-----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, KDyEKbrBjaOOvQjmJtqK29Ig0a82QQl+wO68WlxZfVSCVBD2WSeHrCzggLki+Uv8 x5w11aeF/KmhEvBvtI+wRA== 0000909518-97-000667.txt : 19971117 0000909518-97-000667.hdr.sgml : 19971117 ACCESSION NUMBER: 0000909518-97-000667 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NYSE 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: 97718357 BUSINESS ADDRESS: STREET 1: 315 PARK AVE S CITY: NEW YORK STATE: NY ZIP: 10010 BUSINESS PHONE: 2124601900 FORMER COMPANY: FORMER CONFORMED NAME: TALCOTT NATIONAL CORP DATE OF NAME CHANGE: 19800603 10-Q 1 10Q FOR PERIOD END 09/30/97 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 September 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-5721 LEUCADIA NATIONAL CORPORATION (Exact name of registrant as specified in its Charter) New York 13-2615557 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 315 Park Avenue South, New York, New York 10010-3607 (Address of principal executive offices) (Zip Code) (212) 460 -1900 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) ------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES [ ] NO [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, at November 7, 1997: 63,854,401. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 1997 and December 31, 1996 (Dollars in thousands, except par value)
September 30, December 31, 1997 1996 ------------- -------------- (Unaudited) ASSETS Investments: Available for sale (aggregate cost of $1,267,646 and $1,037,049) $1,273,165 $1,033,793 Held to maturity (aggregate fair value of $45,233 and $45,875) 45,282 45,925 Policyholder loans 4,960 4,955 Other investments, including accrued interest income 77,244 57,289 ---------- ---------- Total investments 1,400,651 1,141,962 Cash and cash equivalents 186,857 184,029 Reinsurance receivable, net 214,145 182,662 Trade, notes and other receivables, net 761,429 326,388 Prepaids and other assets 155,337 211,548 Property, equipment and leasehold improvements, net 68,365 71,563 Deferred policy acquisition costs 26,500 26,585 Deferred income taxes 9,918 43,070 Separate and variable accounts 540,823 436,992 Investments in associated companies 193,385 202,496 Net assets of discontinued operations 430,177 535,261 ---------- ---------- Total $3,987,587 $3,362,556 ========== ========== LIABILITIES Customer banking deposits $ 200,668 $ 209,261 Trade payables and expense accruals 190,038 120,076 Other liabilities 120,816 88,926 Income taxes payable 53,249 34,902 Policy reserves 728,410 675,297 Unearned premiums 142,937 150,419 Separate and variable accounts 540,823 435,937 Debt, including current maturities 379,232 520,263 ---------- ---------- Total liabilities 2,356,173 2,235,081 ---------- ---------- Minority interest 9,741 9,368 ---------- ---------- Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debt securities of the Company 150,000 - ---------- ---------- SHAREHOLDERS' EQUITY Common shares, par value $1 per share, authorized 150,000,000 shares; 63,840,351 and 60,417,579 shares issued and outstanding, after deducting 54,369,610 and 54,353,691 shares held in treasury 63,840 60,418 Additional paid-in capital 252,746 161,026 Net unrealized gain on investments 9,707 1,759 Retained earnings 1,145,380 894,904 ---------- ---------- Total shareholders' equity 1,471,673 1,118,107 ---------- ---------- Total $3,987,587 $3,362,556 ========== ==========
See notes to interim consolidated financial statements. -2- LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the periods ended September 30, 1997 and 1996 (In thousands, except per share amounts) (Unaudited)
For the Three Month For the Nine Month Period Ended September 30, Period Ended September 30, -------------------------- -------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- REVENUES: Insurance revenues and commissions $ 70,654 $ 80,910 $219,796 $251,870 Manufacturing 35,549 35,970 106,119 114,555 Finance 10,064 11,879 30,925 37,891 Investment and other income 41,828 47,291 173,681 120,505 Net securities gains 165 18,923 705 27,782 Equity in losses of associated companies (13,950) (15,698) (34,343) (21,401) -------- -------- -------- -------- 144,310 179,275 496,883 531,202 -------- -------- -------- -------- EXPENSES: Provision for insurance losses and policy benefits 67,573 77,110 204,060 229,028 Amortization of deferred policy acquisition costs 12,930 10,033 39,001 41,982 Manufacturing cost of goods sold 24,305 25,348 73,558 83,295 Interest 10,995 13,267 35,633 40,330 Salaries 10,027 11,475 31,921 35,667 Selling, general and other expenses 36,451 40,900 102,406 119,391 -------- -------- -------- -------- 162,281 178,133 486,579 549,693 -------- -------- -------- -------- Income (loss) from continuing operations before income taxes, minority expense of trust preferred securities and extraordinary loss (17,971) 1,142 10,304 (18,491) -------- -------- -------- -------- Income taxes: Current 4,406 (46) 10,782 3,329 Deferred (12,909) 342 (7,494) (10,192) -------- -------- -------- -------- (8,503) 296 3,288 (6,863) -------- -------- -------- -------- Income (loss) from continuing operations before minority expense of trust preferred securities and extraordinary loss (9,468) 846 7,016 (11,628) Minority expense of trust preferred securities, net of taxes 1,967 - 5,833 - -------- -------- -------- -------- Income (loss) from continuing operations before extraordinary loss (11,435) 846 1,183 (11,628) Income from discontinued operations, net of taxes 15,318 18,339 51,013 59,587 Gain on disposal of discontinued operations, net of taxes of $68,799 200,337 - 200,337 - -------- -------- -------- -------- Income before extraordinary loss 204,220 19,185 252,533 47,959 Extraordinary loss from early extinguishment of debt, net of income tax benefit of $8 and $1,108 (13) - (2,057) - -------- -------- -------- -------- Net income $204,207 $ 19,185 $250,476 $ 47,959 ======== ======== ======== ======== Earnings (loss) per common and dilutive common equivalent share: Income (loss) from continuing operations before extraordinary loss $(.18) $.02 $ .02 $(.19) Income from discontinued operations .24 .30 .82 .98 Gain on disposal of discontinued operations 3.16 - 3.24 - Extraordinary loss - - (.03) - ----- ---- ----- ----- Net income $3.22 $.32 $4.05 $ .79 ===== ==== ===== ===== Fully diluted earnings (loss) per common share: Income (loss) from continuing operations before extraordinary loss $(.18) $.03 $ .04 $(.14) Income from discontinued operations .24 .28 .80 .93 Gain on disposal of discontinued operations 3.13 - 3.12 - Extraordinary loss - - (.03) - ----- ---- ----- ----- Net income $3.19 $.31 $3.93 $ .79 ===== === ===== =====
See notes to interim consolidated financial statements. -3- LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine months ended September 30, 1997 and 1996 (Unaudited)
1997 1996 ---- ---- (Thousands of dollars) NET CASH FLOWS FROM OPERATING ACTIVITIES: Net income $250,476 $ 47,959 Adjustments to reconcile net income to net cash provided by (used for) operations: Extraordinary loss, net of income tax benefit 2,057 - (Benefit) for deferred income taxes (7,494) (10,192) Depreciation and amortization of property, equipment and leasehold improvements 8,472 9,969 Other amortization 43,423 47,076 Provision for doubtful accounts 8,739 11,789 Net securities (gains) (705) (27,782) (Gain) on disposal of real estate, property and equipment (60,719) (5,870) Equity in losses of associated companies 34,343 21,401 Minority expense of trust preferred securities, net of taxes 5,833 - (Gain) on disposal of discontinued operations (200,337) - Deferred policy acquisition costs incurred and deferred (38,916) (42,646) Net change in: Reinsurance receivables (31,483) 8,621 Trade, notes and other receivables (68,237) (10,990) Prepaids and other assets (43,140) (35,794) Net assets of discontinued operations (24,455) (32,695) Trade payables and expense accruals 24,016 3,977 Other liabilities (7,156) 1,256 Income taxes payable 12,512 17,728 Policy reserves 53,113 633 Unearned premiums (7,482) 5,938 Other 1,765 (325) -------- -------- Net cash provided by (used for) operating activities (45,375) 10,053 -------- -------- NET CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of real estate, property, equipment and leasehold improvements (39,983) (16,541) Proceeds from disposals of real estate, property and equipment 160,042 31,046 Proceeds from disposal of discontinued operations 60,000 - Advances on loan receivables (83,033) (90,805) Principal collections on loan receivables 96,902 104,792 Purchases of investments (other than short-term) (921,260) (790,976) Proceeds from maturities of investments 290,549 281,215 Proceeds from sales of investments 395,247 547,432 -------- -------- Net cash provided by (used for) investing activities (41,536) 66,163 -------- -------- NET CASH FLOWS FROM FINANCING ACTIVITIES: Net change in short-term borrowings (27,905) 232 Net change in customer banking deposits (8,545) 7,671 Issuance of Company-obligated mandatorily redeemable preferred securities of subsidiary trust 147,465 - Issuance of long-term debt, net of issuance costs 9,567 8,788 Reduction of long-term debt (30,843) (29,240) -------- -------- Net cash provided by (used for) financing activities 89,739 (12,549) -------- -------- Net increase in cash and cash equivalents 2,828 63,667 Cash and cash equivalents at January 1, 184,029 118,649 -------- -------- Cash and cash equivalents at September 30, $186,857 $182,316 ======== ========
