K dated February 17, 1999 and March 1, 1999 each of which sets forth information under Item 5. Other Events and Item 7. Financial Statements, Pro Forma Financial Statements and Exhibits. -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: May 12, 1999 By /s/ Barbara L. Lowenthal --------------------------- Barbara L. Lowenthal Vice President and Comptroller (Chief Accounting Officer) -14- EXHIBIT INDEX Exhibit Exemption Number Description Indication ------ ----------- ---------- 27 Financial Data Schedule. -15- EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN THE ACCOMPANYING FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1998 MAR-31-1999 930,276 1,419,292 926,943 0 0 0 151,994 0 4,061,324 0 682,606 0 0 60,225 1,896,122 4,061,324 13,850 298,585 9,037 58,912 46,544 0 13,689 179,440 29,845 148,214 8,101 0 0 156,315 2.55 2.55
-----END PRIVACY-ENHANCED MESSAGE-----