See notes to interim consolidated financial statements. -4- LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the nine months ended September 30, 1997 and 1996 (Unaudited)
Net Common Unrealized Shares Additional Gain $1 Par Paid-In (Loss) on Retained Value Capital Investments Earnings Total ----- ------- ----------- -------- ----- (Thousands of dollars) BALANCE, JANUARY 1, 1996 $60,164 $159,914 $30,086 $ 861,327 $1,111,491 Exercise of options to purchase common shares 206 1,323 1,529 Purchase of stock for treasury (24) (556) (580) Net change in unrealized gain (loss) on investments (40,046) (40,046) Net income 47,959 47,959 ------- -------- ------- --------- ---------- BALANCE, SEPTEMBER 30, 1996 $60,346 $160,681 $(9,960) $ 909,286 $1,120,353 ======= ======== ======= ========= ========== BALANCE, JANUARY 1, 1997 $60,418 $161,026 $ 1,759 $ 894,904 $1,118,107 Exercise of options to purchase common shares 181 1,781 1,962 Conversion of 5 1/4% Convertible Subordinated Debentures 3,258 90,417 93,675 Purchase of stock for treasury (17) (478) (495) Net change in unrealized gain (loss) on investments 7,948 7,948 Net income 250,476 250,476 ------- -------- ------- ---------- ---------- BALANCE, SEPTEMBER 30, 1997 $63,840 $252,746 $ 9,707 $1,145,380 $1,471,673 ======= ======== ======= ========== ==========
See notes to interim consolidated financial statements. -5- LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 1. The unaudited interim consolidated financial statements, which reflect all adjustments (consisting only of normal recurring items) that management believes necessary to present fairly results of interim operations, should be read in conjunction with the Notes to Consolidated Financial Statements (including the Summary of Significant Accounting Policies) included in the Company's audited consolidated financial statements for the year ended December 31, 1996, which are included in the Company's Annual Report filed on Forms 10-K/A for such year (the "1996 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, 1996 was extracted from the audited annual financial statements and does not include all disclosures required by generally accepted accounting principles for annual financial statements. On September 30, 1997, the Company completed the sale of its subsidiaries, Colonial Penn Life Insurance Company and Providential Life Insurance Company and certain related assets, including its health insurance operations, to Conseco, Inc. for $460,000,000, including $400,000,000 in notes secured by non-cancelable letters of credit and $60,000,000 in cash. These companies are principally engaged in the sale of graded benefit life insurance policies through direct marketing and agent-sold Medicare supplement insurance. The Company reported a pre-tax gain of approximately $269,000,000 on the sale. The purchase price includes a $25,000,000 indemnity reinsurance premium paid by the buyer to one of the Company's subsidiaries for the reinsurance of certain life insurance policies. Under generally accepted accounting principles, the gain on the reinsurance transaction of approximately $17,000,000 is deferred and not included in the gain on disposal reflected in the consolidated income statement. The deferred gain will be amortized into income based upon actuarial estimates of the premium revenue of the underlying life insurance contracts or will be recognized earlier in income upon conversion to assumption reinsurance to the extent permitted. On June 30, 1997, the Company signed an agreement to sell the property and casualty insurance business of the Colonial Penn P&C Group to General Electric Capital Corporation for $950,000,000 in cash, plus an aggregate of $156,164 per day from and including January 1, 1997 through and including the closing date. The Group's primary business is providing private passenger automobile insurance to the mature adult population through direct response marketing. On November 4, 1997, having received shareholder approval, the Company completed the sale for total cash consideration of $1,018,100,000, plus $14,300,000 for retention of certain employee benefit liabilities. The Company expects to report a pre-tax gain of approximately $600,000,000 in the fourth quarter. The operations of these companies have been classified as discontinued operations and prior periods' financial statements have been restated to conform with this presentation. See Note 5 below for additional information. The Company's remaining insurance operations consist of personal and commercial property and casualty insurance coverage conducted through the Empire Group and the variable annuity business conducted through Charter National Life Insurance Company and Intramerica Life Insurance Company. Certain amounts for prior periods have been reclassified to be consistent with the 1997 presentation. 2. In January 1997, the Company sold $150,000,000 aggregate liquidation amount of 8.65% trust issued preferred securities of its wholly-owned subsidiary, Leucadia Capital Trust I, (the "Trust"). These Company-obligated mandatorily redeemable preferred securities have an effective maturity date of January 15, 2027 and represent undivided beneficial interests in the Trust's assets, which consist solely of $154,640,000 principal amount of 8.65% Junior Subordinated Deferrable Interest Debentures due 2027 of the Company. Considered together, the "back-up undertakings" of the Company related to the Trust's preferred securities constitute a full and unconditional guarantee by the Company of the Trust's obligations under the preferred securities. -6- NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED: 3. On March 12, 1997, the Company called for redemption on April 11, 1997 all of its outstanding $100,000,000 5 1/4% Convertible Subordinated Debentures due 2003 (the "5 1/4% Debentures"), at a redemption price of 102.625% of the principal amount of the Debentures, plus accrued interest through April 11, 1997. The redemption date, but not the interest accrual period, was subsequently extended through July 11, 1997. $93,675,000 par value of the 5 1/4% Debentures was converted into 3,258,145 Common Shares and $6,325,000 par value of the 5 1/4% Debentures was redeemed. The funds used for these redemptions were primarily derived from borrowings under the Company's credit facility. Had all of the shares that were issued upon conversion of the 5 1/4% Debentures been issued as of January 1, 1997, primary earnings per share from continuing operations would have been $.02, primary earnings per share from discontinued operations would have been $.79 and primary earnings per share from gain on disposal of discontinued operations would have been $3.12 for the nine month period ended September 30, 1997. 4. On June 30, 1997, the Company sold its investment in a New York City office building for $100,000,000 in cash. The Company reported a pre-tax gain of approximately $35,600,000 on the sale. 5. The components of net assets of discontinued operations, which include the Colonial Penn P&C Group at September 30, 1997 and the Colonial Penn P&C Group and the discontinued life insurance operations at December 31, 1996, included in the consolidated balance sheets are as follows (in thousands):
September 30, December 31, 1997 1996 ------------- ------------ Investments $ 997,384 $1,648,158 Cash and cash equivalents 136,965 202,778 Separate account assets - 109,082 Deferred policy acquisition costs 16,906 79,082 Other 283,652 327,541 ---------- ---------- Total assets 1,434,907 2,366,641 ---------- ---------- Policy reserves 566,942 1,265,348 Unearned premiums 303,245 290,524 Separate account liabilities - 109,082 Other 134,543 166,426 ---------- ---------- Total liabilities 1,004,730 1,831,380 ---------- ---------- Net assets of discontinued operations $ 430,177 $ 535,261 ========== ==========
A summary of the results of the discontinued Colonial Penn P&C Group operations is as follows for the three and nine month periods ended September 30, 1997 and 1996 (in thousands):
For the Three Month For the Nine Month Period Ended September 30, Period Ended September 30, -------------------------- -------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- Revenues $153,614 $140,392 $455,131 $438,070 -------- -------- -------- -------- Expenses: Provision for insurance losses and policy benefits 113,652 98,246 331,682 312,300 Other operating expenses 27,595 24,925 80,902 75,125 -------- -------- -------- -------- 141,247 123,171 412,584 387,425 -------- -------- -------- -------- Income before income taxes 12,367 17,221 42,547 50,645 Income taxes 4,970 5,777 14,792 15,317 -------- -------- -------- -------- Income from discontinued operations, net of taxes $ 7,397 $ 11,444 $ 27,755 $ 35,328 ======== ======== ======== ========
-7- NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED: A summary of the results of the discontinued life insurance operations is as follows for the three and nine month periods ended September 30, 1997 and 1996 (in thousands):
For the Three Month For the Nine Month Period Ended September 30, Period Ended September 30, -------------------------- -------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- Revenues $46,097 $58,129 $166,078 $171,663 ------- ------- -------- -------- Expenses: Provision for insurance losses and policy benefits 26,162 35,940 100,964 102,823 Other operating expenses 6,843 11,505 28,437 31,525 ------- ------- -------- -------- 33,005 47,445 129,401 134,348 ------- ------- -------- -------- Income before income taxes 13,092 10,684 36,677 37,315 Income taxes 5,171 3,789 13,419 13,056 ------- ------- -------- -------- Income from discontinued operations, net of taxes $ 7,921 $ 6,895 $ 23,258 $ 24,259 ======= ======= ======== ========
6. Earnings (loss) per common and dilutive common equivalent share were calculated by dividing net income by the sum of the weighted average number of common shares outstanding and the incremental weighted average number of shares issuable upon exercise of outstanding options for the periods they were outstanding. The number of shares used to calculate primary earnings (loss) per share amounts was 61,917,000 and 60,556,000 for the nine month periods ended September 30, 1997 and 1996, respectively, and 63,484,000 and 60,534,000 for the three month periods ended September 30, 1997 and 1996, respectively. Fully diluted earnings (loss) per share were calculated as described above and also assumes the outstanding 5 1/4% Debentures had been converted into Common Shares and earnings increased for the interest on the Debentures, net of the income tax effect. The number of shares used to calculate fully diluted earnings (loss) per share was 64,112,000 and 64,037,000 for the nine month periods ended September 30, 1997 and 1996, respectively, and 64,076,000 and 64,022,000 for the three month periods ended September 30, 1997 and 1996, respectively. 7. Cash paid for interest and income taxes (net of refunds) was $35,420,000 and $7,606,000, respectively, for the nine month period ended September 30, 1997 and $40,534,000 and $5,014,000, respectively, for the nine month period ended September 30, 1996. -8- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF INTERIM OPERATIONS. The following should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 1996 10-K/A. LIQUIDITY AND CAPITAL RESOURCES For the nine month period ended September 30, 1997, net cash was used for operations, principally to fund its capital commitments and bridge financing to Pepsi International Bottlers ("PIB"). In April 1996, the Company formed a joint venture, PIB, with PepsiCo, Inc. to be the exclusive bottler and distributor of PepsiCo beverages in a large portion of central and eastern Russia, Kyrgyzstan and Kazakstan. The Company and PepsiCo have committed to make capital contributions to PIB of $79,500,000 and $26,500,000, respectively. As of December 31, 1996, the Company contributed $51,000,000; the balance was funded in January 1997. After reflecting its share of losses since inception, the book value of the Company's investment was $30,032,000 at September 30, 1997. In July 1997, the Company, PepsiCo and PIB entered into loan agreements with third party lenders to provide $90,000,000 of additional financing to PIB. Actual funding will require the completion of certain documentation and the agreement of PepsiCo and the Company. Pending this financing or other financing arrangements, the Company and PepsiCo have provided bridge financing to PIB to cover operating costs and capital expenditures, of which $62,625,000 was due to the Company as of September 30, 1997. PIB continues to need additional funds from its joint venture partners while it is developing its business. As of November 10, 1997, the Company has lent PIB an additional $15,079,000. The Company and PepsiCo are presently discussing the status of their investments in PIB, whether to proceed with the $90,000,000 financing or to consider other alternatives. In January 1997, the Company sold $150,000,000 aggregate liquidation amount of 8.65% trust issued preferred securities of its wholly-owned subsidiary, Leucadia Capital Trust I (the "Trust"). These Company-obligated mandatorily redeemable preferred securities have an effective maturity date of January 15, 2027 and represent undivided beneficial interests in the Trust's assets, which consist solely of $154,640,000 principal amount of 8.65% Junior Subordinated Deferrable Interest Debentures due 2027 of the Company. Considered together, the "back-up undertakings" of the Company related to the Trust's preferred securities constitute a full and unconditional guarantee by the Company of the Trust's obligations under the preferred securities. On March 12, 1997, the Company called for redemption on April 11, 1997 all of its outstanding $100,000,000 5 1/4% Debentures, at a redemption price of 102.625% of the principal amount of the Debentures, plus accrued interest through April 11, 1997. The redemption date, but not the interest accrual period, was subsequently extended through July 11, 1997. $93,675,000 par value of the 5 1/4% Debentures was converted into 3,258,145 Common Shares and $6,325,000 par value of the 5 1/4% Debentures was redeemed. The funds used for these redemptions were primarily derived from borrowings under the Company's credit facility. In June 1997, the Company also redeemed all of the aggregate principal amount outstanding of its 10 3/8% Senior Subordinated Notes due June 15, 2002 for a total redemption price of $23,112,000. In November 1997, the Company replaced its credit facility with a new contractual bank credit facility of $100,000,000. The new facility bears interest based on the prime rate or LIBOR and matures in November 2002. On September 30, 1997, the Company completed the sale of its subsidiaries, Colonial Penn Life Insurance Company and Providential Life Insurance Company and certain related assets, including its health insurance operations, to Conseco, Inc. for $460,000,000, including $400,000,000 in notes secured by non-cancelable letters of credit and $60,000,000 in cash. These companies are principally engaged in the sale of graded benefit life insurance policies through direct marketing and agent-sold Medicare supplement insurance. On June 30, 1997, the Company signed an agreement to sell the property and casualty insurance business of the Colonial Penn P&C Group to General Electric Capital Corporation for $950,000,000 in cash, plus an aggregate -9- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF INTERIM OPERATIONS, CONTINUED. of $156,164 per day from and including January 1, 1997 through and including the closing date. The Group's primary business is providing private passenger automobile insurance to the mature adult population through direct response marketing. On November 4, 1997, having received shareholder approval, the Company completed the sale for total cash consideration of $1,018,100,000, plus $14,300,000 for retention of certain employee benefit liabilities. The Company expects to report a pre-tax gain of approximately $600,000,000 in the fourth quarter. With respect to the sales of the Colonial Penn companies, approximately $32,000,000 of the cash proceeds were paid to the Parent Company. The balance of the cash proceeds and the notes were received by insurance and non-insurance subsidiaries of Charter National Life Insurance Company ("Charter"), a direct wholly-owned subsidiary of the Parent Company. Subsequent to the completion of the sales, $189,000,000 of the cash proceeds were transferred to the Parent Company pursuant to tax sharing agreements. The balance of the sales proceeds (net of expenses) can be distributed to the Parent Company by Charter only as permitted by the regulations of the insurance department in Charter's domicile state. As a result, the Company expects that the remaining sales proceeds will be distributed to the Parent Company primarily during the first quarter of 1998. On June 30, 1997, the Company sold its investment in a New York City office building for $100,000,000 in cash. The Company reported a pre-tax gain of approximately $35,600,000 on the sale. As more fully described in the 1996 10-K/A, securities classified as "available for sale" are carried at fair value with unrealized gains and losses reflected as a separate component of shareholders' equity, net of taxes. Principally as a result of changes in market interest rates during 1997, the unrealized gain on investments at the end of 1996 increased to an unrealized gain of $9,707,000 as of September 30, 1997. While this has resulted in an increase in shareholders' equity and book value per share, it had no effect on results of operations or cash flows. RESULTS OF OPERATIONS THE 1997 PERIODS COMPARED TO THE 1996 PERIODS Earned premium revenues and commissions of the Empire Group were $216,057,000 and $248,838,000 for the nine month periods ended September 30, 1997 and 1996, respectively, and $69,237,000 and $79,925,000 for the three month periods ended September 30, 1997 and 1996, respectively. The decrease in earned premiums principally relates to the depopulation of the assigned risk automobile pools and reduced volume in certain commercial lines resulting from tighter underwriting standards and increased competition. The Empire Group's loss ratios were as follows: Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1997 1996 1997 1996 ---- ---- ---- ---- Loss Ratio: GAAP 97.1% 96.3% 94.1% 91.8% SAP 97.1% 96.0% 94.1% 89.7% Expense Ratio: GAAP 20.6% 18.3% 21.1% 22.7% SAP 22.3% 15.7% 20.1% 18.9% Combined Ratio: GAAP 117.7% 114.6% 115.2% 114.5% SAP 119.4% 111.7% 114.2% 108.6% -10- 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 commercial package, voluntary commercial automobile and workers' compensation lines of business, which resulted from continued unfavorable claims development, and increased levels of new voluntary automobile business. In addition, in the third quarter of 1997, additional losses were recognized for the current accident year primarily for the voluntary automobile and commercial assigned risk lines of business due to increased claim frequency. For the nine month period ended September 30, 1997, the increase in the combined ratios was partially offset by reduced expenses reflecting reduced premium volume in the 1997 period and unusually high assessments from the New York State workers' compensation fund and severance benefits for certain employees, both of which were recorded in the nine month period ended September 30, 1996. The difference between the SAP and GAAP combined ratios principally reflects accounting for certain expenses that are treated differently under SAP and GAAP and, in the 1996 periods, an adjustment to SAP reinsurance reserves. Manufacturing revenues decreased in the 1997 periods principally due to the sale of a division in 1997 and the disposal of certain non-performing businesses in 1996. During the nine month periods ended September 30, 1997 and 1996, the Company recorded charges of approximately $1,611,000 and $3,260,000, respectively, related to the sale and shutdown of these businesses, including the sale of another division on September 30, 1997. The manufacturing segment was profitable in the nine month period ended September 30, 1997. Exclusive of the above charges, this segment was also profitable in the nine month period ended September 30, 1996. Finance revenues and operating profits reflect the level of consumer instalment loans. Such loans approximated $207,862,000 at September 30, 1997 and $233,351,000 at December 31, 1996. The decrease in finance revenues was partially offset by decreased losses on automobile loans. The Company expects that the increased level of competition in its automobile lending business will continue and, together with the Company's tightened underwriting standards and the generally lower rates being offered by competitors, is likely to result in a further contraction in the size of this portfolio. In the third quarter of 1997, the Company recorded a $3,500,000 reserve for expected costs to settle litigation related to a lending program that is in liquidation. Due to this charge, this segment was not profitable in the three month period ended September 30, 1997. Investment and other income increased in the nine month period ended September 30, 1997 as compared to the similar period in 1996 principally due to gains from sales of real estate properties of approximately $61,994,000 and $8,110,000 for the nine month periods ended September 30, 1997 and 1996, respectively ($6,574,000 and $3,828,000 for the three month periods ended September 30, 1997 and 1996, respectively) and higher investment yields on a larger portfolio. Such increases were partially offset by a $5,500,000 gain related to the settlement of certain litigation during the third quarter of 1996 and the Empire Group's lower service fee income during the third quarter of 1997 resulting from increased competition and the depopulation of the assigned risk automobile pools. Equity in losses of associated companies increased in the nine month period ended September 30, 1997 primarily due to start-up losses from the Company's equity investment in PIB of $32,190,000 and $9,510,000 for the nine month periods ended September 30, 1997 and 1996, respectively, and $14,620,000 and $6,730,000 for the three month periods ended September 30, 1997 and 1996, respectively. The Company anticipates that PIB will continue to experience operating losses during the period that PIB is building production, distribution capacity and market share. This loss was offset by decreased losses from the Company's investment in MK Gold Company of $350,000 and $5,820,000 for the nine month periods ended September 30, 1997 and 1996, respectively, and $170,000 and $1,900,000, for the three month periods ended September 30, 1997 and 1996, respectively, and a write-off of $6,540,000 in the third quarter of 1996 representing the Company's investment in an unsuccessful well drilled by its Siberian oil exploration joint venture. Interest expense primarily reflects the level of external borrowings outstanding during the period. The decrease in selling, general and other expenses in the 1997 periods as compared to the 1996 periods principally reflects the Empire Group's decreased expenses related to reduced premium volume, decreased operating expenses -11- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF INTERIM OPERATIONS, CONTINUED. of real estate properties, decreased expenses relating to certain investment activities and lower provisions for bad debts partially offset by the charge related to a pending legal settlement discussed above. The 1997 and 1996 provisions for income taxes reflect reductions for the favorable resolution of certain federal income tax contingencies. In addition, the 1996 provision for income taxes reflects the recognition of additional deferred tax benefits. Earned premium revenues of the discontinued Colonial Penn P&C Group were $387,548,000 and $368,405,000 for the nine month periods ended September 30, 1997 and 1996, respectively, and $131,497,000 and $115,697,000 for the three month periods ended September 30, 1997 and 1996, respectively. Earned premiums from voluntary automobile policies were 17.6% higher during the nine month period ended September 30, 1997 as compared to the nine month period ended September 30, 1996, and voluntary automobile policies in force at September 30, 1997 increased 6.2% from December 31, 1996. This growth in voluntary automobile business was partially offset by the continued depopulation of state assigned risk automobile pools and reduced service fee business. The GAAP combined ratios for the discontinued Colonial Penn P&C Group were 101.1% and 98.5% for the nine month periods ended September 30, 1997 and 1996, respectively, and 102.6% and 99.9% for the three month periods ended September 30, 1997 and 1996, respectively. These increases were primarily due to increased levels of new voluntary automobile business for which higher loss reserves are provided than on renewal business and an unusually high guarantee association assessment in the second quarter of 1997. The number of shares used to calculate primary earnings (loss) per share amounts was 61,917,000 and 60,556,000 for the nine month periods ended September 30, 1997 and 1996, respectively, and 63,484,000 and 60,534,000 for the three month periods ended September 30, 1997 and 1996, respectively. The number of shares used to calculate fully diluted earnings (loss) per share amounts was 64,112,000 and 64,037,000 for the nine month periods ended September 30, 1997 and 1996, respectively, and 64,076,000 and 64,022,000 for the three month periods ended September 30, 1997 and 1996, respectively. The increase in the number of shares utilized in calculating per share amounts principally related to the conversion of the 5 1/4% Debentures, as more fully described above. -12- PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. A) EXHIBITS. 27 Financial Data Schedule. B) REPORTS ON FORM 8-K. The Company filed a current report on Form 8-K dated September 5, 1997 which sets forth information under Item 5. Other Events. The Company filed a current report on Form 8-K/A dated September 5, 1997 which sets forth information under Item 5. Other Events. The Company filed a current report on Form 8-K dated September 30, 1997 which sets forth information under Item 5. Other Events and Item 7. Financial Statements, Pro Forma Financial Statements and Exhibits. The Company filed a current report on Form 8-K dated September 30, 1997 which sets forth information under Item 2. Acquisition or Disposition of Assets 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: November 14, 1997 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 EXHIBIT 27
5 This Schedule contains summary financial information extracted from the financial statements contained in the body of the accompanying Form 10-Q and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1996 SEP-30-1997 186,857 1,400,651 975,574 0 0 0 68,365 0 3,987,587 0 379,232 0 0 63,840 1,407,833 3,987,587 106,119 496,883 73,558 316,619 134,327 0 35,633 10,304 3,288 1,183 251,350 (2,057) 0 250,476 4.05 3.93
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